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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended October 31, 2015
 
or
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ____________ to ____________
 
Commission File Number 001-35624
 
INVESTORS REAL ESTATE TRUST
(Exact name of registrant as specified in its charter)
 
North Dakota
 
45-0311232
(State or other jurisdiction of  incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
1400 31st Avenue SW, Suite 60
Post Office Box 1988
Minot, ND 58702-1988
(Address of principal executive offices) (Zip code)
 
(701) 837-4738
(Registrant’s telephone number, including area code)
 
N/A
(Former name, former address, and former fiscal year, if changed since last report.)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days.
 
 
Yes
No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
 
Yes
No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer
Accelerated filer
 
Non-accelerated filer
Smaller Reporting Company
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
 
Yes
No
 
The number of common shares of beneficial interest outstanding as of December 3, 2015, was 122,425,544.
 



TABLE OF CONTENTS
 
 
Page
Part I. Financial Information
3
3
4
5
6
8
27
48
49
   
Part II. Other Information
 
50
50
50
50
50
50
50
52
 
PART I
ITEM 1. FINANCIAL STATEMENTS - SECOND QUARTER - FISCAL 2016
INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
 
   
(in thousands, except share data)
 
   
October 31, 2015
   
April 30, 2015
 
ASSETS
       
Real estate investments
       
Property owned
 
$
1,763,150
   
$
1,546,367
 
Less accumulated depreciation
   
(333,570
)
   
(313,308
)
     
1,429,580
     
1,233,059
 
Development in progress
   
89,843
     
153,994
 
Unimproved land
   
22,485
     
25,827
 
Total real estate investments
   
1,541,908
     
1,412,880
 
Assets held for sale
   
115,428
     
463,103
 
Cash and cash equivalents
   
55,133
     
48,970
 
Other investments
   
329
     
329
 
Receivable arising from straight-lining of rents, net of allowance of $705 and $718, respectively
   
16,097
     
15,617
 
Accounts receivable, net of allowance of $189 and $438, respectively
   
4,023
     
2,865
 
Real estate deposits
   
444
     
2,489
 
Prepaid and other assets
   
3,289
     
3,174
 
Intangible assets, net of accumulated amortization of $19,839 and $19,610, respectively
   
25,288
     
26,213
 
Tax, insurance, and other escrow
   
7,440
     
10,073
 
Property and equipment, net of accumulated depreciation of $1,213 and $1,464, respectively
   
1,408
     
1,542
 
Goodwill
   
1,715
     
1,718
 
Deferred charges and leasing costs, net of accumulated amortization of $8,622 and $8,077, respectively
   
9,451
     
8,864
 
TOTAL ASSETS
 
$
1,781,953
   
$
1,997,837
 
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
               
LIABILITIES
               
Liabilities held for sale
 
$
145,565
   
$
321,393
 
Accounts payable and accrued expenses
   
55,460
     
56,399
 
Revolving line of credit
   
17,500
     
60,500
 
Mortgages payable
   
728,973
     
668,112
 
Construction debt and other
   
128,477
     
144,111
 
TOTAL LIABILITIES
   
1,075,975
     
1,250,515
 
COMMITMENTS AND CONTINGENCIES (NOTE 6) REDEEMABLE NONCONTROLLING INTERESTS – CONSOLIDATED REAL ESTATE ENTITIES
   
7,105
     
6,368
 
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, 2015 and April 30, 2015,   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, 2015 and April 30, 2015, aggregate liquidation preference of $115,000,000)
   
111,357
     
111,357
 
Common Shares of Beneficial Interest (Unlimited authorization, no par value, 122,797,516 shares issued and outstanding at October 31, 2015, and 124,455,624 shares issued and outstanding at April 30, 2015)
   
936,893
     
951,868
 
Accumulated distributions in excess of net income
   
(455,508
)
   
(438,432
)
Total Investors Real Estate Trust shareholders’ equity
   
620,059
     
652,110
 
Noncontrolling interests – Operating Partnership (13,890,331 units at October 31, 2015 and 13,999,725 units at April 30, 2015)
   
55,957
     
58,325
 
Noncontrolling interests – consolidated real estate entities
   
22,857
     
30,519
 
Total equity
   
698,873
     
740,954
 
TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
 
$
1,781,953
   
$
1,997,837
 
 
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, 2015 and 2014
 
   
(in thousands, except per share data)
 
   
Three Months Ended
October 31
   
Six Months Ended
October 31
 
   
2015
   
2014
   
2015
   
2014
 
REVENUE
               
Real estate rentals
 
$
46,727
   
$
45,304
   
$
92,249
   
$
88,868
 
Tenant reimbursement
   
4,578
     
5,042
     
8,974
     
9,899
 
TRS senior housing revenue
   
965
     
843
     
2,003
     
1,636
 
TOTAL REVENUE
   
52,270
     
51,189
     
103,226
     
100,403
 
EXPENSES
                               
Depreciation/amortization related to real estate investments
   
14,461
     
12,859
     
27,733
     
25,073
 
Utilities
   
3,124
     
3,024
     
6,330
     
5,969
 
Maintenance
   
5,784
     
5,062
     
11,158
     
10,048
 
Real estate taxes
   
5,002
     
4,781
     
9,919
     
9,768
 
Insurance
   
1,244
     
1,068
     
2,344
     
2,530
 
Property management expenses
   
4,635
     
3,479
     
8,506
     
7,145
 
Other property expenses
   
243
     
350
     
175
     
556
 
TRS senior housing expenses
   
812
     
725
     
1,581
     
1,418
 
Administrative expenses
   
2,933
     
2,890
     
5,387
     
6,554
 
Other expenses
   
1,204
     
578
     
1,628
     
1,190
 
Amortization related to non-real estate investments
   
169
     
216
     
340
     
437
 
Impairment of real estate investments
   
1,873
     
1,803
     
3,158
     
4,123
 
TOTAL EXPENSES
   
41,484
     
36,835
     
78,259
     
74,811
 
Operating income
   
10,786
     
14,354
     
24,967
     
25,592
 
Interest expense
   
(10,131
)
   
(9,954
)
   
(19,327
)
   
(19,701
)
Loss on extinguishment of debt
   
(106
)
   
0
     
(106
)
   
0
 
Interest income
   
565
     
560
     
1,121
     
1,120
 
Other income
   
100
     
136
     
151
     
262
 
Income before gain (loss) on sale of real estate and other investments and income (loss) from discontinued operations
   
1,214
     
5,096
     
6,806
     
7,273
 
Gain (loss) on sale of real estate and other investments
   
0
     
1,231
     
(175
)
   
(1,762
)
Income from continuing operations
   
1,214
     
6,327
     
6,631
     
5,511
 
Income (loss) from discontinued operations
   
15,463
     
(457
)
   
14,773
     
160
 
NET INCOME
   
16,677
     
5,870
     
21,404
     
5,671
 
Net (income) loss attributable to noncontrolling interests – Operating Partnership
   
(1,527
)
   
(363
)
   
(1,713
)
   
39
 
Net loss (income) attributable to noncontrolling interests – consolidated real estate entities
   
1,516
     
(393
)
   
1,515
     
(747
)
Net income attributable to Investors Real Estate Trust
   
16,666
     
5,114
     
21,206
     
4,963
 
Dividends to preferred shareholders
   
(2,878
)
   
(2,878
)
   
(5,757
)
   
(5,757
)
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
 
$
13,788
   
$
2,236
   
$
15,449
   
$
(794
)
Earnings (loss) per common share from continuing operations – Investors Real Estate Trust – basic and diluted
 
$
.00
   
$
.02
   
$
.02
   
$
(.01
)
Earnings per common share from discontinued operations – Investors Real Estate Trust – basic and diluted
   
.11
     
.00
     
.10
     
.00
 
NET INCOME (LOSS) PER COMMON SHARE – BASIC AND DILUTED
 
$
.11
   
$
.02
   
$
.12
   
$
(.01
)
DIVIDENDS PER COMMON SHARE
 
$
.13
   
$
.13
   
$
.26
   
$
.26
 
 
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, 2015 and 2014
 
   
(in thousands)
 
   
NUMBER
OF
PREFERRED
SHARES
   
PREFERRED
SHARES
   
NUMBER
OF COMMON
SHARES
   
COMMON
SHARES
   
ACCUMULATED
DISTRIBUTIONS
IN EXCESS OF
NET INCOME
   
NONREDEEMABLE
NONCONTROLLING
INTERESTS
   
TOTAL
EQUITY
 
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
 
                                                         
                                                         
Balance April 30, 2015
   
5,750
   
$
138,674
     
124,455
   
$
951,868
   
$
(438,432
)
 
$
88,844
   
$
740,954
 
Net income attributable to Investors Real Estate Trust and nonredeemable  noncontrolling interests
                                   
21,206
     
287
     
21,493
 
Distributions – common shares and units
                                   
(32,525
)
   
(3,626
)
   
(36,151
)
Distributions – Series A preferred shares
                                   
(1,186
)
           
(1,186
)
Distributions – Series B preferred shares
                                   
(4,571
)
           
(4,571
)
Distribution reinvestment and share purchase plan
                   
821
     
5,619
                     
5,619
 
Share-based compensation
                   
220
     
482
                     
482
 
Partnership units issued
                                           
400
     
400
 
Redemption of units for common shares
                   
154
     
855
             
(855
)
   
0
 
Shares repurchased
                   
(2,852
)
   
(21,931
)
                   
(21,931
)
Other
                                           
(6,236
)
   
(6,236
)
Balance October 31, 2015
   
5,750
   
$
138,674
     
122,798
   
$
936,893
   
$
(455,508
)
 
$
78,814
   
$
698,873
 
 
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, 2015 and 2014
 
   
(in thousands)
 
   
Six Months Ended
October 31
 
   
2015
   
2014
 
CASH FLOWS FROM OPERATING ACTIVITIES
       
Net income
 
$
21,404
   
$
5,671
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
28,594
     
26,033
 
Depreciation and amortization from discontinued operations
   
5,300
     
9,441
 
(Gain) loss on sale of real estate, land, other investments and discontinued operations
   
(23,733
)
   
1,762
 
Loss on extinguishment of debt
   
904
     
0
 
Share-based compensation expense
   
605
     
1,675
 
Impairment of real estate investments
   
3,598
     
5,565
 
Bad debt expense
   
162
     
455
 
Changes in other assets and liabilities:
               
Receivable arising from straight-lining of rents
   
512
     
(270
)
Accounts receivable
   
1,230
     
4,457
 
Prepaid and other assets
   
379
     
2,181
 
Tax, insurance and other escrow
   
565
     
323
 
Deferred charges and leasing costs
   
(576
)
   
(1,976
)
Accounts payable, accrued expenses, and other liabilities
   
(4,626
)
   
(3,096
)
Net cash provided by operating activities
   
34,318
     
52,221
 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Proceeds from real estate deposits
   
2,837
     
245
 
Payments for real estate deposits
   
(792
)
   
(5,024
)
Decrease in lender holdbacks for improvements
   
3,258
     
4,840
 
Increase in lender holdbacks for improvements
   
(578
)
   
(621
)
Proceeds from sale of discontinued operations
   
364,559
     
0
 
Proceeds from sale of real estate and other investments
   
6,783
     
17,106
 
Insurance proceeds received
   
432
     
2,102
 
Payments for acquisitions of real estate assets
   
(71,381
)
   
(23,142
)
Payments for development and re-development of real estate assets
   
(79,298
)
   
(87,388
)
Payments for improvements of real estate assets
   
(13,510
)
   
(11,311
)
Payments for improvements of real estate assets from discontinued operations
   
(4,993
)
   
(4,317
)
Net cash provided (used) by investing activities
   
207,317
     
(107,510
)
CASH FLOWS FROM FINANCING ACTIVITIES
               
Proceeds from mortgages payable
   
51,070
     
43,500
 
Principal payments on mortgages payable
   
(205,833
)
   
(40,922
)
Proceeds from revolving line of credit
   
43,000
     
35,000
 
Principal payments on revolving line of credit and other debt
   
(106,855
)
   
(17,000
)
Proceeds from construction debt
   
46,775
     
44,560
 
Proceeds from sale of common shares under distribution reinvestment and share purchase program
   
1,493
     
26,731
 
Proceeds from noncontrolling partner – consolidated real estate entities
   
826
     
1,551
 
Repurchase of common shares
   
(21,931
)
   
0
 
Distributions paid to common shareholders, net of reinvestment of $3,997 and $7,725, respectively
   
(28,528
)
   
(21,759
)
Distributions paid to preferred shareholders
   
(5,757
)
   
(5,757
)
Distributions paid to noncontrolling interests – Unitholders of the Operating Partnership, net of reinvestment of $130 and $365, respectively
   
(3,496
)
   
(4,513
)
Distributions paid to noncontrolling interests – consolidated real estate entities
   
(6,236
)
   
(370
)
Net cash (used) provided by financing activities
   
(235,472
)
   
61,021
 
NET INCREASE IN CASH AND CASH EQUIVALENTS
   
6,163
     
5,732
 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
   
48,970
     
47,267
 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
55,133
   
$
52,999
 
 
(continued)
 
INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, continued)
for the six months ended October 31, 2015 and 2014
 
   
(in thousands)
 
   
Six Months Ended
October 31
 
   
2015
   
2014
 
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES FOR THE PERIOD
       
Distribution reinvestment plan
 
$
3,997
   
$
7,725
 
Operating partnership distribution reinvestment plan
   
130
     
365
 
Operating partnership units converted to shares
   
855
     
37,700
 
Real estate assets acquired through the issuance of operating partnership units
   
400
     
100
 
Real estate assets acquired through assumption of indebtedness and accrued costs
   
0
     
12,169
 
Increase to accounts payable included within real estate investments
   
1,241
     
9,569
 
Real estate assets contributed by noncontrolling interests – consolidated real estate entities
   
0
     
2,206
 
Construction debt reclassified to mortgages payable
   
41,649
     
0
 
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
               
Cash paid for interest, net of amounts capitalized of $3,367 and $2,232, respectively
 
$
16,846
   
$
26,128
 
 
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, 2015 and 2014
 
NOTE 1 • ORGANIZATION
 
Investors Real Estate Trust (“IRET”, “we” or “us”) is a self-advised real estate investment trust engaged in acquiring, owning and leasing multifamily residential and commercial real estate. We have 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, 2015 and 2014. Our multifamily properties and commercial properties are located mainly in the states of North Dakota and Minnesota, but also in the states of Idaho, Iowa, Kansas, Missouri, Montana, Nebraska, South Dakota, Wisconsin and Wyoming. As of October 31, 2015, we held for investment 94 multifamily properties with 12,269 apartment units and 83 commercial properties, consisting of healthcare, industrial and other, totaling 4.5 million net rentable square feet. We held for sale 8 multifamily and 13 commercial properties as of October 31, 2015. We conduct a majority of our business activities through our consolidated operating partnership, IRET Properties, a North Dakota Limited Partnership (the “Operating Partnership”), as well as through a number of other consolidated subsidiary entities.
 
All references to IRET, we or us refer to Investors Real Estate Trust and its consolidated subsidiaries.
 
NOTE 2 • BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
 
BASIS OF PRESENTATION
 
The accompanying condensed consolidated financial statements include our accounts and the accounts of all our subsidiaries in which we maintain a controlling interest, including the Operating Partnership. All intercompany balances and transactions are eliminated in consolidation. Our fiscal year ends April 30th.
 
Our interest in the Operating Partnership was 89.8% of the limited partnership units of the Operating Partnership (“Units”) as of October 31, 2015 and 89.9% as of April 30, 2015. Under the terms of the Operating Partnership’s Agreement of Limited Partnership, limited partners have the right to require the Operating Partnership to redeem their Units for cash any time following the first anniversary of the date they acquired such Units (“Exchange Right”). When a limited partner exercises the Exchange Right, we have the right, in our sole discretion, to acquire such Units by either making a cash payment or exchanging the Units for our common shares of beneficial interest (“Common Shares”), on a one-for-one basis. The Exchange Right is subject to certain conditions and limitations, including the limited partner may not exercise the Exchange Right more than two times during a calendar year and the limited partner may not exercise for less than 1,000 Units, or, if such limited partner holds less than 1,000 Units, for less than 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, a greater number of redemptions during a calendar year or other limitations to their Exchange Right.
 
The condensed consolidated financial statements also reflect the ownership by the Operating Partnership of certain joint venture entities in which the Operating Partnership has a general partner or controlling interest. These entities are consolidated into our other operations, with noncontrolling interests reflecting the noncontrolling partners’ share of ownership and income and expenses.
 
UNAUDITED INTERIM FINANCIAL STATEMENTS
 
Our interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with U.S. GAAP are omitted. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. In the opinion of management, all adjustments, consisting solely of normal recurring adjustments, necessary for the fair presentation of our financial position, results of operations and cash flows for the interim periods have been included.
 
The current period’s results of operations are not necessarily indicative of results which ultimately may be achieved for the year. The interim condensed consolidated financial statements and accompanying notes thereto should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2015, as filed with the SEC on June 29, 2015.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 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 2014-09 does not apply to lease contracts accounted for under ASC 840, Leases. The ASU will become effective for fiscal years beginning after December 15, 2017. We do not expect adoption of this update to have a material impact on our operating results or financial position.
 
In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis. ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the amendments: (i) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities, (ii) eliminate the presumption that a general partner should consolidate a limited partnership, (iii) affect the consolidated analysis of reporting entities that are involved with variable interest entities, and (iv) provide a scope exception for certain entities.  The ASU will become effective for fiscal years beginning after December 15, 2015. We do not expect adoption of this update to have a material impact on our operating results or financial position.
 
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability to which they relate, consistent with debt discounts, as opposed to being presented as assets. The ASU will become effective for fiscal years beginning after December 15, 2015. We do not expect adoption of this update to have a material impact on our operating results or financial position.
 
In April 2015, the FASB issued ASU 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. Under ASU 2015-05, if a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The ASU will become effective for fiscal years beginning after December 15, 2015. We do not expect adoption of this update to have a material impact on our operating results or financial position.
 
IMPAIRMENT OF LONG-LIVED ASSETS
 
We periodically evaluate our long-lived assets, including investments in real estate, for impairment indicators. The impairment evaluation is performed on assets by property such that assets for a property form an asset group. The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions, expected holding period of each asset group and legal and environmental concerns. If indicators exist, we compare the expected future undiscounted cash flows for the long-lived asset group against the carrying amount of that asset group. If the sum of the estimated undiscounted cash flows is less than the carrying amount of the asset group, an impairment loss is recorded for the difference between the estimated fair value and the carrying amount of the asset group. If our anticipated holding period for properties, the estimated fair value of properties or other factors change based on market conditions or otherwise, our evaluation of impairment charges may be different and such differences could be material to our consolidated financial statements. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results. Plans to hold properties over longer periods decrease the likelihood of recording impairment losses.
 
During the six months ended October 31, 2015, we incurred a loss of approximately $3.6 million due to impairment of one office property, one parcel of land and eight multifamily properties. We recognized impairment of approximately $440,000 on an office property in Eden Prairie, Minnesota, which was written-down to estimated fair value during the first quarter of fiscal year 2016 based on receipt of a market offer to purchase and our intent to dispose of the property.  Also in the first quarter of fiscal year 2016, we recognized impairment of $1.3 million on a parcel of land in Grand Chute, Wisconsin based on its sale listing price and our intent to dispose of the property. We recognized impairment of $1.9 million on eight multifamily properties in St. Cloud, Minnesota which were written-down to estimated fair value during the second quarter of fiscal year 2016 based on receipt of a market offer to purchase and our intent to dispose of the property.  The impairment loss of the Eden Prairie, Minnesota property for the first quarter of fiscal year 2016 is reported in discontinued operations. See Note 7 for additional information.
 
During the six months ended October 31, 2014, we incurred a loss of $5.6 million due to impairment of four commercial properties. We 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.
 
HELD FOR SALE
 
We classify 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. Real estate held for sale is stated at the lower of its carrying amount or estimated fair value less disposal costs. Depreciation is not recorded on assets classified as held for sale. Liabilities classified as held for sale consist of liabilities to be included in the transaction and liabilities directly associated with assets that will be transferred in the transaction. At October 31, 2015, we had 9 office properties, 3 retail properties, 8 multifamily properties and one healthcare property classified as held for sale with assets of $115.4 million and liabilities of $145.6 million. At April 30, 2015, we had 49 office properties, 17 retail properties and two healthcare properties classified as held for sale with assets of $463.1 million and liabilities of $321.4 million.
 
COMPENSATING BALANCES AND OTHER INVESTMENTS; HOLDBACKS
 
We maintain 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, 2015, our compensating balances totaled $13.4 million and consisted of the following:
 
Financial Institution
      
First International Bank, Watford City, ND
 
$
6,000,000
 
Associated Bank, Green Bay, WI
   
3,000,000
 
The PrivateBank, Minneapolis, MN
   
2,000,000
 
Bremer Bank, Saint Paul, MN
   
1,285,000
 
Dacotah Bank, Minot, ND
   
350,000
 
United Community Bank, Minot, ND
   
275,000
 
Peoples State Bank, Velva, ND
   
225,000
 
American National Bank, Omaha, NE
   
200,000
 
Commerce Bank a Minnesota Banking Corporation
   
100,000
 
Total
 
$
13,435,000
 
 
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 one year and we intend to hold them to maturity.
 
We have 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 $3.3 million in holdbacks for improvements reflected in the Condensed Consolidated Statements of Cash Flows for the six months ended October 31, 2015 is due primarily to the release of loan proceeds to us upon completion of construction and tenant improvement projects, while the increase of approximately $578,000 represents additional amounts retained by lenders for new projects.
 
IDENTIFIED INTANGIBLE ASSETS AND LIABILITIES AND GOODWILL
 
Upon acquisition of real estate, we record 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. We amortize 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, 2015 and 2014, respectively, we added approximately $1.3 million and $365,000 of new intangible assets and approximately $101,000 and $0 of new intangible liabilities. The weighted average lives of the intangible assets acquired in the six months ended October 31, 2015 and 2014 are 0.8 years and 0.5 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.
 
Our identified intangible assets and intangible liabilities at October 31, 2015 and April 30, 2015 were as follows:
 
   
(in thousands)
 
   
October 31, 2015
   
April 30, 2015
 
Identified intangible assets (included in intangible assets):
       
Gross carrying amount
 
$
45,127
   
$
45,823
 
Accumulated amortization
   
(19,839
)
   
(19,610
)
Net carrying amount
 
$
25,288
   
$
26,213
 
                 
Identified intangible liabilities (included in other liabilities):
               
Gross carrying amount
 
$
159
   
$
82
 
Accumulated amortization
   
(44
)
   
(61
)
Net carrying amount
 
$
115
   
$
21
 
 
The amortization of acquired below-market leases and acquired above-market leases reduced rental income by approximately $4,000 and $6,000 for the three months ended October 31, 2015 and 2014, respectively, and approximately $11,000 and $11,000 for the six months ended October 31, 2015 and 2014, 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)
 
2017
 
$
3
 
2018
   
(11
)
2019
   
(20
)
2020
   
(16
)
2021
   
(13
)
 
Amortization of all other identified intangible assets (a component of depreciation and amortization expense) was $1.2 million and $1.7 million for the three months ended October 31, 2015 and 2014, respectively, and $2.2 million and $2.9 million for the six months ended October 31, 2015 and 2014, 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)
 
2017
 
$
3,835
 
2018
   
3,605
 
2019
   
3,507
 
2020
   
3,440
 
2021
   
3,312
 
 
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. Our 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, 2015 and April 30, 2015 was $1.7 million. Approximately $3,000 and $193,000 of goodwill is included in assets held for sale at October 31, 2015 and April 30, 2015, respectively. The annual review at April 30, 2015 indicated no impairment to goodwill and there was no indication of impairment at October 31, 2015.  During the six months ended October 31, 2015, we disposed of seven commercial properties to which goodwill had been assigned, and as a result, approximately $193,000 of goodwill was derecognized. During the six months ended October 31, 2014, we recognized approximately $852,000 of goodwill from the acquisition of the Homestead Garden multifamily property and disposed of one multifamily property to which goodwill had been assigned, and as a result, approximately $11,000 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.  On the Condensed Consolidated Statements of Operations, we reclassified certain expenses from general and administrative expenses to administrative expenses and other expenses.
 
We report, in discontinued operations, the results of operations and the related gains or losses of properties that have either been disposed of or classified as held for sale and for which the disposition represents a strategic shift that has or will have a major effect on our operations and financial results. As the result of discontinued operations, retroactive reclassifications that change prior period numbers have been made. See Note 7 for additional information. During the first quarter of fiscal year 2016, we classified as discontinued operations 48 office properties, 17 retail properties and 1 healthcare property.
 
PROCEEDS FROM FINANCING LIABILITY
 
During the first quarter of fiscal year 2014, we 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 us, and also granted us an option to repurchase the property at a specified price at or prior to July 31, 2018. We accounted for the transaction as a financing due to our 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, 2015 is $7.9 million.
 
VARIABLE INTEREST ENTITY
 
On November 27, 2012, we 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, with approximately 69% of the project financed with third-party debt and approximately 7% financed with debt from us to the joint venture entity. The two-phase project was substantially completed in the third quarter of fiscal year 2015. As of October 31, 2015, we are the approximately 51.0% owner of the joint venture and have management and leasing responsibilities; the real estate development company owns approximately 49.0% of the joint venture and was responsible for the development and construction of the property. We have 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. We have also determined that we are the primary beneficiary of the VIE due to the fact that we are providing more than 50% of the equity contributions, the subordinated debt and a guarantee on the third party debt and have the power to direct the most significant activities that impact the entity’s economic performance.
 
On June 12, 2014 we entered into a joint venture operating agreement with a real estate development company and two other partners to construct a three-phase apartment project in Edina, Minnesota as IRET – 71 France, LLC. We estimate total costs for the project at $73.3 million, with approximately 69% of the project financed with third-party debt and approximately 7% financed with debt from us to the joint venture entity. The first phase of the project was substantially completed in the second quarter of fiscal year 2016, the second phase of the project is expected to be completed in the third quarter of fiscal year 2016 and construction of the third phase is expected to be completed in the first quarter of fiscal year 2017. See Development, Expansion and Renovation Projects in Note 6 for additional information. As of October 31, 2015, we are the approximately 52.6% owner of the joint venture and will have management and leasing responsibilities after the project has been in service for 24 months; the real estate development company and the other two partners own approximately 47.4% of the joint venture and are responsible for the development, construction and initial leasing of the property. We have determined that the joint venture is a 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. We have also determined that we are the primary beneficiary of the VIE due to the fact that we are providing more than 50% of the equity contributions, the subordinated debt and a guarantee on the third party debt and have 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. We have 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, 2015 and 2014:
 
     
     (in thousands, except per share data) 
   
   
Three Months Ended
October 31
   
Six Months Ended
October 31
 
   
2015
   
2014
   
2015
   
2014
 
NUMERATOR
               
Income from continuing operations – Investors Real Estate Trust
 
$
2,749
   
$
5,533
   
$
7,909
   
$
4,862
 
Income from discontinued operations – Investors Real Estate Trust
   
13,917
     
(419
)
   
13,297
     
101
 
Net income attributable to Investors Real Estate Trust
   
16,666
     
5,114
     
21,206
     
4,963
 
Dividends to preferred shareholders
   
(2,878
)
   
(2,878
)
   
(5,757
)
   
(5,757
)
Numerator for basic earnings per share – net income available to common shareholders
   
13,788
     
2,236
     
15,449
     
(794
)
Noncontrolling interests – Operating Partnership
   
1,527
     
363
     
1,713
     
(39
)
Numerator for diluted earnings per share
 
$
15,315
   
$
2,599
   
$
17,162
   
$
(833
)
DENOMINATOR
                               
Denominator for basic earnings per share weighted average shares
   
124,665
     
117,034
     
124,757
     
114,033
 
Effect of convertible operating partnership units
   
13,900
     
16,261
     
13,929
     
18,565
 
Denominator for diluted earnings per share
   
138,565
     
133,295
     
138,686
     
132,598
 
Earnings (loss) per common share from continuing operations – Investors Real Estate Trust – basic and diluted
 
$
.00
   
$
.02
   
$
.02
   
$
(.01
)
Earnings per common share from discontinued operations – Investors Real Estate Trust – basic and diluted
   
.11
     
.00
     
.10
     
.00
 
NET INCOME (LOSS) PER COMMON SHARE – BASIC & DILUTED
 
$
.11
   
$
.02
   
$
.12
   
$
(.01
)
 
NOTE 4 • EQUITY
 
ATM. During the second quarter of fiscal year 2014, we and our Operating Partnership entered into an At the Market sales agreement (“ATM”) with Robert W. Baird & Co. Incorporated as sales agent, pursuant to which we may from time to time sell our Common Shares having an aggregate offering price of up to $75 million. The shares would be issued pursuant to our currently-effective shelf registration statement on Form S-3ASR. To date, we have not issued any shares under the ATM.
 
Equity Awards. During the first quarter of fiscal year 2016, we issued approximately 220,000 Common Shares, net of withholding, with a total grant-date value of approximately $1.6 million, under our 2008 Incentive Award Plan, for executive officer and trustee share-based compensation for fiscal year 2015 performance. Of these shares, approximately 108,000 are restricted, and will vest on the one-year anniversary of the grant date (i.e., on April 30, 2016), provided the recipient is still employed with us, and subject to the terms and conditions of our long-term incentive plan (“LTIP”). During the first quarter of fiscal year 2015, we issued approximately 204,000 Common Shares, with a total grant-date value of approximately $1.9 million, under the our 2008 Incentive Award Plan, for executive officer and trustee share-based compensation for fiscal year 2014 performance.
 
Share Repurchase Program. In August 2015, we publicly announced the share repurchase program authorized by our Board of Trustees to repurchase up to $50 million of our Common Shares over a one year period.  During the second quarter of fiscal year 2016, we repurchased and retired approximately 2.9 million Common Shares for an aggregate cost of approximately $21.9 million, including commissions, at an average price per share of $7.69.
 
DRIP. We have implemented a Distribution Reinvestment and Share Purchase Plan (“DRIP”), which provides our common shareholders and the unitholders of the Operating Partnership an opportunity to invest their cash distributions in Common Shares and to purchase additional Common Shares through voluntary cash contributions. A DRIP participant cannot purchase additional Common Shares in excess of $10,000 per month, unless waived by us. We did not issue any waivers during the three months ended October 31, 2015 and 2014. We did not issue any waivers during the six months ended October 31, 2015. During the six months ended October 31, 2014, DRIP participants purchased approximately 926,000 additional Common Shares at an average price of $8.64 per share pursuant to waivers granted by us, for total net proceeds of $8.0 million.
 
As permitted under the DRIP, starting on October 1, 2015, we changed the source from which Common Shares will be purchased under the DRIP to open market transactions, which are not eligible for purchase price discounts. During the three months ended October 31, 2015 and 2014, approximately 55,000 and 1.8 million Common Shares with a total value included in equity of approximately $377,000 and $13.9 million, and an average price per share after applicable discounts of $6.87 and $7.76, respectively, were issued under the DRIP. During the six months ended October 31, 2015 and 2014, approximately 821,000 and 4.2 million Common Shares with a total value included in equity of $5.6 million and $34.8 million, and an average price per share after applicable discounts of $6.85 and $8.27, respectively, were issued under the DRIP.
 
Exchange Rights. Pursuant to Exchange Rights, during the three months ended October 31, 2015 and 2014, respectively, approximately 75,500 Units and 3.3 million Units were exchanged for Common Shares, with a total value of approximately $279,000 and $19.4 million included in equity. During the six months ended October 31, 2015 and 2014, respectively, approximately 154,000 Units and 6.4 million Units were exchanged for Common Shares, with a total value of approximately $855,000 and $37.7 million included in equity.
 
NOTE 5 • SEGMENT REPORTING
 
We report our results in three reportable segments, which are aggregations of similar properties: multifamily, healthcare (including senior housing) and industrial properties.  Prior to the first quarter of fiscal year 2016, we had reported our results in five reportable segments, which included the office and retail segments. However, during the first quarter of fiscal year 2016, we classified the majority of the properties in the office and retail segments as held for sale and discontinued operations, and the remaining properties under these segments fell below the quantitative thresholds for reporting as separate reportable segments and are included in “all other.”
 
We measure the performance of our segments based on net operating income (“NOI”), 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 US GAAP and should not be considered an alternative to net income, net income available for common shareholders or cash flow from operating activities as a measure of financial performance.
 
The revenues and NOI for these reportable segments are summarized as follows for the three and six month periods ended October 31, 2015 and 2014, along with reconciliations to the condensed consolidated financial statements. Segment assets are also reconciled to total assets as reported in the condensed consolidated financial statements.
 
 
(in thousands)
 
Three Months Ended October 31, 2015
 
Multifamily
   
Healthcare
   
Industrial
   
All Other
   
Total
 
Real estate revenue
 
$
32,107
   
$
16,379
   
$
1,640
   
$
1,179
   
$
51,305
 
Real estate expenses
   
15,218
     
4,163
     
289
     
362
     
20,032
 
Net operating income
 
$
16,889
   
$
12,216
   
$
1,351
   
$
817
     
31,273
 
TRS senior housing revenue, net of expenses
                                   
153
 
Depreciation/amortization
                                   
(14,630
)
Administrative expenses
                                   
(2,933
)
Other expenses
                                   
(1,204
)
Impairment of real estate investments
                                   
(1,873
)
Interest expense
                                   
(10,131
)
Loss on extinguishment of debt
                                   
(106
)
Interest and other income
                                   
665
 
Income from continuing operations
                                   
1,214
 
Income from discontinued operations
                                   
15,463
 
Net income
                                 
$
16,677
 
 
 
(in thousands)
 
Three Months Ended October 31, 2014
 
Multifamily
   
Healthcare
   
Industrial
   
All Other
   
Total
 
Real estate revenue
 
$
29,594
   
$
16,331
   
$
1,593
   
$
2,828
   
$
50,346
 
Real estate expenses
   
12,164
     
4,111
     
272
     
1,217
     
17,764
 
Net operating income
 
$
17,430
   
$
12,220
   
$
1,321
   
$
1,611
     
32,582
 
TRS senior housing revenue, net of expenses
                                   
118
 
Depreciation/amortization
                                   
(13,075
)
Administrative expenses
                                   
(2,890
)
Other expenses
                                   
(578
)
Impairment of real estate investments
                                   
(1,803
)
Interest expense
                                   
(9,954
)
Interest and other income
                                   
696
 
Income before gain on sale of real estate and other investments and loss from discontinued operations
Gain on sale of real estate and other investments
                                   
5,096
1,231
 
Income from continuing operations
Loss from discontinued operations
                                   
6,327
(457
Net income
                                 
$
5,870
 
 
 
(in thousands)
 
Six Months Ended October 31, 2015
 
Multifamily
   
Healthcare
   
Industrial
   
All Other
   
Total
 
Real estate revenue
 
$
63,487
   
$
32,085
   
$
3,262
   
$
2,389
   
$
101,223
 
Real estate expenses
   
29,142
     
7,995
     
683
     
612
     
38,432
 
Net operating income
 
$
34,345
   
$
24,090
   
$
2,579
   
$
1,777
     
62,791
 
TRS senior housing revenue, net of expenses
                                   
422
 
Depreciation/amortization
                                   
(28,073
)
Administrative expenses
                                   
(5,387
)
Other expenses
                                   
(1,628
)
Impairment of real estate investments
                                   
(3,158
)
Interest expense
                                   
(19,327
)
Loss on extinguishment of debt
                                   
(106
)
Interest and other income
                                   
1,272
 
Income before loss on sale of real estate and other investments and income from discontinued operations
     
6,806
 
Loss on sale of real estate and other investments
     
(175
)
Income from continuing operations
     
6,631
 
Income from discontinued operations
     
14,773
 
Net income
   
$
21,404
 
 
 
(in thousands)
 
Six Months Ended October 31, 2014
 
Multifamily
   
Healthcare
   
Industrial
   
All Other
   
Total
 
Real estate revenue
 
$
57,321
   
$
32,533
   
$
3,163
   
$
5,750
   
$
98,767
 
Real estate expenses
   
24,382
     
8,469
     
721
     
2,444
     
36,016
 
Net operating income
 
$
32,939
   
$
24,064
   
$
2,442
   
$
3,306
     
62,751
 
TRS senior housing revenue, net of expenses
                                   
218
 
Depreciation/amortization
                                   
(25,510
)
Administrative expenses
                                   
(6,554
)
Other expenses
                                   
(1,190
)
Impairment of real estate investments
                                   
(4,123
)
Interest expense
                                   
(19,701
)
Interest and other income
                                   
1,382
 
Income before loss on sale of real estate and other investments and income from discontinued operations
                                   
7,273
 
Loss on sale of real estate and other investments
                                   
(1,762
)
Income from continuing operations
                                   
5,511
 
Income from discontinued operations
                                 
$
160
 
Net income
                                   
5,671
 
 
Segment Assets and Accumulated Depreciation
Segment assets are summarized as follows as of October 31, 2015, and April 30, 2015, along with reconciliations to the condensed consolidated financial statements:
 
 
(in thousands)
 
As of October 31, 2015
 
Multifamily
   
Healthcare
   
Industrial
   
All Other
   
Total
 
                     
Segment Assets
                   
Property owned
 
$
1,097,171
   
$
558,979
   
$
60,777
   
$
46,223
   
$
1,763,150
 
Less accumulated depreciation
   
(191,854
)
   
(120,010
)
   
(12,086
)
   
(9,620
)
   
(333,570
)
Net property owned
 
$
905,317
   
$
438,969
   
$
48,691
   
$
36,603
     
1,429,580
 
Assets held for sale
                                   
115,428
 
Cash and cash equivalents
                                   
55,133
 
Other investments
                                   
329
 
Receivables and other assets
                                   
69,155
 
Development in progress
                                   
89,843
 
Unimproved land
                                   
22,485
 
Total assets
                                 
$
1,781,953
 

 
(in thousands)
 
As of April 31, 2015
 
Multifamily
   
Healthcare
   
Industrial
   
All Other
   
Total
 
                     
Segment Assets
                   
Property owned
 
$
946,520
   
$
495,021
   
$
60,611
   
$
44,215
   
$
1,546,367
 
Less accumulated depreciation
   
(180,414
)
   
(112,515
)
   
(11,256
)
   
(9,123
)
   
(313,308
)
Net property owned
 
$
766,106
   
$
382,506
   
$
49,355
   
$
35,092
     
1,233,059
 
Assets held for sale
                                   
463,103
 
Cash and cash equivalents
                                   
48,970
 
Other investments
                                   
329
 
Receivables and other assets
                                   
72,555
 
Development in progress
                                   
153,994
 
Unimproved land
                                   
25,827
 
Total assets
                                 
$
1,997,837
 
 
NOTE 6 • COMMITMENTS AND CONTINGENCIES
 
Litigation.  We are not a party to any legal proceedings which are expected to have a material effect on our liquidity, financial position, cash flows or results of operations. We are subject to a variety of legal actions for personal injury or property damage arising in the ordinary course of our 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 our liquidity, financial position, cash flows or results of operations.
 
Insurance.  We carry insurance coverage on our properties in amounts and types that we believe are customarily obtained by owners of similar properties and are sufficient to achieve our risk management objectives.
 
Purchase Options.  We have granted options to purchase certain of our properties to tenants, 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 our initial cost for the property. As of October 31, 2015, our total property cost for the 15 properties subject to purchase options was $117.6 million, and the total gross rental revenue from these properties was $4.3 million for the six months ended October 31, 2015.  The tenant in the Nebraska Orthopaedic Hospital property has exercised its option to purchase the property. However, we can give no assurance if or when such sale of the property 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 we currently have no knowledge of any material violation of environmental laws, ordinances or regulations at any of our properties, there can be no assurance that areas of contamination will not be identified at any of our properties, or that changes in environmental laws, regulations or cleanup requirements would not result in material costs to us.
 
Restrictions on Taxable Dispositions.  Approximately 78 of our properties, consisting of 2.7 million square feet of our combined commercial properties and 5,372 apartment units, are subject to restrictions on our ability to resell in taxable transactions. These restrictions are contained in agreements we entered into with some of the sellers or contributors of the properties, and are effective for varying periods. The real estate investment amount of these properties (net of accumulated depreciation) was $672.8 million at October 31, 2015. We do not believe that these restrictions materially affect the conduct of our business or decisions whether to dispose of these properties during the restriction periods because we generally hold properties for investment purposes, rather than for sale. Historically, however, where we have deemed it to be in the shareholders’ best interests to dispose of restricted properties, we have done so through tax-deferred transactions under Section 1031 of the Internal Revenue Code.
 
Exchange Value of Units.  Whenever limited partners of the Operating Partnership exercise their Exchange Rights, we have the right, but not the obligation, to acquire such Units in exchange for either cash or our Common Shares on a one-for-one basis. If Units are exchanged for cash, the amount of cash per Unit is equal to the average of the daily market price of a Common Share for the ten consecutive trading days immediately preceding the date of valuation of the Unit.  As of October 31, 2015 and 2014, the aggregate exchange value of the then-outstanding Units of the Operating Partnership owned by limited partners was approximately $112.6 million and $119.8 million, respectively. All Units receive the same cash distributions as those paid on our Common Shares.
 
Joint Venture Buy/Sell Options.  Several of our joint venture agreements contain buy/sell options in which each party under certain circumstances has the option to acquire the interest of the other party, but do not generally require that we buy our partners’ interests. However, from time to time, we have entered into joint venture agreements which contain options compelling us to acquire the interest of the other parties. We currently have one such joint venture, our Southgate apartment project in Minot, North Dakota, in which our joint venture partner can, for the four-year period from February 6, 2016 through February 5, 2020, compel us to acquire the partner’s interest for a price to be determined in accordance with the provisions of the joint venture agreement.  The joint venture partner’s interest is reflected as a redeemable noncontrolling interest on the Condensed Consolidated Balance Sheets.
 
Tenant Improvements. In entering into leases with tenants, we may commit 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 we are 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, 2015, we are committed to fund $4.0 million in tenant improvements within approximately the next 12 months. Of this total, approximately $1.1 million is related to properties classified as held for sale.
 
Development, Expansion and Renovation Projects.  As of October 31, 2015, we had several development, expansion and renovation projects underway or placed in service during the quarter, 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(1)
   
Costs as of
October 31,
2015(1)
 
Anticipated
Construction
Completion
 
Minot Southgate Retail - Minot, ND
Other
 
7,963 sq ft
     
2,923
     
2,622
 
In Service
 
PrairieCare Medical - Brooklyn Park, MN
Healthcare
 
70,756 sq ft
     
24,709
     
24,709
 
In Service
 
Deer Ridge - Jamestown, ND
Multifamily
 
163 units
     
24,519
     
23,830
 
3Q 2016
 
Cardinal Point - Grand Forks, ND(2)
Multifamily
 
251 units
     
44,402
     
40,361
 
4Q 2016
 
71 France - Edina, MN(3)
Multifamily
 
241 units
     
73,290
     
64,006
 
1Q 2017
 
Monticello Crossings - Monticello, MN
Multifamily
 
202 units
     
31,784
     
5,305
 
2Q 2017
 
Other
   
n/
a
   
n/
a
   
n/
a
   
3,095
     
n/
a
                   
$
201,627
   
$
163,928
         
 
(1) Includes costs related to development projects that are placed in service in phases (Deer Ridge - $14.3 million, 71 France - $21.3 million, Cardinal Point - $11.1 million).
(2) Anticipated total cost as of October 31, 2015 includes incremental cost increase due to the replacement of the project’s original general contractor.
(3) The project will be constructed in three phases by a joint venture entity in which we have an approximately 52.6% interest. The anticipated total cost amount given in the table above is the total cost to the joint venture entity. The anticipated total cost includes 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, 2015 and 2014, respectively, was $1.1 million and $1.2 million for development projects completed and in progress. Construction interest capitalized for the six month periods ended October 31, 2015 and 2014, respectively, was $3.4 million and $2.2 million for development projects completed and in progress.
 
Pending Dispositions. We currently have 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:
 
· two retail properties in Minnesota for a sales price of $1.6 million;
 
· a retail property in Minot, North Dakota for a sales price of $1.9 million; and
 
· a healthcare property in Omaha, Nebraska for a sales price of $24.4 million, pursuant to the tenant exercising its purchase option.
 
NOTE 7 • DISCONTINUED OPERATIONS
 
We report in discontinued operations the results of operations and any gain or loss on sale of a property or group of properties that has either been disposed of or is classified as held for sale and for which the disposition represents a strategic shift that has or will have a major effect on our operations and financial results. During the first quarter of fiscal year 2016, we determined that our strategic plan to exit the office and retail segments met the criteria for discontinued operations. Accordingly, 48 office properties, 17 retail properties and 1 healthcare property which were classified as held for sale at July 31, 2015 were also classified as discontinued operations. Of the properties classified as discontinued operations, we sold 39 office properties, 15 retail properties and 1 healthcare property during the second quarter of fiscal year 2016, leaving 9 office properties and 2 retail properties classified as held for sale at October 31, 2015.
 
The following information shows the effect on net income from the properties classified as discontinued operations for the three and six months ended October 31, 2015 and 2014:
 
   
(in thousands)
 
   
Three Months Ended
October 31
   
Six Months Ended
October 31
 
   
2015
   
2014
   
2015
   
2014
 
REVENUE
               
Real estate rentals
 
$
4,776
   
$
13,531
   
$
18,390
   
$
27,093
 
Tenant reimbursement
   
1,386
     
6,165
     
7,550
     
12,019
 
TOTAL REVENUE
   
6,162
     
19,696
     
25,940
     
39,112
 
EXPENSES
                               
Depreciation/amortization related to real estate investments
   
0
     
3,969
     
4,239
     
7,939
 
Utilities
   
857
     
2,069
     
2,600
     
3,805
 
Maintenance
   
1,204
     
2,766
     
4,196
     
5,544
 
Real estate taxes
   
1,166
     
3,485
     
4,585
     
6,999
 
Insurance
   
139
     
277
     
404
     
551
 
Property management expenses
   
422
     
876
     
1,473
     
1,840
 
Amortization related to non-real estate investments
   
273
     
624
     
897
     
1,275
 
Impairment of real estate investments
   
0
     
1,442
     
440
     
1,442
 
TOTAL EXPENSES
   
4,061
     
15,508
     
18,834
     
29,395
 
Operating income
   
2,101
     
4,188
     
7,106
     
9,717
 
Interest expense(1)
   
(3,631
)
   
(4,645
)
   
(9,396
)
   
(9,562
)
Loss on extinguishment of debt
   
(7,120
)
   
0
     
(7,120
)
   
0
 
Other income
   
203
     
0
     
273
     
5
 
(Loss) income from discontinued operations before gain on sale
   
(8,447
)
   
(457
)
   
(9,137
)
   
160
 
Gain on sale of discontinued operations
   
23,910
     
0
     
23,910
     
0
 
INCOME (LOSS) FROM DISCONTINUED OPERATIONS(2)
 
$
15,463
   
$
(457
)
 
$
14,773
   
$
160
 
 
(1) Includes $1.6 million  and $3.1 million for the three and six months ended October 31, 2015, respectively, of default interest related to a $122.6 million non-recourse loan by one of our subsidiaries, for which we received a default notice from the special servicer on April 14, 2015 due to nonpayment on April 6, 2015.
(2) Discontinued operations include a noncontrolling interest for our Mendota joint venture entity.  Income (loss) from discontinued operations attributable to IRET was $16.5 million and $(327,000) for the three months ended October 31, 2015 and 2014, respectively, and $16.0 million and $386,000 for the six months ended October 31, 2015and 2014, respectively.
 
The following information reconciles the carrying amounts of major classes of assets and liabilities of the discontinued operations to assets and liabilities held for sale that are presented separately on the Condensed Consolidated Balance Sheets:
 
   
(in thousands)
 
   
October 31, 2015
   
April 30, 2015
 
Carrying amounts of major classes of assets included as part of discontinued operations
       
Property owned and intangible assets, net of accumulated depreciation and amortization
 
$
88,283
   
$
417,045
 
Receivable arising from straight-lining of rents
   
2,398
     
10,078
 
Accounts receivable
   
391
     
566
 
Prepaid and other assets
   
73
     
699
 
Tax, insurance and other escrow
   
0
     
1,176
 
Goodwill
   
0
     
193
 
Deferred charges and leasing costs
   
1,883
     
9,606
 
Total major classes of assets of the discontinued operations
   
93,028
     
439,363
 
Other assets included in the disposal group classified as held for sale
   
22,400
     
23,740
 
Total assets of the disposal group classified as held for sale on the balance sheet
 
$
115,428
   
$
463,103
 
                 
Carrying amounts of major classes of liabilities included as part of discontinued operations
               
Accounts payable and accrued expenses
 
$
11,320
   
$
13,952
 
Mortgages payable
   
122,610
     
295,677
 
Other
   
0
     
4
 
Total major classes of liabilities of the discontinued operations
   
133,930
     
309,633
 
Other liabilities included in the disposal group classified as held for sale
   
11,635
     
11,760
 
Total liabilities of the disposal group classified as held for sale on the balance sheet
 
$
145,565
   
$
321,393
 
 
NOTE 8 • ACQUISITIONS, DEVELOPMENTS PLACED IN SERVICE AND DISPOSITIONS
 
PROPERTY ACQUISITIONS
 
We added $71.8 million new real estate properties to our portfolio through property acquisitions during the six months ended October 31, 2015, compared to $36.7 million in the six months ended October 31, 2014. We expensed approximately $153,000 and $104,000 of transaction costs related to the acquisitions in the six months ended October 31, 2015 and 2014, respectively. Our acquisitions during the six months ended October 31, 2015 and 2014 are detailed below.
 
Six Months Ended October 31, 2015
 
       
(in thousands)
 
       
Total
Acquisition
Cost
   
Form of Consideration
   
Investment Allocation
 
Acquisitions
 
Date Acquired
   
Cash
   
Units(1)
   
Land
 
Building
   
Intangible
Assets
 
                           
Multifamily
                         
74 unit - Gardens - Grand Forks, ND
   
2015-09-10
   
$
9,250
   
$
8,850
   
$
400
   
$
518
 
$
8,672
   
$
60
 
276 unit - GrandeVille at Cascade Lake - Rochester, MN
   
2015-10-29
     
56,000
     
56,000
     
0
     
5,003
   
50,363
     
634
 
             
65,250
     
64,850
     
400
     
5,521
   
59,035
     
694
 
                                                       
Healthcare
                                                     
27,819 sq ft Lakeside Medical Plaza - Omaha, NE
   
2015-08-20
     
6,500
     
6,500
     
0
     
903
   
5,109
     
488
 
                                                       
Total Property Acquisitions
         
$
71,750
   
$
71,350
   
$
400
   
$
6,424
 
$
64,144
   
$
1,182
 
 
(1) Value of Units of the Operating Partnership at the acquisition date.
 
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
 
                                 
Multifamily
                               
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 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, we adjusted the assumed debt to fair value and recognized approximately $852,000 of goodwill.
(4) Land was contributed to a joint venture in which we have an approximately 52.6% interest. The joint venture is consolidated in our financial statements.
 
Acquisitions in the six months ended October 31, 2015 and 2014 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, 2015 and 2014, respectively, (excluding development projects placed in service) are detailed below.
 
 
(in thousands)
 
Six Months Ended October 31,
2015
 
2014
 
Total revenue
 
$
268
   
$
1,003
 
Net income (loss)
 
$
(219
)
 
$
(38
)
 
DEVELOPMENT PROJECTS PLACED IN SERVICE
 
The Operating Partnership placed $137.0 million and $10.3 million of development projects in service during the six months ended October 31, 2015 and 2014, respectively, as detailed below.
 
Six Months Ended October 31, 2015
 
       
(in thousands)
 
Development Projects Placed in Service (1)
 
Date Placed in
Service
   
Land
   
Building
   
Development
Cost
 
                 
Multifamily
               
72 unit – Chateau II - Minot, ND(2)
   
2015-06-01
   
$
240
   
$
14,401
   
$
14,641
 
288 unit – Renaissance Heights - Williston, ND(3)
   
2015-07-27
     
3,080
     
59,440
     
62,520
 
             
3,320
     
73,841
     
77,161
 
Healthcare
                               
57,624 sq ft Edina 6565 France SMC III - Edina, MN(4)
   
2015-06-01
     
0
     
32,495
     
32,495
 
70,756 sq ft PrairieCare Medical – Brooklyn Park, MN(5)
   
2015-09-08
     
2,610
     
22,099
     
24,709
 
             
2,610
      54,594       57,204  
                                 
Other
                               
7,963 sq ft Minot Southgate Retail - Minot, ND(6)
   
2015-10-01
     
889
     
1,733
     
2,622
 
                                 
Total Development Projects Placed in Service
         
$
6,819
   
$
130,168
   
$
136,987
 
 
(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 Deer Ridge, 71 France, and Cardinal Point projects, which were partially placed in service during the three months ended October, 2015.
(2) Costs paid in prior fiscal years totaled $12.3 million. Additional costs paid in fiscal year 2016 totaled $2.3 million, for a total project cost at October 31, 2015 of $14.6 million.
(3) Costs paid in prior fiscal years totaled $57.7 million. Additional costs paid in fiscal year 2016 totaled $4.8 million, for a total project cost at October 31, 2015 of $62.5 million. The project is owned by a joint venture entity in which we have an approximately 70.0% interest. The joint venture is consolidated in our financial statements.
(4) Costs paid in prior fiscal years totaled $20.8 million. Additional costs paid in fiscal year 2016 totaled $11.7 million, for a total project cost at October 31, 2015 of $32.5 million.
(5) Costs paid in prior fiscal years totaled $17.3 million. Additional costs paid in fiscal year 2016 totaled $7.4 million, for a total project cost at October 31, 2015 of $24.7 million.
(6) Costs paid in prior fiscal years totaled $2.1 million. Additional costs paid in fiscal year 2016 totaled approximately $500,000, for a total project cost at October 31, 2015 of $2.6 million.
 
Six Months Ended October 31, 2014
 
       
(in thousands)
 
Development Projects Placed in Service
 
Date Placed in
Service
   
Land
   
Building
   
Development
Cost
 
                 
Multifamily
               
44 unit – Dakota Commons - Williston, ND(1)
   
2014-07-15
     
823
     
9,452
     
10,275
 
                                 
Total Development Projects Placed in Service
         
$
823
   
$
9,452
   
$
10,275
 
 
(1) Costs paid in prior fiscal years totaled $8.1 million. Additional costs paid in fiscal year 2015 totaled $2.2 million, for a total project cost at October 31, 2014 of $10.3 million.
 
PROPERTY DISPOSITIONS
 
During the second quarter of fiscal year 2016, we sold 39 office properties, 1 healthcare property and 15 retail properties for a total sales price of $371.9 million. During the second quarter of fiscal year 2015, we sold one multifamily property, one office property and one retail property, along with the adjacent unimproved land for a total sales price of $10.9 million. The following table details our dispositions during the six months ended October 31, 2015 and 2014:
 
Six Months Ended October 31, 2015
 
       
(in thousands)
 
Dispositions
 
Date
Disposed
   
Sales Price
   
Book Value
and Sales Cost
   
Gain/(Loss)
 
                 
Other
               
117,144 sq ft Thresher Square - Minneapolis, MN
   
2015-05-18
   
$
7,000
   
$
7,175
   
$
(175
)
2,549,222 sq ft Office Sale Portfolio(1)
   
2015-08-03
     
250,000
     
231,537
     
18,463
 
420,216 sq ft Mendota Office Center Portfolio – Mendota Heights, MN(2)
   
2015-08-12
     
40,000
     
41,574
     
(1,574
)
1,027,208 sq ft Retail Sale Portfolio(3)
   
2015-09-30
     
78,960
     
71,913
     
7,047
 
48,700 sq ft Eden Prairie 6101 Blue Circle Drive – Eden Prairie, MN
   
2015-10-19
     
2,900
     
2,928
     
(28
)
                                 
Total Property Dispositions
         
$
378,860
   
$
355,127
   
$
23,733
 
 
(1) The properties included in this portfolio disposition are: 610 Business Center, 7800 West Brown Deer Road, Ameritrade, Barry Pointe Office Park, Benton Business Park, Brenwood, Brook Valley I, Crosstown Centre, Golden Hills Office Center, Granite Corporate Center, Great Plains, Highlands Ranch I, Highlands Ranch II, Interlachen Corporate Center, Intertech Building, Minnesota National Bank, Northpark Corporate Center, Omaha 10802 Farnam Dr, Plaza VII, Plymouth 5095 Nathan Lane, Prairie Oak Business Center, Rapid City 900 Concourse Drive, Spring Valley IV, Spring Valley V, Spring Valley X, Spring Valley XI, Superior Office Building, TCA Building, Three Paramount Plaza, UHC Office, US Bank Financial Center, Wells Fargo Center, West River Business Park and Westgate.
(2) The properties included in this portfolio disposition are: Mendota Office Center I, Mendota Office Center II, Mendota Office Center III, Mendota Office Center IV and American Corporate Center.
(3) The properties included in this portfolio disposition  are: Champlin South Pond, Chan West Village, Duluth 4615 Grand, Duluth Denfeld Retail, Forest Lake Auto, Forest Lake Westlake Center, Grand Forks Medpark Mall, Jamestown Buffalo Mall, Jamestown Business Center, Monticello C Store & vacant land, Omaha Barnes & Noble, Pine City Evergreen Square, Rochester Maplewood Square and St. Cloud Westgate.
 
Six Months Ended October 31, 2014
 
       
(in thousands)
 
Dispositions
 
Date
Disposed
   
Sales Price
   
Book Value
and Sales Cost
   
Gain/(Loss)
 
                 
Multifamily
               
83 unit - Lancaster - St. Cloud, MN
   
2014-09-22
     
4,451
     
3,033
     
1,418
 
                                 
Industrial
                               
198,600 sq ft Eagan 2785 & 2795 - Eagan, MN
   
2014-07-15
     
3,600
     
5,393
     
(1,793
)
                                 
Other
                               
73,338 sq ft Dewey Hill - Edina, MN
   
2014-05-19
     
3,100
     
3,124
     
(24
)
25,644 sq ft Weston Retail - Weston, WI
   
2014-07-28
     
n/
a
   
1,176
     
(1,176
)
74,568 sq ft Wirth Corporate Center - Golden Valley, MN
   
2014-08-29
     
4,525
     
4,695
     
(170
)
52,000 sq ft Kalispell Retail - Kalispell, MT
   
2014-10-15
     
1,230
     
1,229
     
1
 
             
8,855
     
10,224
     
(1,369
)
Unimproved Land
                               
Kalispell Unimproved - Kalispell, MT
   
2014-10-15
     
670
     
670
     
0
 
                                 
Total Property Dispositions
         
$
17,576
   
$
19,320
   
$
(1,744
)
 
NOTE 9 • MORTGAGES PAYABLE AND LINE OF CREDIT
 
Most of the properties we own serve as collateral for separate mortgage loans on single properties or groups of properties. The majority of these mortgages payable are non-recourse to us, other than for standard carve-out obligations such as fraud, waste, failure to insure, environmental conditions and failure to pay real estate taxes. Interest rates on mortgages payable range from 2.70% to 8.25%, and the mortgages have varying maturity dates from the current fiscal year through July 1, 2036. As of October 31, 2015, our management believes there are no defaults or material compliance issues in regard to any mortgages payable other than one $122.6 million non-recourse loan by one of our subsidiaries, for which we received a default notice from the special servicer on April 14, 2015 due to nonpayment on April 6, 2015. This loan is related to assets held for sale. The aggregate estimated fair value of the assets securing this loan is less than the outstanding loan balance of $122.6 million. This loan matures in October 2016 and has an interest rate of 5.93%. We are currently discussing a deed in lieu agreement with the lender, but we can give no assurance that such resolution will be entered into or that another mutually acceptable resolution will be reached.
 
Of the mortgages payable, the balances of fixed rate mortgages totalled $639.1 million at October 31, 2015 and $629.8 million at April 30, 2015. The balances of variable rate mortgages totalled $89.8 million and $38.3 million as of October 31, 2015 and April 30, 2015, respectively. We do not utilize derivative financial instruments to mitigate our exposure to changes in market interest rates. Most of the fixed rate mortgages have substantial pre-payment penalties. As of October 31, 2015, the weighted average rate of interest on our mortgage debt was 5.04%, compared to 4.95% on April 30, 2015. The aggregate amount of required future principal payments on mortgages payable as of October 31, 2015, excluding $133.4 million in outstanding mortgage indebtedness related to assets held for sale, is as follows:
 
Fiscal year ended April 30,
 
(in thousands)
 
2016 (remainder)
 
$
58,971
 
2017
   
43,389
 
2018
   
41,008
 
2019
   
116,390
 
2020
   
110,690
 
Thereafter
   
358,525
 
Total payments
 
$
728,973
 
 
In addition to the individual first mortgage loans comprising our $728.9 million of mortgage indebtedness, we also have 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, 2015, lending commitments of $100.0 million. This line of credit is not included in our mortgage indebtedness total. As of October 31, 2015, the line of credit was secured by mortgages on 16 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, 2015 included, in addition to First International Bank, the following financial institutions: The Bank of North Dakota; First Western Bank and Trust; Dacotah Bank; Highland Bank; American State Bank & Trust Company; Town & Country Credit Union, WoodTrust Bank, and United Community Bank. As of October 31, 2015, the line of credit had an interest rate of 4.75% and a minimum outstanding principal balance requirement of $17.5 million. As of October 31, 2015 and April 30, 2015, we had borrowed $17.5 million and $60.5 million, respectively. The line of credit includes covenants and restrictions requiring us 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. We are also required to maintain minimum depository account(s) totaling $6.0 million with First International Bank, of which $1.5 million is to be held in a non-interest bearing account. As of October 31, 2015, we believe we were in compliance with the line of credit’s covenants.
 
NOTE 10 • FAIR VALUE MEASUREMENTS
 
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
 
We had no assets or liabilities recorded at fair value on a recurring basis at October 31, 2015 and April 30, 2015.
 
Fair Value Measurements on a Nonrecurring Basis
 
Non-financial assets and liabilities measured at fair value on a nonrecurring basis at October 31, 2015 consisted of real estate held for sale that was written-down to estimated fair value during the six months ended October 31, 2015. Non-financial assets measured at fair value on a nonrecurring basis at April 30, 2015 consisted of real estate held for sale that was written-down to estimated fair value during fiscal year 2015. See Note 2 for additional information on impairment losses recognized during fiscal years 2016 and 2015. The aggregate fair value of these assets by their levels in the fair value hierarchy is as follows:
 
   
(in thousands)
 
   
Total
   
Level 1
   
Level 2
   
Level 3
 
October 31, 2015
               
Real estate held for sale
 
$
5,615
   
$
0
   
$
0
   
$
5,615
 
                                 
April 30, 2015
                               
Real estate held for sale
   
7,100
     
0
     
0
     
7,100
 
 
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 the 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 our financial instruments as of October 31, 2015 and April 30, 2015, are as follows:
 
   
(in thousands)
 
   
October 31, 2015
   
April 30, 2015
 
   
Carrying Amount
   
Fair Value
   
Carrying Amount
   
Fair Value
 
FINANCIAL ASSETS
               
Cash and cash equivalents
 
$
55,133
   
$
55,133
   
$
48,970
   
$
48,970
 
Other investments
   
329
     
329
     
329
     
329
 
FINANCIAL LIABILITIES
                               
Other debt
   
128,362
     
128,007
     
144,090
     
143,749
 
Line of credit
   
17,500
     
17,500
     
60,500
     
60,500
 
Mortgages payable
   
728,973
     
783,921
     
668,112
     
749,604
 
Mortgages payable related to assets held for sale
   
133,398
     
163,117
     
306,716
     
374,818
 
 
NOTE 11 • REDEEMABLE NONCONTROLLING INTERESTS
 
Redeemable noncontrolling interests on the Condensed Consolidated Balance Sheets represent the noncontrolling interest in joint ventures in which our unaffiliated partner, at its election, could require us to buy its interest at a purchase price to be determined by an appraisal conducted in accordance with the terms of the agreement, or at a negotiated price. Redeemable noncontrolling interests are presented at the greater of their carrying amount or redemption value at the end of each reporting period. Changes in the value from period to period are charged to Common Shares on the Condensed Consolidated Balance Sheets. We currently have one joint venture, the Southgate apartment project in Minot, North Dakota, in which our joint venture partner can, for the four-year period from February 6, 2016 through February 5, 2020, compel us to acquire the partner’s interest for a price to be determined in accordance with the provisions of the joint venture agreement.
 
As of October 31, 2015 and 2014, the estimated redemption value of the redeemable noncontrolling interests was $7.1 million and $6.4 million, respectively. Below is a table reflecting the activity of the redeemable noncontrolling interests.
 
   
(in thousands)
 
Balance at April 30, 2015
 
$
6,368
 
Contributions
   
826
 
Net loss
   
(89
)
Balance at October 31, 2015
 
$
7,105
 

 
   
(in thousands)
 
Balance at April 30, 2014
 
$
6,203
 
Net income
   
170
 
Balance at October 31, 2014
 
$
6,373
 
 
NOTE 12 • SHARE BASED COMPENSATION
 
Share based awards are provided to officers, non-officer employees and trustees under our 2015 Incentive Plan approved by shareholders on September 15, 2015, which allows for awards in the form of cash and unrestricted and restricted Common Shares, up to an aggregate of 4,250,000 shares, over the ten year period in which the plan will be in effect. Through October 31, 2015, awards under the 2015 Incentive Plan consisted of restricted and unrestricted Common Shares.
 
Prior to the approval of our 2015 Incentive Plan, share based awards were provided to officers, non-officer employees and trustees under the our 2008 Incentive Award Plan, which was approved by shareholders on September 16, 2008, which allowed for awards in the form of cash and unrestricted and restricted Common Shares, up to an aggregate of 2,000,000 shares, over the period in which the plan will be in effect.  Through October 31, 2015, awards under the 2008 Incentive Award Plan consisted of cash and restricted and unrestricted Common Shares.
 
Long-Term Incentive Plan
 
Under the 2008 Incentive Award Plan, our officers and non-officer employees could earn share awards under the Long-Term Incentive Plan (“LTIP”) adopted pursuant to the plan, which was a backward-looking program that measured performance over a one-year performance period beginning on the first day of each fiscal year. Such awards were payable to the extent deemed earned in shares, 50% of which vested on the last day of the performance period and 50% of which vested on the first anniversary of the end of the performance period. Such awards utilized the sole performance metric of the three-year average of the annual absolute total shareholder return (“TSR”).
 
Under the 2015 Incentive Plan, our officers and non-officer employees may earn share awards under a revised long-term incentive plan, a forward-looking program that measures long-term performance over the stated performance period. Such awards are payable to the extent deemed earned in shares, 50% of which will vest at the conclusion of the performance period and 50% of which will vest on the first anniversary of the end of the performance period. To accommodate the transition from the 2008 Incentive Award Plan to the 2015 Incentive Plan, performance periods for such awards granted on September 16, 2015 (“2016 LTIP Awards”) included one-year, two-year and three-year periods beginning on May 1, 2015. Going forward, it is anticipated that LTIP awards will be issued with a three-year performance period. The 2016 LTIP Awards utilize the performance metrics of relative TSR for 67% of the award and absolute TSR for 33% of the award. The 2016 LTIP Awards for performance periods of one, two and three years were 380,498; 353,535 and 353,535 shares, respectively.
 
In connection with the LTIP awards, we recognize compensation expense ratably (over 31.5 months for the 50% unrestricted shares and over 43.5 months for the 50% restricted shares) based on the grant date fair value, as determined using a binomial model employing the Monte Carlo simulation, and regardless of whether the market conditions are achieved and the LTIP awards ultimately vest.  The market conditions utilized for the 2016 LTIP Awards are absolute TSR (1/3 weighting) and relative TSR measured against the MSCI US REIT Index (2/3 weighting). The model evaluates the LTIP awards for changing TSR over the vesting periods, and uses random simulations that are based on past share characteristics as well as distribution growth and other factors. The assumptions used to value the LTIP awards were an expected volatility of 16.6%, a risk-free interest rate of 1.13% and an expected life of 3 years.  We based the expected volatility on the historical volatility of our daily closing share price. The share price at the grant date, September 16, 2015, was $7.13.  We based the risk-free interest rate on the interest rates on U.S. treasury bonds with a maturity equal to the remaining performance period of the LTIP award. We based the expected term on the performance period of the LTIP award.
 
The calculated grant date fair value as a percentage of the officers’ base salary for the 2016 LTIP Awards with a three-year performance period that beginning on May 1, 2015 ranged from approximately 42% to 85% for the portion of the awards based on relative TSR and from 5% to 10% for the portion of the awards based on absolute TSR. For the transition 2016 LTIP Awards with a one-year performance period beginning on May 1, 2015, the calculated grant date fair value as a percentage of the officers’ base salary ranged from approximately 46% to 96% for the portion of the awards based on relative TSR and from 5% to 10% for the portion of the awards based on absolute TSR. For the transition 2016 LTIP Awards with a two-year performance period beginning on May 1, 2015, the calculated grant date fair value as a percentage of the officers’ base salary ranged from approximately 43% to 86% for the portion of the awards based on relative TSR and from 5% to 10% for the portion of the awards based on absolute TSR.
 
Total Compensation Expense
Share-based compensation expense recognized in the consolidated financial statements for all outstanding share based awards was approximately $539,000 and $601,000 for the three months ended October 31, 2015 and 2014, respectively, and approximately $605,000 and $1.7 million for the six months ended October 31, 2015 and 2014, respectively.
 
Restricted Share Awards
 
No share awards vested during the six months ended October 31, 2015 and 2014.  The total unvested restricted share awards at October 31, 2015 was 107,536, which had a weighted average grant date fair value of $7.17 per share.
 
As of October 31, 2015, the total compensation cost related to non-vested share awards not yet recognized was approximately $193,000, which we expect to recognize during the remainder of fiscal year 2016.
 
NOTE 13 • SUBSEQUENT EVENTS
 
Common and Preferred Share Distributions. On December 3, 2015, our 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 4, 2016
January 15, 2016
Preferred shares:
             
Series A
 
$
0.5156
 
December 15, 2015
December 31, 2015
Series B
 
$
0.4968
 
December 15, 2015
December 31, 2015
 
Executed Lease.  In November 2015, a new 89-month lease was executed for 143,956 square feet at the Roseville 3075 Long Lake Road property, a newly redeveloped industrial property located in Roseville, MN. The lease accounts for approximately 11.8% of the rentable square footage for our industrial segment.
 
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 our audited financial statements for the fiscal year ended April 30, 2015, which are included in our Form 10-K filed with the SEC on June 29, 2015.
 
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
 
We are a self-advised equity REIT engaged in owning and operating income-producing real estate properties. Our investments include multifamily residential properties and commercial properties located primarily in the upper Midwest states of Minnesota and North Dakota.  As of October 31, 2015, we held for investment 94 multifamily properties containing 12,269 apartment units and having a total real estate investment amount net of accumulated depreciation of $905.3 million, and 83 commercial properties containing approximately 4.5 million square feet of leasable space and having a total real estate investment amount net of accumulated depreciation of $524.3 million. We held for sale 8 multifamily and 13 commercial properties as of October 31, 2015.
 
Our primary source of income and cash is rents associated with multifamily and commercial leases.  Our business objective is to increase shareholder value by employing a disciplined investment strategy. This strategy is implemented by growing income-producing assets in desired geographical markets in real estate classes we believe will provide a consistent return on investment for our shareholders. 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 our critical accounting policies is included in our Form 10-K for the fiscal year ended April 30, 2015, filed with the SEC on June 29, 2015, under the section titled “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, 2015.
 
Significant Events and Transactions during the Three Months Ended October 31, 2015
 
Summarized below are significant transactions and events that occurred during the second quarter of our fiscal year 2016:
 
· The acquisition of a 27,819 square foot healthcare property in Omaha, Nebraska for a purchase price of $6.5 million, a 74-unit multifamily property in Grand Forks, North Dakota for a purchase price of $9.3 million, and a 276-unit multifamily property in Rochester, Minnesota, for a purchase price of $56.0 million.
 
· The placement into service of the 70,756 square foot PrairieCare Medical project in Brooklyn Park, Minnesota and the 7,963 square foot Minot Southgate Retail project in Minot, North Dakota.
 
· The dispositions of 39 office properties, one healthcare property and 15 retail properties for sales prices totaling $371.9 million.
 
Market Conditions and Outlook

The demand for investment and institutional quality real estate in our markets is strong.  Investors have abundant equity and access to debt to facilitate acquisitions.  Prices and sales volumes are up over last year.  Fundamentals are also favorable with flat or declining vacancies and rising rents in most of our markets.  The exception for us is in the Bakken Oil impacted markets of Williston and Minot, North Dakota where we are experiencing rising apartment vacancies and concessions to attract residents.

We experienced generally stable trends across our apartment investments during the first two quarters of fiscal year 2016. Same-store net operating income was flat and occupancy slipped from 96.0 to 95.4% from one year ago on same store properties.  According to AXIOMetrics Inc., the national apartment occupancy rate improved 0.1% to 95.1% from one year ago, October 31, 2014.  Our ability to maintain occupancy levels and raise rents remains dependent on continued healthy employment and wage growth. We have continued to observe considerable multifamily development activity in our markets, and as this new construction is completed and leased, we will experience increased competition for residents. However, based on information available to us, apartment developers in our markets are currently seeing increases in construction costs for potential new apartment developments, which may slow new developments in our markets.  The U.S. economic outlook through 2017 is forecasted to be good according to U.S. Bureau of Labor Statistics and Moody’s Analytics.  Businesses are adding jobs and for the first time in this phase of the economic cycle we are seeing meaningful wage growth.  There is an attitudinal shift also occurring toward renting by professional millennials and to lesser, although growing degree, by baby boomers.  These trends are beneficial to apartment owners.

Our healthcare segment consists of medical office properties and senior housing facilities. The medical office component remains stable with high occupancy at 96.0% (same store) and modest rent increases.

The industrial property market continues to improve as vacancies have come down across the country and in our principal market of Minneapolis.  Our industrial properties are located primarily in the Minneapolis market, and same-store occupancy remained at 100%. The demand for bulk warehouse and manufacturing space in our markets is healthy, with rents generally rising.

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 multifamily properties and 85% for healthcare, industrial and other properties.
 
For the comparison of the three and six months ended October 31, 2015 and 2014, all or a portion of 52 properties were non-same-store, of which 16 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 for a commercial development property and upon receipt of a certificate of occupancy for a multifamily 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, 2015 and 2014
 
The discussion that follows is based on our consolidated results of operations for the three and six months ended October 31, 2015 and 2014.
 
   
(in thousands, except percentages)
 
   
Three Months Ended
   
Six Months Ended
 
   
October 31
   
2015 vs 2014
   
October 31
   
2015 vs 2014
 
   
2015
   
2014
   
$ Change
   
% Change
   
2015
   
2014
   
$ Change
   
% Change
 
Real estate rentals
 
$
46,727
   
$
45,304
   
$
1,423
     
3.1
%
 
$
92,249
   
$
88,868
   
$
3,381
     
3.8
%
Tenant reimbursement
   
4,578
     
5,042
     
(464
)
   
(9.2
)%
   
8,974
     
9,899
     
(925
)
   
(9.3
)%
TRS senior housing revenue
   
965
     
843
     
122
     
14.5
%
   
2,003
     
1,636
     
367
     
22.4
%
TOTAL REVENUE
   
52,270
     
51,189
     
1,081
     
2.1
%
   
103,226
     
100,403
     
2,823
     
2.8
%
Depreciation/amortization related to real estate investments
   
14,461
     
12,859
     
1,602
     
12.5
%
   
27,733
     
25,073
     
2,660
     
10.6
%
Utilities
   
3,124
     
3,024
     
100
     
3.3
%
   
6,330
     
5,969
     
361
     
6.1
%
Maintenance
   
5,784
     
5,062
     
722
     
14.3
%
   
11,158
     
10,048
     
1,110
     
11.1
%
Real estate taxes
   
5,002
     
4,781
     
221
     
4.6
%
   
9,919
     
9,768
     
151
     
1.6
%
Insurance
   
1,244
     
1,068
     
176
     
16.5
%
   
2,344
     
2,530
     
(186
)
   
(7.4
)%
Property management expenses
   
4,635
     
3,479
     
1,156
     
33.2
%
   
8,506
     
7,145
     
1,361
     
19.1
%
Other property expenses
   
243
     
350
     
(107
)
   
(30.6
)%
   
175
     
556
     
(381
)
   
(68.5
)%
TRS senior housing expenses
   
812
     
725
     
87
     
12.0
%
   
1,581
     
1,418
     
163
     
11.5
%
Administrative expenses
   
2,933
     
2,890
     
43
     
1.5
%
   
5,387
     
6,554
     
(1,167
)
   
(17.8
)%
Other expenses
   
1,204
     
578
     
626
     
108.3
%
   
1,628
     
1,190
     
438
     
36.8
%
Amortization related to non-real estate investments
   
169
     
216
     
(47
)
   
(21.8
)%
   
340
     
437
     
(97
)
   
(22.2
)%
Impairment of real estate investments
   
1,873
     
1,803
     
70
     
3.9
%
   
3,158
     
4,123
     
(965
)
   
(23.4
)%
TOTAL EXPENSES
   
41,484
     
36,835
     
4,649
     
12.6
%
   
78,259
     
74,811
     
3,448
     
4.6
%
Operating income
   
10,786
     
14,354
     
(3,568
)
   
(24.9
)%
   
24,967
     
25,592
     
(625
)
   
(2.4
)%
Interest expense
   
(10,131
)
   
(9,954
)
   
(177
)
   
1.8
%
   
(19,327
)
   
(19,701
)
   
374
     
(1.9
)%
Loss on debt extinguishment
   
(106
)
   
0
     
(106
)
   
(100.0
)%
   
(106
)
   
0
     
(106
)
   
(100.0
)%
Interest income
   
565
     
560
     
5
     
0.9
%
   
1,121
     
1,120
     
1
     
0.1
%
Other income
   
100
     
136
     
(36
)
   
(26.5
)%
   
151
     
262
     
(111
)
   
(42.4
)%
Income before gain (loss) on sale of real estate and other investments and income from discontinued operations
   
1,214
     
5,096
     
(3,882
)
   
(76.2
)%
   
6,806
     
7,273
     
(467
)
   
(6.4
)%
Gain (loss) on sale of real estate and other investments
   
0
     
1,231
     
(1,231
)
   
(100.0
)%
   
(175
)
   
(1,762
)
   
1,587
     
(90.1
)%
Income from continuing operations
   
1,214
     
6,327
     
(5,113
)
   
(80.8
)%
   
6,631
     
5,511
     
1,120
     
20.3
%
Income (loss) from discontinued operations
   
15,463
     
(457
)
   
15,920
     
(3,483.6
)%
   
14,773
     
160
     
14,613
     
9,133.1
%
NET INCOME
   
16,677
     
5,870
     
10,807
     
184.1
%
   
21,404
     
5,671
     
15,733
     
277.4
%
Net (income) loss attributable to noncontrolling interests – Operating Partnership
   
(1,527
)
   
(363
)
   
(1,164
)
   
320.7
%
   
(1,713
)
   
39
     
(1,752
)
   
(4,492.3
)%
Net loss (income) attributable to noncontrolling interests – consolidated real estate entities
   
1,516
     
(393
)
   
1,909
     
(485.8
)%
   
1,515
     
(747
)
   
2,262
     
(302.8
)%
Net income attributable to Investors Real Estate Trust
   
16,666
     
5,114
     
11,552
     
225.9
%
   
21,206
     
4,963
     
16,243
     
327.3
%
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
 
$
13,788
   
$
2,236
     
11,552
     
516.6
%
 
$
15,449
   
$
(794
)
   
16,243
     
(2,045.7
)%
 
Revenues.  Revenues for the three months ended October 31, 2015 were $52.3 million compared to $51.2 million in the three months ended October 31, 2014, an increase of $1.1 million or 2.1%. The increase in revenue for the three months ended October 31, 2015 resulted primarily from properties acquired and development projects placed in service in fiscal years 2016 and 2015, as shown in the table below.
 
   
(in thousands)
 
   
Increase in Total
Revenue
Three Months
ended October 31, 2015
 
Rent in Fiscal 2016 primarily from properties acquired and development projects placed in service in Fiscal 2016
 
$
980
 
Rent in Fiscal 2016 primarily from properties acquired and development projects placed in service in Fiscal 2015 in excess of that received in Fiscal 2015 from the same properties
   
2,413
 
Decrease in rent on same-store properties, excluding straight line rent(1)
   
(89
)
Net change in straight line rent on same-store properties(1)
   
(224
)
Decrease in rent from properties sold or classified as held for sale in Fiscal 2016 and 2015
   
(2,121
)
TRS senior housing revenue in excess of that received in Fiscal 2015(2)
   
122
 
Net increase in total revenue
 
$
1,081
 
 
(1) See analysis of NOI by segment below for additional information.
(2) See discussion in TRS Senior Housing Expenses paragraph below.
 
Revenues for the six months ended October 31, 2015 were $103.2 million compared to $100.4 million in the six months ended October 31, 2014, an increase of $2.8 million or 2.8%. The increase in revenue for the six months ended October 31, 2015 resulted primarily from properties acquired and development projects placed in service in fiscal years 2016 and 2015, as shown in the table below.
 
   
(in thousands)
 
   
Increase in Total
Revenue
Six Months
ended October 31, 2015
 
Rent in Fiscal 2016 primarily from properties acquired and development projects placed in service in Fiscal 2016
 
$
1,116
 
Rent in Fiscal 2016 primarily from properties acquired and development projects placed in service in Fiscal 2015 in excess of that received in Fiscal 2015 from the same properties
   
5,931
 
Increase in rent on same-store properties, excluding straight line rent(1)
   
276
 
Net change in straight line rent on same-store properties(1)
   
(537
)
Decrease in rent from properties sold or classified as held for sale in Fiscal 2016 and 2015
   
(4,330
)
TRS senior housing revenue in excess of that received in Fiscal 2015(2)
   
367
 
Net increase in total revenue
 
$
2,823
 
 
(1) See analysis of NOI by segment below 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 12.5% to $14.5 million in the second quarter of fiscal year 2016, compared to $12.9 million in the same period of the prior fiscal year.  This increase was primarily due to depreciation on new developments placed in service.
 
Depreciation/amortization related to real estate investments decreased by 10.6% to $27.7 million in the six months ended October 31, 2015, compared to $25.1 million in the same period of the prior fiscal year. This increase was primarily due to depreciation on new developments placed in service.
 
Utilities.  Utilities increased by 3.3% to $3.1 million in the second quarter of fiscal year 2016, compared to $3.0 million in the same period of the prior fiscal year. Same-store properties realized an increase of $114,000 due to increased heating costs while a decrease of $14,000 was attributable to non-same-store properties.
 
Utilities increased by 6.1% to $6.3 million in the six months ended October 31, 2015 compared to $6.0 million in the same period of the prior fiscal year. Same-store properties realized an increase of $211,000 primarily due to increased water and sewer costs while an increase of $150,000 at non-same-store properties was attributable to new income producing real estate properties.
 
Maintenance.  Maintenance expenses increased by 14.3% to $5.8 million in the second quarter of fiscal year 2016, compared to $5.1 million in the same period of the prior fiscal year.  An increase of $512,000 was attributable to same-store properties primarily due to an increase in labor and benefit costs as a result of the ability to hire in previously under-staffed markets.  Non-same-store properties realized an increase of $210,000 due to the addition of new income producing real estate properties.
 
Maintenance expenses increased by 11.1% to $11.2 million in the six months ended October 31, 2015 compared to $10.0 million in the same period of the prior fiscal year.  An increase of $796,000 was attributable to same-store properties primarily due to an increase in labor and benefit costs as a result of the ability to hire in previously under-staffed markets.  Non-same-store properties realized an increase of $314,000 due to the addition of new income producing real estate properties.
 
Real Estate Taxes.  Real estate taxes increased by 4.6% to $5.0 million in the second quarter of fiscal year 2016, compared to $4.8 million in the same period of the prior fiscal year. An increase of $131,000 was attributable to non-same-store properties due to new income producing real estate properties and increased property valuations in our North Dakota markets. An increase of $90,000 was attributable to same-store properties primarily due to increased property valuations in our North Dakota markets.
 
Real estate taxes increased by 1.6% to $9.9 million in the six months ended October 31, 2015 compared to $9.8 million in the same period of the prior fiscal year. An increase of $234,000 was attributable to same-store properties primarily due to increased property valuations in our North Dakota markets while non-same-store properties realized a decrease of 83,000.
 
Insurance.  Insurance expense increased by 16.5% to $1.2 million in the second quarter of fiscal year 2016, compared to $1.1 million in the same period of the prior fiscal year. Deductibles paid on insurance claims at same-store properties increased by $100,000 when compared to the prior year while insurance premiums at same-store properties increased by $7,000.  An increase of $69,000 was attributable to the addition of new income-producing real estate properties.
 
Insurance expense decreased by 7.4% to $2.3 million in the six months ended October 31, 2015 compared to $2.5 million in the same period of the prior fiscal year. Deductibles paid on insurance claims at same-store properties decreased by $300,000 when compared to the prior year while insurance premiums at same-store properties decreased by $8,000.  These decreases were offset by an increase of $122,000 which was attributable to the addition of new income-producing real estate properties.
 
Property Management Expenses.  Property management expenses increased by 33.2% to $4.6 million in the second quarter of fiscal year 2016, compared to $3.5 million in the same period of the prior fiscal year. An increase of $629,000 was attributable primarily to increases in internal property management costs, labor and benefits and marketing costs at same-store properties while an increase of $527,000 was primarily due to marketing costs at new income-producing real estate properties.
 
Property management expenses increased by 19.1% to $8.5 million in the six months ended October 31, 2015 compared to $7.1 million in the same period of the prior fiscal year. An increase of $505,000 was attributable primarily to increased marketing costs and internal property management expenses at same-store properties while an increase of $856,000 was primarily due to marketing costs at new income-producing real estate properties.
 
Other Property Expenses.  Other property expense, consisting primarily of bad debt provision expense, decreased to approximately $243,000 in the second quarter of fiscal year 2016, compared to approximately $350,000 in the same period of the prior fiscal year. Other property expense decreased to approximately $175,000 in the six months ended October 31, 2015, compared to approximately $556,000 in the same period of the prior fiscal year.  The decrease for both the three and six months is primarily due to a decrease in the provision for bad debt.
 
TRS Senior Housing Expenses.  We have one TRS, acquired during the second quarter of fiscal year 2014, which is the tenant in the 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 increased to approximately $812,000 in the second quarter of fiscal year 2016, compared to $725,000 in the same period of the prior year. TRS senior housing expense for the six months ended October 31, 2015 increased $163,000 compared to the same period of the prior year.
 
Administrative Expenses.  Administrative expenses increased by 1.5% in the second quarter of fiscal year 2016 compared to the same period of the prior fiscal year. Administrative expenses decreased by 17.8% to $5.4 million in the six months ended October 31, 2015, compared to $6.6 million in the same period of the prior fiscal year. This change was primarily due to decreases of approximately $736,000 in short term incentive plan expense and $1.1 million in share-based compensation expense, offset by increases in salary and bonus expenses.
 
Other Expenses.  Other expenses increased 108.3% to $1.2 million in the second quarter of fiscal year 2016 and increased 36.8% to $1.6 million in the six months ended October 31, 2015, compared to the same periods of the prior fiscal year, respectively. The increase for the quarter and year to date periods was primarily due to increased acquisition and disposition costs and costs related to withdrawn projects
 
Impairment of Real Estate Investments.  We recognized $1.9 million and $1.8 million of impairment in continuing operations during the three months ended October 31, 2015 and 2014, respectively and $3.2 million and $4.1 million during the six months ended October 31, 2015 and 2014, respectively. 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, 2015 and 2014 were as follows.
 
 
(in thousands, except percentages)
 
 
Three Months Ended
 
Six Months Ended
 
 
October 31
 
2015 vs 2014
 
October 31
 
2015 vs 2014
 
 
2015
 
2014
 
$ Change
   
% Change
 
2015
 
2014
 
$ Change
   
% Change
 
Mortgage debt
 
$
9,189
   
$
9,026
   
$
163
     
1.8
%
 
$
17,543
   
$
17,909
   
$
(366
)
   
(2.0
%)
Line of credit
   
241
     
447
     
(206
)
   
(46.1
%)
   
1,155
     
868
     
287
     
33.1
%
Other
   
701
     
481
     
220
     
45.7
%
   
629
     
924
     
(295
)
   
(31.9
%)
Total interest expense
 
$
10,131
   
$
9,954
   
$
177
     
1.8
%
 
$
19,327
   
$
19,701
   
$
(374
)
   
(1.9
%)
 
Mortgage interest increased by 1.8% to $9.2 million in the second quarter of fiscal year 2016, compared to $9.0 million in the same period of the prior fiscal year. Mortgages on non-same-store properties added approximately $848,000  and $930,000 to our mortgage interest expense in the three months and six months ended July October 31, 2015, respectively, while mortgage interest on same-store properties decreased approximately $363,000 and $612,000 compared to the three and six months ended October 31, 2014, primarily due to loan payoffs and refinancings.
 
Interest expense on our line of credit decreased to approximately $241,000 in the three months ended October 31, 2015, compared to approximately $447,000 in the same period of the prior fiscal year, primarily due to a lower average outstanding balance during the second quarter of fiscal year 2016. Interest expense on our line of credit increased to $1.2 million in the six months ended October 31, 2015, compared to approximately $868,000 in the same period of the prior fiscal year, primarily due to a higher average outstanding balance during the fiscal year 2016.
 
Other interest consists of interest on 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 $701,000 in the second quarter of fiscal year 2016, compared to approximately $481,000 in the same period of the prior fiscal year, primarily due to a decrease in capitalized construction interest. Other interest decreased to approximately $629,000 in the six months ended October 31, 2015, compared to approximately $924,000 in the same period of the prior fiscal year, primarily due to an increase in capitalized construction interest.
 
Gain (Loss) on Sale of Real Estate and Other Investments. We recorded no gain or loss in continuing operations in the three months ended October 31, 2015, compared to a net gain of $1.2 million in the same period of the prior year. We recorded in continuing operations a net loss of approximately $175,000 and $1.8 million in the six months ended October 31, 2015 and 2014, respectively. Properties sold in the six months ended October 31, 2015 and 2014 are detailed below in the section captioned “Property Acquisitions and Dispositions.”
 
Income (Loss) from Discontinued Operations.  During the first quarter of fiscal year 2016, we determined that our strategic plan to exit the office and retail segments met the criteria for discontinued operations. Accordingly, 48 office properties, 1 healthcare property and 17 retail properties which were classified as held for sale at July 31, 2015 were also classified as discontinued operations. Of the properties classified as discontinued operations, we sold 39 office properties, 15 retail properties and 1 healthcare property during the second quarter of fiscal year 2016, leaving 9 office properties and 2 retail properties classified as held for sale at October 31, 2015.We recorded income from discontinued operations of $15.5 million in the three months ended October 31, 2015, compared to loss from discontinued operations of approximately $457,000 in the same period of the prior fiscal year. During the six months ended October 31, 2015, we recorded income from continuing operations of $14.8 million and approximately $160,000, respectively. See Note 7 of the Notes to the Condensed Consolidated Financial Statements in this report for further information on discontinued operations.
 
Occupancy
 
Occupancy as of October 31, 2015 compared to October 31, 2014 decreased in our multifamily and healthcare segments and remained stable in our industrial segment on a same-store basis. 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
 
2015
   
2014
   
2015
   
2014
 
Multifamily
   
95.4
%
   
96.0
%
   
91.9
%
   
94.6
%
Healthcare
   
96.0
%
   
96.1
%
   
94.9
%
   
96.1
%
Industrial
   
100.0
%
   
100.0
%
   
84.3
%
   
100.0
%
 
Net Operating Income
 
Net Operating Income (“NOI”) is a non-US 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 US GAAP and should not be considered an alternative to net income, net income available for common shareholders or cash flow from operating activities as a measure of financial performance.
 
The 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, 2015 and 2014.  For a reconciliation of NOI 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 NOI by reportable operating segment on a same-store property and non-same-store property basis. This comparison allows us 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 our properties are performing year over year.  Management uses this measure to assess whether or not it has been successful in increasing NOI, renewing the leases of existing 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 our real estate portfolio, such information is less useful for evaluating the ongoing operational performance of our 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, 2015 and 2014.
 
   
(in thousands, except percentages)
 
   
Three Months Ended October 31
   
Six Months Ended October 31
 
   
2015
   
2014
   
$ Change
   
% Change
   
2015
   
2014
   
$ Change
   
% Change
 
All Segments
                               
                                 
Real estate revenue
                               
Same-store
 
$
43,941
   
$
44,254
   
$
(313
)
   
(0.7
)%
 
$
87,607
   
$
87,868
   
$
(261
)
   
(0.3
)%
Non-same-store(1)
   
7,364
     
6,092
     
1,272
     
20.9
%
   
13,616
     
10,899
     
2,717
     
24.9
%
Total
 
$
51,305
   
$
50,346
   
$
959
     
1.9
%
 
$
101,223
   
$
98,767
   
$
2,456
     
2.5
%
                                                                 
Real estate expenses
                                                               
Same-store
 
$
16,827
   
$
15,513
   
$
1,314
     
8.5
%
 
$
32,589
   
$
31,662
   
$
927
     
2.9
%
Non-same-store(1)
   
3,205
     
2,251
     
954
     
42.4
%
   
5,843
     
4,354
     
1,489
     
34.2
%
Total
 
$
20,032
   
$
17,764
   
$
2,268
     
12.8
%
 
$
38,432
   
$
36,016
   
$
2,416
     
6.7
%
                                                                 
Net operating income
                                                               
Same-store
 
$
27,114
   
$
28,741
   
$
(1,627
)
   
(5.7
)%
 
$
55,018
   
$
56,206
   
$
(1,188
)
   
(2.1
)%
Non-same-store(1)
   
4,159
     
3,841
     
318
     
8.3
%
   
7,773
     
6,545
     
1,228
     
18.8
%
Total
 
$
31,273
   
$
32,582
   
$
(1,309
)
   
(4.0
)%
 
$
62,791
   
$
62,751
   
$
40
     
0.1
%
TRS senior housing revenue
   
965
     
843
                     
2,003
     
1,636
                 
TRS senior housing expenses
   
(812
)
   
(725
)
                   
(1,581
)
   
(1,418
)
               
Depreciation/amortization
   
(14,630
)
   
(13,075
)
                   
(28,073
)
   
(25,510
)
               
Administrative expenses
   
(2,933
)
   
(2,890
)
                   
(5,387
)
   
(6,554
)
               
Other expenses
   
(1,204
)
   
(578
)
                   
(1,628
)
   
(1,190
)
               
Impairment of real estate investments
   
(1,873
)
   
(1,803
)
                   
(3,158
)
   
(4,123
)
               
Interest expense
   
(10,131
)
   
(9,954
)
                   
(19,327
)
   
(19,701
)
               
Loss on extinguishment of debt
   
(106
)
   
0
                     
(106
)
   
0
                 
Interest and other income
   
665
     
696
                     
1,272
     
1,382
                 
Income before gain (loss) on sale of real estate and other investments and income (loss) from discontinued operations
   
1,214
     
5,096
                     
6,806
     
7,273
                 
Gain (loss) on sale of real estate and other investments
   
0
     
1,231
                     
(175
)
   
(1,762
)
               
Income from continuing operations
   
1,214
     
6,327
                     
6,631
     
5,511
                 
Income (loss) from discontinued operations(2)
   
15,463
     
(457
)
                   
14,773
     
160
                 
Net income
 
$
16,677
   
$
5,870
                   
$
21,404
   
$
5,671
                 

(1)
Non-same-store properties consist of the following properties (re-development and in-service development properties are listed in bold type):
Held for Investment -
Multifamily -
71 France, Edina, MN; Arcata, Golden Valley, MN; Cardinal Point, Grand Forks, ND; Chateau II, Minot, ND; Colonial Villa, Burnsville, MN; Commons at Southgate, Minot, ND; Cypress Court I and II, St. Cloud, MNDakota Commons, Williston, ND; Deer Ridge, Jamestown, ND; Gardens, Grand Forks, ND; GrandeVille at Cascade Lake, Rochester, MN; Homestead Garden, Rapid City, SD;  Legacy Heights, Bismarck, ND; Northridge, Bismarck, ND;  Red 20, Minneapolis, MN; Renaissance Heights, Williston, ND and Silver Springs, Rapid City, SD.
Total number of units, 2,392.
 
Healthcare -
Edina 6565 France SMC III, Edina, MN; Lakeside Medical Plaza, Omaha, NE and PrairieCare Medical, Brooklyn Park, MN.
Total rentable square footage, 156,199.
 
Industrial -
Roseville 3075 Long Lake Road, Roseville, MN.
Total rentable square footage, 220,557.
 
Other -
Minot Southgate Retail, Minot, ND and Minot Southgate Wells Fargo Bank, Minot, ND.
Total rentable square footage, 12,961.

Held for Sale -
Multifamily -
Campus Center, St. Cloud, MN; Campus Heights, St. Cloud, MN; Campus Knoll, St. Cloud, MN; Campus Plaza, St. Cloud, MN; Campus Side, St. Cloud, MN; Campus View, St. Cloud, MN; Cornerstone, St. Cloud, MN and University Park Place, St. Cloud, MN.
Total number of units, 391.
 
Healthcare -
Nebraska Orthopaedic Hospital, Omaha, NE.
Total rentable square footage, 61,758.
 
Other -
Minot Plaza, Minot, ND.
Total rentable square footage, 11,003.
 
Total NOI for held for sale properties for the three months ended October 31, 2015 and 2014, respectively, $684 and $682.
Total NOI for held for sale properties for the six months ended October 31, 2015 and 2014, respectively, $1,194 and $1,135.
 
Sold -
Multifamily -
Lancaster, St. Cloud, MN.
 
Healthcare -
Jamestown Medical Office Building, Jamestown, ND.
 
Industrial -
Eagan 2785 & 2795 Hwy 55, Eagan, MN.
 
Other -
2030 Cliff Road, Eagan, MN; Burnsville Bluffs II, Burnsville, MN; Dewey Hill Business Center, Edina, MN; Fargo Express Community, Fargo, ND; Kalispell Retail Center, Kalispell, MT; Northgate I, Maple Grove, MN; Northgate II, Maple Grove, MN; Plymouth I, Plymouth, MN; Plymouth II, Plymouth, MN; Plymouth III, Plymouth, MN; Plymouth IV-V, Plymouth, MN; Southeast Tech, Eagan, MN; Thresher Square, Minneapolis, MN; Weston Retail, Weston, WI; Whitewater Plaza, Minnetonka, MN and Wirth Corporate Center, Golden Valley, MN.
 
Total NOI for sold properties for the three months ended October 31, 2015 and 2014, respectively, $0 and $1,199.
Total NOI for sold properties for the six months ended October 31, 2015 and 2014, respectively, $8 and $2,441.

(2)
Discontinued operations include gain on disposals and income from operations for:
 
2016 Held for Sale – Burnsville Strip Center, Corporate Center West, Farnam Executive Center, Flagship Corporate Center, Gateway Corporate Center, Miracle Hills One, Pacific Hills, Pine City C-Store, Riverport, Timberlands, and Woodlands Plaza IV.
2016 Dispositions – 610 Business Center, 7800 West Brown Deer Road, American Corporate Center, Ameritrade, Barry Pointe Office Park, Benton Business Park, Brenwood, Brook Valley I, Champlin South Pond, Chan West Village, Crosstown Centre, Duluth 4615 Grand, Duluth Denfeld Retail, Eden Prairie 6101 Blue Circle Drive, Forest Lake Auto, Forest Lake Westlake Center, Golden Hills Office Center, Grand Forks Medpark Mall, Granite Corporate Center, Great Plains, Highlands Ranch I and II, Interlachen Corporate Center, Intertech Building, Jamestown Buffalo Mall, Jamestown Business Center, Lakeville Strip Center, Mendota Office Center I-IV, Minnesota National Bank, Monticello C-Store, Northpark Corporate Center, Omaha 10802 Farnam Dr, Omaha Barnes & Noble, Pine City Evergreen Square, Plaza VII, Plymouth 5095 Nathan Lane, Prairie Oak Business Center, Rapid City 900 Concourse Drive, Rochester Maplewood Square, Spring Valley IV, V, X and XI, St.Cloud Westgate, Superior Office Building, TCA Building, Three Paramount Plaza, UHC Office, US Bank Financial Center, Wells Fargo Center, West River Business Park and Westgate.
 
An analysis of NOI by segment follows.
 
Multifamily
 
Real estate revenue from same-store properties in our multifamily segment decreased by 0.7% or $188,000 in the three months ended October 31, 2015 compared to the same period in the prior fiscal year. An increase of $342,000 was realized due to increased rental rates, but was offset by an increase in vacancy of $375,000.  Other fee items combined decreased by $155,000.
 
Real estate expenses at same-store properties increased by 13.5% or $1.5 million in the three months ended October 31, 2015 compared to the same period in the prior fiscal year. The primary factors were increased property management expenses of $658,000 and increased maintenance expenses of $516,000.  The increase in property management expenses was primarily attributable to an increase in internal property management costs, increased labor and benefits and increased marketing costs. The increase in maintenance costs was primarily attributable to an increase in labor and benefits and an increase in under deductible insurance claims.  All other real estate expenses combined increased by $286,000.
 
Real estate revenue from same-store properties in our multifamily segment increased by 0.2% or $78,000 in the six months ended October 31, 2015 compared to the same period in the prior fiscal year. An increase of $813,000 was realized due to increased rental rates, but was offset by an increase in vacancy of $657,000.  Other fee items combined decreased by $78,000.
 
Real estate expenses at same-store properties increased by 8.0% or $1.8 million in the six months ended October 31, 2015 compared to the same period in the prior fiscal year. The primary factors were increased maintenance expenses of $731,000, increased property management expenses of $576,000 and increased real estate taxes of $452,000.  The increase in maintenance expenses was primarily attributable to an increase in labor and benefit costs. The increase in property management expenses was primarily due to increased internal property management costs, and increased marketing costs while the increase in real estate taxes was due to increased property valuations in our North Dakota markets. All other real estate expenses combined increased by $3,000.
 
   
(in thousands, except percentages)
 
   
Three Months Ended October 31,
   
Six Months Ended October 31,
 
   
2015
   
2014
   
$ Change
   
% Change
   
2015
   
2014
   
$ Change
   
% Change
 
Multifamily
                               
                                 
Real estate revenue
                               
Same-store
 
$
25,973
   
$
26,161
   
$
(188
)
   
(0.7
)%
 
$
51,889
   
$
51,811
   
$
78
     
0.2
%
Non-same-store
   
6,134
     
3,433
     
2,701
     
78.7
%
   
11,598
     
5,510
     
6,088
     
110.5
%
Total
 
$
32,107
   
$
29,594
   
$
2,513
     
8.5
%
 
$
63,487
   
$
57,321
   
$
6,166
     
10.8
%
                                                                 
Real estate expenses
                                                               
Same-store
 
$
12,297
   
$
10,837
   
$
1,460
     
13.5
%
 
$
23,798
   
$
22,036
   
$
1,762
     
8.0
%
Non-same-store
   
2,921
     
1,327
     
1,594
     
120.1
%
   
5,344
     
2,346
     
2,998
     
127.8
%
Total
 
$
15,218
   
$
12,164
   
$
3,054
     
25.1
%
 
$
29,142
   
$
24,382
   
$
4,760
     
19.5
%
                                                                 
Net operating income
                                                               
Same-store
 
$
13,676
   
$
15,324
   
$
(1,648
)
   
(10.8
)%
 
$
28,091
   
$
29,775
   
$
(1,684
)
   
(5.7
)%
Non-same-store
   
3,213
     
2,106
     
1,107
     
52.6
%
   
6,254
     
3,164
     
3,090
     
97.7
%
Total
 
$
16,889
   
$
17,430
   
$
(541
)
   
(3.1
)%
 
$
34,345
   
$
32,939
   
$
1,406
     
4.3
%
 
Occupancy
 
2015
   
2014
 
Same-store
   
95.4
%
   
96.0
%
Non-same-store
   
79.5
%
   
84.7
%
Total
   
91.9
%
   
94.6
%

Number of Units
 
2015
   
2014
 
Same-store
   
9,877
     
9,878
 
Non-same-store
   
2,783
     
1,414
 
Total
   
12,660
     
11,292
 
 
Healthcare
 
Real estate revenue from same-store properties in our healthcare segment decreased by 1.2% or $184,000 in the three months ended October 31, 2015 compared to the same period in the prior fiscal year. The decrease in revenue was attributable to a decrease in the straight-line receivable of $248,000 while all other real estate revenues items combined increased by $64,000.
 
Real estate expenses from same-store properties decreased by 1.7% or $69,000 in the three months ended October 31, 2015 compared to the same period in the prior fiscal year. The primary factor was decreased real estate taxes of $157,000, while all other real estate expenses combined increased by $88,000.
 
Real estate revenue from same-store properties in our healthcare segment decreased by 1.5% or $450,000 in the six months ended October 31, 2015 compared to the same period in the prior fiscal year. The decrease in revenue was attributable to a decrease in the straight-line receivable of $534,000 while all other real estate revenues items combined increased by $84,000.
 
Real estate expenses from same-store properties decreased by 6.8% or $553,000 in the six months ended October 31, 2015 compared to the same period in the prior fiscal year. The primary factors were decreased other property expenses of $310,000 and decreased real estate taxes of $258,000.  The decrease in other property expenses, consisting of bad debt provision expenses, was due to a decrease in the estimated uncollectible accounts receivable.  All other real estate expenses combined increased by $15,000.
 
   
(in thousands, except percentages)
 
   
Three Months Ended October 31,
   
Six Months Ended October 31,
 
   
2015
   
2014
   
$ Change
   
% Change
   
2015
   
2014
   
$ Change
   
% Change
 
Healthcare
                               
                                 
Real estate revenue
                               
Same-store
 
$
15,323
   
$
15,507
   
$
(184
)
   
(1.2
)%
 
$
30,430
   
$
30,880
   
$
(450
)
   
(1.5
)%
Non-same-store
   
1,056
     
824
     
232
     
28.2
%
   
1,655
     
1,653
     
2
     
0.1
%
Total
 
$
16,379
   
$
16,331
   
$
48
     
0.3
%
 
$
32,085
   
$
32,533
   
$
(448
)
   
(1.4
)%
                                                                 
Real estate expenses
                                                               
Same-store
 
$
3,900
   
$
3,969
   
$
(69
)
   
(1.7
)%
 
$
7,629
   
$
8,182
   
$
(553
)
   
(6.8
)%
Non-same-store
   
263
     
142
     
121
     
85.2
%
   
366
     
287
     
79
     
27.5
%
Total
 
$
4,163
   
$
4,111
   
$
52
     
1.3
%
 
$
7,995
   
$
8,469
   
$
(474
)
   
(5.6
)%
                                                                 
Net operating income
                                                               
Same-store
 
$
11,423
   
$
11,538
   
$
(115
)
   
(1.0
)%
 
$
22,801
   
$
22,698
   
$
103
     
0.5
%
Non-same-store
   
793
     
682
     
111
     
16.3
%
   
1,289
     
1,366
     
(77
)
   
(5.6
)%
Total
 
$
12,216
   
$
12,220
   
$
(4
)
   
0.0
%
 
$
24,090
   
$
24,064
   
$
26
     
0.1
%

Occupancy
 
2015
   
2014
 
Same-store
   
96.0
%
   
96.1
%
Non-same-store
   
80.0
%
   
96.5
%
Total
   
94.9
%
   
96.1
%

Rentable Square Footage
 
2015
   
2014
 
Same-store
   
2,870,116
     
2,870,234
 
Non-same-store
   
217,957
     
106,980
 
Total
   
3,088,073
     
2,977,214
 
 
Industrial
 
Real estate revenue from same-store properties in our industrial segment increased by 1.5% or $24,000 in the three months ended October 31, 2015 compared to the same period in the prior fiscal year. Tenant reimbursements increased by $23,000 while all other revenue items combined increased by $1,000.
 
Real estate expenses from same-store properties decreased by 5.3% or $16,000 in the three months ended October 31, 2015 compared to the same period of the prior fiscal year. The decrease was primarily due to a decrease in maintenance expenses of $25,000 resulting from fewer general maintenance items being completed during the quarter while all other real estate expenses items combined increased by $9,000.
 
Real estate revenue from same-store properties in our industrial segment increased by 3.2% or $99,000 in the six months ended October 31, 2015 compared to the same period in the prior fiscal year. Tenant reimbursements increased by $101,000 while all other revenue items combined decreased by $2,000.
 
Real estate expenses from same-store properties decreased by 7.3% or $47,000 in the six months ended October 31, 2015 compared to the same period of the prior fiscal year. The decrease was primarily due to a decrease in maintenance expenses of $25,000 resulting from fewer general maintenance items being completed during the period while all other real estate expenses items combined decreased by $22,000.
 
   
(in thousands, except percentages)
 
   
Three Months Ended October 31,
   
Six Months Ended October 31,
 
   
2015
   
2014
   
$ Change
   
% Change
   
2015
   
2014
   
$ Change
   
% Change
 
Industrial
                               
                                 
Real estate revenue
                               
Same-store
 
$
1,580
   
$
1,556
   
$
24
     
1.5
%
 
$
3,152
   
$
3,053
   
$
99
     
3.2
%
Non-same-store
   
60
     
37
     
23
     
62.2
%
   
110
     
110
     
0
     
0
 
Total
 
$
1,640
   
$
1,593
   
$
47
     
3.0
%
 
$
3,262
   
$
3,163
   
$
99
     
3.1
%
                                                                 
Real estate expenses
                                                               
Same-store
 
$
287
   
$
303
   
$
(16
)
   
(5.3
)%
 
$
600
   
$
647
   
$
(47
)
   
(7.3
)%
Non-same-store
   
2
     
(31
)
   
33
     
106.5
%
   
83
     
74
     
9
     
12.2
%
Total
 
$
289
   
$
272
   
$
17
     
6.3
%
 
$
683
   
$
721
   
$
(38
)
   
(5.3
)%
                                                                 
Net operating income
                                                               
Same-store
 
$
1,293
   
$
1,253
   
$
40
     
3.2
%
 
$
2,552
   
$
2,406
   
$
146
     
6.1
%
Non-same-store
   
58
     
68
     
(10
)
   
(14.7
)%
   
27
     
36
     
(9
)
   
(25.0
)%
Total
 
$
1,351
   
$
1,321
   
$
30
     
2.3
%
 
$
2,579
   
$
2,442
   
$
137
     
5.6
%

Occupancy
 
2015
   
2014
 
Same-store
   
100.0
%
   
100.0
%
Non-same-store
   
12.9
%
   
100.0
%
Total
   
84.3
%
   
100.0
%

Rentable Square Footage
 
2015
   
2014
 
Same-store
   
1,002,361
     
1,002,361
 
Non-same-store
   
220,557
     
17,750
 
Total
   
1,222,918
     
1,020,111
 
 
Analysis of Commercial Segments’ Credit Risk and Leases
 
Credit Risk
 
The following table lists our top ten commercial tenants on October 31, 2015, for all commercial properties owned by us, including those held for sale, measured by percentage of total commercial segments’ minimum rents as of October 1, 2015.  Our results of operations are dependent on, among other factors, the economic health of our tenants. We attempt to mitigate tenant credit risk by working to secure creditworthy tenants that meet our underwriting criteria and monitoring our portfolio to identify potential problem tenants. We believe that our credit risk is also mitigated by the fact that no individual tenant accounts for more than 10% of our total real estate rentals, although affiliated entities of Edgewood Vista together accounted for approximately 23.5% of our total commercial segments’ minimum rents as of October 1, 2015, and they accounted for approximately 8.6% of our total real estate rentals as of October 31, 2015.
 
As of October 31, 2015, 50 of our properties held for investment, including all 20 of our Edgewood Vista properties, all eight of our Idaho Spring Creek senior housing properties, and all five of our Wyoming senior housing properties, and one of our properties held for sale were leased under triple net leases under which the tenant pays a monthly lump sum base rent as well as all costs associated with the property, including property taxes, insurance, replacement, repair or restoration, in addition to maintenance. The failure by any of our triple net tenants to effectively conduct their operations or to maintain and improve our properties in accordance with the terms of their respective triple net leases could adversely affect their business reputations and ability to attract and retain residents and customers to our properties, which could have an indirect adverse effect on us.
 
We regularly monitor the relative credit risk of our significant tenants, including our triple net tenants. The metrics we use to evaluate a significant tenant’s liquidity and creditworthiness depend on facts and circumstances specific to that tenant and to the industry in which it operates, and include the tenant’s credit history and economic conditions related to the tenant, its operations and the markets in which it operates. These factors may change over time. Prior to signing a lease with a tenant, we generally assesses the prospective tenant’s credit quality through review of its financial statements and tax returns, and the result of that review is a factor in establishing the rent to be charged (e.g., higher risk tenants will be charged higher rent). Over the course of a lease, our property management and asset management personnel have regular contact with tenants and tenant employees, and, where the terms of the lease permit, receive tenant financial information for periodic review or review publicly-available financial statements in the case of public company tenants or non-profit entities, such as hospital systems, whose financial statements are required to be filed with state agencies. Through these means we monitor tenant credit quality.
 
Lessee
 
% of Total Commercial
Segments’ Minimum Rents
as of October 1, 2015
 
Affiliates of Edgewood Vista
   
23.5
%
Fairview Health Services
   
6.4
%
St. Luke’s Hospital of Duluth, Inc.
   
5.6
%
Applied Underwriters
   
4.0
%
PrairieCare Medical LLC
   
3.6
%
HealthEast Care System
   
2.8
%
Nebraska Orthopaedic Hospital(1)
   
2.2
%
Affiliates of Siemens USA (NYSE: SI)
   
1.8
%
Quality Manufacturing Corp
   
1.6
%
Ascension Health
   
1.4
%
All Others
   
47.1
%
Total Monthly Commercial Rent as of October 1, 2015
   
100.0
%
 
(1) The tenant in the Nebraska Orthopaedic Hospital property has exercised its option to purchase the property. However, we can give no assurance if or when the sale of the property will be completed.
 
Commercial Leasing Activity
 
During fiscal year 2016, we have executed new and renewal commercial leases for our same-store rental properties on 258,027 square feet for the three months ended October 31, 2015 and 319,399 square feet for the six months ended October 31, 2015.  Due to our leasing efforts, occupancy in our same-store healthcare and industrial portfolios has remained strong at 97.1% as of October 31, 2015, compared to 97.1% as of October 31, 2014.
 
The total leasing activity for our same-store healthcare and industrial properties, expressed in square feet of leases signed during the period, and the resulting occupancy levels, are as follows:
 
Three Months Ended October 31, 2015 and 2014
 
    
Square Feet of
New Leases(1)
   
Square Feet of
Leases Renewed(1)
   
Total
Square Feet of
Leases Executed(1)
   
Occupancy
 
Segments
 
2015
   
2014
   
2015
   
2014
   
2015
   
2014
   
2015
   
2014
 
Healthcare
   
2,831
     
2,632
     
60,121
     
61,672
     
62,952
     
64,304
     
96.0
%
   
96.1
%
Industrial
   
0
     
0
     
195,075
     
0
     
195,075
     
0
     
100.0
%
   
100.0
%
Total
   
2,831
     
2,632
     
255,196
     
61,672
     
258,027
     
64,304
     
97.1
%
   
97.1
%
 
(1) The leasing activity presented is based on leases signed or executed for our same-store rental properties during the period and is not intended to coincide with the commencement of rental revenue in accordance with US GAAP.  Prior periods reflect amounts previously reported and exclude retroactive adjustments for properties reclassified to discontinued operations or non-same-store in the current period.
 
Six Months Ended October 31, 2015 and 2014
 
    
Square Feet of
New Leases(1)
   
Square Feet of
Leases Renewed(1)
   
Total
Square Feet of
Leases Executed(1)
   
Occupancy
 
Segments
 
2015
   
2014
   
2015
   
2014
   
2015
   
2014
   
2015
   
2014
 
Healthcare
   
4,455
     
11,579
     
106,543
     
100,688
     
110,998
     
112,267
     
96.0
%
   
96.1
%
Industrial
   
0
     
0
     
208,401
     
0
     
208,401
     
0
     
100.0
%
   
100.0
%
Total
   
4,455
     
11,579
     
314,944
     
100,688
     
319,399
     
112,267
     
97.1
%
   
97.1
%
 
(1) The leasing activity presented is based on leases signed or executed for our same-store rental properties during the period and is not intended to coincide with the commencement of rental revenue in accordance with US GAAP.  Prior periods reflect amounts previously reported and exclude retroactive adjustments for properties reclassified to discontinued operations or non-same-store in the current period.
 
New Leases
 
The following table sets forth the average effective rents and the estimated costs of tenant improvements and leasing commissions, on a per square foot basis, that we are obligated to fulfill under the new leases signed for our same-store healthcare and industrial properties:
 
Three Months Ended October 31, 2015 and 2014
 
 
Square Feet of
New Leases(1)
 
Average Term
in Years
 
Average
Effective Rent(2)
 
Estimated Tenant
 Improvement Cost per
Square Foot(1)
 
Leasing
Commissions per
 Square Foot(1)
 
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
Healthcare
   
2,831
     
2,632
     
2.5
     
3.4
     
19.52
     
19.89
     
24.15
     
9.25
     
2.01
     
0
 
Industrial
   
0
     
0
     
0
     
0
     
0
     
0
     
0
     
0
     
0
     
0
 
Total
   
2,831
     
2,632
     
2.5
     
3.4
   
$
19.52
   
$
19.89
   
$
24.15
   
$
9.25
   
$
2.01
   
$
0
 
 
(1) The leasing activity presented is based on leases signed or executed for our same-store rental properties during the period and is not intended to coincide with the commencement of rental revenue in accordance with US GAAP.  Prior periods reflect amounts previously reported and exclude retroactive adjustments for properties reclassified to discontinued operations or non-same-store in the current period. Tenant improvements and leasing commissions presented are based on square feet leased during the period.
(2) Effective rents represent average annual base rental payments, on a straight-line basis for the term of each lease, excluding operating expense reimbursements. The underlying leases contain various expense structures including gross, modified gross, net and triple net.
 
Six Months Ended October 31, 2015 and 2014
 
 
Square Feet of
New Leases(1)
 
Average Term
in Years
 
Average
Effective Rent(2)
 
Estimated Tenant
 Improvement Cost per
 Square Foot(1)
 
Leasing
Commissions per
 Square Foot(1)
 
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
Healthcare
   
4,455
     
11,579
     
7.2
     
5.5
     
21.02
     
20.82
     
28.11
     
25.05
     
4.92
     
7.03
 
Industrial
   
0
     
0
     
0
     
0
     
0
     
0
     
0
     
0
     
0
     
0
 
Total
   
4,455
     
11,579
     
7.2
     
5.5
   
$
21.02
   
$
20.82
   
$
28.11
   
$
25.05
   
$
4.92
   
$
7.03
 
 
(1) The leasing activity presented is based on leases signed or executed for our same-store rental properties during the period and is not intended to coincide with the commencement of rental revenue in accordance with US GAAP.  Prior periods reflect amounts previously reported and exclude retroactive adjustments for properties reclassified to discontinued operations or non-same-store in the current period. Tenant improvements and leasing commissions presented are based on square feet leased during the period.
(2) Effective rents represent average annual base rental payments, on a straight-line basis for the term of each lease, excluding operating expense reimbursements. The underlying leases contain various expense structures including gross, modified gross, net and triple net.
 
Lease Renewals
 
The following table summarizes our lease renewal activity within our same-store healthcare and industrial segments (square feet data in thousands):
 
Three Months Ended October 31, 2015 and 2014
 
 
Square Feet of Leases
 Renewed(1)
 
Percent of Expiring
 Leases Renewed(2)
 
Average Term
in Years
 
Weighted Average
 Growth (Decline)
in Effective Rents(3)
 
Estimated
Tenant Improvement
Cost per Square
 Foot(1)
 
Leasing
 Commissions per
 Square Foot(1)
 
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
Healthcare
   
60,121
     
61,672
     
86.3
%
   
38.0
%
   
3.7
     
5.6
     
(2.1
%)
   
(8.5
%)
   
7.05
     
11.77
     
0.95
     
0.46
 
Industrial
   
195,075
     
0
     
100.0
%
   
0
%
   
5.0
     
0
     
19.2
%
   
0
%
   
0.56
     
0
     
0
     
0
 
Total
   
255,196
     
61,672
     
94.6
%
   
38.0
%
   
3.9
     
5.6
     
8.1
%
   
(8.5
%)
 
$
2.09
   
$
11.77
   
$
0.22
   
$
0.46
 
 
(1) The leasing activity presented is based on leases signed or executed for our same-store rental properties during the period and is not intended to coincide with the commencement of rental revenue in accordance with US GAAP.  Prior periods reflect amounts previously reported and exclude retroactive adjustments for properties reclassified to discontinued operations or non-same-store in the current period. Tenant improvements and leasing commissions are based on square feet leased during the period.
(2) Renewal percentage of expiring leases is based on square footage of renewed leases and not the number of leases renewed. The category of renewed leases does not include leases that have become month-to-month leases, as the month-to-month leases are considered lease amendments.
(3) Represents the percentage change in effective rent between the original leases and the renewal leases. Effective rents represent average annual base rental payments, on a straight-line basis for the term of each lease, excluding operating expense reimbursements. The underlying leases contain various expense structures including gross, modified gross, net and triple net.
 
Six Months Ended October 31, 2015 and 2014
 
 
Square Feet of Leases
 Renewed(1)
 
Percent of Expiring
 Leases Renewed(2)
 
Average Term
in Years
 
Weighted Average
 Growth (Decline)
in Effective Rents(3)
 
Estimated
Tenant Improvement
Cost per Square
Foot(1)
 
Leasing
 Commissions per
 Square Foot(1)
 
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
Healthcare
   
106,543
     
100,688
     
86.4
%
   
61.3
%
   
5.4
     
5.6
     
6.0
%
   
(3.9
%)
   
10.62
     
9.16
     
3.28
     
1.06
 
Industrial
   
208,401
     
0
     
100.0
%
   
0
%
   
5.0
     
0
     
18.1
%
   
0
%
   
0.59
     
0
     
0.07
     
0
 
Total
   
314,944
     
100,688
     
93.3
%
   
61.3
%
   
5.3
     
5.6
     
10.2
%
   
(3.9
%)
 
$
3.98
   
$
9.16
   
$
1.16
   
$
1.06
 
 
(1) The leasing activity presented is based on leases signed or executed for our same-store rental properties during the period and is not intended to coincide with the commencement of rental revenue in accordance with US GAAP.  Prior periods reflect amounts previously reported and exclude retroactive adjustments for properties reclassified to discontinued operations or non-same-store in the current period. Tenant improvements and leasing commissions are based on square feet leased during the period.
(2) Renewal percentage of expiring leases is based on square footage of renewed leases and not the number of leases renewed. The category of renewed leases does not include leases that have become month-to-month leases, as the month-to-month leases are considered lease amendments.
(3) Represents the percentage change in effective rent between the original leases and the renewal leases. Effective rents represent average annual base rental payments, on a straight-line basis for the term of each lease, excluding operating expense reimbursements. The underlying leases contain various expense structures including gross, modified gross, net and triple net.
 
Our ability to maintain or increase occupancy rates is a principal driver of maintaining and increasing the average effective rents in our commercial segments.  The increase in the average growth in effective rents for the industrial segment for the three months ended October 31, 2015 and the six months ended October 31, 2015 when compared to the same periods in the prior fiscal year is due to a 195,075 square foot lease renewal executed at our Stone Container property in Fargo, North Dakota.  This lease was renewed at a 19.2% increase in effective rent primarily due to improved market conditions in the property location.
 
Lease Expirations
 
Our ability to maintain and improve occupancy rates, and base rents, primarily depends upon our continuing ability to re-lease expiring space. The following table reflects the in-service portfolio lease expiration schedule of our consolidated healthcare and industrial properties, including square footage and annualized base rent for expiring leases, as of October 31, 2015.
 
Fiscal Year of Lease Expiration
 
# of Leases
   
Square Footage of
Expiring Leases(2)
   
Percentage of Total
Commercial Segments
Leased Square Footage
   
Annualized Base
Rent of Expiring
Leases at Expiration(3)
   
Percentage of Total
Commercial
 Segments
Annualized Base Rent
 
2016 (remainder)(1)
   
37
     
593,167
     
15.0
%
 
$
6,295,188
     
11.3
%
2017
   
30
     
201,842
     
5.1
%
   
3,069,721
     
5.5
%
2018
   
20
     
177,701
     
4.5
%
   
4,207,706
     
7.6
%
2019
   
23
     
363,803
     
9.2
%
   
5,004,303
     
9.0
%
2020
   
13
     
166,159
     
4.2
%
   
1,933,197
     
3.5
%
2021
   
19
     
104,879
     
2.7
%
   
2,023,510
     
3.6
%
2022
   
39
     
1,296,621
     
32.7
%
   
17,010,303
     
30.7
%
2023
   
12
     
480,309
     
12.1
%
   
2,312,762
     
4.2
%
2024
   
25
     
194,209
     
4.9
%
   
3,982,194
     
7.2
%
2025
   
5
     
76,691
     
1.9
%
   
1,636,358
     
3.0
%
Thereafter
   
18
     
304,965
     
7.7
%
   
7,994,627
     
14.4
%
Totals
   
241
     
3,960,346
     
100.0
%
 
$
55,469,869
     
100.0
%
 
(1) Includes month-to-month leases. As of October 31, 2015, month-to-month leases accounted for 309,255 square feet of which 286,854 square feet were located in five senior housing facilities in Wyoming.
(2) Assuming that none of the tenants exercise renewal or termination options, and including leases renewed prior to expiration. Also excludes 99,535 square feet of space occupied by us.
(3) Annualized Base Rent is monthly scheduled rent as of October 1, 2015, multiplied by 12.
 
Because of the different property types in our commercial portfolio and the dispersed locations of a substantial portion of the portfolio’s properties in secondary and tertiary markets, information on current market rents is difficult to obtain, is highly subjective, and is often not directly comparable between properties. As a result, we believe that the increase or decrease in effective rent on our recent leases is the most objective and meaningful information available regarding rent trends and the relationship between rents on leases expiring in the near term and current market rents across our markets. We believe that rents on our new and renewed leases generally approximate market rents.
 
PROPERTY ACQUISITIONS AND DISPOSITIONS
 
During the second quarter of fiscal year 2016, we closed on our acquisitions of:
 
· a 27,819 sq ft healthcare property in Omaha, Nebraska, on approximately 1.8 acres of land, for a purchase price of $6.5 million paid in cash;
 
· a 74-unit multifamily property in Grand Forks, North Dakota, on approximately 4.7 acres of land, for a purchase price of $9.3 million, of which $4.1 million was paid in cash, and the remainder in limited partnership units of the Operating partnership valued at $5.2 million; and
 
· a 276-unit multifamily property in Rochester, Minnesota, on approximately 21.2 acres of land, for a purchase price of $56.0 million paid in limited partnership units of the Operating partnership.
 
During the second quarter of fiscal year 2016, we sold 39 office properties, one healthcare property and 15 retail properties for a total sales price of $371.9 million. See Note 8 of the Notes to Condensed Consolidated Financial Statements in this report for a table detailing our acquisitions and dispositions during the six month periods ended October 31, 2015 and 2014.
 
Development and Re-Development Projects
 
The following tables provide additional detail, as of October 31, 2015, on our in-service (completed) development and re-development projects and development and re-development projects in progress. All of these projects are excluded from the same-store pool. We measure initial yield on our development projects upon completion and achievement of target lease-up levels by measuring net operating income from the development against the cost of the project. Estimated initial yields on the projects in progress listed below range from an estimated approximate 5.9% to an estimated approximate 6.3% initial yield.
 
Projects Placed in Service in the Six Months Ended October 31, 2015
 
           
(in thousands)
     
(in fiscal years)
 
Project Name and Location
Segment
Rentable
Square Feet
or Number of
Units
 
Percentage
Leased or
Committed
   
Anticipated
Total
Cost(1)
   
Costs as of
 October 31,
 2015(1)
   
Cost per
Square Foot
or Unit(1)
 
 
Date Placed
in Service
Anticipated
 Same-Store
Date
 
Chateau II - Minot, ND
Multifamily
72 units
   
77.8
%
 
$
14,711
   
$
14,641
   
$
204,319
 
1Q 2016
1Q 2018
 
Edina 6565 France SMC III - Edina, MN(2)
Healthcare
57,624 sq ft
   
24.5
%
    36,752       32,495      
638
 
1Q 2016
1Q 2018
 
Renaissance Heights - Williston, ND(3)
Multifamily
288 units
   
40.3
%
    62,362       62,520      
216,535
 
1Q 2016
1Q 2018
 
Minot Southgate Retail - Minot, ND
Other
7,963 sq ft
   
0
%
    2,923       2,622       367  
2Q 2016
1Q 2018
 
PrairieCare Medical - Brooklyn Park, MN
Healthcare
70,756 sq ft
   
100
%
    24,709       24,709       343  
2Q 2016
1Q 2018
 
               
$
141,457
   
$
136,987
                  
 
(1) Excludes tenant improvements and leasing commissions.
(2) Anticipated total cost includes estimated tenant improvement costs that have not been incurred as of October 31, 2015.
(3) We are currently an approximately 70.0% partner in the joint venture entity constructing this project. The anticipated total cost amount given is the total cost to the joint venture entity.
 
Projects in Progress at October 31, 2015
 
               
(in thousands)
   
(in fiscal years)
 
Project Name and Location
 
Planned Segment
   
Rentable
Square Feet
or Number of
 Units
   
Percentage
Leased
or Committed
   
Anticipated
Total Cost(1)
   
Costs as of
October 31, 2015(1)
   
Anticipated
 Construction
 Completion
 
Deer Ridge - Jamestown, ND
 
Multifamily
   
163 units
     
17.8
%
   
24,519
     
23,830
   
3Q 2016
 
Cardinal Point - Grand Forks, ND(2)
 
Multifamily
   
251 units
     
19.1
%
   
44,402
     
40,361
   
4Q 2016
 
71 France - Edina, MN(3)
 
Multifamily
   
241 units
     
20.8
%
   
73,290
     
64,006
   
1Q 2017
 
Monticello Crossings - Monticello, MN
 
Multifamily
   
202 units
     
0
%
   
31,784
     
5,305
   
2Q 2017
 
Other
   
n/a
 
   
n/a
 
   
n/a
 
   
n/a
 
   
3,095
     
n/a
 
                           
$
173,995
   
$
136,597
         
 
(1) Includes costs related to development projects that are placed in service in phases (Deer Ridge - $14.3 million, 71 France - $21.3 million, Cardinal Point - $11.1 million).
(2) Anticipated total cost as of October 31, 2015 includes incremental cost increase due to the replacement of the project’s original general contractor.
(3) The project will be constructed in three phases by a joint venture entity in which we have an approximately 52.6% interest. The anticipated total cost amount given is the total cost to the joint venture entity. The anticipated total cost includes approximately 21,772 square feet of retail space.
 
FUNDS FROM OPERATIONS
 
We consider Funds from Operations (“FFO”) a useful measure of performance for an equity REIT. We use the definition of FFO adopted by the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”). NAREIT defines FFO to mean “net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect FFO on the same basis.” In addition, in October 2011, NAREIT clarified its computation of FFO to exclude impairment charges for all periods presented. Because of limitations of the FFO definition adopted by NAREIT, we have made certain interpretations in applying the definition. We believe all such interpretations not specifically provided for in the NAREIT definition are consistent with the definition.
 
Management considers that FFO, by excluding depreciation costs, impairment write-downs, the gains or losses from the sale of operating real estate properties and extraordinary items as defined by US GAAP, is useful to investors in providing an additional perspective on our operating results. Historical cost accounting for real estate assets in accordance with US GAAP assumes, through depreciation, that the value of real estate assets decreases predictably over time. However, real estate asset values have historically risen or fallen with market conditions. NAREIT’s definition of FFO, by excluding depreciation costs, reflects the fact that real estate, as an asset class, generally appreciates over time and that depreciation charges required by US GAAP may not reflect underlying economic realities. Additionally, the exclusion in NAREIT’s definition of FFO of impairment write-downs and gains and losses from the sales of previously depreciated operating real estate assets, assists our management and investors in identifying the operating results of the long-term assets that form the core of our investments, and assists in comparing those operating results between periods. FFO is used by our management and investors to identify trends in occupancy rates, rental rates and operating costs.
 
While FFO is widely used by us as a primary performance metric, not all real estate companies use the same definition of FFO or calculate FFO in the same way. Accordingly, FFO presented here is not necessarily comparable to FFO presented by other real estate companies. FFO should not be considered as an alternative to net income as determined in accordance with US GAAP as a measure of our performance, but rather should be considered as an additional, supplemental measure, and should be viewed in conjunction with net income as presented in the consolidated financial statements included in this report. FFO does not represent cash generated from operating activities in accordance with US GAAP, and is not necessarily indicative of sufficient cash flow to fund all of our needs or our ability to service indebtedness or make distributions.
 
FFO applicable to Common Shares and Units for the three months ended October 31, 2015 decreased to $8.1 million compared to $22.2 million for the comparable period ended October 31, 2014, a decrease of 63.4%.  FFO applicable to Common Shares and Units for the six months ended October 31, 2015 decreased by 26.8% to $30.1 million, compared to $41.2 million for the six months ended October 31, 2014.
 
RECONCILIATION OF NET INCOME ATTRIBUTABLE TO
INVESTORS REAL ESTATE TRUST TO FUNDS FROM OPERATIONS
 
 
(in thousands, except per share amounts)
 
Three Months Ended October 31,
 
2015
   
2014
 
   
Amount
   
Weighted
Avg Shares
and Units(1)
   
Per
Share
And
Unit(2)
   
Amount
   
Weighted
Avg Shares
and Units(1)
   
Per
Share
And
Unit(2)
 
Net income attributable to Investors Real Estate Trust
 
$
16,666
           
$
5,114
         
Less dividends to preferred shareholders
   
(2,878
)
           
(2,878
)
       
Net income available to common shareholders
   
13,788
     
124,665
   
$
0.11
     
2,236
     
117,034
   
$
0.02
 
Adjustments:
                                               
Noncontrolling interest – Operating Partnership
   
1,527
     
13,900
             
363
     
16,261
         
Depreciation and amortization of real property
   
14,860
                     
17,624
                 
Impairment of real estate investments
   
1,873
                     
3,245
                 
Loss on depreciable property sales
   
(23,909
)
                   
(1,231
)
               
FFO applicable to common shares and Units(1)(3)
 
$
8,139
     
138,565
   
$
0.06
   
$
22,237
     
133,295
   
$
0.17
 
 
 
(in thousands, except per share amounts)
 
Six Months Ended October 31,
 
2015
   
2014
 
   
Amount
   
Weighted
Avg Shares
and Units(1)
   
Per
Share
And
Unit(2)
   
Amount
   
Weighted
Avg Shares
and Units(1)
   
Per
Share
And
Unit(2)
 
Net income attributable to Investors Real Estate Trust
 
$
21,206
           
$
4,963
         
Less dividends to preferred shareholders
   
(5,757
)
           
(5,757
)
       
Net income (loss) available to common shareholders
   
15,449
     
124,757
   
$
0.12
     
(794
)
   
114,033
   
$
(0.01
)
Adjustments:
                                               
Noncontrolling interest – Operating Partnership
   
1,713
     
13,929
             
(39
)
   
18,565
         
Depreciation and amortization of real property
   
33,119
                     
34,661
                 
Impairment of real estate investments
   
3,598
                     
5,565
                 
Gain (loss) on depreciable property sales
   
(23,733
)
                   
1,762
                 
FFO applicable to common shares and Units(1)(3)
 
$
30,146
     
138,686
   
$
0.22
   
$
41,155
     
132,598
   
$
0.31
 
 
(1) Units of the Operating Partnership are exchangeable for cash, or, at our discretion, for Common Shares on a one-for-one basis.
(2) Net income attributable to Investors Real Estate Trust is calculated on a per share basis. FFO is calculated on a per share and unit basis.
(3) Excluding loss on extinguishment of debt and default interest, FFO would have been $16.9 million and $0.12 per share and unit for the three months ended October 31, 2015 and $40.5 million and $0.29 per share and unit for the six months ended October 31, 2015.
 
DISTRIBUTIONS
 
The following distributions per Common Share and Unit were paid during the six months ended October 31 of fiscal years 2016 and 2015:
 
Month
 
Fiscal Year 2016
   
Fiscal Year 2015
 
July
 
$
.1300
   
$
.1300
 
October
 
$
.1300
   
$
.1300
 
 
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
 
Our principal liquidity demands are maintaining distributions to the holders of Common Shares, preferred shares and Units; capital improvements and repairs and maintenance to properties; acquisition of additional properties; property development; tenant improvements; and debt service and repayments.
 
We have historically met our short-term liquidity requirements through net cash flows provided by our operating activities, and, from time to time, through draws on secured and unsecured lines of credit. As of October 31, 2015, we had one multi-bank line of credit with a total commitment capacity of $100.0 million, secured by mortgages on 16 properties. Management considers our ability to generate cash from property operating activities, cash-out refinancing of existing properties and, from time to time, draws on our line of credit to be adequate to meet all operating requirements and to make distributions to our shareholders in accordance with the REIT provisions of the Internal Revenue Code. Budgeted expenditures for ongoing maintenance and capital improvements and renovations to our real estate portfolio are also generally expected to be funded from existing cash on hand, cash flow generated from property operations, cash-out refinancing of existing properties, and/or new borrowings. However, the commercial real estate market continues to be subject to various market factors that can result in reduced tenant demand, occupancies and rental rates. In the event of deterioration in property operating results, or absent our ability to successfully continue cash-out refinancing of existing properties and/or new borrowings, we may need to consider additional cash preservation alternatives, including scaling back development activities, capital improvements and renovations and reducing the level of distributions to shareholders.
 
To the extent we do not satisfy our long-term liquidity requirements, which consist primarily of maturities under long-term debt, construction and development activities and potential acquisition opportunities, through net cash flows provided by operating activities and our credit facilities, we intend to satisfy such requirements through a combination of funding sources which we believe will be available to us, including the issuance of Units, additional common or preferred equity, proceeds from the sale of properties, and additional long-term secured or short-term unsecured indebtedness.
 
SOURCES AND USES OF CASH
 
Credit markets continue to be stable, with credit availability relatively unconstrained and benchmark interest rates remaining at or near historic lows.  While to date there has been no material negative impact on our ability to borrow in our multifamily segment, we continue to monitor the roles of the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae) in financing multifamily properties and their general capacity to lend given allocations set by the Federal Housing Finance Agency. We consider that one of the consequences of a modification in the agencies’ roles in recent years could potentially lead to a narrowing of their lending focus away from the smaller secondary or tertiary markets which we generally target, to multifamily properties in major metropolitan markets. We have historically obtained a significant portion of our multifamily debt from Freddie Mac, and we continue to plan to refinance portions of our maturing multifamily debt with these two entities, so any change in their ability or willingness to lend going forward could result in higher loan costs and/or more constricted availability of financing for us. Underwriting on commercial real estate continues to be more conservative compared to the underwriting standards employed prior to the recessionary period and we continue to find recourse security more frequently required, lower amounts of proceeds available and lenders limiting the amount of financing available in an effort to manage capital allocations and credit risk.  While we continue to expect to be able to refinance our debt maturing in the next twelve months without significant issues, we also expect lenders to continue to employ conservative underwriting regarding asset quality, occupancy levels and tenant creditworthiness. Accordingly, we remain cautious regarding our ability in fiscal year 2016 to rely on cash-out refinancing at levels we had achieved in recent years to provide funds for investment opportunities and other corporate purposes.
 
As of October 31, 2015 approximately 13.6%, or $6.6 million, of our mortgage debt maturing in the third and fourth quarters of fiscal year 2016 is debt placed on multifamily assets, and approximately 86.4%, or approximately $42.0 million, is debt placed on properties in our commercial segments. Of this $48.6 million, we expect to pay off $97,000, we expect to refinance $6.6 million and we expect to renew $41.9 million, in the second and third quarters of fiscal year 2016.  As of October 31, 2015, approximately 26.1%, or $14.9 million, of our mortgage debt maturing in the next twelve months is debt placed on multifamily assets, and approximately 73.9%, or $42.4 million, is debt placed on properties in our healthcare and industrial segments.
 
Our revolving, multi-bank line of credit with First International Bank as lead bank had, as of October 31, 2015, lending commitments of $100.0 million at an interest rate of 4.75%. As of October 31, 2015, the line of credit was secured by mortgages on 16 properties and had a minimum outstanding principal balance requirement of $17.5 million. As of October 31, 2015 and April 30, 2015, we had borrowed $17.5 million and $60.5 million, respectively.
 
We maintain 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, 2015, our compensating balances totaled $13.4 million and consisted of the following:
 
Financial Institution
 
Compensating Balance
 
First International Bank and Trust, Watford City, ND
 
$
6,000,000
 
Associated Bank, Green Bay, WI
   
3,000,000
 
The PrivateBank, Minneapolis, MN
   
2,000,000
 
Bremer Bank, Saint Paul, MN
   
1,285,000
 
Dacotah Bank, Minot, ND
   
350,000
 
United Community Bank, Minot, ND
   
275,000
 
Peoples State Bank, Velva, ND
   
225,000
 
American National Bank, Omaha, NE
   
200,000
 
Commerce Bank a Minnesota Banking Corporation
   
100,000
 
Total
 
$
13,435,000
 
 
Current anticipated total project costs for development projects in progress at October 31, 2015 total approximately $174.0 million (including costs incurred by project joint venture entities), of which approximately $136.6 million has been incurred as of October 31, 2015. As of October 31, 2015, the Operating Partnership (or the project joint venture entities) had entered into construction loans totaling approximately $87.3 million for development projects in progress. In addition to current planned expenditures for development projects in progress, as of October 31, 2015, we are committed to fund $4.0 million in tenant improvements within approximately the next 12 months. Of this total, approximately $1.1 million is related to properties classified as held for sale.
 
The issuance of Units for property acquisitions continues to be an expected source of capital for us. In the three and six months ended October 31, 2015, approximately 44,000 Units, valued at issuance at $400,000 were issued in connection with our acquisition of property.  In the three and six months ended October 31, 2014, approximately 11,000 Units, valued at issuance at $100,000 were issued in connection with our acquisition of property.
 
Under our DRIP, common shareholders and Unitholders have an opportunity to use their cash distributions to purchase additional Common Shares, and to purchase additional shares through voluntary cash contributions. During the six months ended October 31, 2015 and 2014, approximately 821,000 and 4.2 million Common Shares with a total value included in equity of $5.6 million and $34.8 million, and an average price per share after applicable discounts of $6.85 and $8.27, respectively, were issued under the DRIP plan.
 
Cash and cash equivalents at October 31, 2015 totaled $55.1 million, compared to $53.0 million at October 31, 2014, an increase of $2.1 million. Net cash provided by operating activities for the three months ended October 31, 2015 decreased by $17.9 million, primarily due to an increase in adjusted net income compared to the six months ended October 31, 2014 offset by an increase in gain on sale of real estate and discontinued operations.  Net cash provided by investing activities increased by $314.8 million for the six months ended October 31, 2015 compared to the six months ended October 31, 2014, primarily due to an increase in proceeds from sale of discontinued operations net of an increase in payments for acquisitions of real estate. Net cash used by financing activities for the six months ended October 31, 2015 decreased by $296.5 million compared to the six months ended October 31, 2014, primarily due to an increase in payments on mortgage debt and payments on revolving line of credit and other debt, an increase in repurchases of common shares net of a decrease in proceeds from sale of common shares.
 
FINANCIAL CONDITION
 
Mortgage Loan Indebtedness. Mortgage loan indebtedness increased by approximately $60.9 million as of October 31, 2015, compared to April 30, 2015, due to new loans. As of October 31, 2015, approximately 87.7% of our $728.9 million of mortgage debt is at fixed rates of interest, with staggered maturities. This limits our exposure to changes in interest rates, which minimizes the effect of interest rate fluctuations on our results of operations and cash flows. As of October 31, 2015, the weighted average rate of interest on our mortgage debt was 5.04%, compared to 4.95% on April 30, 2015.
 
Property Owned. Property owned was $1.8 billion at October 31, 2015 compared to $1.5 billion at April 30, 2015. During the six months ended October 31, 2015, we had three new acquisitions and disposed of 55 properties, as described above in the “Property Acquisitions and Dispositions” subsection of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Cash and Cash Equivalents. Cash and cash equivalents on hand on October 31, 2015 were $55.1 million, compared to $49.0 million on April 30, 2015.
 
Other Investments. Other investments, consisting of certificates of deposit held primarily for compensating balances, totaled approximately $329,000 on October 31, 2015 and on April 30, 2015.
 
Operating Partnership Units. Outstanding Units in the Operating Partnership decreased to 13.9 million Units at October 31, 2015 compared to 14.0 million Units outstanding at April 30, 2015. The decrease resulted primarily from Unitholders exercising their Exchange Right, receiving in exchange an equal number of Common Shares.
 
Common and Preferred Shares of Beneficial Interest. Common Shares outstanding on October 31, 2015 totaled 122.8 million, compared to 124.5 million outstanding on April 30, 2015. We issued Common Shares pursuant to our DRIP, consisting of approximately 821,000 Common Shares issued during the six months ended October 31, 2015, for a total value of $5.6 million. Exchanges of approximately 154,000 Units for Common Shares, for a total of approximately $855,000 in shareholders’ equity, also increased the number of Common Shares outstanding during the six months ended October 31, 2015. We issued approximately 220,000 Common Shares, net of withholding, with a total grant-date value of approximately $1.6 million, under our 2008 Incentive Award Plan for executive officer and trustee share-based compensation for fiscal year 2015 performance. During the second quarter of fiscal year 2016, we repurchased and retired approximately 2.9 million Common Shares for an aggregate cost of approximately $21.9 million, including commissions.
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Our exposure to market risk is limited primarily to fluctuations in the general level of interest rates on our current and future fixed and variable rate debt obligations.
 
Approximately 87.7% and 92.8% of our mortgage debt, excluding mortgage debt related to held for sale assets, as of October 31, 2015 and April 30, 2015, respectively, is at fixed interest rates. Therefore, we have little exposure to interest rate fluctuation risk on our existing mortgage debt. Accordingly, interest rate fluctuations during the second quarter of fiscal year 2016 did not have a material effect on us. Even though our goal is to maintain a fairly low exposure to interest rate risk, we may become vulnerable to significant fluctuations in interest rates on any future repricing or refinancing of our fixed or variable rate debt and on future debt.
 
We primarily use long-term (more than nine years) and medium term (five to seven years) debt as a source of capital. We do not currently use derivative securities, interest rate swaps or any other type of hedging activity to manage our interest rate risk.  As of October 31, 2015, we had the following amounts of future principal and interest payments due on mortgages, including mortgages held for sale, secured by our real estate:
 
   
(in thousands)
 
   
Future Principal Payments
 
Mortgages
 
Remaining
Fiscal 2016
   
Fiscal 2017
   
Fiscal 2018
   
Fiscal 2019
   
Fiscal 2020
   
Thereafter
   
Total
   
Fair Value
 
Fixed Rate
 
$
57,993
   
$
33,868
   
$
38,910
   
$
86,001
   
$
63,850
   
$
358,525
   
$
639,147
   
$
694,095
 
Avg Fixed Interest Rate(1)
   
4.94
%
   
5.01
%
   
4.95
%
   
4.74
%
   
4.58
%
                       
                                                                 
Variable Rate
 
$
978
   
$
9,521
   
$
2,098
   
$
30,389
   
$
46,840
   
$
0
   
$
89,826
   
$
89,826
 
Avg Variable Interest Rate(1)
   
4.08
%
   
4.04
%
   
4.16
%
   
4.69
%
   
4.81
%
                       
                                                                 
Held for Sale
 
$
258
   
$
123,151
   
$
576
   
$
9,413
   
$
0
   
$
0
     
133,398
     
163,117
 
Avg Fixed Interest Rate(1)
   
9.08
%
   
6.03
%%
   
6.13
%
   
6.10
%
   
0
%
                       
                                                   
$
862,371
   
$
947,038
 

 
(in thousands)
 
 
Future Interest Payments
 
Mortgages
Remaining
Fiscal 2016
 
Fiscal 2017
 
Fiscal 2018
 
Fiscal 2019
 
Fiscal 2020
 
Thereafter
 
Total
 
Fixed Rate
 
$
15,762
   
$
29,067
   
$
27,062
   
$
24,097
   
$
19,332
   
$
34,179
   
$
149,499
 
Variable Rate
   
1,833
     
3,588
     
3,298
     
2,549
     
1,452
     
0
     
12,720
 
Held for Sale
   
6,055
     
4,339
     
612
     
574
     
0
     
0
     
11,580
 
                                                   
$
173,799
 
 
(1) Interest rate given is for the entire year.
 
The weighted average interest rate on our fixed rate and variable rate debt, excluding mortgages related to assets held for sale, as of October 31, 2015, was 5.04%. Any fluctuations in variable interest rates could increase or decrease our interest expenses. For example, an increase of one percent per annum on our $89.8 million of variable rate mortgage indebtedness would increase our annual interest expense by approximately $898,000.
 
Exposure to interest rate fluctuation risk on our $100.0 million secured line of credit is limited by a cap on the interest rate of 8.65% with a floor of 4.75%. The line of credit has an interest rate equal to the Wall Street Journal Prime Rate plus 1.25%, matures in September 2017 and had an outstanding balance of $17.5 million at October 31, 2015.
 
ITEM 4. CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures:
 
Management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of October 31, 2015, such disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
 
Internal Control Over Financial Reporting:
 
There have not been any changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
PART II — OTHER INFORMATION
 
Item 1. Legal Proceedings
 
None
 
Item 1A.
Risk Factors
 
None
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
Sales of Securities
 
During the second quarter of fiscal year 2016, we issued an aggregate of 12,500 unregistered Common Shares to limited partners of the Operating Partnership, upon exercise of their Exchange Rights regarding an equal number of Units. All such issuances of Common Shares were exempt from registration as private placements under Section 4(2) of the Securities Act, including Regulation D promulgated thereunder. We have registered the re-sale of such Common Shares under the Securities Act.
 
Share Repurchase Program
 
Our Board of Trustees has authorized a share repurchase program of up to $50.0 million worth of our Common Shares over a one year period. Effective September 14, 2015, as part of the implementation of the program, we established a written trading plan (“Plan”) that provides for share repurchases in open market transactions that is intended to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. The extent to which shares are repurchased and the timing of such repurchases will depend upon a variety of factors, including prevailing market conditions, regulatory requirements and other factors. The program does not obligate us to repurchase any specific number of shares and may be suspended at any time in our discretion. The following is a summary of the Common Shares repurchased under the Plan during the second quarter of fiscal year 2016:
 
Period
 
Total Number of
Shares Purchased
   
Average Price
 Paid per
Share
   
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs1
   
Maximum Number (or
Approximate Dollar
Value) of Shares That May
Yet Be Purchased Under
the Plans or Programs
 
August 1 - 31, 2015
   
0
   
$
0
     
0
   
$
50,000,000
 
September 1 - 30, 2015
   
1,226,784
     
7.42
     
1,226,784
     
40,901,487
 
October 1 - 30, 2015
   
1,625,682
     
7.89
     
1,625,682
     
28,068,572
 
Total
   
2,852,466
   
$
7.69
     
2,852,466
   
$
28,068,572
 
 
(1) On August 8, 2015, we publicly announced the share repurchase program to repurchase up to $50.0 million worth of our Common Shares over a one year period.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures
 
Not Applicable
 
Item 5. Other Information
 
None
 
Item 6. Exhibits
 
EXHIBIT INDEX
 
Exhibit No.
Description
   
3.2
Fourth Restated Trustee’s Regulations (Bylaws) of Investors Real Estate Trust, adopted on September 15, 2015 (incorporated herein by reference to Exhibit 3.2 to the Current Report on Form 8-K filed with the Commission on September 21, 2015).
   
10.1
Form of Indemnification Agreement (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Commission on September 21, 2015).
   
10.2
Form of Stock Award Agreement (one-year measurement period) (incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Commission on September 21, 2015).
   
10.3
Form of Stock Award Agreement (two-year measurement period) (incorporated herein by reference to Exhibit 10.3 to the Current Report on Form 8-K filed with the Commission on September 21, 2015).
   
10.4
Form of Stock Award Agreement (three-year measurement period) (incorporated herein by reference to Exhibit 10.4 to the Current Report on Form 8-K filed with the Commission on September 21, 2015).
   
Section 302 Certification of President and Chief Executive Officer
   
Section 302 Certification of Executive Vice President and Chief Financial Officer
   
Section 906 Certifications of President and Chief Executive Officer
   
Section 906 Certifications of Executive Vice President and Chief Financial Officer
   
101*
The following materials from our Quarterly Report on Form 10-Q for the quarter ended October 31, 2015 formatted in eXtensible Business Reporting Language (“XBRL”): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (ii) the Condensed Consolidated Statements of Equity, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) notes to these condensed consolidated financial statements.

* Filed herewith
 
Signatures
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
INVESTORS REAL ESTATE TRUST
(Registrant)
 
/s/ Timothy P. Mihalick
 
Timothy P. Mihalick
 
President and Chief Executive Officer
 
   
/s/ Ted E. Holmes
 
Ted E. Holmes
 
Executive Vice President and Chief Financial Officer
 
   
Date: December 10, 2015
 
 
 
52