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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, 2016

 

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

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

incorporation or organization)

 

 

 

1400 31st Avenue SW, Suite 60

Post Office Box 1988

Minot, ND 58702-1988

(Address of principal executive offices) (Zip code)

 

(701) 837-4738

(Registrant’s telephone number, including area code)

 

N/A

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days.

 

 

 

 

Yes ☑

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 5, 2016, was 121,748,585.

 

 


 

TABLE OF CONTENTS

 

 

 

Page

Part I. Financial Information 

 

 

Condensed Consolidated Balance Sheets (unaudited) October 31, 2016 and April 30, 2016

Condensed Consolidated Statements of Operations (unaudited) For the Three and Six Months ended October 31, 2016 and 2015 

Condensed Consolidated Statements of Equity (unaudited) For the Six Months ended October 31, 2016 and 2015 

Condensed Consolidated Statements of Cash Flows (unaudited) For the Six Months ended October 31, 2016 and 2015 

Notes to Condensed Consolidated Financial Statements (unaudited) 

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

30 

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

48 

Item 4. Controls and Procedures 

49 

 

 

Part II. Other Information 

 

Item 1. Legal Proceedings 

50 

Item 1A. Risk Factors 

50 

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

50 

Item 3. Defaults Upon Senior Securities 

50 

Item 4. Mine Safety Disclosures 

50 

Item 5. Other Information 

50 

Item 6. Exhibits 

50 

Signatures 

52 

 

 

2


 

PART I

ITEM 1. FINANCIAL STATEMENTS - SECOND QUARTER - FISCAL 2017

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

 

 

 

 

 

 

 

 

 

 

(in thousands, except share data)

 

 

    

October 31, 2016

    

April 30, 2016

 

ASSETS

 

 

 

 

 

 

 

Real estate investments

 

 

 

 

 

 

 

Property owned

 

$

1,665,354

 

$

1,681,471

 

Less accumulated depreciation

 

 

(321,790)

 

 

(312,889)

 

 

 

 

1,343,564

 

 

1,368,582

 

Development in progress

 

 

20,921

 

 

51,681

 

Unimproved land

 

 

19,069

 

 

20,939

 

Total real estate investments

 

 

1,383,554

 

 

1,441,202

 

Assets held for sale and assets of discontinued operations

 

 

191,233

 

 

220,537

 

Cash and cash equivalents

 

 

68,729

 

 

66,698

 

Other investments

 

 

 —

 

 

50

 

Receivable arising from straight-lining of rents, net of allowance of $299 and $333, respectively

 

 

7,660

 

 

7,179

 

Accounts receivable, net of allowance of $192 and $97, respectively

 

 

9,815

 

 

1,524

 

Real estate deposits

 

 

1,370

 

 

 —

 

Prepaid and other assets

 

 

3,496

 

 

2,937

 

Intangible assets, net of accumulated amortization of $5,261 and $6,230, respectively

 

 

842

 

 

1,858

 

Tax, insurance, and other escrow

 

 

4,786

 

 

5,450

 

Property and equipment, net of accumulated depreciation of $1,051 and $1,058, respectively

 

 

928

 

 

1,011

 

Goodwill

 

 

1,645

 

 

1,680

 

Deferred charges and leasing costs, net of accumulated amortization of $3,603 and $3,719, respectively

 

 

5,261

 

 

4,896

 

TOTAL ASSETS

 

$

1,679,319

 

$

1,755,022

 

LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

Liabilities held for sale and liabilities of discontinued operations

 

$

69,326

 

$

77,488

 

Accounts payable and accrued expenses

 

 

40,382

 

 

39,727

 

Revolving line of credit

 

 

47,500

 

 

17,500

 

Mortgages payable, net of unamortized loan costs of $4,222 and $4,931, respectively

 

 

779,568

 

 

812,393

 

Construction debt and other

 

 

82,742

 

 

82,130

 

TOTAL LIABILITIES

 

 

1,019,518

 

 

1,029,238

 

COMMITMENTS AND CONTINGENCIES (NOTE 6)

 

 

 

 

 

 

 

REDEEMABLE NONCONTROLLING INTERESTS – CONSOLIDATED REAL ESTATE ENTITIES

 

 

8,585

 

 

7,522

 

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, 2016 and April 30, 2016, 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, 2016 and April 30, 2016, aggregate liquidation preference of $115,000,000)

 

 

111,357

 

 

111,357

 

Common Shares of Beneficial Interest (Unlimited authorization, no par value, 121,701,433 shares issued and outstanding at October 31, 2016, and 121,091,249 shares issued and outstanding at April 30, 2016)

 

 

920,759

 

 

922,084

 

Accumulated distributions in excess of net income

 

 

(489,356)

 

 

(442,000)

 

Total Investors Real Estate Trust shareholders’ equity

 

 

570,077

 

 

618,758

 

Noncontrolling interests – Operating Partnership (16,228,507 units at October 31, 2016 and 16,285,239 units at April 30, 2016)

 

 

71,994

 

 

78,484

 

Noncontrolling interests – consolidated real estate entities

 

 

9,145

 

 

21,020

 

Total equity

 

 

651,216

 

 

718,262

 

TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY

 

$

1,679,319

 

$

1,755,022

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

3


 

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

for the three and six months ended October 31, 2016 and 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except per share data)

 

 

Three Months Ended

 

Six Months Ended

 

 

 

October 31, 

 

October 31, 

 

 

    

2016

    

2015

    

2016

    

2015

 

REVENUE

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate rentals

 

$

45,859

 

$

41,868

 

$

90,844

 

$

82,618

 

Tenant reimbursement

 

 

4,750

 

 

4,478

 

 

9,376

 

 

8,773

 

TOTAL REVENUE

 

 

50,609

 

 

46,346

 

 

100,220

 

 

91,391

 

EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses, excluding real estate taxes

 

 

15,814

 

 

15,052

 

 

31,871

 

 

28,540

 

Real estate taxes

 

 

5,759

 

 

4,899

 

 

11,336

 

 

9,715

 

Depreciation and amortization

 

 

13,531

 

 

12,405

 

 

27,798

 

 

23,622

 

Impairment of real estate investments

 

 

 —

 

 

1,873

 

 

54,153

 

 

3,158

 

General and administrative expenses

 

 

2,702

 

 

2,933

 

 

5,308

 

 

5,387

 

Acquisition and investment related costs

 

 

4

 

 

391

 

 

47

 

 

398

 

Other expenses

 

 

816

 

 

813

 

 

1,668

 

 

1,230

 

TOTAL EXPENSES

 

 

38,626

 

 

38,366

 

 

132,181

 

 

72,050

 

Operating (loss) income

 

 

11,983

 

 

7,980

 

 

(31,961)

 

 

19,341

 

Interest expense

 

 

(10,626)

 

 

(8,741)

 

 

(20,990)

 

 

(16,555)

 

Loss on extinguishment of debt

 

 

 —

 

 

(106)

 

 

 —

 

 

(106)

 

Interest income

 

 

600

 

 

565

 

 

1,172

 

 

1,121

 

Other income

 

 

37

 

 

100

 

 

510

 

 

151

 

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

 

 

1,994

 

 

(202)

 

 

(51,269)

 

 

3,952

 

(Loss) gain on sale of real estate and other investments

 

 

(103)

 

 

 —

 

 

8,855

 

 

(175)

 

Income (loss) from continuing operations

 

 

1,891

 

 

(202)

 

 

(42,414)

 

 

3,777

 

Income from discontinued operations

 

 

10,399

 

 

16,879

 

 

14,110

 

 

17,627

 

NET INCOME (LOSS)

 

 

12,290

 

 

16,677

 

 

(28,304)

 

 

21,404

 

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

 

 

(1,174)

 

 

(1,527)

 

 

2,122

 

 

(1,713)

 

Net loss attributable to noncontrolling interests – consolidated real estate entities

 

 

484

 

 

1,516

 

 

16,139

 

 

1,515

 

Net income (loss) attributable to Investors Real Estate Trust

 

 

11,600

 

 

16,666

 

 

(10,043)

 

 

21,206

 

Dividends to preferred shareholders

 

 

(2,878)

 

 

(2,878)

 

 

(5,757)

 

 

(5,757)

 

NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS

 

$

8,722

 

$

13,788

 

$

(15,800)

 

$

15,449

 

(Loss) earnings per common share from continuing operations – Investors Real Estate Trust – basic and diluted

 

$

 —

 

$

(0.01)

 

$

(0.23)

 

$

 —

 

Earnings per common share from discontinued operations – Investors Real Estate Trust – basic and diluted

 

 

0.07

 

 

0.12

 

 

0.10

 

 

0.12

 

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

 

$

0.07

 

$

0.11

 

$

(0.13)

 

$

0.12

 

DIVIDENDS PER COMMON SHARE

 

$

0.13

 

$

0.13

 

$

0.26

 

$

0.26

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

4


 

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (unaudited)

for the six months ended October 31, 2016 and 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

    

 

    

 

 

    

NUMBER

    

 

 

    

ACCUMULATED

    

 

 

    

 

 

 

 

 

NUMBER OF

 

 

 

 

OF

 

 

 

 

DISTRIBUTIONS

 

NONREDEEMABLE

 

 

 

 

 

 

PREFERRED

 

PREFERRED

 

COMMON

 

COMMON

 

IN EXCESS OF

 

NONCONTROLLING

 

TOTAL

 

 

 

SHARES

 

SHARES

 

SHARES

 

SHARES

 

NET INCOME

 

INTERESTS

 

EQUITY

 

Balance April 30, 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

 

Shares issued and share-based compensation

 

 

 

 

 

 

220

 

 

482

 

 

 

 

 

 

 

 

482

 

Partnership units issued

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

400

 

 

400

 

Redemption of units for common shares

 

 

 

 

 

 

154

 

 

855

 

 

 

 

 

(855)

 

 

 —

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance April 30, 2016

 

5,750

 

$

138,674

 

121,091

 

$

922,084

 

$

(442,000)

 

$

99,504

 

$

718,262

 

Net income attributable to Investors Real Estate Trust and nonredeemable noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

(10,043)

 

 

(18,116)

 

 

(28,159)

 

Distributions - common shares and units

 

 

 

 

 

 

 

 

 

 

 

 

(31,556)

 

 

(4,234)

 

 

(35,790)

 

Distributions – Series A preferred shares

 

 

 

 

 

 

 

 

 

 

 

 

(1,186)

 

 

 

 

 

(1,186)

 

Distributions – Series B preferred shares

 

 

 

 

 

 

 

 

 

 

 

 

(4,571)

 

 

 

 

 

(4,571)

 

Shares issued and share-based compensation

 

 

 

 

 

 

553

 

 

1,218

 

 

 

 

 

 

 

 

1,218

 

Redemption of units for common shares

 

 

 

 

 

 

57

 

 

134

 

 

 

 

 

(134)

 

 

 —

 

Contributions from nonredeemable noncontrolling interests – consolidated real estate entities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,150

 

 

7,150

 

Distributions to nonredeemable noncontrolling interests – consolidated real estate entities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(155)

 

 

(155)

 

Acquisition of nonredeemable noncontrolling interests – consolidated real estate entities

 

 

 

 

 

 

 

 

 

(2,677)

 

 

 

 

 

(2,261)

 

 

(4,938)

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(615)

 

 

(615)

 

Balance October 31, 2016

 

5,750

 

$

138,674

 

121,701

 

$

920,759

 

$

(489,356)

 

$

81,139

 

$

651,216

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

5


 

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

for the six months ended October 31, 2016 and 2015

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

Six Months Ended

 

 

 

October 31, 

 

 

    

2016

    

2015

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

Net (loss) income

 

$

(28,304)

 

$

21,404

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

28,548

 

 

28,594

 

Depreciation and amortization from discontinued operations

 

 

64

 

 

5,300

 

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

 

 

(15,358)

 

 

(23,733)

 

Gain on extinguishment of debt and discontinued operations

 

 

72

 

 

904

 

Share-based compensation expense

 

 

865

 

 

605

 

Impairment of real estate investments

 

 

54,153

 

 

3,598

 

Bad debt expense

 

 

371

 

 

162

 

Changes in other assets and liabilities:

 

 

 

 

 

 

 

Receivable arising from straight-lining of rents

 

 

(487)

 

 

512

 

Accounts receivable

 

 

(588)

 

 

1,230

 

Prepaid and other assets

 

 

(541)

 

 

379

 

Tax, insurance and other escrow

 

 

(200)

 

 

565

 

Deferred charges and leasing costs

 

 

(851)

 

 

(576)

 

Accounts payable, accrued expenses and other liabilities

 

 

(2,357)

 

 

(4,626)

 

Net cash provided by operating activities

 

 

35,388

 

 

34,318

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

Additions to notes receivable

 

 

(8,196)

 

 

 —

 

Proceeds from real estate deposits

 

 

 —

 

 

2,837

 

Payments for real estate deposits

 

 

(1,370)

 

 

(792)

 

Decrease in other investments

 

 

50

 

 

 —

 

Decrease in lender holdbacks for improvements

 

 

1,925

 

 

3,258

 

Increase in lender holdbacks for improvements

 

 

(614)

 

 

(578)

 

Proceeds from sale of discontinued operations

 

 

43,896

 

 

364,559

 

Proceeds from sale of real estate and other investments

 

 

13,875

 

 

6,783

 

Insurance proceeds received

 

 

481

 

 

432

 

Payments for acquisitions of real estate assets

 

 

 —

 

 

(71,381)

 

Payments for development and re-development of real estate assets

 

 

(10,897)

 

 

(79,298)

 

Payments for improvements of real estate assets

 

 

(23,641)

 

 

(13,510)

 

Payments for improvements of real estate assets from discontinued operations

 

 

 —

 

 

(4,993)

 

Net cash provided by investing activities

 

 

15,509

 

 

207,317

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

Proceeds from mortgages payable

 

 

1,113

 

 

51,070

 

Principal payments on mortgages payable

 

 

(53,208)

 

 

(205,833)

 

Proceeds from revolving lines of credit

 

 

30,000

 

 

43,000

 

Principal payments on revolving lines of credit

 

 

 —

 

 

(106,855)

 

Proceeds from construction debt

 

 

11,174

 

 

46,775

 

Proceeds from sale of common shares under distribution reinvestment and share purchase program

 

 

 —

 

 

1,493

 

Proceeds from noncontrolling partner – consolidated real estate entities

 

 

8,696

 

 

826

 

Payments for acquisition of noncontrolling interests – consolidated real estate entities

 

 

(4,938)

 

 

 —

 

Repurchase of common shares

 

 

 —

 

 

(21,931)

 

Distributions paid to common shareholders

 

 

(31,556)

 

 

(28,528)

 

Distributions paid to preferred shareholders

 

 

(5,757)

 

 

(5,757)

 

Distributions paid to noncontrolling interests – Unitholders of the Operating Partnership

 

 

(4,234)

 

 

(3,496)

 

Distributions paid to noncontrolling interests – consolidated real estate entities

 

 

(155)

 

 

(6,236)

 

Net cash used by financing activities

 

 

(48,866)

 

 

(235,472)

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

 

2,031

 

 

6,163

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

 

 

66,698

 

 

48,970

 

CASH AND CASH EQUIVALENTS AT END OF YEAR

 

$

68,729

 

$

55,133

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

6


 

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, continued)

for the six months ended October 31, 2016 and 2015

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

Six Months Ended

 

 

 

October 31, 

 

 

    

2016

    

2015

 

SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

 

Distribution reinvestment plan – shares issued

 

$

 —

 

$

3,997

 

Operating partnership distribution reinvestment plan – shares issued

 

 

 —

 

 

130

 

Operating partnership units converted to shares

 

 

134

 

 

855

 

Real estate assets acquired through the issuance of operating partnership units

 

 

 —

 

 

400

 

Increase  to accounts payable included within real estate investments

 

 

3,188

 

 

1,241

 

Construction debt reclassified to mortgages payable

 

 

10,549

 

 

41,649

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

Cash paid for interest, net of amounts capitalized of $298 and $3,367, respectively

 

$

17,457

 

$

16,846

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

7


 

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

for the six months ended October 31, 2016 and 2015

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 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, 2016 and 2015. Our properties are located mainly in the states of North Dakota and Minnesota, but also in the states of Idaho, Iowa, Kansas, Montana, Nebraska, South Dakota, Wisconsin and Wyoming. As of October 31, 2016, we held for investment 86 multifamily properties with 12,751 apartment units and 2.7 million net rentable square feet in 30 healthcare and 14 other properties. We held for sale 14 multifamily property, 27 healthcare properties, 2 retail properties and 1 parcel of land as of October 31, 2016. 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 88.2% of the limited partnership units of the Operating Partnership (“Units”) as of October 31, 2016 and 88.1% as of April 30, 2016. 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

8


 

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, 2016, as filed with the SEC on June 29, 2016.

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 is 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 is effective for fiscal years beginning after December 15, 2015. We adopted the guidance in ASU 2015-02 as of May 1, 2016, as more fully described in the Variable Interest Entity section below.

 

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 is effective for fiscal years beginning after December 15, 2015. We adopted the guidance in ASU 2015-03 as of May 1, 2016.

 

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 is effective for fiscal years beginning after December 15, 2015. Our adoption of the guidance in ASU 2015-05 did not have a material impact on our operating results or financial position.

 

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 amends certain aspects of recognition, measurement, presentation and disclosure of financial instruments, including the requirement to measure certain equity investments at fair value with changes in fair value recognized in net income. The ASU is effective for interim and annual reporting periods in 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 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 amends existing accounting standards for lease accounting, including by requiring lessees to recognize most leases on the balance sheet and making certain changes to lessor accounting. The ASU is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2018. We are currently evaluating the impact the new standard may have on our consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 amends several aspects of the accounting for share-based payment transactions, including the income tax

9


 

consequences, accrual of compensation cost, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The ASU is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2016. We are currently evaluating the impact the new standard may have on our consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing diversity in practice. The cash flow issues include debt prepayment or debt extinguishment costs and proceeds from the settlement of insurance claims. The ASU is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. We are currently evaluating the impact the new standard may have on our consolidated financial statements.

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, 2016, we recognized impairments of $40.9 million, $5.8 million, $4.7 million, and $2.8 million, respectively, on three multifamily properties and one parcel of unimproved land in Williston, North Dakota, due to deterioration of this energy-impacted market, which resulted in poor leasing activity and declining rental rates during the three months ended July 31, 2016, which should generally be a strong leasing period. These properties were written-down to estimated fair value based on an independent appraisal in the case of one property and management cash flow estimates and market data in the case of the remaining assets. The properties impaired for $40.9 million, $4.7 million, and $2.8 million are owned by joint venture entities in which we currently have an approximately 71.5%, 60% and 70% interest, respectively, but which are consolidated in our financial statements.

During the six months ended October 31, 2015, we incurred a loss of approximately $3.6 million due to impairment of one office property and 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. 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. 

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

10


 

liabilities to be included in the transaction and liabilities directly associated with assets that will be transferred in the transaction. Twenty-seven healthcare properties, fourteen multifamily properties, two commercial properties, and one parcel of land were classified as held for sale at October 31, 2016. Thirty-five healthcare properties, one multifamily property, one industrial property and three parcels of unimproved land were classified as held for sale at April 30, 2016.

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, 2016, our compensating balances totaled $14.8 million and consisted of the following:

 

 

 

 

 

Financial Institution

    

 

 

 

First International Bank, Watford City, ND

 

$

7,758,000

 

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

 

 

250,000

 

Peoples State Bank, Velva, ND

 

 

225,000

 

American National Bank, Omaha, NE

 

 

200,000

 

Commerce Bank a Minnesota Banking Corporation

 

 

100,000

 

Total

 

$

14,818,000

 

 

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 $1.9 million in lender holdbacks for improvements reflected in the Condensed Consolidated Statements of Cash Flows for the six months ended October 31, 2016 is due primarily to the release of loan proceeds to us upon completion of construction and tenant improvement projects, while the increase of approximately $614,000 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, 2016 and 2015, respectively, we added $0 and $1.3 million in new intangible assets and $0 and approximately $101,000 of new intangible liabilities. The weighted average lives of the intangible assets acquired in the six months ended October 31, 2016 and 2015 are 0 and .08 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.

11


 

Our identified intangible assets and intangible liabilities at October 31, 2016 and April 30, 2016 were as follows:

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

    

October 31, 2016

    

April 30, 2016

 

Identified intangible assets (included in intangible assets):

 

 

 

 

 

 

 

Gross carrying amount

 

$

6,103

 

$

8,088

 

Accumulated amortization

 

 

(5,261)

 

 

(6,230)

 

Net carrying amount

 

$

842

 

$

1,858

 

 

 

 

 

 

 

 

 

Identified intangible liabilities (included in other liabilities):

 

 

 

 

 

 

 

Gross carrying amount

 

$

157

 

$

159

 

Accumulated amortization

 

 

(65)

 

 

(55)

 

Net carrying amount

 

$

92

 

$

104

 

 

The amortization of acquired below-market leases and acquired above-market leases reduced rental income by approximately $4,000 for the three months ended October 31, 2016 and 2015, and approximately $9,000 and $11,000 for the six months ended October 31, 2016 and 2015, 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)

 

2018

 

$

(11)

 

2019

 

 

(20)

 

2020

 

 

(16)

 

2021

 

 

(13)

 

2022

 

 

(6)

 

 

Amortization of all other identified intangible assets (a component of depreciation and amortization expense) was approximately $321,000 and $331,000 for the three months ended October 31, 2016 and 2015, respectively, and approximately $995,000 and $523,000 for the six months ended October 31, 2016 and 2015, 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)

 

2018

 

$

269

 

2019

 

 

170

 

2020

 

 

104

 

2021

 

 

78

 

2022

 

 

25

 

 

The excess of the cost of an acquired property 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, 2016 and April 30, 2016 was $1.6 million and $1.7 million, respectively. The annual review at April 30, 2016 indicated no impairment to goodwill and there was no indication of impairment at October 31, 2016.  During the six months ended October 31, 2016, we classified as held for sale of one commercial property to which goodwill had been assigned, and as a result, approximately $17,000 of goodwill was derecognized. Approximately $35,000 and $17,000 of goodwill is included in assets held for sale at October 31, 2016 and April 30, 2016, respectively. 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.

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

12


 

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 combined utilities, maintenance, insurance, property management expenses and other property expenses onto a single line called property operating expenses, excluding real estate taxes. We also combined depreciation/amortization related to real estate investments and amortization related to non-real estate investments onto a single line called depreciation and amortization. Additionally on the Condensed Consolidated Statements of Operations, we reclassed acquisition and project costs from other expenses to acquisition and investment related costs.

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 fourth quarter of fiscal year 2016, we classified as discontinued operations 34 senior housing properties, of which 8 were sold during the second quarter of fiscal year 2017 and 26 remained held for sale at October 31, 2016.

PROCEEDS FROM FINANCING LIABILITY

During 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 liability 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, 2016 was $7.9 million.

VARIABLE INTEREST ENTITY

As discussed in the Recent Accounting Pronouncements section, effective May 1, 2016, we adopted the guidance in ASU 2015-02.  As a result, the Operating Partnership and each of our less than wholly-owned real estate partnerships have been deemed to have the characteristics of a variable interest entity (“VIE”).  However, we were not required to consolidate any previously unconsolidated entities or deconsolidate any previously consolidated entities as a result of the change in classification. Accordingly, there has been no change to the recognized amounts in our condensed consolidated balance sheets and statements of operations or amounts reported in our condensed consolidated statements of cash flows. We determined that an additional six consolidated partnerships, including the Operating Partnership, are VIEs under the new standard because the limited partners are not able to exercise substantive kick-out or participating rights. We are the VIEs primary beneficiary and the partnerships are required to be consolidated on our balance sheet because we have a controlling financial interest in the VIEs, and have both the power to direct the activities of the VIEs that most significantly impact the VIE’s economic performance as well as the obligation to absorb losses or the right to receive benefits from the VIEs that could potentially be significant to the VIEs. Because the Operating Partnership is a VIE, all of our assets and liabilities are held through a VIE.

13


 

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. Upon the exercise of Exchange Rights, and in our sole discretion, we may issue shares in exchange for Units on a one-for-one basis after a minimum holding period of one year. The following table presents a reconciliation of the numerator and denominator used to calculate basic and diluted earnings per share reported in the condensed consolidated financial statements for the three and six months ended October 31, 2016 and 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except per share data)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

October 31, 

 

October 31, 

 

 

    

2016

    

2015

    

2016

    

2015

 

NUMERATOR

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations – Investors Real Estate Trust

 

$

2,426

 

$

1,474

 

$

(22,488)

 

$

5,341

 

Income from discontinued operations – Investors Real Estate Trust

 

 

9,174

 

 

15,192

 

 

12,445

 

 

15,865

 

Net income (loss) attributable to Investors Real Estate Trust

 

 

11,600

 

 

16,666

 

 

(10,043)

 

 

21,206

 

Dividends to preferred shareholders

 

 

(2,878)

 

 

(2,878)

 

 

(5,757)

 

 

(5,757)

 

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

 

 

8,722

 

 

13,788

 

 

(15,800)

 

 

15,449

 

Noncontrolling interests – Operating Partnership

 

 

1,174

 

 

1,527

 

 

(2,122)

 

 

1,713

 

Numerator for diluted earnings (loss) per share

 

$

9,896

 

$

15,315

 

$

(17,922)

 

$

17,162

 

DENOMINATOR

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per share weighted average shares

 

 

121,154

 

 

124,665

 

 

121,135

 

 

124,757

 

Effect of convertible operating partnership units

 

 

16,264

 

 

13,900

 

 

16,276

 

 

13,929

 

Denominator for diluted earnings per share

 

 

137,418

 

 

138,565

 

 

137,411

 

 

138,686

 

(Loss) earnings per common share from continuing operations – Investors Real Estate Trust – basic and diluted

 

$

 —

 

$

(.01)

 

$

(.23)

 

$

 —

 

Earnings per common share from discontinued operations – Investors Real Estate Trust – basic and diluted

 

 

.07

 

 

.12

 

 

.10

 

 

.12

 

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

 

$

.07

 

$

.11

 

$

(.13)

 

$

.12

 

 

 

NOTE 4 • EQUITY 

Equity Awards. During the second quarter of fiscal year 2017, we issued approximately 120,792 Common Shares, with a total grant-date value of approximately $502,000, under our 2015 Incentive Award Plan, for executive officer share based compensation for future performance. During the first quarter of fiscal year 2017, we issued approximately 378,000 Common Shares, with a total grant-date value of approximately $1.4 million, under our 2015 Incentive Award Plan, for executive officer and trustee share based compensation for future performance. We also issued approximately 59,000 Common Shares, with a total grant-date value of approximately $352,000, under our 2008 Incentive Award Plan, for trustee share based compensation for fiscal year 2016 performance. 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. No shares were issued under an incentive award plan during the second quarter of fiscal year 2016.

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, 2016 and 2015.

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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, 2016, no shares were issued under the DRIP. During the three months ended October 31, 2015, approximately 55,000 Common Shares with a total value included in equity of $377,000, and an average price per share after applicable discounts of $6.87, were issued under the DRIP.  During the six months ended October 31, 2016, no shares were issued under the DRIP.  During the six months ended October 31, 2015, approximately 821,000 Common Shares with a total value included in equity of $5.6 million, and an average price per share after applicable discounts of $6.85 were issued under the DRIP.

Exchange Rights. Pursuant to the exercise of Exchange Rights, during the three months ended October 31, 2016 and 2015, respectively, approximately 56,700 and 75,500 Common Shares were issued in exchange for Units, with a total value of approximately $134,000 and $279,000 included in equity.  During the six months ended October 31, 2016 and 2015, approximately 56,700 and 154,000 Common Shares were issued in exchange for Units, with a total value of approximately $134,000 and $855,000 included in equity.

 

NOTE 5 • SEGMENT REPORTING 

We report our results in two reportable segments, which are aggregations of similar properties: multifamily and healthcare, excluding our senior housing properties, which are classified as held for sale and discontinued operations at October 31, 2016.   

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). During the first quarter of fiscal year 2017, we removed offsite costs associated with property management and casualty-related amounts from our assessment of segment performance as a result of our announced strategic shift to focus solely on our multifamily segment. These expenses were removed from the operating results reviewed by our chief operating decision maker to allow for the assessment of direct property costs in NOI, excluding allocated costs. 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 co