Investors Real Estate Trust Annual Report 2004

Plain-text annual report

908007ADP_CVR_R3 7/30/2004 3:08 PM Page 1 I N V E S T O R S R E A L E S T A T E T R U S T 2 0 0 4 A N N U A L R E P O R T IRET INVESTORS REAL ESTATE TRUST 2004 Annual Report Creating shareholder value with a diversified real estate portfolio Multi-Family Residential Office Retail Medical Industrial 908007ADP_CVR_R3 7/30/2004 3:08 PM Page 2 SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected financial data as of and for each of the fiscal years ended April 30, 2000 through 2004. The table illustrates the significant growth in revenue and real estate investment IRET experienced over the period reported. Most of this growth was attributable to our addition of properties through acquisitions. These historical results are not necessarily indicative of the results to be expected in the future. This information is only a summary, and you should refer to our Consolidated Financial Statements and notes thereto, and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K for additional information. Years Ended April 30, 2004 2003 2002 2001 2000 Consolidated Income Statement Data Revenue Income before Gain/Loss on $ 140,505 $ 118,765 Properties and Minority Interest $ 12,253 $ 15,699 $ $ 90,570 14,108 $ $ 75,767 10,188 $ $ 55,445 8,549 (in thousands, except per share data) Gain on Repossession/Sale of Properties Minority Interest Portion of 662 1,595 547 602 1,754 Operating Partnership Income (2,744) (3,640) (3,675) (2,095) (1,495) Net Income* $ 9,440 $ 12,248 $ 10,600 $ 8,694 $ 8,808 Consolidated Balance Sheet Data Total Real Estate Investments $ 1,008,071 $ 845,325 $ 685,347 $ 548,580 $ 418,216 Total Assets Mortgages Payable Shareholders’ Equity $ 1,076,317 $ 885,681 $ 730,209 $ 570,322 $ 432,978 $ 633,124 $ 539,397 $ 459,569 $ 368,957 $ 265,057 $ 278,629 $ 214,761 $ 145,578 $ 118,945 $ 109,921 Consolidated Per Common Share Data (basic and diluted) Net Income Distributions Funds From Operations** $ $ $ .24 .64 36,638 $ $ $ .38 .63 34,178 $ $ $ .42 .59 29,143 $ $ $ .38 .55 22,440 $ $ $ .42 .51 18,328 * Includes both continuing operations and discontinued operations (real estate that we sold) for the indicated fiscal years. ** For the definition of Funds from Operations and a reconciliation of this measure to measures under generally accepted accounting principles, you should refer to the section entitled “Funds from Operations” within the section entitled “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” in our Annual Report on Form 10-K. REVENUE in millions of dollars FUNDS FROM OPERATIONS in millions of dollars DISTRIBUTIONS per share 140.5 118.8 36.6 34.2 29.1 .63 .64 .59 .55 .51 90.6 75.8 55.4 22.4 18.3 TOTAL ASSETS in millions of dollars 1,076.3 885.7 730.2 570.3 433.0 00 01 02 03 04 00 01 02 03 04 00 01 02 03 04 00 01 02 03 04 TRUSTEES John F. Decker Senior Vice President D.A. Davidson & Co. (investment banking firm) Daniel L. Feist (2) (6) (8) President Feist Construction & Realty (construction and real estate development company) Steven B. Hoyt Chief Executive Officer Hoyt Properties, Inc. (property management company) Charles Wm. James Senior Vice President Investors Real Estate Trust Patrick G. Jones (4) (6) (8) Private Investor Jeffrey L. Miller (1) (4) (5) (7) President M&S Concessions, Inc. (food service and facility management company) Timothy P. Mihalick Senior Vice President & Chief Operating Officer Investors Real Estate Trust Stephen L. Stenehjem (3) (6) (8) President and Chief Executive Officer Watford City BancShares, Inc. (bank holding company) Thomas A. Wentz, Jr. Senior Vice President Investors Real Estate Trust EXECUTIVE OFFICERS Thomas A. Wentz, Sr. President & Chief Executive Officer Timothy P. Mihalick Senior Vice President & Chief Operating Officer Diane K. Bryantt Senior Vice President & Chief Financial Officer Charles Wm. James Senior Vice President Thomas A. Wentz, Jr. Senior Vice President Michael A. Bosh General Counsel & Corporate Secretary (1) Chairman, Board of Trustees (2) Vice Chairman, Board of Trustees (3) Chairman, Audit Committee (4) Member, Audit Committee (5) Chairman, Compensation Committee (6) Member, Compensation Committee (7) Chairman, Nominating Committee (8) Member, Nominating Committee SHAREHOLDER INFORMATION ANNUAL MEETING The Annual Meeting of Shareholders of the Company will be held at 7:00 p.m. on September 21, 2004, at the International Inn, 1505 North Broadway, Minot, North Dakota. SHARES LISTED The Company’s common shares of beneficial interest are listed on the Nasdaq Stock Market under the symbol “IRETS.” The Company’s series A cumulative redeemable preferred shares of beneficial interest are listed on the Nasdaq Stock Market under the symbol “IRETP.” INDEPENDENT ACCOUNTANTS Deloitte & Touche LLP Minneapolis, Minnesota INTERNAL AUDITORS Brady, Martz & Associates. P.C. Minot, North Dakota LEGAL COUNSEL Pringle & Herigstad, P.C. Minot, North Dakota Gray, Plant, Mooty, Mooty & Bennett, P.A. Minneapolis, Minnesota DISTRIBUTION REINVESTMENT PLAN The Company has a distribution reinvestment plan for current and future shareholders. Interested participants can obtain more information by contacting the Company at 701-837-4738 or info@iret.com. FORM 10-K A copy of the annual report on Form 10-K for the Company’s fiscal year ended April 30, 2004, as filed with the Securities and Exchange Commission, is available, without charge, by request to IRET, Investor Relations, PO Box 1988, Minot, ND 58702-1988, by visiting the Investor Relations section of the Company’s website at www.iret.com, or by accessing the EDGAR database on the Securities and Exchange Commission’s website at www.sec.gov. TRANSFER AGENT Questions about distribution payments, shareholder accounts, replacement of lost share certificates, address or name changes should be directed to: Transfer Agent, Investors Real Estate Trust, PO Box 1988, Minot, ND 58702-1988. COMPANY HEADQUARTERS Investors Real Estate Trust 12 South Main Street PO Box 1988 Minot, ND 58702-1988 Telephone: (701) 837-4738 Fax: (701) 838-7785 info@iret.com www.iret.com 908007ADP_Nar_R3 7/30/2004 2:52 PM Page 1 An Umbrella Partnership Real Estate Investment Trust Gene Johnson IRET shareholder and UPREIT partner since 1997 "In 1997 IRET acquired the Park East Apartments, a 122-unit apartment complex in Fargo, North Dakota, from a partnership of which I was the general partner. This was IRET's first acquisition of property in exchange for limited partnership ("UPREIT") units. We had other offers to buy this property but chose IRET after meeting the management. We were really impressed with the sincerity, honesty and openness of all of the IRET people we dealt with. I've been very pleased with my association with IRET, and I have recommended IRET to others. It has been a good relationship all the way." Gene is a North Dakota native now living in the Twin Cities area. Following three years of service in the U.S. Navy, he owned and operated a refrigeration service business in Fargo until 1957. He was employed by Dunham Bush and Copeland refrigeration in Omaha and Minneapolis until 1968, when he formed Thermo Dyne Inc., an air conditioning and refrigeration systems company. Gene sold Thermo Dyne in 1997, but is involved in consulting for Thermo Dyne and several other companies. In 2003 Gene was honored as an outstanding alumnus of the College of Engineering and Architecture at North Dakota State University. IRET values its association with Gene Johnson and other long-term shareholders and UPREIT partners. IRET’s UPREIT Program IRET is organized as an Umbrella Partnership Real Estate Investment Trust ("UPREIT"). In 1997, IRET reorganized itself into the UPREIT format by creating IRET Properties, a North Dakota Limited Partnership, with IRET Inc. (a wholly-owned subsidiary of IRET) as the sole general partner. IRET assets were transferred to the Umbrella Partnership in exchange for the general partnership interest, and owners of real estate were offered the opportunity of becoming limited partners in the Umbrella Partnership by conveying their real estate to the partnership in exchange for partnership units. These units are exchangeable for, and the financial equivalent of the IRET publicly-traded common shares. For owners of appreciated real estate, this UPREIT program has been a popular alternative to a taxable sale, allowing the owners to enjoy an IRET return on the full value of their real estate undiminished by capital gains tax until such time as they choose to liquidate their investment. On April 30, 2004, a total of 11,819,350 UPREIT units with a book value of $92.6 million were outstanding. Park East Apartments • Fargo, North Dakota 1 908007ADP_Nar_R3 7/30/2004 2:52 PM Page 2 PRESIDENT’S LETTER To Our Fellow Shareholders On April 30, 2004, IRET completed its 34th year. portfolio prompted us to reorganize our asset management Organized on July 31, 1970, IRET started business with a group, effective July 2004, in order to permit greater $120,000 real estate portfolio, the largest property being a management specialization by property type. Beginning with 4-unit apartment building. Today, IRET has a real estate our first quarterly report of the current fiscal year, we plan to portfolio of over 200 separate properties and total assets reflect our diverse portfolio by reporting our results in five exceeding the $1 billion mark. The business principles which different property categories: IRET adopted in 1970 have been rigorously followed over our 34 year history: carefully selecting the properties we acquire, Property Type keeping those properties in good condition, dealing professionally with our tenants and vendors, and maintaining a strong balance sheet. These principles have allowed IRET to grow and produce superior returns to its shareholders Multi-Family Residential Office Medical (including assisted living) Retail Industrial (including vacant land and any miscellaneous commercial properties) through good and bad times in the real estate industry. TOTAL (in thousands) Investment $ 446,172 301,402 171,176 123,111 Percentage 40.4% 27.3% 15.5% 11.2% 61,567 5.6% $1,103,428 100.0% A $1 BILLION COMPANY IRET's total assets at April 30, 2004, were $1.1 billion. This compares to the year earlier figure of $885.7 million, an increase of $190.6 million, or 21.5%. We will continue to pursue a strategy of disciplined growth, primarily through acquisitions, but also through selected expansion and development projects. In the year ahead, we will continue to use conservative, long-term underwriting standards while working diligently to identify attractive acquisition opportunities in our target markets. A MORE DIVERSIFIED PORTFOLIO - AN INCREASE IN MEDICAL AND RETAIL PROPERTIES During fiscal year 2004, IRET acquired $170.3 million of real estate. Of these new additions to our portfolio, 76% were commercial properties, primarily medical, office and retail, and only 24% were apartments. As a result, we have a more diversified portfolio of real estate properties than formerly, when apartments predominated. At April 30, 2004, approximately 40% of our portfolio consisted of apartment properties and the balance consisted of commercial properties. Our growth and the increased diversity of our 2 Golden Hills Office Center • Golden Valley, Minnesota 908007ADP_Nar_R3 7/30/2004 2:52 PM Page 3 THIRTY-FOUR YEARS OF INCREASED CASH DISTRIBUTIONS TO SHAREHOLDERS exchange for the contribution of real estate to the Operating Partnership increased by $12.2 million, and the minority IRET again increased its cash distributions paid on our interest in other partnerships controlled by IRET increased by common shares of beneficial interest and on the operating $2.2 million, for a total increase in equity capital of the partnership units during each quarter of fiscal year 2004. Operating Partnership of $78.3 million. Distributions increased to 63.7¢ per share and unit, compared to 62.5¢ paid in the prior fiscal year, an increase of A STRONG BALANCE SHEET 1.92%. IRET has paid quarterly cash distributions to its shareholders since July 1, 1971, and annual distributions have increased every year and, since 1988, every calendar quarter. On July 1, 2004, the cash distribution was increased to 16.05¢ per share and unit, and was the 133rd consecutive quarterly cash distribution paid by IRET. At the end of our fiscal year on April 30, 2004, IRET had cash on hand of $31.7 million, compared to the year earlier figure of $17.9 million and, in addition, has available approximately another $20 million of cash from mortgage loans closed after year end. This cash will be used to purchase additional real estate properties. INCREASE IN EQUITY CAPITAL During the past fiscal year, IRET sold additional common FINANCIAL RESULTS shares and preferred shares resulting in shareholder equity IRET's Funds from Operations (net income, less capital increasing to $278.6 million on April 30, 2004, compared to gains, increased by depreciation and amortization) increased the year-earlier figure of $214.8 million, an increase of $63.9 to $36.6 million from the year earlier figure of $34.2 million. In addition, operating partnership units issued in million. However, on a per share basis, FFO declined to 73¢ Thank You! John F. (Jack) Decker and Steve Hoyt are retiring from the Board of Trustees. We thank them both for their years of service to IRET and their valuable contributions to our Company. Both Jack and Steve are affiliated with companies that do business with IRET and, because of those business relationships, have chosen to retire from the IRET Board in order to allow their companies to better work with IRET. JOHN F. DECKER STEVEN B. HOYT Jack has served on the IRET Board since 1998 and is a Financial Advisor/Senior Vice President of D.A. Davidson & Co., an investment banking firm based in Great Falls, Montana, that has provided investment banking services to IRET. Steve is the President of Hoyt Properties, Inc., a leading property management and development firm based in Minneapolis, Minnesota, providing property management services for IRET. 3 908007ADP_Nar_R3 7/30/2004 2:52 PM Page 4 Price Index stood at 39.2 and, in April of 2004, it had risen to 181.5 (Midwest urban, all items), an increase of 363%. IRET common shares sold at $1 a share 34 years ago and have enjoyed a ten-fold increase in addition to paying a cash distribution that has averaged 6% on the growing share price. The billion-dollar real estate portfolio owned by IRET will grow in value as a consequence of inflation, but the mortgage loans on these properties will be paid at the stated amount without inflationary increases. This "leverage" has, and hopefully will again, produce superior financial results for IRET shareholders. A GROWING COMPANY We expect that IRET will continue to grow at a significant rate in the years ahead. We have a large and diversified real estate portfolio, a strong balance sheet, and an energetic and talented staff. Sincerely, Thresher Square • Minneapolis, Minnesota Thomas A. Wentz, Sr. President & Chief Executive Officer per share and unit from the 80¢ realized in the prior year. The weak economy, over-building (particularly single family homes as competition for our apartment communities), and increased operating expenses due to price increases in utilities, insurance and other costs, caused the decline - an experience common to most real estate companies. THE REAL ESTATE CYCLE - THE IMPACT OF INFLATION A lesson that we have learned over IRET's 34-year history is that real estate is a cyclical business, moving in predictable patterns - a period of above-average profitability inevitably leading to over-building and a period of below average returns until the over-capacity is absorbed. But just as predictable is the return to solid and rewarding financial results. Another factor for us to keep in mind is the impact that inflation has had (and, in my opinion, will have) on our Company. When IRET was organized in 1970, the Consumer 4 908007ADP_Nar_R3 7/30/2004 2:52 PM Page 5 REAL ESTATE PORTFOLIO MIX 59.3% Commercial Property 40.4% Multi-Family Residential Property 0.3% Undeveloped Land PROPERTY INVESTMENTS percentage by state 55.7% Minnesota 15.2% North Dakota 4.2% Montana 3.7% Colorado 3.5% South Dakota 3.5% Texas 3.4% Nebraska 3.2% Kansas 1.9% Wisconsin 1.8% Washington 1.7% Idaho 1.6% Iowa 0.4% Georgia 0.2% Michigan MAP LEGEND Multi-Family Residential Property Commercial Property Undeveloped Land INVESTMENT PORTFOLIO COMMERCIAL PROPERTY State Georgia Idaho Iowa Michigan Minnesota Montana Nebraska North Dakota South Dakota Wisconsin Total Commercial Property Sq. Ft. 29,408 130,629 604,711 16,080 4,964,293 114,345 129,568 1,008,230 75,815 299,302 7,372,381 MULTI-FAMILY RESIDENTIAL PROPERTY State Colorado Idaho Iowa Kansas Minnesota Montana Nebraska North Dakota South Dakota Texas Washington Total Multi-Family Residential Property UNDEVELOPED LAND State Minnesota Montana North Dakota Wisconsin Units 597 60 132 680 1,875 770 498 2,796 739 504 304 8,955 Sq. Ft. 652,364 583,810 158,400 80,958 Total Undeveloped Land 1,475,532 (in thousands) Investment Fiscal 2004 Occupancy $ 3,972 15,069 12,904 2,121 516,940 6,304 14,724 53,894 7,047 21,287 $ 654,262 100.0% 96.4% 85.2% 100.0% 93.4% 100.0% 100.0% 95.2% 8.8% 95.6% 92.8% (in thousands) Investment Fiscal 2004 Occupancy 92.3% 92.0% 86.6% 91.5% 82.7% 93.7% 85.2% 94.5% 86.6% 93.9% 90.0% 90.1% $ 40,834 3,924 4,852 35,222 96,379 38,882 22,418 113,727 31,731 38,436 19,767 $ 446,172 (in thousands) Investment $ $ 965 1,563 264 202 2,994 Total Real Estate Owned $ 1,103,428 WA MT ID ND SD NE MN IA WI MI CO KS TX GA 5 908007ADP_Nar_R3 7/30/2004 2:52 PM Page 6 CREATING SHAREHOLDER VALUE Interlachen Corporate Center • Eagan, Minnesota Woodridge Apartments • Rochester, Minnesota 33 CALENDAR YEAR HISTORY OF INCREASING DISTRIBUTIONS Since its first distribution paid July 1, 1971, IRET has never delayed, omitted or reduced its quarterly distribution on its common shares. In each of the last 33 calendar years, the annual distribution has increased over the amount paid in the preceding year. Share Bid Price History1 Distribution History2 Total Return Per Year3 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 $ 1.00 $ 1.10 $ 1.30 $ 1.40 $ 1.50 $ 1.70 $ 1.80 $ 2.00 $ 2.00 $ 1.80 $ 2.00 $ 2.20 $ 2.95 $ 3.15 $ 3.15 $ 3.85 $ 4.05 $ 4.35 $ 4.75 $ 4.50 $ 5.40 $ 5.70 $ 6.00 $ 6.40 $ 6.16 $ 6.44 $ 7.13 $ 7.44 $ 7.88 $ 7.88 $ 9.35 $ 10.05 $ 9.96 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2.75¢ 6.20¢ 6.55¢ 7.10¢ 8.00¢ 8.70¢ 9.50¢ 10.50¢ 11.25¢ 13.25¢ 14.00¢ 14.75¢ 18.50¢ 22.13¢ 24.25¢ 26.18¢ 27.65¢ 28.16¢ 29.10¢ 29.90¢ 30.70¢ 31.50¢ 32.30¢ 33.65¢ 35.25¢ 37.38¢ 40.18¢ 43.70¢ 49.25¢ 52.55¢ 57.50¢ 61.20¢ 63.25¢ 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 5.5% 16.2% 24.1% 13.2% 12.9% 19.1% 11.5% 16.9% 5.6% -3.4% 18.9% 17.4% 42.5% 14.3% 7.7% 30.5% 12.4% 14.4% 15.9% 1.0% 26.8% 11.4% 10.9% 12.3% 1.8% 10.6% 17.0% 10.5% 12.5% 6.7% 26.0% 14.0% 5.4% End of calendar year bid price per common share of beneficial interest of IRET. Total calendar year distributions paid. (1) (2) (3) Distributions plus share price changes. (Calendar year distributions paid plus change in share bid price divided by previous end of year share bid.) Pavilion II - St. Lukes • Duluth, Minnesota PRICE RANGE OF COMMON SHARES OF BENEFICIAL INTEREST Fiscal Year 2004 Low High Fiscal Year 2003 High Low Fiscal Year 2002 High Low May 1 to Jul 31 Aug 1 to Oct 31 Nov 1 to Jan 31 Feb 1 to Apr 30 10.805 10.480 10.700 10.500 9.280 11.900 8.550 10.490 9.690 11.000 9.050 9.430 9.880 11.000 9.660 10.000 9.360 10.000 8.980 10.450 8.250 8.800 9.000 9.510 CALENDAR YEAR TAX STATUS OF DISTRIBUTION ON COMMON SHARES 2003 2002 2001 2000 1999 1998 Capital gain 3.88% 0.00% 0.00% .72% 30.30% 6.30% Ordinary income 58.45% 68.29% 65.98% 86.76% 69.70% 76.00% Return of capital 37.67% 31.71% 34.02% 12.52% 0.00% 17.70% West Village Center • Chanhassen, Minnesota 6 908007ADP_Nar_R3 7/30/2004 2:52 PM Page 7 TOTAL SHAREHOLDER RETURNS 33 CALENDAR YEAR PERFORMANCE COMPARISON $10,000 invested in IRET common shares on January 1, 1972, with distributions reinvested, would be worth $899,300 as of December 31, 2003. This presentation excludes brokerage costs and income taxes. $899,300 IRET Peer Group $487,100 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 03 (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. Sunset Trail • Rochester, Minnesota Mendota Office Center II • Mendota Heights, Minnesota Thomasbrook Apartments • Lincoln, Nebraska 7 908007ADP_Nar_R3 7/30/2004 2:52 PM Page 8 COMPANY PROFILE Clearwater Apartments • Boise, Idaho 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. INVESTMENT STRATEGY As of April 30, 2004, IRET owned 69 apartment communities containing 8,955 apartment units and 142 commercial properties with 7,372,381 square feet of rentable space located primarily in Minnesota and North Dakota as well as twelve other states. IRET's investment strategy is to own real estate primarily in Minnesota, North Dakota, South Dakota, Montana, and Nebraska and to diversify our Pavilion I - St. Lukes • Duluth, Minnesota investments among multi-family residential properties and a variety of commercial properties. 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 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 65% to 90% of our funds from operations (FFO). 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. Crown Colony Apartments • Topeka, Kansas Microsoft Great Plains Office Building • Fargo, North Dakota 8 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the ﬁscal year ended April 30, 2004 Commission File Number 000-14851 Investors Real Estate Trust (Exact name of Registrant as speciﬁed in its charter) North Dakota (State or other jurisdiction of incorporation or organization) 45-0311232 (IRS Employer Identiﬁcation No.) 12 South Main Street Minot, North Dakota 58701 (Address of principal executive ofﬁces) 701.837.4738 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Shares of Beneﬁcial Interest (no par value) Series A Cumulative Redeemable Preferred Shares of Beneﬁcial Interest (no par value) Indicate by check mark whether the registrant: (1) has ﬁled all reports required to be ﬁled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to ﬁle such reports), and (2) has been subject to such ﬁling requirements for the past 90 days. Yes H No h Indicate by check mark if disclosure of delinquent ﬁlers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in deﬁnitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. h Indicate by check mark whether the registrant Rule 12b-2). Yes H No h is an accelerated ﬁler (as deﬁned in Exchange Act The aggregate market value of the registrant’s outstanding common shares of beneﬁcial interest held by non- afﬁliates was $365,193,386 based on the last reported sale price on the NASDAQ National Market on October 31, 2003. The number of common shares of beneﬁcial interest outstanding as of July 7, 2004, was 42,279,703. References in this Annual Report on Form 10-K to the “Company,” “IRET,” “we,” “us,” or “our” include consolidated subsidiaries, unless the context indicates otherwise. Documents Incorporated by Reference: Portions of IRET’s deﬁnitive Proxy Statement for its 2004 Annual Meeting of Shareholders are incorporated by reference into Part III (Items 10, 11, 12, 13 and 14) hereof. INVESTORS REAL ESTATE TRUST INDEX PART I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART II Item 5 Market for Registrant’s Common Equity and Related Stockholder Matters . . . . . . . . . . . . . Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 7A. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART III Item 10 Trustees and Executive Ofﬁcers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 11 Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 12. Security Ownership of Certain Beneﬁcial Owners and Management . . . . . . . . . . . . . . . . . . . Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 14. Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PAGE 1 13 22 22 23 24 24 46 46 47 47 48 48 48 48 48 48 49 Reports of Independent Registered Public Accounting Firms and Financial Statements . . . . . . . . . . . . F-2 to F-52 Special Note Regarding Forward Looking Statements Certain statements included in this Annual Report on Form 10-K and the documents incorporated into this document by reference are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements include statements about our belief that we have the liquidity and capital resources necessary to meet our known obligations and to make additional real estate acquisitions and capital improvements when appropriate to enhance long term growth; and other statements preceded by, followed by or otherwise including words such as “believe,” “expect,” “intend,” “project,” “anticipate,” “potential,” “may,” “will,” “designed,” “estimate,” “should,” “continue” and other similar expressions. These statements indicate that we have used assumptions that are subject to a number of risks and uncertainties that could cause our actual results or performance to differ materially from those projected. Although we believe that the expectations reﬂected in such forward-looking statements are based on reasonable assumptions, we can give no assurance that these expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the expectations reﬂected in the forward-looking statements include: • the economic health of the markets in which we own and operate multi-family and commercial properties, in particular the states of Minnesota and North Dakota, or other markets in which we may invest in the future; • the economic health of our commercial tenants; • market rental conditions, including occupancy levels and rental rates, for multi-family residential and commercial properties; • our ability to identify and secure additional multi-family residential and commercial properties that meet our criteria for investment; • the level and volatility of prevailing market interest rates and the pricing of our shares of beneﬁcial interest; • ﬁnancing risks, such as our inability to obtain debt or equity ﬁnancing on favorable terms, or at all; • our ability to timely complete and lease properties under construction; • compliance with applicable laws, including those concerning the environment and access by persons with disabilities; and • the availability and cost of casualty insurance for losses caused by terrorist acts. Readers should carefully review our ﬁnancial statements and the notes thereto, as well as the section entitled “Risk Factors” in Item 1 of this Annual Report on Form 10-K and the other documents we ﬁle from time to time with the Securities and Exchange Commission. In light of these uncertainties, the events anticipated by our forward-looking statements might not occur. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The foregoing review of factors that could cause our actual results to differ materially from those contemplated in any forward-looking statements included in this Annual Report on Form 10-K should not be construed as exhaustive. (This page intentionally left blank.) PART I Item 1. Business Overview Investors Real Estate Trust is a self-advised equity Real Estate Investment Trust (REIT) organized under the laws of North Dakota. Since our formation in 1970, our business has consisted of owning and operating income- producing real properties. We are structured as an Umbrella Partnership Real Estate Investment Trust or UPREIT and we conduct our day-to-day business operations though our operating partnership, IRET Properties, a North Dakota Limited Partnership (“IRET Properties” or the “Operating Partnership”). Our investments consist of multi- family residential properties and commercial properties. These properties are located primarily in the upper Midwest states of Minnesota and North Dakota. For the twelve months ended April 30, 2004, our real estate investments in these two states accounted for 70.7% of our total gross revenue. Our principal executive ofﬁces are located in Minot, North Dakota. We also have an ofﬁce in Minneapolis, Minnesota. We seek to diversify our investments between multi-family residential and commercial properties with further diversiﬁcation within our commercial property category. As of April 30, 2004, our real estate portfolio consisted of: • 69 multi-family residential properties, containing 8,955 apartment units and having a total investment (less accumulated depreciation) of $385 million; and • 142 commercial properties, containing 7.4 million square feet of leasable space and having a total investment (less accumulated depreciation) of $618 million. Our multi-family residential properties include apartment buildings, complexes and communities. Our commercial properties include ofﬁce buildings, retail stores and centers, industrial facilities and health care properties, such as clinics and assisted living centers. Our residential leases are generally for a one-year term. Our commercial properties are typically leased to tenants under long-term lease arrangements. As of April 30, 2004, no single tenant accounted for more than 4.9% of our total annual commercial rental revenues. Except for certain commercial properties managed by our Minneapolis ofﬁce, we generally contract with locally- based third-party professional management companies to handle the day-to-day management of our properties. These management activities include the negotiation of potential leases, the preparation of proposed operating budgets, the collection and remittance of lease or rental payments and the supervision of routine maintenance and capital improvements that have been authorized by us. All decisions relating to the purchase or sale of property, insurance coverage, capital improvements, approval of commercial leases, annual operating budgets and major renovations are made exclusively by our employees and then implemented by the third-party management companies. Generally, all of our management contracts provide for compensation ranging from 2.5% to 5.0% of gross rent collections and, typically, we may terminate these contracts in 60 days or less, or upon the property manager’s failure to meet speciﬁed ﬁnancial performance goals. We believe that the use of locally-based management companies allows us to enjoy the beneﬁts of local knowledge of the applicable real estate market, while avoiding the cost and difﬁculty associated with maintaining management personnel in every city in which we operate. Structure We were organized as a REIT under the laws of the State of North Dakota on July 31, 1970. Since our formation, we have operated as a REIT under Sections 856-858 of the Internal Revenue Code, as amended (the “Code”), and since February 1, 1997, we have been structured as an UPREIT. Since restructuring as an UPREIT, we have conducted all of our daily business operations through IRET Properties. IRET Properties is organized under the laws of the State of North Dakota pursuant to an Agreement of Limited Partnership dated January 31, 1997. IRET Properties is principally engaged in acquiring, owning, operating and leasing multi-family residential and commercial real estate. The sole general partner of IRET Properties is IRET, Inc., a North Dakota corporation and our wholly-owned subsidiary. All of our assets (except for qualiﬁed REIT subsidiaries) and 1 liabilities were contributed to IRET Properties, through IRET, Inc., in exchange for the sole general partnership interest in IRET Properties, which is held by IRET, Inc. As of April 30, 2004, IRET, Inc. owned a 78% interest in IRET Properties. The remaining ownership of IRET Properties is held by individual limited partners. Investment Strategy and Policies Our business objective is to increase shareholder value by employing a disciplined investment strategy. This strategy is focused on growing assets in desired geographical markets, achieving diversiﬁcation by property type and location, and adhering to targeted returns in acquiring properties. We have increased our cash distributions every year since our inception 34 years ago and every quarter since 1988. We generally use available cash or short-term ﬂoating rate debt to acquire real estate. We then replace such cash or short-term ﬂoating rate debt with ﬁxed-rate secured debt, typically in an amount equal to 65.0% to 75.0% of a property’s appraised value. In appropriate circumstances, we also may acquire one or more properties in exchange for our common shares of beneﬁcial interest (“common shares”) or for limited partnership units of IRET Properties (“limited partnership units” or “UPREIT Units”), which are convertible, after the expiration of a minimum holding period of one year, into cash or, at our sole discretion, into our common shares on a one-to-one basis. Our investment strategy is to invest in multi-family residential properties and ofﬁce, industrial, retail and medical commercial properties that are leased to single or multiple tenants, usually for ﬁve years or longer, and are located throughout the upper Midwest. We operate mainly within the states of North Dakota and Minnesota, although we also have real estate investments in South Dakota, Montana, Nebraska, Colorado, Georgia, Idaho, Iowa, Kansas, Michigan, Washington, Texas and Wisconsin. In order to implement our investment strategy we have certain investment policies. Our signiﬁcant investment policies are as follows: Investments in the securities of, or interests in, entities primarily engaged in real estate activities and other securities. While we are permitted to invest in the securities of other entities engaged in the ownership and operation of real estate, as well as other securities, we currently have no plans to make any investments in other securities. Any policy, as it relates to investments in other securities, may be changed by a majority of the members of our Board of Trustees at any time, or from time to time, without notice to, or a vote of, our shareholders. Investments in real estate or interests in real estate. We currently own multi-family residential properties and/ or commercial properties in 14 states. We may invest in real estate, or interests in real estate, that is located anywhere in the United States; however, we currently plan to focus our investments in those states in which we already have property, with speciﬁc concentration in Minnesota, North Dakota, Nebraska, Montana, and South Dakota. Similarly, we may invest in any type of real estate or interest in real estate including, but not limited to, ofﬁce buildings, apartment buildings, shopping centers, industrial and commercial properties, special purpose buildings and undeveloped acreage. Under our Second Restated Trustees’ Regulations (Bylaws), however, we may not invest more than 10.0% of our total assets in unimproved real estate, excluding property being developed or property where development will be commenced within one year. The operation of our real estate, as it pertains to the day-to-day management, is generally delegated to third- party professional real estate management companies. All major operating decisions concerning the operation of our real estate are, however, made by our Board of Trustees. The method of ﬁnancing the purchase of real estate investments is primarily from borrowed funds and from the sale of shares and the issuance of limited partnership units. There is no limitation on the number or amount of mortgages that may be placed on any one property, unless we seek to borrow an amount in excess of 300% of our total net assets, in which case our Bylaws require that such amount be approved by a majority of the independent members of our Board of Trustees and disclosed to our shareholders in the next quarterly report, along with justiﬁcation for such excess. In addition to the 300% limitation on total indebtedness, it is generally our policy that we will not exceed a 65.0% to 75.0% debt level on our real estate assets. As of April 30, 2004, our ratio of total real estate mortgages to total real estate assets 2 was 63% while our ratio of total indebtedness as compared to our net assets was 178%. This policy may be changed at any time, or from time to time, without notice to, or approval of, our shareholders. It is not our policy to acquire assets primarily for capital gain through sale in the short term. Rather, it is our policy to acquire assets with an intention to hold such assets for at least a 10-year period. During the holding period, it is our policy to seek current income and capital appreciation through an increase in value of our real estate portfolio, as well as increased revenue as a result of higher rents. Any policy as it relates to investments in real estate or interests in real estate may be changed by our Board of Trustees at any time without notice to or a vote of our shareholders. Investments in real estate mortgages. While not our primary business focus, from time to time we make loans to others that are secured by mortgages, liens or deeds of trust covering real estate. Over the last three years, we have made a number of mortgage loans. We have no restrictions on the type of property that may be used as collateral for a mortgage loan; provided, however, that except for loans insured or guaranteed by a government or a governmental agency, we may not invest in or make a mortgage loan unless an appraisal is obtained concerning the value of the underlying property. Unless otherwise approved by our Board of Trustees, it is our policy that we will not invest in mortgage loans on any one property if in the aggregate the total indebtedness on the property, including our mortgage, exceeds 85% of the property’s appraised value. We can invest in junior mortgages without notice to, or the approval of, our shareholders. As of April 30, 2004, we had one junior mortgage with a principal balance net of allowance of $194,000. We do not currently plan to invest in any other junior mortgages. Our policies relating to mortgage loans, including second mortgages, may be changed by our Board of Trustees at any time, or from time to time, without notice to, or a vote of, our shareholders. Policies With Respect to Certain of Our Activities Our current policies as they pertain to certain of our activities are described as follows: Cash distributions to shareholders and holders of limited partnership units. We intend to continue our policy of making cash distributions to our shareholders and the holders of limited partnership units of approximately 65.0% to 90.0% of our funds from operations and to use the remaining funds for capital improvements or the purchase of additional properties. This policy may be changed at any time by our Board of Trustees without notice to, or approval of, our shareholders. We have increased our cash distributions every year since our inception 34 years ago and every quarter since 1988. Issuing senior securities. As of April 30, 2004, we have issued and outstanding $7,074,000 in investment certiﬁcates, which were issued for a deﬁnite term and annual interest rate, and which will be redeemed as they mature. In the event of our dissolution, the investment certiﬁcates would be paid in preference to our common shares. IRET has discontinued the sale of investment certiﬁcates and outstanding certiﬁcates will be redeemed as they mature. Additionally, on April 26, 2004, we issued 1,150,000 shares of 8.25% Series A Cumulative Redeemable Preferred Shares of Beneﬁcial Interest (the “Series A preferred shares”). Depending on future interest rate and market conditions, we may issue additional preferred shares or other senior securities which would have dividend and liquidation preference over our common shares. Borrowing money. We rely on borrowed funds in pursuing our investment objectives and goals. It is our policy to seek to borrow up to 65.0% to 75.0% of the appraised value of all new real estate acquired or developed. This policy concerning borrowed funds is vested solely with our Board of Trustees and can be changed by our Board of Trustees at any time, or from time to time, without notice to, or a vote of, our shareholders. Such policy is subject, however, to the limitation in our Bylaws, which provides that unless approved by a majority of the independent members of our Board of Trustees and disclosed to our shareholders in our next quarterly report along with justiﬁcation for such excess, we may not borrow in excess of 300% of our total net assets. Our Bylaws do not impose any limitation on the amount that we may borrow against any one particular property. 3 Offering securities in exchange for property. Our organizational structure allows us to issue shares and to offer limited partnership units of IRET Properties in exchange for real estate. The limited partnership units are convertible into cash, or, at our option, common shares on a one-for-one basis after a minimum one-year holding period. All limited partnership units receive the same cash distributions as those paid on common shares. Limited partners are not entitled to vote on any matters affecting us until they convert their limited partnership units to common shares. Our Articles of Amendment and Third Restated Declaration of Trust does not contain any restrictions on our ability to offer limited partnership units of IRET Properties in exchange for property. As a result, any decision to do so is vested solely in our Board of Trustees. This policy may be changed at any time, or from time to time, without notice to, or a vote of, our shareholders. For the three most recent ﬁscal years ended April 30, we have issued the following limited partnership units of IRET Properties in exchange for properties: (in thousands) 2004 2003 2002 Limited partnership units issued . . . . . . . . . . . . . . . . . . . . 2,270 Dollar value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $19,851 $8,860 $19,793 2,006 894 Acquiring or repurchasing Shares. As a REIT, it is our intention to only invest in real estate assets. Our Articles of Amendment and Third Restated Declaration of Trust does not prohibit the acquisition or repurchase of our common or preferred shares or other securities so long as such activity does not prohibit us from operating as a REIT under the Code. Any policy regarding the acquisition or repurchase of shares or other securities is vested solely in our Board of Trustees and may be changed at any time, or from time to time, without notice to, or a vote of, our shareholders. During ﬁscal year 2004, we did not repurchase any of our outstanding common shares or limited partnership units, except for the redemption of a nominal amount of fractional common shares held by shareholders, upon request. To make loans to other persons. Our organizational structure allows us to make loans to other persons, subject to certain conditions and subject to our election to be taxed as a REIT. All loans must be secured by real property or limited partnership units of IRET Properties. Our mortgage loan receivables as of April 30, 2004, totaled $4.9 million, and $1.2 million as of April 30, 2003. To invest in the securities of other issuers for the purpose of exercising control. We have not, for the past three years, engaged in, and we are not currently engaging in, investment in the securities of other issuers for the purpose of exercising control. Our Articles of Amendment and Third Restated Declaration of Trust does not impose any limitation on our ability to invest in the securities of other issuers for the purpose of exercising control. Any decision to do so is vested solely in our Board of Trustees and may be changed at any time, or from time to time, without notice to, or a vote of, our shareholders. To provide summary reports to our shareholders. We also have a policy of mailing summary quarterly reports to our shareholders in January, April, July, and October of each year. The quarterly reports do not contain ﬁnancial statements audited by an independent registered public accounting ﬁrm. This policy of providing a summary quarterly report to our shareholders is not required by our organizational documents and may be changed by a majority of our Board of Trustees at any time without notice to or a vote of our shareholders. Information about Segments We currently operate in two reportable segments: multi-family residential properties, and commercial properties. For further information on these segments and other related information, see Note 13 of our consolidated ﬁnancial statements, and Management’s Discussion and Analysis in Item 7 of this Annual Report on Form 10-K. 4 Our Executive Ofﬁcers Set forth below are the names, ages, titles and biographies of each of our executive ofﬁcers as of July 1, 2004. Name Thomas A. Wentz, Sr. Charles Wm. James Timothy P. Mihalick Thomas A. Wentz, Jr. Diane K. Bryantt Michael A. Bosh Age 68 56 45 38 40 33 Title President and Chief Executive Ofﬁcer Senior Vice President Senior Vice President and Chief Operating Ofﬁcer Senior Vice President Senior Vice President and Chief Financial Ofﬁcer Secretary and General Counsel Thomas A. Wentz, Sr. is a graduate of Harvard College and Harvard Law School, and has been associated with us since our formation on July 31, 1970. Mr. Wentz was a member of our Board of Trustees from 1970 to 1998, Secretary from 1970 to 1987, Vice President from 1987 to July 2000, and has been President and Chief Executive Ofﬁcer since July 2000. Previously, from 1985 to 1991, Mr. Wentz was a Vice President of our former advisor, Odell- Wentz & Associates, L.L.C., and, until August 1, 1998, was a partner in the law ﬁrm of Pringle & Herigstad, P.C. Charles Wm. James was appointed as a Senior Vice President in February, 2003. Prior to becoming a Senior Vice President, Mr. James served in several ofﬁcer positions from 1976 to February 2003, including the ofﬁce of Vice President with the T.F. James Company, an Iowa corporation that was merged into IRET, Inc. in February 2003. Mr. James is currently a managing member of Thomas F. James Properties, L.L.C., an Arkansas commercial development company; a partner of Peak Properties Development, a Montana commercial development partnership; a partner of James Family Properties, a Minnesota commercial development partnership; and a limited partner of Thomas F. James Realty Limited Partnership, L.L.L.P., a commercial property management company. Timothy P. Mihalick joined us as a ﬁnancial ofﬁcer in May 1981, after graduating from Minot State University. He has served in various capacities with us over the years and was named Vice President in 1992. Mr. Mihalick has served as the Chief Operating Ofﬁcer since 1997, as a Senior Vice President since 2002, and as a member of our Board of Trustees since 1999. Thomas A. Wentz, Jr. is a graduate of Harvard College and the University of North Dakota Law School, and joined us as General Counsel and Vice President in January 2000. He has served as a Senior Vice President since 2002 and as a member of our Board of Trustees since 1996. Prior to 2000, Mr. Wentz was a shareholder in the law ﬁrm of Pringle & Herigstad, P.C. from 1992 to 1999. Mr. Wentz is a member of the North Dakota Bar Association and a Director of SRT Communications, Inc. Mr. Wentz is the son of Thomas A. Wentz, Sr. Diane K. Bryantt joined us in June 1996 and served as our Controller and Corporate Secretary before being appointed to the positions of Senior Vice President and Chief Financial Ofﬁcer in 2002. Prior to joining us, Ms. Bryantt was employed by First American Bank, Minot, North Dakota. Michael A. Bosh joined us as Associate General Counsel and Secretary in September 2002, and was named General Counsel in September 2003. Prior to 2002, Mr. Bosh was a shareholder in the law ﬁrm of Pringle & Herigstad, P.C. Mr. Bosh graduated from Jamestown College in 1992 and from Washington & Lee University School of Law in 1995. Mr. Bosh is a member of the American Bar Association and the North Dakota Bar Association. Employees As of April 30, 2004, we had 34 full time employees. Environmental Matters and Government Regulation Under various federal, state and local laws, ordinances and regulations relating to the protection of the environment, a current or previous owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances released at a property, and may be held liable to a governmental entity or to third parties for property damage or personal injuries and for investigation and clean-up costs incurred in connection with any contamination. In addition, some environmental laws create a lien on a contaminated site 5 in favor of the government for damages and costs it incurs in connection with the contamination. These laws often impose liability without regard to whether the current owner was responsible for, or even knew of, the presence of such substances. It is our policy to obtain from independent environmental consultants a “Phase I” environmental audit (which involves visual inspection but not soil or groundwater analysis) on all properties that we seek to acquire. We do not believe that any of our properties are subject to any material environmental contamination. However, no assurances can be given that: • a prior owner, operator or occupant of the properties we own or the properties we intend to acquire did not create a material environmental condition not known to us, which might have been revealed by more in-depth study of the properties; and • future uses or conditions (including, without limitation, changes in applicable environmental laws and regulations) will not result in the imposition of environmental liability upon us. In addition to laws and regulations relating to the protection of the environment, many other laws and governmental regulations are applicable to our properties, and changes in the laws and regulations, or in their interpretation by agencies and the courts, occur frequently. Under the Americans with Disabilities Act of 1990 (the “ADA”), all places of public accommodation are required to meet certain federal requirements related to access and use by disabled persons. In addition, the Fair Housing Amendments Act of 1988 (the “FHAA”) requires apartment communities ﬁrst occupied after March 13, 1990, to be accessible to the handicapped. Non-compliance with the ADA or the FHAA could result in the imposition of ﬁnes or an award of damages to private litigants. We believe that those of our properties to which the ADA and/or FHAA apply are substantially in compliance with present ADA and FHAA requirements. Competition Investing in and operating real estate is a very competitive business. We compete with other owners and developers of multi-family and commercial properties to attract tenants to our properties. Ownership of competing properties is diversiﬁed among other REITs, ﬁnancial institutions, individuals and public and private companies who are actively engaged in this business. Our multi-family properties compete directly with other rental apartments, as well as with condominiums and single-family homes that are available for rent or purchase in the areas in which our properties are located. Our commercial properties compete with other commercial properties for tenants. Additionally, we compete with other real estate investors, including other REITs, pension and investment funds, partnerships and investment companies, to acquire properties. This competition affects our ability to acquire properties we want to add to our portfolio and the price we pay in acquisitions. During the past two years, we have witnessed an unprecedented demand for quality investment real estate. This demand caused an escalation in price for all types of real estate. As a result, we were unable to purchase properties that will generate rates of return similar to those generated by properties we acquired in previous years. We expect that the levels of return to be achieved through our investment in existing and stabilized real estate will remain lower than in previous periods as long as interest rates remain at historically low levels. We do not believe we have a dominant position in any of the geographic markets in which we operate, but some of our competitors are dominant in selected markets. Many of our competitors have greater ﬁnancial and management resources than we have. We believe, however, that the geographic diversity of our investments, the experience and abilities of our management, the quality of our assets and the ﬁnancial strength of many of our commercial tenants affords us some competitive advantages that have in the past and will in the future allow us to operate our business successfully despite the competitive nature of our business. Corporate Governance Initiatives During ﬁscal year 2004, the Company’s Board of Trustees adopted several new policies and initiatives to further strengthen the Company’s corporate governance and increase the transparency of ﬁnancial reporting. In response to the requirements of the Sarbanes-Oxley Act of 2002 and revised NASDAQ listing standards, the Board of Trustees took the following actions: • adopted or revised Charters for the Board’s Audit, Compensation, Executive and Nominating Committees; • adopted a Code of Conduct applicable to trustees, ofﬁcers and employees, and a Code of Ethics for Senior Financial Ofﬁcers; 6 • established processes for shareholder communications with the Board of Trustees; and • established regular meetings of the independent trustees in executive sessions at which only the independent trustees are present. Additionally, the Company’s Audit Committee established procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters, including procedures for the conﬁdential, anonymous submission by Company employees of concerns regarding accounting or auditing matters. The Audit Committee also adopted a policy requiring Audit Committee approval of all audit and non-audit services provided to the Company by the Company’s independent registered public accounting ﬁrm. The Company will disclose any amendment to its Code of Ethics for Senior Financial ofﬁcers on its website. In addition, in the event the Company waives compliance by any of the senior ﬁnancial ofﬁcers subject to the Code of ethics, the Company will post on its website within ﬁve business days the nature of the waiver, in satisfaction of its disclosure requirement under Item 10 of Form 8-K. Website and Available Information Our internet address is www.iret.com. We make available, free of charge, through the “SEC ﬁlings” tab under the Investor Relations section of our internet website, our Annual Report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and amendments to such reports ﬁled or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such forms are ﬁled with or furnished to the SEC. Current copies of our Code of Conduct, Code of Ethics for Senior Financial Ofﬁcers, and Charters for the Audit, Compensation, Executive and Nominating Committee of our Board of Trustees are also available on our website under the heading “Corporate Governance” in the Investor Relations section of our website. Copies of these documents are also available to shareholders upon request addressed to the Secretary at Investors Real Estate Trust, P.O. Box 1988, Minot, North Dakota 58701. Information on our internet website does not constitute part of this Annual Report on Form 10-K. 7 Risks Related to Our Properties and Business RISK FACTORS Our increasing ownership of commercial properties subjects us to different risks than our traditional base of multi-family residential properties. Historically, the assets in our investment portfolio consisted predominantly of multi-family residential properties. More recently, our investment activities have caused this balance to shift so that the percentage of commercial properties held in our portfolio has increased signiﬁcantly. Within the past 24 months, approximately 86% of our property acquisitions, on a total asset value basis, have been commercial properties, due to the greater availability of these properties on terms that meet our ﬁnancial and strategic objectives. Based on total asset value, commercial properties now comprise a majority of our real estate assets, with the majority of our commercial properties being located in the Minneapolis, Minnesota area. Based on current market conditions, we anticipate that the percentage of commercial properties that we may acquire will continue to signiﬁcantly exceed the number of multi-family residential properties that we may acquire during the next twelve months. Our historical experience in acquiring and operating multi-family residential properties may not be directly applicable to the acquisition and operation 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. Our earnings may be negatively affected if we are not successful in our acquisition and operation of commercial properties. Our geographic concentration in Minnesota and North Dakota may result in losses. For the ﬁscal year ended April 30, 2004, we received approximately 80% of our commercial gross revenue from commercial properties in Minnesota and approximately 9% of our commercial gross revenue from commercial properties in North Dakota. For that same period, we received approximately 20% of our multi-family residential gross revenue from multi- family residential properties in Minnesota and 29% of our multi-family gross revenue from multi-family properties in North Dakota. As of April 30, 2004, Minnesota accounted for approximately 79% of our commercial real estate portfolio and 22% of our multi-family residential real estate portfolio, as determined by total asset value, while North Dakota accounted for approximately 8% of our commercial real estate portfolio and 26% of our multi-family residential real estate portfolio. As a result of this concentration, we are subject to substantially greater risk than if our investments were more geographically dispersed. Speciﬁcally, we are more signiﬁcantly exposed to the effects of economic and real estate conditions in those particular markets, such as building by competitors, local vacancy and rental rates and general levels of employment and economic activity. The economic climate in Minnesota is highly dependent on the service, manufacturing and high technology industries. The North Dakota economy is dependent on the agricultural, government, business and personal services and wholesale and retail industries. Economic weakening, or lack of recovery from the recent weakness, in any of these industries may adversely affect the performance of our real estate portfolio by decreasing demand for rental space. Approximately 68% of our assets in North Dakota, based on total asset value, are multi-family residential properties, which are dependent on a stable or growing population. During the past ten years, North Dakota’s population and total personal income have grown at slower rates than surrounding states and the nation as a whole. If this trend continues, we may experience difﬁculty in renting our properties at acceptable rates, which may result in a decrease in our net income and adversely affect our ability to make distributions to the holders of our shares of beneﬁcial interest. Increasing physical and economic vacancy rates and declining rental rates will negatively impact earnings. In the twelve months subsequent to April 30, 2004, leases covering approximately 10% of our annualized base rents 8 will expire. At April 30, 2004, the economic occupancy of our commercial properties, on a stabilized property basis, was approximately 93%. “Economic Occupancy” is deﬁned as total possible revenue less vacancy loss as a percentage of total possible revenue. Total possible revenue is determined by valuing occupied units or square footage at contract rates, and vacant units or square footage at market rates. “Stabilized properties” are those properties that we have owned for the entirety of the periods being compared, and include properties that were redeveloped or expanded during the periods being compared. Properties purchased or sold during the periods being compared are excluded from our stabilized property analysis. If we are unable to rent or sell those properties that are vacant or affected by expiring leases, properties producing approximately 11% of our total commercial annualized base rents will be vacant within the next 12 months. Even greater vacancies will be created to the extent that a number of tenants, or any one signiﬁcant tenant, ﬁle for bankruptcy protection and reject our leases. At April 30, 2004, the economic occupancy of our multi-family residential properties, on a stabilized property basis, was approximately 91%. Multi-family residential vacancies could increase from current levels due to general economic conditions, local economic or competitive conditions, the trend toward home ownership facilitated by low interest rates, unsatisfactory property management, the physical condition of our properties or other factors. Increased vacancies in both our commercial and multi-family residential properties will negatively impact our earnings, will cause a decline in the value of our real estate portfolio and may adversely affect our ability to make distributions to the holders of our shares of beneﬁcial interest. Economic occupancy levels for our stabilized commercial and multi-family residential properties have decreased over the past twelve months. Multi-family property economic occupancy rates (on a stabilized property basis) decreased to 91% for the twelve months April 30, 2004, from 91% for the twelve months ended April 30, 2003. Commercial property economic occupancy rates (on a stabilized property basis) decreased to 93% for the twelve months ended April 30, 2004 from 96% for the twelve months ended April 30, 2003. The decrease in economic occupancy rates of our multi-family residential properties does not reﬂect the concessions, such as free rent, that have been granted to attract new tenants to our multi-family residential properties. Concessions, on a multi- family residential stabilized property basis, were $2.58 million and $1.37 million for the twelve months ended April 30, 2004 and 2003, respectively, an increase of 88%. Inability to manage our rapid growth effectively may adversely affect our operating results. Our total assets have increased from $570.3 million at April 30, 2001, to $1.08 billion at April 30, 2004, principally through the acquisition of additional real estate properties. Subject to our continued ability to raise equity capital and issue LP units of IRET Properties and identify suitable investment properties, we intend to continue our acquisition of real estate properties. Effective management of this level of growth will present challenges, including: • the need to expand our management team and staff; • the need to enhance internal operating systems and controls; • increased reliance on outside advisors and property managers; and • the ability to consistently achieve targeted returns. If we are unable to effectively manage our growth, our operating results will be adversely affected. Competition may negatively impact our earnings. We compete with many kinds of institutions, including other REITs, private partnerships, individuals, pension funds and banks, for tenants and investment opportunities. Many of these institutions are active in the markets in which we invest and have greater ﬁnancial and other resources that may be used to compete against us. With respect to tenants, this competition may affect our ability to lease our properties, the price at which we are able to lease our properties and the cost of required renovations or build- outs. With respect to acquisition and development investment opportunities, this competition may cause us to pay higher prices for new properties than we otherwise would have paid, or may prevent us from purchasing a desired property at all. An inability to continue to make accretive property acquisitions may adversely affect our ability to increase our operating income. From our ﬁscal year ended April 30, 2002, to our ﬁscal year ended April 30, 2004, our operating income decreased from $13.0 million to $11.9 million. Our basic and diluted net income per common share was $.24 as of April 30, 2004, compared to $.38 and $.42, respectively, as of April 30, 2003 and 2002. If 9 we are unable to continue to make real estate acquisitions on terms that meet our ﬁnancial and strategic objectives, whether due to market conditions, a changed competitive environment or unavailability of capital, our ability to increase our operating income may be materially and adversely affected. High leverage on our overall portfolio may result in losses. As of April 30, 2004, our ratio of total indebtedness to total net assets was approximately 178%. As of April 30, 2003 and 2002, our percentage of total indebtedness to total net assets was approximately 186% and 211%, respectively. Under our Second Restated Trustees’ Regulations (Bylaws) we may increase our total indebtedness up to 300% of net assets, or by an additional approximately $475 million. There is no limitation on the increase that may be permitted if approved by a majority of the independent members of our board of trustees and disclosed to the holders of our shares of beneﬁcial interest in the next quarterly report, along with justiﬁcation for any excess. This amount of leverage may expose us to cash ﬂow problems if rental income decreases. Under those circumstances, in order to pay our debt obligations we might be required to sell properties at a loss or be unable to make distributions to the holders of our shares of beneﬁcial interest. A failure to pay amounts due may result in a default on our obligations and the loss of the property through foreclosure. Our inability to renew, repay or reﬁnance our debt may result in losses. We are subject to the normal risks associated with debt ﬁnancing, including the risk that: • our cash ﬂow will be insufﬁcient to meet required payments of principal and interest; • we will not be able to renew, reﬁnance or repay our indebtedness when due; and • the terms of any renewal or reﬁnancing will be less favorable than the terms of our current indebtedness. If we are unable to reﬁnance our indebtedness on acceptable terms, or at all, we may be forced to dispose of one or more of the properties on disadvantageous terms, which may result in losses to us. These losses could have a material adverse effect on us, our ability to make distributions to the holders of our shares of beneﬁcial interest and our ability to pay amounts due on our debt. Furthermore, if a property is mortgaged to secure payment of indebtedness and we are unable to meet mortgage payments, the mortgagee could foreclose upon the property, appoint a receiver and receive an assignment of rents and leases or pursue other remedies, all with a consequent loss of our revenues and asset value. Foreclosures could also create taxable income without accompanying cash proceeds, thereby hindering our ability to meet the REIT distribution requirements of the Internal Revenue Code. The principal balance of our indebtedness in mortgage loans secured by individual commercial and residential properties totaled $633 million as of April 30, 2004. Of the outstanding mortgages, both ﬁxed and variable, $15.1 million in principal amount came due during ﬁscal year 2004, $15.8 million in principal amount will come due during ﬁscal year 2005 and the remaining balance will come due in later ﬁscal years. The cost of our indebtedness may increase. We have incurred, and we expect to continue to incur, indebtedness that bears interest at a variable rate. As of April 30, 2004, $42 million, or approximately 7%, of the principal amount of our total mortgage indebtedness was subject to variable interest rate agreements. The interest rates on our variable rate mortgages range from approximately 4% to approximately 8%. An increase of one percent in our variable interest rate would collectively increase our interest payments by $419,000 annually. In addition, portions of our ﬁxed-rate indebtedness incurred for historical property acquisitions will come due on a periodic basis. For example, in each of our ﬁscal years ended April 30, 2005, 2006 and 2007, approximately $14.0 to $17.0 million of our ﬁxed- rate debt will come due. Accordingly, increases in interest rates will increase our interest costs, which could have a material adverse effect on us, our ability to make distributions to the holders of our shares of beneﬁcial interest and our ability to pay amounts due on our debt. Our current or future insurance may not protect us against possible losses. We carry comprehensive liability, ﬁre, extended coverage and rental loss insurance with respect to our properties at levels that we believe to be adequate. However, the coverage limits of our current or future policies may be insufﬁcient to cover the full cost of repair or replacement of all potential losses. Moreover, this level of coverage may not continue to be available in the future or, if available, may be available only at unacceptable cost or with unacceptable terms. Additionally, there may be certain extraordinary losses, such as those resulting from civil unrest, terrorism or environmental contamination, that are not generally, or fully, insured against because they are either uninsurable 10 or not economically insurable. For example, we do not currently carry insurance against losses as a result of environmental contamination. Should an uninsured or underinsured loss occur to a property, we could be required to use our own funds for restoration or lose all or part of our investment in, and anticipated revenues from, the property. In any event, we would continue to be obligated on any mortgage indebtedness on the property. Any loss could have a material adverse effect on us, our ability to make distributions to the holders of our shares of beneﬁcial interest and our ability to pay amounts due on our debt. We have signiﬁcant investments in medical properties and adverse trends in healthcare provider operations may negatively affect our lease revenues from these properties. We have acquired a signiﬁcant number of specialty medical properties (including assisted living facilities) and may acquire more in the future. As of April 30, 2004, our real estate portfolio consisted of 28 medical properties, having a total asset value of $171 million, or approximately 16% of the total asset value of our entire real estate portfolio based on the dollar amount of our original investment plus capital improvements. The healthcare industry is currently experiencing changes in the demand for, and methods of delivery of, healthcare services; changes in third-party reimbursement policies; signiﬁcant unused capacity in certain areas, which has created substantial competition for patients among healthcare providers in those areas; continuing pressure by private and governmental payors to reduce payments to providers of services; and increased scrutiny of billing, referral and other practices by federal and state authorities. Sources of revenue for our medical property tenants may include the federal Medicare program, state Medicaid programs, private insurance carriers and health maintenance organizations, among others. Efforts by such payors to reduce healthcare costs will likely continue, which may result in reductions or slower growth in reimbursement for certain services provided by some of our tenants. These factors may adversely affect the economic performance of some or all of our medical services tenants and, in turn, our lease revenues. In addition, if we or our tenants terminate the leases for these properties, or our tenants lose their regulatory authority to operate such properties, we may not be able to locate suitable replacement tenants to lease the properties for their specialized uses. Alternatively, we may be required to spend substantial amounts to adapt the properties to other uses. Any loss of revenues and/or additional capital expenditures occurring as a result could hinder our ability to make distributions to the holders of our shares of beneﬁcial interest. Adverse changes in applicable laws may affect our potential liabilities relating to our properties and operations. Increases in real estate taxes and income, service and transfer taxes cannot always be passed through to all tenants in the form of higher rents. As a result, any increase may adversely affect our cash available for distribution, our ability to make distributions to the holders of our shares of beneﬁcial interest and our ability to pay amounts due on our debt. Similarly, changes in laws that increase the potential liability for environmental conditions existing on properties, that increase the restrictions on discharges or other conditions or that affect development, construction and safety requirements may result in signiﬁcant unanticipated expenditures that could have a material adverse effect on us, our ability to make distributions to the holders of our shares of beneﬁcial interest and our ability to pay amounts due on our debt. In addition, future enactment of rent control or rent stabilization laws or other laws regulating multi-family residential properties may reduce rental revenues or increase operating costs. Complying with laws beneﬁting disabled persons may affect our costs and investment strategies. Federal, state and local laws and regulations designed to improve disabled person’s access to and use of buildings, including the Americans with Disabilities Act, may require modiﬁcations to, or restrict renovations of, existing buildings. Additionally, these laws and regulations may require that structural features be added to buildings under construction. Any legislation or regulations that may be adopted in the future may impose further burdens or restrictions on us with respect to improved access to, and use of these buildings by, disabled persons. The costs of complying with these laws and regulations may be substantial and limits or restrictions on construction, or the completion of required renovations, may limit the implementation of our investment strategy or reduce overall returns on our investments. This could have an adverse effect on us, our ability to make distributions to the holders of our shares of beneﬁcial interest and our ability to pay amounts due on our debt. We may be responsible for potential liabilities under environmental laws. 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, hazardous or toxic substances in, on, around or under that property. These laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of the hazardous or toxic substances. The presence of these substances, or the failure to properly remediate any 11 property containing these substances, may adversely affect the owner’s or operator’s ability to sell or rent the affected property or to borrow funds using the 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, these substances at that disposal or treatment facility, whether or not the facility is owned or operated by that person. In connection with our current or former ownership (direct or indirect), operation, management, development and/or control of real properties, we may be potentially liable for removal or remediation costs with respect to hazardous or toxic substances as those properties, as well as certain other costs, including governmental ﬁnes and claims for injuries to persons and property. A ﬁnding of liability for an environmental condition as to any one or more properties could have a material adverse effect on us, our ability to make distributions to the holders of our shares of beneﬁcial interest and our ability to pay amounts due on our debt. It is currently our policy to obtain a Phase I environmental study on each property that we seek to acquire. If the Phase I indicates any possible environmental problems, it is our policy is to order a Phase II study, which involves testing the soil and ground water for actual hazardous substances. However, Phase I and Phase II environmental studies, or any other environmental studies undertaken with respect to any of our current or future properties, may not reveal the full extent of potential environmental liabilities. We currently do not carry insurance for environmental liabilities. We may be unable to retain or attract qualiﬁed management. We are dependent upon our senior ofﬁcers for essentially all aspects of our business operations. Our senior ofﬁcers have experience in the specialized business segments in which we operate and the loss of them would likely have a material adverse effect on our operations. We do not have employment contracts with any of our senior ofﬁcers. As a result, any senior ofﬁcer may terminate his or her relationship with us at any time, without providing advance notice. The location of our corporate headquarters in Minot, North Dakota, may make it more difﬁcult and expensive to attract, relocate and retain current and future ofﬁcers and employees. Risks Related to Our Structure and Organization We may incur tax liabilities as a consequence of failing to qualify as a REIT. Although our management believes that we are organized and have operated and are operating in such a manner to qualify as a “real estate investment trust,” as that term is deﬁned under the Internal Revenue Code, we may not in fact have operated, or may not be able to continue to operate, in a manner to qualify or remain so qualiﬁed. Qualiﬁcation as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which there are only limited judicial or administrative interpretations, and further involves the determination of factual matters and circumstances not entirely within our control. For example, in order to qualify as a REIT, at least 95% of our gross income in any year must be derived from qualifying sources, and we must make distributions to the holders of our shares of beneﬁcial interest aggregating annually at least 90% of our REIT taxable income (excluding net capital gains). Thus, to the extent revenues from non-qualifying sources, such as income from third-party management, represents more than ﬁve percent of our gross income in any taxable year, we will not satisfy the 95% income test and may fail to qualify as a REIT, unless certain relief provisions contained in the Internal Revenue Code apply. Even if relief provisions apply, however, a tax would be imposed with respect to excess net income. Additionally, if IRET Properties, our operating partnership or one or more of our subsidiaries is determined to be taxable as a corporation, we may fail to qualify as a REIT. Either our failure to qualify as a REIT, for any reason, or the imposition of taxes on excess net income from non-qualifying sources, could have a material adverse effect on us, our ability to make distributions to the holders of our shares of beneﬁcial interest and our ability to pay amounts due on our debt. Furthermore, new legislation, regulations, administrative interpretations or court decisions could change the tax laws with respect to our qualiﬁcation as a REIT or the federal income tax consequences of our qualiﬁcation. If we failed to qualify as a REIT, we would be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at corporate rates, which would likely have a material adverse effect on us, our ability to make distributions to the holders of our shares of beneﬁcial interest and our ability to pay amounts due on our debt. In addition, unless entitled to relief under applicable statutory provisions, we would also be disqualiﬁed from treatment as a REIT for the four taxable years following the year during which we lost our qualiﬁcation. This treatment would reduce funds available for investment or distributions to the holders of our shares of beneﬁcial interest because of the additional tax liability to us for the year or years involved. In addition, 12 we would no longer be required to make distributions to holders of our common shares. To the extent that distributions to the holders of our shares of beneﬁcial interest would have been made in anticipation of qualifying as a REIT, we might be required to borrow funds or to liquidate certain investments to pay the applicable tax. Certain provisions of our Third Restated Declaration of Trust may limit a change in control and deter a takeover. In order to maintain our qualiﬁcation as a REIT, our Third Restated Declaration of Trust provides that any transaction, other than a transaction entered into through the NASDAQ National Market or other similar exchange, that would result in our disqualiﬁcation as a REIT under Section 856 of the Internal Revenue Code, including any transaction that would result in (i) a person owning in excess of the ownership limit, which as of the date of this annual report is 9.8%, in number or value, of our outstanding shares of beneﬁcial interest, (ii) less than 100 people owning our shares of beneﬁcial interest, (iii) our being “closely held” within the meaning of Section 856(h) of the Internal Revenue Code, or (iv) 50% or more of the fair market value of our shares of beneﬁcial interest being held by persons other than “United States persons,” as deﬁned in Section 7701(a)(30) of the Internal Revenue Code, will be void ab initio. If the transaction is not void ab initio, then the shares of beneﬁcial interest in excess of the ownership limit, that would cause us to be closely held, that would result in 50% or more of the fair market value of our shares of beneﬁcial interest to be held by persons other than United States persons or that otherwise would result in our disqualiﬁcation as a REIT, will automatically be exchanged for an equal number of excess shares, and these excess shares will be transferred to an excess share trustee for the exclusive beneﬁt of the charitable beneﬁciaries named by our board of trustees. These limitations may have the effect of preventing a change in control or takeover of us by a third party, even if the change in control or takeover would be in the best interests of the holders of our shares of beneﬁcial interest. Our board of trustees may make changes to our major policies without approval of the holders of our shares of beneﬁcial interest. Our major policies, including policies relating to development, acquisitions, ﬁnancing, growth, debt capitalization and distributions, are determined by our board of trustees. Our board of trustees may amend or revoke those policies, and other policies, without advance notice to, or the approval of, the holders of our shares of beneﬁcial interest. Item 2. Properties IRET is a qualiﬁed REIT under Section 856-858 of the Code, and is in the business of owning, leasing, developing and acquiring real estate properties. Except for certain commercial properties managed by our Minneapolis ofﬁce, these real estate investments are generally managed by third-party professional real estate management companies on our behalf. Total Real Estate Rental Revenue As of April 30, 2004, our real estate portfolio consisted of 69 multi-family residential properties and 142 commercial properties, comprising 40% and 60%, respectively, of our total real estate portfolio, based on the dollar amount of our original investment plus capital improvements through April 30, 2004. Gross annual rental revenue and percentages of total annual real estate rental revenue by property type for each of the three most recent ﬁscal years ended April 30, are as follows: (in thousands) 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Economic Occupancy Rates Multi-Family Residential Gross Revenue $62,964 $59,653 $58,347 % 45% 50% 65% Commercial Gross Revenue $77,260 $58,878 $32,008 % Total Revenue 55% $140,224 50% $118,531 35% $ 90,355 Economic occupancy rates are shown below for each property type in each of the three most recent ﬁscal years ended April 30. We deﬁne “economic occupancy” as total possible revenue less vacancy loss as a percentage of total possible revenue. Total possible revenue is determined by valuing occupied units or square footage at contract rates and vacant units or square footage at market rates. In the case of multi-family residential properties, lease 13 arrangements with individual tenants vary from month-to-month to one-year leases. Leases on commercial properties vary from month-to-month to 20 years. Multi-Family Residential Economic Occupancy . . . . Commercial Economic Occupancy . . . . . . . . . . . . . . . . . . 90.1% 91.2% 94.4% 92.9% 95.4% 97.9% 2004 2003 2002 Certain Lending Requirements In certain instances, in connection with the acquisition of investment properties, the lender ﬁnancing such properties may require, as a condition of the loan, that the properties be owned by a “single asset entity.” Accordingly, we have organized eleven wholly-owned subsidiary corporations, and IRET Properties has organized several limited partnerships, for the purpose of holding title in an entity that complies with such lending conditions. All ﬁnancial statements of these subsidiaries are consolidated into our ﬁnancial statements. Management of Our Real Estate Assets The day-to-day management of our real estate assets is handled by third-party professional real estate management companies. Day-to-day management activities include the negotiation of potential leases, the preparation of proposed operating budgets, and the supervision of routine maintenance and capital improvements that have been authorized by us. All activities relating to purchase, sale, insurance coverage, capital improvements, approval of commercial leases, annual operating budgets and major renovations are made exclusively by our employees and are then implemented by the third-party property management companies. As of April 30, 2004, we had property management contracts with the following companies: A & L Properties, Inc., Duluth, MN Bayport Properties, Minneapolis, MN Builder’s Management & Investment Co., Fargo, ND Colliers Turley Martin Tucker, Inc., Minneapolis, MN and Jamestown, ND Coast Management, Boise, ID, and Everett, WA Coldwell Banker First Realty, Fargo, ND ConAm, Plano, TX and Aurora, CO Dakota Commercial, Grand Forks, ND Ferguson Commercial Real Estate Services, Des Moines, IA Frauenshuh Companies, Inc., St. Paul, MN Hoyt Properties, Inc., Minnetonka, MN Inland Companies, Milwaukee, MN Investors Management & Marketing, Inc., Minot, ND Illies Nohave Heinen Property Management, St. Cloud, MN Kahler Property Management, Rapid City, SD Northco, Inc., Minneapolis, MN Opus Northwest Management, L.L.C., Minnetonka, MN and Minneapolis, MN R.A. Morton & Associates, St. Cloud, MN and Sauk Rapids, MN Remada Companies, Minnetonka, MN Sundance Company, Boise, ID United Properties, Minneapolis, MN Weis Management, Rochester, MN With the exception of Hoyt Properties, Inc., none of the companies engaged to provide property management services is afﬁliated with us, our ofﬁcers or members of our Board of Trustees. Hoyt Properties, Inc. is owned 100.0% by Steven B. Hoyt, a member of our Board of Trustees, and his wife. Hoyt Properties, Inc. manages, pursuant to written management contracts, the commercial buildings that we acquired from Mr. Hoyt. In July 2004, a former principal of Bayport Properties joined us as a Vice President, Asset Management, with the management of certain of our commercial properties, primarily located in the responsibility for Minneapolis area. 14 Generally, all of our management contracts provide for compensation ranging from 2.5% to 5.0% of gross rent collections and, typically, we may terminate these contracts in 60 days or less or upon the property manager’s failure to meet certain speciﬁed ﬁnancial performance goals. With respect to multi-tenant commercial properties, we rely almost exclusively on third-party brokers to locate potential tenants. As compensation, brokers may receive a commission of up to 7.0% of the total rent to be paid over the term of the lease. This commission rate is the industry standard, which we believe is commercially reasonable. Summary of Real Estate Investment Portfolio As of April 30, (in thousands) 2004 % 2003 % Real Estate Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real Estate Owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less Accumulated Depreciation . . . . . . . . . . . . . . . . . . Mortgage Loans Receivable . . . . . . . . . . . . . . . . . . . . . . Total Real Estate Investments . . . . . . . . . . . . . . . . . . . . $1,103,428 (100,250) $1,003,178 4,893 $1,008,071 $919,781 (75,639) 99.5% $844,142 1,183 100% $845,325 .5% 99.9% .1% 100% Summary of Individual Properties Owned as of April 30, 2004 The following table presents information regarding our 211 properties owned as of April 30, 2004. We own the following interests in real estate either through our wholly-owned subsidiaries or by ownership of a controlling interest in an entity owning the real estate. We account for these interests on a consolidated basis. Occupancy rates given are the average economic occupancy rates for the ﬁscal year ended April 30, 2004: (N/A = Property held less than 12 months) (* = Real estate not owned in fee; leased under a ground lease) Property Name and Location MULTI-FAMILY RESIDENTIAL Units (in thousands) Investment Fiscal 2004 Economic Occupancy 408 1st Street SE – Minot, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Applewood on the Green – Omaha, NE . . . . . . . . . . . . . . . . . . . . . . . . . . . . Beulah Condos – Beulah, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bison Properties – Carrington, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Brookﬁeld Village – Topeka, KS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Candlelight Apartments – Fargo, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Canyon Lake Apartments – Rapid City, SD . . . . . . . . . . . . . . . . . . . . . . . . Castle Rock – Billings, MT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Century Apartments – Williston, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chateau Apartments – Minot, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Clearwater – Boise, ID . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Colton Heights – Minot, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Connelly Estates – Burnsville, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cottonwood Lake I – Bismarck, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cottonwood Lake II – Bismarck, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cottonwood Lake III – Bismarck, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Country Meadows Phase I – Billings, MT . . . . . . . . . . . . . . . . . . . . . . . . . Country Meadows Phase II – Billings, MT . . . . . . . . . . . . . . . . . . . . . . . . . Crestview Apts – Bismarck, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Crown Colony – Topeka, KS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dakota Arms – Minot, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dakota Hill at Valley Ranch – Irving, TX . . . . . . . . . . . . . . . . . . . . . . . . . . East Park Apartments – Sioux Falls, SD . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 234 26 35 160 66 109 165 192 64 60 18 240 67 67 67 67 67 152 220 18 504 84 47 $ 12,024 434 666 7,434 1,670 4,304 6,163 4,536 2,734 3,924 992 14,200 4,572 4,326 4,787 4,311 4,465 5,251 11,190 658 38,435 2,659 100.0% 76.9% 52.3% 72.1% N/A 99.1% 88.7% 85.8% 94.0% 97.3% 92.0% 97.1% N/A 86.3% 88.4% 90.7% 94.1% 93.2% 89.1% 92.5% 98.2% 93.9% 89.3% 15 Property Name and Location Units (in thousands) Investment Fiscal 2004 Economic Occupancy MULTI-FAMILY RESIDENTIAL, continued Eastgate Properties – Moorhead, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forest Park Estates – Grand Forks, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . Heritage Manor – Rochester, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ivy Club – Vancouver, WA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Jenner Properties – Grand Forks, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kirkwood Apartments – Bismarck, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lancaster Apartments – St. Cloud, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legacy Apartments I – Grand Forks, ND . . . . . . . . . . . . . . . . . . . . . . . . . . Legacy Apartments II & III – Grand Forks, ND . . . . . . . . . . . . . . . . . . . Legacy IV – Grand Forks, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legacy V – Grand Forks, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legacy VI – Grand Forks, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legacy VII – Grand Forks, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lonetree Apartments – Harvey, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Magic City Apartments – Minot, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Meadows Phase I – Jamestown, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Meadows Phase II – Jamestown, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Meadows Phase III – Jamestown, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miramont – Fort Collins, CO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Monticello Apartments – Monticello, MN . . . . . . . . . . . . . . . . . . . . . . . . . . Neighborhood Apartments – Co. Springs, CO . . . . . . . . . . . . . . . . . . . . . . North Pointe – Bismarck, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Oakmont Apartments – Sioux Falls, SD . . . . . . . . . . . . . . . . . . . . . . . . . . . . Olympic Village – Billings, MT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Oxbow – Sioux Falls, SD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Park East Apartments – Fargo, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Park Meadows I – Waite Park, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Park Meadows II & III – Waite Park, MN . . . . . . . . . . . . . . . . . . . . . . . . . Parkway Apartments – Beulah, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pebble Springs – Bismarck, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pine Cone Apartments – Fort Collins, CO . . . . . . . . . . . . . . . . . . . . . . . . . . Pinehurst Apartments – Billings, MT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pointe West Apartments – Rapid City, SD . . . . . . . . . . . . . . . . . . . . . . . . . . Prairie Winds Apartments – Sioux Falls, SD . . . . . . . . . . . . . . . . . . . . . . . Prairiewood Meadows – Fargo, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Remada Court Apartments – Eagan, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . Ridge Oaks Apartments – Sioux City, IA . . . . . . . . . . . . . . . . . . . . . . . . . . . Rimrock Apartments – Billings, MT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rocky Meadows 96 – Billings, MT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rosewood/Oakwood – Sioux Falls, SD . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sherwood Apartments – Topeka, KS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . South Pointe – Minot, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Southview Apartments – Minot, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Southwind Apartments – Grand Forks, ND . . . . . . . . . . . . . . . . . . . . . . . . . Sunset Trail Phase I – Rochester, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sunset Trail Phase II – Rochester, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sweetwater Properties – Devils Lake, ND . . . . . . . . . . . . . . . . . . . . . . . . . . Sycamore Village Apartments – Sioux Falls, SD . . . . . . . . . . . . . . . . . . . Thomasbrook – Lincoln, NE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Valley Park Manor – Grand Forks, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 270 182 204 90 108 84 116 67 67 ** ** ** 12 200 27 27 27 210 60 192 49 80 274 120 122 120 240 36 16 195 21 90 48 85 115 132 78 98 160 300 195 24 164 73 73 90 48 264 168 16 $ 2,732 8,146 8,061 13,430 2,015 3,914 3,407 7,312 3,894 6,743 351 230 230 260 4,916 1,841 1,930 2,201 14,881 4,265 12,148 2,413 5,317 12,314 5,215 5,357 6,040 6,919 215 789 13,805 775 4,616 2,099 3,068 6,758 4,852 4,026 6,829 6,013 16,597 10,486 771 6,340 7,103 7,593 1,774 1,508 10,393 5,428 92.4% 98.3% 80.3% 87.2% 97.8% 92.5% 73.4% 99.4% 99.5% 99.3% N/A N/A N/A 64.1% 95.9% 99.7% 98.0% 99.6% 94.2% N/A 91.1% 91.2% 76.7% 97.9% 89.8% 96.6% 75.0% 73.0% 49.9% 97.9% 91.1% 99.2% 96.3% 86.7% 89.1% N/A 86.6% 97.5% 94.4% 82.6% 90.2% 96.0% 97.4% 98.2% 82.0% 78.5% 82.1% 78.5% 92.7% 97.4% Property Name and Location MULTI-FAMILY RESIDENTIAL, continued Van Mall Woods – Vancouver, WA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . West Stonehill – St. Cloud, MN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Westwood Park – Bismarck, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Winchester/Village Green – Rochester, MN . . . . . . . . . . . . . . . . . . . . . . . . . Woodridge Apartments – Rochester, MN. . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL MULTI-FAMILY RESIDENTIAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Units 100 313 64 151 108 8,955 (in thousands) Investment Fiscal 2004 Economic Occupancy $ 6,336 13,218 2,433 9,067 7,016 $446,172 95.5% 90.3% 93.2% N/A 93.4% ** Property not placed in service at April 30, 2004. Additional costs are still to be incurred. Approximate Net Rentable Square Footage OFFICE BUILDINGS 1st Avenue Building – Minot, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 South Main – Minot, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401 South Main – Minot, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2030 Cliff Road – Eagan, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ameritrade – Omaha, NE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benton Business Park – Sauk Rapids, MN . . . . . . . . . . . . . . . . . . . . . . . . . Bloomington Business Plaza – Bloomington, MN . . . . . . . . . . . . . . . . . . Brenwood – Minnetonka, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Brown Deer Road – Milwaukee, WI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Burnsville Bluffs – Burnsville, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Central Bank Ofﬁce – Eden Prairie, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . Chiropractor Ofﬁce Building – Greenwood, MN . . . . . . . . . . . . . . . . . . . Cold Spring Center – St. Cloud, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conseco Building – Rapid City, SD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dewey Hill Business Center – Edina, MN . . . . . . . . . . . . . . . . . . . . . . . . . Flying Cloud Drive – Eden Prairie, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . Golden Hills Ofﬁce Center – Golden Valley, MN . . . . . . . . . . . . . . . . . . Great Plains Software – Fargo, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interlachen Corp Center – Eagan, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mendota Center I – Mendota Heights, MN . . . . . . . . . . . . . . . . . . . . . . . . . Mendota Center II – Mendota Heights, MN . . . . . . . . . . . . . . . . . . . . . . . . Mendota Center III – Mendota Heights, MN . . . . . . . . . . . . . . . . . . . . . . . Mendota Center IV – Mendota Heights, MN . . . . . . . . . . . . . . . . . . . . . . . Mendota Northland Ctr. – Mendota Hts., MN . . . . . . . . . . . . . . . . . . . . . . Metris – Duluth, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minnesota National Bank – Duluth, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . Hospitality Associates – Minnetonka, MN . . . . . . . . . . . . . . . . . . . . . . . . . . Nicollett VII – Burnsville, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Northgate II – Maple Grove, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pillsbury Business Center – Edina, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plaza VII – Boise, ID . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plymouth IV & V – Plymouth, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Southeast Tech Center – Eagan, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TCA Building – Eagan, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Three Paramount Plaza – Bloomington, MN . . . . . . . . . . . . . . . . . . . . . . . Thresher Square East – Minneapolis, MN . . . . . . . . . . . . . . . . . . . . . . . . . . Thresher Square West – Minneapolis, MN . . . . . . . . . . . . . . . . . . . . . . . . . 15,357 3,250 8,597 13,374 73,742 30,464 121,064 176,917 175,610 45,158 39,525 1,600 77,533 75,815 73,338 62,585 190,758 122,040 105,084 59,852 88,398 60,776 72,231 146,808 20,000 27,000 4,000 125,385 25,999 42,220 27,297 126,809 58,300 106,207 75,526 57,891 54,945 $ 548 102 628 983 8,349 1,613 7,589 14,419 13,911 2,799 4,660 334 8,610 7,047 4,939 5,773 $27,588 15,376 16,724 7,040 11,556 6,750 8,705 17,660 2,951 2,107 401 7,382 2,365 1,842 3,400 14,888 6,117 12,552 7,869 6,565 4,562 40.6% 50.7% 49.8% 100.0% 100.0% N/A 97.6% 82.8% N/A 100.0% 92.8% 100.0% 97.8% 0.0% 94.4% 93.5% N/A 100.0% 100.0% 87.8% 95.5% 99.7% 100.0% N/A N/A 100.0% 100.0% 100.0% 100.0% 73.2% 83.5% 100.0% 100.0% N/A 83.6% 86.5% 58.7% 17 Property Name and Location OFFICE BUILDINGS, continued UHC Ofﬁce – International Falls, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Viromed – Eden Prairie, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wayroad – Minnetonka, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . West River Business Park – Waite Park, MN . . . . . . . . . . . . . . . . . . . . . . . . . Westgate – Boise, ID . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wirth Corp Center – Golden Valley, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL OFFICE BUILDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . INDUSTRIAL API Building – Duluth, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dixon Avenue Industrial Park – Des Moines, IA . . . . . . . . . . . . . . . . . . . Lexington Commerce Center – Eagan, MN . . . . . . . . . . . . . . . . . . . . . . . . Lighthouse – Duluth, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lindberg/Bodycote – Eden Prairie, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . Metal Improvement Co. – New Brighton, MN . . . . . . . . . . . . . . . . . . . . . Stone Container – Fargo, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stone Container – Roseville, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stone Container – Waconia, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wilson’s Leather – Brooklyn Park, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . Winsted/Sterner Lighting – Winsted, MN . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL INDUSTRIAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RETAIL Anoka Strip Center – Anoka, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Arrowhead Shopping Center – Minot, ND . . . . . . . . . . . . . . . . . . . . . . . . . Barnes & Noble – Fargo, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Barnes & Noble – Omaha, NE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buffalo Mall – Jamestown, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Carmike Theatre – Grand Forks, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Champion Auto – Forest Lake, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Checkers Auto – Faribault, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Checkers Auto – Rochester, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Denfeld Retail Center – Duluth, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dilly Lily – St. Louis Park, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Eagan PDQ – Eagan, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Eagan Retail Center I – Eagan, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Eagan Retail Center II – Eagan, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . East Grand Station – East Grand Forks, MN . . . . . . . . . . . . . . . . . . . . . . . Ernst Home Center – Kalispell, MT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Evergreen Shopping Center – Pine City, MN . . . . . . . . . . . . . . . . . . . . . . . Excelsior Retail Center – Excelsior, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . Express Shopping Center – Fargo, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interstate Bakery – Mounds View, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inver Grove Center – PDQ – I. Grove Hgts., MN . . . . . . . . . . . . . . . . . . Jamestown Mall – Jamestown, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lakeville Retail Center – Lakeville, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . Maplewood Square – Rochester, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . MedPark Mall – Grand Forks, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minot Plaza – Minot, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pamida – Ladysmith, WI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pamida – Livingston, MT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PDQ Center – Mound, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Approximate Net Rentable Square Footage (in thousands) Investment Fiscal 2004 Economic Occupancy 30,000 48,700 62,383 24,000 103,332 75,216 2,935,086 35,000 604,711 89,840 59,600 41,880 49,620 195,075 229,072 29,440 353,049 38,000 1,725,287 10,625 76,424 30,000 27,500 213,271 28,528 6,836 5,600 6,225 36,542 3,444 3,886 5,400 13,901 16,103 52,000 63,225 7,993 30,227 4,560 8,400 99,403 9,500 118,398 59,177 11,020 41,000 41,200 3,864 $ 2,502 4,864 5,503 1,517 11,668 8,644 $301,402 $ 2,002 12,904 5,831 2,117 2,152 2,449 7,141 8,250 1,667 13,053 1,007 $ 58,573 $ 731 3,097 3,275 3,699 4,625 2,546 498 340 440 5,184 345 782 515 1,358 1,392 2,500 2,937 918 1,427 290 947 1,396 1,964 11,907 5,663 522 1,500 1,800 360 N/A 100.0% 100.0% N/A 100.0% 100.0% N/A 85.2% 85.8% N/A 100.0% 100.0% 100.0% 100.0% 68.6% 100.0% 91.7% 100.0% 95.5% 100.0% 100.0% N/A 100.0% 100.0% 100.0% 100.0% N/A 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 95.6% 95.1% 100.0% 100.0% 100.0% 65.9% 49.8% 75.8% 96.8% 100.0% 100.0% 100.0% 100.0% Property Name and Location RETAIL, continued Petco Warehouse – Fargo, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plaza Shopping Center – Schoﬁeld, WI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PDQ Center – Prior Lake, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prior Lake Peak – Prior Lake, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sam Goody/Musicland – Willmar, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . South Pond Retail Center – Champlin, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . Strip Center I – Burnsville, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Strip Center II – Burnsville, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thomasville – Kentwood, MI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Former Tom Thumb – Andover, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Former Tom Thumb – Bethel, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Former Tom Thumb – Blaine, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Former Tom Thumb – Buffalo, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Former Tom Thumb – Centerville, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Former Tom Thumb – Glencoe, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Former Tom Thumb – Ham Lake, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Former Tom Thumb – Howard Lake, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . Former Tom Thumb – Lakeland, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Former Tom Thumb – Lindstrom, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Former Tom Thumb – Lino Lakes, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Former Tom Thumb – Long Prairie, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Former Tom Thumb – Monticello, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Former Tom Thumb – Mora, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Former Tom Thumb – Oakdale, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Former Tom Thumb – Paynesville, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Former Tom Thumb – Pine City, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Former Tom Thumb – Shoreview, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Former Tom Thumb – Winsted, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tool Crib – Duluth, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . West Lake Center – Forest Lake, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . West Village Center – Chanhassen, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Westgate Shopping Center – St. Cloud, MN . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL RETAIL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . MEDICAL Abbott Northwest – Sartell, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Airport Medical – Bloomington, MN* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Denfeld Clinic – Duluth, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Edgewood Vista – Belgrade, MT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Edgewood Vista – Columbus, NE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Edgewood Vista – Phase III – Duluth, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . Edgewood Vista – East Grand Forks, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . Edgewood Vista – Fremont, NE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Edgewood Vista – Grand Island, NE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Edgewood Vista – Hastings, NE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Edgewood Vista – Kalispell, MT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Edgewood Vista – Minot, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Edgewood Vista – Missoula, MT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Edgewood Vista – Omaha, NE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Edgewood Vista – Virginia, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Edgewood Vista – Phase II – Virginia, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Approximate Net Rentable Square Footage (in thousands) Investment Fiscal 2004 Economic Occupancy 18,040 53,764 6,800 4,200 6,225 25,400 8,526 8,400 16,080 3,000 4,800 8,750 7,700 3,000 4,800 4,800 3,571 3,650 4,000 6,325 5,216 3,575 3,571 6,266 4,800 4,800 3,000 3,571 15,597 100,656 135,969 104,928 1,628,032 60,095 24,218 20,512 5,100 5,100 119,349 16,392 6,042 5,100 6,042 5,895 97,821 10,150 6,042 70,313 76,870 $ 1,279 1,775 976 482 408 3,725 996 777 2,121 280 510 534 471 330 530 535 380 443 321 452 700 856 300 739 365 440 330 411 2,016 8,097 20,774 7,800 $123,111 $ 13,866 4,678 3,337 453 455 11,709 1,430 552 455 572 588 6,271 963 642 7,070 5,111 100.0% 80.9% 100.0% 100.0% 100.0% N/A 89.2% 58.7% 100.0% 100.0% 100.0% 69.3% 100.0% 100.0% 91.7% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 50.0% N/A 100.0% 96.3% N/A 95.7% 100.0% N/A 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% N/A Property Name and Location MEDICAL, continued Fresenius – Duluth, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gateway Clinic – Sandstone, MN* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Healtheast Med Ctr. – Woodbury & St. Johns, MN . . . . . . . . . . . . . . . . . . . Mariner Clinic – Superior, WI* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Park Dental – Brooklyn, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pavilion II – Duluth, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Paul Larson Clinic – Edina, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Southdale Expansion – Edina, MN* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Southdale Medical Center – Edina, MN* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . UH Medical – St. Paul, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wedgwood Sweetwater – Lithia Springs, GA . . . . . . . . . . . . . . . . . . . . . . . . . Wells Clinic – Hibbing, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL MEDICAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . UNDEVELOPED LAND Andover, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Centerville, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cottonwood Lake IV – Bismarck, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inver Grove, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kalispell, MT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Libby, MT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long Prairie, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . River Falls, WI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL UNDEVELOPED LAND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL UNITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Approximate Net Rentable Square Footage (in thousands) Investment Fiscal 2004 Economic Occupancy N/A N/A 100.0% N/A 100.0% N/A 46.6% 88.5% 83.0% 100.0% 100.0% N/A 9,052 12,444 114,316 28,928 10,008 74,800 12,140 0 195,983 43,046 29,408 18,810 1,083,976 0 0 0 0 0 0 0 0 0 8,955 $ 1,803 1,900 21,601 4,101 2,952 19,517 1,013 12,733 32,924 7,605 3,972 2,903 $ 171,176 $ $ 150 102 264 563 1,412 151 150 202 2,994 TOTAL SQUARE FOOTAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,372,381 TOTAL INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,103,428 Mortgages Payable As of April 30, 2004, individual ﬁrst mortgage liens on the above properties totaled $633 million. Of the $633 million of mortgage indebtedness on April 30, 2004, $42 million 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. The balance of ﬁxed rate mortgages totaled $591 million. Principal payments due on our mortgage indebtedness are as follows: Year Ended April 30, (in thousands) 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Later Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage Principal $ 15,789 17,098 19,194 44,829 42,744 493,470 $633,124 20 Future Minimum Lease Payments The future minimum lease payments to be received under leases for commercial properties as of April 30, 2004, assuming that no options to renew or buy out the lease are exercised, are as follows: Year Ended April 30, (in thousands) Lease Payments 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 57,602 52,402 46,465 39,273 33,749 207,093 $436,584 Capital Expenditures Each year we carefully review the physical condition of each property we own. In order for our properties to remain competitive, attract new tenants, and retain existing tenants, we plan for a reasonable amount of capital improvements. For the year ended April 30, 2004, we spent approximately $20.2 million on capital improvements. Contracts or Options to Sell As of April 30, 2004, we had signed an agreement for the sale of our Fargo, North Dakota, Petco and Barnes & Noble store locations, for a total sales price of approximately $6.75 million. This sale closed on July 2, 2004. We have, in addition, granted options to purchase certain of our properties to various third parties. In general, these options grant the right to purchase certain IRET assets at the greater of such asset’s appraised value or an annual compounded increase of 2.0% to 2.5% of the initial cost to us. In addition to options granted to third parties, we have also granted an option to Charles Wm. James to purchase our Excelsior Retail Center. Mr. James is currently an ofﬁcer and member of our Board of Trustees. The option exercise price is equal to the price paid by us for the property, plus an annual consumer price index increase. Our properties subject to purchase options, the cost, plus improvements, of each such property and its gross rental revenue are as follows: Property East Grand Station – EGF, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . Edgewood Vista – Belgrade, MT . . . . . . . . . . . . . . . . . . . . . . . . . Edgewood Vista – Columbus, NE . . . . . . . . . . . . . . . . . . . . . . . . Edgewood Vista – Duluth, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . Edgewood Vista – EGF, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Edgewood Vista – Fremont, NE . . . . . . . . . . . . . . . . . . . . . . . . . . Edgewood Vista – Grand Island, NE . . . . . . . . . . . . . . . . . . . . . . Edgewood Vista – Hastings, NE . . . . . . . . . . . . . . . . . . . . . . . . . . Edgewood Vista – Kalispell, MT . . . . . . . . . . . . . . . . . . . . . . . . . Edgewood Vista – Minot, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . Edgewood Vista – Missoula, MT . . . . . . . . . . . . . . . . . . . . . . . . . Edgewood Vista – Omaha, NE . . . . . . . . . . . . . . . . . . . . . . . . . . . . Edgewood Vista – Virginia, MN . . . . . . . . . . . . . . . . . . . . . . . . . . Excelsior Retail Center – Excelsior, MN . . . . . . . . . . . . . . . . . . Great Plains Software – Fargo, ND . . . . . . . . . . . . . . . . . . . . . . . Healtheast – Woodbury & Maplwd, MN . . . . . . . . . . . . . . . . . . Wedgwd Sweetwater – L. Springs, GA . . . . . . . . . . . . . . . . . . . TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (in thousands) Property Cost $ 1,392 453 456 11,709 1,430 552 456 572 588 6,271 963 641 12,182 917 15,375 21,601 3,972 $79,530 (in thousands) Gross Rental Revenue 2004 $ 152 49 49 1,278 181 59 49 61 62 783 120 67 893 129 1,875 1,948 502 $8,257 2003 $ 152 49 49 1,246 155 59 49 61 62 762 120 67 759 22 1,875 1,917 475 $7,879 2002 $ 152 49 49 770 155 59 49 60 62 681 114 67 0 0 1,875 1,917 436 $6,495 21 Commercial and Multi-Family Residential Properties by State The following table presents, as of April 30, 2004, an analysis by state of each of the two major categories of properties owned by us — multi-family residential and commercial: Total Real Estate Investment By Type and Location State Minnesota . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . North Dakota . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Montana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Colorado . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . South Dakota . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nebraska . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kansas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . All Other States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 3. Legal Proceedings Multi-Family Residential $ 96,379 113,991 38,882 40,834 31,731 38,436 22,418 35,222 28,542 $446,435 (in thousands) Commercial Total % of Total $517,904 53,896 7,867 — 7,047 — 14,724 — 55,555 $656,993 $ 614,283 167,887 46,749 40,834 38,778 38,436 37,142 35,222 84,097 $1,103,428 55.7% 15.2% 4.2% 3.7% 3.5% 3.5% 3.4% 3.2% 7.6% 100.0% In the ordinary course of our operations we become involved in litigation. At this time, we know of no material pending or threatened legal proceedings or other proceedings contemplated by governmental authorities that would have a material impact upon us. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to our shareholders during the fourth quarter of the ﬁscal year ended April 30, 2004. 22 PART II Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters Quarterly Share and Distribution Data Since April 9, 2002, our common shares of beneﬁcial interest (“Shares”) have traded on the NASDAQ National Market under the symbol IRETS. Prior to April 9, 2002, and from October of 1997, our Shares traded on the NASDAQ SmallCap Market. On July 7, 2004, the last reported sales price per share of our Shares on the NASDAQ National Market was $10.05. The following table sets forth the quarterly high and low closing sales prices per share of our Shares as reported on the NASDAQ National Market, and the distributions per share and limited partnership unit declared with respect to each period. Quarter Ended 2004 High Low April 30, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . January 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . July 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10.5 10.7 10.48 10.805 $9.36 9.88 9.69 9.28 Quarter Ended 2003 High Low April 30, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . January 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October 31, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . July 31, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10.00 11.00 11.00 11.90 $8.98 9.66 9.05 8.55 Distributions Declared (per share and unit) $0.1600 0.1595 0.1590 0.1585 Distributions Declared (per share and unit) $0.1580 0.1570 0.1560 0.1540 It is IRET’s policy to pay quarterly distributions to our common shareholders, at the discretion of our Board of Trustees, based on our funds from operations, ﬁnancial condition and capital requirements, annual distribution requirements under the REIT provisions of the Internal Revenue Code and such other factors as our Board of Trustees deems relevant. Since July 1, 1971, IRET has paid quarterly cash distributions in the months of January, April, July and October. Shareholders As of July 7, 2004, the Company had approximately 4,743 shareholders of record, and 42,279,703 common shares of beneﬁcial interest (plus 12,251,159 limited partnership units convertible into 12,251,159 common shares) were outstanding. Unregistered Sales of Shares Sales of Unregistered Securities. During the ﬁscal year ended April 30, 2004, we issued an aggregate of 357,478 common shares to holders of LP Units of IRET Properties upon redemption and conversion of an aggregate of 357,478 LP Units of IRET Properties on a one-for-one basis. All such issuances of our common shares were exempt from registration as private placements under Section 4(2) of the Securities Act, including Regulation D promulgated thereunder. We have registered the re-sale of such common shares under the Securities Act. Issuer Purchases of Equity Securities. The Company did not repurchase any of its equity securities during ﬁscal year 2004, except for repurchases of nominal amounts of fractional shares, at shareholder request. 23 Item 6. Selected Financial Data for Fiscal Years Ended April 30 Set forth below is selected ﬁnancial data on a historical basis for the Company. This information should be read in conjunction with the consolidated ﬁnancial statements and notes appearing elsewhere in this Form 10-K. Consolidated Income Statement Data Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before gain/loss on property and minority interest . . . . . . . . . . . . . . . . . . . . . . . . . Gain on sale of land, properties and other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority interest portion of operating partnership income . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Balance Sheet Data (in thousands, except per share data) 2004 2003 2002 2001 2000 $ 140,505 $118,765 $ 90,570 $ 75,767 $ 55,445 $ $ $ $ 12,253 $ 15,699 $ 14,108 $ 10,188 662 $ 1,595 $ 547 $ 602 $ $ 8,549 1,754 (2,744) 9,440 $ (3,640) $ 12,248 $ (3,675) $ 10,600 $ (2,095) 8,694 $ $ (1,495) 8,808 $ Total real estate investments . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgages payable . . . . . . . . . . . . . . . . . . . . . . . . . Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . $1,008,071 1,076,317 633,124 278,629 $845,325 885,681 539,397 214,761 $685,347 730,209 459,569 145,578 $548,580 570,322 368,957 118,945 $418,216 432,978 265,057 109,921 Consolidated Per Common Share Data (basic and diluted) Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ Calendar Year Tax status of distribution .24 .64 $ $ .38 .63 $ $ .42 .59 $ $ .38 .55 $ $ .42 .51 2003 2002 2001 2000 1999 Capital gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ordinary income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return of capital 3.88% 58.45% 37.67% 0.00% 68.29% 31.71% 0.00% 65.98% 34.02% .72% 86.76% 12.52% 30.30% 69.70% 0.00% Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following information is provided in connection with, and should be read in conjunction with, the consolidated ﬁnancial statements included in this Annual Report on Form 10-K. We operate on a ﬁscal year ending on April 30. The following discussion and analysis is for the ﬁscal year ended April 30, 2004. Overview We are a self-advised equity real estate investment trust engaged in owning and operating income-producing real properties. Our investments include multi-family residential properties and commercial properties located primarily in the upper Midwest states of Minnesota and North Dakota. Our properties are diversiﬁed in property type and location. As of April 30, 2004, our real estate portfolio consisted of 69 multi-family residential properties containing 8,955 apartment units and having a total carrying amount (net of accumulated depreciation) of $385 million, and 142 commercial properties containing approximately 7.4 million square feet of leasable space and having a total carrying amount (net of accumulated depreciation) of $618 million. Our primary source of income and cash is rents associated with multi-family residential and commercial leases. During ﬁscal year 2004, IRET continued to operate in a difﬁcult economic environment. Unemployment rates in our core markets, job growth at a pace slower than anticipated, continued low interest rates and an abundant supply of housing and commercial property alternatives all contributed to increased vacancy levels at our multi- family and commercial properties, lower rental income and increased costs for tenant concessions. In addition, identifying potential acquisition properties that met our investment criteria continued to be a challenge during ﬁscal year 2004. The slow economy, combined with a widespread demand for real estate from traditional and non- traditional investors, resulted in a signiﬁcant reduction in the investment returns from all types of real estate. In 24 response to these operating conditions, during ﬁscal year 2004 IRET was able to implement only modest rental rate increases at certain of our multi-family and commercial properties, and relied on a greater use of rent and other tenant concessions in order to improve occupancy rates. During ﬁscal year 2004, vacancy levels in our stabilized multi-family residential and commercial properties continued to increase, to 9.5% compared to 8.8% at the end of ﬁscal year 2003 in the case of our multi-family portfolio, and to 6.7% from 3.6% at the end of ﬁscal year 2003 in the case of our commercial portfolio. Total revenues of IRET Properties, our operating partnership, increased by $21.7 million to $140.5 million, compared to $118.8 million in ﬁscal year 2003. This increase was primarily attributable to the addition of new real estate properties. Operating income declined in ﬁscal year 2004, to $11.9 million from $14.9 million in ﬁscal year 2003. Our cost for tenant concessions, such as free rent, offered to attract new tenants to our multi-family residential properties, increased to $2.9 million for the twelve months ended April 30, 2004, compared to $1.4 million for ﬁscal year 2003. Other expenses increased during ﬁscal year 2004 as well, with real estate taxes, maintenance, utility, administrative and operating expense and insurance costs all increasing from year-earlier levels. While some of this increase was due to the addition of new real estate to our portfolio, the majority was due to increased costs at our existing real estate assets. During ﬁscal year 2004, the Company added ﬁve multi-family residential properties with a total of 748 apartment units, and 22 commercial properties with a total of approximately 1.3 million rentable square feet, to our investment portfolio, for an aggregate purchase price of $170.3 million. The Company disposed of seven properties, for sale prices totaling $3.8 million. Additional information and more detailed discussions of our ﬁscal year 2004 operating results are found in the following sections of this Management’s Discussion and Analysis of Financial Condition and Results of Operations. Critical Accounting Policies Set forth below is a summary of the accounting policies that management believes are critical to the preparation of the consolidated ﬁnancial statements included in this Annual Report on Form 10-K. Real Estate. Real estate is carried at cost, net of accumulated depreciation, less an adjustment, if any, for impairment. Depreciation requires an estimate by management of the useful life of each property as well as an allocation of the costs associated with a property to its various components. If the Company does not allocate these costs appropriately or incorrectly estimates the useful lives of its real estate, depreciation expense may be misstated. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets. The Company uses a 20–40 year estimated life for buildings and improvements. Maintenance and repairs are charged to operations as incurred. Renovations and improvements that improve and/or extend the useful life of the asset are capitalized over their estimated useful life, generally ﬁve to ten years. Upon acquisitions of real estate, the Company assesses the fair value of acquired tangible assets (including land, buildings and personal property), which is determined by valuing the property as if it were vacant, and considers whether there were signiﬁcant intangible assets acquired (for example, above-and below-market leases, the value of acquired in-place leases, and tenant relationships, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141) and acquired liabilities, and allocates the purchase price based on these assessments. The as-if-vacant value is allocated to land, buildings, and personal property based on management’s determination of the relative fair value of these assets. The estimated fair value of the property is the amount that would be recoverable upon the disposition of the property. Techniques used to estimate fair value include discounted cash ﬂow analysis, independent appraisals, and reference to recent sales of comparable properties. Estimates of future cash ﬂows are based on a number of factors including the historical operating results, known trends, and market/ economic conditions that may affect the property. Land value is assigned based on the purchase price if land is acquired separately, or based on estimated market value if acquired in a merger or in a portfolio acquisition. Above-market and below-market in-place lease values for acquired properties are recorded based on the present value (using an interest rate which reﬂects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable 25 term of the lease. The Company performs this analysis on a lease-by-lease basis. The capitalized above-market and below-market lease values are amortized and included in operating expenses as depreciation/ amortization related to real estate investments and amortized over the remaining non-cancelable terms of the respective leases. Other intangible assets acquired include amounts for in-place lease values that are based upon the Company’s evaluation of the speciﬁc characteristics of the leases. Factors considered in these analyses include an estimate of carrying costs during hypothetical expected lease-up periods, considering current market conditions, and costs to execute similar leases. The Company also considers information about each property obtained during its pre- acquisition due diligence and marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired. Property sales or dispositions are recorded when title transfers and sufﬁcient consideration is received by the Company. The Company’s properties are reviewed for impairment if events or circumstances change indicating that the carrying amount of the assets may not be recoverable. If the Company incorrectly estimates the values at acquisition or the undiscounted cash ﬂows, initial allocations of purchase price and future impairment charges may be different. The impact of the Company’s estimates in connection with acquisitions and future impairment analysis could be material to the Company’s ﬁnancial statements. Allowance for Doubtful Accounts. The Company periodically evaluates the collectibility of amounts due from tenants and maintains an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required payments under their respective lease agreements. The Company also maintains an allowance for receivables arising from the straight-lining of rents. This receivable arises from earnings recognized in excess of amounts currently due under lease agreements. Management exercises judgment in establishing these allowances and considers payment history and current credit status in developing these estimates. If estimates differ from actual results this would impact reported results. Mortgage Loans Receivable. The Company evaluates the collectibility of both interest and principal of each of its mortgage loans receivable (which total $4.9 million as of April 30, 2004) if circumstances warrant to determine whether it is impaired. However, if the Company fails to identify that a borrower is unable to perform, the Company’s bad debt expense may be different than estimated. Revenue Recognition — The Company has the following revenue sources and revenue recognitions policies: • Base Rents — income arising from tenant leases. These rents are recognized over the non-cancelable term of the related leases on a straight-line basis, which includes the effects of rent steps and free rent abatements under the leases. • Percentage Rents — income arising from retail tenant leases which are contingent upon the sales of the tenant exceeding a deﬁned threshold. These rents are recognized in accordance with SEC Staff Accounting Bulletin 101, which states that this income is to be recognized only after the contingency has been removed (i.e., sales thresholds have been achieved). • Expense Reimbursement Income — income arising from tenant leases, which provide for the recovery of all or a portion of the operating expenses and real estate taxes of the respective property. This income is accrued in the same periods as the expenses are incurred. Income Taxes. The Company operates in a manner intended to enable it to continue to qualify as a Real Estate Investment Trust (“REIT”) under Sections 856-860 of the Internal Revenue Code of 1986, as amended. Under those sections, a REIT which distributes at least 90% of its REIT taxable income as a distribution to its shareholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. The Company intends to distribute to its shareholders 100% of its taxable income. Therefore, no provision for Federal income taxes is required. If the Company fails to distribute the required amount of income to its shareholders, it would fail to qualify as a REIT and substantial adverse tax consequences may result. Recent Accounting Pronouncements There are no accounting standards or interpretations that have been issued, but which have not yet been adopted, that we believe will have a material impact on our ﬁnancial statements. 26 RESULTS OF OPERATIONS Revenues Total revenues for ﬁscal year 2004 were $140.5 million, compared to $118.8 million in ﬁscal year 2003 and $90.6 million in ﬁscal year 2002. Revenues during ﬁscal year 2004 were $21.7 million greater than revenues in ﬁscal year 2003 and revenues during ﬁscal year 2003 were $28.2 million greater than in ﬁscal year 2002. For ﬁscal 2004, the increase in revenue of $21.7 million resulted from: Rent from 64 properties acquired in ﬁscal year 2003 in excess of that received in 2003 from the same 64 properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rent from 28 properties acquired in ﬁscal year 2004 . . . . . . . . . . . . . . . . . . . . . . . Increase in rental income on existing properties, net of declining occupancy levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . An increase in straight-line rents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . An increase in discount and fee revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A decrease in rent from properties sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . For ﬁscal 2003, the increase in revenue of $28.2 million resulted from: Rent from 14 properties acquired in ﬁscal year 2002 in excess of that received in 2002 from the same 14 properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rent from 64 properties acquired in ﬁscal year 2003 . . . . . . . . . . . . . . . . . . . . . . . Increase in rental income on existing properties, net of declining occupancy levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . An increase in straight-line rents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . An increase in discount and fee revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A decrease in rent from properties sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (in thousands) $12,099 9,482 152 72 47 (112) $21,740 (in thousands) $16,427 10,636 1,699 87 19 (673) $28,195 As illustrated above, the substantial majority of the increase in our gross revenue for ﬁscal 2004 and 2003 resulted from the addition of new real estate properties to the IRET Properties’ portfolio, rather than from rental increases on existing properties. For the next 12 to 18 months, we expect acquisitions to continue to be the most signiﬁcant factor in any increases in our revenues and ultimately our net income. While acceptable real estate assets are still available for purchase, the slow economy combined with a widespread demand for real estate from traditional and non-traditional investors has resulted in a signiﬁcant reduction in the investment returns from all types of real estate. This reduction in the rates of return has been offset to some extent by the dramatic drop in borrowing costs to historically low levels. While we were able to take advantage of those lower borrowing costs for most of our recent acquisitions, the majority of our debt is ﬁxed and not prepayable without signiﬁcant prepayment costs and fees. 27 Gain on Sale of Real Estate The Company realized a gain on sale of real estate for ﬁscal 2004 of $.6 million. This compares to $1.6 million of gain on sale of real estate recognized in ﬁscal 2003 and $.5 million recognized in ﬁscal 2002. A list of the properties sold during ﬁscal year 2004, showing sales price, depreciated cost plus sales costs and net gain (loss) is included below under the caption “Property Dispositions.” We anticipate that we will continue to sell our older and smaller locations as opportunities arise. Segment Expenses and Operating Proﬁt The following tables show the changes in revenues, operating expenses, interest and depreciation by reportable operating segment for ﬁscal year 2004 compared to ﬁscal year 2003, and for ﬁscal year 2003 compared to ﬁscal year 2002: Fiscal year ended April 30, 2004, compared to ﬁscal year ended April 30, 2003. COMMERCIAL Real Estate Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expenses Mortgage Interest Depreciation/amortization related to . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . real estate investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Utilities and Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real Estate Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Segment Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Segment Operating Proﬁt RESIDENTIAL Real Estate Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expenses Mortgage Interest Depreciation/amortization related to real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Utilities and Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real Estate Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Segment Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Segment Operating Proﬁt (in thousands) 2004 2003 Change % $77,260 $58,878 $18,382 31.2 23,041 18,662 4,379 13,835 12,575 10,137 848 2,990 63,426 $13,834 9,224 8,249 6,789 616 2,302 45,842 $13,036 4,611 4,326 3,348 232 688 17,584 798 $ 23.5 50.0 52.4 49.3 37.7 29.9 38.4 6.1 (in thousands) 2004 2003 Change % $62,964 $59,653 $ 3,311 18,588 17,292 1,296 10,982 13,236 7,022 2,099 6,745 58,672 $ 4,292 10,029 11,541 6,761 1,538 6,013 53,174 $ 6,479 953 1,695 261 561 732 5,498 $(2,187) 5.6 7.5 9.5 14.7 3.9 36.5 12.2 10.3 (33.8) 28 Fiscal year ended April 30, 2003, compared to ﬁscal year ended April 30, 2002. COMMERCIAL Real Estate Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expenses Mortgage Interest Depreciation/amortization related to real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Utilities and Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real Estate Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Segment Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Segment Operating Proﬁt RESIDENTIAL Real Estate Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expenses Mortgage Interest Depreciation/amortization related to real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Utilities and Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real Estate Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Segment Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Segment Operating Proﬁt Changes in Expenses and Net Income (in thousands) 2003 2002 Change % $58,878 $32,008 $26,870 83.9 18,662 12,000 6,662 55.5 9,224 8,249 6,789 616 2,302 45,842 $13,036 5,533 1,933 2,589 185 909 23,149 $ 8,859 3,691 6,316 4,200 431 1,393 22,693 $ 4,177 66.7 326.7 162.2 233.0 153.2 98.0 47.1 (in thousands) 2003 2002 Change % $59,653 $58,347 $ 1,306 17,292 16,640 652 10,029 11,541 6,761 1,538 6,013 53,174 $ 6,479 9,562 10,416 6,455 1,106 5,979 50,158 $ 8,189 467 1,125 306 432 34 3,016 $(1,710) 2.2 3.9 4.9 10.8 4.7 39.1 .6 6.0 (20.9) Operating income for ﬁscal 2004 decreased to $11.9 million from $14.9 million in ﬁscal year 2003, and was $13.0 million in ﬁscal 2002. Our net income for ﬁscal 2004 was $9.4 million, compared to $12.2 million in ﬁscal year 2003 and $10.6 million in ﬁscal 2002. On a per common share basis, net income was $.24 per common share in ﬁscal year 2004, compared to $.38 per common share in ﬁscal 2003 and $.42 in ﬁscal 2002. 29 These changes in operating income and net income result from the changes in revenues and expenses detailed below: Changes in net income for ﬁscal year 2004 resulted from: An increase in net rental income (rents, less utilities, maintenance, taxes, insurance and management) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A decrease in non-operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . An increase in discount and fee revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . An increase in interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . An increase in depreciation/amortization expense related to real estate investments . . . . . . . . . . A decrease in minority interest of operating partnership income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . An increase in operating expenses, administrative, advisory & trustee services . . . . . . . . . . . . . . . A decrease in minority interest of other partnerships’ income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . An increase in amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A decrease in gain on sale of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . An increase in loss on impairment of real estate investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A decrease in discontinued operations, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total decrease in ﬁscal 2004 net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in net income for ﬁscal year 2003 resulted from: An increase in net rental income (rents, less utilities, maintenance, taxes, insurance and management) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A decrease in non-operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . An increase in discount and fee revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . An increase in interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . An increase in depreciation/amortization expense related to real estate investments . . . . . . . . . . A decrease in minority interest of operating partnership income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . An increase in operating expenses, administrative, advisory & trustee services . . . . . . . . . . . . . . . An increase in minority interest of other partnerships’ income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . An increase in amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A decrease in gain on sale of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . An increase in discontinued operations, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total increase in ﬁscal 2003 net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Factors Impacting Net Income During Fiscal 2004 as Compared to 2003 (in thousands) $ 9,850 (457) 47 (6,125) (5,635) 896 (759) 177 (305) (157) (62) (278) $(2,808) (in thousands) $13,939 (232) 19 (7,010) (4,174) 35 (800) (736) (151) (232) 990 $ 1,648 Compared to the prior two ﬁscal years, there were a number of factors that continued to limit the growth of our total revenue and ultimately negatively impacted our net income. A discussion of the factors having the greatest impact on our business compared to the prior two ﬁscal years is set forth below. In management’s opinion, most of these negative inﬂuences show only slight signs of lessening in the next twelve months. • Increased economic vacancy. During ﬁscal 2004, vacancy levels at our stabilized multi-family residential properties continued to increase throughout our entire portfolio to 9.5% compared to 8.8% at the end of ﬁscal year 2003, for economic occupancy levels of approximately 90.5% in ﬁscal year 2004 compared to approximately 91% in ﬁscal year 2003. “Economic Occupancy” is deﬁned as total possible revenue less vacancy loss as a percentage of total possible revenue. Total possible revenue is determined by valuing occupied units or square footage at contract rates, and vacant units or square footage at market rates. “Stabilized properties” are those properties that we have owned for the entirety of the periods being compared, and include properties that were redeveloped or expanded during the periods being compared. Likewise, vacancy levels at our stabilized commercial properties increased to 6.7%, from 3.6% at the end of ﬁscal year 2003, for economic occupancy levels of approximately 93% in ﬁscal year 2004 compared to approximately 96% in ﬁscal year 2003. A majority of the markets in which we operate continue to experience overall poor economic conditions, in respect to job creation. The poor economic climate has translated directly into increased vacancy at many of our properties. 30 Our commercial vacancy is primarily due to our inability to either renew existing leases or to re-lease space being vacated by tenants at the expiration of their lease. While not necessarily indicative of future business cycles, in past economic downturns, a recovery in occupancy levels generally trails the pick up in economic activity by twelve months or more. Despite some positive economic developments, we have yet to see a signiﬁcant increase in demand for multi-family residential or commercial space. We continue to expect that demand in our markets for both apartments and commercial space will remain weak through the remainder of our current ﬁscal year. • Increased real estate taxes. Taxes imposed on our real estate properties increased by $3.6 million, or 26.6% for the ﬁscal year ended April 30, 2004. Of the increased real estate taxes, $1.0 million or 27.8% is attributable to the addition of new real estate acquired in ﬁscal 2004, while $2.6 million or 72.2% is due to increased costs for real estate taxes on existing real estate assets. Most of our new property acquisitions during the past year were in Minnesota, a jurisdiction with higher property taxes than North Dakota and the other states in which we own property. Under the terms of most of our commercial leases, the full cost of real estate tax is paid by the tenant as additional rent. For our noncommercial real estate properties, any increase in our real estate tax costs must be collected from tenants in the form of a general rent increase. While we have implemented selected rent increases, the current economic conditions and increased vacancy levels have prevented us from raising rents in the amount necessary to fully recover our increased real estate tax costs. To further compound the problem, a number of states in which we operate continue to face state budget shortfalls. Our experience is that such shortfalls translate into local governments raising property taxes. • Increased maintenance expense. The maintenance expense category increased by $3.6 million or 30.5% for the ﬁscal year ended April 30, 2004, as compared to the corresponding period of ﬁscal 2003. Of the increased maintenance costs for the ﬁscal year ended April 30, 2004, $1.1 million or 30.5% is attributable to the addition of new real estate acquired in ﬁscal 2004 and 2003, while $2.5 million or 69.5% is due to increased costs for maintenance on existing real estate assets. Under the terms of most of our commercial leases, the full cost of maintenance is paid by the tenant as additional rent. For our noncommercial real estate properties, any increase in our maintenance costs must be collected from tenants in the form of a general rent increase. While we have implemented selected rent increases, the current economic conditions and increased vacancy levels have prevented us from raising rents in the amount necessary to fully recover our increased maintenance costs. • Increased utility expense. The utility expense category increased by $2.4 million or 30.4% for the ﬁscal year ended April 30, 2004, as compared to ﬁscal 2003. Of the increased utility costs, $.8 million or 33.3% is attributable to the addition of new real estate acquired in ﬁscal 2003 and 2004, while $1.6 million or 66.7% is due to increased costs for utilities on existing real estate assets. Under the terms of most of our commercial leases, the full cost of utilities is paid by the tenant as additional rent. For our other noncommercial real estate properties, any increase in our utility costs must be collected from tenants in the form of a general rent increase. While we have implemented selected rent increases, the current economic conditions and increased vacancy levels have prevented us from raising rents in the amount necessary to fully recover our increased utility costs. Since our real estate portfolio is primarily located in Minnesota and North Dakota, the severity of winters has a large impact on our utility costs. • Increased administrative and operating expense. Administrative and operating expenses increased by $.8 million or 26.2% for the ﬁscal year ended April 30, 2004, as compared to ﬁscal 2003. Of this increase in administrative and operating expense for the ﬁscal year ended April 30, 2004, $.7 million or 87.5% was due to employee related costs. Over the past year, we have hired six new employees. The addition of these new employees, together with increases in the wages and beneﬁts paid to existing employees, account for the increase in administrative and operating costs for the ﬁscal year ended April 30, 2004. • Increased insurance premiums. Insurance expense increased by $.8 million or 36.8% for the ﬁscal year ended April 30, 2004, compared to the prior ﬁscal year. Of the increased insurance costs, $.2 million or 25% is attributable to the addition of new real estate during ﬁscal years 2003 and 2004, while $.6 million or 75% is due to increased premium costs for coverage on existing real estate assets. Under the terms of most of our 31 commercial leases, the full cost of insurance is paid by the tenant as additional rent. For our other real estate properties, any increase in our insurance costs must be collected from tenants in the form of a general rent increase. While we have implemented selected rent increases, the current economic conditions and increased vacancy levels have prevented us from raising rents in the amount necessary to fully recover our increased insurance costs. We do not expect our insurance costs to decline during ﬁscal 2005. • Increase in interest expense. Our mortgage debt increased $94 million or 17.4% for the ﬁscal year ended April 30, 2004. Our mortgage interest expense increased by $5.7 million or 16% for the ﬁscal year ended April 30, 2004, as compared to ﬁscal year 2003, due to the fact that interest rates on new mortgages incurred during 2004 were lower than rates on mortgages in prior periods. Of the increased interest expense for the ﬁscal year ended April 30, 2004, $2.3 million or 41.1% is attributable to the addition of new real estate, while interest expenses on existing real estate assets increased by $3.3 million or 58.9%, due primarily to increased borrowing on existing mortgages. Factors Impacting Net Income During Fiscal 2003 as Compared to 2002 • Increased economic vacancy. During ﬁscal 2003, vacancy levels at our stabilized multi-family residential properties increased throughout our entire portfolio, from 5.9% at the end of 2002 to 7.8% at the end of ﬁscal 2003. Likewise, vacancy levels at our stabilized commercial properties increased from 0.9% at the end of ﬁscal 2002 to 4.7% at the end of ﬁscal 2003. A majority of the markets in which we operate continued to experience overall poor economic conditions, particularly in respect of job creation. The poor economic climate translated directly into increased vacancy at many of our properties. • Uninvested cash. The most signiﬁcant reason for the decline in net income per common share during ﬁscal 2003, as compared to ﬁscal 2002, was our large balance of cash and marketable securities. While this money was invested in short-term income-producing investments, we ordinarily seek to invest in income-producing real estate. It was not until the second quarter of ﬁscal 2003 that we were able fully to invest the proceeds from the equity raised during ﬁrst quarter 2003 into income-producing real estate. This delay in investing such proceeds resulted in a reduction in net income for the ﬁscal year ended April 30, 2003 as compared to 2002. • Increased real estate taxes. Taxes imposed on our real estate properties increased by $4.5 million or 49.8% for the ﬁscal year ended April 30, 2003, as compared to the corresponding period of ﬁscal 2002. Of the increased real estate taxes, $3.4 million or 75.6% was attributable to the addition of new real estate acquired in ﬁscal 2002 and 2003, while $1.1 million or 24.4% was due to increased costs for real estate taxes on existing real estate assets. Most of our new property acquisitions during 2003 were in Minnesota, a jurisdiction with higher property taxes than North Dakota and the other states in which we own property. Under the terms of most of our commercial leases, the full cost of real estate tax is paid by the tenant as additional rent. One commercial property, Southdale Medical Center, which is located in Edina, Minnesota, accounted for $0.9 million or 20.0% of the increase in real estate tax costs for the ﬁscal year ended April 30, 2003. Due to increased vacancy at Southdale Medical Center during ﬁscal 2003 we were unable to fully recover the real estate tax cost from the tenants. For our noncommercial real estate properties, any increase in our real estate tax costs must be collected from tenants in the form of a general rent increase. While we implemented portfolio wide rent increases, economic conditions and increased vacancy levels prevented us from raising rents in the amount necessary to fully recover our increased real estate tax costs. • Increased maintenance expense. The maintenance expense category increased by $4.7 million or 64.4% for the ﬁscal year ended April 30, 2003, as compared to the corresponding period of ﬁscal 2002. Of the increased maintenance costs for the ﬁscal year ended April 30, 2003, $3.5 million or 74.5% was attributable to the addition of new real estate acquired in ﬁscal 2002 and 2003, while $1.2 million or 25.5% is due to increased costs for maintenance on existing real estate assets. Under the terms of most of our commercial leases, the full cost of maintenance is paid by the tenant as additional rent. Southdale Medical Center accounted for $0.8 million or 17.0% of the increase in maintenance costs for the ﬁscal year ended April 30, 2003. Due to increased vacancy at Southdale Medical Center during the ﬁscal year ended April 30, 2003, we were unable to fully recover the maintenance cost from the tenants. For our noncommercial real estate properties, any increase in our maintenance costs must be collected from tenants in the form of a general rent increase. 32 • Increased utility expense. The utility expense category increased by $2.8 million or 54.4% for the ﬁscal year ended April 30, 2003, as compared to the corresponding period of ﬁscal 2002. Of the increased utility costs, $1.8 million or 64.3% was attributable to the addition of new real estate acquired in ﬁscal 2002 and 2003, while $1.0 million or 35.7% was due to increased costs for utilities on existing real estate assets. Under the terms of most of our commercial leases, the full cost of utilities is paid by the tenant as additional rent. Southdale Medical Center accounted for $0.7 million or 25.0% of the increase in utility costs for the ﬁscal year ended April 30, 2003. Due to increased vacancy at Southdale Medical Center during the ﬁscal year ended April 30, 2003, we were unable to fully recover the utility cost from the tenants. For our other noncommercial real estate properties, any increase in our utility costs must be collected from tenants in the form of a general rent increase. Since our real estate portfolio is primarily located in Minnesota and North Dakota, the severity of winters will have a large impact on our utility costs. • Increased administrative and operating expense. Administrative and operating expenses increased by $0.8 million or 37.5% for the ﬁscal year ended April 30, 2003, as compared to the corresponding period of ﬁscal 2002. Of this increase in administrative and operating expense for the ﬁscal year ended April 30, 2003, $139,000 or 17.4% was due to professional fees and costs associated with our offering of common shares in the ﬁrst quarter of ﬁscal 2003. In prior years, the work associated with offerings of common shares to the public was largely done by our employees. In addition, during ﬁscal year 2003 we hired ten new employees. The addition of these new employees, together with increases in the wages and beneﬁts paid to existing employees, accounted for $428,044 or 53.5% of the increase in administrative and operating costs for the ﬁscal year ended April 30, 2003. • Increased insurance premiums. Insurance expense increased by $0.9 million or 66.8% for the ﬁscal year ended April 30, 2003, compared to the prior ﬁscal year. Of the increased insurance costs, $0.6 million or 55.6% was attributable to the addition of new real estate, while $0.3 million or 33.4% was due to increased premium costs for coverage on existing real estate assets. Under the terms of most of our commercial leases, the full cost of insurance is paid by the tenant as additional rent. For our other real estate properties, any increase in our insurance costs must be collected from tenants in the form of a general rent increase. • Increase of interest expense. Our mortgage debt increased $79.8 million or 17.4% for the ﬁscal year ended April 30, 2003. Our mortgage interest expense increased by $7.3 million or 25.4% for the ﬁscal year ended April 30, 2003, as compared to ﬁscal 2002. Of the increased interest expense for the ﬁscal year ended April 30, 2003, $8.0 million was attributable to the addition of new real estate, while interest expenses on existing real estate assets declined by $0.7 million due primarily to the decline in interest rates on our adjustable rate mortgages. Comparison of Results from Commercial and Residential Properties The following table presents an analysis of the relative investment in, and ﬁnancial contribution of, our commercial and multi-family residential properties over the past three ﬁscal years: Fiscal Years Ended April 30 Real Estate Investments — net of accumulated depreciation (in thousands) 2004 % (in thousands) 2003 % (in thousands) 2002 % Commercial Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 618,354 384,824 62% $495,778 348,364 38% 59% $333,093 348,301 41% 49% 51% Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,003,178 100% $844,142 100% $681,394 100% Gross Real Estate Rental Revenues Commercial Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 77,260 62,964 55% $ 58,878 59,653 45% 50% $ 32,008 58,347 50% 35% 65% Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 140,224 100% $118,531 100% $ 90,355 100% 33 Commercial Properties — Analysis of Lease Expirations and Credit Risk The following table shows the annual lease expiration percentages for commercial properties owned by us as of April 30, 2004, for ﬁscal years 2005 through 2014 and the leases that will expire during ﬁscal year 2015 and beyond. Year of Lease Expiration 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2015 and beyond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Square Footage of Expiring Lease Percentage of Total Leased Square Footage (in thousands) Annualized Base Rent of Expiring Leases at Expiration 1,602 604 853 685 551 252 629 138 159 236 1,663 7,372 21.72% 8.20% 11.57% 9.30% 7.48% 3.41% 8.53% 1.87% 2.17% 3.20% 22.55% 100.0% $ 5,505 4,195 6,226 7,045 3,500 1,825 4,212 1,562 860 2,733 15,168 $52,831 % of Total Commercial Rent 10.42% 7.94% 11.78% 13.33% 6.63% 3.45% 7.97% 2.96% 1.63% 5.17% 28.72% 100.0% The following table lists our top ten commercial tenants on April 30, 2004, for all commercial properties owned by us as of April 30, 2004: Lessee (in thousands) Monthly Rent % of Total Commercial Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Edgewood Living Communities, Inc. St. Luke’s Hospital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Healtheast – Woodbury & Maplewood . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Microsoft – Great Plain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Northland Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Smurﬁt – Stone Container Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allina Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wilson’s The Leather Experts Inc. State of Idaho – Department of Health & Welfare . . . . . . . . . . . . . . . . . . . . . . . . . . Alliant Techsystems, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . All Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Monthly Rent as of April 30, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 307 254 161 156 147 129 125 116 114 101 4,667 $6,277 4.89% 4.04% 2.57% 2.49% 2.34% 2.05% 1.99% 1.85% 1.82% 1.61% 74.35% 100.0% Results on a “Stabilized Property” Basis The following tables present results on a stabilized property basis for ﬁscal year 2004 compared to ﬁscal year 2003, and for ﬁscal year 2003 compared to ﬁscal year 2002. The ﬁscal year 2003 results presented in the ﬁrst table below are not identical to the ﬁscal year 2003 results presented in the second table, because the properties comprising our stabilized property portfolio vary from year to year, due to our ongoing acquisition and disposition activity. The Company analyzes and compares results of operations on properties that we have owned for the entirety of the periods being compared (including properties that were redeveloped or expanded during the periods being compared, with properties purchased or sold during the periods being compared excluded from this analysis). This comparison allows the Company to evaluate the performance of existing properties and their contribution to net income. Measuring performance on a stabilized property basis is useful to investors because it enables evaluation of how the Company’s properties are performing year over year. Management uses this measure to assess whether 34 or not it has been successful in increasing net operating income, renewing the leases of existing tenants, controlling operating costs and appropriately handling capital improvements. Fiscal year 2004 compared to ﬁscal year 2003: Fiscal Years Ended April 30 Multi-Family Residential (in thousands) 2004 2003 % Change Real Estate Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 58,511 $ 59,100 (1.0%) Expenses Utilities & Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real Estate Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss on impairment of real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property Stabilized Segment Operating Proﬁt . . . . . . . . . . . . . . . . . . . . . . . . . Commercial 12,299 6,208 6,643 1,958 17,490 62 44,660 13,851 11,380 5,951 6,697 1,527 17,276 0 42,831 16,269 8.1% 4.3% (0.8%) 28.2% 1.2% 0% 4.1% (14.5%) Real Estate Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,961 48,356 1.3% Expenses Utilities & Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real Estate Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property Stabilized Segment Operating Proﬁt . . . . . . . . . . . . . . . . . . . . . . . . . Total Stabilized Segment Operating Proﬁt . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reconciliation to Segment Operating Proﬁt Real Estate Revenue — Non-Stabilized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expenses — Non-Stabilized Utilities & Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real Estate Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Segment Operating Proﬁt 7,771 1,816 5,730 506 15,522 31,467 17,616 31,529 6,742 2,010 5,594 463 15,875 30,684 17,672 33,941 32,752 11,075 (5,741) (1,711) (4,786) (483) (24,817) (8,617) $ 18,064 (1,668) (354) (1,259) (164) (19,253) (2,803) $ 19,515 15.3% (9.7%) 2.4% 9.3% (2.2%) 2.2% (0.3%) (7.1%) 35 Fiscal year 2003 compared to ﬁscal year 2002: Fiscal Years Ended April 30 Multi-Family Residential (in thousands) 2003 2002 % Change Real Estate Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $56,627 $57,166 (0.9) Expenses Utilities & Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real Estate Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property Stabilized Segment Operating Proﬁt . . . . . . . . . . . . . . . . . . . . . . . . . Commercial 10,731 5,961 6,412 1,391 16,226 40,721 15,906 10,125 6,783 6,380 1,017 16,127 40,432 16,734 6.0% (12.1%) 0.5% 36.8% 0.6% 0.7% (5.0%) Real Estate Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,706 28,207 5.3% Expenses Utilities & Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real Estate Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage Interest Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property Stabilized Segment Operating Proﬁt . . . . . . . . . . . . . . . . . . . . . . . . . Total Stabilized Segment Operating Proﬁt . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reconciliation to Segment Operating Proﬁt Real Estate Revenue — Non-Stabilized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expenses — Non-Stabilized Utilities & Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real Estate Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Segment Operating Proﬁt 2,948 1,182 3,070 287 10,673 18,160 11,546 27,452 1,322 802 2,043 137 11,027 15,331 12,876 29,610 32,568 5,355 (6,142) (1,177) (4,086) (481) (9,130) $39,004 (927) 692 (633) (143) (1,493) $32,461 123.0% 47.4% 50.3% 109.5% (3.2%) 18.5% (10.3%) (7.3%) Property Acquisitions IRET Properties added $170.3 million of real estate investments to its portfolio during ﬁscal 2004, compared to $177.2 million added in ﬁscal 2003 and $143.3 million added in ﬁscal 2002. The ﬁscal 2004 and 2003 additions are detailed below. 36 Fiscal 2004 (May 1, 2003 to April 30, 2004) MULTI-FAMILY RESIDENTIAL Connelly Estates – Burnsville, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Remada Court Apartments – Eagan, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Winchester/Village Green Townhouses – Rochester, MN . . . . . . . . . . . . . . . . . . . . . . . Brookﬁeld Village – Topeka, KS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Monticello Village Apartments – Monticello, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legacy V – Grand Forks, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legacy VI – Grand Forks, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legacy VII – Grand Forks, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL RESIDENTIAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (in thousands) Purchase Price $13,850 6,600 8,900 7,250 4,200 214 93 93 $41,200 Units 240 115 151 160 60 N/A N/A N/A 726 N/A= Property not placed in service at April 30, 2004. Additional costs are still to be incurred. COMMERCIAL Benton Business Park – Sauk Rapids, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . West River Business Park – Waite Park, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buffalo Mall – Jamestown, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Golden Hills Ofﬁce Center – Golden Valley, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Brown Deer Road – Milwaukee, WI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TCA Building – Eagan, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Edgewood Vista Phase II – Virginia, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Westgate Shopping Center – St Cloud, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . API Building – Duluth, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Denfeld Retail Center – Duluth, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fresenius – Duluth, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lighthouse – Duluth, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Metris – Duluth, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minnesota National Bank – Duluth, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . South Pond Retail Center – Champlin, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tool Crib – Duluth, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . UHC Ofﬁce – International Falls, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mariner Clinic – Superior, WI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Denfeld Clinic – Duluth, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wells Clinic – Hibbing, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pavilion II – Duluth, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gateway Clinic – Sandstone, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL COMMERCIAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL FISCAL 2004 PROPERTY ACQUISITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2003 (May 1, 2002 to April 30, 2003) MULTI-FAMILY RESIDENTIAL East Park Apartments – Sioux Falls, SD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sycamore Village – Sioux Falls, SD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL RESIDENTIAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Square Footage 30,464 24,000 213,271 190,758 175,610 106,207 76,870 104,928 35,000 36,542 9,052 59,600 20,000 27,000 25,400 15,597 30,000 28,928 20,512 18,810 74,800 12,444 1,335,793 Units 84 48 132 $ 1,600 1,500 4,275 27,500 13,500 13,000 5,100 6,575 2,000 5,164 1,800 2,100 2,950 2,100 3,700 2,000 2,500 4,100 3,336 2,900 19,500 1,900 $129,100 $170,300 $2,520 1,418 $3,938 37 (in thousands) Square Footage Purchase Price COMMERCIAL Abbott Northwestern – Sartell, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Airport Medical – Bloomington, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Anoka Strip Center – Anoka, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Brenwood Ofﬁce Park – Minnetonka, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Burnsville Strip Center – Burnsville, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Central Bank – Eden Prairie, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Champion Auto Center – Forest Lake, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chanhassen Retail Center – Chanhassen, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Checkers Auto – Rochester, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Checkers Auto – Faribault, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chiropractic Ofﬁce Bldg – Greenwood, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dilly Lily – St. Louis Park, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dixon Industrial Park – Des Moines, IA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Eagan Strip Center I – Eagan, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Eagan Strip Center II – Eagan, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Edgewood Vista – Hermantown, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Evergreen Center – Pine City, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Excelsior Strip Center – Excelsior, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Express Center – Fargo, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forest Lake Retail Center – Forest Lake, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gas Plus More – Paynesville, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interstate Bakery – St. Paul, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interstate Bakery – Mounds View, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inver Grove Center PDQ – Inver Grove, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Jamestown Mall – Jamestown, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pamida – Kalispell, MT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pamida – Livingston, MT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pamida – Ladysmith, WI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Park Dental – Brooklyn Center, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Paul Larson Clinic – Edina, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PDQ – Burnsville, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PDQ – Prior Lake, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PDQ – Eagan, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PDQ – Mound, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plaza VII – Boise, ID . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prior Lake Peak – Prior Lake, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sam Goody – Willmar, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Schoﬁeld Plaza – Schoﬁeld, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Southdale Expansion – Edina, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Three Paramount Plaza – Edina, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Lakeville, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Monticello, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Oakdale, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Long Prairie, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Ham Lake, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Glencoe, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Blaine, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Bethel, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Buffalo, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Lakeland, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,095 24,218 10,625 176,917 8,400 39,525 6,836 135,969 6,225 5,600 1,600 3,444 604,711 5,400 13,901 44,365 63,225 7,993 30,227 100,656 4,800 6,225 4,560 8,400 99,403 52,000 41,200 41,000 10,008 12,140 8,526 6,800 3,886 3,864 27,297 4,200 6,225 53,764 75,526 9,500 3,575 6,266 5,216 4,800 4,800 8,750 4,800 7,700 3,650 $12,994 4,678 725 14,014 760 4,600 496 20,850 440 340 330 340 11,872 510 1,349 4,624 2,800 900 1,425 8,007 365 320 290 940 1,320 2,500 1,800 1,500 2,952 1,013 980 971 783 360 3,358 479 400 1,750 7,056 7,367 1,263 855 730 700 535 530 520 510 460 440 38 (in thousands) Square Footage Purchase Price 6,325 4,800 3,571 3,571 3,000 3,000 4,000 3,571 3,000 3,575 43,046 103,332 353,049 2,416,653 COMMERCIAL, continued Tom Thumb – Lino Lakes, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Pine City, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Winsted, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Howard Lake, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Centerville, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Shoreview, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Lindstrom, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Mora, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Andover, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Sauk Rapids, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . UH Medical – St. Paul, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Westgate Ofﬁce Center North – Boise, ID . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wilson’s Leather – Brooklyn Park, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL COMMERCIAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . UNDEVELOPED LAND Andover, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Centerville, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inver Grove, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kalispell, MT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Libby, MT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long Prairie, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prior Lake, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . River Falls, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL UNDEVELOPED LAND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL FISCAL 2003 PROPERTY ACQUISITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 440 440 410 380 330 330 320 300 280 250 7,408 11,509 13,011 $170,509 $ 150 100 560 1,400 150 150 50 200 $ 2,760 $177,207 Property Dispositions During ﬁscal year 2004, IRET Properties disposed of six properties and two undeveloped properties for an aggregate sale price of $3.8 million, compared to six properties and one undeveloped property sold for $11.2 million in total during ﬁscal year 2003. Real estate assets sold by IRET Properties during ﬁscal 2004 were as follows: Property Sold (in thousands) Book Value Plus Sales Costs Gain/Loss Sales Price MCA Royal Suites – Minot, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interstate Bakery – St. Paul, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Edgewood Vista – Billings, MT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Edgewood Vista – Sioux Falls, SD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Sauk Rapids, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pioneer Seed – Moorhead, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sunset Trail III – Rochester, MN (vacant land) . . . . . . . . . . . . . . . . . . . . Prior Lake II – Prior Lake, MN (vacant land) . . . . . . . . . . . . . . . . . . . . . . TOTAL FISCAL 2004 GAIN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 410 420 1,101 1,101 275 500 400 160 $4,367 $ 364 317 941 936 247 498 364 52 $3,719 $ 46 103 160 165 28 2 36 108 $648 39 Real estate assets sold by IRET Properties during ﬁscal 2003 were as follows: Property Sold Eastwood Apartments – Dickinson, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . Oak Manor Apartments – Dickinson, ND . . . . . . . . . . . . . . . . . . . . . . . . . Jenner Apartments – Dickinson, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cottage Grove Strip Ctr. – C. Grove, MN . . . . . . . . . . . . . . . . . . . . . . . . Creekside Ofﬁce Building – Billings, MT . . . . . . . . . . . . . . . . . . . . . . . . . America’s Best – Boise, ID . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Century Apartments – Dickinson, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Edgewood Vista – Land – Duluth, MN . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL FISCAL 2003 GAIN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales Price $ 620 420 275 1,275 1,950 3,350 3,250 102 $11,242 (in thousands) Book Value Plus Sales Costs $ 438 342 272 1,222 1,796 3,656 1,819 102 $9,647 Gain/Loss $ 182 78 3 53 154 (306) 1,431 0 $1,595 Funds From Operations IRET considers Funds from Operations (“FFO”) a useful measure of performance for an equity REIT. IRET uses the deﬁnition of FFO adopted by the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”) in 1991, as clariﬁed in 1995, 1999 and 2002. NAREIT deﬁnes FFO to mean “net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reﬂect funds from operations on the same basis.” While IRET uses the NAREIT deﬁnition of FFO, the components of that deﬁnition in many cases require interpretation, and IRET accordingly has made certain interpretations in applying the deﬁnition. In particular, in calculating FFO per share, IRET “adds back” to net income computed in accordance with GAAP the allocations made to limited partners, and divides this amount by the total number of IRET common shares of beneﬁcial interest and UPREIT Units outstanding. Under the partnership agreement pursuant to which IRET’s UPREIT Units are issued, UPREIT Unitholders effectively have the same claim on the earnings and assets of IRET as do IRET’s shares of beneﬁcial interest shareholders, and therefore IRET considers that the UPREIT Units also should be included with the shares of beneﬁcial interest in calculating FFO per share. IRET believes that, while this particular adjustment made by IRET in calculating FFO is not speciﬁcally provided for in the NAREIT deﬁnition, it is consistent with the deﬁnition. While FFO is widely used by REITs as a primary performance metric, not all real estate companies use the same deﬁnition of FFO or calculate FFO in the same way. Accordingly, FFO presented here is not necessarily comparable to FFO presented by other real estate companies. FFO should not be considered as an alternative to net income as determined in accordance with GAAP as a measure of IRET’s performance, but rather should be considered as an additional, supplemental measure, and should be viewed in conjunction with net income as presented in the consolidated ﬁnancial statements included in this report. Management believes that FFO is helpful to investors as a measure of our performance because it excludes various items included in net income that do not relate to or are not indicative of our performance, such as gains and losses on sales of real estate and real estate-related depreciation and amortization, which can make periodic analyses of operating performance more difﬁcult to compare. FFO does not represent cash generated from operating activities in accordance with generally accepted accounting principles, and is not necessarily indicative of sufﬁcient cash ﬂow to fund all of IRET’s needs or its ability to service indebtedness or make distributions. FFO applicable to common shares and Units for the ﬁscal year ended April 30, 2004, increased to $36.6 million, compared to $34.2 million and $33.8 million for the ﬁscal years ended April 30, 2003 and 2002, respectively. 40 Reconciliation of Net Income Available to Common Shareholders to Funds From Operations Fiscal Years Ended April 30, (in thousands, except per share amounts) 2004 Weighted Avg Shares and Units (2) Amount Per Share and Unit (4) Amount 2003 Weighted Avg Shares and Units (2) Per Share and Unit (4) Amount 2002 Weighted Avg Shares and Units (2) Per Share and Unit (4) Net income available to common shareholders . . . . . . . $ 9,407 39,257 $.24 $12,248 32,574 $.38 $10,600 25,492 $.42 Adjustments: Minority interest in earnings of unitholders . . . . . . . . . . . 2,752 11,176 3,899 10,041 3,614 8,289 Depreciation and Amortization (1) . . . . . . . . . . . Gains on depreciable property . . . . . . . . . . . . . . . . . . sales $25,079 (600) $19,626 (1,595) $15,476 (547) Funds from operations applicable to common shares and Units . . . . . . . . . . . . . . . . $36,638 50,433 $.73 $34,178 42,615 $.80 $29,143 33,781 $.86 (1) (2) (3) (4) Depreciation on ofﬁce equipment and other assets used by us is excluded. Amortization of leasing commissions and property-related intangible assets is included, however, the amortization of ﬁnancing and other expenses is excluded. UPREIT Units of the Operating Partnership are exchangeable for common shares of beneﬁcial interest on a one-for-one basis. Cash distributions are paid equally on common shares of beneﬁcial interest and UPREIT Units. Net income is calculated on a per share basis. Funds From Operations is calculated on a per share and unit basis. Cash Distributions The following cash distributions were paid to our common shareholders and UPREIT unitholders during ﬁscal years 2004, 2003, and 2002: Date July 1, October 1, January 15, April 1, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 $.1585 .1590 .1595 .1600 $.6370 2003 $.1540 .1560 .1570 .1580 $.6250 2002 $.1450 .1475 .1500 .1520 $.5945 The ﬁscal 2004 cash distributions increased 2% over the cash distributions paid during ﬁscal year 2003 and 7% over ﬁscal 2002 distributions. Liquidity and Capital Resources Overview Management expects that the Company’s principal liquidity demands will continue to be distributions to holders of the Company’s preferred and common shares of beneﬁcial interest and UPREIT Units, capital improvements and repairs and maintenance to the Company’s properties, acquisition of additional properties, redemption of outstanding investment certiﬁcates, property development, debt repayments and tenant improvements. The Company expects to meet its short-term liquidity requirements through net cash ﬂows provided by its operating activities, and through draws from time to time on its unsecured lines of credit. Management considers the Company’s ability to generate cash to be adequate to meet all operating requirements and to make distributions to its shareholders in accordance with the REIT provisions of the Internal Revenue Code. Budgeted expenditures for ongoing maintenance and capital improvements and renovations to our real estate portfolio are expected to be funded from cash ﬂow generated from operations of current properties. 41 To the extent the Company does not satisfy its long-term liquidity requirements, which consist primarily of maturities under the Company’s long-term debt, maturing investment certiﬁcates, construction and development activities and potential acquisition opportunities, through net cash ﬂows provided by operating activities and its credit facilities, the Company intends to satisfy such requirements through a combination of funding sources which the Company believes will be available to it, including the issuance of UPREIT Units, additional common or preferred equity, proceeds from the sale of properties, and additional long-term secured or unsecured indebtedness. Sources And Uses Of Cash As of April 30, 2004, the Company had three unsecured lines of credit in the amounts of $10 million, $10 million and $4.4 million, respectively, from (1) Bremer Bank, Minot, ND; (2) First Western Bank and Trust, Minot, ND; and (3) First International Bank and Trust, Watford City, ND. The Company had no outstanding borrowings on these lines as of April, 30, 2004. Borrowings under the lines of credit bear interest based on the following for each of the lines of credit described above: (1) Bremer Financial Corporation Reference Rate, (2) the highest New York Prime rate as published in the Wall Street Journal, and (3) the highest new York Prime rate as published in the Wall Street Journal. Increases in interest rates will increase the Company’s interest expense on any borrowings under its lines of credit and as a result will affect the Company’s results of operations and cash ﬂows. The lines of credit expire on September 15, 2004, September 1, 2004 and December 12, 2004, respectively. The Company will seek to renew each of these three lines of credit prior to their expiration. In addition to the above-described three unsecured lines of credit, the Company’s operating partnership, IRET Properties, in April 2004 entered into a $25 million unsecured bridge loan in connection with the Company’s acquisition of 15 commercial and medical properties located primarily in Duluth, Minnesota and the surrounding area (“Duluth Portfolio”). The bridge loan from Wells Fargo Bank, National Association, as of July 1, 2004, bears interest at a rate of 3.375% per annum. The Company plans to repay the bridge loan by July 22, 2004, the date on which the interest rate applicable to the loan would otherwise increase. The bridge loan will be repaid with the proceeds of mortgage loans, which have already been obtained in July, 2004, placed against the properties in the Duluth Portfolio. In September 2003, the Company completed the sale of 4,500,000 of its common shares of beneﬁcial interest, at a price of $10.00 per share, resulting in net proceeds to the Company of approximately $35.4 million. In February 2004 the Company ﬁled a shelf registration statement on Form S-3 to offer for sale from time to time common shares and preferred shares. This registration statement was declared effective in April 2004. We may sell any combination of common shares and preferred shares up to aggregate initial offering price of $150 million during the period that the registration statement remains effective. During ﬁscal year 2004, the Company issued preferred shares with an aggregate initial offering price of $28,750,000 under this registration statement. In a public offering commenced in April 2004 and closed in May 2004, the Company issued common shares with an aggregate initial offering price of $5,480,270, under this registration statement. As of July 1, 2004, the Company has available securities under this registration statement in the aggregate amount of approximately $115.8 million. On April 26, 2004, the Company issued 1.15 million shares of its 8.25% Series A Cumulative Redeemable Preferred Shares of Beneﬁcial Interest (“Series A preferred shares”), with a $25.00 liquidation preference per share. This offering generated net proceeds to the Company of approximately $27.3 million to fund property acquisitions, development, and improvements. The Series A preferred shares are redeemable by the Company at any time on or after April 26, 2009 at a redemption price of $25.00 per share, plus any accumulated, accrued and unpaid distributions. Each Series A preferred share will receive an annual distribution equivalent to 8.25% of the liquidation preference per share (equivalent to a ﬁxed annual amount of $2.06 per share). In May 2004, the Company completed the sale of .5 million of its common shares of beneﬁcial interest, at a price of $10.10 per share, resulting in net proceeds to the Company of approximately $5.2 million. The issuance of UPREIT Units for property acquisitions continues to be a source of capital for the Company. Two million units were issued in connection with property acquisitions during ﬁscal year 2004, and .9 million units were issued in connection with property acquisitions during ﬁscal year 2003. As a result of the sales of common and preferred shares described above, shareholder equity increased during ﬁscal 2004 by $63.9 million. Additionally, the equity capital of the Company was increased by $12.2 million as 42 a result of contributions of real estate in exchange for limited partnership units, as summarized above, and the minority interest in other partnerships controlled by us increased by $2.2 million, resulting in a total increase in equity capital for the Company of $78.2 million. The Company has a Distribution Reinvestment Plan (“DRIP”). The DRIP provides shareholders of the Company an opportunity to invest their cash distributions in common shares of the Company at a discount of 5% from the market price. During ﬁscal year 2004, 1.067 million common shares were issued under this plan, with an additional .971 million common shares issued during ﬁscal year 2003. Cash and cash equivalents on April 30, 2004 totaled $31.7 million, compared to $18.0 million and $22.8 million on the same date in 2003 and 2002, respectively. Net cash provided from operating activities decreased to $28.7 million in ﬁscal year 2004 from $37.9 million in ﬁscal year 2003, due primarily to increased vacancies and higher expenses at our properties. Net cash provided from operating activities in ﬁscal year 2002 was $26.9 million. Net cash used in investing activities increased to $137.7 million in ﬁscal year 2004, from $66.7 million in ﬁscal year 2003 and $65.4 million in ﬁscal year 2002. This increase resulted because more cash was needed to acquire new investment properties. Net cash provided from ﬁnancing activities also increased to $122.7 million during ﬁscal year 2004, from $24.0 million during ﬁscal year 2003, due to a signiﬁcant increase in our activity in acquiring new properties using borrowed funds and the reﬁnancing of mortgage payables. Net cash provided from ﬁnancing activities was $54.9 million during ﬁscal year 2002. Financial Condition Mortgage Loan Indebtedness. Mortgage loan indebtedness increased to $633 million on April 30, 2004, due to the acquisition of new investment properties from $539 million on April 30, 2003. Ninety-three per cent of such mortgage debt is at ﬁxed rates of interest, with staggered maturities. This limits the Company’s exposure to changes in interest rates, which minimizes the effect of interest rate ﬂuctuations on the Company’s results of operations and cash ﬂows. As of April 30, 2004, the weighted average rate of interest on the Company’s mortgage debt was 7.17%, compared to 7.4% on April 30, 2003. Mortgage Loans Receivable. Mortgage loans receivable increased to $4.9 million at April 30, 2004, from $1.2 million at April 30, 2003. Real Estate Owned. Real estate owned increased to $1,103 million at April 30, 2004, from $920 million at April 30, 2003. The increase resulted primarily from the acquisition of the additional investment properties net of dispositions as described in the “Property Acquisitions” and “Property Dispositions” subsections of this Management’s Discussion and Analysis of Financial Condition and Results of Operations. Investment Certiﬁcates. We discontinued the issuance of investment certiﬁcates in April 2002. As of April 30, 2004, $7.074 million of such certiﬁcates was outstanding. Cash and Cash Equivalents. Cash and cash equivalents on April 30, 2004 was $31.7 million, compared to $18.0 million on April 30, 2003. The increase in cash on hand from April 30, 2004 as compared to April 30, 2003 was due primarily to the sale of preferred and common shares in April, 2004. Marketable Securities. During ﬁscal year 2004, IRET increased its investment in marketable securities classiﬁed as available-for-sale to $2.3 million on April 30, 2004 from $0 on April 30, 2003. Marketable securities are held available for sale and, from time to time, the Company invests excess funds in such securities or uses the funds so invested for operational purposes. Operating Partnership Units. Outstanding limited partnership units in the Operating Partnership increased to 11.8 million units on April 30, 2004, compared to 10.2 million units outstanding on April 30, 2003. The increase in units outstanding at April 30, 2004 as compared to April 30, 2003 resulted primarily from the issuance of additional limited partnership units to acquire interests in real estate, net of units converted to shares. Common and Preferred Shares of Beneﬁcial Interest. Common shares of beneﬁcial interest outstanding on April 30, 2004 totaled 41.7 million compared to 36.2 million common shares outstanding on April 30, 2003. This increase in common shares outstanding from April 30, 2003 to April 30, 2004 was primarily due to the public 43 offerings of common shares completed during ﬁscal year 2004, and to the issuance of common shares pursuant to our distribution reinvestment plan. Preferred shares of beneﬁcial interest outstanding on April 30, 2004 totaled 1.15 million. The Company had no preferred shares outstanding on April 30, 2003. Contractual Obligations and other Commitments The primary contractual obligations of the Company relate to its borrowings under its three lines of credit and mortgage notes payable. The Company’s lines of credit had no amounts outstanding at April 30, 2004. The Company had $25 million outstanding as of April 30, 2004 under a bridge loan that the Company expects to repay in July 2004. The approximately $633 million in mortgage notes payable have varying maturities ranging from .7 to 19 years. The principal payments on the mortgage notes payable for the years subsequent to April 30, 2004 are included in the table below as “long-term debt.” The other debt category consists of a mortgage note payable on our Minneapolis, Minnesota ofﬁce. The Company has sold investment certiﬁcates to the public, with interest rates varying from 6% to 8% per annum. The sales of these investment certiﬁcates has been discontinued and the outstanding certiﬁcates will be redeemed at they mature. Amounts due in respect of these investment certiﬁcates are reﬂected in the “Investment Certiﬁcates” category below. As of April 30, 2004, the Company is a tenant under operating ground leases on four of its properties. The Company pays a total of approximately $82,000 per year in rent under these ground leases, which have terms ranging from 15 to 30 years, and expiration dates ranging from October 2005 to February 2031. Purchase obligations of the Company represent those costs that the Company is contractually obligated to pay in the future. The Company’s signiﬁcant contractual obligations as of April 30, 2004 are summarized in the following table. The signiﬁcant components in this category are costs for construction and expansion projects and capital improvements at the Company’s properties. Contractual obligations that are contingent upon the achievement of certain milestones are not included in the table below, nor are service orders or contracts for the provision of routine maintenance services at our properties, such as landscaping and grounds maintenance, since these arrangements are generally based on current needs, are ﬁlled by our service providers within short time horizons, and may be cancelled without penalty. The expected timing of payment of the obligations discussed below is estimated based on current information. Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment Certiﬁcates . . . . . . . . . . . . . . . . . . . . . . . . Operating Lease Obligations . . . . . . . . . . . . . . . . . . Purchase Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . (in thousands) Total $633,124 25,000 586 7,074 1,410 11,000 Less Than 1 Year $15,789 25,000 24 2,231 82 2,000 1–3 Years 3–5 Years $36,292 — 53 4,701 163 8,000 $87,573 — 509 142 171 1,000 More than 5 Years $493,470 — — — 994 — As of April 30, 2004, the Company had signed a purchase agreement to acquire a commercial property in the Minneapolis, Minnesota area for a purchase price of approximately $13.05 million. This pending acquisition is subject to certain closing conditions and contingencies, and, accordingly, this potential acquisition is not included in the above table of the Company’s contractual obligations. No assurance can be given that this transaction will be consummated. Off-Balance-Sheet Arrangements As of April 30, 2004, we did not have any signiﬁcant off-balance-sheet arrangements, as deﬁned in Item 303(a)(4)(ii) of SEC Regulation S-K. Recent Developments Common and Preferred Share Distributions. On June 30, 2004, the Company paid a distribution of 37.24 cents per share on the Company’s newly-issued Series A Cumulative Redeemable Preferred Shares to preferred 44 shareholders of record on June 15, 2004. The distribution was pro-rated from the date of initial issuance of the preferred shares (65 days versus 90 days in a regular quarter). On July 1, 2004, the Company paid a distribution of 16.05 cents per share on the Company’s common shares of beneﬁcial interest, to common shareholders and UPREIT unitholders of record on June 18, 2004. This distribution represented an increase of .05 cents or .3% over the previous regular quarterly distribution of 16.00 cents per common share/unit paid April 1, 2004. Duluth Acquisition. In the Company’s Quarterly Report on Form 10-Q for the third quarter of ﬁscal year 2004, the Company announced that it had signed a purchase agreement to acquire a portfolio of 15 commercial and medical properties located primarily in Duluth, Minnesota. The Company closed on the acquisition of 14 of these 15 properties in April 2004. The remaining property, a 61,094 square foot clinic property in Duluth, was acquired in May 2004. The Company paid approximately $66,950,000 for this portfolio of 15 properties. Tom Thumb Bankruptcy. On March 9, 2004, Tom Thumb Food Markets, Inc. ﬁled a Chapter 7 bankruptcy petition with the U.S. Bankruptcy Court in Minneapolis. At the time of the ﬁling, the Company owned 18 properties in Minnesota that were operated as Tom Thumb convenience stores. As of July 2, 2004, leases for nine of these 18 stores have been assigned by the bankruptcy trustee to new tenants. Monthly rents payable to the Company under the leases now in place in respect of these nine properties total $17,281, and the lease terms range from one to ten years. The Company is engaged in discussions with the bankruptcy trustee regarding cure amounts due to the Company in respect of delinquent rent and real estate taxes for these nine properties. The amount claimed due by the Company is $143,830. In early July, the trustee paid $107,953 of this amount and has requested additional documentation with respect to certain of the remaining amounts claimed. The bankruptcy trustee, on behalf of the bankruptcy estate, rejected the leases on ﬁve of the remaining nine properties. Of these ﬁve properties, two are currently vacant, and three are being operated as convenience stores by subtenants under the original leases with Tom Thumb. The Company is receiving monthly rents from these three stores totaling $7,851. Cure amounts totaling $21,915 for delinquent rent and real estate taxes for these three stores have been asserted by the Company as due from the bankruptcy estate. The remaining four properties of the 18 are currently vacant, and the Company is engaged in discussions with the trustee as to their assumption or rejection. The Company is in discussions with a potential tenant for one of these four vacant properties, and is actively pursuing tenants for all remaining vacant locations. Related Party Transaction. On June 30, 2004, IRET Properties purchased four commercial properties from afﬁliates of Steven B. Hoyt, a member of IRET’s Board of Trustees. IRET Properties acquired three ofﬁce buildings, each containing 26,186 square feet of rentable area, and one ofﬁce building containing 79,287 square feet of rentable area, in this transaction, for a total purchase price for the four properties of $14 million. Three of the properties are located in Plymouth, Minnesota, and the fourth is located in Maple Grove, Minnesota. Additional Acquisitions and Dispositions. In addition to the acquisitions described in the paragraphs above, the Company closed on the following acquisitions and dispositions subsequent to its ﬁscal year ended April 30, 2004: Acquisitions Nebraska Orthopaedic Hospital Expansion Project. The Company purchased a 99% interest in a limited liability company that owns expansion premises constructed at the Company’s Nebraska Orthopaedic Hospital facility in Omaha, Nebraska. The Company paid approximately $4.6 million for this interest. The acquisition closed May 1, 2004. Sleep Inn. The Company paid approximately $3.6 million to purchase a “Sleep Inn” hotel in Brooklyn Park, MN, and a warehouse building located near the hotel. This acquisition closed in June 2004. The hotel tenant subsequently exercised an option to purchase the warehouse building for $450,000. Dispositions Barnes & Noble and Petco Stores. In July 2004 the Company sold its Barnes & Noble and Petco store locations in Fargo, ND for approximately $6.75 million. 45 Item 7A. Quantitative and Qualitative Disclosures About Market Risk Our exposure to market risk is limited primarily to ﬂuctuations in the general level of interest rates on our current and future ﬁxed and variable rate debt obligations, and secondarily to our deposits with and investments in certain products issued by various ﬁnancial institutions. Variable interest rates. Even though our goal is to maintain a fairly low exposure to interest rate ﬂuctuation risk, we are still vulnerable to signiﬁcant ﬂuctuations in interest rates on variable rate debt, on any future repricing or reﬁnancing of our ﬁxed rate debt and on future debt. We primarily use long-term (more than nine 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 interest rate risk. As of April 30, 2004, we had the following amount of future principal payments due on mortgages secured by our real estate. Long Term Debt 2005 2006 2007 2008 2009 Thereafter Total (in thousands) Fixed Rate . . . . . . . . . . . . . . . . . . . . . . Variable Rate . . . . . . . . . . . . . . . . . . . . $14,277 1,512 $15,412 1,686 $16,691 2,503 $43,045 1,784 $40,650 2,094 $461,101 32,369 $591,176 41,948 $633,124 Average Interest Rate (%) . . . . . . . . . (1) (1) (1) (1) (1) (1) (1) (1) The weighted average interest rate on our debt as of April 30, 2004, was 7.17%. Any ﬂuctuations in variable interest rates could increase or decrease our interest expenses. For example, an increase of one percent per annum on our $41.9 million of variable rate indebtedness would increase our annual interest expense by $419,000. Marketable Securities. IRET’s investments in securities are classiﬁed as “available-for-sale.” The securities classiﬁed as “available-for-sale” represent investments in debt and equity securities which the Company intends to hold for an indeﬁnite period of time. As of April 30, 2004, IRET had approximately $2.3 million of marketable securities classiﬁed as “available-for-sale,” consisting of securities of various issuers, primarily U.S. Government, U.S. agency and corporate bonds and bank certiﬁcates of deposit, held in IRET Properties’ security deposit account with Merrill Lynch. IRET had no securities classiﬁed as “available-for-sale” as of April 30, 2003. The values of these securities will ﬂuctuate with changes in market interest rates. Investments with Certain Financial Institutions. IRET has entered into a cash management arrangement with First Western Bank with respect to deposit accounts with First Western Bank that exceed FDIC Insurance coverage. On a daily basis, account balances are invested in U.S. Government securities sold to IRET by First Western Bank. IRET can require First Western Bank to repurchase such securities at any time, at a purchase price equal to what IRET paid for the securities, plus interest. First Western Bank automatically repurchases obligations when collected amounts on deposit in IRET’s deposit accounts fall below the maximum insurance amount, with the proceeds of such repurchases being transferred to IRET’s deposit accounts to bring the amount on deposit back up to the threshold amount. The amounts invested by IRET pursuant to the repurchase agreement are not insured by FDIC. IRET has entered into a cash management arrangement with US Bank with respect to IRET depository accounts at multiple US Bank locations. Account balances are swept daily to an IRET master account. Amounts in the master account in excess of $4 million are invested overnight in short-term U.S. Government securities and repurchase agreements secured by U.S. Government securities. Amounts invested were $7.5 million as of April 30, 2004 and $3.5 million as of April 30, 2003. Deposits exceeding FDIC insurance. The Company is potentially exposed to off-balance-sheet risk in respect of cash deposited with FDIC-insured ﬁnancial institutions in accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. Item 8. Financial Statements and Supplementary Data Financial statements required by this item appear with an Index to Financial Statements and Schedules, starting on page F-1 of this report. 46 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Matters Subsequent to the end of ﬁscal 2003, on July 23, 2003, our Board of Trustees, upon recommendation of our Audit Committee, terminated the engagement of Brady, Martz & Associates, P.C. (“Brady Martz”) as our independent public accountants and engaged Deloitte & Touche LLP to serve as our independent public accountants for our ﬁscal year ended April 30, 2004. This termination was not related to the quality of services provided by Brady Martz. We have retained Brady Martz in ﬁscal 2004 for tax and other advising issues, and we expect that we will, in the future, continue to engage Brady Martz for tax and other professional advice. Other than this change in accountants, which was previously reported in a Form 8-K, ﬁled with the SEC on July 26, 2003, there were no changes in or disagreements with accountants on accounting and ﬁnancial disclosure during the ﬁscal year ended April 30, 2004. Item 9A. Controls and Procedures As of April 30, 2004, the end of the period covered by this Annual Report on Form 10-K, our management carried out an evaluation, under the supervision and with the participation of the President, the Chief Operating Ofﬁcer and the Chief Financial Ofﬁcer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14 and 15d-14. Based upon that evaluation, the President, Chief Operating Ofﬁcer and Chief Financial Ofﬁcer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC ﬁlings. There have been no signiﬁcant changes in our internal controls over ﬁnancial reporting or identiﬁed in connection with the above-referenced evaluation that has materially affected, or is likely to materially affect, our internal controls over ﬁnancial reporting. 47 Item 10. Trustees and Executive Ofﬁcers of the Registrant PART III Information regarding executive ofﬁcers required by this Item is set forth in Part I, Item 1 of this Annual Report on Form 10-K pursuant to Instruction 3 to Item 401(b) of Regulation S-K. Other information required by this Item will be included in our deﬁnitive Proxy Statement for our 2004 Annual Meeting of Shareholders and such information is incorporated herein by reference. Item 11. Executive Compensation The information required by this Item will be contained in our deﬁnitive Proxy Statement for our 2004 Annual Meeting of Shareholders and such information is incorporated herein by reference. Item 12. Security Ownership of Certain Beneﬁcial Owners and Management The information required by this Item will be contained in our deﬁnitive Proxy Statement for our 2004 Annual Meeting of Shareholders and such information is incorporated herein by reference. We do not have any equity compensation plans and, as such, are not required to include the disclosure required by Item 201(d) of Regulation S-K. Item 13. Certain Relationships and Related Transactions The information required by this Item will be contained in our deﬁnitive Proxy Statement for our 2004 Annual Meeting of Shareholders and such information is incorporated herein by reference. Item 14. Principal Accounting Fees and Services The information required by this Item will be contained in our deﬁnitive Proxy Statement for our 2004 Annual Meeting of Shareholders and such information is incorporated herein by reference. PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) The following documents are ﬁled as part of this report: 1. Financial Statements The response to this portion of Item 15 is submitted as a separate section of this report. See the table of contents to Financial Statements and Supplemental Data. 2. Financial Statement Schedules The response to this portion of Item 15 is submitted as a separate section of this report. The following ﬁnancial statement schedules should be read in conjunction with the ﬁnancial statements referenced in Part II, Item 8 of this Annual Report on Form 10-K: III Real Estate Owned and Accumulated Depreciation IV Investments in Mortgage Loans on Real Estate 3. Exhibits See the list of exhibits set forth in part (c) below. (b) Reports on Form 8-K: The following reports on Form 8-K were ﬁled during the last quarter of the period covered by this report: Amendment No. 1 to Current Report on Form 8-K ﬁled March 8, 2004 to provide, under Item 7, the ﬁnancial statements and pro forma ﬁnancial information required in respect of our acquisition 48 of property which in the aggregate constituted a signiﬁcant amount of assets; this ﬁling amended our previously-ﬁled Current Report on Form 8-K ﬁled on January 7, 2004. Current Report on Form 8-K ﬁled April 14, 2004 to report, under Item 5, the issuance of a press release announcing an underwritten public offering of Series A Cumulative Redeemable Preferred Shares of Beneﬁcial Interest, and the offering of common shares of beneﬁcial interest of the Company in a separate best efforts offering. Current Report on Form 8-K ﬁled April 22, 2004 to ﬁle, under Items 5 and 7, the Underwriting Agreement and a legal opinion in respect of our public offering of Series A Cumulative Redeemable Preferred Shares of Beneﬁcial Interest, and to ﬁle a press release announcing the pricing of the shares. (c) 3.1 3.2 3.3 3.4 The following is a list of Exhibits to this Annual Report on Form 10-K. We will furnish a copy of any exhibit listed below to any security holder who requests it upon payment of a fee of 15 cents per page. All Exhibits are either contained in this Annual Report on Form 10-K or are incorporated by reference as indicated below. Articles of Amendment and Third Restated Declaration of Trust of Investors Real Estate Trust, dated September 23, 2003 and incorporated herein by reference to Exhibit A to the Company’s Deﬁnitive Proxy Statement on Schedule 14A for the 2003 Annual Meeting of Shareholders, ﬁled with the SEC on August 13, 2003. Second Restated Trustees’ Regulations (Bylaws), dated September 24, 2003 and incorporated herein by reference to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended October 31, 2003, ﬁled with the SEC on December 15, 2003. Agreement of Limited Partnership of IRET Properties, A North Dakota Limited Partnership, dated January 31, 1997, ﬁled as Exhibit 3(ii) to the Registration Statement on Form S-11, effective March 14, 1997 (SEC File No. 333-21945) ﬁled for the Registrant on February 18, 1997 (File No. 0-14851) and incorporated herein by reference. Articles Supplementary classifying and designating 8.25% Series A Cumulative Redeemable Preferred Shares of Beneﬁcial Interest, ﬁled as Exhibit 3.2 to the Company’s Form 8-A ﬁled on April 22, 2004 and incorporated herein by reference. 10.1 Member Control and Operating Agreement dated September 30, 2002 ﬁled as Exhibit 10 to the Company’s Form 8-K ﬁled October 15, 2003 and incorporated herein by reference. Letter Agreement dated January 31, 2003 ﬁled as Exhibit 10(i) to the Company’s Form 8-K ﬁled February 27, 2003 and incorporated herein by reference. Option Agreement dated January 31, 2003 ﬁled as Exhibit 10(ii) to the Company’s Form 8-K ﬁled February 27, 2003 and incorporated herein by reference. Financial Statements of T.F. James Company ﬁled as Exhibit 10 to the Company’s Form 8-K ﬁled January 31, 2003 and incorporated herein by reference. Agreement for Purchase and Sale of Property dated February 13, 2004, by and between IRET Properties and the Sellers speciﬁed therein, ﬁled herewith. Subsidiaries of Investors Real Estate Trust, ﬁled herewith. Consent of Deloitte & Touche LLP, ﬁled herewith. Section 302 Certiﬁcation of President and Chief Executive Ofﬁcer, ﬁled herewith. Section 302 Certiﬁcation of Senior Vice President and Chief Financial Ofﬁcer, ﬁled herewith. Section 906 Certiﬁcation of the President and Chief Executive Ofﬁcer, ﬁled herewith. Section 906 Certiﬁcation of the Senior Vice President and Chief Financial Ofﬁcer, ﬁled herewith. 10.2 10.3 10.4 10.5 21.1 23 31.1 31.2 32.1 32.2 49 (This page intentionally left blank.) INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES TABLE OF CONTENTS REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS . . . . . . . . . . . CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ADDITIONAL INFORMATION Reports of Independent Registered Public Accounting Firms on Additional Information . . . Real Estate and Accumulated Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments in Mortgage Loans on Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PAGE F-2 F-4 F-6 F-7 F-8 F-10 F-35 F-36 F-52 Schedules other than those listed above are omitted since they are not required or are not applicable, or the required information is shown in the consolidated ﬁnancial statements or notes thereon. F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Trustees and Shareholders of Investors Real Estate Trust Minot, North Dakota We have audited the accompanying consolidated balance sheet of Investors Real Estate Trust and subsidiaries (the “Company”) as of April 30, 2004, and the related consolidated statements of operations, shareholders’ equity, and cash ﬂows for the year then ended. These consolidated ﬁnancial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated ﬁnancial statements based on our audit. We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). 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 ﬁnancial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated ﬁnancial statements present fairly, in all material respects, the ﬁnancial position of the Company as of April 30, 2004, and the results of its operations and its cash ﬂows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Minneapolis, Minnesota July 16, 2004 F-2 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Trustees Investors Real Estate Trust and Subsidiaries Minot, North Dakota We have audited the accompanying consolidated balance sheet of Investors Real Estate Trust and Subsidiaries as of April 30, 2003, and the related consolidated statements of operations, shareholders’ equity, and cash ﬂows for the years ended April 30, 2003 and 2002. 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 for 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, 2003, and the consolidated results of its operations and cash ﬂows for the years ended April 30, 2003, and 2002, in conformity with accounting principles generally accepted in the United States of America. Our audit was conducted for the purpose of forming an opinion on the basic ﬁnancial statements, taken as a whole. The additional information contained in Note 20, which is marked “unaudited”, has not been subjected to the auditing procedures applied in the audit of the basic ﬁnancial statements and, accordingly, we express no opinion on it. /s/ Brady, Martz & Associates, P.C. BRADY, MARTZ & ASSOCIATES, P.C. Minot, North Dakota, USA May 22, 2003 F-3 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS April 30, 2004 and 2003 ASSETS Real estate investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less accumulated depreciation/amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage loans receivable, net of allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total real estate investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Assets Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Marketable securities — available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivable arising from straight-lining of rents, net of allowance . . . . . . . . Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax, insurance, and other escrow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill Deferred charges and leasing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (in thousands) 2004 2003 $1,103,428 (100,250) 1,003,178 4,893 1,008,071 31,704 2,336 5,976 2,155 1,567 3,044 11,301 2,292 1,441 6,430 $1,076,317 $919,781 (75,639) 844,142 1,183 845,325 17,964 0 4,604 789 354 298 8,112 2,088 1,441 4,706 $885,681 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-4 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued) April 30, 2004 and 2003 LIABILITIES AND SHAREHOLDERS’ EQUITY LIABILITIES Accounts payable, accrued expenses and other liabilities . . . . . . . . . . . . . . . . . Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgages payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment certiﬁcates issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . COMMITMENTS AND CONTINGENCIES (NOTE 17) MINORITY INTEREST IN PARTNERSHIPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . MINORITY INTEREST OF UNIT HOLDERS IN OPERATING PARTNERSHIP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11,819,350 units on April 30, 2004 and 10,206,036 units on April 30, 2003) SHAREHOLDERS’ EQUITY Preferred Shares of Beneﬁcial Interest (Cumulative redeemable preferred shares, no par value, 1,150,000 shares issued and outstanding at April 30, 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common Shares of Beneﬁcial Interest (Unlimited authorization, no par value, 41,693,256 shares at April 30, 2004, and 36,166,351 shares outstanding at April 30, 2003) . . . . . . . . . . . . . . . . . . . . . . Accumulated distributions in excess of net income . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY . . . . . . . . . . . . . . . . . (in thousands) 2004 2003 $ 22,896 25,000 633,124 7,074 586 688,680 $ 16,638 10,570 539,397 9,035 678 576,318 16,386 14,225 92,622 80,377 27,343 0 292,400 (41,083) (31) 278,629 $1,076,317 240,645 (25,884) 0 214,761 $885,681 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-5 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS for the years ended April 30, 2004, 2003, and 2002 (in thousands, except per share data) 2004 2003 2002 REVENUE Real estate rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tenant reimbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Discounts and fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL REVENUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OPERATING EXPENSE Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation/amortization related to real estate investments . . . . . . . . Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real Estate taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property management expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property management related party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Administrative expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advisory and trustee services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of related party costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss on impairment of real estate investment . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL OPERATING EXPENSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before gain/loss on properties and minority interest . . . . . . . . . . Gain on sale of land and other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority interest portion of other partnerships’ income . . . . . . . . . . . . . . . Minority interest portion of operating partnership income . . . . . . . . . . . . Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Discontinued operations, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends to preferred shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NET INCOME AVAILABLE TO COMMON SHAREHOLDERS . . . . $118,695 21,529 281 140,505 43,117 24,980 10,239 15,572 17,159 2,947 8,992 743 2,747 104 957 935 71 62 128,625 11,880 373 12,253 158 (757) (2,744) 8,910 530 9,440 (33) 9,407 $ Earnings per common share from continuing operations . . . . . . . . . . . . . . Earnings per share common from discontinued operations . . . . . . . . . . . . NET INCOME PER COMMON SHARE — BASIC & DILUTED . . . $ $ .23 .01 .24 $103,433 15,098 234 118,765 36,992 19,345 7,855 11,935 13,550 2,154 7,811 504 2,051 113 885 663 38 0 103,896 14,869 830 15,699 315 (934) (3,640) 11,440 808 12,248 (0) $ 12,248 $ $ .35 .03 .38 $85,687 4,668 215 90,570 29,982 15,171 5,088 7,261 9,044 1,291 6,567 321 1,570 113 566 543 7 0 77,524 13,046 1,062 14,108 547 (198) (3,675) 10,782 (182) 10,600 (0) $10,600 $ $ .42 .00 .42 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-6 BALANCE MAY 1, 2001 . . . . . . . . Comprehensive Income Net income . . . . . . . . . . . . . . . . . . . Unrealized gain on securities available-for-sale . . . . . . . . . . . . Total comprehensive income . . . . . . Distributions . . . . . . . . . . . . . . . . . . . . Distribution reinvestment plan . . . . Sale of shares . . . . . . . . . . . . . . . . . . . Redemption of units for common shares . . . . . . . . . . . . . . . . Fractional shares repurchased . . . . . BALANCE APRIL 30, 2002 . . . . . . Comprehensive Income Net income . . . . . . . . . . . . . . . . . . . Total comprehensive income . . . . . . Distributions . . . . . . . . . . . . . . . . . . . . Distribution reinvestment plan . . . . Sale of shares . . . . . . . . . . . . . . . . . . . Redemption of units for common shares . . . . . . . . . . . . . . . . Fractional shares repurchased . . . . . Comprehensive Income Net income . . . . . . . . . . . . . . . . . . . Unrealized loss on securities available-for-sale . . . . . . . . . . . . Total comprehensive income . . . . . . Distributions . . . . . . . . . . . . . . . . . . . . Distribution reinvestment plan . . . . Sale of shares . . . . . . . . . . . . . . . . . . . Redemption of units for common shares . . . . . . . . . . . . . . . . Fractional shares repurchased . . . . . INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY for the years ended April 30, 2004, 2003, and 2002 (in thousands) Number of Preferred Shares Preferred Shares Number of Common Shares Common Shares Accumulated Other Compre- hensive Income (Loss) Total Share- holders’ Equity Distributions in Excess of Net Income 0 $ 0 24,068 $132,148 $(13,073) $(130) $118,945 0 0 0 0 10,600 0 0 130 0 833 2,789 0 7,298 22,611 (15,325) 0 0 159 (2) 1,339 (19) 0 0 0 27,847 163,377 (17,798) 0 0 12,248 0 971 7,027 0 9,463 65,245 (20,334) 0 0 324 (3) 2,589 (29) 0 10,600 130 10,730 (15,325) 7,298 22,611 1,339 (19) 145,579 12,248 $ 12,248 (20,334) 9,463 65,245 2,589 (29) 214,761 9,440 0 0 0 0 0 0 0 0 0 0 0 0 BALANCE APRIL 30, 2003 . . . . . . 0 0 36,166 240,645 (25,884) 0 0 0 0 9,440 0 (31) (31) 1,150 27,343 0 1,067 4,068 0 10,157 38,307 (24,639) 0 0 393 (1) 3,303 (12) 0 $ 9,409 (24,639) 10,157 65,650 3,303 (12) 0 0 0 0 BALANCE APRIL 30, 2004 . . . . . . 1,150 $27,343 41,693 $292,400 $(41,083) $ (31) $278,629 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-7 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended April 30, 2004, 2003, and 2002 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 income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on sale of real estate, land and other investments . . . . . . . . . . . . . . . . . . . Interest reinvested in investment certiﬁcates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss on impairment of real estate investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bad debt expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in other assets and liabilities: (Increase)decrease in real estate deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivable arising from straight-lining of rents . . . . . . . . . . . . . . . . . . . . . . . . . . . (Increase)decrease in accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Increase)decrease in prepaid and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase in tax, insurance and other escrow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase in deferred charges and leasing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase in related party capitalized leasing commissions . . . . . . . . . . . . . . . . Increase in accounts payable, accrued expenses and other liabilities . . . . . . Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of marketable securities — available-for-sale . . . . . . . . . . . Principal payments on mortgage loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment in mortgage loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchase of marketable securities — available-for-sale . . . . . . . . . . . . . . . . . . . . . . Proceeds from sale of property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments for acquisitions and improvement of properties . . . . . . . . . . . . . . . . . . Proceeds from notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment in notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used by investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from sale of common shares, net of issue costs . . . . . . . . . . . . . . . . . . . Proceeds from sale of preferred shares, net of issue costs . . . . . . . . . . . . . . . . . . . Proceeds from investment certiﬁcates issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from mortgages payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sale of minority interest units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repurchase of shares and minority interest units . . . . . . . . . . . . . . . . . . . . . . . . . . . . Distributions paid to shareholders, net of reinvestment . . . . . . . . . . . . . . . . . . . . . Distributions paid to unitholders of operating partnership . . . . . . . . . . . . . . . . . . . Distributions paid to other minority partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Redemption of investment certiﬁcates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Principal payments on mortgages payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Principal payments on notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by ﬁnancing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR . . . . . . . . . CASH AND CASH EQUIVALENTS AT END OF YEAR . . . . . . . . . . . . . . . . . . (in thousands) 2004 2003 2002 $ 9,440 $ 12,248 $ 10,600 26,034 3,509 (662) 303 62 360 (2,604) (1,731) (1,183) (2,746) (3,098) (2,334) (92) 3,469 28,727 2,500 3,232 (6,625) (4,867) 3,743 (135,658) 0 0 (137,675) 38,307 27,343 0 130,191 49,988 0 (12) (15,206) (6,330) (1,555) (2,264) (62,125) (35,649) 122,688 13,740 17,964 $ 31,704 20,307 4,833 (1,595) 375 0 215 85 (1,560) 1,967 (1,208) (1,698) (1,729) (180) 3,386 37,862 0 5,889 (2,969) 0 10,527 (82,664) 3,500 0 (66,717) 31,913 0 0 43,925 14,100 0 (29) (11,663) (5,461) (1,015) (16,527) (25,354) (6,903) 23,986 (4,869) 22,833 $ 17,964 16,064 3,813 (547) 486 0 30 1,063 (1,338) (2,319) (532) (1,887) (847) (27) 2,359 26,918 3,085 5,591 (8,507) 0 1,126 (63,157) 0 (3,500) (65,362) 13,521 0 24,109 43,093 0 346 (30) (8,363) (4,477) (150) (2,195) (10,933) 0 54,921 16,477 6,356 $ 22,833 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-8 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) for the years ended April 30, 2004, 2003, and 2002 SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Distribution reinvestment plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property acquired through issue of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate investment acquired through assumption of mortgage loans payable and accrual of costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate investment acquired through assumption of notes payable . . . . . . Mortgage loan receivable transferred to other assets . . . . . . . . . . . . . . . . . . . . . . . . Mortgage loan receivable from sale of property . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage loan receivable acquired through assumption of mortgage loans payable and accrual of costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assets acquired through the issuance of minority interest units in the operating partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority partner interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment certiﬁcates transferred to shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating partnership units converted to shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Interest on mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest on investment certiﬁcates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest on margin account and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (in thousands) 2004 2003 2002 $10,157 0 $ 9,463 33,333 $ 7,298 0 25,660 0 158 475 61,258 4,051 0 0 59,650 0 0 0 0 175 0 19,851 2,701 0 3,303 8,860 1,486 0 2,589 19,793 9,483 9,090 1,339 $41,197 376 991 $42,564 $35,950 989 104 $37,043 $27,319 664 1 $27,984 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-9 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004, 2003, and 2002 NOTE 1 • ORGANIZATION Investors Real Estate Trust (“IRET”) is a self-advised real estate investment trust engaged in acquiring, owning and leasing multi-family and commercial real estate. IRET has elected to be taxed as a Real Estate Investment Trust (“REIT”) under Sections 856-860 of the Internal Revenue Code of 1986, as amended. REITs are subject to a number of organizational and operational requirements, including a requirement to distribute 90% of ordinary taxable income to shareholders, and, generally, are not subject to federal income tax on net income. IRET’s multi-family residential properties and commercial properties are located mainly in the states of North Dakota and Minnesota, but also in the states of Colorado, Idaho, Iowa, Georgia, Kansas, Montana, Nebraska, South Dakota, Texas, Michigan, Washington and Wisconsin. As of April 30, 2004, IRET owned 69 multi-family residential properties with 8,955 apartment units and 142 commercial properties totaling 7.4 million net rentable square feet. IRET conducts a majority of its business activities through its consolidated operating partnership, IRET Properties, a North Dakota Limited Partnership (the “Operating Partnership”), as well as through a number of other subsidiary entities. All references to IRET or the Company refer to Investors Real Estate Trust and its consolidated subsidiaries. NOTE 2 • BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying consolidated ﬁnancial statements include the accounts of IRET and all subsidiaries in which it maintains a controlling interest. All signiﬁcant intercompany balances and transactions are eliminated in consolidation. The Company’s ﬁscal year ends April 30th. The accompanying consolidated ﬁnancial statements include the accounts of IRET and its general partnership interest in the Operating Partnership. The Company’s interest in the Operating Partnership was 78% as of April 30, 2004, which includes 100% of the general partnership interest. The limited partners have a redemption option that they may exercise. IRET has the option of redeeming the limited partners’ interests (“Units”) for IRET common shares of beneﬁcial interest, on a one-for-one basis, or for cash payment to the unitholder. The redemption generally may be exercised by the limited partners at any time after the ﬁrst anniversary of the date of the acquisition of the Units (provided, however, that not more than two redemptions by a limited partner may occur during each calendar year, and each limited partner may not exercise the redemption for less than 1,000 Units, or, if such limited partner holds less than 1,000 Units, for all of the Units held by such limited partner). Some limited partners have contractually agreed to a holding period of greater than one year. The consolidated ﬁnancial statements also reﬂect the ownership by the Operating Partnership of certain joint venture entities in which the Operating Partnership has a general partner or controlling interest. These entities are consolidated into IRET’s other operations with minority interests reﬂecting the minority partners’ share of ownership and income and expenses. RECENT ACCOUNTING PRONOUNCEMENTS In January 2003, the Financial Accounting Standards Board (“FASB”) issued FIN No. 46, “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51”. FIN No. 46 explains how to identify variable interest entities and how an enterprise assesses its interests in a variable interest entity to decide whether to consolidate that entity. This Interpretation requires existing unconsolidated variable interest entities to be consolidated by their primary beneﬁciaries if the entities do not effectively disperse risks among parties involved. FIN No. 46 was scheduled to be effective for variable interest entities created after January 31, 2003. On December 24, 2003, the FASB published a revision to FIN No. 46 (“FIN No. 46(R)”). FIN No. 46(R) clariﬁes certain provisions of FIN No. 46 and exempts certain entities from its requirements. For interests in variable interest entities acquired prior to January 31, 2003, the provisions of FIN No. 46(R) were applied in April 2004. The adoption of FIN No. 46 and FIN No. 46(R) did not have a signiﬁcant impact on the Company’s consolidated ﬁnancial statements. F-10 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004, 2003, and 2002 (Continued) NOTE 2 • BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued) Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting for Certain Financial Instruments With Characteristics of Both Liabilities and Equity,” establishes standards for how an issuer classiﬁes and measures certain ﬁnancial instruments with characteristics of both liabilities and equity. The Company adopted SFAS No. 150 on August 1, 2003, and the adoption did not have a signiﬁcant impact on the Company’s consolidated ﬁnancial statements. 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. REAL ESTATE ASSETS AND DEPRECIATION OF INVESTMENT IN REAL ESTATE Real estate is recorded at cost less accumulated depreciation less an adjustment, if any, for impairment. Asset acquisitions are recorded based upon preliminary allocations of the purchase price which are subject to adjustment as additional information is obtained, but in no case more than one year after the date of acquisition. The Company allocates the purchase price to the fair value of the tangible assets of an acquired property (which includes the land, building, and personal property) which are determined by valuing the property as if it were vacant and to fair value of the intangible assets (which include in-place leases.) The as-if-vacant value is allocated to land, buildings, and personal property based on management’s determination of the relative fair values of these assets. The estimated fair value of the property is the amount that would be recoverable upon the disposition of the property. Techniques used to estimate fair value include discounted cash ﬂow analysis, independent appraisals, and reference to recent sales of comparables. A land value is assigned based on the purchase price if land is acquired separately or based on estimated market value if acquired in a merger or in a single or portfolio acquisition. Above-market and below-market in-place lease values for acquired properties are recorded based on the present value (using an interest rate which reﬂects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market and below-market lease values are amoritized over the remaining non-cancelable terms of the respective leases as depreciation/amortization related to real estate investments. Other intangible assets acquired include amounts for in-place lease values that are based upon the Company’s evaluation of the speciﬁc characteristics of the leases. Factors considered in these analyses include an estimate of carrying costs during hypothetical expected lease-up periods, considering current market conditions, and costs to execute similar leases. The Company also considers information about each property obtained during its pre- acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets. The Company uses a 20–40 year estimated life for buildings and improvements and a 5–12 year estimated life for furniture, ﬁxtures and equipment. Expenditures for ordinary maintenance and repairs are expensed to operations as incurred. Renovations and improvements that improve and/or extend the useful life of the asset are capitalized over their estimated useful life, generally ﬁve to ten years. Property sales or dispositions are recorded when title transfers and sufﬁcient consideration has been received by the Company. The Company periodically evaluates its long-lived assets, including its investments in real estate, for impairment indicators. The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions, expected holding F-11 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004, 2003, and 2002 (Continued) NOTE 2 • BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued) period of each asset and legal and environmental concerns. Future events could occur which would cause the Company to conclude that impairment indicators exist and an impairment loss is warranted. If indicators exist, the Company compares the expected future undiscounted cash ﬂows for the long-lived asset against the carrying amount of that asset. If the sum of the estimated undiscounted cash ﬂows is less than the carrying amount of the asset, an impairment loss is recorded for the difference between the estimated fair value and the carrying amount of the asset. REAL ESTATE HELD FOR SALE 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 to purchase its properties, either solicited or unsolicited. For those offers that are accepted, the prospective buyer will usually require 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 probable, 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. The Company reports, in discontinued operations, the results of operations of a property that has either been disposed of or is classiﬁed as held for sale and the related gains or losses. GOODWILL Goodwill of $1,645,000 was recorded by the Company in July 2000 from the purchase of the Company’s former advisor, Odell-Wentz & Associates LLC. Prior to its adoption of SFAS No. 142, the Company elected to amortize the goodwill over a ﬁfteen-year period. Following adoption of SFAS No. 142 on May 1, 2002, the Company ceased amortization and annually reviews the fair market value of the asset for impairment. The annual reviews for years ended April 30, 2004 and 2003 indicated no impairment. PROPERTY AND EQUIPMENT Property and equipment consists of the administrative ofﬁce buildings and equipment contained at IRET’s headquarters in Minot, North Dakota and the ofﬁce location in Minneapolis, Minnesota. The balance sheet reﬂects these assets at cost, net of accumulated depreciation. As of April 30, 2004 and 2003, the cost was $2.9 million and $2.5 million, respectively. Accumulated depreciation was $.6 million and $.4 million as of April 30, 2004 and 2003, respectively. MORTGAGE LOANS RECEIVABLE Mortgage loans receivable is stated at the outstanding principal balance. Interest income is accrued and reﬂected in the balance. Non-performing loans are recognized as impaired in conformity with SFAS No. 114, Accounting by Creditors for Impairment of a Loan. The Company evaluates the collectibility of both interest and principal of each of its loans, if circumstances warrant, to determine whether the loan is impaired. A loan is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the existing contractual terms. An allowance is recorded to reduce impaired loans to their estimated fair value. Interest on impaired loans is recognized on a cash basis. The average balance of impaired loans for ﬁscal years ended April 30, 2004, 2003, and 2002, was not signiﬁcant. Additional interest income that would have been earned on loans if they had not been non-performing was not signiﬁcant in ﬁscal 2004, 2003, or 2002. There was no interest income on non-performing loans recognized on a cash basis for ﬁscal 2004, 2003, and 2002. F-12 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004, 2003, and 2002 (Continued) NOTE 2 • BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued) CASH AND CASH EQUIVALENTS Cash and cash equivalents include all cash and highly liquid investments purchased with maturities of three months or less. Cash and cash equivalents consist of the Company’s bank deposits and short-term investment certiﬁcates acquired subject to repurchase agreements, and the Company’s deposits in a money market mutual fund. MARKETABLE SECURITIES IRET’s investments in securities are classiﬁed as “available-for-sale.” The securities classiﬁed as “available- for-sale” represent investments in debt and equity securities which the Company intends to hold for an indeﬁnite period of time. These securities are valued at current market value with the resulting unrealized gains and losses excluded from earnings and reported as a separate component of shareholders’ equity until realized. Gains or losses on these securities are computed based on the amortized cost of the speciﬁc securities when sold. All securities with unrealized losses are subjected to the Company’s process for identifying other-than- temporary impairments. The Company writes down to fair value securities that it deems to be other-than-temporarily impaired in the period the securities are deemed to be other-than-temporarily impaired. The assessment of whether such impairment has occurred is based on management’s case-by-case evaluation of the underlying reasons for the decline in fair value. Management considers a wide range of factors in making this assessment. Those factors include, but are not limited to, the length and severity of the decline in value and changes in the credit quality of the issuer or underlying assets. The Company does not engage in trading activities. ALLOWANCE FOR DOUBTFUL ACCOUNTS Management evaluates the appropriate amount of the allowance for doubtful accounts by assessing the recoverability of individual real estate mortgage loans and rent receivables, through a comparison of their carrying amount with their estimated realizable value. Management considers tenant ﬁnancial condition, credit history and current economic conditions in establishing these allowances. Receivable balances are written off when deemed uncollectible. Recoveries of receivables previously written off, if any, are recorded when received. A summary of the changes in the allowance for doubtful accounts for ﬁscal years ended April 30, 2004 and 2003 is as follows: Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for straight-line rents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for mortgage loan receivable . . . . . . . . . . . . . . . . . . . . . . . . . Write-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at close of year (in thousands) 2003 $ 141 215 25 (241) $ 115 2002 $120 30 0 (9) $141 2004 $115 360 0 0 $475 TAX, INSURANCE, AND OTHER ESCROW Tax, insurance, and other escrow includes funds deposited with a lender for payment of real estate tax and insurance, and reserves for 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 Real estate deposits include funds held by escrow agents to be applied toward the purchase of real estate or the payment of loan costs associated with loan placement or reﬁnancing. F-13 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004, 2003, and 2002 (Continued) NOTE 2 • BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued) 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 INTERESTS Interests in the Operating Partnership held by limited partners are represented by operating partnership Units. The Operating Partnership’s 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 Minnesota Medical Investors LLC, Mendota Properties LLC, IRET-BD LLC, IRET-Candlelight LLC, IRET-Golden Jack LLC, and IRET-1715 YDR LLC 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 minority interest portion of other partnerships’income in the consolidated statements of operations. INCOME TAXES IRET intends to continue to qualify as a REIT and, as a result, IRET generally 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 accompanying consolidated ﬁnancial statements. IRET conducts all of its business activity as an Umbrella Partnership Real Estate Investment Trust (“UPREIT”) through its Operating Partnership. UPREIT status allows IRET to accept the contribution of real estate in exchange for Operating Partnership 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. 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 are reﬂected as receivable arising from straight-lining of rents, net of allowance for doubtful accounts. 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 of its multi-tenant commercial tenants throughout the 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. 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 above in the Mortgage Loans Receivable section of this Note 2. NET INCOME PER SHARE Basic net income per share is computed as net income available to common shareholders divided by the weighted average number of common shares outstanding for the period. The potential exchange of Units for F-14 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004, 2003, and 2002 (Continued) NOTE 2 • BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued) common shares will have no effect on diluted net income per share as Unitholders and common shareholders effectively share equally in the net income of the Operating Partnership. RECLASSIFICATIONS Certain previously reported amounts have been reclassiﬁed to conform with the current ﬁnancial statement presentation. NOTE 3 • CREDIT RISK The Company is potentially exposed to credit risk in respect of cash deposited with FDIC-insured ﬁnancial institutions in accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. IRET has entered into a cash management arrangement with First Western Bank with respect to deposit accounts that exceed FDIC Insurance coverage. On a daily basis account balances are invested in United States government securities sold to IRET by First Western Bank. IRET can require First Western Bank to repurchase such securities at any time, at a purchase price equal to what IRET paid for the securities plus interest. First Western Bank automatically repurchases securities when collected amounts on deposit in IRET’s deposit accounts fall below the maximum insurance amount, with the proceeds of such repurchases being transferred to IRET’s deposit accounts to bring the amount on deposit back up to the threshold amount. The amounts invested by IRET pursuant to the repurchase agreement are not insured by FDIC. IRET has entered into a cash management arrangement with US Bank with respect to IRET depository accounts at multiple US Bank locations. Account balances are swept daily to an IRET master account. Amounts in the master account in excess of $4 million are invested overnight in short term U.S. Government securities and repurchase agreements secured by U.S. Government securities. Amounts invested were $7.5 million as of April 30, 2004 and $3.5 million as of April 30, 2003. NOTE 4 • PROPERTY OWNED Property, consisting principally of real estate, is stated at cost less accumulated depreciation and is summarized as follows: Multi-family residential(1) . . . . . . . . . . . . . . . . . . . . . . . . . . Less accumulated depreciation . . . . . . . . . . . . . . . . . . . Commercial(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less accumulated depreciation . . . . . . . . . . . . . . . . . . . Property owned, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April 30, (in thousands) 2004 2003 $ 446,435 (61,611) 384,824 656,993 (38,639) 618,354 $1,003,178 $398,917 (50,553) 348,364 520,864 (25,086) 495,778 $844,142 (1) (2) Includes undeveloped land stated at cost in the amount of $264,000 classiﬁed as mutli-family residential. Includes undeveloped land stated at cost in the amount of $2,730,000 classiﬁed as commercial. In addition, as of April 30, 2004, the Company had signed a purchase agreement to acquire a commercial property in the Minneapolis, Minnesota area for a purchase price of approximately $13.05 million. This pending F-15 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004, 2003, and 2002 (Continued) NOTE 4 • PROPERTY OWNED (Continued) acquisition is subject to certain closing conditions and contingencies; therefore, no assurance can be given that this transaction will be consummated. Construction period interest of $148,922, $90,939 and $99,668, has been capitalized for the years ended April 30, 2004, 2003, and 2002, respectively. The future minimum lease payments to be received under leases for commercial properties as of April 30, 2004, assuming that no options to renew or buy out the lease are exercised, are as follows: Year Ended April 30, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (in thousands) $ 57,602 52,402 46,465 39,273 33,749 207,093 $436,584 During ﬁscal 2004, the Company incurred a loss of $62,000 due to impairment on one property. For the years ended April 30, 2003, and 2002, the Company did not record any losses due to impairment. NOTE 5 • MORTGAGE LOANS RECEIVABLE — NET Mortgage loans receivable consists of three separate loans that are collateralized by real estate. Contract terms vary in regard to payment of principal and interest. Interest rates range from 7% to 11%. Future principal payments due under these mortgage loans as of April 30, 2004, are as follows: Year Ended April 30, (in thousands) 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Later Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less allowance for doubtful accounts . . . . . . . . . . . . . . . $4,274 27 28 202 25 362 4,918 (25) $4,893 There were no non-performing mortgage loans receivable as of April 30, 2004, or 2003. F-16 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004, 2003, and 2002 (Continued) NOTE 6 • MARKETABLE SECURITIES The amortized cost and fair value (estimated market values) of marketable securities available-for-sale at April 30, 2004 are as follows. These marketable securities are securities of various issuers, primarily U.S. government, U.S. agency and corporate bonds, held in IRET Properties’security deposit account with Merrill Lynch: 2004 US Government & Agency Debt Securities . . . . . . Corporate Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank Certiﬁcates of Deposit . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses $1,173 292 852 $ 50 $2,367 $— — — $— $ 0 $26 5 — $— $31 Fair Value $1,147 287 852 $ 50 $2,336 The Company had no available-for-sale securities at April 30, 2003. There were no realized losses on sales of securities available-for-sale for the ﬁscal years ended April 30, 2004, 2003 and 2002. None of the securities with an unrealized loss at April 30, 2004 have been in such a position for more than one year, and are not considered to be other-than-temporarily impaired. NOTE 7 • NOTES PAYABLE AND OTHER DEBT IRET has lines of credit with three ﬁnancial institutions, and one unsecured bridge loan outstanding with a fourth ﬁnancial institution, as of April 30, 2004. Interest payments on outstanding borrowings are due monthly. These credit facilities and bridge loan are summarized in the following table: Financial Institution Lines of Credit First Western Bank & Trust . . . . . First Int’l Bank & Trust . . . . . . . . Bremer Bank . . . . . . . . . . . . . . . . . Unsecured Bridge Loan Wells Fargo Bank . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . Amount Available $10,000 4,400 10,000 25,000 $49,400 (in thousands) Amount Outstanding as of April 30, 2004 Amount Outstanding as of April 30, 2003 $ 0 0 0 25,000 $25,000 $ 4,700 2,700 3,170 0 $10,570 Applicable Interest Rate as of April 30, 2004 4.00% 4.00% 4.00% Maturity Date 09/01/04 12/12/04 09/15/04 Weighted Average Int. Rate on Borrowings during ﬁscal year 2004 4.02% 4.13% 4.05% 3.125% 07/22/04 3.125% The three lines of credit bear interest at a variable interest rate tied to the prime lending rate as published in the Wall Street Journal (in the case of the First Western Bank & Trust and First International Bank & Trust credit facilities) and the Bremer Financial Corporation Reference Rate (in respect of the Bremer Bank credit facility). The promissory note in respect of the Wells Fargo bridge loan bears interest based upon the thirty-day LIBOR rate plus two percent. F-17 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004, 2003, and 2002 (Continued) NOTE 7 • NOTES PAYABLE AND OTHER DEBT (Continued) The other debt balance of $586,000 at April 30, 2004, relates to a mortgage note with Main Street Bank collateralized by the IRET Minneapolis ofﬁce. The interest rate is ﬁxed at 6.450% and the maturity date is February 1, 2009. Future minimum payments are as follows: Year Ended April 30, (in thousands) 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24 26 27 29 480 $586 NOTE 8 • MORTGAGES PAYABLE The Company’s mortgages payable are collateralized by substantially all of its properties owned. Interest rates on mortgages payable range from 3.45% to 8.61%, and the mortgages have varying maturity dates from December 1, 2004, through August 1, 2036. Of the mortgages payable, the balances of ﬁxed rate mortgages totaled $591,176,000 and $516,218,000, and the balances of variable rate mortgages totaled $41,948,000 and $23,180,000 as of April 30, 2004, and 2003, respectively. Most of the ﬁxed rate mortgages have substantial pre-payment penalties. As of April 30, 2004, the weighted average rate of interest on the Company’s mortgage debt was 7.17%, compared to 7.4% on April 30, 2003. The aggregate amount of required future principal payments on mortgages payable as of April 30, 2004, is as follows: Year Ended April 30, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Later Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (in thousands) $ 15,789 17,098 19,194 44,829 42,744 493,470 $633,124 NOTE 9 • GOODWILL As of May 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. Accordingly, goodwill is no longer amortized, but is tested on at least an annual basis for impairment. No impairment was present on April 30, 2004, or April 30, 2003. The following reﬂects net income and earnings per share for the ﬁscal year ended April 30, 2002 as if SFAS 142 had been applied to that period. (in thousands, except per share data) Reported net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Add back goodwill amortization . . . . . . . . . . . . . . . . . Adjusted net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reported earnings per share . . . . . . . . . . . . . . . . . . . . . . . . Add back goodwill amortization per share . . . . . . . Adjusted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . 2002 $10,600 109 $10,709 .42 $ .00 .42 $ F-18 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004, 2003, and 2002 (Continued) NOTE 10 • INVESTMENT CERTIFICATES ISSUED IRET has sold unsecured investment certiﬁcates to the public. The ﬁxed interest rates vary from 6% to 8% per annum, depending on the term of the security. Interest is paid annually, semiannually, or quarterly on the anniversary date of issuance. IRET has discontinued the sale of investment certiﬁcates and the outstanding certiﬁcates will be redeemed at maturity as follows: Year Ended April 30, (in thousands) 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,231 2,174 2,527 142 $7,074 NOTE 11 • TRANSACTIONS WITH RELATED PARTIES PROPERTY MANAGEMENT SERVICES Hoyt Properties, Inc., (“Hoyt Properties”), a provider of property management services to the Company, is owned by Steven B. Hoyt, currently a member of the Company’s Board of Trustees. During the ﬁscal year ended April 30, 2004, Hoyt Properties managed ten ofﬁce properties or complexes for the Company pursuant to written management contracts. As compensation for its services, Hoyt Properties receives a monthly fee of 5% percent 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 that the Company is not reimbursed for such fee by a tenant and must pay such fee from rent proceeds, the annual fee is 3.5% of the gross rental proceeds. In addition to such management fee, Hoyt Properties is paid a separate fee for leasing space to tenants at each location. Any leasing commissions earned by Hoyt Properties are not reimbursed by the building’s tenants. The leasing commission rates are set forth in a written contract between the Company and Hoyt Properties. All of the Company’s management contracts with Hoyt Properties may be terminated by either party on 30 days written notice for any reason and without penalty. In Fiscal 2004, the Company paid management fees to Hoyt Properties in the amount of $743 ,000, a portion of which was reimbursed by the tenants. Additionally, during that same period, the Company paid leasing commissions to Hoyt Properties in the amount of $93,000. In Fiscal 2003 and 2002, the Company paid management fees to Hoyt Properties in the amount of $503,976 and $321,348, respectively, a portion of which was reimbursed by tenants. Additionally, during that same period, the Company paid leasing commissions to Hoyt Properties in the amount of $179,553 and $27,324, respectively. PROPERTY ACQUISITIONS Brenwood Ofﬁce Complex. During ﬁscal year 2003, the Company acquired four commercial buildings from afﬁliates of Steven B. Hoyt. On October 1, 2002, the Company acquired a 51% ownership interest in IRET-BD, LLC, a Minnesota limited liability company, for $13,107,000. The Brenwood Ofﬁce project consists of the four ofﬁce buildings contributed as well as three industrial/warehouse buildings purchased by IRET-BD, LLC on October 1, 2002, for $11,800,000. Thresher Square East and West. On January 2, 2002, IRET acquired a seven-story ofﬁce building containing 113,736 square feet located at 700 and 708 South Third Street, Minneapolis, Minnesota. The property was purchased for an agreed value of $10,943,414, which was paid by the assumption by IRET of existing debt. The seller is an afﬁliate of Steven B. Hoyt. Wirth Corporate Center. On April 1, 2002, IRET acquired Wirth Corporate Center, an 89,384 square foot, four- story ofﬁce building from Mr. Hoyt. The purchase price was approximately $8.6 million. F-19 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004, 2003, and 2002 (Continued) NOTE 11 • TRANSACTIONS WITH RELATED PARTIES (Continued) Independent appraisals were obtained by the Company for each of the above three property acquisitions, and the purchase prices were based on the results of these appraisals. SECURITY SALE SERVICES D.A. Davidson & Co. is an investment banking ﬁrm that has participated in offerings of the Company’s shares of beneﬁcial interest, and may in the future continue to participate in sales of the Company’s shares and provide investment banking services to the Company. John F. Decker, currently a member of the Company’s Board of Trustees, is an employee of D.A. Davidson. In the ﬁrst of the Company’s two offerings of common shares of beneﬁcial interest during ﬁscal year 2004, conducted in September 2003, D.A. Davidson participated, on a best- efforts basis, as a member of the selling syndicate, and sold 250,000 shares. In connection with this offering, the Company authorized and paid D.A. Davidson commissions in the amount of $150,000. D.A. Davidson did not participate in the Company’s second offering of common shares of beneﬁcial interest in April 2004. D.A. Davidson served as book-running manager and representative of the underwriters for the Company’s April 2004 offering of Series A cumulative redeemable preferred shares of beneﬁcial interest. In connection with this offering, the Company paid D.A. Davidson a fee of $1,078,125 and reimbursed D.A. Davidson for legal and other expenses in the amount of $100,000. In October 2003 and April 2004, the Company paid D.A. Davidson fees of $19,500 and $77,849, respectively, for the services of Mr. Decker’s son as a broker-dealer in representing certain clients who contributed real property in exchange for Units. In connection with two offerings of the Company’s common shares in ﬁscal year 2002, the Company authorized and paid D. A. Davidson commissions in the amount of $490,000. The Company did not pay any commissions or expenses to D. A. Davidson during the ﬁscal year ended April 30, 2003. PURCHASE OPTIONS On February 1, 2003, the Company entered into a merger agreement with the T. F. James Company. As part of the merger agreement, two afﬁliated entities of the T. F. James Company, Thomas F. James Realty Limited Partnership, L.L.L.P. and Thomas F. James Properties, LLC, were granted the right to purchase certain real property acquired by the Company as a result of the merger. Charles Wm. James, a member of the Company’s Board of Trustees, has an ownership interest in each of Thomas F. James Realty Limited Partnership, L.L.L.P., and Thomas F. James Properties, LLC, of less than ten percent. Under the terms of the Purchase Option Agreement, the Thomas F. James Realty Limited Partnership, L.L.L.P. purchased a parcel of property located in Ripley, Tennessee for $250,000. Under the terms of the agreement, Thomas F. James Properties, LLC has the option, but not the obligation, to purchase a commercial strip mall located in Excelsior, Minnesota, for the sum of $900,000, plus an annual Consumer Price Index increase from February 2003 until the date the option is exercised. The option purchase price is equal to the price the Company paid to acquire the property at closing on February 1, 2003, and is equal to the value set by an independent appraisal. Until such time as the option is exercised, the Company will continue to operate the property and collect all rents from the tenants. TRUSTEE AND OFFICER LOANS In July 2000, the Company assumed a note receivable from Timothy Mihalick, currently a member of the Company’s Board of Trustees and the Company’s Chief Operating Ofﬁcer, in the amount of $101,002. Proceeds of the note were used to purchase common shares of the Company. The note bore interest at New York Prime less 1% and was payable on demand. The note was paid in full by Mr. Mihalick on October 4, 2002, including principal and interest in the amount of $92,769. On January 16, 2002, the Board authorized an UPREIT unit loan program that was available to persons holding $1.0 million or more of Units. Under such loan program, the Company could lend up to 50% of the value of the F-20 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004, 2003, and 2002 (Continued) NOTE 11 • TRANSACTIONS WITH RELATED PARTIES (Continued) borrower’s Units, with such value to be based on the closing price of the Shares on the NASDAQ National Market on the date of the loan. Such loans were to be for terms of two years or less, collateralized by the borrower’s Units and at a variable interest rate of 1.5% over the interest rate charged to the Company by a participating lender. On January 30, 2002, a loan in the amount of $3.5 million was made to Steven B. Hoyt. On October 1, 2002, Mr. Hoyt repaid the loan in full in the amount of $3,500,000 plus accrued interest in the amount of $55,137. UPREIT CONTRIBUTION In April 2002, Edgeview Estates I, Ltd., (“Edgeview”), contributed the proceeds from the sale of real estate to IRET Properties. The total amount contributed to IRET Properties by Edgeview in exchange for Units was $386,168. A total of 38,909 Units were allocated to the partnership at a price of $9.925 per Unit. Edgeview was owned by several ofﬁcers and current and past trustees of IRET. NOTE 12 • ACQUISITIONS AND DISPOSITIONS IN FISCAL YEARS 2004 AND 2003 PROPERTY ACQUISITIONS IRET Properties added $170.3 million of real estate investments to its portfolio during ﬁscal 2004, compared to $177.2 million added in ﬁscal 2003. The ﬁscal 2004 and 2003 additions are detailed below. Fiscal 2004 (May 1, 2003 to April 30, 2004) (in thousands) Purchase Price Units MULTI-FAMILY RESIDENTIAL Connelly Estates – Burnsville, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Remada Court Apartments – Eagan, MN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Winchester/Village Green Townhouses – Rochester, MN. . . . . . . . . . . . . . . . . . . . . . . . Brookﬁeld Village – Topeka, KS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Monticello Village Apartments – Monticello, MN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legacy V – Grand Forks, ND. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legacy VI – Grand Forks, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legacy VII – Grand Forks, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL RESIDENTIAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240 115 151 160 60 ** ** ** 726 ** Property not placed in service at April 30, 2004. Additional costs are still to be incurred. COMMERCIAL Benton Business Park – Sauk Rapids, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . West River Business Park – Waite Park, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buffalo Mall – Jamestown, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Golden Hills Ofﬁce Center – Golden Valley, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Brown Deer Road – Milwaukee, WI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TCA Building – Eagan, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Edgewood Vista Phase II – Virginia, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Westgate Shopping Center – St Cloud, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . API Building – Duluth, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Denfeld Retail Center – Duluth, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-21 Square Footage 30,464 24,000 213,271 190,758 175,610 106,207 76,870 104,928 35,000 36,542 $13,850 6,600 8,900 7,250 4,200 214 93 93 41,200 $ 1,600 1,500 4,275 27,500 13,500 13,000 5,100 6,575 2,000 5,164 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004, 2003, and 2002 (Continued) NOTE 12 • ACQUISITIONS AND DISPOSITIONS IN FISCAL YEARS 2004 AND 2003 (Continued) (in thousands) Square Footage Purchase Price COMMERCIAL – continued Fresenius – Duluth, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lighthouse – Duluth, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Metris – Duluth, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minnesota National Bank – Duluth, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . South Pond Retail Center – Champlin, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tool Crib – Duluth, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . UHC Ofﬁce – International Falls, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mariner Clinic – Superior, WI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Denfeld Clinic – Duluth, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wells Clinic – Hibbing, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pavilion II – Duluth, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gateway Clinic – Sandstone, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL COMMERCIAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL FISCAL 2004 PROPERTY ACQUISITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,052 59,600 20,000 27,000 25,400 15,597 30,000 28,928 20,512 18,810 74,800 12,444 1,335,793 Fiscal 2003 (May 1, 2002 to April 30, 2003) MULTI-FAMILY RESIDENTIAL East Park Apartments – Sioux Falls, SD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sycamore Village – Sioux Falls, SD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL RESIDENTIAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . COMMERCIAL Abbott Northwestern – Sartell, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Airport Medical – Bloomington, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Anoka Strip Center – Anoka, MN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Brenwood Ofﬁce Park – Minnetonka, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Burnsville Strip Center – Burnsville, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Central Bank – Eden Prairie, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Champion Auto Center – Forest Lake, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chanhassen Retail Center – Chanhassen, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Checkers Auto – Rochester, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Checkers Auto – Faribault, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chiropractic Ofﬁce Building – Greenwood, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dilly Lily – St. Louis Park, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dixon Industrial Park – Des Moines, IA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Eagan Strip Center I – Eagan, MN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Eagan Strip Center II – Eagan, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Edgewood Vista – Hermantown, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Evergreen Center – Pine City, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Excelsior Strip Center – Excelsior, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Units 84 48 132 Square Footage 60,095 24,218 10,625 176,917 8,400 39,525 6,836 135,969 6,225 5,600 1,600 3,444 604,711 5,400 13,901 44,365 63,225 7,993 $ 1,800 2,100 2,950 2,100 3,700 2,000 2,500 4,100 3,336 2,900 19,500 1,900 129,100 $170,300 $ 2,520 1,418 $ 3,938 $12,994 4,678 725 14,014 760 4,600 496 20,850 440 340 330 340 11,872 510 1,349 4,624 2,800 900 F-22 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004, 2003, and 2002 (Continued) NOTE 12 • ACQUISITIONS AND DISPOSITIONS IN FISCAL YEARS 2004 AND 2003 (Continued) (in thousands) Square Footage Purchase Price COMMERCIAL – continued Express Center – Fargo, ND. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forest Lake Retail Center – Forest Lake, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gas Plus More – Paynesville, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interstate Bakery – St. Paul, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interstate Bakery – Mounds View, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inver Grove Center PDQ – Inver Grove, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Jamestown Mall – Jamestown, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pamida – Kalispell, MT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pamida – Livingston, MT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pamida – Ladysmith, WI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Park Dental – Brooklyn Center, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Paul Larson Clinic – Edina, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PDQ – Burnsville, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PDQ – Prior Lake, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PDQ – Eagan, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PDQ – Mound, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plaza VII – Boise, ID . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prior Lake Peak – Prior Lake, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sam Goody – Willmar, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Schoﬁeld Plaza – Schoﬁeld, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Southdale Expansion – Edina, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Three Paramount Plaza – Edina, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Lakeville, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Monticello, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Oakdale, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Long Prairie, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Ham Lake, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Glencoe, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Blaine, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Bethel, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Buffalo, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Lakeland, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Lino Lakes, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Pine City, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Winsted, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Howard Lake, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Centerville, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Shoreview, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Lindstrom, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Mora, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Andover, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Sauk Rapids, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . UH Medical – St. Paul, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Westgate Ofﬁce Center North – Boise, ID . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wilson’s Leather – Brooklyn Park, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL COMMERCIAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-23 30,227 100,656 4,800 6,225 4,560 8,400 99,403 52,000 41,200 41,000 10,008 12,140 8,526 6,800 3,886 3,864 27,297 4,200 6,225 53,764 75,526 9,500 3,575 6,266 5,216 4,800 4,800 8,750 4,800 7,700 3,650 6,325 4,800 3,571 3,571 3,000 3,000 4,000 3,571 3,000 3,575 43,046 103,332 353,049 2,416,653 $ 1,425 8,007 365 320 290 940 1,320 2,500 1,800 1,500 2,952 1,013 980 971 783 360 3,358 479 400 1,750 7,056 7,367 1,263 855 730 700 535 530 520 510 460 440 440 440 410 380 330 330 320 300 280 250 7,408 11,509 13,011 $170,509 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004, 2003, and 2002 (Continued) NOTE 12 • ACQUISITIONS AND DISPOSITIONS IN FISCAL YEARS 2004 AND 2003 (Continued) UNDEVELOPED LAND Andover, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Centerville, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inver Grove, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kalispell, MT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Libby, MT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long Prairie, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prior Lake, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . River Falls, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL UNDEVELOPED LAND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL FISCAL 2003 PROPERTY ACQUISITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (in thousands) Purchase Price $ 150 100 560 1,400 150 150 50 200 2,760 $177,207 PROPERTY DISPOSITIONS During ﬁscal year 2004, the Company disposed of six properties and two undeveloped properties for an aggregate sale price of $4.4 million, compared to six properties and one undeveloped property sold for $11.2 million in total during ﬁscal year 2003. Real estate assets sold by the Company during ﬁscal 2004 and 2003 were as follows: Fiscal 2004 Property Sold (in thousands) Book Value and Sales Costs Gain/Loss Sales Price MCA Royal Suites – Minot, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interstate Bakery – St. Paul, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Edgewood Vista – Billings, MT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Edgewood Vista – Sioux Falls, SD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tom Thumb – Sauk Rapids, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pioneer Seed – Moorhead, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sunset Trail III – Rochester, MN (vacant land) . . . . . . . . . . . . . . . . . Prior Lake II – Prior Lake, MN (vacant land) . . . . . . . . . . . . . . . . . . TOTAL FISCAL 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 410 420 1.101 1.101 275 500 400 160 $4,367 $ 364 317 941 936 247 498 364 52 $3,719 Fiscal 2003 Property Sold (in thousands) Book Value and Sales Costs Sales Price 620 Eastwood Apartments – Dickinson, ND . . . . . . . . . . . . . . . . . . . . . . . . . $ 420 Oak Manor Apartments – Dickinson, ND . . . . . . . . . . . . . . . . . . . . . . . 275 Jenner Apartments – Dickinson, ND . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,275 Cottage Grove Strip Ctr. – C. Grove, MN . . . . . . . . . . . . . . . . . . . . . . 1,950 Creekside Ofﬁce Building – Billings, MT . . . . . . . . . . . . . . . . . . . . . . 3,350 America’s Best – Boise, ID . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,250 Century Apartments – Dickinson, ND . . . . . . . . . . . . . . . . . . . . . . . . . . Edgewood Vista – Land – Duluth, MN . . . . . . . . . . . . . . . . . . . . . . . . . 102 TOTAL FISCAL 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,242 $ 438 342 272 1,222 1,796 3,656 1,819 102 $9,647 $ 46 103 160 165 28 2 36 108 $648 Gain/Loss $ 182 78 3 53 154 (306) 1,431 0 $1,595 F-24 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004, 2003, and 2002 (Continued) NOTE 13 • OPERATING SEGMENTS Each of IRET’s multi-family residential and commercial properties is considered a separate operating segment. Each segment on a stand-alone basis is less than 10% of the revenues, proﬁt or loss and assets of the combined reported operating segments, and meets the majority of the aggregation criteria under SFAS No. 131. IRET’s operating segments are aggregated and classiﬁed as multi-family residential and commercial properties for purposes of producing reportable segments. The revenues, proﬁt (loss) and assets for these reportable segments are summarized as follows, along with reconciliations to the consolidated ﬁnancial statements: Year Ended April 30, 2004 Real Estate Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expenses Mortgage Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Utilities and Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real Estate Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss on impairment of real estate investment Total Segment Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Segment Operating Proﬁt Reconciliation to Consolidated Operations: Discounts and Fee Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation — Furniture and Fixtures . . . . . . . . . . . . . . . . . . . . . . . Administrative, Advisory and Trustee Fees . . . . . . . . . . . . . . . . . . . Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (in thousands) Multi-Family Residential Total Commercial $77,260 $62,964 $140,224 23,041 13,835 12,575 10,137 848 2,990 0 63,426 $13,834 18,588 10,982 13,236 7,022 2,099 6,745 62 58,734 $ 4,230 41,629 24,817 25,811 17,159 2,947 9,735 62 122,160 18,064 281 (1,488) (163) (2,851) (957) (1,006) $ 11,880 (in thousands) Multi-Family Residential Total Commercial Segment Assets Property Owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $656,993 (38,639) Less Accumulated Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Property Owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $618,354 (61,611) $446,435 $1,103,428 (100,250) $384,824 $1,003,178 F-25 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004, 2003, and 2002 (Continued) NOTE 13 • OPERATING SEGMENTS (Continued) Year Ended April 30, 2003 Real Estate Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expenses Mortgage Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Utilities and Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real Estate Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Segment Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Segment Operating Proﬁt Reconciliation to Consolidated Operations: Discounts and Fee Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation — Furniture and Fixtures . . . . . . . . . . . . . . . . . . . . . . . Administrative, Advisory and Trustee Fees . . . . . . . . . . . . . . . . . . . Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (in thousands) Multi-Family Residential Total Commercial $58,878 $59,653 $118,531 18,662 9,224 8,249 6,789 616 2,302 45,842 $13,036 17,292 10,029 11,541 6,761 1,538 6,013 53,174 $ 6,479 35,954 19,253 19,790 13,550 2,154 8,315 99,016 19,515 234 (1,038) (92) (2,164) (885) (701) $ 14,869 Segment Assets Property Owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $520,864 (25,086) Less Accumulated Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Property Owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $495,778 $398,917 (50,553) $348,364 $919,781 (75,639) $844,142 (in thousands) Multi-Family Residential Total Commercial F-26 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004, 2003, and 2002 (Continued) NOTE 13 • OPERATING SEGMENTS (Continued) Year Ended April 30, 2002 Real Estate Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expenses Mortgage Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Utilities and Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real Estate Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Segment Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Segment Operating Proﬁt Reconciliation to Consolidated Operations: Discounts and Fee Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation — Furniture and Fixtures . . . . . . . . . . . . . . . . . . . . . . . Administrative, Advisory and Trustee Fees . . . . . . . . . . . . . . . . . . . Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (in thousands) Multi-Family Residential Total Commercial $32,008 $58,347 $90,355 12,000 5,533 1,933 2,589 185 909 23,149 $ 8,859 16,640 9,562 10,416 6,455 1,106 5,979 50,158 $ 8,189 28,640 15,095 12,349 9,044 1,291 6,888 73,307 17,048 $ 215 (1,342) (76) (1,683) (566) (550) $13,046 F-27 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004, 2003, and 2002 (Continued) NOTE 14 • DISCONTINUED OPERATIONS SFAS No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets,” requires the Company to report in discontinued operations the results of operations of a property that has either been disposed of or is classiﬁed as held for sale. It also requires that any gains or losses from the sale of a property be reported in discontinued operations. There were no properties held for sale as of April 30, 2004 or 2003. The following information shows the effect on net income, net of minority interest, and the gains or losses from the sale of properties classiﬁed as discontinued operations for the ﬁscal years ended April 30, 2004, 2003 and 2002. REVENUE Real Estate Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tenant Reimbursements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Discounts and Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OPERATING EXPENSE Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation/Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Utilities and Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real Estate Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property Management Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating Income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income(Loss) from Discontinued Operations . . . . . . . . . . . . . . . . . . . . . . . . . . Gain(Loss) on Sale of Discontinued Operations . . . . . . . . . . . . . . . . . . . . . . Discontinued Operations, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Segment Data Residential Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property Sale Data Sales Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Cost of Property Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (in thousands) 2004 2003 2002 $ 183 0 0 183 47 48 28 20 3 3 149 34 (8) 26 504 $ 530 $ 55 475 $ 530 $3,807 3,303 $ 504 $1,167 5 0 1,172 584 261 293 143 32 71 1,384 (212) (259) (471) 1,279 $ 808 $1,154 (346) $ 808 $8,550 7,271 $1,279 $1,383 0 0 1,383 623 344 360 140 62 97 1,626 (243) 61 (182) 0 $ (182) $ 135 (317) $ (182) $ N/A N/A $ N/A F-28 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004, 2003, and 2002 (Continued) NOTE 15 • EARNINGS PER SHARE Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. The Company has no outstanding warrants, convertible stock or other contractual obligations requiring issuance of additional common shares that would result in a dilution of earnings. While Units can be exchanged for shares on a one-for-one basis after a minimum holding period of one year, the exchange of Units for common shares has no effect on diluted earnings per share, as Unitholders and common shareholders effectively share equally in the net income of the Operating Partnership. The following table presents a reconciliation of the numerator and denominator used to calculate basic and diluted earnings per share reported in the consolidated ﬁnancial statements for the ﬁscal years ended April 30, 2004, 2003, and 2002: NUMERATOR Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends to preferred shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Numerator for basic earnings per share — net income available to common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority interest portion of operating partnership income . . . . . . . . . . . . Numerator for diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . DENOMINATOR Denominator for basic earnings per share weighted average shares . . . Effect of dilutive securities Convertible operating partnership units . . . Denominator for diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings per common share from continuing operations — basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings per common share from discontinued operations — basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NET INCOME PER COMMON SHARE — BASIC & DILUTED . . . NOTE 16 • RETIREMENT PLANS For Years Ended April 30, (in thousands, except per share data) 2004 2003 2002 $ 8,910 530 9,440 (33) 9,407 2,752 $12,159 $39,257 11,176 $50,433 $ $ .23 .01 .24 $11,440 808 12,248 0 12,248 3,899 $16,147 $32,574 10,041 $42,615 $ $ .35 .03 .38 $10,782 (182) 10,600 0 10,600 3,614 $14,214 $25,492 8,289 $33,781 $ $ .42 .00 .42 IRET sponsors a deﬁned contribution proﬁt sharing retirement plan and a deﬁned contribution 401K plan. IRET’s deﬁned contribution proﬁt sharing retirement plan is available to employees over the age of 21 who have completed one year of service. Contributions to the proﬁt sharing plan are at the discretion of the Company’s management. All employees over the age of 21 are immediately eligible to participate in IRET’s deﬁned contribution 401K plan and may contribute up to maximum levels established by the I.R.S. IRET matches up to 3% of participating employees’ wages. Plan expenses to IRET for the years ended April 30, 2004, 2003, and 2002, were $133,800, $46,875, and $90,455, respectively. NOTE 17 • COMMITMENTS AND CONTINGENCIES Ground Leases. As of April 30, 2004, the Company was a tenant under operating ground leases on four of its properties. The Company pays a total of approximately $81,585 per year in rent under these ground leases, which have terms ranging from 15 to 30 years, and expiration dates ranging from October 2005 to February 2031. The Company has renewal options for three of the four ground leases. F-29 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004, 2003, and 2002 (Continued) NOTE 17 • COMMITMENTS AND CONTINGENCIES (Continued) Legal Proceedings. IRET is involved in various lawsuits arising in the normal course of business. Management believes that such matters will not have a material effect on the Company’s ﬁnancial statements. Purchase Options. The Company has granted options to purchase certain IRET properties to various parties. In general, the options grant the parties the right to purchase these properties at the greater of their appraised value or an annual compounded increase of 2% to 2.5% of the initial cost of the property to IRET. In addition to options granted to third parties, we have also granted an option to Charles Wm. James to purchase our Excelsior Retail Center. Mr. James is an ofﬁcer and member of our Board of Trustees. The option exercise price is equal to the price paid by us for the property, plus an annual consumer price index increase. The property cost and gross rental revenue of these properties are as follows: Property East Grand Station – EGF, MN . . . . . . . . . . . . . . . . . . . . . Edgewood Vista – Belgrade, MT . . . . . . . . . . . . . . . . . . . Edgewood Vista – Columbus, NE . . . . . . . . . . . . . . . . . . Edgewood Vista – Duluth, MN . . . . . . . . . . . . . . . . . . . . . Edgewood Vista – EGF, MN . . . . . . . . . . . . . . . . . . . . . . . . Edgewood Vista – Fremont, NE . . . . . . . . . . . . . . . . . . . . Edgewood Vista – Grand Island, NE . . . . . . . . . . . . . . . . Edgewood Vista – Hastings, NE . . . . . . . . . . . . . . . . . . . . Edgewood Vista – Kalispell, MT . . . . . . . . . . . . . . . . . . . Edgewood Vista – Minot, ND . . . . . . . . . . . . . . . . . . . . . . Edgewood Vista – Missoula, MT . . . . . . . . . . . . . . . . . . . Edgewood Vista – Omaha, NE . . . . . . . . . . . . . . . . . . . . . . Edgewood Vista – Virginia, MN . . . . . . . . . . . . . . . . . . . . Excelsior Retail Center – Excelsior, MN . . . . . . . . . . . . Great Plains Software – Fargo, ND . . . . . . . . . . . . . . . . . Healtheast – Woodbury & Maplwd, MN . . . . . . . . . . . . Wedgwd Sweetwater – L. Springs, GA . . . . . . . . . . . . . TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (in thousands) Property Cost (in thousands) Gross Rental Revenue 2004 2003 2002 $ 1,392 453 456 11,709 1,430 552 456 572 588 6,271 963 641 12,182 917 15,375 21,601 3,972 $79,530 $ 152 49 49 1,278 181 59 49 61 62 783 120 67 893 129 1,875 1,948 502 $8,257 $ 152 49 49 1,246 155 59 49 61 62 762 120 67 759 22 1,875 1,917 475 $7,879 $ 152 49 49 770 155 59 49 60 62 681 114 67 0 0 1,875 1,917 436 $6,495 Real Estate Expansion and Development. The Company has certain funding commitments under contracts for property development and expansion projects. As of April 30, 2004, the Company had the following contractual obligations: • Grand Forks Apartment Construction — The Company is obligated under a construction contract and an excavating contract in respect of the construction of a multi-family residential property in Grand Forks, ND. The Company is obligated to pay approximately $7.5 million, subject to additions and deductions as provided in the contract, under the construction contract, and approximately $300,000 under the excavating contract, for this development project. • Lithia Springs, Georgia Expansion Project — The Company is obligated to pay up to $500,000 to construct expansion premises at its Lithia Springs, Georgia assisted living facility. Pending Acquisition. As of April 30, 2004, the Company had signed a purchase agreement to acquire a commercial property in the Minneapolis, Minnesota area for a purchase price of approximately $13.05 million. This pending acquisition is subject to certain closing conditions and contingencies, and no assurances can be given that this transaction will be consummated. F-30 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004, 2003, and 2002 (Continued) NOTE 18 • FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of ﬁnancial instruments. 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. Terms are short term in nature and carrying value approximates the estimated market value. Cash and Cash Equivalents. 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. Other Debt. The fair value of other debt is estimated based on the discounted cash ﬂows of the loan using current market rates. Mortgages payable. For variable rate loans that re-price frequently, fair values are based on carrying values. The fair value of ﬁxed rate loans is estimated based on the discounted cash ﬂows of the loans using current market rates. Investment Certiﬁcates Issued. The fair value is estimated using a discounted cash ﬂow calculation that applies interest rates currently being offered on deposits at ﬁnancial institutions with similar remaining maturities. The estimated fair values of the Company’s ﬁnancial instruments as of April 30, 2004 and 2003 are as follows: (in thousands) 2004 2003 Carrying Amount Fair Value Carrying Amount Fair Value FINANCIAL ASSETS Mortgage loans receivable . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . Marketable securities — available-for-sale . . . . . . . . $ 4,893 31,704 2,336 $ 4,893 31,704 2,336 $ 1,183 17,964 0 $ 1,183 17,964 0 FINANCIAL LIABILITIES Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgages payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment certiﬁcates issued . . . . . . . . . . . . . . . . . . . . . $ 25,000 586 633,124 7,074 $ 25,000 604 643,673 7,021 $ 10,570 0 539,397 9,035 $ 10,570 0 567,146 9,035 NOTE 19 • COMMON AND PREFERRED SHARES OF BENEFICIAL INTEREST AND SHAREHOLDERS’ EQUITY During ﬁscal year 2004, IRET issued 1.1 million common shares pursuant to its distribution reinvestment plan, at a total value at issuance of $10.2 million. In addition, .4 million Units were converted to common shares during ﬁscal year 2004, with a total value of $3.3 million included in shareholders’ equity. IRET’s distribution reinvestment plan is available to common 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 distributions used to purchase additional IRET common shares. Series A Cumulative Redeemable Preferred Shares of Beneﬁcial Interest. On April 26, 2004, the Company issued 1,150,000 shares of 8.25% Series A Cumulative Redeemable Preferred Shares of Beneﬁcial Interest for total proceeds of $27.3 million, net of selling costs. Holders of the Company’s Series A Cumulative Redeemable Preferred Shares of Beneﬁcial Interest are entitled to receive dividends at an annual rate of 8.25% of the liquidation preference of $25 per share, or $2.0625 per share per annum. These dividends are cumulative and payable quarterly in arrears. F-31 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004, 2003, and 2002 (Continued) NOTE 19 • COMMON AND PREFERRED SHARES OF BENEFICIAL INTEREST AND SHAREHOLDERS’ EQUITY (Continued) The shares are not convertible into or exchangeable for any other property or any other securities of the Company at the election of the holders. However, on or after April 26, 2009 (or sooner, under limited circumstances), the Company, at its option, may redeem the shares at a redemption price of $25.00 per share, plus any accrued and unpaid distributions through the date of redemption. The shares have no maturity date and will remain outstanding indeﬁnitely unless redeemed by the Company. NOTE 20 • QUARTERLY RESULTS OF CONSOLIDATED OPERATIONS (unaudited) (in thousands, except per share data) QUARTER ENDED July 31, 2003 October 31, 2003 January 31, 2004 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Income available to common shareholders . . . . . Net Income per common share — basic & diluted . . $32,992 $ 2,920 .08 $ $33,983 $ 2,615 .07 $ $35,600 $ 2,489 .06 $ QUARTER ENDED July 31, 2002 October 31, 2002 January 31, 2003 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Income available to common shareholders . . . . . Net Income per common share — basic & diluted . . $27,599 $ 2,928 .10 $ $29,279 $ 3,068 .10 $ $30,026 $ 2,451 .08 $ QUARTER ENDED July 31, 2001 October 31, 2001 January 31, 2002 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Income available to common shareholders . . . . . Net Income per common share — basic & diluted . . $21,780 $ 2,776 .11 $ $23,175 $ 2,946 .12 $ $23,606 $ 2,240 .09 $ April 30, 2004 $37,930 $ 1,383 .03 $ April 30, 2003 $31,861 $ 3,801 .10 $ April 30, 2002 $22,009 $ 2,638 .10 $ The above ﬁnancial information is unaudited. In the opinion of management, all adjustments (which are of a normal recurring nature) have been included for a fair presentation. NOTE 21 • SUBSEQUENT EVENTS Common Share Offering. In May 2004 the Company completed the sale of .5 million of its common shares of beneﬁcial interest, at a price of $10.10 per share, resulting in net proceeds to the Company of approximately $5.2 million. Common and Preferred Share Distributions. On June 30, 2004, the Company paid a distribution of 37.24 cents per share on the Company’s newly-issued Series A Cumulative Redeemable Preferred Shares to preferred shareholders of record on June 15, 2004. The distribution was pro-rated from the date of initial issuance of the preferred shares (65 days versus 90 days in a regular quarter). On July 1, 2004, the Company paid a distribution of 16.05 cents per share on the Company’s common shares, to common shareholders and Unitholders of record on June 18, 2004. This distribution represented an increase of .05 cents or .3% over the previous regular quarterly distribution of 16.00 cents per common share/unit paid April 1, 2004. Duluth Acquisition. In the Company’s Quarterly Report on Form 10-Q for the third quarter of ﬁscal year 2004, the Company announced that it had signed a purchase agreement to acquire a portfolio of 15 commercial properties located primarily in Duluth, Minnesota. The Company closed on the acquisition of 14 of these 15 properties in April 2004. The remaining property, a 60,194 square foot clinic property in Duluth, was acquired in May 2004. The Company paid approximately $67 million for this portfolio of 15 properties. Related Party Transaction. On June 30, 2004, IRET Properties purchased four commercial properties from afﬁliates of Steven B. Hoyt. IRET Properties acquired three ofﬁce buildings, each containing 26,186 square feet of rentable area, and one ofﬁce building containing 79,287 square feet of rentable area, in this transaction, for a F-32 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004, 2003, and 2002 (Continued) NOTE 21 • SUBSEQUENT EVENTS (Continued) total purchase price of $14 million. Three of the properties are located in Plymouth, Minnesota, and the fourth is located in Maple Grove, Minnesota. Additional Acquisitions and Dispositions. In addition to the acquisitions described in the paragraphs above, the Company closed on the following acquisitions and dispositions subsequent to its ﬁscal year ended April 30, 2004: Acquisitions Nebraska Orthopaedic Hospital Expansion Project. The Company purchased a 99% interest in a limited liability company that owns expansion premises constructed at the Company’s Nebraska Orthopaedic Hospital facility in Omaha, Nebraska. The Company paid approximately $4.6 million for this interest. The acquisition closed May 1, 2004. Sleep Inn. The Company paid approximately $3.6 million to purchase a “Sleep Inn” hotel in Brooklyn Park, MN, and a warehouse building located near the hotel. This acquisition closed in June 2004. The hotel tenant subsequently exercised an option to purchase the warehouse building for $450,000. Dispositions Barnes & Noble and Petco Stores. In July 2004, the Company sold its Barnes & Noble and Petco store locations in Fargo, ND for approximately $6.75 million. The carrying amount of these properties was approximately $3.67 million. F-33 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT SCHEDULES To the Board of Trustees and Shareholders of Investors Real Estate Trust Minot, North Dakota We have audited the consolidated ﬁnancial statements of Investors Real Estate Trust and subsidiaries as of April 30, 2004 and for the year then ended and have issued our report thereon dated July 16, 2004; such report is included elsewhere in this Form 10-K. Our audit also included the information included in the consolidated ﬁnancial statement schedules as of and for the year ended April 30, 2004 listed in the table of contents to the consolidated ﬁnancial statements. These ﬁnancial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audit. In our opinion, the information included in such ﬁnancial statement schedules as of and for the year ended April 30, 2004, when considered in relation to the basic 2004 consolidated ﬁnancial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ DELOITTE & TOUCHE LLP Minneapolis, Minnesota July 16, 2004 F-34 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON ADDITIONAL INFORMATION Board of Trustees Investors Real Estate Trust and Subsidiaries Minot, North Dakota Our report on our audit of the consolidated balance sheet of Investors Real Estate Trust and Subsidiaries as of April 30, 2003, and the related consolidated statements of operations, shareholders equity, and cash ﬂows for the years ended April 30, 2003 and 2002, appears on page F-2. Those audits were made for the purpose of forming an opinion on such consolidated ﬁnancial statements taken as a whole. The information as listed in the table of contents related to the consolidated balance sheets of Investors Real Estate Trust and Subsidiaries as of April 30, 2003, and the related consolidated statements of operations, shareholders’ equity, and cash ﬂows for the years ended April 30, 2003 and 2002 is presented for purposes of additional analysis and is not a required part of the basic consolidated ﬁnancial statements. Such information has been subjected to the auditing procedures applied in the audits of the basic consolidated ﬁnancial statements, and, in our opinion, the information is fairly stated in all material respects in relation to the consolidated balance sheet of Investors Real Estate Trust and Subsidiaries as of April 30, 2003, and the related consolidated statements of operations, shareholders’ equity, and cash ﬂows for the years ended April 30, 2003 and 2002, taken as a whole. /s/ Brady, Martz & Associates, P.C. BRADY, MARTZ & ASSOCIATES, P.C. Minot, North Dakota, USA May 22, 2003 F-35 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES April 30, 2004 Schedule III REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands) INITIAL COST TO COMPANY ENCUMBRANCES $ 0 LAND 10 $ MULTI-FAMILY RESIDENTIAL 408 1st Street SE – Minot, ND . . . Applewood On The Green – Omaha, NE . . . . . . . . . . . . . . . . . Beulah Condos – Beulah, ND . . . . Bison Properties – Carrington, ND . . . . . . . . . . . . . Brookﬁeld Village – Topeka, KS . Candlelight Apartments – Fargo, ND . . . . . . . . . . . . . . . . . . Canyon Lake Apartments – Rapid City, SD . . . . . . . . . . . . . . . . . . . Castle Rock – Billings, MT . . . . . . Century Apartments – Williston, ND . . . . . . . . . . . . . . . Chateau Apartments – Minot, ND Clearwater – Boise, ID . . . . . . . . . Colton Heights – Minot, ND . . . . . Connelly Estates – Burnsville, MN . . . . . . . . . . . . . Cottonwood Lake I – Bismarck, ND . . . . . . . . . . . . . . Cottonwood Lake II – Bismarck, ND . . . . . . . . . . . . . . Cottonwood Lake III – Bismarck, ND . . . . . . . . . . . . . . Country Meadows Phase I – Billings, MT . . . . . . . . . . . . . . . . Country Meadows Phase II – Billings, MT . . . . . . . . . . . . . . . . Crestview Apartments – Bismarck, ND . . . . . . . . . . . . . . Crown Colony – Topeka, KS . . . . Dakota Arms – Minot, ND . . . . . . Dakota Hill At Valley Ranch – Irving, TX . . . . . . . . . . . . . . . . . . East Park Apartments – Sioux Falls, SD . . . . . . . . . . . . . . . . . . . Eastgate Properties – Moorhead, MN . . . . . . . . . . . . . . Forest Park Estates – Grand Forks, ND . . . . . . . . . . . . . . . . . . Heritage Manor – Rochester, MN . Ivy Club – Vancouver, WA . . . . . . Jenner Properties – Grand Forks, ND . . . . . . . . . . . . . . . . . . Kirkwood Apartments – Bismarck, ND . . . . . . . . . . . . . . Lancaster Apartments – St. Cloud, MN . . . . . . . . . . . . . . Legacy Apartments I – Grand Forks, ND . . . . . . . . . . . . . . . . . . Legacy Apts II & III – Grand Forks, ND . . . . . . . . . . . . . . . . . . Legacy IV – Grand Forks, ND . . . Legacy V – Grand Forks, ND . . . . Legacy VI – Grand Forks, ND . . . Legacy VII – Grand Forks, ND . . 7,442 0 219 5,286 1,548 2,917 3,700 3,227 1,942 2,479 639 9,810 2,613 2,719 2,544 2,367 2,377 3,539 7,012 459 24,514 1,716 1,544 7,015 4,279 7,847 1,793 2,164 1,547 3,451 2,304 2,743 0 0 0 COST CAPITALIZATION SUBSEQUENT TO ACQUISITION CARRYING COSTS 0 $ IMPROVEMENTS $ 0 195 (56) 7 130 588 7 73 112 93 30 10 284 37 13 13 15 14 (46) 82 10 338 58 125 273 73 139 22 68 120 57 10 99 0 0 0 95 0 0 0 0 73 0 0 0 0 0 0 38 37 40 39 81 0 0 0 0 0 0 0 0 0 0 0 0 112 112 0 0 0 0 BUILDINGS & IMPROVEMENTS $ 37 11,028 484 559 6,680 1,002 3,919 5,354 4,224 2,519 3,309 902 706 6 100 624 80 305 736 200 122 585 80 2,401 11,515 4,233 4,012 4,470 4,011 4,124 5,062 10,488 598 34,447 2,486 2,583 7,063 7,585 12,017 1,792 3,397 2,998 6,235 3,318 6,392 214 93 93 264 264 264 246 246 235 620 50 3,650 115 24 810 403 1,274 201 449 289 908 454 252 137 137 137 F-36 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES April 30, 2004 Schedule III REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands) MULTI-FAMILY RESIDENTIAL – continued Lonetree Apartments – INITIAL COST TO COMPANY ENCUMBRANCES LAND BUILDINGS & IMPROVEMENTS COST CAPITALIZATION SUBSEQUENT TO ACQUISITION CARRYING COSTS IMPROVEMENTS Harvey, ND . . . . . . . . . . . . . . . . $ 111 $ 14 $ 245 $ 1 $ Magic City Apartments – Minot, ND . . . . . . . . . . . . . . . . . 3,156 Meadows Phase I – Jamestown, ND . . . . . . . . . . . . . Meadows Phase II – Jamestown, ND . . . . . . . . . . . . . Meadows Phase III – Jamestown, ND . . . . . . . . . . . . . Miramont – Fort Collins, CO . . . . Monticello Apartments – Monticello, MN . . . . . . . . . . . . . Neighborhood Apts. – Co. Springs, CO . . . . . . . . . . . . . . . . North Pointe – Bismarck, ND . . . . Oakmont Apartments – Sioux Falls, SD . . . . . . . . . . . . . . . . . . . Olympic Village – Billings, MT . . Oxbow – Sioux Falls, SD . . . . . . . Park East Apartments – Fargo, ND . . . . . . . . . . . . . . . . . . Park Meadows I – Waite Park, MN . . . . . . . . . . . . . . . . . . Park Meadows II & III – Waite Park, MN . . . . . . . . . . . . . . . . . . Parkway Apartments – Beulah, ND . . . . . . . . . . . . . . . . Pebble Springs – Bismarck, ND . . Pine Cone Apartments – Fort Collins, CO . . . . . . . . . . . . . . . . Pinehurst Apartments – Billings, MT . . . . . . . . . . . . . . . . Pointe West Apartments – Rapid City, SD . . . . . . . . . . . . . . . . . . . Prairie Winds Apartments – Sioux Falls, SD . . . . . . . . . . . . . . . . . . . Prairiewood Meadows – Fargo, ND . . . . . . . . . . . . . . . . . . Remada Court Apartments – Eagan, MN . . . . . . . . . . . . . . . . . Ridge Oaks Apartments – Sioux City, IA . . . . . . . . . . . . . . . . . . . . Rimrock Apartments – Billings, MT . . . . . . . . . . . . . . . . Rocky Meadows 96–Billings, MT Rosewood/Oakwood – Sioux Falls, SD . . . . . . . . . . . . . . . . . . . Sherwood Apartments – Topeka, KS . . . . . . . . . . . . . . . . . South Pointe – Minot, ND . . . . . . Southview Apartments – Minot, ND . . . . . . . . . . . . . . . . . Southwind Apartments – Grand Forks, ND . . . . . . . . . . . . . . . . . . Sunset Trail Phase I – Rochester, MN . . . . . . . . . . . . . . 960 960 1,109 11,197 3,397 6,594 1,572 3,997 8,158 4,111 3,938 2,868 7,655 0 416 10,064 466 2,146 1,252 1,907 4,905 2,809 2,468 3,508 3,773 10,517 7,006 0 3,791 4,223 4,383 1,781 3 2,143 13,092 3,755 10,665 2,192 4,991 10,927 4,777 5,193 5,286 6,028 193 798 12,593 690 4,325 1,910 2,736 5,571 4,587 3,674 6,024 5,363 15,268 9,466 567 5,833 6,930 412 57 55 56 1,470 490 1,034 144 423 1,164 404 83 572 572 7 7 905 72 240 144 280 1,067 178 330 656 543 1,150 550 185 400 168 F-37 121 3 1,872 2 319 20 449 (47) (124) 223 34 81 182 319 15 (16) 307 7 51 45 52 120 87 22 46 107 179 67 19 107 5 0 0 0 0 0 0 0 0 124 27 0 0 0 0 0 0 0 0 6 0 0 0 0 0 0 103 0 0 403 0 0 0 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES April 30, 2004 Schedule III REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands) MULTI-FAMILY RESIDENTIAL – continued Sunset Trail Phase II – INITIAL COST TO COMPANY ENCUMBRANCES LAND BUILDINGS & IMPROVEMENTS COST CAPITALIZATION SUBSEQUENT TO ACQUISITION CARRYING COSTS IMPROVEMENTS Rochester, MN . . . . . . . . . . . . . . $ 4,154 $ 168 $ 7,357 $ Sweetwater Properties – Carrington & Cooperstown, ND Sycamore Village Apts. – Sioux Falls, SD . . . . . . . . . . . . . . . . . . . Thomasbrook – Lincoln, NE . . . . . Valley Park Manor – Grand Forks, ND . . . . . . . . . . . . . . . . . . Van Mall Woods – Vancouver, WA . . . . . . . . . . . . . . West Stonehill – St. Cloud, MN . . Westwood Park – Bismarck, ND . Winchester/Village Green – Rochester, MN . . . . . . . . . . . . . . Woodridge Apartments – Rochester, MN . . . . . . . . . . . . . . TOTAL MULTI-FAMILY 851 965 5,764 3,807 3,542 7,078 1,128 6,475 3,508 90 100 600 293 600 938 161 982 370 1,657 1,355 9,703 5,000 5,674 11,888 2,208 7,918 6,611 68 27 53 90 135 62 392 64 167 35 $ 0 0 0 0 0 0 0 0 0 0 RESIDENTIAL . . . . . . . . . . . . . $280,062 $ 35,518 $400,603 $ 8,761 $1,290 OFFICE BUILDINGS 1st Avenue Building – Minot, ND . . . . . . . . . . . . . . . . . 17 South Main – Minot, ND . . . . . 401 South Main – Minot, ND . . . . 2030 Cliff Road – Eagan, MN . . . Ameritrade – Omaha, NE . . . . . . . Benton Business Park – Sauk Rapids, MN . . . . . . . . . . . . . . . . Bloomington Bus. Plaza – Bloomington, MN . . . . . . . . . . . Brenwood – Minnetonka, MN . . . Brown Deer Road – Milwaukee, WI . . . . . . . . . . . . . . Burnsville Bluffs – Burnsville, MN . . . . . . . . . . . . . Central Bank Ofﬁce – Eden Prairie, MN . . . . . . . . . . . . . . . . Chiropractor Ofﬁce Bldg. – Greenwood, MN . . . . . . . . . . . . Cold Spring Center – St. Cloud, MN . . . . . . . . . . . . . . Conseco Bldg. – Rapid City, SD . Dewey Hill Business Center – Edina, MN . . . . . . . . . . . . . . . . . Flying Cloud Dr – Eden Prairie, MN . . . . . . . . . . . . . . . . Golden Hills Off. Ctr. – Golden Valley, MN . . . . . . . . . . . . . . . . . Great Plains Software – Fargo, ND . . . . . . . . . . . . . . . . . . Interlachen Corp Center – Eagan, MN . . . . . . . . . . . . . . . . . Mendota Center I – Mendota Heights, MN . . . . . . . . . . . . . . . . $ 0 0 0 602 5,325 0 4,814 8,550 6,304 1,529 2,408 230 4,930 4,093 2,978 3,731 15,000 9,500 11,090 4,361 $ 510 76 552 837 8,022 1,421 6,248 12,444 11,942 2,154 4,069 141 7,906 6,762 3,905 4,689 24,534 15,250 14,850 5,434 $ 30 15 71 146 327 188 1,300 1,762 1,455 300 531 189 588 285 985 1,062 3,018 126 1,650 1,570 F-38 $ 8 11 5 0 0 4 2 213 514 345 60 4 116 0 49 22 36 0 33 36 $ 0 0 0 0 0 0 39 0 0 0 0 0 0 0 0 0 0 0 191 0 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES April 30, 2004 Schedule III REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands) OFFICE BUILDINGS – continued Mendota Center II – Mendota INITIAL COST TO COMPANY ENCUMBRANCES LAND BUILDINGS & IMPROVEMENTS COST CAPITALIZATION SUBSEQUENT TO ACQUISITION CARRYING COSTS IMPROVEMENTS Heights, MN . . . . . . . . . . . . . . . . $ 6,983 $ 1,074 $ 10,465 $ Mendota Center III – Mendota Heights, MN . . . . . . . . . . . . . . . . Mendota Center IV – Mendota Heights, MN . . . . . . . . . . . . . . . . Mendota Northland Ctr. – Mendota Hts., MN . . . . . . . . . . . Metris – Duluth, MN . . . . . . . . . . . Minnesota National Bank – Duluth, MN . . . . . . . . . . . . . . . . Hospitality Associates – Minnetonka, MN . . . . . . . . . . . . Nicollett VII – Burnsville, MN . . . Northgate II – Maple Grove, MN . Pillsbury Business Center – Edina, MN . . . . . . . . . . . . . . . . . Plaza VII – Boise, ID . . . . . . . . . . Plymouth IV & V – Plymouth, MN . . . . . . . . . . . . . . Southeast Tech Center – Eagan, MN . . . . . . . . . . . . . . . . . TCA Building – Eagan, MN . . . . . Three Paramount Plaza – Bloomington, MN . . . . . . . . . . . Thresher Square East – Minneapolis, MN . . . . . . . . . . . . Thresher Square West – Minneapolis, MN . . . . . . . . . . . . UHC Ofﬁce – International Falls, MN . . . . . . . . . . . . . . . . . . Viromed – Eden Prairie, MN . . . . Wayroad – Minnetonka, MN . . . . . West River Business Pk. – Waite Park, MN . . . . . . . . . . . . . . . . . . Westgate – Boise, ID . . . . . . . . . . . Wirth Corp Center – Golden Valley, MN . . . . . . . . . . . . . . . . . TOTAL OFFICE BUILDINGS . . . INDUSTRIAL API Building – Duluth, MN . . . . . Dixon Ave. Industrial Park – Des Moines, IA . . . . . . . . . . . . . . . . . Lexington Commerce Center – Eagan, MN . . . . . . . . . . . . . . . . . Lighthouse – Duluth, MN . . . . . . . Lindberg/Bodycote – Eden Prairie, MN . . . . . . . . . . . . . . . . Metal Improvement Co. – N. Brighton, MN . . . . . . . . . . . . . . . Stone Container – Fargo, ND . . . . Stone Container – Roseville, MN . 3,948 5,126 10,997 0 0 0 4,571 1,480 1,167 0 8,877 4,005 10,400 4,943 3,316 2,136 0 2,414 3,433 0 7,888 5,230 $172,359 1,501 1,385 1,331 336 287 40 429 358 284 300 641 560 627 1,261 646 449 119 666 530 5,203 7,320 16,329 2,614 1,819 361 6,951 2,000 1,558 3,093 13,707 5,556 11,589 6,619 5,913 4,108 2,382 4,198 4,895 234 1,000 970 $ 30,626 1,279 10,648 7,644 $267,997 17 46 0 0 1 1 0 2 7 0 7 540 1 336 (11) 1 1 1 0 58 4 20 $ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 5 4 0 0 20 0 0 1 $ 2,491 29 $ 288 1 3 7 1 0 0 36 0 $ 0 0 0 0 0 4 89 165 $ 0 $ 115 $ 1,886 $ 8,791 3,221 0 1,574 1,446 4,683 5,017 1,439 11,462 5,371 2,026 1,954 2,205 6,576 7,275 453 90 198 240 440 810 F-39 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES April 30, 2004 Schedule III REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands) INDUSTRIAL – continued Stone Container – Waconia, MN . Wilson’s Leather – Brooklyn Park, MN . . . . . . . . . . . . . . . . . . Winsted/Sterner Lighting – Winsted, MN . . . . . . . . . . . . . . . TOTAL INDUSTRIAL . . . . . . . . . RETAIL Anoka Strip Center – Anoka, MN Arrowhead Shopping Center – Minot, ND . . . . . . . . . . . . . . . . . Barnes & Noble – Fargo, ND . . . . Barnes & Noble – Omaha, NE . . . Buffalo Mall – Jamestown, ND . . Carmike Theatre – Grand Forks, ND . . . . . . . . . . . . . . . . . . Champion Auto – Forest Lake, MN . . . . . . . . . . . . . . . . . . Checkers Auto – Faribault, MN . . Checkers Auto – Rochester, MN . . Denfeld Retail Center – Duluth, MN . . . . . . . . . . . . . . . . Dilly Lily – St. Louis Park, MN . . Eagan PDQ – Eagan, MN . . . . . . . Eagan Retail Center I – Eagan, MN . . . . . . . . . . . . . . . . . Eagan Retail Center II – Eagan, MN . . . . . . . . . . . . . . . . . East Grand Station – E. Grand Forks, MN . . . . . . . . . . . . . . . . . Ernst Home Center – Kalispell, MT . . . . . . . . . . . . . . . Evergreen Shopping Ctr. – Pine City, MN . . . . . . . . . . . . . . . . . . . Excelsior Retail Center – Excelsior, MN . . . . . . . . . . . . . . Express Shopping Center – Fargo, ND . . . . . . . . . . . . . . . . . . Interstate Bakery – Mounds View, MN . . . . . . . . . . . . . . . . . . Inver Grove Ctr. – PDQ – I. Grove Hts., MN . . . . . . . . . . . . . Jamestown Mall – Jamestown, ND . . . . . . . . . . . . . Lakeville Retail Center – Lakeview, MN . . . . . . . . . . . . . . Maplewood Square – Rochester, MN . . . . . . . . . . . . . . MedPark Mall – Grand Forks, ND . . . . . . . . . . . . . . . . . . Minot Plaza – Minot, ND . . . . . . . Pamida – Ladysmith, WI . . . . . . . . Pamida – Livingston, MT . . . . . . . PDQ Center – Mound, MN . . . . . . Petco Warehouse – Fargo, ND . . . ENCUMBRANCES $ 0 8,748 0 $ 33,480 $ 492 1,192 1,376 1,491 0 1,663 0 224 290 0 231 0 1,711 0 733 0 2,313 0 1,043 0 653 920 0 6,063 3,239 0 1,231 1,462 0 619 INITIAL COST TO COMPANY LAND 165 $ BUILDINGS & IMPROVEMENTS $ 1,502 COST CAPITALIZATION SUBSEQUENT TO ACQUISITION CARRYING COSTS 0 $ IMPROVEMENTS 0 $ 11,685 901 $ 52,843 $ 602 $ $ 2,954 2,735 3,099 3,886 2,295 446 257 364 4,908 172 568 314 1,057 1,242 2,250 2,648 626 1,120 243 719 1,024 1,240 8,631 4,968 471 1,411 1,573 260 928 0 6 54 6 43 0 0 164 0 2 0 0 0 5 0 5 10 0 0 135 17 2 0 7 75 603 1 14 1 0 0 0 0 0 0 $ 258 $ 0 0 0 0 0 67 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 27 $ $ 1,368 100 5,418 123 100 540 600 575 184 50 83 76 276 168 214 196 291 150 250 154 275 305 47 221 297 121 3,275 681 50 89 227 100 324 F-40 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES April 30, 2004 Schedule III REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands) INITIAL COST TO COMPANY ENCUMBRANCES LAND BUILDINGS & IMPROVEMENTS COST CAPITALIZATION SUBSEQUENT TO ACQUISITION CARRYING COSTS IMPROVEMENTS $ 0 925 $ $ 1,575 769 $ RETAIL – continued Plaza Shopping Center – Schoﬁeld, WI . . . . . . . . . . . . . . . PDQ Center – Prior Lake, MN . . . Prior Lake Peak – Prior Lake, MN . . . . . . . . . . . . . . . . . . Sam Goody/Musicland – Willmar, MN . . . . . . . . . . . . . . . South Pond Retail Center – Champlin, MN . . . . . . . . . . . . . . Strip Center I – Burnsville, MN . . Strip Center II – Burnsville, MN . Thomasville – Kentwood, MI . . . . Former Tom Thumb – Andover, MN . . . . . . . . . . . . . . . Former Tom Thumb – Bethel, MN . . . . . . . . . . . . . . . . . Former Tom Thumb – Blaine, MN . . . . . . . . . . . . . . . . . Former Tom Thumb – Buffalo, MN . . . . . . . . . . . . . . . . Former Tom Thumb – Centerville, MN . . . . . . . . . . . . . Former Tom Thumb – Glencoe, MN . . . . . . . . . . . . . . . Former Tom Thumb – Ham Lake, MN . . . . . . . . . . . . . . . . . . Former Tom Thumb – Howard Lake, MN . . . . . . . . . . . . . . . . . . Former Tom Thumb – Lakeland, MN . . . . . . . . . . . . . . Former Tom Thumb – Lindstrom, MN . . . . . . . . . . . . . Former Tom Thumb – Lino Lakes, MN . . . . . . . . . . . . . . . . . Former Tom Thumb – Long Prairie, MN . . . . . . . . . . . . . . . . Former Tom Thumb – Monticello, MN . . . . . . . . . . . . . Former Tom Thumb – Mora, MN . Former Tom Thumb – Oakdale, MN . . . . . . . . . . . . . . . Former Tom Thumb – Paynesville, MN . . . . . . . . . . . . . Former Tom Thumb – Pine City, MN . . . . . . . . . . . . . . . . . . . Former Tom Thumb – Shoreview, MN . . . . . . . . . . . . . Former Tom Thumb – Winsted, MN . . . . . . . . . . . . . . . Tool Crib – Duluth, MN . . . . . . . . West Lake Center – Forest Lake, MN . . . . . . . . . . . . . . . . . . West Village Center – Chanhassen, MN . . . . . . . . . . . . Westgate Shopping Center – St. Cloud, MN . . . . . . . . . . . . . . TOTAL RETAIL . . . . . . . . . . . . . . 0 0 0 665 529 1,154 199 363 382 315 228 0 0 250 307 222 297 0 0 0 498 0 377 0 271 0 5,472 15,575 4,318 $ 59,293 175 202 48 170 842 208 291 225 104 32 121 131 78 52 143 22 86 67 121 39 86 55 351 31 83 63 35 130 2,397 5,035 431 230 2,883 776 469 1,896 176 478 399 329 252 478 392 358 354 254 319 661 770 245 380 334 357 267 375 1,886 5,611 15,833 1,232 $ 22,697 6,490 $ 99,038 F-41 25 5 3 8 0 12 17 0 0 0 14 11 0 0 0 0 3 0 12 0 0 0 8 0 0 0 1 0 89 (94) 78 $ 1,282 $ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 94 $ INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES April 30, 2004 Schedule III REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands) COST CAPITALIZATION SUBSEQUENT TO ACQUISITION CARRYING COSTS 0 $ IMPROVEMENTS 229 $ 0 0 0 0 4 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1,841 0 5,509 (172) 198 0 0 $ 7,609 $ 0 2 0 3 12 1 0 2 $ 20 $20,217 0 0 0 0 0 0 0 0 0 0 0 0 0 58 0 0 0 0 0 0 0 0 0 0 0 0 0 58 0 0 $ $ 0 0 0 0 0 0 $ 0 $1,988 MEDICAL Abbott Northwest – Sartell, MN . . Airport Medical – Bloomington, MN . . . . . . . . . . . Denfeld Clinic – Duluth, MN . . . . Edgewood Vista – Belgrade, MT . Edgewood Vista – Columbus, NE . Edgewood Vista – Duluth, MN . . . Edgewood Vista – East Grand Forks, MN . . . . . . . . . . . . . . . . . Edgewood Vista – Fremont, NE . . Edgewood Vista – Grand Island, NE . . . . . . . . . . . . . . . . . Edgewood Vista – Hastings, NE . . Edgewood Vista – Kalispell, MT . Edgewood Vista – Minot, ND . . . . Edgewood Vista – Missoula, MT . Edgewood Vista – Omaha, NE . . . Edgewood Vista – Virginia, MN . . Edgewood Vista – Phase II – Virginia, MN . . . . . . . . . . . . . . . Fresenius – Duluth, MN . . . . . . . . Gateway Clinic – Sandstone, MN . Healtheast Medical Center – Woodbury & St. Johns, MN . . . Mariner Clinic – Superior, WI . . . Park Dental – Brooklyn, MN . . . . Pavilion II – Duluth, MN . . . . . . . Paul Larson Clinic – Edina, MN . Southdale Expansion – Edina, MN . . . . . . . . . . . . . . . . . Southdale Medical Center – Edina, MN . . . . . . . . . . . . . . . . . UH Medical – St. Paul, MN . . . . . Wedgwood – Sweetwater, GA . . . . Wells Clinic – Hibbing, MN . . . . . TOTAL MEDICAL . . . . . . . . . . . . UNDEVELOPED LAND Andover, MN . . . . . . . . . . . . . . . . . Centerville, MN . . . . . . . . . . . . . . . Cottonwood Lake IV – Bismarck, ND . . . . . . . . . . . . . . Inver Grove, MN . . . . . . . . . . . . . . Kalispell, MT . . . . . . . . . . . . . . . . . Libby, MT . . . . . . . . . . . . . . . . . . . Long Prairie, MN . . . . . . . . . . . . . . River Falls, WI . . . . . . . . . . . . . . . . TOTAL UNDEVELOPED LAND TOTAL . . . . . . . . . . . . . . . . . . . . . . INITIAL COST TO COMPANY ENCUMBRANCES $ 8,271 LAND 0 $ BUILDINGS & IMPROVEMENTS $ 13,637 4,678 2,796 439 441 11,315 1,405 496 441 558 518 6,011 854 553 6,766 5,111 1,753 1,829 18,363 3,704 2,767 14,941 662 7,224 29,596 7,407 3,638 2,726 $150,629 $ 0 0 0 0 0 0 0 0 $ 0 $971,110 3,024 0 226 249 4,130 867 324 249 335 339 3,018 481 387 4,836 3,502 0 0 18,066 0 1,734 0 0 8,577 23,366 4,611 1,273 0 $ 87,865 $ 0 0 0 65 0 0 0 0 $ 65 $633,124 0 541 14 14 390 25 56 14 14 70 260 109 89 246 0 50 71 3,238 397 185 2,735 351 0 3,500 0 334 177 $ 12,880 $ 150 100 264 560 1,400 150 150 200 $ 2,974 $110,113 F-42 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES April 30, 2004 Schedule III REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands) MULTI-FAMILY RESIDENTIAL LAND BUILDING & IMPROVEMENTS TOTAL ACCUMULATED DEPRECIATION DATE ACQUIRED 408 1st Street SE – Minot, ND . . . . $ Applewood On The Green – Omaha, NE . . . . . . . . . . . . . . . . . . Beulah Condos – Beulah, ND . . . . . Bison Properties – Carrington, ND . Brookﬁeld Village – Topeka, KS . . . Candlelight Apartments – Fargo, ND . . . . . . . . . . . . . . . . . . . Canyon Lake Apartments – Rapid City, SD . . . . . . . . . . . . . . . . . . . . Castle Rock – Billings, MT . . . . . . . Century Apartments – Williston, ND . . . . . . . . . . . . . . . . Chateau Apartments – Minot, ND . . Clearwater – Boise, ID . . . . . . . . . . Colton Heights – Minot, ND . . . . . . Connelly Estates – Burnsville, MN . Cottonwood Lake I – Bismarck, ND . . . . . . . . . . . . . . . . Cottonwood Lake II – Bismarck, ND . . . . . . . . . . . . . . . . Cottonwood Lake III – Bismarck, ND . . . . . . . . . . . . . . . . Country Meadows Phase I – Billings, MT . . . . . . . . . . . . . . . . . Country Meadows Phase II – Billings, MT . . . . . . . . . . . . . . . . . Crestview Apartments – Bismarck, ND . . . . . . . . . . . . . . . . Crown Colony – Topeka, KS . . . . . Dakota Arms – Minot, ND . . . . . . . Dakota Hill At Valley Ranch – 10 706 6 100 624 80 305 736 200 122 585 80 2,401 264 264 264 246 246 235 620 50 Irving, TX . . . . . . . . . . . . . . . . . . . 3,650 East Park Apartments – Sioux Falls, SD . . . . . . . . . . . . . . . . . . . . Eastgate Properties – Moorhead, MN . . . . . . . . . . . . . . . Forest Park Estates – Grand Forks, ND . . . . . . . . . . . . . . . . . . . Heritage Manor – Rochester, MN . . Ivy Club – Vancouver, WA . . . . . . . Jenner Properties – Grand Forks, ND . . . . . . . . . . . . . . . . . . . Kirkwood Apartments – Bismarck, ND . . . . . . . . . . . . . . . . Lancaster Apartments – St. Cloud, MN . . . . . . . . . . . . . . . Legacy Apartments I – Grand Forks, ND . . . . . . . . . . . . . . . . . . . Legacy Apts II & III – Grand Forks, ND . . . . . . . . . . . . . . . . . . . 115 24 810 403 1,274 201 449 289 908 454 $ 37 $ 47 $ 33 690 342 404 93 412 266 756 1,883 405 484 496 231 669 626 432 648 463 1,267 1,239 132 3,698 118 1,811 1,993 1,145 1,530 323 628 333 1,293 557 12,024 434 666 7,434 1,670 4,304 6,163 4,536 2,734 3,924 992 14,200 4,572 4,326 4,787 4,311 4,465 5,251 11,190 658 38,435 2,659 2,732 8,146 8,061 13,430 2,015 3,914 3,407 7,312 3,894 11,318 428 566 6,810 1,590 3,999 5,427 4,336 2,612 3,339 912 11,799 4,308 4,062 4,523 4,065 4,219 5,016 10,570 608 34,785 2,544 2,708 7,336 7,658 12,156 1,814 3,465 3,118 6,404 3,440 F-43 2001 2001 1983 1972 2003 1993 2001 1999 1986 1997 1999 1996 2003 1999 1999 1999 1984 1997 1994 2000 1996 2000 2002 1970 1993 1999 1999 1996 1997 2000 1996 1996 LIFE ON WHICH LATEST INCOME STATEMENT IS COMPUTED 40 years 40 years 15–40 years 25–40 years 40 years 24–40 years 40 years 40 years 35–40 years 12–40 years 40 years 40 years 40 years 40 years 40 years 40 years 33–40 years 40 years 24–40 years 40 years 24–40 years 40 years 40 years 33–40 years 24–40 years 40 years 40 years 40 years 12–40 years 40 years 24–40 years 24–40 years INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES April 30, 2004 Schedule III REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands) MULTI-FAMILY RESIDENTIAL – continued LAND BUILDING & IMPROVEMENTS TOTAL ACCUMULATED DEPRECIATION DATE ACQUIRED Legacy IV – Grand Forks, ND . . . . . $ Legacy V – Grand Forks, ND . . . . . Legacy VI – Grand Forks, ND . . . . . Legacy VII – Grand Forks, ND . . . . Lonetree Apartments – Harvey, ND . . . . . . . . . . . . . . . . . . Magic City Apartments – Minot, ND . . . . . . . . . . . . . . . . . . . Meadows Phase I – Jamestown, ND . . . . . . . . . . . . . . . Meadows Phase II – Jamestown, ND . . . . . . . . . . . . . . Meadows Phase III – Jamestown, ND . . . . . . . . . . . . . . Miramont – Fort Collins, CO . . . . . Monticello Apartments – 252 137 137 137 14 412 57 55 56 1,470 Monticello, MN . . . . . . . . . . . . . . 490 Neighborhood Apts. – Co. Springs, CO . . . . . . . . . . . . . . . . . North Pointe – Bismarck, ND . . . . . Oakmont Apartments – Sioux Falls, SD . . . . . . . . . . . . . . . . . . . . Olympic Village – Billings, MT . . . Oxbow – Sioux Falls, SD . . . . . . . . Park East Apartments – Fargo, ND . Park Meadows I – Waite Park, MN . . . . . . . . . . . . . . . . . . . Park Meadows II & III – Waite Park, MN . . . . . . . . . . . . . . . . . . . Parkway Apartments – Beulah, ND Pebble Springs – Bismarck, ND . . . Pine Cone Apartments – Fort Collins, CO . . . . . . . . . . . . . . . . . . Pinehurst Apartments – Billings, MT . . . . . . . . . . . . . . . . . Pointe West Apartments – Rapid City, SD . . . . . . . . . . . . . . . . . . . . Prairie Winds Apartments – Sioux Falls, SD . . . . . . . . . . . . . . . . . . . . Prairiewood Meadows – Fargo, ND . . . . . . . . . . . . . . . . . . . Remada Court Apartments – 1,034 144 423 1,164 404 83 572 572 7 7 905 72 240 144 280 Eagan, MN . . . . . . . . . . . . . . . . . . 1,067 Ridge Oaks Apartments – Sioux City, IA . . . . . . . . . . . . . . . . . . . . . Rimrock Apartments – Billings, MT . . . . . . . . . . . . . . . . . Rocky Meadows 96 – Billings, MT . . . . . . . . . . . . . . . . . Rosewood/Oakwood – Sioux Falls, SD . . . . . . . . . . . . . . . . . . . . 178 330 656 543 $ 711 0 0 0 72 785 211 200 130 2,512 20 2,128 486 256 1,065 1,130 803 1,148 1,320 50 93 2,860 39 1,095 552 275 111 497 452 1,188 1,369 $ $ 6,491 214 93 93 246 4,504 1,784 1,875 2,145 13,411 3,975 11,114 2,269 4,894 11,150 4,811 5,274 5,468 6,347 208 782 6,743 351 230 230 260 4,916 1,841 1,930 2,201 14,881 4,265 12,148 2,413 5,317 12,314 5,215 5,357 6,040 6,919 215 789 12,900 13,805 775 4,616 2,099 3,068 6,758 4,852 4,026 6,829 6,013 703 4,376 1,955 2,788 5,691 4,674 3,696 6,173 5,470 F-44 2000 2000 2000 2000 1991 1997 2000 2000 2002 1996 2004 1996 1995 2002 2001 1994 1997 1997 1997 1988 2000 1994 2002 1994 1993 2001 2003 2001 2000 1996 1996 LIFE ON WHICH LATEST INCOME STATEMENT IS COMPUTED 40 years 40 years 40 years 40 years 24–40 years 12–40 years 40 years 40 years 40 years 40 years 40 years 40 years 24–40 years 40 years 40 years 24–40 years 12–40 years 40 years 40 years 5–40 years 40 years 40 years 40 years 24–40 years 24–40 years 40 years 40 years 40 years 40 years 40 years 40 years INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES April 30, 2004 Schedule III REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands) MULTI-FAMILY RESIDENTIAL – continued LAND BUILDING & IMPROVEMENTS TOTAL ACCUMULATED DEPRECIATION DATE ACQUIRED Sherwood Apartments – Topeka, KS . . . . . . . . . . . . . . . . . . $ 1,150 550 South Pointe – Minot, ND . . . . . . . . Southview Apartments – $ 15,447 9,936 $ 16,597 10,486 $ 1,814 1,992 Minot, ND . . . . . . . . . . . . . . . . . . Southwind Apartments – Grand Forks, ND . . . . . . . . . . . . . . . . . . . Sunset Trail Phase I – Rochester, MN . . . . . . . . . . . . . . . Sunset Trail Phase II – Rochester, MN . . . . . . . . . . . . . . . Sweetwater Properties – Carrington & Cooperstown, ND . . . . . . . . . . Sycamore Village Apts. – Sioux Falls, SD . . . . . . . . . . . . . . . . . . . . Thomasbrook – Lincoln, NE . . . . . . Valley Park Manor – Grand Forks, ND . . . . . . . . . . . . . . . . . . . Van Mall Woods – Vancouver, WA . West Stonehill – St. Cloud, MN . . . Westwood Park – Bismarck, ND . . . Winchester/Village Green – Rochester, MN . . . . . . . . . . . . . . . Woodridge Apartments – Rochester, MN . . . . . . . . . . . . . . . TOTAL MULTI-FAMILY 185 400 168 168 90 100 600 293 600 938 161 982 370 586 5,940 6,935 7,425 1,684 1,408 9,793 5,135 5,736 12,280 2,272 8,085 6,646 771 6,340 7,103 7,593 1,774 1,508 10,393 5,428 6,336 13,218 2,433 9,067 7,016 147 1,247 627 501 1,076 65 1,325 666 809 2,570 359 159 1,295 RESIDENTIAL . . . . . . . . . . . . . . $ 35,518 $410,654 $ 446,172 $ 61,610 OFFICE BUILDINGS 1st Avenue Building – Minot, ND . $ 17 South Main – Minot, ND . . . . . . 401 South Main – Minot, ND . . . . . 2030 Cliff Road – Eagan, MN . . . . Ameritrade – Omaha, NE . . . . . . . . Benton Business Park – Sauk Rapids, MN . . . . . . . . . . . . . . . . . Bloomington Bus. Plaza – Bloomington, MN . . . . . . . . . . . . Brenwood – Minnetonka, MN . . . . . Brown Deer Road – 30 15 71 146 327 188 1,300 1,762 Milwaukee, WI . . . . . . . . . . . . . . . 1,455 Burnsville Bluffs – Burnsville, MN . . . . . . . . . . . . . . . Central Bank Ofﬁce – Eden Prairie, MN . . . . . . . . . . . . . . . . . . Chiropractor Ofﬁce Bldg. – Greenwood, MN . . . . . . . . . . . . . . Cold Spring Center – St. Cloud, MN . . . . . . . . . . . . . . . Conseco Bldg – Rapid City, SD . . . 300 531 189 588 285 $ 518 87 557 837 8,022 1,425 6,289 12,657 12,456 2,499 4,129 145 8,022 6,762 $ 548 102 628 983 8,349 1,613 7,589 14,419 13,911 2,799 4,660 334 8,610 7,047 $ 456 7 212 64 1,008 50 409 526 432 172 124 4 617 641 F-45 2000 1995 1994 1996 2001 2002 1972 2002 2000 2000 1999 1995 1999 2003 1996 1981 2001 1987 1986 1999 2003 2001 2002 2003 2001 2003 2003 2001 2001 LIFE ON WHICH LATEST INCOME STATEMENT IS COMPUTED 40 years 24–40 years 24–40 years 24–40 years 40 years 40 years 5–40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 33–40 years 40 years 24–40 years 19–40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES April 30, 2004 Schedule III REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands) OFFICE BUILDINGS – continued Dewey Hill Business Center – LAND BUILDING & IMPROVEMENTS TOTAL ACCUMULATED DEPRECIATION DATE ACQUIRED Edina, MN . . . . . . . . . . . . . . . . . . $ 985 $ 3,954 $ 4,939 $ 331 Flying Cloud Drive – Eden Prairie, MN . . . . . . . . . . . . . . . . . . 1,062 Golden Hills Ofﬁce Ctr. – Golden Valley, MN . . . . . . . . . . . . . . . . . . Great Plains Software – Fargo, ND Interlachen Corp Center – 3,018 126 Eagan, MN . . . . . . . . . . . . . . . . . . 1,650 Mendota Center I – Mendota Heights, MN . . . . . . . . . . . . . . . . . 1,570 Mendota Center II – Mendota 4,711 24,570 15,250 15,074 5,470 Heights, MN . . . . . . . . . . . . . . . . . 1,074 10,482 Mendota Center III – Mendota Heights, MN . . . . . . . . . . . . . . . . . 1,501 Mendota Center IV – Mendota Heights, MN . . . . . . . . . . . . . . . . . 1,385 Mendota Northland Ctr. – Mendota Hts., MN . . . . . . . . . . . . . . . . . . . . Metris – Duluth, MN . . . . . . . . . . . . Minnesota National Bank – Duluth, MN . . . . . . . . . . . . . . . . . Hospitality Associates – Minnetonka, MN . . . . . . . . . . . . . Nicollett VII – Burnsville, MN . . . . Northgate II – Maple Grove, MN . . Pillsbury Business Center – Edina, MN . . . . . . . . . . . . . . . . . . Plaza VII – Boise, ID . . . . . . . . . . . Plymouth IV & V – Plymouth, MN . . . . . . . . . . . . . . . Southeast Tech Center– Eagan, MN . . . . . . . . . . . . . . . . . . TCA Building– Eagan, MN . . . . . . . Three Paramount Plaza – 1,331 336 287 40 429 358 284 300 641 560 627 Bloomington, MN . . . . . . . . . . . . 1,261 Thresher Square East – Minneapolis, MN . . . . . . . . . . . . . Thresher Square West – Minneapolis, MN . . . . . . . . . . . . . UHC Ofﬁce – International Falls, MN . . . . . . . . . . . . . . . . . . . Viromed – Eden Prairie, MN . . . . . . Wayroad – Minnetonka, MN . . . . . . West River Business Pk. – Waite Park, MN . . . . . . . . . . . . . . . . . . . Westgate – Boise, ID . . . . . . . . . . . . Wirth Corp Center – Golden 646 449 119 666 530 234 1,000 Valley, MN . . . . . . . . . . . . . . . . . . 970 5,249 7,320 16,329 2,615 1,820 361 6,953 2,007 1,558 3,100 14,247 5,557 11,925 6,608 5,919 4,113 2,383 4,198 4,973 1,283 10,668 7,674 5,773 27,588 15,376 16,724 7,040 11,556 6,750 8,705 17,660 2,951 2,107 401 7,382 2,365 1,842 3,400 14,888 6,117 12,552 7,869 6,565 4,562 2,502 4,864 5,503 1,517 11,668 8,644 527 993 1,795 1,036 326 621 297 392 860 9 4 62 530 217 118 101 1,024 610 181 339 339 236 4 546 258 53 367 406 TOTAL OFFICE BUILDINGS . . . . $ 30,626 $270,776 $ 301,402 $ 17,304 F-46 2001 2000 2003 2000 2001 2002 2002 2002 2002 2002 2004 2004 2001 2001 2000 2001 2003 2001 2000 2003 2002 2002 2002 2004 1999 2002 2003 2003 2002 1981 LIFE ON WHICH LATEST INCOME STATEMENT IS COMPUTED 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 33–40 years INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES April 30, 2004 Schedule III REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands) INDUSTRIAL LAND BUILDING & IMPROVEMENTS TOTAL ACCUMULATED DEPRECIATION DATE ACQUIRED API Building –Duluth, MN . . . . . . . $ Dixon Ave. Industrial Park – Des 115 $ 1,887 $ 2,002 $ 4 Moines, IA . . . . . . . . . . . . . . . . . . 1,439 11,465 12,904 Lexington Commerce Center – Eagan, MN . . . . . . . . . . . . . . . . . . Lighthouse – Duluth, MN . . . . . . . . Lindberg/Bodycote – Eden Prairie, MN . . . . . . . . . . . . . . . . . . Metal Improvement Co. – N. Brighton, MN . . . . . . . . . . . . . . . . Stone Container – Fargo, ND . . . . . Stone Container – Roseville, MN . . Stone Container – Waconia, MN . . . Wilson’s Leather – Brooklyn 453 90 198 240 440 810 165 5,378 2,027 1,954 2,209 6,701 7,440 1,502 Park, MN . . . . . . . . . . . . . . . . . . . 1,368 11,685 Winsted/Sterner Lighting – Winsted, MN . . . . . . . . . . . . . . . . 100 907 5,831 2,117 2,152 2,449 7,141 8,250 1,667 13,053 1,007 449 560 8 418 113 1,100 442 139 547 81 TOTAL INDUSTRIAL . . . . . . . . . . $ 5,418 $ 53,155 $ 58,573 $ 3,861 RETAIL Anoka Strip Center – Anoka, MN . . $ Arrowhead Shopping Center – Minot, ND . . . . . . . . . . . . . . . . . . Barnes & Noble – Fargo, ND . . . . . Barnes & Noble – Omaha, NE . . . . Buffalo Mall – Jamestown, ND . . . . Carmike Theatre – Grand Forks, ND . . . . . . . . . . . . . . . . . . . Champion Auto – Forest Lake, MN . . . . . . . . . . . . . . . . . . . Checkers Auto – Faribault, MN . . . Checkers Auto – Rochester, MN . . . Denfeld Retail Center – Duluth, MN . . . . . . . . . . . . . . . . . Dilly Lily – St. Louis Park, MN . . . Eagan PDQ – Eagan, MN . . . . . . . . Eagan Retail Center I – Eagan, MN . . . . . . . . . . . . . . . . . . Eagan Retail Center II – Eagan, MN . . . . . . . . . . . . . . . . . . East Grand Station – E. Grand Forks, MN . . . . . . . . . . . . . . . . . . Ernst Home Center – Kalispell, MT . . . . . . . . . . . . . . . . Evergreen Shopping Ctr. – Pine City, MN . . . . . . . . . . . . . . . . . . . . Excelsior Retail Center – Excelsior, MN . . . . . . . . . . . . . . . Express Shopping Center – Fargo, ND . . . . . . . . . . . . . . . . . . . 123 100 540 600 575 184 50 83 76 276 168 214 196 291 150 250 154 275 305 $ 608 $ 731 $ 18 2,331 655 659 139 561 11 8 11 9 5 17 9 31 138 68 82 19 34 3,097 3,275 3,699 4,625 2,546 498 340 440 5,184 345 782 515 1,358 1,392 2,500 2,937 918 1,427 2,997 2,735 3,099 4,050 2,362 448 257 364 4,908 177 568 319 1,067 1,242 2,250 2,783 643 1,122 F-47 2004 2002 2000 2004 1992 2002 1995 2001 2001 2002 2001 2004 2003 1973 1994 1995 2003 1994 2003 2003 2003 2004 2003 2003 2003 2003 2000 2003 2003 2003 2003 LIFE ON WHICH LATEST INCOME STATEMENT IS COMPUTED 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 15 1/2–40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES April 30, 2004 Schedule III REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands) RETAIL – continued Interstate Bakery – Mounds LAND BUILDING & IMPROVEMENTS TOTAL ACCUMULATED DEPRECIATION DATE ACQUIRED View, MN . . . . . . . . . . . . . . . . . . . $ 47 $ 243 $ 290 $ Inver Grove Ctr. – PDQ – I. Grove Hts., MN . . . . . . . . . . . . . . . . . . . . Jamestown Mall – Jamestown, ND . Lakeville Retail Center – Lakeview, MN . . . . . . . . . . . . . . . Maplewood Square – Rochester, MN . . . . . . . . . . . . . . . MedPark Mall – Grand Forks, ND . Minot Plaza – Minot, ND . . . . . . . . Pamida – Ladysmith, WI . . . . . . . . . Pamida – Livingston, MT . . . . . . . . PDQ Center – Mound, MN . . . . . . . Petco Warehouse – Fargo, ND . . . . Plaza Shopping Center – Schoﬁeld, WI . . . . . . . . . . . . . . . . PDQ Center – Prior Lake, MN . . . . Prior Lake Peak – Prior Lake, MN . Sam Goody/Musicland – Willmar, MN . . . . . . . . . . . . . . . . South Pond Retail Center – Champlin, MN . . . . . . . . . . . . . . . Strip Center I – Burnsville, MN . . . Strip Center II – Burnsville, MN . . Thomasville – Kentwood, MI . . . . . Former Tom Thumb – Andover, MN . . . . . . . . . . . . . . . . Former Tom Thumb – Bethel, MN . Former Tom Thumb – Blaine, MN . Former Tom Thumb – Buffalo, MN . . . . . . . . . . . . . . . . . Former Tom Thumb – Centerville, MN . . . . . . . . . . . . . . Former Tom Thumb – Glencoe, MN . . . . . . . . . . . . . . . . Former Tom Thumb – Ham 221 297 121 3,275 681 50 89 227 100 324 175 202 48 170 842 208 291 225 104 32 121 131 78 52 Lake, MN . . . . . . . . . . . . . . . . . . . 143 Former Tom Thumb – Howard Lake, MN . . . . . . . . . . . . . . . . . . . Former Tom Thumb – Lakeland, MN . . . . . . . . . . . . . . . . Former Tom Thumb – Lindstrom, MN . . . . . . . . . . . . . . . Former Tom Thumb – Lino 22 86 67 Lakes, MN . . . . . . . . . . . . . . . . . . 121 Former Tom Thumb – Long Prairie, MN . . . . . . . . . . . . . . . . . . Former Tom Thumb – Monticello, MN . . . . . . . . . . . . . . 39 86 947 1,396 1,964 11,907 5,663 522 1,500 1,800 360 1,279 1,775 976 482 408 3,725 996 777 2,121 280 510 534 471 330 530 535 380 443 321 452 700 856 726 1,099 1,843 8,632 4,982 472 1,411 1,573 260 955 1,600 774 434 238 2,883 788 486 1,896 176 478 413 340 252 478 392 358 357 254 331 661 770 F-48 7 22 32 50 1,038 535 135 43 48 8 226 48 24 10 7 6 24 14 355 5 14 13 10 8 14 12 11 11 8 10 20 23 2003 2003 2003 2003 2000 2000 1993 2003 2003 2003 1994 2003 2003 2003 2003 2004 2003 2003 1996 2003 2003 2003 2003 2003 2003 2003 2003 2003 2003 2003 2003 2003 LIFE ON WHICH LATEST INCOME STATEMENT IS COMPUTED 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES April 30, 2004 Schedule III REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands) RETAIL – continued LAND BUILDING & IMPROVEMENTS TOTAL ACCUMULATED DEPRECIATION DATE ACQUIRED LIFE ON WHICH LATEST INCOME STATEMENT IS COMPUTED Former Tom Thumb – Mora, MN . . $ Former Tom Thumb – Oakdale, MN . . . . . . . . . . . . . . . . Former Tom Thumb – Paynesville, MN . . . . . . . . . . . . . . Former Tom Thumb – Pine City, MN . . . . . . . . . . . . . . . . . . . . Former Tom Thumb – Shoreview, MN . . . . . . . . . . . . . . . Former Tom Thumb – Winsted, MN . . . . . . . . . . . . . . . . Tool Crib – Duluth, MN . . . . . . . . . West Lake Center – Forest 55 351 31 83 63 35 130 Lake, MN . . . . . . . . . . . . . . . . . . . 2,397 West Village Center – $ 245 $ 388 334 357 267 376 1,886 5,700 Chanhassen, MN . . . . . . . . . . . . . 5,035 15,739 Westgate Shopping Center – St. Cloud, MN . . . . . . . . . . . . . . . 1,232 6,568 300 739 365 440 330 411 2,016 8,097 20,774 7,800 $ 7 12 10 11 8 11 4 168 475 41 TOTAL RETAIL . . . . . . . . . . . . . . . . $ 22,697 $100,414 $ 123,111 $ 8,343 MEDICAL Abbott Northwest – Sartell, MN . . . $ Airport Medical – Bloomington, MN . . . . . . . . . . . . Denfeld Clinic – Duluth, MN . . . . . Edgewood Vista – Belgrade, MT . . Edgewood Vista – Columbus, NE . . Edgewood Vista – Duluth, MN . . . . Edgewood Vista – East Grand Forks, MN . . . . . . . . . . . . . . . . . . Edgewood Vista – Fremont, NE . . . Edgewood Vista – Grand Island, NE . . . . . . . . . . . . . . . . . . . Edgewood Vista – Hastings, NE . . . Edgewood Vista – Kalispell, MT . . Edgewood Vista – Minot, ND . . . . . Edgewood Vista – Missoula, MT . . Edgewood Vista – Omaha, NE . . . . Edgewood Vista – Virginia, MN . . . Edgewood Vista – Phase II – Virginia, MN . . . . . . . . . . . . . . . . Fresenius – Duluth, MN . . . . . . . . . Gateway Clinic – Sandstone, MN . . Healtheast Med. Center –Woodbury & St. Johns, MN . . . . . . . . . . . . . Mariner Clinic – Superior, WI . . . . . Park Dental – Brooklyn, MN . . . . . Pavilion II – Duluth, MN . . . . . . . . Paul Larson Clinic – Edina, MN . . . Southdale Expansion – Edina, MN . 0 $ 13,866 $ 13,866 $ 552 0 541 14 14 390 25 56 14 14 70 260 109 89 246 0 50 71 3,238 397 185 2,735 351 0 4,678 2,796 439 441 11,319 1,405 496 441 558 518 6,011 854 553 6,824 5,111 1,753 1,829 18,363 3,704 2,767 16,782 662 12,733 4,678 3,337 453 455 11,709 1,430 552 455 572 588 6,271 963 642 7,070 5,111 1,803 1,900 21,601 4,101 2,952 19,517 1,013 12,733 190 5 52 52 740 191 42 52 45 41 979 160 43 348 27 2 2 1,817 5 112 22 26 200 F-49 2003 2003 2003 2003 2003 2003 2004 2003 2003 2004 2003 2002 2002 2004 2000 2000 2000 1997 2001 2000 2001 2001 1997 1997 2001 2002 2004 2004 2004 2001 2004 2002 2004 2002 2003 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES April 30, 2004 Schedule III REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands) MEDICAL – continued Southdale Medical Center – LAND BUILDING & IMPROVEMENTS TOTAL ACCUMULATED DEPRECIATION DATE ACQUIRED Edina, MN . . . . . . . . . . . . . . . . . . $ 3,500 0 334 177 UH Medical – St. Paul, MN . . . . . . Wedgwood – Sweetwater, GA . . . . . Wells Clinic – Hibbing, MN . . . . . . TOTAL MEDICAL . . . . . . . . . . . . . $ 12,880 $ 29,424 7,605 3,638 2,726 $158,296 $ 32,924 7,605 3,972 2,903 $ 171,176 $ 2,456 314 654 3 $ 9,132 $ UNDEVELOPED LAND Andover, MN . . . . . . . . . . . . . . . . . . $ Centerville, MN . . . . . . . . . . . . . . . . Cottonwood Lake IV – Bismarck, ND . . . . . . . . . . . . . . . . Inver Grove, MN . . . . . . . . . . . . . . . Kalispell, MT . . . . . . . . . . . . . . . . . . Libby, MT . . . . . . . . . . . . . . . . . . . . . Long Prairie, MN . . . . . . . . . . . . . . . River Falls, WI . . . . . . . . . . . . . . . . . 150 100 264 560 1,400 150 150 200 TOTAL UNDEVELOPED LAND . . $ 2,974 $ 0 2 0 3 12 1 0 2 20 $ $ 150 102 264 563 1,412 151 150 202 2,994 $ $ 0 0 0 0 0 0 0 0 0 TOTAL . . . . . . . . . . . . . . . . . . . . . . . $110,113 $993,315 $1,103,428 (1) $100,250 2001 2002 1996 2004 2003 1999 2003 2003 2003 2003 2003 LIFE ON WHICH LATEST INCOME STATEMENT IS COMPUTED 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years 40 years (1) The aggregate cost of land, building and improvements for federal income tax purposes is approximately $925 million. F-50 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES April 30, 2004 Schedule III REAL ESTATE AND ACCUMULATED DEPRECIATION Reconciliations of total real estate carrying value for the three years ended April 30, 2004, 2003, and 2002 are as follows: (in thousands) 2004 2003 2002 Balance at beginning of year Additions during year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 919,781 $740,319 $591,637 Commercial Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Undeveloped Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Improvements and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129,100 41,200 0 17,384 $1,107,465 170,509 3,938 2,760 14,574 $932,100 119,329 23,951 0 8,708 $743,625 Deductions during year Cost of Real Estate Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reclassiﬁcation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impairment charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at close of year (3,975) 0 (62) $1,103,428 (11,908) (411) 0 $919,781 (3,306) 0 0 $740,319 Reconciliations of accumulated depreciation/amortization for the three years ended April 30, 2004, 2003, and 2002, are as follows: Balance at beginning of year Additions during year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75,639 $58,926 $44,093 Provisions for depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,088 19,606 15,515 Deductions during year Accumulated depreciation/amortization on real estate sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at close of year (477) $100,250 (2,893) $75,639 (682) $58,926 (in thousands) 2004 2003 2002 F-51 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES April 30, 2004 Schedule IV INVESTMENTS IN MORTGAGE LOANS ON REAL ESTATE (in thousands) Interest Rate Final Maturity Date Payment Terms Prior Liens Face Amt. of Mortgages Carrying Amt. of Mortgages First Mortgage Martin Property — Pioneer Seed Nebraska Orthopaedic . . . . . . . . . 6.00% 05/01/09 Monthly/Balloon 4.75% 09/30/04 Monthly/Balloon — — Junior Mortgage C. Grueber — Cottage Grove . . . 7.50% 10/04/07 Monthly/Balloon — Less: Unearned Discounts . . . . . . . . . . . Deferred Gain from Property Dispositions . . . . . . . . . . . . . . . Allowance for Loan Losses . . . . . $ 475 4,249 $4,724 $ 200 $4,924 $ 475 4,249 $4,724 $ 194 $4,918 $ 0 0 (25) $4,893 Prin. Amt of Loans Subject to Delinquent Prin. or Int. — — — MORTGAGE LOANS RECEIVABLE, BEGINNING OF YEAR . . . . . New participations in and advances on mortgage loans . . . . . . . . . . . . Collections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transferred to other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . MORTGAGE LOANS RECEIVABLE, END OF YEAR . . . . . . . . . . . . . . 2004 $ 1,183 7,100 $ 8,283 (3,232) (158) $ 4,893 (in thousands) 2003 $ 3,953 1,024 $ 4,977 (3,794) 0 $ 1,183 2002 $1,037 3,200 $4,237 (284) 0 $3,953 F-52 Certiﬁcations Exhibit 31.1 I, Thomas A. Wentz, Sr., certify that: 1. I have reviewed this Annual Report on Form 10-K of Investors Real Estate Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the ﬁnancial statements, and other ﬁnancial information included in this report, fairly present in all material respects the ﬁnancial condition, results of operations and cash ﬂows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant’s other certifying ofﬁcer and I are responsible for establishing and maintaining disclosure controls and procedures (as deﬁned in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant’s internal control over ﬁnancial reporting that occurred during the registrant’s most recent ﬁscal quarter (the registrant’s fourth ﬁscal quarter) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over ﬁnancial reporting; and 5. The registrant’s other certifying ofﬁcer and I have disclosed, based on our most recent evaluation of internal control over ﬁnancial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): a) all signiﬁcant deﬁciencies and material weaknesses in the design or operation of internal controls over ﬁnancial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report ﬁnancial information; and b) any fraud, whether or not material, that involves management or other employees who have a signiﬁcant role in the registrant’s internal control over ﬁnancial reporting. Date: July 12, 2004 By: /s/ Thomas A. Wentz, Sr. Thomas A. Wentz, Sr., President & CEO Exhibit 31.2 I, Diane K. Bryantt, certify that: 1. I have reviewed this Annual Report on Form 10-K of Investors Real Estate Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the ﬁnancial statements, and other ﬁnancial information included in this report, fairly present in all material respects the ﬁnancial condition, results of operations and cash ﬂows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant’s other certifying ofﬁcer and I are responsible for establishing and maintaining disclosure controls and procedures (as deﬁned in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant’s internal control over ﬁnancial reporting that occurred during the registrant’s most recent ﬁscal quarter (the registrant’s fourth ﬁscal quarter) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over ﬁnancial reporting; and 5. The registrant’s other certifying ofﬁcer and I have disclosed, based on our most recent evaluation of internal control over ﬁnancial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): a) all signiﬁcant deﬁciencies and material weaknesses in the design or operation of internal controls over ﬁnancial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report ﬁnancial information; and b) any fraud, whether or not material, that involves management or other employees who have a signiﬁcant role in the registrant’s internal control over ﬁnancial reporting. Date: July 12, 2004 By: /s/ Diane K. Bryantt Diane K. Bryantt, Senior Vice President & CFO 908007ADP_CVR_R3 7/30/2004 3:08 PM Page 2 SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected financial data as of and for each of the fiscal years ended April 30, 2000 through 2004. The table illustrates the significant growth in revenue and real estate investment IRET experienced over the period reported. Most of this growth was attributable to our addition of properties through acquisitions. These historical results are not necessarily indicative of the results to be expected in the future. This information is only a summary, and you should refer to our Consolidated Financial Statements and notes thereto, and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K for additional information. Years Ended April 30, 2004 2003 2002 2001 2000 Consolidated Income Statement Data Revenue Income before Gain/Loss on $ 140,505 $ 118,765 Properties and Minority Interest $ 12,253 $ 15,699 $ $ 90,570 14,108 $ $ 75,767 10,188 $ $ 55,445 8,549 (in thousands, except per share data) Gain on Repossession/Sale of Properties Minority Interest Portion of 662 1,595 547 602 1,754 Operating Partnership Income (2,744) (3,640) (3,675) (2,095) (1,495) Net Income* $ 9,440 $ 12,248 $ 10,600 $ 8,694 $ 8,808 Consolidated Balance Sheet Data Total Real Estate Investments $ 1,008,071 $ 845,325 $ 685,347 $ 548,580 $ 418,216 Total Assets Mortgages Payable Shareholders’ Equity $ 1,076,317 $ 885,681 $ 730,209 $ 570,322 $ 432,978 $ 633,124 $ 539,397 $ 459,569 $ 368,957 $ 265,057 $ 278,629 $ 214,761 $ 145,578 $ 118,945 $ 109,921 Consolidated Per Common Share Data (basic and diluted) Net Income Distributions Funds From Operations** $ $ $ .24 .64 36,638 $ $ $ .38 .63 34,178 $ $ $ .42 .59 29,143 $ $ $ .38 .55 22,440 $ $ $ .42 .51 18,328 * Includes both continuing operations and discontinued operations (real estate that we sold) for the indicated fiscal years. ** For the definition of Funds from Operations and a reconciliation of this measure to measures under generally accepted accounting principles, you should refer to the section entitled “Funds from Operations” within the section entitled “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” in our Annual Report on Form 10-K. REVENUE in millions of dollars FUNDS FROM OPERATIONS in millions of dollars DISTRIBUTIONS per share 140.5 118.8 36.6 34.2 29.1 .63 .64 .59 .55 .51 90.6 75.8 55.4 22.4 18.3 TOTAL ASSETS in millions of dollars 1,076.3 885.7 730.2 570.3 433.0 00 01 02 03 04 00 01 02 03 04 00 01 02 03 04 00 01 02 03 04 TRUSTEES John F. Decker Senior Vice President D.A. Davidson & Co. (investment banking firm) Daniel L. Feist (2) (6) (8) President Feist Construction & Realty (construction and real estate development company) Steven B. Hoyt Chief Executive Officer Hoyt Properties, Inc. (property management company) Charles Wm. James Senior Vice President Investors Real Estate Trust Patrick G. Jones (4) (6) (8) Private Investor Jeffrey L. Miller (1) (4) (5) (7) President M&S Concessions, Inc. (food service and facility management company) Timothy P. Mihalick Senior Vice President & Chief Operating Officer Investors Real Estate Trust Stephen L. Stenehjem (3) (6) (8) President and Chief Executive Officer Watford City BancShares, Inc. (bank holding company) Thomas A. Wentz, Jr. Senior Vice President Investors Real Estate Trust EXECUTIVE OFFICERS Thomas A. Wentz, Sr. President & Chief Executive Officer Timothy P. Mihalick Senior Vice President & Chief Operating Officer Diane K. Bryantt Senior Vice President & Chief Financial Officer Charles Wm. James Senior Vice President Thomas A. Wentz, Jr. Senior Vice President Michael A. Bosh General Counsel & Corporate Secretary (1) Chairman, Board of Trustees (2) Vice Chairman, Board of Trustees (3) Chairman, Audit Committee (4) Member, Audit Committee (5) Chairman, Compensation Committee (6) Member, Compensation Committee (7) Chairman, Nominating Committee (8) Member, Nominating Committee SHAREHOLDER INFORMATION ANNUAL MEETING The Annual Meeting of Shareholders of the Company will be held at 7:00 p.m. on September 21, 2004, at the International Inn, 1505 North Broadway, Minot, North Dakota. SHARES LISTED The Company’s common shares of beneficial interest are listed on the Nasdaq Stock Market under the symbol “IRETS.” The Company’s series A cumulative redeemable preferred shares of beneficial interest are listed on the Nasdaq Stock Market under the symbol “IRETP.” INDEPENDENT ACCOUNTANTS Deloitte & Touche LLP Minneapolis, Minnesota INTERNAL AUDITORS Brady, Martz & Associates. P.C. Minot, North Dakota LEGAL COUNSEL Pringle & Herigstad, P.C. Minot, North Dakota Gray, Plant, Mooty, Mooty & Bennett, P.A. Minneapolis, Minnesota DISTRIBUTION REINVESTMENT PLAN The Company has a distribution reinvestment plan for current and future shareholders. Interested participants can obtain more information by contacting the Company at 701-837-4738 or info@iret.com. FORM 10-K A copy of the annual report on Form 10-K for the Company’s fiscal year ended April 30, 2004, as filed with the Securities and Exchange Commission, is available, without charge, by request to IRET, Investor Relations, PO Box 1988, Minot, ND 58702-1988, by visiting the Investor Relations section of the Company’s website at www.iret.com, or by accessing the EDGAR database on the Securities and Exchange Commission’s website at www.sec.gov. TRANSFER AGENT Questions about distribution payments, shareholder accounts, replacement of lost share certificates, address or name changes should be directed to: Transfer Agent, Investors Real Estate Trust, PO Box 1988, Minot, ND 58702-1988. COMPANY HEADQUARTERS Investors Real Estate Trust 12 South Main Street PO Box 1988 Minot, ND 58702-1988 Telephone: (701) 837-4738 Fax: (701) 838-7785 info@iret.com www.iret.com 908007ADP_CVR_R3 7/30/2004 3:08 PM Page 1 I N V E S T O R S R E A L E S T A T E T R U S T 2 0 0 4 A N N U A L R E P O R T IRET INVESTORS REAL ESTATE TRUST 2004 Annual Report Creating shareholder value with a diversified real estate portfolio Multi-Family Residential Office Retail Medical Industrial

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