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EX-31.2 - CERTIFICATION BY CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES - CENTERSPACEiretexhibit312-10312014.htm
EX-31.1 - CERTIFICATION BY CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES - CENTERSPACEiretexhibit311-10312014.htm
EX-12 - CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES AND EARNINGS TO COMBINED FIXED - CENTERSPACEiretexhibit12-10312014.htm
EXCEL - IDEA: XBRL DOCUMENT - CENTERSPACEFinancial_Report.xls
EX-32 - CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002. - CENTERSPACEiretexhibit32-10312014.htm
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 Quarter Ended October 31, 2014
Commission File Number 0-14851
INVESTORS REAL ESTATE TRUST
(Exact name of registrant as specified in its charter)
North Dakota
45-0311232
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
 
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 R
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 R
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 R
Accelerated filer £
 
Non-accelerated filer £
Smaller Reporting Company £
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes £
No R
Registrant is a North Dakota Real Estate Investment Trust. As of November 20, 2014, it had 120,257,746 common shares of beneficial interest outstanding.


TABLE OF CONTENTS
 
Page
 
3
3
 
4
 
5
 
6
 
8
29
52
53
   
 
54
54
54
54
54
54
54
55
2

PART I
ITEM 1. FINANCIAL STATEMENTS - SECOND QUARTER - FISCAL 2015
INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
 
(in thousands, except share data)
 
October 31, 2014
April 30, 2014
ASSETS
       
Real estate investments
       
Property owned
$
2,013,770
$
1,996,031
Less accumulated depreciation
 
(426,545)
 
(424,288)
   
1,587,225
 
1,571,743
Development in progress
 
146,390
 
104,609
Unimproved land
 
24,947
 
22,864
Total real estate investments
 
1,758,562
 
1,699,216
Real estate held for sale
 
41,183
 
2,951
Cash and cash equivalents
 
52,999
 
47,267
Other investments
 
329
 
329
Receivable arising from straight-lining of rents, net of allowance of $669 and $796, respectively
 
27,425
 
27,096
Accounts receivable, net of allowance of $425 and $248, respectively
 
3,719
 
10,206
Real estate deposits
 
4,924
 
145
Prepaid and other assets
 
2,263
 
4,639
Intangible assets, net of accumulated amortization of $24,153 and $24,071, respectively
 
29,745
 
32,639
Tax, insurance, and other escrow
 
16,338
 
20,880
Property and equipment, net of accumulated depreciation of $1,270 and $2,041, respectively
 
1,598
 
1,681
Goodwill
 
1,940
 
1,100
Deferred charges and leasing costs, net of accumulated amortization of $20,677 and $21,068, respectively
 
20,445
 
21,072
TOTAL ASSETS
$
1,961,470
$
1,869,221
LIABILITIES AND EQUITY
       
LIABILITIES
       
Accounts payable and accrued expenses
$
67,037
$
59,105
Revolving line of credit
 
40,500
 
22,500
Mortgages payable
 
1,013,161
 
997,689
Other
 
107,731
 
63,178
TOTAL LIABILITIES
 
1,228,429
 
1,142,472
COMMITMENTS AND CONTINGENCIES (NOTE 6)
       
REDEEMABLE NONCONTROLLING INTERESTS – CONSOLIDATED REAL ESTATE ENTITIES
 
6,373
 
6,203
EQUITY
       
Investors Real Estate Trust shareholders' equity
       
Series A Preferred Shares of Beneficial Interest (Cumulative redeemable preferred shares, no par value, 1,150,000 shares issued and outstanding at October 31, 2014 and April 30, 2014, aggregate liquidation preference of $28,750,000)
 
27,317
 
27,317
Series B Preferred Shares of Beneficial Interest (Cumulative redeemable preferred shares, no par value, 4,600,000 shares issued and outstanding at October 31, 2014 and April 30, 2014, aggregate liquidation preference of $115,000,000)
 
111,357
 
111,357
Common Shares of Beneficial Interest (Unlimited authorization, no par value, 119,808,974 shares issued and outstanding at October 31, 2014, and 109,019,341 shares issued and outstanding at April 30, 2014)
 
918,221
 
843,268
Accumulated distributions in excess of net income
 
(420,036)
 
(389,758)
Total Investors Real Estate Trust shareholders' equity
 
636,859
 
592,184
Noncontrolling interests – Operating Partnership (14,730,910 units at October 31, 2014 and 21,093,445 units at April 30, 2014)
 
63,207
 
105,724
Noncontrolling interests – consolidated real estate entities
 
26,602
 
22,638
Total equity
 
726,668
 
720,546
TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
$
1,961,470
$
1,869,221
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
for the three and six months ended October 31, 2014 and 2013
 
(in thousands, except per share data)
 
Three Months Ended
October 31
Six Months Ended
October 31
   
2014
 
2013
 
2014
 
2013
REVENUE
               
Real estate rentals
$
58,835
$
54,477
$
115,961
$
108,100
Tenant reimbursement
 
11,207
 
11,295
 
21,918
 
22,770
TRS senior housing revenue
 
843
 
0
 
1,636
 
0
TOTAL REVENUE
 
70,885
 
65,772
 
139,515
 
130,870
EXPENSES
               
Depreciation/amortization related to real estate investments
 
16,828
 
16,367
 
33,012
 
34,423
Utilities
 
5,093
 
5,208
 
9,774
 
10,131
Maintenance
 
7,828
 
7,162
 
15,592
 
14,891
Real estate taxes
 
8,266
 
8,361
 
16,767
 
16,736
Insurance
 
1,345
 
1,413
 
3,081
 
2,714
Property management expenses
 
4,355
 
4,184
 
8,985
 
8,319
Other property expenses
 
350
 
3
 
556
 
180
TRS senior housing expenses
 
725
 
0
 
1,418
 
0
General and administrative
 
3,468
 
3,205
 
7,744
 
6,637
Amortization related to non-real estate investments
 
840
 
800
 
1,712
 
1,744
Impairment of real estate investments
 
3,245
 
0
 
5,565
 
0
TOTAL EXPENSES
 
52,343
 
46,703
 
104,206
 
95,775
Gain on involuntary conversion
 
0
 
0
 
0
 
966
Operating income
 
18,542
 
19,069
 
35,309
 
36,061
Interest expense
 
(14,599)
 
(14,799)
 
(29,263)
 
(29,395)
Interest income
 
560
 
585
 
1,120
 
773
Other income
 
136
 
67
 
267
 
89
Income before gain (loss) on sale of real estate and other investments and income from discontinued operations
 
4,639
 
4,922
 
7,433
 
7,528
Gain (loss) on sale of real estate and other investments
 
1,231
 
0
 
(1,762)
 
0
Income from continuing operations
 
5,870
 
4,922
 
5,671
 
7,528
Income from discontinued operations
 
0
 
5,375
 
0
 
5,985
NET INCOME
 
5,870
 
10,297
 
5,671
 
13,513
Net (income) loss attributable to noncontrolling interests – Operating Partnership
 
(363)
 
(1,226)
 
39
 
(1,276)
Net income attributable to noncontrolling interests – consolidated real estate entities
 
(393)
 
(284)
 
(747)
 
(372)
Net income attributable to Investors Real Estate Trust
 
5,114
 
8,787
 
4,963
 
11,865
Dividends to preferred shareholders
 
(2,878)
 
(2,878)
 
(5,757)
 
(5,757)
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
$
2,236
$
5,909
$
(794)
$
6,108
Earnings (loss) per common share from continuing operations – Investors Real Estate Trust – basic and diluted
$
.02
$
.01
$
(.01)
$
.01
Earnings per common share from discontinued operations – Investors Real Estate Trust – basic and diluted
 
.00
 
.05
 
.00
 
.05
NET INCOME (LOSS) PER COMMON SHARE – BASIC AND DILUTED
$
.02
$
.06
$
(.01)
$
.06
DIVIDENDS PER COMMON SHARE
$
.1300
$
.1300
$
.2600
$
.2600
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (unaudited)
for the six months ended October 31, 2014 and 2013
 
(in thousands)
 
NUMBER
OF
PREFERRED
SHARES
PREFERRED
SHARES
NUMBER
OF COMMON
SHARES
COMMON
SHARES
ACCUMULATED
DISTRIBUTIONS
IN EXCESS OF
NET INCOME
NONCONTROLLING
INTERESTS
TOTAL
EQUITY
                 
(as revised)
(as revised)
Balance April 30, 2013
5,750
$
138,674
101,488
$
784,454
$
(310,341)
$
142,657
$
755,444
Net income attributable to Investors Real Estate Trust and nonredeemable noncontrolling interests
             
11,865
 
1,541
 
13,406
Distributions – common shares and units
             
(26,883)
 
(5,671)
 
(32,554)
Distributions – Series A preferred shares
             
(1,186)
     
(1,186)
Distributions – Series B preferred shares
             
(4,571)
     
(4,571)
Distribution reinvestment and share purchase plan
     
3,893
 
33,021
         
33,021
Share-based compensation
     
13
 
112
         
112
Partnership units issued
                 
3,480
 
3,480
Redemption of units for common shares
     
160
 
946
     
(946)
 
0
Contributions from nonredeemable noncontrolling interests – consolidated real estate entities
                 
3,316
 
3,316
Other
         
(17)
     
(560)
 
(577)
Balance October 31, 2013
5,750
$
138,674
105,554
$
818,516
$
(331,116)
$
143,817
$
769,891
                         
                         
                         
Balance April 30, 2014
5,750
$
138,674
109,019
$
843,268
$
(389,758)
$
128,362
$
720,546
Net income attributable to Investors Real Estate Trust and nonredeemable  noncontrolling interests
             
4,963
 
538
 
5,501
Distributions – common shares and units
             
(29,484)
 
(4,878)
 
(34,362)
Distributions – Series A preferred shares
             
(1,186)
     
(1,186)
Distributions – Series B preferred shares
             
(4,571)
     
(4,571)
Distribution reinvestment and share purchase plan
     
4,212
 
34,821
         
34,821
Share-based compensation
     
204
 
2,432
         
2,432
Partnership units issued
                 
100
 
100
Redemption of units for common shares
     
6,374
 
37,700
     
(37,700)
 
0
Contributions from nonredeemable noncontrolling interests – consolidated real estate entities
                 
3,757
 
3,757
Other
                 
(370)
 
(370)
Balance October 31, 2014
5,750
$
138,674
119,809
$
918,221
$
(420,036)
$
89,809
$
726,668
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
for the six months ended October 31, 2014 and 2013
 
(in thousands)
 
Six Months Ended
October 31
 
2014
2013
CASH FLOWS FROM OPERATING ACTIVITIES
       
Net income
$
5,671
$
13,513
Adjustments to reconcile net income to net cash provided by operating activities:
       
Depreciation and amortization
 
35,474
 
37,988
Loss (gain) on sale of real estate, land, other investments and discontinued operations
 
1,762
 
(6,641)
Gain on involuntary conversion
 
0
 
(966)
Share-based compensation expense
 
1,675
 
0
Impairment of real estate investments
 
5,565
 
1,860
Bad debt expense
 
455
 
214
Changes in other assets and liabilities:
       
Increase in receivable arising from straight-lining of rents
 
(270)
 
(1,352)
Decrease (increase) in accounts receivable
 
4,457
 
(1,095)
Decrease (increase) in prepaid and other assets
 
2,181
 
(2,534)
Decrease (increase) in tax, insurance and other escrow
 
323
 
(343)
Increase in deferred charges and leasing costs
 
(1,976)
 
(1,834)
Decrease in accounts payable, accrued expenses, and other liabilities
 
(3,096)
 
(2,629)
Net cash provided by operating activities
 
52,221
 
36,181
CASH FLOWS FROM INVESTING ACTIVITIES
       
Proceeds from real estate deposits
 
245
 
676
Payments for real estate deposits
 
(5,024)
 
(710)
Decrease in lender holdbacks for improvements
 
4,840
 
1,610
Increase in lender holdbacks for improvements
 
(621)
 
(562)
Proceeds from sale of discontinued operations
 
0
 
67,478
Proceeds from sale of real estate and other investments
 
17,106
 
0
Insurance proceeds received
 
2,102
 
985
Payments for acquisitions of real estate assets
 
(23,142)
 
(32,369)
Payments for development and re-development of real estate assets
 
(87,388)
 
(63,170)
Payments for improvements of real estate assets
 
(15,628)
 
(15,580)
Net cash used by investing activities
 
(107,510)
 
(41,642)
CASH FLOWS FROM FINANCING ACTIVITIES
       
Proceeds from mortgages payable
 
43,500
 
32,083
Principal payments on mortgages payable
 
(40,922)
 
(60,136)
Proceeds from revolving line of credit and other debt
 
35,000
 
0
Proceeds from construction debt
 
44,560
 
22,785
Principal payments on revolving line of credit and other debt
 
(17,000)
 
(17,143)
Proceeds from financing liability
 
0
 
7,900
Proceeds from sale of common shares under distribution reinvestment and share purchase program
 
26,731
 
25,586
Proceeds from noncontrolling partner – consolidated real estate entities
 
1,551
 
416
Distributions paid to common shareholders, net of reinvestment of $7,725 and $7,102, respectively
 
(21,759)
 
(19,781)
Distributions paid to preferred shareholders
 
(5,757)
 
(5,757)
Distributions paid to noncontrolling interests – Unitholders of the Operating Partnership, net of reinvestment of $365 and $333, respectively
 
(4,513)
 
(5,338)
Distributions paid to noncontrolling interests – consolidated real estate entities
 
(370)
 
(560)
Net cash provided (used) by financing activities
 
61,021
 
(19,945)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
 
5,732
 
(25,406)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
 
47,267
 
94,133
CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
52,999
$
68,727
(continued)
INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, continued)
for the six months ended October 31, 2014 and 2013
 
(in thousands)
 
Six Months Ended
October 31
 
2014
2013
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES FOR THE PERIOD
       
Distribution reinvestment plan
$
7,725
$
7,102
Operating partnership distribution reinvestment plan
 
365
 
333
Operating partnership units converted to shares
 
37,700
 
946
Shares issued under the Incentive Award Plan
 
860
 
112
Real estate assets acquired through the issuance of operating partnership units
 
100
 
3,480
Real estate assets acquired through assumption of indebtedness and accrued costs
 
12,169
 
0
Increase to accounts payable included within real estate investments
 
9,569
 
9,606
Real estate assets contributed by noncontrolling interests – consolidated real estate entities
 
2,206
 
2,900
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
       
Cash paid for interest, net of amounts capitalized of $2,232 and $1,360, respectively
$
26,128
$
27,470
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
for the six months ended October 31, 2014 and 2013
NOTE 1 • ORGANIZATION
Investors Real Estate Trust ("IRET" or the "Company") is a self-advised real estate investment trust engaged in acquiring, owning and leasing multi-family and commercial real estate. IRET has elected to be taxed as a Real Estate Investment Trust ("REIT") under Sections 856-860 of the Internal Revenue Code of 1986, as amended. As a REIT, we are subject to a number of organizational and operational requirements, including a requirement to distribute 90% of ordinary taxable income to shareholders, and, generally, are not subject to federal income tax on net income, except for taxes on undistributed REIT taxable income and taxes on the income generated by our taxable REIT subsidiary ("TRS"). Our TRS is subject to corporate federal and state income tax on its taxable income at regular statutory rates. We have considered estimated future taxable income and have determined that there were no material income tax provisions or material net deferred income tax items for our TRS for the six months ended October 31, 2014 and 2013. IRET's multi-family residential properties and commercial properties are located mainly in the states of North Dakota and Minnesota, but also in the states of Colorado, Idaho, Iowa, Kansas, Missouri, Montana, Nebraska, South Dakota, Wisconsin and Wyoming. As of October 31, 2014, IRET owned 96 multi-family residential properties with 11,292 apartment units and 161 commercial properties, consisting of office, healthcare, industrial and retail properties, totaling 9.9 million net rentable square feet. IRET conducts a majority of its business activities through its consolidated operating partnership, IRET Properties, a North Dakota Limited Partnership (the "Operating Partnership"), as well as through a number of other consolidated subsidiary entities.
All references to IRET or the Company refer to Investors Real Estate Trust and its consolidated subsidiaries.
NOTE 2 • BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the accounts of IRET and all subsidiaries in which it maintains a controlling interest. All intercompany balances and transactions are eliminated in consolidation. The Company's fiscal year ends April 30th.
The accompanying condensed consolidated financial statements include the accounts of IRET and its interest in the Operating Partnership. The Company's interest in the Operating Partnership was 89.1% of the common units of the Operating Partnership as of October 31, 2014 and 83.8% as of April 30, 2014. The limited partners in the Operating Partnership have a redemption option that they may exercise. Upon exercise of the redemption option by the limited partners, IRET has the choice of redeeming the limited partners' interests ("Units") for IRET common shares of beneficial interest, on a one-for-one basis, or making a cash payment to the unitholder. The redemption generally may be exercised by the limited partners at any time after the first anniversary of the date of the acquisition of the Units (provided, however, that in general not more than two redemptions by a limited partner may occur during each calendar year, and each limited partner may not exercise the redemption for less than 1,000 Units, or, if such limited partner holds less than 1,000 Units, for all of the Units held by such limited partner). The Operating Partnership and some limited partners have contractually agreed to a holding period of greater than one year and/or a greater number of redemptions during a calendar year.
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 IRET's other operations, with noncontrolling interests reflecting the noncontrolling partners' share of ownership and income and expenses.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim condensed consolidated financial statements of IRET have been prepared in accordance with accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America ("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 the Company's 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 notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2014, as filed with the SEC on June 30, 2014.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360):  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. Examples include a disposal of a major geographic area, a major line of business, or a major equity method investment. In addition, the new guidance requires expanded disclosures about the assets, liabilities, income and expenses of discontinued operations. The ASU is effective for all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The Company adopted this update effective February 1, 2014 and determined that the adoption did not have a material impact on the Company's consolidated results of operations or financial condition.
As a result of the adoption of ASU No. 2014-08, results of operations and gains or losses on sale for properties that are disposed or classified as held for sale in the ordinary course of business on or subsequent to February 1, 2014 would generally be included in continuing operations on the Company's consolidated statements of operations, to the extent such disposals did not meet the criteria for classification as a discontinued operation described above. During the quarter ended April 30, 2014, the Company applied the new standard to one property that was classified as held for sale.  The Company applied the new standard to seven property dispositions and ten properties classified as held for sale during the six months ended October 31, 2014.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The standard will eliminate the transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU No. 2014-09 does not apply to lease contracts accounted for under ASC 840, Leases. The ASU is effective for annual and interim periods beginning after December 15, 2016. The Company does not expect adoption of this update to have a material impact on the Company's operating results or financial position.
In June 2014, the FASB issued ASU No. 2014-12, Compensation – Stock Compensation (Topic 718):  Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. ASU 2014-12 requires an entity to treat performance targets that can be met after the requisite service period of a share-based award has ended, as a performance condition that affects vesting. The ASU is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2015. The Company does not expect the adoption of this update to have a material impact on the Company's operating results or financial position.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically evaluates its long-lived assets, including its 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, the Company compares 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, 2014, the Company incurred a loss of $5.6 million due to impairment of four commercial properties. The Company recognized impairments of $2.1 million on a retail property in Kalispell, Montana, approximately $183,000 on an office property in Golden Valley, Minnesota, $1.8 million on an office property in Minneapolis, Minnesota, and $1.4 million on an office property in Boise, Idaho. These properties were written-down to estimated fair value during the first and second quarters of fiscal year 2015 based on receipt of individual market offers to purchase and the Company's intent to dispose of the properties or, in the case of the Boise, Idaho property, an independent appraisal. The Kalispell and Golden Valley properties were sold in the second quarter of fiscal year 2015. The Minneapolis property is classified as held for sale at October 31, 2014. During the six months ended October 31, 2013, the Company incurred a loss of $1.9 million due to impairment of four commercial properties. The Company recognized impairments of approximately $864,000 on a commercial industrial property in St. Louis Park, Minnesota; $329,000 on a commercial office property in Bloomington, Minnesota; $265,000 on a commercial retail property in Anoka, Minnesota and $402,000 on a commercial industrial property in Clive, Iowa. The impairment charge for fiscal year 2014 is reported in discontinued operations. See Note 7 for additional information.
HELD FOR SALE
The Company classifies properties as held for sale when they meet the U.S. 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. Depreciation is not recorded on assets classified as held for sale. Prior to February 1, 2014, the Company reported, in discontinued operations, the results of operations and the related gains or losses of properties that had either been disposed of or classified as held for sale and otherwise met the classification of a discontinued operation. As a result of the adoption of ASU No. 2014-08, results of operations and gains or losses on sale for properties that are disposed or classified as held for sale in the ordinary course of business on or subsequent to February 1, 2014 would generally be included in continuing operations on the Company's consolidated statements of operations, to the extent such disposals did not meet the criteria for classification as a discontinued operation described above in Recent Accounting Pronouncements. At October 31, 2014, the Company had nine office properties and two retail properties classified as held for sale with assets of $41.2 million and liabilities of $22.1 million.
COMPENSATING BALANCES AND OTHER INVESTMENTS; HOLDBACKS
The Company maintains compensating balances, not restricted as to withdrawal, with several financial institutions in connection with financing received from those institutions and/or to ensure future credit availability. At October 31, 2014, the Company's compensating balances totaled $10.7 million and consisted of the following: First International Bank, Watford City, North Dakota, deposit of $6.1 million; Private Bank, Minneapolis, Minnesota, deposit of $2.0 million; Associated Bank, Green Bay, Wisconsin, deposit of $600,000; American National Bank, Omaha, Nebraska, deposit of $400,000; Dacotah Bank, Minot, North Dakota, deposit of $350,000; United Community Bank, Minot, North Dakota, deposit of $275,000; Peoples State Bank of Velva, North Dakota, deposit of $225,000, Commerce Bank, a Minnesota Banking Corporation, deposit of $100,000, and Bremer Bank, Saint Paul, Minnesota, deposit of $650,000. The deposits at United Community Bank and a portion of the deposit at Dacotah Bank are held as certificates of deposit and comprise the approximately $329,000 in other investments on the Condensed Consolidated Balance Sheets. The certificates of deposit have remaining terms of less than two years and the Company intends to hold them to maturity.
The Company has a number of mortgage loans under which the lender retains a portion of the loan proceeds or requires a deposit for the payment of construction costs or tenant improvements. The decrease of $4.8 million in holdbacks for improvements reflected in the Condensed Consolidated Statements of Cash Flows for the six months ended October 31, 2014 is due primarily to the release of loan proceeds to the Company upon completion of construction and tenant improvement projects, while the increase of approximately $621,000 represents additional amounts retained by lenders for new projects.
IDENTIFIED INTANGIBLE ASSETS AND LIABILITIES AND GOODWILL
Upon acquisition of real estate, the Company records the intangible assets and liabilities acquired (for example, if the leases in place for the real estate property acquired carry rents above the market rent, the difference is classified as an intangible asset) at their estimated fair value separate and apart from goodwill. The Company amortizes identified intangible assets and liabilities that are determined to have finite lives based on the period over which the assets and liabilities are expected to affect, directly or indirectly, the future cash flows of the real estate property acquired (generally the life of the lease). In the six months ended October 31, 2014 and 2013, respectively, the Company added approximately $365,000 and $892,000 of new intangible assets and no new intangible liabilities. The weighted average lives of the intangible assets acquired in the six months ended October 31, 2014 and 2013 are 0.5 years and 0.7 years, respectively. Amortization of intangibles related to above or below-market leases is recorded in real estate rentals in the Condensed Consolidated Statements of Operations. Amortization of other intangibles is recorded in depreciation/amortization related to real estate investments in the Condensed Consolidated Statements of Operations. Intangible assets subject to amortization
are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss is recognized if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its estimated fair value.
The Company's identified intangible assets and intangible liabilities at October 31, 2014 and April 30, 2014 were as follows:
 
(in thousands)
 
October 31, 2014
April 30, 2014
Identified intangible assets (included in intangible assets):
       
Gross carrying amount
$
53,898
$
56,710
Accumulated amortization
 
(24,153)
 
(24,071)
Net carrying amount
$
29,745
$
32,639
         
Identified intangible liabilities (included in other liabilities):
       
Gross carrying amount
$
148
$
173
Accumulated amortization
 
(110)
 
(127)
Net carrying amount
$
38
$
46
The amortization of acquired below-market leases and acquired above-market leases reduced rental income by approximately $6,000 and $10,000 for the three months ended October 31, 2014 and 2013, respectively, and approximately $13,000 and $21,000 for the six months ended October 31, 2014 and 2013, respectively. The estimated annual amortization of acquired below-market leases, net of acquired above-market leases, for each of the five succeeding fiscal years is as follows:
Year Ended April 30,
(in thousands)
2016
$
19
2017
 
11
2018
 
(2)
2019
 
(3)
2020
 
(2)
Amortization of all other identified intangible assets (a component of depreciation and amortization expense) was $1.8 million for the three months ended October 31, 2014 and 2013, and $3.2 million and $5.4 million for the six months ended October 31, 2014 and 2013, respectively. The estimated annual amortization of all other identified intangible assets for each of the five succeeding fiscal years is as follows:
Year Ended April 30,
(in thousands)
2016
$
4,505
2017
 
4,036
2018
 
3,605
2019
 
3,481
2020
 
3,395
The excess of the cost of an acquired business over the net of the amounts assigned to assets acquired (including identified intangible assets) and liabilities assumed is recorded as goodwill.  The Company's goodwill has an indeterminate life and is not amortized, but is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The book value of goodwill as of October 31, 2014 and April 30, 2014 was $1.9 million and $1.1 million, respectively. The annual review at April 30, 2014 indicated no impairment to goodwill and there was no indication of impairment at October 31, 2014.  During the six months ended October 31, 2014, the Company recognized approximately $852,000 of goodwill from the acquisition of the Homestead Garden residential property and disposed of one residential property to which goodwill had been assigned, and as a result, approximately $11,000 of goodwill was derecognized. During the six months ended October 31, 2013, the Company disposed of one commercial industrial property to which goodwill had been assigned, and as a result, approximately $7,000 of goodwill was derecognized.


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.
RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to conform to the current financial statement presentation. Prior to February 1, 2014, the Company reported, in discontinued operations, the results of operations and the related gains or losses of properties that had either been disposed of or classified as held for sale and otherwise met the classification of a discontinued operation. As a result of the adoption of ASU No. 2014-08, results of operations and gains or losses on sale for properties that are disposed or classified as held for sale in the ordinary course of business on or subsequent to February 1, 2014 would generally be included in continuing operations on the Company's consolidated statements of operations, to the extent such disposals did not meet the criteria for classification as a discontinued operation described above in Recent Accounting Pronouncements. As a result of discontinued operations recognized prior to February 1, 2014, retroactive reclassifications that change prior period numbers have been made. See Note 7 for additional information. During fiscal year 2014, the Company classified as discontinued operations two multi-family residential properties, three office properties, twelve industrial properties and three retail properties.
The Company also reclassified administrative expenses, advisory and trustee services and other expenses to general and administrative on the Condensed Consolidated Statements of Operations.
REVISION
During fiscal year 2014 the Company identified an error pertaining to the reporting for a noncontrolling interest in a consolidated real estate joint venture formed in the fourth quarter of fiscal year 2013 for which the holder of such interest has the right to require the Company to acquire the interest at fair value twelve months after the final certificate of occupancy is obtained for the joint venture's development project. Accounting guidance in ASC 480-10-S99:  Redeemable Preferred Stocks, requires that this noncontrolling interest be classified outside of permanent equity because it is redeemable at the option of the joint venture partner. This error resulted in an overstatement of noncontrolling interests and equity in the Company's consolidated statement of equity. This non-cash revision did not impact the Company's consolidated statements of operations or statements of cash flows for any period.
In accordance with accounting guidance found in ASC 250-10, Materiality, the Company assessed the materiality of the error and concluded that the error was not material to any of the Company's previously issued financial statements.  In accordance with accounting guidance found in ASC 250-10, Considering the Effects of Prior Year Misstatement when Quantifying Misstatements in Current Year Financial Statements, the Company revised its previously issued statement of equity to correct the effect of this error.
The following table presents the effect of this correction on the Company's Condensed Consolidated Statement of Equity for the period affected:
 
(in thousands)
Six Months Ended October 31, 2013
As Previously Reported
Adjustment
As Revised
Consolidated Statement of Equity
           
Noncontrolling Interests
           
Balance April 30, 2013
$
148,594
$
(5,937)
$
142,657
Net income attributable to Investors Real Estate Trust and nonredeemable noncontrolling interests
 
1,648
 
(107)
 
1,541
Balance October 31, 2013
 
149,861
 
(6,044)
 
143,817
Total Equity
           
Balance April 30, 2013
 
761,381
 
(5,937)
 
755,444
Net income attributable to Investors Real Estate Trust and nonredeemable noncontrolling interests
 
13,513
 
(107)
 
13,406
Balance October 31, 2013
 
775,935
 
(6,044)
 
769,891


INVOLUNTARY CONVERSION OF ASSETS
In June 2011, the Company's Chateau Apartments property, which at that time consisted of two 32-unit buildings, was extensively damaged by a flood. In February 2012, one of the buildings of the Chateau Apartments property, which had been undergoing restoration work following the flood, was completely destroyed by fire (the "2012 Fire"). During the first quarter of fiscal year 2014, the Company received $966,000 of insurance proceeds for the 2012 Fire.  The total insurance proceeds for redevelopment related to the 2012 Fire exceeded the basis in the assets requiring replacement, resulting in recognition of $966,000 in gain from involuntary conversion in the first quarter of fiscal year 2014.
In December 2013, 15-unit and 57-unit buildings at the Chateau Apartments property were destroyed by fire (the "2013 Fire"). Both buildings were under construction and were unoccupied. The Company is rebuilding both buildings, and currently expects them to be completed in the first quarter of fiscal year 2016. The Company received proceeds for the 2013 Fire claim of $1.0 million in fiscal year 2014, $2.0 million in the three months ended July 31, 2014 and $4.0 million in the three months ended October 31, 2014, which reduced to zero the accounts receivable recorded at the time of the fire for expected proceeds. No gain or loss on involuntary conversion was recorded due to the settlement of the claim.
PROCEEDS FROM FINANCING LIABILITY
During the first quarter of fiscal year 2014, the Company sold a non-core assisted living property in exchange for $7.9 million in cash and a $29.0 million contract for deed. The buyer leased the property back to the Company, and also granted an option to the Company to repurchase the property at a specified price at or prior to July 31, 2018. IRET accounted for the transaction as a financing due to the Company's continuing involvement with the property and recorded the $7.9 million in sales proceeds within other liabilities on the Condensed Consolidated Balance Sheets.  The balance of the liability as of October 31, 2014 is $7.9 million.
VARIABLE INTEREST ENTITY
On November 27, 2012 the Company entered into a joint venture operating agreement with a real estate development company to construct an apartment project in Minot, North Dakota as IRET – Minot Apartments, LLC. The Company estimates total costs for the project at $52.2 million, with approximately 69% of the project financed with third-party debt and approximately 7% financed with debt from IRET to the joint venture entity. The first phase of the project, Landing at Southgate, was substantially completed in the second quarter of fiscal year 2014. The second phase of the project, Commons at Southgate, is expected to be completed in the third quarter of fiscal year 2015. See Development, Expansion and Renovation Projects in Note 6 for additional information on Commons at Southgate. As of October 31, 2014 IRET is the approximately 52.9% owner of the joint venture and will have management and leasing responsibilities when the project is completed; the real estate development company owns approximately 47.1% of the joint venture and is responsible for the development and construction of the property. The Company has determined that the joint venture is a variable interest entity ("VIE"), primarily based on the fact that the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support. The Company has also determined that IRET is the primary beneficiary of the VIE due to the fact that IRET is providing more than 50% of the equity contributions, the subordinated debt and a guarantee on the third party debt and has the power to direct the most significant activities that impact the entity's economic performance.

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 common shares outstanding during the period. The Company has no outstanding options, warrants, convertible stock or other contractual obligations requiring issuance of additional shares that would result in dilution of earnings. Units can be exchanged for shares 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, 2014 and 2013:

 
(in thousands, except per share data)
 
Three Months Ended
October 31
Six Months Ended
October 31
 
2014
2013
2014
2013
NUMERATOR
               
Income from continuing operations – Investors Real Estate Trust
$
5,114
$
4,334
$
4,963
$
6,918
Income from discontinued operations – Investors Real Estate Trust
 
0
 
4,453
 
0
 
4,947
Net income attributable to Investors Real Estate Trust
 
5,114
 
8,787
 
4,963
 
11,865
Dividends to preferred shareholders
 
(2,878)
 
(2,878)
 
(5,757)
 
(5,757)
Numerator for basic earnings per share – net income available to common shareholders
 
2,236
 
5,909
 
(794)
 
6,108
Noncontrolling interests – Operating Partnership
 
363
 
1,226
 
(39)
 
1,276
Numerator for diluted earnings per share
$
2,599
$
7,135
$
(833)
$
7,384
DENOMINATOR
               
Denominator for basic earnings per share weighted average shares
 
117,034
 
104,861
 
114,033
 
103,606
Effect of convertible operating partnership units
 
16,261
 
21,852
 
18,565
 
21,834
Denominator for diluted earnings per share
 
133,295
 
126,713
 
132,598
 
125,440
Earnings (loss) per common share from continuing operations – Investors Real Estate Trust – basic and diluted
$
.02
$
.01
$
(.01)
$
.01
Earnings per common share from discontinued operations – Investors Real Estate Trust – basic and diluted
 
.00
 
.05
 
.00
 
.05
NET INCOME (LOSS) PER COMMON SHARE – BASIC & DILUTED
$
.02
$
.06
$
(.01)
$
.06

NOTE 4 • EQUITY
During the first quarter of fiscal year 2014, on June 27, 2013, the Company filed a shelf registration statement with the SEC to enable the Company to offer and sell, from time to time, in one or more offerings, an indeterminate amount of its common and preferred shares of beneficial interest and debt securities. On October, 27, 2014, the Company filed a prospectus supplement under this registration statement, relating to 10 million common shares registered for purchase under the Company's Distribution Reinvestment and Share Purchase Plan. On August 30, 2013, the Company entered into an ATM program with Robert W. Baird & Co. Incorporated as sales agent, pursuant to which the Company may from time to time offer and sell its common shares of beneficial interest having an aggregate gross sales price of up to $75.0 million, under this registration statement. Sales of common shares, if any, under the program will depend upon market conditions and other factors to be determined by the Company. The Company to date has issued no shares under the ATM program.
During the first quarter of fiscal year 2015, the Company issued approximately 204,000 common shares, with a total grant-date value of approximately $1.9 million, under the Company's 2008 Incentive Award Plan, for executive officer and trustee share-based compensation for fiscal year 2014 performance. Of these shares, approximately 105,000 are restricted, and will vest on the one-year anniversary of the grant date (i.e., on April 30, 2015), provided the recipient is still employed with the Company, and subject to the terms and conditions of the Company's long-term incentive plan ("LTIP").   During the first quarter of fiscal year 2014, the Company issued approximately 13,000 common shares, with a total grant-date value of approximately $112,000, under the 2008 Incentive Award Plan, for trustee share-based compensation for fiscal year 2013 performance.
The Company has a Distribution Reinvestment and Share Purchase Plan ("DRIP"). The DRIP provides common shareholders and UPREIT Unitholders of the Company an opportunity to invest their cash distributions in common shares of the Company, and purchase additional shares through voluntary cash contributions, at a discount (currently 3%) from the market price. The maximum
monthly voluntary cash contribution permitted without prior Company approval is currently $10,000. The Company can issue waivers to DRIP participants to provide for investments in excess of the $10,000 maximum monthly investment. There were no waivers issued during the three months ended October 31, 2014 and 2013. During the six months ended October 31, 2014, the Company issued approximately 926,000 shares at an average price of $8.64 per share pursuant to such waivers, for total net proceeds to the Company of $8.0 million. During the six months ended October 31, 2013, the Company issued 1.4 million shares at an average price of $8.88 per share pursuant to such waivers, for total net proceeds to the Company of $12.0 million.
During the three months ended October 31, 2014 and 2013, 1.8 million and 1.3 million common shares with a total value included in equity of $13.9 million and $10.3 million, and an average price per share after applicable discounts of $7.76 and $8.01, respectively, were issued under the DRIP plan. During the six months ended October 31, 2014 and 2013, 4.2 million and 3.9 million common shares with a total value included in equity of $34.8 million and $33.0 million, and an average price per share after applicable discounts of $8.27 and $8.48, respectively, were issued under the DRIP plan.
During the three months ended October 31, 2014 and 2013, respectively, 3.3 million Units and approximately 34,000 Units were converted to common shares, with a total value of $19.4 million and approximately $239,000 included in equity. During the six months ended October 31, 2014 and 2013, respectively, 6.4 million Units and approximately 160,000 Units were converted to common shares, with a total value of $37.7 million and approximately $946,000 included in equity.
NOTE 5 • SEGMENT REPORTING
IRET reports its results in five reportable segments: multi-family residential, office, healthcare (including senior housing), industrial and retail properties. The Company's reportable segments are aggregations of similar properties.
IRET measures the performance of its segments based on net operating income ("NOI"), which the Company defines as total real estate revenues and gain on involuntary conversion less real estate expenses (which consist of utilities, maintenance, real estate taxes, insurance, property management expenses and other property expenses). IRET believes 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 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 net operating income for these reportable segments are summarized as follows for the three and six month periods ended October 31, 2014 and 2013, 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.
Three Months Ended October 31, 2014
(in thousands)
Multi-Family
Residential

Office

Healthcare

Industrial

Retail
Total
                         
Real estate revenue
$
29,594
$
18,984
$
16,436
$
1,593
$
3,435
$
70,042
Real estate expenses
 
12,164
 
9,496
 
4,173
 
272
 
1,132
 
27,237
Net operating income
$
17,430
$
9,488
$
12,263
$
1,321
$
2,303
 
42,805
TRS senior housing revenue
                     
843
TRS senior housing expenses
                 
(725)
Depreciation/amortization
                 
(17,668)
General and administrative
                 
(3,468)
Impairment of real estate investments
                 
(3,245)
Interest expense
                     
(14,599)
Interest and other income
                     
696
Income before gain on sale of real estate and other investments
 
4,639
Gain on sale of real estate and other investments
 
1,231
Net income
$
5,870



Three Months Ended October 31, 2013
(in thousands)
Multi-Family
Residential

Office

Healthcare

Industrial

Retail
Total
                         
Real estate revenue
$
25,438
$
19,367
$
16,025
$
1,571
$
3,371
$
65,772
Real estate expenses
 
11,162
 
9,525
 
4,128
 
501
 
1,015
 
26,331
Net operating income
$
14,276
$
9,842
$
11,897
$
1,070
$
2,356
 
39,441
Depreciation/amortization
                     
(17,167)
General and administrative
                 
(3,205)
Interest expense
                     
(14,799)
Interest and other income
                     
652
Income from continuing operations
               
4,922
Income from discontinued operations
                 
5,375
Net income
$
10,297


Six Months Ended October 31, 2014
(in thousands)
Multi-Family
Residential

Office

Healthcare

Industrial

Retail
Total
                         
Real estate revenue
$
57,321
$
37,831
$
32,734
$
3,163
$
6,830
$
137,879
Real estate expenses
 
24,382
 
18,824
 
8,590
 
721
 
2,238
 
54,755
Net operating income
$
32,939
$
19,007
$
24,144
$
2,442
$
4,592
 
83,124
TRS senior housing revenue
                     
1,636
TRS senior housing expenses
                 
(1,418)
Depreciation/amortization
                 
(34,724)
General and administrative
                 
(7,744)
Impairment of real estate investments
                 
(5,565)
Interest expense
                     
(29,263)
Interest and other income
                     
1,387
Income before loss on sale of real estate and other investments
 
7,433
Loss on sale of real estate and other investments
 
(1,762)
Net income
$
5,671


Six Months Ended October 31, 2013
(in thousands)
Multi-Family
Residential

Office

Healthcare

Industrial

Retail
Total
                         
Real estate revenue
$
49,811
$
38,681
$
32,098
$
3,609
$
6,671
$
130,870
Real estate expenses
 
22,007
 
19,279
 
8,412
 
956
 
2,317
 
52,971
Gain on involuntary conversion
 
966
 
0
 
0
 
0
 
0
 
966
Net operating income
$
28,770
$
19,402
$
23,686
$
2,653
$
4,354
 
78,865
Depreciation/amortization
                     
(36,167)
General and administrative
                 
(6,637)
Interest expense
                     
(29,395)
Interest and other income
                     
862
Income from continuing operations
               
7,528
Income from discontinued operations
                 
5,985
Net income
$
13,513


Segment Assets and Accumulated Depreciation
Segment assets are summarized as follows as of October 31, 2014, and April 30, 2014, along with reconciliations to the condensed consolidated financial statements:
 
(in thousands)
As of October 31, 2014
Multi-Family
Residential

Office

Healthcare

Industrial

Retail
Total
                         
Segment Assets
                       
Property owned
$
847,155
$
480,185
$
525,027
$
50,719
$
110,684
$
2,013,770
Less accumulated depreciation
 
(166,181)
 
(109,813)
 
(112,289)
 
(10,483)
 
(27,779)
 
(426,545)
Net property owned
$
680,974
$
370,372
$
412,738
$
40,236
$
82,905
 
1,587,225
Real estate held for sale
                     
41,183
Cash and cash equivalents
                     
52,999
Other investments
                     
329
Receivables and other assets
                     
108,397
Development in progress
                     
146,390
Unimproved land
                     
24,947
Total assets
                   
$
1,961,470

 
(in thousands)
As of April 30, 2014
Multi-Family
Residential

Office

Healthcare

Industrial

Retail
Total
                         
Segment assets
                       
Property owned
$
753,731
$
544,628
$
525,028
$
55,375
$
117,269
$
1,996,031
Less accumulated depreciation
 
(158,100)
 
(121,892)
 
(105,843)
 
(10,198)
 
(28,255)
 
(424,288)
Net property owned
$
595,631
$
422,736
$
419,185
$
45,177
$
89,014
 
1,571,743
Real estate held for sale
                     
2,951
Cash and cash equivalents
                     
47,267
Other investments
                     
329
Receivables and other assets
                     
119,458
Development in progress
                     
104,609
Unimproved land
                     
22,864
Total assets
$
1,869,221

NOTE 6 • COMMITMENTS AND CONTINGENCIES
Litigation.  The Company is not a party to any legal proceedings which are expected to have a material effect on the Company's liquidity, financial position, cash flows or results of operations. The Company is subject to a variety of legal actions for personal injury or property damage arising in the ordinary course of its business, most of which are covered by liability insurance. Various claims of resident discrimination are also periodically brought, most of which also are covered by insurance. While the resolution of these matters cannot be predicted with certainty, management believes that the final outcome of such legal proceedings and claims will not have a material effect on the Company's liquidity, financial position, cash flows or results of operations.
Insurance.  IRET carries insurance coverage on its properties in amounts and types that the Company believes are customarily obtained by owners of similar properties and are sufficient to achieve IRET's risk management objectives.
Purchase OptionsThe Company has granted options to purchase certain IRET properties to tenants in these properties, under lease agreements. In general, the options grant the tenant the right to purchase the property at the greater of such property's appraised value or an annual compounded increase of a specified percentage of the initial cost of the property to IRET. As of October 31, 2014, the total property cost of the 15 properties subject to purchase options was $120.5 million, and the total gross rental revenue from these properties was $5.2 million for the six months ended October 31, 2014.  The tenant in the Company's Nebraska Orthopaedic Hospital property has exercised its option to purchase the property. The Company and its tenant are currently engaged in an arbitration proceeding pursuant to the lease agreement to determine the purchase price. The Company currently can give no assurance that the sale of the property pursuant to the purchase option will be completed.
Environmental Matters.  Under various federal, state and local laws, ordinances and regulations, a current or previous owner or operator of real estate may be liable for the costs of removal of, or remediation of, certain hazardous or toxic substances in, on, around or under the property. While IRET currently has no knowledge of any material violation of environmental laws, ordinances or regulations at any of its properties, there can be no assurance that areas of contamination will not be identified at any of the Company's properties, or that changes in environmental laws, regulations or cleanup requirements would not result in material costs to the Company.
Restrictions on Taxable DispositionsApproximately 97 of IRET's properties, consisting of 4.2 million square feet of the Company's combined commercial segments' properties and 4,963 apartment units, 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 $728.4 million at October 31, 2014. The restrictions on taxable dispositions are effective for varying periods. The terms of these agreements generally prevent the Company from selling the properties in taxable transactions. The Company does not believe that the agreements materially affect the conduct of the Company's business or decisions whether to dispose of restricted properties during the restriction period because the Company generally holds these and the Company's other properties for investment purposes, rather than for sale. Historically, however, where IRET has deemed it to be in the shareholders' best interests to dispose of restricted properties, it has done so through transactions structured as tax-deferred transactions under Section 1031 of the Internal Revenue Code.
Redemption Value of UPREIT Units.  The limited partnership units ("UPREIT Units") of the Company's operating partnership, IRET Properties, are redeemable at the option of the holder for cash, or, at our option, for the Company's common shares of beneficial interest on a one-for-one basis, after a minimum one-year holding period.  All UPREIT Units receive the same cash distributions as those paid on common shares.  UPREIT Units are redeemable for an amount of cash per Unit equal to the average of the daily market price of an IRET common share for the ten consecutive trading days immediately preceding the date of valuation of the Unit.  As of October 31, 2014 and 2013, the aggregate redemption value of the then-outstanding UPREIT Units of the operating partnership owned by limited partners was approximately $119.8 million and $194.1 million, respectively.
Joint Venture Buy/Sell Options.  Certain of IRET's 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 the Company buy its partners' interests. The Company currently has one joint venture, the Company's Southgate apartment project in Minot, North Dakota, in which the Company's joint venture partner can, for a four-year period beginning twelve months after the last certificate of occupancy is received for the project, compel the Company 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 condensed consolidated balance sheets.
Tenant Improvements. In entering into leases with tenants, IRET may commit itself to fund improvements or build-outs of the rented space to suit tenant requirements. These tenant improvements are typically funded at the beginning of the lease term, and IRET is accordingly exposed to some risk of loss if a tenant defaults prior to the expiration of the lease term, and the rental income that was expected to cover the cost of the tenant improvements is not received. As of October 31, 2014, the Company is committed to fund $9.1 million in tenant improvements, within approximately the next 12 months.

Development, Expansion and Renovation ProjectsAs of October 31, 2014, the Company had several development, expansion and renovation projects underway or recently completed, the costs for which have been capitalized, as follows:
       
(in thousands)
 
(in fiscal years)
Project Name and Location
Planned Segment
 
Rentable
Square Feet
or Number of Units
Anticipated
Total Cost
Costs as of
October 31, 2014(1)
 
Anticipated Construction Completion
Commons at Southgate - Minot, ND(2)
Multi-Family Residential
 
233 units
$
37,201
$
34,787
 
3Q 2015
Minot Wells Fargo Bank - Minot, ND
Retail
 
4,998 sq ft
 
3,288
 
2,781
 
3Q 2015
Cypress Court II – St. Cloud, MN(3)
Multi-Family Residential
 
66 units
 
7,028
 
5,777
 
3Q 2015
Arcata - Golden Valley, MN
Multi-Family Residential
 
165 units
 
33,448
 
24,689
 
3Q 2015
Red 20 - Minneapolis, MN(4)
Multi-Family Residential and Commercial
 
130 units and 10,625 sq ft
 
29,462
 
27,424
 
3Q 2015
Minot Office Center - Minot, ND
Retail
 
7,963 sq ft
 
2,923
 
1,300
 
1Q 2016
Roseville 3075 Long Lake Rd - Roseville, MN
Industrial
 
202,807 sq ft
 
13,915
 
7,347
 
1Q 2016
Renaissance Heights I - Williston, ND(5)
Multi-Family Residential
 
288 units
 
62,362
 
50,607
 
1Q 2016
Chateau II - Minot, ND
Multi-Family Residential
 
72 units
 
14,711
 
8,500
 
1Q 2016
71 France Phase I - Edina, MN(6)
Multi-Family Residential
 
109 units
 
27,458
 
9,649
 
1Q 2016
Cardinal Point - Grand Forks, ND
Multi-Family Residential
 
251 units
 
40,042
 
13,565
 
2Q 2016
Deer Ridge – Jamestown, ND
Multi-Family Residential
 
163 units
 
24,519
 
5,646
 
2Q 2016
Edina 6565 France SMC III - Edina, MN
Medical
 
57,479 sq ft
 
34,665
 
10,840
 
2Q 2016
PrairieCare Medical - Brooklyn Park, MN
Medical
 
72,588 sq ft
 
24,251
 
7,458
 
2Q 2016
Other
n/a
 
n/a
 
n/a
 
1,390
 
n/a
       
$
355,273
$
211,760
   

(1)
Includes costs related to development projects that are placed in service in phases (Commons at Southgate - $19.3 million, Red 20 - $11.6 million, Renaissance Heights I - $34.5 million).
(2)
The Company is currently an approximately 52.9% partner in the joint venture entity constructing this project; the anticipated total cost amount given is the total cost to the joint venture entity.
(3)
The Company is an approximately 86.1% partner in the joint venture entity constructing this project; the anticipated total cost amount given is the total cost to the joint venture entity.
(4)
The Company is an approximately 58.6% partner in the joint venture entity constructing this project; the anticipated total cost amount given is the total cost to the joint venture entity.
(5)
The Company is an approximately 70% partner in the joint venture entity constructing this project; the anticipated total cost amount given is the total cost to the joint venture entity.
(6)
The project will be constructed in three phases, and at the conclusion of construction of the third phase, the Company will have an approximately 52.6% interest in the joint venture entity constructing the project. The anticipated total cost amount given in the table above is the total cost to the joint venture entity of the project's first phase. The expected total project cost for all three phases is approximately $69.9 million for a total of approximately 241 residential units and approximately 21,772 square feet of retail space.

These development projects are subject to various contingencies, and no assurances can be given that they will be completed within the time frames or on the terms currently expected.
Construction interest capitalized for the three month periods ended October 31, 2014 and 2013, respectively, was $1.2 million and approximately $781,000 for development projects completed and in progress. Construction interest capitalized for the six month periods ended October 31, 2014 and 2013, respectively, was $2.2 million and $1.4 million for development projects completed and in progress.
Pending Acquisitions. The Company currently has signed purchase agreements for the acquisition of the following properties. These pending acquisitions are subject to various closing conditions and contingencies, and no assurances can be given that the transactions will be completed on the terms currently proposed, or at all:
·
a 119-unit multi-family residential property in Bismarck, North Dakota, for a purchase price of $15.0 million, of which approximately $14.3 million is to be paid in cash with the remainder in limited partnership units of the Operating Partnership valued at approximately $700,000;
·
a 74-unit multi-family residential property in Grand Forks, North Dakota, for a purchase price of $9.3 million, of which approximately $8.9 million is to be paid in cash with the remainder in limited partnership units of the Operating Partnership valued at approximately $400,000;
·
an approximately 45,339-square foot office property in Minot, North Dakota, for a purchase price of $2.8 million, to be paid in cash; and
·
an approximately 1,680-square foot office property in Minot, North Dakota, for a purchase price of $1.3 million, to be paid in cash.
Pending Dispositions. The Company currently has signed sales agreements for the disposition of the following properties. These pending dispositions are subject to various closing conditions and contingencies, and no assurances can be given that the transactions will be completed on the terms currently proposed, or at all:
·
an office property in Minneapolis, Minnesota, for a sales price of $7.1 million; and
·
a retail property and adjacent vacant land in Weston, Wisconsin, for a sales price of $5.3 million.
NOTE 7 • DISCONTINUED OPERATIONS
Prior to February 1, 2014, the Company reported, in discontinued operations, the results of operations and the related gains or losses of properties that had either been disposed of or classified as held for sale and otherwise met the classification of a discontinued operation. As a result of the adoption of ASU No. 2014-08, results of operations and gains or losses on sale for properties that are disposed or classified as held for sale in the ordinary course of business on or subsequent to February 1, 2014 would generally be included in continuing operations on the Company's consolidated statements of operations, to the extent such disposals did not meet the criteria for classification as a discontinued operation described above. See Note 2 for additional information.
During the six months ended October 31, 2014, the Company applied ASU No. 2014-08 to the dispositions of seven properties and to the classification of ten properties as held for sale and did not record any discontinued operations.  During the first three quarters of fiscal year 2014, the Company disposed of two multi-family residential properties, three office properties, twelve industrial properties and three retail properties that were classified as discontinued operations. During the quarter ended April 30, 2014, the Company applied ASU No. 2014-08 to one property that was classified as held for sale and did not record any discontinued operations. 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 three and six months ended October 31, 2013:
 
(in thousands)
 
Three Months Ended
October 31
Six Months Ended
October 31
   
2013
 
2013
REVENUE
       
Real estate rentals
$
1,214
$
2,846
Tenant reimbursement
 
519
 
1,238
TOTAL REVENUE
 
1,733
 
4,084
EXPENSES
       
Depreciation/amortization related to real estate investments
 
308
 
845
Utilities
 
10
 
138
Maintenance
 
79
 
264
Real estate taxes
 
343
 
871
Insurance
 
38
 
87
Property management expenses
 
77
 
195
Amortization related to non-real estate investments
 
39
 
88
Impairment of real estate investments
 
57
 
1,860
TOTAL EXPENSES
 
951
 
4,348
Operating income (loss)
 
782
 
(264)
Interest expense
 
(105)
 
(392)
Income (loss) from discontinued operations before gain on sale
 
677
 
(656)
Gain on sale of discontinued operations
 
4,698
 
6,641
INCOME FROM DISCONTINUED OPERATIONS
$
5,375
$
5,985


NOTE 8 • ACQUISITIONS, DEVELOPMENTS PLACED IN SERVICE AND DISPOSITIONS
PROPERTY ACQUISITIONS
The Company added approximately $36.7 million of real estate properties to its portfolio through property acquisitions during the six months ended October 31, 2014, compared to $34.8 million in the six months ended October 31, 2013. The Company expensed approximately $104,000 and $161,000 of transaction costs related to the acquisitions in the six months ended October 31, 2014 and 2013, respectively. The Company's acquisitions during the six months ended October 31, 2014 and 2013 are detailed below.
Six Months Ended October 31, 2014
   
(in thousands)
   
Total
Acquisition
Cost
Form of Consideration
Investment Allocation
Acquisitions
Date Acquired
Cash
Units(1)
Other(2)
Land
Building
Intangible
Assets
                               
Multi-Family Residential
                             
152 unit - Homestead Garden - Rapid City, SD(3)
2014-06-02
$
15,000
$
5,092
$
0
$
9,908
$
655
$
14,139
$
206
52 unit - Silver Springs - Rapid City, SD
2014-06-02
 
3,280
 
1,019
 
0
 
2,261
 
215
 
3,006
 
59
68 unit - Northridge - Bismarck, ND
2014-09-12
 
8,500
 
8,400
 
100
 
0
 
884
 
7,516
 
100
     
26,780
 
14,511
 
100
 
12,169
 
1,754
 
24,661
 
365
                               
Unimproved Land
                             
Creekside Crossing - Bismarck, ND
2014-05-22
 
4,269
 
4,269
 
0
 
0
 
4,269
 
0
 
0
PrairieCare Medical - Brooklyn Park, MN
2014-06-05
 
2,616
 
2,616
 
0
 
0
 
2,616
 
0
 
0
71 France Phase I - Edina, MN(4)
2014-06-12
 
1,413
 
0
 
0
 
1,413
 
1,413
 
0
 
0
Monticello 7th Addition - Monticello, MN
2014-10-09
 
1,660
 
1,660
 
0
 
0
 
1,660
 
0
 
0
     
9,958
 
8,545
 
0
 
1,413
 
9,958
 
0
 
0
                               
Total Property Acquisitions
 
$
36,738
$
23,056
$
100
$
13,582
$
11,712
$
24,661
$
365
(1)
Value of limited partnership units of the Operating Partnership at the acquisition date.
(2)
Consists of assumed debt (Homestead Garden I - $9.9 million, Silver Springs - $2.3 million) and value of land contributed by the joint venture partner (71 France - $1.4 million).
(3)
At acquisition the Company adjusted the assumed debt to fair value and recognized approximately $852,000 of goodwill.
(4)
Land is owned by a joint venture in which the Company will have an approximately 52.6% interest after the development project is completed. The joint venture is consolidated in IRET's financial statements.


Six Months Ended October 31, 2013

   
(in thousands)
   
Total
Acquisition
Cost
Form of Consideration
Investment Allocation
Acquisitions
Date Acquired
Cash
Units(1)
Other(2)
Land
Building
Intangible
Assets
                               
Multi-Family Residential
                             
71 unit - Alps Park - Rapid City, SD
2013-05-01
$
6,200
$
2,920
$
3,280
$
0
$
287
$
5,551
$
362
96 unit - Southpoint - Grand Forks, ND
2013-09-05
 
10,600
 
10,400
 
200
 
0
 
576
 
9,893
 
131
24 unit - Pinecone Villas - Sartell, MN
2013-10-31
 
2,800
 
2,800
 
0
 
0
 
629
 
2,139
 
32
     
19,600
 
16,120
 
3,480
 
0
 
1,492
 
17,583
 
525
                               
Healthcare
                             
98,174 sq ft Legends at Heritage Place - Sartell, MN
2013-10-31
 
11,370
 
11,370
 
0
 
0
 
1,112
 
9,890
 
368
                               
Unimproved Land
                             
Chateau II - Minot, ND
2013-05-21
 
179
 
179
 
0
 
0
 
179
 
0
 
0
Jamestown Unimproved - Jamestown, ND
2013-08-09
 
700
 
700
 
0
 
0
 
700
 
0
 
0
Red 20 - Minneapolis, MN(3)
2013-08-20
 
1,900
 
0
 
0
 
1,900
 
1,900
 
0
 
0
Legends at Heritage Place - Sartell, MN
2013-10-31
 
1,030
 
1,030
 
0
 
0
 
1,030
 
0
 
0
     
3,809
 
1,909
 
0
 
1,900
 
3,809
 
0
 
0
                               
Total Property Acquisitions
 
$
34,779
$
29,399
$
3,480
$
1,900
$
6,413
$
27,473
$
893
(1)
Value of limited partnership units of the Operating Partnership at the acquisition date.
(2)
Value of land contributed by the joint venture partner.
(3)
Land is owned by a joint venture in which the Company has an approximately 58.6% interest. The joint venture is consolidated in IRET's financial statements.
Acquisitions in the six months ended October 31, 2014 and 2013 are immaterial to our real estate portfolio both individually and in the aggregate, and consequently no proforma information is presented. The results of operations from acquired properties are included in the Condensed Consolidated Statements of Operations as of their acquisition date. The revenue and net income of our acquisitions in the six months ended October 31, 2014 and 2013, respectively, (excluding development projects placed in service) are detailed below.
 
(in thousands)
 
Six Months Ended
October 31
 
2014
2013
Total revenue
$
1,003
$
573
Net (loss) income
$
38
$
(233)


DEVELOPMENT PROJECTS PLACED IN SERVICE
IRET Properties placed $10.3 million and $15.1 million of development projects in service during the six months ended October 31, 2014 and 2013, respectively. The development projects placed in service during the six months ended October 31, 2014 and 2013 are detailed below.
Six Months Ended October 31, 2014
   
(in thousands)
Development Projects Placed in Service (1)
Date Placed in
Service
Land
Building
Development
Cost
               
Multi-Family Residential
             
44 unit – Dakota Commons - Williston, ND(2)
2014-07-15
 
823
 
9,452
 
10,275
       
 
 
 
 
Total Development Projects Placed in Service
 
$
823
$
9,452
$
10,275
(1) Development projects that are placed in service in phases are excluded from this table until the entire project has been placed in service. See Note 6 for additional information on the Renaissance Heights I project, which was partially placed in service during the fiscal year 2014 and the six months ended October 31, 2014 and the Commons at Southgate and Red 20 projects, which were partially placed in service during the three months ended October 31, 2014.
(2)
Development property placed in service July 15, 2014. Costs paid in fiscal year 2014 totaled $8.1 million, including the land acquired in fiscal year 2013. Additional costs paid in fiscal year 2015 totaled $2.2 million, for a total project cost at October 31, 2014 of $10.3 million.

Six Months Ended October 31, 2013
   
(in thousands)
Development Projects Placed in Service (1)
Date Placed in
Service
Land
Building
Development
Cost
               
Multi-Family Residential
             
108 unit - Landing at Southgate - Minot, ND(2)
2013-09-04
 
2,262
 
12,864
 
15,126
       
 
 
 
 
Total Development Projects Placed in Service
 
$
2,262
$
12,864
$
15,126
(1)
Development projects that are placed in service in phases are excluded from this table until the entire project has been placed in service. See Note 6 for additional information on the River Ridge and Cypress Court projects, which were partially placed in service during the three months ended October 31, 2013.
(2) Development property placed in service September 4, 2013. Costs paid in fiscal year 2013 totaled $6.3 million. Costs paid in fiscal year 2014 totaled $8.8 million for a total project cost at October 31, 2013 of $15.1 million. The project is owned by a joint venture entity in which the Company has an approximately 52.9% interest.


PROPERTY DISPOSITIONS
During the second quarter of fiscal year 2015, the Company sold one multi-family residential property, one office property and one retail property, along with the adjacent unimproved land for a total sales price of $10.9 million. During the first quarter of fiscal year 2015, the Company sold one office property and one industrial property for a total sales price of $6.7 million. The Company also demolished a building at a retail property in Weston, Wisconsin.
During the second quarter of fiscal year 2014, the Company sold three commercial office properties and five commercial industrial properties for a total sales price of $47.4 million. During the first quarter of fiscal year 2014, the Company sold four industrial properties and one retail property for a total sales price of $21.8 million. The following table details the Company's dispositions during the six months ended October 31, 2014 and 2013:
Six Months Ended October 31, 2014
   
(in thousands)
Dispositions
Date
Disposed
Sales Price
Book Value
and Sales Cost
Gain/(Loss)
               
Multi-Family Residential
             
83 unit - Lancaster - St. Cloud, MN
2014-09-22
 
4,451
 
3,033
 
1,418
               
Office
             
73,338 sq ft Dewey Hill - Edina, MN
2014-05-19
 
3,100
 
3,124
 
(24)
74,568 sq ft Wirth Corporate Center - Golden Valley, MN
2014-08-29
 
4,525
 
4,695
 
(170)
     
7,625
 
7,819
 
(194)
               
Industrial
             
198,600 sq ft Eagan 2785 & 2795 - Eagan, MN
2014-07-15
 
3,600
 
5,393
 
(1,793)
               
Retail
             
25,644 sq ft Weston Retail - Weston, WI
2014-07-28
 
n/a
 
1,176
 
(1,176)
52,000 sq ft Kalispell Retail - Kalispell, MT
2014-10-15
 
1,230
 
1,229
 
1
     
1,230
 
2,405
 
(1,175)
               
Unimproved Land
             
Kalispell Unimproved - Kalispell, MT
2014-10-15
 
670
 
670
 
0
               
Total Property Dispositions
 
$
17,576
$
19,320
$
(1,744)


Six Months Ended October 31, 2013
   
(in thousands)
Dispositions
Date
Disposed
Sales Price
Book Value
and Sales Cost
Gain/(Loss)
               
Office
             
121,669 sq ft Bloomington Business Plaza - Bloomington, MN
2013-09-12
 
4,500
 
7,339
 
(2,839)
118,125 sq ft Nicollet VII - Burnsville, MN
2013-09-12
 
7,290
 
6,001
 
1,289
42,929 sq ft Pillsbury Business Center - Bloomington, MN
2013-09-12
 
1,160
 
1,164
 
(4)
     
12,950
 
14,504
 
(1,554)
               
Industrial
             
41,880 sq ft Bodycote Industrial Building- Eden Prairie, MN
2013-05-13
 
3,150
 
1,375
 
1,775
42,244 sq ft Fargo 1320 45th Street N - Fargo, ND
2013-05-13
 
4,700
 
4,100
 
600
49,620 sq ft Metal Improvement Company - New Brighton, MN
2013-05-13
 
2,350
 
1,949
 
401
172,057 sq ft Roseville 2929 Long Lake Road - Roseville, MN
2013-05-13
 
9,275
 
9,998
 
(723)
322,751 sq ft Brooklyn Park 7401 Boone Ave - Brooklyn Park, MN
2013-09-12
 
12,800
 
12,181
 
619
50,400 sq ft Cedar Lake Business Center - St. Louis Park, MN
2013-09-12
 
2,550
 
2,607
 
(57)
35,000 sq ft API Building - Duluth, MN
2013-09-24
 
2,553
 
1,488
 
1,065
59,292 sq ft Lighthouse - Duluth, MN
2013-10-08
 
1,825
 
1,547
 
278
606,006 sq ft Dixon Avenue Industrial Park - Des Moines, IA
2013-10-31
 
14,675
 
10,328
 
4,347
     
53,878
 
45,573
 
8,305
               
Retail
             
23,187 sq ft Eagan Community - Eagan, MN
2013-05-14
 
2,310
 
2,420
 
(110)
               
Total Property Dispositions
 
$
69,138
$
62,497
$
6,641



NOTE 9 • MORTGAGES PAYABLE AND LINE OF CREDIT
Most of the properties owned by the Company serve as collateral for separate mortgage loans on single properties or groups of properties. The majority of these mortgages payable are non-recourse to the Company, other than for standard carve-out obligations such as fraud, waste, failure to insure, environmental conditions and failure to pay real estate taxes. As of October 31, 2014, the management of the Company believes there are no defaults or material compliance issues in regard to any mortgages payable. Interest rates on mortgages payable range from 2.40% to 8.25%, and the mortgages have varying maturity dates from the current fiscal year through July 1, 2036.
Of the mortgages payable, the balances of fixed rate mortgages totaled $949.0 million at October 31, 2014 and $977.2 million at April 30, 2014. The balances of variable rate mortgages totaled $64.2 million and $20.5 million as of October 31, 2014 and April 30, 2014, respectively. The Company does not utilize derivative financial instruments to mitigate its exposure to changes in market interest rates. Most of the fixed rate mortgages have substantial pre-payment penalties. As of October 31, 2014, the weighted average rate of interest on the Company's mortgage debt was 5.26%, compared to 5.37% on April 30, 2014. The aggregate amount of required future principal payments on mortgages payable as of October 31, 2014, is as follows:
Fiscal year ended April 30,
(in thousands)
2015 (remainder)
$
57,898
2016
 
93,591
2017
 
215,344
2018
 
106,121
2019
 
133,961
Thereafter
 
406,246
Total payments
$
1,013,161

In the table above, included in the approximately $215.3 million (as of October 31, 2014) of future principal payments on mortgages payable in fiscal year 2017 is a non-recourse $122.6 million CMBS loan, for which nine of the Company's office properties serve as collateral and under which a special-purpose subsidiary of the Company is the borrower. This loan matures in October 2016. Because the loan amount significantly exceeds the Company's current estimate of the fair value of this nine-property portfolio, the Company contacted the master servicer to initiate discussions on various alternatives with regard to the loan. During the first quarter of fiscal year 2015, the Company was notified that the loan has been transferred to the special servicer. The Company cannot predict the outcome of discussions with the special servicer regarding the loan. Cash flow from the portfolio currently covers debt service on the loan, and to date the borrower is current on all payments under the loan.
In addition to the individual first mortgage loans comprising the Company's $1.0 billion of mortgage indebtedness, the Company also has a revolving, multi-bank line of credit with First International Bank and Trust, Watford City, North Dakota, as lead bank, which had, as of October 31, 2014, lending commitments of $90.0 million. This facility is not included in the Company's mortgage indebtedness total. As of October 31, 2014, the line of credit was secured by mortgages on 15 properties; under the terms of the line of credit, properties may be added and removed from the collateral pool with the agreement of the lenders. Participants in this credit facility as of October 31, 2014 included, in addition to First International Bank, the following financial institutions: The Bank of North Dakota; First Western Bank and Trust; Dacotah Bank; MidCountry Bank; Highland Bank; American State Bank & Trust Company; Town & Country Credit Union and United Community Bank. As of October 31, 2014, the line of credit had an interest rate of 4.75% and a minimum outstanding principal balance requirement of $17.5 million, and as of October 31, 2014 and April 30, 2014, the Company had borrowed $40.5 million and $22.5 million, respectively. The facility includes covenants and restrictions requiring the Company to achieve on a fiscal and calendar quarter basis a debt service coverage ratio on borrowing base collateral of 1.25x in the aggregate and 1.00x on individual assets in the collateral pool, and the Company is also required to maintain minimum depository account(s) totaling $6.0 million with First International, of which $1.5 million is to be held in a non-interest bearing account. As of October 31, 2014, the Company believes it was in compliance with the facility covenants.

NOTE 10 • FAIR VALUE OF FINANCIAL INSTRUMENTS
ASC 820, Fair Value Measurement and Disclosures defines and establishes a framework for measuring fair value.  The objective of fair value is to determine the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels, as follows:
Level 1:  Quoted prices in active markets for identical assets
Level 2:  Significant other observable inputs
Level 3:  Significant unobservable inputs
Fair value estimates may be different than the amounts that may ultimately be realized upon sale or disposition of the assets and liabilities.
Fair Value Measurements on a Recurring Basis
The Company had no assets or liabilities recorded at fair value on a recurring basis at October 31, 2014 and April 30, 2014.
Fair Value Measurements on a Nonrecurring Basis
Non-financial assets and liabilities measured at fair value on a nonrecurring basis at October 31, 2014 consisted of real estate investments that were written-down to estimated fair value during the six months ended October 31, 2014. Non-financial assets measured at fair value on a nonrecurring basis at April 30, 2014 consisted of real estate investments and real estate held for sale that was written-down to estimated fair value during fiscal year 2014. See Note 2 for additional information on impairment losses recognized during fiscal years 2014 and 2013. The aggregate fair value of these assets by their levels in the fair value hierarchy are as follows:
 
(in thousands)
 
October 31, 2014
 
Total
Level 1
Level 2
Level 3
ASSETS:
       
Real estate investments
$
1,213
$
0
$
0
$
1,213
Real estate held for sale
 
41,183
 
0
 
0
 
41,183

 
(in thousands)
 
April 30, 2014
 
Total
Level 1
Level 2
Level 3
ASSETS:
       
Real estate investments
$
89,537
$
0
$
0
$
89,537
Real estate held for sale
 
2,951
 
0
 
0
 
2,951
Financial Assets and Liabilities Not Measured at Fair Value
The following methods and assumptions were used to estimate the fair value of each class of financial assets and liabilities. The fair values of our financial instruments approximate their carrying amount in our consolidated financial statements except for debt.
Cash and Cash Equivalents. The carrying amount approximates fair value because of the short maturity.
Other Investments. The carrying amount, or cost plus accrued interest, of the certificates of deposit approximates fair value.
Other Debt. For variable rate loans that re-price frequently, fair values are based on carrying values. The fair value of fixed rate loans is estimated based on the discounted cash flows of the loans using relevant treasury interest rates plus credit spreads (Level 2).
Lines of Credit.  The carrying amount approximates fair value because the variable rate debt re-prices frequently.
Mortgages Payable. For variable rate loans that re-price frequently, fair values are based on carrying values. The fair value of fixed rate loans is estimated based on the discounted cash flows of the loans using relevant treasury interest rates plus credit spreads (Level 2).

The estimated fair values of the Company's financial instruments as of October 31, 2014 and April 30, 2014, are as follows:
 
(in thousands)
 
October 31, 2014
April 30, 2014
 
Carrying Amount
Fair Value
Carrying Amount
Fair Value
FINANCIAL ASSETS
               
Cash and cash equivalents
$
52,999
$
52,999
$
47,267
$
47,267
Other investments
 
329
 
329
 
329
 
329
FINANCIAL LIABILITIES
               
Other debt
 
107,692
 
107,355
 
63,132
 
63,250
Line of credit
 
40,500
 
40,500
 
22,500
 
22,500
Mortgages payable
 
1,013,161
 
1,184,085
 
997,689
 
1,130,262
NOTE 11 • REDEEMABLE NONCONTROLLING INTERESTS
Redeemable noncontrolling interests on our Consolidated Balance Sheets represent the noncontrolling interest in a joint venture of the Company in which the Company's unaffiliated partner, at its election, could require the Company 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 of beneficial interest on our Consolidated Balance Sheets. During fiscal year 2014 the Company identified an error pertaining to the reporting for a noncontrolling interest in a consolidated real estate joint venture formed in the fourth quarter of fiscal year 2013 for which the holder of such interest has the right to require the Company to acquire the interest at fair value twelve months after the final certificate of occupancy is obtained for the joint venture's development project. This error resulted in an overstatement of equity and offsetting understatement of the line entitled "redeemable noncontrolling interests – consolidated real estate entities" in the mezzanine section of the Company's consolidated balance sheet of $6.0 million as of October 31, 2013. The Company revised its previously issued statement of equity to correct the effect of this error.  See Note 2 for additional information.
As of October 31, 2014 and 2013, the estimated redemption value of the redeemable noncontrolling interests was $6.4 million and $6.0 million, respectively. Below is a table reflecting the activity of the redeemable noncontrolling interests.
 
(in thousands)
Balance at April 30, 2014
$
6,203
Net income
 
170
Balance at October 31, 2014
$
6,373

 
(in thousands)
Balance at April 30, 2013
$
5,937
Net income
 
107
Balance at October 31, 2013
$
6,044
NOTE 12 • SUBSEQUENT EVENTS
Common and Preferred Share Distributions. On December 4, 2014, the Company's Board of Trustees declared the following distributions:
Class of shares/units
Quarterly Amount
per Share or Unit
 
Record Date
 
Payment Date
Common shares and limited partnership units
$0.1300
 
January 2, 2015
 
January 16, 2015
Preferred shares:
         
Series A
$0.5156
 
December 15, 2014
 
December 31, 2014
Series B
$0.4968
 
December 15, 2014
 
December 31, 2014
Completed Dispositions. On November 18, 2014, the Company sold the Fargo Express Community, a retail property in Fargo, North Dakota, for a sale price of $2.8 million. On December 1, 2014, the Company sold Northgate I, an office property in Maple Grove, Minnesota, for a sale price of $7.2 million.

ITEM 2. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements included in this report, as well as the Company's audited financial statements for the fiscal year ended April 30, 2014, which are included in the Company's Form 10-K filed with the SEC on June 30, 2014.
Forward Looking Statements. Certain matters included in this discussion are forward looking statements within the meaning of the federal securities laws. Although we believe that the expectations reflected in the following statements are based on reasonable assumptions, we can give no assurance that the expectations expressed will actually be achieved. Many factors may cause actual results to differ materially from our current expectations, including general economic conditions, local real estate conditions, the general level of interest rates and the availability of financing and various other economic risks inherent in the business of owning and operating investment real estate.
Overview
IRET is a self-advised equity REIT engaged in owning and operating income-producing real estate properties. Our investments include multi-family residential properties and commercial properties located primarily in the upper Midwest states of Minnesota and North Dakota. Our properties are diversified by type and location. As of October 31, 2014, our real estate portfolio consisted of 96 multi-family residential properties containing 11,292 apartment units and having a total real estate investment amount net of accumulated depreciation of $681.0 million, and 161 commercial properties containing approximately 9.9 million square feet of leasable space and having a total real estate investment amount net of accumulated depreciation of $906.2 million.
Our primary source of income and cash is rents associated with multi-family residential and commercial leases. Our business objective is to increase shareholder value by employing a disciplined investment strategy. This strategy is focused on growing assets in desired geographical markets, achieving diversification by property type and location, and adhering to targeted returns in acquiring properties. We have paid quarterly distributions continuously since our first distribution in 1971.
Critical Accounting Policies
In preparing the condensed consolidated financial statements management has made estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. A summary of the Company's critical accounting policies is included in the Company's Form 10-K for the fiscal year ended April 30, 2014, filed with the SEC on June 30, 2014, in Management's Discussion and Analysis of Financial Condition and Results of Operations. There have been no significant changes to those policies during the three months ended October 31, 2014.
Significant Events and Transactions during the Three Months Ended October 31, 2014 and 2013
Summarized below are the Company's significant transactions and events during the second quarters of fiscal years 2015 and 2014:
Three Months Ended October 31, 2014
·
An increase in the commitment amount under the Company's secured line of credit with First International Bank and Trust as lead bank and lender, from $75.0 million to $90.0 million.
·
The acquisition of a 68-unit multi-family residential property in Bismarck, North Dakota for a purchase price of $8.5 million, and a parcel of vacant land in Monticello, Minnesota, for a purchase price of $1.6 million.
·
The disposition of an office property in Golden Valley, Minnesota; a retail property in Kalispell, Montana; and an apartment property in St. Cloud, Minnesota, for sales prices totaling $10.9 million.
Three Months Ended October 31, 2013
·
The acquisition of a multi-family residential property in Sartell, Minnesota, for approximately $2.8 million, adding 24 units to the Company's multi-family residential portfolio.
·
The acquisition of a senior housing property with and associated parcel of unimproved land in Sartell, Minnesota, for approximately $12.4 million.
·
The acquisition of a multi-family residential property in Grand Forks, North Dakota, for approximately $10.6 million, adding 96 units to the Company's multi-family residential portfolio.
·
The disposition of three office properties and five industrial properties for a total sales price of approximately $47.4 million.
·
The commencement of construction of the Company's 165-unit Arcata Apartments project in Golden Valley, Minnesota.
·
The commencement of construction of the RED 20 project in northeast Minneapolis, Minnesota, with 130 apartment units and approximately 10,000 square feet of commercial space, of which project the Company owns approximately 58.6%, with the remainder owned by the Company's joint venture partner.
·
The commencement of construction of the Company's 251-unit Cardinal Point Apartments project in Grand Forks, North Dakota.
·
The execution of a Sales Agreement with Robert W. Baird & Co. Incorporated, under which the Company may from time to time offer and sell its common shares of beneficial interest having an aggregate gross sales price of up to $75.0 million, pursuant to an at-the-market (ATM) program.
Market Conditions and Outlook
During the second quarter of fiscal year 2015, continued high occupancy levels in the Company's multi-family residential portfolio allowed the Company to implement selected rent increases, and the Company expects to see continued favorable results in this segment in the remainder of fiscal year 2015. Demand was strong for the approximately 227 apartment units the Company placed in service during the quarter, at three joint venture multi-family residential projects: the Commons at Southgate property in Minot, North Dakota, Red 20 in Minneapolis, Minnesota, and Renaissance Heights in Williston, North Dakota. However, the Company's ability to maintain occupancy levels and selectively raise rents remains dependent on continued healthy employment and wage growth. The Company also continues to observe considerable multi-family development activity in the Company's markets, and as this new construction is completed and leased, the Company will experience increased competition for residents.
The Company's office segment, mostly concentrated in Minnesota, continued to be affected by a number of adverse macro conditions. Demand for office space continues to be limited, with space absorption in the Minneapolis market in particular concentrated in prime locations, and suburban office properties continuing to lag in terms of occupancy. Businesses appear to be maintaining their goal of increasing the density of their work spaces by placing more employees in less total square footage, and downsizing upon lease renewals. The Company expects this erosion in demand for office space to continue, which we expect will impede increases on rental rates in our office portfolio. As a result, although the Company has experienced some modest growth in occupancy levels during the second quarter of fiscal year 2015 compared to the second quarter of fiscal year 2014, on an all-properties basis, the Company continues to expect a slow and uneven recovery in its office segment.
The Company's healthcare segment consists of medical office properties and senior housing facilities. The medical office sector remains stable with modest increases in both occupancy and rents. The Company's senior housing assets continue to benefit from the strengthening recovery in the housing market, as occupancy trends are closely aligned with the ability of seniors to sell their homes in anticipation of moving to a senior care facility.
Both the industrial and retail property markets continue to show signs of recovery. The Company's industrial properties are located primarily in the Minneapolis market, and all of these Minneapolis properties are 100% leased. The demand for bulk warehouse and manufacturing space in the Company's markets is strong, with rents generally rising. The retail recovery is evident in regard to the Company's Minneapolis-metro and grocery-anchored retail properties, which are performing well. Outstate locations, however, continue to experience less demand, with the recession-driven contraction not yet fully reversed.
The Company plans to continue in the remainder of fiscal year 2015 its disposition of assets in non-core markets, particularly office, industrial and retail segment assets, and intends to use the proceeds from these dispositions to continue portfolio deleveraging and for developing and acquiring high-quality assets in the Company's multi-family and healthcare segments.
Same-store and Non-same-store Properties
Throughout this Quarterly Report on Form 10-Q, we have provided certain information on a same-store and non-same-store properties basis. Information provided on a same-store properties basis includes the results of properties that we have owned and operated for the entirety of both periods being compared (except for properties for which significant redevelopment or expansion occurred during either of the periods being compared, and properties sold or classified as held for sale), and which, in the case of development or re-development properties, have achieved a target level of occupancy of 90% for multi-family residential properties and 85% for office, healthcare, industrial and retail properties.
For the comparison of the three and six months ended October 31, 2014 and 2013, all or a portion of 31 properties were non-same-store, of which non-same-store properties 9 were redevelopment or in-service development properties.
While there are judgments to be made regarding changes in designation, we typically remove properties from same-store to non-same-store when redevelopment has or is expected to have a significant impact on property net operating income within the fiscal year. Acquisitions are moved to same-store once we have owned the property for the entirety of comparable periods and the property is not under significant redevelopment or expansion. Our development projects in progress are not included in our non-same-store properties category until they are placed in-service, which occurs upon the substantial completion of a commercial property, and upon receipt of a certificate of occupancy, in the case of a multi-family residential development project. They are then subsequently moved from non-same-store to same-store when the property has been in-service for the entirety of both periods being compared and has reached the target level of occupancy specified above.
RESULTS OF OPERATIONS
Consolidated Results of Operations for the Three and Six Months Ended October 31, 2014 and 2013
The discussion that follows is based on our consolidated results of operations for the three and six months ended October 31, 2014 and 2013.
 
(in thousands, except percentages)
 
Three Months Ended
Six Months Ended
 
October 31
2014 vs 2013
October 31
2014 vs 2013
 
2014
2013
$ Change
% Change
2014
2013
$ Change
% Change
Real estate rentals
$
58,835
$
54,477
$
4,358
8.0%
$
115,961
$
108,100
$
7,861
7.3%
Tenant reimbursement
 
11,207
 
11,295
 
(88)
(0.8)%
 
21,918
 
22,770
 
(852)
(3.7)%
TRS senior housing revenue
 
843
 
0
 
843
n/a
 
1,636
 
0
 
1,636
n/a
TOTAL REVENUE
 
70,885
 
65,772
 
5,113
7.8%
 
139,515
 
130,870
 
8,645
6.6%
Depreciation/amortization related to real estate investments
 
16,828
 
16,367
 
461
2.8%
 
33,012
 
34,423
 
(1,411)
(4.1)%
Utilities
 
5,093
 
5,208
 
(115)
(2.2)%
 
9,774
 
10,131
 
(357)
(3.5)%
Maintenance
 
7,828
 
7,162
 
666
9.3%
 
15,592
 
14,891
 
701
4.7%
Real estate taxes
 
8,266
 
8,361
 
(95)
(1.1)%
 
16,767
 
16,736
 
31
0.2%
Insurance
 
1,345
 
1,413
 
(68)
(4.8)%
 
3,081
 
2,714
 
367
13.5%
Property management expenses
 
4,355
 
4,184
 
171
4.1%
 
8,985
 
8,319
 
666
8.0%
Other property expenses
 
350
 
3
 
347
11566.7%
 
556
 
180
 
376
208.9%
TRS senior housing expenses
 
725
 
0
 
725
n/a
 
1,418
 
0
 
1,418
n/a
General and administrative
 
3,468
 
3,205
 
263
8.2%
 
7,744
 
6,637
 
1,107
16.7%
Amortization related to non-real estate investments
 
840
 
800
 
40
5.0%
 
1,712
 
1,744
 
(32)
(1.8)%
Impairment of real estate investments
 
3,245
 
0
 
3,245
n/a
 
5,565
 
0
 
5,565
n/a
TOTAL EXPENSES
 
52,343
 
46,703
 
5,640
12.1%
 
104,206
 
95,775
 
8,431
8.8%
Gain on involuntary conversion
 
0
 
0
 
0
n/a
 
0
 
966
 
(966)
(100.0)%
Operating income
 
18,542
 
19,069
 
(527)
(2.8)%
 
35,309
 
36,061
 
(752)
(2.1)%
Interest expense
 
(14,599)
 
(14,799)
 
200
(1.4)%
 
(29,263)
 
(29,395)
 
132
(0.4)%
Interest income
 
560
 
585
 
(25)
(4.3)%
 
1,120
 
773
 
347
44.9%
Other income
 
136
 
67
 
69
103.0%
 
267
 
89
 
178
200.0%
Income before gain (loss) on sale of real estate and other investments and income from discontinued operations
 
4,639
 
4,922
 
(283)
(5.7)%
 
7,433
 
7,528
 
(95)
(1.3)%
Gain (loss) on sale of real estate and other investments
 
1,231
 
0
 
1,231
n/a
 
(1,762)
 
0
 
(1,762)
n/a
Income from continuing operations
 
5,870
 
4,922
 
948
19.3%
 
5,671
 
7,528
 
(1,857)
(24.7)%
Income from discontinued operations
 
0
 
5,375
 
(5,375)
(100.0)%
 
0
 
5,985
 
(5,985)
(100.0)%
NET INCOME
 
5,870
 
10,297
 
(4,427)
(43.0)%
 
5,671
 
13,513
 
(7,842)
(58.0)%
Net (income) loss attributable to noncontrolling interests – Operating Partnership
 
(363)
 
(1,226)
 
863
(70.4)%
 
39
 
(1,276)
 
1,315
(103.1)%
Net income attributable to noncontrolling interests – consolidated real estate entities
 
(393)
 
(284)
 
(109)
38.4%
 
(747)
 
(372)
 
(375)
100.8%
Net income attributable to Investors Real Estate Trust
 
5,114
 
8,787
 
(3,673)
(41.8)%
 
4,963
 
11,865
 
(6,902)
(58.2)%
Dividends to preferred shareholders
 
(2,878)
 
(2,878)
 
0
0.0%
 
(5,757)
 
(5,757)
 
0
0.0%
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
$
2,236
$
5,909
 
(3,673)
(62.2)%
$
(794)
$
6,108
 
(6,902)
(113.0)%

Revenues.  Revenues for the three months ended October 31, 2014 were $70.9 million compared to $65.8 million in the three months ended October 31, 2013, an increase of $5.1 million or 7.8%. The increase in revenue for the three months ended October 31, 2014 resulted both from properties acquired and development projects placed in service in Fiscal 2015 and 2014 and from same-store properties, as shown in the table below.
 
 
(in thousands)
 
Increase in Total
Revenue
Three Months
ended October 31, 2014
Rent in Fiscal 2015 primarily from properties acquired and development projects placed in service in Fiscal 2015
$
1,218
Rent in Fiscal 2015 primarily from properties acquired and development projects placed in service in Fiscal 2014 in excess of that received in Fiscal 2014 from the same properties
 
2,241
Increase in rent on same-store properties(1)
 
811
TRS senior housing revenue in excess of that received in Fiscal 2014(2)
 
843
Net increase in total revenue
$
5,113
(1)
See analysis of NOI by segment on pages 37-41 of the MD&A for additional information.
(2)
See discussion in TRS Senior Housing Expenses paragraph below.
Revenues for the six months ended October 31, 2014 were $139.5 million compared to $130.9 million in the six months ended October 31, 2013, an increase of $8.6 million or 6.6%. The increase in revenue for the six months ended October 31, 2014 resulted both from properties acquired and development projects placed in service in Fiscal 2015 and 2014 and from same-store properties, as shown in the table below.
 
 
(in thousands)
 
Increase in Total
Revenue
Six Months
ended October 31, 2014
Rent in Fiscal 2015 primarily from properties acquired and development projects placed in service in Fiscal 2015
$
1,726
Rent in Fiscal 2015 primarily from properties acquired and development projects placed in service in Fiscal 2014 in excess of that received in Fiscal 2014 from the same properties
 
4,330
Increase in rent on same-store properties(1)
 
953
TRS senior housing revenue in excess of that received in Fiscal 2014(2)
 
1,636
Net increase in total revenue
$
8,645
(1)
See analysis of NOI by segment on pages 37-41 of the MD&A for additional information.
(2)
See discussion in TRS Senior Housing Expenses paragraph below.
Depreciation/Amortization Related to Real Estate Investments. Depreciation/amortization related to real estate investments increased by 2.8% to $16.8 million in the second quarter of fiscal year 2015, compared to $16.4 million in the same period of the prior fiscal year. This increase was primarily attributable to the addition of depreciable assets from acquisitions, development projects placed in service, capital improvements and tenant improvements.
Depreciation/amortization related to real estate investments decreased by 4.1% to $33.0 million in the six months ended October 31, 2014, compared to $34.4 million in the same period of the prior fiscal year. This decrease was primarily attributable to a change in the lives of several intangible assets due to a change in lease terms in the first quarter of fiscal year 2014.
Utilities.  Utilities decreased by 2.2% to $5.1 million in the second quarter of fiscal year 2015, compared to $5.2 million in the same period of the prior fiscal year. Same-store properties realized a decrease of $214,000 which was primarily attributable to a decrease in utility rates.  This decrease was offset by an increase of $99,000 attributable to the addition of new income producing real estate properties.
Utilities decreased by 3.5% to $9.8 million in the six months ended October 31, 2014 compared to $10.1 million in the same period of the prior fiscal year. Same-store properties realized a decrease of $549,000 which was primarily attributable to a decrease in utility rates.  This decrease was offset by an increase of $192,000 attributable to the addition of new income producing real estate properties.

Maintenance.  Maintenance expenses increased by 9.3% to $7.8 million in the second quarter of fiscal year 2015, compared to $7.2 million in the same period of the prior fiscal year.  An increase of $476,000 was attributable to more general maintenance items being completed at same-store properties compared to the prior year while an increase of $190,000 was attributable to the addition of new income producing real estate properties.
Maintenance expenses increased by 4.7% to $15.6 million in the six months ended October 31, 2014 compared to $14.9 million in the same period of the prior fiscal year.  An increase of $408,000 was attributable to more general maintenance items being completed at same-store properties compared to the prior year while an increase of $293,000 was attributable to the addition of new income producing real estate properties.
Real Estate Taxes.  Real estate taxes decreased by 1.1% to $8.3 million in the second quarter of fiscal year 2015, compared to $8.4 million in the same period of the prior fiscal year. A decrease of $76,000 was realized at same-store properties compared to the prior year while a decrease of $19,000 was attributable to the addition of new income-producing real estate properties.
Real estate taxes increased by 0.2% to $16.8 million in the six months ended October 31, 2014 compared to $16.7 million in the same period of the prior fiscal year. An increase of $170,000 was attributable to the addition of new income-producing real estate properties while same-store properties realized a decrease of $139,000 compared to the prior year.
Insurance.  Insurance expense decreased by 4.8% to $1.3 million in the second quarter of fiscal year 2015, compared to $1.4 million in the same period of the prior fiscal year. Increased deductibles paid on insurance claims at same-store properties accounted for a decrease of $298,000 while insurance premiums increased by $149,000 when compared to the prior year.  An increase of $81,000 was attributable to the addition of new income-producing real estate properties.
Insurance expense increased by 13.5% to $3.1 million in the six months ended October 31, 2014 compared to $2.7 million in the same period of the prior fiscal year. Approximately $294,000 of the increase was attributable to increased insurance premiums at same-store properties while deductibles paid on insurance claims decreased by $80,000 when compared to the prior year.  The addition of new income-producing real estate properties accounted for an increase of $153,000.
Property Management Expenses.  Property management expenses increased by 4.1% to $4.4 million in the first quarter of fiscal year 2015, compared to $4.2 million in the same period of the prior fiscal year. An increase of $184,000 was attributable to the addition of new income-producing real estate properties while same-store properties realized a decrease of $13,000 compared to the prior year.
Property management expenses increased by 8.0% to $9.0 million in the six months ended October 31, 2014 compared to $8.3 million in the same period of the prior fiscal year. An increase of $251,000 was attributable to internal property management expenses at same-store properties while the addition of new income-producing real estate properties accounted for an increase of $415,000.
Other Property Expenses.  Other property expense, consisting of bad debt provision expense, increased to approximately $350,000 in the second quarter of fiscal year 2015, compared to approximately $3,000 in the same period of the prior fiscal year. Other property expense increased to approximately $556,000 in the six months ended October 31, 2014, compared to approximately $180,000 in the same period of the prior fiscal year.  The increase for both the three and six months is primarily due to an increase in the provision for bad debt.
TRS Senior Housing Expenses.  The Company has one TRS, acquired during the second quarter of fiscal year 2014, which is the tenant in the Company's Legends at Heritage Place senior housing facility. Property management expenses for the Heritage Place property are paid by the TRS, as the tenant in the property, and revenue from the Heritage Place facility is shown as TRS senior housing revenue on the Condensed Consolidated Statements of Operations. TRS senior housing expense was approximately $725,000 and $1.4 million, respectively, in the three and six months ended October 31, 2014.  The Company had no TRS senior housing expenses in the same periods of the prior fiscal year.
General and Administrative.  General and administrative expenses increased by 8.2% to $3.5 million in the second quarter of fiscal year 2015, compared to $3.2 million in the same period of the prior fiscal year. This change was primarily due to an increase of approximately $299,000 in share-based compensation expense, partially offset by decreases in other expenses.
General and administrative expenses increased by 16.7% to $7.7 million in the six months ended October 31, 2014, compared to $6.6 million in the same period of the prior fiscal year. This change was primarily due to an increase of approximately $1.1 million in share-based compensation expense.
Amortization Related to Non-Real Estate Investments.  Amortization related to non-real estate investments remained consistent in the three and six months ended October 31, 2014, compared to the same periods of the prior fiscal year.

Impairment of Real Estate Investments.  During the three months ended October 31, 2014, the Company incurred a loss of $3.2 million due to the impairment of two office properties. During the six months ended October 31, 2014, the Company incurred a loss of $5.6 million dollars due to the impairment of three office properties and a retail property. No impairment from continuing operations was recognized in the three and six months ended October 31, 2013. See Note 2 of the Notes to the Condensed Consolidated Financial Statements in this report for additional information.
Gain on Involuntary Conversion.  During the six months ended October 31, 2013, the Company recognized a gain on involuntary conversion of $966,000. No gain on involuntary conversion was recognized in the three or six months ended October 31, 2014. See Note 2 of the Notes to the Condensed Consolidated Financial Statements in this report for additional information.
Interest Expense.  Components of interest expense in the three and six months ended October 31, 2014 and 2013 were as follows.

 
(in thousands, except percentages)
 
Three Months Ended
Six Months Ended
 
October 31
2014 vs 2013
October 31
2014 vs 2013
 
2014
2013
$ Change
% Change
2014
2013
$ Change
% Change
Mortgage debt
$
13,583
$
14,206
$
(623)
(4.4)%
$
26,992
$
28,376
$
(1,384)
(4.9)%
Line of credit
 
447
 
132
 
315
238.6%
 
868
 
263
 
605
230.0%
Other
 
569
 
461
 
108
23.4%
 
1,403
 
756
 
647
85.6%
Total interest expense
$
14,599
$
14,799
$
(200)
(1.4)%
$
29,263
$
29,395
$
(132)
(0.4)%
Mortgage interest decreased by 4.4% to $13.6 million in the second quarter of fiscal year 2015, compared to $14.2 million in the same period of the prior fiscal year.  Mortgages on properties newly acquired in fiscal years 2015 and 2014 added approximately $170,000 and $265,000 to our mortgage interest expense in the three and six months ended October 31, 2014, respectively, while mortgage interest on same-store properties decreased approximately $793,000 and $1.6 million compared to the three and six months ended October 31, 2013, primarily due to loan payoffs and refinancings. Our overall weighted average mortgage interest rate was 5.26% and 5.50% as of October 31, 2014 and 2013, respectively.
Interest expense on our line of credit increased to approximately $447,000 and $868,000 in the three and six months ended October 31, 2014, respectively, compared to approximately $132,000 and $263,000 in the same periods of the prior fiscal year, primarily due to a higher average outstanding balance during fiscal year 2015.
Other interest consists of interest on the Company's construction loans, a financing liability, security deposits and special assessments, as well as amortization of loan costs, offset by capitalized construction interest. Other interest increased to approximately $569,000 in the second quarter of fiscal year 2015, compared to approximately $461,000 in the same period of the prior fiscal year. Other interest increased to $1.4 million in the six months ended October 31, 2014, compared to approximately $756,000 in the same period of the prior fiscal year, primarily due to interest on a financing liability that was not in place for the entirety of the six months ended October 31, 2013.
Interest Income and Other Income.  The Company recorded interest income in the second quarter of fiscal years 2015 and 2014 of approximately $560,000 and $585,000, respectively. Interest income for the six months ended October 31, 2014 was $1.1 million, compared to approximately $773,000 in the same period of the prior fiscal year. The increase was primarily due to interest earned on a contract for deed that was not in place for the entirety of the six months ended October 31, 2013. See the Proceeds from Financing Liability section of Note 2 of the Notes to the Condensed Consolidated Financial Statements in this report for additional information.
Other income consists of real estate tax appeal refunds and other miscellaneous income. The Company earned other income in the three months ended October 31, 2014 and 2013 of approximately $136,000 and $67,000, respectively, and in the six months ended October 31, 2014 and 2013 of approximately $267,000 and $89,000, respectively.
Gain (Loss) on Sale of Real Estate and Other Investments. The Company recorded in continuing operations a net gain of $1.2 million in the three months ended October 31, 2014 and a net loss of $(1.8) million in the six months ended October 31, 2014 on the sale of real estate.  Properties sold in the six months ended October 31, 2014 and 2013 are detailed below in the section captioned "Property Dispositions."
Income from Discontinued Operations.  Prior to February 1,  2014, the Company reported, in discontinued operations, the results of operations and the related gains or losses of properties that had either been disposed of or classified as held for sale and otherwise met the classification of a discontinued operation. Effective February 1, 2014 the Company adopted ASU No. 2014-08. 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. As a result of the adoption of ASU No. 2014-08, results of operations and gains or losses on sale for
properties that are disposed or classified as held for sale in the ordinary course of business on or subsequent to February 1, 2014 would generally be included in continuing operations on the Company's consolidated statements of operations, to the extent such disposals did not meet the criteria for classification as a discontinued operation described above.
The Company recorded no income from discontinued operations in the three and six months ended October 31, 2014, compared to $5.4 million and $6.0 million in the three and six months ended October 31, 2013, respectively. During the first three quarters of fiscal year 2014, the Company disposed of two multi-family residential properties, three office properties, twelve industrial properties and three retail properties that were classified as discontinued operations. The Company realized a gain on sale of discontinued operations of approximately $4.7 million and $6.6 million in the three and six months ended October 31, 2013, respectively. See Note 7 of the Notes to the Condensed Consolidated Financial Statements in this report for further information on discontinued operations.
Net Income.  Net income available to common shareholders for the three and six months ended October 31, 2014 was $5.9 million and $5.7 million, respectively, compared to $10.3 million and $13.5 million for the three and six months ended October 31, 2013, respectively. On a per common share basis, net income was $.02 and $(.01) per common share for the three and six months ended October 31, 2014, respectively, compared to $.06 for the three and six months ended October 31, 2013.
Occupancy
Occupancy as of October 31, 2014 compared to October 31, 2013 increased in two of our five reportable segments (multi-family residential and industrial), decreasing in our office and retail segments and remaining stable in our healthcare segment on a same-store basis. On an all-property basis, occupancy increased in our multi-family residential, office and industrial segments, decreasing in our retail segment and remaining the same in our healthcare segment. The increased occupancy in the industrial segment is due to the lease-up of 90,363 square feet at the Company's Urbandale, Iowa property, which raised occupancy in that segment to 100%. Occupancy represents the actual number of units or square footage leased divided by the total number of units or square footage at the end of the period.
Occupancy Levels on a Same-Store Property and All Property Basis:
 
Same-Store Properties
 
All Properties
 
As of October 31,
 
As of  October 31,
Segments
2014
2013
 
2014
2013
Multi-Family Residential
95.6%
94.4%
 
94.6%
93.7%
Office
83.3%
85.1%
 
81.6%
81.0%
Healthcare
96.0%
96.1%
 
96.1%
96.1%
Industrial
100.0%
95.4%
 
100.0%
70.2%
Retail
85.7%
87.5%
 
86.1%
86.6%
Net Operating Income
Net Operating Income ("NOI") is a non-GAAP measure which we define as total real estate revenues and gain on involuntary conversion 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 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 show real estate revenues, real estate operating expenses, gain on involuntary conversion and NOI by reportable operating segment for the three and six months ended October 31, 2014 and 2013.  For a reconciliation of net operating income of reportable segments to net income as reported, see Note 5 of the Notes to the Condensed Consolidated Financial Statements in this report.
The tables also show net operating income by reportable operating segment on a same-store property and non-same-store property basis. This comparison allows the Company to evaluate the performance of existing properties and their contribution to net income. Management believes that measuring performance on a same-store property basis is useful to investors because it enables evaluation of how the Company's properties are performing year over year.  Management uses this measure to assess whether or not it has been successful in increasing net operating income, renewing the leases of existing tenants, controlling operating costs and appropriately handling capital improvements. The discussion below focuses on the main factors affecting real estate revenue and real estate expenses from same-store properties, since changes from one fiscal year to another in real estate revenue and expenses from non-same-store properties are due to the addition of those properties to the Company's real estate portfolio, and accordingly provide less useful information for evaluating the ongoing operational performance of the Company's real estate portfolio.
All Segments
The following table of selected operating data reconciles NOI to net income and provides the basis for our discussion of NOI by segment in the three and six months ended October 31, 2014 and 2013.
 
(in thousands, except percentages)
 
Qtr Ended
YTD Ended
 
Oct FY2015
Oct FY2014
$ Change
% Change
Oct FY2015
Oct FY2014
$ Change
% Change
All Segments
                           
                             
Real estate revenue
                           
Same-store
$
63,760
$
62,904
$
856
1.4%
$
126,452
$
125,453
$
999
0.8%
Non-same-store(1)
 
6,282
 
2,868
 
3,414
119.0%
 
11,427
 
5,417
 
6,010
110.9%
Total
$
70,042
$
65,772
$
4,270
6.5%
$
137,879
$
130,870
$
7,009
5.4%
                             
Real estate expenses
                           
Same-store
$
24,946
$
24,584
$
362
1.5%
$
50,373
$
49,815
$
558
1.1%
Non-same-store(1)
 
2,291
 
1,747
 
544
31.1%
 
4,382
 
3,156
 
1,226
38.8%
Total
$
27,237
$
26,331
$
906
3.4%
$
54,755
$
52,971
$
1,784
3.4%
                             
Gain on involuntary conversion
                           
Same-store
$
0
$
0
$
0
n/a
$
0
$
0
$
0
n/a
Non-same-store(1)
 
0
 
0
 
0
n/a
 
0
 
966
 
(966)
(100.0)%