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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KT
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from May 1, 2018 to December 31, 2018
Commission File Number 001-35624
INVESTORS REAL ESTATE TRUST
(Exact name of Registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
North Dakota
45-0311232
1400 31st Avenue SW, Suite 60
Post Office Box 1988
Minot, ND 58702-1988
(Address of principal executive offices) (Zip code)
701-837-4738
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Shares of Beneficial Interest (no par value) - New York Stock Exchange
6.625% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest (no par value) -
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes
No
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
No
Indicate by checkmark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter
period that the Registrant was required to submit and post such files).
Yes
No
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.
Yes
No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the
Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No
The aggregate market value of the Registrant’s outstanding common shares of beneficial interest held by non-affiliates of the Registrant as of
October 31, 2018 was 645,456,465 based on the last reported sale price on the New York Stock Exchange on October 31, 2018. For purposes of this
calculation, the Registrant has assumed that its trustees and executive officers are affiliates.
The number of common shares of beneficial interest outstanding as of February 20, 2019, was 11,768,248.
References in this Transition Report on Form 10-KT 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 2019 Annual Meeting of Shareholders will be
incorporated by reference into Part III (Items 10, 11, 12, 13 and 14) hereof.
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F-2
INVESTORS REAL ESTATE TRUST
INDEX
Business
PART I
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Trustees, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Trustee Independence
Principal Accountant Fees and Services
Item 15. Exhibits, Financial Statement Schedules
Exhibit Index
Signatures
Reports of Independent Registered Public Accounting Firm and Financial Statements
1
Special Note Regarding Forward-Looking Statements
Certain statements included in this Transition Report on Form 10-KT 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 plans and objectives, including our future financial condition, anticipated
capital expenditures, anticipated distributions, and 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. Forward-looking statements are typically identified by the use of terms such as “expects,” “anticipates,”
“intends,” “plans,” “believes,” “seeks,” “estimates,” and variations of those words and similar expressions. These forward-
looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results,
performance, or achievements to be materially different from the results of operations, financial conditions, or plans expressed
or implied by the forward-looking statements. Although we believe the expectations reflected in our forward-looking
statements are based upon reasonable assumptions, we can give no assurance that our expectations will be achieved. Any
statements contained herein that are not statements of historical fact should be deemed forward-looking statements. As a result,
reliance should not be placed on these forward-looking statements, as these statements are subject to known and unknown
risks, uncertainties, and other factors beyond our control and could differ materially from our actual results and performance.
The following factors, among others, could cause our future results to differ materially from those expressed in the forward-
looking statements:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
economic conditions in the markets where we own apartment communities or markets in which we may invest in the
future;
rental conditions in our markets, including occupancy levels and rental rates, our potential inability to renew residents
or obtain new residents upon expiration of existing leases, changes in tax and housing laws, or other factors;
adverse changes in real estate markets, including future demand for apartment homes in our significant markets, barriers
of entry into new markets, limitations on our ability to increase rental rates, our ability to identify and consummate
acquisitions and dispositions on favorable terms, our ability to reinvest sales proceeds successfully, and our ability to
accommodate any significant decline in the market value of real estate serving as collateral for our mortgage obligations;
inability to succeed in any new markets we may enter;
failure of new acquisitions to achieve anticipated results or be efficiently integrated;
inability to complete lease-up of our projects on schedule and on budget;
inability to sell certain properties on terms that are acceptable;
failure to reinvest proceeds from sales of properties into tax-deferred exchanges, which could necessitate special dividend
and tax protection payments;
inability to fund capital expenditures out of cash flow;
inability to pay, or need to reduce, dividends on our common shares;
financing risks, including our potential inability to obtain debt or equity financing on favorable terms, or at all;
level and volatility of interest or capitalization rates or capital market conditions;
changes in operating costs, including real estate taxes, utilities, and insurance costs;
the availability and cost of casualty insurance for losses;
inability to continue to satisfy complex rules in order to maintain our status as a REIT for federal income tax purposes,
inability of the Operating Partnership to satisfy the rules to maintain its status as a partnership for federal income tax
purposes, and the risk of changes in laws affecting REITs;
inability to attract and retain qualified personnel;
cyber liability or potential liability for breaches of our privacy or information security systems;
inability to comply with environmental laws and regulations; and
other risks identified in this Report, in other SEC reports, or in other documents that we publicly disseminate.
Readers should carefully review our financial statements and the notes thereto, as well as the section entitled “Risk Factors” in
Item 1A of this Transition Report on Form 10-KT and the other documents we file from time to time with the Securities and
Exchange Commission (“SEC”).
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
2
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 Transition Report on Form 10-KT should not be construed as exhaustive.
Item 1. Business
PART I
OVERVIEW
Investors Real Estate Trust (“we,” “us,” “IRET” or the “Company”) is a real estate investment trust (“REIT”) organized under
the laws of North Dakota, that is focused on the ownership, management, acquisition, development, and redevelopment of
apartment communities. Over the past several years, we have extensively repositioned our portfolio from a diversified, multi-
segment collection of properties into a single segment concentrated on apartment communities. Our current emphasis is on
making operational enhancements that will improve our residents' experience, redeveloping some of our existing apartment
communities to meet current market demands, and acquiring new apartment communities in the Minneapolis/St. Paul and
Denver metropolitan areas.
We focus on investing in markets characterized by stable and growing economic conditions, strong employment, and an
attractive quality of life that we believe, in combination, lead to higher demand for our apartment homes and retention of our
residents. As of December 31, 2018, we owned interests in 87 multifamily communities, containing 13,702 apartment homes
and having a total real estate investment amount, net of accumulated depreciation, of $1.3 billion. Our corporate headquarters is
located in Minot, North Dakota. We also have a corporate office in Minneapolis, Minnesota, and additional property
management offices located in the states where we own apartment communities.
On September 20, 2018, our Board of Trustees approved a change in our fiscal year-end from April 30 to December 31,
effective as of January 1, 2019. This transition report on Form 10-KT is for the eight-month period ended December 31, 2018,
in accordance with SEC rules and regulations, and all subsequent fiscal years, beginning in 2019, will be from January 1 to
December 31.
On December 14, 2018, the Board approved a reverse stock split of our outstanding common shares and Units, no par value per
share, at a ratio of 1-for-10. The reverse stock split was effective as of the close of trading on December 27, 2018, with trading
commencing on a split-adjusted basis on December 28, 2018. The number of common shares and Operating Partnership
limited partnership units ("Units" or "OP Units") was reduced from 119.4 million to 11.9 million and 13.7 million to 1.4
million, respectively. We have retroactively restated all shares and Units and per share and Unit data for all periods presented.
STRUCTURE
We were organized under the laws of North Dakota on July 31, 1970, and have operated as a REIT under Sections 856-858 of
the Internal Revenue Code since our formation. On February 1, 1997, we were restructured as an Umbrella Partnership Real
Estate Investment Trust, or UPREIT, and we conduct our daily business operations primarily through our operating partnership,
IRET Properties, a North Dakota Limited Partnership (“IRET Properties” or the “Operating Partnership”). 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 liabilities were contributed to IRET Properties, through IRET, Inc., in exchange for
the sole general partnership interest in IRET Properties. IRET Properties holds substantially all of the assets of the Company.
IRET Properties conducts the operations of the business and is structured as a partnership with no publicly traded equity.
Contributions of properties to the Company can be structured as tax-deferred transactions through the issuance of OP Units,
which is one of the reasons the Company is structured in this manner. As of December 31, 2018, IRET, Inc. owned an 89.7%
interest in IRET Properties. The remaining interest in IRET Properties is held by individual limited partners.
BUSINESS STRATEGIES
Our business is focused on our mission - to provide a great home - for our residents, our employees and our investors. We fulfill
this mission throughout the Midwest by providing renters well-located options that range from workforce to lifestyle housing.
While fulfilling our mission, we are seeking consistent earnings growth through exceptional operations, disciplined capital
allocation, and market knowledge and efficiencies. Our operations and investment strategies are the foundation for fulfilling
our mission.
3
Operations Strategy
We manage our apartment communities with a focus on providing an exceptional resident experience and maximizing our
property financial results. Our initiatives to optimize our operations include:
•
Providing excellent customer service to enhance resident satisfaction and retention;
• Employing new technologies that make our communities more efficient and more accessible to residents;
• Optimizing revenues;
• Controlling operating costs; and
• Unlocking value within the portfolio through redevelopment and enhancement of existing assets.
Investment Strategy
Our business objective under our current strategic plan is to employ an investment strategy that includes the following
elements:
•
•
Investing in income-producing apartment communities that grow distributable cash flow and are located in key
geographic markets with populations ranking in the top 25 U.S. metropolitan statistical areas, including expansion in
the Minneapolis and Denver markets;
Selecting markets with favorable market characteristics, including occupancy rates, supply pipeline, rent growth,
income growth, and employment forecasts;
• Leveraging our Midwest-centered portfolio to take advantage of our heightened market knowledge and regional
experience;
• Building a strong market presence in new markets but limiting over-exposure to any given market; and
• Deemphasizing our exposure to tertiary markets.
FINANCING AND DISTRIBUTIONS
To fund our investment and capital activities, we rely on a combination of issuance of senior securities, borrowed funds, and
offering securities in exchange for property. We regularly issue dividends to our shareholders. Each of these is described below.
Issuance of Senior Securities
On October 2, 2017, we issued 4,118,460 shares of 6.625% Series C Cumulative Redeemable Preferred Shares of Beneficial
Interest (the "Series C preferred shares"). All of our outstanding shares of 7.95% Series B preferred shares were redeemed on
October 30, 2017. Depending on future interest rates and market conditions, we may issue additional preferred shares or other
senior securities which would have dividend and liquidation preference over our common shares.
Bank Financing and Other Debt
As of December 31, 2018, we owned 87 apartment communities, of which 51 properties served as collateral for mortgage
loans. The majority of these mortgages payable were non-recourse to us other than for standard carve-out obligations. Our
primary unsecured credit facility is a revolving, multi-bank line of credit, with borrowing capacity based on the value of
properties contained in the unencumbered asset pool. This credit facility matures on August 31, 2022, with one 12-month
option to extend the maturity date at our election.
During the transition period ended December 31, 2018, we amended our primary unsecured credit facility. We extended the
maturity date on our existing $70.0 million unsecured term loan, which now matures on January 15, 2024. We also added a
new $75.0 million, seven-year term loan which matures on August 31, 2025.
We also have a $6.0 million operating line of credit, which is designed to enhance treasury management activities and more
effectively manage cash balances. As of December 31, 2018, our ratio of total indebtedness to total gross real estate
investments was 39.5%.
4
Issuance of Securities in Exchange for Property
Our organizational structure allows us to issue shares and limited partnership units (or OP Units) of IRET Properties in
exchange for real estate. The OP Units generally are redeemable, at the option of the holder, for cash, or, at our option, common
shares on a one-for-one basis. Generally, limited partnership units receive the same per unit cash distributions as the per share
dividends paid on common shares.
Our Declaration of Trust, as amended (our “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. For the transition period ended December 31, 2018 and the three most recent fiscal years ended April 30, we
have issued the following limited partnership units of IRET Properties in exchange for properties:
Transition Period Ended
Years Ended
(in thousands)
Limited partnership units issued
Value at issuance, net of issue costs
$
Distributions to Shareholders
December 31, 2018
—
— $
April 30, 2018 April 30, 2017 April 30, 2016
2,559
18,226
—
— $
—
— $
Distributions to shareholders and holders of limited partnership units. The Internal Revenue Code requires a REIT to distribute
90% of its net taxable income, excluding net capital gains, to its shareholders, and a separate requirement to distribute net
capital gains or pay a corporate level tax in lieu thereof. We have distributed, and intend to continue to distribute, enough of our
taxable income to satisfy these requirements. Our general practice has been to target cash distributions to our common
shareholders and the holders of limited partnership units of approximately 65% to 90% of our funds from operations and to use
the remaining funds for capital improvements or the reduction of debt. Distributions to our common shareholders and
unitholders in the eight months ended December 31, 2018 and in the fiscal year 2018 totaled approximately 82% and 104%,
respectively, on a per share and unit basis of our funds from operations.
For additional information on our sources of liquidity and funds from operations, see Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources."
As of December 31, 2018, we had 435 employees, of which 396 were full-time and 39 were part-time.
ENVIRONMENTAL MATTERS
EMPLOYEES
See the discussion under the caption "Risks Related to Our Properties and Operations -- We may be responsible for potential
liabilities under environmental laws" in Item 1A, Risk Factors, for information concerning the potential effects of
environmental matters on our business, which discussion under "We may be responsible for potential liabilities under
environmental laws" is incorporated by reference into this Item 1.
INSURANCE
We purchase general liability and property insurance coverage for each of our properties. We also purchase limited terrorism,
environmental, and flood insurance as well as other types of insurance coverage related to a variety of risks and exposures.
There are certain types of losses that may not be covered or could exceed coverage limits. Our insurance policies are also
subject to deductibles and coverage limits. Although we believe that we have adequate insurance coverage on our properties,
we may incur losses, which could be material, due to uninsured risks, deductibles and/or losses in excess of coverage limits,
any of which could have a material adverse effect on our business.
5
COMPETITION
There are numerous housing alternatives that compete with our apartment communities in attracting residents. Our apartment
communities compete directly with other apartment communities, condominiums, and single-family homes in the areas in
which our properties are located. If the demand for our apartment communities is reduced or competitors develop or acquire
competing housing, rental and occupancy rates may decrease, which could have a material adverse effect on our business.
Additionally, we compete with other real estate investors, including other REITs, businesses, and other entities to acquire
properties. This competition affects our ability to acquire properties we want to add to our portfolio and the price we pay for
acquisitions.
Website and Available Information
Our internet address is www.iretapartments.com. We make available, free of charge, through the “SEC filings” tab under the
Investors section of our website, our Transition Report on Form 10-KT, annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments to such reports, and proxy statements for our Annual Meetings of
Shareholders, filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after
such reports are filed with or furnished to the SEC. We also file press releases, investor presentations, and certain supplemental
information on our website. Current copies of our Code of Conduct; Code of Ethics for Senior Financial Officers; and Charters
for the Audit, Compensation, Executive, and Nominating and Governance Committees of our Board of Trustees are also
available on our website under the “Corporate Governance” tab under the Investors section of our website. Copies of these
documents are also available free of charge to shareholders upon request addressed to the Secretary at Investors Real Estate
Trust, P.O. Box 1988, Minot, North Dakota 58702-1988. Information on our website does not constitute part of this Transition
Report on Form 10-KT.
Item 1A. Risk Factors
Risks Related to Our Properties and Operations
We face certain risks related to our ownership of apartment communities and operation of our business. Set forth below are the
risks that we believe are material to IRET’s shareholders and unitholders. You should carefully consider the following risks in
evaluating our properties, business, and operations. Our business, financial condition, cash flows, results of operations, value
of our real estate assets and/or the value of an investment in our stock or units are subject to various risks and uncertainties,
including those set forth below, any of which could cause our actual operating results to vary materially from our recent results
or from our anticipated future results.
Our financial performance is subject to risks associated with the real estate industry and ownership of apartment
communities. Our financial performance risks include, but are not limited to, the following:
• downturns in national, regional, and local economic conditions (particularly increases in unemployment);
• competition from other apartment communities;
• local real estate market conditions, including an oversupply of apartments or other housing, or a reduction in demand for
apartment communities;
• the attractiveness of our apartment communities to residents as well as residents' perceptions of the safety, convenience,
and attractiveness of our apartment communities and the areas in which they are located;
• changes in interest rates and availability of attractive financing that might make other housing options, like home
ownership, more attractive;
• our ability to collect rents from our residents;
• vacancies, changes in rental rates, and the periodic need to repair, renovate, and redevelop our apartment communities;
• increases in operating costs, including real estate taxes, state and local taxes, insurance expenses, utilities, and security
costs, many of which are not reduced significantly when circumstances cause a reduction in revenues from a property;
• increases in compensation costs due to the tight labor market in many of the markets in which we operate;
• our ability to provide adequate maintenance and insurance on our apartment communities; and
• changes in tax laws and other government regulations that could affect the value of REITs generally or our business in
particular.
6
Our property acquisition activities may not produce the cash flows expected and could subject us to various risks that could
adversely affect our operating results. We have acquired and intend to continue to pursue the acquisition of apartment communities,
but the success of our acquisition activities is subject to numerous risks, including the following:
• acquisition agreements are subject to customary closing conditions, including completion of due diligence investigations,
and we may be unable to complete an acquisition after making a non-refundable deposit and incurring other acquisition-
related costs;
• expected occupancy, rental rates, and operating expenses of acquired apartment communities may differ from the actual
results, or from those of our existing apartment communities;
• we may be unable to obtain financing for acquisitions on favorable terms, or at all;
• competition for these properties could cause us to pay higher prices for new properties or prevent us from purchasing a
desired property at all;
• we may be subject to unknown liabilities from acquired properties, with either no recourse or limited recourse against
prior owners or other third parties with respect to these unknown liabilities; and
• we may be unable to quickly and efficiently integrate new acquisitions into our existing operations.
We may be unable to acquire or develop properties and expand our operations into new or existing markets successfully. We
intend to explore acquisitions or developments of properties in new and existing geographic markets. Acquiring or developing
new properties and expanding into new markets introduces several risks, including but not limited to the following:
• we may not be successful in identifying suitable properties or other assets that meet our acquisition or development
criteria or in consummating acquisitions or developments on satisfactory terms, or at all;
• we may be unable to maintain consistent standards, controls, policies, and procedures, or realize the anticipated
benefits of the acquisitions within the anticipated time frame, or at all;
•
•
acquisitions and divestitures could divert our attention from our existing properties and could cause us to lose key
employees or be unable to attract highly qualified new employees;
unfamiliarity with the dynamics and prevailing market conditions or local government or permitting procedures of any
new geographic markets could adversely affect our ability to successfully expand into or operate within those markets
or cause us to become more dependent on third parties in new markets due to our inability to directly and efficiently
manage and otherwise monitor new properties in new markets;
• we may make assumptions regarding the expected future performance of acquired properties, including expected
occupancy, rental rates, and cash flows, that prove to be inaccurate; and
• we may improperly estimate the costs of repositioning or redeveloping an acquired property.
We also may abandon opportunities to enter new markets that we have begun to explore for any reason and may, as a result, fail
to recover expenses already incurred.
We are dependent on a concentration of our investments in a single asset class, making our results of operations more vulnerable
to a downturn or slowdown in the sector or other economic factors. Since April 30, 2018, substantially all of our investments
have been concentrated in the multifamily sector. As a result, we will be subject to risks inherent in investments in a single type
of property. A downtown or slowdown in the demand for multifamily housing may have more pronounced effects on our business
and results of operations or on the value of our assets than if we had continued to be more diversified in our investments into more
than one asset class.
Our operations are concentrated in the Midwest region and a portion of the West region of the United States; we are subject
to general economic conditions in the regions in which we operate. Our overall operations are concentrated in the Midwest
region and portions of the West region of the United States. Our performance could be adversely affected by economic conditions
in, and other factors relating to, these geographic areas, including supply and demand for apartments in these areas, zoning and
other regulatory conditions, and competition from other communities and alternative forms of housing. In particular, our
performance is influenced by job growth and unemployment rates in the areas in which we operate. To the extent the economic
conditions, job growth and unemployment in any of these markets deteriorate or any of these areas experience natural disasters,
the value of our portfolio, our results of operations, and our ability to make payments on our debt and to make distributions could
be adversely affected.
7
Competition may negatively impact our earnings. We compete with many kinds of institutions, including other REITs, private
partnerships, individuals, pension funds, and banks in attracting residents and finding investment opportunities. Many of these
institutions are active in the markets in which we invest and have greater financial and other resources than we do. Our apartment
communities compete directly with other multifamily apartment communities, single-family homes, condominiums, and other
short-term rentals.
Short-term leases could expose us to the effects of declining market rents. Our apartment leases are generally for a term of
18 months or less. Because these leases generally allow residents to leave at the expiration of the lease term without penalty,
our rental revenues are impacted by declines in market rents more quickly than if our leases were for longer terms.
Because real estate investments are relatively illiquid, and various factors limit our ability to dispose of assets, we may not be
able to sell properties when appropriate. We may have limited ability to change our portfolio of properties quickly in response
to our strategic plan and changes in economic or other conditions, and the prohibitions under the federal income tax laws on REITs
holding property for sale and related regulations may affect our ability to sell properties. Under certain circumstances, the Code
imposes penalties on a REIT that sells property held for less than two years and limits the number of properties it can sell in a
given year. Our ability to dispose of assets also may be limited by constraints on our ability to use disposition proceeds to make
acquisitions on financially attractive terms. More specifically, we are required to distribute or pay tax on all capital gains generated
from the sale of assets. Some of our properties were acquired using limited partnership units of IRET Properties, our operating
partnership, and are subject to certain agreements that restrict our ability to sell these properties in transactions that would create
current taxable income to the former owners. As a result, we are motivated to structure the sale of these assets as tax-free exchanges,
the requirements of which are technical and may be difficult to achieve.
Inability to manage growth effectively may adversely affect our operating results. We have experienced significant growth at
various times in the past, principally through the acquisition of additional real estate properties. Effective management of rapid
growth presents challenges, including:
• the need to expand our management team and staff;
• the need to enhance internal operating systems and controls; and
• the ability to consistently achieve targeted returns on individual properties.
We may not be able to maintain similar rates of growth in the future or manage our growth effectively.
Adverse changes in taxes and other laws may affect our liabilities relating to our properties and operations. Increases in real
estate taxes and service and transfer taxes may adversely affect our cash available for distributions and our ability to pay amounts
due on our debt. Similarly, changes in laws that increase the potential liability for environmental conditions or that affect
development, construction, and safety requirements may result in significant unanticipated costs. Future enactment of rent control
or rent stabilization laws or other laws regulating apartment communities may reduce rental revenues or increase operating costs.
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 real estate industry, and the loss of them would likely have
a material adverse effect on our operations and could adversely impact our relationships with lenders and industry personnel. 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. If we fail to effectively manage a transition to new personnel, or if we fail
to attract and retain qualified and experienced personnel on acceptable terms, it could adversely affect our business.
We may not be able to attract and retain qualified employees. Strong economic growth in recent years has created a tight labor
market in many of the markets in which we operate, and we are dependent on employees at our apartment communities to provide
attractive apartment homes for our residents. The loss of key personnel at these apartment communities, or the inability or cost
of replacing such personnel at such communities, could have an adverse impact on our business and results of operations.
We face risks associated with security breaches through cyber-attacks, cyber intrusions, or otherwise, which could pose a risk
to our systems, networks, and services. We face risks associated with security breaches or disruptions, whether through cyber-
attacks or cyber intrusions over the Internet, malware, computer viruses, attachments to emails, or persons inside our organization.
The risk of a security breach or disruption, particularly through cyber-attacks or cyber intrusion, including by computer hackers,
foreign governments and cyber terrorists, has generally increased as the number, intensity, and sophistication of attempted attacks
and intrusions around the world have increased. In the normal course of business, we and our service providers (including service
providers engaged in providing web hosting, property management, leasing, accounting and/or payroll software/services) collect
and retain certain personal information provided by our residents, employees, and vendors. We also rely extensively on computer
systems to process transactions and manage our business. While we and our service providers employ a variety of data security
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measures to protect confidential information on our systems and periodically review and improve our data security measures, we
cannot provide assurance that we or our service providers will be able to prevent unauthorized access to this personal information,
that our efforts to maintain the security and integrity of the information that we and our service providers collect will be effective,
or that attempted security breaches or disruptions would not be successful or damaging. Even the most well-protected information,
networks, systems, and facilities remain potentially vulnerable because the techniques used in such attempted security breaches
evolve and generally are not recognized until launched against a target. In some cases, these breaches are designed not to be
detected and, in fact, may not be detected. Accordingly, we and our service providers may be unable to anticipate these techniques
or to implement adequate security barriers or other preventative measures, thereby making it impossible to entirely mitigate this
risk. The risk of a breach or security failure, particularly through cyber-attacks or cyber-intrusion, has generally increased due to
the rise in new technologies and the increased sophistication and activities of the perpetrators of attempted attacks and intrusions.
A security breach or other significant disruption involving computer networks and related systems could cause substantial costs
and other negative measures, including litigation, remediation costs, costs to deploy additional protection strategies, compromising
of confidential information, and reputational damage adversely affecting investor confidence.
We may be responsible for potential liabilities under environmental laws. Under various federal, state, and local laws, ordinances
and regulations, we, as a current or previous owner or operator of real estate, may be liable for the costs of removal or remediation
of hazardous or toxic substances in, on, around, or under that property. These laws may impose liability without regard to whether
we knew of, or were responsible for, the presence of the hazardous or toxic substances. The presence of these substances, or the
failure to properly remediate any property containing these substances, may adversely affect our ability to sell or rent the affected
property or to borrow funds using the property as collateral. In arranging for the disposal or treatment of hazardous or toxic
substances, we also may be liable for the costs of removal of, or remediation of, these substances at that disposal or treatment
facility, whether or not we own or operate the facility. 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 at those properties, as well as certain other costs, including governmental fines
and claims for injuries to persons and property. Although we are not aware of any such claims associated with our existing
properties that would have a material adverse effect on our business, potential future costs and damage claims may be substantial
and could exceed any insurance coverage we may have for such events or such coverage may not exist. The presence of such
substances, or the failure to properly remediate any such impacts, may adversely affect our ability to borrow against, develop,
sell, or rent the affected property. Some environmental laws create or allow a government agency to impose a lien on the impacted
property in favor of the government for damages and costs it incurs as a result of responding to hazardous or toxic substances.
Environmental laws also govern the presence, maintenance, and removal of asbestos, and require that owners or operators of
buildings containing asbestos properly manage and maintain the asbestos; notify and train those who may come into contact with
asbestos; and undertake special precautions if asbestos would be disturbed during renovation or demolition of a building. Indoor
air quality issues may also necessitate special investigation and remediation. These air quality issues can result from inadequate
ventilation, chemical contaminants from indoor or outdoor sources, or biological contaminants such as molds, pollen, viruses and
bacteria. Asbestos or air quality remediation programs could be costly, necessitate the temporary relocation of some or all of the
property’s residents, or require rehabilitation of an affected property.
It is generally our policy to obtain a Phase I environmental study on each property that we seek to acquire. A Phase I environmental
study generally includes a visual inspection of the property and the surrounding areas, an examination of current and historical
uses of the property and the surrounding areas, and a review of relevant state and federal documents but does not involve invasive
techniques such as soil and ground water sampling. If the Phase I indicates any possible environmental problems, 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.
Our current or future insurance may not protect us against possible losses. We carry comprehensive liability, fire, extended
coverage, and other insurance with respect to our properties at levels that we believe to be adequate and comparable to coverage
customarily obtained by owners of similar properties. 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, or our 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. We also do not
maintain coverage for certain catastrophic events like hurricanes and earthquakes because the cost of such insurance is deemed
by management to be higher than the risk of loss due to the location of our properties. In most cases, we have to renew our
insurance policies on an annual basis and negotiate acceptable terms for coverage, exposing us to the volatility of the insurance
markets, including the possibility of rate increases. Any material increases in insurance rates or decrease in available coverage in
the future could adversely affect our results of operations.
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Litigation risks could affect our business. As a publicly traded owner, manager, and developer of apartment communities, we
may incur liability based on various conditions at our properties and the buildings thereon. In the past, we have been, and in the
future may become, involved in legal proceedings, including consumer, employment, tort, or commercial litigation, any of which
if decided adversely to us or settled by us and not adequately covered by insurance, could result in liability that could be material
to our results of operations.
Catastrophic weather, natural events, and climate change could adversely affect our business. Some of our apartment
communities are located in areas that may experience catastrophic weather and other natural events from time to time, including
snow or ice storms, flooding, tornadoes, or other severe or inclement weather. These adverse and natural events could cause
damage or losses that may be greater than insured levels. In the event of a loss in excess of insured limits, we could lose all or a
portion of our investment in an affected property as well as additional revenue from that apartment community. We may continue
to be obligated to repay mortgage indebtedness or other obligations related to an affected apartment community.
To the extent that we experience any significant changes in the climate in areas where our apartment communities are located, we
may experience extreme weather conditions and prolonged changes in precipitation and temperature, all of which could result in
physical damage to, and/or a decrease in demand for, our apartment communities located in these areas. If the impact of any such
climate change were to be material, or occur for a lengthy period of time, our business may be adversely affected.
Risks related to properties under development, redevelopment, or newly developed properties may adversely affect our financial
performance. We may be unable to obtain, or may suffer delays in obtaining, necessary zoning, land-use, building, occupancy,
and other required governmental permits and authorizations, which could lead to increased costs or abandonment of projects. We
may not be able to obtain financing on favorable terms, or at all, and we may not be able to complete lease-up of a property on
schedule. The resulting time required for development, redevelopment, and lease-up means that we may have to wait years for
significant cash returns.
Future cash flows may not be sufficient to ensure recoverability of the carrying value of our real estate assets. We periodically
evaluate the recoverability of the carrying value of our real estate assets under United States generally accepted accounting
principles (“GAAP”). Factors considered in evaluating impairment of our real estate assets held for investment include recurring
net operating losses and other significant adverse changes in general market conditions that are considered permanent in nature.
Generally, a real estate asset held for investment is not considered impaired if the estimated undiscounted future cash flows of the
asset over its estimated holding period are in excess of the asset’s net book value at the balance sheet date. Assumptions used to
estimate annual and residual cash flow and the estimated holding period of these assets require the judgment of management.
Complying with laws benefiting disabled persons or other safety regulations and requirements may affect our costs
and investment strategies. Federal, state, and local laws and regulations designed to improve disabled persons’ access to and use
of buildings, including the Americans with Disabilities Act of 1990, may require modifications to, or restrict renovations of,
existing buildings that may require unexpected expenditures. These laws and regulations may require that structural features be
added to buildings under construction. 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. Noncompliance could
result in the imposition of fines by government authorities or the award of damages to private litigants. 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.
Risks related to joint ventures may adversely affect our financial performance and results of operations. We have entered into,
and may continue in the future to enter into, partnerships or joint ventures with other persons or entities. Joint venture investments
involve risks that may not be present with other methods of ownership, including the possibility that:
•
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our partner might become insolvent, refuse to make capital contributions when due, or otherwise fail to meet its obligations,
which may result in certain liabilities to us for guarantees and other commitments;
our partner might at any time have economic or other business interests or goals that are or become inconsistent with our
interests or goals;
• we could become engaged in a dispute with our partner, which could require us to expend additional resources to resolve
such disputes; or
•
our partner may be in a position to take action or withhold consent contrary to our instructions or requests, which could
restrict our ability to transfer our interest in a joint venture to a third party.
In some instances, we and/or our partner may have the right to trigger a buy-sell arrangement, which could cause us to sell our
interest, or acquire our partner’s interest, at a time when we otherwise would not have initiated such a transaction. Our ability to
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acquire our partner’s interest may be limited if we do not have sufficient cash, available borrowing capacity, or other capital
resources. In such event, we may be forced to sell our interest in the joint venture when we would otherwise prefer to retain it.
Joint ventures may require us to share decision-making authority with our partners, which could limit our ability to control the
properties in the joint ventures. Even when we have a controlling interest, certain major decisions may require partner approval,
such as the sale, acquisition, or financing of a property.
Actual or threatened terrorist attacks may adversely affect our business. Actual or threatened terrorist attacks and other acts of
war or violence could adversely affect our business. Attacks that directly impact one or more of our apartment communities could
significantly affect our ability to operate these communities, thereby impairing our ability to achieve our expected results. Our
insurance may not adequately cover all losses from a terrorist attack, and the ongoing effects of any terrorist attacks or threatened
terrorist attacks could adversely affect the U.S. economy generally and our business in particular.
Potential changes to the condition of Fannie Mae and Freddie Mac and in government support for apartment communities
may adversely affect our business. Historically, we have depended on the Federal National Mortgage Association (“Fannie Mae”)
and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) to provide financing for certain apartment communities.
Although Fannie Mae and Freddie Mac have a mandate to support multifamily housing through their financing activities, there
are current government proposals relating to the future of agency mortgage finance in the U.S. that could involve the phase-out
of Fannie Mae and Freddie Mac. Although we believe that Fannie Mae and Freddie Mac will continue to provide liquidity to the
multifamily sector, any phase-out of Fannie Mae and Freddie Mac, change in their mandate, or reduction in government support
for apartment communities generally could result in adverse changes to interest rates, capital availability, development of additional
apartment communities, and the value of these communities.
Expanding social media usage could present new risks. The use of social media could cause us to suffer broad reputational
damage. Negative posts or comments about us on any social networking website, or disclosure of any non-public sensitive
information relating to our business, could damage our reputation. The continuing evolution of social media will present us with
new and ongoing challenges and risks.
Employee theft or fraud could result in loss. Certain employees have access to, or signature authority with respect to, our bank
accounts or assets, which exposes us to the risk of fraud or theft. Certain employees also have access to key information technology
(“IT”) infrastructure and to resident and other information that may be commercially valuable. If any employee were to compromise
our IT systems, or misappropriate resident or other information, we could incur losses, including potentially significant financial
or reputational harm. We may not have insurance that covers any losses in full or covers losses from particular criminal acts.
Risks Related to Our Indebtedness and Financings
Our inability to renew, repay, or refinance our debt may result in losses. We incur a significant amount of debt in the ordinary
course of our business and in connection with acquisitions of real properties. Because we have a limited ability to retain earnings
as a result of the REIT distribution requirements, we will generally be required to refinance debt that matures with additional debt
or equity. We are subject to the normal risks associated with debt financing, including the risks 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.
These risks increase when credit markets are tight. In general, when the credit markets are tight, we may encounter resistance
from lenders when we seek financing or refinancing for properties or proposed acquisitions, and the terms of such financing or
refinancing are likely to be less favorable to us than the terms of our current indebtedness.
We anticipate that we will need to refinance a significant portion of our outstanding debt as it matures. We cannot guarantee that
any refinancing of debt with other debt will be possible on terms that are favorable or acceptable to us. If we cannot refinance,
extend, or pay principal payments due at maturity with the proceeds of other capital transactions, our cash flows may not be
sufficient in all years to repay debt as it matures. If we are unable to refinance our indebtedness on acceptable terms, or at all, we
may be forced to dispose of one or more properties on disadvantageous terms, which may result in losses. These losses could have
a material adverse effect on our business, our ability to make distributions to our shareholders, and our ability to pay amounts due
on our debt. If a property is mortgaged to secure payment of indebtedness and we are unable to meet mortgage payments or
refinance the debt at maturity, the mortgagor could foreclose upon the property, appoint a receiver, and receive an assignment of
rents and leases or pursue other remedies, including taking ownership of the property, all with a consequent loss of revenues and
asset value. Foreclosures also could affect our ability to obtain new debt and could create taxable income without accompanying
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cash proceeds, thereby hindering our ability to meet the REIT distribution requirements of the Code and impeding our ability to
obtain financing for our other properties.
The restrictive terms of indebtedness may cause acceleration of debt payments and constrain our ability to conduct certain
transactions. At December 31, 2018, we and our Operating Partnership had outstanding borrowings of approximately $648.5
million. Some of this indebtedness contains financial covenants relating to fixed charge coverage ratios, maximum secured debt,
maintenance of unencumbered asset value, and total debt to gross assets, among others. Some covenants present new constraints
as we navigate investments and dispositions with respect to our ability to invest in certain markets, add incremental secured and
recourse debt, and add overall leverage. If an event of default occurs, our lenders may declare borrowings under the loan agreements
to be due and payable immediately, which could have an adverse effect on our ability to make distributions to our shareholders
and pay amounts due on our debt.
Rising interest rates may affect our cost of capital and financing activities. Rising interest rates could limit our ability to refinance
portions of our fixed-rate indebtedness when it matures and would increase our interest costs. We also have an unsecured credit
facility that bears interest at variable rates based on amounts drawn. As a result, any further increase in interest rates could increase
our interest expense on our variable rate debt, increase our interest rates when refinancing fixed-rate debt, increase the cost of
issuing new debt, and reduce the cash available for distribution to shareholders.
Interest rate hedging arrangements may result in losses. From time to time, we use interest rate swaps and other hedging
instruments to manage our interest rate risks. Although these arrangements may partially protect us against rising interest rates,
they also may reduce the benefits to us if interest rates decline. If a hedging arrangement is not indexed to the same rate as the
indebtedness that is hedged, we may be exposed to losses to the extent that the rate governing the indebtedness and the rate
governing the hedging arrangement change independently of each other, and nonperformance by the other party to the hedging
arrangement also may subject us to increased credit risks. In order to minimize any counterparty credit risk, we enter into hedging
arrangements only with investment grade financial institutions.
Potential changes to LIBOR could affect our financing covenants. LIBOR has been used as a primary benchmark for short-
term interest rates, including under our credit facility. Daily LIBOR interest rates have been published since January 1, 1986 and
have become deeply entrenched into the global financial markets. Post-financial crisis, regulation has significantly reduced bank
appetite to issue commercial paper and wholesale deposits, which means there is a very low volume of transactions upon which
banks can base their LIBOR submissions. As a result, banks must rely upon their "expert judgment" in translating other interest
rates into a LIBOR rate. The liability associated with generating such a highly utilized interest rate based upon expert judgment
is significant. As a result, a global effort is underway to find new benchmark rates to replace LIBOR by the end of 2021. This
raises a complication for financial assets and financial contracts with maturities beyond 2021. As it relates to future and derivatives
contracts, ISDA master agreements between counterparties will need to be amended or replaced, including derivative contracts
in which we are invested. There can be no assurance that a new global standard will be agreed upon or that any new rate will be
reflective of the original interest rate and credit risk included within LIBOR.
Risks Related to Our Shares
Our stock price may fluctuate significantly. The market price and trading volume of our common shares are subject to fluctuation
due to general market conditions, the risks discussed in this report, and several other factors, including the following:
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regional, national, and global economic and business conditions;
actual or anticipated changes in our quarterly operating results or dividends;
changes in our funds from operations or earnings estimates;
investor interest in our property portfolio;
the market perception and performance of REITs in general;
the market perception or trading volume of REITs relative to other investment opportunities;
the market perception of our financial condition, performance, distributions, and growth potential;
general stock and bond market conditions, including potential increases in interest rates that could lead investors to seek
high annual yield from dividends;
shifts in our investor base to a higher concentration of passive investors, including exchange-traded funds and index
funds, that could have an adverse effect on our ability to communicate with our shareholders;
•
our ability to access capital markets, which could impact our cost of capital;
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a change in our credit rating or analyst ratings;
changes in minimum dividend requirements;
terrorism or other factors that adversely impact the markets in which our stock trades; and
changes in tax laws or government regulations that could affect the attractiveness of our stock.
Rising interest rates could have an adverse effect on our share price, and low trading volume on the NYSE may prevent the
timely resale of our shares. If interest rates continue to increase, this could cause holders of our common stock and other investors
to seek higher dividends on our shares or higher yields through other investments, which could adversely affect the market price
of our shares. Although our common shares are listed on the NYSE, the daily trading volume of our shares may be lower than
the trading volume for other companies. As a result of lower trading volume, an owner of our common shares may encounter
difficulty in selling our shares in a timely manner and may incur a substantial loss.
Failure to generate sufficient revenue or other liquidity needs could limit cash flow available for distributions to our
shareholders. A decrease in rental revenue, an increase in funding to support our acquisition and development needs, or other
unmet liquidity needs could have an adverse effect on our ability to pay distributions to our shareholders or the Operating
Partnership's unitholders.
Payment of distributions on our common shares is not guaranteed. Our Board of Trustees must approve any stock distributions
and may elect at any time, or from time to time, and for an indefinite duration, to reduce or not pay the distributions payable on
our common shares. Our Board may reduce distributions for a variety of reasons, including but not limited to the following:
•
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operating and financial results cannot support the current distribution payment;
unanticipated costs, capital requirements, or cash requirements;
annual distribution requirements under the REIT provisions of the Code;
a conclusion that the payment of distributions would cause us to breach the terms of certain agreements or contracts, such
as financial ratio covenants in our debt financing documents; or
•
other factors the Board of Trustees may consider relevant.
Our future growth depends, in part, on our ability to raise additional equity capital, which will have the effect of diluting the
interests of our common shareholders. Our future growth depends upon, among other things, our ability to raise equity capital
and issue limited partnership units of IRET Properties. Sales of substantial amounts of our common or preferred shares in the
public market, or substantial issuances of our common shares in connection with redemption requests for limited partnership units,
or the perception that such sales or issuances might occur, will dilute the interests of the current common shareholders and could
adversely affect the market price of our common shares.
We may issue additional classes or series of our shares of beneficial interest with rights and preferences that are superior to
the rights and preferences of our common shares. Without the approval of our common shareholders, our Board of Trustees may
establish additional classes or series of our shares of beneficial interest, and such classes or series may have dividend rights,
conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences, or other rights and preferences
that are superior to the rights of the holders of our common shares. In that regard, in September 2017, we filed a shelf registration
statement with the SEC that enables us to sell an undetermined number of equity and debt securities as defined in the prospectus.
Future sales of common stock, preferred stock, or convertible debt securities may dilute current shareholders and could have an
adverse impact on the market price of our common stock.
Our rating by proxy advisory firms or other corporate governance consultants advising institutional investors could have an
adverse effect on the perception of our corporate governance and thereby negatively impact the market price of our common
stock. Various proxy advisory firms and other corporate governance consultants advising institutional investors provide scores
or ratings of our corporate governance, executive compensation practices, and other matters that may be submitted to shareholders
in connection with our annual meetings. From time to time, certain matters that we propose for approval may not receive a
favorable score or rating or might even result in a negative score or rating or recommendation against the matter proposed. In
these situations, unfavorable scores or ratings may lead to rejected proposals, which could lead to decreases in our market price.
Although we periodically review our corporate governance measures and consider implementing changes that we believe to be
responsive to concerns that have been raised, there may be times when we decide not to implement changes recommended by
proxy advisors or other corporate governance consultants because we do not believe that such changes are in the best interests of
IRET and our shareholders, notwithstanding the negative effect that such a decision could have on our ratings or stock price.
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Any material weaknesses identified in our internal control over financial reporting could adversely affect our stock price.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate and report on our internal control over financial reporting.
If we were to identify one or more material weaknesses in our internal control over financial reporting, we could lose investor
confidence in our financial reporting and results of operations, which in turn could have an adverse effect on our stock price.
Risks Related to Our Tax Status
We may incur tax liabilities as a consequence of failing to qualify as a REIT, which could force us to borrow funds during
unfavorable market conditions. We have elected to be taxed as a REIT under the Code. Qualification as a REIT involves the
application of highly technical and complex Code provisions, including income, asset, and distribution tests, for which there are
only limited judicial or administrative interpretations. Even a technical or inadvertent mistake could endanger our REIT status.
The determination that we qualify as a REIT requires an ongoing analysis of various factual matters and circumstances, some of
which may not be within our control. For example, in order to qualify as a REIT, at least 95% of our gross income in any year
must come from certain passive sources that are itemized in the REIT tax laws, and we are prohibited from owning specified
amounts of debt or equity securities of some issuers. Thus, to the extent revenues from non-qualifying sources, such as income
from third-party management services, represent more than 5% 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 Code apply. Even if relief
provisions apply, however, a tax would be imposed with respect to excess net income. We are also required to make distributions
to the holders of our securities of at least 90% of our REIT taxable income, determined before a deduction for dividends paid and
excluding any net capital gain. To the extent that we satisfy the 90% test but distribute less than 100% of our REIT taxable income,
we will be subject to corporate income tax on such undistributed income and could be subject to an additional 4% excise tax.
Because we need to meet these tests to maintain our qualification as a REIT, it could cause us to have to forego certain business
opportunities and potentially require us to liquidate otherwise attractive investments. The fact that we hold substantially all of our
assets (except for qualified REIT subsidiaries) through IRET Properties, our operating partnership, and its subsidiaries, and our
ongoing reliance on factual determinations, such as determinations related to the valuation of our assets, further complicates the
application of the REIT requirements for us. If IRET Properties 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 adversely affect our business and our ability to make distributions to
our shareholders and pay amounts due on our debt. 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 were to fail to qualify as a REIT, we would be subject to federal income tax on our taxable income at regular corporate rates,
could be subject to increased state and local taxes and, unless entitled to relief under applicable statutory provisions, would be
disqualified from treatment as a REIT for the four taxable years following the year during which we lost our qualification, which
would likely have a material adverse effect on us, our ability to make distributions to our shareholders, and our ability to pay
amounts due on our debt. This treatment would reduce funds available for investment or distributions to the holders of our securities
due to the additional tax liability to us for the year or years involved, and we would no longer be able to deduct, and would not
be required to make, distributions to our shareholders. To the extent that distributions to the holders of our securities had been
made in anticipation of qualifying as a REIT, we may need short-term debt or long-term debt or proceeds from asset sales or sales
of common shares to fund required distributions as a result of differences in timing between the actual receipt of income and the
recognition of income for federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves
or required debt or amortization payments. The inability of our cash flows to cover our distribution requirements could have an
adverse impact on our ability to raise short and long-term debt or sell equity securities in order to fund distributions required to
maintain our REIT status.
Failure of our operating partnership to qualify as a partnership would adversely affect us. We believe that IRET Properties,
our operating partnership, qualifies as a partnership for federal income tax purposes. However, we can provide no assurance that
the IRS will not challenge its status as a partnership for federal income tax purposes or that a court would not sustain such a
challenge. If the IRS were to be successful in treating IRET Properties as an entity taxable as a corporation (such as a publicly
traded partnership taxable as a corporation), we would cease to qualify as a REIT because the value of our ownership interest in
IRET Properties would exceed 5% of our assets and because we would be considered to hold more than 10% of the voting securities
and value of the outstanding securities of another corporation. The imposition of a corporate tax on IRET Properties would
significantly reduce the amount of cash available for distribution.
Certain provisions of our Declaration of Trust may limit a change in control and deter a takeover. In order to maintain our
qualification as a REIT, our Declaration of Trust provides that any transaction that would result in our disqualification as a REIT
under Section 856 of the Code will be void, including any transaction that would result in the following:
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less than 100 people owning our shares;
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our being “closely held” within the meaning of Section 856(h) of the Code; or
50% or more of the fair market value of our shares being held by persons other than “United States persons.”
If the transaction is not void, then the shares in violation of the foregoing conditions 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. The Trust's Declaration of Trust also provides a limit on a person owning
in excess of the ownership limit of 9.8%, in number or value, of the Trust's outstanding shares, although the Board of Trustees
retains the ability to make exceptions to this ownership threshold. 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 our shareholders.
Legislative or regulatory actions affecting REITs could have an adverse effect on us or our shareholders. Changes to the tax
laws could adversely affect us or our shareholders. In 2017, Congress passed tax legislation (the “2017 Tax Cuts and Jobs Act”)
that significantly changed the U.S. federal income taxation of U.S. businesses and their owners, including REITs and their
shareholders. Although the 2017 Tax Cuts and Jobs Act was recently passed, there can be no assurance that future changes to
the U.S. federal income tax laws or regulations will not be proposed or enacted that could impact our business and financial
results. The REIT rules are constantly under review by persons involved in the legislative process and by the Internal Revenue
Service and the U.S. Treasury Department, which may result in revisions to regulations and interpretations as well as statutory
changes. If enacted, certain changes could have an adverse impact on our business. The Tax Cuts and Jobs Act of 2017 also
contained provisions that may reduce the relative competitive advantage of operating as a REIT. For example, the Tax Cuts and
Jobs Act of 2017 lowered income tax rates on individuals and corporations, easing the burden of double taxation on corporate
dividends and potentially causing the single level of taxation on REIT distributions to be relatively less attractive. The Tax Cuts
and Jobs Act of 2017 also contains provisions allowing the expensing of capital expenditures, which could result in the
bunching of taxable income and required distributions for REITs, and provisions further limiting the deductibility of interest
expense, which could disrupt the real estate market. We cannot predict whether, when, or to what extent the Tax Cuts and Jobs
Act of 2017 and any new U.S. federal tax laws, regulations, interpretations, or rulings will impact the real estate investment
industry or REITs. Prospective investors are urged to consult their tax advisers regarding the effect of the Tax Cuts and Jobs Act
of 2017 and potential future changes to the federal tax laws of an investment in our shares or Units.
Dividends payable by REITs may be taxed at higher rates than dividends of non-REIT corporations, which could reduce the
net cash received by our shareholders and may be detrimental to our ability to raise additional funds through any future
sale of our stock. Dividends paid by REITs to U.S. shareholders that are individuals, trusts, or estates are generally not eligible
for the reduced tax rate applicable to qualified dividends received from non-REIT corporations but, under the 2017 Tax Cuts
and Jobs Act, U.S. shareholders that are individuals, trusts, and estates generally may deduct 20% of ordinary dividends from a
REIT (for taxable years beginning after December 31, 2017 and before January 1, 2026). Although this deduction reduces the
effective tax rate applicable to certain dividends paid by REITs, such tax rate is still higher than the tax rate applicable to
regular corporate qualified dividends. This may cause investors to view REIT investments as less attractive than investments in
non-REIT corporations, which in turn may adversely affect the value of stock in REITs, including our stock. Investors should
consult with their tax advisers regarding the U.S. tax consequences of an investment in our stock or Units.
We may face risks in connection with Section 1031 exchanges. From time to time, we dispose of properties in transactions
intended to qualify as “like-kind exchanges” under Section 1031 of the Code. If a transaction intended to qualify as a
Section 1031 exchange is later determined to be taxable, we may face adverse consequences, and if the laws applicable to such
transactions are amended or repealed, we may not be able to dispose of properties on a tax-deferred basis. If we are unable to
meet the technical requirements of a desired Section 1031 exchange, we may be required to make a special dividend payment
to our shareholders if we are unable to mitigate the taxable gains realized.
Complying with REIT requirements may force us to forego otherwise attractive opportunities or liquidate otherwise attractive
investments. To qualify and maintain our status as a REIT, we must satisfy certain requirements with respect to the character of
our assets. If we fail to comply with these requirements at the end of any quarter, we must correct such failure within 30 days after
the end of the quarter (by, possibly, selling assets notwithstanding their prospects as an investment) to avoid losing our REIT
status. This could include potentially selling otherwise attractive assets or liquidating or foregoing otherwise attractive investments.
These actions could reduce our income and amounts available for distribution to our shareholders.
Even if we qualify as a REIT, we may face other tax liabilities that reduce our cash flows. Even if we qualify for taxation as a
REIT, we may be subject to certain federal, state, and local taxes on our income and assets, including taxes on any undistributed
income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property, and transfer
taxes, such as mortgage recording taxes. Any of these taxes would decrease cash available for distribution to our shareholders.
15
The tax imposed on REITs engaging in prohibited transactions and our agreements entered into with certain contributors of
our properties may limit our ability to engage in transactions that would be treated as sales for federal income tax purposes.
The federal income tax provisions applicable to REITs provide that any gain realized by a REIT on the sale of property held as
inventory or other property held primarily for sale to customers in the ordinary course of business is treated as income from a
“prohibited transaction” that is subject to a 100% penalty tax. Under current law, unless a sale of real property qualifies for a safe
harbor, the question of whether the sale of a property constitutes the sale of property held primarily for sale to customers is generally
a question of the facts and circumstances regarding a particular transaction. We may make sales that do not satisfy the requirements
of the safe harbors, or the IRS may successfully assert that one or more of our sales are prohibited transactions and, as a result,
we may be required to pay a penalty tax. To avert this penalty tax, we may hold some of our assets through a taxable REIT subsidiary
(“TRS”). While the TRS structure would allow the economic benefits of ownership to flow to us, a TRS is subject to tax on its
income at the federal and state level. We have entered into agreements with certain contributors of our properties that contain
limitations on our ability to dispose of certain properties in taxable transactions. The restrictions on taxable dispositions are effective
for varying periods. Such agreements may require that we make a payment to the contributor in the event that we dispose of a
covered property in a taxable sale during the restriction period.
Our ownership of TRSs is limited, and our transactions with TRSs will cause us to be subject to a 100% penalty tax on certain
income or deductions if those transactions are not conducted on arm's-length terms. A REIT may own up to 100% of the stock
of one or more TRSs. A TRS may hold assets and earn income that would not be qualifying assets or income if held or earned
directly by a REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation of which
a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS.
Overall, no more than 20% of the value of a REIT's assets may consist of stock or securities of one or more TRSs, and the TRS
rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate
level of corporate taxation. The rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT
that are not conducted on an arm’s-length basis.
Our TRS is subject to applicable federal, state, and local income tax on its taxable income, and its after-tax net income will be
available for distribution to us but is not required to be distributed to us. We believe that the aggregate value of the stock and
securities of our TRS is and will continue to be less than 20% of the value of our total assets (including our TRS stock and
securities). We will continue to monitor the value of our investments in our TRS for the purpose of ensuring compliance with TRS
ownership limitations. We will scrutinize all of our transactions with our TRS to ensure that they are entered into on arm's-length
terms to avoid incurring the 100% excise tax described above. There can be no assurance, however, that we will be able to comply
with the 20% limitation discussed above or to avoid application of the 100% excise tax discussed above.
Our Board of Trustees may make changes to our major policies without approval of our shareholders. Our operating and
financial policies, including policies relating to development and acquisition of real estate, financing, growth, operations,
indebtedness, capitalization, and distributions are exclusively 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, our shareholders.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We are organized as a REIT under Section 856-858 of the Code and are structured as an UPREIT. We conduct the business of
owning, leasing, developing and acquiring real estate properties through our Operating Partnership. These real estate
investments are managed by our own employees and by third-party professional real estate management companies on our
behalf.
Certain Lending Requirements
In certain instances, in connection with the financing of investment properties, the lender may require, as a condition of the
loan, that the properties be owned by a “single asset entity.” Accordingly, we have organized a number of wholly owned
subsidiary entities 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 and Leasing of Our Real Estate Assets
16
We conduct our corporate operations from offices in Minot, North Dakota and Minneapolis, Minnesota. We also have property
management offices located in the states where we own properties. The day-to-day management of our properties is carried out
by our own employees and in certain cases by third-party property management companies. In markets where the amount of
rentable square footage we own does not justify self-management, when properties acquired have effective pre-existing
property management in place, or when for other reasons particular properties are in our judgment not attractive candidates for
self-management, we utilize third-party professional management companies for day-to-day management. However, all
decisions relating to purchase, sale, insurance coverage, capital improvements, approval of leases, annual operating budgets and
major renovations are made exclusively by our employees and implemented by the third-party management companies.
Generally, our management contracts are for terms of one year or less and provide for compensation ranging from 2.5% to
5.0% of gross rent collections and, typically, we may terminate these contracts upon 60 days or less notice for cause or upon the
property manager’s failure to meet certain specified financial performance goals.
Summary of Individual Properties Owned as of December 31, 2018
The following table presents information regarding our 87 apartment communities and four other properties held for
investment, as well as unimproved land as of December 31, 2018. 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. Additional information is included in Schedule III to our financial statements included in
this Transition Report on Form 10-KT.
Community Name and Location
MULTIFAMILY
71 France - Edina, MN (1) (2) (4) (5)
Alps Park - Rapid City, SD (1)
Arbors - South Sioux City, NE (1)
Arcata - Golden Valley, MN (4) (5)
Ashland - Grand Forks, ND (1)
Avalon Cove - Rochester, MN (5)
Boulder Court - Eagan, MN
Brookfield Village - Topeka, KS (1)
Canyon Lake - Rapid City, SD (1)
Cardinal Point - Grand Forks, ND (4) (5)
Cascade Shores - Rochester, MN (1) (5)
Castlerock - Billings, MT (1)
Chateau - Minot, ND (4) (5)
Cimarron Hills - Omaha, NE (1)
Colonial Villa - Burnsville, MN
Colony - Lincoln, NE (1)
Commons and Landing at Southgate - Minot, ND (1) (2)
Cottage West Twin Homes - Sioux Falls, SD (1)
Cottonwood - Bismarck, ND (1)
Country Meadows - Billings, MT (1)
Crestview - Bismarck, ND (1)
Crown Colony - Topeka, KS (1)
Crystal Bay - Rochester, MN (5)
Cypress Court - St. Cloud, MN (1) (2)
Deer Ridge - Jamestown, ND (1) (4) (5)
Dylan - Denver, CO (3)(4)
Evergreen - Isanti, MN (1)
Forest Park - Grand Forks, ND (1)
French Creek - Rochester, MN (5)
Gables Townhomes - Sioux Falls, SD (1)
Gardens - Grand Forks, ND (5)
Grand Gateway - St. Cloud, MN
(in thousands)
Investment
(initial cost plus
improvements less
Physical
Occupancy
as of
impairment) December 31, 2018
Number of
Apartment
Homes
241 $
71
192
165
84
187
115
160
109
251
90
166
104
234
239
232
341
50
268
133
152
220
76
196
163
274
72
268
40
24
74
116
66,585
6,208
9,505
33,244
8,603
36,127
9,818
9,215
6,674
35,052
18,383
8,059
21,299
15,185
23,334
18,901
54,917
5,348
24,011
10,089
6,826
14,525
12,130
20,714
25,041
89,942
7,083
14,836
5,153
2,527
9,333
9,788
95.0%
100.0%
94.8%
95.2%
96.4%
97.3%
100.0%
97.5%
97.2%
94.4%
95.6%
95.2%
93.3%
96.2%
93.7%
96.6%
98.2%
96.0%
96.3%
94.0%
98.0%
96.8%
92.1%
96.9%
94.5%
91.2%
97.2%
91.4%
100.0%
87.5%
94.6%
96.6%
17
Community Name and Location
GrandeVille at Cascade Lake - Rochester, MN (1) (5)
Greenfield - Omaha, NE
Heritage Manor - Rochester, MN (1)
Homestead Garden - Rapid City, SD (1)
Indian Hills - Sioux City, IA
Kirkwood Manor - Bismarck, ND (1)
Lakeside Village - Lincoln, NE (1)
Landmark - Grand Forks, ND
Legacy - Grand Forks, ND (1)
Legacy Heights - Bismarck, ND (4) (5)
Mariposa - Topeka, KS (1)
Meadows - Jamestown, ND
Monticello Crossings - Monticello, MN (4) (5)
Monticello Village - Monticello, MN
North Pointe - Bismarck, ND (1)
Northridge - Bismarck, ND
Oakmont Estates - Sioux Falls, SD
Oakwood Estates - Sioux Falls, SD
Olympic Village - Billings, MT (1)
Olympik Village - Rochester, MN (1)
Oxbo - St Paul, MN (3)(4)
Oxbow Park - Sioux Falls, SD
Park Meadows - Waite Park, MN (1)
Park Place - Plymouth, MN (3)(4)
Pebble Springs - Bismarck, ND
Pinehurst - Billings, MT
Plaza - Minot, ND (1)
Pointe West - Rapid City, SD (1)
Ponds at Heritage Place - Sartell, MN
Prairie Winds - Sioux Falls, SD (1)
Quarry Ridge - Rochester, MN (1)
Red 20 - Minneapolis, MN (1)(5)
Regency Park Estates - St. Cloud, MN (1)
Ridge Oaks - Sioux City, IA (1)
Rimrock West - Billings, MT (1)
River Ridge - Bismarck, ND
Rocky Meadows - Billings, MT (1)
Rum River - Isanti, MN (1)
Sherwood - Topeka, KS (1)
Sierra Vista - Sioux Falls, SD
Silver Springs - Rapid City, SD (1)
South Pointe - Minot, ND (1)
Southpoint - Grand Forks, ND
Southwind - Grand Forks, ND (1)
Sunset Trail - Rochester, MN (1)
Thomasbrook - Lincoln, NE (1)
Valley Park - Grand Forks, ND (1)
Villa West - Topeka, KS (1)
Village Green - Rochester, MN
Westend - Denver, CO (3)(4)
West Stonehill - Waite Park, MN (1)
Westwood Park - Bismarck, ND (1)
Number of
Apartment
Homes
(in thousands)
Investment
(initial cost plus
improvements less
Physical
Occupancy
as of
impairment) December 31, 2018
96.0%
57,017
276 $
96
182
152
120
108
208
90
360
119
54
81
202
60
73
68
79
160
274
140
191
120
360
500
16
21
71
90
58
48
313
130
147
132
78
146
98
72
300
44
52
196
96
164
146
264
167
308
36
390
313
65
18
6,044
10,688
15,459
7,704
5,124
18,254
2,913
33,568
15,368
6,550
7,064
31,898
5,354
5,619
8,590
6,664
8,155
15,638
9,861
57,562
7,294
20,241
94,861
991
1,282
16,697
5,873
5,405
2,699
34,370
26,201
13,355
7,258
5,881
26,145
7,999
6,129
21,153
2,934
3,946
15,736
10,638
9,457
16,433
16,235
8,480
19,232
3,598
127,879
18,942
4,088
99.0%
95.6%
98.0%
96.7%
93.5%
94.2%
93.3%
91.1%
97.5%
98.1%
95.1%
98.0%
98.3%
91.8%
95.6%
98.7%
95.6%
98.2%
97.1%
95.3%
94.2%
97.8%
93.4%
100.0%
85.7%
94.4%
91.1%
91.4%
97.9%
95.2%
92.3%
94.6%
92.4%
97.4%
99.3%
96.9%
94.4%
99.0%
100.0%
98.1%
98.5%
93.8%
88.4%
95.9%
97.0%
91.0%
94.8%
100.0%
96.7%
98.4%
96.9%
Community Name and Location
Whispering Ridge - Omaha, NE (1)
Winchester - Rochester, MN
Woodridge - Rochester, MN (1)
TOTAL MULTIFAMILY
Property Name and Location
OTHER - MIXED USE
71 France - Edina, MN (1)
Oxbo - St Paul, MN
Plaza - Minot, ND (1)
Red 20 - Minneapolis, MN (1)
TOTAL OTHER - MIXED USE
OTHER - COMMERCIAL
Dakota West Plaza - Minot, ND
Minot 1400 31st Ave - Minot, ND
Minot IPS - Minot, ND
Woodbury 1865 Woodlane - Woodbury, MN
TOTAL OTHER - COMMERCIAL
UNIMPROVED LAND
Creekside Crossing - Bismarck, ND
Minot 1525 24th Ave SW - Minot, ND
Rapid City - Rapid City, SD
Weston - Weston, WI
TOTAL UNIMPROVED LAND
TOTAL APARTMENT HOMES
TOTAL SQUARE FOOTAGE - OTHER
(in thousands)
Investment
(initial cost plus
improvements less
Physical
Occupancy
as of
impairment) December 31, 2018
Number of
Apartment
Homes
336 $
115
110
29,256
8,924
9,756
13,702 $
1,582,917
97.3%
96.5%
97.3%
95.7%
Net Rentable
(in thousands)
Investment
(initial cost plus
Square improvements less
Footage
Physical
Occupancy
as of
impairment) December 31, 2018
100.0%
100.0%
100.0%
100.0%
52.3%
76.3%
100.0%
100.0%
6,654
3,526
9,597
2,944
22,721
624
11,606
6,368
3,400
21,998
3,049
506
1,376
370
5,301
20,955 $
11,477
50,610
10,508
93,550 $
16,921
48,960
27,698
69,600
163,179 $
$
13,702
256,729
TOTAL GROSS REAL ESTATE INVESTMENTS, EXCLUDING MORTGAGE NOTES
RECEIVABLE
$
1,632,937
(1) Encumbered by mortgage debt.
(2) Owned by a joint venture entity and consolidated in our financial statements. We have an approximately 52.6% ownership in 71 France, 65.5% ownership in Commons
& Landing at Southgate, and 86.1% ownership in Cypress Court.
(3) Non-same-store for the comparison of the eight months ended December 31, 2018 to the eight months ended December 31, 2017. Refer to Item 7 for definition of non-
same-store.
(4) Non-same-store for the comparison of fiscal years 2018 and 2017.
(5) Non-same-store for the comparison of fiscal years 2017 and 2016.
19
Properties by State
The following table presents, as of December 31, 2018, the total amount of property owned, net of accumulated depreciation,
by state:
State
Minnesota
North Dakota
Colorado
Nebraska
South Dakota
Kansas
Montana
Iowa
Total
(in thousands)
Multifamily
Other
Total % of Total
$
550,874 $
15,297 $
269,878
212,056
81,890
47,834
45,223
25,730
9,351
15,632
—
—
—
—
—
—
566,171
285,510
212,056
81,890
47,834
45,223
25,730
9,351
44.4%
22.4%
16.7%
6.4%
3.8%
3.6%
2.0%
0.7%
$
1,242,836 $
30,929 $
1,273,765
100.0%
Item 3. Legal Proceedings
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. Mine Safety Disclosures
Not Applicable
20
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity
Securities
Quarterly Distribution Data
Our common shares of beneficial interest trade on the NYSE under the symbol “IRET.” The following table shows the
distributions per common share and limited partnership unit declared with respect to each period.
Two months ended December 31, 2018
Three months ended October 31, 2018
Three months ended July 31, 2018
Quarter Ended
April 30
January 31
October 31
July 31
Distributions Declared
(per share and unit)
$
0.70
0.70
0.70
Distributions Declared
(per share and unit)
Fiscal Year 2018 Fiscal Year 2017
0.70
$
0.70 $
0.70
0.70
0.70
1.30
1.30
1.30
We pay quarterly distributions to our common shareholders and unitholders, 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 Code, and such other factors as our Board of Trustees deems relevant. Since July 1, 1971, we have paid
quarterly cash distributions in the months of January, April, July and October.
Shareholders
As of February 20, 2019, there were approximately 2,912 common shareholders of record.
Unregistered Sales of Shares
Under the terms of IRET Properties’ Agreement of Limited Partnership, limited partners have the right to require IRET
Properties to redeem their limited partnership units for cash generally any time following the first anniversary of the date they
acquired such Units (“Exchange Right”). When a limited partner exercises the Exchange Right, we have the right, in our sole
discretion, to redeem such Units by either making a cash payment or exchanging the Units for our common shares, on a one-
for-one basis. The Exchange Right is subject to certain conditions and limitations, including that the limited partner may not
exercise the Exchange Right more than two times during a calendar year and the limited partner may not exercise for less than
100 Units, or, if such limited partner holds less than 100 Units, for less than all of the Units held by such limited partner. IRET
Properties and some limited partners have contractually agreed to a holding period of greater than one year, a greater number of
redemptions during a calendar year or other limitations to their Exchange Right.
During the transition period ended December 31, 2018 and the fiscal years ended April 30, 2018, 2017, and 2016, respectively,
we issued an aggregate of 19,899, 2,892, 30,471, and 3,616 unregistered common shares to limited partners of IRET Properties
upon exercise of their Exchange Rights for an equal number of Units. All such issuances of our common shares were exempt
from registration as private placements under Section 4(a)(2) of the Securities Act, including Regulation D promulgated
thereunder. We have registered the resale of such common shares under the Securities Act.
21
Issuer Purchases of Equity Securities
Period
May 1 - 31, 2018
June 1 - 30, 2018
July 1 - 31, 2018
August 1 - 31, 2018
September 1 - 30, 2018
October 1 - 31, 2018
November 1 - 30, 2018
December 1 - 31, 2018
Total
Total Number of Shares
Amount of Shares That
Maximum Dollar
Total Number of
Average Price
Purchased as Part of
May Yet Be Purchased
Shares and Units
Purchased(1)
Paid per
Publicly Announced
Share and Unit
Plans or Programs
Under the Plans or
Programs(2)
11,921 $
8,944
—
—
60
—
1,717
28,865
51,507 $
51.77
53.07
—
—
54.70
—
52.57
51.16
51.68
11,829 $
—
—
—
—
—
1,717
28,575
42,121
34,949,007
34,949,007
34,949,007
34,949,007
34,949,007
34,949,007
34,858,396
33,391,744
Includes 235 shares surrendered to us by employees in satisfaction of tax withholding obligations associated with the vesting of restricted shares.
(1)
(2) Represents amounts outstanding under our $50,000,000 share repurchase program, which was authorized by our Board of Trustees on December 7, 2016
reauthorized on December 5, 2017 for a one year period, and reauthorized for another one year period on December 5, 2018.
Comparative Stock Performance
The information contained in this Comparative Stock Performance section shall not be deemed to be “soliciting material” or
“filed” or "incorporated by reference" into our future filings with the SEC, or subject to the liabilities of Section 18 of the
Exchange Act, except to the extent that we specifically incorporate it by reference into a document filed under the Securities Act
or the Exchange Act.
Set forth below is a graph that compares, for the five years commencing December 31, 2013 and ending December 31, 2018,
the cumulative total returns for our common shares with the comparable cumulative total return of two indexes, the Standard &
Poor’s 500 Index (“S&P 500”) and the FTSE Nareit Equity REITs Index, the latter of which is an index prepared by the FTSE
Group for the National Association of Real Estate Investment Trusts, which includes all tax-qualified equity REITs listed on the
NYSE and the NASDAQ Market. The performance graph assumes that, at the close of trading on December 31, 2013, $100
was invested in our common shares and in each of the indexes. The comparison assumes the reinvestment of all distributions.
22
Index
Investors Real Estate Trust
S&P 500 Index
FTSE Nareit Equity REITs
Source: S&P Global Market Intelligence
Period Ending
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
100.00
100.00
100.00
101.17
113.69
130.43
92.66
115.26
134.40
101.42
129.05
144.55
85.91
157.22
150.20
79.27
150.33
144.38
23
Item 6. Selected Financial Data
Set forth below is selected financial data on a historical basis for the eight months ended December 31, 2018 and the five most
recent fiscal years ended April 30. This information should be read in conjunction with the consolidated financial statements
and notes appearing elsewhere in this Transition Report on Form 10-KT.
Consolidated Statement of Operations Data
Revenue
$
121,871 $ 169,745 $ 160,104 $ 145,500 $ 141,294 $ 127,124
(in thousands, except per share data)
Eight Months Ended
Fiscal Years Ended April 30,
December 31, 2018
2018
2017
2016
2015
2014
Impairment of real estate investments in continuing and
discontinued operations
Gain (loss) on debt extinguishment in continuing and
discontinued operations
Gain (loss) on sale of discontinued operations and real
estate and other investments
Income (loss) from continuing operations
Income (loss) from discontinued operations
Net income (loss)
Net (income) loss attributable to noncontrolling interests
– Operating Partnership
1,221
18,065
57,028
5,983
6,105
44,426
(556)
(7,448)
(4,889)
29,230
—
—
10,277
183,687
74,847
(5,890)
(37,194)
(46,228)
570
164,823
(5,320)
127,629
76,753
30,525
33,422
9,182
67,420
76,602
6,093
10,237
18,447
28,684
6,948
(2,003)
(14,937)
(16,940)
1,032
(12,702)
(4,059)
(7,032)
(1,526)
4,676
Net income (loss) attributable to controlling interests
(4,398)
116,788
43,347
72,006
24,087
(13,174)
Consolidated Balance Sheet Data
Total real estate investments
Total assets
Mortgages payable
Revolving lines of credit
Term loans
1,289,476
1,380,245
1,121,385
1,204,654
1,057,356
910,077
1,335,997
1,426,658
1,474,514
1,755,022
1,992,092
1,862,990
444,197
509,919
565,978
648,173
453,928
462,380
57,500
124,000
57,050
17,500
60,500
22,500
143,991
69,514
—
—
—
—
Total Investors Real Estate Trust shareholders’ equity
568,786
605,663
553,721
618,758
652,110
592,184
Consolidated Per Common Share Data (basic and diluted)
Earnings (loss) from continuing operations – basic &
diluted
Earnings (loss) from discontinued operations – basic &
diluted
Net income (loss) per common share - basic & diluted
Distributions
CALENDAR YEAR
Tax status of distributions
Capital gain
Ordinary income
Return of capital
$
$
$
$
(0.79) $
(3.54) $
(3.01)
— $
(0.32) $
(1.11)
0.04 $
12.25 $
(0.75) $
2.10 $
8.71 $
2.80 $
5.59 $
2.58 $
4.60 $
4.91 $
4.91 $
5.20 $
1.37 $
1.05 $
5.20 $
(1.20)
(2.31)
5.20
2018
2017
2016
2015
2014
2013
100.00%
48.87%
87.57%
11.99%
23.09%
3.09%
—
—
14.59%
12.43%
36.28%
25.74%
28.41%
36.54%
—
51.73%
51.17%
68.50%
24
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes
appearing elsewhere in this report. Historical results and trends which might appear in the consolidated financial statements
should not be interpreted as being indicative of future operations.
We consider this and other sections of this Report to contain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Exchange Act, with respect to our expectations for future
periods. Forward-looking statements do not discuss historical fact, but instead include statements related to expectations,
projections, intentions or other items related to the future.
Executive Summary
We own, manage, acquire, redevelop, and develop apartment communities. We primarily focus on investing in markets
characterized by stable and growing economic conditions, strong employment, and an attractive quality of life that we believe,
in combination, lead to higher demand for our apartment homes and retention of our residents. As of December 31, 2018, we
owned interests in 87 apartment communities consisting of 13,702 apartment homes as detailed in Item 2 - Properties. Property
owned was $1.6 billion at December 31, 2018, compared to $1.7 billion and $1.4 billion at April 30, 2018 and April 30, 2017,
respectively.
Renting apartment homes is our primary source of revenue, and our business objective is to provide great homes. We strive to
maximize resident satisfaction and retention by investing in high-quality assets in desirable locations and creating vibrant
apartment communities through service-oriented operations. We believe that delivering superior resident experiences will drive
consistent profitability for our shareholders. We have paid quarterly distributions continuously since our first distribution in
1971.
Transition Period Ended December 31, 2018 Significant Events and Transactions
During the transition period ended December 31, 2018, we successfully completed the following significant transactions,
including acquisition, disposition and financing transactions, and experienced the following significant events:
• Continued the refinement of our portfolio, resulting in the disposition of three apartment communities, five commercial
properties, and three parcels of unimproved land for an aggregate sale price of $63.4 million;
•
Stabilized two class A core assets - Oxbo Apartments located in St. Paul, Minnesota, and Dylan Apartments located in
Denver, Colorado;
• Amended our line of credit to increase the overall unsecured facility and to make certain other changes to our credit
facility described under "Credit Agreement" below;
• Changed our fiscal year-end to December 31, effective January 1, 2019, thereby improving comparability of IRET results
with our peers; and
• Completed a 1-for-10 reverse stock split of our common stock, effective as of the close of trading on December 27, 2018,
with trading commencing on a split-adjusted basis on December 28, 2018.
Implementation of our Strategic Plan
In June 2016, we announced our intention to transition to a multifamily REIT and sell our remaining commercial properties. In
furtherance of this strategic plan, during the transition period ended December 31, 2018, we sold five commercial properties for
a total sales price of approximately $16.7 million. At December 31, 2018, we owned a total of four non-multifamily properties.
Credit Agreement:
On August 31, 2018, we amended our credit agreement to:
•
increase the overall unsecured facility from $370.0 million to $395.0 million, reallocating the commitment for our
revolving line of credit to $250.0 million and the remaining $145.0 million between two term loans;
25
•
•
•
extend the maturity of the revolving line of credit to August 2022;
extend the existing $70.0 million unsecured term loan maturity to January 2024; and
add a new $75.0 million, 7-year unsecured term loan maturing in August 2025 that bears interest at a spread over LIBOR
based on IRET's overall leverage.
Under the amendment, the interest rate on our existing facilities decreased by 25-35 basis points (depending on overall leverage).
We also entered into a swap agreement for the entire $75.0 million and full term of the new 7-year term loan in our ongoing effort
to reduce floating interest rate exposure.
On September 20, 2018, we entered into a swap agreement covering the extension of the $70 million term loan from January 2023
to January 2024, resulting in both term loans being covered by swap agreements for the duration of the terms.
At the end of the transition period on December 31, 2018, we had $188.8 million of total liquidity on our balance sheet, including
$175.0 million available on our corporate revolver.
Operating LOC:
We have a $6.0 million operating line of credit with Wells Fargo Bank. This operating line of credit is utilized to enhance
treasury management activities and more effectively manage cash balances. The operating line has a one-year term, with
pricing based on a market spread plus the one-month LIBOR index rate. As of December 31, 2018, we had $6.0 million
available under this line.
Changes in our Board of Trustees:
On September 18, 2018, trustee Jeffrey L. Miller retired from our Board of Trustees and all committees of the Board.
Outlook
We intend to continue our focus on maximizing our property financial results in our existing portfolio. To accomplish this, we
have introduced initiatives to expand our margin by enhancing the resident experience, making value-add investments, and
implementing technology solutions and expense controls. We will actively manage our existing portfolio and strategically
pursue acquisitions of multifamily communities in our target markets of Minneapolis and Denver as opportunities arise and
market conditions allow. Our continued management of a strong balance sheet should provide us with flexibility to pursue both
internal and external growth.
RESULTS OF OPERATIONS
Consolidated Results of Operations
The discussion that follows is based on our consolidated results of operations for the eight months ended December 31, 2018 and
2017 and the fiscal years ended April 30, 2018, 2017 and 2016.
26
(in thousands)
Eight Months Ended December 31,
2018
2017
$ Change
% Change
Revenue
Same-store
Non-same-store
Other properties and dispositions
Total
Property operating expenses, including real estate taxes
Same-store
Non-same-store
Other properties and dispositions
Total
Net operating income
Same-store
Non-same-store
Other properties and dispositions
Total
Property management expense
Casualty gain (loss)
Depreciation and amortization
Impairment of real estate investments
General and administrative expenses
Interest expense
Loss on extinguishment of debt
Interest and other income
Income (loss) before gain (loss) on sale of real estate and other
investments and income (loss) from discontinued operations
Gain (loss) on sale of real estate and other investments
Income (loss) from continuing operations
Income (loss) from discontinued operations
$
98,753 $
95,539 $
17,385
5,733
121,871
42,359
6,537
1,823
50,719
56,394
10,848
3,910
4,044
11,666
111,249
42,064
1,714
4,037
47,815
53,475
2,330
7,629
$
71,152 $
63,434 $
(3,663)
(915)
(50,456)
(1,221)
(9,812)
(21,359)
(556)
1,233
(15,597)
9,707
(5,890)
570
(3,652)
(600)
(54,902)
(256)
(9,041)
(22,804)
(818)
714
(27,925)
17,816
(10,109)
150,703
NET INCOME (LOSS)
$
(5,320) $
140,594 $
3,214
13,341
(5,933)
10,622
295
4,823
(2,214)
2,904
2,919
8,518
(3,719)
7,718
11
315
(4,446)
965
771
(1,445)
(262)
519
12,328
(8,109)
4,219
(150,133)
(145,914)
3.4 %
329.9 %
(50.9)%
9.5 %
0.7 %
281.4 %
(54.8)%
6.1 %
5.5 %
365.6 %
(48.7)%
12.2 %
0.3 %
52.5 %
(8.1)%
377.0 %
8.5 %
(6.3)%
(32.0)%
72.7 %
44.1 %
(45.5)%
(41.7)%
(99.6)%
(103.8)%
Net (income) loss attributable to noncontrolling interests –
Operating Partnership
Net (income) loss attributable to noncontrolling interests –
consolidated real estate entities
Net income (loss) attributable to controlling interests
Dividends to preferred shareholders
Redemption of preferred shares
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS
1,032
(110)
(4,398)
(4,547)
—
(14,222)
1,042
127,414
(6,296)
(3,657)
15,254
(107.3)%
(1,152)
(131,812)
1,749
3,657
(110.6)%
(103.5)%
(27.8)%
(100.0)%
$
(8,945) $
117,461 $
(126,406)
(107.6)%
27
(in thousands)
Fiscal Years Ended April 30,
2018 vs. 2017
2017 vs 2016
2018
2017 $ Change % Change
2017
2016 $ Change % Change
(1.6)%
78.5 %
8.7 %
10.0 %
1.9 %
60.5 %
1.3 %
10.6 %
(4.1)%
93.6 %
10.7 %
9.6 %
35.9 %
73.9 %
12.7 %
Revenue
Same-store
Non-same-store
$ 126,415 $121,252 $
5,163
4.3 % $108,347
$ 110,078 $ (1,731)
33,568
20,962
12,606
60.1 % 33,867
18,971
14,896
Other properties and dispositions
9,762
17,890
(8,128)
(45.4)% 17,890
16,451
1,439
Total
169,745
160,104
9,641
6.0 % 160,104
145,500
14,604
Property operating expenses, including real estate
taxes
Same-store
Non-same-store
Other properties and dispositions
56,773
51,862
13,687
2,574
9,033
3,431
9.5 % 46,988
46,099
4,911
4,654
51.5 % 13,907
(857)
(25.0)%
3,431
889
5,244
45
8,663
3,386
Total
Net operating income
Same-store
Non-same-store
73,034
64,326
8,708
13.5 % 64,326
58,148
6,178
69,642
69,390
252
0.4 % 61,359
63,979
(2,620)
19,881
11,929
7,952
66.7 % 19,960
10,308
13,065
9,652
1,394
Other properties and dispositions
7,188
14,459
(7,271)
(50.3)% 14,459
Total
Property management expense
Casualty gain (loss)
$ 96,711 $ 95,778 $
(5,526)
(5,046)
(500)
(414)
933
480
86
1.0 % $ 95,778
$ 87,352 $ 8,426
9.5 % (5,046)
(3,714)
1,332
20.8 %
(414)
(238)
176
Depreciation and amortization
(82,070)
(44,253)
37,817
85.5 % (44,253)
(39,273)
4,980
Impairment of real estate investments
(18,065)
(57,028)
(38,963)
(68.3)% (57,028)
(5,543)
51,485
928.8 %
General and administrative expenses
(14,203)
(15,871)
(1,668)
(10.5)% (15,871)
(13,498)
2,373
17.6 %
Acquisition and investment related costs
(51)
(3,276)
(3,225)
(98.4)% (3,276)
(830)
2,446
294.7 %
Interest expense
Loss on extinguishment of debt
Interest and other income
(34,178)
(34,314)
(940)
(1,651)
1,508
1,146
(136)
(711)
362
(0.4)% (34,314)
(28,417)
5,897
20.8 %
(43.1)% (1,651)
(106)
1,545
1,457.5 %
31.6 %
1,146
385
761
197.7 %
Income (loss) before gain (loss) on sale of real estate
and other investments and income (loss) from
discontinued operations
Gain (loss) on sale of real estate and other
investments
(57,314)
(64,929)
7,615
11.7 % (64,929)
(3,882)
(61,047)
(1,572.6)%
20,120
18,701
1,419
7.6 % 18,701
9,640
9,061
94.0 %
Gain on bargain purchase
—
—
—
—
—
3,424
(3,424)
(100.0)%
Income (loss) from continuing operations
(37,194)
(46,228)
9,034
(19.5)% (46,228)
9,182
(55,410)
(603.5)%
Income (loss) from discontinued operations
164,823
76,753
88,070
114.7 % 76,753
67,420
9,333
13.8 %
NET INCOME (LOSS)
$ 127,629 $ 30,525 $ 97,104
318.1 % $ 30,525
$ 76,602 $(46,077)
(60.2)%
(12,702)
(4,059)
(8,643)
212.9 % (4,059)
(7,032)
2,973
(42.3)%
Net (income) loss attributable to noncontrolling
interests – Operating Partnership
Net (income) loss attributable to noncontrolling
interests – consolidated real estate entities
Net income (loss) attributable to controlling interests
116,788
43,347
73,441
169.4 % 43,347
72,006
(28,659)
Dividends to preferred shareholders
(8,569)
(10,546)
1,977
(18.7)% (10,546)
(11,514)
968
1,861
16,881
(15,020)
(89.0)% 16,881
2,436
14,445
593.0 %
(39.8)%
(8.4)%
Redemption of preferred shares
(3,657)
(1,435)
(2,222)
154.8 % (1,435)
— (1,435)
100.0 %
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS
$ 104,562 $ 31,366 $ 73,196
233.4 % $ 31,366
$ 60,492 $(29,126)
(48.1)%
28
Physical Occupancy
(1)
Same-store
Non-same-store
Total
December 31,
April 30,
2018
95.8%
94.2%
95.7%
2017
95.2%
84.9%
94.5%
2018
96.5%
92.1%
95.6%
2017
93.8%
88.5%
93.1%
2017
94.2%
88.8%
93.1%
2016
94.9%
73.7%
90.8%
Number of Apartment Homes
2018
2017
2018
2017
2017
2016
Same-store
Non-same-store
Total
12,347
1,355
13,702
12,344
965
13,309
11,320
11,320
10,511
10,511
2,856
1,892
2,701
2,463
14,176
13,212
13,212
12,974
(1)
Physical occupancy represents the actual number of apartment homes leased divided by the total number of apartment homes at the end of the period.
Net operating income. Net Operating Income (“NOI”) is a non-GAAP measure which we define as total real estate revenues
less property operating expenses, including real estate taxes. We believe that NOI is an important supplemental measure of
operating performance for real estate because it provides a measure of operations that is unaffected by depreciation,
amortization, financing, property management overhead, and general and administrative expense. NOI does not represent cash
generated by operating activities in accordance with GAAP and should not be considered an alternative to net income, net
income available for common shareholders, or cash flow from operating activities as a measure of financial performance.
Throughout this Transition Report on Form 10-KT, we have provided certain information on a same-store and non-same-store
basis. Same-store apartment communities are owned or in service for the entirety of the periods being compared, and, in the
case of development properties, which have achieved a target level of physical occupancy of 90%. This comparison allows us
to evaluate the performance of existing apartment communities and their contribution to net income. Management believes that
measuring performance on a same-store basis is useful to investors because it enables evaluation of how our communities are
performing year-over-year. Management uses this measure to assess whether or not it has been successful in increasing NOI,
renewing the leases of existing residents, controlling operating costs, and making prudent capital improvements. The discussion
below focuses on the main factors affecting real estate revenue and real estate expenses from same-store apartment
communities because changes from one fiscal year to another in real estate revenue and expenses from non-same-store
communities are due to the addition of those properties to or from our real estate portfolio, and accordingly provide less useful
information for evaluating the ongoing operational performance of our real estate portfolio.
For the comparison of the eight months ended December 31, 2018 and December 31, 2017 and for the fiscal years ended April
30, 2018 and 2017, sold communities and communities designated as held for sale are in "Other." "Other" also includes non-
multifamily properties and the non-multifamily components of mixed use properties. For the comparison of fiscal years 2017
and 2016, sold communities and communities designated as held for sale are in the non-same-store category. For the
comparison of the eight months ended December 31, 2018 and 2017, four apartment communities were non-same-store. For
the comparison of fiscal years ended April 30, 2018 and 2017, 12 apartment communities were non-same-store, of which seven
were in-service development communities. For the comparison of fiscal years 2017 and 2016, 37 apartment communities were
non-same-store, of which eight were in-service development communities and 22 were held for sale or sold. See Item 2 -
Properties for the held for investment communities classified as non-same-store.
Revenue. Revenue increased by 9.5% to $121.9 million for the eight months ended December 31, 2018 compared to $111.2
million in the eight months ended December 31, 2017. Four non-same-store apartment communities contributed $13.3 million
to the increase, offset by a $5.9 million decrease from dispositions and other properties. Revenue from same-store
communities increased by 3.4% or $3.2 million in the eight months ended December 31, 2018, compared to the same period in
the prior year. Approximately 2.8% of the increase was attributable to growth in average rental revenue. Approximately 0.6%
of the increase was due to higher occupancy as weighted average occupancy increased from 93.1% to 93.7% for the eight
months ended December 31, 2017 and 2018, respectively. For the year ended December 31, 2019, weighted average
occupancy is expected to increase to 94.9%.
Weighted average occupancy is defined as the percentage resulting from dividing actual rental revenue by scheduled rental
revenue. Scheduled rental revenue represents the value of all apartment homes, with occupied apartment homes valued at
contractual rental rates pursuant to leases and vacant apartment homes valued at estimated market rents. When calculating
actual rents for occupied apartment homes and market rents for vacant apartment homes, delinquencies and concessions are not
taken into account. Market rates are determined using the recently signed effective rates on new leases at the community and
are used as the starting point in determination of the market rates of vacant apartment homes. We believe that weighted average
29
occupancy is a meaningful measure of occupancy because it considers the value of each vacant unit at its estimated market rate.
Weighted average occupancy may not completely reflect short-term trends in physical occupancy and our calculation of
weighted average occupancy may not be comparable to that disclosed by other REITs.
Revenue increased by 6.0% to $169.7 million in fiscal year 2018, compared to $160.1 million in fiscal year 2017. Revenue
from same-store apartment communities increased by 4.3% or $5.2 million in the twelve months ended April 30, 2018,
compared to the same period in the prior year. Approximately 2.4% of the increase was due to higher occupancy and 1.9% of
the increase was attributable to growth in average rental revenue.
Revenue increased by 10.0% to $160.1 million in fiscal year 2017, compared to $145.5 million in fiscal year 2016. Revenue
from same-store apartment communities decreased by 1.6% or $1.7 million in the twelve months ended April 30, 2017,
compared to the same period in the prior fiscal year. A decrease of $2.0 million was attributable to increased vacancy, primarily
in the energy impacted markets of Williston, North Dakota and Minot, North Dakota. This decrease in revenue was offset by an
increase of $1.1 million that was the result of a ratio utility billings system implemented in fiscal year 2017 to recapture
resident utility expenses.
Property operating expenses, including real estate taxes. Property operating expenses, including real estate taxes, increased by
6.1% to $50.7 million in the eight months ended December 31, 2018 compared to $47.8 million in the eight months ended
December 31, 2017. A total of $4.8 million of the increase was attributable to non-same-store apartment communities but was
partially offset by a decrease of $2.2 million from other properties and dispositions. Property operating expenses at same-store
communities increased by 0.7% or $295,000 in the eight months ended December 31, 2018, compared to the same period in the
prior year. Utilities, insurance, and real estate taxes comprised $274,000 of the increase and rose by 1.4%. Controllable
operating expenses, which exclude utilities, insurance, and real estate taxes, increased by $21,000 or 0.1%.
Property operating expenses, including real estate taxes, increased by 13.5% to $73.0 million in fiscal year 2018 compared to
$64.3 million in fiscal year 2017. A total of $3.7 million of the increase was attributable to non-same-store communities but
was partially offset by a $1.0 million decrease from dispositions and other properties. Property operating expenses at same-
store communities increased by 9.5% or $4.9 million in the twelve months ended April 30, 2018, compared to the same period
in the prior year. The increase was primarily attributable to the previously disclosed change in our capitalization policies,
additional costs related to increasing occupancy, and an increase in real estate tax levy rates in select markets.
Property operating expenses, including real estate taxes, increased by 10.6% to $64.3 million in fiscal year 2017 compared to
$58.1 million in fiscal year 2016. A total of $3.0 million of the increase was attributable to non-same-store apartment
communities and other properties and dispositions. Property operating expenses at same-store communities increased by 1.9%
or $889,000 in the twelve months ended April 30, 2017, compared to the same period in the prior fiscal year. The primary
factors were increased administrative and maintenance expenses of $810,000 and $911,000, respectively, due to increased labor
costs and snow removal. These increases were offset by a decrease in insurance expenses of $267,000, due to a decrease in
insurance premiums as well as a decrease in deductibles paid on insurance claims.
Property management expense. Property management expense, consisting of property management overhead and property
management fees paid to third parties, was $3.7 million in the eight months ended December 31, 2018 and December 31, 2017.
For 2019, property management expenses are expected to increase due to technology initiatives and a reduction in open
positions.
Property management expense increased by 9.5% to $5.5 million in fiscal year 2018 compared to $5.0 million in fiscal year
2017, primarily due to technology initiatives and an increase in the average apartment homes under management. Property
management expense increased by 35.9% to $5.0 million in fiscal year 2017 compared to $3.7 million in fiscal year 2016,
primarily due to the reallocation of fixed costs after the sale of our office and retail portfolios.
Casualty gain (loss). Casualty loss increased by 52.5% to $915,000 in the eight months ended December 31, 2018, compared
to $600,000 in the eight months ended December 31, 2017, due to uninsured water intrusion damage at two communities, offset
by a reduction in deductibles for insured losses. Changes in casualty loss from fiscal year 2018 to fiscal year 2017 and from
fiscal year 2017 to fiscal year 2016 were immaterial.
Depreciation and amortization. Depreciation and amortization decreased by 8.1% to $50.5 million in the eight months ended
December 31, 2018, compared to $54.9 million in the eight months ended December 31, 2017. This decrease was primarily due
to a change in the estimated useful lives of our real estate assets in the prior period, offset by the addition of new assets. See
Note 2 to our consolidated financial statements contained in this Transition Report on Form 10-KT for additional information.
30
Depreciation and amortization increased by 85.5% to $82.1 million in fiscal year 2018, compared to $44.3 million in fiscal year
2017. This increase was primarily due to a change in the estimated useful lives of our real estate assets. Depreciation and
amortization increased by 12.7% to $44.3 million in fiscal year 2017, compared to $39.3 million in fiscal year 2016. This
increase was primarily attributable to the addition of depreciable assets from acquisitions, development projects placed in
service, and capital expenditures during fiscal years 2017 and 2016.
Impairment of real estate investments. During the transition period ended December 31, 2018 and fiscal years 2018, 2017, and
2016, we incurred impairment losses of $1.2 million, $18.1 million, $57.0 million, and $5.5 million, respectively, in continuing
operations. See Note 2 to our consolidated financial statements contained in this Transition Report on Form 10-KT for
additional information.
General and administrative expenses. General and administrative expenses increased by 8.5% to $9.8 million in the eight
months ended December 31, 2018, compared to $9.0 million in the eight months ended December 31, 2017, primarily
attributable to increases of $462,000 in severance costs, $428,000 in legal costs, $442,000 in short term incentive costs, and
$282,000 in audit fees due to the transition period for the change in our fiscal year. These increases were partially offset by a
reduction of $388,000 in salary costs due to open positions and $166,000 in consulting related costs. For 2019, we expect an
increase in compensation costs from the reduction in open positions will offset the decrease in severance costs.
General and administrative expenses decreased by 10.5% to $14.2 million in fiscal year 2018, compared to $15.9 million in
fiscal year 2017, primarily due to decreased salary and benefit costs of $2.3 million related to a reduction in full-time
equivalent employees, but partially offset by transition costs of $951,000.
General and administrative expenses increased by 17.6% to $15.9 million in fiscal year 2017, compared to $13.5 million in
fiscal year 2016. This increase was primarily a result of transition and severance costs, an increase in health insurance costs,
and increased legal and consulting expenses.
Acquisition and investment related costs. There were no acquisition and investment related costs during the eight months
ended December 31, 2018. Acquisition and investment related costs in fiscal years 2018, 2017, and 2016 were $51,000, $3.3
million, and $830,000, respectively, and varied based on the write-off of development pursuit costs in each year.
Interest expense. Interest expense decreased 6.3% to $21.4 million in the eight months ended December 31, 2018, compared to
$22.8 million in the eight months ended December 31, 2017, primarily due to a decrease in the average balance of our
outstanding indebtedness and changes in variable rates.
Interest expense decreased 0.4% to $34.2 million in fiscal year 2018, compared to $34.3 million in fiscal year 2017, due to a
decrease in the average balance of our outstanding indebtedness and changes in variable rates. Interest expense increased
20.8% to $34.3 million in fiscal year 2017, compared to $28.4 million in fiscal year 2016, primarily due to a decrease in
interest capitalized during construction.
Loss on extinguishment of debt. We recorded loss on extinguishment of debt in the transition period ended December 31, 2018
and fiscal years 2018, 2017 and 2016 of $556,000, $940,000, $1.7 million, and $106,000, respectively, due to prepayment
penalties associated with the disposal of assets and the write-off of unamortized loan costs.
Interest and other income. We recorded interest income in the transition period ended December 31, 2018 and fiscal years
2018, 2017, and 2016 of $1.2 million, $1.5 million, $1.1 million and $385,000, respectively. The increase for the eight-months
ended December 31, 2018 compared to the same period in the prior year and from fiscal year 2017 to fiscal year 2018 was due
to seller-financing associated with a disposition and funding a note receivable for a third-party apartment development. The
increase in interest income from fiscal year 2016 to fiscal year 2017 was primarily due to interest earned on notes receivable
from our joint venture partners.
Gain (loss) on sale of real estate and other investments. In the transition period ended December 31, 2018 and fiscal years
2018, 2017, and 2016, we recorded gains on sale of real estate and other investments in continuing operations of $9.7 million,
$20.1 million, $18.7 million and $9.6 million, respectively.
Income (loss) from discontinued operations. Income from discontinued operations in the transition period ended December 31,
2018 and fiscal years 2018, 2017, and 2016 was $570,000, $164.8 million, $76.8 million and $67.4 million, respectively. We
realized a gain on sale of discontinued operations for the fiscal years 2018, 2017, and 2016 of $163.6 million, $56.1 million and
$23.8 million, respectively. See Note 10 of the Notes to Consolidated Financial Statements in this report for further
information.
31
Acquisitions and Dispositions
During the transition period ended December 31, 2018, we sold three apartment communities, five commercial properties, and
three parcels of land for an aggregate sale price of $63.4 million. We had no acquisitions of properties during the transition
period ended December 31, 2018. See Note 8 of the Notes to Consolidated Financial Statements in this Transition Report for a
table detailing our acquisitions and dispositions for the transition period ended December 31, 2018 and for the fiscal years
ended April 30, 2018 and 2017.
Funds From Operations
We consider Funds from Operations (“FFO”) to be a useful measure of performance for an equity REIT. We use the definition
of FFO adopted by the National Association of Real Estate Investment Trusts, Inc. (“Nareit”). Nareit defines FFO as net
income or loss calculated in accordance with GAAP, excluding:
•
•
•
•
depreciation and amortization related to real estate;
gains and losses from the sale of certain real estate assets;
gains and losses from change in control; and
impairment write-downs of certain real estate assets and investments in entities when the impairment is directly
attributable to decreases in the value of depreciable real estate held by the entity.
Due to limitations of the FFO definition adopted by Nareit, we have made certain interpretations in applying the definition. We
believe all such interpretations not specifically provided for in the Nareit definition are consistent with the definition. Nareit's
FFO White Paper 2018 Restatement clarified that impairment write-downs of land related to a REIT's main business are
excluded from FFO and a REIT has the option to exclude impairment write-downs of assets that are incidental to the main
business. Accordingly, we recast FFO for the fiscal year ended April 30, 2018 to exclude $2.6 million in impairment write-
downs of land.
We believe that FFO, which is a standard supplemental measure for equity real estate investment trusts, is helpful to investors
in understanding our operating performance, primarily because its calculation excludes depreciation and amortization expense
on real estate assets, thereby providing an additional perspective on our operating results. We believe that GAAP historical cost
depreciation of real estate assets generally is not correlated with changes in the value of those assets, whose value does not
diminish predictably over time, as historical cost depreciation implies. The exclusion in Nareit’s definition of FFO of
impairment write-downs and gains and losses from the sale of real estate assets helps to identify the operating results of the
long-term assets that form the base of our investments, and assists management and investors in comparing those operating
results between periods.
While FFO is widely used by us as a primary performance metric, not all real estate companies use the same definition of FFO
or calculate FFO 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 or any other GAAP measurement of
performance, but rather should be considered as an additional, supplemental measure. FFO also does not represent cash
generated from operating activities in accordance with GAAP, and is not necessarily indicative of sufficient cash flow to fund
all of our needs or our ability to service indebtedness or make distributions.
FFO applicable to common shares and Units for the eight months ended December 31, 2018, increased to $30.6 million
compared to $25.6 million for the eight months ended December 31, 2017, a change of 19.4%, primarily due to a reduction in
interest expense, preferred dividends, and loss on extinguishment of debt and partially offset by a reduction in NOI from sold
properties. FFO applicable to common shares and Units for the fiscal year ended April 30, 2018 decreased to $38.9 million
compared to $55.2 million for the fiscal year ended April 30, 2017, primarily due to a reduction of NOI as a result of
disposition activities and costs related to the redemption of preferred shares. FFO applicable to common shares and limited
partnership units for the fiscal year ended April 30, 2017 was $55.2 million, compared to $103.9 million for the fiscal year
ended April 30, 2016 primarily due to a gain on extinguishment of debt that was recorded in the fiscal year ended April 30,
2016.
32
Reconciliation of Net Income Available to Common Shareholders to Funds From Operations
For the eight months ended December 31, 2018 and 2017:
Eight Months Ended December 31,
(in thousands, except per share and unit amounts)
2018
2017
Weighted Avg
Shares and
Units(1)
Amount
Per
Share
and
Unit(2)
Weighted Avg
Shares and
Units(1)
Amount
Per
Share
and
Unit(2)
Net income (loss) available to common shareholders
$
(8,945)
11,937
$
(0.75)
$
117,461
12,015
$
9.78
Adjustments:
Noncontrolling interests – Operating Partnership
Depreciation and amortization
Impairment of real estate
Gain on sale of real estate
1,387
(1,032)
48,425
1,221
(9,110)
1,483
14,222
61,200
256
(167,553)
Funds from operations applicable to common shares and Units
$
30,559
13,324
$
2.29
$
25,586
13,498
$
1.90
(1) Pursuant to Exchange Rights, limited partnership units of the Operating Partnership are redeemable for cash, or, at our discretion, may be
exchangeable for common shares on a one-for-one basis.
(2) Net income (loss) available to common shareholders is calculated on a per common share basis. FFO is calculated on a per common share and
limited partnership unit basis.
For the years ended April 30, 2018, 2017 and 2016:
Fiscal Years Ended April 30,
2018
2017
2016
(in thousands, except per share and unit amounts)
Weighted Avg
Shares and
Units(1)
Amount
Per
Share
and
Unit(2)
Weighted Avg
Shares and
Units(1)
Amount
Per
Share
and
Unit(2)
Weighted Avg
Shares and
Units(1)
Amount
Per
Share
and
Unit(2)
$ 104,562
11,998
$ 8.71
$
31,366
12,117
$ 2.59
$
60,492
12,309
$ 4.91
1,461
12,702
87,299
18,065
(183,687)
1,613
4,059
52,564
42,065
(74,847)
1,428
7,032
63,789
5,983
(33,422)
$
38,941
13,459
$ 2.89
$
55,207
13,730
$ 4.02
$ 103,874
13,737
$ 7.56
Net income (loss) available to common
shareholders
Adjustments:
Noncontrolling interests – Operating
Partnership
Depreciation and amortization
Impairment of real estate
Gain on sale of real estate
Funds from operations applicable to
common shares and Units
(1) Pursuant to Exchange Rights, limited partnership units of the Operating Partnership are redeemable for cash, or, at our discretion, may be
exchangeable for common shares on a one-for-one basis.
(2) Net income (loss) available to common shareholders is calculated on a per common share basis. FFO is calculated on a per common share and
limited partnership unit basis.
33
Liquidity and Capital Resources
Overview
We desire to create and maintain a strong balance sheet that offers financial flexibility and enables us to pursue and acquire
apartment communities that enhance our portfolio composition, operating metrics, and cash flow growth prospects. We intend
to strengthen our capital and liquidity positions by continuing to focus on improving our core fundamentals, which include
generating positive cash flows from operations, maintaining appropriate debt levels and leverage ratios, and controlling
overhead costs.
Our primary sources of liquidity are cash and cash equivalents on hand and cash flows generated from operations. Other
sources include availability under our unsecured lines of credit, proceeds from property dispositions, offerings of preferred and
common stock under our shelf registration statement, and unsecured term loans or long-term secured mortgages.
Our primary liquidity demands are normally-recurring operating and overhead expenses, debt service and repayments, capital
improvements to our communities, distributions to the holders of our preferred shares, common shares, and Units, value-add
redevelopment, and acquisition of additional communities.
We intend to maintain a strong balance sheet and preserve our financial flexibility, which we believe should enhance our ability
to capitalize on appropriate investment opportunities as they may arise. We intend to maintain a conservative capital structure
by taking certain actions, including:
•
extending and sequencing our debt maturity dates;
• managing interest rate exposure through the appropriate use of a mix of fixed and floating debt and utilizing our line
of credit and term loan as appropriate;
• maintaining adequate coverage ratios on our debt obligations;
• where appropriate, accessing the equity markets through our shelf registration statement.
We have historically met our short-term liquidity requirements through net cash flows provided by our operating activities and,
from time to time, through draws on our line of credit. Management considers our ability to generate cash from property
operating activities and draws on our line of credit to be adequate to meet all operating requirements and to make distributions
to our 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 also generally expected to be funded
from existing cash on hand, cash flow generated from property operations, draws on our line of credit and/or new borrowings,
and we believe we will have sufficient cash to meet our commitments over the next twelve months.
To maintain our qualification as a REIT, we must pay dividends to our shareholders aggregating annually at least 90% of our
REIT taxable income, excluding net capital gains. While we have historically satisfied this distribution requirement by making
cash distributions to our shareholders, we may choose to satisfy this requirement by making distributions of other property,
including, in limited circumstances, our own common stock. As a result of this distribution requirement, our Operating
Partnership cannot rely on retained earnings to fund ongoing operations to the same extent that other companies whose parent
companies are not REITs can. We pay dividends from cash available for distribution. Until it is distributed, cash available for
distribution is typically invested in investment grade securities or is used to reduce balances outstanding under our line of
credit. In the event of deterioration in property operating results, we may need to consider additional cash preservation
alternatives, including reducing development activities, capital improvements, and renovations. For the transition period ended
December 31, 2018, we declared cash distributions of $28.0 million to common shareholders and unitholders of IRET
Properties, as compared to net cash provided by operating activities of $40.0 million and FFO of $30.6 million.
Factors that could increase or decrease our future liquidity include, but are not limited to, changes in interest rates or sources of
financing, general volatility in capital and credit markets, changes in minimum REIT dividend requirements, and our ability to
access the capital markets on favorable terms, or at all. As a result of the foregoing conditions or general economic conditions
in our markets that affect our ability to attract and retain residents, we may not generate sufficient cash flow from operations. If
we are unable to obtain capital from other sources, we may not be able to pay the distribution required to maintain our status as
a REIT, make required principal and interest payments, make strategic acquisitions or make necessary routine capital
improvements or undertake re-development opportunities with respect to our existing portfolio of operating assets.
34
Capital Resources and Cash Flows
As of December 31, 2018, we had total liquidity of approximately $188.8 million, which included $175.0 million available on
our Line of Credit based on the value of properties contained in our unencumbered asset pool ("UAP") and $13.8 million of
cash and cash equivalents. As of April 30, 2018, we had total liquidity of approximately $187.9 million, which included $176.0
million available on our Line of Credit based on the UAP and $11.9 million of cash and cash equivalents. As of April 30,
2017, we had total liquidity of approximately $177.7 million, which included $148.9 million available under our Line of Credit
based on the UAP and $28.8 million of cash and cash equivalents.
As of December 31, 2018, we also had restricted cash consisting of $5.5 million of escrows held by lenders for real estate
taxes, insurance, and capital additions. We had restricted cash consisting of $4.2 million and $4.3 million of escrows held by
lenders for real estate taxes, insurance, and capital additions as of April 30, 2018 and 2017, respectively. As of April 30, 2017,
we also had restricted cash of $23.7 million for net tax-deferred exchange proceeds remaining from a portion of our senior
housing sale.
Our Line of Credit has total commitments of up to $250.0 million, with borrowing capacity based on the UAP. The UAP
provided for a borrowing capacity of approximately $232.5 million at year-end, offering additional borrowing availability of
$175.0 million beyond the $57.5 million drawn as of December 31, 2018.
During the transition period ended December 31, 2018, we amended our primary unsecured credit facility. We extended the
maturity date on our existing $70.0 million unsecured term loan, which now matures in January 2024. We also added a new
$75.0 million, seven-year term loan which matures in August 2025. We have also entered into swap agreements for both term
loans for the duration of the terms in our ongoing effort to reduce floating interest rate exposure.
We also have a $6.0 million operating line of credit. This operating line of credit is designed to enhance treasury management
activities and more effectively manage cash balances. This operating line has a one-year term, with pricing based on a market
spread plus the one-month LIBOR index rate.
For information regarding our cash flows for the transition period ended December 31, 2018 and the fiscal years ended
April 30, 2018, and 2017, see the Consolidated Statements of Cash Flows in Item 15.
In addition to cash flow from operations, during the transition period ended December 31, 2018, we generated capital from
various activities, including:
• The disposition of three apartment communities, five commercial properties, and three land parcels for a total sales
price of $63.4 million. The net proceeds of these transactions was $32.5 million after pay down of debt and
distribution of $1.9 million in net proceeds to our joint venture partners in those transactions; and
•
Proceeds from a $75.0 million term loan that expires in 2025.
During the transition period ended December 31, 2018, we used capital for various activities, including:
• Repaying approximately $66.2 million of mortgage principal; and
•
Funding capital expenditures for apartment communities of approximately $12.5 million.
Financial Condition
Mortgage Loan Indebtedness. Mortgage loan indebtedness, including mortgages on properties held for sale, was $446.0 million
on December 31, 2018, $512.1 million on April 30, 2018, and $687.2 million on April 30, 2017. All of our mortgage debt is at
fixed rates of interest, with staggered maturities. This reduces the exposure to changes in interest rates, which minimizes the
effect of interest rate fluctuations on our results of operations and cash flows. As of December 31, 2018, the weighted average
rate of interest on our mortgage debt was 4.58% compared to 4.69% on April 30, 2018 and 4.71% on April 30, 2017. Refer to
Note 5 of our consolidated financial statements contained in this Transition Report on Form 10-KT for the principal payments
due on our mortgage indebtedness.
Construction Loan Indebtedness. We had no construction loan indebtedness on December 31, 2018 or April 30, 2018 compared
to $41.8 million on April 30, 2017. The weighted average rate of interest on construction loan indebtedness was 3.27% on
April 30, 2017.
Revolving Unsecured Line of Credit. As of December 31, 2018, our Line of Credit had a credit limit of $250.0 million based on
the UAP, of which $57.5 million was drawn, at an interest rate of 3.72%. The multi-bank line of credit bears interest either at
35
the lender's base rate plus a margin ranging from 35 to 85 basis points, or the LIBOR, plus a margin ranging from 135 to 190
basis points based on our consolidated leverage. The line of credit is utilized to refinance existing indebtedness, to finance
property acquisitions, to finance capital expenditures, and for general corporate purposes.
Property Owned. Property owned was $1.6 billion, $1.7 billion, and $1.4 billion at December 31, 2018, April 30, 2018 and
2017, respectively. The decrease from April 30, 2018 to December 31, 2018 is primarily due to the disposition of properties
during the transition period.
Cash and Cash Equivalents. Cash and cash equivalents on December 31, 2018, totaled $13.8 million, compared to $11.9
million and $28.8 million on April 30, 2018 and April 30, 2017, respectively.
Operating Partnership Units. Outstanding limited partnership units in the Operating Partnership totaled 1.4 million Units on
December 31, 2018, compared to 1.4 million Units on April 30, 2018 and 1.6 million Units on April 30, 2017, respectively. The
decrease in Units outstanding at April 30, 2018, as compared to April 30, 2017, resulted from the redemption of Units for cash
or shares.
Pursuant to the exercise of Exchange Rights, during the transition period ended December 31, 2018 and fiscal years 2018 and
2017, respectively, we redeemed approximately 9,000, 149,000, and 16,500 Units for an aggregate purchase price of $499,000,
$8.8 million and $966,000 at an average price per unit of $53.12, $58.90, and $58.40.
Common and Preferred Shares. Common shares outstanding on December 31, 2018, totaled 11.9 million, compared to 12.0
million and 12.1 million common shares outstanding on April 30, 2018 and April 30, 2017, respectively. The decrease in
common shares outstanding was due to repurchases of outstanding common shares under the share repurchase program.
During the transition period ended December 31, 2018 and fiscal years 2018 and 2017, respectively, approximately 33,000,
3,000 and 50,000 Units were redeemed, respectively, in exchange for common shares in connection with Unitholders exercising
their Exchange Rights, with a total book value of $649,000, $34,000, and $875,000, respectively, included in equity.
During the transition period ended December 31, 2018, we issued approximately 5,600 restricted stock units ("RSUs"), with a
total grant-date value of $347,000, under our 2015 Incentive Award Plan. During fiscal years 2018 and 2017, we issued
approximately 9,300 and 60,000 share awards, with a total grant-date value of $536,000 and $2.6 million, respectively, under
our 2015 Incentive Plan. We also issued approximately 5,900 common shares, with a total grant-date value of approximately
$352,000, under our 2008 Incentive Plan, for trustee share based compensation for fiscal year 2016 performance.
On December 7, 2016, our Board of Trustees authorized a share repurchase program to repurchase up to $50 million of our
common shares and/or Series B preferred shares over a one-year period. On December 5, 2017, our Board of Trustees
reauthorized this share repurchase program for our common shares for an additional one-year period. On December 5, 2018,
our Board of Trustees reauthorized this share repurchase program for a third one-year period. Under this program, we may
repurchase Common Shares in open-market purchases including pursuant to Rule 10b5-1 or Rule 10b-18 plans, as determined
by management and in accordance with the requirements of the Securities and Exchange Commission. The extent to which we
repurchase our shares, and the timing of such repurchases, will depend upon a variety of factors, including market conditions,
regulatory requirements and other corporate considerations, as determined by the executive management team. The program
may be suspended or discontinued at any time. During the transition period ended December 31, 2018, we repurchased and
retired approximately 42,000 common shares for an aggregate cost of $2.2 million, including commissions, at an average price
per share of $51.36. During fiscal year 2018, we repurchased and retired approximately 178,000 common shares for an
aggregate cost of $9.9 million, including commissions, at an average price per share of $55.82. During fiscal year 2017, we
repurchased and retired approximately 78,000 common shares for an aggregate cost of $4.5 million, including commissions, at
an average price per share of $57.69.
As of December 31, 2018 and April 30, 2018, we had 4.1 million Series C preferred shares outstanding. On October 30, 2017,
we completed the redemption of all the outstanding 7.95% Series B Cumulative Redeemable Preferred Shares ("Preferred B
Shares") for an aggregate redemption price of $115.0 million, as such shares are no longer outstanding as of such date. On
December 2, 2016, we completed the redemption of all of the outstanding 8.25% Series A Cumulative Redeemable Preferred
Shares (“Preferred A Shares”) for an aggregate redemption price of $29.2 million, and such shares are no longer outstanding as
of such date.
36
Contractual Obligations and Other Commitments
Our primary contractual obligations relate to our borrowings under the line of credit, term loans, and mortgage notes payable.
The line of credit matures in August 2022 and had a $57.5 million balance outstanding at December 31, 2018. We had two term
loans with an aggregate balance of $145.0 million at December 31, 2018. The $70.0 million term loan matures in January 2024
and the $75.0 million term loan matures in August 2025. The principal and interest payments on the mortgage notes payable,
for the years subsequent to December 31, 2018, are included in the table below as “Long-term debt.”
Long-term debt (principal and interest)
Line of credit (principal and interest)(1)
Term loans (principal and interest)
Total
(in thousands)
Total
521,495
65,633
182,247
769,375
$
$
$
$
Less than
1 Year
48,756
2,168
6,156
57,080
$
$
$
$
1-3 Years
3-5 Years
More than
5 Years
221,218
4,343
12,328
237,889
$
$
$
$
103,499
$
148,022
59,122
12,311
174,932
$
$
—
151,452
299,474
$
$
$
$
(1) The future interest payments on the line of credit were estimated using the outstanding principal balance and interest rate in effect as of December 31, 2018.
Off-Balance-Sheet Arrangements
As of December 31, 2018, we had no significant off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC
Regulation S-K.
Inflation
Substantially all of our apartment leases are for a term generally ranging from six to eighteen months. In an inflationary
environment, we may realize increased rents at the commencement of new leases or upon the renewal of existing leases. We
believe the short-term nature of our leases generally minimizes our risk from the adverse effects of inflation.
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 Transition Report on Form 10-KT.
Real Estate. Real estate is carried at cost, net of accumulated depreciation, less an adjustment for impairment, if any.
Depreciation requires an estimate by management of the useful life of each asset as well as an allocation of the costs associated
with a property to its various components. As described further below, the process of allocating property costs to its
components involves a considerable amount of subjective judgments to be made by management. If we do not allocate these
costs appropriately or incorrectly estimate the useful lives of our real estate, depreciation expense may be misstated.
Depreciation is computed on a straight-line basis over the estimated useful lives of the assets. We use a 10-37 year estimated
life for buildings and improvements and a 5-10 year estimated life for furniture, fixtures and equipment. 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.
In the first quarter of fiscal year 2018, we determined it was appropriate to review and adjust our estimated useful lives to be
specific to our remaining asset portfolio. Effective May 1, 2017, we changed the estimated useful lives of our real estate assets
to better reflect the estimated periods during which they will be of economic benefit. Refer to Note 2 of our consolidated
financial statements contained in this Transition Report on Form 10-KT for further discussion on this change and its impact.
Property sales or dispositions are recorded when control of the assets are transferred to the buyer and we have no significant
continuing involvement with the property sold.
Acquisition of Investments in Real Estate. Upon acquisitions of real estate, we assess 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
consider whether there were significant intangible assets acquired (for example, above-and below-market leases, the value of
acquired in-place leases and resident relationships) and assumed liabilities, and allocate 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. Techniques used to estimate fair value include discounted cash flow analysis and
37
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 a relative fair value allocation if acquired in a
portfolio acquisition.
Other intangible assets acquired include amounts for in-place lease values that are based upon our evaluation of the specific
characteristics of the leases. Factors considered in the fair value analysis include an estimate of carrying costs and foregone
rental income during hypothetical expected lease-up periods, consideration of current market conditions, and costs to execute
similar leases. We also consider information about each property obtained during our pre-acquisition due diligence, marketing
and leasing activities in estimating the relative fair value of the tangible and intangible assets acquired.
Capitalization of Costs. We follow the real estate project costs guidance in ASC 970, Real Estate – General, in accounting for
the costs of development and re-development projects. As real estate is undergoing development or redevelopment, all project
costs directly associated with and attributable to the development and construction of a project, including interest expense and
real estate tax expense, are capitalized to the cost of the real property. The capitalization period begins when development
activities and expenditures begin and ends upon completion, which is when the asset is ready for its intended use. Generally,
rental property is considered substantially complete upon issuance of a certificate of occupancy.
Real Estate Held For Sale. Properties are classified as held for sale when they meet the necessary criteria, which include: (a)
management, having the authority to approve the action, commits to a plan to sell the asset and (b) the sale of the asset is
probable and expected to be completed within one year. We generally consider these criteria to be met when the transaction has
been approved by our Board of Trustees, there are no known significant contingencies related to the sale, and management
believes it is probable that the sale will be completed within one year. 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.
We report in discontinued operations the results of operations and the related gains or losses on the sales of properties that have
either been disposed of or classified as held for sale and meet the classification of a discontinued operation as described in ASC
205 - Presentation of Financial Statements and ASC 360 - Property, Plant, and Equipment: Reporting Discontinued Operations
and Disclosures of Disposals of Components of an Entity. Under these standards, a disposal (or classification as held for sale)
of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the
disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.
Impairment. We periodically evaluate our long-lived assets, including our investments in real estate, for impairment indicators.
The impairment evaluation is performed on assets by property such that assets for a property form an asset group. The
judgments regarding the existence of impairment indicators are based on factors such as operational performance, market
conditions, expected holding period of each asset group, and legal and environmental concerns. If indicators exist, we compare
the expected future undiscounted cash flows for the long-lived asset group against the carrying amount of that asset group. If
the sum of the estimated undiscounted cash flows is less than the carrying amount of the asset group, an impairment loss is
recorded for the difference between the estimated fair value and the carrying amount of the asset group. If our anticipated
holding period for properties, the estimated fair value of properties or other factors change based on market conditions or
otherwise, our evaluation of impairment charges may be different and such differences could be material to our consolidated
financial statements. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding
future occupancy, rental rates and capital requirements that could differ materially from actual results. Plans to hold properties
over longer periods decrease the likelihood of recording impairment losses.
Revenue Recognition. The Company primarily leases apartment communities under operating leases with terms generally of
one year or less. Rental revenue is recognized on the straight-line basis, which averages minimum required rents over the terms
of the leases. Rental income represents gross market rent less adjustments for concessions, vacancy loss, and bad debt. Rents
recognized in advance of collection are reflected as receivable arising from straight-lining of rents, net of allowance for
doubtful accounts. Rent concessions, including free rent, are amortized on a straight-line basis over the terms of the related
leases. Other property revenues are recognized when the services are transferred to our residents for amounts which reflects
the consideration we expect to receive in exchange for those services.
REIT Status. We operate in a manner intended to enable us to continue to qualify as a REIT under Sections 856-860 of the
Internal Revenue Code. Under those sections, a REIT which distributes at least 90% of its REIT taxable income, excluding net
capital gains, 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. We intend to distribute to our shareholders 100% of our
taxable income. Therefore, no provision for Federal income taxes is required. If we fail to distribute the required amount of
income to our shareholders, we would fail to qualify as a REIT and substantial adverse tax consequences may result.
38
We have one taxable REIT subsidiary ("TRS"), acquired during fiscal year 2014, which is subject to corporate federal and state
income taxes on its taxable income at regular statutory rates. For the transition period ended December 31, 2018, we estimate
that the TRS will have no taxable income. There were no income tax provisions or material deferred income tax items for our
TRS for the transition period ended December 31, 2018 and the fiscal years ended April 30, 2018, 2017, and 2016.
Our taxable income is affected by a number of factors, including, but not limited to, the following: our residents perform their
obligations under their leases and our tax and accounting positions do not change. These factors, which impact our taxable
income, are subject to change and many are outside of our control. If actual results vary, our taxable income may change.
Recent Accounting Pronouncements
For disclosure regarding recent accounting pronouncements and the anticipated impact they will have on our operations, please
refer to Note 2 to our consolidated financial statements appearing elsewhere in this Transition Report on Form 10-KT.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk is primarily related to fluctuations in the general level of interest rates on our current and future
fixed and variable rate debt obligations. We currently use interest rate swaps to offset the impact of interest rate fluctuations on
our $70.0 million and $75.0 million variable-rate term loans. The swap on our $70.0 million term loan has a notional amount
of $70.0 million and an average pay rate of 2.16%. The swap on our $75.0 million term loan has a notional amount of $75.0
million and an average pay rate of 2.81%. The aggregate fair value of our interest rate swaps is a liability of $856,000, as of
December 31, 2018. We do not enter into derivative instruments for trading or speculative purposes. The interest rate swap
exposes us to credit risk in the event of non-performance by the counterparty under the terms of the agreement.
As of December 31, 2018, we had no variable-rate mortgage debt outstanding and $202.5 million of variable-rate borrowings
under our line of credit and term loans, of which, $145.0 million is fixed through interest rate swaps. We estimate that an
increase in 30-day LIBOR of 100 basis points with constant risk spreads would result in our net income being reduced by
approximately $575,000 on an annual basis. We estimate that a decrease in 30-day LIBOR of 100 basis points would increase
the amount of net income by a similar amount.
Mortgage loan indebtedness decreased by $43.4 million as of December 31, 2018, compared to April 30, 2018, primarily due to
loan payoffs related to property dispositions. As of December 31, 2018, 100.0% of our $446.0 million of mortgage debt was at
fixed rates of interest, with staggered maturities, compared to 95.6% as of April 30, 2018. As of December 31, 2018, the
weighted average rate of interest on our mortgage debt was 4.58%, compared to 4.69% on April 30, 2018. Even though our
goal is to maintain a fairly low exposure to interest rate risk, we may become vulnerable to significant fluctuations in interest
rates on any future repricing or refinancing of our fixed or variable rate debt or future debt.
The following table provides information about our financial instruments that are sensitive to changes in interest rates. For
debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates.
Average variable rates are based on rates in effect at the reporting date.
Future Principal Payments (in thousands, except percentages)
Debt
2019
2020
2021
2022
2023
Thereafter
Total
Fair
Value
Fixed Rate
Average Interest Rate(1)
Variable Rate(2)
Average Interest Rate(1)
$
28,587
$
87,592
$
104,553
$
40,917
$
48,546
$
135,779
5.18%
5.03%
4.93%
4.30%
4.05%
—
—
—
—
— $
57,500
— $
145,000
—
3.72%
—
$
$
445,974 $
444,241
202,500 $
202,500
(1)
(2)
Interest rate is annualized,
Includes $57.5 million under our line of credit and $145.0 million on our term loans.
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements and related notes, together with the Report of the Independent Registered Public
Accounting Firm, are set forth beginning on page F-1 of this Transition Report on Form 10-KT and are incorporated herein by
reference.
39
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures: As of December 31, 2018, the end of the period covered by this Transition Report on
Form 10-KT, our management carried out an evaluation, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and
procedures (as such term is defined in Rule 13a-15(e) under the Exchange Act). Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure
that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and is accumulated
and communicated to management, including our principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting: There have been no changes in our internal control over financial
reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the last two months of the transition period to which
this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for
performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2018. Our internal
control over financial reporting is a process designed under the supervision of our principal executive and principal financial
officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial
statements for external reporting purposes in accordance with GAAP.
As of December 31, 2018, management conducted an assessment of the effectiveness of our internal control over financial
reporting, based on the framework established in Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management has determined that
our internal control over financial reporting as of December 31, 2018, was effective.
Our internal control over financial reporting includes policies and procedures that:
•
•
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions, acquisitions
and dispositions of assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations
of our management and the trustees; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on our financial statements.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due
to changes in conditions or deterioration in the degree of compliance with the policies or procedures.
Our internal control over financial reporting as of December 31, 2018 has been audited by Grant Thornton LLP, an independent
registered public accounting firm, as stated in their report on page F-3 of our consolidated financial statements contained in our
Transition Report on Form 10-KT, which expresses an unqualified opinion on the effectiveness of our internal control over
financial reporting as of December 31, 2018.
Item 9B. Other Information
On February 26, 2019, in connection with the closing of the acquisition of SouthFork Townhomes (as described under Note 18,
"Subsequent Events"), IRET, Inc., a North Dakota corporation, as the General Partner (the "General Partner") of IRET Properties,
a North Dakota Limited Partnership (the "Partnership"), entered into that certain Fourth Amendment to the Agreement of Limited
Partnership (the "Partnership Agreement") of the Partnership for the designation and issuance of up to 165,600 Series D Preferred
40
Units in exchange for the contribution by a new Limited Partner to the Partnership of the SouthFork Townhomes property. The
Fourth Amendment to the Partnership Agreement is attached hereto as Exhibit 10.32.
On February 27, 2019, the General Partner of the Partnership also executed that certain Amended and Restated Partnership
Agreement, which amended the provision relating to the change in the Partnership's fiscal year-end (to December 31), adjusted
certain numbers to account for our 1-for-10 reverse stock split in December 2018, updated certain tax provisions, and incorporated
certain other administrative updates. A copy of the Amended and Restated Partnership Agreement is attached hereto as
Exhibit 10.30.
PART III
The information required in Item 10 (Directors, Executive Officers and Corporate Governance), Item 11 (Executive
Compensation), Item 12 (Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters), Item 13 (Certain Relationships and Related Transactions, and Director Independence), and Item 14 (Principal
Accountant Fees and Services) will be incorporated by reference to our definitive proxy statement for our 2019 Annual
Meeting of Shareholders to be filed with the SEC no later than 120 days after the end of the fiscal year covered by this
Transition Report on Form 10-KT.
PART IV
Item 15. Exhibits, Financial Statement Schedules
The following documents are filed as part of this report:
1. Financial Statements
See the “Table of Contents” to our consolidated financial statements on page F-1 of this Transition Report on Form 10-KT.
2. Financial Statement Schedules
See the “Table of Contents” to our consolidated financial statements on page F-1 of this Transition Report on Form 10-KT.
The following financial statement schedules should be read in conjunction with the financial statements referenced in Part II,
Item 8 of this Transition Report on Form 10-KT: Schedule III Real Estate and Accumulated Depreciation
3. Exhibits
See the Exhibit Index set forth in part (b) below.
The Exhibit Index below lists the exhibits to this Transition Report on Form 10-KT. We will furnish a printed 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 Transition Report on Form 10-KT or are incorporated by reference as indicated below.
41
EXHIBIT NO.
3.1.
3.2
3.3
10.1**
10.2**
10.3
10.4**
10.5**
10.6**
10.7**
10.8**
10.9**
10.10**
10.11**
10.12**
10.13**
EXHIBIT INDEX
DESCRIPTION
Articles of Amendment and Third Restated Declaration of Trust of Investors Real Estate Trust adopted on September
23, 2003, as amended on September 18, 2007 (incorporated herein by reference to Exhibit 3.1 to the Company’s
Annual Report on Form 10-K filed with the Commission on June 30, 2014).
Fifth Restated Trustee’s Regulations (Bylaws) of Investors Real Estate Trust, adopted on March 15, 2017
(incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-k filed on March 17, 2017).
Articles Supplementary to the Company’s Articles of Amendment and Third Restated Declaration of Trust
designating the Company’s 6.625% Series C Cumulative Redeemable Preferred Shares, no par value per share
(incorporated by reference to Exhibit 3.2 of the Company’s Registration Statement on Form 8-A filed with the SEC
on September 28, 2017).
2015 Incentive Plan dated June 23, 2015 ((incorporated herein by reference to Appendix A to the Company’s Proxy
Statement on Schedule 14A filed with the Commission on August 3, 2015).
Amendment to 2015 Incentive Plan dated April 19, 2016 (incorporated herein by reference to Exhibit 10.2 to the
Company’s Annual Report on Form 10-K filed with the Commission on June 29, 2016).
Form of Trustee Stock Award Agreement under the 2015 Incentive Plan dated June 22, 2016 (incorporated herein by
reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K filed with the Commission on June 29,
2016).
Form of Performance Stock Award Agreement under the 2015 Incentive Plan dated June 22, 2016 (incorporated
herein by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K filed with the Commission on
June 29, 2016).
Form of Stock Award Agreement under the 2015 Incentive Plan dated June 22, 2016 (incorporated herein by
reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K filed with the Commission on June 29,
2016).
Form of Stock Award Agreement (one-year measurement period) under the 2015 Incentive Plan dated September 16,
2015 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the
Commission on September 21, 2015).
Form of Stock Award Agreement (two-year measurement period) under the 2015 Incentive Plan dated September 16,
2015 (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the
Commission on September 21, 2015).
Form of Stock Award Agreement (three-year measurement period) under the 2015 Incentive Plan dated September
16, 2015 (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with
the Commission on September 21, 2015).
Form of Change in Control Severance Agreement (incorporated herein by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed with the Commission on July 7, 2015).
Form of Indemnification Agreement (incorporated herein by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed with the Commission on September 21, 2015).
2008 Incentive Award Plan of Investors Real Estate Trust and IRET Properties dated September 16, 2008
(incorporated herein by reference to Appendix A to the Company’s Definitive Proxy Statement filed with the
Commission on August 1, 2008).
Short-Term Incentive Program dated May 1, 2012 (incorporated herein by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed with the Commission on June 4, 2012).
Long-Term Incentive Program dated May 1, 2012 (incorporated herein by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-K filed with the Commission on June 4, 2012).
42
EXHIBIT NO.
DESCRIPTION
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
Credit Agreement, dated January 31, 2017, between IRET Properties, as borrower; Investors Real Estate Trust, IRET,
Inc., and other subsidiaries as guarantors; lenders; KeyBank, NA and PNC Bank, NA as syndication agents; and
Bank of Montreal as administrative Agent (incorporated herein by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q filed with the Commission on March 13, 2017).
Purchase and Sale Agreement, by and between IRET Properties, A North Dakota Limited Partnership, together with
certain affiliates set forth therein, and Harrison Street Real Estate, LLC, a Delaware limited liability company, dated
November 30, 2017 (incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q filed with the Commission on March 12, 2018).
First Amendment to Purchase and Sale Agreement, by and between IRET Properties, A North Dakota Limited
Partnership, together with certain affiliates set forth therein, and Harrison Street Real Estate, LLC, a Delaware
limited liability company, dated December 22, 2017 (incorporated herein by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q filed with the Commission on March 12, 2018).
Agreement for Sale and Purchase of Property – Wyoming Senior Housing Assets Portfolio, dated August 26, 2016,
by IRET Properties and LSREF Golden Property 14 (WY), LLC as sellers and Edgewood Properties, LLLP,
Edgewood Properties Managements, LLC and LSREF Golden Ops 14 (WY), LLC as buyers (incorporated herein by
reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on December
12, 2016).
Agreement for Sale and Purchase of Property – Hermantown Senior Housing Assets Portfolio, dated August 26,
2016, by IRET Properties as seller and Edgewood Properties, LLLP, Edgewood Properties Managements, LLC and
Edgewoodvista Senior Living, Inc. as buyers (incorporated herein by reference to Exhibit 10.2 to the Company’s
Quarterly Report on Form 10-Q filed with the Commission on December 12, 2016).
Agreement for Sale and Purchase of Property – Edgewood Vista 1 Senior Housing Assets Portfolio, dated August 26,
2016, by IRET Properties as seller and Edgewood Properties, LLLP, Edgewood Properties Managements, LLC and
Edgewoodvista Senior Living, Inc. as buyers (incorporated herein by reference to Exhibit 10.3 to the Company’s
Quarterly Report on Form 10-Q filed with the Commission on December 12, 2016).
Agreement for Sale and Purchase of Property – Edgewood Vista 2 Senior Housing Assets Portfolio, dated August 26,
2016, by IRET Properties as seller and Edgewood Properties, LLLP, Edgewood Properties Managements, LLC and
Edgewoodvista Senior Living, Inc. as buyers (incorporated herein by reference to Exhibit 10.4 to the Company’s
Quarterly Report on Form 10-Q filed with the Commission on December 12, 2016).
Agreement for Sale and Purchase of Property – Edgewood Vista 3 Senior Housing Assets Portfolio, dated August 26,
2016, by IRET Properties, EVI Billings, LLC, EVI Sioux Falls, LLC and IRET-Minot EV, LLC as sellers and
Edgewood Properties, LLLP, Edgewood Properties Managements, LLC and Edgewoodvista Senior Living, Inc. as
buyers (incorporated herein by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q filed with
the Commission on December 12, 2016).
Agreement for Sale and Purchase of Property – Sartell Senior Housing Assets Portfolio, dated August 26, 2016, by
IRET Properties and IRET-SH 1, LLC as sellers and Edgewood Properties, LLLP, Edgewood Properties
Managements, LLC and Edgewoodvista Senior Living, Inc. as buyers (incorporated herein by reference to Exhibit
10.6 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on December 12, 2016).
Separation Agreement and Release dated August 1, 2016 between the Company and Mark W. Reiling (incorporated
herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on
September 8, 2016).
Stock Award Agreement under the 2015 Incentive Plan dated August 8, 2016 issued to Mark O. Decker, Jr
(incorporated herein by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the
Commission on September 8, 2016).
43
EXHIBIT NO.
DESCRIPTION
10.25
10.26
10.27**
10.28**
10.29**
10.30†
10.31
10.32†
21.1†
23.1†
24.1†
31.1†
31.2†
32.1†
32.2†
101†
Separation Agreement and Release dated April 27, 2017 between the Company and Timothy P. Mihalick
(incorporated herein by reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K filed with the
Commission on June 28, 2017).
Separation Agreement and Release dated April 27, 2017 between the Company and Diane K. Bryantt (incorporated
herein by reference to Exhibit 10.27 to the Company's Annual Report on Form 10-K filed with the Commission on
June 28, 2017).
Offer Letter dated April 27, 2017 between the Company and Anne Olson (incorporated herein by reference to
Exhibit 10.28 to the Company's Annual Report on Form 10-K filed with the Commission on June 28, 2017).
Offer Letter dated April 27, 2017 between the Company and John Kirchmann (incorporated by reference to
Exhibit 10.29 to the Company's Annual Report on Form 10-K filed with the Commission on June 28, 2017).
Offer Letter dated April 27, 2017 between the Company and Mark O. Decker, Jr. (incorporated by reference to
Exhibit 10.30 to the Company's Annual Report on Form 10-K filed with the Commission on June 28, 2017).
Amended and Restated Agreement of Limited Partnership of IRET Properties, A North Dakota Limited Partnership
(as amended and restated through February 27, 2019).
Third Amendment to the Agreement of Limited Partnership of IRET Properties, A North Dakota Limited Partnership
(incorporated herein by reference to Exhibit 3.2 to the Registrant's Current Report on Form 8-K filed on October 2,
2017).
Fourth Amendment to the Agreement of Limited Partnership of IRET Properties, A North Dakota Limited
Partnership, dated as of February 26, 2019.
Subsidiaries of Investors Real Estate Trust
Consent of Independent Registered Public Accounting Firm
Power of Attorney (included on the signature page to this Transition Report on Form 10-KT and incorporated by
reference herein).
Section 302 Certification of President and Chief Executive Officer
Section 302 Certification of Chief Financial Officer
Section 906 Certification of the President and Chief Executive Officer
Section 906 Certification of the Chief Financial Officer
The following materials from our Transition Report on Form 10-KT for the eight-months ended December 31, 2018
formatted in eXtensible Business Reporting Language ("XBRL"): (i) the Consolidated Balance Sheets, (ii) the
Consolidated Statements of Operations, (iii) the Consolidated Statements of Equity, (iv) the Consolidated Statements
of Cash Flows, and (v) notes to these consolidated financial statements.
† Filed herewith
** Indicates management compensatory plan, contract or arrangement.
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 27, 2019
Investors Real Estate Trust
By:
/s/ Mark O. Decker, Jr.
Mark O. Decker, Jr.
President & Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature
Title
Date
/s/ Jeffrey P. Caira
Jeffrey P. Caira
/s/ Mark O. Decker, Jr.
Mark O. Decker, Jr.
/s/ John A. Kirchmann
John A. Kirchmann
/s/ Michael T. Dance
Michael T. Dance
/s/ Emily Nagle Green
Emily Nagle Green
/s/ Linda J. Hall
Linda J. Hall
/s/ Terrance P. Maxwell
Terrance P. Maxwell
/s/ John A. Schissel
John A. Schissel
/s/ Mary J. Twinem
Mary J. Twinem
Trustee & Chairman
February 27, 2019
President & Chief Executive Officer
(Principal Executive Officer); Trustee
February 27, 2019
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
February 27, 2019
February 27, 2019
February 27, 2019
February 27, 2019
February 27, 2019
February 27, 2019
February 27, 2019
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
45
(This page has been left blank intentionally.)
INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
TABLE OF CONTENTS
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
ADDITIONAL INFORMATION
Schedule III - Real Estate and Accumulated Depreciation
PAGE
F-2
F-4
F-5
F-6
F-7
F-9
F-11
F-40
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
Board of Trustees and Shareholders
Investors Real Estate Trust
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Investors Real Estate Trust (a North Dakota real estate
investment trust) and subsidiaries (the “Company”) as of December 31, 2018, April 30, 2018 and 2017, the related consolidated
statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for the eight month period
ended December 31, 2018 and each of the three years in the period ended April 30, 2018, and the related notes (collectively
referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2018, April 30, 2018 and 2017, and the results of its operations and its
cash flows for the eight month period ended December 31, 2018 and each of the three years in the period ended April 30, 2018,
in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in
the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”), and our report dated February 27, 2019 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2013.
Minneapolis, Minnesota
February 27, 2019
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Trustees and Shareholders
Investors Real Estate Trust
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Investors Real Estate Trust (a North Dakota real estate
investment trust) and subsidiaries (the “Company”) as of December 31, 2018, based on criteria established in the 2013 Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2018, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2018, and our
report dated February 27, 2019 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Report
on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota
February 27, 2019
F-3
INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, 2018 April 30, 2018 April 30, 2017
$
$
$
ASSETS
Real estate investments
Property owned
Less accumulated depreciation
Unimproved land
Mortgage loans receivable
Total real estate investments
Assets held for sale and assets of discontinued operations
Cash and cash equivalents
Restricted cash
Other assets
TOTAL ASSETS
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND
EQUITY
LIABILITIES
Liabilities held for sale and liabilities of discontinued operations
Accounts payable and accrued expenses
Revolving line of credit
Term loans, net of unamortized loan costs of $1,009, $486 and $0, respectively
Mortgages payable, net of unamortized loan costs of $1,777, $2,221 and
$3,054, respectively
Construction debt
TOTAL LIABILITIES
COMMITMENTS AND CONTINGENCIES (NOTE 13)
REDEEMABLE NONCONTROLLING INTERESTS – CONSOLIDATED
REAL ESTATE ENTITIES
EQUITY
Series B Preferred Shares of Beneficial Interest (Cumulative redeemable
preferred shares, no par value, no shares issued and outstanding at December
31, 2018 and April 30, 2018 and 4,600,000 shares issued and outstanding at
April 30, 2017, aggregate liquidation preference of $115,000,000)
Series C Preferred Shares of Beneficial Interest (Cumulative redeemable
preferred shares, no par value, 4,118,460 shares issued and outstanding at
December 31, 2018 and April 30, 2018 and no shares issued and outstanding
at April 30, 2017, aggregate liquidation preference of $102,971,475)
Common Shares of Beneficial Interest (Unlimited authorization, no par value,
11,942,372 shares issued and outstanding at December 31, 2018, 11,952,598
shares issued and outstanding at April 30, 2018 and 12,119,930 shares issued
and outstanding at April 30, 2017)
Accumulated distributions in excess of net income
Accumulated other comprehensive income
Total Investors Real Estate Trust shareholders’ equity
Noncontrolling interests – Operating Partnership (1,367,502 units at
December 31, 2018, 1,409,943 units at April 30, 2018 and 1,561,722 units at
April 30, 2017)
Noncontrolling interests – consolidated real estate entities
Total equity
1,627,636 $
(353,871)
1,273,765
5,301
10,410
1,289,476
—
13,792
5,464
27,265
1,335,997 $
1,669,764 $
(311,324)
1,358,440
11,476
10,329
1,380,245
—
11,891
4,225
30,297
1,426,658 $
1,358,529
(255,599)
1,102,930
18,455
—
1,121,385
283,023
28,819
27,981
13,306
1,474,514
— $
— $
40,892
57,500
143,991
444,197
—
686,580
29,018
124,000
69,514
509,919
—
732,451
130,904
35,566
57,050
—
565,978
41,741
831,239
5,968
6,644
7,117
—
—
111,357
99,456
99,456
—
899,234
(429,048)
(856)
568,786
67,916
6,747
643,449
900,097
(395,669)
1,779
605,663
73,012
8,888
687,563
908,905
(466,541)
—
553,721
73,233
9,204
636,158
TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS
AND EQUITY
$
1,335,997 $
1,426,658 $
1,474,514
See Notes to Consolidated Financial Statements.
F-4
INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Eight Months Ended December 31,
2017
(Unaudited)
111,249
121,871 $
2018
$
REVENUE
EXPENSES
Property operating expenses, excluding real estate
taxes
Real estate taxes
Property management expense
Casualty (gain) loss
Depreciation and amortization
Impairment of real estate investments
General and administrative expenses
Acquisition and investment related costs
TOTAL EXPENSES
Operating income (loss)
Interest expense
Loss on extinguishment of debt
Interest income
Other income
Income (loss) before gain (loss) on sale of real estate
and other investments, gain on bargain purchase and
income (loss) from discontinued operations
Gain (loss) on sale of real estate and other investments
Gain on bargain purchase
Income (loss) from continuing operations
Income (loss) from discontinued operations
NET INCOME (LOSS)
Net (income) loss attributable to noncontrolling
interests – Operating Partnership
Net (income) loss attributable to noncontrolling
interests – consolidated real estate entities
Net income (loss) attributable to controlling interests
Dividends to preferred shareholders
Redemption of preferred shares
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS
Earnings (loss) per common share from continuing
operations – basic and diluted
Earnings (loss) per common share from discontinued
operations – basic and diluted
NET EARNINGS (LOSS) PER COMMON SHARE –
BASIC & DILUTED
$
$
$
37,198
13,521
3,663
915
50,456
1,221
9,812
—
116,786
5,085
(21,359)
(556)
1,168
65
(15,597)
9,707
—
(5,890)
570
(5,320)
Fiscal Years Ended April 30,
2018
2017
2016
$
169,745 $
160,104 $
145,500
54,292
18,742
5,526
500
82,070
18,065
14,203
51
47,587
16,739
5,046
414
44,253
57,028
15,871
3,276
193,449
190,214
(23,704)
(34,178)
(940)
1,197
311
(30,110)
(34,314)
(1,651)
366
780
43,741
14,407
3,714
238
39,273
5,543
13,498
830
121,244
24,256
(28,417)
(106)
78
307
(57,314)
(64,929)
(3,882)
35,581
12,234
3,652
600
54,902
256
9,041
—
116,266
(5,017)
(22,804)
(818)
432
282
(27,925)
17,816
—
20,120
18,701
—
—
(10,109)
(37,194)
(46,228)
150,703
140,594
164,823
127,629
76,753
30,525
9,640
3,424
9,182
67,420
76,602
1,032
(14,222)
(12,702)
(4,059)
(7,032)
(110)
(4,398)
(4,547)
—
1,042
127,414
(6,296)
(3,657)
1,861
116,788
(8,569)
(3,657)
16,881
43,347
2,436
72,006
(10,546)
(11,514)
(1,435)
—
(8,945) $
117,461
$
104,562 $
31,366 $
60,492
(0.79) $
(1.41) $
(3.54) $
(3.01) $
0.04
11.19
12.25
5.59
(0.75) $
9.78
$
8.71 $
2.58 $
—
4.91
4.91
See Notes to Consolidated Financial Statements.
F-5
INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Eight Months Ended
Fiscal Years Ended April 30,
December 31, 2018
2018
2017
2016
Net income (loss)
Other comprehensive income:
Unrealized gain (loss) from derivative instrument
(Gain) loss on derivative instrument reclassified into earnings
Total comprehensive income (loss)
Comprehensive (income) loss attributable to noncontrolling
interests – Operating Partnership
Net comprehensive (income) loss attributable to noncontrolling
interests – consolidated real estate entities
$
$
(5,320) $
127,629
$
30,525
$
76,602
(2,794)
159
1,627
152
—
—
—
—
(7,955) $
129,408
$
30,525
$
76,602
1,032
(12,888)
(4,059)
(7,032)
(110)
1,861
16,881
2,436
Comprehensive income (loss) attributable to controlling interests
$
(7,033) $
118,381
$
43,347
$
72,006
See Notes to Consolidated Financial Statements.
F-6
INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
NUMBER
OF
(in thousands)
ACCUMULATED
ACCUMULATED
DISTRIBUTIONS
OTHER
NONREDEEMABLE
PREFERRED COMMON COMMON
IN EXCESS OF
COMPREHENSIVE NONCONTROLLING TOTAL
SHARES
SHARES
SHARES
NET INCOME
INCOME
INTERESTS
EQUITY
Balance at April 30, 2015
$
138,674
12,446 $ 951,868 $
(438,432)
— $
88,844 $ 740,954
Net income (loss) attributable to controlling interest
and noncontrolling interests
Distributions – common shares and Units
Distributions – Series A preferred shares
Distributions – Series B preferred shares
Distribution reinvestment and share purchase plan
Shares issued and share-based compensation
Partnership units issued
Redemption of Units for common shares
Shares repurchased
Distributions to nonredeemable noncontrolling
interests – consolidated real estate entities
Adjustments to prior year redemption of Units for
common shares
72,006
(64,060)
(2,372)
(9,142)
82
19
27
5,619
1,728
1,477
(464)
(35,000)
(3,608)
Balance at April 30, 2016
$
138,674
12,110 $ 922,084 $
(442,000)
— $
Net income (loss) attributable to controlling interests
and nonredeemable noncontrolling interests
Distributions – common shares and Units
Distributions – Series A preferred shares
Distributions – Series B preferred shares
Shares issued and share-based compensation
Redemption of Units for common shares
Redemption of Units for cash
Shares repurchased
Contributions from nonredeemable noncontrolling
interests – consolidated real estate entities
Conversion to equity of notes receivable from
nonredeemable noncontrolling interests –
consolidated real estate entities
Acquisition of nonredeemable noncontrolling
interests – consolidated real estate entities
Other
43,347
(55,907)
(1,403)
(9,143)
39
50
358
875
(27,317)
(79)
(4,501)
(1,435)
(9,893)
(18)
—
4,562
76,568
(7,230)
(71,290)
(2,372)
(9,142)
5,619
1,728
18,226
18,226
(1,477)
—
(35,000)
(7,029)
(7,029)
3,608
—
99,504 $ 718,262
(12,400)
30,947
(7,453)
(63,360)
(1,403)
(9,143)
358
—
(966)
(33,253)
(875)
(966)
7,188
7,188
(7,366)
(7,366)
5,019
(4,874)
(214)
(232)
Balance at April 30, 2017
$
111,357
12,120 $ 908,905 $
(466,541)
— $
82,437 $ 636,158
See Notes to Consolidated Financial Statements.
F-7
INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY (continued)
NUMBER
OF
ACCUMULATED
ACCUMULATED
DISTRIBUTIONS
OTHER
NONREDEEMABLE
PREFERRED COMMON COMMON
IN EXCESS OF
COMPREHENSIVE NONCONTROLLING TOTAL
SHARES
SHARES
SHARES
NET INCOME
INCOME
INTERESTS
EQUITY
Balance at April 30, 2017
$
111,357
12,120 $ 908,905 $
(466,541) $
— $
82,437 $ 636,158
Net income (loss) attributable to controlling interests
and nonredeemable noncontrolling interests
Other comprehensive income - derivative instrument
Distributions – common shares and Units
Distributions – Series B preferred shares
Distributions – Series C preferred shares
Share-based compensation, net of forfeitures
Issuance of Series C preferred shares
99,456
Redemption of Units for common shares
Redemption of Units for cash
Shares repurchased
Contributions from nonredeemable noncontrolling
interests – consolidated real estate entities
Conversion to equity of notes receivable from
nonredeemable noncontrolling interests –
consolidated real estate entities
1,779
116,788
(33,689)
(4,571)
(3,999)
10
3
1,663
34
(111,357)
(178)
(9,935)
(3,657)
11,582
128,370
1,779
(4,096)
(37,785)
(4,571)
(3,999)
1,663
99,456
(34)
—
(8,775)
(8,775)
(124,949)
619
619
(246)
413
(246)
(157)
Other
(2)
(570)
Balance at April 30, 2018
$
99,456
11,953 $ 900,097 $
(395,669) $
1,779 $
81,900 $ 687,563
Cumulative adjustment upon adoption of ASC 606
and ASC 610-20
627
627
Balance on May 1, 2018
99,456
11,953
900,097
(395,042)
1,779
81,900
688,190
(4,398)
(25,060)
(4,548)
(2,635)
Net income (loss) attributable to controlling interests
and nonredeemable noncontrolling interests
Other comprehensive income - derivative instrument
Distributions – common shares and Units
Distributions – Series C preferred shares
Share-based compensation, net of forfeitures
Redemption of Units for common shares
Redemption of Units for cash
Shares repurchased
Distributions to nonredeemable noncontrolling
interests – consolidated real estate entities
Conversion to equity of notes receivable from
nonredeemable noncontrolling interests –
consolidated real estate entities
Acquisition of nonredeemable noncontrolling
interests – consolidated real estate entities
Other
3
33
1,042
649
(42)
(2,172)
(175)
(207)
(5)
(480)
(4,878)
(2,635)
(2,917)
(27,977)
(4,548)
1,042
—
(498)
(2,172)
(649)
(498)
(2,432)
(2,432)
(392)
(392)
131
(44)
(207)
Balance at December 31, 2018
$
99,456
11,942 $ 899,234 $
(429,048) $
(856) $
74,663 $ 643,449
See Notes to Consolidated Financial Statements.
F-8
INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization
Depreciation and amortization from discontinued operations
(Gain) loss on sale of real estate, land, other investments and discontinued operations
(Gain) loss on extinguishment of debt and discontinued operations
Gain on bargain purchase
Share-based compensation expense
Impairment of real estate investments
Other, net
Write off of development pursuit costs
Changes in other assets and liabilities:
Other assets
Accounts payable and accrued expenses
Net cash provided (used) by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Principal proceeds on mortgage loan receivable
Increase in loans receivable
Decrease in other investments
Proceeds from sale of discontinued operations
Proceeds from sale of real estate and other investments
Insurance proceeds received
Payments for acquisitions of real estate assets
Payments for development of real estate assets
Payments for improvements of real estate assets
Payments for improvements of real estate assets from discontinued operations
Net cash provided (used) by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from mortgages payable
Principal payments on mortgages payable
Proceeds from revolving lines of credit
Principal payments on revolving lines of credit
Proceeds from notes payable and other debt
Principal payments on notes payable and other debt
Payoff of financing liability
Proceeds from term loan
Proceeds from sale of common shares under distribution reinvestment and share purchase
program
Additions to notes receivable from noncontrolling partner – consolidated real estate
entities
Proceeds from noncontrolling partner – consolidated real estate entities
Payments for acquisition of noncontrolling interests – consolidated real estate entities
Proceeds from sale of preferred shares
Repurchase of common shares
Repurchase of preferred shares
Repurchase of partnership units
Distributions paid to common shareholders
Distributions paid to preferred shareholders
Distributions paid to noncontrolling interests – Unitholders of the Operating Partnership
Distributions paid to noncontrolling interests – consolidated real estate entities
Net cash provided (used) by financing activities
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND
RESTRICTED CASH
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF YEAR
(in thousands)
Eight Months Ended
December 31, 2018
Fiscal Year Ended April 30,
2018
2017
2016
$
(5,320) $ 127,629 $
30,525 $
76,602
51,394
—
(10,277)
482
—
845
1,221
629
—
(1,145)
2,205
40,034
545
(918)
—
—
62,695
1,344
(977)
—
(11,518)
—
51,171
—
(67,016)
53,017
(119,517)
—
—
—
74,352
—
—
—
—
—
(2,172)
—
(498)
(16,724)
(5,116)
(1,959)
(2,432)
(88,065)
3,140
16,116
83,276
8,526
(183,687)
6,839
—
1,587
18,065
1,457
—
(646)
(7,851)
55,195
—
(15,480)
—
426,131
64,639
584
(374,081)
(2,655)
(17,980)
(1,046)
80,112
—
(205,159)
370,350
(303,400)
3,252
(21,689)
(7,900)
69,462
—
—
—
—
99,467
(9,935)
(115,017)
(8,775)
(33,689)
(8,763)
(4,096)
(99)
(175,991)
46,135
10,477
(74,847)
3,848
—
6
57,028
499
3,161
(214)
2,434
79,052
41,098
24,357
(33,423)
(30,135)
(3,424)
2,256
5,983
651
—
2,588
(14,292)
72,261
—
—
—
—
279
50
365,845
237,135
40,306
47,354
88
1,320
— (121,821)
(122,801)
(26,904)
(7,672)
128,552
(18,274)
(41,083)
(1,110)
224,160
84,150
(298,984)
246,000
(206,450)
19,341
(49,080)
—
—
143,574
(241,206)
82,000
(125,000)
94,142
(24,754)
—
—
—
1,493
(9,211)
9,749
(4,938)
—
(4,501)
(28,752)
(966)
(55,907)
(10,744)
(7,453)
(174)
(317,920)
—
1,120
—
—
(35,000)
—
—
(60,063)
(11,514)
(7,101)
(7,029)
(189,338)
(40,684)
(14,708)
56,800
71,508
11,475
60,033
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF YEAR
$
19,256
$
16,116 $
56,800 $
71,508
F-9
INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Distribution reinvestment plan – shares issued
Operating partnership distribution reinvestment plan – shares issued
Operating partnership units converted to shares
Real estate assets acquired through the issuance of operating partnership units
(Decrease) increase to accounts payable included within real estate investments
Conversion to equity of notes receivable from noncontrolling interests – consolidated real
estate entities
Construction debt reclassified to mortgages payable
Increase in mortgage notes receivable
Decrease in real estate assets in connection with transfer of real estate assets in settlement
of debt
Decrease in debt in connection with transfer of real estate assets in settlement of debt
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest, net of amounts capitalized of $0, $0, $431 and $4,396, respectively
Eight Months Ended
December 31, 2018
(in thousands)
Fiscal Year Ended April 30,
2018
2017
2016
—
—
649
—
(329)
670
—
—
—
—
—
—
34
—
(3,415)
—
23,300
10,329
—
—
—
—
875
—
(1,851)
9,846
10,549
—
—
—
3,997
130
1,477
18,226
(10,420)
—
123,553
—
87,213
122,610
24,135
35,758
34,432
39,668
See Notes to Consolidated Financial Statements.
F-10
INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, April 30, 2018, 2017, and 2016
NOTE 1 • ORGANIZATION
Investors Real Estate Trust (“IRET,” “we” or “us”) is a real estate investment trust (“REIT”) focused on the ownership,
management, acquisition, redevelopment and development of apartment communities. As of December 31, 2018, we held for
investment 87 apartment communities with 13,702 apartment homes. We conduct a majority of our business activities through
our 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, we, or us 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 our accounts and the accounts of all our subsidiaries in which we
maintain a controlling interest, including the Operating Partnership. All intercompany balances and transactions are eliminated
in consolidation. Our fiscal year previously ended April 30th. On September 20, 2018, our Board of Trustees approved a
change in our fiscal year-end from April 30 to December 31, effective as of January 1, 2019. This transition report on Form 10-
KT is for the eight-month period ended December 31, 2018, in accordance with SEC rules and regulations, and all subsequent
fiscal years, beginning in 2019, will be from January 1 to December 31.
Our interest in the Operating Partnership was 89.7%, 89.4%, and 88.6%, respectively, of the limited partnership units of the
Operating Partnership (“Units”) as of December 31, 2018, April 30, 2018 and April 30, 2017, which includes 100% of the
general partnership interest.
On December 14, 2018, the Board approved a reverse stock split of our outstanding common shares and Units, no par value per
share, at a ratio of 1-for-10. The reverse stock split was effective as of the close of trading on December 27, 2018, with trading
commencing on a split-adjusted basis on December 28, 2018. The number of common shares and Units was reduced from
119.4 million to 11.9 million and 13.7 million to 1.4 million, respectively. We have retroactively restated all shares and Units
and per share and Unit data for all periods presented.
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's or controlling interest. These entities are consolidated into our other
operations with noncontrolling interests reflecting the noncontrolling partners’ share of ownership, income, and expenses.
PRIOR PERIOD FINANCIAL STATEMENT CORRECTION OF AN IMMATERIAL MISSTATEMENT
In the first quarter of the transition period ended December 31, 2018, we identified certain adjustments required to correct
balances within total equity related to noncontrolling interests in our joint venture entities. Related to our acquisition of
additional ownership interest in the joint venture entities, noncontrolling interest - consolidated real estate entities was
understated and common shares of beneficial interest was overstated beginning in fiscal year 2017. The adjustments did not
impact total assets, total liabilities, revenue, net income, net income available to common shareholders, number of common
shares, or earnings per share.
Based on an analysis of Accounting Standards Codification (“ASC”) 250 - “Accounting Changes and Error
Corrections” (“ASC 250”), Staff Accounting Bulletin 99 - “Materiality” (“SAB 99”) and Staff Accounting Bulletin 108 -
"Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements" (“SAB 108”), we determined that these errors were immaterial to the previously-issued financial statements. The
misstatement was corrected in the consolidated balance sheets as of April 30, 2017 and April 30, 2018 and the consolidated
statements of equity as of April 30, 2018 and April 30, 2017.
The effect of these revisions on our condensed consolidated balance sheet is as follows:
F-11
As previously reported at
April 30, 2017
(in thousands)
Adjustment
As revised at April 30,
2017
Common shares of beneficial interest
$
916,121
$
(7,216) $
908,905
Noncontrolling interests - consolidated real estate
entities
Redeemable noncontrolling interests - consolidated real
estate entities
1,924
7,181
7,280
(64)
9,204
7,117
As previously reported at
April 30, 2018
(in thousands)
Adjustment
As revised at April 30,
2018
Common shares of beneficial interest
$
907,843
$
(7,746) $
900,097
Noncontrolling interests - consolidated real estate
entities
Redeemable noncontrolling interests - consolidated real
estate entities
1,078
6,708
7,810
(64)
8,888
6,644
The effect of these revisions on our condensed consolidated statements of equity is as follows:
Common shares of beneficial interest
$
Nonredeemable noncontrolling interests
916,121
$
75,157
(7,216) $
7,280
908,905
82,437
As previously reported at
April 30, 2017
(in thousands)
Adjustment
As revised at April 30,
2017
Common shares of beneficial interest
$
Nonredeemable noncontrolling interests
907,843
$
74,090
(7,746) $
7,810
900,097
81,900
As previously reported at
April 30, 2018
(in thousands)
Adjustment
As revised at April 30,
2018
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP 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.
RECENT ACCOUNTING PRONOUNCEMENTS
The following table provides a brief description of recent GAAP accounting standards updates (“ASUs”).
F-12
Standard
ASU 2014-09,
Revenue from
Contracts with
Customers
Description
This ASU will eliminate the transaction- and
industry-specific revenue recognition guidance
under current GAAP and replace it with a
principle based approach for determining
revenue recognition. The standard outlines a
five-step model whereby revenue is recognized
as performance obligations within a contract are
satisfied.
ASU 2016-02,
Leases
This ASU amends existing accounting standards
for lease accounting, including by requiring
lessees to recognize most leases on the balance
sheet and making certain changes to lessor
accounting.
ASU 2016-15,
Classification of
Certain Cash
Receipts and Cash
Payments
This ASU addresses eight specific cash flow
issues with the objective of reducing diversity in
practice. The cash flow issues include debt
prepayment or debt extinguishment costs and
proceeds from the settlement of insurance claims.
ASU 2016-18,
Statement of Cash
Flows (Topic 230):
Restricted Cash
This ASU requires the statement of cash flows to
explain the change in total cash, cash
equivalents, and amounts generally described as
restricted cash. It also requires that restricted
cash be included when reconciling the beginning
and end of period amounts on the statement of
cash flows.
ASU 2017-05,
Other Income –
Gains and Losses
from the
Derecognition of
Nonfinancial
Assets (Subtopic
610-20):
Clarifying the
Scope of Asset
Derecognition
Guidance and
Accounting for
Partial Sales of
Nonfinancial
Assets
ASU 2018-10,
Codification
Improvements to
Topic 842, Leases
This ASU clarifies the definition of an in-
substance nonfinancial asset and changes the
accounting for partial sales of nonfinancial assets
to be more consistent with the accounting for a
sale of a business pursuant to ASU
2017-01. This ASU allows for either a
retrospective or modified retrospective approach.
This ASU was issued to increase shareholders'
awareness of narrow aspects of the guidance
issued in the amendments and to expedite the
improvements under ASU 2016-02.
Effect on the Financial Statements or
Other Significant Matters
The majority of our revenue is derived
from rental income, which is scoped out
from this standard and will be accounted
for under ASC 840, Leases. Our other
revenue streams, which were evaluated
under this ASU, include but are not
limited to other income from residents
determined not to be within the scope of
ASC 840 and gains and losses from real
estate dispositions. Refer to the
Revenues section below for information
regarding the impact of adopting the
standard on our consolidated financial
statements.
Our residential leases, where we are the
lessor, will continue to be accounted for
as operating leases under the new
standard. As a result, there is not a
significant change in the accounting for
lease revenue. For leases where we are
the lessee, we will recognize a right of
use asset and related lease liability on
our consolidated balance sheets upon
adoption. The adoption of this standard
will not have a material impact on our
consolidated financial statements.
The standard requires we present
combined inflows and outflows of cash,
cash equivalents, and restricted cash in
the consolidated statement of cash flows.
See additional disclosures regarding the
required change below.
The standard requires we present
combined inflows and outflows of cash,
cash equivalents, and restricted cash in
the consolidated statement of cash flows.
See additional disclosures regarding the
required change below.
Refer to the Revenues section below for
information regarding the impact of
adopting the standard on our condensed
consolidated financial statements.
The adoption of this standard will not
have a material impact on our
consolidated financial statements.
Date of Adoption
This ASU is effective
for annual reporting
periods beginning after
December 15, 2017, as a
result of a deferral of the
effective date arising
from the issuance of
ASU 2015-14, Revenue
from Contracts with
Customers - Deferral of
the Effective Date. Early
adoption is permitted.
We adopted the new
standard effective May
1, 2018 using the
modified retrospective
approach.
This ASU is effective
for annual reporting
periods beginning after
December 15, 2018.
Early adoption is
permitted.
This ASU is effective
for fiscal years
beginning after
December 15, 2017, and
interim periods within
those fiscal years. We
adopted the new
standard effective May
1, 2018.
This ASU is effective
for fiscal years
beginning after
December 15, 2017, and
interim periods within
those fiscal years. We
adopted the new
standard effective May
1, 2018.
This ASU is effective
for annual reporting
periods beginning after
December 15, 2017,
including interim
reporting periods within
that reporting period.
We adopted the new
standard effective May
1, 2018 using the
modified retrospective
approach.
This ASU is effective
for annual reporting
periods beginning after
December 15, 2018.
Early adoption is
permitted.
F-13
Standard
ASU 2018-11,
Leases: Targeted
Improvements
ASU 2018-13,
Fair Value
Measurements
(Topic 820) -
Disclosure
Framework -
Changes to the
Disclosure
Requirement for
Fair Value
Measurements
ASU 2018-15,
Intangibles -
Goodwill and
Other - Internal-
Use Software
(Topic 350-40):
Customer's
Accounting for
Implementation
Costs Incurred in a
Cloud Computing
Arrangement That
is a Service
Contract
ASU 2018-20,
Leases (Topic 842)
- Narrow-Scope
Improvements for
Lessors
Description
This ASU allows lessors to account for lease and
non-lease components, by class of underlying
assets, as a single lease component if certain
criteria are met. The new standard also indicates
that companies are permitted to recognize a
cumulative-effect adjustment to the opening
balance of retained earnings in the period of
adoption in lieu of the modified retrospective
approach and provides other practical expedients.
This ASU eliminates certain disclosure
requirements affecting all levels of measurement,
and modifies and adds new disclosure
requirements for Level 3 measurements.
Date of Adoption
This ASU is effective
for annual reporting
periods beginning after
December 15, 2018.
Early adoption is
permitted.
This ASU is effective
for annual reporting
periods beginning after
December 15, 2019.
Early adoption is
permitted.
Effect on the Financial Statements or
Other Significant Matters
The adoption of this standard will not
have a material impact on our
consolidated financial statements.
We are currently evaluating the impact
the new standard may have on our
disclosures.
This ASU reduces the complexity for the
accounting for costs of implementing a cloud
computing service arrangement. The standard
aligns various requirements for capitalizing
implementation costs.
This ASU is effective
for annual reporting
periods beginning after
December 15, 2019.
Early adoption is
permitted.
We are currently evaluating the impact
the new standard may have on our
consolidated financial statements.
This ASU reduces a lessor's implementation and
ongoing costs associated with applying the new
leases standard. The ASU also clarifies a
specific lessor accounting requirements.
This ASU is effective
for annual reporting
periods beginning after
December 15, 2018.
Early adoption is
permitted.
The adoption of this standard will not
have a material impact on our
consolidated financial statements.
RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to conform to the current financial statement presentation. These
reclassifications had no impact on net income as reported in the consolidated statement of operations, total assets, liabilities or
equity as reported in the consolidated balance sheets and total shareholder’s equity. We report in discontinued operations the
results of operations and the related gains or losses of properties that have either been disposed or classified as held for sale and
for which the disposition represents a strategic shift that has or will have a major effect on our operations and financial results.
REAL ESTATE INVESTMENTS
Real estate investments are recorded at cost less accumulated depreciation and an adjustment for impairment, if any. Property,
consisting primarily of real estate investments, totaled $1.3 billion, $1.4 billion, and $1.1 billion as of December 31, 2018,
April 30, 2018, and April 30, 2017, respectively. We allocate the purchase price based on the relative fair values of the tangible
and intangible 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 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 and reference to recent comparable
transactions. A land value is assigned based on the purchase price if land is acquired separately or based on estimated fair value
if acquired in a single or portfolio acquisition.
Acquired above- and below-market lease values are recorded as the difference between the contractual amounts to be paid
pursuant to the in-place leases and management’s estimate of fair market value lease rates for the corresponding in-place leases.
F-14
The capitalized above- and below-market lease values are amortized as adjustments to rental revenue over the remaining terms
of the respective leases.
Other intangible assets acquired include amounts for in-place lease values that are based upon our evaluation of the specific
characteristics of the leases. Factors considered in the fair value analysis include an estimate of carrying costs and foregone
rental income during hypothetical expected lease-up periods, considering current market conditions, and costs to execute
similar leases. We also consider information about each property obtained during pre-acquisition due diligence, marketing, and
leasing activities in estimating the relative 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. We use a 10-37 year estimated
life for buildings and improvements and a 5-10 year estimated life for furniture, fixtures, and equipment.
We follow the real estate project costs guidance in ASC 970, Real Estate – General, in accounting for the costs of development
and redevelopment projects. As real estate is undergoing development or redevelopment, all project costs directly associated
with and attributable to the development and construction of a project, including interest expense and real estate tax expense,
are capitalized to the cost of the real property. The capitalization period begins when development activities and expenditures
begin and are identifiable to a specific property and ends upon completion, which is when the asset is ready for its intended use.
Generally, rental property is considered substantially complete and ready for its intended use, which is generally upon issuance
of a certificate of occupancy (in the case of apartment communities). General and administrative costs are expensed as
incurred. Interest of approximately $4,000, $431,000, and $4.9 million has been capitalized in continuing and discontinue
operations for the years ended April 30, 2018, 2017, and 2016, respectively. We did not capitalize interest during the transition
period ended December 31, 2018.
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 and depreciated over their estimated useful life, generally five
to ten years. Property sales or dispositions are recorded when control of the assets transfers to the buyer and we have no
significant continuing involvement with the property sold.
We periodically evaluate our long-lived assets, including real estate investments, for impairment indicators. The judgments
regarding the existence of impairment indicators are based on factors such as operational performance, market conditions,
expected holding period of each asset group, and legal and environmental concerns. If indicators exist, we compare the
expected future undiscounted cash flows for the long-lived asset group 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 group. If our anticipated holding period for
properties, the estimated fair value of properties or other factors change based on market conditions or otherwise, our
evaluation of impairment charges may be different and such differences could be material to our consolidated financial
statements. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future
physical occupancy, rental rates, and capital requirements that could differ materially from actual results. Plans to hold
properties over longer periods decrease the likelihood of recording impairment losses.
During the transition period ended December 31, 2018, we incurred a loss of $1.2 million due to impairment of a parcel of
land in Bismarck, North Dakota. The parcel was written-down to estimated fair value based on receipt of a market offer to
purchase and our intent to dispose of the property.
During fiscal year 2018, we incurred a loss of $18.1 million due to impairment of one apartment community, three other
commercial properties, and four parcels of land. We recognized impairments of $12.2 million on one apartment community in
Grand Forks, North Dakota; $1.4 million on an industrial property in Bloomington, Minnesota; $922,000 on an industrial
property in Woodbury, Minnesota; $630,000 on a retail property in Minot, North Dakota. These properties were written-down
to estimated fair value based on independent appraisals and market data or, in the case of the retail property, receipt of a market
offer to purchase and our intent to dispose of the property. We recognized impairments of $428,000 on a parcel of land in
Williston, North Dakota; $1.5 million on a parcel of land in Grand Forks, North Dakota; $256,000 and $709,000 on two parcels
of land in Bismarck, North Dakota. These parcels were written down to estimated fair value based on independent appraisals
and market data.
During fiscal year 2017, we incurred a loss of $57.0 million due to impairment of 16 apartment communities and two parcels of
unimproved land. We recognized impairments of $40.9 million, $5.8 million, $4.7 million, and $2.8 million, respectively, on
three apartment communities and one parcel of unimproved land in Williston, North Dakota, due to deterioration of this energy-
impacted market, which resulted in poor leasing activity and declining rental rates during the three months ended July 31, 2016,
which should generally be a strong leasing period. These properties were written down to estimated fair value based on an
F-15
independent appraisal in the case of one property and management cash flow estimates and market data in the case of the
remaining assets. The properties impaired for $40.9 million, $4.7 million, and $2.8 million are owned by joint venture entities
in which, at the time of impairment, we had an approximately 70%, 60%, and 70% interest, respectively, but which are
consolidated in our consolidated financial statements. We recognized impairments of $2.9 million on 13 properties and one
parcel of land in Minot, North Dakota. These properties were written down to estimated fair value based on management cash
flow estimates and market data and, in the case of the 13 properties, our intent to dispose of the properties.
During fiscal year 2016, we incurred a loss of $6.0 million due to impairment of one office property, one healthcare property,
two parcels of land, and eight apartment communities, of which approximately $440,000 is reflected in discontinued
operations. See Note 10 for additional information on discontinued operations. We recognized impairments of approximately
$440,000 on an office property in Eden Prairie, Minnesota; $1.9 million on a healthcare property in Sartell, Minnesota; $1.6
million on a parcel of land in Grand Chute, Wisconsin; $1.9 million on eight apartment communities in St. Cloud, Minnesota;
and $162,000 on a parcel of land in River Falls, Wisconsin. These properties were written down to estimated fair value during
fiscal year 2016 based on receipt of individual market offers to purchase and our intent to dispose of the properties or, in the
case of the Grand Chute, Wisconsin, the sale listing price and our intent to dispose of the property. The Sartell, Minnesota
property was classified as held for sale at April 30, 2016.
CHANGE IN DEPRECIABLE LIVES OF REAL ESTATE ASSETS
Effective May 1, 2017, we changed the estimated useful lives of our real estate assets to better reflect the estimated periods
during which they will be of economic benefit. Generally, the estimated lives of buildings and improvements that previously
were 20-40 years have been decreased to 10-37 years, while those that were previously nine years were changed to 5-10 years.
The effect of this change in estimate for the fiscal year ended April 30, 2018, was to increase depreciation expense by
approximately $29.3 million, decrease net income by $29.3 million, and decrease earnings per share by $0.22.
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. Our
determination of fair value is based on inputs management believes are consistent with those that market participants would
use. Estimates are significantly impacted by estimates of sales price, selling velocity, and other factors. Due to uncertainties in
the estimation process, actual results could differ from such estimates. Depreciation is not recorded on assets classified as held
for sale.
We classify properties as held for sale when they meet the GAAP criteria, which include: (a) management commits to and
initiates a plan to sell the asset (disposal group); (b) the sale is probable and expected to be completed within one year under
terms that are usual and customary for sales of such assets (disposal groups); and (c) actions required to complete the plan
indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. We generally
consider these criteria met when the transaction has been approved by our Board of Trustees, there are no known significant
contingencies related to the sale, and management believes it is probable that the sale will be completed within one year. We
had no properties classified as held for sale at December 31, 2018 and April 30, 2018. Thirteen apartment communities, two
healthcare properties, and two retail properties were classified as held for sale at April 30, 2017.
We report in discontinued operations the results of operations and the related gains or losses on the sales of properties that have
either been disposed of or classified as held for sale and meet the classification of a discontinued operation as described in ASC
205 - Presentation of Financial Statements and ASC 360 - Property, Plant, and Equipment: Reporting Discontinued Operations
and Disclosures of Disposals of Components of an Entity. Under these standards, a disposal (or classification as held for sale)
of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the
disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
Effective May 1, 2018, we adopted ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments and ASU
2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which affects the presentation and disclosure of the statements
of cash flows. Previously our consolidated statements of cash flows presented transfers between restricted cash and unrestricted
cash as operating, financing, and investing cash activities based upon the required or intended purpose for the restricted cash.
We revised our consolidated statements of cash flows for the years ended April 30, 2018 , 2017, and 2016 to conform to this
presentation, and the effect of the revisions to net cash flows from operating and investing activities as previously reported for
the years ended April 30, 2018, 2017, and 2016 are summarized in the following table:
F-16
Net cash provided by operating activities
$
48,035
$
7,160
$
Net cash provided by (used by) investing activities
Net cash provided by (used by) financing activities
Net increase (decrease) in cash, cash equivalents
Net increase (decrease) in cash, cash equivalents, and restricted cash
Cash and cash equivalents at beginning of period
Cash, cash equivalents, and restricted cash at beginning of period
Cash and cash equivalents at end of period
Cash, cash equivalents, and restricted cash at end of period
Net cash provided by operating activities
Net cash provided by (used by) investing activities
Net cash provided by (used by) financing activities
Net increase (decrease) in cash, cash equivalents
Net increase (decrease) in cash, cash equivalents, and restricted cash
Cash and cash equivalents at beginning of period
Cash, cash equivalents, and restricted cash at beginning of period
Cash and cash equivalents at end of period
Cash, cash equivalents, and restricted cash at end of period
Net cash provided by operating activities
Net cash provided by (used by) investing activities
Net cash provided by (used by) financing activities
Net increase (decrease) in cash, cash equivalents
Net increase (decrease) in cash, cash equivalents, and restricted cash
Cash and cash equivalents at beginning of period
Cash, cash equivalents, and restricted cash at beginning of period
Cash and cash equivalents at end of period
$
$
$
$
$
As previously
reported
(in thousands)
Impact of ASUs
As adjusted and
currently reported
April 30, 2018
2016-15 and 2016-18
April 30, 2018
104,189
(169,152)
(16,928)
—
28,819
—
11,891
(24,077)
(6,839)
16,928
(40,684)
(28,819)
56,800
55,195
80,112
(175,991)
—
(40,684)
—
56,800
$
4,225
$
16,116
As previously
reported
(in thousands)
Impact of ASUs
As adjusted and
currently reported
April 30, 2017
2016-15 and 2016-18
April 30, 2017
73,930
$
5,122
$
202,263
(314,072)
(37,879)
—
66,698
—
28,819
21,897
(3,848)
37,879
(14,708)
(66,698)
71,508
79,052
224,160
(317,920)
—
(14,708)
—
71,508
$
27,981
$
56,800
As previously
reported
(in thousands)
Impact of ASUs
As adjusted and
currently reported
April 30, 2016
2016-15 and 2016-18
April 30, 2016
66,493
$
5,768
$
134,252
(183,017)
17,728
—
48,970
—
66,698
(5,700)
(6,321)
(17,728)
11,475
(48,970)
60,033
72,261
128,552
(189,338)
—
11,475
—
60,033
Cash, cash equivalents, and restricted cash at end of period
$
4,810
$
71,508
F-17
Balance sheet description
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents and restricted cash
(in thousands)
December 31, 2018
April 30, 2018
April 30, 2017
$
$
13,792
$
5,464
19,256
$
11,891
$
4,225
16,116
$
28,819
27,981
56,800
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 our bank deposits, short-term investment certificates acquired subject to repurchase
agreements, and our deposits in a money market mutual fund. We are potentially exposed to credit risk for cash deposited with
FDIC-insured financial institutions in accounts which, at times, may exceed federally insured limits. We have not experienced
any losses in such accounts.
As of December 31, 2018, April 30, 2018, and April 30, 2017, restricted cash consisted of $5.5 million, $4.2 million, and $4.3
million, respectively, of escrows held by lenders for real estate taxes, insurance, and capital additions. As of April 30, 2017, we
held $23.7 million of net tax-deferred exchange proceeds remaining from the sale of properties. Tax, insurance, and other
escrows include funds deposited with a lender for payment of real estate taxes 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.
REVENUE
We adopted ASU 2014-09, Revenue from Contracts with Customers, as of May 1, 2018, using the modified retrospective
approach. We elected to apply the new standard to contracts that are not complete as of May 1, 2018. We also elected to omit
disclosing the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
Under the new standard, revenue is recognized in accordance with the transfer of goods and services to customers at an amount
that reflects the consideration the company expects to be entitled for those goods and services.
We primarily lease multifamily apartments under operating leases generally with terms of one year or less. Rental revenues are
recognized in accordance with ASC 840, Leases, using a method that represents a straight-line basis over the term of the lease.
Rental income represents approximately 96.5% of our total revenues and includes gross market rent less adjustments for
concessions, vacancy loss, and bad debt. Other property revenues represent the remaining 3.5% of our total revenue and are
primarily driven by utility reimbursement from our residents and other fee income, which is typically recognized at a point in
time. Revenue streams that are included in ASU 2014-09 include:
• Other property revenues: We recognize revenue for rental related income not included as a component of a lease, such
as other transactional fees, when the services are transferred to our customers for an amount which reflects the
consideration we expect to receive in exchange for those services. These fees are charged to residents monthly and
recognized as the performance obligation is satisfied.
• Gains or losses on sales of real estate: Subsequent to the adoption of the new standard, a gain or loss is recognized
when the criteria for derecognition of an asset are met, including when (1) a contract exists and (2) the buyer obtained
control of the nonfinancial asset that was sold. As a result, we may recognize a gain on real estate disposition
transactions that previously did not qualify as a sale or for full profit recognition under the previous accounting
standard.
We concluded that the adoption of the new standard required a cumulative adjustment of $627,000 to the opening balance of
retained earnings as of May 1, 2018, due to the sale of a group of properties in the prior fiscal year. The sale of properties was
previously accounted for using the installment method. Under the installment method, we recorded a mortgage receivable net
of the deferred gain on sale, which was to be recognized as payments were received. The gain on sale under the new revenue
standard is recognized when control of the assets is transferred to the buyer. As a result of our adoption of the new standard, we
recorded a cumulative adjustment to retained earnings and increased the mortgage receivable by $627,000 to recognize the
previously deferred gain on sale.
The following table presents the disaggregation of revenue streams of our rental income for the transition period ended
December 31, 2018:
F-18
Revenue Stream
Applicable Standard
Amount of Revenue
Percent of Revenue
Rental revenue
Leases
Other property revenue
Revenue Recognition
$
$
117,575
4,296
121,871
96.5%
3.5%
100.0%
(in thousands, except percentages)
Eight Months Ended December 31, 2018
INCOME TAXES
We operate in a manner intended to enable us to continue to qualify as a 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, excluding
capital gains, as a dividend 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 shareholders. For the transition period ended December 31, 2018 and the
fiscal years ended April 30, 2018, 2017, and 2016, we distributed in excess of 90% of our taxable income and realized capital
gains from property dispositions within the prescribed time limits. Accordingly, no provision has been made for federal income
taxes in the accompanying consolidated financial statements. If we fail to qualify as a REIT in any taxable year, we will be
subject to federal income tax on our taxable income at regular corporate rates (including any alternative minimum tax) and may
not be able to qualify as a REIT for the four subsequent taxable years. Even as a REIT, we may be subject to certain state and
local income and property taxes, and to federal income and excise taxes on undistributed taxable income. In general, however,
if we qualify as a REIT, no provisions for federal income taxes are necessary except for taxes on undistributed REIT taxable
income and taxes on the income generated by a taxable REIT subsidiary (TRS).
We have one TRS, acquired during the second quarter of fiscal year 2014, which is subject to corporate federal and state
income taxes on its taxable income at regular statutory rates. For the transition period ended December 31, 2018, we estimate
that the TRS will have no taxable income. There were no income tax provisions or material deferred income tax items for our
TRS for the transition period ended December 31, 2018 and the fiscal years ended April 30, 2018, 2017, and 2016.
We conduct our business activity as an Umbrella Partnership Real Estate Investment Trust (“UPREIT”) through our Operating
Partnership. UPREIT status allows us to accept the contribution of real estate in exchange for Units. Generally, such a
contribution to a limited partnership allows for the deferral of gain by an owner of appreciated real estate.
Distributions for the calendar year ended December 31, 2018, were characterized, for federal income tax purposes, as 100.00%
capital gain. Distributions for the calendar year ended December 31, 2017, were characterized, for federal income tax
purposes, as 14.59% ordinary income, 48.87% capital gain, and 36.54% return of capital. Distributions for the calendar year
ended December 31, 2016 were characterized, for federal income tax purposes, as 12.43% ordinary income and 87.57% capital
gain.
VARIABLE INTEREST ENTITY
We have determined that our Operating Partnership and each of our less-than-wholly owned real estate partnerships is a
variable interest entity (“VIE”), as the limited partners or the functional equivalent of limited partners lack substantive kick-out
rights and substantive participating rights. We are the primary beneficiary of the VIEs, and the VIEs are required to be
consolidated on our balance sheet because we have a controlling financial interest in the VIEs and have both the power to direct
the activities of the VIEs that most significantly impact the economic performance of the VIEs as well as the obligation to
absorb losses or the right to receive benefits from the VIEs that could potentially be significant to the VIEs. Because our
Operating Partnership is a VIE, all of our assets and liabilities are held through a VIE.
OTHER ASSETS
As of December 31, 2018, April 30, 2018, and April 30, 2017, other assets consisted of the following amounts:
F-19
in thousands
December 31, 2018
April 30, 2018
April 30, 2017
Receivable arising from straight line rents
$
1,145 $
1,458 $
Accounts receivable, net of allowance
Fair value of interest rate swaps
Loans receivable
Prepaid and other assets
Intangible assets
Property and equipment, net of accumulated depreciation
Goodwill
Deferred charges and leasing costs
Total Other Assets
PROPERTY AND EQUIPMENT
71
818
16,399
3,802
498
686
1,546
2,300
81
1,779
15,480
5,334
1,469
820
1,553
2,323
$
27,265 $
30,297 $
2,145
476
—
—
4,891
202
901
1,572
3,119
13,306
Property and equipment consists primarily of office equipment contained at our headquarters in Minot, North Dakota, corporate
office in Minneapolis, Minnesota, and additional property management offices located in the states where we own properties.
The Consolidated Balance Sheets reflects these assets at cost, net of accumulated depreciation and are included within Other
Assets. As of December 31, 2018, April 30, 2018, and April 30, 2017, property and equipment cost was $2.2 million, $2.1
million, and $2.1 million, respectively. Accumulated depreciation was $1.4 million, $1.3 million, and $1.2 million as of
December 31, 2018, April 30, 2018, and April 30, 2017, respectively, and are included within other assets in the Consolidated
Balance Sheets.
MORTGAGE LOANS RECEIVABLE AND NOTES RECEIVABLE
In August 2017, we sold 13 apartment communities in exchange for cash and a note secured by a mortgage on the assets. As of
December 31, 2018 and April 30, 2018, the remaining balance on the mortgage was $10.4 million and $11.0 million . The note
bears an interest rate of 5.5% and matures in August 2020. Monthly payments are interest-only, with the principal balance
payable at maturity. We received and recognized approximately $448,000 and $372,000 of interest income during the
transition period ended December 31, 2018 and the fiscal year ended April 30, 2018, respectively. During the transition period
ended December 31, 2018, we received a payment of $545,000 to pay down the balance of the mortgage receivable and
released one of the 13 properties from the assets used to secure the mortgage.
In July 2017, we originated a $16.2 million loan in a multifamily development located in New Hope, MN, a Minneapolis
suburb. As of July 31, 2018, we had funded the full initial loan balance, which appears in our Consolidated Balance Sheets;
however, we may fund additional amounts upon satisfaction of certain conditions set forth in the loan agreement. The note
bears an interest rate of 6%, matures in July 2023, and provides us an option to purchase the development prior to the loan
maturity date.
GAIN ON BARGAIN PURCHASE
During fiscal year 2016, we acquired an apartment community in Rochester, MN, which had a fair value at acquisition of
approximately $36.3 million, as appraised by a third party. The consideration exchanged for the property consisted of $15.0
million cash and approximately 250,000 Units, valued at approximately $17.8 million. The fair value of the Units transferred
was based on the closing market price of our common shares on the acquisition date of $70.90 per share. The acquisition
resulted in a gain on bargain purchase because the fair value of assets acquired exceeded the total of the fair value of the
consideration paid by approximately $3.4 million. The seller accepted consideration below the fair value of the property in
order to do a partial tax-deferred exchange for Units.
NOTE 3 • NONCONTROLLING INTERESTS
Interests in the Operating Partnership held by limited partners are represented by 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 noncontrolling interests in accordance with the terms of the
Operating Partnership’s Agreement of Limited Partnership.
F-20
We reflect noncontrolling interests in consolidated real estate entities on the Balance Sheet for the portion of properties
consolidated by us that are not wholly owned by us. The earnings or losses from these properties attributable to the
noncontrolling interests are reflected as net income attributable to noncontrolling interests – consolidated real estate entities in
the Consolidated Statements of Operations. Our noncontrolling interests – consolidated real estate entities at December 31,
2018, April 30, 2018, and 2017 were as follows:
IRET - 71 France, LLC
IRET - Cypress Court Apartments, LLC
IRET - Williston Garden Apartments, LLC
IRET - WRH 1, LLC
WRH Holding, LLC
Noncontrolling interests – consolidated real estate entities
$
$
(in thousands)
December 31, 2018 April 30, 2018 April 30, 2017
7,427
5,918 $
6,606 $
829
—
—
—
890
1,635
(467)
224
6,747 $
8,888 $
979
1,057
(619)
360
9,204
NOTE 4 • REDEEMABLE NONCONTROLLING INTERESTS
Redeemable noncontrolling interests on our Consolidated Balance Sheets represent the noncontrolling interest in a joint venture
in which our unaffiliated partner, at its election, could require us to buy its interest at a purchase price to be determined by an
appraisal conducted in accordance with the terms of the agreement, or at a negotiated price. Redeemable noncontrolling
interests are presented at the greater of their carrying amount or redemption value at the end of each reporting period. Changes
in the value from period to period are charged to common shares on our Consolidated Balance Sheets. We currently have one
joint venture, which owns Commons and Landing at Southgate in Minot, North Dakota, in which our joint venture partner can,
for the four-year period from February 6, 2016 through February 5, 2020, compel us to acquire its interest for a price to be
determined in accordance with the provisions of the joint venture agreement. Below is a table reflecting the activity of the
redeemable noncontrolling interests.
(in thousands)
Transition period ended
Years ended April 30,
December 31, 2018
2018
2017
2016
Balance at beginning of fiscal year
Contributions
Net (loss) income
Balance at close of fiscal year
NOTE 5 • DEBT
$
$
6,644
$ 7,117 $ 7,522 $ 6,368
—
(676)
5,968
268
17
1,120
(741)
(422)
$ 6,644 $ 7,117 $ 7,522
34
As of December 31, 2018, we owned 87 apartment communities, of which 51 served as collateral for mortgage loans. The
majority of these mortgages payable were non-recourse to us other than for standard carve-out obligations. Interest rates on
mortgage loans range from 3.47% to 6.66%, and the mortgage loans have varying maturity dates from September 1, 2019,
through May 31, 2035. As of December 31, 2018, we believe there are no material defaults or instances of material
noncompliance in regards to any of these mortgage loans.
The aggregate amount of required future principal payments on mortgages payable and term loans as of December 31, 2018 is
as follows:
2019
2020
2021
2022
2023
Thereafter
Total payments
(in thousands)
28,587
87,592
104,553
40,917
48,546
280,779
590,974
$
$
F-21
As of December 31, 2018, we owned 40 multifamily and other properties that were not encumbered by mortgages, with 32 of
these properties providing credit support for our unsecured borrowings. Our primary unsecured credit facility is a revolving,
multi-bank line of credit, with the BMO Harris Bank N.A. serving as administrative agent. Our line of credit has total
commitments of $250.0 million (the “Line of Credit”), with borrowing capacity based on the value of properties contained in
the unencumbered asset pool (“UAP”). The UAP provided for a borrowing capacity of $232.5 million at December 31, 2018,
providing additional borrowing availability of $175.0 million beyond the $57.5 million drawn as of December 31, 2018, priced
at an interest rate of 3.72%. This credit facility matures on August 31, 2022, with one 12-month option to extend the maturity
date at our election. At April 30, 2018, the line of credit borrowing capacity was $300.0 million based on the UAP, of which
$124.0 million was drawn on the line. At April 30, 2017, the line of credit borrowing capacity was $206.0 million based on the
UAP, of which $57.1 million was drawn on the line.
During the transition period ended December 31, 2018, we amended our primary unsecured credit facility. We extended the
maturity date on our existing $70.0 million unsecured term loan, which now matures on January 15, 2024. We also added a
new $75.0 million, seven-year term loan which matures on August 31, 2025.
The interest rates on the line of credit and term loans are based, at our option, on the lender's base rate plus a margin, ranging
from 35-85 basis points, or the London Interbank Offered Rate (“LIBOR”), plus a margin that ranges from 135-190 basis
points based on our consolidated leverage. Our line of credit and term loans are subject to customary financial covenants and
limitations. We believe that we are in compliance with all such financial covenants and limitations as of December 31, 2018.
We also have a $6.0 million operating line of credit. This operating line of credit is designed to enhance treasury management
activities and more effectively manage cash balances. This operating line has a one-year term, with pricing based on a market
spread plus the one-month LIBOR index rate. As of December 31, 2018 and April 30, 2018, we had no outstanding balance on
this operating line of credit.
Our remaining construction debt was paid off during the year ended April 30, 2018. Construction debt at April 30, 2017, was
$41.7 million, with a weighted average rate of interest of 3.27%.
The following table summarizes our indebtedness at December 31, 2018:
(in thousands)
December 31, 2018
April 30, 2018
April 30, 2017
Weighted Average
Maturity in Years
Unsecured line of credit
Term loans
Unsecured debt
Mortgages payable - fixed (1)
Mortgages payable - variable(1)
Construction debt - variable
Total debt
Weighted average interest rate on unsecured line of credit
Weighted average interest rate on term loans (rate with swaps)
Weighted average interest rate on mortgages payable(1)
Weighted average interest rate on construction debt
$
$
57,500
$
124,000
$
145,000
202,500
445,974
—
—
70,000
194,000
489,401
22,739
—
648,474
$
706,140
$
3.72%
4.01%
4.58%
—
3.35%
3.86%
4.69%
—
57,050
—
57,050
629,535
57,708
41,737
786,030
2.67%
—
4.71%
3.27%
(1)
Includes mortgages payable related to assets held for sale and assets of discontinued operations at April 30, 2017.
NOTE 6 • DERIVATIVE INSTRUMENTS
3.67
5.86
3.61
Our objective in using an interest rate derivatives is to add stability to interest expense and to manage our exposure to interest
rate fluctuations. To accomplish this objective, we primarily use interest rate swap contracts to fix the variable rate interest on
our term loans. The interest rate swap contracts qualify as cash flow hedges.
Under ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,
which we adopted on November 1, 2017, the ineffective portion of a hedging instrument is no longer required to be recognized
currently in earnings or disclosed. Changes in the fair value of cash flow hedges are recorded in accumulated other
comprehensive income and subsequently reclassified into earnings in the period that the hedged transaction affects earnings.
Amounts reported in accumulated other comprehensive income for our interest rate swap will be reclassified to interest expense
F-22
as interest payments are made on our term loan. During the next 12 months, we estimate an additional $61,000 will be
reclassified as a decrease to interest expense.
At December 31, 2018, we had two interest rate swap contracts in effect with a notional amount of $145.0 million and one
additional interest rate swap that becomes effective on January 31, 2023 with a notional amount of $70.0 million.
The table below presents the fair value of our derivative financial instruments as well as their classification on our Consolidated
Balance Sheets as of December 31, 2018, April 30, 2018 and April 30, 2017.
(in thousands)
(in thousands)
December 31,
2018
April 30,
2018
April 30,
2017
December 31,
2018
April 30,
2018
April 30,
2017
Balance
Sheet
Location
Fair Value
Fair Value
Fair Value
Derivative instruments - interest
rate swaps
Other Assets
$
818
$
1,779
Total derivatives designated as
hedging instruments
$
818
$
1,779
—
—
Balance
Sheet
Location
Accounts
Payable and
Accrued
Expenses
Fair Value
Fair Value
Fair Value
$
$
1,675
1,675
—
—
—
—
The table below presents the effect of the Company's derivative financial instruments on the Consolidated Statements of
Operations as of December 31, 2018 and April 30, 2018.
Gain (Loss) Recognized in OCI
Transition
Period Ended
December 31,
Year Ended April 30,
(in thousands)
Location of Gain
(Loss) Reclassified
from Accumulated
OCI into Income
Gain (Loss) Reclassified from
Accumulated OCI into Income
Transition
Period Ended
December 31,
Year Ended April 30,
2018
2018
2017
2018
2018
2017
Interest rate contracts
Total derivatives in cash flow hedging
relationships
$
$
(2,794) $
1,627
—
Interest expense
(2,794) $
1,627
—
$
$
(159) $
(152)
(159) $
(152)
—
—
NOTE 7 • TRANSACTIONS WITH RELATED PARTIES
Transactions with BMO Capital Markets
We have an historical and ongoing relationship with BMO Capital Markets (“BMO”). On July 17, 2017, we engaged BMO to
provide financial advisory services in connection with the proposed disposition of our healthcare property portfolio. A family
member of Mark O. Decker, Jr., our President and Chief Executive Officer, is an employee of BMO and could have an indirect
material interest in any such engagement and related transaction(s). The Board pre-approved the engagement of BMO. During
the fiscal year ended April 30, 2018, we completed the disposition of 27 of our 28 healthcare properties and paid BMO a
transaction fee of $1.8 million in connection with this engagement.
NOTE 8 • ACQUISITIONS, DEVELOPMENT PROJECTS PLACED IN SERVICE AND DISPOSITIONS
ACQUISITIONS
We added no new apartment communities to our portfolio through acquisitions during the transition period ended December 31,
2018 compared to $373.1 million during the fiscal year ended April 30, 2018 and $0 in the fiscal year ended April 30, 2017.
Our acquisitions during fiscal year ended April 30, 2018 qualified as asset acquisitions under ASU 2017-01, Clarifying the
Definition of a Business, and are detailed below.
F-23
Fiscal 2018 (May 1, 2017 to April 30, 2018)
Acquisitions
Multifamily
191 homes - Oxbo - St. Paul, MN (1)
500 homes - Park Place - Plymouth, MN
274 homes - Dylan - Denver, CO
390 homes - Westend - Denver, CO
Total Acquisitions
(1) Property includes 11,477 square feet of retail space.
(in thousands)
Total Form of Consideration
Investment Allocation
Date Acquisition
Acquired
Cost
Cash
Land Building
Assets
Intangible
May 26, 2017 $
61,500 $
61,500 $
5,809 $
54,910 $
September 13, 2017
November 28, 2017
92,250
90,600
March 28, 2018
128,700
92,250
90,600
128,700
10,609
12,155
25,525
80,711
77,249
102,101
$
373,050 $
373,050 $ 54,098 $ 314,971 $
781
930
1,196
1,074
3,981
DEVELOPMENT PROJECTS PLACED IN SERVICE
We placed no development projects in service during the transition period ended December 31, 2018 and the fiscal year ended
April 30, 2018, compared to $102.9 million in fiscal year ended April 30, 2017. The fiscal year 2017 development projects
placed in service are detailed below.
Fiscal 2017 (May 1, 2016 to April 30, 2017)
Development Projects Placed in Service
Multifamily
241 homes - 71 France - Edina, MN(1)
202 homes - Monticello Crossings - Monticello, MN(2)
Total Development Projects Placed in Service
(in thousands)
Date Placed
Development
in Service
Land Building
Cost
May 1, 2016 $
4,721 $
67,641 $
72,362
March 1, 2017
1,734
28,782
$
6,455 $
96,423 $
30,516
102,878
(1) Costs paid in prior fiscal years totaled $70.9 million. Additional costs incurred in fiscal year 2017 totaled $1.5 million, for a total project cost at April 30,
2017 of $72.4 million. The project is owned by a joint venture entity in which we currently have an approximately 52.6% interest. The joint venture is
consolidated in our financial statements.
(2) Costs paid in prior fiscal years totaled $15.5 million. Additional costs incurred in fiscal year 2017 totaled $15.0 million, for a total project cost at April 30,
2017 of $30.5 million.
DISPOSITIONS
During the transition period ended December 31, 2018, we sold three apartment communities, five commercial properties and
three parcels of unimproved land for a total sales price of $63.4 million. Dispositions totaled $515.1 million and $286.9
million in the fiscal years ended April 30, 2018 and 2017, respectively. The dispositions for the transition period ended
December 31, 2018 and fiscal years ended April 30, 2018 and 2017 are detailed below.
F-24
Transition Period Ended December 31, 2018 (May 1, 2018 to December 31, 2018)
Dispositions
Multifamily
44 unit - Dakota Commons - Williston, ND
145 unit - Williston Garden - Williston, ND(1)
288 unit - Renaissance Heights - Williston, ND(2)
Other
7,849 sq ft Minot Southgate Retail - Minot, ND
9,052 sq ft Fresenius - Duluth, MN
15,000 sq ft Minot 2505 16th St SW - Minot, ND
81,594 sq ft Minot Arrowhead - Minot, ND
100,850 sq ft Bloomington 2000 W 94th Street - Bloomington, MN
Unimproved Land
Grand Forks - Grand Forks, ND
Renaissance Heights - Williston, ND(3)
Badger Hills Unimproved - Rochester, MN
Date
(in thousands)
Book Value
Disposed Sales Price
and Sale Cost Gain/(Loss)
July 26, 2018 $
4,420 $
3,878 $
July 26, 2018
July 26, 2018
July 12, 2018
July 27, 2018
October 12, 2018
November 30, 2018
December 19, 2018
12,310
24,770
41,500
1,925
1,900
1,710
6,622
4,550
11,313
17,856
33,047
2,056
1,078
1,814
5,907
4,550
542
997
6,914
8,453
(131)
822
(104)
715
—
16,707
15,405
1,302
July 16, 2018
July 26, 2018
August 29, 2018
3,000
750
1,400
5,150
2,986
684
1,528
5,198
14
66
(128)
(48)
Total Property Dispositions
$
63,357 $
53,650 $
9,707
(1) This apartment community was owned by a joint venture entity in which we had an interest of approximately 74.11%.
(2) This apartment community was owned by a joint venture entity in which we had an interest of approximately 87.14%.
(3) This parcel of land was owned by a joint venture entity in which we had an interest of approximately 70.00%
F-25
Fiscal 2018 (May 1, 2017 to April 30, 2018)
Dispositions
Multifamily
Date
(in thousands)
Book Value
Disposed Sales Price
and Sales Cost
Gain/(Loss)
327 homes - 13 apartment communities - Minot, ND (1)(2)
August 22, 2017 $
12,263 $
11,562 $
48 homes - Crown - Rochester, MN
16 homes - Northern Valley - Rochester, MN
Other
4,998 sq ft Minot Southgate Wells Fargo Bank - Minot, ND
90,260 sq ft Lexington Commerce Center - Eagan, MN
17,640 sq ft Duckwood Medical - Eagan, MN
279,834 sq ft Edgewood Vista Hermantown I & II - Hermantown, MN
518,161 sq ft Urbandale - Urbandale, IA
36,053 sq ft 3075 Long Lake Road - Roseville, MN
1,205,432 sq ft 25 Healthcare properties
43,404 sq ft Garden View - St. Paul, MN
52,116 sq ft Ritchie Medical - St. Paul, MN
22,187 sq ft Bismarck 715 East Broadway and Unimproved Land - Bismarck,
ND
December 1, 2017
December 1, 2017
May 15, 2017
August 22, 2017
August 24, 2017
October 19, 2017
November 22, 2017
November 28, 2017
5,700
950
18,913
3,440
9,000
2,100
36,884
16,700
18,650
December 29, 2017
370,268
January 19, 2018
January 19, 2018
March 7, 2018
14,000
16,500
5,500
493,042
3,318
690
15,570
3,332
3,963
1,886
24,697
12,857
12,766
232,778
6,191
10,419
3,215
312,104
701
2,382
260
3,343
108
5,037
214
12,187
3,843
5,884
137,490
7,809
6,081
2,285
180,938
Unimproved Land
Bismarck 4916 Unimproved Land - Bismarck, ND
August 8, 2017
3,175
3,188
(13)
Total Dispositions
$
515,130 $
330,862 $
184,268
(1) These communities include: 4th Street 4 Plex, 11th Street 3 Plex, Apartments on Main, Brooklyn Heights, Colton Heights, Fairmont, First Avenue
(Apartments and Office), Pines, Southview, Summit Park, Temple (includes 17 South Main Retail), Terrace Heights, and Westridge.
(2) The properties included: 2800 Medical, 2828 Chicago Avenue, Airport Medical, Billings 2300 Grand Road, Burnsville 303 Nicollet Medical, Burnsville
305 Nicollet Medical, Duluth Denfeld Clinic, Edina 6363 France Medical, Edina 6405 France Medical, Edina 6517 Drew Avenue, Edina 6225 France
SMC II, Edina 6545 France SMC I, Gateway Clinic, High Pointe Health Campus, Lakeside Medical Plaza, Mariner Clinic, Minneapolis 701 25th Avenue
Medical, Missoula 3050 Great Northern, Park Dental, Pavilion I, Pavilion II, PrairieCare Medical, St. Michael Clinic, Trinity at Plaza 16 and Wells
Clinic.
F-26
Fiscal 2017 (May 1, 2016 to April 30, 2017)
Dispositions
Multifamily
Date
(in thousands)
Book Value
Disposed Sales Price
and Sales Cost
Gain/(Loss)
24 homes Pinecone Villas - Sartell, MN
April 20, 2017 $
3,540 $
2,732 $
808
Healthcare
189,244 sq ft 9 Idaho Spring Creek Senior Housing Properties(1)
426,652 sq ft 5 Edgewood Vista Senior Housing Properties(2)
286,854 sq ft 5 Wyoming Senior Housing Properties(3)
169,001 sq ft 9 Edgewood Vista Senior Housing Properties(4)
169,562 sq ft 4 Edgewood Vista Senior Housing Properties(5)
114,316 sq ft Healtheast St. John & Woodwinds - Maplewood & Woodbury MN
59,760 sq ft Sartell 2000 23rd Street South - Sartell, MN
98,174 sq ft Legends at Heritage Place - Sartell, MN
October 31, 2016
January 18, 2017
February 1, 2017
February 15, 2017
March 1, 2017
March 6, 2017
March 31, 2017
April 20, 2017
43,900
69,928
49,600
30,700
35,348
20,700
5,600
9,960
37,397
50,393
45,469
24,081
14,511
13,777
5,923
11,439
Other
195,075 sq ft Stone Container - Fargo, ND
28,528 sq ft Grand Forks Carmike - Grand Forks, ND
July 25, 2016
December 29, 2016
265,736
202,990
13,400
4,000
17,400
4,418
1,563
5,981
6,503
19,535
4,131
6,619
20,837
6,923
(323)
(1,479)
62,746
8,982
2,437
11,419
Unimproved Land
Georgetown Square Unimproved Land - Grand Chute, WI
May 6, 2016
250
274
(24)
Total Property Dispositions
$
286,926 $
211,977 $
74,949
(1) The properties included in this portfolio disposition are: Spring Creek American Falls, Spring Creek Boise, Spring Creek Eagle, Spring Creek Fruitland,
Spring Creek Fruitland Unimproved, Spring Creek Meridian, Spring Creek Overland, Spring Creek Soda Springs and Spring Creek Ustick.
(2) The properties included in this portfolio disposition are: Edgewood Vista Bismarck, Edgewood Vista Brainerd, Edgewood Vista East Grand Forks,
Edgewood Vista Fargo, and Edgewood Vista Spearfish.
(3) The properties included in this portfolio disposition are: Casper 1930 E 12th Street (Park Place), Casper 3955 E 12th Street (Meadow Wind), Cheyenne
4010 N College Drive (Aspen Wind), Cheyenne 4606 N College Drive (Sierra Hills) and Laramie 1072 N 22nd Street (Spring Wind).
(4) The properties included in this portfolio disposition are: Edgewood Vista Belgrade, Edgewood Vista Billings, Edgewood Vista Columbus, Edgewood
Vista Fremont, Edgewood Vista Grand Island, Edgewood Vista Minot, Edgewood Vista Missoula, Edgewood Vista Norfolk and Edgewood Vista Sioux
Falls.
(5) The properties included in this portfolio are: Edgewood Vista Hastings, Edgewood Vista Kalispell, Edgewood Vista Omaha and Edgewood Vista Virginia.
NOTE 9 • OPERATING SEGMENT
We operate in a single reportable segment which includes the ownership, management, development, redevelopment, and
acquisition of apartment communities. Each of our operating properties is considered a separate operating segment because
each property earns revenues, incurs expenses, and has discrete financial information. Our chief operating decision-makers
evaluate each property's operating results to make decisions about resources to be allocated and to assess performance. We do
not group our operations based on geography, size, or type. Our apartment communities have similar long-term economic
characteristics and provide similar products and services to our residents. No apartment community comprises more than 10%
of consolidated revenues, profits, or assets. Accordingly, our apartment communities are aggregated into a single reportable
segment. "All other" is composed of non-multifamily properties, non-multifamily components of mixed use properties, and
properties disposed or designated as held for sale.
Prior to the third quarter of fiscal year 2018, we reported our results in two reportable segments: multifamily and healthcare.
We sold substantially all of our healthcare portfolio during the third quarter of fiscal year 2018 and classified it as discontinued
operations (see Note 10 for additional information), at which point healthcare no longer met the quantitative thresholds for
reporting as a separate reportable segment.
Our executive management team comprises our chief operating decision-makers. This team measures the performance of our
reportable segment based on net operating income (“NOI”), which we define as total real estate revenues less property
operating expenses, including real estate taxes. We believe that NOI is an important supplemental measure of operating
performance for real estate because it provides a measure of operations that is unaffected by depreciation, amortization,
financing, property management overhead, and general and administrative expense. NOI does not represent cash generated by
F-27
operating activities in accordance with GAAP and should not be considered an alternative to net income, net income available
for common shareholders, or cash flow from operating activities as a measure of financial performance. The following tables
present net operating income for the transition period ended December 31, 2018 and the fiscal years ended April 30, 2018,
2017, and 2016 from our reportable segment and reconcile net operating income to net income as reported in the consolidated
financial statements. Segment assets are also reconciled to total assets as reported in the consolidated financial statements.
$
$
$
$
Transition period ended December 31, 2018
Revenue
Property operating expenses, including real estate taxes
Net operating income
Property management expenses
Casualty loss
Depreciation and amortization
Impairment of real estate investments
General and administrative expenses
Interest expense
Loss on debt extinguishment
Interest and other income
Income (loss) before gain on sale of real estate and other investments and income
(loss) from discontinued operations
Gain (loss) on sale of real estate and other investments
Gain (loss) from continuing operations
Income (loss) from discontinued operations
Net income (loss)
Year ended April 30, 2018
Revenue
Property operating expenses, including real estate taxes
Net operating income
Property management expenses
Casualty loss
Depreciation and amortization
Impairment of real estate investments
General and administrative expenses
Acquisition and investment related costs
Interest expense
Loss on debt extinguishment
Interest and other income
(in thousands)
Multifamily
All Other
Total
116,138 $
5,733 $
121,871
48,896
67,242 $
1,823
3,910 $
50,719
71,152
(3,663)
(915)
(50,456)
(1,221)
(9,812)
(21,359)
(556)
1,233
(15,597)
9,707
(5,890)
570
$
(5,320)
(in thousands)
Multifamily
All Other
Total
159,983 $
9,762 $
169,745
70,460
89,523 $
2,574
7,188 $
73,034
96,711
(5,526)
(500)
(82,070)
(18,065)
(14,203)
(51)
(34,178)
(940)
1,508
(57,314)
20,120
(37,194)
164,823
127,629
Income (loss) before gain on sale of real estate and other investments and income
(loss) from discontinued operations
Gain (loss) on sale of real estate and other investments
Gain (loss) from continuing operations
Income (loss) from discontinued operations
Net income (loss)
$
F-28
$
$
$
$
Year ended April 30, 2017
Revenue
Property operating expenses, including real estate taxes
Net operating income
Property management expenses
Casualty loss
Depreciation and amortization
Impairment of real estate investments
General and administrative expenses
Acquisition and investment related costs
Interest expense
Loss on debt extinguishment
Interest and other income
Income (loss) before gain on sale of real estate and other investments
Gain (loss) on sale of real estate and other investments
Income (loss) from continuing operations
Income (loss) from discontinued operations
Net income (loss)
Year ended April 30, 2016
Revenue
Property operating expenses, including real estate taxes
Net operating income
Property management expenses
Casualty loss
Depreciation and amortization
Impairment of real estate investments
General and administrative expenses
Acquisition and investment related costs
Interest expense
Loss on debt extinguishment
Interest and other income
(in thousands)
Multifamily
All Other
Total
142,214 $
17,890 $
160,104
60,895
3,431
81,319 $
14,459 $
$
(in thousands)
64,326
95,778
(5,046)
(414)
(44,253)
(57,028)
(15,871)
(3,276)
(34,314)
(1,651)
1,146
(64,929)
18,701
(46,228)
76,753
30,525
Multifamily
All Other
Total
129,049 $
16,451 $
145,500
54,762
3,386
74,287 $
13,065 $
58,148
87,352
(3,714)
(238)
(39,273)
(5,543)
(13,498)
(830)
(28,417)
(106)
385
(3,882)
9,640
3,424
9,182
67,420
76,602
Income (loss) before loss on sale of real estate and other investments and income
(loss) from discontinued operations
Gain (loss) on sale of real estate and other investments
Gain (loss) on bargain purchase
Income (loss) from continuing operations
Income (loss) from discontinued operations
Net income (loss)
$
F-29
Segment Assets and Accumulated Depreciation
As at December 31, 2018
Segment assets
Property owned
Less accumulated depreciation
Total property owned
Cash and cash equivalents
Restricted cash
Other assets
Unimproved land
Mortgage loans receivable
Total Assets
As at April 30, 2018
Segment assets
Property owned
Less accumulated depreciation
Total property owned
Cash and cash equivalents
Restricted cash
Other assets
Unimproved land
Mortgage loans receivable
Total Assets
As at April 30, 2017
Segment assets
Property owned
Less accumulated depreciation
Total property owned
Assets held for sale and assets from discontinued operations
Cash and cash equivalents
Restricted cash
Other assets
Unimproved land
Total Assets
NOTE 10 • DISCONTINUED OPERATIONS
$
$
$
$
$
$
(in thousands)
Multifamily
All Other
Total
1,582,917 $
44,719 $
1,627,636
(340,081)
(13,790)
(353,871)
1,242,836 $
30,929 $
1,273,765
13,792
5,464
27,265
5,301
10,410
$
1,335,997
(in thousands)
Multifamily
All Other
Total
1,606,421 $
(294,477)
1,311,944 $
63,343 $
(16,847)
46,496 $
1,669,764
(311,324)
1,358,440
11,891
4,225
30,297
11,476
10,329
$
1,426,658
(in thousands)
Multifamily
All Other
Total
1,260,541 $
(232,592)
1,027,949 $
97,988 $
(23,007)
74,981 $
1,358,529
(255,599)
1,102,930
283,023
28,819
27,981
13,306
18,455
$
1,474,514
We report in discontinued operations the results of operations and the related gains or losses on the sales of properties that have
either been disposed of or classified as held for sale and meet the classification of a discontinued operation as described in ASC
205 - Presentation of Financial Statements and ASC 360 - Property, Plant, and Equipment: Reporting Discontinued Operations
and Disclosures of Disposals of Components of an Entity. Under this standard, a disposal (or classification as held for sale) of a
component of an entity or a group of components of an entity is required to be reported in discontinued operations if the
disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.
F-30
We determined that our strategic decision to exit our healthcare segment met the criteria for discontinued operations, and we
consequently classified 27 property dispositions as discontinued operations during the fiscal year ended April 30, 2018. We
classified no dispositions as discontinued operations during the transition period ended December 31, 2018 and the fiscal year
ended April 30, 2017. During the fiscal year ended April 30, 2016, we determined that our strategic plan to exit the office and
retail segments met the criteria for discontinued operations. Accordingly, 48 office properties, 17 retail properties and 1
healthcare property were classified as discontinued operations and subsequently sold during the fiscal year ended April 30,
2016. In fiscal year 2016, we determined that our strategic decision to exit senior housing, which was a subset of our healthcare
segment, met the criteria for discontinued operations and we classified 34 senior housing properties as held for sale and
discontinued operations at April 30, 2016. Thirty-two of these senior housing properties were subsequently sold during the
fiscal year ended April 30, 2017. The following information shows the effect on net income and the gains or losses from the
sale of properties classified as discontinued operations for the transition period ended December 31, 2018 and the fiscal years
ended April 30, 2018, 2017, and 2016.
REVENUE
Real estate rentals
Tenant reimbursement
TRS senior housing revenue
TOTAL REVENUE
EXPENSES
Property operating expenses, excluding real estate taxes
Real estate taxes
Property management expense
Depreciation and amortization
Impairment of real estate investments
TRS senior housing expenses
TOTAL EXPENSES
Operating income (loss)
Interest expense(1)
Gain (loss) on extinguishment of debt(1)
Interest income
Other income
Income (loss) from discontinued operations before gain on sale
Gain (loss) on sale of discontinued operations
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
Segment Data
All other
Total
(in thousands)
Period Ended
Year Ended
December 31, 2018 April 30, 2018 April 30, 2017 April 30, 2016
$
— $
19,744 $
43,984 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
570
11,650
—
31,394
6,350
5,191
206
8,445
—
—
20,192
11,202
(4,172)
(6,508)
661
73
1,256
163,567
16,110
3,218
63,312
9,051
6,848
574
10,772
—
3,113
30,358
32,954
(11,628)
(3,238)
2,179
340
20,607
56,146
$
$
$
570 $
164,823 $
76,753 $
570 $
570 $
164,823 $
164,823 $
76,753 $
76,753 $
69,623
23,434
3,955
97,012
17,470
11,611
1,957
24,725
440
3,366
59,569
37,443
(25,757)
29,336
2,179
437
43,638
23,782
67,420
67,420
67,420
(1)
Interest expense includes $4.7 million for the fiscal year ended April 30, 2016, of default interest related to a $122.6 million non-recourse loan. Gain on
extinguishment of debt in the fiscal year ended April 30, 2016 includes $36.5 million of gain on extinguishment of debt recognized in connection with our
transfer of ownership to the mortgage lender of the nine properties serving as collateral for the $122.6 million non-recourse loan and the removal of the debt
obligation and accrued interest from our balance sheet.
Property Sale Data
Sales price
Net book value and sales costs
Gain on sale of discontinued operations
(in thousands)
Period Ended
Year Ended
12/31/2018 April 30, 2018 April 30, 2017 April 30, 2016
— $
437,652 $
239,436 $
373,460
—
(274,085)
(183,290)
(349,678)
— $
163,567 $
56,146 $
23,782
F-31
As of December 31, 2018 and April 30, 2018, we had no assets or liabilities classified as held for sale. The following
information reconciles the carrying amounts of major classes of assets and liabilities of the discontinued operations to assets
and liabilities held for sale that are presented separately on the Consolidated Balance Sheets at April 30, 2017:
Carrying amounts of major classes of assets included as part of discontinued operations
Property owned and intangible assets, net of accumulated depreciation and amortization
Restricted cash
Other Assets
Total major classes of assets of the discontinued operations
Other assets included in the disposal group classified as held for sale
Total assets of the disposal group classified as held for sale on the balance sheet
Carrying amounts of major classes of liabilities included as part of discontinued operations
Accounts payable and accrued expenses
Mortgages payable
Other
Total major classes of liabilities of the discontinued operations
Other liabilities included in the disposal group classified as held for sale
Total liabilities of the disposal group classified as held for sale on the balance sheet
NOTE 11 • EARNINGS PER SHARE
April 30, 2017
255,466
728
12,750
268,944
14,079
283,023
4,835
112,208
7,977
125,020
5,884
130,904
$
$
$
$
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. We have issued restricted stock units ("RSUs") under our 2015
Incentive Plan, which could have a dilutive effect on our earnings per share upon exercise of the RSUs. Other than the issuance
of RSUs, we have no outstanding options, warrants, convertible stock or other contractual obligations requiring issuance of
additional common shares that would result in a dilution of earnings. Pursuant to the exercise of Exchange Rights, Units may
be tendered for redemption for cash or, at our option, for common shares on a one-for-one-basis.
For the transition period ended December 31, 2018, performance-based restricted stock awards of 25,300 were excluded from
the calculation of diluted earnings per share because the assumed proceeds per share plus the average unearned compensation
were greater than the average market price of the common stock for the periods presented and, therefore, were anti-dilutive.
Refer to Note 17 - Share-Based Compensation for discussion of the terms for these awards.
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 transition period ended December 31, 2018 and the fiscal years
ended April 30, 2018, 2017, and 2016:
F-32
(in thousands, except per share data)
For Period Ended
For Year Ended April 30,
December 31, 2018
April 30, 2018 April 30, 2017 April 30, 2016
NUMERATOR
Income (loss) from continuing operations – controlling interests
$
(4,908) $
(30,266) $
(24,473) $
Income (loss) from discontinued operations – controlling interests
Net income (loss) attributable to controlling interests
Dividends to preferred shareholders
Redemption of preferred shares
Numerator for basic earnings per share – net income available to
common shareholders
Noncontrolling interests – Operating Partnership
Numerator for diluted earnings per share
DENOMINATOR
Denominator for basic earnings per share weighted average shares
Effect of redeemable operating partnership units
Denominator for diluted earnings per share
Earnings (loss) per common share from continuing operations – basic
and diluted
Earnings (loss) per common share from discontinued operations –
basic and diluted
NET EARNINGS (LOSS) PER COMMON SHARE – BASIC &
DILUTED
$
$
$
510
(4,398)
(4,547)
—
(8,945)
(1,032)
147,054
116,788
(8,569)
(3,657)
104,562
12,702
67,820
43,347
(10,546)
(1,435)
31,366
4,059
(9,977) $
117,264 $
35,425 $
11,937
1,387
13,324
119,977
14,617
134,594
121,169
16,130
137,299
(0.79) $
(3.54) $
(3.01) $
0.04
12.25
5.59
(0.75) $
8.71 $
2.58 $
11,553
60,453
72,006
(11,514)
—
60,492
7,032
67,524
123,094
14,278
137,372
—
4.91
4.91
NOTE 12 • RETIREMENT PLANS
We sponsor a defined contribution 401(k) plan to provide retirement benefits for employees that meet minimum employment
criteria. We currently match, dollar for dollar, employee contributions to the 401(k) plan in an amount equal to up to 5.0% of
the eligible wages of each participating employee. 401(k) matching contributions are fully vested when made. We recognized
expense of approximately $476,000, $838,000, $565,000, and $836,000 in the transition period ended December 31, 2018 and
the fiscal years ended April 30, 2018, 2017, and 2016, respectively. The expense increased from fiscal year 2017 to fiscal year
2018 primarily due to an increase of 1% in the employer match contribution. The expense decreased from fiscal year 2016 to
fiscal year 2017 because fiscal year 2016 included a 3.5% discretionary employer contribution.
NOTE 13 • COMMITMENTS AND CONTINGENCIES
Legal Proceedings. We are involved in various lawsuits arising in the normal course of business. We believe that such matters
will not have a material adverse effect on our consolidated financial statements.
Environmental Matters. It is generally our policy to obtain a Phase I environmental assessment of each property that we seek to
acquire. Such assessments have not revealed, nor are we aware of, any environmental liabilities that we believe would have a
material adverse effect on our financial position or results of operations. We own properties that contain or potentially contain
(based on the age of the property) asbestos or lead. For certain of these properties, we estimated the fair value of the conditional
asset retirement obligation and chose not to book a liability because the amounts involved were immaterial. With respect to
certain other properties, we have not recorded any related asset retirement obligation as the fair value of the liability cannot be
reasonably estimated due to insufficient information. We believe we do not have sufficient information to estimate the fair
value of the asset retirement obligations for these properties because a settlement date or range of potential settlement dates has
not been specified by others and, additionally, there are currently no plans or expectation of plans to demolish these properties
or to undertake major renovations that would require removal of the asbestos, lead and/or underground storage tanks. These
properties are expected to be maintained by repairs and maintenance activities that would not involve the removal of the
asbestos, lead and/or underground storage tanks. Also, a need for renovations caused by resident changes, technology changes
or other factors has not been identified.
Insurance. We carry insurance coverage on our properties in amounts and types that we believe are customarily obtained by
owners of similar properties and are sufficient to achieve our risk management objectives.
F-33
Restrictions on Taxable Dispositions. Approximately 24 of our properties, consisting of approximately 4,099 apartment homes,
are subject to restrictions on taxable dispositions under agreements entered into with some of the sellers or contributors of the
properties. The real estate investment amount of these properties, net of accumulated depreciation, was approximately $532.0
million at December 31, 2018. The restrictions on taxable dispositions are effective for varying periods. We do not believe that
the agreements materially affect the conduct of our business or our decisions whether to dispose of restricted properties during
the restriction period because we generally hold these and our other properties for investment purposes rather than for sale. In
addition, where we deem it to be in our shareholders’ best interests to dispose of such properties, we generally seek to structure
sales of such properties as tax deferred transactions under Section 1031 of the Internal Revenue Code. Otherwise, we may be
required to provide tax indemnification payments to the parties to these agreements.
Redemption Value of Units. Pursuant to a Unitholder’s exercise of its Exchange Rights, we have the right, in our sole
discretion, to acquire such Units by either making a cash payment or acquiring the Units for our common shares, on a one-for-
one basis. All Units receive the same per Unit cash distributions as the per share dividends paid on common shares. Units are
redeemable for an amount of cash per Unit equal to the average of the daily market price of our common shares for the ten
consecutive trading days immediately preceding the date of valuation of the Unit. As of December 31, 2018, April 30, 2018,
and April 30, 2017, the aggregate redemption value of the then-outstanding Units owned by limited partners, as determined by
the ten-day average market price for our common shares, was approximately $68.4 million, $74.7 million, and $95.1 million,
respectively.
Joint Venture Buy/Sell Options. Several of our joint venture agreements contain buy/sell options in which each party under
certain circumstances has the option to acquire the interest of the other party, but do not generally require that we buy our
partners’ interests. However, from time to time, we have entered into joint venture agreements which contain options
compelling us to acquire the interest of the other parties. We currently have one such joint venture, which owns Commons and
Landing at Southgate in Minot, North Dakota, in which our joint venture partner can, for the four-year period from February 6,
2016 through February 5, 2020, compel us to acquire the partner’s interest for a price to be determined in accordance with the
provisions of the joint venture agreement. The joint venture partner’s interest is reflected as a redeemable noncontrolling
interest on the Consolidated Balance Sheets.
NOTE 14 • FAIR VALUE MEASUREMENTS
Cash and cash equivalents, restricted cash, accounts payable, accrued expenses, and other liabilities are carried at amounts that
reasonably approximate their fair value due to their short-term nature. For variable rate debt that re-prices frequently, fair
values are based on carrying values. The fair values of our financial instruments approximate their carrying amount in the
consolidated financial statements except for fixed rate debt.
In determining the fair value of other financial instruments, we apply Financial Accounting Standard Board ASC 820, Fair
Value Measurement and Disclosures, or ASC 820. ASC 820 defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. Fair value hierarchy under ASC 820 distinguishes between
market participant assumptions based on market data obtained from sources independent of the reporting entity (Levels 1 and
2) and the reporting entity’s own assumptions about market participant assumptions (Level 3). Fair value estimates may differ
from the amounts that may ultimately be realized upon sale or disposition of the assets and liabilities.
Fair Value Measurements on a Recurring Basis
The fair value of our interest rate swaps is determined using the market standard methodology of netting discounted expected
variable cash payments and receipts. The variable cash payments and receipts are based on an expectation of future interest
rates (a forward curve) derived from observable market interest rate curves. We consider both our own nonperformance risk
and the counterparty's nonperformance risk in the fair value measurement.
Fair Value Measurements on a Nonrecurring Basis
Non-financial assets measured at fair value on a nonrecurring basis at December 31, 2018 and April 30, 2018, consisted of real
estate investments and at April 30, 2017, consisted of real estate investments and real estate held for sale that were written-
down to estimated fair value during the transition period ended December 31, 2018 and the fiscal years ended April 30, 2018
and 2017, respectively. The aggregate fair value of these assets by their levels in the fair value hierarchy are as follows:
F-34
December 31, 2018
Real estate investments valued at fair value
$
3,049
—
— $
3,049
April 30, 2018
Real estate investments valued at fair value
$
52,145
—
— $ 52,145
(in thousands)
Total
Level 1
Level 2
Level 3
April 30, 2017
Real estate investments valued at fair value
Real estate held for sale (1)
$
506
10,891
—
—
— $
506
— 10,891
(1) Represents only the portion of real estate held for sale at April 30, 2017 that was written down to estimated fair value.
As of December 31, 2018 and April 30, 2018, we estimated the fair value of our real estate investments using appraisals, a
market offer to purchase, market comparisons, and other market data. As of April 30, 2017, we estimated fair value on a group
of our properties using projected net operating income and an estimated capitalization rate to estimate fair value. Significant
unobservable quantitative inputs used in determining the fair value of each investment includes capitalization rates based on the
location, type, and nature of each property and current and anticipated market conditions. Significant unobservable quantitative
inputs used in determining the fair value of these real estate investments at April 30, 2017, was a capitalization rate of 7.0%.
Financial Assets and Liabilities Not Measured at Fair Value
For mortgages payable, the fair value of fixed rate loans is estimated based on the discounted cash flows of the loans using
market research and management estimates of comparable interest rates (Level 3).
The estimated fair values of our financial instruments as of December 31, 2018, April 30, 2018 and April 30, 2017 are as
follows:
FINANCIAL ASSETS
Cash and cash equivalents
Mortgage and note receivables
FINANCIAL LIABILITIES
12/31/2018
(in thousands)
4/30/2018
4/30/2017
Amount Fair Value
Amount Fair Value
Amount Fair Value
$ 13,792 $ 13,792 $ 11,891 $ 11,891 $ 28,819 $ 28,819
26,809
26,809
25,809
25,809
—
—
Other debt, including other debt related to assets held for sale
Revolving line of credit
Term loan A (1)
Term loan B (1)
Mortgages payable (2)
Mortgages payable related to assets held for sale
—
57,500
70,000
75,000
—
—
—
57,500
124,000
124,000
70,000
75,000
70,000
70,000
—
—
49,637
57,050
49,637
57,050
—
—
—
—
445,974
444,241
509,919
510,803
665,440
680,941
—
—
—
—
21,803
21,861
(1) Excluding the effect of the interest rate swap agreement.
(2)
Includes mortgages payable related to assets held for sale and assets of discontinued operations at April 30, 2017.
NOTE 15 • SHAREHOLDERS’ EQUITY
Operating Partnership Units. Outstanding Units in the Operating Partnership were 1.4 million Units at December 31, 2018, 1.4
million Units at April 30, 2018, and 1.6 million Units at April 30, 2017.
F-35
Exchange Rights. Pursuant to the exercise of Exchange Rights, we redeemed Units during the transition period ended
December 31, 2018 and the fiscal years ended April 30, 2018 and 2017 as detailed in the table below.
Transition Period Ended December 31, 2018
Fiscal Year Ended April 30, 2018
Fiscal Year Ended April 30, 2017
(in thousands, except per Unit amounts)
Number of
Aggregate
Average Price
Units
Cost
Per Unit
9 $
499 $
149
17
8,775
966
53.12
58.90
58.40
We also redeemed Units in exchange for common shares during the transition period ended December 31, 2018 and the fiscal
years ended April 30, 2018 and April 30, 2017 as detailed in the table below.
Transition Period Ended December 31, 2018
Fiscal Year Ended April 30, 2018
Fiscal Year Ended April 30, 2017
(in thousands)
Number of
Units
Total Book
Value
33 $
3
50
649
34
875
Common Shares and Equity Awards. Common shares outstanding on December 31, 2018, April 30, 2018 and April 30, 2017,
totaled 11.9 million, 12.0 million, and 12.1 million, respectively. During the transition period ended December 31, 2018 and
the fiscal years ended April 30, 2018 and 2017, we issued approximately 5,600, 9,300, and 60,400 common shares,
respectively, with a total grant-date value of $347,000, $536,000, and $2.6 million, respectively, under our 2015 Incentive Plan,
for executive officer and trustee share-based compensation for future performance. During fiscal year 2017, we also issued
approximately 5,900 common shares, with a total grant-date value of approximately $352,000, under our 2008 Incentive Plan,
for trustee share based compensation for fiscal year 2016 performance. During the transition period ended December 31, 2018
and the fiscal years ended April 30, 2018 and 2017, approximately 200, 3,200, and 27,400 common shares were forfeited under
the 2015 Incentive Plan, respectively.
Share Repurchase Program. On December 7, 2016, our Board of Trustees authorized a share repurchase program to repurchase
up to 50 million of our common shares over a one year period. On December 5, 2017, our Board of Trustees reauthorized this
share repurchase program for an additional one year period. On December 5, 2018, our Board of Trustees reauthorized this
share repurchase program for an third one-year period. Under this program, we may repurchase common shares in open-
market purchases, including pursuant to Rule 10b5-1 and Rule 10b-18 plans, as determined by management and in accordance
with the requirements of the SEC. The extent to which we repurchase our shares, and the timing of such repurchases, will
depend upon a variety of factors, including market conditions, regulatory requirements, and other corporate considerations, as
determined by the executive management team. The program may be suspended or discontinued at any time. During the
transition period ended December 31, 2018, we repurchased and retired approximately 42,000 common shares for an aggregate
cost of $2.2 million, including commissions, at an average price per share of $51.36, excluding commissions. During fiscal
year 2018, we repurchased and retired approximately 178,000 common shares for an aggregate cost of $9.9 million, including
commissions, at an average price per share of $55.82, excluding commissions. During fiscal year 2017, we repurchased and
retired approximately 78,000 common shares for an aggregate cost of $4.5 million, including commissions, at an average price
per share of $57.69.
Issuance of Preferred Shares and Redemption of Series B Preferred Shares. In the year ended April 30, 2018, we issued
4,118,460 shares of our 6.625% Series C Cumulative Redeemable Preferred Shares ("Series C preferred shares") and redeemed
all 4,600,000 shares of our 7.95% Series B Cumulative Redeemable Preferred Shares. The Series C preferred shares are
nonvoting and redeemable for cash at $25.00 per share at our option on or after October 2, 2022. Holders of these shares are
entitled to cumulative distributions, payable quarterly (as and if declared by the Board of Trustees). Distributions accrue at an
annual rate of $1.65625 per share, which is equal to 6.625% of the $25.00 per share liquidation preference ($103.0 million
liquidation preference in the aggregate). In the year ended April 30, 2017, we completed the redemption of all of the
outstanding 8.25% Series A Cumulative Redeemable Preferred Shares (“Preferred A Shares”) for an aggregate redemption price
of $29.2 million, and such shares are no longer outstanding as of such date.
F-36
NOTE 16 • QUARTERLY RESULTS OF CONSOLIDATED OPERATIONS (unaudited)
QUARTER ENDED
Revenues
Net income (loss) attributable to controlling interest
Net income (loss) available to common shareholders
Net income (loss) per common share - basic & diluted
QUARTER ENDED
Revenues
Net income (loss) attributable to controlling interests
Net income (loss) available to common shareholders
Net income (loss) per common share - basic & diluted
QUARTER ENDED
Revenues
Net income (loss) attributable to controlling interests
Net income (loss) available to common shareholders
Net income (loss) per common share - basic & diluted
(in thousands, except per share data)
July 31, 2018 October 31, 2018
Two Months
Ended December
31, 2018
$
$
$
$
45,946 $
2,916 $
1,211 $
0.10 $
45,638 $
(4,558) $
(6,264) $
(0.52) $
30,287
(2,756)
(3,892)
(0.33)
(in thousands, except per share data)
July 31, 2017 October 31, 2017 January 31, 2018 April 30, 2018
$
$
$
$
40,978 $
(11,264) $
(13,550) $
(1.12) $
41,866 $
12,821 $
6,360 $
0.53 $
42,716 $
44,185
136,105 $
134,331 $
11.22 $
(20,874)
(22,579)
(1.89)
(in thousands, except per share data)
July 31, 2016 October 31, 2016 January 31, 2017 April 30, 2017
$
$
$
$
38,301 $
(21,643) $
(24,522) $
(2.02) $
39,195 $
11,600 $
8,722 $
0.72 $
39,797 $
23,110 $
19,172 $
1.58 $
42,811
30,280
27,994
2.33
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 17 • SHARE BASED COMPENSATION
Share based awards are provided to officers, non-officer employees, and trustees under our 2015 Incentive Plan approved by
shareholders on September 15, 2015, which allows for awards in the form of cash, unrestricted, and restricted common shares,
and restricted stock units ("RSUs") up to an aggregate of 4,250,000 shares over the ten-year period in which the plan will be in
effect. Under our 2015 Incentive Plan, officers and non-officer employees may earn share awards under a long-term incentive
plan, which is a forward-looking program that measures long-term performance over the stated performance period. These
awards are payable to the extent deemed earned in shares. The terms of the long-term incentive awards granted under the
program may vary from year to year. Through December 31, 2018, awards under the 2015 Incentive Plan consisted of restricted
and unrestricted common shares and RSUs. We account for forfeitures of restricted and unrestricted common shares and RSUs
when they occur instead of estimating the forfeitures.
Transition Period Ended December 31, 2018 LTIP Awards
Awards granted to trustees on July 20, 2018, consist of 6,495 time-based RSUs. All of these awards are classified as equity
awards. The time-based awards vest on July 20, 2019. We recognize compensation expense associated with the time-based
awards ratably over the requisite service period. The fair value of share awards at grant date for non-management trustees was
approximately $348,000, $389,000, $365,000, and $352,000 for the transition period ended December 31, 2018 and each of the
fiscal years ended April 30, 2018, 2017, and 2016, respectively.
Awards granted to management on July 20, 2018, consist of time-based RSUs for 7,492 shares and performance RSUs based on
total shareholder return ("TSR") for 14,987 shares. The time-based RSUs vest as to one-third of the shares on each of July 20,
2019, April 30, 2020, and April 30, 2021. All of these awards are classified as equity awards.
Awards granted on August 10, 2018, consist of 237 time-based RSUs that vest as to one-third on each of August 10, 2019, April
30, 2020, and April 30, 2021; 474 performance RSUs based on TSR; and 554 time-based RSUs that vest as to one-third on
each of August 10, 2019, August 10, 2020, and August 10, 2021. Awards granted on November 5, 2018, consist of 100 time-
based RSUs that vest on November 5, 2019. All of these awards are classified as equity awards.
F-37
The TSR performance RSU awards are earned based on our TSR as compared to the MSCI US REIT Index over a forward
looking three-year period. The maximum number of RSUs eligible to be earned is 30,922 RSUs, which is 200% of the RSUs
granted. Earned awards (if any) will fully vest as of the last day of the measurement period. These awards have market
conditions in addition to service conditions that must be met for the awards to vest. We recognize compensation expense
ratably based on the grant date fair value, as determined using the Monte Carlo valuation model, regardless of whether the
market conditions are achieved and the awards ultimately vest. Therefore, previously recorded compensation expense is not
adjusted in the event that the market conditions are not achieved. We based the expected volatility on the historical volatility of
our daily closing share price, the risk-free interest rate on the interest rates on U.S. treasury bonds with a maturity equal to the
remaining performance period of the award, and the expected term on the performance period of the award. The assumptions
used to value the TSR performance RSU awards were an expected volatility of 28.6%, a risk-free interest rate of 2.66% and an
expected life of 2.78 years. The share price at the grant date, July 20, 2018, was $53.60 per share.
Total Compensation Expense
Total share based compensation expense recognized in the consolidated financial statements for the transition period ended
December 31, 2018 and the three years ended April 30, 2018, for all share-based awards was as follows (in thousands):
Share based compensation expense
Restricted Share Awards
Transition Period Ended
Fiscal Year Ended April 30,
December 31, 2018
2018
2017
2016
$
845 $ 1,587 $
6 $ 2,256
The total fair value of time-based share grants vested during the transition period ended December 31, 2018 and the fiscal years
ended April 30, 2018, 2017, and 2016 was $147,000, $1.1 million, $127,000, and $647,000, respectively. As of December 31,
2018, the total compensation cost related to non-vested time-based share awards not yet recognized was $109,000, which we
expect to recognize over a weighted average period of 1.1 years.
The unamortized value of share awards with market conditions as of December 31, 2018, April 30, 2018, and April 30, 2017
was approximately $26,000, $130,000, and $300,000, respectively.
The activity for the transition period ended December 31, 2018 and the three years ended April 30, 2018, 2017, and 2016,
related to our restricted share awards was as follows:
Awards with Service Conditions
Wtd Avg Grant-
Unvested at April 30, 2015
Granted
Vested
Unvested at April 30, 2016
Granted
Vested
Forfeited
Unvested at April 30, 2017
Granted
Vested
Forfeited
Unvested at April 30, 2018
Granted
Vested
Forfeited
Unvested at December 31, 2018
F-38
61.59
59.50
62.40
Shares Date Fair Value
71.70
10,754 $
—
—
(10,754)
71.70
—
25,326
(2,132)
(3,683)
19,511
9,136
(18,545)
(202)
9,900
—
(2,709)
—
7,191 $
—
63.21
—
60.49
57.55
59.89
62.40
Restricted Stock Units
During the transition period ended December 31, 2018, we issued 8,383 time-based RSUs to management. These RSUs
generally vest over a three year period. The fair value of the time-based RSUs granted to management during the transition
period ended December 31, 2018 was $449,000. The total compensation cost related to non-vested time-based RSUs not yet
recognized is $574,000, which we expect to recognize over a weighted average period of 1.7 years.
RSUs with market conditions were granted under the LTIP during the transition period ended December 31, 2018 with a fair
market value, as determined using a Monte Carlo simulation, of $892,000. The unamortized value of awards and RSUs with
market conditions as of December 31, 2018 and April 30, 2018, was approximately $1.1 million and $448,000, respectively.
The activity for the transition period ended December 31, 2018 and the three years ended April 30, 2018, related to our RSUs
was as follows:
Unvested at April 30, 2017
Granted
Vested
Forfeited
Unvested at April 30, 2018
Granted
Vested
Forfeited
Unvested at December 31, 2018
NOTE 18 • SUBSEQUENT EVENTS
RSUs with Service Conditions
RSUs with Market Conditions
Wtd Avg Grant-
Wtd Avg Grant-
Shares Date Fair Value
Shares Date Fair Value
—
6,994 $
(207)
—
6,787
14,878
(2,943)
(462)
18,260 $
60.54
50.30
60.85
53.60
60.83
53.60
55.13
—
11,538 $
70.90
—
—
11,538
15,461
—
(1,680)
25,319 $
70.90
57.70
—
70.90
62.84
On February 26, 2019, we acquired SouthFork Townhomes, a 272-unit residential apartment community located in Lakeville,
Minnesota, for a total sale price of $44.0 million, with $27.4 million paid in cash and $16.6 million paid through the issuance of
convertible preferred units that have a 3.9% coupon and are convertible, at the holders' option, into common units at an exchange
rate of $72.50 per common unit share. The convertible preferred units also have a put feature that allows the seller to put all or
any of the convertible preferred units to IRET for a cash payment equal to the issue price.
F-39
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