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Section 1: 10-Q (10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended October 31, 2017

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____________ to ____________

 

Commission File Number 001-35624

 

INVESTORS REAL ESTATE TRUST

(Exact name of registrant as specified in its charter)

 

North Dakota

45-0311232

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

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)

 

N/A

(Former name, former address, and former fiscal year, if changed since last report.)

 

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 the filing requirements for at least the past 90 days.

 

 

 

Yes ☑

No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 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 whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 

 

 

 

Large accelerated filer ☑

Accelerated filer ☐

Non-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 number of common shares of beneficial interest outstanding as of December 4, 2017, was 120,037,183.

 

 


 

Table of Contents

TABLE OF CONTENTS

 

 

 

Page

Part I. Financial Information 

 

Item 1. Financial Statements - Second Quarter - Fiscal 2018 :

3

Condensed Consolidated Balance Sheets (unaudited) October 31, 2017, and April 30, 2017 

3

Condensed Consolidated Statements of Operations (unaudited) For the Three and Six Months ended October 31, 2017 and 2016 

4

Condensed Consolidated Statements of Equity (unaudited) For the Six Months ended October 31, 2017 and 2016 

5

Condensed Consolidated Statements of Cash Flows (unaudited) For the Six Months ended October 31, 2017 and 2016 

6

Notes to Condensed Consolidated Financial Statements (unaudited) 

8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 

23

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

37

Item 4. Controls and Procedures 

38

 

 

Part II. Other Information 

 

Item 1. Legal Proceedings 

39

Item 1A. Risk Factors 

39

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

39

Item 3. Defaults Upon Senior Securities 

39

Item 4. Mine Safety Disclosures 

39

Item 5. Other Information 

39

Item 6. Exhibits 

40

Signatures 

41

 

 

2


 

Table of Contents

PART I

ITEM 1. FINANCIAL STATEMENTS - SECOND QUARTER - FISCAL 2018

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

    

October 31, 2017

    

April 30, 2017

 

ASSETS

 

 

 

 

 

 

 

Real estate investments

 

 

 

 

 

 

 

Property owned

 

$

1,831,181

 

$

1,677,481

 

Less accumulated depreciation

 

 

(384,402)

 

 

(340,417)

 

 

 

 

1,446,779

 

 

1,337,064

 

Unimproved land

 

 

15,216

 

 

18,455

 

Mortgage loans receivable

 

 

10,329

 

 

 —

 

Total real estate investments

 

 

1,472,324

 

 

1,355,519

 

Assets held for sale and assets of discontinued operations

 

 

 —

 

 

37,708

 

Cash and cash equivalents

 

 

42,464

 

 

28,819

 

Restricted cash

 

 

4,306

 

 

28,709

 

Other assets

 

 

31,933

 

 

23,759

 

TOTAL ASSETS

 

$

1,551,027

 

$

1,474,514

 

LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS, AND EQUITY

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

Liabilities held for sale and liabilities of discontinued operations

 

$

 —

 

$

30,062

 

Accounts payable and accrued expenses

 

 

33,757

 

 

40,430

 

Revolving line of credit

 

 

247,500

 

 

57,050

 

Mortgages payable, net of unamortized loan costs of $3,062 and $3,480, respectively

 

 

655,903

 

 

661,960

 

Construction debt

 

 

21,561

 

 

41,737

 

TOTAL LIABILITIES

 

 

958,721

 

 

831,239

 

COMMITMENTS AND CONTINGENCIES (NOTE 6)

 

 

 

 

 

 

 

REDEEMABLE NONCONTROLLING INTERESTS – CONSOLIDATED REAL ESTATE ENTITIES

 

 

6,812

 

 

7,181

 

EQUITY

 

 

 

 

 

 

 

Series B Preferred Shares of Beneficial Interest (Cumulative redeemable preferred shares, no par value, no shares issued and outstanding at October 31, 2017 and 4,600 shares issued and outstanding at April 30, 2017, aggregate liquidation preference of $115,000)

 

 

 —

 

 

111,357

 

Series C Preferred Shares of Beneficial Interest (Cumulative redeemable preferred shares, no par value, 4,118 shares issued and outstanding at October 31, 2017 and no shares issued and outstading at April 30, 2017, aggregate liquidation preference of $102,962)

 

 

99,467

 

 

 —

 

Common Shares of Beneficial Interest (Unlimited authorization, no par value, 120,189 shares issued and outstanding at October 31, 2017 and 121,199 shares issued and outstanding at April 30, 2017)

 

 

910,683

 

 

916,121

 

Accumulated distributions in excess of net income

 

 

(490,612)

 

 

(466,541)

 

Total shareholders’ equity

 

 

519,538

 

 

560,937

 

Noncontrolling interests – Operating Partnership (14,618 units at October 31, 2017 and 15,617 units at April 30, 2017)

 

 

64,291

 

 

73,233

 

Noncontrolling interests – consolidated real estate entities

 

 

1,665

 

 

1,924

 

Total equity

 

 

585,494

 

 

636,094

 

TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS, AND EQUITY

 

$

1,551,027

 

$

1,474,514

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

3


 

Table of Contents

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

for the three and six months ended October 31, 2017 and 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except per share data)

 

 

Three Months Ended

 

Six Months Ended

 

 

 

October 31, 

 

October 31, 

 

 

    

2017

    

2016

    

2017

    

2016

 

REVENUE

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate rentals

 

$

48,702

 

$

45,859

 

$

96,349

 

$

90,844

 

Tenant reimbursement

 

 

5,219

 

 

4,750

 

 

10,307

 

 

9,376

 

TOTAL REVENUE

 

 

53,921

 

 

50,609

 

 

106,656

 

 

100,220

 

EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses, excluding real estate taxes

 

 

18,741

 

 

15,814

 

 

36,377

 

 

31,871

 

Real estate taxes

 

 

6,556

 

 

5,759

 

 

13,170

 

 

11,336

 

Depreciation and amortization

 

 

20,694

 

 

13,531

 

 

49,621

 

 

27,798

 

Impairment of real estate investments

 

 

 —

 

 

 —

 

 

256

 

 

54,153

 

General and administrative expenses

 

 

3,118

 

 

3,522

 

 

7,120

 

 

7,023

 

TOTAL EXPENSES

 

 

49,109

 

 

38,626

 

 

106,544

 

 

132,181

 

Operating income (loss)

 

 

4,812

 

 

11,983

 

 

112

 

 

(31,961)

 

Interest expense

 

 

(9,666)

 

 

(10,626)

 

 

(18,961)

 

 

(20,990)

 

Loss on extinguishment of debt

 

 

(334)

 

 

 —

 

 

(533)

 

 

 —

 

Interest income

 

 

199

 

 

56

 

 

220

 

 

84

 

Other income

 

 

57

 

 

37

 

 

267

 

 

197

 

(Loss) income before gain (loss) on sale of real estate and other investments and income from discontinued operations

 

 

(4,932)

 

 

1,450

 

 

(18,895)

 

 

(52,670)

 

Gain (loss) on sale of real estate and other investments

 

 

5,324

 

 

(103)

 

 

5,448

 

 

8,855

 

Income (loss) from continuing operations

 

 

392

 

 

1,347

 

 

(13,447)

 

 

(43,815)

 

Income from discontinued operations

 

 

12,747

 

 

10,943

 

 

13,307

 

 

15,511

 

NET INCOME (LOSS)

 

 

13,139

 

 

12,290

 

 

(140)

 

 

(28,304)

 

Net (income) loss attributable to noncontrolling interests – Operating Partnership

 

 

(773)

 

 

(1,174)

 

 

871

 

 

2,122

 

Net loss attributable to noncontrolling interests – consolidated real estate entities

 

 

455

 

 

484

 

 

826

 

 

16,139

 

Net income (loss) attributable to controlling interests

 

 

12,821

 

 

11,600

 

 

1,557

 

 

(10,043)

 

Dividends to preferred shareholders

 

 

(2,812)

 

 

(2,878)

 

 

(5,098)

 

 

(5,757)

 

Redemption of preferred shares

 

 

(3,649)

 

 

 —

 

 

(3,649)

 

 

 —

 

NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS

 

$

6,360

 

$

8,722

 

$

(7,190)

 

$

(15,800)

 

Loss per common share from continuing operations – basic and diluted

 

$

(0.05)

 

$

 —

 

$

(0.16)

 

$

(0.23)

 

Earnings per common share from discontinued operations – basic and diluted

 

 

0.10

 

 

0.07

 

 

0.10

 

 

0.10

 

NET EARNINGS (LOSS) PER COMMON SHARE – BASIC & DILUTED

 

$

0.05

 

$

0.07

 

$

(0.06)

 

$

(0.13)

 

DIVIDENDS PER COMMON SHARE

 

$

0.07

 

$

0.13

 

$

0.14

 

$

0.26

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

4


 

Table of Contents

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (unaudited)

for the six months ended October 31, 2017 and 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

    

 

    

 

 

    

NUMBER

    

 

 

    

ACCUMULATED

    

 

 

    

 

 

 

 

 

NUMBER OF

 

 

 

 

OF

 

 

 

 

DISTRIBUTIONS

 

NONREDEEMABLE

 

 

 

 

 

 

PREFERRED

 

PREFERRED

 

COMMON

 

COMMON

 

IN EXCESS OF

 

NONCONTROLLING

 

TOTAL

 

 

 

SHARES

 

SHARES

 

SHARES

 

SHARES

 

NET INCOME

 

INTERESTS

 

EQUITY

 

Balance April 30, 2016

 

5,750

 

$

138,674

 

121,091

 

$

922,084

 

$

(442,000)

 

$

99,504

 

$

718,262

 

Net loss attributable to controlling interests and nonredeemable noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

(10,043)

 

 

(18,116)

 

 

(28,159)

 

Distributions – common shares and units

 

 

 

 

 

 

 

 

 

 

 

 

(31,556)

 

 

(4,234)

 

 

(35,790)

 

Distributions – Series A preferred shares

 

 

 

 

 

 

 

 

 

 

 

 

(1,186)

 

 

 

 

 

(1,186)

 

Distributions – Series B preferred shares

 

 

 

 

 

 

 

 

 

 

 

 

(4,571)

 

 

 

 

 

(4,571)

 

Shares issued and share-based compensation

 

 

 

 

 

 

553

 

 

1,218

 

 

 

 

 

 

 

 

1,218

 

Redemption of units for common shares

 

 

 

 

 

 

57

 

 

134

 

 

 

 

 

(134)

 

 

 —

 

Contributions from nonredeemable noncontrolling interests – consolidated real estate entities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,150

 

 

7,150

 

Distributions to nonredeemable noncontrolling interests – consolidated real estate entities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(155)

 

 

(155)

 

Acquisition of nonredeemable noncontrolling interests - consolidated real estate entities

 

 

 

 

 

 

 

 

 

(2,677)

 

 

 

 

 

(2,261)

 

 

(4,938)

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(615)

 

 

(615)

 

Balance October 31, 2016

 

5,750

 

$

138,674

 

121,701

 

$

920,759

 

$

(489,356)

 

$

81,139

 

$

651,216

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance April 30, 2017

 

4,600

 

$

111,357

 

121,199

 

$

916,121

 

$

(466,541)

 

$

75,157

 

$

636,094

 

Net income (loss) attributable to controlling interests and nonredeemable noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

1,557

 

 

(1,328)

 

 

229

 

Distributions – common shares and units

 

 

 

 

 

 

 

 

 

 

 

 

(16,881)

 

 

(2,089)

 

 

(18,970)

 

Distributions – Series B preferred shares

 

 

 

 

 

 

 

 

 

 

 

 

(4,571)

 

 

 

 

 

(4,571)

 

Distributions – Series C preferred shares

 

 

 

 

 

 

 

 

 

 

 

 

(527)

 

 

 

 

 

(527)

 

Shares issued and share-based compensation

 

 

 

 

 

 

75

 

 

844

 

 

 

 

 

 

 

 

844

 

Series C preferred shares issued

 

4,118

 

 

99,467

 

 

 

 

 

 

 

 

 

 

 

 

 

99,467

 

Redemption of units for cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,982)

 

 

(5,982)

 

Shares repurchased

 

(4,600)

 

 

(111,357)

 

(1,080)

 

 

(6,253)

 

 

(3,649)

 

 

 

 

 

(121,259)

 

Contributions from nonredeemable noncontrolling interests – consolidated real estate entities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

239

 

 

239

 

Distributions to nonredeemable noncontrolling interests – consolidated real estate entities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(41)

 

 

(41)

 

Other

 

 

 

 

 

 

(5)

 

 

(29)

 

 

 

 

 

 

 

 

(29)

 

Balance October 31, 2017

 

4,118

 

$

99,467

 

120,189

 

$

910,683

 

$

(490,612)

 

$

65,956

 

$

585,494

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

5


 

Table of Contents

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

for the six months ended October 31, 2017 and 2016

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

Six Months Ended

 

 

 

October 31, 

 

 

    

2017

    

2016

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

Net loss

 

$

(140)

 

$

(28,304)

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization, including amortization of capitalized loan costs

 

 

50,244

 

 

28,548

 

Depreciation and amortization from discontinued operations, including amortization of capitalized loan costs

 

 

 9

 

 

64

 

Gain on sale of real estate, land, other investments and discontinued operations

 

 

(17,686)

 

 

(15,358)

 

Loss on extinguishment of debt

 

 

128

 

 

72

 

Share-based compensation expense

 

 

751

 

 

865

 

Impairment of real estate investments

 

 

256

 

 

54,153

 

Bad debt expense

 

 

498

 

 

371

 

Changes in other assets and liabilities:

 

 

 

 

 

 

 

Receivable arising from straight-lining of rents

 

 

(128)

 

 

(487)

 

Accounts receivable

 

 

(195)

 

 

(588)

 

Prepaid and other assets

 

 

(864)

 

 

(541)

 

Tax, insurance and other escrow

 

 

(187)

 

 

(200)

 

Deferred charges and leasing costs

 

 

(998)

 

 

(851)

 

Accounts payable, accrued expenses and other liabilities

 

 

(4,756)

 

 

(2,357)

 

Net cash provided by operating activities

 

 

26,932

 

 

35,387

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

Proceeds from real estate deposits

 

 

38,029

 

 

 —

 

Payments for real estate deposits

 

 

(14,370)

 

 

(1,370)

 

Increase in notes receivable

 

 

(6,126)

 

 

 —

 

Decrease in other investments

 

 

 —

 

 

50

 

Decrease in lender holdbacks for improvements

 

 

1,444

 

 

1,925

 

Increase in lender holdbacks for improvements

 

 

(513)

 

 

(614)

 

Proceeds from sale of discontinued operations

 

 

35,775

 

 

43,896

 

Proceeds from sale of real estate and other investments

 

 

18,039

 

 

13,875

 

Insurance proceeds received

 

 

530

 

 

481

 

Payments for acquisitions of real estate assets

 

 

(154,122)

 

 

 —

 

Payments for development and re-development of real estate assets

 

 

(2,817)

 

 

(10,897)

 

Payments for improvements of real estate assets

 

 

(10,981)

 

 

(23,641)

 

Net cash (used) provided by investing activities

 

 

(95,112)

 

 

23,705

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

Proceeds from mortgages payable

 

 

 —

 

 

1,113

 

Principal payments on mortgages payable

 

 

(51,733)

 

 

(53,208)

 

Proceeds from revolving lines of credit

 

 

293,350

 

 

30,000

 

Principal payments on revolving lines of credit

 

 

(102,900)

 

 

 —

 

Proceeds from construction debt

 

 

3,124

 

 

11,174

 

Payment on financing liability

 

 

(7,900)

 

 

 —

 

Proceeds from noncontrolling partner – consolidated real estate entities

 

 

 —

 

 

500

 

Payments for acquisition of noncontrolling interests – consolidated real estate entities

 

 

 —

 

 

(4,938)

 

Repurchase of common shares

 

 

(6,253)

 

 

 —

 

Proceeds from issuance of Series C preferred shares, net of issue costs

 

 

99,467

 

 

 —

 

Repurchase of Series B preferred shares

 

 

(115,005)

 

 

 —

 

Repurchase of partnership units

 

 

(5,982)

 

 

 —

 

Distributions paid to common shareholders

 

 

(16,881)

 

 

(31,556)

 

Distributions paid to preferred shareholders

 

 

(5,333)

 

 

(5,757)

 

Distributions paid to noncontrolling interests – Unitholders of the Operating Partnership

 

 

(2,089)

 

 

(4,234)

 

Distributions paid to noncontrolling interests – consolidated real estate entities

 

 

(40)

 

 

(155)

 

Net cash provided (used) by financing activities

 

 

81,825

 

 

(57,061)

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

 

13,645

 

 

2,031

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

 

28,819

 

 

66,698

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

42,464

 

$

68,729

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

6


 

Table of Contents

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, continued)

for the six months ended October 31, 2017 and 2016

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

Six Months Ended

 

 

 

October 31, 

 

 

    

2017

    

2016

 

SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

 

Operating partnership units converted to shares

 

$

 —

 

$

134

 

(Decrease) increase to accounts payable included within real estate investments

 

 

(2,106)

 

 

3,188

 

Construction debt reclassified to mortgages payable

 

 

23,300

 

 

10,549

 

Increase in mortgage notes receivable

 

 

10,329

 

 

 —

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

Cash paid for interest, net of amounts capitalized of $0 and $298, respectively

 

$

17,122

 

$

17,457

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

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INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

for the six months ended October 31, 2017 and 2016

NOTE 1 • ORGANIZATION 

Investors Real Estate Trust, collectively with our consolidated subsidiaries (“IRET,” “we,” “us,” or “our”), is a multifamily real estate investment trust (“REIT”) focused on the ownership, management, acquisition, redevelopment, and development of multifamily communities. As of October 31, 2017, we owned interests in 89 multifamily properties consisting of 13,576 apartment homes and 40 commercial properties, including 28 healthcare and 12 other commercial properties, with a total of 2.5 million square feet of leasable space.

NOTE 2 • BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES 

BASIS OF PRESENTATION

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 consolidated subsidiary entities. The accompanying condensed 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 ends April 30th.

The condensed consolidated financial statements also reflect the ownership by the Operating Partnership of certain joint venture entities in which the Operating Partnership has a general partner or controlling interest. These entities are consolidated into our other operations, with noncontrolling interests reflecting the noncontrolling partners’ share of ownership and income and expenses.

UNAUDITED INTERIM FINANCIAL STATEMENTS

Our interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with U.S. GAAP are omitted. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. In the opinion of management, all adjustments, consisting solely of normal recurring adjustments, necessary for the fair presentation of our financial position, results of operations and cash flows for the interim periods have been included.

The current period’s results of operations are not necessarily indicative of results which ultimately may be achieved for the year. The interim condensed consolidated financial statements and accompanying notes thereto should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2017, as filed with the SEC on June 28, 2017.

RECENT ACCOUNTING PRONOUNCEMENTS

The following table provides a brief description of recent accounting standards updates (“ASUs”) that could have a material effect on our financial statements:

 

 

 

 

 

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Standard

Description

Date of Adoption

Effect on the Financial Statements or Other Significant Matters

ASU 2014-09, Revenue from Contracts with Customers

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. 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 are being 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.

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 will adopt the new standard effective May 1, 2018 using the modified retrospective approach.

We are continuing to assess the impact of the new standard on our consolidated financial statements and internal accounting processes; as the majority of our revenue is derived from rental income, we do not expect the adoption of ASU 2014-09 will have a material impact on our consolidated financial statements.  

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.

This ASU is effective for annual reporting periods beginning after December 15, 2018; however, early adoption is permitted.

We are currently evaluating the impact the new standard may have on our consolidated financial statements.

ASU 2016-09, Improvements to Employee Share-Based Payment Accounting

This ASU amends several aspects of the accounting for share-based payment transactions, including the income tax consequences, accrual of compensation cost, classification of awards as either equity or liabilities, and classification on the statement of cash flows.

This ASU is effective for annual reporting periods beginning after December 15, 2016. We adopted this guidance effective May 1, 2017.

Upon adoption of the standard, we elected to account for forfeitures when they occur instead of estimating the forfeitures. The new standard did not have a material effect on our financial position, results of operations or earnings per share.

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.

This ASU is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted.

We are currently evaluating the impact the new standard may have on our consolidated financial statements.

ASU 2017-01, Clarifying the Definition of a Business

This ASU clarifies the definition of a business and provides further guidance for evaluating whether a transaction will be accounted for as an acquisition of an asset or a business. This new standard is required to be applied prospectively to transactions occurring after the date of adoption.

This ASU is effective for interim and annual periods beginning after December 15, 2017. We early adopted this standard effective May 1, 2017.

We believe that most of our future acquisitions of operating properties will qualify as asset acquisitions and most future transaction costs associated with these acquisitions will be capitalized. Adoption of the standard did not have a material effect on our financial position or results of operations. During the six months ended October 31, 2017, acquisition costs totaling approximately $245,000 from our acquisitions of Oxbo and Park Place were capitalized and allocated to the assets acquired based on the relative fair market value of those underlying assets.

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Standard

Description

Date of Adoption

Effect on the Financial Statements or Other Significant Matters

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

This ASU clarifies the definition of an in-substances 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 is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted.

This standard allows for either a retrospective or modified retrospective approach. We are currently evaluating the impact this standard may have on our consolidated financial statements and related disclosures upon adoption.

ASU 2017-12, Derivatives and Hedging

This ASU clarifies hedge accounting requirements, improves disclosure of hedging arrangements, and better aligns risk management activities and financial reporting for hedging relationships.

This ASU is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted.

This standard should be adopted using a modified retrospective approach.  We are currently evaluating the impact this standard may have on our consolidated financial statements and related disclosures upon adoption.

 

IMPAIRMENT OF LONG-LIVED ASSETS

We periodically evaluate our long-lived assets, including 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.

During the six months ended October 31, 2017, we recognized impairment of approximately $256,000 on a parcel of land in Bismarck, ND. This property was written down to estimated fair value during the first quarter of fiscal year 2018 based on receipt of a market offer to purchase and our intent to dispose of the property. We disposed of the property during the second quarter of fiscal year 2018.

During the six months ended October 31, 2016, we recognized impairments of $40.9 million, $5.8 million, $4.7 million, and $2.8 million, respectively, on three multifamily properties and one parcel of unimproved land in Williston, ND, due to deterioration of the market. These properties were written down to estimated fair value based on an 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 71.5%, 60% and 70% interest, respectively, but which are consolidated in our financial statements.

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USE OF ESTIMATES

The preparation of financial statements in conformity with U.S. 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.

CHANGE IN DEPRECIABLE LIVES OF REAL ESTATE ASSETS

We review the estimated useful lives of our real estate assets on an ongoing basis. Prior to our strategic shift to become a multifamily-focused REIT, which began in fiscal year 2016, we operated in five segments (office, retail, industrial, healthcare and multifamily). Accordingly, our estimated useful lives represented a blend of these segments. During fiscal years 2016 and 2017, we disposed of the bulk of our office, retail, and industrial portfolios as well as a portion of our healthcare portfolio. 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 portfolio of assets.

Effective May 1, 2017, we changed the estimated useful lives of our real estate assets to better reflect the estimated periods during which these assets will be of economic benefit.  Generally, the estimated lives of buildings and improvements that previously were 20-40 years have been decreased to 10-30 years, while those that were previously nine years were changed to 5-10 years. The effect of this change in estimate in the six months ended October 31, 2017, was to increase depreciation expense by approximately $20.3 million, decrease net income by $20.3 million, and decrease earnings per share by $0.15. Of the total increase in expense, $9.0 million, or $0.07 per share, represented depreciation on assets that were fully depreciated under the new estimated useful lives in the first quarter of fiscal year 2018.

RECLASSIFICATIONS

Certain previously reported amounts have been reclassified to conform to the current financial statement presentation.  On the Condensed Consolidated Statements of Operations, we reclassified other expenses into general and administrative expenses. On the Condensed Consolidated Balance Sheets, we reclassified real estate deposits and tax, insurance, and other escrow into restricted cash. We also reclassified receivables arising from straight-lining of rents, accounts receivable, prepaid and other assets, notes receivable, intangible assets, property and equipment, goodwill, and deferred charges and leasing costs into other assets. Additionally, we reclassified other long-term liabilities previously included within construction debt and other to accounts payable and accrued expenses.

MORTGAGE LOANS RECEIVABLE AND NOTES RECEIVABLE

In August 2017, we sold 13 multifamily properties in exchange for cash and a note secured by a mortgage on the assets. The sale was recorded using the installment method, under which cash receipts are apportioned between cost recovered and the gain on sale. The $11.0 million note is presented net of approximately $626,000 of deferred gain in mortgage loans receivable on the Condensed Consolidated Balance Sheets. 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. During the three months ended October 31, 2017, we received and recognized approximately $119,000 of interest income.

In July 2017, we originated a $16.2 million loan in a multifamily development located in New Hope, MN, a suburb of Minneapolis. The investment will be funded in installments through the third quarter of fiscal year 2018. As of October 31, 2017, we had funded $6.1 million which appears in other assets on the Condensed Consolidated Balance Sheets. The note bears an interest rate of 6%, matures in July 2023, and provides us with an option to purchase the development prior to the loan maturity date.

VARIABLE INTEREST ENTITY

We have determined that our Operating Partnership and each of our less-than-wholly owned real estate partnerships are variable interest entities (“VIEs”), as the limited partners lack substantive kick-out rights and substantive participating rights. We are the primary beneficiary of the VIEs, and the partnerships 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

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VIEs that most significantly impact the VIE’s economic performance 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.

 

NOTE 3 • EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of our common shares of beneficial interest (“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 shares that would result in dilution of earnings. Under the terms of the Operating Partnership’s Agremeent of Limited Partnership, limited partners have the right to require the Operating Partnership to redeem their limited partnership units (“Units”) for cash any time following the first anniversary of the date they acquired such Units (“Exchange Right”).  Upon the exercise of Exchange Rights, and in our sole discretion, we may issue Common Shares in exchange for Units on a one-for-one basis after a minimum holding period of one year. The following table presents a reconciliation of the numerator and denominator used to calculate basic and diluted earnings per share reported in the condensed consolidated financial statements for the three and six months ended October 31, 2017 and 2016:  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except per share data)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

October 31, 

 

October 31, 

 

 

    

2017

    

2016

    

2017

    

2016

 

NUMERATOR

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations – controlling interests

 

$

1,446

 

$

2,426

 

$

(10,317)

 

$

(22,488)

 

Income from discontinued operations – controlling interests

 

 

11,375

 

 

9,174

 

 

11,874

 

 

12,445

 

Net income (loss) attributable to controlling interests

 

 

12,821

 

 

11,600

 

 

1,557

 

 

(10,043)

 

Dividends to preferred shareholders

 

 

(2,812)

 

 

(2,878)

 

 

(5,098)

 

 

(5,757)

 

Redemption of preferred shares

 

 

(3,649)

 

 

 —

 

 

(3,649)

 

 

 —

 

Numerator for basic earnings per share – net income available to common shareholders

 

 

6,360

 

 

8,722

 

 

(7,190)

 

 

(15,800)

 

Noncontrolling interests – Operating Partnership

 

 

773

 

 

1,174

 

 

(871)

 

 

(2,122)

 

Numerator for diluted earnings per share

 

$

7,133

 

$

9,896

 

$

(8,061)

 

$

(17,922)

 

DENOMINATOR

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per share weighted average shares

 

 

120,144

 

 

121,154

 

 

120,282

 

 

121,135

 

Effect of redeemable operating partnership units

 

 

14,623

 

 

16,264

 

 

14,912

 

 

16,276

 

Denominator for diluted earnings per share

 

 

134,767

 

 

137,418

 

 

135,194

 

 

137,411

 

Loss per common share from continuing operations – basic and diluted

 

$

(0.05)

 

$

 —

 

$

(0.16)

 

$

(0.23)

 

Earnings per common share from discontinued operations – basic and diluted

 

 

0.10

 

 

0.07

 

 

0.10

 

 

0.10

 

NET EARNINGS (LOSS) PER COMMON SHARE – BASIC & DILUTED

 

$

0.05

 

$

0.07

 

$

(0.06)

 

$

(0.13)

 

 

NOTE 4 • EQUITY 

Equity Awards. There were no shares issued under our 2015 Incentive Award Plan during the second quarter of fiscal year 2018 and approximately 75,000 restricted Common Shares, with a total grant-date value of approximately $445,000, issued during the first quarter of fiscal year 2018. During the second quarter of fiscal year 2017, we issued approximately 120,792 restricted Common Shares, with a total grant-date value of $502,000, under our 2015 Incentive Award Plan, and we issued approximately 378,000 restricted Common Shares, with a total grant-date value of $1.4 million,during the first quarter of fiscal year 2017. These shares are issued for executive officer and trustee share-based compensation for future performance under our 2015 Incentive Award Plan.

Exchange Rights. Pursuant to the exercise of Exchange Rights, during the three months ended October 31, 2017, we redeemed approximately 39,622 Units for an aggregate cost of $246,524, at an average price per Unit of $6.22.  There

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were no Units redeemed during the three months ended October 31, 2016.  During the six months ended October 31, 2017, we redeemed approximately 999,529 Units for an aggregate cost of $6.0 million, at an average price per Unit of $5.98.  There were no Units redeemed during the six months ended October 31, 2016.     

 

Share Repurchase Program. On December 7, 2016, our Board of Directors 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.  Under this program, we may repurchase the shares in open-market purchases including pursuant to Rule 10b5-1 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 second quarter of fiscal year 2018, we repurchased and retired approximately 398,000 common shares for an aggregate cost of $2.3 million, including commissions, at an average price per share of $5.82.  As of October 31, 2017, $39.2 million remained available under the $50 million authorized share repurchase program.

 

Issuance of Series C Preferred Shares and Redemption of Series B Preferred Shares. In the quarter ended October 31, 2017, we issued 4,118,460 shares of our 6.625% Series C Cumulative Redeemable Preferred Shares and redeemed all 4,600,000 shares of our 7.95% Series B Cumulative Redeemable Preferred Shares.  

 

NOTE 5 • SEGMENT REPORTING 

We report our results in two reportable segments, which are aggregations of similar properties: multifamily and healthcare. We measure the performance of our segments based on net operating income (“NOI”), which we define as total real estate revenues less real estate expenses (which consist of utilities, maintenance, real estate taxes, insurance, property management expenses and other property expenses). We believe that NOI is an important supplemental measure of operating performance for a REIT’s operating real estate because it provides a measure of core operations that is unaffected by depreciation, amortization, financing, and general and administrative expense. NOI does not represent cash generated by operating activities in accordance with US 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 revenues and NOI for these reportable segments are summarized as follows for the three- and six-month periods ended October 31, 2017 and 2016, along with reconciliations to the condensed consolidated financial statements. Segment assets are also reconciled to total assets as reported in the condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Three Months Ended October 31, 2017

    

Multifamily

    

Healthcare

    

All Other

    

Amounts Not
Allocated To
Segments
(1)

    

Total

 

Real estate revenue

 

$

39,734

 

$

11,449

 

$

2,738

 

$

 —

 

$

53,921

 

Real estate expenses

 

 

18,888

 

 

4,373

 

 

698

 

 

1,338

 

 

25,297

 

Net operating income (loss)

 

$

20,846

 

$

7,076

 

$

2,040

 

$

(1,338)

 

$

28,624

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(20,694)

 

General and administrative expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,118)

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,666)

 

Loss on debt extinguishment