UNITED STATESSECURITIES AND EXCHANGE COMMISSION
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934
For the fiscal year ended April 30, 2003
Commission File Number 000-14851
INVESTORS REAL ESTATE TRUST
12 South Main StreetMinot, North Dakota 58701(Address of principal executive offices)
701-837-4738(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:None
Securities registered pursuant to Section 12(g) of the Act:
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 such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 126-2). þ Yes o No
The aggregate market value of the Registrant’s outstanding capital shares of beneficial interest held by non-affiliates was $312,262,733, based on the last reported sale price on the NASDAQ National Market on October 31, 2002.
The number of shares of beneficial interest outstanding as of June 30, 2003, was 36,215,919.
References in this Annual Report or Form 10-K to the “Company,” “IRET,” “we,” “us,” or “our” include consolidated subsidiaries, unless the context indicates otherwise.
Documents Incorporated by Reference: Portions of IRET’s definitive Proxy Statement for its 2003 Annual Meeting of Shareholders are incorporated by reference into Part III (Items 10, 11, 12 and 13) hereof.
TABLE OF CONTENTS
INDEX
Special Note Regarding Forward Looking Statements
Certain statements included in this Annual Report on Form 10-K and the documents incorporated into this document by reference are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements include statements about our intention to invest in properties that we believe will increase in income and value; our belief that the real estate markets in which we invest will continue to perform well; our belief that we have the liquidity and capital resources necessary to meet our known obligations and to make additional real estate acquisitions and capital improvements when appropriate to enhance long term growth; and other statements preceded by, followed by or otherwise including words such as “believe,” “expect,” “intend,” “project,” “anticipate,” “potential,” “may,” “will,” “designed,” “estimate,” “should,” “continue” and other similar expressions. These statements indicate that we have used assumptions that are subject to a number of risks and uncertainties that could cause our actual results or performance to differ materially from those projected.
Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, we can give no assurance that these expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements include:
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In light of these uncertainties, the events anticipated by our forward-looking statements might not occur. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The foregoing review of factors that could cause our actual results to differ materially from those contemplated in any forward-looking statements included in this Annual Report on Form 10-K should not be construed as exhaustive.
PART I
Item 1. Business
Internet Website
Our internet address is www.iret.com. We make available, free of charge, through the “SEC filings” tab under the Investor Relations section of our internet website, our Annual Report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such forms are filed with or furnished to the SEC. Information on our internet website does not constitute part of this Annual Report on Form 10-K.
Overview
We are a self-administered, externally managed equity Real Estate Investment Trust or REIT and our business consists of owning and operating income-producing real properties. We are structured as an Umbrella Partnership Real Estate Investment Trust or UPREIT and we conduct our day-to-day business operations though our operating partnership, IRET Properties, a North Dakota Limited Partnership. We have fundamental strategies of focusing our real estate investments in the upper Midwest, primarily in Minnesota, North Dakota, South Dakota, Montana and Nebraska, and of diversifying our investments between multi-family residential and commercial properties. For the twelve months ended April 30, 2003, our real estate investments in the states listed above accounted for 82.5% of our total gross revenue.
Our objective is to increase shareholder value by employing a disciplined investment strategy. This strategy is focused on growing assets in desired geographical markets, achieving diversification by property type and location, adhering to targeted returns by acquiring properties in an attempt to create value for our investors. We have increased our cash distributions every year since our inception 33 years ago and every quarter since 1988.
We seek to diversify our investments between multi-family residential and commercial properties. As of April 30, 2003, our real estate portfolio consisted of:
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Typically, we attempt to concentrate our multi-family residential properties in communities with populations of approximately 35,000 to 500,000 and we attempt to concentrate our commercial holdings in metropolitan areas with populations of approximately 100,000 to 3.0 million. Our multi-family residential properties include apartment buildings, complexes and communities. Our commercial properties include office buildings, warehouse and industrial facilities, medical office and health care facilities, and retail stores and centers. As of April 30, 2003, no single tenant accounted for more than 10.0% of our total rental revenues. At April 30, 2003, the economic occupancy rates for our multi-family residential properties and our commercial properties were 91.2% and 95.4% respectively. Our average economic occupancy rates for those properties we have owned for at least the past 12 months or what we label as stabilized properties for the twelve-month period ended April 30, 2003, were 92.2% for multi-family residential properties and 95.3% for commercial properties. Economic occupancy rates are calculated by dividing the rent collected by the rent scheduled.
We generally use available cash or short-term floating rate debt to acquire real estate. We then replace such cash or short-term floating rate debt with fixed-rate secured debt, typically in an amount equal to 65.0% to 70.0% of the acquisition cost. In appropriate circumstances, we also may acquire one or more properties in exchange for limited partnership units of IRET Properties, which are convertible, after the expiration of a minimum holding period of one-year, into cash or, at our sole discretion, into our Shares of Beneficial Interest (“Shares”) on a one-to-one basis. Subject to our continued ability to raise equity capital and exchange limited partnership units, we anticipate acquiring $100.0 million to $200.0 million of real estate assets on an annual basis.
We generally contract with locally based third-party management companies to handle all onsite management duties necessary for the proper operation of our properties. Generally, all of our management contracts provide for compensation ranging from 2.5% to 5.0% of gross rent collections and, in all but two contracts, we may terminate these contracts in 60 days or less. The two management contracts that may not be terminated in 60 days or less may be terminated if the manager fails to meet certain financial performance goals. The use of locally-based management companies allows us to enjoy the benefits of local knowledge of the applicable real estate market, while avoiding the cost and difficulty associated with maintaining management personnel in every city in which we operate.
Investments Since May 1, 2002
During the past fiscal year we acquired 62 commercial properties consisting of 2.4 million leasable square feet for $163.5 million and invested $7.1 million in expanding our Southdale Medical Center. We also acquired two residential apartment communities containing 132 units for $3.9 million. In addition, eight undeveloped or vacant properties were acquired for $2.8 million. In order to complete these acquisitions, we used $22.2 million of our own cash,
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issued 894,085 limited partnership units of IRET Properties with a value of $8.9 million, issued 7,350,918 Shares with a value net of issue costs of $61.3 million, borrowed or assumed debt of $83.4 million from various lenders, and had a minority partner investment of equity in the amount of $1.5 million. The majority of the commercial properties we acquired during the past year were part of our merger with the T.F. James Company located in Minneapolis, Minnesota. As a result of the merger, we opened an office in Minneapolis, which is located at 21500 Highway 7, Greenwood, Minnesota.
Other Developments
Property dispositions. During the past fiscal year, we sold three commercial properties for a total of $6.6 million, four residential apartment communities for a total $4.6 million, and land for $102,000, resulting in a total gain of $1.6 million on gross sale proceeds of $11.2 million for fiscal 2003.
Investment certificates. In April 2002, we discontinued the issuance of investment certificates. All outstanding certificates will be redeemed as they mature. During the past year, we redeemed $16.2 million of investment certificates. The amount of investment certificates to be redeemed in fiscal 2004 and succeeding years is as follows:
Third Restated Declaration of Trust. At our Annual Meeting of Shareholders to be held on September 23, 2003, our shareholders may approve Articles of Amendment and a Third Restated Declaration of Trust. Our Board of Trustees has already unanimously approved the Third Restated Declaration of Trust. If approved, the Third Restated Declaration of Trust will, among other things, remove all references to a “sponsor” or “advisor;” simplify our corporate governance by removing provisions regarding our investment policies, borrowing and other limitations and compensation and fees; modifying provisions regarding transfer restrictions and ownership limitations of Shares; and modifying provisions regarding our capital structure by allowing our Board of Trustees to establish by resolution more than one class or series of Shares and to fix the relative rights and preferences of such different class or series of shares without the prior approval of our shareholders. For a more complete summary of the material differences between our Second Restated Declaration of Trust and our proposed Third Restated Declaration of Trust , please see our definitive Proxy Statement for our 2003 Annual Meeting of Shareholders to be filed with the SEC on or about August 11, 2003.
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Our Executive Officers
Set forth below are the names, ages, titles and biographies of each of our executive officers as of July 15, 2003.
Thomas A. Wentz, Sr. has been associated with us since our formation on July 31, 1970. Mr. Wentz, Sr. was a member of our Board of Trustees from 1970 to 1998, Secretary from 1970 to 1987, and Vice President from 1987 to July 2000. Mr. Wentz, Sr. has served as our President and Chief Executive Officer since July 2000. Previously, from 1985 to 1991, Mr. Wentz, Sr. was a Vice President of our advisor, Odell-Wentz & Associates, L.L.C., and, until August 1, 1998, was a partner in the law firm of Pringle & Herigstad, P.C.
Charles Wm. James was appointed as a Senior Vice President in February, 2003. Prior to becoming a Senior Vice President, Mr. James served in several officer positions from 1976 to February 2003, including the officer of President, with the T.F. James Company, an Iowa corporation that was merged into IRET, Inc. in February 2003. Mr. James is currently a managing member of Thomas F. James Properties, L.L.C., an Arkansas commercial development company; a partner of Peak Properties Development, a Montana commercial development partnership; a partner of James Family Properties, a Minnesota commercial development partnership; and a limited partner of Thomas F. James Realty Limited Partnership, L.L.L.P., a commercial property management company;
Timothy P. Mihalick joined us as a financial officer in May 1981, after graduating from Minot State University. He has served in various capacities with us over the years and was named Vice President in 1992. Mr. Mihalick has served as the Chief Operating Officer since 1997, as a Senior Vice President since 2002, and as a member of our Board of Trustees since 1999.
Thomas A. Wentz, Jr. joined us as General Counsel and Vice President in January 2000. He has served as a Senior Vice President since 2002 and as a member of our Board of Trustees since 1996. Prior to 2000, Mr. Wentz, Jr. was a shareholder in the law firm of Pringle & Herigstad, P.C. from 1992 to 1999. Mr. Wentz, Jr. is a member of the North Dakota Bar Association and a Director of SRT Communications, Inc. Mr. Wentz, Jr. is the son of Mr. Wentz, Sr.
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Diane K. Bryantt joined us in June 1996 and served as our Controller and Corporate Secretary before being appointed to the positions of Senior Vice President and Chief Financial Officer in 2002. Prior to joining us, Ms. Bryantt was employed by First American Bank, Minot, North Dakota.
Michael A. Bosh joined us as Associate General Counsel and Secretary in September 2002. Prior to 2002, Mr. Bosh was a shareholder in the law firm of Pringle & Herigstad, P.C. Mr. Bosh graduated from Jamestown College in 1992 and from Washington & Lee University School of Law in 1995. Mr. Bosh is a member of the American Bar Association and the North Dakota Bar Association.
Employees
As of April 30, 2003, we had 28 full time employees.
Environmental Matters
Under various federal, state and local laws, ordinances and regulations, owners, as well as tenants and operators, of real estate, may be required to investigate and clean up hazardous substances released at a property, and may be held liable to a governmental entity or to third parties for property damage or personal injuries and for investigation and clean-up costs incurred in connection with any contamination. In addition, some environmental laws create a lien on a contaminated site in favor of the government for damages and costs it incurs in connection with the contamination. We have done an environmental review for all properties that we own. Based upon that review we do not believe that any of these properties are subject to any material environmental contamination. However, no assurances can be given that:
Structure
We were organized as a REIT under the laws of the State of North Dakota on July 31, 1970. Our Second Restated Declaration of Trust provides that we will continue in existence until the expiration of 20 years after the death of the last survivor of the seven original members of our Board of Trustees, unless sooner terminated or extended by a vote of shareholders holding a majority of the issued and outstanding Shares. Five of the seven original members of our Board of Trustees are still living, the youngest being 68 years of age. Our existence may be extended indefinitely by an action of the members of our Board of Trustees, which is approved by the vote of shareholders holding 50.0% or more of the outstanding Shares.
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Since our formation, we have operated as a REIT under Sections 856-858 of the Internal Revenue Code, as amended (the “Code”), and since February 1, 1997, we have been structured as an UPREIT. Since restructuring as an UPREIT, we have conducted all of our daily business operations through IRET Properties. IRET Properties is organized under the laws of the State of North Dakota pursuant to an Agreement of Limited Partnership dated January 31, 1997. IRET Properties is principally engaged in acquiring, owning, operating and leasing multi-family residential and commercial real estate. The sole general partner of IRET Properties is IRET, Inc., a North Dakota corporation and our wholly-owned subsidiary. All of our assets (except for qualified REIT subsidiaries) and liabilities were contributed to IRET Properties, through IRET, Inc., in exchange for the sole general partnership interest in IRET Properties, which is held by IRET, Inc. As of April 30, 2003, IRET, Inc. owned a 78.0% interest in IRET Properties. The remaining ownership of IRET Properties is held by individual limited partners, none of who own more than 10.0% of the outstanding limited partnership units.
Competition
Investing in and operating real estate is a very competitive business. We compete against other REITs, financial institutions, individuals and public and private companies who are actively engaged in this business. We do not believe we have a dominant position in any of the geographic markets in which we operate but some of our competitors are dominant in selected markets. Many of our competitors have greater financial and management resources than we have. We believe, however, that the geographic diversity of our investments, the experience and abilities of our management, the quality of our assets and the financial strength of many of our commercial tenants affords us some competitive advantages that have in the past and will in the future allow us to operate our business successfully despite the competitive nature of our business. During the past year, we witnessed an unprecedented demand for quality investment real estate. This demand caused an escalation in price for all types of real estate. As a result, we were unable to purchase properties that will generate rates of return similar to those we acquired in previous years. We expect that the levels of return to be achieved through the investment in existing and stabilized real estate will remain lower than in previous periods as long as interest rates remain at historically low levels.
Investment Strategy and Policies
Our investment strategy is to invest in multi-family residential properties and certain commercial properties, such as warehouses, retirement homes, manufacturing plants, offices and retail properties, that are leased to single or multiple tenants, usually for five years or longer, and are located throughout the upper Midwest. We operate mainly within the states of North Dakota and Minnesota, although we do have real estate investments in South Dakota, Montana, Nebraska, Colorado, Georgia, Idaho, Iowa, Kansas, Michigan, Washington, Texas and Wisconsin. We generally seek to leverage all of the property that we acquire so that the debt on such property is approximately 65.0% to 70.0% of the property’s value.
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In order to implement our investment strategy we have certain investment policies. Our significant investment policies are as follows:
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Total Real Estate Rental Revenue
As of April 30, 2003, our real estate portfolio consisted of 43.4% multi-family residential properties, based on the dollar amount of our original investment plus capital improvements through April 30, 2003, and 56.6% commercial properties, based on the dollar amount of our original investment plus capital improvements through April 30, 2003. The dollar amounts and percentages of total real estate rental revenue by property group for each of the three most recent fiscal years ended April 30, were as follows:
Increase of Commercial Property Investments
Historically, the assets in our portfolio consisted predominantly of multi-family residential properties, as compared to commercial properties. More recently, our investment activities have caused this balance to shift so that the percentage of commercial properties held in our portfolio has increased significantly. Specifically, approximately 90.4% of our property acquisitions made during the past 24 months have been commercial properties. This change is predominantly due to the greater availability of commercial properties on terms that meet our financial and strategic objectives. Based on current market conditions, we anticipate that the percentage of commercial properties that we may acquire will continue to significantly exceed the number of multi-family residential properties that we may acquire during fiscal 2004. This may not, however, be a long-term trend as in future periods we may purchase a greater percentage of multi-family residential properties depending on market conditions.
Major Tenants
No single tenant accounted for more than 10.0% of revenues during the past fiscal year. As of April 30, 2003, our ten largest commercial tenants, as a percentage of total real estate rental income, were:
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Economic Occupancy Rates
Economic occupancy rates are shown below for each property group in each of the three most recent fiscal years ending April 30. Economic occupancy rates are calculated by dividing the rent collected by the rent scheduled. In the case of multi-family residential properties, lease arrangements with individual tenants vary from month-to-month to one-year leases, with the normal term being six months. Leases on commercial properties vary from month-to-month to 20 years.
Material Lease Terms
Multi-family residential. Our typical residential lease terms are as follows:
Commercial. Our typical commercial lease terms are as follows:
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Certain Lending Requirements
In certain instances, in connection with the acquisition of investment properties, the lender financing such properties may require, as a condition of the loan, that the properties be owned by a “single asset entity.” Accordingly, we have organized two wholly-owned subsidiary corporations, and IRET Properties has organized several limited partnerships, for the purpose of holding title in an entity that complies with such lending conditions. All financial statements of these subsidiaries are consolidated into our financial statements.
Selection, Management and Custody of Our Real Estate Assets
The day-to-day management of our real estate assets is handled by third-party professional real estate management companies. Day-to-day management activities include: the negotiation of potential leases, the preparation of proposed operating budgets, and the supervision of routine maintenance and capital improvements that have been authorized by us. All activities relating to purchase, sale, insurance coverage, capital improvements, approval of commercial leases, annual operating budgets and major renovations are made exclusively by our employees and are then implemented by the third-party property management companies.
As of April 30, 2003, we had property management contracts with the following companies:
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Generally, all of our management contracts provide for compensation ranging from 2.5% to 5.0% of gross rent collections and, in all but two contracts, we may terminate these contracts in 60 days or less. The two management contracts that may not be terminated in 60 days or less may be terminated if the manager fails to meet certain financial performance goals. It is our understanding that each of the property management companies listed above are properly licensed, insured and bonded to the extent required for their particular duties.
With the exception of Hoyt Properties, Inc., none of the firms engaged to provide property management services are affiliated with us, our officers or members of our Board of Trustees. Hoyt Properties, Inc. is owned 100.0% by Steven B. Hoyt, a member of our Board of Trustees, and his wife. Hoyt Properties, Inc. manages the commercial buildings that we acquired from him pursuant to written management contracts.
With respect to multi-tenant commercial properties, we rely almost exclusively on third-party brokers to locate potential tenants. As compensation, brokers may receive a commission of up to 7.0% of the total rent to be paid over the term of the lease. This commission rate is the industry standard, which we believe is commercially reasonable.
Policies With Respect to Certain of Our Activities
Our current policies as they pertain to certain of our activities are described below.
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IRET Properties Agreement of Limited Partnership
We conduct our day-to-day business activities through our operating partnership, IRET Properties, a North Dakota Limited Partnership. The material terms of the Agreement of Limited Partnership of IRET Properties are as follows:
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Risk Factors
Like all businesses, we are faced with certain general risks that could negatively impact our operations. Additionally, due to the specific nature of our activities in real estate and the locations in which we operate, we are faced with certain specific risk factors which may negatively affect our business during the upcoming fiscal year. While not intended to be an exhaustive list, some of the more significant risks are:
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Item 2. Properties
IRET is a qualified REIT under Section 856-858 of the Code, and is in the business of making passive investments in real estate properties and mortgages. These real estate investments are managed by third-party professional real estate management companies on our behalf.
Summary of Real Estate Investment Portfolio
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Summary of Individual Properties Owned as of April 30, 2003(N/A = Property held less than 12 months)
Commercial Properties
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Apartment Communities
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Undeveloped and Vacant Land(N/A = Owned less than 12 months)
Occupancy and Leases
Occupancy rates shown above are for the fiscal year ended April 30, 2003. In the case of multi-family residential properties, lease arrangements with individual tenants vary from month-to-month to one-year leases, with the normal term being six months. Leases on commercial properties vary from month-to-month to 20 years.
Mortgage Loans Payable
As of April 30, 2003, the above properties were encumbered with individual first mortgage liens totaling $539.4 million. The original principal balance was $572.8 million. Of the $539.4 million of mortgage indebtedness on April 30, 2003, $23.2 million is represented by variable rate mortgages on which the future interest rate will vary based on changes in the interest rate index for each respective loan and the balance of fixed rate mortgages was $516.2 million. The principal payments due on all of the mortgage indebtedness are as follows:
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Summary of Real Estate Investment by State
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Mortgage Loans Receivable
Item 3. Legal Proceedings
In the ordinary course of our operations we become involved in litigation. At this time, we know of no material pending or threatened legal proceedings or other proceedings contemplated by governmental authorities that would have a material impact upon us.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to our shareholders during the fourth quarter of the fiscal year ended April 30, 2003.
PART II
Item 5. Market for the Registrant’s Common Stock and Related Security Holder Matters
Quarterly Share Data
Since April 9, 2002, our Shares have traded on the NASDAQ National Market under the symbol IRETS. Prior to April 9, 2002, and from October of 1997, our Shares traded on the NASDAQ SmallCap Market. The following table reflects the range of high and low prices of our Shares for each full quarterly period within the two most recent years. This information is based on selling prices as reported on the NASDAQ National Market and NASDAQ SmallCap Market, as applicable.
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Holders
On June 30, 2003, we had 10,697 shareholders of record.
Unregistered Sale of Shares
On February 1, 2003, the T.F. James Company was merged into IRET, Inc. As consideration for the merger, we issued 3,422,022 Shares and assumed outstanding debt and liabilities in the amount of $37.7 million. The issuance of these Shares was not registered under the Securities Act of 1933 and such Shares were issued in reliance upon Section 4(2) of the Securities Act. As a result of the merger, we acquired approximately 52 retail and commercial real estate properties containing approximately 807,154 square feet of rentable space, as well as eight underdeveloped or primarily vacant parcels of real estate. The merger increased our real estate portfolio by $70.2 million and is expected to increase gross rental revenues by $6.4 million on an annual basis.
Registered Sale of Shares and Repurchase of Shares
During fiscal 2003, we sold 3,928,896 Shares under best efforts offerings through various brokers registered with the National Association of Securities Dealers. These Shares were sold at $9.50 per Share. We also issued 971,292 Shares pursuant to our distribution reinvestment plan. We repurchased fractional units of Shares during fiscal 2003 and 2002. Following is a two-year summary, by quarter, of the issuance of Shares in offerings, the issuance of distribution reinvestment Shares and the repurchase of fractional Shares:
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Distributions
We have paid quarterly cash distributions since July 1, 1971. Cash distributions paid during the past three fiscal years were as follows:
Item 6. Selected Financial Data for Fiscal Years Ended April 30, Including Discontinued Operations.
Set forth below is selected financial data for the periods and dates indicated. This information should be read in conjunction with, and is qualified in its entirety by reference to, the consolidated financial statements and notes included in this Annual Report on Form 10-K.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following information is provided in connection with, and should be read in conjunction with, the consolidated financial statements included in this Annual Report on Form 10-K. We operate on a fiscal year ending on April 30. The following discussion and analysis is for the fiscal year ended April 2003.
Revenues
Total revenues of IRET Properties, our operating partnership, for fiscal 2003 were $119.1 million, compared to $90.9 million in fiscal 2002 and $74.1 million in fiscal 2001. The increase in revenues received during fiscal 2003 was $28.2 million greater than fiscal 2002 and $45.0 million greater than fiscal 2001. This increase resulted from:
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As illustrated above, the substantial majority of the increase in our gross revenue for fiscal 2003 and 2002, respectively, resulted from the addition of new real estate properties to the IRET Properties’ portfolio rather than rental increases on existing properties. For the next 12 to 18 months, we expect acquisitions to be the most significant factor to increase our revenues and ultimately our net income. While acceptable real estate assets are still available for purchase, the slow economy combined with a widespread demand for real estate from traditional and non-traditional investors has resulted in a significant reduction in the investment returns from all types of real estate. This reduction in the rates of return has been offset to some extent by the dramatic drop in borrowing costs to historically low levels. While we were able to take advantage of those lower borrowing costs for most of our recent acquisitions, the majority of our debt is fixed and not prepayable without significant prepayment costs and fees.
Capital Gain Income
IRET Properties realized capital gain income for fiscal 2003 of $1.6 million. This compares to $0.5 million of capital gain income recognized in fiscal 2002 and $0.6 million recognized in fiscal 2001. A list of the properties sold during each of these years showing sales price, depreciated cost plus sales costs and net gain (loss) is included below under the caption “Property Dispositions.” We anticipate that we will continue to sell our older and smaller locations as opportunities arise. We do not believe that this is inconsistent with our strategy of acquiring properties that we intend to retain for at least ten years.
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Expenses and Net Income
The operating income of IRET Properties for fiscal 2003 increased to $15.9 million from $14.3 million in fiscal 2002 and $10.8 million in fiscal 2001. Our net income for generally accepted accounting purposes for fiscal 2003 was $12.2 million, compared to $10.6 million in fiscal 2002 and $8.7 million in fiscal 2001. On a per share basis, net income was $.38 per share in fiscal 2003 compared to $.42 in fiscal 2002 and $.38 in fiscal 2001.
These changes in operating income and net income result from the changes in revenues and expenses detailed below:
For fiscal 2003, an increase in net income of $1.6 million, resulting from:
For fiscal 2002, an increase in net income of $1.9 million, resulting from:
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Factors Impacting Net Income During Fiscal 2003 as Compared to 2002 and 2001
Compared to the prior two fiscal years, there were a number of factors that continued to limit the growth of our total revenue and ultimately negatively impacted our net income per share. A discussion of the factors having the greatest impact on our business compared to the prior two fiscal years is set forth below. While most of these negative influences show no signs of lessening in the next twelve months, the most significant negative factor, our uninvested cash that was raised in June, 2002, by our offering of additional Shares, was resolved during our second quarter of fiscal 2003 by the investment of such cash. Despite the positive development pertaining to our uninvested cash, the same factor reduced our full earnings for fiscal 2003.
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Telephone Endorsement Fee
During fiscal 2001, we received a payment of $0.9 million from a major telecommunications provider for allowing marketing access by that provider to residents of the apartment communities owned by us, totaling 5,863 units. The contract provides that we will allow promotional materials to be placed in our apartment communities advertising the availability of tele-communication services over a 12-year period. Of this payment, $110,979 was recognized as income by us during fiscal 2001, $65,959 in fiscal 2002, and $65,959 in fiscal 2003. The balance of $0.6 million will be recognized ratably over the remaining portion of the contract period and there is a possibility of a refund of these monies if we should violate the contractual terms of the agreement.
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Comparison of Results from Commercial and Residential Properties
The following is an analysis of the contribution by each of the two categories of real estate owned by us - multi-family residential and commercial:
Commercial Properties - Analysis of Lease Expirations and Credit Exposure
The following table shows the annual lease expiration percentages for the commercial properties owned by us as of April 30, 2003, for fiscal years 2004 through 2013 and the leases that will expire during fiscal year 2014 and beyond.
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The following table shows the percentage of commercial leases by size of leased space in 10,000 square foot increments as of April 30, 2003:
The following table lists our top ten commercial tenants on April 30, 2003, for all commercial properties owned by us:
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Results from Stabilized Properties
We define fully stabilized properties as those both owned at the beginning of the prior fiscal year and having completed the rent-up phase (90% occupancy). “Same-store” results for fiscal 2003 and 2002 for residential and commercial were:
Property Acquisitions
IRET Properties added $177.2 million of real estate investments to its portfolio during fiscal 2003, compared to $143.3 million added in fiscal 2002 and $143.0 million in fiscal 2001. The fiscal 2003 and 2002 additions are detailed below.
Fiscal 2003 (May 1, 2002 to April 30, 2003)
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Fiscal 2002 (May 1, 2001 to April 30, 2002)
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Property Dispositions
Real estate assets sold by IRET Properties during fiscal 2003 and 2002 were as follows:
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Funds from Operations
Funds from operations (“FFO”) for the operating partnership increased to $34,178,597 for fiscal 2003, compared to $29,143,549 for fiscal 2002, and $22,440,463 for fiscal 2001. We consider FFO a useful measure of performance for an equity REIT. FFO is a supplemental non-GAAP financial measurement used as a standard in the real estate industry to measure and compare the operating performance of real estate companies. We adhere to the NAREIT definition of FFO. NAREIT defines FFO as net income or loss, excluding gains on losses from sales of depreciated property, plus operating property depreciation and amortization and adjustments for minority interest and unconsolidated companies on the same basis. FFO presented herein is not necessarily comparable to FFO presented by other real estate companies because not all real estate companies use the same definition.
FFO should not be considered as an alternative to net income determined in accordance with GAAP as a measure of our liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of our needs or our ability to service indebtedness or make distributions. A reconciliation of FFO to GAAP net income is as follows:
Reconciliation of Net Income to Funds From Operations (unaudited)For the Twelve-Month Periods ended April 30, 2003 and 2002 and 2001
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Self-Advised Status
On July 1, 2000, IRET Properties became self-advised. Prior to that date, Odell-Wentz and Associates, L.L.C., pursuant to an advisory contract with us, provided all office space, personnel, office equipment, and other equipment and services necessary to conduct all of our day-to-day operations. Odell-Wentz and its predecessor firms had acted as our advisor since our inception in 1970. We obtained an independent appraisal of the value of the advisory business and assets from certified public accountants not otherwise employed by either us or the advisory company. The purchase price for the business and assets was $2.1 million allocated as follows:
IRET Properties issued 255,000 limited partnership units in exchange for the above-described assets. Except for Roger R. Odell, who retired on July 1, 2000, all officers and employees of Odell-Wentz and Associates, L.L.C. were retained by IRET Properties.
Cash Distributions
The following cash distributions were paid to our shareholders and holders of limited partners units during fiscal years 2003, 2002, and 2001:
The fiscal 2003 cash distributions increased 5.1% over the cash distributions paid during fiscal year 2002 and 13.6% over fiscal 2001.
Liquidity and Capital Resources
Important equity capital and financing events in fiscal 2003 were:
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We expect that our short-term liquidity requirements will be met through the net cash provided by our operations and also expect that we will meet our long-term liquidity requirements, including scheduled debt maturities, maturing investment certificates, construction and development activities, and property acquisitions through long-term secured borrowings and the issuance of additional equity securities, including Shares, as well as limited partnership units of IRET Properties.
We believe that our net cash provided by operations will continue to be adequate to meet both operating requirements and cash distributions to our shareholders in accordance with REIT requirements in both the short and long term. Budgeted expenditures for ongoing maintenance and capital improvements and renovations to our real estate portfolio are expected to be funded from cash flow generated from operations of current properties.
In addition to our cash and marketable securities, IRET Properties has unsecured line of credit agreements with First International Bank & Trust, Bremer Bank, and First Western Bank & Trust, all of Minot, North Dakota, totaling $19.4 million. On April 30, 2003, there were $10.6 million of borrowings outstanding. On April 30, 2002 and 2001, there were no borrowings outstanding.
Certain Relationships and Related Transactions
Property Management Services
Hoyt Properties, Inc., a provider of property management services (“Hoyt Properties”), is owned by Steven B. Hoyt, a member of our Board. During the fiscal year ended April 30, 2003, Hoyt Properties managed the following commercial buildings pursuant to written management contracts:
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Effective July 1, 2003, Hoyt Properties, Inc. no longer manages 2030 Cliff Road. The Company assumed management of such property directly.
As compensation for its services, Hoyt Properties receives a monthly fee of 5% percent of the gross rental income, provided that such management fee is reimbursable by the building’s tenants pursuant to the tenant’s lease agreement. In the event that the Company is not reimbursed for such fee by a tenant and must pay such fee from our rent proceeds, the annual fee is 3.5% of the gross rental proceeds. In addition to such management fee, Hoyt Properties is paid a separate fee for leasing space to tenants at each location. Any leasing commissions earned by Hoyt Properties are not reimbursed by the building’s tenants. The leasing commission rates are set forth in a written contract between the Company and Hoyt Properties.
Each of the written management and leasing contracts with Hoyt Properties commenced on April 1, 2001, with the exception of the contracts for Bloomington Business Plaza, which commenced on October 1, 2001, Thresher Square, which commenced on January 2, 2002, Wirth Corporate Center, which commenced on April 1, 2002, and Brenwood Office Complex, which commenced on October 1, 2002. All such contracts may be terminated by either party on 30 days written notice for any reason and without penalty. In fiscal 2003, the Company paid management fees to Hoyt Properties in the amount of $503,976, 99.9% of which has been reimbursed by the tenants. Additionally, during that same period, the Company paid leasing commissions to Hoyt Properties in the amount of $179,553. The Company believes that all of the terms of the management contracts are commercially reasonable and are on terms no less favorable than we could have obtained from unrelated property management firms.
We currently have a management contract with Investors Management and Marketing, Inc. (“IMM”). Until July 2000, there was a relationship between IMM, Odell-Wentz and IRET because of the affiliation of Mr. Roger Odell with each entity. Specifically, Mr. Odell was a majority owner of IMM; a 50% owner of Odell-Wentz, our advisor; and an officer of IRET.
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Mr. Odell retired from all positions with IRET in July 2000, and since that time has had no relationship with us. In July 2000, we purchased Odell-Wentz and converted to self-advised status. IMM still manages a number of our apartment complexes. All management contracts with IMM are at fees ranging from 3.0% to 5.0% of gross rents and may be terminated on a 30-day written notice without penalty.
Bloomington Business Plaza
On October 1, 2001, we acquired the Bloomington Business Plaza from a general partnership controlled by Steven B. Hoyt. The property was acquired pursuant to the terms of a contract dated January 8, 2001, as amended by an agreement dated September 27, 2001. At the time of acquisition, Mr. Hoyt was a member of our Board of Trustees. At the time the original acquisition contract was signed, however, Mr. Hoyt was not a member of our Board of Trustees.
The property was purchased for an agreed value of $7.2 million, of which $215,000 was paid in cash and the balance of $7.0 million of which was paid with 812,405 limited partnership units of IRET Properties having a value of $8.60 per unit. The limited partnership units are convertible on a one-to-one basis to Shares. The units must be held for a two-year period before they may be converted to Shares and sold. In addition to the purchase price of $7.2 million, we incurred acquisition costs of $203,989 for commissions, loan costs and legal costs. The acquisition was approved by all of the members of our Board of Trustees. A subsequent independent appraisal of the property as part of the loan process determined the value of the property to be $7.0 million.
Bloomington Business Plaza is a multi-tenant office/warehouse building constructed in 1985. It consists of 121,064 square feet of leasable space. As of June 1, 2003, the property was 100.0% leased to 22 tenants with remaining lease terms ranging from four months to 54 months. All rents paid by the current tenants are at market rates. No one tenant occupies more than 18.0% of the leasable space.
Acquisition of Thresher Square East and West
On January 2, 2002, we acquired a seven-story office building containing 112,836 square feet located at 700 and 708 South Third Street, Minneapolis, Minnesota, from WPT I, L.L.C. WPT I, L.L.C. is an affiliate of Steven B. Hoyt, a member of our Board of Trustees, in that Mr. Hoyt owns 78% of WPT I, L.L.C.
The property was purchased for an agreed value of $10.9 million, which was paid by the assumption of existing debt with unpaid principal balances of $3.7 million and $2.6 million, respectively, as of January 1, 2002. The assumed debt bears interest at the rates of 7.0% and 7.4%, respectively, payable in monthly installments of $34,582 and $33,270, respectively, amortized over remaining terms of 14 years and nine years, respectively. The balance of $4.4 million was paid by the distribution of 507,651 limited partnership units of IRET Properties to the seller with an agreed value of $8.60 per unit. The limited partnership units are convertible on a one-to-one basis to shares of beneficial interest of IRET. The units must be
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held for a two-year period before they may be converted to shares of IRET and sold. In addition to the purchase price, IRET incurred acquisition costs of $168,574.56 for commission and legal costs.
All of the members of our Board of Trustees approved the transaction as being fair and reasonable to us and determined that substantial justification existed for us to pay a price greater than the cost of the property to WPT I, L.L.C. Mr. Hoyt abstained from the vote. We did not obtain an independent appraisal of the property, however, we did prepare an internal current appraisal of the property that determined the value to be $10.9 million.
As of June 1, 2003, the property was 71.0% leased to seven different tenants with remaining lease terms of six months to six years. No one tenant leases more than 52.6% of the property.
Acquisition of Brenwood Office Complex from Steven B. Hoyt, Marisa Moe and Natalie Hoyt
During fiscal 2003, the Company acquired four commercial buildings from affiliates of Steven B. Hoyt, a member of our Board. On October 1, 2002, the Company acquired a 51.0% ownership interest in IRET-BD, LLC, a Minnesota limited liability company, for $13.1 million with the total joint venture project having an independent third-party appraised value of $25.7 million. The joint venture partners are Steven B. Hoyt, Marisa Moe and Natalie Hoyt, who own 29.4%, 9.8% and 9.8% respectively. Marisa Moe and Natalie Hoyt are the adult daughters of Steven B. Hoyt. Steven B. Hoyt, Natalie Hoyt and Marisa Moe acquired their respective interest in the joint venture by contributing a parcel of real estate known as Brenwood Office Complex located at 5620 in Minnetonka, Minnesota, which was previously acquired on February 1, 2002, by Steven Hoyt, Natalie Hoyt and Marisa Moe for a purchase price of $12.5 million. This transaction required the approval of a majority of our Board and a majority of the independent members of our Board. Such approval was obtained on August 21, 2003. The office complex was appraised by an independent third-party MAI appraiser on September 13, 2002, at $13.9 million. In addition to the purchase price, the joint venture incurred acquisition costs of $186,436.
The project consists of the four office buildings contributed by Steven B. Hoyt, Marisa Moe and Natalie Hoyt, as well as three industrial/warehouse buildings purchased by the joint venture on October 1, 2002, for $11.8 million. The individual properties are as follows:
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The Company’s 51.0% interest in the joint venture was acquired by contributing cash in the amount of $1.5 million, with the balance paid by the assumption, joint and severally with the joint venture partners, of existing debt with an unpaid principal balance of $22.7 million as of April 30, 2003. The assumed debt consists of a loan from Allstate Life Insurance Company secured by a first mortgage on the Brenwood Office Complex, with an unpaid principal balance $8.8 million as of April 30, 2003, bearing interest at a fixed rate of 8.1%, and amortized over 25 years with monthly installment payments of $70,061, with a final payment of all outstanding principal due on October 1, 2010, and a loan from Aegon secured by a first mortgage on the Dixon property with an unpaid principal balance of $9.0 million as of April 30, 2003, bearing interest at a fixed rate of 5.8% and amortized over ten years with monthly installment payments of $56,620 with a final payment of all outstanding principal due January 1, 2013.
The balance of the assumed debt of $5.3 million on April 30, 2003, currently consists of two short-term unsecured promissory notes from us as the managing member. Both notes bear interest at a variable rate equal to the Prime Rate plus 150 basis points or 1.5%. The rate is currently 6.0% with a provision that the rate may never be below 6.0%.
As of April 30, 2003, the Brenwood Office Complex is 81.0% leased to approximately 25 different tenants, with remaining lease terms of one month to five years. No one tenant occupies more than 22.0% of the total leasable space. As of April 30, 2003, the three Dixon Avenue buildings are 93.0% leased to nine different tenants, with remaining lease terms of one month to five years. No one tenant occupies more than 32.0% of the total leasable space.
Charles Wm. James - Ripley and Excelsior Options
On February 1, 2003, the Company entered into a merger agreement with the T.F. James Company. As part of the merger agreement, two affiliated entities of the T.F. James Company, Thomas F. James Realty Limited Partnership, L.L.L.P. and Thomas F. James Properties, LLC, were granted the right to purchase certain real property acquired by the Company as a result of the merger. Charles Wm. James, a member of our Board, has an ownership interest in each of Thomas F. James Realty Limited Partnership, L.L.L.P. and Thomas F. James Properties, LLC, of less than 10.0%. Both agreements required the approval of a majority of our Board and a majority of the independent members of our Board. Such approval was obtained on February 12, 2003. Under the terms of the agreement, the Thomas F. James Realty Limited Partnership, L.L.L.P. purchased a parcel of property located in Ripley, Tennessee for $250,000. The purchase price was equal to the amount paid by us to T.F. James two months earlier. The agreement further provides that Thomas F. James Properties, LLC has the option, but not the obligation, to purchase a commercial strip mall located in Excelsior, Minnesota, for the sum of $900,000, plus an annual CPI increase from February 2003 until the date the option is exercised. The option purchase price is equal to the price the Company paid at closing on February 1, 2003. The purchase price is equal to the value set by an independent appraisal. Until such time as the option is exercised, the Company will continue to operate the property and collect all rents from the tenants.
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Director and Executive Officer Loans
As a result of the acquisition of Odell-Wentz & Associates, L.L.C., the entity that acted as our advisor prior to July 1, 2000, the Company assumed a note receivable from Mr. Mihalick in the amount of $101,002. Proceeds of said note were used to purchase Shares. The note bears interest at New York Prime less 1.0% and is payable on demand. The note was paid in full by Mr. Mihalick on October 4, 2002, including principal and interest in the amount of $92,769.
On January 16, 2002, our Board authorized an UPREIT unit loan program that was available to persons holding $1.0 million or more of IRET Properties limited partnership units. Under such loan program, the Company could lend up to 50.0% of the value of the borrower’s limited partnership units, with such value to be based on the closing price of the Shares on the NASDAQ National Market on the date of the loan. Such loans were to be for terms of two years or less, secured by the borrower’s limited partnership units in IRET Properties and at a variable interest rate of 1.5% over the interest rate charged to us by a participating lender. The interest rate adjusted on the first of each month. In connection with such loans, the Company charged a .5% loan fee.
On January 30, 2002, a loan in the amount of $3.5 million was made to Steven B. Hoyt, a member of our Board. Our Board approved such loan. The terms of the loan required Mr. Hoyt to make quarterly interest payments beginning April 1, 2002, with the full balance of the principal sum due on or before January 31, 2004. The initial interest rate was equal to the Wall Street Journal Prime Rate as of January 31, 2002, plus 1.5%, which equaled 6.25%. Mr. Hoyt paid a $17,500 loan fee to the Company at the loan closing on January 30, 2002. On March 31, 2002, Mr. Hoyt made his first required interest payment of $35,959. On June 30, 2002, Mr. Hoyt made his second required quarterly interest payment of $54,538. On October 1, 2002, Mr. Hoyt repaid the loan in full in the amount of $3.5 million plus accrued interest in the amount of $55,137.
Security Sale Services
D.A. Davidson & Co. is a corporation that has, and may in the future, on a best-efforts basis, participated in offerings of the Company’s Shares. John F. Decker, a member of our Board, is an employee of D.A. Davidson. In the Company’s two most recent offerings, D.A. Davidson & Co. participated as a member of the selling syndicate and sold 600,000 and 700,000 Shares, respectively. In connection with such offerings during the fiscal year ended April 30, 2002, the Company authorized and paid D.A. Davidson commissions in the amount of $490,000, and reimbursed it for legal and travel expenses in the amount of $4,814. Of these amounts, Mr. Decker personally received $37,370 in compensation from D.A. Davidson in connection with such offerings. The Company did not pay any commissions or expenses to D.A. Davidson during the fiscal year ended April 30, 2003.
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Critical Accounting Policies
Our most critical accounting policies involve our investments in real property. These policies affect the following:
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Recent Accounting Pronouncements
Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities, established accounting and reporting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Certain provisions of SFAS 133 were amended by SFAS 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities” an amendment of Statement 133. The impact of SFAS 133 is not significant.
We adopted FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others, for any guarantees issued or modified after December 31, 2002. FASB Interpretation No 45 requires a liability to be recognized upon issuance of certain guarantees, whether or not payment under the guarantee is probable. It also requires the disclosure of certain information related to new and previously existing guarantees. We do not believe that we have entered into any guarantees that fall within the guidance of FASB Interpretation No. 45 and, thus, such Interpretation has no impact on our financial statements.
We have adopted FASB Interpretation No. 46, Consolidation of Variable Interest Entities. These consolidation requirements apply to variable interest entities created after January 31, 2003, and to existing variable interest entities beginning August 1, 2003. FASB Interpretation No. 46 requires that a variable interest entity be consolidated if we are subject to a majority of the risk of loss from its activities or are entitled to receive a majority of the entities’ returns. We do believe that we have interests in any variable interest entities, and thus, this Interpretation has no impact on the our financial statements.
Effective May 1, 2003, SFAS No. 143, Accounting for Asset Retirement Obligations, requires us to recognize obligations incurred in conjunction with the retirement of tangible long-lived assets. It is anticipated that the adoption of this standard will not have a material impact on our financial statements.
We adopted SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, effective for activities initiated after December 31, 2002. This standard establishes the need for recognition of liabilities for costs associated with exit or disposal activities. The adoption of SFAS No. 146 has not materially impacted the our financial statements.
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Item 7a. 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 its current and future fixed and variable rate debt obligations, and secondarily to our deposits with and investment in certain products issued by various financial institutions.
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Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data listed in the accompanying Index to Financial Statements and Supplementary Data are filed as a part of this report and incorporated herein by reference.
Item 9. Changes in and Disagreements with Accounting and Financial Disclosure
Subsequent to the end of fiscal 2003, on July 23, 2003, our Board of Trustees, upon recommendation of our Audit Committee, terminated the engagement of Brady, Martz & Associates, P.C. (“Brady Martz”) as our independent public accountants and engaged Deloitte & Touche LLP (“Deloitte & Touche”) to serve as our independent public accountants for our fiscal year ending April 30, 2004. We anticipate that we will, in the future, retain Brady Martz from time to time for tax and other advising issues.
On July 23, 2003, our management informed Brady Martz that it would no longer be engaged as our principal independent accountants. The reports of Brady Martz on our consolidated financial statements for each of the fiscal years ended April 30, 2003 and 2002 did not contain an adverse opinion or disclaimer of opinion, nor were such financial statements qualified or modified as to uncertainty, audit scope or accounting principles. During the fiscal years ended April 30, 2003 and 2002, and through July 23, 2003, there were (i) no disagreements with Brady Martz on any matter of accounting principals or practices, financial statement disclosure or auditing scope or procedure which, if not resolved, to the satisfaction of Brady Martz, would have caused Brady Martz to make reference to the subject
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matter in connection with its report on our consolidated financial statements for such years; and (ii) there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.
During the fiscal years ended April 30, 2003 and 2002, and through July 23, 2003, we did not consult Deloitte & Touche with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our consolidated financial statements, or any other matters or reportable events as set forth Items 304(a)(2)(i) and (ii) of Regulation S-K.
We provided Brady Martz with a copy of the foregoing disclosures. By copy of a letter dated July 23, 2003, Brady Martz stated its agreement with such statements.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding executive officers required by this Item is set forth in Part I, Item 1 of this Annual Report on Form 10-K pursuant to Instruction 3 to Item 401(b) of Regulation S-K. Other information required by this Item will be included in our definitive Proxy Statement for our 2003 Annual Meeting of Shareholders and such information is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this Item will be contained in our definitive Proxy Statement for our 2003 Annual Meeting of Shareholders and such information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item will be contained in our definitive Proxy Statement for our 2003 Annual Meeting of Shareholders and such information is incorporated herein by reference. We do not have any equity compensation plans and, as such, have omitted the disclosure required by Item 201(d) of Regulation S-K.
Item 13. Certain Relationships and Related Transactions
The information required by this Item will be contained in our definitive Proxy Statement for our 2003 Annual Meeting of Shareholders and such information is incorporated herein by reference. The information required by this Item is also contained in Part II, Item 7 of this Annual Report on Form 10-K.
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Item 14. Internal Controls and Procedures
Within the 90 days prior to the date of this report, our management carried out an evaluation, under the supervision and with the participation of the President, the Chief Operating Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14 and 15d-14. Based upon that evaluation, the President, Chief Operating Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC filings.
There have been no significant changes in our internal controls or in other factors that could significantly affect those controls since our evaluation of these controls, including any corrective actions with regard to significant deficiencies and material weaknesses.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
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Signatures
Pursuant to the requirements of Section 13 or 15(d) 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
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Certifications
I, Thomas A. Wentz, Sr., certify that:
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Date: July 23, 2003
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I, Diane K. Bryantt certify that:
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INVESTORS REAL ESTATE TRUSTAND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDEDApril 30, 2003, 2002 and 2001
and
INDEPENDENT AUDITOR’S REPORT
PO Box 198812 South Main StreetMinot, ND 58702-1988701-837-4738fax: 701-838-7785email: info@iret.comwww.iret.com
INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
Board of TrusteesInvestor Real Estate Trustand SubsidiariesMinot, North Dakota
We have audited the accompanying consolidated balance sheets of Investors Real Estate Trust and Subsidiaries as of April 30, 2003, and 2002, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the years ended April 30, 2003, 2002, and 2001. These consolidated financial statements are the responsibility of the Trust’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis of our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Investors Real Estate Trust and Subsidiaries as of April 30, 2003, and 2002, and the consolidated results of its operations and cash flows for the years ended April 30, 2003, 2002, and 2001, in conformity with accounting principles generally accepted in the United States of America.
/S/ Brady Martz and Associates, P.C.BRADY, MARTZ & ASSOCIATES, P.C.Minot, North Dakota, USA
May 22, 2003
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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NOTE 1 - ORGANIZATION
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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NOTE 2 - (continued)
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NOTE 3 - OFF-BALANCE-SHEET RISK
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NOTE 3 - (continued)
NOTE 4 - PROPERTY OWNED UNDER LEASE
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NOTE 4 - (continued)
NOTE 5 - MORTGAGE LOANS RECEIVABLE - NET
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NOTE 5 - (continued)
NOTE 6 - MARKETABLE SECURITIES
NOTE 7 - NOTES PAYABLE
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NOTE 7 - (continued)
NOTE 8 - MORTGAGES PAYABLE
THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK.
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NOTE 9 - GOODWILL
NOTE 10 - INVESTMENT CERTIFICATES ISSUED
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NOTE 11 - TRANSACTIONS WITH RELATED PARTIES
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NOTE 11 - (continued)
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NOTE 12 - MARKET PRICE RANGE OF SHARES
NOTE 13 - OPERATING SEGMENTS
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NOTE 13 - (continued)
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YEAR ENDING APRIL 30, 2002
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YEAR ENDING APRIL 30, 2001
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NOTE 14 - DISCONTINUED OPERATIONS
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NOTE 15 - EARNINGS PER SHARE
NOTE 16 - RETIREMENT PLAN
NOTE 17 - COMMITMENTS AND CONTINGENCIES
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NOTE 17 - (continued)
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NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS
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NOTE 18 - (continued)
NOTE 19 – ADVERTISING COSTS
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ADDITIONAL INFORMATION
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INDEPENDENT AUDITOR’S REPORT ON ADDITIONAL INFORMATION
Our report on our audit of the consolidated balance sheets of Investors Real Estate Trust and Subsidiaries as of April 30, 2003, and 2002, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the years ended April 30, 2003, 2002, and 2001, appears on page 1. Those audits were made for the purpose of forming an opinion on such consolidated financial statements taken as a whole. The information on pages 35 through 57 related to the consolidated balance sheets of Investors Real Estate Trust and Subsidiaries as of April 30, 2003, and 2002, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the years ended April 30, 2003, 2002, and 2001 is presented for purposes of additional analysis and is not a required part of the basic consolidated financial statements. Such information, except for information on page 58 that is marked “unaudited” on which we express no opinion, has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements, and, in our opinion, the information is fairly stated in all material respects in relation to the consolidated balance sheets of Investors Real Estate Trust and Subsidiaries as of April 30, 2003, and 2002, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the years ended April 30, 2003, 2002, and 2001 taken as a whole.
We also have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheets of Investors Real Estate Trust and Subsidiaries as of April 30, 2001, 2000, and 1999, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the two years ended April 30, 2000, and 1999, none of which is presented herein, and we expressed unqualified opinions on those consolidated financial statements. In our opinion, the information on page 49 relating to the consolidated balance sheets of Investors Real Estate Trust and Subsidiaries as of April 30, 2001, 2000, and 1999, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the two years ended April 30, 2000, and 1999, is fairly stated in all material respects in relation to the basic consolidated financial statements from which it has been derived.
/S/ Brady, Martz & Associates, P.C.BRADY, MARTZ & ASSOCIATES, P.C.Minot, North Dakota, USA
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INVESTORS REAL ESTATE TRUST AND SUBSIDIARIESApril 30, 2003
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SELECTED FINANCIAL DATAINCLUDING DISCONTINUED OPERATIONS
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INVESTORS REAL ESTATE TRUST AND AFFILIATEDPARTNERSHIPSApril 30, 2003, 2002 and 2001
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PROPERTY ACQUISITIONS
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PROPERTY ACQUISITIONS - (continued)
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INVESTORS REAL ESTATE TRUST AND SUBSIDIARIESQUARTERLY RESULTS OF CONSOLIDATED OPERATIONSINCLUDING DISCONTINUED OPERATIONS (unaudited)
The above financial information is unaudited. In the opinion of management, all adjustments (which are of a normal recurring nature) have been included for a fair presentation.
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