Table of Contents

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

 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, 2005

Commission File Number 000-14851

Investors Real Estate Trust
(Exact name of Registrant as specified in its charter) 

North Dakota	45-0311232
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

 

12 South Main Street
Minot, 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:
Common Shares of Beneficial Interest (no par value)
Series A Cumulative Redeemable Preferred Shares of Beneficial Interest (no par value)

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 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. þ 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
þ Yes o No 

The aggregate market value of the registrant’s outstanding common shares of beneficial interest held by non-affiliates (i.e., by persons other than officers and trustees of the registrant as reflected in the table in Item 12 of this Form 10-K, incorporated by reference from the registrant’s definitive Proxy Statement for its 2005 Annual Meeting of Shareholders) was $405,548,619 based on the last reported sale price on the NASDAQ National Market on October 29, 2004. 

The number of common shares of beneficial interest outstanding as of June 30, 2005, was 45,217,241. 

References in this Annual Report on 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 2005 Annual Meeting of Shareholders are incorporated by reference into Part III (Items 10, 11, 12, 13 and 14) hereof.

2005 Annual Report

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INVESTORS REAL ESTATE TRUST

INDEX

		PAGE
PART I	4
Item 1.    Business	4
Item 2.    Properties	16
Item 3.    Legal Proceedings	24
Item 4.    Submission of Matters to a Vote of Security Holders	25
PART II	25
Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	25
Item 6.    Selected Financial Data	26
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 7A. Quantitative and Qualitative Disclosures about Market Risk	49
Item 8.    Financial Statements and Supplementary Data	50
Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	50
Item 9A. Controls and Procedures	50
Item 9B. Other Information	53
PART III	53
Item 10.  Trustees and Executive Officers of the Registrant	53
Item 11.  Executive Compensation	53
Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	53
Item 13.  Certain Relationships and Related Transactions	53
Item 14.  Principal Accountant Fees and Services	53
PART IV	54
Item 15.  Exhibits, Financial Statement Schedules	54
Exhibit Index	54
Signatures	56
Reports of Independent Registered Public Accounting Firms and Financial Statements	F-1 to F-44

 2005 Annual Report 2

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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 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,” “plan,” “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: 

•   the economic health of the markets in which we own and operate multi-family and commercial properties, in particular the states of Minnesota and North Dakota, or other markets in which we may invest in the future; 

•   the economic health of our commercial tenants; 

•   market rental conditions, including occupancy levels and rental rates, for multi-family residential and commercial properties; 

•   our ability to identify and secure additional multi-family residential and commercial properties that meet our criteria for investment; 

•   the level and volatility of prevailing market interest rates and the pricing of our common shares of beneficial interest; 

•   financing risks, such as our inability to obtain debt or equity financing on favorable terms, or at all; and 

•   compliance with applicable laws, including those concerning the environment and access by persons with disabilities. 

Readers should carefully review our financial statements and the notes thereto, as well as the section entitled “Risk Factors” in Item 1 of this Annual Report on Form 10-K and the other documents we file from time to time with the Securities and Exchange Commission (“SEC”). 

In light of these uncertainties, the events anticipated by our forward-looking statements might not occur. We undertake no obligation to 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 

Overview 

Investors Real Estate Trust is a self-advised equity Real Estate Investment Trust (“REIT”) organized under the laws of North Dakota. Since our formation in 1970, our business has consisted of owning and operating income-producing real estate 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 (“IRET Properties” or the “Operating Partnership”). Our investments consist of multi-family residential properties and commercial office, medical, industrial and retail properties. These properties are located primarily in the upper Midwest states of Minnesota and North Dakota. For the twelve months ended April 30, 2005, our real estate investments in these two states accounted for 73.2% of our total gross revenue. Our principal executive offices are located in Minot, North Dakota. We also have an office in Minneapolis, Minnesota. 

We seek to diversify our investments among multi-family residential and office, medical, industrial and retail properties. As of April 30, 2005, our real estate portfolio consisted of: 

•   65 multi-family residential properties, containing 8,610 apartment units and having a total carrying amount (net of accumulated depreciation) of $374.6 million; 

•   50 office properties containing approximately 3.5 million square feet of leasable space and having a total carrying amount (net of accumulated depreciation) of $330.3 million; 

•   25 medical properties (including assisted living facilities) containing approximately 1.1 million square feet of leasable space and having a total carrying amount (net of accumulated depreciation) of $192.5 million; 

•   11 industrial properties (including miscellaneous commercial properties) containing approximately 1.7 million square feet of leasable space and having a total carrying amount (net of accumulated depreciation) of $53.0 million; and 

•   60 retail properties containing approximately 1.6 million square feet of leasable space and having a total carrying amount (net of accumulated depreciation) of $110.9 million.

Our residential leases are generally for a one-year term. Our commercial properties are typically leased to tenants under long-term lease arrangements. As of April 30, 2005, no single tenant accounted for more than 5% of our total annual commercial segments rental revenues. 

Except for certain commercial properties managed by our Minneapolis office, we generally contract with locally-based third-party professional management companies to handle the day-to-day management of our properties. These management activities include the negotiation of potential leases, the preparation of proposed operating budgets, the collection and remittance of lease or rental payments and the supervision of routine maintenance and capital improvements that have been authorized by us. All decisions relating to the purchase or sale of property, insurance coverage, capital improvements, approval of commercial leases, annual operating budgets and major renovations are made exclusively by our employees and then implemented by the third-party management companies. Generally, our management contracts provide for compensation ranging from 1.0% to 5.5% of gross rent collections and, typically, we may terminate these contracts in 60 days or less, or upon the property manager’s failure to meet specified financial performance goals. We believe that 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.

 

Structure 

We were organized as a REIT under the laws of North Dakota on July 31, 1970. 

Since our formation, we have operated as a REIT under Sections 856-858 of the Internal Revenue Code of 1986, 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 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. As of April 30, 2005, IRET, Inc. owned a 77.5% interest in IRET Properties. The remaining ownership of IRET Properties is held by individual limited partners. 

Investment Strategy and Policies 

Our business objective is to increase shareholder value by employing a disciplined investment strategy. This strategy is focused on growing assets in desired geographical markets, achieving diversification by property type and location, and adhering to targeted returns in acquiring properties. We have increased our cash distributions every year since our inception 35 years ago and every quarter since 1988. 

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 75.0% of a property’s appraised value. In appropriate circumstances, we also may acquire one or more properties in exchange for our common shares of beneficial interest (“common shares”) or for limited partnership units of IRET Properties (“limited partnership units” or “UPREIT Units”), which are convertible, after the expiration of a minimum holding period of one year, into cash or, at our sole discretion, into our common shares on a one-to-one basis. 

Our investment strategy is to invest in multi-family residential properties and office, medical, industrial and retail commercial 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 also have real estate investments in South Dakota, Montana, Nebraska, Colorado, Georgia, Idaho, Iowa, Kansas, Michigan, Texas and Wisconsin. 

In order to implement our investment strategy we have certain investment policies. Our significant investment policies are as follows: 

Investments in the securities of, or interests in, entities primarily engaged in real estate activities and other securities. While we are permitted to invest in the securities of other entities engaged in the ownership and operation of real estate, as well as other securities, we currently have no plans to make any investments in other securities. 

Any policy, as it relates to investments in other securities, may be changed by a majority of the members of our Board of Trustees at any time without notice to or a vote of our shareholders. 

Investments in real estate or interests in real estate. We currently own multi-family residential properties and/or commercial properties in 13 states. We may invest in real estate, or interests in real estate, that is located anywhere in the United States; however, we currently plan to focus our investments in those states in which we already have property, with specific concentration in Minnesota, North Dakota, Nebraska, Montana, and South Dakota. Similarly, we may invest in any type of real estate or interest in real estate including, but not limited to, office buildings, apartment buildings, shopping centers, industrial and commercial properties, special purpose buildings and undeveloped acreage. Under our Second Restated Trustees’ Regulations (Bylaws), however, we may not invest more than 10.0% of our total assets in unimproved real estate, excluding property being developed or property where development will be commenced within one year.

It is not our policy to acquire assets primarily for capital gain through sale in the short term. Rather, it is our policy to acquire assets with an intention to hold such assets for at least a 10-year period. During the holding period, it is our policy to seek current income and capital appreciation through an increase in value of our real estate portfolio, as well as increased revenue as a result of higher rents. 

Any policy, as it relates to investments in real estate or interests in real estate may be changed by our Board of Trustees at any time without notice to or a vote of our shareholders. 

Investments in real estate mortgages. While not our primary business focus, from time to time we make loans to others that are secured by mortgages, liens or deeds of trust covering real estate. We have no restrictions on the type of property that may be used as collateral for a mortgage loan; provided, however, that except for loans insured or guaranteed by a government or a governmental agency, we may not invest in or make a mortgage loan unless an appraisal is obtained concerning the value of the underlying property.  Unless otherwise approved by our Board of Trustees, it is our policy that we will not invest in mortgage loans on any one property if in the aggregate the total indebtedness on the property, including our mortgage, exceeds 85.0% of the property’s appraised value.  We can invest in junior mortgages without notice to, or the approval of, our shareholders. As of April 30, 2005, we had one junior mortgage with a principal balance net of allowance of $189,000. We do not currently plan to invest in any other junior mortgages. 

Our policies relating to mortgage loans, including second mortgages, may be changed by our Board of Trustees at any time, or from time to time, without notice to, or a vote of, our shareholders. 

Policies With Respect to Certain of Our Activities 

Our current policies as they pertain to certain of our activities are described as follows: 

Cash distributions to shareholders and holders of limited partnership units. We intend to continue our policy of making cash distributions to our common shareholders and the holders of limited partnership units of approximately 65.0% to 90.0% of our funds from operations and to use the remaining funds for capital improvements or the purchase of additional properties. This policy may be changed at any time by our Board of Trustees without notice to, or approval of, our shareholders. We have increased our cash distributions every year since our inception 35 years ago and every quarter since 1988. 

Issuing senior securities. As of April 30, 2005, we have issued and outstanding $4,635,721 in investment certificates, which were issued for a definite term and annual interest rate, and which will be redeemed as they mature. In the event of our dissolution, the investment certificates would be paid in preference to our common shares. IRET has discontinued the sale of investment certificates and outstanding certificates will be redeemed as they mature. Additionally, on April 26, 2004, we issued 1,150,000 shares of 8.25% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series A preferred shares”). Depending on future interest rate and market conditions, we may issue additional preferred shares or other senior securities which would have dividend and liquidation preference over our common shares. 

Borrowing money. We rely on borrowed funds in pursuing our investment objectives and goals. It is generally our policy to seek to borrow up to 65.0% to 75.0% of the appraised value of all new real estate acquired or developed. This policy concerning borrowed funds is vested solely with our Board of Trustees and can be changed by our Board of Trustees at any time, or from time to time, without notice to, or a vote of, our shareholders. Such policy is subject, however, to the limitation in our Bylaws, which provides that unless approved by a majority of the independent members of our Board of Trustees and disclosed to our shareholders in our next quarterly report along with justification for such excess, we may not borrow in excess of 300.0% of our total Net Assets (as such term is used in our Bylaws, which usage is not in accordance with GAAP, “Net Assets” means our total assets at cost before deducting depreciation or other non-cash reserves, less total liabilities). Our Bylaws do not impose any limitation on the amount that we may borrow against any one particular property.  As of April 30, 2005, our ratio of total real estate mortgages to total real estate assets was 66.4% while our ratio of total indebtedness as compared to our Net Assets (computed in accordance with our Bylaws) was 133.9%.

Offering securities in exchange for property. Our organizational structure allows us to issue shares and to offer limited partnership units of IRET Properties in exchange for real estate. The limited partnership units are convertible into cash, or, at our option, common shares on a one-for-one basis after a minimum one-year holding period. All limited partnership units receive the same cash distributions as those paid on common shares. Limited partners are not entitled to vote on any matters affecting us until they convert their limited partnership units to common shares. 

Our Articles of Amendment and Third Restated Declaration of Trust does not contain any restrictions on our ability to offer limited partnership units of IRET Properties in exchange for property. As a result, any decision to do so is vested solely in our Board of Trustees. This policy may be changed at any time, or from time to time, without notice to, or a vote of, our shareholders. For the three most recent fiscal years ended April 30, we have issued the following limited partnership units of IRET Properties in exchange for properties:

Acquiring or repurchasing shares. As a REIT, it is our intention to only invest in real estate assets. Our Articles of Amendment and Third Restated Declaration of Trust does not prohibit the acquisition or repurchase of our common or preferred shares or other securities so long as such activity does not prohibit us from operating as a REIT under the Code. Any policy regarding the acquisition or repurchase of shares or other securities is vested solely in our Board of Trustees and may be changed at any time, or from time to time, without notice to, or a vote of, our shareholders. 

During fiscal year 2005, we did not repurchase any of our outstanding common shares, preferred shares or limited partnership units, except for the redemption of a nominal amount of fractional common shares held by shareholders, upon request. 

To make loans to other persons. Our organizational structure allows us to make loans to other persons, subject to certain conditions and subject to our election to be taxed as a REIT. All loans must be secured by real property or limited partnership units of IRET Properties. Our mortgage loan receivables as of April 30, 2005, totaled $0.6 million, and $4.9 million as of April 30, 2004. 

To invest in the securities of other issuers for the purpose of exercising control. We have not, for the past three years, engaged in, and we are not currently engaging in, investment in the securities of other issuers for the purpose of exercising control. Our Articles of Amendment and Third Restated Declaration of Trust does not impose any limitation on our ability to invest in the securities of other issuers for the purpose of exercising control. Any decision to do so is vested solely in our Board of Trustees and may be changed at any time, or from time to time, without notice to, or a vote of, our shareholders. 

To provide summary reports to our shareholders. We also have a policy of mailing summary quarterly reports to our shareholders in January, April, July, and October of each year. The quarterly reports do not contain financial statements audited by an independent registered public accounting firm. This policy of providing a summary quarterly report to our shareholders is not required by our organizational documents and may be changed by a majority of our Board of Trustees at any time without notice to or a vote of our shareholders. 

Information about Segments 

We currently operate in five reportable segments: multi-family residential properties, and office, medical (including assisted living facilities), industrial (including miscellaneous properties) and retail properties. For further information on these segments and other related information, see Note 12 of our consolidated financial statements, and Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Annual Report on Form 10-K.

 

Our Executive Officers 

Set forth below are the names, ages, titles and biographies of each of our executive officers as of July 1, 2005.

 

Name	Age	Title
Thomas A. Wentz, Sr.	69	President and Chief Executive Officer
Charles Wm. James	57	Senior Vice President
Timothy P. Mihalick	46	Senior Vice President and Chief Operating Officer
Thomas A. Wentz, Jr.	39	Senior Vice President
Diane K. Bryantt	41	Senior Vice President and Chief Financial Officer
Michael A. Bosh	34	Secretary and General Counsel

 

Thomas A. Wentz, Sr. is a graduate of Harvard College and Harvard Law School, and has been associated with us since our formation on July 31, 1970. Mr. Wentz was a member of our Board of Trustees from 1970 to 1998, Secretary from 1970 to 1987, Vice President from 1987 to July 2000, and has been President and Chief Executive Officer since July 2000. Previously, from 1985 to 1991, Mr. Wentz was a Vice President of our former 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, from 1976 to February 2003, Mr. James served in several officer positions with companies unrelated to IRET, including the office of Vice President with the T.F. James Company, an Iowa corporation that was merged into IRET, Inc. in February 2003. Mr. James, who devotes three-quarters of his time to the Company, is currently also 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. is a graduate of Harvard College and the University of North Dakota School of Law, and 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 was a shareholder in the law firm of Pringle & Herigstad, P.C. from 1992 to 1999. Mr. Wentz is a member of the American Bar Association and the North Dakota Bar Association, and he is a Director of SRT Communications, Inc. Mr. Wentz is the son of Thomas A. Wentz, Sr. 

Diane K. Bryantt is a graduate of Minot State University, 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, and was named General Counsel in September 2003. 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, 2005, we had 42 employees. 

Environmental Matters and Government Regulation 

Under various federal, state and local laws, ordinances and regulations relating to the protection of the environment, a current or previous owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic 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. These laws often impose liability without regard to whether the current owner was responsible for, or even knew of, the presence of such substances. It is generally our policy to obtain from independent environmental consultants a “Phase I” environmental audit (which involves visual inspection but not soil or groundwater analysis) on all properties that we seek to acquire. We do not believe that any of our properties are subject to any material environmental contamination. However, no assurances can be given that: 

•   a prior owner, operator or occupant of the properties we own or the properties we intend to acquire did not create a material environmental condition not known to us, which might have been revealed by more in-depth study of the properties; and 

•   future uses or conditions (including, without limitation, changes in applicable environmental laws and regulations) will not result in the imposition of environmental liability upon us. 

In addition to laws and regulations relating to the protection of the environment, many other laws and governmental regulations are applicable to our properties, and changes in the laws and regulations, or in their interpretation by agencies and the courts, occur frequently. Under the Americans with Disabilities Act of 1990 (the “ADA”), all places of public accommodation are required to meet certain federal requirements related to access and use by disabled persons. In addition, the Fair Housing Amendments Act of 1988 (the “FHAA”) requires apartment communities first occupied after March 13, 1990, to be accessible to the handicapped. Non-compliance with the ADA or the FHAA could result in the imposition of fines or an award of damages to private litigants. We believe that those of our properties to which the ADA and/or FHAA apply are substantially in compliance with present ADA and FHAA requirements. 

Competition 

Investing in and operating real estate is a very competitive business. We compete with other owners and developers of multi-family and commercial properties to attract tenants to our properties. Ownership of competing properties is diversified among other REITs, financial institutions, individuals and public and private companies who are actively engaged in this business. Our multi-family properties compete directly with other rental apartments, as well as with condominiums and single-family homes that are available for rent or purchase in the areas in which our properties are located. Our commercial properties compete with other commercial properties for tenants. Additionally, we compete with other real estate investors, including other REITs, pension and investment funds, partnerships and investment companies, to acquire properties. This competition affects our ability to acquire properties we want to add to our portfolio and the price we pay in acquisitions. During the past year, we have continued to witness 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 generated by properties we acquired in previous years. We expect that the levels of return to be achieved through our investment in existing and stabilized real estate will remain lower than in previous periods as long as interest rates remain at historically low levels. 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. 

Corporate Governance  

The Company’s Board of Trustees has adopted various policies and initiatives to strengthen the Company’s corporate governance and increase the transparency of financial reporting.  Each of the committees of the Company’s Board of Trustees operates under written charters, and the Company’s independent trustees meet regularly in executive sessions at which only the independent trustees are present.  The Board of Trustees has also adopted a Code of Conduct applicable to trustees, officers and employees, and a Code of Ethics for Senior Financial Officers, and has established processes for shareholder communications with the Board of Trustees.

Additionally, the Company’s Audit Committee has established procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters, including procedures for the confidential, anonymous submission by Company employees of concerns regarding accounting or auditing matters. The Audit Committee also maintains a policy requiring Audit Committee approval of all audit and non-audit services provided to the Company by the Company’s independent registered public accounting firm. 

The Company will disclose any amendment to its Code of Ethics for Senior Financial officers on its website. In the event the Company waives compliance by any of its trustees or officers subject to the Code of Ethics or Code of Conduct, the Company will disclose such waiver in a Form 8-K filed within four business days. 

Website and Available Information 

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. Current copies of our Code of Conduct, Code of Ethics for Senior Financial Officers, and Charters for the Audit, Compensation, Executive and Nominating Committee of our Board of Trustees are also available on our website under the heading “Corporate Governance” in the Investor Relations section of our website. Copies of these documents are also available to shareholders upon request addressed to the Secretary at Investors Real Estate Trust, P.O. Box 1988, Minot, North Dakota 58701. Information on our internet website does not constitute part of this Annual Report on Form 10-K. 

RISK FACTORS 

Risks Related to Our Properties and Business 

Our increasing ownership of commercial properties subjects us to different risks than our traditional base of multi-family residential properties. Historically, the assets in our investment portfolio consisted predominantly of multi-family residential 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. Within the past 24 months, approximately 81.5% of our property acquisitions, on a total carrying amount basis, have been commercial properties, due to the greater availability of these properties on terms that meet our financial and strategic objectives. “Total carrying amount” is the amount we have invested in our properties (original investment plus improvements, if any) less accumulated depreciation.  Based on total carrying amount, commercial properties now comprise a majority of our real estate assets, with the majority of our commercial properties being located in the Minneapolis/St. Paul, Minnesota metropolitan area. 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 the next 12 months. 

Our historical experience in acquiring and operating multi-family residential properties may not be directly applicable to the acquisition and operation of commercial properties. Commercial properties involve different risks than multi-family residential properties, including: 

•     direct exposure to business and economic downturns; 

•     exposure to tenant lease terminations or bankruptcies; and 

•     competition from real estate investors with greater experience in developing and owning commercial properties. 

Our earnings may be negatively affected if we are not successful in our acquisition and operation of commercial properties. 

Our geographic concentration in Minnesota and North Dakota may result in losses due to our significant exposure to the effects of economic and real estate conditions in those markets.  For the fiscal year ended April 30, 2005, we

received approximately 80.9% of our combined commercial segments gross revenue from commercial properties in Minnesota and approximately 6.4% of our combined commercial segments gross revenue from commercial properties in North Dakota. For that same period, we received approximately 21.6% of our multi-family residential gross revenue from multi-family residential properties in Minnesota and 28.9% of our multi-family gross revenue from multi-family properties in North Dakota. As of April 30, 2005, Minnesota accounted for approximately 79.6% of our combined commercial segments real estate portfolio and 24.2% of our multi-family residential real estate portfolio, each as determined by total carrying amount, while North Dakota accounted for approximately 5.1% of our combined commercial segments real estate portfolio and 24.6% of our multi-family residential real estate portfolio. 

As a result of this concentration, we are subject to substantially greater risk than if our investments were more geographically dispersed. Specifically, we are more significantly exposed to the effects of economic and real estate conditions in those particular markets, such as building by competitors, local vacancy and rental rates and general levels of employment and economic activity. 

The economic climate in Minnesota is highly dependent on the service, manufacturing and high technology industries. The North Dakota economy is dependent on the agricultural, energy, government, business and personal services and wholesale and retail industries. Economic weakening, or lack of recovery from the recent weakness, in any of these industries may adversely affect the performance of our real estate portfolio by decreasing demand for rental space. 

Increasing physical and economic vacancy rates and declining rental rates will negatively impact earnings. As of April 30, 2005, approximately 0.9 million square feet, or 11.5% of our total commercial property square footage, was vacant.  In addition, leases covering approximately 2.3% of our total combined commercial segments annualized base rents will expire during fiscal year 2006.  At April 30, 2005, the economic occupancy of our total commercial properties, on a stabilized property basis, was approximately 89.3%.  We define “economic occupancy” as total possible revenue less vacancy loss as a percentage of total possible revenue. Total possible revenue is determined by valuing occupied units or square footage at contract rates, and vacant units or square footage at market rates. “Stabilized properties” are those properties that we have owned for the entirety of the periods being compared, and include properties that were redeveloped or expanded during the periods being compared. Properties purchased or sold during the periods being compared are excluded from our stabilized property analysis. If we are unable to rent or sell those properties that are vacant or affected by expiring leases, properties producing approximately 2.3% of our total combined commercial segments annualized base rents will be vacant by April 30, 2006. Even greater vacancies will be created to the extent that a number of tenants, or any one significant tenant, file for bankruptcy protection and reject our leases. At April 30, 2005, the economic occupancy of our multi-family residential properties, on a stabilized property basis, was approximately 90.8%. Multi-family residential vacancies could increase from current levels due to general economic conditions, local economic or competitive conditions, the trend toward home ownership facilitated by low interest rates, unsatisfactory property management, and the physical condition of our properties or other factors. Increased vacancies in both our commercial and multi-family residential properties will negatively impact our earnings, will cause a decline in the value of our real estate portfolio and may adversely affect our ability to make distributions to the holders of our shares of beneficial interest. 

Our multi-family residential property economic occupancy rate, on a stabilized property basis, was 90.8% for the twelve months ended April 30, 2005, compared to 90.6% for the twelve months ended April 30, 2004.  Commercial property economic occupancy rates, on a stabilized property basis, were 89.3% and 92.6% for the twelve months ended April 30, 2005 and 2004, respectively.  To maintain our physical occupancy levels, we may offer tenants incentives, generally in the form of lower rents, which results in decreased revenues and income from operations at our stabilized properties.  We estimate that rent concessions offered during the twelve months ended April 30, 2005, lowered our operating revenues by approximately $4.5 million, as compared to an estimated $2.9 million reduction in operating revenues attributable to rent concessions offered in the twelve months ended April 30, 2004. 

Inability to manage our rapid growth effectively may adversely affect our operating results. Our total assets have increased from $885.7 million at April 30, 2003, to $1,151.2 million at April 30, 2005, principally through the acquisition of additional real estate properties. Subject to our continued ability to raise equity capital and issue limited partnership units of IRET Properties and identify suitable investment properties, we intend to continue our acquisition of real estate properties. Effective management of this level of growth will present challenges, including:

•     the need to expand our management team and staff; 

•     the need to enhance internal operating systems and controls; 

•     increased reliance on outside advisors and property managers; and 

•     the ability to consistently achieve targeted returns. 

If we are unable to effectively manage our growth, our operating results will be adversely affected. 

Competition may negatively impact our earnings. We compete with many kinds of institutions, including other REITs, private partnerships, individuals, pension funds and banks, for tenants and investment opportunities. Many of these institutions are active in the markets in which we invest and have greater financial and other resources that may be used to compete against us. With respect to tenants, this competition may affect our ability to lease our properties, the price at which we are able to lease our properties and the cost of required renovations or build-outs. With respect to acquisition and development investment opportunities, this competition may cause us to pay higher prices for new properties than we otherwise would have paid, or may prevent us from purchasing a desired property at all. 

An inability to continue to make accretive property acquisitions may adversely affect our ability to increase our operating income. From our fiscal year ended April 30, 2003, to our fiscal year ended April 30, 2005, our operating income decreased from $13.3 million to $9.7 million. Our basic and diluted net income per common share was $.30 as of April 30, 2005, compared to $.24 and $.38, respectively, as of April 30, 2004 and 2003. If we are unable to continue to make real estate acquisitions on terms that meet our financial and strategic objectives, whether due to market conditions, a changed competitive environment or unavailability of capital, our ability to increase our operating income may be materially and adversely affected. 

High leverage on our overall portfolio may result in losses. As of April 30, 2005, our ratio of total indebtedness to total Net Assets (as that term is used in our Bylaws, which usage is not in accordance with GAAP, “Net Assets” means our total assets at cost before deducting depreciation or other non-cash reserves, less total liabilities) was approximately 133.9%. As of April 30, 2004 and 2003, our percentage of total indebtedness to total Net Assets was approximately 136.8% and 145.3%, respectively. Under our Bylaws we may increase our total indebtedness up to 300.0% of our Net Assets, or by an additional approximately $886.3 million. There is no limitation on the increase that may be permitted if approved by a majority of the independent members of our board of trustees and disclosed to the holders of our shares of beneficial interest in the next quarterly report, along with justification for any excess.

This amount of leverage may expose us to cash flow problems if rental income decreases. Under those circumstances, in order to pay our debt obligations we might be required to sell properties at a loss or be unable to make distributions to the holders of our shares of beneficial interest. A failure to pay amounts due may result in a default on our obligations and the loss of the property through foreclosure. 

Our inability to renew, repay or refinance our debt may result in losses. We are subject to the normal risks associated with debt financing, including the risk that: 

•     our cash flow will be insufficient to meet required payments of principal and interest; 

•     we will not be able to renew, refinance or repay our indebtedness when due; and 

•     the terms of any renewal or refinancing will be less favorable than the terms of our current indebtedness. 

If we are unable to refinance our indebtedness on acceptable terms, or at all, we may be forced to dispose of one or more of the properties on disadvantageous terms, which may result in losses to us. These losses could have a material adverse effect on us, our ability to make distributions to the holders of our shares of beneficial interest and our ability to pay amounts due on our debt. Furthermore, if a property is mortgaged to secure payment of indebtedness and we are unable to meet mortgage payments, the mortgagee could foreclose upon the property, appoint a receiver and receive an assignment of rents and leases or pursue other remedies, all with a consequent loss

of our revenues and asset value. Foreclosures could also create taxable income without accompanying cash proceeds, thereby hindering our ability to meet the REIT distribution requirements of the Internal Revenue Code. 

The principal balance of our indebtedness in mortgage loans secured by individual commercial and residential properties totaled $708.6 million as of April 30, 2005. Of the outstanding mortgages, both fixed and variable, $15.8 million in principal amount came due during fiscal year 2005, $18.9 million in principal amount will come due during fiscal year 2006, $21.2 million in principal amount will come due during fiscal year 2007, and the remaining balance will come due in later fiscal years. 

The cost of our indebtedness may increase. We have incurred, and we expect to continue to incur, indebtedness that bears interest at a variable rate. As of April 30, 2005, $27.0 million, or approximately 3.8%, of the principal amount of our total mortgage indebtedness was subject to variable interest rate agreements. The interest rates on our variable rate mortgages range from approximately 4.5% to approximately 6.6%. An increase of one percent in our variable interest rate would collectively increase our interest payments by $270,000 annually. In addition, portions of our fixed-rate indebtedness incurred for historical property acquisitions will come due on a periodic basis. For example, in each of our fiscal years ended April 30, 2006, 2007 and 2008, approximately $17.7, $19.1 and $38.9 million, respectively, of our fixed-rate debt will come due. Accordingly, increases in interest rates will increase our interest costs, which could have a material adverse effect on us, our ability to make distributions to the holders of our shares of beneficial interest and our ability to pay amounts due on our debt. 

Our current or future insurance may not protect us against possible losses. We carry comprehensive liability, fire, extended coverage and rental loss insurance with respect to our properties at levels that we believe to be adequate. However, the coverage limits of our current or future policies may be insufficient to cover the full cost of repair or replacement of all potential losses. Moreover, this level of coverage may not continue to be available in the future or, if available, may be available only at unacceptable cost or with unacceptable terms. 

Additionally, there may be certain extraordinary losses, such as those resulting from civil unrest, terrorism or environmental contamination, that are not generally, or fully, insured against because they are either uninsurable or not economically insurable. For example, we do not currently carry insurance against losses as a result of environmental contamination. Should an uninsured or underinsured loss occur to a property, we could be required to use our own funds for restoration or lose all or part of our investment in, and anticipated revenues from, the property. In any event, we would continue to be obligated on any mortgage indebtedness on the property. Any loss could have a material adverse effect on us, our ability to make distributions to the holders of our shares of beneficial interest and our ability to pay amounts due on our debt. 

We have significant investments in medical properties and adverse trends in healthcare provider operations may negatively affect our lease revenues from these properties. We have acquired a significant number of specialty medical properties (including assisted living facilities) and may acquire more in the future. As of April 30, 2005, our real estate portfolio consisted of 25 medical properties, having a total carrying amount of $192.5 million, or approximately 18.1% of the total carrying amount of our entire real estate portfolio. The healthcare industry is currently experiencing changes in the demand for, and methods of delivery of, healthcare services; changes in third-party reimbursement policies; significant unused capacity in certain areas, which has created substantial competition for patients among healthcare providers in those areas; continuing pressure by private and governmental payors to reduce payments to providers of services; and increased scrutiny of billing, referral and other practices by federal and state authorities. Sources of revenue for our medical property tenants may include the federal Medicare program, state Medicaid programs, private insurance carriers and health maintenance organizations, among others. Efforts by such payors to reduce healthcare costs will likely continue, which may result in reductions or slower growth in reimbursement for certain services provided by some of our tenants. These factors may adversely affect the economic performance of some or all of our medical services tenants and, in turn, our lease revenues. In addition, if we or our tenants terminate the leases for these properties, or our tenants lose their regulatory authority to operate such properties, we may not be able to locate suitable replacement tenants to lease the properties for their specialized uses. Alternatively, we may be required to spend substantial amounts to adapt the properties to other uses. Any loss of revenues and/or additional capital expenditures occurring as a result could hinder our ability to make distributions to the holders of our shares of beneficial interest. 

Adverse changes in applicable laws may affect our potential liabilities relating to our properties and operations. Increases in real estate taxes and income, service and transfer taxes cannot always be passed through to all tenants in

the form of higher rents. As a result, any increase may adversely affect our cash available for distribution, our ability to make distributions to the holders of our shares of beneficial interest and our ability to pay amounts due on our debt. Similarly, changes in laws that increase the potential liability for environmental conditions existing on properties, that increase the restrictions on discharges or other conditions or that affect development, construction and safety requirements may result in significant unanticipated expenditures that could have a material adverse effect on us, our ability to make distributions to the holders of our shares of beneficial interest and our ability to pay amounts due on our debt. In addition, future enactment of rent control or rent stabilization laws or other laws regulating multi-family residential properties may reduce rental revenues or increase operating costs. 

Complying with laws benefiting disabled persons may affect our costs and investment strategies. Federal, state and local laws and regulations designed to improve disabled person’s access to and use of buildings, including the Americans with Disabilities Act, may require modifications to, or restrict renovations of, existing buildings. Additionally, these laws and regulations may require that structural features be added to buildings under construction. Any legislation or regulations that may be adopted in the future may impose further burdens or restrictions on us with respect to improved access to, and use of these buildings by, disabled persons. The costs of complying with these laws and regulations may be substantial and limits or restrictions on construction, or the completion of required renovations, may limit the implementation of our investment strategy or reduce overall returns on our investments. This could have an adverse effect on us, our ability to make distributions to the holders of our shares of beneficial interest and our ability to pay amounts due on our debt. 

We may be responsible for potential liabilities under environmental laws. Under various federal, state and local laws, ordinances and regulations, a current or previous owner or operator of real estate may be liable for the costs of removal of, or remediation of, hazardous or toxic substances in, on, around or under that property. These laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of the hazardous or toxic substances. The presence of these substances, or the failure to properly remediate any property containing these substances, may adversely affect the owner’s or operator’s ability to sell or rent the affected property or to borrow funds using the property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal of, or remediation of, these substances at that disposal or treatment facility, whether or not the facility is owned or operated by that person. In connection with our current or former ownership (direct or indirect), operation, management, development and/or control of real properties, we may be potentially liable for removal or remediation costs with respect to hazardous or toxic substances as those properties, as well as certain other costs, including governmental fines and claims for injuries to persons and property. A finding of liability for an environmental condition as to any one or more properties could have a material adverse effect on us, our ability to make distributions to the holders of our shares of beneficial interest and our ability to pay amounts due on our debt. 

It is generally our policy to obtain a Phase I environmental study on each property that we seek to acquire. If the Phase I indicates any possible environmental problems, it is our policy is to order a Phase II study, which involves testing the soil and ground water for actual hazardous substances. However, Phase I and Phase II environmental studies, or any other environmental studies undertaken with respect to any of our current or future properties, may not reveal the full extent of potential environmental liabilities. We currently do not carry insurance for environmental liabilities. 

We may be unable to retain or attract qualified management. We are dependent upon our senior officers for essentially all aspects of our business operations. Our senior officers have experience in the specialized business segments in which we operate and the loss of them would likely have a material adverse effect on our operations. We do not have employment contracts with any of our senior officers. As a result, any senior officer may terminate his or her relationship with us at any time, without providing advance notice. The location of our corporate headquarters in Minot, North Dakota, may make it more difficult and expensive to attract, relocate and retain current and future officers and employees. 

Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business, operating results and stock price, and continuing compliance will result in additional expenses.  If we fail to maintain the adequacy of our internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, as such, standards may be modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting.  Failure to maintain an effective internal control environment could have a material adverse

effect on our business, operating results, and stock price.  Additionally, our efforts to comply with Section 404 of the Sarbanes-Oxley Act and the related regulations have required, and we believe will continue to require, the commitment of significant financial and managerial resources. 

Risks Related to Our Structure and Organization 

We may incur tax liabilities as a consequence of failing to qualify as a REIT. Although our management believes that we are organized and have operated and are operating in such a manner to qualify as a “real estate investment trust,” as that term is defined under the Internal Revenue Code, we may not in fact have operated, or may not be able to continue to operate, in a manner to qualify or remain so qualified. Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which there are only limited judicial or administrative interpretations, and further involves the determination of factual matters and circumstances not entirely within our control. For example, in order to qualify as a REIT, at least 95% of our gross income in any year must be derived from qualifying sources, and we must make distributions to the holders of our shares of beneficial interest aggregating annually at least 90% of our REIT taxable income (excluding net capital gains). Thus, to the extent revenues from non-qualifying sources, such as income from third-party management, represents more than five percent of our gross income in any taxable year, we will not satisfy the 95% income test and may fail to qualify as a REIT, unless certain relief provisions contained in the Internal Revenue Code apply. Even if relief provisions apply, however, a tax would be imposed with respect to excess net income. Additionally, if IRET Properties, our operating partnership or one or more of our subsidiaries is determined to be taxable as a corporation, we may fail to qualify as a REIT. Either our failure to qualify as a REIT, for any reason, or the imposition of taxes on excess net income from non-qualifying sources, could have a material adverse effect on us, our ability to make distributions to the holders of our shares of beneficial interest and our ability to pay amounts due on our debt. Furthermore, new legislation, regulations, administrative interpretations or court decisions could change the tax laws with respect to our qualification as a REIT or the federal income tax consequences of our qualification. 

If we failed to qualify as a REIT, we would be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at corporate rates, which would likely have a material adverse effect on us, our ability to make distributions to the holders of our shares of beneficial interest and our ability to pay amounts due on our debt. In addition, unless entitled to relief under applicable statutory provisions, we would also be disqualified from treatment as a REIT for the four taxable years following the year during which we lost our qualification. This treatment would reduce funds available for investment or distributions to the holders of our shares of beneficial interest because of the additional tax liability to us for the year or years involved. In addition, we would no longer be required to make distributions to holders of our common shares. To the extent that distributions to the holders of our shares of beneficial interest would have been made in anticipation of qualifying as a REIT, we might be required to borrow funds or to liquidate certain investments to pay the applicable tax. 

Certain provisions of our Articles of Amendment and Third Restated Declaration of Trust may limit a change in control and deter a takeover. In order to maintain our qualification as a REIT, our Third Restated Declaration of Trust provides that any transaction, other than a transaction entered into through the NASDAQ National Market or other similar exchange, that would result in our disqualification as a REIT under Section 856 of the Internal Revenue Code, including any transaction that would result in (i) a person owning in excess of the ownership limit, which as of the date of this Annual Report on Form 10-K is 9.8%, in number or value, of our outstanding shares of beneficial interest, (ii) less than 100 people owning our shares of beneficial interest, (iii) our being “closely held” within the meaning of Section 856(h) of the Internal Revenue Code, or (iv) 50% or more of the fair market value of our shares of beneficial interest being held by persons other than “United States persons,” as defined in Section 7701(a)(30) of the Internal Revenue Code, will be void ab initio. If the transaction is not void ab initio, then the shares of beneficial interest in excess of the ownership limit, that would cause us to be closely held, that would result in 50% or more of the fair market value of our shares of beneficial interest to be held by persons other than United States persons or that otherwise would result in our disqualification as a REIT, will automatically be exchanged for an equal number of excess shares, and these excess shares will be transferred to an excess share trustee for the exclusive benefit of the charitable beneficiaries named by our board of trustees. These limitations may have the effect of preventing a change in control or takeover of us by a third party, even if the change in control or takeover would be in the best interests of the holders of our shares of beneficial interest. 

Our board of trustees may make changes to our major policies without approval of the holders of our shares of beneficial interest. Our major policies, including policies relating to development, acquisitions, financing, growth,

debt capitalization and distributions, are determined by our board of trustees. Our board of trustees may amend or revoke those policies, and other policies, without advance notice to, or the approval of, the holders of our shares of beneficial interest. 

Item 2. Properties 

IRET is organized as a REIT under Section 856-858 of the Code, and is in the business of owning, leasing, developing and acquiring real estate properties. Except for certain commercial properties managed by our Minneapolis office, these real estate investments are generally managed by third-party professional real estate management companies on our behalf. 

Total Real Estate Rental Revenue 

As of April 30, 2005, our real estate portfolio consisted of 65 multi-family residential properties and 146 commercial properties, consisting of office, medical, industrial and retail properties, comprising 37.5%, 30.0%, 17.4%, 4.9%, and 10.2%, respectively, of our total real estate portfolio, based on the dollar amount of our original investment plus capital improvements through April 30, 2005. Gross annual rental revenue and percentages of total annual real estate rental revenue by property type for each of the three most recent fiscal years ended April 30, are as follows: 

Fiscal Year Ended April 30, (in thousands)		Multi-Family Residential Gross Revenue			%		Commercial Office Gross Revenue			%		Commercial Medical Gross Revenue			%		Commercial Industrial Gross Revenue			%		Commercial Retail Gross Revenue			%		Total Revenue
2005	$		60,207		38.5%	$		48,648		31.1%	$		25,794		16.5%	$		6,459		4.1%	$		15,339		9.8%	$	156,447
2004	$		59,294		44.3%	$		39,919		29.9%	$		15,876		11.9%	$		6,634		5.0%	$		11,873		8.9%	$	133,596
2003	$		56,036		50.0%	$		31,159		27.8%	$		13,168		11.8%	$		5,846		5.2%	$		5,862		5.2%	$	112,071

 

Economic Occupancy Rates 

Economic occupancy rates are shown below for each property type in each of the three most recent fiscal years ended April 30. We define “economic occupancy” as total possible revenue less vacancy loss as a percentage of total possible revenue. Total possible revenue is determined by valuing occupied units or square footage at contract rates and vacant units or square footage at market rates. In the case of multi-family residential properties, lease arrangements with individual tenants vary from month-to-month to one-year leases. Leases on commercial properties generally vary from month-to-month to 20 years. 

	Fiscal Year Ended April 30,
	2005	2004	2003
Multi-Family Residential Economic Occupancy	90.1%	90.2%	91.2%
Commercial - Office Economic Occupancy	90.8%	92.2%	95.7%
Commercial - Medical Economic Occupancy	92.7%	93.6%	96.3%
Commercial - Industrial Economic Occupancy	86.8%	93.6%	96.3%
Commercial - Retail Economic Occupancy	89.4%	92.2%	96.2%

 

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 38 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. 

Management and Leasing of Our Real Estate Assets 

The day-to-day management and leasing of our real estate assets is, with the exception of certain properties managed by our Minneapolis office, generally 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, 2005, we had property management contracts with the following companies: 

With the exception of Hoyt Properties, Inc., none of the companies engaged to provide property management services is affiliated with us, our officers or members of our Board of Trustees. Hoyt Properties, Inc. is owned 100.0% by Steven B. Hoyt, a former member of our Board of Trustees, and his wife. Mr. Hoyt resigned from our Board of Trustees on September 21, 2004, at the expiration of his term of office.  Hoyt Properties, Inc. manages, pursuant to written management contracts, the commercial buildings that we acquired from Mr. Hoyt, and certain other of our properties. 

In July 2004, a former principal of Bayport Properties joined us as a Vice President, Asset Management, with responsibility for the management of certain of our commercial properties, primarily located in the Minneapolis metropolitan area. 

Generally, our management contracts provide for compensation ranging from 2.5% to 5.0% of gross rent collections and, typically, we may terminate these contracts in 60 days or less or upon the property manager’s failure to meet certain specified financial performance goals. 

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 that is generally calculated as a percentage of the net rent to be paid over the term of the lease. We believe that the broker commissions paid by us conform to market and industry standards, and accordingly are commercially reasonable.

Summary of Real Estate Investment Portfolio 

As of April 30, (in thousands)	2005		%		2004			%		2003			%
Real Estate Investments
Real Estate Owned	$	1,179,856				$	1,082,773				$	916,757
Less Accumulated Depreciation		(118,512)					(98,923)					(75,639)
	$	1,061,344		99.4%		$	983,850		99.2%		$	841,118		99.5%
Undeveloped Land		5,382		0.5%			3,180		0.3%			3,024		0.4%
Mortgage Loans Receivable		619		0.1%			4,893		0.5%			1,183		0.1%
Total Real Estate Investments	$	1,067,345		100.0%		$	991,923		100.0%		$	845,325		100.0%

 

Summary of Individual Properties Owned as of April 30, 2005 

The following table presents information regarding our 211 properties owned as of April 30, 2005. We own the following interests in real estate either through our wholly-owned subsidiaries or by ownership of a controlling interest in an entity owning the real estate. We account for these interests on a consolidated basis. Occupancy rates given are the average economic occupancy rates for the fiscal year ended April 30, 2005: 

(N/A = Property held less than 12 months) 

(* = Real estate not owned in fee; all or a portion is leased under a ground lease)
(** = Primarily Parking Lot Rental) 

 

 

Property Name and Location	Approximate Net Rentable Square Footage		(in thousands) Investment		Fiscal 2005 Economic Occupancy
OFFICE
1st Avenue Building - Minot, ND		15,357	$	555		50.1%
17 South Main - Minot, ND		3,250		110		0.0%
401 South Main - Minot, ND		8,597		630		54.0%
2030 Cliff Road - Eagan, MN		13,374		983		100.0%
Ameritrade - Omaha, NE		73,742		8,349		100.0%

 

Mortgages Payable 

As of April 30, 2005, individual first mortgage liens on the above properties totaled $708.6 million. Of the $708.6 million of mortgage indebtedness on April 30, 2005, $27.0 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. The balance of fixed rate mortgages totaled $681.6 million. Principal payments due on our mortgage indebtedness are as follows: 

Year Ended April 30, (in thousands)	Mortgage Principal
2006	$	18,893
2007		21,150
2008		40,130
2009		45,710
2010		106,034
Later Years		476,641
Total	$	708,558

 

Future Minimum Lease Payments 

The future minimum lease payments to be received under leases for commercial properties in place as of April 30, 2005, assuming that no options to renew or buy out the lease are exercised, are as follows: 

Year Ended April 30, (in thousands)		Lease Payments
2006	$	64,075
2007		59,556
2008		52,111
2009		44,847
2010		39,854
Thereafter		215,881
Total	$	476,324

Capital Expenditures 

Each year we review the physical condition of each property we own. In order for our properties to remain competitive, attract new tenants, and retain existing tenants, we plan for a reasonable amount of capital improvements. For the year ended April 30, 2005, we spent approximately $18.0 million on capital improvements.

Contracts or Options to Sell 

We have granted options to purchase certain of our properties to various third parties. In general, these options grant the right to purchase certain IRET assets at the greater of such asset’s appraised value or an annual compounded increase of 2.0% to 2.5% of the initial cost to us. During the fiscal year ended April 30, 2005, the tenant in five of IRET’s Edgewood Vista assisted living facilities exercised the purchase options contained in the leases for these properties. These sales closed in fiscal year 2005. See the discussion of Property Dispositions in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Annual Report on Form 10-K for further information on these sales. In addition to options granted to third parties, we have also granted an option to Charles Wm. James to purchase our Excelsior Retail Center. Mr. James is currently an officer and member of our Board of Trustees. The option exercise price is equal to the price paid by us for the property, plus an annual consumer price index increase. As of April 30, 2005, our properties subject to purchase options, the cost, plus improvements, of each such property and its gross rental revenue are as follows: 

Property	(in thousands) Property Cost		(in thousands) Gross Rental Revenue
			2005		2004		2003
East Grand Station - East Grand F orks, MN	$	1,392	$	152	$	152	$	152
Edgewood Vista - Duluth, MN		11,709		1,406		1,278		1,246
Edgewood Vista - Fremont, NE		552		59		59		59
Edgewood Vista - Hastings, NE		572		61		61		61
Edgewood Vista - Kalispell, MT		588		62		62		62
Edgewood Vista - Missoula, MT		962		120		120		120
Edgewood Vista - Omaha, NE		641		67		67		67
Edgewood Vista - Virginia, MN		12,181		1,320		893		759
Excelsior Retail Center - Excelsior, MN		929		82		129		22
Great Plains Software - Fargo, ND		15,375		1,876		1,875		1,875
Healtheast - Woodbury & Maplewood, MN		21,601		2,032		1,948		1,917
Wedgewood Sweetwater - Lithia Springs, GA		4,622		509		502		475
Sleep Inn - Brooklyn Park, MN		2,750		247		0		0
Total	$	73,874	$	7,993	$	7,146	$	6,815

 

Properties by State 

The following table presents, as of April 30, 2005, an analysis by state of each of the five major categories of properties owned by us - multi-family residential, office, medical, industrial and retail: 

Total Real Estate Investment by Type and Location 

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, 2005. 

PART II 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities  

Quarterly Share and Distribution Data 

Our common shares of beneficial interest trade on the NASDAQ National Market under the symbol IRETS. On June 30, 2005, the last reported sales price per share of our common shares on the NASDAQ National Market was $9.66. The following table sets forth the quarterly high and low closing sales prices per share of our common shares as reported on the NASDAQ National Market, and the distributions per common share and limited partnership unit declared with respect to each period. 

Quarter Ended	High		Low		Distributions Declared (per share and unit)
2005
April 30, 2005	$	10.26	$	8.90	$	0.1620
January 31, 2005		10.72		9.78		0.1615
October 31, 2004		10.30		9.51		0.1610
July 31, 2004		10.47		9.39		0.1605

 

Quarter Ended	High		Low		Distributions Declared (per share and unit)
2004
April 30, 2004	$	10.50	$	9.36	$	0.1600
January 31, 2004		10.70		9.88		0.1595
October 31, 2003		10.48		9.69		0.1590
July 31, 2003		10.81		9.28		0.1585

 

It is IRET’s policy to pay quarterly distributions to our common shareholders, at the discretion of our Board of Trustees, based on our funds from operations, financial condition and capital requirements, annual distribution requirements under the REIT provisions of the Internal Revenue Code and such other factors as our Board of Trustees deems relevant. Since July 1, 1971, IRET has paid quarterly cash distributions in the months of January, April, July and October. 

Shareholders 

As of June 30, 2005, the Company had approximately 4,791 common shareholders of record, and 45,217,241 common shares of beneficial interest (plus 13,199,342 limited partnership units convertible into 13,199,342 common shares) were outstanding.

Unregistered Sales of Shares 

Sales of Unregistered Securities. During the fiscal years ended April 30, 2005 and 2004, respectively, we issued an aggregate of 595,810 and 357,478 unregistered common shares to holders of limited partnership units of IRET Properties upon redemption and conversion of an aggregate of 595,810 and 357,478 limited partnership units of IRET Properties on a one-for-one basis. All such issuances of our common shares were exempt from registration as private placements under Section 4(2) of the Securities Act, including Regulation D promulgated thereunder. We have registered the re-sale of such common shares under the Securities Act. 

Issuer Purchases of Equity Securities. The Company did not repurchase any of its equity securities during fiscal year 2005, except for repurchases of nominal amounts of fractional shares, at shareholder request.

 

Item 6. Selected Financial Data 

Set forth below is selected financial data on a historical basis for the Company for the five most recent fiscal years ended April 30. This information should be read in conjunction with the consolidated financial statements and notes appearing elsewhere in this Annual Report on Form 10-K. 

	(in thousands, except per share data)
	2005		2004		2003		2002		2001
Consolidated Income Statement Data
Revenue	$	156,447	$	133,596	$	112,071	$	84,120	$	67,473
Income before minority interest and discontinued operations and gain on sale of other investments	$	10,709	$	10,858	$	14,337	$	12,664	$	9,840
Gain on sale of real estate, land, and other investments	$	8,605	$	662	$	1,595	$	547	$	602
Minority interest portion of operating partnership income	$	(1,918)	$	(2,320)	$	(3,341)	$	(3,304)	$	(1,894)
Income from continuing operations	$	8,415	$	7,939	$	10,377	$	9,708	$	8,135
Income from discontinued operations	$	6,661	$	1,501	$	1,871	$	892	$	559
Net income	$	15,076	$	9,440	$	12,248	$	10,600	$	8,694
Consolidated Balance Sheet Data
Total real estate investments	$	1,067,345	$	991,923	$	845,325	$	685,347	$	548,580
Total assets	$	1,151,158	$	1,076,317	$	885,681	$	730,209	$	570,322
Mortgages payable	$	708,558	$	633,124	$	539,397	$	459,569	$	368,957
Shareholders’ equity	$	295,172	$	278,629	$	214,761	$	145,578	$	118,945
Consolidated Per Common Share Data   (basic and diluted)
Income from continuing operations	$	.14	$	.20	$	.32	$	.38	$	.35
Income from discontinued operations	$	.16	$	.04	$	.06	$	.04	$	.03
Net Income	$	.30	$	.24	$	.38	$	.42	$	.38
Distributions	$	.65	$	.64	$	.63	$	.59	$	.55

 

CALENDAR YEAR	2004	2003	2002	2001	2000
Tax status of distribution
Capital gain	0.00%	3.88%	0.00%	0.00%	0.72%
Ordinary income	44.65%	58.45%	68.29%	65.98%	86.76%
Return of capital	55.35%	37.67%	31.71%	34.02%	12.52%

 

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 30, 2005. 

Overview 

We are a self-advised equity real estate investment trust engaged in owning and operating income-producing real properties. Our investments include multi-family residential properties and commercial properties located primarily in the upper Midwest states of Minnesota and North Dakota. Our properties are diversified in property type and location. As of April 30, 2005, our real estate portfolio consisted of 65 multi-family residential properties containing 8,610 apartment units and having a total carrying amount (net of accumulated depreciation) of $374.6 million, and 146 commercial properties containing approximately 8.0 million square feet of leasable space and having a total carrying amount (net of accumulated depreciation) of $686.7 million. Our commercial properties consist of: 

• 50 office properties containing approximately 3.5 million square feet of leasable space and having a total carrying amount (net of accumulated depreciation) of $330.3 million;  

• 25 medical properties (including assisted living facilities) containing approximately 1.1 million square feet of leasable space and having a total carrying amount (net of accumulated depreciation) of $192.5 million;

• 11 industrial properties (including miscellaneous commercial properties) containing approximately 1.7 million square feet of leasable space and having a total carrying amount (net of accumulated depreciation) of $53.0 million; and  

• 60 retail properties containing approximately 1.6 million square feet of leasable space and having a total carrying amount (net of accumulated depreciation) of $110.9 million.

 

Our primary source of income and cash is rents associated with multi-family residential and commercial leases.  Our business objective is to increase shareholder value by employing a disciplined investment strategy.  This strategy is focused on growing assets in desired geographical markets, achieving diversification by property type and location, and adhering to targeted returns in acquiring properties. 

During fiscal year 2005, IRET continued to operate in a difficult economic environment.  Unemployment rates in our markets, job growth at a pace slower than anticipated, continued low interest rates and an abundant supply of housing, lower rental income and increased costs for tenant concessions and commercial property alternatives all contributed to continued pressure on occupancy levels at our multi-family and commercial properties.  While we are seeing some slight improvement in vacancy levels, our operating environment in fiscal year 2005 continued to be challenging.  In addition, identifying potential acquisition properties that met our investment criteria remained a challenge during fiscal year 2005. A widespread demand for real estate from traditional and non-traditional investors combined with lower tenant demand for commercial space and apartments resulted in a significant reduction in the investment returns from all types of real estate. In response to these operating conditions, during fiscal year 2005 IRET was able to implement only modest rental rate increases at certain of our multi-family and commercial properties, and continued to rely on rent and other tenant concessions in order to improve occupancy rates. 

During fiscal year 2005, vacancy levels in our total commercial segment properties continued to increase, to 9.2% from 7.8% at the end of fiscal year 2004 in the case of our commercial office portfolio, to 7.3% from 6.4% at the end of fiscal year 2004 in the case of our commercial medical portfolio, to 13.2% from 6.4% at the end of fiscal year 2004 in the case of our commercial industrial portfolio, and to 10.6% from 7.8% at the end of fiscal year 2004 in the case of our commercial retail portfolio. Vacancy levels also increased slightly at our total multi-family residential properties, to 9.9% compared to 9.8% at the end of fiscal year 2004. Total revenues of IRET Properties, our operating partnership, increased by $22.8 million to $156.4 million, compared to $133.6 million in fiscal year 2004. This increase was primarily attributable to the addition of new real estate properties. Operating income declined in fiscal year 2005, to $9.7 million from $10.2 million in fiscal year 2004. We estimate that rent concessions offered to tenants during the twelve months ended April 30, 2005, lowered our operating revenues by approximately $4.5 million, compared to $2.9 million for fiscal year 2004. Expenses increased during fiscal year 2005 as well, with real estate taxes, maintenance, utility, administrative and operating expense all increasing from year-earlier levels. While some of this increase was due to existing real estate, the majority was due to the addition of new real estate to our portfolio. 

During fiscal year 2005, the Company added four multi-family residential properties with a total of 266 apartment units, three medical properties with a total of 157,675 leasable square feet, eight office properties with a total of 664,483 leasable square feet, and two retail properties consisting of 50,720 leasable square feet to our investment portfolio, for an aggregate purchase price of $146.4 million. The Company disposed of 18 properties, consisting of eight apartment complexes, five medical properties (assisted living facilities), one office property, three retail properties and one parcel of undeveloped land, for sale prices totaling $48.9 million. 

Additional information and more detailed discussions of our fiscal year 2005 operating results are found in the following sections of this Management’s Discussion and Analysis of Financial Condition and Results of Operations. 

Critical Accounting Policies 

Set forth below is a summary of the accounting policies that management believes are critical to the preparation of the consolidated financial statements included in this Annual Report on Form 10-K. 

Real Estate. Real estate is carried at cost, net of accumulated depreciation, less an adjustment for impairment, if any. Depreciation requires an estimate by management of the useful life of each property as well as an allocation of the

costs associated with a property to its various components. If the Company does not allocate these costs appropriately or incorrectly estimates the useful lives of its real estate, depreciation expense may be misstated. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets. The Company uses a 20-40 year estimated life for buildings and improvements. Maintenance and repairs are charged to operations as incurred. Renovations and improvements that improve and/or extend the useful life of the asset are capitalized over their estimated useful life, generally five to ten years. 

Upon acquisitions of real estate, the Company assesses the fair value of acquired tangible assets (including land, buildings and personal property), which is determined by valuing the property as if it were vacant, and considers whether there were significant intangible assets acquired (for example, above-and below-market leases, the value of acquired in-place leases, and tenant relationships, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141) and acquired liabilities, and allocates the purchase price based on these assessments. The as-if-vacant value is allocated to land, buildings, and personal property based on management’s determination of the relative fair value of these assets. The estimated fair value of the property is the amount that would be recoverable upon the disposition of the property. Techniques used to estimate fair value include discounted cash flow analysis, independent appraisals, and reference to recent sales of comparable properties. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market/economic conditions that may affect the property. Land value is assigned based on the purchase price if land is acquired separately, or based on estimated market value if acquired in a merger or in a portfolio acquisition. 

Above-market and below-market in-place lease values for acquired properties are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The Company performs this analysis on a lease-by-lease basis. The capitalized above-market and below-market lease values are amortized and included in operating expenses as depreciation/ amortization related to real estate investments and amortized over the remaining non-cancelable terms of the respective leases. 

Other intangible assets acquired include amounts for in-place lease values that are based upon the Company’s evaluation of the specific characteristics of the leases. Factors considered in these analyses include an estimate of carrying costs during hypothetical expected lease-up periods, considering current market conditions, and costs to execute similar leases. The Company also considers information about each property obtained during its pre-acquisition due diligence and marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired. 

Property sales or dispositions are recorded when title transfers and sufficient consideration is received by the Company. The Company’s properties are reviewed for impairment if events or circumstances change indicating that the carrying amount of the assets may not be recoverable. If the Company incorrectly estimates the values at acquisition or the undiscounted cash flows, initial allocations of purchase price and future impairment charges may be different. The impact of the Company’s estimates in connection with acquisitions and future impairment analysis could be material to the Company’s financial statements. 

Allowance for Doubtful Accounts. The Company periodically evaluates the collectibility of amounts due from tenants and maintains an allowance for doubtful accounts ($200,000 as of April 30, 2005) for estimated losses resulting from the inability of tenants to make required payments under their respective lease agreements. The Company also maintains an allowance for receivables arising from the straight-lining of rents ($500,000 as of April 30, 2005). This receivable arises from earnings recognized in excess of amounts currently due under lease agreements. Management exercises judgment in establishing these allowances and considers payment history and current credit status in developing these estimates. If estimates differ from actual results this would impact reported results. 

Revenue Recognition - The Company has the following revenue sources and revenue recognition policies: 

•   Base Rents - income arising from tenant leases. These rents are recognized over the non-cancelable term of the related leases on a straight-line basis, which includes the effects of rent steps and free rent abatements under the leases.  Certain leases provide for tenant occupancy during periods for which no rent is due or where minimum rent payments increase during the term of the lease. Rental revenue is recorded for the full

    term of each lease on a straight-line basis. Accordingly, the Company records a receivable from tenants for rents that it expects to collect over the remaining lease term as deferred rents receivable. When the Company acquires a property, the term of the existing leases is considered to commence as of the acquisition date for the purposes of this calculation. Revenue recognition is considered to be critical because the evaluation of the realizability of such deferred rents receivable involves management's assumptions relating to such tenant's viability. 

•   Percentage Rents - income arising from retail tenant leases which are contingent upon the sales of the tenant exceeding a defined threshold. These rents are recognized in accordance with SEC Staff Accounting Bulletin 104: Revenue Recognition, which states that this income is to be recognized only after the contingency has been removed (i.e., sales thresholds have been achieved). 

•   Expense Reimbursement Income – revenue arising from tenant leases, which provide for the recovery of all or a portion of the operating expenses and real estate taxes of the respective property. This revenue is accrued in the same periods as the expenses are incurred. 

Income Taxes. The Company operates in a manner intended to enable it to continue to qualify as a REIT under Sections 856-860 of the Internal Revenue Code of 1986, as amended. Under those sections, a REIT which distributes at least 90% of its REIT taxable income as a distribution to its shareholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. The Company intends to distribute to its shareholders 100% of its taxable income. Therefore, no provision for Federal income taxes is required. If the Company fails to distribute the required amount of income to its shareholders, it would fail to qualify as a REIT and substantial adverse tax consequences may result. 

The Company’s taxable income is affected by a number of factors, including, but not limited to, the following:  that the Company’s tenants perform their obligations under their leases with the Company; that the Company’s tax and accounting positions do not change; and that the number of issued and outstanding shares of the Company’s common stock remain relatively unchanged.  These factors, which impact the Company’s taxable income, are subject to change, and many are outside the control of the Company.  If actual results vary, the Company’s taxable income may change. 

Recent Accounting Pronouncements 

On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 153, “Exchanges of Nonmonetary Assets - Amendment of APB Opinion No. 29”.  The amendments made by SFAS No. 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged.  Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have “commercial substance.”  SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005.  The Company does not believe the adoption of SFAS No. 153 will have a material effect on the Company’s consolidated financial statements. 

RESULTS OF OPERATIONS 

Revenues 

Total revenues for fiscal year 2005 were $156.4 million, compared to $133.6 million in fiscal year 2004 and $112.1 million in fiscal year 2003. Revenues during fiscal year 2005 were $22.8 million greater than revenues in fiscal year 2004 and revenues during fiscal year 2004 were $21.5 million greater than in fiscal year 2003. 

 

As illustrated above, the substantial majority of the increase in our gross revenue for fiscal years 2005 and 2004 resulted from the addition of new real estate properties to the IRET Properties’ portfolio, rather than from rental increases on existing properties. For the next 12 months, we expect acquisitions to continue to be the most significant factor in any increases in our revenues and ultimately our net income. While acceptable real estate assets are still available for purchase, declining tenant demand combined with a continued 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 decline 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. 

Gain on Sale of Real Estate 

The Company realized a gain on sale of real estate for fiscal year 2005 of $8.6 million. This compares to $0.7 million of gain on sale of real estate recognized in fiscal 2004 and $1.6 million recognized in fiscal 2003. A list of the properties sold during fiscal year 2005, showing sales price, depreciated cost plus sales costs and net gain (loss) is included below on page 43 under the caption “Property Dispositions.” 

Segment Expenses and Operating Profit 

The following tables show the changes in revenues, operating expenses, interest and depreciation by reportable operating segment for fiscal year 2005 compared to fiscal year 2004, and for fiscal year 2004 compared to fiscal year 2003.  For a reconciliation of segment revenues, profit (loss) and assets to the consolidated financial statements, see Note 12 of the Notes to Consolidated Financial Statements in this report. 

Fiscal year ended April 30, 2005, compared to fiscal year ended April 30, 2004.  

Fiscal year ended April 30, 2004, compared to fiscal year ended April 30, 2003.  

Factors Impacting Segment Expenses and Operating Profit 

Depreciation/amortization related to real estate investments.  Depreciation/amortization related to real estate investments increased significantly in our Commercial Office and Commercial Medical segments in fiscal year 2005 compared to fiscal year 2004 (increasing 79.2% and 78.2%, respectively), and in our Commercial Office segment in fiscal year 2004 compared to fiscal year 2003 (increasing 221.0%).  These increases were a result of the implementation of SFAS No. 141, which establishes standards for valuing in-place leases in purchase transactions.  The Company allocates a portion of the purchase price paid for properties to in-place lease intangible assets.  The amortization period of these intangible assets is the term of the lease, rather than the estimated life of the building and improvements.  The Company accordingly initially records additional amortization expense due to this shorter amortization period. 

Changes in Expenses and Net Income 

Operating income for fiscal year 2005 decreased to $9.7 million from $10.2 million in fiscal year 2004, and was $13.3 million in fiscal year 2003. Our net income available to common shareholders for fiscal year 2005 was $12.7 million, compared to $9.4 million in fiscal year 2004 and $12.2 million in fiscal year 2003. On a per common share basis, net income was $0.30 per common share in fiscal year 2005, compared to $0.24 per common share in fiscal year 2004 and $0.38 in fiscal year 2003. 

These changes in operating income and net income result from the changes in revenues and expenses detailed below: 

Changes in net income for fiscal year 2005 resulted from:  

	(in thousands)
An increase in net rental income primarily due to new acquisitions (rents, less utilities, maintenance, taxes, insurance and management)	$	17,126
An increase in income from discontinued operations, net		5,160
An increase in non-operating income		338
A decrease in minority interest of operating partnership income		402
A decrease in minority interest of other partnership’s income		378
These increases were partially offset by:
An increase in interest expense primarily due to debt placed on new acquisitions		(5,594)
An increase in depreciation/amortization expense related to real estate investments		(9,833)
An increase in operating expenses, administrative, advisory & trustee services		(1,469)
An increase in amortization expense		(717)
A decrease in gain on sale of other investments		(155)
An increase in dividends to preferred shareholders		(2,339)
Total increase in fiscal 2005 net income available to common shareholders	$	3,297

 

Changes in net income for fiscal year 2004 resulted from:  

	(in thousands)
An increase in net rental income (rents, less utilities, maintenance, taxes, insurance and management)	$	9,811
A decrease in minority interest of operating partnership income		1,021
A decrease in minority interest of other partnerships’ income		177
These increases were partially offset by:
A decrease in income from discontinued operations, net		(370)
A decrease in non-operating income		(414)
An increase in interest expense		(6,149)
An increase in depreciation/amortization expense related to real estate investments		(5,579)
An increase in operating expenses, administrative, advisory & trustee services		(873)
An increase in amortization expense		(275)
A decrease in gain on sale of other investments		(157)
An increase in dividends to preferred shareholders		(33)
Total decrease in fiscal 2004 net income available to common shareholders	$	(2,841)

 

Factors Impacting Net Income During Fiscal Year 2005 as Compared to Fiscal Year 2004 

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. A discussion of the factors having the greatest impact on our business compared to the prior two fiscal years is set forth below. In management’s opinion, most of these negative influences show signs of lessening in the next twelve months. 

•   Increased economic vacancy and concessions. During fiscal year 2005, vacancy levels at our stabilized multi-family residential properties decreased slightly throughout our entire portfolio to 9.2% compared to 9.4% at the end of fiscal year 2004, for economic occupancy levels of approximately 90.8% in fiscal year 2005 compared to approximately 90.6% in fiscal year 2004. “Economic Occupancy” is defined as total possible revenue less vacancy loss as a percentage of total possible revenue. Total possible revenue is determined by valuing occupied units or square footage at contract rates, and vacant units or square footage at market rates. “Stabilized properties” are those properties that we have owned for the entirety of the periods being compared, and include properties that were redeveloped or expanded during the periods being compared. However, vacancy levels at our stabilized total commercial segment properties increased to 10.7%, from 7.4% at the end of fiscal year 2004, for economic occupancy levels of approximately 89.3% in fiscal year 2005 compared to approximately 92.6% in fiscal year 2004. A majority of the markets in which we operate continue to experience overall poor economic conditions in respect to job creation. The poor economic climate has translated into increased vacancy at many of our properties. 

While occupancy levels at our multi-family residential properties showed signs of improvement during the last half of fiscal year 2005, our level of tenant concessions has not declined significantly, and results at our multi-family residential properties continue to be negatively influenced by the availability of low-interest mortgages to prospective home buyers.  To maintain physical occupancy levels at our multi-family residential properties, we may offer tenant incentives, generally in the form of lower rents, which results in decreased revenues and income from operations at our stabilized properties.  We estimate that rent concessions offered during fiscal year 2005 lowered our operating revenues by approximately $4.5 million, as compared to an estimated approximately $2.9 million reduction in operating revenues attributable to rent concessions offered in fiscal year 2004.

Our commercial vacancy is primarily due to our inability to either renew existing leases or to re-lease space being vacated by tenants at the expiration of their lease. While not necessarily indicative of future business cycles, in past economic downturns, a recovery in occupancy levels generally trails the pick up in economic activity by twelve months or more. Despite some positive economic developments, we have yet to see a significant increase in demand for multi-family residential or commercial space. We continue to expect that demand in our markets for both apartments and commercial space will remain weak through the remainder of our current fiscal year 2006.

•   Increased real estate taxes. Taxes imposed on our real estate properties increased by $2.0 million, or 12.3% for the fiscal year ended April 30, 2005. Of the increased real estate taxes, $2.4 million or 118.4% is attributable to the addition of new real estate acquired in fiscal 2005 and 2004, while ($0.4) million or (18.4)% is due to decreased costs for real estate taxes on existing real estate assets. 

Under the terms of most of our commercial leases, the full cost of real estate tax is paid by the tenant as additional rent. For our noncommercial real estate properties, any increase in our real estate tax costs must be collected from tenants in the form of a general rent increase. While we have implemented selected rent increases, the current economic conditions and increased vacancy levels have prevented us from raising rents in the amount necessary to fully recover our increased real estate tax costs.

•   Increased maintenance expense. The maintenance expense category increased by $1.4 million or 9.4% for the fiscal year ended April 30, 2005, as compared to the corresponding period of fiscal year 2004. Of the increased maintenance costs for the fiscal year ended April 30, 2005, $2.2 million or 157.4% is attributable to the addition of new real estate acquired in fiscal 2005 and 2004, while $(0.8) million or (57.4)% is due to decreased costs for maintenance on existing real estate assets. Under the terms of most of our commercial leases, the full cost of maintenance is paid by the tenant as additional rent. For our noncommercial real estate properties, any increase in our maintenance costs must be collected from tenants in the form of a general rent increase. While we have implemented selected rent increases, the current economic conditions and increased vacancy levels have prevented us from raising rents in the amount necessary to fully recover our increased maintenance costs. 

•   Increased utility expense. The utility expense category increased by $1.3 million or 13.6% for the fiscal year ended April 30, 2005, as compared to fiscal year 2004. Of the increased utility costs, $1.3 million or 102.1% is attributable to the addition of new real estate acquired in fiscal 2005 and 2004, while $(0.03) million or (2.1)% is due to decreased costs for utilities on existing real estate assets. Under the terms of most of our commercial leases, the full cost of utilities is paid by the tenant as additional rent. For our other noncommercial real estate properties, any increase in our utility costs must be collected from tenants in the form of a general rent increase. While we have implemented selected rent increases, the current economic conditions and increased vacancy levels have prevented us from raising rents in the amount necessary to fully recover our increased utility costs. Since our real estate portfolio is primarily located in Minnesota and North Dakota, the severity of winters has a large impact on our utility costs. 

•   Increased administrative and operating expense. Administrative and operating expenses increased by $1.5 million or 38.6% for the fiscal year ended April 30, 2005, as compared to fiscal year 2004. Of this increase in administrative and operating expense for the fiscal year ended April 30, 2005, $1.0 million or 70.1% was due to employee related costs. Over the past year, we have hired seven new employees. The addition of these new employees, together with increases in the wages and benefits paid to existing employees, account for a significant portion of the increase in administrative and operating costs for the fiscal year ended April 30, 2005.  In addition, in common with other public companies, we have experienced a significant increase in accounting fees and other costs, primarily as a result of certain provisions of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), in particular the internal controls report and attestation requirements of Section 404 of Sarbanes-Oxley. 

•   Increase in mortgage  interest expense. Our mortgage debt increased $75.4 million or 11.9% for the fiscal year ended April 30, 2005. Our mortgage interest expense increased by $6.4 million or 16.2% for the fiscal year ended April 30, 2005, as compared to fiscal year 2004. Of the increased interest expense for the fiscal year ended April 30, 2005, $6.9 million or 106.3% is attributable to the addition of new real estate, while interest expenses on existing real estate assets decreased by $(0.4) million or (6.3)%, due primarily to lower interest rates on mortgages. 

•   Increase in amortization expense. In accordance with SFAS No. 141, “Business Combinations,” which establishes standards for valuing in-place leases in purchase transactions, the Company allocates a portion of the purchase price paid for properties to in-place lease intangible assets.  The amortization period of these intangible assets is the term of the lease, rather than the estimated life of the building and improvements.  The Company accordingly initially records additional amortization expense due to this shorter amortization

period, which has the effect in the short term of decreasing the Company’s net income available to common shareholders. 

Factors Impacting Net Income During Fiscal Year 2004 as Compared to Fiscal Year 2003 

•   Increased economic vacancy. During fiscal year 2004, vacancy levels at our stabilized multi-family residential properties continued to increase throughout our entire portfolio to 9.5% compared to 8.8% at the end of fiscal year 2003, for economic occupancy levels of approximately 90.5% in fiscal year 2004 compared to approximately 91.2% in fiscal year 2003. “Economic Occupancy” is defined as total possible revenue less vacancy loss as a percentage of total possible revenue. Total possible revenue is determined by valuing occupied units or square footage at contract rates, and vacant units or square footage at market rates. “Stabilized properties” are those properties that we have owned for the entirety of the periods being compared, and include properties that were redeveloped or expanded during the periods being compared. Likewise, vacancy levels at our stabilized commercial properties increased to 6.7%, from 3.6% at the end of fiscal year 2003, for economic occupancy levels of approximately 93.3% in fiscal year 2004 compared to approximately 96.4% in fiscal year 2003. A majority of the markets in which we operate continued to experience overall poor economic conditions, in respect of job creation. The poor economic climate translated into increased vacancy at many of our properties. Our commercial vacancy was primarily due to our inability to either renew existing leases or to re-lease space being vacated by tenants at the expiration of their lease. 

•   Increased real estate taxes. Taxes imposed on our real estate properties increased by $3.6 million, or 27.6% for the fiscal year ended April 30, 2004. Of the increased real estate taxes, $1.0 million or 27.8% was attributable to the addition of new real estate acquired in fiscal 2004, while $2.6 million or 72.2% was due to increased costs for real estate taxes on existing real estate assets. Most of our new property acquisitions in fiscal year 2004 were in Minnesota, a jurisdiction with higher property taxes than North Dakota and the other states in which we own property. 

Under the terms of most of our commercial leases, the full cost of real estate tax is paid by the tenant as additional rent. For our noncommercial real estate properties, any increase in our real estate tax costs must be collected from tenants in the form of a general rent increase. While we implemented selected rent increases, economic conditions and increased vacancy levels prevented us from raising rents in the amount necessary to fully recover our increased real estate tax costs. To further compound the problem, a number of states in which we operate continued to face state budget shortfalls. Our experience is that such shortfalls translate into local governments raising property taxes. 

•   Increased maintenance expense. The maintenance expense category increased by $3.6 million or 32.0% for the fiscal year ended April 30, 2004, as compared to the corresponding period of fiscal year 2003. Of the increased maintenance costs for the fiscal year ended April 30, 2004, $1.1 million or 30.5% was attributable to the addition of new real estate acquired in fiscal years 2004 and 2003, while $2.5 million or 69.5% was due to increased costs for maintenance on existing real estate assets. Under the terms of most of our commercial leases, the full cost of maintenance is paid by the tenant as additional rent. For our noncommercial real estate properties, any increase in our maintenance costs must be collected from tenants in the form of a general rent increase. While we implemented selected rent increases, economic conditions and increased vacancy levels prevented us from raising rents in the amount necessary to fully recover our increased maintenance costs. 

•   Increased utility expense. The utility expense category increased by $2.1 million or 28.3% for the fiscal year ended April 30, 2004, as compared to fiscal year 2003. Of the increased utility costs, $0.8 million or 38.1% was attributable to the addition of new real estate acquired in fiscal years 2003 and 2004, while $1.6 million or 76.2% was due to increased costs for utilities on existing real estate assets and $(.3) related to 2005 discontinued operations.  Under the terms of most of our commercial leases, the full cost of utilities is paid by the tenant as additional rent. For our other noncommercial real estate properties, any increase in our utility costs must be collected from tenants in the form of a general rent increase. While we implemented selected rent increases, economic conditions and increased vacancy levels prevented us from raising rents in the amount necessary to fully recover our increased utility costs. Since our real estate portfolio is primarily located in Minnesota and North Dakota, the severity of winters has a large impact on our utility costs.

•   Increased administrative and operating expense. Administrative and operating expenses increased by $0.9 million or 30.1% for the fiscal year ended April 30, 2004, as compared to fiscal year 2003. Of this increase in administrative and operating expense for the fiscal year ended April 30, 2004, $0.7 million or 77.8% was due to employee related costs. In fiscal year 2004, we hired six new employees. The addition of these new employees, together with increases in the wages and benefits paid to existing employees, account for the increase in administrative and operating costs for the fiscal year ended April 30, 2004.

•   Increased insurance premiums. Insurance expense increased by $0.8 million or 37.6% for the fiscal year ended April 30, 2004, compared to the prior fiscal year. Of the increased insurance costs, $0.2 million or 25% was attributable to the addition of new real estate during fiscal years 2003 and 2004, while $0.6 million or 75% was due to increased premium costs for coverage on existing real estate assets. Under the terms of most of our commercial leases, the full cost of insurance is paid by the tenant as additional rent. For our other real estate properties, any increase in our insurance costs must be collected from tenants in the form of a general rent increase. While we implemented selected rent increases, economic conditions and increased vacancy levels prevented us from raising rents in the amount necessary to fully recover our increased insurance costs.

•   Increase in interest expense. Our mortgage debt increased $94 million or 17.4% for the fiscal year ended April 30, 2004. Our mortgage interest expense increased by $5.7 million or 16.6% for the fiscal year ended April 30, 2004, as compared to fiscal year 2003, due to the fact that interest rates on new mortgages incurred during 2004 were lower than rates on mortgages in prior periods. Of the increased interest expense for the fiscal year ended April 30, 2004, $2.3 million or 41.1% was attributable to the addition of new real estate, while interest expenses on existing real estate assets increased by $3.3 million or 58.9%, due primarily to increased borrowing on existing real estate assets. 

Comparison of Results from Commercial and Residential Properties 

The following table presents an analysis of the relative investment in, and financial contribution of, our commercial and multi-family residential properties over the past three fiscal years: 

	(in thousands)				(in thousands)				(in thousands)
Fiscal Years Ended April 30	2005		%		2004		%		2003		%
Real Estate Investments – net of accumulated depreciation
Commercial Office	$	330,338		31.1%	$	271,823		27.6%	$	225,076		26.7%
Commercial Medical		192,478		18.1%		160,662		16.3%		122,547		14.6%
Commercial Industrial		53,040		5.0%		54,201		5.5%		52,283		6.2%
Commercial Retail		110,913		10.5%		112,790		11.5%		93,112		11.1%
Multi-Family Residential		374,575		35.3%		384,374		39.1%		348,100		41.4%
Total	$	1,061,344		100.0%	$	983,850		100.0%	$	841,118		100.0%
Gross Real Estate Rental Revenues
Commercial Office	$	48,648		31.1%	$	39,919		29.9%	$	31,159		27.8%
Commercial Medical		25,794		16.5%		15,876		11.9%		13,168		11.7%
Commercial Industrial		6,459		4.1%		6,634		5.0%		5,846		5.2%
Commercial Retail		15,339		9.8%		11,873		8.9%		5,862		5.3%
Multi-Family Residential		60,207		38.5%		59,294		44.3%		56,036		50.0%
Total	$	156,447		100.0%	$	133,596		100.0%	$	112,071		100.0%

 

Total Commercial Segments Properties - Analysis of Lease Expirations and Credit Risk 

The following table shows the annual lease expiration percentages for the total commercial segments properties owned by us as of April 30, 2005, for fiscal years 2006 through 2015 and the leases that will expire during fiscal year 2016 and beyond. 

The following table lists our top ten commercial tenants on April 30, 2005, for the total commercial segments properties owned by us as of April 30, 2005, based upon minimum rents in place as of April 30, 2005: 

	(in thousands)
Lessee	% of Total Commercial Segments Minimum Rents as of April 30, 2005
St. Luke’s Hospital	5.0%
Edgewood Living Communities, Inc.	3.7%
Best Buy	3.1%
Healtheast - Woodbury & Maplewood	2.5%
Allina Health	2.3%
Microsoft - Great Plain	2.3%
St. Paul Companies	2.2%
Nebraska Orthopaedic Hospital	2.1%
Smurfit - Stone Container Corp.	1.9%
Wilson’s The Leather Experts Inc.	1.8%
All Others	73.1%
Total Monthly Rent as of April 30, 2005	100.0%

 

Results on a “Stabilized Property” Basis 

The following tables present results on a stabilized property basis for fiscal year 2005 compared to fiscal year 2004, and for fiscal year 2004 compared to fiscal year 2003, for our multi-family residential and commercial properties, consisting of office, medical, industrial and retail properties.  Property Segment Operating Profit should not be considered an alternative to operating net income as determined in accordance with GAAP as a measure of IRET’s performance.  For a reconciliation of segment operating profit to the consolidated financial statements, see Note 12 of the Notes to Consolidated Financial Statements in this report.  We analyze and compare results of operations on properties owned and in operation for the entirety of the periods being compared (including properties that were redeveloped or expanded during the periods being compared, with properties purchased or sold during the periods being compared being excluded form this analysis).  This comparison allows us to evaluate the performance of existing properties and their contribution to net income.  The fiscal year 2004 results presented in the first table below are not identical to the fiscal year 2004 results presented in the second table, because the properties comprising our stabilized property portfolio vary from year to year, due to our ongoing acquisition and disposition activity.

 

Management believes that measuring performance on a stabilized property basis is useful to investors because it enables evaluation of how our properties are performing year over year. Management uses this measure to assess

whether or not it has been successful in increasing net operating income, renewing the leases of existing tenants, controlling operating costs and appropriately handling capital improvements. 

Fiscal year 2005 compared to fiscal year 2004:  

	(in thousands)
Fiscal Years Ended April 30	2005		2004		% Change
Multi-Family Residential
Real Estate Revenue	$	55,092	$	55,504		(0.7%)
Expenses
Utilities & Maintenance		11,444		11,745		(2.6%)
Property Management		5,989		5,774		3.7%
Real Estate Taxes		6,514		6,373		2.2%
Insurance		1,375		1,882		(26.9%)
Depreciation and Amortization		10,019		9,695		3.3%
Mortgage Interest		16,657		16,711		(0.3%)
Total Expenses	$	51,998	$	52,180		(0.3%)
Property Segment Operating Profit	$	3,094	$	3,324		(6.9%)
Commercial Office
Real Estate Revenue	$	32,930	$	35,584		(7.5%)
Expenses
Utilities & Maintenance		6,771		7,607		(11.0%)
Property Management		1,507		1,589		(5.2%)
Real Estate Taxes		4,989		5,122		(2.6%)
Insurance		353		403		(12.4%)
Depreciation and Amortization		5,662		5,448		3.9%
Mortgage Interest		9,630		10,202		(5.6%)
Total Expenses	$	28,912	$	30,371		(4.8%)
Property Segment Operating Profit	$	4,018	$	5,213		(22.9%)
Commercial Medical
Real Estate Revenue	$	15,491	$	15,171		2.1%
Expenses
Utilities & Maintenance		2,292		2,046		12.0%
Property Management		760		1,005		(24.4%)
Real Estate Taxes		1,293		1,449		(10.8%)
Insurance		149		133		12.0%
Depreciation and Amortization		2,811		2,710		3.7%
Mortgage Interest		5,383		5,521		(2.5%)
Total Expenses	$	12,688	$	12,864		(1.4%)
Property Segment Operating Profit	$	2,803	$	2,307		21.5%
Commercial Industrial
Real Estate Revenue	$	5,961	$	6,614		(9.9%)
Expenses
Utilities & Maintenance		229		251		(8.8%)
Property Management		91		98		(7.1%)
Real Estate Taxes		709		764		(7.2%)
Insurance		72		65		10.8%
Depreciation and Amortization		1,256		1,242		1.1%
Mortgage Interest		2,171		2,092		3.8%
Total Expenses	$	4,528	$	4,512		0.4%
Property Segment Operating Profit	$	1,433	$	2,102		(31.8%)
Commercial Retail
Real Estate Revenue	$	12,022	$	11,169		7.6%
Expenses
Utilities & Maintenance		1,085		1,004		8.1%
Property Management		68		50		36.0%
Real Estate Taxes		1,650		1,821		(9.4%)
Insurance		139		151		(7.9%)

	(in thousands)
Commercial Retail, continued	2005		2004		% Change
Depreciation and Amortization	$	1,913	$	1,861		2.8%
Mortgage Interest		3,383		3,229		4.8%
Total Expenses	$	8,238	$	8,116		1.5%
Property Segment Operating Profit	$	3,784	$	3,053		23.9%
Total Stabilized Segment Operating Profit	$	15,132	$	15,999		(5.4%)
Reconciliation to Segment Operating Profit
Real Estate Revenue – Non-Stabilized	$	34,951	$	9,554
Expenses – Non-Stabilized
Utilities & Maintenance	$	5,368	$	1,840
Property Management		2,156		845
Real Estate Taxes		3,463		1,050
Insurance		526		200
Depreciation and Amortization		11,813		2,723
Mortgage Interest		9,103		2,130
Total Segment Operating Profit	$	17,654	$	16,765

 

Fiscal year 2004 compared to fiscal year 2003:  

	(in thousands)
Fiscal Years Ended April 30	2004		2003		% Change
Multi-Family Residential
Real Estate Revenue	$	58,511	$	59,100		(1.0%)
Expenses
Utilities & Maintenance		12,299		11,380		8.1%
Property Management		6,208		5,951		4.3%
Real Estate Taxes		6,643		6,697		(0.8%)
Insurance		1,958		1,527		28.2%
Mortgage Interest		17,490		17,276		1.2%
Loss on Impairment of Real Estate		62		0		0.0%
Total Expenses	$	44,660	$	42,831		4.3%
Property Segment Operating Profit	$	13,851	$	16,269		(14.9%)
Commercial Office
Real Estate Revenue	$	29,941	$	28,616		4.6%
Expenses
Utilities & Maintenance		6,007		4,869		23.4%
Property Management		1,233		1,255		(1.8%)
Real Estate Taxes		4,298		4,131		4.0%
Insurance		346		310		11.6%
Mortgage Interest		8,833		8,822		0.1%
Total Expenses	$	20,717	$	19,387		6.9%
Property Segment Operating Profit	$	9,224	$	9,229		(0.1%)
Commercial Medical
Real Estate Revenue	$	11,720	$	11,641		0.7%
Expenses
Utilities & Maintenance		1,424		1,552		(8.2%)
Property Management		503		634		(20.7%)
Real Estate Taxes		850		904		(6.0%)
Insurance		89		73		21.9%
Mortgage Interest		4,331		4,583		(5.5%)
Total Expenses	$	7,197	$	7,746		(7.1%)
Property Segment Operating Profit	$	4,523	$	3,895		16.1%
Commercial Industrial
Real Estate Revenue	$	3,118	$	3,300		(5.5%)
Expenses
Utilities & Maintenance		56		78		(28.2%)
Property Management		30		23		30.4%
Real Estate Taxes		184		161		14.3%

	(in thousands)
Commercial Industrial, continued	2004		2003		% Change
Insurance	$	19	$	15		26.7%
Mortgage Interest		1,010		1,034		(2.3%)
Total Expenses	$	1,299	$	1,311		(0.9%)
Property Segment Operating Profit	$	1,819	$	1,989		(8.5%)
Commercial Retail
Real Estate Revenue	$	4,182	$	4,799		(12.9%)
Expenses
Utilities & Maintenance		284		243		16.9%
Property Management		50		98		(49.0%)
Real Estate Taxes		398		398		0.0%
Insurance		52		65		(20.0%)
Mortgage Interest		1,348		1,436		(6.1%)
Total Expenses	$	2,132	$	2,240		(4.8%)
Property Segment Operating Profit	$	2,050	$	2,559		(19.9%)
Total Stabilized Segment Operating Profit	$	31,467	$	33,941		(7.3%)
Reconciliation to Segment Operating Profit
Real Estate Revenue – Non-Stabilized	$	32,752	$	11,075
Expenses – Non-Stabilized
Utilities & Maintenance	$	5,741	$	1,668
Property Management		1,711		354
Real Estate Taxes		4,786		1,259
Insurance		483		164
Depreciation and Amortization		24,817		19,253
Mortgage Interest		8,617		2,803
Total Segment Operating Profit	$	18,064	$	19,515

 

Property Acquisitions 

IRET Properties added $146.4 million of real estate investments to its portfolio during fiscal year 2005, compared to $170.3 million added in fiscal year 2004. The fiscal year 2005 and 2004 additions are detailed below. 

Fiscal 2005 (May 1, 2004 to April 30, 2005) 

	(in thousands)
Fiscal 2005 Acquisitions	Purchase Price
Multi-Family Residential
54-unit Southbrook Court and Mariposa Lane Townhomes - Topeka, KS	$	5,500
36-unit Legacy 5 - Grand Forks, ND		2,738
36-unit Legacy 6 - Grand Forks, ND		2,607
140-unit Olympik Village - Rochester, MN		7,100
	$	17,945
Commercial Property - Office
26,186 sq. ft. Plymouth I Office Building - Plymouth, MN	$	1,864
26,186 sq. ft. Plymouth II Office Building - Plymouth, MN		1,748
26,186 sq. ft. Plymouth III Office Building - Plymouth, MN		2,214
79,377 sq. ft. Northgate I Office Building - Maple Grove, MN		8,175
185,000 sq. ft. Crosstown Circle Office Building - Eden Prairie, MN		22,000
81,173 sq. ft. Highlands Ranch II Office Building - Highlands Ranch, CO		12,800
86,428 sq. ft. Wells Fargo Center - St. Cloud, MN		9,201
153,947 sq. ft. US Bank - Bloomington, MN		20,300
	$	78,302
Commercial Property - Medical
52,300 sq. ft. Nebraska Orthopaedic Hospital Expansion Project - Omaha, NE	$	20,597
45,081 sq. ft. Pavilion I Clinic - Duluth, MN		10,900
60,294 sq. ft. High Pointe Health Campus Phase I (East Metro Medical Building) - Lake Elmo, MN		13,050
	$	44,547

	(in thousands)
Fiscal 2005 Acquisitions, continued	Purchase Price
Commercial Property - Retail
46,720 sq. ft. Sleep Inn Hotel - Brooklyn Park, MN	$	2,750
4,000 sq. ft. single tenant retail building (former Payless building) - Fargo, ND		375
	$	3,125
Unimproved Property
* Legacy VII - Grand Forks, ND	$	2,443
	$	2,443
Total Fiscal 2005 Property Acquisitions	$	146,362

* = Property not placed in service at April 30, 2005. Additional costs were still to be incurred. 

Fiscal 2004 (May 1, 2003 to April 30, 2004) 

	(in thousands)
Fiscal 2004 Acquisitions	Purchase Price
Multi-Family Residential
240-unit Colonial Villa - Burnsville, MN	$	13,850
115-unit Boulder Court Apartments - Eagan, MN		6,600
151-unit Winchester/Village Green Townhouses - Rochester, MN		8,900
160-unit Brookfield Village - Topeka , KS		7,250
60-unit Monticello Village Apartments - Monticello, MN		4,200
	$	40,800
Commercial Property - Office
30,464 sq. ft. Benton Business Park - Sauk Rapids, MN	$	1,600
24,000 sq. ft. West River Business Park - Waite Park, MN		1,500
190,758 sq. ft. Golden Hills Office Center - Golden Valley, MN		27,500
175,610 sq. ft. Brown Deer Road - Milwaukee, WI		13,500
106,207 sq. ft. TCA Building - Eagan, MN		13,000
20,000 sq. ft. Metris - Duluth, MN		2,950
27,000 sq. ft. Minnesota National Bank - Duluth, MN		2,100
30,000 sq. ft. UHC Office - International Falls, MN		2,500
	$	64,650
Commercial Property - Medical
76,870 sq. ft. Edgewood Vista Phase II - Virginia, MN	$	5,100
9,052 sq. ft. Fresenius - Duluth, MN		1,800
28,928 sq. ft. Mariner Clinic - Superior, WI		4,100
20,512 sq. ft. Denfeld Clinic - Duluth, MN		3,336
18,810 sq. ft. Wells Clinic - Hibbing, MN		2,900
74,800 sq. ft. Pavilion II - Duluth, MN		19,500
12,444 sq. ft. Gateway Clinic - Sandstone, MN		1,900
	$	38,636
Commercial Property - Industrial (miscellaneous commercial property)
35,000 sq. ft. API Building - Duluth, MN	$	2,000
59,600 sq. ft. Lighthouse - Duluth, MN		2,100
	$	4,100
Commercial Property – Retail
213,271 sq. ft. Buffalo Mall - Jamestown, ND	$	4,275
104,928 sq. ft. Westgate Shopping Center - St. Cloud, MN		6,575
36,542 sq. ft. Denfeld Retail Center - Duluth, MN		5,164
25,400 sq. ft. South Pond Retail Center - Champlin, MN		3,700
15,597 sq. ft. Tool Crib - Duluth, MN		2,000
	$	21,714
Unimproved Property
** Legacy V - Grand Forks, ND	$	214
** Legacy VI - Grand Forks, ND		93
** Legacy VII - Grand Forks, ND		93
	$	400
Total Fiscal 2004 Property Acquisitions	$	170,300

** = Property not placed in service at April 30, 2004. Additional costs were still to be incurred.

Property Dispositions 

During fiscal year 2005, IRET Properties disposed of 17 properties and one undeveloped property for an aggregate sale price of $48.9 million, compared to six properties and two parcels of undeveloped land sold for $4.4 million in total during fiscal year 2004. Real estate assets sold by IRET during fiscal year 2005 were as follows: 

 

Properties sold by IRET during fiscal 2004 were as follows:  

Funds From Operations 

IRET considers Funds from Operations (“FFO”) a useful measure of performance for an equity REIT. IRET uses the definition of FFO adopted by the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”) in 1991, as clarified in 1995, 1999 and 2002. NAREIT defines FFO to mean “net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect funds from operations on the same basis.”  Because of limitations of the FFO definition adopted by NAREIT, IRET has made certain interpretations in applying the definition.  IRET believes all such interpretations not specifically provided for in the NAREIT definition are consistent with the definition. 

IRET management considers that FFO, by excluding depreciation costs, the gains or losses from the sale of operating real estate properties and extraordinary items as defined by GAAP, is useful to investors in providing an additional perspective on IRET’s operating results.   Historical cost accounting for real estate assets in accordance with GAAP assumes, through depreciation, that the value of real estate assets decreases predictably over time.  However, real estate asset values have historically risen or fallen with market conditions.  NAREIT’s definition of FFO, by excluding depreciation costs, reflects the fact that real estate, as an asset class, generally appreciates over time and that depreciation charges required by GAAP may not reflect underlying economic realities.  Additionally, the exclusion, in NAREIT’s definition of FFO, of gains and losses from the sales of previously depreciated operating real estate assets, allows IRET management and investors better to identify the operating results of the long-term assets that form the core of IRET’s investments, and assists in comparing those operating results between periods.  FFO is used by IRET’s management and investors to identify trends in occupancy rates, rental rates and operating costs.  

While FFO is widely used by REITs as a primary performance metric, not all real estate companies use the same definition of FFO or calculate FFO in the same way. Accordingly, FFO presented here is not necessarily comparable to FFO presented by other real estate companies. 

FFO should not be considered as an alternative to net income as determined in accordance with GAAP as a measure of IRET’s performance, but rather should be considered as an additional, supplemental measure, and should be viewed in conjunction with net income as presented in the consolidated financial statements included in this report. FFO does not represent cash generated from operating activities in accordance with GAAP, and is not necessarily indicative of sufficient cash flow to fund all of IRET’s needs or its ability to service indebtedness or make distributions. 

FFO applicable to common shares and limited partnership units for the fiscal year ended April 30, 2005 increased to $42.3 million, compared to $36.6 million and $34.2 million for the fiscal years ended April 30, 2004 and 2003, respectively. 

Reconciliation of Net Income to Funds From Operations 

For the years ended April 30, 2005, 2004 and 2003: 

(1) Real estate depreciation and amortization consists of the sum of depreciation/amortization related to real estate investments; amortization; and amortization of related party costs from the Consolidated Statements of Operations, totaling $35,356, $24,806 and $18,952, and depreciation and amortization from Discontinued Operations (excluding amortization of financing charges) of $441, $1,228 and $1,355, less corporate-related depreciation and amortization on office equipment and other assets of $200, $160 and $92 and less amortization of financing costs of $1,255, $795 and $589, for the fiscal years ended April 30, 2005, 2004 and 2003, respectively. 

(2)  UPREIT Units of the Operating Partnership are exchangeable for common shares of beneficial interest on a one-for-one basis. 

(3)  Net income is calculated on a per share basis. FFO is calculated on a per share and unit basis. 

Cash Distributions 

The following cash distributions were paid to our common shareholders and UPREIT unitholders during fiscal years 2005, 2004, and 2003: 

Date	2005		2004		2003
July 1,	$	.1605	$	.1585	$	.1540
October 1,		.1610		.1590		.1560
January 15,		.1615		.1595		.1570
April 1,		.1620		.1600		.1580
	$	.6450	$	.6370	$	.6250

 

The fiscal year 2005 cash distributions increased 1% over the cash distributions paid during fiscal year 2004 and 3% over fiscal year 2003 distributions.

 

Liquidity and Capital Resources 

Overview 

Management expects that the Company’s principal liquidity demands will continue to be distributions to holders of the Company’s preferred and common shares of beneficial interest and UPREIT Units, capital improvements and repairs and maintenance to the Company’s properties, acquisition of additional properties, redemption of outstanding investment certificates, property development, debt repayments and tenant improvements. 

The Company expects to meet its short-term liquidity requirements through net cash flows provided by its operating activities, and through draws from time to time on its unsecured lines of credit. Management considers the Company’s ability to generate cash to be adequate to meet all operating requirements and to make distributions to its shareholders in accordance with the REIT provisions of the Internal Revenue Code. Budgeted expenditures for ongoing maintenance and capital improvements and renovations to our real estate portfolio are expected to be funded from cash flow generated from operations of current properties. 

To the extent the Company does not satisfy its long-term liquidity requirements, which consist primarily of maturities under the Company’s long-term debt, maturing investment certificates, construction and development activities and potential acquisition opportunities, through net cash flows provided by operating activities and its credit facilities, the Company intends to satisfy such requirements through a combination of funding sources which the Company believes will be available to it, including the issuance of UPREIT Units, additional common or preferred equity, proceeds from the sale of properties, and additional long-term secured or unsecured indebtedness. 

Sources and Uses of Cash 

As of April 30, 2005, the Company had three unsecured lines of credit in the amounts of $10.0 million, $10.0 million and $4.4 million, respectively, from (1) Bremer Bank, Minot, ND; (2) First Western Bank and Trust, Minot, ND; and (3) First International Bank and Trust, Watford City, ND. The Company had no outstanding borrowings on these lines as of April 30, 2005. Borrowings under the lines of credit bear interest based on the following for each of the lines of credit described above: (1) Bremer Financial Corporation Reference Rate, (2) the highest New York Prime rate as published in the Wall Street Journal, and (3) the highest New York Prime rate as published in the Wall Street Journal. Increases in interest rates will increase the Company’s interest expense on any borrowings under its lines of credit and as a result will affect the Company’s results of operations and cash flows. The Company’s lines of credit with Bremer Bank and First Western Bank expire September 14, 2005, and September 1, 2005, respectively.  The Company’s line of credit with First International Bank and Trust expires on December 7, 2005. The Company will seek to renew each of these three lines of credit prior to their expiration. 

In addition to the above-described three unsecured lines of credit, the Company’s operating partnership, IRET Properties, in April 2004 entered into a $25.0 million unsecured bridge loan in connection with the Company’s acquisition of 15 commercial and medical properties located primarily in Duluth, Minnesota and the surrounding area (“Duluth Portfolio”). The bridge loan from Wells Fargo Bank, National Association was repaid on July 22, 2004, with the proceeds of mortgage loans placed against the properties in the Duluth Portfolio. 

In February 2004, the Company filed a shelf registration statement on Form S-3 to offer for sale from time to time common shares and preferred shares. This registration statement was declared effective in April 2004. We may sell any combination of common shares and preferred shares up to aggregate initial offering price of $150 million during the period that the registration statement remains effective. On April 26, 2004, the Company issued 1.15 million shares of its 8.25% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest (“Series A preferred shares”), with a $25.00 liquidation preference per share, under this registration statement. This offering generated net proceeds to the Company of approximately $27.3 million to fund property acquisitions, development, and improvements. The Series A preferred shares are redeemable by the Company at any time on or after April 26, 2009, at a redemption price of $25.00 per share, plus any accumulated, accrued and unpaid distributions. Each Series A preferred share will receive an annual distribution equivalent to 8.25% of the liquidation preference per share (equivalent to a fixed annual amount of $2.06 per share).  In May 2004, the Company completed the sale of 0.5 million of its common shares of beneficial interest in a public offering under this registration statement, at a price of $10.10 per share, resulting in net proceeds to the Company of approximately $5.2 million. In a public offering commenced in October 2004 and closed in November 2004, the Company issued approximately 1.4 million common shares under this registration statement, at a price of $10.15 per share, resulting in net proceeds to the

Company of approximately $13.4 million. As of April 30, 2005, the Company had available securities under this registration statement in the aggregate amount of approximately $101.5 million. 

The issuance of UPREIT Units for property acquisitions continues to be a source of capital for the Company.  Approximately 2.0 million units were issued in connection with property acquisitions during fiscal year 2005, and approximately 2.0 million units were issued in connection with property acquisitions during fiscal year 2004. 

As a result of the sales of common shares described above and the conversion of UPREIT units, shareholder equity increased during fiscal 2005 by $15.8 million. Additionally, the equity capital of the Company was increased by $20.1 million as a result of contributions of real estate in exchange for UPREIT units, as summarized above, resulting in a total increase in equity capital for the Company of $35.9 million. 

The Company has a Distribution Reinvestment Plan (“DRIP”). The DRIP provides shareholders of the Company an opportunity to invest their cash distributions in common shares of the Company at a discount of 5% from the market price. During fiscal year 2005, 1.1 million common shares were issued under this plan, with an additional 1.1 million common shares issued during fiscal year 2004. 

Cash and cash equivalents on April 30, 2005 totaled $23.5 million, compared to $31.7 million and $18.0 million on the same date in 2004 and 2003, respectively. Net cash provided from operating activities increased to $46.7 million in fiscal year 2005 from $28.7 million in fiscal year 2004, due primarily to increased net income and increase for non-cash item of depreciation and amortization. Net cash provided from operating activities in fiscal year 2003 was $37.9 million. 

Net cash used in investing activities decreased to $68.9 million in fiscal year 2005, from $137.7 million in fiscal year 2004. Net cash used in investing activities was $65.7 million in fiscal year 2003. This decrease resulted because of a lower level of property investment activity during the year. Net cash provided from financing activities also decreased to $14.0 million during fiscal year 2005, from $122.7 million during fiscal year 2004, due to fewer offerings of equity securities compared to the previous year. Net cash provided from financing activities was $23.0 million during fiscal year 2003. 

Financial Condition 

Mortgage Loan Indebtedness. Mortgage loan indebtedness increased to $708.6 million on April 30, 2005, due to the acquisition of new investment properties, from $633.1 million on April 30, 2004. Approximately 96.2% of such mortgage debt is at fixed rates of interest, with staggered maturities. This limits the Company’s exposure to changes in interest rates, which minimizes the effect of interest rate fluctuations on the Company’s results of operations and cash flows. As of April 30, 2005, the weighted average rate of interest on the Company’s mortgage debt was 6.08%, compared to 7.17% on April 30, 2004. 

Mortgage Loans Receivable. Mortgage loans receivable decreased to $0.6 million at April 30, 2005, from $4.9 million at April 30, 2004. 

Real Estate Owned. Real estate owned increased to $1,179.9 million at April 30, 2005, from $1,082.8 million at April 30, 2004. The increase resulted primarily from the acquisition of the additional investment properties net of dispositions as described in the “Property Acquisitions” and “Property Dispositions” subsections of this Management’s Discussion and Analysis of Financial Condition and Results of Operations. 

Investment Certificates. We discontinued the issuance of investment certificates in April 2002. As of April 30, 2005, $4.6 million of such certificates was outstanding. 

Cash and Cash Equivalents. Cash and cash equivalents on April 30, 2005, totaled $23.5 million, compared to $31.7 million on April 30, 2004. The increase in cash on hand from April 30, 2005, as compared to April 30, 2004, was due primarily to the sale of common shares in October and November 2004. 

Marketable Securities. During fiscal year 2005, IRET increased its investment in marketable securities classified as available-for-sale to $2.5 million on April 30, 2005, from $2.3 million on April 30, 2004. Marketable securities are held available for sale and, from time to time, the Company invests excess funds in such securities or uses the funds so invested for operational purposes.

Operating Partnership Units. Outstanding limited partnership units in the Operating Partnership increased to 13.1 million units on April 30, 2005, compared to 11.8 million units outstanding on April 30, 2004. The increase in units outstanding at April 30, 2005 as compared to April 30, 2004, resulted primarily from the issuance of additional limited partnership units to acquire interests in real estate, net of units converted to shares. 

Common and Preferred Shares of Beneficial Interest. Common shares of beneficial interest outstanding on April 30, 2005 totaled 45.2 million compared to 41.7 million common shares outstanding on April 30, 2004. This increase in common shares outstanding from April 30, 2004, to April 30, 2005, was primarily due to the public offerings of common shares completed during fiscal year 2005, and to the issuance of common shares pursuant to our distribution reinvestment plan. Preferred shares of beneficial interest outstanding on April 30, 2005 and 2004 totaled 1.15 million. 

Contractual Obligations and Other Commitments 

The primary contractual obligations of the Company relate to its borrowings under its three lines of credit and mortgage notes payable. The Company’s lines of credit had no amounts outstanding at April 30, 2005. The principal and interest payments on the mortgage notes payable for the years subsequent to April 30, 2005, are included in the table below as “long-term debt.” The other debt category consists of a mortgage note payable on our Minneapolis, Minnesota office. 

The Company has sold investment certificates to the public, with interest rates varying from 6.5% to 9.0% per annum. The sales of these investment certificates has been discontinued and the outstanding certificates will be redeemed at they mature. Amounts due in respect of these investment certificates are reflected in the “Investment Certificates” category below. 

As of April 30, 2005, the Company is a tenant under operating ground leases on six of its properties. The Company pays a total of approximately $292,222 per year in rent under these ground leases, which have terms ranging from 7 to 90 years, and expiration dates ranging from July 2012 to April 2095. 

Purchase obligations of the Company represent those costs that the Company is contractually obligated to pay in the future. The Company’s significant contractual obligations as of April 30, 2005, are summarized in the following table. The significant components in this category are costs for construction and expansion projects and capital improvements at the Company’s properties. Contractual obligations that are contingent upon the achievement of certain milestones are not included in the table below, nor are service orders or contracts for the provision of routine maintenance services at our properties, such as landscaping and grounds maintenance, since these arrangements are generally based on current needs, are filled by our service providers within short time horizons, and may be cancelled without penalty. The expected timing of payment of the obligations discussed below is estimated based on current information. 

	(in thousands)
	Total		Less Than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Long-term debt (principal and interest)	$	1,068,300	$	64,942	$	150,924	$	228,734	$	623,700
Other Debt	$	847	$	275	$	92	$	480	$	0
Investment Certificates	$	4,636	$	2,253	$	2,383	$	0	$	0
Operating Lease Obligations	$	19,044	$	292	$	601	$	601	$	17,500
Purchase Obligations	$	1,369	$	551	$	818	$	0	$	0

 

Not included in the above table are the following completed and pending property acquisitions: as of April 30, 2005, the Company had signed purchase agreements to acquire two medical office buildings in St. Paul and Minneapolis, Minnesota, respectively, for purchase prices totaling $19.8 million.  These purchases closed on June 7, 2005.  See “Recent Developments” below, and Note 20, Subsequent Events, for further information on these purchases. Additionally, as of April 30, 2005, the Company had signed purchase agreements to acquire five office/industrial properties located in or near Omaha, Nebraska, for purchase prices totaling $7.25 million. These pending acquisitions are subject to certain closing conditions and contingencies, and no assurances can be given that these transactions will be completed.

 

Off-Balance-Sheet Arrangements 

As of April 30, 2005, we did not have any significant off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K. 

Recent Developments 

Common and Preferred Share Distributions. On June 30, 2005, the Company paid a distribution of 51.56 cents per share on the Company’s Series A Cumulative Redeemable Preferred Shares to preferred shareholders of record on June 15, 2005. On July 1, 2005, the Company paid a distribution of 16.25 cents per share on the Company’s common shares of beneficial interest, to common shareholders and UPREIT unitholders of record on June 17, 2005. This distribution represented an increase of .05 cents or .3% over the previous regular quarterly distribution of 16.20 cents per common share/unit paid April 1, 2005. 

Acquisitions. The Company closed on the following acquisitions subsequent to its April 30, 2005 fiscal year end: 

Ritchie Medical Plaza and 2800 Medical Building.  On June 7, 2005, the Company closed on its acquisition of two medical office buildings in St. Paul and Minneapolis, Minnesota, respectively.  The Company paid approximately $10.8 million to acquire seven condominium units totaling 50,409 square feet in Ritchie Medical Plaza in St. Paul, and approximately $9.0 million to acquire the 2800 Medical Building in Minneapolis, an approximately 54,971 square foot building.  

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 our current and future fixed and variable rate debt obligations, and secondarily to our deposits with and investments in certain products issued by various financial institutions. 

Variable interest rates. Even though our goal is to maintain a fairly low exposure to interest rate fluctuation risk, we are still vulnerable to significant fluctuations in interest rates on variable rate debt, on any future repricing or refinancing of our fixed rate debt and on future debt. We primarily use long-term (more than nine years) and medium term (five to seven years) debt as a source of capital. We do not currently use derivative securities, interest-rate swaps or any other type of hedging activity to manage our interest rate risk. As of April 30, 2005, we had the following amount of future principal and interest payments due on mortgages secured by our real estate. 

	Future Principal Payments (in thousands)
Long Term Debt		2006		2007		2008		2009		2010		Thereafter		Total
Fixed Rate	$	17,724	$	19,125	$	38,877	$	41,793	$	104,776	$	459,222	$	681,517
Variable Rate		1,169		2,025		1,253		3,917		1,258		17,419		27,041
													$	708,558
Average Interest Rate (%)		(1)		(1)		(1)		(1)		(1)		(1)		(1)

  

	Future Interest Payments (in thousands)
Long Term Debt		2006		2007		2008		2009		2010		Thereafter		Total
Fixed Rate	$	43,867	$	43,396	$	42,140	$	38,946	$	34,578	$	143,380	$	346,307
Variable Rate		2,182		2,108		2,000		1,782		1,684		3,679		13,435
													$	359,742
Average Interest Rate (%)		(1)		(1)		(1)		(1)		(1)		(1)		(1)

 

(1)  The weighted average interest rate on our debt as of April 30, 2005, was 6.08%. Any fluctuations in variable interest rates could increase or decrease our interest expenses. For example, an increase of one percent per annum on our $27.0 million of variable rate indebtedness would increase our annual interest expense by $270,000.

 

Marketable Securities. IRET’s investments in securities are classified as “available-for-sale.” The securities classified as “available-for-sale” represent investments in debt and equity securities which the Company intends to hold for an indefinite period of time. As of April 30, 2005 and 2004, IRET had approximately $2.5 million and $2.3 million, respectively, of marketable securities classified as “available for sale,” consisting of securities of various issuers, primarily U.S. Government, U.S. agency and corporate bonds and bank certificates of deposit, held in IRET Properties’ security deposit account with Merrill Lynch. IRET had no securities classified as “available-for-sale” as of April 30, 2003. The values of these securities will fluctuate with changes in market interest rates. 

Investments with Certain Financial Institutions. IRET has entered into a cash management arrangement with First Western Bank with respect to deposit accounts with First Western Bank that exceed FDIC Insurance coverage. On a daily basis, account balances are invested in U.S. Government securities sold to IRET by First Western Bank. IRET can require First Western Bank to repurchase such securities at any time, at a purchase price equal to what IRET paid for the securities, plus interest. First Western Bank automatically repurchases obligations when collected amounts on deposit in IRET’s deposit accounts fall below the maximum insurance amount, with the proceeds of such repurchases being transferred to IRET’s deposit accounts to bring the amount on deposit back up to the threshold amount. The amounts invested by IRET pursuant to the repurchase agreement are not insured by FDIC. 

IRET has entered into a cash management arrangement with US Bank with respect to IRET depository accounts at multiple US Bank locations. Account balances are swept daily to an IRET master account. Amounts in the master account are invested overnight in short-term U.S. Government securities and repurchase agreements secured by U.S. Government securities. Amounts invested were $2.0 million as of April 30, 2005, $7.5 million as of April 30, 2004, and $3.5 million as of April 30, 2003. 

Deposits exceeding FDIC insurance. The Company is potentially exposed to off-balance-sheet risk in respect of cash deposited with FDIC-insured financial institutions in accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. 

Item 8. Financial Statements and Supplementary Data 

Financial statements required by this item appear with an Index to Financial Statements and Schedules, starting on page F-1 of this report. 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 

Not applicable. 

Item 9A. Controls and Procedures  

Disclosure Controls and Procedures:  As of April 30, 2005, the end of the period covered by this Annual Report on Form 10-K, our management carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Operating Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange act of 1934, as amended).  Based upon that evaluation, the Company’s Chief Executive Officer, 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. 

Internal Control Over Financial Reporting:  There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities and Exchange Act of 1934, as amended) during the fourth quarter of the fiscal year to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

  

Management of Investors Real Estate Trust (together with its consolidated subsidiaries, the “Company’), is responsible for establishing and maintaining adequate internal control over financial reporting.  The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with United States generally accepted accounting principles. 

As of April 30, 2005, management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting, based on the framework established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Based on this assessment, management has determined that the Company’s internal control over financial reporting as of April 30, 2005, is effective. 

The Company’s internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and acquisitions and dispositions of assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with United States generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the trustees of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Company assets that could have a material effect on the Company’s financial statements. 

Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of April 30, 2005, has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing below, which expresses unqualified opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting as of April 30, 2005.

(The remainder of this page has been intentionally left blank.)

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 

To the Board of Directors and Shareholders of
Investors Real Estate Trust
Minot, North Dakota 

We have audited management's assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Investors Real Estate Trust and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of April 30, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting.  Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit. 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinions. 

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. 

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.  Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 

In our opinion, management's assessment that the Company maintained effective internal control over financial reporting as of April 30, 2005, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of April 30, 2005, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements  as of and for the year ended April 30, 2005, of the Company and our report dated June 28, 2005, expressed an unqualified opinion on those financial statements. 

/s/ DELOITTE & TOUCHE LLP 

Minneapolis, MN
June 28, 2005

Item 9B.  Other Information 

None. 

PART III 

Item 10. Trustees 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 2005 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 2005 Annual Meeting of Shareholders and such information is incorporated herein by reference. 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 

The information required by this Item will be contained in our definitive Proxy Statement for our 2005 Annual Meeting of Shareholders and such information is incorporated herein by reference. We do not have any equity compensation plans and, accordingly, are not required to include 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 2005 Annual Meeting of Shareholders and such information is incorporated herein by reference. 

Item 14. Principal Accountant Fees and Services 

The information required by this Item will be contained in our definitive Proxy Statement for our 2005 Annual Meeting of Shareholders and such information is incorporated herein by reference.

 

PART IV 

Item 15. Exhibits, Financial Statement Schedules  

(a)         The following documents are filed as part of this report: 

1.  Financial Statements 

The response to this portion of Item 15 is submitted as a separate section of this report. See the table of contents to Financial Statements and Supplemental Data. 

2. Financial Statement Schedules 

The response to this portion of Item 15 is submitted as a separate section of this report. The following financial statement schedules should be read in conjunction with the financial statements referenced in Part II, Item 8 of this Annual Report on Form 10-K: 

III Real Estate Owned and Accumulated Depreciation 

IV Investments in Mortgage Loans on Real Estate 

3. Exhibits  

See the list of exhibits set forth in part (b) below.

(b)         The following is a list of Exhibits to this Annual Report on Form 10-K. We will furnish a copy of any exhibit listed below to any security holder who requests it upon payment of a fee of 15 cents per page. All Exhibits are either contained in this Annual Report on Form 10-K or are incorporated by reference as indicated below. 

3.1         Articles of Amendment and Third Restated Declaration of Trust of Investors Real Estate Trust, dated September 23, 2003, and incorporated herein by reference to Exhibit A to the Company’s Definitive Proxy Statement on Schedule 14A for the 2003 Annual Meeting of Shareholders, filed with the SEC on August 13, 2003. 

3.2         Second Restated Trustees’ Regulations (Bylaws), dated September 24, 2003, and incorporated herein by reference to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended October 31, 2003, filed with the SEC on December 15, 2003. 

3.3         Agreement of Limited Partnership of IRET Properties, A North Dakota Limited Partnership, dated January 31, 1997, filed as Exhibit 3(ii) to the Registration Statement on Form S-11, effective March 14, 1997 (SEC File No. 333-21945) filed for the Registrant on February 18, 1997, (File No. 0-14851) and incorporated herein by reference. 

3.4         Articles Supplementary classifying and designating 8.25% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest, filed as Exhibit 3.2 to the Company’s Form 8-A filed on April 22, 2004, and incorporated herein by reference. 

10.1       Member Control and Operating Agreement dated September 30, 2002, filed as Exhibit 10 to the Company’s Form 8-K filed October 15, 2003, and incorporated herein by reference. 

10.2       Letter Agreement dated January 31, 2003, filed as Exhibit 10(i) to the Company’s Form 8-K filed February 27, 2003, and incorporated herein by reference.

10.3       Option Agreement dated January 31, 2003, filed as Exhibit 10(ii) to the Company’s Form 8-K filed February 27, 2003, and incorporated herein by reference.

10.4       Financial Statements of T.F. James Company filed as Exhibit 10 to the Company’s Form 8-K filed January 31, 2003, and incorporated herein by reference. 

10.5       Agreement for Purchase and Sale of Property dated February 13, 2004, by and between IRET Properties and the Sellers specified therein, filed as Exhibit 10.5 to the Company’s Form 10-K filed July 20, 2004, and incorporated herein by reference. 

10.6       Description of Compensation of Executive Officers, filed as Exhibit 10 to the Company’s Form 10-Q filed March 11, 2005, and incorporated herein by reference. 

21.1       Subsidiaries of Investors Real Estate Trust, filed herewith. 

23.1       Consent of Deloitte & Touche LLP, filed herewith. 

23.2       Consent of Brady, Martz & Associates P.C., filed herewith. 

31.1       Section 302 Certification of President and Chief Executive Officer, filed herewith. 

31.2       Section 302 Certification of Senior Vice President and Chief Financial Officer, filed herewith. 

32.1       Section 906 Certification of the President and Chief Executive Officer, filed herewith. 

32.2       Section 906 Certification of the Senior Vice President and Chief Financial Officer, filed herewith.

 

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. 

Date: July 13, 2005	Investors Real Estate Trust
	By:	/s/ Thomas A. Wentz, Sr.
		Thomas A. Wentz, Sr.
		President & Chief Executive Officer

 

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: 

Signature		Title		Date
/s/ Jeffrey L. Miller   Jeffrey L. Miller		Trustee & Chairman		July 13, 2005
/s/ Daniel L. Feist   Daniel L. Feist		Trustee & Vice Chairman		July 13, 2005
/s/ Thomas A. Wentz. Sr.   Thomas A. Wentz, Sr.		President & Chief Executive Officer (Principal Executive Officer)		July 13, 2005
/s/ Timothy P. Mihalick   Timothy P. Mihalick		Trustee, Senior Vice President & Chief Operating Officer		July 13, 2005
/s/ Thomas A. Wentz, Jr.   Thomas A. Wentz, Jr.		Trustee & Senior Vice President		July 13, 2005
/s/ Diane K. Bryantt    Diane K. Bryantt		Senior Vice President & Chief Financial Officer (Principal Financial and Accounting Officer)		July 13, 2005
/s/ Charles Wm. James    Charles Wm. James		Trustee & Senior Vice President		July 13, 2005
/s/ John D. Stewart    John D. Stewart		Trustee		July 13, 2005
/s/ Patrick G. Jones   Patrick G. Jones		Trustee		July 13, 2005
/s/ Stephen L. Stenehjem   Stephen L. Stenehjem		Trustee		July 13, 2005