Item 1. Financial Statements
Item 1. Financial Statements.
INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in thousands, except per share data)
June 30, 2020
December 31, 2019
ASSETS
Real estate investments
Property owned
$
1,694,033
$
1,643,078
Less accumulated depreciation
( 383,917
)
( 349,122
)
1,310,116
1,293,956
Unimproved land
—
1,376
Mortgage loans receivable
10,961
16,140
Total real estate investments
1,321,077
1,311,472
Cash and cash equivalents
52,714
26,579
Restricted cash
2,535
19,538
Other assets
16,484
34,829
TOTAL ASSETS
$
1,392,810
$
1,392,418
LIABILITIES, MEZZANINE EQUITY, AND EQUITY
LIABILITIES
Accounts payable and accrued expenses
$
54,883
$
47,155
Revolving lines of credit
63,000
50,079
Notes payable, net of unamortized loan costs of $845 and $942 respectively
269,155
269,058
Mortgages payable, net of unamortized loan costs of $1,525 and $1,712, respectively
323,705
329,664
TOTAL LIABILITIES
$
710,743
$
695,956
COMMITMENTS AND CONTINGENCIES (NOTE 10)
SERIES D PREFERRED UNITS (Cumulative convertible preferred units, $100 par value, 166 units issued and outstanding at June 30, 2020 and December 31, 2019, aggregate liquidation preference of $16,560)
$
16,560
$
16,560
EQUITY
Series C Preferred Shares of Beneficial Interest (Cumulative redeemable preferred shares, no par value, $25 per share liquidation preference, 3,883 shares issued and outstanding at June 30, 2020, aggregate liquidation preference of $97,085 and 4,118 shares issued and outstanding at December 31, 2019, aggregate liquidation preference of $102,971)
93,579
99,456
Common Shares of Beneficial Interest (Unlimited authorization, no par value, 12,827 shares issued and outstanding at June 30, 2020 and 12,098 shares issued and outstanding at December 31, 2019)
958,292
917,400
Accumulated distributions in excess of net income
( 421,515
)
( 390,196
)
Accumulated other comprehensive income (loss)
( 18,139
)
( 7,607
)
Total shareholders’ equity
$
612,217
$
619,053
Noncontrolling interests – Operating Partnership (1,022 units at June 30, 2020 and 1,058 units at December 31, 2019)
52,558
55,284
Noncontrolling interests – consolidated real estate entities
732
5,565
Total equity
$
665,507
$
679,902
TOTAL LIABILITIES, MEZZANINE EQUITY, AND EQUITY
$
1,392,810
$
1,392,418
See accompanying Notes to Condensed Consolidated Financial Statements.
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INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(in thousands, except per share data)
Three Months Ended June 30,
Six Months Ended June 30,
2020
2019
2020
2019
REVENUE
$
43,910
$
46,934
$
88,316
$
92,542
EXPENSES
Property operating expenses, excluding real estate taxes
12,360
13,942
25,828
28,746
Real estate taxes
5,410
5,574
10,875
10,806
Property management expense
1,345
1,445
2,899
2,999
Casualty loss
913
92
1,240
733
Depreciation and amortization
18,156
18,437
36,316
36,548
General and administrative expenses
3,202
3,549
6,630
7,355
TOTAL EXPENSES
$
41,386
$
43,039
$
83,788
$
87,187
Operating income (loss)
2,524
3,895
4,528
5,355
Interest expense
( 6,940
)
( 7,590
)
( 13,851
)
( 15,486
)
Loss on extinguishment of debt
( 17
)
( 407
)
( 17
)
( 409
)
Interest and other income (loss)
538
468
( 2,239
)
892
Income (loss) before gain (loss) on sale of real estate and other investments, and gain (loss) on litigation settlement
( 3,895
)
( 3,634
)
( 11,579
)
( 9,648
)
Gain (loss) on sale of real estate and other investments
( 190
)
615
( 190
)
669
Gain (loss) on litigation settlement
—
6,286
—
6,286
NET INCOME (LOSS)
$
( 4,085
)
$
3,267
$
( 11,769
)
$
( 2,693
)
Dividends to preferred unitholders
( 160
)
( 160
)
( 320
)
( 217
)
Net (income) loss attributable to noncontrolling interests – Operating Partnership
447
( 148
)
1,139
595
Net (income) loss attributable to noncontrolling interests – consolidated real estate entities
( 5
)
154
140
730
Net income (loss) attributable to controlling interests
( 3,803
)
3,113
( 10,810
)
( 1,585
)
Dividends to preferred shareholders
( 1,609
)
( 1,706
)
( 3,314
)
( 3,411
)
Discount on redemption of preferred shares
25
—
298
—
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
$
( 5,387
)
$
1,407
$
( 13,826
)
$
( 4,996
)
BASIC
NET EARNINGS (LOSS) PER COMMON SHARE – BASIC
$
( 0.44
)
$
0.11
$
( 1.13
)
$
( 0.43
)
DILUTED
NET EARNINGS (LOSS) PER COMMON SHARE – DILUTED
$
( 0.44
)
$
0.11
$
( 1.13
)
$
( 0.43
)
See accompanying Notes to Condensed Consolidated Financial Statements.
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INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
(in thousands)
Three Months Ended June 30,
Six Months Ended June 30,
2020
2019
2020
2019
Net income (loss)
$
( 4,085
)
$
3,267
$
( 11,769
)
$
( 2,693
)
Other comprehensive income:
Unrealized gain (loss) from derivative instrument
( 1,696
)
( 4,430
)
( 11,105
)
( 6,712
)
(Gain) loss on derivative instrument reclassified into earnings
917
( 29
)
573
( 30
)
Total comprehensive income (loss)
$
( 4,864
)
$
( 1,192
)
$
( 22,301
)
$
( 9,435
)
Net comprehensive (income) loss attributable to noncontrolling interests – Operating Partnership
504
275
1,967
1,255
Net (income) loss attributable to noncontrolling interests – consolidated real estate entities
( 5
)
154
140
730
Comprehensive income (loss) attributable to controlling interests
$
( 4,365
)
$
( 763
)
$
( 20,194
)
$
( 7,450
)
See accompanying Notes to Condensed Consolidated Financial Statements.
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INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (unaudited)
(in thousands, except per share data)
Six Months Ended June 30, 2019
PREFERRED
SHARES
NUMBER
OF
COMMON
SHARES
COMMON
SHARES
ACCUMULATED
DISTRIBUTIONS
IN EXCESS OF
NET INCOME
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
NONREDEEMABLE
NONCONTROLLING
INTERESTS
TOTAL
EQUITY
Balance December 31, 2018
$
99,456
11,942
$
899,234
$
( 429,048
)
$
( 856
)
$
74,663
$
643,449
Net income (loss) attributable to controlling interests and nonredeemable noncontrolling interests
( 1,585
)
( 1,151
)
( 2,736
)
Change in fair value of derivatives
( 6,742
)
( 6,742
)
Distributions - common shares and units ($0.70 per share and unit)
( 16,389
)
( 1,816
)
( 18,205
)
Distributions – Series C preferred shares ($0.4140625 per Series C share)
( 3,411
)
( 3,411
)
Share-based compensation, net of forfeitures
3
981
981
Redemption of units for common shares
8
( 521
)
521
—
Redemption of units for cash
( 8,124
)
( 8,124
)
Shares repurchased
( 290
)
( 15,677
)
( 15,677
)
Acquisition of redeemable noncontrolling interests
4,529
4,529
Other
( 7
)
( 5
)
( 59
)
( 64
)
Balance June 30, 2019
$
99,456
11,656
$
888,541
$
( 450,433
)
$
( 7,598
)
$
64,034
$
594,000
Six Months Ended June 30, 2020
Balance December 31, 2019
$
99,456
12,098
$
917,400
$
( 390,196
)
$
( 7,607
)
$
60,849
$
679,902
Net income (loss) attributable to controlling interests and noncontrolling interests
( 10,810
)
( 1,279
)
( 12,089
)
Change in fair value of derivatives
( 10,532
)
( 10,532
)
Distributions - common shares and units ($0.70 per share and unit)
( 17,493
)
( 1,446
)
( 18,939
)
Distributions – Series C preferred shares ($0.4140625 per Series C share)
( 3,314
)
( 3,314
)
Share-based compensation, net of forfeitures
19
967
967
Sale of common shares, net
674
48,141
48,141
Redemption of units for common shares
36
118
( 118
)
—
Redemption of units for cash
( 23
)
( 23
)
Shares repurchased
( 5,877
)
—
—
298
( 5,579
)
Acquisition of noncontrolling interests
( 7,584
)
( 4,637
)
( 12,221
)
Other
—
( 750
)
( 56
)
( 806
)
Balance June 30, 2020
$
93,579
12,827
$
958,292
$
( 421,515
)
$
( 18,139
)
$
53,290
$
665,507
See accompanying Notes to Condensed Consolidated Financial Statements.
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INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (unaudited)
(in thousands, except per share data)
Three Months Ended June 30, 2019
PREFERRED
SHARES
NUMBER
OF
COMMON
SHARES
COMMON
SHARES
ACCUMULATED
DISTRIBUTIONS
IN EXCESS OF
NET INCOME
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
NONREDEEMABLE
NONCONTROLLING
INTERESTS
TOTAL
EQUITY
Balance March 31, 2019
$
99,456
11,768
$
895,381
$
( 443,661
)
$
( 3,139
)
$
72,355
$
620,392
Net income (loss) attributable to controlling interests and nonredeemable noncontrolling interests
3,113
( 6
)
3,107
Change in fair value of derivatives
( 4,459
)
( 4,459
)
Distributions - common shares and units ($0.70 per share and unit)
( 8,179
)
( 859
)
( 9,038
)
Distributions – Series C preferred shares ($0.4140625 per Series C share)
( 1,706
)
( 1,706
)
Share-based compensation, net of forfeitures
3
565
565
Redemption of units for common shares
8
( 521
)
521
—
Redemption of units for cash
( 7,968
)
( 7,968
)
Shares repurchased
( 116
)
( 6,863
)
( 6,863
)
Other
( 7
)
( 21
)
( 9
)
( 30
)
Balance June 30, 2019
$
99,456
11,656
$
888,541
$
( 450,433
)
$
( 7,598
)
$
64,034
$
594,000
Three Months Ended June 30, 2020
Balance March 31, 2020
$
96,046
12,163
$
912,653
$
( 407,150
)
$
( 17,360
)
$
55,527
$
639,716
Net income (loss) attributable to controlling interests and noncontrolling interests
( 3,803
)
( 442
)
( 4,245
)
Change in fair value of derivatives
( 779
)
( 779
)
Distributions - common shares and units ($0.70 per share and unit)
( 8,978
)
( 715
)
( 9,693
)
Distributions – Series C preferred shares ($0.4140625 per Series C share)
( 1,609
)
( 1,609
)
Share-based compensation, net of forfeitures
18
502
502
Sale of common shares, net
624
44,789
44,789
Redemption of units for common shares
22
1,048
( 1,048
)
—
Redemption of units for cash
( 9
)
( 9
)
Shares repurchased
( 2,467
)
25
( 2,442
)
Other
—
( 700
)
( 23
)
( 723
)
Balance June 30, 2020
$
93,579
12,827
$
958,292
$
( 421,515
)
$
( 18,139
)
$
53,290
$
665,507
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INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)
Six Months Ended
June 30,
2020
2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)
$
( 11,769
)
$
( 2,693
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization, including amortization of capitalized loan costs
36,829
37,136
(Gain) loss on sale of real estate and other investments
190
( 669
)
Realized (gain) loss on marketable securities
3,378
—
(Gain) loss on litigation settlement
—
( 2,286
)
Share-based compensation expense
967
981
Other, net
909
1,350
Changes in other assets and liabilities:
Other assets
( 2,036
)
( 1,745
)
Accounts payable and accrued expenses
( 3,192
)
( 3,468
)
Net cash provided by (used by) operating activities
$
25,276
$
28,606
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of marketable securities
3,856
—
Principal proceeds on mortgage loans receivable
10,020
—
Increase in mortgages and notes receivable
( 11,162
)
( 159
)
Proceeds from sale of real estate and other investments
1,162
9,882
Payments for acquisitions of real estate assets
( 22,770
)
( 29,918
)
Payments for improvements of real estate assets
( 12,428
)
( 6,317
)
Other investing activities
633
282
Net cash provided by (used by) investing activities
$
( 30,689
)
$
( 26,230
)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on mortgages payable
( 6,392
)
( 74,614
)
Proceeds from revolving lines of credit
41,578
146,439
Principal payments on revolving lines of credit
( 28,656
)
( 26,000
)
Payments for acquisition of noncontrolling interests – consolidated real estate entities
( 12,221
)
( 1,260
)
Proceeds from issuance of common shares
48,141
—
Repurchase of common shares
—
( 15,677
)
Repurchase of Series C preferred shares
( 5,579
)
—
Repurchase of partnership units
( 23
)
( 8,124
)
Distributions paid to common shareholders
( 16,984
)
( 16,583
)
Distributions paid to preferred shareholders
( 3,314
)
( 1,705
)
Distributions paid to preferred unitholders
( 320
)
( 57
)
Distributions paid to noncontrolling interests – Unitholders of the Operating Partnership
( 1,472
)
( 1,914
)
Other financing activities
( 213
)
( 59
)
Net cash provided by (used by) financing activities
$
14,545
$
446
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
9,132
2,822
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF PERIOD
46,117
19,256
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD
$
55,249
$
22,078
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Accrued capital expenditures
$
( 458
)
$
499
Distributions declared but not paid to common shareholders
9,694
9,038
Distributions declared but not paid to preferred shareholders
—
1,706
Distributions declared but not paid to preferred unitholders
—
160
Gain on litigation settlement
—
2,286
Real estate assets acquired through exchange of note receivable
17,663
—
Note receivable exchanged through real estate acquisition
( 17,663
)
—
Property acquired through issuance of Series D preferred units
—
16,560
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest
$
13,120
$
15,044
See accompanying Notes to Condensed Consolidated Financial Statements.
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INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
for the six months ended June 30, 2020 and 2019
NOTE 1 • ORGANIZATION
Investors Real Estate Trust, collectively with our consolidated subsidiaries (“IRET,” “we,” “us,” or “our”), is a real estate investment trust (“REIT”) focused on the ownership, management, acquisition, redevelopment, and development of apartment communities. As of June 30, 2020 , we owned interests in 70 apartment communities consisting of 12,135 apartment homes.
NOTE 2 • BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
We conduct a majority of our business activities through our consolidated operating partnership, IRET Properties, A North Dakota Limited Partnership (the “Operating Partnership”), as well as through a number of other consolidated subsidiary entities. The accompanying condensed consolidated financial statements include our accounts and the accounts of all our subsidiaries in which we maintain a controlling interest, including the Operating Partnership. All intercompany balances and transactions are eliminated in consolidation.
The condensed consolidated financial statements also reflect the Operating Partnership's ownership of certain joint venture entities in which the Operating Partnership has a general partner or controlling interest. These entities are consolidated into our operations, with noncontrolling interests reflecting the noncontrolling partners’ share of ownership, income, and expenses.
SIGNIFICANT RISKS AND UNCERTAINTIES
The COVID-19 pandemic is a source of significant risk and uncertainty that could have an adverse impact on our business. The COVID-19 pandemic has adversely impacted the global economy and financial markets, and multifamily residents and commercial tenants have experienced financial hardship or closures. We have received requests for rent relief in the form of rent deferrals or rent abatements due to these financial hardships and government-mandated closures. As of June 30, 2020 , $ 68,000 remained outstanding under the rent deferral agreements offered to multifamily residents. During the three months ended June 30, 2020 , we recognized a reduction in revenue of $ 402,000 due to rent abatements to commercial tenants.
The extent to which the COVID-19 pandemic could have an adverse effect on our financial condition, results of operations, and cash flows is uncertain and will depend on future developments. The COVID-19 pandemic has not had a significant adverse effect on our financial condition, results of operations, and cash flows for the six months ended June 30, 2020 ; however, we continue to monitor the impact of the COVID-19 pandemic on all aspects of our business and cannot predict the impact it may have on our financial condition, results of operations, and cash flows in the future.
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Our interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain disclosures accompanying annual consolidated financial statements prepared in accordance with GAAP are omitted. The year-end balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by GAAP. In the opinion of management, all adjustments, consisting solely of normal recurring adjustments necessary for the fair presentation of our financial position, results of operations, and cash flows for the interim periods, have been included.
The current period’s results of operations are not necessarily indicative of results which ultimately may be achieved for the year. The interim condensed consolidated financial statements and accompanying notes thereto should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2019 , as filed with the SEC on February 19, 2020.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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RECENT ACCOUNTING PRONOUNCEMENTS
The following table provides a brief description of recent accounting standards updates (“ASUs”).
Standard
Description
Date of Adoption
Effect on the Financial Statements or Other Significant Matters
ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments; ASU 2018-19, Codification Improvements to Topic 326; ASU 2019-05, Financial Instruments - Credit Losses - Targeted Transition Relief
These ASUs require entities to estimate a lifetime expected credit loss for most financial assets, such as loans and other financial instruments, and to present the net amount expected to be collected. In 2018, another ASU was issued to amend ASU 2016-13, which clarifies that it does not apply to operating lease receivables. In 2019, an additional ASU was issued to provide transition relief in which an entity is allowed to elect the fair value option on an instrument-by-instrument basis for eligible instruments, upon adoption of Topic 326.
These ASUs are effective for annual reporting periods beginning after December 15, 2019. Early adoption is permitted.
We elected the fair value option for all of our mortgages and notes receivable at January 1, 2020, as allowed by ASU 2019-05. As a result, we do not have any receivables or other financial instruments to which we are applying this standard.
ASU 2018-13, Fair Value Measurements (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirement for Fair Value Measurements
This ASU eliminates certain disclosure requirements affecting all levels of measurement, and modifies and adds new disclosure requirements for Level 3 measurements.
This ASU is effective for annual reporting periods beginning after December 15, 2019. Early adoption is permitted.
The new standard did not have a material impact on our condensed consolidated financial statements but did require additional disclosures.
ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting
This ASU contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur.
This ASU is optional and may be elected over time.
We are currently evaluating the practical expedients and the impact they may have on our condensed consolidated financial statements.
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
(in thousands)
Balance sheet description
June 30, 2020
December 31, 2019
June 30, 2019
Cash and cash equivalents
$
52,714
$
26,579
$
17,406
Restricted cash
2,535
19,538
4,672
Total cash, cash equivalents and restricted cash
$
55,249
$
46,117
$
22,078
As of June 30, 2020 , restricted cash consisted primarily of escrows held by lenders for real estate taxes, insurance, and capital additions.
LEASES
Effective January 1, 2019, we adopted ASUs 2016-02, 2018-10, 2018-11, 2018-20, and 2019-01 related to leases using the modified retrospective approach. We elected to adopt the package of practical expedients permitted under the transition guidance, which permits us to not reassess prior conclusions about lease identification, classification, and initial direct costs under the new standard, and the practical expedient related to land easements, which allows us to not evaluate existing or expired land easements that were not previously accounted for under ASC 840. We made an accounting policy election to exclude leases in which we are a lessee with a term of 12 months or less from the balance sheet.
As a lessor, we primarily lease multifamily apartment homes which qualify as operating leases with terms that are generally one year or less. Rental revenues are recognized in accordance with ASC 842, Leases , using a method that represents a straight-line basis over the term of the lease. Rental income represents approximately 98.4 % of our total revenues and includes gross market rent less adjustments for concessions, vacancy loss, and bad debt. Other property revenues represent the remaining 1.6 % of our total revenues and are primarily driven by other fee income, which is typically recognized when earned, at a point in time.
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Some of our apartment communities have commercial spaces available for lease. Lease terms for these spaces typically range from three to fifteen years. The leases for commercial spaces generally include options to extend the lease for additional terms.
Beginning in April 2020, we offered multifamily residents suffering from financial hardship related to the COVID-19 pandemic the option to apply for rent deferral. We also abated rent, common area maintenance, and tax expenses for commercial tenants that experienced government-mandated interruptions or closures of their businesses. We elected to account for these accommodations as though enforceable rights and obligations for the accommodation existed without evaluating if such a right or obligation existed under the lease agreement, as allowed by the FASB Q&A released on April 10, 2020 related to lease modification guidance under ASC 842. The accommodations were recognized as variable lease payments. As of June 30, 2020 , $ 68,000 remained outstanding under the rent deferral agreements offered to multifamily residents. During the three months ended June 30, 2020 , we recognized a reduction in revenue of $ 402,000 due to rent abatements to commercial tenants.
Many of our leases contain non-lease components for utility reimbursement from our residents and common area maintenance from our commercial tenants. We have elected the practical expedient to combine lease and non-lease components for all asset classes. The combined components are included in lease income and are accounted for under ASC 842.
The aggregate amount of future scheduled lease income on our operating leases for commercial spaces, excluding any variable lease income and non-lease components, as of June 30, 2020 , was as follows:
(in thousands)
2020 (remainder)
$
1,490
2021
3,044
2022
3,047
2023
2,870
2024
2,339
Thereafter
5,021
Total scheduled lease income - operating leases
$
17,811
REVENUES
Revenue is recognized in accordance with the transfer of goods and services to customers at an amount that reflects the consideration to which the company expects to be entitled for those goods and services. We elected to omit disclosing the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
Revenue streams that are included in revenues from contracts with customers include:
•
O ther property revenues: We recognize revenue for rental related income not included as a component of a lease, such as application fees, as earned.
•
Gains or losses on sales of real estate: A gain or loss is recognized when the criteria for derecognition of an asset are met, including when (1) a contract exists and (2) the buyer obtained control of the nonfinancial asset that was sold.
The following table presents the disaggregation of revenue streams for the three and six months ended June 30, 2020 :
(in thousands)
Three Months Ended June 30,
Six Months Ended June 30,
Revenue Stream
Applicable Standard
2020
2019
2020
2019
Fixed lease income - operating leases
Leases
$
41,910
$
44,342
$
83,843
$
88,084
Variable lease income - operating leases
Leases
1,302
1,548
3,082
2,632
Other property revenue
Revenue from contracts with customers
698
1,044
1,391
1,826
Total revenue
$
43,910
$
46,934
$
88,316
$
92,542
IMPAIRMENT OF LONG-LIVED ASSETS
We evaluate our long-lived assets, including investments in real estate, for impairment indicators at least quarterly. The impairment evaluation is performed on assets by property such that assets for a property form an asset group. The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions, expected holding period of each asset group, and legal and environmental concerns. If indicators exist, we compare the expected future undiscounted cash flows for the long-lived asset group against the carrying amount of that asset group. If the
11
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sum of the estimated undiscounted cash flows is less than the carrying amount of the asset group, an impairment loss is recorded for the difference between the estimated fair value and the carrying amount of the asset group. If our anticipated holding period for properties, the estimated fair value of properties, or other factors change based on market conditions or otherwise, our evaluation of impairment charges may be different and such differences could be material to our consolidated financial statements. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates, and capital requirements that could differ materially from actual results. Reducing planned property holding periods may increase the likelihood of recording impairment losses.
During the six months ended June 30, 2020 and 2019 , we recorded no impairment charges.
MORTGAGE LOANS RECEIVABLE AND NOTES RECEIVABLE
In August 2017, we sold 13 multifamily communities in exchange for cash and an $ 11.0 million note secured by a mortgage on the assets. As of June 30, 2020 , the note was paid in full. As of December 31, 2019 , the balance of the note was $ 10.0 million , with 12 communities remaining in the pool of assets used to secure the mortgage. During the six months ended June 30, 2020 and 2019 , we received and recognized approximately $ 279,000 and $ 285,000 of interest income, respectively.
In July 2017, we originated a $ 16.2 million loan in a multifamily development located in New Hope, Minnesota, a Minneapolis suburb. We funded an additional $ 341,000 upon satisfaction of certain conditions set forth in the loan agreement. During the six months ended June 30, 2020 , we executed the purchase option for the apartment community (refer to Note 8 for details on acquisition). This note was paid in full as part of our acquisition of this apartment community. As of December 31, 2019 , the balance of the note was $ 16.6 million .
In December 2019, we originated a $ 29.9 million construction loan and a $ 15.3 million mezzanine loan for the development of a multifamily development located in Minneapolis, Minnesota. In conjunction with the loans, we received a guaranty for the substantial completion of the project improvements from an investment grade guarantor. The construction and mezzanine loans bear interest at 4.5 % and 11.5 % , respectively. As of June 30, 2020 and December 31, 2019 , we had funded $ 11.0 million and $ 6.2 million , respectively, of the construction loan, which appears within mortgage loans receivable in our condensed consolidated balance sheets. The loans are secured by mortgages and mature on December 31, 2023, and the agreement provides us with an option to purchase the development. The loans represent an investment in an unconsolidated variable interest entity. We are not the primary beneficiary of the variable interest entity ("VIE") as we do not have the power to direct the activities which most significantly impact the entity’s economic performance nor do we have significant influence over the entity.
In March 2020, in connection with our acquisition of Ironwood, an apartment community in New Hope, Minnesota, we acquired a tax increment financing note receivable ("TIF") with a principal balance of $ 6.6 million . The note bears an interest rate of 4.5 % with payments due in February and August of each year.
VARIABLE INTEREST ENTITIES
We have determined that our Operating Partnership and each of our less-than-wholly owned real estate partnerships is a VIE, as the limited partners or the functional equivalent of limited partners lack substantive kick-out rights and substantive participating rights. We are the primary beneficiary of the VIEs, and the VIEs are required to be consolidated on our balance sheet because we have a controlling financial interest in the VIEs and have both the power to direct the activities of the VIEs that most significantly impact the economic performance of the VIEs as well as the obligation to absorb losses or the right to receive benefits from the VIEs that could potentially be significant to the VIEs. Because our Operating Partnership is a VIE, all of our assets and liabilities are held through a VIE.
During the six months ended June 30, 2020 , we acquired the 47.4 % noncontrolling interests in the real estate partnership that owns 71 France for $ 12.2 million .
MARKETABLE SECURITIES
Marketable securities consisted of equity securities. We report equity securities at fair value based on quoted market prices (Level 1 inputs). Any unrealized gains or losses are included in interest and other income on the consolidated statements of operations. As of June 30, 2020 , we had no marketable securities. As of December 31, 2019 , the cost basis of marketable securities was $ 6.9 million , the gross unrealized gain was $ 113,000 , and the carrying value was $ 7.1 million . During the six months ended June 30, 2020 , we had a realized loss of $ 3.4 million .
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NOTE 3 • EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of our common shares of beneficial interest (“common shares”) outstanding during the period. We have issued restricted stock units (“RSUs”) and incentive stock options ("ISOs") under our 2015 Incentive Plan and Series D Convertible Preferred Units ("Series D preferred units"), which could have a dilutive effect on our earnings per share upon exercise of the RSUs or ISOs or upon conversion of the Series D preferred units (refer to Note 4 for further discussion of the Series D preferred units). Other than the issuance of RSUs, ISOs, and Series D preferred units, we have no outstanding options, warrants, convertible stock or other contractual obligations requiring issuance of additional shares that would result in dilution of earnings. Under the terms of the Operating Partnership’s Agreement of Limited Partnership, limited partners have the right to require the Operating Partnership to redeem their limited partnership units (“Units”) any time following the first anniversary of the date they acquired such Units (“Exchange Right”). Upon the exercise of Exchange Rights, and in our sole discretion, we may issue common shares in exchange for Units on a one -for-one basis.
Performance-based RSUs of 27,964 and 37,625 for the three months ended June 30, 2020 and 2019 , respectively, and 27,964 and 37,625 for the six months ended June 30, 2020 and 2019 , respectively, were excluded from the calculation of diluted earnings per share because they were anti-dilutive.
For the three months ended June 30, 2020 and 2019 , Series D preferred units of 228,000 and, for the six months ended June 30, 2020 and 2019 , Series D preferred units of 228,000 and 157,000 , respectively, were excluded from the calculation of diluted earnings per share because they were anti-dilutive. For the three months ended June 30, 2020 and 2019 , RSUs of 13,000 and 14,000 , respectively, and, for the six months ended June 30, 2020 and 2019 , RSUs of 15,000 and 11,000 , respectively, were excluded from the calculation of diluted earnings per share because they were anti-dilutive.
Stock options of 63,527 and 31,764 for the three and six months ended June 30, 2020 , respectively, were excluded from the calculation of diluted earnings per share because the assumed proceeds per share plus the average unearned compensation were greater than the average market price of common shares for the periods ended and, therefore were anti-dilutive.
The following table presents a reconciliation of the numerator and denominator used to calculate basic and diluted earnings per share reported in the condensed consolidated financial statements for the three and six months ended June 30, 2020 and 2019 :
(in thousands, except per share data)
Three Months Ended June 30,
Six Months Ended June 30,
2020
2019
2020
2019
NUMERATOR
Net income (loss) attributable to controlling interests
$
( 3,803
)
$
3,113
$
( 10,810
)
$
( 1,585
)
Dividends to preferred shareholders
( 1,609
)
( 1,706
)
( 3,314
)
( 3,411
)
Redemption of preferred shares
25
—
298
—
Numerator for basic earnings (loss) per share – net income available to common shareholders
( 5,387
)
1,407
( 13,826
)
( 4,996
)
Noncontrolling interests – Operating Partnership
( 447
)
148
( 1,139
)
( 595
)
Dividends to preferred unitholders
160
160
320
217
Numerator for diluted earnings (loss) per share
$
( 5,674
)
$
1,715
$
( 14,645
)
$
( 5,374
)
DENOMINATOR
Denominator for basic earnings per share weighted average shares
12,280
11,729
12,192
11,746
Effect of redeemable operating partnership units
1,037
1,226
1,047
1,306
Denominator for diluted earnings per share
13,317
12,955
13,239
13,052
NET EARNINGS (LOSS) PER COMMON SHARE – BASIC
$
( 0.44
)
$
0.11
$
( 1.13
)
$
( 0.43
)
NET EARNINGS (LOSS) PER COMMON SHARE – DILUTED
$
( 0.44
)
$
0.11
$
( 1.13
)
$
( 0.43
)
NOTE 4 • EQUITY AND MEZZANINE EQUITY
Operating Partnership Units. The Operating Partnership had 1.0 million and 1.1 million outstanding Units at June 30, 2020 and December 31, 2019 , respectively.
Common Shares and Equity Awards . Common shares outstanding on June 30, 2020 and December 31, 2019 , totaled 12.8 million and 12.1 million , respectively. There were 19,508 and 20,701 shares issued upon the vesting of equity awards under our
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2015 Incentive Plan during the three and six months ended June 30, 2020 , respectively, with a total grant-date fair value of $ 956,000 and $ 1.0 million , respectively. During the three and six months ended June 30, 2019 , we issued 6,511 and 6,718 shares, respectively, with a total grant-date fair value of $ 447,000 and 457,000 , respectively, under our 2015 Incentive Plan. These shares vest based on performance and service criteria.
Equity Distribution Agreement. We have an equity distribution agreement in connection with an at-the-market offering ("2019 ATM Program") through which we may offer and sell common shares having an aggregate sales price of up to $ 150.0 million , in amounts and at times as we determine. The proceeds from the sale of common shares under the 2019 ATM Program are intended to be used for general purposes, which may include the funding of future acquisitions, construction or mezzanine loans, community renovations, and the repayment of indebtedness. The table below provides details on the sale of common shares during the three and six months ended June 30, 2020 . As of June 30, 2020 , common shares having an aggregate offering price of up to $ 79.5 million remained available under the 2019 ATM Program.
(in thousands, except per share amounts)
Three Months Ended June 30,
Number of Common Shares
Total Consideration (1)
Average Price Per Share (1)
2020
624
$
44,848
$
71.84
Six Months Ended June 30,
2020
674
$
48,250
$
71.56
(1)
Total consideration is net of commissions and issuance costs.
Exchange Rights . Pursuant to the exercise of exchange rights, we redeemed Units for cash during the three and six months ended June 30, 2020 and 2019 as detailed in the table below.
(in thousands, except per Unit amounts)
Three Months Ended June 30,
Number of Units
Aggregate Cost (1)
Average Price Per Unit
2020
—
$
9
$
60.35
2019
133
$
7,968
$
60.01
Six Months Ended June 30,
2020
—
$
23
$
68.44
2019
135
$
8
$
60.00
(1)
The redemption price is determined using the volume weighted average price for the ten trading days prior to the date a unitholder provides notification of their intent to redeem units.
We also redeemed Units in exchange for common shares in connection with Unitholders exercising their exchange rights during the three and six months ended June 30, 2020 and 2019 as detailed in the table below.
(in thousands)
Three Months Ended June 30,
Number of Units
Total Book Value
2020
22
$
1,048
2019
8
$
( 521
)
Six Months Ended June 30,
2020
36
$
118
2019
8
$
( 521
)
Share Repurchase Program . On December 5, 2019, our Board of Trustees terminated the existing share repurchase program and authorized a new share repurchase program to repurchase up to $ 50 million of our common or preferred shares over a one-year period. Under this new repurchase program, we may repurchase common or preferred shares in open-market purchases, including pursuant to Rule 10b5-1 and Rule 10b-18 plans, as determined by management and in accordance with the requirements of the SEC. The extent to which we repurchase our shares, and the timing of repurchases, will depend on a variety of factors, including market conditions, regulatory requirements, and other corporate considerations, as determined by the executive management team. This program may be suspended or discontinued at any time. As of June 30, 2020 , $ 44.4 million remained available under our share repurchase program. Common shares and Series C Preferred Shares repurchased during the three and six months ended June 30, 2020 and 2019 are detailed in the table below.
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(in thousands, except per share amounts)
Three Months Ended June 30,
Number of Common Shares
Number of Preferred Shares
Aggregate Cost (1)
Average Price Per Share (1)
2020
—
99
$
2,442
$
24.75
2019
116
—
$
6,862
$
59.12
Six Months Ended June 30,
2020
—
235
$
5,579
$
23.73
2019
290
—
$
16
$
54.03
(1)
Amount includes commissions.
Series C Preferred Shares. Series C preferred shares outstanding were 3.9 million and 4.1 million shares at June 30, 2020 and December 31, 2019 , respectively. The Series C preferred shares are nonvoting and redeemable for cash at $ 25.00 per share at our option after October 2, 2022. Holders of these shares are entitled to cumulative distributions, payable quarterly (as and if declared by the Board of Trustees). Distributions accrue at an annual rate of $ 1.65625 per share, which is equal to 6.625 % of the $ 25.00 per share liquidation preference ( $ 97.1 million liquidation preference in the aggregate).
Series D Preferred Units (Mezzanine Equity). On February 26, 2019, we issued 165,600 newly created Series D preferred units at an issuance price of $ 100 per preferred unit as partial consideration for the acquisition of SouthFork Townhomes. The Series D preferred unit holders receive a preferred distribution at the rate of 3.862 % per year. The Series D preferred units have a put option which allows the holder to redeem any or all of the Series D preferred units for cash equal to the issue price. Each Series D preferred unit is convertible, at the holder's option, into 1.37931 Units, representing a conversion exchange rate of $ 72.50 per unit. Changes in the redemption value are charged to common shares on our condensed consolidated balance sheets from period to period. The holders of the Series D preferred units do not have any voting rights. Distributions to Series D unitholders are presented in the condensed consolidated statements of equity within net income (loss) attributable to controlling interests and noncontrolling interests.
NOTE 5 • DEBT
As of June 30, 2020 , we owned 70 apartment communities, of which 23 served as collateral for mortgage loans. All of these mortgage loans were non-recourse to us other than for standard carve-out obligations. As of June 30, 2020 , we believe that there are no material defaults or instances of noncompliance in regards to any of these mortgages payable.
As of June 30, 2020 , 47 of our apartment communities were not encumbered by mortgages, with 45 of those properties providing credit support for our unsecured borrowings. Our primary unsecured credit facility ("unsecured credit facility") is a revolving, multi-bank line of credit, with the Bank of Montreal serving as administrative agent. Our line of credit has total commitments of $ 250.0 million , with borrowing capacity based on the value of properties contained in the unencumbered asset pool ("UAP"). As of June 30, 2020 , the UAP provided for a borrowing capacity of $ 250.0 million , with additional borrowing availability of $ 187.0 million beyond the $ 63.0 million drawn, including the balance on our operating line of credit (discussed below). The unsecured credit facility matures on August 31, 2022, with one twelve-month option to extend the maturity date at our election.
Under our unsecured credit facility, we also have unsecured term loans of $ 70.0 million and $ 75.0 million , included within notes payable on the condensed consolidated balance sheets, which mature on January 15, 2024 and on August 31, 2025, respectively.
The interest rates on the line of credit and term loans are based, at our option, on either the lender's base rate plus a margin, ranging from 35-85 basis points, or the London Interbank Offered Rate ("LIBOR"), plus a margin that ranges from 135-190 basis points based on our consolidated leverage ratio, as defined under our Second Amended and Restated Credit Agreement. Our unsecured credit facility and unsecured senior notes are subject to customary financial covenants and limitations. We believe that we are in compliance with all such financial covenants and limitations as of June 30, 2020 .
We have a private shelf agreement for the issuance of up to $ 150.0 million of unsecured senior promissory notes ("unsecured senior notes"). Under this agreement, we issued $ 75.0 million of Series A notes due September 13, 2029 bearing interest at a rate of 3.84 % annually and $ 50.0 million of Series B notes due September 30, 2028 bearing interest at a rate of 3.69 % annually. We have $ 25.0 million remaining available under the private shelf agreement.
We also have a $ 6.0 million operating line of credit. This operating line of credit is designed to enhance treasury management activities and more effectively manage cash balances. This operating line matures on August 31, 2020 and has a one-year rolling commitment, with pricing based on a market spread plus the one-month LIBOR index r ate.
15
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The following table summarizes our indebtedness at June 30, 2020 :
(in thousands)
June 30, 2020
December 31, 2019
Weighted Average Maturity in Years at June 30, 2020
Lines of credit
$
63,000
$
50,079
2.2
Term loans (1)
145,000
145,000
4.4
Unsecured senior notes (1)
125,000
125,000
8.8
Unsecured debt
333,000
320,079
5.6
Mortgages payable - fixed
325,230
331,376
5.3
Total debt
$
658,230
$
651,455
5.5
Weighted average interest rate on lines of credit (rate with swap)
3.19
%
3.81
%
Weighted average interest rate on term loans (rate with swap)
4.13
%
4.11
%
Weighted average interest rate on unsecured senior notes
3.78
%
3.78
%
Weighted average interest rate on mortgages payable
4.01
%
4.02
%
(1)
Included within notes payable on our condensed consolidated balance sh eets.
The aggregate amount of required future principal payments on term loans, unsecured senior notes, and mortgages payable as of June 30, 2020 , was as follows:
(in thousands)
2020 (remainder)
$
12,055
2021
40,395
2022
37,219
2023
45,068
2024
73,777
Thereafter
386,716
Total payments
$
595,230
NOTE 6 • DERIVATIVE INSTRUMENTS
Our objective in using interest rate derivatives is to add stability to interest expense and to manage our exposure to interest rate fluctuations. To accomplish this objective, we primarily use interest rate swap contracts to fix the variable interest rate on our term loans and a portion of our revolving line of credit. The interest rate swap contracts qualify as cash flow hedges.
Under ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities , the ineffective portion of a hedging instrument is not required to be recognized currently in earnings or disclosed. Changes in the fair value of cash flow hedges are recorded in accumulated other comprehensive income ("OCI") and subsequently reclassified into earnings in the period that the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income for our interest rate swap will be reclassified to interest expense as interest expense is incurred on our term loans. During the next twelve months, we estimate an additional $ 4.4 million will be reclassified as an increase to interest expense.
At June 30, 2020 and December 31, 2019 , we had a $ 50.0 million interest rate swap to fix the interest rate on a portion of our primary line of credit.
At June 30, 2020 and December 31, 2019 , we had three interest rate swap contracts in effect with a notional amount of $ 195.0 million and one additional interest rate swap that becomes effective on January 31, 2023 , with a notional amount of $ 70.0 million .
The table below presents the fair value of our derivative financial instruments as well as their classification on our Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019 .
(in thousands)
June 30, 2020
December 31, 2019
Balance Sheet Location
Fair Value
Fair Value
Total derivative instruments designated as hedging instruments - interest rate swaps
Accounts Payable and Accrued Expenses
$
18,139
$
7,607
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The table below presents the effect of the Company’s derivative financial instruments on the Condensed Consolidated Statements of Operations as of June 30, 2020 and 2019 .
(in thousands)
Gain (Loss) Recognized in OCI
Location of Gain (Loss) Reclassified from Accumulated OCI into Income
Gain (Loss) Reclassified from Accumulated OCI into Income
Three months ended June 30,
2020
2019
2020
2019
Total derivatives in cash flow hedging relationships - Interest rate contracts
$
( 1,696
)
$
( 4,430
)
Interest expense
$
917
$
( 29
)
Six months ended June 30,
Total derivatives in cash flow hedging relationships - Interest rate contracts
$
( 11,105
)
$
( 6,712
)
Interest expense
$
573
$
( 30
)
NOTE 7 • FAIR VALUE MEASUREMENTS
Cash and cash equivalents, restricted cash, accounts payable, accrued expenses, and other liabilities are carried at amounts that reasonably approximate their fair value due to their short-term nature. For variable rate line of credit debt that re-prices frequently, fair values are based on carrying values.
In determining the fair value of other financial instruments, we apply FASB ASC 820, " Fair Value Measurement and Disclosures. " Fair value hierarchy under ASC 820 distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (Levels 1 and 2) and the reporting entity’s own assumptions about market participant assumptions (Level 3). Fair value estimates may differ from the amounts that may ultimately be realized upon sale or disposition of the assets and liabilities.
Fair Value Measurements on a Recurring Basis
(in thousands)
Total
Level 1
Level 2
Level 3
June 30, 2020
Assets
Mortgages and notes receivable
$
17,535
—
—
$
17,535
Liabilities
Derivative instruments - interest rate swaps
$
18,139
—
—
$
18,139
December 31, 2019
Liabilities
Derivative instruments - interest rate swaps
$
7,607
$
—
$
—
$
7,607
The fair value of our interest rate swaps is determined using the market standard methodology of netting discounted expected variable cash payments and receipts. The variable cash payments and receipts are based on an expectation of future interest rates (a forward curve) derived from observable market interest rate curves. We also consider both our own nonperformance risk and the counterparty's nonperformance risk in the fair value measurement (Level 3).
Effective January 1, 2020, we elected the fair value option for our mortgage loans receivable and notes receivable, as allowed under ASU 2019-05 which provided transition relief upon adoption of ASU 2016-13, "Financial Instruments - Credit Losses." We utilize an income approach with level 3 inputs based on expected future cash flows to value these instruments. The inputs include market transactions for similar instruments, instrument specific credit risk (range of 0.5 % to 1.0 % ), and management estimates of comparable interest rates (range of 3.75 % to 5.0 % ). Changes in the fair value of these receivables from period to period are reported in interest and other income on our condensed consolidated statements of operations.
(in thousands)
Fair Value Measurement at June 30, 2020
Other Gains (Losses)
Interest
Income
Total Changes in Fair Value Included in Current-Period Earnings
Mortgage loans and notes receivable
$
17,535
$
5
$
858
$
863
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Table of Contents
Fair Value Measurements on a Nonrecurring Basis
There were no non-financial assets or liabilities measured at fair value on a nonrecurring basis at June 30, 2020 and December 31, 2019 .
Financial Assets and Liabilities Not Measured at Fair Value
The fair value of mortgages payable are estimated based on the discounted cash flows of the loans using market research and management estimates of comparable interest rates (Level 3).
The estimated fair values of our financial instruments as of June 30, 2020 and December 31, 2019 , respectively, are as follows:
(in thousands)
June 30, 2020
December 31, 2019
Carrying Amount
Fair Value
Carrying Amount
Fair Value
FINANCIAL ASSETS
Cash and cash equivalents
$
52,714
$
52,714
$
26,579
$
26,579
Restricted cash
$
2,535
$
2,535
$
19,538
$
19,538
Mortgage and note receivable (2)
—
—
$
32,810
$
32,810
FINANCIAL LIABILITIES
Revolving lines of credit (1)
$
63,000
$
63,000
$
50,079
$
50,079
Notes payable (1)
$
270,000
$
270,000
$
270,000
$
270,000
Mortgages payable
$
325,230
$
334,234
$
331,376
$
332,471
(1)
Excluding the effect of interest rate swap agreements.
(2)
As of January 1, 2020, we elected the fair value option, as allowed under ASU 2019-05. Fair value for these instruments is discussed within the Fair Value Measurements on a Recurring Basis section above.
NOTE 8 • ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS
We acquired no new real estate during the three months ended June 30, 2020 , compared to $ 2.1 million acquisitions in the three months ended June 30, 2019 . Our acquisitions during the six months ended June 30, 2020 and 2019 are detailed below.
Six Months Ended June 30, 2020
Date
Acquired
(in thousands)
Total
Acquisition
Cost
Form of Consideration
Investment Allocation
Acquisitions
Cash
Other (1)
Land
Building
Intangible
Assets
Other (2)
182 homes - Ironwood Apartments - New Hope, MN
March 5, 2020
$
46,263
$
28,600
$
17,663
$
2,165
$
36,869
$
824
$
6,405
Total Acquisitions
$
46,263
$
28,600
$
17,663
$
2,165
$
36,869
$
824
$
6,405
(1)
Payoff of note receivable and accrued interest by seller at closing.
(2)
Consists of TIF note acquired. Refer to Note 2 for further discussion.
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Six Months Ended June 30, 2019
Date
Acquired
(in thousands)
Total
Acquisition
Cost
Form of Consideration
Investment Allocation
Acquisitions
Cash
Units (1)
Land
Building
Intangible
Assets
Multifamily
272 homes - SouthFork Townhomes - Lakeville, MN
February 26, 2019
$
44,000
$
27,440
$
16,560
$
3,502
$
39,950
$
548
Other
Minot 3100 10th St SW - Minot, ND (2)
May 23, 2019
$
2,112
$
2,112
—
$
246
$
1,866
—
Total Acquisitions
$
46,112
$
29,552
$
16,560
$
3,748
$
41,816
$
548
(1)
Value of Series D preferred units at the acquisition date.
DISPOSITIONS
During the three months ended June 30, 2020 , we disposed of one parcel of unimproved land for a total sale price of $ 1.3 million . During the three months ended June 30, 2019 , we sold one parcel of unimproved land and one commercial property for a total sale price of $ 7.3 million . The following tables detail our dispositions for the six months ended June 30, 2020 and 2019 .
Six Months Ended June 30, 2020
(in thousands)
Dispositions
Date
Disposed
Sale Price
Book Value and Sales Cost
Gain/(Loss)
Unimproved Land
Rapid City Land - Rapid City, SD
June 29, 2020
$
1,300
$
1,490
$
( 190
)
Total Dispositions
$
1,300
$
1,490
$
( 190
)
Six Months Ended June 30, 2019
(in thousands)
Dispositions
Date
Disposed
Sale Price
Book Value
and Sale Cost
Gain/(Loss)
Other
Minot 1400 31st Ave SW - Minot, ND
May 23, 2019
$
6,530
$
6,048
$
482
Unimproved Land
Creekside Crossing - Bismarck, ND
March 1, 2019
$
3,049
$
3,205
$
( 156
)
Minot 1525 24th Ave SW - Minot, ND
April 3, 2019
725
593
132
$
3,774
$
3,798
$
( 24
)
Total Dispositions
$
10,304
$
9,846
$
458
NOTE 9 • SEGMENT REPORTING
We operate in a single reportable segment which includes the ownership, management, development, redevelopment, and acquisition of apartment communities. Each of our operating properties is considered a separate operating segment because each property earns revenues, incurs expenses, and has discrete financial information. Our chief operating decision-makers evaluate each property's operating results to make decisions about resources to be allocated and to assess performance and do not group the properties based on geography, size, or type for this purpose. Our apartment communities have similar long-term economic characteristics and provide similar products and services to our residents. No apartment community comprises more than 10% of consolidated revenues, profits, or assets. Accordingly, our apartment communities are aggregated into a single reportable segment.
Our executive management team comprises our chief operating decision-makers. This team measures the performance of our reportable segment based on net operating income (“NOI”), which we define as total real estate revenues less property
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operating expenses, including real estate taxes. We believe that NOI is an important supplemental measure of operating performance for real estate because it provides a measure of operations that is unaffected by depreciation, amortization, financing, property management overhead, casualty losses, and general and administrative expense. NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered an alternative to net income, net income available for common shareholders, or cash flow from operating activities as a measure of financial performance.
The following tables present NOI for the three and six months ended June 30, 2020 and 2019 , respectively, along with reconciliations to net income in the condensed consolidated financial statements. Segment assets are also reconciled to total assets as reported in the condensed consolidated financial statements.
(in thousands)
Three Months Ended June 30, 2020
Multifamily
All Other
Total
Revenue
$
43,492
$
418
$
43,910
Property operating expenses, including real estate taxes
17,521
249
17,770
Net operating income
$
25,971
$
169
$
26,140
Property management
( 1,345
)
Casualty gain (loss)
( 913
)
Depreciation and amortization
( 18,156
)
General and administrative expenses
( 3,202
)
Interest expense
( 6,940
)
Interest and other income
538
Income (loss) before gain (loss) on sale of real estate and other investments and gain (loss) on litigation settlement
( 3,895
)
Gain (loss) on sale of real estate and other investments
( 190
)
Net income (loss)
$
( 4,085
)
(in thousands)
Three Months Ended June 30, 2019
Multifamily
All Other
Total
Revenue
$
39,867
$
7,067
$
46,934
Property operating expenses, including real estate taxes
16,203
3,313
19,516
Net operating income
$
23,664
$
3,754
$
27,418
Property management
( 1,445
)
Casualty gain (loss)
( 92
)
Depreciation and amortization
( 18,437
)
General and administrative expenses
( 3,549
)
Interest expense
( 7,590
)
Loss on debt extinguishment
( 407
)
Interest and other income
468
Income (loss) before gain (loss) on sale of real estate and other investments and gain (loss) on litigation settlement
( 3,634
)
Gain (loss) on sale of real estate and other investments
615
Gain (loss) on litigation settlement
6,286
Net income (loss)
$
3,267
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(in thousands)
Six Months Ended June 30, 2020
Multifamily
All Other
Total
Revenue
$
86,823
$
1,493
$
88,316
Property operating expenses, including real estate taxes
36,099
604
36,703
Net operating income
$
50,724
$
889
$
51,613
Property management expenses
( 2,899
)
Casualty gain (loss)
( 1,240
)
Depreciation and amortization
( 36,316
)
General and administrative expenses
( 6,630
)
Interest expense
( 13,851
)
Loss on debt extinguishment
( 17
)
Interest and other income
( 2,239
)
Income (loss) before gain (loss) on sale of real estate and other investments and gain (loss) on litigation settlement
( 11,579
)
Gain (loss) on sale of real estate and other investments
( 190
)
Net income (loss)
$
( 11,769
)
(in thousands)
Six Months Ended June 30, 2019
Multifamily
All Other
Total
Revenue
$
78,606
$
13,936
$
92,542
Property operating expenses, including real estate taxes
32,974
6,578
39,552
Net operating income
$
45,632
$
7,358
$
52,990
Property management expenses
( 2,999
)
Casualty gain (loss)
( 733
)
Depreciation and amortization
( 36,548
)
General and administrative expenses
( 7,355
)
Interest expense
( 15,486
)
Loss on debt extinguishment
( 409
)
Interest and other income
892
Income (loss) before gain (loss) on sale of real estate and other investments and gain (loss) on litigation settlement
( 9,648
)
Gain (loss) on sale of real estate and other investments
669
Gain (loss) on litigation settlement
6,286
Net income (loss)
$
( 2,693
)
Segment Assets and Accumulated Depreciation
Segment assets are summarized as follows as of June 30, 2020 , and December 31, 2019 , respectively, along with reconciliations to the condensed consolidated financial statements:
(in thousands)
As of June 30, 2020
Multifamily
All Other
Total
Segment assets
Property owned
$
1,660,419
$
33,614
$
1,694,033
Less accumulated depreciation
( 373,244
)
( 10,673
)
( 383,917
)
Total property owned
$
1,287,175
$
22,941
$
1,310,116
Cash and cash equivalents
52,714
Restricted cash
2,535
Other assets
16,484
Mortgage loans receivable
10,961
Total Assets
$
1,392,810
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(in thousands)
As of December 31, 2019
Multifamily
All Other
Total
Segment assets
Property owned
$
1,609,471
$
33,607
$
1,643,078
Less accumulated depreciation
( 339,272
)
( 9,850
)
( 349,122
)
Total property owned
$
1,270,199
$
23,757
$
1,293,956
Cash and cash equivalents
26,579
Restricted cash
19,538
Other assets
34,829
Unimproved land
1,376
Mortgage loans receivable
16,140
Total Assets
$
1,392,418
NOTE 10 • COMMITMENTS AND CONTINGENCIES
Litigation. 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 on us.
Environmental Matters. Under various federal, state, and local laws, ordinances, and regulations, a current or previous owner or operator of real estate may be liable for the costs of removal of, or remediation of, certain hazardous or toxic substances in, on, around, or under the property. While we currently have no knowledge of any material violation of environmental laws, ordinances, or regulations at any of our properties, there can be no assurance that areas of contamination will not be identified at any of our properties or that changes in environmental laws, regulations, or cleanup requirements would not result in material costs to us.
Restrictions on Taxable Dispositions. Twenty-four of our properties, consisting of 4,560 apartment homes, are subject to restrictions on taxable dispositions under agreements entered into with some of the sellers or contributors of the properties and are effective for varying periods. We do not believe that the agreements materially affect the conduct of our business or our decisions whether to dispose of restricted properties during the restriction period because we generally hold these and our other properties for investment purposes rather than for sale. In addition, where we deem it to be in our shareholders' best interests to dispose of such properties, we generally seek to structure sales of such properties as tax deferred transactions under Section 1031 of the Internal Revenue Code. Otherwise, we may be required to provide tax indemnification payments to the parties to these agreements.
NOTE 11 • SHARE-BASED COMPENSATION
Share-based awards are provided to officers, non-officer employees, and trustees under our 2015 Incentive Plan approved by shareholders on September 15, 2015, as amended and restated on May 19, 2020 (the "2015 Incentive Plan") which allows for awards in the form of cash, unrestricted and restricted common shares, stock options, stock appreciation rights, and restricted stock units ("RSUs") up to an aggregate of 425,000 shares over the ten-year period in which the plan is in effect. Under our 2015 Incentive Plan, officers and non-officer employees may earn share awards under a long-term incentive plan, which is a forward-looking program that measures long-term performance over the stated performance period. These awards are payable to the extent deemed earned in shares. The terms of the long-term incentive awards granted under the revised program may vary from year to year.
2020 LTIP Awards
Awards granted to officers on March 13, 2020, consist of an aggregate of 8,806 time-based RSU awards. All of these awards are classified as equity awards. The time-based RSU awards vest as to one-third of the shares on each of March 13, 2021, March 13, 2022, and March 13, 2023.
Awards granted to officers on May 21, 2020, consist of an aggregate of 141,000 stock options, which vest as to 25% on each of May 21, 2021, January 1, 2022, January 1, 2023, and January 1, 2024. The fair value of stock options was $ 7.255 per share and was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
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2020
Exercise price
$
66.36
Risk-free rate
0.978
%
Expected term
6.25 years
Expected volatility
21.08
%
Dividend yield
3.974
%
Awards granted to trustees on May 19, 2020, consist of 8,272 time-based RSUs, which vest on May 19, 2021. These awards are classified as equity awards.
Share-Based Compensation Expense
Share-based compensation expense recognized in the consolidated financial statements for all outstanding share-based awards was $ 967,000 and $ 981,000 for the six months ended June 30, 2020 and 2019 , respectively.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.