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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 June 30, 2019
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)
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 every Interactive Data File required to be submitted 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, a smaller reporting company, or an emerging growth 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
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
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Shares of Beneficial Interest, no par value
IRET
New York Stock Exchange
Series C Cumulative Redeemable Preferred Shares
IRET-C
New York Stock Exchange
The number of common shares of beneficial interest outstanding as of July 31, 2019, was 11,624,590.
 


Table of Contents

TABLE OF CONTENTS
 
Page
 
 
 
 

2

Table of Contents

PART I
Item 1. Financial Statements.

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
 
(in thousands, except per share data)
 
June 30, 2019
 
December 31, 2018
ASSETS
 
 
 
Real estate investments
 
 
 
Property owned
$
1,663,539

 
$
1,627,636

Less accumulated depreciation
(380,321
)
 
(353,871
)
 
1,283,218

 
1,273,765

Unimproved land
1,746

 
5,301

Mortgage loans receivable
10,140

 
10,410

Total real estate investments
1,295,104

 
1,289,476

Cash and cash equivalents
17,406

 
13,792

Restricted cash
4,672

 
5,464

Other assets
30,626

 
27,265

TOTAL ASSETS
$
1,347,808

 
$
1,335,997

LIABILITIES, MEZZANINE EQUITY, AND EQUITY
 
 
 
LIABILITIES
 
 
 
Accounts payable and accrued expenses
$
44,766

 
$
40,892

Revolving lines of credit
177,939

 
57,500

Term loans, net of unamortized loan costs of $918 and $1,009, respectively
144,082

 
143,991

Mortgages payable, net of unamortized loan costs of $1,490 and $1,777, respectively
370,461

 
444,197

TOTAL LIABILITIES
$
737,248

 
$
686,580

COMMITMENTS AND CONTINGENCIES (NOTE 6)

 

REDEEMABLE NONCONTROLLING INTERESTS – CONSOLIDATED REAL ESTATE ENTITIES

 
$
5,968

SERIES D PREFERRED UNITS (Cumulative convertible preferred units, $100 par value, 166 units issued and outstanding at June 30, 2019 and no units issued and outstanding at December 31, 2018, aggregate liquidation preference of $16,560)
$
16,560

 

EQUITY
 
 
 
Series C Preferred Shares of Beneficial Interest (Cumulative redeemable preferred shares, no par value, $25 per share liquidation preference, 4,118 shares issued and outstanding at June 30, 2019 and December 31, 2018, aggregate liquidation preference of $102,971)
99,456

 
99,456

Common Shares of Beneficial Interest (Unlimited authorization, no par value, 11,656 shares issued and outstanding at June 30, 2019 and 11,942 shares issued and outstanding at December 31, 2018)
888,541

 
899,234

Accumulated distributions in excess of net income
(450,433
)
 
(429,048
)
Accumulated other comprehensive income
(7,598
)
 
(856
)
Total shareholders’ equity
$
529,966

 
$
568,786

Noncontrolling interests – Operating Partnership (1,224 units at June 30, 2019 and 1,368 units at December 31, 2018)
57,902

 
67,916

Noncontrolling interests – consolidated real estate entities
6,132

 
6,747

Total equity
$
594,000

 
$
643,449

TOTAL LIABILITIES, MEZZANINE EQUITY, AND EQUITY
$
1,347,808

 
$
1,335,997

See accompanying Notes to Condensed Consolidated Financial Statements.

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Table of Contents

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

 
(in thousands, except per share data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
REVENUE
$
46,934

 
$
46,197

 
$
92,542

 
$
89,232

EXPENSES
 
 
 
 
 
 
 
Property operating expenses, excluding real estate taxes
13,942

 
13,934

 
28,746

 
28,180

Real estate taxes
5,574

 
5,003

 
10,806

 
10,024

Property management expense
1,445

 
1,444

 
2,999

 
2,821

Casualty loss
92

 

 
733

 
50

Depreciation and amortization
18,437

 
19,132

 
36,548

 
39,648

Impairment of real estate investments

 
17,809

 

 
17,809

General and administrative expenses
3,549

 
4,348

 
7,355

 
7,967

TOTAL EXPENSES
$
43,039

 
$
61,670

 
$
87,187

 
$
106,499

Operating income (loss)
3,895

 
(15,473
)
 
5,355

 
(17,267
)
Interest expense
(7,590
)
 
(8,562
)
 
(15,486
)
 
(16,858
)
Loss on extinguishment of debt
(407
)
 
(12
)
 
(409
)
 
(133
)
Interest income
402

 
429

 
809

 
1,102

Other income
66

 
31

 
83

 
47

Income (loss) before gain (loss) on sale of real estate and other investments, gain (loss) on litigation settlement, and income (loss) from discontinued operations
(3,634
)
 
(23,587
)
 
(9,648
)
 
(33,109
)
Gain (loss) on sale of real estate and other investments
615

 

 
669

 
2,304

Gain (loss) on litigation settlement
6,286

 

 
6,286

 

Income (loss) from continuing operations
3,267

 
(23,587
)
 
(2,693
)
 
(30,805
)
Income (loss) from discontinued operations

 
238

 

 
14,120

NET INCOME (LOSS)
$
3,267

 
$
(23,349
)
 
$
(2,693
)
 
$
(16,685
)
Dividends to preferred unitholders
(160
)
 

 
(217
)
 

Net (income) loss attributable to noncontrolling interests – Operating Partnership
(148
)
 
2,580

 
595

 
2,000

Net (income) loss attributable to noncontrolling interests – consolidated real estate entities
154

 
595

 
730

 
1,115

Net income (loss) attributable to controlling interests
3,113

 
(20,174
)
 
(1,585
)
 
(13,570
)
Dividends to preferred shareholders
(1,706
)
 
(1,706
)
 
(3,411
)
 
(3,411
)
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
$
1,407

 
$
(21,880
)
 
$
(4,996
)
 
$
(16,981
)
Earnings (loss) per common share from continuing operations – basic and diluted
$
0.11

 
$
(1.85
)
 
$
(0.43
)
 
$
(2.48
)
Earnings (loss) per common share from discontinued operations – basic and diluted

 
0.02

 

 
1.06

NET EARNINGS (LOSS) PER COMMON SHARE – BASIC & DILUTED
$
0.11

 
$
(1.83
)
 
$
(0.43
)
 
$
(1.42
)
See accompanying Notes to Condensed Consolidated Financial Statements.

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Table of Contents

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)


 
(in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net income (loss)
$
3,267

 
$
(23,349
)
 
$
(2,693
)
 
$
(16,685
)
Other comprehensive income:
 
 
 
 
 
 
 
Unrealized gain (loss) from derivative instrument
(4,430
)
 
438

 
(6,712
)
 
2,158

(Gain) loss on derivative instrument reclassified into earnings
(29
)
 
27

 
(30
)
 
129

Total comprehensive income (loss)
$
(1,192
)
 
$
(22,884
)
 
$
(9,435
)
 
$
(14,398
)
Net comprehensive (income) loss attributable to noncontrolling interests – Operating Partnership
275

 
2,531

 
1,255

 
1,759

Net (income) loss attributable to noncontrolling interests – consolidated real estate entities
154

 
595

 
730

 
1,115

Comprehensive income (loss) attributable to controlling interests
$
(763
)
 
$
(19,758
)
 
$
(7,450
)
 
$
(11,524
)

See accompanying Notes to Condensed Consolidated Financial Statements.


5

Table of Contents

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (unaudited)

 
(in thousands, except per share data)
 
PREFERRED
SHARES
NUMBER
OF
COMMON
SHARES
 
COMMON
SHARES
 
ACCUMULATED
DISTRIBUTIONS
IN EXCESS OF
NET INCOME
 
ACCUMULATED OTHER COMPREHENSIVE INCOME
 
NONREDEEMABLE
NONCONTROLLING
INTERESTS
 
TOTAL
EQUITY
Balance December 31, 2017
$
99,456

12,004

 
$
902,305

 
$
(374,365
)
 
$
(539
)
 
$
87,186

 
$
714,043

Net income (loss) attributable to controlling interests and nonredeemable noncontrolling interests
 
 
 
 
 
(13,570
)
 
 
 
(2,728
)
 
(16,298
)
Change in fair value of derivatives
 
 
 
 
 


 
2,287

 


 
2,287

Distributions - common shares and units ($1.40 per share and unit)
 
 
 
 
 
(16,763
)
 
 
 
(1,977
)
 
(18,740
)
Distributions – Series C preferred shares ($0.8281 per Series C share)
 
 
 
 
 
(3,411
)
 
 
 
 
 
(3,411
)
Shares issued and share-based compensation
 

5

 
611

 
 
 
 
 
 
 
611

Redemption of units for common shares


3

 
34

 
 
 
 
 
(34
)
 

Redemption of units for cash
 



 


 
 
 
 
 
(2,747
)
 
(2,747
)
Shares repurchased

(67
)
 
(3,415
)
 

 
 
 
 
 
(3,415
)
Cumulative adjustment upon adoption of ASC 606 and ASC 610-20
 
 
 
 
 
627

 
 
 
 
 
627

Other
 
(6
)
 
(55
)
 
 
 
 
 
(519
)
 
(574
)
Balance June 30, 2018
$
99,456

11,939

 
$
899,480

 
$
(407,482
)
 
$
1,748

 
$
79,181

 
$
672,383

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2018
$
99,456

11,942

 
$
899,234

 
$
(429,048
)
 
$
(856
)
 
$
74,663

 
$
643,449

Net income (loss) attributable to controlling interests and nonredeemable noncontrolling interests
 
 
 
 
 
(1,585
)
 
 
 
(1,151
)
 
(2,736
)
Change in fair value of derivatives
 
 
 
 
 
 
 
(6,742
)
 
 
 
(6,742
)
Distributions – common shares and units ($1.40 per share and unit)
 
 
 
 
 
(16,389
)
 
 
 
(1,816
)
 
(18,205
)
Distributions – Series C preferred shares ($0.8281 per Series C share)
 
 
 
 
 
(3,411
)
 
 
 
 
 
(3,411
)
Shares issued and share-based compensation
 

3

 
981

 
 
 
 
 
 
 
981

Redemption of units for common shares
 
8

 
(521
)
 
 
 
 
 
521

 

Redemption of units for cash
 

 

 
 

 
 
 
 
 
(8,124
)
 
(8,124
)
Shares repurchased


(290
)
 
(15,677
)
 
 
 
 
 
 

 
(15,677
)
Acquisition of redeemable noncontrolling interests
 
 
 
4,529

 
 
 
 
 
 
 
4,529

Other
 

(7
)
 
(5
)
 
 
 
 
 
(59
)
 
(64
)
Balance June 30, 2019
$
99,456

11,656

 
$
888,541

 
$
(450,433
)
 
$
(7,598
)
 
$
64,034

 
$
594,000


See accompanying Notes to Condensed Consolidated Financial Statements.

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INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (unaudited)

 
(in thousands, except per share data)
 
PREFERRED
SHARES
NUMBER
OF
COMMON
SHARES
 
COMMON
SHARES
 
ACCUMULATED
DISTRIBUTIONS
IN EXCESS OF
NET INCOME
 
ACCUMULATED OTHER COMPREHENSIVE INCOME
 
NONREDEEMABLE
NONCONTROLLING
INTERESTS
 
TOTAL
EQUITY
Balance March 31, 2018
$
99,456

11,979

 
$
901,312

 
$
(377,871
)
 
$
1,283

 
$
84,287

 
$
708,467

Net income (loss) attributable to controlling interests and nonredeemable noncontrolling interests
 
 
 
 
 
(20,174
)
 
 
 
(3,009
)
 
(23,183
)
Change in fair value of derivatives
 
 
 
 
 
 
 
465

 
 
 
465

Distributions - common shares and units ($0.70 per share and unit)
 
 
 
 
 
(8,358
)
 
 
 
(987
)
 
(9,345
)
Distributions – Series C preferred shares ($0.4140625 per Series C share)
 

 

 
 

 
(1,706
)
 
 
 
 
 
(1,706
)
Shares issued and share-based compensation
 

3

 
187

 
 
 
 
 
 
 
187

Redemption of units for cash
 

 
 
 
 
 
 
 
 
(510
)
 
(510
)
Shares repurchased
 
(37
)
 
(1,973
)
 
 
 
 
 
 
 
(1,973
)
Cumulative adjustment upon adoption of ASC 606 and ASC 610-20
 
 
 
 
 
627

 
 
 
 
 
627

Other
 
(6
)
 
(46
)
 
 
 
 
 
(600
)
 
(646
)
Balance June 30, 2018
$
99,456

11,939

 
$
899,480

 
$
(407,482
)
 
$
1,748

 
$
79,181

 
$
672,383

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance March 31, 2019
$
99,456

11,768

 
$
895,381

 
$
(443,661
)
 
$
(3,139
)
 
$
72,355

 
$
620,392

Net income (loss) attributable to controlling interests and nonredeemable noncontrolling interests
 
 
 
 
 
3,113

 
 
 
(6
)
 
3,107

Change in fair value of derivatives
 
 
 
 
 
 
 
(4,459
)
 
 
 
(4,459
)
Distributions – common shares and units ($0.70 per share and unit)
 
 
 
 
 
(8,179
)
 
 
 
(859
)
 
(9,038
)
Distributions – Series C preferred shares ($0.4140625 per Series C share)
 
 
 
 
 
(1,706
)
 
 
 
 
 
(1,706
)
Shares issued and share-based compensation
 

3

 
565

 
 
 
 
 
 
 
565

Redemption of units for common shares
 
8

 
(521
)
 
 
 
 
 
521

 

Redemption of units for cash
 

 

 
 

 
 
 
 
 
(7,968
)
 
(7,968
)
Shares repurchased
 
(116
)
 
(6,863
)
 


 
 
 
 

 
(6,863
)
Other
 

(7
)
 
(21
)
 
 
 
 
 
(9
)
 
(30
)
Balance June 30, 2019
$
99,456

11,656

 
$
888,541

 
$
(450,433
)
 
$
(7,598
)
 
$
64,034

 
$
594,000

See accompanying Notes to Condensed Consolidated Financial Statements.



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Table of Contents

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

 
(in thousands)
 
Six Months Ended
June 30,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES
 

 
 

Net income (loss)
$
(2,693
)
 
$
(16,685
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 

 
 

Depreciation and amortization, including amortization of capitalized loan costs
37,136

 
40,345

(Gain) loss on sale of real estate, other investments, and discontinued operations
(669
)
 
(16,133
)
(Gain) loss on litigation settlement
(2,286
)
 

Share-based compensation expense
981

 
611

Impairment of real estate investments

 
17,809

Other, net
1,350

 
1,255

Changes in other assets and liabilities:
 

 
 

Other assets
(1,745
)
 
4,741

Accounts payable and accrued expenses
(3,468
)
 
(2,789
)
Net cash provided by (used by) operating activities
$
28,606

 
$
29,154

CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

Increase in notes receivable
(159
)
 
(7,509
)
Proceeds from sale of real estate and other investments
9,882

 
34,831

Payments for acquisitions of real estate assets
(29,918
)
 
(129,737
)
Payments for improvements of real estate assets
(6,317
)
 
(7,747
)
Other investing activities
282

 
690

Net cash provided by (used by) investing activities
$
(26,230
)
 
$
(109,472
)
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

Principal payments on mortgages payable
(74,614
)
 
(60,757
)
Proceeds from revolving lines of credit
146,439

 
99,000

Principal payments on revolving lines of credit
(26,000
)
 
(169,000
)
Principal payments on construction debt

 
(21,689
)
Payments for acquisition of noncontrolling interests – consolidated real estate entities
(1,260
)
 

Repurchase of common shares
(15,677
)
 
(3,415
)
Repurchase of partnership units
(8,124
)
 
(2,747
)
Distributions paid to common shareholders
(16,583
)
 
(16,764
)
Distributions paid to preferred shareholders
(1,705
)
 
(3,410
)
Distributions paid to preferred unitholders
(57
)
 

Distributions paid to noncontrolling interests – Unitholders of the Operating Partnership
(1,914
)
 
(1,977
)
Distributions paid to noncontrolling interests – consolidated real estate entities
(59
)
 
(244
)
Net cash provided by (used by) financing activities
$
446

 
$
(181,003
)
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
2,822

 
(261,321
)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF PERIOD
19,256

 
286,226

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD
$
22,078

 
$
24,905

SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
 

 
 

Accrued capital expenditures
$
499

 
$
1,569

Distributions declared but not paid to common shareholders
9,038

 
8,358

Distributions declared but not paid to preferred shareholders
1,706

 
1,706

Distributions declared but not paid to preferred unitholders
160

 

Gain on litigation settlement
2,286

 

Property acquired through issuance of Series D preferred units
16,560

 

 
 
 
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 

 
 

Cash paid for interest
$
15,044

 
$
15,367

See accompanying Notes to Condensed Consolidated Financial Statements.

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Table of Contents

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
for the six months ended June 30, 2019 and 2018
NOTE 1 • ORGANIZATION 
Investors Real Estate Trust, collectively with our consolidated subsidiaries (“IRET,” “we,” “us,” or “our”), is a real estate investment trust (“REIT”) focused on the ownership, management, acquisition, redevelopment, and development of apartment communities, primarily in Midwest markets. As of June 30, 2019, we owned interests in 88 apartment communities consisting of 13,975 apartment homes.
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. On September 20, 2018, our Board of Trustees approved a change in our fiscal year-end from April 30 to December 31, beginning on January 1, 2019. We filed a transition report on Form 10-KT for the transition period ended December 31, 2018, in accordance with SEC rules and regulations. Beginning on January 1, 2019, all fiscal years will be from January 1 to December 31.
On December 14, 2018, the Board approved a reverse stock split of our outstanding common shares, no par value per share, and limited partnership units ("Units") at a ratio of 1-for-10. The reverse stock split was effective as of the close of trading on December 27, 2018, with trade commencing on a split-adjusted basis on December 28, 2018. We have adjusted all shares and Units and per share and Unit data for all periods presented.
The condensed consolidated financial statements also reflect the Operating Partnership's ownership of certain joint venture entities in which the Operating Partnership has a general partner or controlling interest. These entities are consolidated into our operations, with noncontrolling interests reflecting the noncontrolling partners’ share of ownership, income, and expenses.
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Our interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain disclosures accompanying annual consolidated financial statements prepared in accordance with GAAP are omitted. The year-end balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by 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 Transition Report on Form 10-KT for the transition period ended December 31, 2018, as filed with the SEC on February 27, 2019.
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 accounting standards updates (“ASUs”).



9

Table of Contents

Standard
Description
Date of Adoption
Effect on the Financial Statements or Other Significant Matters
ASU 2016-02, Leases; ASU 2018-10, Codification Improvements to Topic 842, Leases; ASU 2018-11, Leases: Targeted Improvements; ASU 2018-20, Leases (Topic 842) - Narrow-Scope Improvements for Leases
These ASUs amend existing accounting standards for lease accounting, including requiring lessees to recognize most leases on the balance sheet and making certain changes to lessor accounting.
These ASUs are effective for annual reporting periods beginning after December 15, 2018. Early adoption is permitted. We adopted these standards using the modified retrospective approach effective January 1, 2019.
Our residential leases, where we are the lessor, will continue to be accounted for as operating leases under the new standards. As a result of adopting these standards, there were no significant changes in the accounting for lease revenue. For leases where we are the lessee, we recognized a right of use asset and lease liability of $889,000 and $1.0 million, respectively, on our consolidated balance sheets. There are also additional disclosures required under the new standard. Refer to the Leases section below for more information regarding the impact of adopting the standards on our condensed consolidated financial statements.
ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments; ASU 2018-19, Codification Improvements to Topic 326; ASU 2019-05, Financial Instruments - Credit Losses - Targeted Transition Relief
These ASUs require entities to estimate a lifetime expected credit loss for most financial assets, such as loans and other financial instruments, and to present the net amount expected to be collected. In 2018, another ASU was issued to amend ASU 2016-13, which clarifies that it does not apply to operating lease receivables. In 2019, an additional ASU was issued to provide transition relief in which an entity is allowed to elect the fair value option on an instrument-by-instrument basis for eligible instruments, upon adoption of Topic 326.
These ASUs are effective for annual reporting periods beginning after December 15, 2019. Early adoption is permitted.
We are currently evaluating the impact the new standards will have on our mortgage and note receivables.
ASU 2018-13, Fair Value Measurements (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirement for Fair Value Measurements
This ASU eliminates certain disclosure requirements affecting all levels of measurement, and modifies and adds new disclosure requirements for Level 3 measurements.
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 disclosures.
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
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 condensed consolidated financial statements.
ASU 2019-01, Leases (Topic 842) - Codification Improvements
This ASU provides clarification on various lease related issues and provides for reduced transition disclosure requirements.
This ASU has two effective dates. The various lease issues are effective for annual reporting periods beginning after December 15, 2019. The transition disclosures are effective with the ASU 2016-02, Leases. We adopted this standard using the modified retrospective approach effective January 1, 2019.
The adoption of the standard did not have a material impact on our condensed consolidated financial statements. Refer to the Leases section below for transition disclosures.


10

Table of Contents

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
 
(in thousands)
Balance sheet description
June 30, 2019

 
June 30, 2018

Cash and cash equivalents
$
17,406

 
$
20,451

Restricted cash
4,672

 
4,454

Total cash, cash equivalents and restricted cash
$
22,078

 
$
24,905


As of June 30, 2019, restricted cash consisted primarily of loan application deposits and escrows held by lenders for real estate taxes, insurance, and capital additions.
LEASES
Effective January 1, 2019, we adopted ASUs 2016-02, 2018-10, 2018-11, 2018-20, and 2019-01 related to leases using the modified retrospective approach. We elected to adopt the package of practical expedients permitted under the transition guidance, which permits us to not reassess prior conclusions about lease identification, classification, and initial direct costs under the new standard, and the practical expedient related to land easements, which allows us to not evaluate existing or expired land easements that were not previously accounted for under ASC 840. We made an accounting policy election to exclude leases in which we are a lessee with a term of 12 months or less from the balance sheet.
As a lessor, we primarily lease multifamily apartment homes which qualify as operating leases with terms that are generally one year or less. Rental revenues are recognized in accordance with ASC 842, Leases, using a method that represents a straight-line basis over the term of the lease. Rental income represents approximately 98.0% of our total revenues and includes gross market rent less adjustments for concessions, vacancy loss, and bad debt. Other property revenues represent the remaining 2.0% of our total revenues and are primarily driven by other fee income, which is typically recognized at a point in time.
Some of our apartment communities have commercial spaces available for lease. Lease terms for these spaces typically range from three to fifteen years. The leases for commercial spaces generally include options to extend the lease for additional terms.
Many of our leases contain non-lease components for utility reimbursement from our residents and common area maintenance from our commercial tenants. We have elected the practical expedient to combine lease and non-lease components for all asset classes. The combined components are included in lease income and are accounted for under ASC 842.
The aggregate amount of future scheduled lease income on our operating leases for commercial spaces, excluding any variable lease income and non-lease components, as of June 30, 2019, was as follows:
 
 
(in thousands)
2019 (remainder)
 
$
1,672

2020
 
3,014

2021
 
3,017

2022
 
3,021

2023
 
2,895

Thereafter
 
7,501

Total scheduled lease income - operating leases
 
$
21,120


REVENUES
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 were 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 to which the company expects to be entitled for those goods and services.
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 application fees, as earned, and have concluded that this is appropriate under the new standard.
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

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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.

The following table presents the disaggregation of revenue streams for the three and six months ended June 30, 2019:
 
 
 
(in thousands)
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Revenue Stream
Applicable Standard
 
2019
2018
 
2019
2018
Fixed lease income - operating leases
Leases
 
$
44,342

$
43,193

 
$
88,084

$
83,314

Variable lease income - operating leases
Leases
 
1,548


 
2,632


Non-lease components
Revenue from contracts with customers
 

1,335

 

2,546

Other property revenue
Revenue from contracts with customers
 
1,044

1,669

 
1,826

3,372

Total revenue
 
 
$
46,934

$
46,197

 
$
92,542

$
89,232



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. Reducing planned property holding periods may increase the likelihood of recording impairment losses.
During the six months ended June 30, 2019, we recorded no impairment charges. During the six months ended June 30, 2018, we recognized $17.8 million of impairment charges on one apartment community, three commercial properties, and three 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; and $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; and $709,000 on a parcel of land in Bismarck, North Dakota. These parcels were written down to estimated fair value based on independent appraisals and market data.
MORTGAGE RECEIVABLE AND NOTES RECEIVABLE
In August 2017, we sold 13 multifamily communities in exchange for cash and an $11.0 million note secured by a mortgage on the assets. As of June 30, 2019, the balance of the note was $10.1 million, with 12 communities remaining in the pool of assets used to secure the mortgage. 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 six months ended June 30, 2019 and 2018, we received and recognized approximately $285,000 and $305,000 of interest income, respectively.
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 other assets on our Condensed Consolidated Balance Sheets; however, we may fund additional amounts upon satisfaction of certain conditions set forth in the loan agreement. As of June 30, 2019, the balance of the note was $16.6 million. The note bears an interest rate of 6.0%, matures in July 2023, and provides us an option to purchase the development prior to the loan maturity date.



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VARIABLE INTEREST ENTITIES
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.
GAIN ON LITIGATION SETTLEMENT
During the three months ended June 30, 2019, we recorded a gain on litigation settlement of $6.3 million from the settlement on a construction defect claim. The gain consisted of $4.0 million of cash received, $937,000 of cash receivable, and $1.4 million of liabilities waived under the terms of the settlement.
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 and Series D Convertible Preferred Units ("Series D preferred units"), which could have a dilutive effect on our earnings per share upon exercise of the RSUs or upon conversion of the Series D preferred units (refer to Note 4 for further discussion of the Series D preferred units). Other than the issuance of RSUs and Series D preferred units, 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 Agreement of Limited Partnership, limited partners have the right to require the Operating Partnership to redeem their limited partnership units (“Units”) 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.
Performance-based restricted stock awards and RSUs of 37,625 and 9,858 for the three months ended June 30, 2019 and 2018, respectively, and 37,625 and 9,858, respectively, for the six months ended June 30, 2019 and 2018 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.
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 June 30, 2019 and 2018:  
 
(in thousands, except per share data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
NUMERATOR
 

 
 

 
 
 
 
Income (loss) from continuing operations – controlling interests
$
3,113

 
$
(20,386
)
 
$
(1,585
)
 
$
(26,200
)
Income (loss) from discontinued operations – controlling interests

 
212

 

 
12,630

Net income (loss) attributable to controlling interests
3,113

 
(20,174
)
 
(1,585
)
 
(13,570
)
Dividends to preferred shareholders
(1,706
)
 
(1,706
)
 
(3,411
)
 
(3,411
)
Numerator for basic earnings (loss) per share – net income available to common shareholders
1,407

 
(21,880
)
 
(4,996
)
 
(16,981
)
Noncontrolling interests – Operating Partnership
148

 
(2,580
)
 
(595
)
 
(2,000
)
Numerator for diluted earnings (loss) per share
$
1,555

 
$
(24,460
)
 
$
(5,591
)
 
$
(18,981
)
DENOMINATOR
 

 
 

 
 

 
 

Denominator for basic earnings per share weighted average shares
11,729

 
11,928

 
11,746

 
11,950

Effect of redeemable operating partnership units
1,226

 
1,407

 
1,306

 
1,416

Denominator for diluted earnings per share
12,955

 
13,335

 
13,052

 
13,366

Earnings (loss) per common share from continuing operations – basic and diluted
$
0.11

 
$
(1.85
)
 
$
(0.43
)
 
$
(2.48
)
Earnings (loss) per common share from discontinued operations – basic and diluted

 
0.02

 

 
1.06

NET EARNINGS (LOSS) PER COMMON SHARE – BASIC & DILUTED
$
0.11

 
$
(1.83
)
 
$
(0.43
)
 
$
(1.42
)


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NOTE 4 • EQUITY AND MEZZANINE EQUITY
Operating Partnership Units. The Operating Partnership had 1.2 million and 1.4 million outstanding Units at June 30, 2019 and December 31, 2018, respectively.
Common Shares and Equity Awards. Common shares outstanding on June 30, 2019 and December 31, 2018, totaled 11.7 million and 11.9 million, respectively. There were 6,511 shares issued upon the vesting of equity awards under our 2015 Incentive Plan during the three months ended June 30, 2019, with a total grant-date fair value of $447,000. During the six months ended June 30, 2019, we issued 6,718 shares, with a total grant-date fair value $457,000. During the three and six months ended June 30, 2018, we issued 5,142 shares, with a total grant-date fair value of $350,000 and 6,226 shares, with a total grant-date fair value of $412,000, respectively, under our 2015 Incentive Plan. These shares vest based on performance and service criteria.
Exchange Rights. Pursuant to the exercise of Exchange Rights, we redeemed Units during the six months ended June 30, 2019 and 2018 as detailed in the table below.
 
(in thousands, except per Unit amounts)
Three Months Ended June 30,
Number of Units

 
Aggregate Cost(1)

 
Average Price Per Unit

2019
133

 
$
7,968

 
$
60.01

2018
10

 
$
510

 
$
52.72

 
 
 
 
 
 
Six Months Ended June 30,
 
 
 
 
 
2019
135