iretform10k-07142008.htm

 
 
 

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, 2008

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 Main Street South
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:
Common Shares of Beneficial Interest (no par value) - NASDAQ Global Select Market
Series A Cumulative Redeemable Preferred Shares of Beneficial Interest (no par value) -
NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:
None
________________________________
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
o
Yes
þ
No
 
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
 
o
Yes
þ
No
 
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. o
 

2008 Annual Report
 
 
 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
o Large accelerated filer
  
þ Accelerated filer
o Non-accelerated filer
  
o Smaller reporting Company
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
o
Yes
þ
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 2008 Annual Meeting of Shareholders) was $592,992,811 based on the last reported sale price on the NASDAQ Global Select Market on October 31, 2007.
 
The number of common shares of beneficial interest outstanding as of June 30, 2008, was 57,869,815.
 
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 2008 Annual Meeting of Shareholders to be held on September 16, 2008 are incorporated by reference into Part III (Items 10, 11, 12, 13 and 14) hereof.
 

 

2008 Annual Report  2
 
 
 

INVESTORS REAL ESTATE TRUST
 
INDEX
 
 
PAGE
PART I
  
Item 1.    Business                                                                                                                                  
5
Item 1A. Risk Factors                                                                                                                                  
10
Item 1B. Unresolved Staff Comments                                                                                                                                  
19
Item 2.    Properties                                                                                                                                  
19
Item 3.    Legal Proceedings                                                                                                                                  
29
Item 4.    Submission of Matters to a Vote of Security Holders                                                                                                                                  
30
PART II
  
30
31
32
53
54
54
54
57
PART III
  
57
57
57
57
57
PART IV
  
58
58
60
F-1 to F-41

2008 Annual Report 3 
 
 

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 1A 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.
 

2008 Annual Report  4
 
 

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, 2008, our real estate investments in these two states accounted for 67.4% of our total gross revenue. Our principal executive offices are located in Minot, North Dakota. We also have offices in Minneapolis, Minnesota and Omaha, Nebraska, and property management offices in Kansas City, Kansas and St. Louis, Missouri.
 
We seek to diversify our investments among multi-family residential and office, medical, industrial and retail properties. As of April 30, 2008, our real estate portfolio consisted of:
 
 
•
72 multi-family residential properties, containing 9,500 apartment units and having a total real estate investment amount net of accumulated depreciation of $408.7 million;
 
 
•
65 office properties containing approximately 4.9 million square feet of leasable space and having a total real estate investment amount net of accumulated depreciation of $498.6 million;
 
 
•
48 medical properties (including senior housing) containing approximately 2.3 million square feet of leasable space and having a total real estate investment amount net of accumulated depreciation of $327.5 million;
 
 
•
17 industrial properties containing approximately 2.8 million square feet of leasable space and having a total real estate investment amount net of accumulated depreciation of $93.5 million; and
 
 
•
33 retail properties containing approximately 1.5 million square feet of leasable space and having a total real estate investment amount net of accumulated depreciation of $100.5 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, 2008, no single tenant accounted for more than 10% of our total rental revenues.
 
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, 2008, IRET, Inc. owned a 73.1% 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.
 

2008 Annual Report  5
 
 

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 in 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, Idaho, Iowa, Kansas, Michigan, Missouri, 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, 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, Iowa, Colorado, Montana, South Dakota, and Kansas. 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 Third 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, 2007 and 2008, we had no junior mortgages outstanding.  We had one contract for deed outstanding as of April 30, 2007, with a balance of approximately $399,000, net of reserves, due to us. We had two contracts for deed outstanding as of April 30, 2008, with a combined balance of approximately $541,000, net of reserves, due to us.
 
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.
 

2008 Annual Report  6
 
 

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. One of the requirements of the Internal Revenue Code of 1986, as amended, for a REIT is that it distribute 90% of its net taxable income, excluding net capital gains, to its shareholders. There is a separate requirement to distribute net capital gains or pay a corporate level tax in lieu thereof. 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 38 years ago and every quarter since 1988.
 
Issuing senior securities. 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, 2008, our ratio of total real estate mortgages to total real estate assets was 73.1% while our ratio of total indebtedness as compared to our Net Assets (computed in accordance with our Bylaws) was 143.8%.
 
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:
 
   
(in thousands)
  
   
2008
    
2007
    
2006
  
Limited partnership units issued
     2,309       6,705       1,072  
Value at issuance
   $ 22,931     $ 62,427     $ 10,964  
 
Acquiring or repurchasing shares. As a REIT, it is our intention to invest only 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 2008, 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.
 

2008 Annual Report 7 
 
 

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 loans receivables (including contracts for deed), net of reserves, totaled approximately $541,000 as of April 30, 2008, and $399,000 as of April 30, 2007.
 
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 real estate segments: multi-family residential, office, medical (including senior housing), industrial and retail. For further information on these segments and other related information, see Note 11 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, 2008.
 
Name
Age
Title
Thomas A. Wentz, Sr.
72
President and Chief Executive Officer
Timothy P. Mihalick
49
Senior Vice President and Chief Operating Officer
Thomas A. Wentz, Jr.
42
Senior Vice President
Diane K. Bryantt
44
Senior Vice President and Chief Financial Officer
Michael A. Bosh
37
Secretary and General Counsel
Kelly A. Walters
47
Vice President
 
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.
 
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 of Asset Management and Finance 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.
 

2008 Annual Report  8
 
 

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.
 
Kelly A. Walters joined IRET in October of 2006 as Vice President of Capital Markets and New Business Development. Prior to joining IRET, Mr. Walters spent ten years as Senior Vice President of Magnum Resources, Inc., a privately held real estate investment and operating firm, based in Omaha, NE, and from 1993 through 1996, he was a senior portfolio manager with Brown Brothers Harriman & Co. in Chicago, IL. Prior to 1993, Mr. Walters spent five years as the Investment Manager at Peter Kiewit and Sons, Inc. in Omaha, NE.  Mr. Walters earned his undergraduate degree in finance at the University of Nebraska at Omaha, and received his MBA from the University of Nebraska.
 
Employees
 
As of April 30, 2008, we had 69 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. We do not believe we have a dominant position in any of
 

2008 Annual Report  9
 
 

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 Committees 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.
 
Item 1A.  Risk Factors
 
Risks Related to Our Properties and Business
 
Our performance and share value are subject to risks associated with the real estate industry.  Our results of operations and financial condition, the value of our real estate assets, and the value of an investment in us are subject to the risks normally associated with the ownership and operation of real estate properties.  These risks include, but are not limited to, the following factors which, among others, may adversely affect the income generated by our properties:
 
 
•
downturns in national, regional and local economic conditions (particularly increases in unemployment);
 
 
•
competition from other commercial and multi-family residential properties;
 
 
•
local real estate market conditions, such as oversupply or reduction in demand for commercial and multi-family residential space;
 
 
•
changes in interest rates and availability of attractive financing;
 

2008 Annual Report  10
 
 

 
•
declines in the economic health and financial condition of our tenants and our ability to collect rents from our tenants;
 
 
•
vacancies, changes in market rental rates and the need periodically to repair, renovate and re-lease space;
 
 
•
increased operating costs, including real estate taxes, state and local taxes, insurance expense, utilities, and security costs;
 
 
•
significant expenditures associated with each investment, such as debt service payments, real estate taxes and insurance and maintenance costs, which are generally not reduced when circumstances cause a reduction in revenues from a property;
 
 
•
weather conditions, civil disturbances, natural disasters, or terrorist acts or acts of war which may result in uninsured or underinsured losses;  and
 
 
•
decreases in the underlying value of our real estate.
 
Our property acquisition activities subject us to various risks which could adversely affect our operating results. We have acquired in the past and intend to continue to pursue the acquisition of properties and portfolios of properties, including large portfolios that could increase our size and result in alterations to our capital structure. Our acquisition activities and their success are subject to numerous risks, including, but not limited to:
 
 
•
even if we enter into an acquisition agreement for a property, it is subject to customary closing conditions, including completion of due diligence investigations, and we may be unable to complete that acquisition after making a non-refundable deposit and incurring other acquisition-related costs;
 
 
•
we may be unable to obtain financing for acquisitions on favorable terms or at all;
 
 
•
acquired properties may fail to perform as expected;
 
 
•
the actual costs of repositioning or redeveloping acquired properties may be greater than our estimates; and
 
 
•
we may be unable quickly and efficiently to integrate new acquisitions into our existing operations.
 
These risks could have an adverse effect on our results of operations and financial condition and the amount of cash available for payment of distributions.
 
Acquired properties may subject us to unknown liabilities which could adversely affect our operating results. We may acquire properties subject to liabilities and without any recourse, or with only limited recourse against prior owners or other third parties, with respect to unknown liabilities.  As a result, if liability were asserted against us based upon ownership of these properties, we might have to pay substantial sums to settle or contest it, which could adversely affect our results of operations and cash flows.  Unknown liabilities with respect to acquired properties might include liabilities for clean-up of undisclosed environmental contamination; claims by tenants, vendors or other persons against the former owners of the properties; liabilities incurred in the ordinary course of business; and claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the 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, 2008, we received approximately 67.4% of our gross revenue from properties in Minnesota and North Dakota.  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.  To the extent that weak economic or real estate conditions affect Minnesota and/or North Dakota more severely than other areas of the country, our financial performance could be negatively impacted.
 
If we are not able to renew leases or enter into new leases on favorable terms or at all as our existing leases expire, our revenue, operating results and cash flows will be reduced.  We may be unable to renew leases with our existing
 

2008 Annual Report  11
 
 

tenants or enter into new leases with new tenants due to economic and other factors as our existing leases expire or are terminated prior to the expiration of their current terms.  As a result, we could lose a significant source of revenue while remaining responsible for the payment of our obligations.  In addition, even if we were able to renew existing leases or enter into new leases in a timely manner, the terms of those leases may be less favorable to us than the terms of expiring leases, because the rental rates of the renewal or new leases may be significantly lower than those of the expiring leases, or tenant installation costs, including the cost of required renovations or concessions to tenants, may be significant.  If we are unable to enter into lease renewals or new leases on favorable terms or in a timely manner for all or a substantial portion of space that is subject to expiring leases, our revenue, operating results and cash flows will be adversely affected. As a result, our ability to make distributions to the holders of our shares of beneficial interest may be adversely affected. As of April 30, 2008, approximately 879,000 square feet, or 7.6% of our total commercial property square footage, was vacant. Approximately 747 of our 9,500 apartment units, or 7.9%, were vacant. As of April 30, 2008, leases covering approximately 8.3% of our total commercial segments net rentable square footage will expire in fiscal year 2009, 12.7% in fiscal year 2010, 21.0% in fiscal year 2011, 12.8% in fiscal year 2012, and 9.6% in fiscal year 2013.
 
We face potential adverse effects from commercial tenant bankruptcies or insolvencies.  The bankruptcy or insolvency of our commercial tenants may adversely affect the income produced by our properties.  If a tenant defaults, we may experience delays and incur substantial costs in enforcing our rights as landlord.  If a tenant files for bankruptcy, we cannot evict the tenant solely because of such bankruptcy.  A court, however, may authorize the tenant to reject and terminate its lease with us.  In such a case, our claim against the tenant for unpaid future rent would be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the lease, and it is unlikely that a bankrupt tenant would pay in full amounts it owes us under a lease.  This shortfall could adversely affect our cash flow and results of operations.  If a tenant experiences a downturn in its business or other types of financial distress, it may be unable to make timely rental payments.  Under some circumstances, we may agree to partially or wholly terminate the lease in advance of the termination date in consideration for a lease termination fee that is less than the agreed rental amount.  Additionally, without regard to the manner in which a lease termination occurs, we are likely to incur additional costs in the form of tenant improvements and leasing commissions in our efforts to lease the space to a new tenant, as well as possibly lower rental rates reflective of declines in market rents.
 
Because real estate investments are generally illiquid, and various factors limit our ability to dispose of assets, we may not be able to sell properties when appropriate.  Real estate investments are relatively illiquid and, therefore, we have limited ability to vary our portfolio quickly in response to changes in economic or other conditions.  In addition, the prohibitions under the federal income tax laws on REITs holding property for sale and related regulations may affect our ability to sell properties.  Our ability to dispose of assets may also be limited by constraints on our ability to utilize disposition proceeds to make acquisitions on financially attractive terms, and the requirement that we take additional impairment charges on certain assets.  More specifically, we are required to distribute or pay tax on all capital gains generated from the sale of assets, and, in addition, a significant number of our properties were acquired using limited partnership units of IRET Properties, our operating partnership, and are subject to certain agreements which restrict our ability to sell such properties in transactions that would create current taxable income to the former owners.  As a result, we are motivated to structure the sale of these assets as tax-free exchanges.  To accomplish this we must identify attractive re-investment opportunities.  Recently, while capital market conditions have been favorable for dispositions, investment yields on acquisitions have been less attractive due to the abundant capital inflows into the real estate sector.  These considerations impact our decisions on whether or not to dispose of certain of our assets.
 
Inability to manage our rapid growth effectively may adversely affect our operating results. We have experienced significant growth in recent years, increasing our total assets from approximately $1.2 billion at April 30, 2006, to $1.6 billion at April 30, 2008, 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 presents 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
 

2008 Annual Report  12
 
 

 
•
the ability to consistently achieve targeted returns on individual properties.
 
We may not be able to maintain similar rates of growth in the future, or manage our growth effectively.  Our failure to do so may have a material adverse effect on our financial condition and results of operations and ability to make distributions to the holders of our shares of beneficial interest.
 
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 tenant improvements. 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 make accretive property acquisitions may adversely affect our ability to increase our operating income. From our fiscal year ended April 30, 2006, to our fiscal year ended April 30, 2008, our operating income increased from $9.9 million to $12.3 million.  The acquisition of additional real estate properties is critical to our ability to increase our operating income.  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, 2008, 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 143.8%. As of April 30, 2007 and 2006, our percentage of total indebtedness to total Net Assets was approximately 149.6% and 138.0%, respectively. Under our Bylaws we may increase our total indebtedness up to 300.0% of our Net Assets, or by an additional approximately $1.2 billion. 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.  Additionally, our degree of leverage could adversely affect our ability to obtain additional financing and may have an adverse effect on the market price of our common shares.
 
Our inability to renew, repay or refinance our debt may result in losses. We incur a significant amount of debt in the ordinary course of our business and in connection with acquisitions of real properties. In addition, because we are unable to retain earnings as a result of the REIT distribution requirements, we will generally be required to refinance debt that matures with additional debt or equity.  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.
 
These risks increase when the credit markets are tight, as they are now; in general, when the credit markets are constrained, we may encounter resistance from lenders when we seek financing or refinancing for properties or proposed acquisitions, and the terms of such financing or refinancing are likely to be less favorable to us than the terms of our current indebtedness.
 
We anticipate that only a small portion of the principal of our debt will be repaid prior to maturity.  Therefore, we are likely to need to refinance at least a portion of our outstanding debt as it matures.  We cannot guarantee that any refinancing of debt with other debt will be possible on terms that are favorable or acceptable to us.  If we cannot refinance, extend or pay principal payments due at maturity with the proceeds of other capital transactions, such as
 

2008 Annual Report 13 
 
 

new equity capital, our cash flows may not be sufficient in all years to repay debt as it matures.  Additionally, 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 our 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 cost of our indebtedness may increase. Portions of our fixed-rate indebtedness incurred for past property acquisitions come due on a periodic basis.  Rising interest rates could limit our ability to refinance this existing debt when it matures, and would 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.  In addition, we have incurred, and we expect to continue to incur, indebtedness that bears interest at a variable rate. As of April 30, 2008, $11.7 million, or approximately 1.1%, of the principal amount of our total mortgage indebtedness was subject to variable interest rate agreements.  If short-term interest rates rise, our debt service payments on adjustable rate debt would increase, which would lower our net income and could decrease our distributions to the holders of our shares of beneficial interest.
 
We depend on distributions and other payments from our subsidiaries that they may be prohibited from making to us, which could impair our ability to make distributions to holders of our shares of beneficial interest.  Substantially all of our assets are held through IRET Properties, our operating partnership, and other of our subsidiaries. As a result, we depend on distributions and other payments from our subsidiaries in order to satisfy our financial obligations and make distributions to the holders of our shares of beneficial interest.  The ability of our subsidiaries to make such distributions and other payments depends on their earnings, and may be subject to statutory or contractual limitations.  As an equity investor in our subsidiaries, our right to receive assets upon their liquidation or reorganization effectively will be subordinated to the claims of their creditors.  To the extent that we are recognized as a creditor of such subsidiaries, our claims may still be subordinate to any security interest in or other lien on their assets and to any of their debt or other obligations that are senior to our claims.
 
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 and comparable to coverage customarily obtained by owners of similar properties. 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.  In addition, in most cases we have to renew our insurance policies on an annual basis and negotiate acceptable terms for coverage, exposing us to the volatility of the insurance markets, including the possibility of rate increases.  Any material increase in insurance rates or decrease in available coverage in the future could adversely affect our business and financial condition and results of operations, which could cause a decline in the market value of our securities.
 
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 senior housing) and may acquire more in the future. As of April 30, 2008, our real estate portfolio consisted of 48 medical properties, with a total real estate investment amount, net of accumulated depreciation, of $327.5 million, or approximately 22.9% of the total real estate investment amount, net of accumulated depreciation, 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
 

2008 Annual Report  14
 
 

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 or other safety regulations and requirements may affect our costs and investment strategies. Federal, state and local laws and regulations designed to improve disabled persons’ access to and use of buildings, including the Americans with Disabilities Act of 1990, 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.  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. Noncompliance could result in the imposition of fines by government authorities or the award of damages to private litigants.  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.  Our properties are also subject to various other federal, state and local regulatory requirements, such as state and local fire and life safety requirements.  If we fail to comply with these requirements, we could incur fines or private damage awards.  Additionally, in the event that existing requirements change, compliance with future requirements may require significant unanticipated expenditures that may adversely affect our cash flow and results of operations.
 
We may be responsible for potential liabilities under environmental laws. Under various federal, state and local laws, ordinances and regulations, we, as 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 may impose liability without regard to whether we knew of, or were 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 our ability to sell or rent the affected property or to borrow funds using the property as collateral. In arranging for the disposal or treatment of hazardous or toxic substances, we may also be liable for the costs of removal of, or remediation of, these substances at that disposal or treatment facility, whether or not we own or operate the facility. 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 at 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.
 
Environmental laws also govern the presence, maintenance and removal of asbestos, and require that owners or operators of buildings containing asbestos properly manage and maintain the asbestos; notify and train those who
 

2008 Annual Report  15
 
 

may come into contact with asbestos; and undertake special precautions if asbestos would be disturbed during renovation or demolition of a building.  Indoor air quality issues may also necessitate special investigation and remediation.  These air quality issues can result from inadequate ventilation, chemical contaminants from indoor or outdoor sources, or biological contaminants such as molds, pollen, viruses and bacteria.  Such asbestos or air quality remediation programs could be costly, necessitate the temporary relocation of some or all of the property’s tenants or require rehabilitation of an affected property.
 
It is generally our policy to obtain a Phase I environmental study on each property that we seek to acquire.  A Phase I environmental study generally includes a visual inspection of the property and the surrounding areas, an examination of current and historical uses of the property and the surrounding areas and a review of relevant state and federal documents, but does not involve invasive techniques such as soil and ground water sampling. If the Phase I indicates any possible environmental problems, 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, and could adversely impact our relationships with lenders, industry personnel and potential tenants.  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.  If we fail to manage effectively a transition to new personnel, or if we fail to attract and retain qualified and experienced personnel on acceptable terms, our business and prospects could be harmed.  The location of our company 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 comply with changing regulation of corporate governance and public disclosure could have a material adverse effect on our business, operating results and stock price, and continuing compliance will result in additional expenses.  The Sarbanes-Oxley Act of 2002, as well as new rules and standards subsequently implemented by the Securities and Exchange Commission and NASDAQ, have required changes in some of our corporate governance and accounting practices, and are creating uncertainty for us and many other public companies, due to varying interpretations of the rules and their evolving application in practice.  We expect these laws, rules and regulations to increase our legal and financial compliance costs, and to subject us to additional risks.  In particular, 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, a material misstatement could go undetected, and 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.  Even a technical or inadvertent mistake could endanger our REIT status.  The determination that we qualify as a REIT requires an ongoing analysis of various factual matters and circumstances, some of which may not be within our control. For example, in order to qualify as a REIT, at least 95% of our gross income in any year must come from qualifying sources that are itemized in the REIT tax laws, and we are prohibited from owning specified amounts of debt or equity securities of some issuers.  Thus, to the extent revenues from non-qualifying sources, such as income from third-party management services, represent 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. We are also required to make
 

2008 Annual Report 16 
 
 

distributions to the holders of our shares of beneficial interest of at least 90% of our REIT taxable income, excluding net capital gains.  The fact that we hold substantially all of our assets (except for qualified REIT subsidiaries) through IRET Properties, our operating partnership, and its subsidiaries, and our ongoing reliance on factual determinations, such as determinations related to the valuation of our assets, further complicates the application of the REIT requirements for us.  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, we could be subject to increased state and local taxes, and, 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 able to deduct, and would not 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 had 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.
 
Failure of our operating partnership to qualify as a partnership would have a material adverse effect on us.  We believe that IRET Properties, our operating partnership, qualifies as a partnership for federal income tax purposes.  No assurance can be given, however, that the Internal Revenue Service will not challenge its status as a partnership for federal income tax purposes, or that a court would not sustain such a challenge.  If the Internal Revenue Service were to be successful in treating IRET Properties as an entity that is taxable as a corporation, we would cease to qualify as a REIT because the value of our ownership interest in IRET Properties would exceed 5% of our assets, and because we would be considered to hold more than 10% of the voting securities of another corporation.  Also, the imposition of a corporate tax on IRET Properties would reduce significantly the amount of cash available for distribution by it.
 
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, (recently renamed the NASDAQ Global 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 of 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.
 
In order to maintain our REIT status, we may be forced to borrow funds during unfavorable market conditions.  In order to maintain our REIT status, we may need to borrow funds on a short-term basis to meet the REIT distribution requirements, even if the then-prevailing market conditions are not favorable for these borrowings.  To qualify as a REIT, we generally must distribute to our shareholders at least 90% of our net taxable income each year, excluding net capital gains.  In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions made by us with respect to the calendar year are less than the sum of 85% of our ordinary
 

2008 Annual Report 17 
 
 

income, 95% of our capital gain net income for that year, and any undistributed taxable income from prior periods.  We intend to make distributions to our shareholders to comply with the 90% distribution requirement and to avoid the nondeductible excise tax and will rely for this purpose on distributions from our operating partnership.  However, we may need short-term debt or long-term debt or proceeds from asset sales or sales of common shares to fund required distributions as a result of differences in timing between the actual receipt of income and the recognition of income for federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves or required debt or amortization payments.  The inability of our cash flows to cover our distribution requirements could have an adverse impact on our ability to raise short and long-term debt or sell equity securities in order to fund distributions required to maintain our REIT status.
 
Our board of trustees may make changes to our major policies without approval of the holders of our shares of beneficial interest. Our operating and financial policies, including policies relating to development and acquisition of real estate, financing, growth, operations, indebtedness, capitalization and distributions, are exclusively 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.  Accordingly, our shareholders do not control these policies, and policy changes could adversely affect our financial condition and results of operations.
 
Risks Related to the Purchase of our Shares of Beneficial Interest
 
Our future growth depends, in part, on our ability to raise additional equity capital, which will have the effect of diluting the interests of the holders of our common shares. Our future growth depends upon, among other things, our ability to raise equity capital and issue limited partnership units of IRET Properties. The issuance of additional common shares, and of limited partnership units for which we subsequently issue common shares upon the redemption of the limited partnership units, will dilute the interests of the current holders of our common shares.  Additionally, sales of substantial amounts of our common shares or preferred shares in the public market, or issuances of our common shares upon redemption of limited partnership units in our operating partnership, or the perception that such sales or issuances might occur, could adversely affect the market price of our common shares.
 
We may issue additional classes or series of our shares of beneficial interest with rights and preferences that are superior to the rights and preferences of our common shares. Without the approval of the holders of our common shares, our board of trustees may establish additional classes or series of our shares of beneficial interest, and such classes or series may have dividend rights, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences or other rights and preferences that are superior to the rights of the holders of our common shares.
 
Payment of distributions on our shares of beneficial interest is not guaranteed. Our board of trustees must approve our payment of distributions and may elect at any time, or from time to time, and for an indefinite duration, to reduce the distributions payable on our shares of beneficial interest or to not pay distributions on our shares of beneficial interest. Our board of trustees may reduce distributions for a variety of reasons, including, but not limited to, the following:
 
 
•
operating and financial results below expectations that cannot support the current distribution payment;
 
 
•
unanticipated costs or cash requirements; or
 
 
•
a conclusion that the payment of distributions would cause us to breach the terms of certain agreements or contracts, such as financial ratio covenants in our debt financing documents.
 
Our distributions are not eligible for the lower tax rate on dividends except in limited situations.  The tax rate applicable to qualifying corporate dividends received by certain non-corporate shareholders prior to 2010 has been reduced to a maximum rate of 15%.  This special tax rate is generally not applicable to distributions paid by a REIT, unless such distributions represent earnings on which the REIT itself had been taxed. As a result, distributions (other than capital gain distributions) paid by us to certain non-corporate shareholders will generally be subject to the tax rates that are otherwise applicable to ordinary income which, currently, are as high as 35%.  This law change may make an investment in our common shares comparatively less attractive relative to an investment in the shares of other entities which pay dividends but are not formed as REITs.
 

2008 Annual Report 18 
 
 

Changes in market conditions could adversely affect the price of our shares of beneficial interest. As is the case with any publicly-traded securities, certain factors outside of our control could influence the value of our common shares,
 
Series A preferred shares and any other classes or series of preferred shares of beneficial interest to be issued in the future. These conditions include, but are not limited to:
 
 
•
market perception of REITs in general;
 
 
•
market perception of REITs relative to other investment opportunities;
 
 
•
market perception of our financial condition, performance, distributions and growth potential;
 
 
•
prevailing interest rates;
 
 
•
general economic and business conditions;
 
 
•
government action or regulation, including changes in the tax laws; and
 
 
•
relatively low trading volumes in securities of REITS.
 
Higher market interest rates may adversely affect the market price of our common shares, and low trading volume on the NASDAQ Global Select Market may prevent the timely resale of our common shares. One of the factors that investors may consider important in deciding whether to buy or sell shares of a REIT is the distribution with respect to such REIT’s shares as a percentage of the price of those shares, relative to market interest rates.  If market interest rates rise, prospective purchasers of REIT shares may expect a higher distribution rate in order to maintain their investment.  Higher market interest rates would likely increase our borrowing costs and might decrease funds available for distribution.  Thus, higher market interest rates could cause the market price of our common shares to decline.  In addition, although our common shares of beneficial interest are listed on the NASDAQ Global Select Market, the daily trading volume of our shares may be lower than the trading volume for other companies.  The average daily trading volume for the period of May 1, 2007, through April 30, 2008, was 194,469 shares and the average monthly trading volume for the period of May 1, 2007 through April 30, 2008 was 4,100,054 shares.  As a result of this trading volume, an owner of our common shares may encounter difficulty in selling our shares in a timely manner and may incur a substantial loss.
 
Item 1B.  Unresolved Staff Comments
 
None.
 
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. These real estate investments are managed by our own employees and by third-party professional real estate management companies on our behalf.
 
Certain financial information from fiscal 2007 and 2006 was adjusted to reflect the effects of discontinued operations. See the Property Dispositions section in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the discussion in Note 12 to our Consolidated Financial Statements.
 
Total Real Estate Rental Revenue
 
As of April 30, 2008, our real estate portfolio consisted of 72 multi-family residential properties and 163 commercial properties, consisting of office, medical, industrial and retail properties, comprising 28.6%, 34.9%, 22.9%, 6.6%, and 7.0%, respectively, of our total real estate portfolio, based on the dollar amount of our original investment plus capital improvements, net of accumulated depreciation, through April 30, 2008. 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:
 

2008 Annual Report  19
 
 


 
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
  
2008
   $ 72,827       32.9 %   $ 84,042       38.0 %   $ 38,412       17.4 %   $ 11,691       5.3 %   $ 14,198       6.4 %   $ 221,170  
2007
   $ 66,972       34.0 %   $ 73,603       37.2 %   $ 34,783       17.6 %   $ 8,091       4.1 %   $ 14,089       7.1 %   $ 197,538  
2006
   $ 61,669       36.3 %   $ 57,483       33.8 %   $ 31,670       18.6 %   $ 6,372       3.7 %   $ 12,977       7.6 %   $ 170,171  
 
Economic Occupancy Rates
 
Economic occupancy levels on a stabilized property and all-property basis are shown below for each property type in each of the three most recent fiscal years ended April 30. Economic occupancy represents actual rental revenues recognized for the period indicated as a percentage of scheduled rental revenues for the period.  Percentage rents, tenant concessions, straightline adjustments and expense reimbursements are not considered in computing either actual revenues or scheduled rent revenues.  Scheduled rent 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 owned for the entirety of both periods being compared.  While results presented on a stabilized property basis are not determined in accordance with GAAP, management believes that measuring performance on a stabilized property basis is useful to investors and to management because it enables evaluation of how the Company’s properties are performing year over year. 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.
 
Segments
  
Stabilized Properties
    
All Properties
  
   
Fiscal Year Ended April 30,
    
Fiscal Year Ended April 30,
  
   
2008
    
2007
    
2006
    
2008
    
2007
    
2006
  
Multi - Family Residential
     93.3 %     93.2 %     91.7 %     92.7 %     93.2 %     91.6 %
Commercial - Office
     91.0 %     90.8 %     92.6 %     92.1 %     91.9 %     92.6 %
Commercial - Medical
     95.5 %     96.7 %     96.8 %     95.3 %     96.7 %     96.1 %
Commercial - Industrial
     96.2 %     94.8 %     94.8 %     87.2 %     95.1 %     87.2 %
Commercial - Retail
     87.1 %     89.3 %     89.3 %     89.2 %     89.6 %     89.2 %
 
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 a number of 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
 
We conduct our operations from offices in Minot, North Dakota; Minneapolis, Minnesota and Omaha, Nebraska.  We also have property management offices in St. Louis, Missouri; Jamestown, North Dakota and Kansas City, Kansas. The day-to-day management of our commercial properties is carried out by our own employees and by third-party property management companies. The management and leasing of our multi-family residential properties are handled by locally-based, third-party management companies.
 
In markets where the amount of rentable square footage we own does not justify self-management, when properties acquired have effective pre-existing property management in place, or when for other reasons particular properties are in our judgment not attractive candidates for self-management, we utilize third-party professional management companies for day-to-day management.  However, all decisions 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 implemented by the third-party management companies.  As of April 30, 2008, we have under internal management 90 commercial properties.  Our remaining 73 commercial properties are managed by third parties.  We plan to continue evaluating our portfolio to identify other commercial properties that may be candidates for management by our own employees.
 

2008 Annual Report  20
 
 

As of April 30, 2008, we had property management contracts and/or leasing agreements with the following companies:
 
Residential Management
Commercial Management and Leasing
   
•           Builder’s Management & Investment Co., Inc.
•    A & L Management Services, LLC
•           ConAm Management Corporation
•    AJB, Inc. dba Points West Realty Management
•           Investors Management & Marketing, Inc.
•    Bayport Properties US, Inc.
•           Illies Nohava Heinen Property Management, Inc.
•    BTO Development Corporation
•           Kahler Property Management
•    CB Richard Ellis, Inc.
•           Paramark Corp.
•    Colliers Turley Martin Tucker Company
 
•    Dakota Commercial and Development Co.
 
•    Davis Real Estate Services Group
 
•    Duemelands Commercial LLLP
 
•    Frauenshuh Companies
 
•    Ferguson Property Management Services, L.C.
 
•    Illies Nohava Heinen Property Management, Inc.
 
•    Inland Companies, Inc.
 
•    Mega Corporation, dba CB Richard Ellis/Mega
 
•    Nath Management, Inc.
 
•    Northco Real Estate Services, LLC
 
•    NorthMarq Real Estate Brokerage LLC
 
•    Northstar Partners, LLC
 
•    Pacific Realty Commercial LLC
 
•    Paramount Real Estate Corporation
 
•    Red Brokerage LLC
 
•    Results Unlimited, Inc.
 
•    Sansone Group/DDR LLC
 
•    Thornton Oliver Keller, Commercial, LLC
 
•    United Properties, LLC
 
•    Vector Property Services, LLC
 
•    Welsh Companies, LLC
 
•    Winbury Realty of K.C.
 
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)
  
2008
    
%
    
2007
    
%
    
2006
    
%
  
Real estate investments
                                    
Property owned
   $ 1,648,259           $ 1,489,287           $ 1,269,423        
Less accumulated depreciation
     (219,379 )           (180,544 )           (148,607 )      
    $ 1,428,880       98.1 %   $ 1,308,743       99.4 %   $ 1,120,816       99.5 %
Development in progress
     22,856       1.6 %     3,498       0.3 %     2,122       0.2 %
Unimproved land
     3,901       0.3 %     3,894       0.3 %     3,053       0.3 %
Mortgage loans receivable
     541       0.0 %     399       0.0 %     409       0.0 %
Total real estate investments
   $ 1,456,178       100.0 %   $ 1,316,534       100.0 %   $ 1,126,400       100.0 %

2008 Annual Report 21 
 
 

 
Summary of Individual Properties Owned as of April 30, 2008
 
The following table presents information regarding our 235 properties owned as of April 30, 2008. 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, 2008:
 
* = Real estate not owned in fee; all or a portion is leased under a ground or air rights lease.
 
**=Single-family house
 
Property Name and Location
  
Units
    
(in thousands) Investment (initial cost plus improvements)
    
Fiscal 2008 Economic Occupancy
  
                   
MULTI-FAMILY RESIDENTIAL
                  
17 S Main Apartments - Minot, ND
     4     $ 222       100.0 %
408 1st Street SE - Minot, ND
     **       49       100.0 %
Applewood On The Green - Omaha, NE
     234       12,929       78.9 %
Arbors Apts - S Sioux City, NE
     192       7,419       92.8 %
Boulder Court - Eagan, MN
     115       7,574       90.2 %
Brookfield Village Apartments - Topeka, KS
     160       7,900       95.6 %
Candlelight Apartments - Fargo, ND
     66       1,836       97.4 %
Canyon Lake Apartments - Rapid City, SD
     109       4,468       86.1 %
Castle Rock - Billings, MT
     165       6,706       90.9 %
Chateau Apartments - Minot, ND
     64       3,216       100.0 %
Colonial Villa - Burnsville, MN
     240       15,798       89.2 %
Colton Heights Properties - Minot, ND
     18       1,059       99.5 %
Cottonwood Community - Bismarck, ND
     268       20,366       77.7 %
Country Meadows Community - Billings, MT
     134       8,921       96.4 %
Crestview Apartments - Bismarck, ND
     152       5,241       99.3 %
Crown Colony Apartments - Topeka, KS
     220       11,658       93.1 %
Dakota Hill At Valley Ranch - Irving, TX
     504       39,489       91.9 %
East Park Apartments - Sioux Falls, SD
     84       2,944       92.7 %
Forest Park Estates - Grand Forks, ND
     270       9,695       91.6 %
Greenfield Apartments - Omaha,NE
     96       4,817       93.2 %
Heritage Manor - Rochester, MN
     182       8,464       98.3 %
Indian Hills Apartments - Sioux City, IA
     120       5,061       74.1 %
Jenner Properties - Grand Forks, ND
     90       2,368       98.5 %
Kirkwood Manor - Bismarck, ND
     108       4,310       98.1 %
Lancaster Place - St. Cloud, MN
     84       3,817       90.7 %
Legacy Community - Grand Forks, ND
     358       27,467       94.0 %
Magic City Apartments - Minot, ND
     200       5,676       99.1 %
Meadows Community - Jamestown, ND
     81       6,063       100.0 %
Miramont Apartments - Fort Collins, CO
     210       15,387       98.8 %
Monticello Apartments - Monticello, MN
     60       4,489       94.3 %
Neighborhood Apartments - Colorado Springs, CO
     192       13,416       94.4 %
North Pointe - Bismarck, ND
     49       2,507       100.0 %
Oakmont Apartments - Sioux Falls, SD
     80       5,386       94.1 %
Oakwood - Sioux Falls, SD
     160       6,538       90.8 %
Olympic Village - Billings, MT
     274       12,957       96.7 %
Olympik Village Apartments - Rochester, MN
     140       7,627       97.0 %
Oxbow - Sioux Falls, SD
     120       5,579       94.1 %
Park Meadows Community - Waite Park, MN
     360       14,134       84.2 %
Pebble Springs - Bismarck, ND
     16       826       100.0 %
Pinecone Apartments - Fort Collins, CO
     195       14,307       90.8 %

2008 Annual Report  22
 
 


 
Property Name and Location
  
Units
    
(in thousands) Investment (initial cost plus improvements)
    
Fiscal 2008 Economic Occupancy
  
                   
MULTI-FAMILY RESIDENTIAL - continued
                  
Pinehurst Apartments - Billings, MT
     21     $ 822       100.0 %
Pointe West - Rapid City, SD
     90       4,811       94.7 %
Prairie Winds Apartments - Sioux Falls, SD
     48       2,270       81.2 %
Prairiewood Meadows - Fargo, ND
     85       3,568       88.8 %
Quarry Ridge Apartments - Rochester, MN
     154       14,752       91.9 %
Ridge Oaks - Sioux City, IA
     132       5,270       95.7 %
Rimrock Apartments - Billings, MT
     78       4,200       97.1 %
Rocky Meadows - Billings, MT
     98       7,040       98.5 %
Rum River Apartments - Isanti, MN
     72       5,668       93.4 %
SCSH Campus Heights Apartments - St. Cloud, MN
     49       747       75.9 %
SCSH Campus Plaza Apartments - St. Cloud, MN
     24       368       91.0 %
SCSH Campus Knoll I Apartments - St. Cloud, MN
     71       1,796       93.3 %
SCSH University Park Place Apartments - St. Cloud, MN
     35       539       87.4 %
SCSH Cornerstone Apartments - St. Cloud, MN
     24       367       72.9 %
SCSH Campus Center Apartments - St. Cloud, MN
     90       2,655       98.9 %
SCSH Campus Side Apartments - St. Cloud, MN
     48       726       91.7 %
SCSH Campus View Apartments - St. Cloud, MN
     48       727       97.8 %
Sherwood Apartments - Topeka, KS
     300       17,430       98.5 %
Southbrook & Mariposa - Topeka, KS
     54       5,680       97.3 %
South Pointe - Minot, ND
     195       11,714       99.6 %
Southview Apartments - Minot, ND
     24       902       99.6 %
Southwind Apartments - Grand Forks, ND
     164       7,017       83.3 %
Sunset Trail - Rochester, MN
     146       14,937       94.8 %
Sweetwater Properties - Grafton, ND
     42       901       75.6 %
Sycamore Village Apartments - Sioux Falls, SD
     48       1,723       87.6 %
Terrace On The Green - Moorhead, MN
     116       3,152       93.3 %
Thomasbrook Apartments - Lincoln, NE
     264       11,553       75.2 %
Valley Park Manor - Grand Forks, ND
     168       6,038       94.3 %
Village Green - Rochester, MN
     36       2,770       97.2 %
West Stonehill - Waite Park, MN
     313       14,352       87.4 %
Westwood Park - Bismarck, ND
     64       2,772       98.4 %
Winchester - Rochester, MN
     115       7,176       90.2 %
Woodridge Apartments - Rochester, MN
     110       7,567       89.7 %
TOTAL MULTI-FAMILY RESIDENTIAL
     9,500     $ 510,697       92.7 %
 
Property Name and Location
  
Approximate Net Rentable Square Footage
    
(in thousands) Investment (initial cost plus improvements)
    
Fiscal 2008 Economic Occupancy
  
                   
OFFICE BUILDINGS
                  
1st Avenue Building - Minot, ND
     15,446     $ 694       82.5 %
401 South Main - Minot, ND
     8,443       643       0.0 %
610 Business Center IV - Brooklyn Park, MN
     78,560       8,583       0.0 %
2030 Cliff Road - Eagan, MN
     13,374       983       100.0 %
7800 W Brown Deer Road - Milwaukee, WI
     175,610       11,108       100.0 %
American Corporate Center - Mendota Heights, MN
     138,959       20,498       86.1 %
Ameritrade - Omaha, NE
     73,742       8,349       100.0 %
Benton Business Park - Sauk Rapids, MN
     30,464       1,527       94.9 %
Bloomington Business Plaza - Bloomington, MN
     121,064       8,041       52.2 %


2008 Annual Report  23
 
 


Property Name and Location
  
Approximate Net Rentable Square Footage
    
(in thousands) Investment (initial cost plus improvements)
    
Fiscal 2008 Economic Occupancy
  
                   
OFFICE BUILDINGS - continued
                  
Brenwood - Minnetonka, MN
     176,789     $ 16,571       78.7 %
Brook Valley I - La Vista, NE
     30,000       2,045       68.3 %
Burnsville Bluffs II - Burnsville, MN
     45,158       3,247       73.8 %
Cold Spring Center - St. Cloud, MN
     77,634       9,066       90.6 %
Corporate Center West - Omaha, NE
     141,724       21,405       100.0 %
Crosstown Centre - Eden Prairie, MN
     185,000       17,933       100.0 %
Dewey Hill Business Center - Edina, MN
     73,338       5,341       29.4 %
Farnam Executive Center - Omaha, NE
     94,832       13,592       100.0 %
Flagship - Eden Praire, MN
     138,825       24,015       97.1 %
Gateway Corporate Center, Woodbury, MN
     59,827       9,489       100.0 %
Golden Hills Office Center - Golden Valley, MN
     190,758       23,858       95.9 %
Great Plains - Fargo, ND
     122,040       15,375       100.0 %
Highlands Ranch - Highlands Ranch, CO
     81,173       11,762       100.0 %
Highlands Ranch I- Highlands Ranch, CO
     71,430       10,629       100.0 %
Interlachen Corporate Center - Edina, MN
     105,084       16,726       94.9 %
Intertech Building - Fenton, MO
     64,607       6,099       90.9 %
Mendota Office Center I - Mendota Heights, MN
     59,852       7,219       81.2 %
Mendota Office Center II - Mendota Heights, MN
     88,398       12,136       67.2 %
Mendota Office Center III - Mendota Heights, MN
     60,776       6,806       93.6 %
Mendota Office Center IV - Mendota Heights, MN
     72,231       8,705       100.0 %
Minnesota National Bank - Duluth, MN
     17,108       1,745       100.0 %
Miracle Hills One - Omaha, NE
     83,448       12,470       86.1 %
Nicollett VII - Burnsville, MN
     118,125       7,444       79.1 %
Northgate I - Maple Grove, MN
     79,297       7,789       100.0 %
Northgate II - Maple Grove, MN
     26,000       2,445       100.0 %
Northpark Corporate Center - Arden Hills, MN
     146,087       17,485       84.8 %
Pacific Hills - Omaha, NE
     143,075       16,508       94.5 %
Pillsbury Business Center - Bloomington, MN
     42,220       1,904       45.8 %
Plaza VII - Boise, ID
     28,994       3,688       82.8 %
Plymouth 5095 Nathan Lane - Plymouth, MN
     20,528       1,897       100.0 %
Plymouth I - Plymouth, MN
     26,186       1,680       89.3 %
Plymouth II - Plymouth, MN
     26,186       1,643       100.0 %
Plymouth III - Plymouth, MN
     26,186       2,012       100.0 %
Plymouth IV & V - Plymouth, MN
     126,930       14,889       95.1 %
Prairie Oak Business Center - Eden Prairie, MN
     36,421       5,935       100.0 %
Rapid City, SD - 900 Concourse Drive - Rapid City, SD
     75,815       7,088       100.0 %
Riverport - Maryland Heights, MO
     122,567       20,873       100.0 %
Southeast Tech Center - Eagan, MN
     58,300       6,358       100.0 %
Spring Valley IV - Omaha, NE
     15,700       1,138       100.0 %
Spring Valley V - Omaha, NE
     24,171       1,364       49.1 %
Spring Valley X - Omaha, NE
     24,000       1,232       83.6 %
Spring Valley XI - Omaha, NE
     24,000       1,265       100.0 %
Superior Office Building - Duluth, MN
     20,000       2,539       100.0 %
TCA Building - Eagan, MN
     103,640       9,903       75.7 %
Three Paramount Plaza - Bloomington, MN
     75,526       8,202       86.1 %
Thresher Square - Minneapolis, MN
     117,144       12,105       71.9 %
Timberlands - Leawood, KS
     90,388       14,730       73.8 %
UHC Office - International Falls, MN
     30,000       2,505       100.0 %
US Bank Financial Center - Bloomington, MN
     153,947       16,752       96.2 %
Viromed - Eden Prairie, MN
     48,700       4,863       100.0 %

 

2008 Annual Report  24
 
 


 
Property Name and Location
  
Approximate Net Rentable Square Footage
    
(in thousands) Investment (initial cost plus improvements)
    
Fiscal 2008 Economic Occupancy
  
                   
OFFICE BUILDINGS - continued
                  
Wells Fargo Center - St Cloud, MN
     86,428     $ 10,021       92.6 %
West River Business Park - Waite Park, MN
     24,075       1,476       82.0 %
Westgate - Boise, ID
     103,342       12,231       100.0 %
Whitewater Plaza - Minnetonka, MN
     62,383       5,645       46.7 %
Wirth Corporate Center - Golden Valley, MN
     74,568       9,001       96.8 %
Woodlands Plaza IV - Maryland Heights, MO
     61,820       5,442       83.9 %
TOTAL OFFICE BUILDINGS
     4,938,443     $ 556,712       92.1 %

 
Property Name and Location
  
Approximate Net Rentable Square Footage
    
(in thousands) Investment (initial cost plus improvements)
    
Fiscal 2008 Economic Occupancy
  
                   
MEDICAL
                  
2800 Medical Building - Minneapolis, MN
     54,490     $ 8,203       82.9 %
6517 Drew Avenue South - Edina, MN
     12,140       1,515       100.0 %
Abbott Northwest - Sartell, MN*
     59,760       12,653       95.7 %
Airport Medical - Bloomington, MN*
     24,218       4,678       100.0 %
Barry Pointe Office Park - Kansas City, MO
     18,502       2,749       100.0 %
Burnsville 303 Nicollet Medical (Ridgeview) - Burnsville, MN
     53,466       8,609       100.0 %
Burnsville 305 Nicollet Medical (Ridgeview South) - Burnsville, MN
     36,199       5,825       100.0 %
Denfeld Clinic - Duluth, MN
     20,512       3,099       100.0 %
Eagan 1440 Duckwood Medical - Eagan, MN
     17,640       2,096       100.0 %
Edgewood Vista - Belgrade, MT
     5,192       814       100.0 %
Edgewood Vista - Billings, MT
     11,800       1,898       100.0 %
Edgewood Vista - Bismarck, ND
     74,112       9,740       100.0 %
Edgewood Vista - Brainerd, MN
     82,535       9,620       100.0 %
Edgewood Vista - Columbus, NE
     5,194       867       100.0 %
Edgewood Vista - East Grand Forks, MN
     18,488       1,673       100.0 %
Edgewood Vista - Fargo, ND
     168,801       21,842       100.0 %
Edgewood Vista - Fremont, NE
     6,042       588       100.0 %
Edgewood Vista - Grand Island, NE
     5,185       807       100.0 %
Edgewood Vista - Hastings, NE
     6,042       606       100.0 %
Edgewood Vista - Hermantown I, MN
     119,349       11,749       100.0 %
Edgewood Vista - Hermantown II, MN
     160,485       11,269       100.0 %
Edgewood Vista - Kalispell, MT
     5,895       624       100.0 %
Edgewood Vista - Missoula, MT
     10,150       999       100.0 %
Edgewood Vista - Norfolk, NE
     5,135       764       100.0 %
Edgewood Vista - Omaha, NE
     6,042       676       100.0 %
Edgewood Vista - Sioux Falls, SD
     11,800       1,316       100.0 %
Edgewood Vista - Spearfish, SD
     60,161       6,156       100.0 %
Edgewood Vista - Virginia, MN
     147,183       12,221       100.0 %
Edina 6363 France Medical - Edina, MN*
     70,934       12,675       97.3 %
Edina 6405 France Medical - Edina, MN*
     55,478       12,201       100.0 %
Fox River Cottages - Grand Chute, WI
     26,336       3,808       100.0 %
Fresenius - Duluth, MN
     9,052       1,572       100.0 %
Garden View - St. Paul, MN*
     43,404       7,588       100.0 %
Gateway Clinic - Sandstone, MN*
     12,444       1,765       100.0 %
Health East St John & Woodwinds - Maplewood & Woodbury, MN
     114,316       21,601       100.0 %


2008 Annual Report 25 
 
 


Property Name and Location
  
Approximate Net Rentable Square Footage
    
(in thousands) Investment (initial cost plus improvements)
    
Fiscal 2008 Economic Occupancy
  
                   
MEDICAL - continued
                  
High Pointe Health Campus - Lake Elmo, MN
     60,294     $ 12,127       94.1 %
Mariner Clinic - Superior, WI*
     28,928       3,788       100.0 %
Minneapolis 701 25th Ave Medical (Riverside) - Minneapolis, MN*
     57,212       7,873       100.0 %
Nebraska Orthopaedic Hospital - Omaha, NE*
     61,758       20,512       100.0 %
Park Dental - Brooklyn Center, MN
     9,998       2,952       100.0 %
Pavilion I - Duluth, MN*
     45,081       10,174       100.0 %
Pavilion II - Duluth, MN
     73,000       19,325       100.0 %
Ritchie Medical Plaza - St Paul, MN
     50,409       9,575       64.5 %
St Michael Clinic - St Michael, MN
     10,796       2,851       100.0 %
Southdale FM - Edina, MN
     67,409       13,999       96.8 %
Southdale SMB - Edina, MN*
     195,983       34,459       82.0 %
Stevens Point - Stevens Point, WI
     47,950       14,825       100.0 %
Wells Clinic - Hibbing, MN
     18,810       2,660       100.0 %
TOTAL MEDICAL
     2,266,110     $ 359,986       95.8 %

Property Name and Location
  
Approximate Net Rentable Square Footage
    
(in thousands) Investment (initial cost plus improvements)
    
Fiscal 2008 Economic Occupancy
  
                   
INDUSTRIAL
                  
API Building - Duluth, MN
     35,000     $ 1,723       100.0 %
Bloomington 2000 W 94th Street - Bloomington, MN
     100,850       6,229       100.0 %
Bodycote Industrial Building - Eden Prairie, MN
     41,880       2,152       100.0 %
Cedar Lake Business Center - St. Louis Park, MN
     50,400       3,705       100.0 %
Dixon Avenue Industrial Park - Des Moines, IA
     604,886       13,171       82.4 %
Eagan 2785 & 2795 Hwy 55 - Eagan, MN
     198,600       5,922       100.0 %
Lexington Commerce Center - Eagan, MN
     90,260       6,472       100.0 %
Lighthouse - Duluth, MN
     59,292       1,885       81.6 %
Metal Improvement Company - New Brighton, MN
     49,620       2,507       100.0 %
Roseville 2929 Long Lake Road - Roseville, MN
     172,057       10,541       100.0 %
Stone Container - Fargo, ND
     195,075       7,141       100.0 %
Stone Container - Roseville, MN
     229,072       8,250       100.0 %
Urbandale 3900 106th Street - Urbandale, IA
     528,353       13,810       100.0 %
Waconia Industrial Building - Waconia, MN
     29,440       2,004       100.0 %
Wilson's Leather - Brooklyn Park, MN
     353,049       13,805       100.0 %
Winsted Industrial Building - Winsted, MN
     41,685       1,007       100.0 %
Woodbury 1865 Woodland - Woodbury, MN
     69,600       3,736       100.0 %
TOTAL INDUSTRIAL
     2,849,119     $ 104,060       96.3 %
                         
RETAIL
                        
17 South Main - Minot, ND
     2,454     $ 287       100.0 %
Anoka Strip Center - Anoka, MN
     10,625       733       56.8 %
Burnsville 1 Strip Center - Burnsville, MN
     8,526       1,029       100.0 %
Burnsville 2 Strip Center - Burnsville, MN
     8,400       804       86.5 %
Champlin South Pond - Champlin, MN
     26,259       3,635       85.1 %
Chan West Village - Chanhassen, MN
     137,572       21,375       98.1 %
Dakota West Plaza - Minot, ND
     16,921       605       78.3 %
Duluth Denfeld Retail - Duluth, MN
     37,547       4,986       96.7 %
Duluth NAPA - Duluth, MN
     15,582       1,933       100.0 %
Eagan Community - Eagan, MN
     23,187       2,710       89.7 %


2008 Annual Report  26
 
 


Property Name and Location
  
Approximate Net Rentable Square Footage
    
(in thousands) Investment (initial cost plus improvements)
    
Fiscal 2008 Economic Occupancy
  
                   
RETAIL - continued
                  
East Grand Station - East Grand Forks, MN
     16,103     $ 1,392       100.0 %
Fargo Express Community - Fargo, ND
     34,226       1,809       100.0 %
Forest Lake Auto - Forest Lake, MN
     6,836       501       100.0 %
Forest Lake Westlake Center - Forest Lake, MN
     100,570       8,187       100.0 %
Grand Forks Carmike - Grand Forks, ND
     28,528       2,546       100.0 %
Grand Forks Medpark Mall - Grand Forks, ND
     59,117       5,697       100.0 %
Jamestown Buffalo Mall - Jamestown, ND
     213,271       5,748       84.1 %
Jamestown Business Center - Jamestown, ND
     100,129       2,360       91.8 %
Kalispell Retail Center - Kalispell, MT
     52,000       3,470       100.0 %
Kentwood Thomasville Furniture - Kentwood, MI
     16,080       2,121       100.0 %
Ladysmith Pamida - Ladysmith, WI
     41,000       1,500       100.0 %
Lakeville Strip Center - Lakeville, MN
     9,488       1,971       100.0 %
Livingston Pamida - Livingston, MT
     41,200       1,800       100.0 %
Minot Arrowhead SC - Minot, ND
     77,912       7,787       96.9 %
Minot Plaza - Minot, ND
     10,843       595       100.0 %
Monticello C Store - Monticello, MN
     3,575       893       100.0 %
Omaha Barnes & Noble - Omaha, NE
     26,985       3,699       100.0 %
Pine City C Store - Pine City, MN
     4,800       442       100.0 %
Pine City Evergreen Square - Pine City, MN
     63,225       3,225       60.9 %
Rochester Maplewood Square - Rochester, MN
     118,398       11,987       57.7 %
St. Cloud Westgate SC - St. Cloud, MN
     104,928       6,841       58.7 %
Weston Retail - Weston, WI
     25,644       1,681       100.0 %
Weston Walgreens - Weston, WI
     14,820       2,455       100.0 %
TOTAL RETAIL
     1,456,751     $ 116,804       87.4 %
SUBTOTAL
     11,510,423     $ 1,648,259          

 
Property Name and Location
    
(in thousands) Investment (initial cost plus improvements)
  
         
UNIMPROVED LAND
        
Eagan Unimproved Land - Eagan, MN
     $ 422  
Kalispell Unimproved Land - Kalispell, MT
       1,424  
Monticello Unimproved Land - Monticello, MN
       96  
Quarry Ridge Unimproved Land - Rochester, MN
       942  
River Falls Unimproved Land - River Falls, WI
       205  
Weston Unimproved Land - Weston, WI
       812  
TOTAL UNIMPROVED LAND
     $ 3,901  
           
DEVELOPMENT IN PROGRESS
          
401 South Main - Minot, ND
     $ 46  
2828 Chicago Avenue - Minneapolis, MN
       8,162  
Minot Corporate Plaza - Minot, ND
       9,189  
Southdale 6545 Expansion - Edina, MN
       5,459  
DEVELOPMENT IN PROGRESS
     $ 22,856  
           
TOTAL UNITS – RESIDENTIAL SEGMENT
9,500
        
TOTAL SQUARE FOOTAGE – COMMERCIAL SEGMENTS
11,510,423
        
TOTAL INVESTMENTS
     $ 1,675,016  

2008 Annual Report  27
 
 

 
Mortgages Payable
 
As of April 30, 2008, individual first mortgage loans on the above properties totaled $1.0 billion. Of the $1.1 billion of mortgage indebtedness on April 30, 2008, $11.7 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 $1.1 billion. Principal payments due on our mortgage indebtedness are as follows:
 
Year Ended April 30,
  
Mortgage Principal
(in thousands)
  
2009
   $ 44,318  
2010
     153,680  
2011
     103,094  
2012
     106,356  
2013
     51,689  
Thereafter
     604,721  
Total
   $ 1,063,858  
 
Future Minimum Lease Receipts
 
The future minimum lease receipts to be received under leases for commercial properties in place as of April 30, 2008, assuming that no options to renew or buy out the leases are exercised, are as follows:
 
Year Ended April 30,
  
Lease Payments
(in thousands)
  
2009
   $ 108,758  
2010
     100,852  
2011
     85,976  
2012
     71,839  
2013
     59,844  
Thereafter
     303,769  
Total
   $ 731,038  
 
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, 2008, we spent approximately $25.8 million on capital improvements.
 
Contracts or Options to Purchase
 
We have granted options to purchase certain of our properties to tenants in these properties, under lease agreements with the tenant. In general, these options grant the tenant the right to purchase the property at the greater of such property’s appraised value or an annual compounded increase of a specified percentage of the initial cost to us. As of April 30, 2008, our properties subject to purchase options, the cost, plus improvements, of each such property and its gross rental revenue are as follows:
 

2008 Annual Report  28
 
 


 
   
(in thousands)
  
         
Gross Rental Revenue
  
Property
  
Investment Cost
    
2008
    
2007
    
2006
  
Abbott Northwest-Sartell, MN
   $ 12,653     $ 1,292     $ 1,252     $ 1,233  
Edgewood Vista-Belgrade, MT
     2,135       31       0       0  
Edgewood Vista-Billings, MT
     4,289       66       0       0  
Edgewood Vista-Bismarck, ND
     10,903       985       980       653  
Edgewood Vista-Brainerd, MN
     10,667       971       968       645  
Edgewood Vista-Columbus, NE
     1,481       21       0       0  
Edgewood Vista East Grand Forks, MN
     5,027       78       0       0  
Edgewood Vista-Fargo, ND
     26,322       310       0       0  
Edgewood Vista-Fremont, NE
     588       69       68       62  
Edgewood Vista-Grand Island, NE
     1,431       20       0       0  
Edgewood Vista-Hastings, NE
     606       69       68       63  
Edgewood Vista-Hermantown I, MN
     11,749       1,557       1,472       1,472  
Edgewood Vista-Hermantown II, MN
     22,209       1,127       1,124       749  
Edgewood Vista-Kalispell, MT
     624       72       72       62  
Edgewood Vista-Missoula, MT
     999       132       132       120  
Edgewood Vista-Norfolk, NE
     1,332       19       0       0  
Edgewood Vista-Omaha, NE
     676       77       76       70  
Edgewood Vista-Sioux Falls, SD
     3,380       52       0       0  
Edgewood Vista-Spearfish, SD
     6,792       612       608       406  
Edgewood Vista-Virginia, MN
     17,207       1,381       1,320       1,320  
Fox River Cottage - Grand Chute, WI
     3,956       387       260       0  
Great Plains Software - Fargo, ND
     15,375       1,876       1,876       1,876  
Healtheast - Woodbury & Maplewood, MN
     21,601       2,032       2,032       2,032  
Minnesota National Bank - Duluth, MN
     2,104       205       135       100  
St. Michael Clinic - St. Michael, MN
     2,851       229       35       0  
Stevens Point - Stevens Point, WI
     15,020       1,279       630       102  
Total
   $ 201,977     $ 14,949     $ 13,108     $ 10,965  
 
Properties by State
 
The following table presents, as of April 30, 2008, the total real estate investment amount, net of accumulated depreciation, by state of each of the five major segments of properties owned by us - multi-family residential, office, medical, industrial and retail:
 
   
(in thousands)
        
State
  
Multi-Family
 Residential
    
Commercial
 Office
    
Commercial
 Medical
    
Commercial
 Industrial
    
Commercial
 Retail
    
Total
    
% of Total
  
Minnesota
   $ 116,778     $ 314,948     $ 238,972     $ 63,142     $ 64,669     $ 798,509       55.9 %
North Dakota
     95,059       12,769       30,912       5,371       21,665       165,776       11.6 %
Nebraska
     31,561       74,968       22,498       0       2,731       131,758       9.2 %
Colorado
     31,280       21,101       0       0       0       52,381       3.7 %
Kansas
     35,418       14,161       0       0       0       49,579       3.5 %
Montana
     32,055       0       3,985       0       4,698       40,738       2.8 %
South Dakota
     25,381       5,766       7,086       0       0       38,233       2.7 %
Wisconsin
     0       9,541       21,375       0       5,130       36,046       2.5 %
Texas
     32,086       0       0       0       0       32,086       2.2 %
All Other States*
     9,115       45,363       2,692       25,027       1,577       83,774       5.9 %
Total
   $ 408,733     $ 498,617     $ 327,520     $ 93,540     $ 100,470     $ 1,428,880       100.0 %
* Idaho, Iowa, Michigan and Missouri
 
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.
 

2008 Annual Report  29
 
 

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, 2008.
 
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 Global Select Market under the symbol IRET (formerly IRETS; we changed our symbol to IRET on July 1, 2008). On June 30, 2008, the last reported sales price per share of our common shares on the NASDAQ was $9.54. The following table sets forth the quarterly high and low closing sales prices per share of our common shares as reported on the NASDAQ Global Select 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)
  
Fiscal Year 2008
                  
April 30, 2008
   $ 10.47     $ 8.95     $ 0.1680  
January 31, 2008
     10.55       8.84       0.1675  
October 31, 2007
     11.59       9.35       0.1670  
July 31, 2007
     10.86       9.40       0.1665  

 
Quarter Ended
  
High
    
Low
    
Distributions Declared
(per share and unit)
  
Fiscal Year 2007
                  
April 30, 2007
   $ 11.00     $ 9.66     $ 0.1660  
January 31, 2007
     10.68       9.65       0.1655  
October 31, 2006
     10.15       9.22       0.1650  
July 31, 2006
     9.50       8.85       0.1645  
 
It is IRET’s policy to pay quarterly distributions to our common shareholders and unitholders, 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, 2008, the Company had 4,054 common shareholders of record, and 57,869,815 common shares of beneficial interest (plus 21,293,532 limited partnership units potentially convertible into 21,293,532 common shares) were outstanding.
 
Unregistered Sales of Shares
 
Sales of Unregistered Securities. During the fiscal years ended April 30, 2008, 2007 and 2006, respectively, we issued an aggregate of 389,670, and 219,587 and 342,242 unregistered common shares to holders of limited partnership units of IRET Properties upon redemption and conversion of an aggregate of 389,670, and 219,587 and 342,242 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 2008, except for repurchases of nominal amounts of fractional shares, at shareholder request.
 

2008 Annual Report 30 
 
 

Comparative Stock Performance
 

The information contained in this Comparative Stock Performance Graph section shall not be deemed to be “soliciting material” or “filed” or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, except to the extent that we specifically incorporate it by reference into a document filed under the Securities Act of 1933 or the Securities Exchange Act of 1934.
 

Set forth below is a graph that compares, for the five fiscal years commencing May 1, 2003, and ending April 30, 2008, the cumulative total returns for the Company’s common shares with the comparable cumulative total return of two indexes, the Standard & Poor’s 500 Index (“S&P 500”), and the NAREIT Equity Index, which is an index prepared by the National Association of Real Estate Investment Trusts, which includes all tax-qualified equity REITs listed on the New York Stock Exchange, the American Stock Exchange and the NASDAQ Market.
 

The performance graph assumes that at the close of trading on April 30, 2003, the last trading day of fiscal year 2003, $100 was invested in the Company’s common shares and in each of the indexes.  The comparison assumes the reinvestment of all distributions.  Cumulative total shareholder returns for the Company’s common shares, the S&P 500 and the NAREIT Equity Index are based on the Company’s fiscal year ending April 30.
 


 

 

 
   
FY03
    
FY04
    
FY05
    
FY06
    
FY07
    
FY08
  
Investors Real Estate Trust
     100.00       104.32       104.95       117.62       140.08       144.53  
S&P 500
     100.00       122.88       130.66       150.81       173.79       165.66  
NAREIT Equity
     100.00       124.84       168.06       212.73       269.03       235.36  

 
Source:  Research Data Group, Inc.
 

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.
 

2008 Annual Report 31 
 
 


 
   
(in thousands, except per share data)
  
   
2008
    
2007
    
2006
    
2005
    
2004
  
Consolidated Income Statement Data
                              
Revenue
   $ 221,170     $ 197,538     $ 170,171     $ 152,759     $ 130,283  
Income before minority interest and discontinued operations and gain on sale of other investments
   $ 15,021     $ 14,255     $ 11,119     $ 9,871     $ 10,136  
Gain on sale of real estate, land, and other investments
   $ 556     $ 4,602     $ 3,293     $ 8,605     $ 662  
Minority interest portion of operating partnership income
   $ (3,524 )   $ (3,217 )   $ (1,892 )   $ (1,727 )   $ (2,161 )
Income from continuing operations
   $ 11,675     $ 11,026     $ 8,766     $ 7,768     $ 7,376  
Income from discontinued operations
   $ 413     $ 3,084     $ 2,801     $ 7,308     $ 2,064  
Net income
   $ 12,088     $ 14,110     $ 11,567     $ 15,076     $ 9,440  
Consolidated Balance Sheet Data
                                        
Total real estate investments
   $ 1,456,178     $ 1,316,534     $ 1,126,400     $ 1,067,345     $ 991,923  
Total assets
   $ 1,618,026     $ 1,435,389     $ 1,207,315     $ 1,151,158     $ 1,076,317  
Mortgages payable
   $ 1,063,858     $ 951,139     $ 765,890     $ 708,558     $ 633,124  
Shareholders’ equity
   $ 345,006     $ 284,969     $ 289,560     $ 295,172     $ 278,629  
                                         
Consolidated Per Common Share Data
(basic and diluted)
                                        
Income from continuing operations
   $ .17     $ .18     $ .14     $ .13     $ .19  
Income from discontinued operations
   $ .01     $ .06     $ .06     $ .17     $ .05  
Net income
   $ .18     $ .24     $ .20     $ .30     $ .24  
Distributions
   $ .67     $ .66     $ .65     $ .65     $ .64  

 
CALENDAR YEAR
  
2007
    
2006
    
2005
    
2004
    
2003
  
Tax status of distributions
                              
Capital gain
     1.49 %     1.22 %     16.05 %     0.00 %     3.88 %
Ordinary income
     51.69 %     42.01 %     41.48 %     44.65 %     58.45 %
Return of capital
     46.82 %     56.77 %     42.47 %     55.35 %     37.67 %
 
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, 2008.
 
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, 2008, our real estate portfolio consisted of 72 multi-family residential properties containing 9,500 apartment units and having a total real estate investment amount net of accumulated depreciation of $408.7 million, and 163 commercial properties containing approximately 11.5 million square feet of leasable space and having a total real estate investment amount net of accumulated depreciation of $1.0 billion. Our commercial properties consist of:
 
 
•
65 office properties containing approximately 4.9 million square feet of leasable space and having a total real estate investment amount net of accumulated depreciation of $498.6 million;
 
 
•
48 medical properties (including senior housing) containing approximately 2.3 million square feet of leasable space and having a total real estate investment amount net of accumulated depreciation of $327.5 million;
 

2008 Annual Report 32 
 
 

 
•
17 industrial properties containing approximately 2.8 million square feet of leasable space and having a total real estate investment amount net of accumulated depreciation of $93.5 million; and
 
 
•
33 retail properties containing approximately 1.5 million square feet of leasable space and having a total real estate investment amount net of accumulated depreciation of $100.5 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.
 
The uncertainty and volatility in the economy and credit markets during fiscal year 2008 restrained demand for commercial office, retail and industrial space throughout our portfolio.  While we expect our medical and multi-family segments show increased demand, we currently see no growing demand for commercial office, retail or industrial space in IRET’s markets.  We expect continuing deterioration in the economy to increase credit stresses on our tenants through at least the first and second quarters of our current fiscal year (2009), which we expect will lead to moderate increases for us in past due accounts and vacancies.
 
Despite these market uncertainties, and a tightening in credit standards by lenders during the latter half of fiscal year 2008 in particular, IRET during fiscal year 2008 acquired eight senior housing facilities, seven medical office properties, four office/warehouse properties, three commercial office properties and one multi-family residential complex for purchase prices totaling $148.5 million, excluding transaction costs, and completed construction of an additional multi-family residential property for a cost of $6.2 million.  During fiscal year 2008, the Company sold two properties and two buildings of an apartment community for an aggregate sale price of $1.4 million. Additionally, during fiscal year 2008 IRET completed a public offering of 6.9 million common shares for net proceeds of approximately $66.4 million.
 
Total revenues of IRET Properties, our operating partnership, increased by $23.7 million to $221.2 million in fiscal year 2008, compared to $197.5 million in fiscal year 2007.  This increase was primarily attributable to the addition of new real estate properties.  Operating income increased in fiscal year 2008, to $12.3 million from $11.6 million in fiscal year 2007. We estimate that rent concessions offered to tenants during the twelve months ended April 30, 2008 lowered our operating revenues by approximately $3.0 million, compared to $5.0 million for fiscal year 2007.  Expenses increased during fiscal year 2008 as well, with real estate taxes, maintenance, utilities and property management 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 properties to our portfolio.
 
On an all-property basis, economic occupancy levels in our total commercial property segments decreased slightly to 93.0% in fiscal year 2008 from 93.2% in fiscal year 2007.  Economic occupancy rates in our commercial office segment increased; the economic occupancy rates in our commercial medical, industrial and retail segments decreased.  Economic occupancy in our multi-family residential segment decreased to 92.7% in fiscal year 2008 on an all-property basis, from 93.2% in fiscal year 2007.
 
Additional information and more detailed discussions of our fiscal year 2008 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. As described further below, the process of allocating property costs to its components involves a considerable amount of subjective judgments to be made by Company management. 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 and a 5-12 year estimated life for furniture, fixtures and equipment. Maintenance and repairs are charged to
 

2008 Annual Report  33
 
 

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 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 estimated based on the present value 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 or below-market intangible is amortized to rental income 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 and the Company has no significant continuing involvement with the property sold. 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. This review requires management to exercise judgment, including making estimates about the future performance of the properties being reviewed. 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 (approximately $261,000 as of April 30, 2008) 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 (approximately $992,000 as of April 30, 2008) and from mortgage loans (approximately $11,000 as of April 30, 2008). The straight-lining of rents 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 increases and abated rent 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
 

2008 Annual Report  34
 
 

of this calculation. Revenue recognition is considered to be critical because the evaluation of the reliability 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
 
For disclosure regarding recent accounting pronouncements and the anticipated impact they will have on our operations, please refer to Note 2 to our Consolidated Financial Statements.
 
RESULTS OF OPERATIONS
 
Revenues
 
Total revenues for fiscal year 2008 were $221.2 million, compared to $197.5 million in fiscal year 2007 and $170.2 million in fiscal year 2006. Revenues during fiscal year 2008 were $23.7 million greater than revenues in fiscal year 2007 and revenues during fiscal year 2007 were $27.3 million greater than in fiscal year 2006.
 
For fiscal 2008, the increase in revenue of $23.7 million resulted from:
 
   
(in thousands)
  
Rent from 29 properties acquired in fiscal year 2007 in excess of that received in 2007 from the same 29 properties
   $ 14,256  
Rent from 23 properties acquired in fiscal year 2008
     5,759  
Increase in rental income on existing properties
     3,644  
Decrease in lease termination fees
     (27 )
    $ 23,632  
 
For fiscal 2007, the increase in revenue of $27.3 million resulted from:
 
   
(in thousands)
  
Rent from 13 properties acquired in fiscal year 2006 in excess of that received in 2006 from the same 13 properties
   $ 5,443  
Rent from 29 properties acquired in fiscal year 2007
     16,948  
Increase in rental income on existing properties
     5,609  
Decrease in lease termination fees
     (631 )
    $ 27,369  

2008 Annual Report  35
 
 

 
As illustrated above, the substantial majority (84.7% in fiscal year 2008 and 81.8% in fiscal year 2007) of the increase in our gross revenue for fiscal years 2008 and 2007 resulted from the addition of new real estate properties to the IRET Properties’ portfolio, with 15.4%  and 20.5%, respectively, resulting 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. However, domestic financial markets have recently been experiencing unusual volatility and uncertainty. Although this has occurred most visibly within the single-family mortgage lending sector of the credit market, liquidity has tightened in overall domestic financial markets, including the equity capital markets. Consequently, there is greater uncertainty regarding our ability to access the credit markets in order to attract financing on reasonable terms, and our ability to make acquisitions could be adversely affected.  At the same time, though, these credit market dislocations may offer investment opportunities, as potential acquisitions may become more attractive due to moderating commercial real estate price increases.  Additionally, joint venture and development opportunities may become more plentiful, due to an increase in the number of smaller developers who currently have constrained access to equity capital, and are seeking investment partners.
 
Gain on Sale of Real Estate
 
The Company realized a gain on sale of real estate, land and other investments for fiscal year 2008 of approximately $556,000. This compares to $4.6 million of gain on sale of real estate recognized in fiscal 2007 and $3.3 million recognized in fiscal 2006. A list of the properties sold during fiscal year 2008, showing sales price, depreciated cost plus sales costs and net gain is included in this Item 7 under the caption “Property Dispositions.”
 
Net Operating Income
 

The following tables report segment financial information.  We measure the performance of our segments based on net operating income (“NOI”), which we define as total revenues less property operating expenses and real estate taxes.  We believe that NOI is an important supplemental measure of operating performance for a REIT’s operating real estate because it provides a measure of core operations that is unaffected by depreciation, amortization, financing 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 show revenues, operating expenses and NOI by reportable operating segment for fiscal years 2008, 2007 and 2006.  For a reconciliation of net operating income of reportable segments to operating income as reported, see Note 11 of the Notes to Consolidated Financial Statements in this report.
 

The tables also show net operating income by reportable operating segment on a stabilized property and non-stabilized property basis.  Stabilized properties are 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 excluded from the stabilized property category).  This comparison allows the Company to evaluate the performance of existing properties and their contribution to net income.  Management believes that measuring performance on a stabilized property basis is useful to investors because it enables evaluation of how the Company’s 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.
 


2008 Annual Report 36 
 
 


 

   
(in thousands)
  
Year Ended April 30, 2008
  
Multi-Family Residential
    
Commercial-Office
    
Commercial-Medical
    
Commercial-Industrial
    
Commercial-Retail
    
Total
  
                                     
Real estate revenue
   $ 72,827     $ 84,042     $ 38,412     $ 11,691     $ 14,198     $ 221,170  
Real estate expenses
                                                
Utilities
     7,388       7,743       2,111       131       420       17,793  
Maintenance
     9,637       10,522       2,757       558       1,108       24,582  
Real estate taxes
     7,528       13,140       2,977       1,346       2,142       27,133  
Insurance
     1,162       901       257       135       169       2,624  
Property management
     8,922       3,900       1,654       359       438       15,273  
Total expenses
   $ 34,637     $ 36,206     $ 9,756     $ 2,529     $ 4,277     $ 87,405  
Net operating income
   $ 38,190     $ 47,836     $ 28,656     $ 9,162     $ 9,921     $ 133,765  
                                                 
Stabilized net operating income
     35,310       33,916       26,260       6,172       9,580       111,238  
Non-stabilized net operating income
     2,880       13,920       2,396       2,990       341       22,527  
Total net operating income
   $ 38,190     $ 47,836     $ 28,656     $ 9,162     $ 9,921     $ 133,765  

 
   
(in thousands)
  
Year Ended April 30, 2007
  
Multi-Family Residential
    
Commercial-Office
    
Commercial-Medical
    
Commercial-Industrial
    
Commercial-Retail
    
Total
  
                                     
Real estate revenue
   $ 66,972     $ 73,603     $ 34,783     $ 8,091     $ 14,089     $ 197,538  
Real estate expenses
                                                
Utilities
     6,666       6,286       1,771       57       377       15,157  
Maintenance
     8,619       9,243       2,611       218       1,000       21,691  
Real estate taxes
     7,294       10,831       2,322       755       2,079       23,281  
Insurance
     1,090       772       274       75       166       2,377  
Property management
     7,785       3,343       1,697       148       853       13,826  
Total expenses
   $ 31,454     $ 30,475     $ 8,675     $ 1,253     $ 4,475     $ 76,332  
Net operating income
   $ 35,518     $ 43,128     $ 26,108     $ 6,838     $ 9,614     $ 121,206  
                                                 
Stabilized net operating income
     34,318       34,675       25,823       6,317       9,229       110,362  
Non-stabilized net operating income
     1,200       8,453       285       521       385       10,844  
Total net operating income
   $ 35,518     $ 43,128     $ 26,108     $ 6,838     $ 9,614     $ 121,206  

 
   
(in thousands)
  
Year Ended April 30, 2006
  
Multi-Family Residential
    
Commercial-Office
    
Commercial-Medical
    
Commercial-Industrial
    
Commercial-Retail
    
Total
  
                                     
Real estate revenue
   $ 61,669     $ 57,483     $ 31,670     $ 6,372     $ 12,977     $ 170,171  
Real estate expenses
                                                
Utilities
     6,544       4,805       1,600       91       390       13,430  
Maintenance
     7,822       7,582       2,471       201       1,107       19,183  
Real estate taxes
     6,955       8,021       2,283       771       1,727       19,757  
Insurance
     1,394       705       298       81       179       2,657  
Property management
     6,987       2,488       1,662       108       541       11,786  
Total expenses
   $ 29,702     $ 23,601     $ 8,314     $ 1,252     $ 3,944     $ 66,813  
Net operating income
   $ 31,967     $ 33,882     $ 23,356     $ 5,120     $ 9,033     $ 103,358  
                                                 
Stabilized net operating income
     31,859       33,412       19,101       5,120       9,033       98,525  
Non-stabilized net operating income
     108       470       4,255       0       0       4,833  
Total net operating income
   $ 31,967     $ 33,882     $ 23,356     $ 5,120     $ 9,033     $ 103,358  
 

 

2008 Annual Report  37
 
 

Changes in Expenses and Net Income
 
Operating income for fiscal year 2008 increased to $12.3 million from $11.6 million in fiscal year 2007, and from $9.9 million in fiscal year 2006. Our net income available to common shareholders for fiscal year 2008 was $9.7 million, compared to $11.7 million in fiscal year 2007 and $9.2 million in fiscal year 2006. On a per common share basis, net income was $.18 per common share in fiscal year 2008, compared to $.24 per common share in fiscal year 2007 and $.20 in fiscal year 2006.
 
Although operating income increased on an absolute basis from the year-earlier period, net income on a per share and unit basis declined, primarily due to dilution following the Company’s October 2007 public offering of 6.9 million common shares, and due to the effect of a gain on sale included within discontinued operations in the twelve months ended April 30, 2007.
 
These changes in operating income and net income result from the changes in revenues and expenses detailed below:
 
Changes in net income available to common shareholders for fiscal year 2008 resulted from:
 
   
(in thousands)
  
An increase in net operating income primarily due to new acquisitions
   $ 12,559  
An increase in interest income
     151  
An increase in minority interest of other partnership’s income
     110  
An increase in gain on sale of other investments
     80  
         
These increases were offset by:
        
An increase in depreciation/amortization expense related to real estate investments
     (5,623 )
An increase in interest expense primarily due to debt placed on new acquisitions
     (5,015 )
An increase in operating expenses, administrative, advisory & trustee services
     (856 )
An increase in amortization related to non-real estate investments
     (394 )
An increase in minority interest of operating partnership income
     (307 )
A decrease in income from discontinued operations, net
     (2,671 )
A decrease in non-operating income
     (56 )
Total decrease in fiscal 2008 net income available to common shareholders
   $ (2,022 )

 
Changes in net income available to common shareholders for fiscal year 2007 resulted from:
 
   
(in thousands)
  
An increase in net operating income primarily due to new acquisitions
   $ 17,848  
An increase in interest income
     1,128  
An increase in non-operating income
     297  
An increase in income from discontinued operations, net
     283  
A decrease in minority interest of other partnership’s income
     510  
         
These increases were offset by:
        
An increase in depreciation/amortization expense related to real estate investments
     (7,525 )
An increase in interest expense primarily due to debt placed on new acquisitions
     (7,747 )
An increase in minority interest of operating partnership income
     (1,325 )
An increase in operating expenses, administrative, advisory & trustee services
     (528 )
An increase in amortization related to non-real estate investments
     (337 )
A decrease in gain on sale of other investments
     (61 )
Total increase in fiscal 2007 net income available to common shareholders
   $ 2,543  
 
Factors Impacting Net Income During Fiscal Year 2008 as Compared to Fiscal Year 2007
 
Economic occupancy rates in three of our five segments increased slightly compared to the year-earlier period, and real estate revenue increased in fiscal year 2008 compared to fiscal year 2007 in all of our reportable segments.  Net income available to common shareholders decreased to $9.7 million in fiscal year 2008, compared to $11.7 million in fiscal year 2007.  Revenue increases during fiscal year 2008 were offset somewhat by increases in maintenance,
 
2008 Annual Report  38
 
utilities, mortgage interest due to increased borrowing, real estate taxes, property management, insurance and amortization expense.

•
Economic Occupancy.  During fiscal year 2008, economic occupancy levels at our properties increased slightly over year-earlier levels in three of our five reportable segments, and declined in our commercial medical and retail segments.  Economic occupancy represents actual rental revenues recognized for the period indicated as a percentage of scheduled rental revenues for the period. Percentage rents, tenant concessions, straightline adjustments and expense reimbursements are not considered in computing either actual revenues or scheduled rent revenues.   Economic occupancy rates on a stabilized property basis for the fiscal year ended April 30, 2008 compared to the fiscal year ended April 30, 2007 are shown below:
 

   
Fiscal Year Ended April 30,
  
   
2008
    
2007
    
% Change
  
Multi-Family Residential
     93.3 %     93.2 %     0.1 %
Commercial Office
     91.0 %     90.8 %     0.2 %
Commercial Medical
     95.5 %     96.7 %     (1.2 %)
Commercial Industrial
     96.2 %     94.8 %     1.4 %
Commercial Retail
     87.1 %     89.3 %     (2.2 %)

 
•
Concessions.  Our overall level of tenant concessions declined for the fiscal year ended April 30, 2008 compared to the year-earlier period. To maintain or increase physical occupancy levels at our properties, we may offer tenant incentives, generally in the form of lower or abated rents, which results in decreased revenues and income from operations at our properties.  Rent concessions offered during the fiscal year ended April 30, 2008 lowered our operating revenues by approximately $3.0 million, as compared to an approximately $5.0 million reduction in operating revenues attributable to rent concessions offered in fiscal year 2007.
 

The following table shows the approximate reduction in our operating revenues due to rent concessions, by segment, for the fiscal years ended April 30, 2008 and 2007:
 

   
(in thousands)
  
   
Fiscal Year Ended April 30,
  
   
2008
    
2007
    
%Change
  
Multi-Family Residential
   $ 2,254     $ 3,147       (28.4 %)
Commercial Office
     692       1,769       (60.9 %)
Commercial Medical
     34       70       (51.4 %)
Commercial Industrial
     0       14       (100.0 %)
Commercial Retail
     31       22       40.9 %
Total
   $ 3,011     $ 5,022       (40.0 %)

 
•
Increased Maintenance Expense.  Maintenance expenses totaled $24.6 million in fiscal year 2008, compared to $21.7 million in fiscal year 2007.  Maintenance expenses at properties newly acquired in fiscal years 2008 and 2007 added $2.3 million to the maintenance expense category during fiscal year 2008, while maintenance expenses at existing properties increased by approximately $568,000 primarily for snow removal and janitorial contract services, resulting in a net increase of $2.9 million or 13.3% in maintenance expenses in fiscal year 2008 compared to fiscal year 2007.  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 general rent increases.
 

Maintenance expenses by reportable segment for the fiscal years ended April 30, 2008 and 2007 are as follows:
 

 
(in thousands)
  
 
Multi-Family Residential
  
Commercial Office
  
Commercial Medical
  
Commercial Industrial
  
Commercial Retail
  
Total
  
 
2008
   $ 9,637     $ 10,522     $ 2,757     $ 558     $ 1,108     $ 24,582  
2007
   $ 8,619     $ 9,243     $ 2,611     $ 218     $ 1,000     $ 21,691  
% change (2008 vs. 2007)
     11.8 %     13.8 %     5.6 %     156.0 %     10.8 %     13.3 %

2008 Annual Report  39
 
 

 
•
Increased Utility Expense.  Utility expense totaled $17.8 million in fiscal year 2008, compared to $15.2 million in fiscal year 2007.  Utility expenses at properties newly acquired in fiscal years 2008 and 2007 added $1.5 million to the utility expense category during fiscal year 2008, while utility expenses at existing properties increased by $1.1 million, primarily due to unusually warm weather in certain of IRET’s markets, resulting in increased cooling costs, for a total increase of $2.6 million or 17.4% in utility expenses in fiscal year 2008 compared to fiscal year 2007.
 

Utility expenses by reportable segment for the fiscal years ended April 30, 2008 and 2007 are as follows:
 

 
(in thousands)
  
 
Multi-Family Residential
  
Commercial Office
  
Commercial Medical
  
Commercial Industrial
  
Commercial Retail
  
Total
  
 
2008
   $ 7,388     $ 7,743     $ 2,111     $ 131     $ 420     $ 17,793  
2007
   $ 6,666     $ 6,286     $ 1,771     $ 57     $ 377     $ 15,157  
% change (2008 vs. 2007)
     10.8 %     23.2 %     19.2 %     129.8 %     11.4 %     17.4 %

 
•
Increased Mortgage Interest Expense.  Our mortgage interest expense increased approximately $6.1 million, or 10.5%, to approximately $62.7 million during fiscal year 2008, compared to $56.6 million in fiscal year 2007. Mortgage interest expense for properties newly acquired in fiscal years 2008 and 2007 added $6.1 million to our total mortgage interest expense in fiscal year 2008, while mortgage interest expense on existing properties increased $24,000.  Our overall weighted average interest rate on all outstanding mortgage debt was 6.37% as of April 30, 2008, compared to 6.43% as of April 30, 2007.  Our mortgage debt increased approximately $112.8 million, or 11.9%, to approximately $1.1 billion as of April 30, 2008, compared to $951.1 million on April 30, 2007.
 

Mortgage interest expense by reportable segment for the fiscal years ended April 30, 2008 and 2007 is as follows:
 

 
(in thousands)
  
 
Multi-Family Residential
  
Commercial Office
  
Commercial Medical
  
Commercial Industrial
  
Commercial Retail
  
Total
  
 
2008
   $ 19,602     $ 23,131     $ 12,351     $ 3,481     $ 4,137     $ 62,702  
2007
   $ 18,723     $ 20,157     $ 11,291     $ 2,325     $ 4,070     $ 56,566  
% change (2008 vs. 2007)
     4.7 %     14.8 %     9.4 %     49.7 %     1.6 %     10.8 %

 
•
Increased 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 buildings 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, as computed in accordance with GAAP.  Amortization expense related to in-places leases totaled $10.0 million in fiscal year 2008, compared to $9.2 million in fiscal year 2007. The increase in amortization expense in fiscal year 2008 compared to fiscal year 2007 was primarily due to property acquisitions completed by the Company in fiscal year 2008.
 

•
Increased Real Estate Tax Expense.  Real estate taxes on properties newly acquired in fiscal years 2008 and 2007 added $3.1 million to real estate tax expense, while real estate taxes on existing properties increased by approximately $738,000, for a total increase of $3.8 million or 16.5% in real estate tax expense in fiscal year 2008 compared to fiscal year 2007, from $23.3  million to $27.1 million.
 


2008 Annual Report 40 
 
 

Real estate tax expense by reportable segment for the fiscal years ended April 30, 2008 and 2007 is as follows:
 

 
(in thousands)
  
 
Multi-Family Residential
  
Commercial Office
  
Commercial Medical
  
Commercial Industrial
  
Commercial Retail
  
Total
  
 
2008
   $ 7,528     $ 13,140     $ 2,977     $ 1,346     $ 2,142     $ 27,133  
2007
   $ 7,294     $ 10,831     $ 2,322     $ 755     $ 2,079     $ 23,281  
% change (2008 vs. 2007)
     3.2 %     21.3 %     28.2 %     78.2 %     3.0 %     16.5 %

 
•
Increased Insurance Expense.  Insurance expense increased in fiscal year 2008 compared to fiscal year 2007, from $2.4 million to $2.6 million, an increase of approximately 10.4%.  Insurance expense at properties newly-acquired in fiscal years 2008 and 2007 added approximately $240,000 to insurance expense, while insurance expense at existing properties increased by approximately $7,000, for a net increase of approximately $247,000 in insurance expense in fiscal year 2008 compared to fiscal year 2007.
 

Insurance expense by reportable segment for the fiscal years ended April 30, 2008 and 2007 is as follows:
 

 
(in thousands)
  
 
Multi-Family Residential
  
Commercial Office
  
Commercial Medical
  
Commercial Industrial
  
Commercial Retail
  
Total
  
 
2008
   $ 1,162     $ 901     $ 257     $ 135     $ 169     $ 2,624  
2007
   $ 1,090     $ 772     $ 274     $ 75     $ 166     $ 2,377  
% change (2008 vs. 2007)
     6.6 %     16.7 %     (6.2 %)     80.0 %     1.8 %     10.4 %

 
•
Increased Property Management Expense.  Property management expense increased in fiscal year 2008 compared to fiscal year 2007, from $13.8 million to $15.3 million, an increase of $1.5 million or approximately 10.5%.  Of this increase, approximately $240,000 million is attributable to existing properties, while $1.2 million is due to properties acquired in fiscal years 2008 and 2007.  The increase at existing properties is primarily due to an increase in property revenue resulting in higher management fees payable (management fees are generally a percentage of rents received).
 

Property management expense by reportable segment for the fiscal years ended April 30, 2008 and 2007 is as follows:
 

 
(in thousands)
  
 
Multi-Family Residential
  
Commercial Office
  
Commercial Medical
  
Commercial Industrial
  
Commercial Retail
  
Total
  
 
2008
   $ 8,922     $ 3,900     $ 1,654     $ 359     $ 438     $ 15,273  
2007
   $ 7,785     $ 3,343     $ 1,697     $ 148     $ 853     $ 13,826  
% change (2008 vs. 2007)
     14.6 %     16.7 %     (2.5 %)     142.6 %     (48.7 %)     10.5 %
 
Factors Impacting Net Income During Fiscal Year 2007 as Compared to Fiscal Year 2006
 
Our results during the fiscal year ended April 30, 2007, compared to the fiscal year ended April 30, 2006, showed continued overall improvement in occupancy levels and rental revenues.  Economic occupancy rates in four of our five segments increased compared to the year-earlier period, and real estate revenue increased in fiscal year 2007 compared to fiscal year 2006 in all of our reportable segments.  Net income available to common shareholders increased to $11.7 million in fiscal year 2007, compared to $9.2 million in fiscal year 2006.  Revenue increases during fiscal year 2007 were offset somewhat by increases in maintenance, utilities, mortgage interest due to increased borrowing, real estate taxes, property management and amortization expense.  Insurance expense decreased in fiscal year 2007.
 

•
Economic Occupancy.  During fiscal year 2007, economic occupancy levels at our properties improved over year-earlier levels in each of our reportable segments other than commercial office.  Economic occupancy represents actual rental revenues recognized for the period indicated as a percentage of scheduled rental revenues for the period. Percentage rents, tenant concessions, straightline adjustments and expense reimbursements are not considered in computing either actual revenues or scheduled rent revenues.
 


2008 Annual Report 41 
 
 

Economic occupancy rates on a stabilized property basis for the fiscal year ended April 30, 2007 compared to the fiscal year ended April 30, 2006 are shown below:
 

   
Fiscal Year Ended April 30,
  
   
2007
    
2006
    
% Change
  
Multi-Family Residential
     93.2 %     91.7 %     1.5 %
Commercial Office
     90.5 %     92.6 %     (2.1 %)
Commercial Medical
     96.8 %     95.3 %     1.5 %
Commercial Industrial
     94.8 %     87.2 %     7.6 %
Commercial Retail
     89.3 %     89.2 %     0.1 %

 
During fiscal year 2007, results continued to improve at our multi-family residential properties.  While we had limited success in increasing scheduled rental rates at our apartment communities, the construction of competing apartment units, single-family homes and condominium units abated in most of our markets.  Combined with positive absorption of previously-constructed housing, this reduction in construction of competing product allowed us to reduce vacancy and tenant concessions in our multi-family residential segment.  We also saw during fiscal year 2007 an accelerating demand for industrial space, although as in past periods rental rates in this segment continued to remain at levels lower than in prior fiscal years.  We did not see in fiscal year 2007 any consistent sustained demand for commercial office space or for existing smaller retail developments, which comprise a majority of IRET’s retail portfolio.
 

•
Concessions.  Our overall level of tenant concessions declined slightly for the fiscal year ended April 30, 2007 compared to the year-earlier period. To maintain or increase physical occupancy levels at our properties, we may offer tenant incentives, generally in the form of lower or abated rents, which results in decreased revenues and income from operations at our properties.  Rent concessions offered during the fiscal year ended April 30, 2007 lowered our operating revenues by approximately $5.0 million, as compared to an approximately $5.2 million reduction in operating revenues attributable to rent concessions offered in fiscal year 2006.
 

The following table shows the approximate reduction in our operating revenues due to rent concessions, by segment, for the fiscal years ended April 30, 2007 and 2006:
 

   
(in thousands)
  
   
Fiscal Year Ended April 30,
  
   
2007
    
2006
    
%Change
  
Multi-Family Residential
   $ 3,147     $ 3,848       (18.2 %)
Commercial Office
     1,769       1,213       45.8 %
Commercial Medical
     70       74       (5.4 %)
Commercial Industrial
     14       53       (73.6 %)
Commercial Retail
     22       23       (4.3 %)
Total
   $ 5,022     $ 5,211       (3.6 %)

 
•
Increased Maintenance Expense.  Maintenance expenses totaled $21.7 million in fiscal year 2007, compared to $19.2 million in fiscal year 2006.  Maintenance expenses at properties newly acquired in fiscal years 2007 and 2006 added $2.5 million to the maintenance expense category during fiscal year 2007, while maintenance expenses at existing properties decreased by approximately $31,000, resulting in a net increase of $2.5 million or 13.1% in maintenance expenses in fiscal year 2007 compared to fiscal year 2006.  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 general rent increases.
 


2008 Annual Report  42
 
 

Maintenance expenses by reportable segment for the fiscal years ended April 30, 2007 and 2006 were as follows:
 

 
(in thousands)
  
 
Multi-Family Residential
  
Commercial Office
  
Commercial Medical
  
Commercial Industrial
  
Commercial Retail
  
Total
  
 
2007
   $ 8,619     $ 9,243     $ 2,611     $ 218     $ 1,000     $ 21,691  
2006
   $ 7,822     $ 7,582     $ 2,471     $ 201     $ 1,107     $ 19,183  
% change (2007 vs. 2006)
     10.2 %     21.9 %     5.7 %     8.5 %     (9.7 %)     13.1 %

 
•
Increased Utility Expense.  Utility expense totaled $15.2 million in fiscal year 2007, compared to $13.4 million in fiscal year 2006.  Utility expenses at properties newly acquired in fiscal years 2007 and 2006 added $1.6 million to the utility expense category during fiscal year 2007, while utility expenses at existing properties increased by approximately $88,000, for a total increase of $1.7 million or 12.9% in utility expenses in fiscal year 2007 compared to fiscal year 2006.
 

Utility expenses by reportable segment for the fiscal years ended April 30, 2007 and 2006 were as follows:
 

 
(in thousands)
  
 
Multi-Family Residential
  
Commercial Office
  
Commercial Medical
  
Commercial Industrial
  
Commercial Retail
  
Total
  
 
2007
   $ 6,666     $ 6,286     $ 1,771     $ 57     $ 377     $ 15,157  
2006
   $ 6,544     $ 4,805     $ 1,600     $ 91     $ 390     $ 13,430  
% change (2007 vs. 2006)
     1.9 %     30.8 %     10.7 %     (37.4 %)     (3.3 %)     12.9 %

 
•
Increased Mortgage Interest Expense.  Our mortgage interest expense increased approximately $7.1 million, or 14.3%, to approximately $56.6 million during fiscal year 2007, compared to $49.5 million in fiscal year 2006. Mortgage interest expense for properties newly acquired in fiscal years 2007 and 2006 added $7.7 million to our total mortgage interest expense in fiscal year 2007, while mortgage interest expense on existing properties decreased approximately $627,000.  Our overall weighted average interest rate on all outstanding mortgage debt was 6.43% as of April 30, 2007, compared to 6.63% as of April 30, 2006.  Our mortgage debt increased approximately $185.2 million, or 24.2%, to approximately $951.1 million as of April 30, 2007, compared to $765.9 million on April 30, 2006.
 

Mortgage interest expense by reportable segment for the fiscal years ended April 30, 2007 and 2006 were as follows:
 

 
(in thousands)
  
 
Multi-Family Residential
  
Commercial Office
  
Commercial Medical
  
Commercial Industrial
  
Commercial Retail
  
Total
  
 
2007
   $ 18,723     $ 20,157     $ 11,291     $ 2,325     $ 4,070     $ 56,566  
2006
   $ 17,919     $ 14,774     $ 10,534     $ 2,240     $ 4,029     $ 49,496  
% change (2007 vs. 2006)
     4.5 %     36.4 %     7.2 %     3.8 %     1.0 %     14.3 %

 
•
Increased 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 buildings 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, as computed in accordance with GAAP.  Amortization expense related to in-places leases totaled $9.2 million in fiscal year 2007, compared to $6.7 million in fiscal year 2006. The increase in amortization expense in fiscal year 2007 compared to fiscal year 2006 was primarily due to a significant acquisition completed by the Company in the second quarter of fiscal year 2007, of a portfolio of properties from Magnum Resources, Inc.
 

•
Increased Real Estate Tax Expense.  Real estate taxes on properties newly acquired in fiscal years 2007 and 2006 added $2.9 million to real estate tax expense, while real estate taxes on existing properties increased by
 


2008 Annual Report  43
 
 

approximately $638,000, for a total increase of $3.5 million or 17.8% in real estate tax expense in fiscal year 2007 compared to fiscal year 2006, from $19.8 million to $23.3 million.
 

Real estate tax expense by reportable segment for the fiscal years ended April 30, 2007 and 2006 was as follows:
 

 
(in thousands)
  
 
Multi-Family Residential
  
Commercial Office
  
Commercial Medical
  
Commercial Industrial
  
Commercial Retail
  
Total
  
 
2007
   $ 7,294     $ 10,831     $ 2,322     $ 755     $ 2,079     $ 23,281  
2006
   $ 6,955     $ 8,021     $ 2,283     $ 771     $ 1,727     $ 19,757  
% change (2007 vs. 2006)
     4.9 %     35.0 %     1.7 %     (2.1 %)     20.4 %     17.8 %

 
•
Decreased Insurance Expense.  Insurance expense decreased in fiscal year 2007 compared to fiscal year 2006, from $2.7 million to $2.4 million, a decrease of approximately 10.5%.  Insurance expense at properties newly-acquired in fiscal years 2007 and 2006 totaled approximately $208,000, while insurance expense at existing properties decreased approximately $488,000, for a net decrease of approximately $280,000 in insurance expense in fiscal year 2007 compared to fiscal year 2006.
 

Insurance expense by reportable segment for the fiscal years ended April 30, 2007 and 2006 was as follows:
 

 
(in thousands)
  
 
Multi-Family Residential
  
Commercial Office
  
Commercial Medical
  
Commercial Industrial
  
Commercial Retail
  
Total
  
 
2007
   $ 1,090     $ 772     $ 274     $ 75     $ 166     $ 2,377  
2006
   $ 1,394     $ 705     $ 298     $ 81     $ 179     $ 2,657  
% change (2007 vs. 2006)
     (21.8 %)     9.5 %     (8.1 %)     (7.4 %)     (7.3 %)     (10.5 %)

 
•
Increased Property Management Expense.  Property management expense increased in fiscal year 2007 compared to fiscal year 2006, from $11.8 million to $13.8 million, an increase of $2.0 million or approximately 17.3%.  Of this increase, $1.2 million was attributable to existing properties, while approximately $829,000 was due to properties acquired in fiscal years 2007 and 2006.  The increase at existing properties was primarily due to an increase in property revenue resulting in higher management fees payable (management fees are generally a percentage of rents received).
 

Property management expense by reportable segment for the fiscal years ended April 30, 2007 and 2006 was as follows:
 

 
(in thousands)
  
 
Multi-Family Residential
  
Commercial Office
  
Commercial Medical
  
Commercial Industrial
  
Commercial Retail
  
Total
  
 
2007
   $ 7,785     $ 3,343     $ 1,697     $ 148     $ 853     $ 13,826  
2006
   $ 6,987     $ 2,488     $ 1,662     $ 108     $ 541     $ 11,786  
% change (2007 vs. 2006)
     11.4 %     34.4 %     2.1 %     37.0 %     57.7 %     17.3 %
 
Comparison of Results from Commercial and Residential Properties
 
The following table presents an analysis of the relative investment in (corresponding to “Property owned” on the balance sheet, i.e., cost), and net operating income of, our commercial and multi-family residential properties over the past three fiscal years:
 

2008 Annual Report  44
 
 


 
   
(in thousands)
          
(in thousands)
          
(in thousands)
        
Fiscal Years Ended April 30
  
2008
    
%
    
2007
    
%
    
2006
    
%
  
Real Estate Investments – (cost)
                                    
Multi-Family Residential
   $ 510,697       31.0 %   $ 489,644       32.9 %   $ 452,251       35.6 %
Commercial Office
     556,712       33.8 %     536,431       36.0 %     383,280       30.2 %
Commercial Medical
     359,986       21.8 %     274,779       18.4 %     263,300       20.7 %
Commercial Industrial
     104,060       6.3 %     75,257       5.1 %     59,583       4.7 %
Commercial Retail
     116,804       7.1 %     113,176       7.6 %     111,009       8.8 %
Total
   $ 1,648,259       100 %   $ 1,489,287       100.0 %   $ 1,269,423       100.0 %
Net Operating Income
                                                
Multi-Family Residential
   $ 38,190       28.6 %   $ 35,518       29.4 %   $ 31,967       30.9 %
Commercial Office
     47,836       35.8 %     43,128       35.6 %     33,882       32.8 %
Commercial Medical
     28,656       21.4 %     26,108       21.5 %     23,356       22.6 %
Commercial Industrial
     9,162       6.8 %     6,838       5.6 %     5,120       5.0 %
Commercial Retail
     9,921       7.4 %     9,614       7.9 %     9,033       8.7 %
Total
   $ 133,765       100.0 %   $ 121,206       100.0 %   $ 103,358       100.0 %
 
Analysis of Lease Expirations and Credit Risk
 
The following table shows the annual lease expiration percentages and base rent of expiring leases for the total commercial segments properties owned by us as of April 30, 2008, for fiscal years 2009 through 2018, and the leases that will expire during fiscal year 2019 and beyond. Our multi-family residential properties are excluded from this table, since residential leases are generally for a one-year term.
 
Fiscal Year of Lease Expiration
  
Square Footage of Expiring Leases
    
Percentage of Total Commercial Segments Leased Square Footage
    
Annualized Base
Rent of Expiring
Leases at Expiration
    
Percentage of Total Commercial Segments Annualized Base Rent
  
2009
     826,376       8.3 %   $ 7,148,267       7.2 %
2010
     1,259,555       12.7 %     11,944,132       12.0 %
2011
     2,082,339       21.0 %     14,931,308       14.9 %
2012
     1,269,275       12.8 %     13,252,768       13.3 %
2013
     949,815       9.6 %     8,844,907       8.9 %
2014
     538,851       5.4 %     7,688,184       7.7 %
2015
     287,271       2.9 %     2,639,619       2.6 %
2016
     662,390       6.7 %     4,618,462       4.6 %
2017
     428,250       4.3 %     6,282,978       6.3 %
2018
     165,426       1.7 %     2,910,161       2.9 %
Thereafter
     1,445,997       14.6 %     19,594,066       19.6 %
Totals
     9,915,545       100.0 %   $ 99,854,852       100.0 %
 
The following table lists our top ten commercial tenants on April 30, 2008, for the total commercial segments properties owned by us as of April 30, 2008, based upon minimum rents in place as of April 30, 2008:
 

2008 Annual Report  45
 
 


   
(in thousands)
  
Lessee
  
% of Total Commercial Segments Minimum Rents as of April 30, 2008
  
Edgewood Vista/Sunwest Management, Inc.
     9.4 %
St. Lukes Hospital of Duluth, Inc.
     3.5 %
Fairview Health
     2.3 %
Applied Underwriters
     2.2 %
Best Buy Co., Inc. (NYSE: BBY)
     2.0 %
UGS Corp.
     1.7 %
HealthEast Care System
     1.6 %
Microsoft (Nasdaq: MSFT)
     1.5 %
Smurfit - Stone Container (Nasdaq: SSCC)
     1.5 %
Allina Health System
     1.4 %
All Others
     72.9 %
Total Monthly Rent as of April 30, 2008
     100.0 %
 
Property Acquisitions
 
IRET Properties paid approximately $154.7 million for real estate properties added to its portfolio during fiscal year 2008, compared to $220.7 million in fiscal year 2007. The fiscal year 2008 and 2007 additions are detailed below.
 
Fiscal 2008 (May 1, 2007 to April 30, 2008)
   
(in thousands)
  
Acquisitions
  
Acquisition Cost
  
       
Multi-Family Residential
      
96 – unit Greenfield Apartments – Omaha, NE
   $ 4,700  
67 – unit Cottonwood Lake IV – Bismarck, ND*
     6,191  
      10,891  
Commercial Property – Office
        
20,528 sq. ft. Plymouth 5095 Nathan Lane Office Building – Plymouth, MN
     2,000  
78,560 sq. ft. 610 Business Center IV – Brooklyn Park, MN
     6,500  
64,607 sq. ft. Intertech Office Building – Fenton, MO
     7,000  
      15,500  
Commercial Property—Medical (including Senior Housing)
        
18,502 sq. ft. Barry Pointe Medical Building – Kansas City, MO
     3,200  
11,800 sq. ft./28 beds Edgewood Vista Billings—Billings, MT
     4,250  
18,488 sq. ft./36 beds Edgewood Vista East Grand Forks—East Grand Forks, MN
     4,990  
11,800 sq. ft./28 beds Edgewood Vista Sioux Falls—Sioux Falls, SD
     3,350  
55,478 sq. ft. Edina 6405 France Medical—Edina, MN**
     13,615  
70,934 sq. ft. Edina 6363 France Medical—Edina, MN**
     13,360  
57,212 sq. ft. Minneapolis 701 25th Ave Medical (Riverside)—Minneapolis, MN**
     8,000  
53,466 sq. ft. Burnsville 303 Nicollet Medical (Ridgeview)—Burnsville, MN
     8,800  
36,199 sq. ft. Burnsville 305 Nicollet Medical (Ridgeview South)—Burnsville, MN
     5,900  
17,640 sq. ft. Eagan 1440 Duckwood Medical—Eagan, MN
     2,325  
5,192 sq. ft./13 beds Edgewood Vista Belgrade—Belgrade, MT
     2,100  
5,194 sq. ft./13 beds Edgewood Vista Columbus—Columbus, NE
     1,450  
168,801 sq. ft./185 beds Edgewood Vista Fargo—Fargo, ND
     25,850  
5,185 sq. ft./13 beds Edgewood Vista Grand Island—Grand Island, NE
     1,400  
5,135 sq. ft./13 beds Edgewood Vista Norfolk—Norfolk, NE
     1,300  
      99,890  
Commercial Property – Industrial
        
50,400 sq. ft. Cedar Lake Business Center – St. Louis Park, MN
     4,040  
528,353 sq. ft. Urbandale Warehouse Building – Urbandale, IA
     14,000  
69,600 sq. ft. Woodbury 1865 Woodlane – Woodbury, MN
     4,000  
198,600 sq. ft. Eagan 2785 & 2795 Highway 55—Eagan, MN
     6,400  
      28,440  
Total Property Acquisitions
   $ 154,721  
 
* Development property placed in service January 2, 2008.
 
** Acquisition of leasehold interests only (air rights lease and ground leases)
 
2008 Annual Report  46
 
Fiscal 2007 (May 1, 2006 to April 30, 2007)
   
(in thousands)
  
Fiscal 2007 Acquisitions
  
Acquisition Cost
  
       
Multi-Family Residential
      
192-unit Arbors Apartments – Sioux City, NE
   $ 7,000  
154-unit Quarry Ridge Apartments – Rochester, MN
     14,570  
389-unit St. Cloud Apartments – St. Cloud, MN
     7,800  
120-unit Indian Hills Apartments – Sioux City, IA
     3,120  
72-unit Rum River Apartments – Isanti, MN
     5,650  
      38,140  
Commercial Property – Office
        
143,061 sq. ft. Pacific Hills – Omaha, NE
     16,502  
141,724 sq. ft. Corporate Center West – Omaha, NE
     21,497  
94,832 sq. ft. Farnam Executive Center – Omaha, NE
     12,853  
84,475 sq. ft. Miracle Hills One – Omaha, NE
     11,950  
60,942 sq. ft. Woodlands Plaza IV – Maryland Heights, MO
     5,840  
122,567 sq. ft. Riverport – Maryland Heights, MO
     21,906  
90,315 sq. ft. Timberlands – Leawood, KS
     14,546  
138,825 sq. ft. Flagship – Eden Prairie, MN
     26,094  
59,827 sq. ft. Gateway Corporate Center – Woodbury, MN
     9,612  
71,430 sq. ft. Highlands Ranch I – Highlands Ranch, CO
     12,250  
      153,050  
Commercial Property – Medical (including senior housing)
        
26,336 sq. ft. Fox River Cottages – Grand Chute, WI
     3,200  
10,796 sq. ft. St. Michael Clinic – St. Michael, MN*
     2,587  
      5,787  
Commercial Property – Industrial
        
100,850 sq. ft. Bloomington 2000 – Bloomington, MN
     6,750  
172,057 sq. ft. Roseville 2929 – Roseville, MN
     10,300  
      17,050  
Commercial Property – Retail
        
16,921 sq. ft. Dakota West Plaza – Minot, ND
     625  
14,820 sq. ft. Weston Walgreens – Weston, WI**
     2,144  
      2,769  
Unimproved Land
        
Monticello Unimproved Parcel (City) – Monticello, MN
     5  
St. Michaels Unimproved – St. Michael, MN
     320  
Monticello Unimproved Parcel (Other) – Monticello, MN
     75  
Weston Unimproved – Weston, WI
     800  
Quarry Ridge Unimproved – Rochester, MN
     930  
Minot Prairie Green – Minot, ND
     1,750  
      3,880  
Total Fiscal 2007 Property Acquisitions
   $ 220,676  
* Development property placed in service March 1, 2007.
** Development property placed in service May 1, 2006.
 
In addition to the above property acquisitions, in the fourth quarter of fiscal year 2007 IRET Properties issued limited partnership units with a value at issuance of approximately $5.25 million to purchase an approximately 29% ownership interest in a limited liability company in which IRET already owned a 71% interest.  This entity owns the Southdale Medical Building in Edina, Minnesota, and with its acquisition of this remaining ownership interest, IRET now is the sole owner of this property.
 
Property Dispositions
 
During fiscal year 2008, IRET Properties disposed of two properties and two buildings of an apartment community for an aggregate sale price of $1.4 million, compared to 14 properties and two unimproved parcels sold for an aggregate sale price of $22.5 million in total during fiscal year 2007. Real estate assets sold by IRET during fiscal years 2008 and 2007 were as follows:
 

2008 Annual Report  47
 
 


 
   
(in thousands)
  
Fiscal 2008 Dispositions
  
Sales Price
    
Book Value
and Sales Cost
    
Gain/Loss
  
                   
Multi-Family Residential
                  
405 Grant Ave (Lonetree) Apartments – Harvey, ND
   $ 185     $ 184     $ 1  
Sweetwater Apartments – Devils Lake, ND
     940       430       510  
      1,125       614       511  
Commercial Property – Office
                        
Minnetonka Office Buildings – Minnetonka, MN
     310       307       3  
      310       307       3  
Total Fiscal 2008 Property Dispositions
   $ 1,435     $ 921     $ 514  

 
   
(in thousands)
  
Fiscal 2007 Dispositions
  
Sales Price
    
Book Value
and Sales Cost
    
Gain/Loss
  
                   
Multi-Family Residential
                  
60-unit Clearwater Apartments – Boise, ID
   $ 4,000     $ 3,413     $ 587  
122-unit Park East Apartments – Fargo, ND
     6,188       4,476       1,712  
      10,188       7,889       2,299  
Commercial Property – Office
                        
5,640 sq. ft. Greenwood Office – Greenwood, MN
     1,500       961       539  
      1,500       961       539  
Commercial Property – Medical (senior housing)
                        
29,408 sq. ft. Wedgewood Sweetwater – Lithia Springs, GA
     4,550       3,836       714  
      4,550       3,836       714  
Commercial Property – Retail
                        
4,560 sq. ft. Moundsview Bakery – Mounds View, MN
     380       287       93  
3,571 sq. ft. Howard Lake C-Store – Winsted, MN
     550       374       176  
6,225 sq. ft. Wilmar Sam Goody – Wilmar, MN
     450       409       41  
3,571 sq. ft. Winsted C-Store – Winsted, MN
     190       214       (24 )
7,700 sq. ft. Buffalo Strip Center – Buffalo, MN
     800       667       133  
4,800 sq. ft. Glencoe C-Store – Glencoe, MN
     350       344       6  
5,216 sq. ft. Long Prairie C-Store – Long Prairie, MN
     302       304       (2 )
5,600 sq. ft. Faribault Checkers Auto – Faribault, MN
     525       337       188  
4,800 sq. ft. Paynesville C-Store – Paynesville, MN
     149       150       (1 )
6,800 sq. ft. Prior Lake Strip Center I – Prior Lake, MN
     1,105       993       112  
4,200 sq. ft. Prior Lake Strip Center III – Prior Lake, MN
     545       465       80  
      5,346       4,544       802  
Unimproved Land
                        
IGH Land – Inver Grove Heights, MN
     900       613       287  
Long Prairie Unimproved Land – Long Prairie, MN
     59       60       (1 )
      959       673       286  
Total Fiscal 2007 Property Dispositions
   $ 22,543     $ 17,903     $ 4,640  
 
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.
 

2008 Annual Report  48
 
 

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 to better 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, 2008 increased to $64.2 million, compared to $57.0 million and $46.7 million for the fiscal years ended April 30, 2007 and 2006, respectively.
 
Reconciliation of Net Income to Funds From Operations
 
For the years ended April 30, 2008, 2007 and 2006:
 
   
(in thousands, except per share and unit amounts)
  
Fiscal Years Ended April 30,
  
2008
    
2007
    
2006
  
   
Amount
    
Weighted Avg
 Shares and
 Units (2)
    
Per
 Share
 and
 Unit (3)
    
Amount
    
Weighted Avg
 Shares and
 Units (2)
    
Per
 Share
 and
 Unit (3)
    
Amount
    
Weighted Avg
 Shares and
 Units (2)
    
Per
Share
and
Unit (3)
  
                                                       
Net income
   $ 12,088           $       $ 14,110           $       $ 11,567           $    
Less dividends to preferred shareholders
     (2,372 )                   (2,372 )                   (2,372 )              
Net income available to common shareholders
     9,716       53,060       0.18       11,738       47,672       0.24       9,195       45,717       0.20  
Adjustments:
                                                                        
Minority interest in earnings of unitholders
     3,677       20,417               4,299       17,017               2,705       13,329          
Depreciation and amortization(1)
     51,303                       45,559                       38,104                  
Gains on depreciable property sales
     (514 )                     (4,602 )                     (3,293 )                
Funds from operations applicable to common shares and Units(4)
   $ 64,182       73,477     $ 0.87     $ 56,994       64,689     $ 0.88     $ 46,711       59,046     $ 0.79  
 
(1)
Real estate depreciation and amortization consists of the sum of depreciation/amortization related to real estate investments and amortization related to non-real estate investments from the Consolidated Statements of Operations, totaling $51,518, and depreciation/amortization from Discontinued Operations of $47, less corporate-related depreciation and amortization on office equipment and other assets of $262, for the fiscal year ended April 30, 2008.
(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.
(4)
In accordance with SEC and NAREIT guidance, IRET does not exclude impairment write-downs from FFO (that is, impairment charges are not added back to GAAP net income in calculating FFO). IRET recorded impairment charges of $0, $640 and $409 for the fiscal years ended April 30, 2008, 2007 and 2006, respectively. If these impairment charges are excluded from the Company's calculation of FFO, the Company's FFO per share and unit would be unchanged for fiscal year 2008, and would increase by one cent per share and unit in each of fiscal years 2007 and 2006, to $.89 and $.80 per share and unit, respectively.
 
2008 Annual Report  49
 
Cash Distributions
 
The following cash distributions were paid to our common shareholders and UPREIT unitholders during fiscal years 2008, 2007 and 2006:
 
   
Fiscal Years
  
Quarters
  
2008
    
2007
    
2006
  
First
   $ .1665     $ .1645     $ .1625  
Second
     .1670       .1650       .1630  
Third
     .1675       .1655       .1635  
Fourth
     .1680       .1660       .1640  
    $ .6690     $ .6610     $ .6530  
 
The fiscal year 2008 cash distributions increased 1.2% over the cash distributions paid during fiscal year 2007, and fiscal year 2007 cash distributions increased 1.2% over the cash distributions paid during fiscal year 2006, respectively.
 
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, 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, 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, 2008, the Company had three unsecured lines of credit, in the amounts of $10.0 million, $12.0 million and $10.0 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, 2008. Borrowings under the lines of credit bear interest based on the following, respectively: (1) Bremer Financial Corporation Reference Rate, (2) 175 basis points below the Prime Rate as published in the Wall Street Journal with a floor of 5.25% and a ceiling of 8.25%, and (3) Wall Street Journal Prime Rate. 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, First Western Bank and First International Bank and Trust expire in September 2008, December 2011 and December 2008, respectively.  The Company expects to renew these lines of credit prior to their expiration.
 
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 an aggregate initial offering price of $150.0 million during the period that the registration statement remains effective. The Company did not issue any common or preferred shares under this registration statement in fiscal years 2007 and 2006. The Company issued 6.9 million
 

2008 Annual Report  50
 
 

common shares under this registration statement in fiscal year 2008, for net proceeds of $66.4 million. As of April 30, 2008, the Company had available securities under this registration statement in the aggregate amount of approximately $30.7 million.
 
The Company has a Distribution Reinvestment and Share Purchase 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 (currently 5%) from the market price, and to purchase additional common shares of the Company with voluntary cash contributions, also at a discount to the market price. During fiscal year 2008, approximately 1.2 million common shares were issued under this plan, with an additional 1.2 million common shares issued during fiscal year 2007, and 1.2 million common shares issued during fiscal year 2006.
 
The issuance of UPREIT Units for property acquisitions continues to be a source of capital for the Company.  Approximately 2.3 million units were issued in connection with property acquisitions during fiscal year 2008, and approximately 6.7 million units and 1.1 million units, respectively, were issued in connection with property acquisitions during fiscal years 2007 and 2006.
 
Primarily as a result of the conversion of UPREIT units and the issuance of common shares pursuant to our shelf registration statement and distribution reinvestment plan, net of fractional shares repurchased, the Company’s equity capital increased during fiscal 2008 by $85.7 million. Additionally, the equity capital of the Company was increased by $22.9 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 during fiscal year 2008 of $108.6 million. The Company’s equity capital increased by $66.5 million and $26.2 million in fiscal years 2007 and 2006, respectively.
 
Cash and cash equivalents on April 30, 2008 totaled $53.5 million, compared to $44.5 million and $17.5 million on the same date in 2007 and 2006, respectively. Net cash provided from operating activities increased to $61.9 million in fiscal year 2008 from $58.4 million in fiscal year 2007, due primarily to increased net income as a result of less cash concessions given to tenants . Net cash provided from operating activities increased to $58.4 million in fiscal year 2007 from $48.4 million in fiscal year 2006, also due primarily to increased net income as a result of higher occupancy rates at Company properties.
 
Net cash used in investing activities decreased to $145.3 million in fiscal year 2008, from $161.4 million in fiscal year 2007. Net cash used in investing activities was $82.6 million in fiscal year 2006. The decrease in net cash used in investing activities in fiscal year 2008 compared to fiscal year 2007 was primarily a result of fewer proceeds from sales of properties. Net cash provided from financing activities decreased to $92.3 million during fiscal year 2008, from $130.0 million during fiscal year 2007, due primarily to an decrease in proceeds received from mortgage borrowings and refinancings. Net cash provided from financing activities increased to $130.0 million during fiscal year 2007, from $28.2 million during fiscal year 2006, also due primarily to an increase in proceeds received from mortgage borrowings and refinancings.
 
Financial Condition
 
Mortgage Loan Indebtedness. Mortgage loan indebtedness increased to $1.1 billion on April 30, 2008, due to the debt placed on acquisitions, from $951.1 million on April 30, 2007 and $765.9 million on April 30, 2006. Approximately 98.9% 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, 2008, the weighted average rate of interest on the Company’s mortgage debt was 6.37%, compared to 6.43% on April 30, 2007 and 6.63% on April 30, 2006.
 
Revolving lines of credit. As of April 30, 2008 and 2007, the Company had no amounts outstanding under its unsecured credit lines with Bremer Bank, First Western Bank and Trust, and First International Bank and Trust. The Company had $3.5 million outstanding under its unsecured credit line with First Western Bank and Trust as of April 30, 2006.
 
Mortgage Loans Receivable. Mortgage loans receivable net of allowance increased to approximately $541,000 at April 30, 2008, from approximately $399,000 at April 30, 2007 and approximately $409,000 at April 30, 2006.
 
Property Owned. Property owned increased to $1.6 billion at April 30, 2008, from $1.5 billion at April 30, 2007. The increases resulted primarily from the acquisition of the additional investment properties net of dispositions as
 

2008 Annual Report  51
 
 

described in the “Property Acquisitions” and “Property Dispositions” subsections of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Cash and Cash Equivalents. Cash and cash equivalents on April 30, 2008, totaled $53.5 million, compared to $44.5 million on April 30, 2007 and $17.5 million on April 30, 2006. The increase in cash on hand on April 30, 2008, as compared to April 30, 2007, was due primarily to proceeds from an increase in mortgage loan borrowings.
 
Marketable Securities. During fiscal year 2008, IRET decreased its investment in marketable securities classified as available-for-sale to approximately $420,000 on April 30, 2008, from $2.0 million on April 30, 2007 and $2.4 million on April 30, 2006. 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 21.2 million units on April 30, 2008, compared to 20.0 million units on April 30, 2007 and 13.7 million units on April 30, 2006. The increase in units outstanding at April 30, 2008 as compared to April 30, 2007 and 2006, 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, 2008 totaled 57.7 million compared to 48.6 million common shares outstanding on April 30, 2007 and 46.9 million common shares outstanding on April 30, 2006. This increase in common shares outstanding from April 30, 2007 and 2006, to April 30, 2008, was due to the issuance of common shares pursuant to our shelf registration statement and distribution reinvestment plan. Preferred shares of beneficial interest outstanding on April 30, 2008, 2007 and 2006 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 had no amounts outstanding under its lines of credit at April 30, 2008. The principal and interest payments on the mortgage notes payable for the years subsequent to April 30, 2008, are included in the table below as “Long-term debt.” Interest due on variable rate mortgage notes is calculated using rates in effect on April 30, 2008. The other debt category consists of one unsecured promissory note for leasehold improvements at one of our properties, Southdale Medical Center in Edina, Minnesota.
 
As of April 30, 2008, the Company is a tenant under operating ground or air rights leases on eleven of its properties. The Company pays a total of approximately $503,000 per year in rent under these leases, which have remaining terms ranging from 4 to 92 years, and expiration dates ranging from July 2012 to October 2100.
 
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, 2008, which the Company expects to finance through debt and operating cash, 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)
   $ 1,471,688     $ 111,096     $ 368,962     $ 239,136     $ 752,494  
Other Debt
   $ 73     $ 73     $ 0     $ 0     $ 0  
Operating Lease Obligations
   $ 26,576     $ 503     $ 1,006     $ 1,006     $ 24,061  
Purchase Obligations
   $ 5,416     $ 5,209     $ 207     $ 0     $ 0  

2008 Annual Report  52
 
 

Off-Balance-Sheet Arrangements
 
As of April 30, 2008, 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, 2008, 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 16, 2008. On July 1, 2008, the Company paid a distribution of 16.85 cents per share on the Company’s common shares of beneficial interest, to common shareholders and UPREIT unitholders of record on June 16, 2008. This distribution represented an increase of .05 cents or .3% over the previous regular quarterly distribution of 16.80 cents per common share/unit paid April 1, 2008.
 
Closed and Pending Acquisitions.  Subsequent to its April 30, 2008 fiscal year end, the Company closed on the acquisition of several small apartment buildings in Minot, North Dakota, with a total of 52 units, for a total purchase price of $2.5 million, including the issuance to the seller of approximately 192,000 UPREIT units valued at $10.20 per unit.  The Company also acquired, subsequent to its fiscal 2008 year end, a parcel of vacant land in Bismarck, North Dakota, for a purchase price of approximately $576,000.  This vacant parcel adjoins the Company’s existing Cottonwoods apartment complexes in Bismarck.

As of April 30, 2008, the Company had signed purchase agreements to acquire a 36-unit multi-family apartment complex in Isanti, Minnesota, for a purchase price of $3.1 million, and a small office building in Bismarck, North Dakota, for a purchase price of $2.2 million.  These pending acquisitions are subject to various closing conditions and contingencies, and no assurances can be given that these transactions will be completed.

The Company also continues to work to close a previously-announced proposed acquisition of a two-building senior housing complex located in Minot, North Dakota, consisting of two single-story facilities containing approximately 93,708 square feet and 9,693 square feet, respectively, with a combined total of 184 units/beds, for a purchase price of $14.8 million.  The Company had expected to close this acquisition prior to its April 30, 2008 fiscal year end; negotiations with the sellers and lenders to the project are continuing, but the Company currently has no firm estimate of when this proposed acquisition transaction may be completed, or negotiations terminated. This pending acquisition is subject to various closing conditions and contingencies, and no assurances can be given that this transaction will be completed.
 
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. Because approximately 98.9% of our debt, as of April 30, 2008 (97.7% and 96.8% respectively, as of April 30, 2007 and 2006), is at fixed interest rates, we have little exposure to interest rate fluctuation risk on our existing debt. However, even though our goal is to maintain a fairly low exposure to interest rate risk, we are still vulnerable to significant fluctuations in interest rates on any future repricing or refinancing of our fixed or variable 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, 2008, 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
  
2009
    
2010
    
2011
    
2012
    
2013
    
Thereafter
    
Total
  
Fixed Rate
   $ 41,474     $ 150,947     $ 102,844     $ 106,089     $ 46,830     $ 603,978     $ 1,052,162  
Variable Rate
     2,844       2,733       250       267       4,859       743       11,696  
                                                    $ 1,063,858  


2008 Annual Report  53
 
 


   
Future Interest Payments (in thousands)
  
Long Term Debt
  
2009
    
2010
    
2011
    
2012
    
2013
    
Thereafter
    
Total
  
Fixed Rate
   $ 66,159     $ 59,971     $ 51,308     $ 42,651     $ 37,722     $ 147,503     $ 405,314  
Variable Rate
     619       482       427       410       308       270       2,516  
                                                    $ 407,830  

 
The weighted average interest rate on our debt as of April 30, 2008, was 6.37%. Any fluctuations in variable interest rates could increase or decrease our interest expenses. For example, an increase of one percent per annum on our $11.7 million of variable rate indebtedness would increase our annual interest expense by $117,000.
 
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, 2008 and 2007, IRET had approximately $420,000 and $2.0 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 approximately $2.4 million of securities classified as “available-for-sale” as of April 30, 2006. The values of these securities will fluctuate with changes in market interest rates. As of April 30, 2007, IRET recorded in other comprehensive income an unrealized loss of $16,000 on these securities. During the fourth quarter of fiscal year 2008, IRET sold the securities in its deposit account with Merrill Lynch for a gain of approximately $42,000, recorded in other comprehensive income and in net income as of April 30, 2008.
 
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.
 
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, 2008, 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.
 

2008 Annual Report 54 
 
 

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, 2008, 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, 2008, was 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.
 
The Company’s internal control over financial reporting as of April 30, 2008, has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing below, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of April 30, 2008.
 

 

 

 

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

2008 Annual Report  55
 
 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 

 
To the Board of Trustees and Shareholders of
 
Investors Real Estate Trust
 
Minot, North Dakota
 
We have audited the internal control over financial reporting of Investors Real Estate Trust and subsidiaries (the “Company”) as of April 30, 2008, 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 internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express 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, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
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 trustees, 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 trustees 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, the Company maintained, in all material respects, effective internal control over financial reporting as of April 30, 2008, 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 and financial statement schedules as of and for the year ended April 30, 2008, of the Company and our report dated July 11, 2008, expressed an unqualified opinion on those financial statements and financial statement schedules.
 
Minneapolis, Minnesota
 
July 11, 2008
 

2008 Annual Report  56
 
 

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 2008 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 2008 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 2008 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, and Trustee Independence
 
The information required by this Item will be contained in our definitive Proxy Statement for our 2008 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 2008 Annual Meeting of Shareholders and such information is incorporated herein by reference.
 

2008 Annual Report 57 
 
 

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:
 
II Valuation and Qualifying Accounts
 
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
Third Restated Trustees’ Regulations (Bylaws), dated May 16, 2007, and incorporated herein by reference to the Company’s Current Report on Form 8-K , filed with the SEC on May 16, 2007.
 
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.
 

2008 Annual Report  58
 
 

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.
 
10.7
Description of Compensation of Executive Officers, filed as Exhibit 10 to the Company’s Form 10-Q filed December 12, 2005, and incorporated herein by reference.
 
10.8
Contribution Agreement, filed as Exhibit 10.1 to the Company’s Form 8-K filed May 17, 2006, and incorporated herein by reference.
 
10.09
Description of Compensation of Trustees, filed as Exhibit 10 to the Company’s Form 10-Q filed September 11, 2006, and incorporated herein by reference.
 
10.10
Loan and Security Agreement, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed September 18, 2006, and incorporated herein by reference.
 
10.11
Description of Compensation of Executive Officers, filed as Exhibit 10 to the Company’s Form 10-Q filed March 12, 2007, and incorporated herein by reference.
 
10.12
Description of Compensation of Executive Officers, filed as Exhibit 10 to the Company’s Form 10-Q filed March 11, 2008, and incorporated herein by reference.
 
10.13
Description of Compensation of Trustees, filed as Exhibit 10 to the Company’s Form 10-Q filed December 10, 2007, and incorporated herein by reference.
 
21.1
Subsidiaries of Investors Real Estate Trust, filed herewith.
 
23.1
Consent of Deloitte & Touche LLP, 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.
 

 

2008 Annual Report 59 
 
 

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 9, 2008
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 9, 2008
         
/s/ Stephen L. Stenehjem
        
Stephen L. Stenehjem
  
Trustee & Vice Chairman
  
July 9, 2008
         
/s/ Thomas A. Wentz. Sr.
        
Thomas A. Wentz, Sr.
  
President & Chief Executive Officer
(Principal Executive Officer)
  
July 9, 2008
         
/s/ Timothy P. Mihalick
        
Timothy P. Mihalick
  
Trustee, Senior Vice President & Chief
Operating Officer
  
July 9, 2008
         
/s/ Thomas A. Wentz, Jr.
        
Thomas A. Wentz, Jr.
  
Trustee & Senior Vice President
  
July 9, 2008
         
/s/ Diane K. Bryantt
        
Diane K. Bryantt
  
Senior Vice President & Chief Financial Officer (Principal Financial and Accounting Officer)
  
July 9, 2008
         
/s/ John D. Stewart
        
John D. Stewart
  
Trustee
  
July 9, 2008
         
/s/ Patrick G. Jones
        
Patrick G. Jones
  
Trustee
  
July 9, 2008
         
/s/ C.W. “Chip” Morgan
        
C.W. “Chip” Morgan
  
Trustee
  
July 9, 2008
         
/s/ W. David Scott
        
W. David Scott
  
Trustee
  
July 9, 2008

2008 Annual Report  60
 
 


 

 

 

 

 

 
 
INVESTORS REAL ESTATE TRUST
AND SUBSIDIARIES
 
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
April 30, 2008, 2007 and 2006
 
ADDITIONAL INFORMATION
FOR THE YEAR ENDED
April 30, 2008
 
and
 
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
 
PO Box 1988
12 Main Street South
Minot, ND 58702-1988
701-837-4738
fax: 701-838-7785
info@iret.com
www.iret.com
 

 

2008 Annual Report 
 
 
 

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
 
TABLE OF CONTENTS
 
 
PAGE
F-2
CONSOLIDATED FINANCIAL STATEMENTS
  
F-3
F-4
F-5
F-6 – F-7
F-8 – F-28
ADDITIONAL INFORMATION
  
F-29
F-30
F-31-40
F-41
 
Schedules other than those listed above are omitted since they are not required or are not applicable, or the required information is shown in the consolidated financial statements or notes thereon.
 

 

 

2007 Annual Report F-1
 
 
 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Trustees and Shareholders of
 
Investors Real Estate Trust
 
Minot, North Dakota
 
We have audited the accompanying consolidated balance sheets of Investors Real Estate Trust and subsidiaries (the “Company”) as of April 30, 2008 and 2007, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three fiscal years in the period ended April 30, 2008. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits 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 the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Investors Real Estate Trust and subsidiaries as of April 30, 2008 and 2007, and the results of their operations and their cash flows for each of the three fiscal years in the period ended April 30, 2008, in conformity with accounting principles generally accepted in the United States of America.
 
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of April 30, 2008, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated July 11, 2008 expressed an unqualified opinion on the Company's internal control over financial reporting.
 
Minneapolis, Minnesota
 
July 11, 2008
 

2008 Annual Report F-2
 
 
 

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 30, 2008 and 2007
 

 
   
(in thousands)
  
   
April 30, 2008
    
April 30, 2007
  
ASSETS
            
Real estate investments
            
Property owned
   $ 1,648,259     $ 1,489,287  
Less accumulated depreciation
     (219,379 )     (180,544 )
      1,428,880       1,308,743  
Development in progress
     22,856       3,498  
Unimproved land
     3,901       3,894  
Mortgage loans receivable, net of allowance
     541       399  
Total real estate investments
     1,456,178       1,316,534  
Other assets
                
Cash and cash equivalents
     53,481       44,516  
Marketable securities – available-for-sale
     420       2,048  
Receivable arising from straight-lining of rents, net of allowance
     14,113       12,558  
Accounts receivable, net of allowance
     4,163       3,171  
Real estate deposits
     1,379       735  
Prepaid and other assets
     349       568  
Intangible assets, net of accumulated amortization
     61,649       33,240  
Tax, insurance, and other escrow
     8,642       7,222  
Property and equipment, net
     1,467       1,458  
Goodwill
     1,392       1,397  
Deferred charges and leasing costs, net
     14,793       11,942  
TOTAL ASSETS
   $ 1,618,026     $ 1,435,389  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
                
LIABILITIES
                
Accounts payable and accrued expenses
   $ 33,757     $ 28,995  
Mortgages payable
     1,063,858       951,139  
Other
     978       896  
TOTAL LIABILITIES
     1,098,593       981,030  
                 
COMMITMENTS AND CONTINGENCIES (NOTE 15)
                
MINORITY INTEREST IN PARTNERSHIPS
     12,609       12,925  
MINORITY INTEREST OF UNITHOLDERS IN OPERATING PARTNERSHIP
     161,818       156,465  
(21,238,342 units at April 30, 2008 and 19,981,259 units at April 30, 2007)
                
SHAREHOLDERS’ EQUITY
                
Preferred Shares of Beneficial Interest (Cumulative redeemable preferred shares, no par value, 1,150,000 shares issued and outstanding at April 30, 2008 and April 30, 2007, aggregate liquidation preference of $28,750,000)
     27,317       27,317  
Common Shares of Beneficial Interest (Unlimited authorization, no par value, 57,731,863 shares issued and outstanding at April 30, 2008, and 48,570,461 shares issued and outstanding at April 30, 2007)
     440,187       354,495  
Accumulated distributions in excess of net income
     (122,498 )     (96,827 )
Accumulated other comprehensive loss
     0       (16 )
Total shareholders’ equity
     345,006       284,969  
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
   $ 1,618,026     $ 1,435,389  
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
 

2008 Annual Report F-3
 
 
 

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended April 30, 2008, 2007, and 2006
 

 
   
(in thousands, except per share data)
  
   
2008
    
2007
    
2006
  
REVENUE
                  
Real estate rentals
   $ 179,965     $ 162,410     $ 141,782  
Tenant reimbursement
     41,205       35,128       28,389  
TOTAL REVENUE
     221,170       197,538       170,171  
OPERATING EXPENSE
                        
Interest
     63,439       58,424       50,677  
Depreciation/amortization related to real estate investments
     50,042       44,419       36,894  
Utilities
     17,793       15,157       13,430  
Maintenance
     24,582       21,691       19,183  
Real estate taxes
     27,133       23,281       19,757  
Insurance
     2,624       2,377       2,657  
Property management expenses
     15,273       13,826       11,786  
Administrative expenses
     4,745       4,162       3,673  
Advisory and trustee services
     458       289       221  
Other operating expenses
     1,344       1,240       1,269  
Amortization related to non-real estate investments
     1,476       1,082       745  
TOTAL OPERATING EXPENSE
     208,909       185,948       160,292  
Operating income
     12,261       11,590       9,879  
Interest income
     2,095       1,944       816  
Other non-operating income
     665       721       424  
Income before minority interest and discontinued operations and gain (loss) on sale of other investments
     15,021       14,255       11,119  
Gain (loss) on sale of other investments
     42       (38 )     23  
Minority interest portion of operating partnership income
     (3,524 )     (3,217 )     (1,892 )
Minority interest portion of other partnerships’ loss (income)
     136       26       (484 )
Income from continuing operations
     11,675       11,026       8,766  
Discontinued operations, net of minority interest
     413       3,084       2,801  
NET INCOME
     12,088       14,110       11,567  
Dividends to preferred shareholders
     (2,372 )     (2,372 )     (2,372 )
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
   $ 9,716     $ 11,738     $ 9,195  
Earnings per common share from continuing operations
   $ .17     $ .18     $ .14  
Earnings per common share from discontinued operations
     .01       .06       .06  
NET INCOME PER COMMON SHARE – BASIC & DILUTED
   $ .18     $ .24     $ .20  
 
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
 

2008 Annual Report F-4
 
 
 

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
for the years ended April 30, 2008, 2007, and 2006
 

 
   
(in thousands)
  
   
NUMBER OF PREFERRED SHARES
    
PREFERRED SHARES
    
NUMBER OF COMMON SHARES
    
COMMON SHARES
    
ACCUMULATED
DISTRIBUTIONS
IN EXCESS OF
NET INCOME
  
ACCUMULATED
OTHER
COMPRE-HENSIVE
(LOSS)
    
TOTAL
SHARE-
HOLDERS’
EQUITY
  
BALANCE APRIL 30, 2005
     1,150     $ 27,317       45,188     $ 324,180     $ (56,303 )   $ (22 )   $ 295,172  
Comprehensive Income
                                                        
Net income
                                     11,567               11,567  
Unrealized loss for the period on securities available-for-sale
                                             (26 )     (26 )
Total comprehensive income
                                                     11,541  
Distributions - common shares
                                     (29,985 )             (29,985 )
Distributions - preferred shares
                                     (2,372 )             (2,372 )
Distribution reinvestment plan
                     1,213       11,076                       11,076  
Sale of shares
                     15       139                       139  
Redemption of units for common shares
                     501       4,006                       4,006  
Fractional shares repurchased
                     (2 )     (17 )                     (17 )
BALANCE APRIL 30, 2006
     1,150       27,317       46,915       339,384       (77,093 )     (48 )     289,560  
Comprehensive Income
                                                        
Net income
                                     14,110               14,110  
Unrealized gain for the period on securities available-for-sale
                                             32       32  
Total comprehensive income
                                                     14,142  
Distributions - common shares
                                     (31,472 )             (31,472 )
Distributions - preferred shares
                                     (2,372 )             (2,372 )
Distribution reinvestment plan
                     1,215       11,412                       11,412  
Sale of shares
                     32       303                       303  
Redemption of units for common shares
                     410       3,411                       3,411  
Fractional shares repurchased
                     (2 )     (15 )                     (15 )
BALANCE APRIL 30, 2007
     1,150       27,317       48,570       354,495       (96,827 )     (16 )     284,969  
Comprehensive Income
                                                        
Net income
                                     12,088               12,088  
Unrealized gain for the period on securities available-for-sale
                                             16       16  
Total comprehensive income
                                                     12,104  
Distributions - common shares
                                     (35,387 )             (35,387 )
Distributions - preferred shares
                                     (2,372 )             (2,372 )
Distribution reinvestment plan
                     1,177       11,274                       11,274  
Sale of shares
                     6,934       66,679                       66,679  
Redemption of units for common shares
                     1,052       7,753                       7,753  
Fractional shares repurchased
                     (1 )     (14 )                     (14 )
BALANCE APRIL 30, 2008
     1,150     $ 27,317       57,732     $ 440,187     $ (122,498 )   $ 0     $ 345,006  
 
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
 

2008 Annual Report F-5
 
 
 

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended April 30, 2008, 2007, and 2006
 

 
   
(in thousands)
  
   
2008
    
2007
    
2006
  
CASH FLOWS FROM OPERATING ACTIVITIES
                  
Net Income
   $ 12,088     $ 14,110     $ 11,567  
Adjustments to reconcile net income to net cash provided by operating activities:
                        
Depreciation and amortization
     52,423       46,695       39,219  
Minority interest portion of income
     3,541       4,273       3,189  
Gain on sale of real estate, land and other investments
     (556 )     (4,602 )     (3,293 )
Loss on impairment of real estate investments
     0       640       409  
Bad debt expense
     1,060       507       167  
Changes in other assets and liabilities:
                        
Increase in receivable arising from straight-lining of rents
     (1,921 )     (3,247 )     (2,261 )
Increase in accounts receivable
     (1,754 )     (1,007 )     (1,137 )
Decrease (increase) in prepaid and other assets
     219       (132 )     724  
(Increase) decrease in tax, insurance and other escrow
     (1,420 )     1,671       175  
Increase in deferred charges and leasing costs
     (5,468 )     (4,801 )     (2,914 )
Increase in accounts payable, accrued expenses and other liabilities
     3,667       4,334       2,555  
Net cash provided by operating activities
     61,879       58,441       48,400  
CASH FLOWS FROM INVESTING ACTIVITIES
                        
Proceeds from sale of marketable securities - available-for-sale
     1,740       525       174  
Proceeds (payments) of real estate deposits
     (644 )     442       1,365  
Principal proceeds on mortgage loans receivable
     25       23       210  
Investment in mortgage loans receivable
     (167 )     0       0  
Purchase of marketable securities - available-for-sale
     (54 )     (132 )     (57 )
Proceeds from sale of real estate and other investments
     1,374       22,375       13,480  
Insurance proceeds received
     837       0       0  
Payments for acquisitions and improvements of real estate investments
     (148,364 )     (184,613 )     (97,810 )
Net cash used by investing activities
     (145,253 )     (161,380 )     (82,638 )
CASH FLOWS FROM FINANCING ACTIVITIES
                        
Proceeds from sale of common shares, net of issue costs
     66,679       303       139  
Proceeds from mortgages payable
     111,684       257,664       80,276  
Proceeds from minority partner
     0       54       248  
Proceeds from revolving lines of credit
     0       20,500       3,500  
Repurchase of fractional shares and minority interest units
     (14 )     (15 )     (17 )
Distributions paid to common shareholders, net of reinvestment
     (24,869 )     (20,865 )     (19,649 )
Distributions paid to preferred shareholders
     (2,372 )     (2,372 )     (2,372 )
Distributions paid to unitholders of operating partnership
     (12,747 )     (10,258 )     (7,881 )
Distributions paid to other minority partners
     (179 )     (170 )     (189 )
Redemption of investment certificates
     (11 )     (2,440 )     (2,312 )
Principal payments on mortgages payable
     (45,759 )     (88,345 )     (23,482 )
Principal payments on revolving lines of credit and other debt
     (73 )     (24,086 )     (76 )
Net cash provided by financing activities
     92,339       129,970       28,185  
NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS
     8,965       27,031       (6,053 )
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
     44,516       17,485       23,538  
CASH AND CASH EQUIVALENTS AT END OF YEAR
   $ 53,481     $ 44,516     $ 17,485  
 
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
 

2008 Annual Report F-6
 
 
 

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
for the years ended April 30, 2008, 2007, and 2006
 

 
   
(in thousands)
  
   
2008
    
2007
    
2006
  
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
                  
Distribution reinvestment plan
   $ 10,518     $ 10,607     $ 10,336  
Operating partnership distribution reinvestment plan
     756       805       741  
Real estate investment acquired through assumption of indebtedness and accrued costs
     46,794       16,838       0  
Other assets acquired in lieu of cash
     0       6       129  
Assets acquired through the issuance of minority interest units in the operating partnership
     22,931       62,427       10,898  
Operating partnership units converted to shares
     7,753       3,411       4,006  
                         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
                        
Cash paid during the year for:
                        
Interest on mortgages
   $ 62,110     $ 56,918     $ 49,900  
Interest on investment certificates
     2       164       231  
Interest on margin account and other
     98       812       100  
    $ 62,210     $ 57,894     $ 50,231  
 
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
 

2008 Annual Report F-7
 
 
 

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2008, 2007, and 2006
 
NOTE 1 • ORGANIZATION
 
Investors Real Estate Trust (“IRET” or the “Company”) is a self-advised real estate investment trust engaged in acquiring, owning and leasing multi-family and commercial real estate. IRET has elected to be taxed as a Real Estate Investment Trust (“REIT”) under Sections 856-860 of the Internal Revenue Code of 1986, as amended. REITs are subject to a number of organizational and operational requirements, including a requirement to distribute 90% of ordinary taxable income to shareholders, and, generally, are not subject to federal income tax on net income. IRET’s multi-family residential properties and commercial properties are located mainly in the states of North Dakota and Minnesota, but also in the states of Colorado, Idaho, Iowa, Kansas, Montana, Missouri, Nebraska, South Dakota, Texas, Michigan and Wisconsin. As of April 30, 2008, IRET owned 72 multi-family residential properties with approximately 9,500 apartment units and 163 commercial properties, consisting of office, medical, industrial and retail properties, totaling approximately 11.5 million net rentable square feet. IRET conducts a majority of its business activities through its consolidated operating partnership, IRET Properties, a North Dakota Limited Partnership (the “Operating Partnership”), as well as through a number of other subsidiary entities.
 
All references to IRET or the Company refer to Investors Real Estate Trust and its consolidated subsidiaries.
 
NOTE 2 • BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
 
BASIS OF PRESENTATION
 
The accompanying consolidated financial statements include the accounts of IRET and all subsidiaries in which it maintains a controlling interest. All intercompany balances and transactions are eliminated in consolidation. The Company’s fiscal year ends April 30th.
 
The accompanying consolidated financial statements include the accounts of IRET and its general partnership interest in the Operating Partnership. The Company’s interest in the Operating Partnership was 73.1% and 70.9% as of April 30, 2008 and 2007, which includes 100% of the general partnership interest. The limited partners have a redemption option that they may exercise. Upon exercise of the redemption option by the limited partners, IRET has the option of redeeming the limited partners’ interests (“Units”) for IRET common shares of beneficial interest, on a one-for-one basis, or for cash payment to the unitholder. The redemption generally may be exercised by the limited partners at any time after the first anniversary of the date of the acquisition of the Units (provided, however, that not more than two redemptions by a limited partner may occur during each calendar year, and each limited partner may not exercise the redemption for less than 1,000 Units, or, if such limited partner holds less than 1,000 Units, for all of the Units held by such limited partner). Some limited partners have contractually agreed to a holding period of greater than one year.
 
The consolidated financial statements also reflect the ownership by the Operating Partnership of certain joint venture entities in which the Operating Partnership has a general partner or controlling interest. These entities are consolidated into IRET’s other operations with minority interests reflecting the minority partners’ share of ownership and income and expenses.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB 51 (“SFAS 160”). SFAS 160 changes the accounting and reporting for minority interests. Minority interests will be recharacterized as noncontrolling interests and will be reported as a component of equity separate from the parent’s equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement and upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. SFAS 160 is effective for the Company on May 1, 2009, and most of its provisions will apply prospectively, except for the presentation and disclosure requirements, which will apply retrospectively. The Company is currently evaluating the impact of adopting SFAS 160 on its consolidated financial statements.
 
2008 Annual Report F-8
NOTE 2 • continued
 
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS 141(R)”). This new standard will significantly change the accounting for and reporting of business combination transactions in consolidated financial statements. SFAS 141(R) requires an acquiring entity to recognize acquired assets and liabilities assumed in a transaction at fair value as of the acquisition date, changes the disclosure requirements for business combination transactions and changes the accounting treatment for certain items, including contingent consideration agreements which will be required to be recorded at acquisition date fair value and acquisition costs which will be required to be expensed as incurred. SFAS 141(R) is to be applied prospectively for business combinations by the Company which close after April 30, 2009. Early adoption of the standard is prohibited.  The Company is currently evaluating the impact of this statement on its consolidated financial statements.
 
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”).  SFAS 159 permits entities to irrevocably elect fair value on a contract-by-contract basis as the initial and subsequent measurement attribute for many financial assets and liabilities and certain other items including property and casualty insurance contracts. SFAS 159 was effective for the Company on May 1, 2008, and it did not elect the fair value option for any of its eligible financial instruments.
 
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 was effective for the Company on May 1, 2008. The Company is currently evaluating the impact of this statement on its consolidated financial statements.
 
USE OF ESTIMATES
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.
 
REAL ESTATE INVESTMENTS
 
Real estate investments are recorded at cost less accumulated depreciation and an adjustment for impairment, if any. Acquisitions of real estate investments are recorded based upon preliminary allocations of the purchase price which are subject to adjustment as additional information is obtained, but in no case more than one year after the date of acquisition. The Company allocates the purchase price to the fair value of the tangible and intangible assets of an acquired property (which includes the land, building, and personal property) which are determined by valuing the property as if it were vacant and to fair value of the intangible assets (which include in-place leases.) The as-if-vacant value is allocated to land, buildings, and personal property based on management’s determination of the relative fair values 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 and reference to recent sales of comparables. A land value is assigned based on the purchase price if land is acquired separately or based on estimated fair value if acquired in a merger or in a single or portfolio acquisition.
 
Above-market and below-market in-place lease intangibles 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 market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease.
 
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 and foregone rental income 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, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired.
 

2008 Annual Report F-9
 
 
 

NOTE 2 • continued
 
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 and a 5-12 year estimated life for furniture, fixtures and equipment.
 
Expenditures for ordinary maintenance and repairs are expensed to operations as incurred. Renovations and improvements that improve and/or extend the useful life of the asset are capitalized and depreciated over their estimated useful life, generally five to ten years. Property sales or dispositions are recorded when title transfers and sufficient consideration has been received by the Company and the Company has no significant involvement with the property sold.
 
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long Lived Assets, the Company periodically evaluates its long-lived assets, including its investments in real estate, for impairment indicators. The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions, expected holding period of each asset and legal and environmental concerns. If indicators exist, the Company compares the expected future undiscounted cash flows for the long-lived asset against the carrying amount of that asset. If the sum of the estimated undiscounted cash flows is less than the carrying amount of the asset, an impairment loss is recorded for the difference between the estimated fair value and the carrying amount of the asset. No impairment losses were recorded in fiscal year 2008.
 
REAL ESTATE HELD FOR SALE
 
Real estate held for sale is stated at the lower of its carrying amount or estimated fair value less disposal costs. Depreciation is not recorded on assets classified as held for sale.
 
The application of current accounting principles that govern the classification of any of our properties as held-for-sale on the balance sheet requires management to make certain significant judgments. In evaluating whether a property meets the criteria set forth in SFAS No. 144, Accounting for the Impairment and Disposal of Long-Lived Assets (“SFAS 144”), the Company makes a determination as to the point in time that it is probable that a sale will be consummated. It is not unusual for real estate sales contracts to allow potential buyers a period of time to evaluate the property prior to formal acceptance of the contract. In addition, certain other matters critical to the final sale, such as financing arrangements, often remain pending even upon contract acceptance. As a result, properties under contract may not close within the expected time period, or may not close at all. Due to these uncertainties, it is not likely that the Company can meet the criteria of SFAS 144 prior to the sale formally closing. Therefore, any properties categorized as held-for-sale represent only those properties that management has determined are probable to close within the requirements set forth in SFAS 144.
 
The Company reports, in discontinued operations, the results of operations of a property that has either been disposed of or is classified as held for sale and the related gains or losses, and as a result of discontinued operations, reclassifications of prior year revenues and expenses have been made.
 
IDENTIFIED INTANGIBLE ASSETS AND LIABILITIES AND GOODWILL
 
Upon acquisition of real estate, the Company records the intangible assets and liabilities acquired (for example, if the leases in place for the real estate property acquired carry rents above the market rent, the difference is classified as an intangible asset) at their estimated fair value separate and apart from goodwill.  The Company amortizes identified intangible assets and liabilities that are determined to have finite lives based on the period over which the assets and liabilities are expected to affect, directly or indirectly, the future cash flows of the real estate property acquired (generally the life of the lease).  In fiscal years 2008 and 2007, respectively, the Company added $38.0 million and $16.0 million of new intangible assets, net of intangible liabilities, all of which were classified as in-place leases. The average lives of these intangibles are 11.4 years for fiscal 2008 and 4.9 years for fiscal year 2007. Amortization of intangibles related to above or below-market leases is recorded in real estate rentals in the consolidated statements of operations. Amortization of other intangibles is recorded in depreciation/amortization related to real estate investments in the consolidated statements of operations. Intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable.  An impairment loss is recognized if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its estimated fair value.
 

2008 Annual Report F-10
 
 
 

NOTE 2 • continued
 
As of April 30, 2008 and 2007, respectively, the net carrying amounts of the Company’s identified intangible assets and liabilities were $60.7 million and $33.2 million (net of accumulated amortization of $32.8 million and $24.1 million), respectively. The estimated annual amortization of the Company’s identified intangible assets for each of the five succeeding fiscal years is as follows:
 
Year Ended April 30,
  
(in thousands)
  
2009
   $ 9,723  
2010
     8,192  
2011
     6,304  
2012
     4,322  
2013
     3,330  
 
The excess of the cost of an acquired business over the net of the amounts assigned to assets acquired (including identified intangible assets) and liabilities assumed is recorded as goodwill.  The Company’s goodwill has an indeterminate life in accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. Goodwill is not amortized, but is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Goodwill book values as of April 30, 2008 and 2007 were $1.4 million. The annual reviews for these same periods indicated no impairment. In fiscal 2008 the Company disposed of one property and two buildings of an apartment community that had goodwill assigned, and as a result, approximately $5,000 of goodwill was derecognized.
 
PROPERTY AND EQUIPMENT
 
Property and equipment consists of the administrative office buildings and equipment contained at IRET’s headquarters in Minot, North Dakota, and other locations in Minneapolis, Minnesota and Omaha, Nebraska. The balance sheet reflects these assets at cost, net of accumulated depreciation. As of April 30, 2008 and 2007, the cost was $2.8 million and $2.5 million, respectively. Accumulated depreciation was $1.3 million and $1.1 million as of April 30, 2008 and 2007, respectively.
 
MORTGAGE LOANS RECEIVABLE
 
The mortgage loans receivable (which include contracts for deed) are stated at the outstanding principal balance, net of an allowance for uncollectibility. Interest income is accrued and reflected in the balance sheet. Non-performing loans are recognized as impaired in conformity with SFAS No. 114, Accounting by Creditors for Impairment of a Loan. The Company evaluates the collectibility of both interest and principal of each of its loans, if circumstances warrant, to determine whether the loan is impaired. A loan is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the existing contractual terms. An allowance is recorded to reduce impaired loans to their estimated fair value. Interest on impaired loans is recognized on a cash basis.
 
CASH AND CASH EQUIVALENTS
 
Cash and cash equivalents include all cash and highly liquid investments purchased with maturities of three months or less. Cash and cash equivalents consist of the Company’s bank deposits and short-term investment certificates acquired subject to repurchase agreements, and the Company’s deposits in a money market mutual fund.
 
MARKETABLE SECURITIES
 
IRET’s investments in marketable 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. These securities are valued at current fair value with the resulting unrealized gains and losses excluded from earnings and reported as a separate component of shareholders’ equity until realized. Gains or losses on these securities are computed based on the amortized cost of the specific securities when sold.
 
All securities with unrealized losses are subjected to the Company’s process for identifying other-than-temporary impairments. The Company records a charge to earnings to write down to fair value securities that it deems to be other-than-temporarily impaired in the period the securities are deemed to be other-than-temporarily impaired. The
 

2008 Annual Report F-11
 
 
 

NOTE 2 • continued
 
assessment of whether such impairment has occurred is based on management’s case-by-case evaluation of the underlying reasons for the decline in fair value. Management considers a wide range of factors in making this assessment. Those factors include, but are not limited to, the length and severity of the decline in value and changes in the credit quality of the issuer or underlying assets. The Company does not engage in trading activities.
 
ALLOWANCE FOR DOUBTFUL ACCOUNTS
 
Management evaluates the appropriate amount of the allowance for doubtful accounts by assessing the recoverability of individual real estate mortgage loans and rent receivables, through a comparison of their carrying amount with their estimated realizable value. Management considers tenant financial condition, credit history and current economic conditions in establishing these allowances. Receivable balances are written off when deemed uncollectible. Recoveries of receivables previously written off, if any, are recorded when received. A summary of the changes in the allowance for doubtful accounts for fiscal years ended April 30, 2008, 2007 and 2006 is as follows:
 
   
(in thousands)
  
   
2008
    
2007
    
2006
  
Balance at beginning of year
   $ 910     $ 725     $ 725  
Provision
     1,060       507       230  
Write-off
     (706 )     (322 )     (230 )
Balance at close of year
   $ 1,264     $ 910     $ 725  
 
TAX, INSURANCE, AND OTHER ESCROW
 
Tax, insurance, and other escrow includes funds deposited with a lender for payment of real estate tax and insurance, and reserves for funds to be used for replacement of structural elements and mechanical equipment of certain projects. The funds are under the control of the lender. Disbursements are made after supplying written documentation to the lender.
 
REAL ESTATE DEPOSITS
 
Real estate deposits include funds held by escrow agents to be applied toward the purchase of real estate or the payment of loan costs associated with loan placement or refinancing.
 
DEFERRED LEASING AND LOAN ACQUISITION COSTS
 
Costs and commissions incurred in obtaining tenant leases are amortized on the straight-line method over the terms of the related leases. Costs incurred in obtaining long-term financing are amortized to interest expense over the life of the loan using the straight-line method, which approximates the effective interest method.
 
MINORITY INTERESTS
 
Interests in the Operating Partnership held by limited partners are represented by Units. The Operating Partnership’s income is allocated to holders of Units based upon the ratio of their holdings to the total Units outstanding during the period. Capital contributions, distributions, and profits and losses are allocated to minority interests in accordance with the terms of the Operating Partnership agreement.
 
IRET reflects minority interests in Mendota Properties LLC, IRET–BD LLC, IRET-Candlelight LLC, IRET-Golden Jack LLC, and IRET-1715 YDR LLC on the balance sheet for the portion of properties consolidated by IRET that are not wholly owned by IRET. The earnings or losses from these properties attributable to the minority interests are reflected as minority interest portion of other partnerships’ income in the consolidated statements of operations.
 
INCOME TAXES
 
IRET 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 dividend 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 shareholders. The Company intends to
 

2008 Annual Report F-12
 
 
 

NOTE 2 • continued
 
distribute all of its taxable income and realized capital gains from property dispositions within the prescribed time limits and, accordingly, there is no provision or liability for income taxes shown on the accompanying consolidated financial statements.
 
IRET conducts its business activity as an Umbrella Partnership Real Estate Investment Trust (“UPREIT”) through its Operating Partnership. UPREIT status allows IRET to accept the contribution of real estate in exchange for Units. Generally, such a contribution to a limited partnership allows for the deferral of gain by an owner of appreciated real estate.
 
On May 1, 2008, IRET adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). The adoption of FIN 48 did not have a material impact on the Company’s consolidated financial statements.
 
REVENUE RECOGNITION
 
Residential rental properties are leased under operating leases with terms generally of one year or less. Commercial properties are leased under operating leases to tenants for various terms generally exceeding one year. Lease terms often include renewal options. Rental revenue is recognized on the straight-line basis, which averages minimum required rents over the terms of the leases. Rents recognized in advance of collection are reflected as receivable arising from straight-lining of rents, net of allowance for doubtful accounts.  Rent concessions, including free rent, are amortized on a straight-line basis over the terms of the related leases. This treatment of rent concessions is supported in SFAS No. 13, Accounting for Leases, which provides that if rentals vary from a straight-line basis, the income shall be recognized on a straight-line basis.
 
Reimbursements from tenants for real estate taxes and other recoverable operating expenses are recognized as revenue in the period the applicable expenditures are incurred. IRET receives payments for these reimbursements from substantially all of its multi-tenant commercial tenants throughout the year.
 
A number of the commercial leases provide for a base rent plus a percentage rent based on gross sales in excess of a stipulated amount. These percentage rents are recorded once the required sales level is achieved.
 
Interest on mortgage loans receivable is recognized in income as it accrues during the period the loan is outstanding. In the case of non-performing loans, income is recognized as discussed above in the Mortgage Loans Receivable section of this Note 2.
 
NET INCOME PER SHARE
 
Basic net income per share is computed as net income available to common shareholders divided by the weighted average number of common shares outstanding for the period. The Company has no potentially dilutive financial interests; the potential exchange of Units for common shares will have no effect on net income per share because Unitholders and common shareholders effectively share equally in the net income of the Operating Partnership.
 
NOTE 3 • CREDIT RISK
 
The Company is potentially exposed to credit risk for 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.
 
IRET has entered into a cash management arrangement with First Western Bank with respect to deposit accounts that exceed FDIC Insurance coverage. On a daily basis, account balances are invested in United States 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 securities 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.
 

2008 Annual Report F-13
 
 
 

NOTE 4 • PROPERTY OWNED
 
Property, consisting principally of real estate, is stated at cost less accumulated depreciation and totaled $1.4 billion and $1.3 billion as of April 30, 2008, and April 30, 2007, respectively.
 
Construction period interest of approximately, $505,000, $69,000, and $21,000, has been capitalized for the years ended April 30, 2008, 2007, and 2006, respectively.
 
The future minimum lease receipts to be received under non-cancellable leases for commercial properties as of April 30, 2008, assuming that no options to renew or buy out the lease are exercised, are as follows:
 
Year Ended April 30,
  
(in thousands)
  
2009
   $ 108,758  
2010
     100,852  
2011
     85,976  
2012
     71,839  
2013
     59,844  
Thereafter
     303,769  
    $ 731,038  
 
During fiscal 2008, the Company incurred no losses due to impairment. For the year ended April 30, 2007, the Company incurred a loss of approximately $640,000 due to impairment of three properties and one parcel of unimproved land. For the year ended April 30, 2006, the Company incurred a loss of approximately $409,000 due to impairment on one property.  The 2007 and 2006 impairment losses were related to properties which were subsequently sold; accordingly such losses are included in discontinued operations (Note 12).
 
NOTE 5 • MORTGAGE LOANS RECEIVABLE - NET
 
The mortgage loans receivable consist of two contracts for deed that are collateralized by real estate. The interest rates on these loans are 6.0% and 7.0% and they mature in fiscal 2010 and fiscal 2013. Future principal payments due under these mortgage loans as of April 30, 2008, are as follows:
 
Year Ended April 30,
  
(in thousands)
  
2009
   $ 27  
2010
     364  
2011
     2  
2012
     2  
2013
     157  
      552  
Less allowance for doubtful accounts
     (11 )
    $ 541  
 
There were no non-performing mortgage loans receivable as of April 30, 2008, and 2007.
 
NOTE 6 • MARKETABLE SECURITIES
 
The amortized cost and fair value of marketable securities available-for-sale at April 30, 2008 and 2007 are as follows. These marketable securities are securities of various issuers, primarily U.S. government, U.S. agency and corporate bonds, held in IRET Properties’ security deposit account with Merrill Lynch:
 
 
(in thousands)
  
2008
Amortized Cost
  
Gross Unrealized Gains
  
Gross Unrealized Losses
  
Fair Value
  
                         
Bank certificates of deposit
   $ 420     $ 0     $ 0     $ 420  
    $ 420     $ 0     $ 0     $ 420  

 

2008 Annual Report F-14
 
 
 

NOTE 6 • continued
 
   
(in thousands)
  
2007
  
Amortized Cost
    
Gross Unrealized Gains
    
Gross Unrealized Losses
    
Fair Value
  
                         
US government & agency debt securities
   $ 369     $ 1     $ 0     $ 370  
Agency MBS
     871       0       14       857  
Corporate bonds
     328       0       3       325  
Bank certificates of deposit
     422       0       0       422  
Other
     74       0       0       74  
    $ 2,064     $ 1     $ 17     $ 2,048  
 
As of April 30, 2008, the investment in bank certificates of deposit will mature in less than one year.
 
There was a realized gain on sale of securities available-for-sale of $42,000 for the fiscal year ended April 30, 2008. There were no realized gains or losses on sales of securities available-for-sale for the fiscal years ended April 30, 2007 and 2006.
 
 
NOTE 7 • REVOLVING LINES OF CREDIT
 
IRET has lines of credit with three financial institutions as of April 30, 2008. Interest payments on outstanding borrowings are due monthly. These credit facilities are summarized in the following table:
 
   
(in thousands)
  
Financial Institution
  
Amount Available
  
Amount Outstanding as of April 30, 2008
  
Amount Outstanding as of April 30, 2007
    
Applicable Interest Rate as of April 30, 2008
  
Maturity Date
  
Weighted Average Int. Rate on Borrowings during fiscal year 2008
  
                                 
Lines of Credit
                                
(1) First Western Bank & Trust
   $ 12,000     $ 0     $ 0       5.25 %
12/26/11
     0.0 %
(2) First International Bank
& Trust
     10,000       0       0       5.00 %
12/13/08
     0.0 %
(3) Bremer Bank
     10,000       0       0       5.00 %
09/12/08
     0.0 %
                                           
Total
   $ 32,000     $ 0     $ 0                    
 
Borrowings under the lines of credit bear interest based on the following: (1) 175 basis points below the Prime Rate as published in the Wall Street Journal with a floor of 5.25% and a ceiling of 8.25%, (2) Wall Street Journal Prime Rate, and (3) Bremer Financial Corporation Reference Rate.
 
NOTE 8 • MORTGAGES PAYABLE
 
The Company’s mortgages payable are collateralized by substantially all of its properties owned. The majority of the Company’s mortgages payable are secured by individual properties or groups of properties, and are non-recourse to the Company, other than for standard carve-out obligations such as fraud, waste, failure to insure, environmental conditions and failure to pay real estate taxes. Interest rates on mortgages payable range from 4.50% to 9.75%, and the mortgages have varying maturity dates from June 30, 2008, through April 1, 2040.
 
Of the mortgages payable, the balances of fixed rate mortgages totaled $1.1 billion and $929.5 million, and the balances of variable rate mortgages totaled $11.7 million and $21.7 million as of April 30, 2008, and 2007, respectively. The Company does not utilize derivative financial instruments to mitigate its exposure to changes in market interest rates. Most of the fixed rate mortgages have substantial pre-payment penalties. As of April 30, 2008, the weighted average rate of interest on the Company’s mortgage debt was 6.37%, compared to 6.43% on April 30, 2007. The aggregate amount of required future principal payments on mortgages payable as of April 30, 2008, is as follows:
 

2008 Annual Report F-15
 
 
 

NOTE 8 • continued
 
Year Ended April 30,
  
(in thousands)
  
2009
   $ 44,318  
2010
     153,680  
2011
     103,094  
2012
     106,356  
2013
     51,689  
Thereafter
     604,721  
Total payments
   $ 1,063,858  

 
NOTE 9 • TRANSACTIONS WITH RELATED PARTIES
 
PROPERTY ACQUISITION
 
During fiscal year 2008, the Company acquired a two-story office building consisting of approximately 65,000 rentable square feet, located in Fenton, Missouri, for a purchase price of $7.0 million.  The Company purchased the property from entities controlled by W. David Scott, a trustee of the Company.  In accordance with the requirements of the Company’s Declaration of Trust, the transaction was approved by a majority of the trustees and by a majority of the independent trustees not otherwise interested in the transaction.
 
PURCHASE OPTION
 
On February 1, 2003, the Company entered into a merger agreement with the T. F. James Company. As part of the merger agreement, two affiliated entities of the T. F. James Company were granted the right to purchase certain real property acquired by the Company as a result of the merger. Charles Wm. James, a former executive officer of the Company and a former member of the Company’s Board of Trustees, has an ownership interest in these entities.  Under the terms of the agreement, one of the entities had the option, but not the obligation, to purchase a commercial strip mall located in Excelsior, Minnesota, for the price the Company paid to acquire the property, plus an annual Consumer Price Index increase.  This option was exercised during the fourth quarter of fiscal year 2006 at a purchase price of approximately $965,000, and Mr. James resigned from the Company’s Board of Trustees.
 
BANKING SERVICES
 
The Company maintains an unsecured line of credit with First International Bank and Trust, Watford City, North Dakota. During fiscal years 2008, 2007 and 2006, respectively, the Company’s interest charges were approximately $0, $71,000, and $14,000, for borrowings under the First International line of credit.  During fiscal year 2007, the Company entered into two mortgage loans with First International in the amounts of $450,000 and $2.4 million, respectively, paying a total of approximately $34,000 in origination fees and loan closing costs for these two loans, and paying interest on the loans of approximately $26,000 and $69,000, respectively, during fiscal year 2007, and interest of approximately $34,000 and $174,000, respectively, on the loans in fiscal year 2008.  The Company also maintains a number of checking accounts with First International.  In each of fiscal years 2008, 2007 and 2006, respectively, IRET paid less than $500 in total in various wire transfer and other fees charged on these checking accounts.  Stephen L. Stenehjem, a member of the Company’s Board of Trustees and Audit Committee, is the President and Chief Executive Officer of First International, and the bank is owned by Mr. Stenehjem and members of his family.
 
NOTE 10 • ACQUISITIONS AND DISPOSITIONS IN FISCAL YEARS 2008 AND 2007
 
PROPERTY ACQUISITIONS
 
IRET Properties paid approximately $154.7 million for real estate properties added to its portfolio during fiscal 2008, compared to $220.7 million paid in fiscal 2007. The fiscal 2008 and 2007 additions are detailed below.
 

2008 Annual Report F-16
 
 
 

NOTE 10 • continued
 
Fiscal 2008 (May 1, 2007 to April 30, 2008)
 

 
   
(in thousands)
  
Acquisitions
  
Acquisition Cost
  
       
Multi-Family Residential
      
96 – unit Greenfield Apartments – Omaha, NE
   $ 4,700  
67 – unit Cottonwood Lake IV – Bismarck, ND*
     6,191  
      10,891  
Commercial Property – Office
        
20,528 sq. ft. Plymouth 5095 Nathan Lane Office Building – Plymouth, MN
     2,000  
78,560 sq. ft. 610 Business Center IV – Brooklyn Park, MN
     6,500  
64,607 sq. ft. Intertech Office Building – Fenton, MO
     7,000  
      15,500  
Commercial Property—Medical (including Senior Housing)
        
18,502 sq. ft. Barry Pointe Medical Building – Kansas City, MO
     3,200  
11,800 sq. ft./28 beds Edgewood Vista Billings – Billings, MT
     4,250  
18,488 sq. ft./36 beds Edgewood Vista East Grand Forks – East Grand Forks, MN
     4,990  
11,800 sq. ft./28 beds Edgewood Vista Sioux Falls – Sioux Falls, SD
     3,350  
55,478 sq. ft. Edina 6405 France Medical – Edina, MN**
     13,615  
70,934 sq. ft. Edina 6363 France Medical – Edina, MN**
     13,360  
57,212 sq. ft. Minneapolis 701 25th Ave Medical (Riverside) – Minneapolis, MN**
     8,000  
53,466 sq. ft. Burnsville 303 Nicollet Medical (Ridgeview) – Burnsville, MN
     8,800  
36,199 sq. ft. Burnsville 305 Nicollet Medical (Ridgeview South) – Burnsville, MN
     5,900  
17,640 sq. ft. Eagan 1440 Duckwood Medical – Eagan, MN
     2,325  
5,192 sq. ft./13 beds Edgewood Vista Belgrade – Belgrade, MT
     2,100  
5,194 sq. ft./13 beds Edgewood Vista Columbus – Columbus, NE
     1,450  
168,801 sq. ft./185 beds Edgewood Vista Fargo – Fargo, ND
     25,850  
5,185 sq. ft./13 beds Edgewood Vista Grand Island – Grand Island, NE
     1,400  
5,135 sq. ft./13 beds Edgewood Vista Norfolk – Norfolk, NE
     1,300  
      99,890  
Commercial Property – Industrial
        
50,400 sq. ft. Cedar Lake Business Center – St. Louis Park, MN
     4,040  
528,353 sq. ft. Urbandale Warehouse Building – Urbandale, IA
     14,000  
69,600 sq. ft. Woodbury 1865 Woodlane – Woodbury, MN
     4,000  
198,600 sq. ft. Eagan 2785 & 2795 Highway 55 – Eagan, MN
     6,400  
      28,440  
Total Property Acquisitions
   $ 154,721  
 
 
* Development property placed in service January 2, 2008.
 
** Acquisition of leasehold interests only (air rights lease and ground leases)

2008 Annual Report F-17
 
 
 

NOTE 10 • continued
 
   
(in thousands)
  
Fiscal 2007 Acquisitions
  
Acquisition Cost
  
       
Multi-Family Residential
      
192-unit Arbors Apartments – Sioux City, NE
   $ 7,000  
154-unit Quarry Ridge Apartments – Rochester, MN
     14,570  
389-unit St. Cloud Apartments – St. Cloud, MN
     7,800  
120-unit Indian Hills Apartments – Sioux City, IA
     3,120  
72-unit Rum River Apartments – Isanti, MN
     5,650  
      38,140  
Commercial Property – Office
        
143,061 sq. ft. Pacific Hills – Omaha, NE
     16,502  
141,724 sq. ft. Corporate Center West – Omaha, NE
     21,497  
94,832 sq. ft. Farnam Executive Center – Omaha, NE
     12,853  
84,475 sq. ft. Miracle Hills One – Omaha, NE
     11,950  
60,942 sq. ft. Woodlands Plaza IV – Maryland Heights, MO
     5,840  
122,567 sq. ft. Riverport – Maryland Heights, MO
     21,906  
90,315 sq. ft. Timberlands – Leawood, KS
     14,546  
138,825 sq. ft. Flagship – Eden Prairie, MN
     26,094  
59,827 sq. ft. Gateway Corporate Center – Woodbury, MN
     9,612  
71,430 sq. ft. Highlands Ranch I – Highlands Ranch, CO
     12,250  
      153,050  
Commercial Property – Medical (including senior housing)
        
26,336 sq. ft. Fox River Cottages – Grand Chute, WI
     3,200  
10,796 sq. ft. St. Michael Clinic – St. Michael, MN*
     2,587  
      5,787  
Commercial Property – Industrial
        
100,850 sq. ft. Bloomington 2000 – Bloomington, MN
     6,750  
172,057 sq. ft. Roseville 2929 – Roseville, MN
     10,300  
      17,050  
Commercial Property – Retail
        
16,921 sq. ft. Dakota West Plaza – Minot, ND
     625  
14,820 sq. ft. Weston Walgreens – Weston, WI**
     2,144  
      2,769  
Unimproved Land
        
Monticello Unimproved Parcel (City) – Monticello, MN
     5  
St. Michaels Unimproved – St. Michael, MN
     320  
Monticello Unimproved Parcel (Other) – Monticello, MN
     75  
Weston Unimproved – Weston, WI
     800  
Quarry Ridge Unimproved – Rochester, MN
     930  
Minot Prairie Green – Minot, ND
     1,750  
      3,880  
Total Fiscal 2007 Property Acquisitions
   $ 220,676  
* Development property placed in service March 1, 2007.
** Development property placed in service May 1, 2006.
 
In addition to the above property acquisitions, in the fourth quarter of fiscal year 2007 IRET Properties issued limited partnership units with a value at issuance of approximately $5.25 million to purchase an approximately 29% ownership interest in a limited liability company in which IRET already owned a 71% interest.  This entity owns the Southdale Medical Building in Edina, Minnesota, and with its acquisition of this remaining ownership interest, IRET now is the sole owner of this property.
 
PROPERTY DISPOSITIONS
 
During fiscal year 2008, IRET Properties disposed of two properties and two buildings of an apartment community for an aggregate sale price of $1.4 million, compared to 14 properties and two parcels of unimproved land for an aggregate sale price of $22.5 million in total during fiscal year 2007. Real estate assets sold by IRET during fiscal years 2008 and 2007 were as follows:
2008 Annual Report F-18
 
NOTE 10 • continued
 
   
(in thousands)
  
Fiscal 2008 Dispositions
  
Sales Price
    
Book Value
and Sales Cost
    
Gain/Loss
  
                   
Multi-Family Residential
                  
405 Grant Ave (Lonetree) Apartments – Harvey, ND
   $ 185     $ 184     $ 1  
Sweetwater Apartments – Devils Lake, ND
     940       430       510  
      1,125       614       511  
Commercial Property – Office
                        
Minnetonka Office Buildings – Minnetonka, MN
     310       307       3  
      310       307       3  
Total Fiscal 2008 Property Dispositions
   $ 1,435     $ 921     $ 514  
 
   
(in thousands)
  
Fiscal 2007 Dispositions
  
Sales Price
    
Book Value
and Sales Cost
    
Gain/Loss
  
                   
Multi-Family Residential
                  
60-unit Clearwater Apartments – Boise, ID
   $ 4,000     $ 3,413     $ 587  
122-unit Park East Apartments – Fargo, ND
     6,188       4,476       1,712  
      10,188       7,889       2,299  
Commercial Property – Office
                        
5,640 sq. ft. Greenwood Office – Greenwood, MN
     1,500       961       539  
      1,500       961       539  
Commercial Property – Medical (senior housing)
                        
29,408 sq. ft. Wedgewood Sweetwater – Lithia Springs, GA
     4,550       3,836       714  
      4,550       3,836       714  
Commercial Property – Retail
                        
4,560 sq. ft. Moundsview Bakery – Mounds View, MN
     380       287       93  
3,571 sq. ft. Howard Lake C-Store – Winsted, MN
     550       374       176  
6,225 sq. ft. Wilmar Sam Goody – Wilmar, MN
     450       409       41  
3,571 sq. ft. Winsted C-Store – Winsted, MN
     190       214       (24 )
7,700 sq. ft. Buffalo Strip Center – Buffalo, MN
     800       667       133  
4,800 sq. ft. Glencoe C-Store – Glencoe, MN
     350       344       6  
5,216 sq. ft. Long Prairie C-Store – Long Prairie, MN
     302       304       (2 )
5,600 sq. ft. Faribault Checkers Auto – Faribault, MN
     525       337       188  
4,800 sq. ft. Paynesville C-Store – Paynesville, MN
     149       150       (1 )
6,800 sq. ft. Prior Lake Strip Center I – Prior Lake, MN
     1,105       993       112  
4,200 sq. ft. Prior Lake Strip Center III – Prior Lake, MN
     545       465       80  
      5,346       4,544       802  
Unimproved Land
                        
IGH Land – Inver Grove Heights, MN
     900       613       287  
Long Prairie Unimproved Land – Long Prairie, MN
     59       60       (1 )
      959       673       286  
Total Fiscal 2007 Property Dispositions
   $ 22,543     $ 17,903     $ 4,640  
 
NOTE 11 • OPERATING SEGMENTS
 
IRET reports its results in five reportable segments: multi-family residential properties, and commercial office, medical (including senior housing), industrial and retail properties.  Our reportable segments are aggregations of similar properties.  The accounting policies of each of these segments are the same as those described in Note 2. We disclose segment information in accordance with SFAS 131, Disclosures about Segments of an Enterprise and Related Disclosures (“SFAS 131”).  SFAS 131 requires that segment disclosures present the measure(s) used by the chief operating decision maker for purposes of assessing segment performance.
 


2008 Annual Report F-19
 
 
 

NOTE 11 • continued
 
Segment information in this report is presented based on net operating income, which we define as total revenues less property operating expenses and real estate taxes.  The following tables present revenues and net operating income for the fiscal years ended April 30, 2008, 2007 and 2006 from our five reportable segments, and reconcile net operating income of reportable segments to operating income as reported. Segment assets are also reconciled to Total Assets as reported in the consolidated financial statements.
 

 
(in thousands)
  
Year Ended April 30, 2008
Multi-Family Residential
    
Commercial-Office
    
Commercial-Medical
    
Commercial-Industrial
    
Commercial-Retail
    
Total
  
                                     
Real estate revenue
   $ 72,827     $ 84,042     $ 38,412     $ 11,691     $ 14,198     $ 221,170  
Real estate expenses
     34,637       36,206       9,756       2,529       4,277       87,405  
Net operating income
   $ 38,190     $ 47,836     $ 28,656     $ 9,162     $ 9,921       133,765  
Interest
                                             (63,439 )
Depreciation/amortization
                                             (51,518 )
Administrative, advisory and trustee fees
                                       (5,203 )
Operating expenses
                                             (1,344 )
Non-operating income
                                             2,760  
Income before minority interest and discontinued operations and gain on sale of other investments
     $ 15,021  

 
 
(in thousands)
  
Year Ended April 30, 2007
Multi-Family Residential
    
Commercial-Office
    
Commercial-Medical
    
Commercial-Industrial
    
Commercial-Retail
    
Total
  
                                     
Real estate revenue
   $ 66,972     $ 73,603     $ 34,783     $ 8,091     $ 14,089     $ 197,538  
Real estate expenses
     31,454       30,475       8,675       1,253       4,475       76,332  
Net operating income
   $ 35,518     $ 43,128     $ 26,108     $ 6,838     $ 9,614       121,206  
Interest
                                             (58,424 )
Depreciation/amortization
                                             (45,501 )
Administrative, advisory and trustee fees
                                       (4,451 )
Operating expenses
                                             (1,240 )
Non-operating income
                                             2,665  
Income before minority interest and discontinued operations and gain on sale of other investments
     $ 14,255  

 
 
(in thousands)
  
Year Ended April 30, 2006
Multi-Family Residential
    
Commercial-Office
    
Commercial-Medical
    
Commercial-Industrial
    
Commercial-Retail
    
Total
  
                                     
Real estate revenue
   $ 61,669     $ 57,483     $ 31,670     $ 6,372     $ 12,977     $ 170,171  
Real estate expenses
     29,702       23,601       8,314       1,252       3,944       66,813  
Net operating income
   $ 31,967     $ 33,882     $ 23,356     $ 5,120     $ 9,033     $ 103,358  
Interest
                                             (50,677 )
Depreciation/amortization
                                             (37,639 )
Administrative, advisory and trustee fees
                                       (3,894 )
Operating expenses
                                             (1,269 )
Non-operating income
                                             1,240  
Income before minority interest and discontinued operations and gain on sale of other investments
     $ 11,119  
 

 

2008 Annual Report F-20
 
 
 

NOTE 11 • continued
 
Segment Assets and Accumulated Depreciation
 
   
(in thousands)
  
As of April 30, 2008
  
Multi-Family Residential
    
Commercial-Office
    
Commercial-Medical
    
Commercial-Industrial
    
Commercial-Retail
    
Total
  
                                     
Segment assets
                                    
Property owned
   $ 510,697     $ 556,712     $ 359,986     $ 104,060     $ 116,804     $ 1,648,259  
Less accumulated depreciation/amortization
     (101,964 )     (58,095 )     (32,466 )     (10,520 )     (16,334 )     (219,379 )
Total property owned
   $ 408,733     $ 498,617     $ 327,520     $ 93,540     $ 100,470     $ 1,428,880  
Cash
                                             53,481  
Marketable securities
                                             420  
Receivables and other assets
                                             107,947  
Development in progress
                                             22,856  
Unimproved land
                                             3,901  
Mortgage receivables
                                             541  
Total Assets
     $ 1,618,026  

   
(in thousands)
  
As of April 30, 2007
  
Multi-Family Residential
    
Commercial-Office
    
Commercial-Medical
    
Commercial-Industrial
    
Commercial-Retail
    
Total
  
                                     
Segment assets
                                    
Property owned
   $ 489,644     $ 536,431     $ 274,779     $ 75,257     $ 113,176     $ 1,489,287  
Less accumulated depreciation/amortization
     (89,541 )     (44,204 )     (24,787 )     (8,257 )     (13,755 )     (180,544 )
Total property owned
   $ 400,103     $ 492,227     $ 249,992     $ 67,000     $ 99,421     $ 1,308,743  
Cash
                                             44,516  
Marketable securities
                                             2,048  
Receivables and other assets
                                             72,291  
Development in progress
                                             3,498  
Unimproved land
                                             3,894  
Mortgage receivables
                                             399  
Total Assets
     $ 1,435,389  
 
NOTE 12 • DISCONTINUED OPERATIONS
 
SFAS No. 144, Accounting for the Impairment or Disposal of Long Lived Assets, requires the Company to report in discontinued operations the results of operations of a property that has either been disposed of or is classified as held for sale. It also requires that any gains or losses from the sale of a property be reported in discontinued operations. There were no properties classified as held for sale as of April 30, 2008, 2007 or 2006. The following information shows the effect on net income, net of minority interest, and the gains or losses from the sale of properties classified as discontinued operations for the fiscal years ended April 30, 2008, 2007 and 2006.
 

2008 Annual Report F-21
 
 
 

NOTE 12 • continued
 
   
(in thousands)
  
   
2008
    
2007
    
2006
  
REVENUE
                  
Real estate rentals
   $ 208     $ 1,609     $ 3,528  
Tenant reimbursement
     2       66       287  
TOTAL REVENUE
     210       1,675       3,815  
OPERATING EXPENSE
                        
Interest
     0       415       950  
Depreciation/amortization related to real estate investments
     47       299       694  
Utilities
     35       205       261  
Maintenance
     22       214       386  
Real estate taxes
     28       202       445  
Insurance
     4       31       65  
Property management expenses
     22       132       236  
Administrative expenses
     0       2       1  
Other operating expenses
     0       9       25  
Loss on impairment of real estate
     0       640       409  
TOTAL OPERATING EXPENSE
     158       2,149       3,472  
Operating (loss) income
     52       (474 )     343  
Non-operating income
     0       0       1  
Income before minority interest and gain on sale
     52       (474 )     344  
Minority interest
     (153 )     (1,082 )     (813 )
Gain on sale of discontinued operations
     514       4,640       3,270  
DISCONTINUED OPERATIONS, NET
   $ 413     $ 3,084     $ 2,801  
Segment Data
                        
Multi-Family Residential
   $ 415     $ 1,783     $ 57  
Commercial - Office
     (2 )     392       70  
Commercial - Medical
     0       605       259  
Commercial - Industrial
     0       0       0  
Commercial - Retail
     0       170       2,383  
Unimproved Land
     0       134       32  
Total
   $ 413     $ 3,084     $ 2,801  
                         

 
   
(in thousands)
  
   
2008
    
2007
    
2006
  
Property Sale Data
                  
Sales price
   $ 1,435     $ 22,543     $ 14,198  
Net book value and sales costs
     921       17,903       10,928  
Gain on sale of discontinued operations
   $ 514     $ 4,640     $ 3,270  
 
NOTE 13 • EARNINGS PER SHARE
 
Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. The Company has no outstanding options, warrants, convertible stock or other contractual obligations requiring issuance of additional common shares that would result in a dilution of earnings. While Units can be exchanged for shares on a one-for-one basis after a minimum holding period of one year, the exchange of Units for common shares has no effect on diluted earnings per share, as Unitholders and common shareholders effectively share equally in the net income of the Operating Partnership. The following table presents a reconciliation of the numerator and denominator used to calculate basic and diluted earnings per share reported in the consolidated financial statements for the fiscal years ended April 30, 2008, 2007, and 2006:
 

2008 Annual Report F-22
 
 
 

NOTE 13 • continued
 
   
For Years Ended April 30,
  
   
(in thousands, except per share data)
  
   
2008
    
2007
    
2006
  
NUMERATOR
                  
Income from continuing operations
   $ 11,675     $ 11,026     $ 8,766  
Discontinued operations
     413       3,084       2,801  
Net income
     12,088       14,110       11,567  
Dividends to preferred shareholders
     (2,372 )     (2,372 )     (2,372 )
Numerator for basic earnings per share – net income available to
common shareholders
     9,716       11,738       9,195  
Minority interest portion of operating partnership income
     3,677       4,299       2,705  
Numerator for diluted earnings per share
   $ 13,393     $ 16,037     $ 11,900  
DENOMINATOR
                        
Denominator for basic earnings per share weighted average shares
   $ 53,060     $ 47,672     $ 45,717  
Effect of dilutive securities convertible operating partnership units
     20,417       17,017       13,329  
Denominator for diluted earnings per share
   $ 73,477     $ 64,689     $ 59,046  
Earnings per common share from continuing operations – basic and diluted
   $ .17     $ .18     $ .14  
Earnings per common share from discontinued operations –
basic and diluted
     .01       .06       .06  
NET INCOME PER COMMON SHARE – BASIC & DILUTED
   $ .18     $ .24     $ .20  

 
NOTE 14 • RETIREMENT PLANS
 
IRET sponsors a defined contribution profit sharing retirement plan and a defined contribution 401(k) plan.  IRET’s defined contribution profit sharing retirement plan is available to employees over the age of 21 who have completed one year of service.  Participation in IRET’s defined contribution 401(k) plan is available to all employees over the age of 21 immediately upon their employment with the Company, and employees participating in the 401(k) plan may contribute up to maximum levels established by the IRS.  Employer contributions to the profit sharing and 401(k) plans are at the discretion of the Company’s management.  IRET currently contributes 4.5% of the salary of each employee participating in the profit sharing plan, and 3% of the salary of each employee participating in the 401(k) plan, for a total contribution of 7.5% of the salary of each of the employees participating in both plans. Contributions by IRET to these plans on behalf of employees totaled approximately $305,000 in fiscal year 2008, $258,000 in fiscal year 2007 and $218,000 in fiscal year 2006.
 
NOTE 15 • COMMITMENTS AND CONTINGENCIES
 
Ground Leases. As of April 30, 2008, the Company is a tenant under operating ground or air rights leases on eleven of its properties. The Company pays a total of approximately $503,000 per year in rent under these ground leases, which have remaining terms ranging from 4 to 92 years, and expiration dates ranging from July 2012 to October 2100. The Company has renewal options for five of the eleven ground leases, and rights of first offer or first refusal for the remainder.
 
The expected timing of ground and air rights lease payments as of April 30, 2008 is as follows:
 
 
(in thousands)
  
Year Ended April 30,
Lease Payments
  
2009
   $ 503  
2010
     503  
2011
     503  
2012
     503  
2013
     503  
Thereafter
     24,061  
Total
   $ 26,576  
 
Legal Proceedings. IRET is involved in various lawsuits arising in the normal course of business. Management believes that such matters will not have a material effect on the Company’s financial statements.
 

2008 Annual Report F-23
 
 
 

NOTE 15 • continued
 
Environmental Matters. It is generally IRET’s policy to obtain a Phase I environmental assessment of each property that the Company seeks to acquire.  Such assessments have not revealed, nor is the Company aware of, any environmental liabilities that IRET believes would have a material adverse effect on IRET’s financial position or results of operations. IRET owns properties that contain or potentially contain (based on the age of the property) asbestos or lead, or have underground fuel storage tanks. For certain of these properties, the Company estimated the fair value of the conditional asset retirement obligation in accordance with FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, or FIN 47, and chose not to book a liability, because the amounts involved were immaterial. With respect to certain other properties, the Company has not recorded any related asset retirement obligation, as the fair value of the liability cannot be reasonably estimated, due to uncertainties in the timing and manner of settlement of these obligations.
 
Purchase Options. The Company has granted options to purchase certain IRET properties to tenants in these properties, under lease agreements.  In general, the options grant the tenant the right to purchase the property at the greater of such property’s appraised value or an annual compounded increase of a specified percentage of the initial cost of the property to IRET. The property cost and gross rental revenue of these properties are as follows:
 
   
(in thousands)
  
         
Gross Rental Revenue
  
Property
  
Investment Cost
    
2008
    
2007
    
2006
  
Abbott Northwest-Sartell, MN
   $ 12,653     $ 1,292     $ 1,252     $ 1,233  
Edgewood Vista-Belgrade, MT
     2,135       31       0       0  
Edgewood Vista-Billings, MT
     4,289       66       0       0  
Edgewood Vista-Bismarck, ND
     10,903       985       980       653  
Edgewood Vista-Brainerd, MN
     10,667       971       968       645  
Edgewood Vista-Columbus, NE
     1,481       21       0       0  
Edgewood Vista East Grand Forks, MN
     5,027       78       0       0  
Edgewood Vista-Fargo, ND
     26,322       310       0       0  
Edgewood Vista-Fremont, NE
     588       69       68       62  
Edgewood Vista-Grand Island, NE
     1,431       20       0       0  
Edgewood Vista-Hastings, NE
     606       69       68       63  
Edgewood Vista-Hermantown I, MN
     11,749       1,557       1,472       1,472  
Edgewood Vista-Hermantown II, MN
     22,209       1,127       1,124       749  
Edgewood Vista-Kalispell, MT
     624       72       72       62  
Edgewood Vista-Missoula, MT
     999       132       132       120  
Edgewood Vista-Norfolk, NE
     1,332       19       0       0  
Edgewood Vista-Omaha, NE
     676       77       76       70  
Edgewood Vista-Sioux Falls, SD
     3,380       52       0       0  
Edgewood Vista-Spearfish, SD
     6,792       612       608       406  
Edgewood Vista-Virginia, MN
     17,207       1,381       1,320       1,320  
Fox River Cottage - Grand Chute, WI
     3,956       387       260       0  
Great Plains Software - Fargo, ND
     15,375       1,876       1,876       1,876  
Healtheast - Woodbury & Maplewood, MN
     21,601       2,032       2,032       2,032  
Minnesota National Bank - Duluth, MN
     2,104       205       135       100  
St. Michael Clinic - St. Michael, MN
     2,851       229       35       0  
Stevens Point - Stevens Point, WI
     15,020       1,279       630       102  
Total
   $ 201,977     $ 14,949     $ 13,108     $ 10,965  
 
Income Guarantees. In connection with its acquisition in April 2004 of a portfolio of properties located in and near Duluth, Minnesota, the Company received from the seller of the properties a guarantee, for five years from the closing date of the acquisition, of a specified minimum amount of annual net operating income, before debt service (principal and interest payments), from two of the properties included in the portfolio. As of April 30, 2008, the Company has recorded a receivable for payment of approximately $204,000 under this guarantee.
 
Restrictions on Taxable Dispositions.  Approximately 129 of the Company’s properties, consisting of approximately 7.3 million square feet of our combined commercial segment’s properties and 4,056 apartment units, are subject to restrictions on taxable dispositions under agreements entered into with some of the sellers or contributors of the properties.  The real estate investment amount of these properties (net of accumulated depreciation) was approximately $870.3 million at April 30, 2008.  The restrictions on taxable dispositions are effective for varying
 

2008 Annual Report F-24
 
 
 

NOTE 15 • continued
 
periods.  The terms of these agreements generally prevent us from selling the properties in taxable transactions.  The Company does not believe that the agreements materially affect the conduct of its business or its decisions whether to dispose of restricted properties during the restriction period because the Company generally holds these and its other properties for investment purposes, rather than for sale.  Historically, however, where the Company has deemed it to be in its shareholders’ best interests to dispose of restricted properties, the Company has done so through transactions structured as tax-deferred transactions under Section 1031 of the Internal Revenue Code.
 
Redemption Value of UPREIT Units.  The limited partnership units (“UPREIT Units”) of the Company’s operating partnership, IRET Properties, are redeemable at the option of the holder for cash, or, at our option, for the Company’s common shares of beneficial interest on a one-for-one basis, after a minimum one-year holding period.  All UPREIT Units receive the same cash distributions as those paid on common shares.  UPREIT Units are redeemable for an amount of cash per Unit equal to the average of the daily market price of an IRET common share for the ten consecutive trading days immediately preceding the date of valuation of the Unit.  As of April 30, 2008 and 2007, the aggregate redemption value of the then-outstanding UPREIT Units of the operating partnership owned by limited partners was approximately $218 million and $216 million, respectively.
 
Joint Venture Buy/Sell Options.  Certain of our joint venture agreements contain buy/sell options in which each party under certain circumstances has the option to acquire the interest of the other party, but do not generally require that we buy our partners’ interests.  We have one joint venture which allows our unaffiliated partner, at its election, to require that we buy its interest at a purchase price to be determined by an appraisal conducted in accordance with the terms of the agreement, or at a negotiated price.  In accordance with Statement of Accounting Standards No. 5, Accounting for Contingencies, we have not recorded a liability or the related asset that would result from the acquisition in connection with the above potential obligation because the probability of our unaffiliated partner requiring us to buy their interest is not currently determinable, and we are unable to estimate the amount of the payment required for that purpose.
 
Development Projects.  The Company has certain funding commitments under contracts for property development and renovation projects. As of April 30, 2008, IRET’s funding commitments included the following:
 
Southdale Medical Building Expansion Project: In July 2007, the Company signed a lease with an anchor tenant committing the Company to construct an approximately 27,750 square foot addition to the Company’s existing Southdale Medical Building located in Edina, Minnesota.  The estimated cost of this expansion project is approximately $10.9 million, including relocation, tenant improvement and leasing costs expected to be incurred to relocate tenants in the existing facility.  Construction began in September 2007, and the expansion project is scheduled for completion in July 2008. As of April 30, 2008, the Company has incurred approximately $5.5 million in construction costs for this expansion project.
 
IRET Corporate Plaza: During fiscal year 2007, the Company purchased an unimproved parcel of land in Minot, North Dakota for approximately $1.8 million.  The Company is constructing a mixed-use project on this site, to consist of approximately 67 apartments and 60,100 rentable square feet of office and retail space.  The Company plans to move its Minot, North Dakota offices to this location, occupying approximately one-third of the proposed office/retail space.   Current estimates are that the project will be completed in the second quarter of the Company’s fiscal year 2009, at a total cost of approximately $20.7 million.  As of April 30, 2008, the Company has incurred approximately $9.2 million of the estimated construction cost of this project.
 
2828 Chicago Avenue Medical Building: In fiscal year 2006, IRET purchased an approximately 55,000 square foot, five-story medical office building located in Minneapolis, Minnesota.  During fiscal year 2007, IRET committed to construct an approximately 56,000 square foot medical office building adjacent to the existing structure, and an adjoining parking ramp, with a planned project completion date of August 2008 and an estimated total project cost of $15.7 million. As of April 30, 2008, approximately 73% of this new medical office building was pre-leased to two tenants.  Construction on the project began in August 2007, and as of April 30, 2008, the Company has incurred approximately $8.2 million in construction costs.
 
Crosstown Circle Office Building, Eden Prairie, MN. The Company’s Crosstown Circle Office Building in Eden Prairie, Minnesota was acquired in October 2004 from Best Buy Company, which is leasing all but 7,500 square feet of the 185,000 square foot building under a master lease expiring September 30, 2010. Under the terms of the
 

2008 Annual Report F-25
 
 
 

NOTE 15 • continued
 
financing obtained by the Company for this building, the Company is obligated to fund a leasing reserve account in the event that a specified occupancy level is not met at the time the Best Buy master lease expires. The amount to be deposited in the leasing reserve account would be calculated by multiplying a specified amount per square foot by the difference between the specified occupancy level and the building’s actual occupied square feet. The maximum amount the Company would be required to deposit in such leasing reserve account is $4,625,000. Funds in the leasing reserve account would be released as leases for vacant space in the building are executed.
 
Pending Acquisitions.  As of April 30, 2008, the Company had signed purchase agreements to acquire a 36-unit multi-family apartment complex in Isanti, Minnesota, for a purchase price of $3.1 million and a small office building in Bismarck, North Dakota, for a purchase price of $2.2 million.  These pending acquisitions are subject to various closing conditions and contingencies, and no assurances can be given that these transactions will be completed.

The Company also continues to work to close a previously-announced proposed acquisition of a two-building senior housing complex located in Minot, North Dakota, consisting of two single-story facilities containing approximately 93,708 square feet and 9,693 square feet, respectively, with a combined total of 184 units/beds, for a purchase price of $14.8 million.  The Company had expected to close this acquisition prior to its April 30, 2008 fiscal year end; negotiations with the sellers and lenders to the project are continuing, but the Company currently has no firm estimate of when this proposed acquisition transaction may be completed, or negotiations terminated. This pending acquisition is subject to various closing conditions and contingencies, and no assurances can be given that this transaction will be completed.

NOTE 16 • FAIR VALUE OF FINANCIAL INSTRUMENTS
 
The following methods and assumptions were used to estimate the fair value of each class of financial instruments.
 
Mortgage Loans Receivable. Fair values are based on the discounted value of future cash flows expected to be received for a loan using current rates at which similar loans would be made to borrowers with similar credit risk and the same remaining maturities. Terms are short term in nature and carrying value approximates the estimated fair value.
 
Cash and Cash Equivalents. The carrying amount approximates fair value because of the short maturity.
 
Marketable Securities. The fair values of these instruments are estimated based on quoted market prices for the security.
 
Other Debt. The fair value of other debt is estimated based on the discounted cash flows of the loan using current market rates.
 
Mortgages Payable. For variable rate loans that re-price frequently, fair values are based on carrying values. The fair value of fixed rate loans is estimated based on the discounted cash flows of the loans using current market rates.
 
The estimated fair values of the Company’s financial instruments as of April 30, 2008 and 2007, are as follows:
 
   
(in thousands)
  
   
2008
    
2007
  
   
Carrying Amount
    
Fair Value
    
Carrying Amount
    
Fair Value
  
FINANCIAL ASSETS
                        
Mortgage loans receivable
   $ 541     $ 541     $ 399     $ 399  
Cash and cash equivalents
     53,481       53,481       44,516       44,516  
Marketable securities - available-for-sale
     420       420       2,048       2,048  
FINANCIAL LIABILITIES
                                
Other debt
     73       74       146       148  
Mortgages payable
     1,063,858       1,079,986       951,139       944,843  
 

 

2008 Annual Report F-26
 
 
 

 
NOTE 17 • COMMON AND PREFERRED SHARES OF BENEFICIAL INTEREST AND SHAREHOLDERS’ EQUITY
 
Distribution Reinvestment Plan and Share Purchase.  During each of fiscal years 2008 and 2007, IRET issued 1.2 million common shares pursuant to its distribution reinvestment and share purchase plan, at a total value at issuance of $11.4 million and $11.4 million, respectively. IRET’s distribution reinvestment plan is available to common shareholders of IRET and all limited partners of IRET Properties. Under the distribution reinvestment plan, shareholders or limited partners may elect to have all or a portion of their distributions used to purchase additional IRET common shares, and may elect to make voluntary cash contributions for the  purchase of IRET common shares, at a discount (currently 5%) from the market price.
 
Conversion of Units to Common Shares.  During fiscal years 2008 and 2007, respectively, 1.1 million and 0.4 million Units were converted to common shares, with a total value of $7.8 million and $3.4 million included in shareholders’ equity.
 
Issuance of Common Shares.  In October 2007, the Company sold 6.9 million common shares at $10.20 per share in an underwritten public offering, for net proceeds to the Company of approximately $66.4 million, after payment of commissions and other expenses of the offering. The Company conducted no public offerings of common shares in fiscal years 2007 and 2006, other than sales of common shares under its Distribution Reinvestment Plan.
 
Series A Cumulative Redeemable Preferred Shares of Beneficial Interest.  During fiscal year 2004, the Company issued 1,150,000 shares of 8.25% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest for total proceeds of $27.3 million, net of selling costs. Holders of the Company’s Series A Cumulative Redeemable Preferred Shares of Beneficial Interest are entitled to receive dividends at an annual rate of 8.25% of the liquidation preference of $25 per share, or $2.0625 per share per annum. These dividends are cumulative and payable quarterly in arrears. The shares are not convertible into or exchangeable for any other property or any other securities of the Company at the election of the holders. However, on or after April 26, 2009 (or sooner, under limited circumstances), the Company, at its option, may redeem the shares at a redemption price of $25.00 per share, plus any accrued and unpaid distributions through the date of redemption. The shares have no maturity date and will remain outstanding indefinitely unless redeemed by the Company.
 
NOTE 18 • QUARTERLY RESULTS OF CONSOLIDATED OPERATIONS (unaudited)
 
   
(in thousands, except per share data)
  
QUARTER ENDED
  
July 31, 2007
    
October 31, 2007
    
January 31, 2008
    
April 30, 2008
  
Revenues
   $ 53,573     $ 54,211     $ 54,424     $ 58,962  
Operating Income
   $ 3,276     $ 3,243     $ 2,818     $ 2,924  
Net Income available to common shareholders
   $ 2,388     $ 2,243     $ 2,390     $ 2,695  
Net Income per common share - basic & diluted
   $ .05     $ .04     $ .04     $ .05  

   
(in thousands, except per share data)
  
QUARTER ENDED
  
July 31, 2006
    
October 31, 2006
    
January 31, 2007
    
April 30, 2007
  
Revenues
   $ 44,268     $ 48,571     $ 51,033     $ 53,666  
Operating Income
   $ 3,009     $ 2,243     $ 3,276     $ 3,062  
Net Income available to common shareholders
   $ 2,520     $ 2,915     $ 2,861     $ 3,442  
Net Income per common share - basic & diluted
   $ .05     $ .06     $ .06     $ .07  
 
The above financial information is unaudited. In the opinion of management, all adjustments (which are of a normal recurring nature) have been included for a fair presentation.
 
NOTE 19 • SUBSEQUENT EVENTS
 
Common and Preferred Share Distributions. On June 30, 2008, 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 16, 2008. On July 1, 2008, the Company paid a distribution of 16.85 cents per share on the Company’s common shares and units, to common shareholders and Unitholders of record on June 16, 2008. This common share/unit distribution represented an increase of .05 cents or 0.3% over the previous regular quarterly distribution of 16.80 cents per common share/unit paid April 1, 2008.
 

2008 Annual Report F-27
 
 
 

NOTE 19 • continued
 
Closed Acquisitions.  Subsequent to its April 30, 2008 fiscal year end, the Company closed on the acquisition of several small apartment buildings in Minot, North Dakota, with a total of 52 units, for a total purchase price of $2.5 million, including the issuance to the seller of 191,596 UPREIT units valued at $10.20 per unit.  The Company also acquired, subsequent to its fiscal 2008 year end, a parcel of vacant land in Bismarck, North Dakota, for a purchase price of approximately $576,000.  This vacant parcel adjoins the Company’s existing Cottonwoods apartment complexes in Bismarck.

2008 Annual Report F-28
 
 
 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 

 
To the Board of Trustees and Shareholders of
 
Investors Real Estate Trust
 
Minot, North Dakota
 
We have audited the consolidated financial statements of Investors Real Estate Trust and subsidiaries (the “Company”) as of April 30, 2008 and 2007, and for each of the three fiscal years in the period ended April 30, 2008 and the Company’s internal control over financial reporting as of April 30, 2008, and have issued our reports thereon dated July 11, 2008; such reports are included elsewhere in this Form 10-K. Our audits also included the consolidated financial statement schedules of the Company listed in the table of contents to the consolidated financial statements. These consolidated financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
 
 

 
Minneapolis, Minnesota
July 11, 2008
 

2008 Annual Report F-29
 
 
 

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
April 30, 2008
 
Schedule II
 
VALUATION AND QUALIFYING ACCOUNTS
 
   
(in thousands)
  
   
Column A
    
Column B
    
Column C
    
Column E
  
Description
  
Balance at Beginning of Year
    
Additions Charged Against Operations
    
Uncollectible Accounts Written-off
    
Balance at End of Year
  
Fiscal Year Ended April 30, 2008
Allowance for doubtful accounts
   $ 910     $ 1,060     $ (706 )   $ 1,264  
Fiscal Year Ended April 30, 2007
Allowance for doubtful accounts
   $ 725     $ 507     $ (322 )   $ 910  
Fiscal Year Ended April 30, 2006
Allowance for doubtful accounts
   $ 725     $ 230     $ (230 )   $ 725  

 

2008 Annual Report F-30
 
 
 

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
April 30, 2008
 
Schedule III - REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands)
 
   
 Initial Cost to Company
  
 Gross amount at which carried at
close of period
      
Description
Encumbrances
Land
Buildings & Improvements
Costs capitalized subsequent to acquisition
Land
Buildings & Improvements
Total
Accumulated Depreciation
Date of Construction or Acquisition
Life on which depreciation in latest income statement is computed
Multi-Family Residential
                                      
17 S Main Apartments - Minot, ND
$
0
$
0
$
0
$
222
$
0
$
222
$
222
$
(9)
  
2006
40 years
408 1st Street SE - Minot, ND
  
0
  
10
  
35
  
4
  
12
  
37
  
49
  
(36)
  
1986
40 years
Applewood On The Green - Omaha, NE
  
6,887
  
706
  
9,589
  
2,634
  
930
  
11,999
  
12,929
  
(2,144)
  
2001
40 years
Arbors Apts - S Sioux City, NE
  
4,331
  
350
  
6,625
  
444
  
366
  
7,053
  
7,419
  
(344)
  
2006
40 years
Boulder Court - Eagan, MN
  
4,259
  
1,067
  
5,498
  
1,009
  
1,258
  
6,316
  
7,574
  
(773)
  
2003
40 years
Brookfield Village Apartments - Topeka, KS
  
4,971
  
509
  
6,698
  
693
  
574
  
7,326
  
7,900
  
(864)
  
2003
40 years
Candlelight Apartments - Fargo, ND
  
1,426
  
80
  
758
  
998
  
216
  
1,620
  
1,836
  
(614)
  
1992
24-40 years
Canyon Lake Apartments - Rapid City, SD
  
2,751
  
305
  
3,957
  
206
  
324
  
4,144
  
4,468
  
(691)
  
2001
40 years
Castle Rock - Billings, MT
  
3,434
  
736
  
4,864
  
1,106
  
817
  
5,889
  
6,706
  
(1,435)
  
1998
40 years
Chateau Apartments - Minot, ND
  
1,834
  
122
  
2,224
  
870
  
167
  
3,049
  
3,216
  
(745)
  
1998
12-40 years
Colonial Villa - Burnsville, MN
  
8,518
  
2,401
  
11,515
  
1,882
  
2,623
  
13,175
  
15,798
  
(1,623)
  
2003
40 years
Colton Heights Properties - Minot, ND
  
569
  
80
  
734
  
245
  
110
  
949
  
1,059
  
(612)
  
1984
40 years
Cottonwood Community - Bismarck, ND
  
7,379
  
1,056
  
17,372
  
1,938
  
1,182
  
19,184
  
20,366
  
(3,195)
  
1997
40 years
Country Meadows Community - Billings, MT
  
5,488
  
492
  
7,809
  
620
  
519
  
8,402
  
8,921
  
(1,948)
  
1995
33-40 years
Crestview Apartments - Bismarck, ND
  
4,294
  
235
  
4,290
  
716
  
442
  
4,799
  
5,241
  
(1,859)
  
1994
24-40 years
Crown Colony Apartments - Topeka, KS
  
6,591
  
620
  
9,955
  
1,083
  
720
  
10,938
  
11,658
  
(2,409)
  
1999
40 years
Dakota Hill At Valley Ranch - Irving, TX
  
23,145
  
3,650
  
33,810
  
2,029
  
3,864
  
35,625
  
39,489
  
(7,403)
  
2000
40 years
East Park Apartments - Sioux Falls, SD
  
1,619
  
115
  
2,406
  
423
  
153
  
2,791
  
2,944
  
(434)
  
2002
40 years
Forest Park Estates - Grand Forks, ND
  
6,372
  
810
  
5,579
  
3,306
  
1,071
  
8,624
  
9,695
  
(2,991)
  
1993
24-40 years
Greenfield Apartments - Omaha, NE
  
3,650
  
578
  
4,122
  
117
  
580
  
4,237
  
4,817
  
(39)
  
2007
40 years
Heritage Manor - Rochester, MN
  
4,827
  
403
  
6,969
  
1,092
  
411
  
8,053
  
8,464
  
(2,056)
  
1998
40 years
Indian Hills Apartments - Sioux City, IA
  
0
  
294
  
2,920
  
1,847
  
295
  
4,766
  
5,061
  
(90)
  
2007
40 years
Jenner Properties - Grand Forks, ND
  
1,662
  
184
  
1,514
  
670
  
264
  
2,104
  
2,368
  
(557)
  
1997
40 years
Kirkwood Manor - Bismarck, ND
  
1,981
  
449
  
2,725
  
1,136
  
528
  
3,782
  
4,310
  
(1,068)
  
1997
12-40 years
Lancaster Place - St. Cloud, MN
  
1,258
  
289
  
2,899
  
629
  
410
  
3,407
  
3,817
  
(757)
  
2000
40 years
Legacy Community - Grand Forks, ND
  
17,646
  
1,362
  
21,728
  
4,377
  
1,929
  
25,538
  
27,467
  
(5,040)
  
1995-2004
24-40 years
Magic City Apartments - Minot, ND
  
2,808
  
370
  
3,875
  
1,431
  
506
  
5,170
  
5,676
  
(1,416)
  
1997
12-40 years
Meadows Community - Jamestown, ND
  
2,861
  
590
  
4,518
  
955
  
626
  
5,437
  
6,063
  
(1,092)
  
1998
40 years
Miramont Apartments - Fort Collins, CO
  
11,202
  
1,470
  
12,765
  
1,152
  
1,565
  
13,822
  
15,387
  
(4,022)
  
1996
40 years
Monticello Apartments - Monticello, MN
  
3,201
  
490
  
3,756
  
243
  
585
  
3,904
  
4,489
  
(425)
  
2004
40 years
Neighborhood Apartments - Colorado Springs, CO
  
10,099
  
1,034
  
9,811
  
2,571
  
1,141
  
12,275
  
13,416
  
(3,502)
  
1997
40 years
North Pointe - Bismarck, ND
  
2,134
  
144
  
2,243
  
120
  
157
  
2,350
  
2,507
  
(745)
  
1995
24-40 years
Oakmont Apartments - Sioux Falls, SD
  
3,797
  
423
  
4,837
  
126
  
429
  
4,957
  
5,386
  
(773)
  
2002
40 years

2008 Annual Report F-31
 
 
 

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
April 30, 2008
 
Schedule III - REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands)
 
   
 Initial Cost to Company
  
 Gross amount at which carried at
close of period
      
Description
Encumbrances
Land
Buildings & Improvements
Costs capitalized subsequent to acquisition
Land
Buildings & Improvements
Total
Accumulated Depreciation
Date of Construction or Acquisition
Life on which depreciation in latest income statement is computed
Multi-Family Residential - continued
                                      
Oakwood - Sioux Falls, SD
$
3,547
$
543
$
2,784
$
3,211
$
751
$
5,787
$
6,538
$
(2,090)
  
1993
40 years
Olympic Village - Billings, MT
  
7,773
  
1,164
  
10,441
  
1,352
  
1,396
  
11,561
  
12,957
  
(2,349)
  
2000
40 years
Olympik Village Apartments - Rochester, MN
  
5,083
  
1,034
  
6,109
  
484
  
1,073
  
6,554
  
7,627
  
(533)
  
2005
40 years
Oxbow - Sioux Falls, SD
  
3,865
  
404
  
3,152
  
2,023
  
472
  
5,107
  
5,579
  
(1,692)
  
1994
24-40 years
Park Meadows Community - Waite Park, MN
  
9,810
  
1,143
  
9,099
  
3,892
  
1,448
  
12,686
  
14,134
  
(4,216)
  
1997
40 years
Pebble Springs - Bismarck, ND
  
358
  
7
  
749
  
70
  
35
  
791
  
826
  
(182)
  
1999
40 years
Pinecone Apartments - Fort Collins, CO
  
9,963
  
905
  
12,105
  
1,297
  
1,020
  
13,287
  
14,307
  
(4,306)
  
1995
40 years
Pinehurst Apartments - Billings, MT
  
427
  
72
  
687
  
63
  
74
  
748
  
822
  
(121)
  
2002
40 years
Pointe West - Rapid City, SD
  
2,949
  
240
  
3,538
  
1,033
  
304
  
4,507
  
4,811
  
(1,608)
  
1994
24-40 years
Prairie Winds Apartments - Sioux Falls, SD
  
1,572
  
144
  
1,816
  
310
  
207
  
2,063
  
2,270
  
(799)
  
1993
24-40 years
Prairiewood Meadows - Fargo, ND
  
2,596
  
280
  
2,531
  
757
  
334
  
3,234
  
3,568
  
(649)
  
2000
40 years
Quarry Ridge Apartments - Rochester, MN
  
12,840
  
1,312
  
13,362
  
78
  
1,318
  
13,434
  
14,752
  
(548)
  
2006
40 years
Ridge Oaks - Sioux City, IA
  
2,663
  
178
  
4,073
  
1,019
  
250
  
5,020
  
5,270
  
(1,126)
  
2001
40 years
Rimrock Apartments - Billings, MT
  
2,242
  
330
  
3,489
  
381
  
375
  
3,825
  
4,200
  
(861)
  
1999
40 years
Rocky Meadows - Billings, MT
  
3,186
  
656
  
5,726
  
658
  
741
  
6,299
  
7,040
  
(1,877)
  
1995
40 years
Rum River Apartments - Isanti, MN
  
3,964
  
843
  
4,823
  
2
  
843
  
4,825
  
5,668
  
(126)
  
2007
40 years
SCSH Campus Heights Apartments - St. Cloud, MN
  
0
  
110
  
628
  
9
  
110
  
637
  
747
  
(19)
  
2007
40 years
SCSH Campus Plaza Apartments - St. Cloud, MN
  
0
  
54
  
310
  
4
  
54
  
314
  
368
  
(10)
  
2007
40 years
SCSH Campus Knoll I Apartments - St. Cloud, MN
  
1,064
  
266
  
1,512
  
18
  
265
  
1,531
  
1,796
  
(47)
  
2007
40 years
SCSH University Park Place Apartments - St. Cloud, MN
  
0
  
78
  
451
  
10
  
78
  
461
  
539
  
(14)
  
2007
40 years
SCSH Cornerstone Apartments - St. Cloud, MN
  
0
  
54
  
311
  
2
  
54
  
313
  
367
  
(10)
  
2007
40 years
SCSH Campus Center Apartments - St. Cloud, MN
  
1,596
  
395
  
2,244
  
16
  
395
  
2,260
  
2,655
  
(69)
  
2007
40 years
SCSH Campus Side Apartments - St. Cloud, MN
  
0
  
107
  
615
  
4
  
107
  
619
  
726
  
(18)
  
2007
40 years
SCSH Campus View Apartments - St. Cloud, MN
  
0
  
107
  
616
  
4
  
107
  
620
  
727
  
(19)
  
2007
40 years
Sherwood Apartments - Topeka, KS
  
9,887
  
1,150
  
14,684
  
1,596
  
1,452
  
15,978
  
17,430
  
(3,526)
  
1999
40 years
Southbrook & Mariposa - Topeka, KS
  
3,229
  
399
  
5,110
  
171
  
416
  
5,264
  
5,680
  
(451)
  
2004
40 years
South Pointe - Minot, ND
  
9,642
  
550
  
9,548
  
1,616
  
1,235
  
10,479
  
11,714
  
(3,134)
  
1995
24-40 years
Southview Apartments - Minot, ND
  
760
  
185
  
469
  
248
  
219
  
683
  
902
  
(231)
  
1994
24-40 years
Southwind Apartments - Grand Forks, ND
  
6,155
  
400
  
5,034
  
1,583
  
653
  
6,364
  
7,017
  
(1,981)
  
1995
24-40 years
Sunset Trail - Rochester, MN
  
7,906
  
336
  
12,814
  
1,787
  
479
  
14,458
  
14,937
  
(2,607)
  
1999
40 years
Sweetwater Properties - Grafton, ND
  
0
  
50
  
403
  
448
  
58
  
843
  
901
  
(546)
  
1974
5-40 years
Sycamore Village Apartments - Sioux Falls, SD
  
911
  
101
  
1,316
  
306
  
144
  
1,579
  
1,723
  
(251)
  
2002
40 years

2008 Annual Report F-32
 
 
 

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
April 30, 2008
 
Schedule III - REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands)
 
   
 Initial Cost to Company
  
 Gross amount at which carried at
close of period
      
Description
Encumbrances
Land
Buildings & Improvements
Costs capitalized subsequent to acquisition
Land
Buildings & Improvements
Total
Accumulated Depreciation
Date of Construction or Acquisition
Life on which depreciation in latest income statement is computed
Multi-Family Residential - continued
                                      
Terrace On The Green - Moorhead, MN
$
1,445
$
24
$
1,490
$
1,638
$
129
$
3,023
$
3,152
$
(2,079)
  
1970
33-40 years
Thomasbrook Apartments - Lincoln, NE
  
5,235
  
600
  
8,867
  
2,086
  
753
  
10,800
  
11,553
  
(2,630)
  
1999
40 years
Valley Park Manor - Grand Forks, ND
  
3,606
  
294
  
4,137
  
1,607
  
386
  
5,652
  
6,038
  
(1,363)
  
1999
40 years
Village Green - Rochester, MN
  
1,630
  
234
  
2,296
  
240
  
303
  
2,467
  
2,770
  
(298)
  
2003
40 years
West Stonehill - Waite Park, MN
  
9,458
  
939
  
10,168
  
3,245
  
1,153
  
13,199
  
14,352
  
(4,273)
  
1995
40 years
Westwood Park - Bismarck, ND
  
1,034
  
116
  
1,910
  
746
  
233
  
2,539
  
2,772
  
(689)
  
1998
40 years
Winchester - Rochester, MN
  
3,991
  
748
  
5,622
  
806
  
923
  
6,253
  
7,176
  
(765)
  
2003
40 years
Woodridge Apartments - Rochester, MN
  
2,748
  
370
  
6,029
  
1,169
  
421
  
7,147
  
7,568
  
(2,140)
  
1997
40 years
Total Multi-Family Residential
$
304,129
$
38,346
$
399,468
$
72,883
$
45,542
$
465,155
$
510,697
$
(101,964)
      
                                       
Office
                                      
1st Avenue Building - Minot, ND
$
0
$
30
$
80
$
584
$
33
$
661
$
694
$
(350)
  
1981
33-40 years
401 South Main - Minot, ND
  
0
  
71
  
334
  
238
  
77
  
566
  
643
  
(273)
  
1987
24-40 years
610 Business Center IV - Brooklyn Park, MN
  
0
  
975
  
5,542
  
2,066
  
975
  
7,608
  
8,583
  
(64)
  
2007
40 years
2030 Cliff Road - Eagan, MN
  
520
  
146
  
835
  
2
  
146
  
837
  
983
  
(147)
  
2001
19-40 years
7800 W Brown Deer Road - Milwaukee, WI
  
11,500
  
1,455
  
9,268
  
385
  
1,475
  
9,633
  
11,108
  
(1,567)
  
2003
40 years
American Corporate Center - Mendota Heights, MN
  
9,918
  
893
  
16,767
  
2,838
  
893
  
19,605
  
20,498
  
(3,343)
  
2002
40 years
Ameritrade - Omaha, NE
  
4,413
  
327
  
7,957
  
65
  
327
  
8,022
  
8,349
  
(1,811)
  
1999
40 years
Benton Business Park - Sauk Rapids, MN
  
852
  
188
  
1,261
  
78
  
188
  
1,339
  
1,527
  
(163)
  
2003
40 years
Bloomington Business Plaza - Bloomington, MN
  
4,415
  
1,300
  
6,106
  
635
  
1,305
  
6,736
  
8,041
  
(1,288)
  
2001
40 years
Brenwood - Minnetonka, MN
  
7,852
  
1,762
  
12,138
  
2,671
  
1,771
  
14,800
  
16,571
  
(2,405)
  
2002
40 years
Brook Valley I - La Vista, NE
  
1,493
  
347
  
1,672
  
26
  
347
  
1,698
  
2,045
  
(111)
  
2005
45 years
Burnsville Bluffs II - Burnsville, MN
  
1,328
  
300
  
2,154
  
793
  
301
  
2,946
  
3,247
  
(616)
  
2001
40 years
Cold Spring Center - St. Cloud, MN
  
4,378
  
588
  
7,807
  
671
  
592
  
8,474
  
9,066
  
(1,522)
  
2001
40 years
Corporate Center West - Omaha, NE
  
17,315
  
3,880
  
17,509
  
16
  
3,880
  
17,525
  
21,405
  
(712)
  
2006
40 years
Crosstown Centre - Eden Prairie, MN
  
15,358
  
2,884
  
14,569
  
480
  
2,887
  
15,046
  
17,933
  
(1,355)
  
2004
40 years
Dewey Hill Business Center - Edina, MN
  
2,736
  
985
  
3,507
  
849
  
995
  
4,346
  
5,341
  
(946)
  
2000
40 years
Farnam Executive Center - Omaha, NE
  
12,160
  
2,188
  
11,404
  
0
  
2,188
  
11,404
  
13,592
  
(463)
  
2006
40 years
Flagship - Eden Praire, MN
  
21,565
  
1,899
  
21,637
  
479
  
1,899
  
22,116
  
24,015
  
(921)
  
2006
40 years
Gateway Corporate Center, Woodbury, MN
  
8,700
  
1,637
  
7,762
  
90
  
1,637
  
7,852
  
9,489
  
(320)
  
2006
40 years
Golden Hills Office Center - Golden Valley, MN
  
14,715
  
3,018
  
24,482
  
(3,642)
  
3,018
  
20,840
  
23,858
  
(2,911)
  
2003
40 years
Great Plains - Fargo, ND
  
6,267
  
126
  
15,239
  
10
  
126
  
15,249
  
15,375
  
(3,320)
  
1997
40 years

2008 Annual Report F-33
 
 
 

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
April 30, 2008
 
Schedule III - REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands)
 
   
 Initial Cost to Company
  
 Gross amount at which carried at
close of period
      
Description
Encumbrances
Land
Buildings & Improvements
Costs capitalized subsequent to acquisition
Land
Buildings & Improvements
Total
Accumulated Depreciation
Date of Construction or Acquisition
Life on which depreciation in latest income statement is computed
Office - continued
                                      
Highlands Ranch - Highlands Ranch, CO
$
9,168
$
1,437
$
9,549
$
776
$
1,437
$
10,325
$
11,762
$
(985)
  
2004
40 years
Highlands Ranch I- Highlands Ranch, CO
  
9,186
  
2,268
  
8,362
  
(1)
  
2,268
  
8,361
  
10,629
  
(305)
  
2006
40 years
Interlachen Corporate Center - Edina, MN
  
10,162
  
1,650
  
14,984
  
92
  
1,652
  
15,074
  
16,726
  
(2,546)
  
2001
40 years
Intertech Building - Fenton, MO
  
4,900
  
2,130
  
3,969
  
0
  
2,130
  
3,969
  
6,099
  
(37)
  
2007
40 years
Mendota Office Center I - Mendota Heights, MN
  
3,933
  
835
  
6,169
  
215
  
835
  
6,384
  
7,219
  
(1,058)
  
2002
40 years
Mendota Office Center II - Mendota Heights, MN
  
6,298
  
1,121
  
10,085
  
930
  
1,121
  
11,015
  
12,136
  
(2,051)
  
2002
40 years
Mendota Office Center III - Mendota Heights, MN
  
3,644
  
970
  
5,734
  
102
  
970
  
5,836
  
6,806
  
(933)
  
2002
40 years
Mendota Office Center IV - Mendota Heights, MN
  
4,732
  
1,070
  
7,635
  
0
  
1,070
  
7,635
  
8,705
  
(1,175)
  
2002
40 years
Minnesota National Bank - Duluth, MN
  
1,093
  
287
  
1,454
  
4
  
288
  
1,457
  
1,745
  
(147)
  
2004
40 years
Miracle Hills One - Omaha, NE
  
8,895
  
1,974
  
10,117
  
379
  
1,974
  
10,496
  
12,470
  
(486)
  
2006
40 years
Nicollett VII - Burnsville, MN
  
4,202
  
429
  
6,932
  
83
  
436
  
7,008
  
7,444
  
(1,236)
  
2001
40 years
Northgate I - Maple Grove, MN
  
5,945
  
1,062
  
6,359
  
368
  
1,067
  
6,722
  
7,789
  
(629)
  
2004
40 years
Northgate II - Maple Grove, MN
  
1,351
  
359
  
1,944
  
142
  
403
  
2,042
  
2,445
  
(463)
  
1999
40 years
Northpark Corporate Center - Arden Hills, MN
  
14,000
  
2,034
  
14,584
  
867
  
2,034
  
15,451
  
17,485
  
(810)
  
2006
40 years
Pacific Hills - Omaha, NE
  
16,770
  
4,220
  
11,988
  
300
  
4,220
  
12,288
  
16,508
  
(531)
  
2006
40 years
Pillsbury Business Center - Bloomington, MN
  
1,007
  
284
  
1,557
  
63
  
284
  
1,620
  
1,904
  
(292)
  
2001
40 years
Plaza VII - Boise, ID
  
1,255
  
300
  
3,058
  
330
  
351
  
3,337
  
3,688
  
(458)
  
2003
40 years
Plymouth 5095 Nathan Lane - Plymouth, MN
  
1,350
  
604
  
1,253
  
40
  
604
  
1,293
  
1,897
  
(26)
  
2007
40 years
Plymouth I - Plymouth, MN
  
1,333
  
530
  
1,132
  
18
  
530
  
1,150
  
1,680
  
(111)
  
2004
40 years
Plymouth II - Plymouth, MN
  
1,333
  
367
  
1,263
  
13
  
367
  
1,276
  
1,643
  
(126)
  
2004
40 years
Plymouth III - Plymouth, MN
  
1,640
  
507
  
1,494
  
11
  
507
  
1,505
  
2,012
  
(146)
  
2004
40 years
Plymouth IV & V - Plymouth, MN
  
8,176
  
1,336
  
12,692
  
861
  
1,337
  
13,552
  
14,889
  
(2,569)
  
2001
40 years
Prairie Oak Business Center - Eden Prairie, MN
  
3,674
  
531
  
4,069
  
1,335
  
563
  
5,372
  
5,935
  
(809)
  
2003
40 years
Rapid City, SD - 900 Concourse Drive - Rapid City, SD
  
3,049
  
285
  
6,600
  
203
  
321
  
6,767
  
7,088
  
(1,322)
  
2000
40 years
Riverport - Maryland Heights, MO
  
19,690
  
1,891
  
18,982
  
0
  
1,891
  
18,982
  
20,873
  
(771)
  
2006
40 years
Southeast Tech Center - Eagan, MN
  
3,655
  
560
  
5,496
  
302
  
569
  
5,789
  
6,358
  
(1,318)
  
1999
40 years
Spring Valley IV - Omaha, NE
  
889
  
178
  
915
  
45
  
178
  
960
  
1,138
  
(68)
  
2005
41 years
Spring Valley V - Omaha, NE
  
978
  
212
  
1,123
  
29
  
212
  
1,152
  
1,364
  
(75)
  
2005
42 years
Spring Valley X - Omaha, NE
  
907
  
180
  
1,025
  
27
  
180
  
1,052
  
1,232
  
(69)
  
2005
43 years
Spring Valley XI - Omaha, NE
  
889
  
143
  
1,094
  
28
  
143
  
1,122
  
1,265
  
(74)
  
2005
44 years
Superior Office Building - Duluth, MN
  
1,644
  
336
  
2,200
  
3
  
336
  
2,203
  
2,539
  
(222)
  
2004
40 years
TCA Building - Eagan, MN
  
9,134
  
627
  
8,571
  
705
  
684
  
9,219
  
9,903
  
(1,209)
  
2003
40 years

2008 Annual Report F-34
 
 
 

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
April 30, 2008
 
Schedule III - REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands)
 
   
 Initial Cost to Company
  
 Gross amount at which carried at
close of period
      
Description
Encumbrances
Land
Buildings & Improvements
Costs capitalized subsequent to acquisition
Land
Buildings & Improvements
Total
Accumulated Depreciation
Date of Construction or Acquisition
Life on which depreciation in latest income statement is computed
Office - continued
                                      
Three Paramount Plaza - Bloomington, MN
$
4,192
$
1,261
$
6,149
$
792
$
1,298
$
6,904
$
8,202
$
(1,145)
  
2002
40 years
Thresher Square - Minneapolis, MN
  
0
  
1,094
  
10,026
  
985
  
1,104
  
11,001
  
12,105
  
(1,686)
  
2002
40 years
Timberlands - Leawood, KS
  
13,155
  
2,375
  
12,218
  
137
  
2,408
  
12,322
  
14,730
  
(569)
  
2006
40 years
UHC Office - International Falls, MN
  
1,393
  
119
  
2,366
  
20
  
119
  
2,386
  
2,505
  
(247)
  
2004
40 years
US Bank Financial Center - Bloomington, MN
  
14,791
  
3,117
  
13,351
  
284
  
3,119
  
13,633
  
16,752
  
(1,062)
  
2005
40 years
Viromed - Eden Prairie, MN
  
1,644
  
666
  
4,196
  
1
  
666
  
4,197
  
4,863
  
(966)
  
1999
40 years
Wells Fargo Center - St Cloud, MN
  
7,156
  
869
  
8,373
  
779
  
869
  
9,152
  
10,021
  
(707)
  
2005
40 years
West River Business Park - Waite Park, MN
  
852
  
235
  
1,195
  
46
  
235
  
1,241
  
1,476
  
(152)
  
2003
40 years
Westgate - Boise, ID
  
6,861
  
1,000
  
10,618
  
613
  
1,000
  
11,231
  
12,231
  
(1,507)
  
2003
40 years
Whitewater Plaza - Minnetonka, MN
  
4,098
  
530
  
4,860
  
255
  
577
  
5,068
  
5,645
  
(836)
  
2002
40 years
Wirth Corporate Center - Golden Valley, MN
  
4,475
  
970
  
7,660
  
371
  
971
  
8,030
  
9,001
  
(1,356)
  
2002
40 years
Woodlands Plaza IV – Maryland Heights, MO
  
4,360
  
771
  
4,609
  
62
  
771
  
4,671
  
5,442
  
(197)
  
2006
40 years
Total Office
$
373,344
$
68,723
$
466,040
$
21,949
$
69,159
$
487,553
$
556,712
$
(58,095)
      
                                       
Medical
                                      
2800 Medical Building - Minneapolis, MN
$
6,242
$
204
$
7,135
$
864
$
229
$
7,974
$
8,203
$
(605)
  
2005
40 years
6517 Drew Avenue South - Edina, MN
  
1,267
  
353
  
660
  
502
  
353
  
1,162
  
1,515
  
(164)
  
2002
40 years
Abbott Northwest - Sartell, MN
  
6,457
  
0
  
11,781
  
872
  
0
  
12,653
  
12,653
  
(1,856)
  
2002
40 years
Airport Medical - Bloomington, MN
  
2,327
  
0
  
4,678
  
0
  
0
  
4,678
  
4,678
  
(926)
  
2002
40 years
Barry Pointe Office Park - Kansas City, MO
  
0
  
384
  
2,365
  
0
  
384
  
2,365
  
2,749
  
(57)
  
2007
40 years
Burnsville 303 Nicollet Medical (Ridgeview) - Burnsville, MN
  
8,000
  
1,071
  
6,842
  
696
  
1,071
  
7,538
  
8,609
  
(24)
  
2008
40 years
Burnsville 305 Nicollet Medical (Ridgeview South) - Burnsville, MN
  
5,000
  
189
  
5,127
  
509
  
189
  
5,636
  
5,825
  
(18)
  
2008
40 years
Denfeld Clinic - Duluth, MN
  
2,126
  
501
  
2,597
  
1
  
501
  
2,598
  
3,099
  
(263)
  
2004
40 years
Eagan 1440 Duckwood Medical - Eagan, MN
  
2,000
  
521
  
1,547
  
28
  
521
  
1,575
  
2,096
  
(5)
  
2008
40 years
Edgewood Vista - Belgrade, MT
  
0
  
35
  
779
  
0
  
35
  
779
  
814
  
(2)
  
2008
40 years
Edgewood Vista - Billings, MT
  
986
  
115
  
1,782
  
1
  
155
  
1,743
  
1,898
  
(9)
  
2008
40 years
Edgewood Vista - Bismarck, ND
  
6,825
  
511
  
9,193
  
36
  
115
  
9,625
  
9,740
  
(604)
  
2005
40 years
Edgewood Vista - Brainerd, MN
  
6,745
  
587
  
8,999
  
34
  
587
  
9,033
  
9,620
  
(591)
  
2005
40 years
Edgewood Vista - Columbus, NE
  
0
  
43
  
824
  
0
  
43
  
824
  
867
  
(3)
  
2008
40 years
Edgewood Vista - East Grand Forks, MN
  
1,468
  
290
  
1,383
  
0
  
290
  
1,383
  
1,673
  
(7)
  
2008
40 years
Edgewood Vista - Fargo, ND
  
14,680
  
792
  
21,050
  
0
  
792
  
21,050
  
21,842
  
(66)
  
2008
40 years
Edgewood Vista - Fremont, NE
  
665
  
56
  
490
  
42
  
56
  
532
  
588
  
(91)
  
2000
40 years

2008 Annual Report F-35
 
 
 

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
April 30, 2008
 
Schedule III - REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands)
 
   
 Initial Cost to Company
  
 Gross amount at which carried at
close of period
      
Description
Encumbrances
Land
Buildings & Improvements
Costs capitalized subsequent to acquisition
Land
Buildings & Improvements
Total
Accumulated Depreciation
Date of Construction or Acquisition
Life on which depreciation in latest income statement is computed
Medical - continued
                                      
Edgewood Vista - Grand Island, NE
$
0
$
33
$
774
$
0
$
33
$
774
$
807
$
(2)
  
2008
40 years
Edgewood Vista - Hastings, NE
  
685
  
49
  
516
  
41
  
49
  
557
  
606
  
(97)
  
2000
40 years
Edgewood Vista - Hermantown I, MN
  
18,374
  
288
  
9,871
  
1,590
  
288
  
11,461
  
11,749
  
(1,884)
  
2000
40 years
Edgewood Vista - Hermantown II, MN
  
7,816
  
719
  
10,516
  
34
  
719
  
10,550
  
11,269
  
(690)
  
2005
40 years
Edgewood Vista - Kalispell, MT
  
687
  
70
  
502
  
52
  
70
  
554
  
624
  
(93)
  
2001
40 years
Edgewood Vista - Missoula, MT
  
976
  
109
  
854
  
36
  
109
  
890
  
999
  
(246)
  
1996
40 years
Edgewood Vista - Norfolk, NE
  
0
  
42
  
722
  
0
  
42
  
722
  
764
  
(2)
  
2008
40 years
Edgewood Vista - Omaha, NE
  
434
  
89
  
547
  
40
  
89
  
587
  
676
  
(98)
  
2001
40 years
Edgewood Vista - Sioux Falls, SD
  
985
  
314
  
1,002
  
0
  
314
  
1,002
  
1,316
  
(5)
  
2008
40 years
Edgewood Vista - Spearfish, SD
  
4,249
  
315
  
5,806
  
35
  
315
  
5,841
  
6,156
  
(381)
  
2005
40 years
Edgewood Vista - Virginia, MN
  
15,629
  
246
  
11,824
  
151
  
246
  
11,975
  
12,221
  
(1,568)
  
2002
40 years
Edina 6363 France Medical - Edina, MN
  
8,332
  
0
  
12,675
  
0
  
0
  
12,675
  
12,675
  
(150)
  
2008
40 years
Edina 6405 France Medical - Edina, MN
  
9,511
  
0
  
12,201
  
0
  
0
  
12,201
  
12,201
  
(30)
  
2008
40 years
Fox River Cottages - Grand Chute, WI
  
2,346
  
305
  
2,747
  
756
  
305
  
3,503
  
3,808
  
(123)
  
2006
40 years
Fresenius - Duluth, MN
  
1,003
  
50
  
1,519
  
3
  
50
  
1,522
  
1,572
  
(154)
  
2004
40 years
Garden View - St. Paul, MN
  
3,436
  
0
  
7,408
  
180
  
0
  
7,588
  
7,588
  
(1,160)
  
2002
40 years
Gateway Clinic - Sandstone, MN
  
1,231
  
66
  
1,698
  
1
  
66
  
1,699
  
1,765
  
(172)
  
2004
40 years
Health East St John & Woodwinds - Maplewood & Woodbury, MN
  
15,506
  
3,239
  
18,362
  
0
  
3,239
  
18,362
  
21,601
  
(3,653)
  
2000
40 years
High Pointe Health Campus - Lake Elmo, MN
  
4,213
  
1,305
  
10,528
  
294
  
1,308
  
10,819
  
12,127
  
(1,022)
  
2004
40 years
Mariner Clinic - Superior, WI
  
2,693
  
0
  
3,781
  
7
  
6
  
3,782
  
3,788
  
(383)
  
2004
40 years
Minneapolis 701 25th Ave Medical (Riverside) - Minneapolis, MN
  
6,950
  
0
  
7,873
  
0
  
0
  
7,873
  
7,873
  
(25)
  
2008
40 years
Nebraska Orthopaedic Hospital - Omaha, NE
  
13,827
  
0
  
20,272
  
240
  
0
  
20,512
  
20,512
  
(2,029)
  
2004
40 years
Park Dental - Brooklyn Center, MN
  
1,335
  
185
  
2,767
  
0
  
185
  
2,767
  
2,952
  
(389)
  
2002
40 years
Pavilion I - Duluth, MN
  
7,095
  
1,245
  
8,898
  
31
  
1,245
  
8,929
  
10,174
  
(864)
  
2004
40 years
Pavilion II - Duluth, MN
  
13,055
  
2,715
  
14,673
  
1,937
  
2,715
  
16,610
  
19,325
  
(2,118)
  
2004
40 years
Ritchie Medical Plaza - St Paul, MN
  
7,472
  
1,615
  
7,851
  
109
  
1,648
  
7,927
  
9,575
  
(571)
  
2005
40 years
St Michael Clinic - St Michael, MN
  
2,115
  
328
  
2,259
  
264
  
328
  
2,523
  
2,851
  
(68)
  
2007
40 years
Southdale FM - Edina, MN
  
9,871
  
755
  
8,054
  
5,190
  
755
  
13,244
  
13,999
  
(2,092)
  
2003
40 years
Southdale SMB - Edina, MN
  
22,294
  
3,480
  
26,432
  
4,547
  
3,480
  
30,979
  
34,459
  
(6,314)
  
2001
40 years
Stevens Point - Stevens Point, WI
  
11,588
  
442
  
3,888
  
10,495
  
442
  
14,383
  
14,825
  
(540)
  
2006
40 years
Wells Clinic - Hibbing, MN
  
1,878
  
162
  
2,498
  
0
  
162
  
2,498
  
2,660
  
(252)
  
2004
40 years
Total Medical
$
260,374
$
23,818
$
306,550
$
29,618
$
23,529
$
336,457
$
359,986
$
(32,466)
      

2008 Annual Report F-36
 
 
 

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
April 30, 2008
 
Schedule III - REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands)
 
   
 Initial Cost to Company
  
 Gross amount at which carried at
close of period
    
Life on which depreciation in latest income statement is computed
Description
Encumbrances
Land
Buildings & Improvements
Costs capitalized subsequent to acquisition
Land
Buildings & Improvements
Total
Accumulated Depreciation
Date of Construction or Acquisition
Industrial
                                      
API Building - Duluth, MN
$
1,115
$
115
$
1,605
$
3
$
115
$
1,608
$
1,723
$
(162)
  
2004
40 years
Bloomington 2000 W 94th Street - Bloomington, MN
  
4,162
  
2,133
  
4,096
  
0
  
2,133
  
4,096
  
6,229
  
(141)
  
2006
40 years
Bodycote Industrial Building - Eden Prairie, MN
  
1,371
  
198
  
1,155
  
799
  
198
  
1,954
  
2,152
  
(613)
  
1992
40 years
Cedar Lake Business Center - St. Louis Park, MN
  
2,532
  
895
  
2,810
  
0
  
895
  
2,810
  
3,705
  
(61)
  
2007
40 years
Dixon Avenue Industrial Park - Des Moines, IA
  
8,010
  
1,439
  
10,757
  
975
  
1,439
  
11,732
  
13,171
  
(1,733)
  
2002
40 years
Eagan 2785 & 2795 Hwy 55 - Eagan, MN
  
0
  
985
  
4,937
  
0
  
985
  
4,937
  
5,922
  
(86)
  
2008
40 years
Lexington Commerce Center - Eagan, MN
  
2,940
  
453
  
4,352
  
1,667
  
480
  
5,992
  
6,472
  
(1,327)
  
1999
40 years
Lighthouse - Duluth, MN
  
1,170
  
90
  
1,789
  
6
  
90
  
1,795
  
1,885
  
(182)
  
2004
40 years
Metal Improvement Company - New Brighton, MN
  
1,269
  
240
  
2,189
  
78
  
240
  
2,267
  
2,507
  
(343)
  
2002
40 years
Roseville 2929 Long Lake Road - Roseville, MN
  
6,121
  
1,966
  
7,272
  
1,303
  
1,980
  
8,561
  
10,541
  
(256)
  
2006
40 years
Stone Container - Fargo, ND
  
3,481
  
440
  
6,597
  
104
  
440
  
6,701
  
7,141
  
(1,770)
  
1995
40 years
Stone Container - Roseville, MN
  
4,366
  
810
  
7,440
  
0
  
810
  
7,440
  
8,250
  
(1,186)
  
2001
40 years
Urbandale 3900 106th Street - Urbandale, IA
  
10,800
  
3,680
  
10,089
  
41
  
3,721
  
10,089
  
13,810
  
(221)
  
2007
40 years
Waconia Industrial Building - Waconia, MN
  
1,162
  
165
  
1,492
  
347
  
187
  
1,817
  
2,004
  
(391)
  
2000
40 years
Wilson's Leather - Brooklyn Park, MN
  
7,624
  
1,368
  
11,643
  
794
  
1,368
  
12,437
  
13,805
  
(1,810)
  
2002
40 years
Winsted Industrial Building - Winsted, MN
  
0
  
100
  
901
  
6
  
100
  
907
  
1,007
  
(186)
  
2001
40 years
Woodbury 1865 Woodland - Woodbury, MN
  
2,979
  
1,108
  
2,628
  
0
  
1,108
  
2,628
  
3,736
  
(52)
  
2007
40 years
Total Industrial
$
59,102
$
16,185
$
81,752
$
6,123
$
16,289
$
87,771
$
104,060
$
(10,520)
      
                                       
Retail
                                      
17 South Main - Minot, ND
$
0
$
15
$
75
$
197
$
17
$
270
$
287
$
(67)
  
2000
40 years
Anoka Strip Center - Anoka, MN
  
439
  
123
  
602
  
8
  
123
  
610
  
733
  
(79)
  
2003
40 years
Burnsville 1 Strip Center - Burnsville, MN
  
571
  
208
  
773
  
48
  
208
  
821
  
1,029
  
(112)
  
2003
40 years
Burnsville 2 Strip Center - Burnsville, MN
  
454
  
291
  
469
  
44
  
291
  
513
  
804
  
(87)
  
2003
40 years
Champlin South Pond - Champlin, MN
  
2,062
  
842
  
2,703
  
90
  
866
  
2,769
  
3,635
  
(296)
  
2004
40 years
Chan West Village - Chanhassen, MN
  
14,601
  
5,035
  
14,665
  
1,675
  
5,566
  
15,809
  
21,375
  
(2,098)
  
2003
40 years
Dakota West Plaza - Minot, ND
  
432
  
92
  
493
  
20
  
106
  
499
  
605
  
(25)
  
2006
40 years
Duluth Denfeld Retail - Duluth, MN
  
3,130
  
276
  
4,699
  
11
  
276
  
4,710
  
4,986
  
(481)
  
2004
40 years
Duluth NAPA - Duluth, MN
  
947
  
130
  
1,800
  
3
  
130
  
1,803
  
1,933
  
(182)
  
2004
40 years
Eagan Community - Eagan, MN
  
1,550
  
701
  
1,589
  
420
  
703
  
2,007
  
2,710
  
(255)
  
2003
40 years
East Grand Station - East Grand Forks, MN
  
418
  
150
  
1,235
  
7
  
150
  
1,242
  
1,392
  
(263)
  
1999
40 years
Fargo Express Community - Fargo, ND
  
1,173
  
374
  
1,419
  
16
  
385
  
1,424
  
1,809
  
(172)
  
2003-2005
40 years
Forest Lake Auto - Forest Lake, MN
  
0
  
50
  
446
  
5
  
50
  
451
  
501
  
(56)
  
2003
40 years
Forest Lake Westlake Center - Forest Lake, MN
  
4,956
  
2,446
  
5,304
  
437
  
2,480
  
5,707
  
8,187
  
(743)
  
2003
40 years

2008 Annual Report F-37
 
 
 

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
April 30, 2008
 
Schedule III - REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands)
 
   
 Initial Cost to Company
  
 Gross amount at which carried at
close of period
      
Description
Encumbrances
Land
Buildings & Improvements
Costs capitalized subsequent to acquisition
Land
Buildings & Improvements
Total
Accumulated Depreciation
Date of Construction or Acquisition
Life on which depreciation in latest income statement is computed
Retail - continued
                                      
Grand Forks Carmike - Grand Forks, ND
$
2,031
$
184
$
2,360
$
2
$
184
$
2,362
$
2,546
$
(797)
  
1994
40 years
Grand Forks Medpark Mall - Grand Forks, ND
  
2,985
  
681
  
4,808
  
208
  
699
  
4,998
  
5,697
  
(1,051)
  
2000
40 years
Jamestown Buffalo Mall - Jamestown, ND
  
1,841
  
566
  
3,209
  
1,973
  
799
  
4,949
  
5,748
  
(449)
  
2003
40 years
Jamestown Business Center - Jamestown, ND
  
749
  
297
  
1,023
  
1,040
  
326
  
2,034
  
2,360
  
(253)
  
2003
40 years
Kalispell Retail Center - Kalispell, MT
  
1,599
  
250
  
2,250
  
970
  
253
  
3,217
  
3,470
  
(367)
  
2003
40 years
Kentwood Thomasville Furniture - Kentwood, MI
  
691
  
225
  
1,889
  
7
  
225
  
1,896
  
2,121
  
(544)
  
1996
40 years
Ladysmith Pamida - Ladysmith, WI
  
1,115
  
89
  
1,411
  
0
  
89
  
1,411
  
1,500
  
(184)
  
2003
40 years
Lakeville Strip Center - Lakeville, MN
  
1,171
  
46
  
1,142
  
783
  
94
  
1,877
  
1,971
  
(284)
  
2003
40 years
Livingston Pamida - Livingston, MT
  
1,324
  
227
  
1,573
  
0
  
227
  
1,573
  
1,800
  
(205)
  
2003
40 years
Minot Arrowhead SC - Minot, ND
  
5,078
  
100
  
1,064
  
6,623
  
387
  
7,400
  
7,787
  
(2,754)
  
1973
15 1/2-40 years
Minot Plaza - Minot, ND
  
654
  
50
  
453
  
92
  
59
  
536
  
595
  
(201)
  
1993
40 years
Monticello C Store - Monticello, MN
  
0
  
86
  
770
  
37
  
118
  
775
  
893
  
(102)
  
2003
40 years
Omaha Barnes & Noble - Omaha, NE
  
3,040
  
600
  
3,099
  
0
  
600
  
3,099
  
3,699
  
(968)
  
1995
40 years
Pine City C Store - Pine City, MN
  
343
  
83
  
357
  
2
  
83
  
359
  
442
  
(47)
  
2003
40 years
Pine City Evergreen Square - Pine City, MN
  
2,105
  
154
  
2,646
  
425
  
380
  
2,845
  
3,225
  
(399)
  
2003
40 years
Rochester Maplewood Square - Rochester, MN
  
4,209
  
3,275
  
8,610
  
102
  
3,294
  
8,693
  
11,987
  
(1,910)
  
1999
40 years
St. Cloud Westgate SC - St. Cloud, MN
  
3,834
  
1,219
  
5,536
  
86
  
1,242
  
5,599
  
6,841
  
(581)
  
2004
40 years
Weston Retail - Weston, WI
  
0
  
79
  
1,575
  
27
  
80
  
1,601
  
1,681
  
(208)
  
2003
40 years
Weston Walgreens - Weston, WI
  
3,406
  
66
  
1,718
  
671
  
67
  
2,388
  
2,455
  
(114)
  
2006
40 years
Total Retail
$
66,908
$
19,010
$
81,765
$
16,029
$
20,557
$
96,247
$
116,804
$
(16,334)
      
                                       
Subtotal
$
1,063,857
$
166,082
$
1,335,575
$
146,602
$
175,076
$
1,473,183
$
1,648,259
$
(219,379)
      

 

2008 Annual Report F-38
 
 
 

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
April 30, 2008
 
Schedule III - REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands)
 
   
 Initial Cost to Company
  
 Gross amount at which carried at
close of period
      
Description
Encumbrances
Land
Buildings & Improvements
Costs capitalized subsequent to acquisition
Land
Buildings & Improvements
Total
Accumulated Depreciation
Date of Construction or Acquisition
Life on which depreciation in latest income statement is computed
Unimproved Land
                                      
Eagan Unimproved Land - Eagan, MN
$
0
$
422
$
0
$
0
$
422
$
0
$
422
$
0
  
2006
40 years
Kalispell Unimproved Land - Kalispell, MT
  
0
  
1,400
  
0
  
24
  
1,411
  
13
  
1,424
  
0
  
2003
40 years
Monticello Unimproved Land - Monticello, MN
  
0
  
95
  
0
  
1
  
96
  
0
  
96
  
0
  
2006
40 years
Quarry Ridge Unimproved Land - Rochester, MN
  
0
  
942
  
0
  
0
  
942
  
0
  
942
  
0
  
2006
40 years
River Falls Unimproved Land - River Falls, WI
  
0
  
200
  
0
  
5
  
203
  
2
  
205
  
0
  
2003
40 years
Weston Unimproved Land - Weston, WI
  
0
  
812
  
0
  
0
  
812
  
0
  
812
  
0
  
2006
40 years
Total Unimproved Land
$
0
$
3,871
$
0
$
30
$
3,886
$
15
$
3,901
$
0
      
                                       
Development In Progress
                                      
401 South Main - Minot, ND
$
0
$
0
$
0
$
46
$
0
$
46
$
46
$
0
  
1987
40 years
2828 Chicago Avenue - Minneapolis, MN
  
0
  
726
  
0
  
7,436
  
726
  
7,436
  
8,162
  
0
  
2007
40 years
Minot Corporate Plaza - Minot, ND
  
0
  
1,755
  
0
  
7,434
  
1,755
  
7,434
  
9,189
  
0
  
2007
40 years
Southdale 6545 Expansion - Edina, MN
  
0
  
0
  
0
  
5,459
  
0
  
5,459
  
5,459
  
0
  
2007
40 years
Total Development In Progress
$
0
$
2,481
$
0
$
20,375
$
2,481
$
20,375
$
22,856
$
0
      
                                       
Total
$
1,063,857
$
172,434
$
1,335,575
$
167,007
$
181,443
$
1,493,573
$
1,675,016
$
(219,379)
      
                                       

 

 

2008 Annual Report F-39
 
 
 

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
 
April 30, 2008
 
Schedule III
 
REAL ESTATE AND ACCUMULATED DEPRECIATION
 
Reconciliations of total real estate carrying value for the three years ended April 30, 2008, 2007, and 2006 are as follows:
 
   
(in thousands)
  
   
2008
    
2007
    
2006
  
                   
Balance at beginning of year
   $ 1,489,287     $ 1,269,423     $ 1,179,856  
Additions during year
                        
Multi-Family Residential
     11,159       38,562       2,445  
Commercial Office
     14,473       147,302       25,034  
Commercial Medical
     82,233       5,638       58,200  
Commercial Industrial
     27,132       15,467       0  
Commercial Retail
     0       2,382       0  
Improvements and Other
     25,787       30,865       14,771  
      1,650,071       1,509,639       1,280,306  
Deductions during year
                        
Cost of Real Estate Sold
     (1,812 )     (19,797 )     (10,474 )
Impairment charge
     0       (555 )     (409 )
Balance at close of year(1)
   $ 1,648,259     $ 1,489,287     $ 1,269,423  
 
Reconciliations of accumulated depreciation/amortization for the three years ended April 30, 2008, 2007, and 2006, are as follows:
 
   
(in thousands)
  
   
2008
    
2007
    
2006
  
                   
Balance at beginning of year
   $ 180,544     $ 148,607     $ 118,512  
Additions during year
                        
Provisions for depreciation
     39,806       35,143       30,585  
Deductions during year
                        
Accumulated depreciation on real estate sold
     (971 )     (3,206 )     (490 )
Balance at close of year
   $ 219,379     $ 180,544     $ 148,607  
 
 
(1)
The net basis of the Company’s real estate investments for Federal Income Tax purposes is approximately $1.1 billion.
 

2008 Annual Report F-40
 
 
 

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
 
April 30, 2008
 
Schedule IV
 
INVESTMENTS IN MORTGAGE LOANS ON REAL ESTATE
 
             
(in thousands)
  
   
Interest
Rate
  
Final
Maturity
Date
Payment
Terms
  
Prior
Liens
    
Face Amt. of
Mortgages
    
Carrying
Amt. of
Mortgages
    
Prin. Amt
of Loans
Subject to
Delinquent
Prin. or Int.
  
First Mortgage
                                  
Martin Property, LLC
     6.00 %
05/01/09
Monthly/ Balloon
   $ 0     $ 475     $ 387     $ 0  
Liberty Holdings, LLC
     7.00 %
11/01/12
Monthly/ Balloon
     0       167       165       0  
                $ 0     $ 642     $ 552     $ 0  
Less:
                                            
Allowance for Loan Losses
                               $ (11 )        
      $ 541          
 
   
(in thousands)
  
   
2008
    
2007
    
2006
  
MORTGAGE LOANS RECEIVABLE, BEGINNING OF YEAR
   $ 399     $ 409     $ 619  
New participations in and advances on mortgage loans
     167       0       0  
    $ 566     $ 409     $ 619  
Collections
     (25 )     (22 )     (210 )
Transferred to other assets
     0       12       0  
MORTGAGE LOANS RECEIVABLE, END OF YEAR
   $ 541     $ 399     $ 409  

 

 

2008 Annual Report F-41