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Item 1. Business

2021-02-22 compared with 2020-02-19 · 66 added, 58 removed, 74 unchanged (63% of the section changed)

Investors Real Estate Trust (“we,” “us,” “IRET” or the “Company”) is a real estate investment trust (“REIT”) organized under the laws of North Dakota, that is focused on the ownership, management, acquisition, development, and redevelopment of apartment communities.

Investors Real Estate Trust doing business as Centerspace (“we,” “us,” “our,” “Centerspace,” or the “Company”) is a real estate investment trust (“REIT”) organized under the laws of North Dakota, that is focused on the ownership, management, acquisition, development, and redevelopment of apartment communities.

Over the past several years, we have extensively repositioned our portfolio from a diversified, multi-segment collection of properties into a single segment concentrated on apartment communities.

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Paul and Denver metropolitan areas.

On December 9, 2020, we announced a new name, Centerspace, and brand platform that reflects both transformation of the Company and our vision for the future.

We focus on investing in markets characterized by stable and growing economic conditions, strong employment, and an attractive quality of life that we believe, in combination, lead to higher demand for our apartment homes and retention of our residents.

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We also have a corporate office in Minneapolis, Minnesota.

On September 20, 2018, our Board of Trustees approved a change in our fiscal year-end from April 30 to December 31, effective as of January 1, 2019.

Effective January 1, 2019, we changed our fiscal year end from April 30 to December 31.

As a result of this change, we filed a transition report on Form 10-KT for the eight-month transition period ended December 31, 2018, in accordance with SEC rules and regulations.

The references in this Annual Report on Form 10-K to the terms listed below reflect the respective period noted (all other reporting periods defined separately):

Financial Reporting Period

Year ended December 31, 2019

January 1, 2019 through December 31, 2019

Year ended December 31, 2018

January 1, 2018 through December 31, 2018

Transition period ended December 31, 2018

May 1, 2018 through December 31, 2018

Fiscal year ended April 30, 2018

May 1, 2017 through April 30, 2018

Fiscal year ended April 30, 2017

May 1, 2016 through April 30, 2017

For comparative purposes, unaudited data is shown for the year ended December 31, 2018 and for the eight-month period ended December 31, 2017.

On December 14, 2018, the Board approved a reverse stock split of our outstanding common shares and Units, no par value per share, at a ratio of 1-for-10.

The reverse stock split was effective as of the close of trading on December 27, 2018, with trading commencing on a split-adjusted basis on December 28, 2018.

The number of common shares and Operating Partnership limited partnership units ("Units" or "OP Units") was reduced from 119.4 million to 11.9 million and 13.7 million to 1.4 million , respectively.

We have retroactively restated all shares and Units and per share and Unit data for all periods presented.

The references in this Report to the terms listed below reflect the respective period noted (all other reporting periods defined separately):

Term Financial Reporting Period

Year ended December 31, 2020 January 1, 2020 through December 31, 2020

Year ended December 31, 2019 January 1, 2019 through December 31, 2019

Year ended December 31, 2018 January 1, 2018 through December 31, 2018

Transition period ended December 31, 2018 May 1, 2018 through December 31, 2018

Fiscal year ended April 30, 2018 May 1, 2017 through April 30, 2018

Website and Available Information

Our internet address is www.iretapartments.com.

We make available, free of charge, through the “SEC filings” tab under the Investors section of our website, our Transition Report on Form 10-KT, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports, and proxy statements for our Annual Meetings of Shareholders, filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such reports are filed with or furnished to the SEC.

We also file press releases, investor presentations, and certain supplemental information on our website.

Our internet address is www.centerspacehomes.com.

such reports are filed with or furnished to the SEC.

These reports are also available at www.sec.gov.

We also make press releases, investor presentations, and certain supplemental information available on our website.

Current copies of our Code of Conduct;

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and Charters for the Audit, Compensation, and Nominating and Governance Committees of our Board of Trustees are also available on our website under the “Corporate Governance” tab under the Investors section of our website.

Copies of these documents are also available free of charge to shareholders upon request addressed to the Secretary at Investors Real Estate Trust, P.O.

Copies of these documents are also available free of charge to shareholders upon request addressed to the Secretary at Centerspace, P.O.

Box 1988, Minot, North Dakota 58702-1988.

Information on our website does not constitute part of this Annual Report on Form 10-K.

Information on our website does not constitute part of this Report.

We were organized under the laws of North Dakota on July 31, 1970, and have operated as a REIT under Sections 856-858 of the Internal Revenue Code since our formation.

On February 1, 1997, we were restructured as an Umbrella Partnership Real Estate Investment Trust, or UPREIT, and we conduct our daily business operations primarily through our operating partnership, IRET Properties, a North Dakota Limited Partnership (“IRET Properties” or the “Operating Partnership”).

The sole general partner of IRET Properties is IRET, Inc., a North Dakota corporation and our wholly owned subsidiary.

All of our assets and liabilities have been contributed to IRET Properties, through IRET, Inc., in exchange for the sole general partnership interest in IRET Properties.

IRET Properties holds substantially all of the assets of the Company.

IRET Properties conducts the operations of the business and is structured as a partnership with no publicly traded equity.

On February 1, 1997, we were restructured as an Umbrella Partnership Real Estate Investment Trust (“UPREIT”), and we conduct our daily business operations primarily through our operating partnership, Centerspace, LP (the “Operating Partnership”).

The sole general partner of Centerspace, LP is Centerspace, Inc., a North Dakota corporation and our wholly owned subsidiary.

All of our assets and liabilities have been contributed to Centerspace, LP, through Centerspace, Inc., in exchange for the sole general partnership interest in Centerspace, LP.

Centerspace, LP holds substantially all of the assets of the Company.

Centerspace, LP conducts the operations of the business and is structured as a partnership with no publicly traded equity.

Contributions of properties to the Company can be structured as tax-deferred transactions through the issuance of OP Units, which is one of the reasons the Company is structured in this manner.

As of December 31, 2019 , IRET, Inc.

owned a 92.0% interest in IRET Properties.

The remaining interest in IRET Properties is held by individual limited partners.

As of December 31, 2020, Centerspace, Inc.

owned a 93.0% interest in Centerspace, LP.

The remaining interest in Centerspace, LP is held by individual limited partners.

BUSINESS STRATEGIES

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• Investing in income-producing apartment communities that grow distributable cash flow and are located in key geographic markets with populations ranking in the top 50 U.S.

metropolitan statistical areas, including expansion in the Minneapolis and Denver markets;

metropolitan statistical areas, including expansion in the Minneapolis and Denver markets and our planned entrance into the Nashville market;

• Selecting markets with favorable market characteristics, including strong growth prospects and employment forecasts, high occupancy rates, strong rent growth potential, and institutional liquidity;

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• Building a strong market presence in new markets;

Deemphasizing our exposure to tertiary markets.

• Reducing our exposure to tertiary markets.

FINANCING AND DISTRIBUTIONS

To fund our investment and capital activities, we rely on a combination of issuance of common shares, preferred shares, OP Units, and borrowed funds in exchange for property.

To fund our investment and capital activities, we rely on a combination of issuance of common shares, preferred shares, OP Units in exchange for property, and borrowed funds.

We regularly issue dividends to our shareholders.

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On October 2, 2017, we issued 4,118,460 shares of 6.625% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series C preferred shares”).

All of our outstanding shares of 7.95% Series B preferred shares were redeemed on October 30, 2017.

As of December 31, 2020, 3,881,453 shares remained outstanding.

Depending on future interest rates and market conditions, we may issue additional preferred shares or other senior securities which would have dividend and liquidation preference over our common shares.

Bank Financing and Other Debt

As of December 31, 2019 , we owned 69 apartment communities, of which 24 properties served as collateral for mortgage loans.

All of these mortgages payable were non-recourse to us other than for standard carve-out obligations.

Our primary unsecured credit facility is a revolving, multi-bank line of credit, with borrowing capacity based on the value of properties contained in the unencumbered asset pool.

This credit facility matures on August 31, 2022, with one 12-month option to extend the maturity date at our election.

During the year ended December 31, 2019 , we entered into 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.

As of December 31, 2020, we owned 47 apartment communities that were not encumbered by mortgages, with 34 of these 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”).

The UAP provided for a borrowing capacity of $250.0 million at December 31, 2019 , providing additional borrowing availability of $199.9 million beyond the $50.1 million drawn, including the balance on our operating line of credit (discussed below), priced at an interest rate of 3.81% , including the impact of our interest rate swap.

Our line of credit has total commitments and borrowing capacity of $250.0 million, based on the value of properties contained in the unencumbered asset pool (“UAP”).

As of December 31, 2020, the additional borrowing availability was $97.1 million beyond the $152.9 million drawn, including the balance on our operating line of credit (discussed below), priced at an interest rate of 2.85%, including the impact of our interest rate swap.

This credit facility matures on August 31, 2022, with one 12-month option to extend the maturity date at our election.

Under our primary unsecured credit facility, we also have a $70.0 million unsecured term loan, which matures on January 15, 2024, and a $75.0 million unsecured term loan, which matures on August 31, 2025.

We have a private shelf agreement for the issuance of up to $150.0 million of unsecured senior promissory notes (“unsecured senior notes”).

As of December 31, 2020, we had $25.0 million remaining available under the private shelf agreement.

As of December 31, 2020, we owned 20 apartment communities that served as collateral for mortgage loans.

All of these mortgages payable were non-recourse to us other than for standard carve-out obligations.

We also have a $6.0 million operating line of credit, which is designed to enhance treasury management activities and more effectively manage cash balances.

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Issuance of Securities in Exchange for Property

Our organizational structure allows us to issue shares and limited partnership units (or "OP Units") of IRET Properties in exchange for real estate.

Our organizational structure allows us to issue shares and limited partnership units (or “OP Units”) of Centerspace, LP in exchange for real estate.

The OP Units generally are redeemable, at our option for cash or common shares on a one-for-one basis.

Generally, OP Units receive the same per unit cash distributions as the per share dividends paid on common shares.

Our Declaration of Trust, as amended (our “Declaration of Trust”), does not contain any restrictions on our ability to offer limited partnership units of IRET Properties in exchange for property.

Our Declaration of Trust, as amended (our “Declaration of Trust”), does not contain any restrictions on our ability to offer limited partnership units of Centerspace, LP in exchange for property.

As a result, any decision to do so is vested solely in our Board of Trustees.

For the year ended December 31, 2019 , the transition period ended December 31, 2018 and the fiscal years ended April 30, 2018 and 2017, we did not issue any regular OP Units of IRET Properties in exchange for properties.

However, on February 26, 2019, we issued 165,600 newly created Series D preferred units as partial consideration for the acquisition of

SouthFork Townhomes.

On February 26, 2019, we issued 165,600 newly created Series D preferred units 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.

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.

The holders of the Series D preferred units do not have any voting rights.

For the years ended December 31, 2020 and 2019, the transition period ended December 31, 2018 and the fiscal year ended April 30, 2018, we did not issue any regular OP Units of Centerspace, LP in exchange for properties.

Distributions to Shareholders

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Our general practice has been to target cash distributions to our common shareholders and the holders of limited partnership units of approximately 65% to 90% of our funds from operations and to use the remaining funds for capital improvements or the reduction of debt.

Distributions to our common shareholders and unitholders in the year ended December 31, 2019 and in the transition period ended December 31, 2018 totaled approximately 69% and 82% , respectively, on a per share and unit basis of our funds from operations.

Distributions to our common shareholders and unitholders in the years ended December 31, 2020 and 2019 totaled approximately 81% and 69%, respectively, on a per share and unit basis of our funds from operations.

For additional information on our sources of liquidity and funds from operations, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources.”

As of December 31, 2019 , we had 392 employees, of which 361 were full-time and 31 were part-time.

HUMAN CAPITAL

We strive to be a great place to work and offer competitive benefits and training programs to our team members.

Our objective is to attract and reward individuals with the talent and skills to help support our business objectives and make our communities home for our residents.

Our total rewards program includes competitive compensation, paid leave, paid holidays, volunteer time, health and dental benefits, discounted rental rates on our apartments, employee assistance program, life insurance, 401(k) plan, and more.

As of December 31, 2020, we had 365 employees (340 full-time and 25 part-time) across six states.

Training is important, and we facilitate that through a learning management system which allows us to provide custom training as well as utilize a library of multifamily focused courses specializing in customer service, sales, leadership, diversity, and fair housing.

We take great pride in our pay for performance strategy where team members are aligned with overall company performance as well as specific performance metrics based on roles.

Our annual performance management process invites team members to complete a self-review along with their manager's assessment.

The results of these assessments are a component of the merit increase and pay for performance strategy.

As part of our Environmental, Social, and Governance (ESG) initiatives, we publish an annual ESG report detailing our efforts related to furthering our mission - through providing corporate sponsorship in the communities which we serve, offering paid time off for team members to volunteer, training and compensation programs, and our commitment to diversity, equity, and inclusion.

As of December 31, 2020:

• The average tenure of our team members is 3.6 years;

• 53% of our total team members, 46% of our senior management, and 37% of our Board of Trustees are female;

• We have over 200 custom courses on our learning management system;

• Over 10,000 training courses were completed by team members;

• Our online reputation management scores increased from 504 to 605;

• 76.5% of our team members participated in our engagement management survey;

• 648 volunteer hours were completed by team members.

We purchase general liability and property insurance coverage for each of our properties.

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Due to changing market conditions, our insurance policies are also subject to increasing deductibles and coverage limits.

In addition, we carry other types of insurance coverage related to a variety of risks and exposures.

Based on market conditions, we may change or potentially eliminate insurance coverages or face higher deductibles or other costs.

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If the demand for our apartment communities is reduced or competitors develop or acquire competing housing, rental and occupancy rates may decrease, which could have a material adverse effect on our business.

Additionally, we compete with other real estate investors, including other REITs, businesses, and other entities to acquire properties.

This competition affects our ability to acquire properties we want to add to our portfolio and the price we pay for acquisitions.

ENVIRONMENTAL MATTERS

See the discussion under the caption " Risks Related to Our Properties and Operations -- We may be responsible for potential liabilities under environmental laws " in Item 1A, Risk Factors, for information concerning the potential effects of environmental matters on our business, which discussion under " We may be responsible for potential liabilities under environmental laws " is incorporated by reference into this Item 1.

Additionally, we compete with other real estate investors, including REITs, to acquire properties.

This competition affects our ability to acquire properties we want to add to our portfolio and the cost of those acquisitions.

GOVERNMENT REGULATION

See the discussion under the caption “ Risks Related to Our Properties and Operations -- We may be responsible for potential liabilities under environmental laws” in Item 1A, Risk Factors, for information concerning the potential effects of environmental matters on our business, “ Complying with laws benefiting disabled persons or other safety regulations and requirements may affect our costs and investment strategies ” in Item 1A, Risk Factors, for information concerning the potential effects of compliance with disabled persons and other safety regulations on our business, “ Changes in federal or state laws and regulations relating to climate change could result in increased costs to our business, including capital expenditures to improve the energy efficiency of our existing communities or new development communities without a corresponding increase in revenue ” in Item 1A, Risk Factors, for information concerning the potential effects of climate change regulation on our business, “ Complying with zoning and permitting law may affect our acquisition, redevelopment, and development costs ” in Item 1A.

Risk Factors, for information concerning the potential costs associated with zoning and permitting regulations, and “ The current pandemic of COVID-19 and the potential future outbreak of other highly infectious or contagious diseases may materially and adversely impact and disrupt our business, income, cash flow, results of operations, financial condition, liquidity, prospects and ability to service our debt obligations, and our ability to pay dividends and other distributions to our equityholders ” in Item 1A Risk Factors, for information concerning the potential effects of regulations related to the COVID-19 pandemic, which discussions thereunder are incorporated by reference into this Item 1.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business