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Table of Contents

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

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________

Commission File Number 001-35624
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.)
1400 31st Avenue SW
Suite 60
Post Office Box 1988
Minot
ND
58702-1988
(Address of principal executive offices)
 (Zip code)
701-837-4738
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Shares of Beneficial Interest, no par value
IRET
New York Stock Exchange
Series C Cumulative Redeemable Preferred Shares
IRET-PC
New York Stock Exchange
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.
      Yes                         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.
      Yes                           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.
      Yes                          No
Indicate by checkmark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).
      Yes                          No

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,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
 
 
 
 
 
Large accelerated filer
Accelerated filer
Emerging growth company
Non-accelerated filer
Smaller reporting company
 
 
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
      Yes                          No
The aggregate market value of the Registrant’s outstanding common shares of beneficial interest held by non-affiliates of the Registrant as of June 30, 2019 was 679,479,919 based on the last reported sale price on the New York Stock Exchange on June 30, 2019. For purposes of this calculation, the Registrant has assumed that its trustees and executive officers are affiliates.
The number of common shares of beneficial interest outstanding as of February 12, 2020, was 12,098,979.
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 2020 Annual Meeting of Shareholders will be incorporated by reference into Part III (Items 10, 11, 12, 13 and 14) hereof.


Table of Contents

INVESTORS REAL ESTATE TRUST 
INDEX
 
 
 
PAGE
PART I 
 
 
Item 1. 
3
Item 1A. 
7
Item 1B. 
17
Item 2. 
18
Item 3. 
21
Item 4. 
21
PART II 
 
 
Item 5. 
22
Item 6. 
24
Item 7. 
25
Item 7A. 
36
Item 8. 
37
Item 9. 
37
Item 9A. 
37
Item 9B. 
38
PART III 
 
 
Item 10.
38
Item 11.
38
Item 12.
38
Item 13.
38
Item 14.
38
PART IV 
 
 
Item 15. 
38
40
42
F-2

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Table of Contents

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 plans and objectives, including our future financial condition, anticipated capital expenditures, anticipated distributions, and 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. Forward-looking statements are typically identified by the use of terms such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and variations of those words and similar expressions. These forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance, or achievements to be materially different from the results of operations, financial conditions, or plans expressed or implied by the forward-looking statements. Although we believe the expectations reflected in our forward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be achieved. Any statements contained herein that are not statements of historical fact should be deemed forward-looking statements. As a result, reliance should not be placed on these forward-looking statements, as these statements are subject to known and unknown risks, uncertainties, and other factors beyond our control and could differ materially from our actual results and performance.
The following factors, among others, could cause our future results to differ materially from those expressed in the forward-looking statements:
economic conditions in markets in which we own apartment communities or in which we may invest in the future;
rental conditions in our markets, including occupancy levels and rental rates, our potential inability to renew residents or obtain new residents upon expiration of existing leases, changes in tax and housing laws, or other factors;
adverse changes in our markets, including future demand for apartment homes in our markets, barriers of entry into new markets, limitations on our ability to increase rental rates, and inability to reinvest sales proceeds successfully;
reliance on a single asset class (multifamily) and certain geographic areas (Midwest and West regions) of the U.S.;
inability to acquire or develop properties and expand our operations into new markets successfully;
inability to provide high-quality housing and consistent operation of our apartment communities;
failure of new acquisitions to achieve anticipated results or be efficiently integrated;
inability to complete lease-up of our projects on schedule and on budget;
inability to sell certain properties on terms that are acceptable;
failure to reinvest proceeds from sales of properties into tax-deferred exchanges, which could necessitate special dividend and tax protection payments;
inability to fund capital expenditures out of cash flow;
inability to pay, or need to reduce, dividends on our common shares;
financing risks, including our potential inability to obtain debt or equity financing on favorable terms, or at all;
level and volatility of interest or capitalization rates or capital market conditions;
changes in operating costs, including real estate taxes, utilities, and insurance costs;
inability to continue to satisfy complex tax rules in order to maintain our status as a REIT, inability of the Operating Partnership to maintain its status as a partnership for tax purposes, and the risk of changes in laws affecting REITs;
inability to attract and retain qualified personnel;
cyber liability or potential liability for breaches of our privacy or information security systems;
increasing social media activity regarding our properties that could adversely affect our business or reputation;
inability to address catastrophic weather, natural events, and climate change;
inability to comply with environmental laws and regulations; and
other risks identified in this Report, in other SEC reports, or in other documents that we publicly disseminate.
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.


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Table of Contents

PART I
 
Item 1. Business
OVERVIEW
Investors Real Estate Trust (“we,” “us,” “IRET” or the “Company”) is a real estate investment trust (“REIT”) organized under the laws of North Dakota, that is focused on the ownership, management, acquisition, development, and redevelopment of apartment communities. Over the past several years, we have extensively repositioned our portfolio from a diversified, multi-segment collection of properties into a single segment concentrated on apartment communities. Our current emphasis is on making operational enhancements that will improve our residents' experience, redeveloping some of our existing apartment communities to meet current market demands, and acquiring new apartment communities in the Minneapolis/St. Paul and Denver metropolitan areas.
We focus on investing in markets characterized by stable and growing economic conditions, strong employment, and an attractive quality of life that we believe, in combination, lead to higher demand for our apartment homes and retention of our residents. As of December 31, 2019, we owned interests in 69 apartment communities, containing 11,953 homes and having a total real estate investment amount, net of accumulated depreciation, of $1.3 billion. Our corporate headquarters is located in Minot, North Dakota. We also have a corporate office in Minneapolis, Minnesota.
On September 20, 2018, our Board of Trustees approved a change in our fiscal year-end from April 30 to December 31, effective as of January 1, 2019. As a result of this change, we filed a transition report on Form 10-KT for the eight-month transition period ended December 31, 2018, in accordance with SEC rules and regulations. The references in this Annual Report on Form 10-K to the terms listed below reflect the respective period noted (all other reporting periods defined separately):
Term
 
Financial Reporting Period
Year ended December 31, 2019
 
January 1, 2019 through December 31, 2019
Year ended December 31, 2018
 
January 1, 2018 through December 31, 2018
Transition period ended December 31, 2018
 
May 1, 2018 through December 31, 2018
Fiscal year ended April 30, 2018
 
May 1, 2017 through April 30, 2018
Fiscal year ended April 30, 2017
 
May 1, 2016 through April 30, 2017
For comparative purposes, unaudited data is shown for the year ended December 31, 2018 and for the eight-month period ended December 31, 2017.
On December 14, 2018, the Board approved a reverse stock split of our outstanding common shares and Units, no par value per share, at a ratio of 1-for-10. The reverse stock split was effective as of the close of trading on December 27, 2018, with trading commencing on a split-adjusted basis on December 28, 2018. The number of common shares and Operating Partnership limited partnership units ("Units" or "OP Units") was reduced from 119.4 million to 11.9 million and 13.7 million to 1.4 million, respectively. We have retroactively restated all shares and Units and per share and Unit data for all periods presented.
Website and Available Information
 
Our internet address is www.iretapartments.com. We make available, free of charge, through the “SEC filings” tab under the Investors section of our website, our Transition Report on Form 10-KT, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports, and proxy statements for our Annual Meetings of Shareholders, filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such reports are filed with or furnished to the SEC. We also file press releases, investor presentations, and certain supplemental information on our website. Current copies of our Code of Conduct; Code of Ethics for Senior Financial Officers; and Charters for the Audit, Compensation, and Nominating and Governance Committees of our Board of Trustees are also available on our website under the “Corporate Governance” tab under the Investors section of our website. Copies of these documents are also available free of charge to shareholders upon request addressed to the Secretary at Investors Real Estate Trust, P.O. Box 1988, Minot, North Dakota 58702-1988. Information on our website does not constitute part of this Annual Report on Form 10-K.

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STRUCTURE
We were organized under the laws of North Dakota on July 31, 1970, and have operated as a REIT under Sections 856-858 of the Internal Revenue Code since our formation. On February 1, 1997, we were restructured as an Umbrella Partnership Real Estate Investment Trust, or UPREIT, and we conduct our daily business operations primarily through our operating partnership, IRET Properties, a North Dakota Limited Partnership (“IRET Properties” or the “Operating Partnership”). The sole general partner of IRET Properties is IRET, Inc., a North Dakota corporation and our wholly owned subsidiary. All of our assets and liabilities have been contributed to IRET Properties, through IRET, Inc., in exchange for the sole general partnership interest in IRET Properties. IRET Properties holds substantially all of the assets of the Company. IRET Properties conducts the operations of the business and is structured as a partnership with no publicly traded equity. Contributions of properties to the Company can be structured as tax-deferred transactions through the issuance of OP Units, which is one of the reasons the Company is structured in this manner. As of December 31, 2019, IRET, Inc. owned a 92.0% interest in IRET Properties. The remaining interest in IRET Properties is held by individual limited partners.
BUSINESS STRATEGIES 
Our business is focused on our mission - to provide a great home - for our residents, our employees and our investors. We fulfill this mission by providing renters well-located options that range from workforce to lifestyle housing. While fulfilling our mission, we are seeking consistent earnings growth through exceptional operations, disciplined capital allocation, and market knowledge and efficiencies. Our operations and investment strategies are the foundation for fulfilling our mission.
Operations Strategy
We manage our apartment communities with a focus on providing an exceptional resident experience and maximizing our property financial results. Our initiatives to optimize our operations include:
Providing excellent customer service to enhance resident satisfaction and retention;
Employing new technologies that make our communities more efficient and more accessible to residents;
Optimizing revenues;
Controlling operating costs; and
Unlocking value within the portfolio through redevelopment and enhancement of existing assets.
Investment Strategy
Our business objective under our current strategic plan is to employ an investment strategy that includes the following elements:
Investing in income-producing apartment communities that grow distributable cash flow and are located in key geographic markets with populations ranking in the top 50 U.S. metropolitan statistical areas, including expansion in the Minneapolis and Denver markets;
Selecting markets with favorable market characteristics, including strong growth prospects and employment forecasts, high occupancy rates, strong rent growth potential, and institutional liquidity;
Leveraging our portfolio to take advantage of our heightened market knowledge and regional experience;
Building a strong market presence in new markets; and
Deemphasizing our exposure to tertiary markets.
 
FINANCING AND DISTRIBUTIONS
 
To fund our investment and capital activities, we rely on a combination of issuance of common shares, preferred shares, OP Units, and borrowed funds in exchange for property. We regularly issue dividends to our shareholders. Each of these is described below.

4


At-the-Market Offering
In November 2019, we entered into an equity distribution agreement in connection with an at-the-market offering ("2019 ATM Program") through which we may offer and sell common shares having an aggregate gross sales price of up to $150.0 million, in amounts and at times that we determine. The proceeds from the sale of common shares under the 2019 ATM Program are intended to be used for general corporate purposes, which may include the funding of future acquisitions and the repayment of indebtedness. During the year ended December 31, 2019, we issued 308,444 common shares under the 2019 ATM Program at an average price of $72.29 per share, net of commissions. Total consideration, net of commissions and issuance costs, was approximately $22.0 million. As of December 31, 2019, we had common shares having an aggregate offering price of up to $127.7 million remaining available under the 2019 ATM Program.
Issuance of Senior Securities
On October 2, 2017, we issued 4,118,460 shares of 6.625% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest (the "Series C preferred shares"). All of our outstanding shares of 7.95% Series B preferred shares were redeemed on October 30, 2017. Depending on future interest rates and market conditions, we may issue additional preferred shares or other senior securities which would have dividend and liquidation preference over our common shares.
Bank Financing and Other Debt
As of December 31, 2019, we owned 69 apartment communities, of which 24 properties served as collateral for mortgage loans. All of these mortgages payable were non-recourse to us other than for standard carve-out obligations. Our primary unsecured credit facility is a revolving, multi-bank line of credit, with borrowing capacity based on the value of properties contained in the unencumbered asset pool. This credit facility matures on August 31, 2022, with one 12-month option to extend the maturity date at our election.
During the year ended December 31, 2019, we entered into a private shelf agreement for the issuance of up to $150.0 million of unsecured senior promissory notes ("unsecured senior notes"). Under this agreement, we issued $75.0 million of Series A notes due September 13, 2029 bearing interest at a rate of 3.84% annually, and $50.0 million of Series B notes due September 30, 2028 bearing interest at a rate of 3.69% annually. We have $25.0 million remaining available under the private shelf agreement.
As of December 31, 2019, we owned 45 apartment communities that were not encumbered by mortgages, with 45 of these properties providing credit support for our unsecured borrowings. Our primary unsecured credit facility ("unsecured credit facility") is a revolving, multi-bank line of credit, with the Bank of Montreal serving as administrative agent. Our line of credit has total commitments of $250.0 million, with borrowing capacity based on the value of properties contained in the unencumbered asset pool (“UAP”). The UAP provided for a borrowing capacity of $250.0 million at December 31, 2019, providing additional borrowing availability of $199.9 million beyond the $50.1 million drawn, including the balance on our operating line of credit (discussed below), priced at an interest rate of 3.81%, including the impact of our interest rate swap. This credit facility matures on August 31, 2022, with one 12-month option to extend the maturity date at our election.
Under our primary unsecured credit facility, we also have a $70.0 million unsecured term loan, which matures on January 15, 2024, and a $75.0 million unsecured term loan, which matures on August 31, 2025.
We also have a $6.0 million operating line of credit, which is designed to enhance treasury management activities and more effectively manage cash balances. As of December 31, 2019, our ratio of total indebtedness to total gross real estate investments was 39.2%.
Issuance of Securities in Exchange for Property
Our organizational structure allows us to issue shares and limited partnership units (or "OP Units") of IRET Properties in exchange for real estate. The OP Units generally are redeemable, at our option for cash or common shares on a one-for-one basis. Generally, OP Units receive the same per unit cash distributions as the per share dividends paid on common shares.
 
Our Declaration of Trust, as amended (our “Declaration of Trust”), does not contain any restrictions on our ability to offer limited partnership units of IRET Properties in exchange for property. As a result, any decision to do so is vested solely in our Board of Trustees. For the year ended December 31, 2019, the transition period ended December 31, 2018 and the fiscal years ended April 30, 2018 and 2017, we did not issue any regular OP Units of IRET Properties in exchange for properties. However, on February 26, 2019, we issued 165,600 newly created Series D preferred units as partial consideration for the acquisition of

5


SouthFork Townhomes. The Series D preferred unit holders receive a preferred distribution at the rate of 3.862% per year. The Series D preferred units have a put option which allows the holder to redeem any or all of the Series D preferred units for cash equal to the issue price. Each Series D preferred unit is convertible, at the holder's option, into 1.37931 Units, representing a conversion exchange rate of $72.50 per unit. The holders of the Series D preferred units do not have any voting rights.

Distributions to Shareholders
The Internal Revenue Code requires a REIT to distribute 90% of its net taxable income, excluding net capital gains, to its shareholders, and a separate requirement to distribute 100% net capital gains or pay a corporate level tax in lieu thereof. We have distributed, and intend to continue to distribute, enough of our taxable income to satisfy these requirements. Our general practice has been to target cash distributions to our common shareholders and the holders of limited partnership units of approximately 65% to 90% of our funds from operations and to use the remaining funds for capital improvements or the reduction of debt. Distributions to our common shareholders and unitholders in the year ended December 31, 2019 and in the transition period ended December 31, 2018 totaled approximately 69% and 82%, respectively, on a per share and unit basis of our funds from operations.
For additional information on our sources of liquidity and funds from operations, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources."
EMPLOYEES
 
As of December 31, 2019, we had 392 employees, of which 361 were full-time and 31 were part-time.
 
INSURANCE
We purchase general liability and property insurance coverage for each of our properties. We also purchase limited terrorism, environmental, and flood insurance as well as other types of insurance coverage related to a variety of risks and exposures. There are certain types of losses that may not be covered or could exceed coverage limits. Due to changing market conditions, our insurance policies are also subject to increasing deductibles and coverage limits. In addition, we carry other types of insurance coverage related to a variety of risks and exposures. Based on market conditions, we may change or potentially eliminate insurance coverages or face higher deductibles or other costs. Although we believe that we have adequate insurance coverage on our properties, we may incur losses, which could be material, due to uninsured risks, deductibles and/or losses in excess of coverage limits, any of which could have a material adverse effect on our business.
COMPETITION
There are numerous housing alternatives that compete with our apartment communities in attracting residents. Our apartment communities compete directly with other apartment communities, condominiums, and single-family homes in the areas in which our properties are located. If the demand for our apartment communities is reduced or competitors develop or acquire competing housing, rental and occupancy rates may decrease, which could have a material adverse effect on our business. Additionally, we compete with other real estate investors, including other REITs, businesses, and other entities to acquire properties. This competition affects our ability to acquire properties we want to add to our portfolio and the price we pay for acquisitions.  
ENVIRONMENTAL MATTERS
See the discussion under the caption "Risks Related to Our Properties and Operations -- We may be responsible for potential liabilities under environmental laws" in Item 1A, Risk Factors, for information concerning the potential effects of environmental matters on our business, which discussion under "We may be responsible for potential liabilities under environmental laws" is incorporated by reference into this Item 1.


6



Item 1A.  Risk Factors
Risks Related to Our Properties and Operations
We face certain risks related to our ownership of apartment communities and operation of our business. Set forth below are the risks that we believe are material to IRET’s shareholders and unitholders. You should carefully consider the following risks in evaluating our properties, business, and operations. Our business, financial condition, cash flows, results of operations, value of our real estate assets and/or the value of an investment in our stock or units are subject to various risks and uncertainties, including those set forth below, any of which could cause our actual operating results to vary materially from our recent results or from our anticipated future results.
Our financial performance is subject to risks associated with the real estate industry and ownership of apartment communities. Our financial performance risks include, but are not limited to, the following:
downturns in national, regional, and local economic conditions (particularly increases in unemployment); 
competition from other apartment communities; 
local real estate market conditions, including an oversupply of apartments or other housing, or a reduction in demand for apartment communities; 
the attractiveness of our apartment communities to residents as well as residents' perceptions of the safety, convenience, and attractiveness of our apartment communities and the areas in which they are located;
changes in interest rates and availability of attractive financing that might make other housing options, like home ownership, more attractive; 
our ability to collect rents from our residents;
vacancies, changes in rental rates, and the periodic need to repair, renovate, and redevelop our apartment communities; 
increases in operating costs, including real estate taxes, state and local taxes, insurance expenses, utilities, and security costs, many of which are not reduced significantly when circumstances cause a reduction in revenues from a property;
increases in compensation costs due to the tight labor market in many of the markets in which we operate; 
our ability to provide adequate maintenance for our apartment communities;
our ability to provide adequate insurance on our apartment communities; and
changes in tax laws and other government regulations that could affect the value of REITs generally or our business in particular.
Our property acquisition activities may not produce the cash flows expected and could subject us to various risks that could adversely affect our operating results. We have acquired and intend to continue to pursue the acquisition of apartment communities, but the success of our acquisition activities is subject to numerous risks, including the following:
acquisition agreements are subject to customary closing conditions, including completion of due diligence investigations, and we may be unable to complete an acquisition after making a non-refundable deposit and incurring other acquisition-related costs; 
expected occupancy, rental rates, and operating expenses of acquired apartment communities may differ from the actual results, or from those of our existing apartment communities;
we may be unable to obtain financing for acquisitions on favorable terms, or at all; 
competition for these properties could cause us to pay higher prices or prevent us from purchasing a desired property at all;
we may be subject to unknown liabilities from acquired properties, with either no recourse or limited recourse against prior owners or other third parties with respect to these unknown liabilities; and 
we may be unable to quickly and efficiently integrate new acquisitions into our existing operations.

7


We may be unable to acquire or develop properties and expand our operations into new or existing markets successfully. We intend to explore acquisitions or developments of properties in new and existing geographic markets. Acquiring or developing new properties and expanding into new markets introduces several risks, including but not limited to the following:
we may not be successful in identifying suitable properties or other assets that meet our acquisition or development criteria or in consummating acquisitions or developments on satisfactory terms, or at all;
we may be unable to maintain consistent standards, controls, policies, and procedures, or realize the anticipated benefits of the acquisitions within the anticipated time frame, or at all;
acquisitions and divestitures could divert our attention from our existing properties and could cause us to lose key employees or be unable to attract highly qualified new employees;
unfamiliarity with the dynamics and prevailing market conditions or local government or permitting procedures of any new geographic markets could adversely affect our ability to successfully expand into or operate within those markets or cause us to become more dependent on third parties in new markets due to our inability to directly and efficiently manage and otherwise monitor new properties in new markets;
we may make assumptions regarding the expected future performance of acquired properties, including expected occupancy, rental rates, and cash flows, that prove to be inaccurate; and
we may improperly estimate the costs of repositioning or redeveloping an acquired property.
We also may abandon opportunities to enter new markets that we have begun to explore for any reason and may, as a result, fail to recover expenses already incurred.
Our current or future insurance may not protect us against possible losses. We carry comprehensive liability, fire, extended coverage, and other 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, or our 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. We also do not maintain coverage for certain catastrophic events like hurricanes and earthquakes because the cost of such insurance is deemed by management to be higher than the risk of loss due to the location of our properties. 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. In addition, a reduction of the number of insurance providers or the unwillingness of existing insurance providers to write insurance for multifamily properties may reduce the potential availability and/or cost for obtaining insurance on our properties. Any material increases in insurance rates or decrease in available coverage in the future could adversely affect our results of operations.
Catastrophic weather, natural events, and climate change could adversely affect our business. Some of our apartment communities are located in areas that may experience catastrophic weather and other natural events from time to time, including snow or ice storms, flooding, tornadoes, or other severe or inclement weather. During the year ended December 31, 2019, many of our markets were impacted by a series of adverse weather-related events. These events included extreme cold, record-setting snowfall, extensive hail storms in certain markets, and tornadoes, which caused excess ice and snow accumulation, water and hail damage, and other weather-related damage to some of our apartment communities. Although most of these losses were covered by insurance, these or other adverse and natural events could cause damage or losses that may be greater than insured levels. In the event of a loss in excess of insured limits, we could lose all or a portion of our investment in an affected property as well as additional revenue from that apartment community. We may continue to be obligated to repay mortgage indebtedness or other obligations related to an affected apartment community.
To the extent that we experience any significant changes in the climate in areas where our apartment communities are located, we may experience extreme weather conditions and prolonged changes in precipitation and temperature, all of which could result in physical damage to, and/or a decrease in demand for, our apartment communities located in these areas. If the impact of any such climate change were to be material, or occur for a lengthy period of time, our business may be adversely affected.
Changes in federal or state laws and regulations relating to climate change could result in increased costs to our business, including capital expenditures to improve the energy efficiency of our existing communities or new development communities without a corresponding increase in revenue. Among other things, "green" building codes may seek to reduce emissions through the imposition of standards for design, construction materials, water and energy usage and efficiency and waste management The imposition of such requirements in the future, including the imposition of new energy efficiency standards or requirements relating to resistance to inclement weather, could increase the costs of maintaining or improving our properties without a corresponding increase in revenue, thereby having an adverse effect on our financial condition or results of operation. The impact of climate

8


change also may increase the cost of, or make unavailable, property insurance or other hazard insurance on terms we find acceptable or necessary to adequately protect our properties.
We are dependent on a concentration of our investments in a single asset class, making our results of operations more vulnerable to a downturn or slowdown in the sector or other economic factors. Since April 30, 2018, substantially all of our investments have been concentrated in the multifamily sector. As a result, we will be subject to risks inherent in investments in a single type of property. A downtown or slowdown in the demand for multifamily housing may have more pronounced effects on our business and results of operations or on the value of our assets than if we had continued to be more diversified in our investments into more than one asset class.
Our operations are concentrated in certain regions of the United States, and we are subject to general economic conditions in the regions in which we operate. Our overall operations are concentrated in the Midwest region and portions of the West region of the United States. Our performance could be adversely affected by economic conditions in, and other factors relating to, these geographic areas, including supply and demand for apartments in these areas, zoning and other regulatory conditions, and competition from other communities and alternative forms of housing. In particular, our performance is influenced by job growth and unemployment rates in the areas in which we operate. To the extent the economic conditions, job growth and unemployment in any of these markets deteriorate or any of these areas experience natural disasters or more pronounced effects of climate change, the value of our portfolio, our results of operations, and our ability to make payments on our debt and to make distributions could be adversely affected.
Our business depends on our ability to continue to provide high quality housing and consistent operation of our apartment communities, the failure of which could adversely affect our business and results of operations. Our business depends on providing our residents with quality housing and reliable services (including utilities), along with the consistent operation of our communities and their associated amenities, including covered parking, swimming pools, clubhouses with fitness facilities, playground areas, and other similar features. We may be required to undertake significant capital expenditures to renovate or reconfigure our communities in order to attract new residents and retain existing residents. The delayed delivery, material reduction, or prolonged interruption in any of these services may cause our residents to terminate their leases, may result in the reduction of rents and/or may result in an increase in our costs. In addition, we may fail to provide quality housing and continuous access to amenities as a result of other factors, including mechanical failure, power failure, inclement weather, physical or electronic security breaches, vandalism or acts of terrorism, or other similar events. Any of these issues could cause our residents to terminate or fail to renew their leases, could expose us to additional costs or liability claims, and could damage our reputation, any of which could impact our ability to provide quality housing and consistent operation of our apartment communities, which in turn could materially affect our business and results of operations.
Competition may negatively impact our earnings. We compete with many kinds of institutions, including other REITs, private partnerships, individuals, pension funds, and banks in attracting residents and finding investment opportunities. Many of these institutions are active in the markets in which we invest and have greater financial and other resources than we do, including access to capital on more favorable terms. Our apartment communities compete directly with other multifamily apartment communities, single-family homes, condominiums, and other short-term rentals.
Short-term leases could expose us to the effects of declining market rents. Our apartment leases are generally for a term of 18 months or less. Because these leases generally allow residents to leave at the expiration of the lease term without penalty, our rental revenues are impacted by declines in market rents more quickly than if our leases were for longer terms.
Because real estate investments are relatively illiquid and various other factors limit our ability to dispose of assets, we may not be able to sell properties when appropriate. We may have limited ability to change our portfolio of properties quickly in response to our strategic plan and changes in economic or other conditions, and the prohibitions under the federal income tax laws on REITs holding property for sale and related regulations may affect our ability to sell properties. Under certain circumstances, the Internal Revenue Code (the "Code") imposes penalties on a REIT that sells property held for less than two years and limits the number of properties it can sell in a given year. Our ability to dispose of assets also may be limited by constraints on our ability to use disposition proceeds to make acquisitions on financially attractive terms. Some of our properties were acquired using limited partnership units of IRET Properties, our operating partnership, and are subject to certain tax-protection agreements that restrict our ability to sell these 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, the requirements of which are technical and may be difficult to achieve.
Inability to manage growth effectively may adversely affect our operating results. We have experienced significant growth at various times in the past and may do so in the future, principally through the acquisition of additional real estate properties. Effective management of rapid growth presents challenges, including:

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the need to expand our management team and staff;
the need to enhance internal operating systems and controls; and
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.
Adverse changes in taxes and other laws may affect our liabilities relating to our properties and operations. Increases in real estate taxes, including recent property tax increases in several of the markets in which we operate, and service and transfer taxes may adversely affect our cash available for distributions and our ability to pay amounts due on our debt. Similarly, changes in laws that increase the potential liability for environmental conditions or that affect development, construction, and safety requirements may result in significant unanticipated costs. Future enactment of rent control or rent stabilization laws or other laws regulating apartment communities may reduce rental revenues or increase operating costs.
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 real estate industry, and the loss of them would likely have a material adverse effect on our operations and could adversely impact our relationships with lenders and industry personnel. 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 effectively manage a transition to new personnel, or if we fail to attract and retain qualified and experienced personnel on acceptable terms, it could adversely affect our business.
We may not be able to attract and retain qualified employees. Strong economic growth in recent years has created a tight labor market in many of the markets in which we operate, and we are dependent on employees at our apartment communities to provide attractive homes for our residents. The loss of key personnel at these apartment communities, or the inability or cost of replacing such personnel at such communities, could have an adverse impact on our business and results of operations.
We face risks associated with security breaches through cyber-attacks, cyber intrusions, or otherwise, which could pose a risk to our systems, networks, and servicesWe face risks associated with security breaches or disruptions, whether through cyber-attacks or cyber intrusions over the Internet, malware, computer viruses, attachments to emails, or persons inside our organization. The risk of a security breach or disruption, particularly through cyber-attacks or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity, and sophistication of attempted attacks and intrusions around the world have increased. In the normal course of business, we and our service providers (including service providers engaged in providing web hosting, property management, leasing, accounting and/or payroll software/services) collect and retain certain personal information provided by our residents, employees, and vendors. We also rely extensively on computer systems to process transactions and manage our business. While we and our service providers employ a variety of data security measures to protect confidential information on our systems and periodically review and improve our data security measures, we cannot provide assurance that we or our service providers will be able to prevent unauthorized access to this personal information, that our efforts to maintain the security and integrity of the information that we and our service providers collect will be effective, or that attempted security breaches or disruptions would not be successful or damaging. Even the most well-protected information, networks, systems, and facilities remain potentially vulnerable because the techniques used in such attempted security breaches evolve and generally are not recognized until launched against a target. In some cases, these breaches are designed not to be detected and, in fact, may not be detected. Accordingly, we and our service providers may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, thereby making it impossible to entirely mitigate this risk. The risk of a breach or security failure, particularly through cyber-attacks or cyber-intrusion, has generally increased due to the rise in new technologies and the increased sophistication and activities of the perpetrators of attempted attacks and intrusions. A security breach or other significant disruption involving computer networks and related systems could cause substantial costs and other negative effects, including litigation, remediation costs, costs to deploy additional protection strategies, compromising of confidential information, and reputational damage adversely affecting investor confidence.
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 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 also may 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

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and claims for injuries to persons and property. Although we are not aware of any such claims associated with our existing properties that would have a material adverse effect on our business, potential future costs and damage claims may be substantial and could exceed any insurance coverage we may have for such events or such coverage may not exist. The presence of such substances, or the failure to properly remediate any such impacts, may adversely affect our ability to borrow against, develop, sell, or rent the affected property. Some environmental laws create or allow a government agency to impose a lien on the impacted property in favor of the government for damages and costs it incurs as a result of responding to hazardous or toxic substances.
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 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. Asbestos or air quality remediation programs could be costly, necessitate the temporary relocation of some or all of the property’s residents, 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.
Expanding social media usage could present new risks. The use of social media could cause us to suffer broad reputational damage. Negative posts or comments about us through social media, whether by residents or prospective residents, could damage our reputation or that of our apartment communities, whether or not such claims or posts are valid, which in turn could adversely affect our business and results of operations. Similarly, disclosure of any non-public sensitive information relating to our business or our residents or prospective residents could damage our reputation, our business, or our results of operations. The continuing evolution of social media will present us with new and ongoing challenges and risks.
Litigation risks could affect our business. As a publicly traded owner, manager, and developer of apartment communities, we may incur liability based on various conditions at our properties and the buildings thereon. In the past, we have been, and in the future may become, involved in legal proceedings, including consumer, employment, tort, or commercial litigation, any of which if decided adversely to us or settled by us and not adequately covered by insurance, could result in liability that could be material to our results of operations.
Risks related to properties under development, redevelopment, or newly developed properties may adversely affect our financial performance. We may be unable to obtain, or may suffer delays in obtaining, necessary zoning, land-use, building, occupancy, and other required governmental permits and authorizations, which could lead to increased costs or abandonment of projects. We may not be able to obtain financing on favorable terms, or at all, and we may not be able to complete lease-up of a property on schedule. The resulting time required for development, redevelopment, and lease-up means that we may have to wait years for significant cash returns.
Future cash flows may not be sufficient to ensure recoverability of the carrying value of our real estate assets. We periodically evaluate the recoverability of the carrying value of our real estate assets under United States generally accepted accounting principles (“GAAP”). Factors considered in evaluating impairment of our real estate assets held for investment include recurring net operating losses and other significant adverse changes in general market conditions that are considered permanent in nature. Generally, a real estate asset held for investment is not considered impaired if the estimated undiscounted future cash flows of the asset over its estimated holding period are in excess of the asset’s net book value at the balance sheet date. Assumptions used to estimate annual and residual cash flow and the estimated holding period of these assets require the judgment of management.
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 that may require unexpected expenditures. 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

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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.
Risks related to joint ventures may adversely affect our financial performance and results of operations. We have entered into, and may continue in the future to enter into, partnerships or joint ventures with other persons or entities. Joint venture investments involve risks that may not be present with other methods of ownership, based on the financial condition and business interests of our partners, which are beyond our control and which may conflict with our interests..
In some instances, we and/or our partner may have the right to trigger a buy-sell arrangement, which could cause us to sell our interest, or acquire our partner’s interest, at a time when we otherwise would not have initiated such a transaction. Our ability to acquire our partner’s interest may be limited if we do not have sufficient cash, available borrowing capacity, or other capital resources. In such event, we may be forced to sell our interest in the joint venture when we would otherwise prefer to retain it. Joint ventures may require us to share decision-making authority with our partners, which could limit our ability to control the properties in the joint ventures. Even when we have a controlling interest, certain major decisions may require partner approval, such as the sale, acquisition, or financing of a property.
Actual or threatened terrorist attacks may adversely affect our business. Actual or threatened terrorist attacks and other acts of war or violence could adversely affect our business. Attacks that directly impact one or more of our apartment communities could significantly affect our ability to operate these communities, thereby impairing our ability to achieve our expected results. Our insurance may not adequately cover all losses from a terrorist attack, and the ongoing effects of any terrorist attacks or threatened terrorist attacks could adversely affect the U.S. economy generally and our business in particular.
Potential changes to the financial condition of Fannie Mae and Freddie Mac and in government support for apartment communities may adversely affect our business. Historically, we have depended on the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) to provide financing for certain apartment communities. Although Fannie Mae and Freddie Mac have a mandate to support multifamily housing through their financing activities, there are current government proposals relating to the future of agency mortgage finance in the U.S. that could involve the phase-out of Fannie Mae and Freddie Mac. Although we believe that Fannie Mae and Freddie Mac will continue to provide liquidity to the multifamily sector, any phase-out of Fannie Mae and Freddie Mac, change in their mandate, or reduction in government support for apartment communities generally could result in adverse changes to interest rates, capital availability, development of additional apartment communities, and the value of these communities.
Employee theft or fraud could result in loss. Certain employees have access to, or signature authority with respect to, our bank accounts or assets, which exposes us to the risk of fraud or theft. Certain employees also have access to key information technology (“IT”) infrastructure and to resident and other information that may be commercially valuable. If any employee were to compromise our IT systems, or misappropriate resident or other information, we could incur losses, including potentially significant financial or reputational harm. We may not have insurance that covers any losses in full or covers losses from particular criminal acts.
Risks Related to Our Indebtedness and Financings
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. Because we have a limited ability 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 risks 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 credit markets are tight. In general, when the credit markets are tight, 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 we will need to refinance a significant 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, our cash flows may not be sufficient in all years to repay debt as it matures. If we are unable to refinance our indebtedness on acceptable terms, or at all, we may be forced to dispose of one or more properties on disadvantageous terms, which may result in losses. These losses could have a material adverse effect on our business, our ability to make distributions to our shareholders, and our ability to pay amounts due

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on our debt. If a property is mortgaged to secure payment of indebtedness and we are unable to meet mortgage payments or refinance the debt at maturity, the mortgagor could foreclose upon the property, appoint a receiver, and receive an assignment of rents and leases or pursue other remedies, including taking ownership of the property, all with a consequent loss of revenues and asset value. Foreclosures also could affect our ability to obtain new debt and could create taxable income without accompanying cash proceeds, thereby hindering our ability to meet the REIT distribution requirements of the Code and impeding our ability to obtain financing for our other properties.
The restrictive terms of indebtedness may cause acceleration of debt payments and constrain our ability to conduct certain transactions. At December 31, 2019, we and our Operating Partnership had outstanding borrowings of approximately $651.5 million. Some of this indebtedness contains financial covenants relating to fixed charge coverage ratios, maximum secured debt, maintenance of unencumbered asset value, and total debt to gross assets, among others. Some covenants present new constraints as we navigate investments and dispositions with respect to our ability to invest in certain markets, add incremental secured and recourse debt, and add overall leverage. If an event of default occurs, our lenders may increase rates or declare borrowings under the loan agreements to be due and payable immediately, which could have an adverse effect on our ability to make distributions to our shareholders and pay amounts due on our debt.
Rising interest rates may affect our cost of capital and financing activities. The potential for rising interest rates could limit our ability to refinance portions of our fixed-rate indebtedness when it matures and would increase our interest costs. We also have an unsecured credit facility that bears interest at variable rates based on amounts drawn. As a result, any increase in interest rates could increase our interest expense on our variable rate debt, increase our interest rates when refinancing fixed-rate debt, increase the cost of issuing new debt, and reduce the cash available for distribution to shareholders.
Interest rate hedging arrangements may result in losses. From time to time, we use interest rate swaps and other hedging instruments to manage our interest rate risks. Although these arrangements may partially protect us against rising interest rates, they also may reduce the benefits to us if interest rates decline. If a hedging arrangement is not indexed to the same rate as the indebtedness that is hedged, we may be exposed to losses to the extent that the rate governing the indebtedness and the rate governing the hedging arrangement change independently of each other, and nonperformance by the other party to the hedging arrangement also may subject us to increased credit risks. In order to minimize any counterparty credit risk, we enter into hedging arrangements only with investment grade financial institutions.
Potential changes to LIBOR could affect our financing covenants. LIBOR has been used as a primary benchmark for short-term interest rates, including under our credit facility. Daily LIBOR interest rates have been published since January 1, 1986 and have become deeply entrenched into the global financial markets. Post-financial crisis, regulation has significantly reduced bank appetite to issue commercial paper and wholesale deposits, which means there is a very low volume of transactions upon which banks can base their LIBOR submissions. As a result, central banks around the world, including the Federal Reserve, have commissioned working groups of market participants and official sector representatives with the goal of finding suitable replacements for LIBOR based on observable market transactions. It is expected a transition away from the widespread use of LIBOR to alternative rates will occur over the course of the next few years. The U.K. Financial Conduct Authority (FCA), which regulates LIBOR, has announced it has commitments from panel banks to continue to contribute to LIBOR through the end of 2021, but it will not use its powers to compel contributions beyond such date. Accordingly, there is considerable uncertainty regarding the publication of such rates beyond 2021. The Federal Reserve Bank of New York and various other authorities have commenced the publication of reforms and actions relating to alternatives to U.S. dollar LIBOR. Although the full impact of such reforms and actions, together with any transition away from LIBOR, including the potential or actual discontinuance of LIBOR publication, remains unclear, these changes may have a material adverse impact on the availability of financing. In addition, as it relates to future and derivatives contracts, ISDA master agreements between counterparties may need to be amended or replaced, including derivative contracts in which we are invested. There can be no assurance that a new global standard will be agreed upon or that any new rate will be reflective of the original interest rate and credit risk included within LIBOR, any of which could have a material adverse effect on our financing costs as well as our business and results of operations.
Risks Related to Our Shares
Our stock price may fluctuate significantly. The market price and trading volume of our common shares are subject to fluctuation due to general market conditions, the risks discussed in this report, and several other factors, including the following:
regional, national, and global economic and business conditions;
actual or anticipated changes in our quarterly operating results or dividends;
changes in our estimates of funds from operations or earnings;
investor interest in our property portfolio;

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the market perception and performance of REITs in general and apartment REITs in particular;
the market perception or trading volume of REITs relative to other investment opportunities;
the market perception of our financial condition, performance, distributions, and growth potential;
general stock and bond market conditions, including potential increases in interest rates that could lead investors to seek higher annual yields from dividends;
shifts in our investor base to a higher concentration of passive investors, including exchange-traded funds and index funds, that could have an adverse effect on our ability to communicate with our shareholders;
our ability to access capital markets, which could impact our cost of capital;
a change in our credit rating or analyst ratings;
changes in minimum dividend requirements;
terrorism or other factors that adversely impact the markets in which our stock trades; and
changes in tax laws or government regulations that could affect the attractiveness of our stock.
Rising interest rates could have an adverse effect on our share price. If interest rates increase, this could cause holders of our common shares and other investors to seek higher dividends on our shares or higher yields through other investments, which could adversely affect the market price of our shares.
Low trading volume on the NYSE may prevent the timely sale or resale of our shares. Although our common shares are listed on the NYSE, the daily trading volume of our shares may be lower than the trading volume for other companies. As a result of lower 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.
Failure to generate sufficient revenue or other liquidity needs could limit cash flow available for distributions to our shareholders. A decrease in rental revenue, an increase in funding to support our acquisition and development needs, or other unmet liquidity needs could have an adverse effect on our ability to pay distributions to our shareholders or the Operating Partnership's unitholders.
Payment of distributions on our common shares is not guaranteed. Our Board of Trustees must approve any stock distributions and may elect at any time, or from time to time, and for an indefinite duration, to reduce or not pay the distributions payable on our common shares. Our Board may reduce distributions for a variety of reasons, including but not limited to the following:
operating and financial results cannot support the current distribution payment;
unanticipated costs, capital requirements, or cash requirements;
annual distribution requirements under the REIT provisions of the Code;
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; or
other factors the Board of Trustees may consider relevant.
Our future growth depends, in part, on our ability to raise additional equity capital, which will have the effect of diluting the interests of our common shareholders. Our future growth depends upon, among other things, our ability to raise equity capital and issue limited partnership units of IRET Properties. Sales of substantial amounts of our common or preferred shares in the public market, or the perception that such sales or issuances might occur, may dilute the interests of the current common shareholders and could adversely affect the market price of our common shares. In addition, as a REIT, we are required to make distributions to holders of our equity securities of at least 90% of our REIT taxable income, determined before a deduction for dividends paid and excluding any net capital gain. This limits our ability to retain cash or earnings to fund future growth and makes us more dependent on raising funds through other means, which may include raising additional equity capital.
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. Our Declaration of Trust provides for an unlimited number of shares of beneficial interest. Without the approval of our common shareholders, 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. In that regard, in September 2017, we filed a shelf registration statement with the SEC that

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enables us to sell an undetermined number of equity and debt securities as defined in the prospectus, including under the 2019 ATM Program. Future sales of common shares, preferred shares, or convertible debt securities may dilute current shareholders and could have an adverse impact on the market price of our common shares.
Any material weaknesses identified in our internal control over financial reporting could adversely affect our stock price. Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate and report on our internal control over financial reporting. If we were to identify one or more material weaknesses in our internal control over financial reporting, we could lose investor confidence in our financial reporting and results of operations, which in turn could have an adverse effect on our stock price.
Risks Related to Tax Matters
We may incur tax liabilities as a consequence of failing to qualify as a REIT, which could force us to borrow funds during unfavorable market conditions. We have elected to be taxed as a REIT under the Code. Qualification as a REIT involves the application of highly technical and complex Code provisions, including income, asset, and distribution tests, 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 certain passive 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 5% 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 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 distributions to the holders of our securities of at least 90% of our REIT taxable income, determined before a deduction for dividends paid and excluding any net capital gain. To the extent that we satisfy the 90% test but distribute less than 100% of our REIT taxable income, we will be subject to corporate income tax on such undistributed income and could be subject to an additional 4% excise tax. Because we need to meet these tests to maintain our qualification as a REIT, it could cause us to have to forgo certain business opportunities and potentially require us to liquidate otherwise attractive investments. 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. If IRET Properties 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 adversely affect our business and our ability to make distributions to our shareholders and pay amounts due on our debt. 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 were to fail to qualify as a REIT, we would be subject to federal income tax on our taxable income at regular corporate rates, could be subject to increased state and local taxes and, unless entitled to relief under applicable statutory provisions, would be disqualified from treatment as a REIT for the four taxable years following the year during which we lost our qualification, which would likely have a material adverse effect on us, our ability to make distributions to our shareholders, and our ability to pay amounts due on our debt. This treatment would reduce funds available for investment or distributions to the holders of our securities due to the additional tax liability to us for the year or years involved, and we would no longer be able to deduct, and would not be required to make, distributions to our shareholders. To the extent that distributions to the holders of our securities had been made in anticipation of qualifying as a REIT, 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.
Failure of our operating partnership to qualify as a partnership would result in corporate taxation and significantly reduce the amount of cash available for distribution. We believe that IRET Properties, our operating partnership, qualifies as a partnership for federal income tax purposes. However, we can provide no assurance that the IRS 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 IRS were to be successful in treating IRET Properties as an entity taxable as a corporation (such as a publicly traded partnership 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 and value of the outstanding securities of another corporation. The imposition of a corporate tax on IRET Properties would significantly reduce the amount of cash available for distribution.

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Certain provisions of our Declaration of Trust may limit a change in control and deter a takeover. In order to maintain our qualification as a REIT, our Declaration of Trust provides that any transaction that would result in our disqualification as a REIT under Section 856 of the Code will be void, including any transaction that would result in the following:
less than 100 people owning our shares;
our being “closely held” within the meaning of Section 856(h) of the Code; or
50% or more of the fair market value of our shares being held by persons other than “United States persons.”
If the transaction is not void, then the shares in violation of the foregoing conditions 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. The Trust's Declaration of Trust also provides a limit on a person owning in excess of the ownership limit of 9.8%, in number or value, of the Trust's outstanding shares, although the Board of Trustees retains the ability to make exceptions to this ownership threshold. 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 our shareholders.
Legislative or regulatory actions affecting REITs could have an adverse effect on us or our shareholders. Changes to tax laws or regulations may adversely impact our shareholders and our business and financial results. The REIT rules are constantly under review by persons involved in the legislative process and by the Internal Revenue Service and the U.S. Treasury Department, which may result in revisions to regulations and interpretations as well as statutory changes. 
In 2017, Congress passed tax legislation (the “2017 Tax Cuts and Jobs Act”) that significantly changed the U.S. federal income taxation of U.S. businesses and their owners, including REITs and their shareholders. The Tax Cuts and Jobs Act of 2017 also contained provisions that may reduce the relative competitive advantage of operating as a REIT. For example, the Tax Cuts and Jobs Act of 2017 lowered income tax rates on individuals and corporations, easing the burden of double taxation on corporate dividends and potentially causing the single level of taxation on REIT distributions to be relatively less attractive. The Tax Cuts and Jobs Act of 2017 also contains provisions allowing the expensing of capital expenditures, which could result in the bunching of taxable income and required distributions for REITs, and provisions further limiting the deductibility of interest expense, which could disrupt the real estate market. Changes made by the 2017 Tax Cuts and Jobs Act that could affect our shareholders include the following:
reducing the individual U.S. federal income tax rates on ordinary income (with the highest rate being reduced from 39.6% to 37% for taxable years beginning after December 31, 2017 and before January 1, 2026;
permanently eliminating the progressive corporate tax rate structure, including dividends we may distribute to our shareholders that are not designated as capital gains dividends or qualified dividend income, which will allow individuals, trusts, and estate to deduct up to 20% of such amounts for taxable years beginning after December 31, 2017 and before January 1, 2026;
reducing the highest rate of withholding on distributions to non-U.S. shareholders that are treated as attributable to gains from the sale or exchange of U.S. real property interests from 35% to 21%;
limiting our deductions for net operating losses arising in taxable years beginning after December 31, 2017 to 80% of REIT taxable income (determined without regard to the dividends paid deduction); and
eliminating the corporate alternative minimum tax.
We cannot predict whether, when, or to what extent the Tax Cuts and Jobs Act of 2017 and any new U.S. federal tax laws, regulations, interpretations, or rulings will impact the real estate investment industry or REITs. Prospective investors are urged to consult their tax advisers regarding the effect of the Tax Cuts and Jobs Act of 2017 and potential future changes to the federal tax laws of an investment in our shares or Units.
Dividends payable by REITs may be taxed at higher rates than dividends of non-REIT corporations, which could reduce the net cash received by our shareholders and may be detrimental to our ability to raise additional funds through any future sale of our stock. Dividends paid by REITs to U.S. shareholders that are individuals, trusts, or estates are generally not eligible for the reduced tax rate applicable to qualified dividends received from non-REIT corporations but, under the 2017 Tax Cuts and Jobs Act, U.S. shareholders that are individuals, trusts, and estates generally may deduct 20% of ordinary dividends from a REIT (for taxable years beginning after December 31, 2017 and before January 1, 2026). Although this deduction reduces the effective tax rate applicable to certain dividends paid by REITs, such tax rate is still higher than the tax rate applicable to regular corporate qualified dividends. This may cause investors to view REIT investments as less attractive than investments in non-REIT corporations, which in turn may adversely affect the value of stock in REITs, including our stock. Investors should consult with their tax advisers regarding the U.S. tax consequences of an investment in our stock or Units.

16


We may face risks in connection with Section 1031 exchanges. From time to time, we dispose of properties in transactions intended to qualify as “like-kind exchanges” under Section 1031 of the Code. If a transaction intended to qualify as a Section 1031 exchange is later determined to be taxable, we may face adverse consequences, and if the laws applicable to such transactions are amended or repealed, we may not be able to dispose of properties on a tax-deferred basis. If we are unable to meet the technical requirements of a desired Section 1031 exchange, we may be required to make a special dividend payment to our shareholders if we are unable to mitigate the taxable gains realized. The failure to reinvest proceeds from sales of properties into tax-deferred exchanges could necessitate payments to unitholders with tax protection agreements.
Complying with REIT requirements may force us to forgo otherwise attractive opportunities or liquidate otherwise attractive investments. To qualify and maintain our status as a REIT, we must satisfy certain requirements with respect to the character of our assets. If we fail to comply with these requirements at the end of any quarter, we must correct such failure within 30 days after the end of the quarter (by, possibly, selling assets notwithstanding their prospects as an investment) to avoid losing our REIT status. This could include potentially selling otherwise attractive assets or liquidating or foregoing otherwise attractive investments. These actions could reduce our income and amounts available for distribution to our shareholders.
Even if we qualify as a REIT, we may face other tax liabilities that reduce our cash flows. Even if we qualify as a REIT under the U.S. tax code, we may be subject to certain federal, state, and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property, and transfer taxes, such as mortgage recording taxes. Any of these taxes would decrease cash available for distribution to our shareholders.
The tax imposed on REITs engaging in prohibited transactions and our agreements entered into with certain contributors of our properties may limit our ability to engage in transactions that would be treated as sales for federal income tax purposes. The federal income tax provisions applicable to REITs provide that any gain realized by a REIT on the sale of property held as inventory or other property held primarily for sale to customers in the ordinary course of business is treated as income from a “prohibited transaction” that is subject to a 100% penalty tax. Under current law, unless a sale of real property qualifies for a safe harbor, the question of whether the sale of a property constitutes the sale of property held primarily for sale to customers is generally a question of the facts and circumstances regarding a particular transaction. We may make sales that do not satisfy the requirements of the safe harbors, or the IRS may successfully assert that one or more of our sales are prohibited transactions and, as a result, we may be required to pay a penalty tax. To avert this penalty tax, we may hold some of our assets through a taxable REIT subsidiary (“TRS”). While the TRS structure would allow the economic benefits of ownership to flow to us, a TRS is subject to tax on its income at the federal and state level. We have entered into agreements with certain contributors of our properties that contain limitations on our ability to dispose of certain properties in taxable transactions. The restrictions on taxable dispositions are effective for varying periods. Such agreements may require that we make a payment to the contributor in the event that we dispose of a covered property in a taxable sale during the restriction period.
Our ownership of TRSs is limited, and our transactions with TRSs will cause us to be subject to a 100% penalty tax on certain income or deductions if those transactions are not conducted on arm's-length terms. A REIT may own up to 100% of the stock of one or more TRSs. A TRS may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS. Overall, no more than 20% of the value of a REIT's assets may consist of stock or securities of one or more TRSs, and the TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis.
Our TRS is subject to applicable federal, state, and local income tax on its taxable income, and its after-tax net income will be available for distribution to us but is not required to be distributed to us. We believe that the aggregate value of the stock and securities of our TRS is and will continue to be less than 20% of the value of our total assets (including our TRS stock and securities). We will continue to monitor the value of our investments in our TRS for the purpose of ensuring compliance with TRS ownership limitations. We will scrutinize all of our transactions with our TRS to ensure that they are entered into on arm's-length terms to avoid incurring the 100% excise tax described above. There can be no assurance, however, that we will be able to comply with the 20% limitation discussed above or to avoid application of the 100% excise tax discussed above.
Item 1B.  Unresolved Staff Comments 

None.

17


Item 2. Communities
 
We are organized as a REIT under Section 856-858 of the Code and are structured as an Umbrella Partnership Real Estate Investment Trust (“UPREIT”), which allows us to accept the contribution of real estate to our Operating Partnership in exchange for OP Units. Our business is focused on the ownership, management, acquisition, redevelopment, and development of apartment communities, which we own and operate through our Operating Partnership. We are a fully integrated owner-operator of apartment communities.

Certain Lending Requirements
 
In certain instances, in connection with the financing of investment properties, the lender 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 entities 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 corporate operations from offices in Minot, North Dakota and Minneapolis, Minnesota. The day-to-day management of our properties is generally carried out by our own employees. In certain 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 particular properties are, in our judgment, not attractive candidates for self-management, we may utilize third-party professional management companies for day-to-day management. However, all decisions relating to purchase, sale, insurance coverage, major capital improvements, annual operating budgets, and major renovations are made exclusively by our employees and implemented by the third-party management companies. Generally, our management contracts are for terms of one year or less and provide for compensation ranging from 2.5% to 5.0% of gross rent collections and, typically, we may terminate these contracts upon 60 days or less notice for cause or upon the property manager’s failure to meet certain specified financial performance goals.
 
Summary of Communities Owned as of December 31, 2019
 
The following table presents information regarding our 69 apartment communities and three other properties held for investment, as well as unimproved land as of December 31, 2019. We provide certain information on a same-store and non-same-store basis. Same-store communities are owned or in service for the entirety of the periods being compared, and, in the case of development properties, have achieved a target level of physical occupancy of 90%. On the first day of each calendar year, we determine the composition of our same-store pool for that year as well as adjust the previous year, which allows us to evaluate the performance of existing apartment communities. "Other" includes non-multifamily properties and non-multifamily components of mixed use properties. 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. Additional information is included in Schedule III to our financial statements included in this Annual Report on Form 10-K. 


18


 
 
 
(in thousands)

 
 
 
 
Investment

Physical

 
 
Number of
(initial cost plus

Occupancy 

 
 
Apartment
improvements less

as of 

Community Name and Location
 
Homes

impairment)

December 31, 2019

SAME-STORE
 
 
 
 
71 France - Edina, MN (1) (3) (5)
 
241

$
66,795

97.5
%
Alps Park - Rapid City, SD (1)
 
71

6,235

100.0
%
Arcata - Golden Valley, MN  (2) (5)
 
165

33,386

97.6
%
Ashland - Grand Forks, ND (1)
 
84

8,639

98.8
%
Avalon Cove - Rochester, MN (2)
 
187

36,188

90.9
%
Boulder Court - Eagan, MN (2)
 
115

9,841

97.4
%
Canyon Lake - Rapid City, SD (1)
 
109

6,667

98.2
%
Cardinal Point - Grand Forks, ND (2) (5)
 
251

35,200

96.4
%
Cascade Shores - Rochester, MN (1)
 
90

18,394

96.7
%
Castlerock - Billings, MT (2)
 
166

8,052

97.0
%
Chateau - Minot, ND (2) (5)
 
104

21,382

92.3
%
Cimarron Hills - Omaha, NE (1)
 
234

15,310

93.6
%
Colonial Villa - Burnsville, MN (2)
 
239

24,484

92.9
%
Colony - Lincoln, NE (1)
 
232

19,229

96.1
%
Commons and Landing at Southgate - Minot, ND (2)
 
341

55,258

94.4
%
Cottonwood - Bismarck, ND (2)
 
268

24,384

96.6
%
Country Meadows - Billings, MT (2)
 
133

10,088

95.5
%
Crystal Bay - Rochester, MN (2)
 
76

12,157

100.0
%
Cypress Court - St. Cloud, MN (1) (3)
 
196

20,905

94.4
%
Deer Ridge - Jamestown, ND (2) (5)
 
163

25,109

95.7
%
Evergreen - Isanti, MN (2)
 
72

7,184

93.1
%
Forest Park - Grand Forks, ND (2)
 
268

15,283

94.8
%
French Creek - Rochester, MN (2)
 
40

5,174

97.5
%
Gardens - Grand Forks, ND (2)
 
74

9,345

95.9
%
Grand Gateway - St. Cloud, MN (2)
 
116

9,869

92.2
%
GrandeVille at Cascade Lake - Rochester, MN (1)
 
276

57,209

96.0
%
Greenfield - Omaha, NE (2)
 
96

6,213

94.8
%
Heritage Manor - Rochester, MN (2)
 
182

10,858

90.7
%
Homestead Garden - Rapid City, SD (2)
 
152

15,578

94.7
%
Lakeside Village - Lincoln, NE (1)
 
208

18,527

94.2
%
Landmark - Grand Forks, ND (2)
 
90

2,960

95.6
%
Legacy - Grand Forks, ND (1)
 
360

33,827

96.1
%
Legacy Heights - Bismarck, ND  (2) (5)
 
119

15,287

99.2
%
Meadows - Jamestown, ND (2)
 
81

7,102

90.1
%
Monticello Crossings - Monticello, MN (2) (5)
 
202

31,980

98.0
%
Monticello Village - Monticello, MN (2)
 
60

5,457

98.3
%
Northridge - Bismarck, ND (2)
 
68

8,677

100.0
%
Olympic Village - Billings, MT (1)
 
274

15,636

93.8
%
Olympik Village - Rochester, MN (2)
 
140

9,948

98.6
%
Park Meadows - Waite Park, MN (1)
 
360

20,334

95.3
%
Park Place - Plymouth, MN (2) (4) (5)
 
500

98,670

85.8
%
Plaza - Minot, ND (2)
 
71

16,720

94.4
%
Pointe West - Rapid City, SD (2)
 
90

5,918

95.6
%
Ponds at Heritage Place - Sartell, MN (2)
 
58

5,451

94.8
%
Quarry Ridge - Rochester, MN (1)
 
313

34,411

95.8
%
Red 20 - Minneapolis, MN (1)
 
130

26,296

93.8
%
Regency Park Estates - St. Cloud, MN (1)
 
147

13,609

95.9
%
Rimrock West - Billings, MT (2)
 
78

5,915

97.4
%
River Ridge - Bismarck, ND (2)
 
146

26,324

98.6
%
Rocky Meadows - Billings, MT (2)
 
98

8,033

98.0
%
Rum River - Isanti, MN (1)
 
72

6,202

91.7
%
Silver Springs - Rapid City, SD (1)
 
52

4,196

100.0
%

19


 
 
 
(in thousands)

 
 
 
 
Investment

Physical

 
 
Number of
(initial cost plus

Occupancy 

 
 
Apartment
improvements less

as of 

Community Name and Location
 
Homes

impairment)

December 31, 2019

South Pointe - Minot, ND (2)
 
196

$
15,932

92.9
%
Southpoint - Grand Forks, ND (2)
 
96

10,696

95.8
%
Southwind - Grand Forks, ND (2)
 
164

9,965

87.8
%
Sunset Trail - Rochester, MN (1)
 
146

16,580

97.9
%
Thomasbrook - Lincoln, NE (1)
 
264

16,357

92.0
%
Valley Park - Grand Forks, ND (2)
 
168

8,674

94.6
%
Village Green - Rochester, MN (2)
 
36

3,586

100.0
%
West Stonehill - Waite Park, MN (1)
 
313

19,038

97.8
%
Whispering Ridge - Omaha, NE (1)
 
336

29,421

94.6
%
Winchester - Rochester, MN (2)
 
115

9,046

98.3
%
Woodridge - Rochester, MN (1)
 
110

10,559

96.4
%
TOTAL SAME-STORE
 
10,402

$
1,165,750

 
 
 
 
 
 
NON-SAME-STORE
 
 
 
 
Dylan - Denver, CO (2) (4) (5)
 
274

90,240

96.4
%
FreightYard Townhomes & Flats - Minneapolis, MN (2)
 
96

25,629

92.7
%
Lugano at Cherry Creek - Denver, CO (2)
 
328

95,548

91.8
%
Oxbo - St Paul, MN  (2) (4) (5)
 
191

57,564

97.4
%
SouthFork Townhomes - Lakeville, MN (1)
 
272

46,538

96.0
%
Westend - Denver, CO (2) (4) (5)
 
390

128,202

91.3
%
TOTAL NON-SAME-STORE
 
1,551

$
443,721

 
 
 
 
 
 
TOTAL MULTIFAMILY
 
11,953

$
1,609,471

 
 
 
 
(in thousands)

 
 
 
 
Investment

Physical

 
 
Net Rentable

(initial cost plus

Occupancy 

 
 
Square

improvements less

as of 

Property Name and Location
 
Footage

impairment)

December 31, 2019

OTHER - MIXED USE COMMERCIAL
 
 
 
 
71 France - Edina, MN (1)
 
20,955

$
6,764

93.6
%
Lugano at Cherry Creek - Denver, CO
 
13,295

1,600

47.8
%
Oxbo - St Paul, MN (2)
 
11,477

3,526

100.0
%
Plaza - Minot, ND (2)
 
50,610

9,672

100.0
%
Red 20 - Minneapolis, MN (1)
 
10,508

2,944

89.6
%
TOTAL OTHER - MIXED USE COMMERCIAL
 
106,845

$
24,506



 
 
 
 
 
OTHER - COMMERCIAL
 
 
 
 
3100 10th St SW - Minot, ND(6)
 
9,690

$
2,111


Dakota West Plaza - Minot, ND
 
16,921

622

52.3
%
Minot IPS - Minot, ND
 
27,698

6,368

100.0
%
TOTAL OTHER - COMMERCIAL
 
54,309

$
9,101

 
 
 
 
 
 
UNIMPROVED LAND
 
 
 
 
Rapid City - Rapid City, SD
 
 
$
1,376

 
TOTAL UNIMPROVED LAND
 
 
$
1,376

 
 
 
 
 
 
TOTAL SQUARE FOOTAGE - OTHER
 
161,154

 

 
TOTAL GROSS REAL ESTATE INVESTMENTS, EXCLUDING MORTGAGE NOTES RECEIVABLE
 
 

$
1,644,454

 

(1)
Encumbered by mortgage debt.
(2)
Pledged as credit support on unencumbered asset pool for our line of credit.
(3)
Owned by a joint venture entity and consolidated in our financial statements. We have an approximately 52.6% ownership in 71 France, and 86.1% ownership in Cypress Court.
(4)
Non-same-store for the comparison of the eight months ended December 31, 2018 to the eight months ended December 31, 2017.
(5)
Non-same-store for the comparison of fiscal years 2018 and 2017.
(6)
This is our Minot corporate office building.


20


 
Properties by State
 
The following table presents, as of December 31, 2019, the total amount of property owned, net of accumulated depreciation, by state:
 
 
 
(in thousands)
    
State
 
Multifamily

Other

Total

% of Total

Minnesota
 
$
600,580

$
11,505

$
612,085

47.3
%
Colorado
 
300,990

1,582

302,572

23.4
%
North Dakota
 
245,942

10,672

256,614

19.8
%
Nebraska
 
72,414


72,414

5.6
%
South Dakota
 
27,073


27,073

2.1
%
Montana
 
23,198


23,198

1.8
%
Total
 
$
1,270,197

$
23,759

$
1,293,956

100.0
%

Item 3. Legal Proceedings
 
In the ordinary course of our operations, we become involved in litigation. At this time, we know of no material pending or threatened legal proceedings, or other proceedings contemplated by governmental authorities, that would have a material impact upon us.
 
Item 4. Mine Safety Disclosures
 
Not Applicable


21


PART II 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities 
Shareholders 
As of February 12, 2020, there were approximately 2,689 common shareholders of record.
Unregistered Sales of Shares
Under the terms of IRET Properties’ Agreement of Limited Partnership, limited partners have the right to require IRET Properties to redeem their limited partnership units for cash generally any time following the first anniversary of the date they acquired such Units (“Exchange Right”). When a limited partner exercises the Exchange Right, we have the right, in our sole discretion, to redeem such Units by either making a cash payment or exchanging the Units for our common shares, on a one-for-one basis. The Exchange Right is subject to certain conditions and limitations, including that the limited partner may not exercise the Exchange Right more than two times during a calendar year and the limited partner may not exercise for less than 100 Units, or, if such limited partner holds less than 100 Units, for less than all of the Units held by such limited partner. IRET Properties and some limited partners have contractually agreed to a holding period of greater than one year, a greater number of redemptions during a calendar year, or other limitations to their Exchange Right.
During the year ended December 31, 2019, the transition period ended December 31, 2018, and the fiscal years ended April 30, 2018 and 2017, respectively, we issued an aggregate of 21,004, 19,899, 2,892, and 30,471 unregistered common shares to limited partners of IRET Properties upon exercise of their Exchange Rights for an equal number of Units. All such issuances of our common shares were exempt from registration as private placements under Section 4(a)(2) of the Securities Act, including Regulation D promulgated thereunder. We have registered the resale of such common shares under the Securities Act.
Issuer Purchases of Equity Securities
 
 
 
 
 
Maximum Dollar
 
 
 
 
Total Number of Shares
Amount of Shares That
 
 
Total Number of
Average Price
Purchased as Part of
May Yet Be Purchased 
 
 
Shares and Units
Paid per
Publicly Announced
Under the Plans or
Period
 
Purchased(1)
Share and Unit(2)
Plans or Programs
Programs(3)
January 1 - 31, 2019
 
174,085

50.54

173,916

24,587,276

February 1 - 28, 2019
 
30

57.89


24,587,276

March 1 - 31, 2019
 
2,443

59.56


24,587,276

April 1, - 30, 2019
 
144,020

59.86

15,078

23,705,362

May 1 - 31, 2019
 
24,263

59.26

24,263

22,267,567

June 1 - 30, 2019
 
80,561

59.22

76,731

17,724,778

July 1 - 31, 2019
 
39,441

59.57

39,381

15,378,896

August 1 - 31, 2019
 
30

60.40


15,378,896

September 1 - 30, 2019
 
92

64.68


15,378,896

October 1 - 31, 2019
 



15,378,896

November 1 - 30, 2019
 



15,378,896

December 1 - 31, 2019
 
166

75.52


50,000,000

Total
 
465,131

$
56.24

329,369

 

(1)
Includes a total of 135,762 Units redeemed for cash pursuant to the exercise of exchange rights.
(2)
Amount includes commissions paid.
(3)
Amounts for January through November represent amounts outstanding under our $50,000,000 share repurchase program, which was authorized by our Board of Trustees on December 7, 2016 reauthorized on December 5, 2017 for a one year period, and reauthorized for another one year period on December 5, 2018. On December 5, 2019, the board terminated the existing repurchase program and authorized a new $50,000,000 repurchase program.
Comparative Stock Performance
The information contained in this Comparative Stock Performance section shall not be deemed to be “soliciting material” or “filed” or "incorporated by reference" into our future filings with the SEC, or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that we specifically incorporate it by reference into a document filed under the Securities Act or the Exchange Act.

22


Set forth below is a graph that compares, for the five years commencing December 31, 2014 and ending December 31, 2019, the cumulative total returns for our common shares with the comparable cumulative total return of two indexes, the Standard & Poor’s 500 Index (“S&P 500”) and the FTSE Nareit Equity REITs Index, the latter of which is an index prepared by the FTSE Group for the National Association of Real Estate Investment Trusts, which includes all tax-qualified equity REITs listed on the NYSE and the NASDAQ Market. The performance graph assumes that, at the close of trading on December 31, 2014, $100 was invested in our common shares and in each of the indexes. The comparison assumes the reinvestment of all distributions.
TOTALRETURNPERFORMANCECHART.JPG
 
Period Ending
Index
12/31/2014

12/31/2015

12/31/2016

12/31/2017

12/31/2018

12/31/2019

Investors Real Estate Trust
100.00

91.58

101.67

84.91

77.36

119.31

S&P 500 Index
100.00

101.38

113.51

138.29

132.23

173.86

FTSE Nareit Equity REITs
100.00

103.04

110.83

115.15

110.70

137.65

Source: S&P Global Market Intelligence 

23


Item 6. Selected Financial Data 
Set forth below is selected financial data on a historical basis for the year ended December 31, 2019, the eight months ended December 31, 2018, and the four most recent fiscal years ended April 30, 2018. This information should be read in conjunction with the consolidated financial statements and notes appearing elsewhere in this Annual Report on Form 10-K.
 
 
(in thousands, except per share data)
 
 
Year Ended

Eight Months Ended

Fiscal Years Ended April 30,
 
 
December 31, 2019

December 31, 2018

2018

2017

2016

2015

Consolidated Statement of Operations Data
 
 
 
    
    
    
    
Revenue
 
$
185,755

$
121,871

$
169,745

$
160,104

$
145,500

$
141,294

Impairment of real estate investments in continuing and discontinued operations
 

1,221

18,065

57,028

5,983

6,105

Gain (loss) on sale of discontinued operations and real estate and other investments
 
97,624

10,277

183,687

74,847

33,422

6,093

Income (loss) from continuing operations
 
84,822

(5,890
)
(37,194
)
(46,228
)
9,182

10,237

Income (loss) from discontinued operations
 

570

164,823

76,753

67,420

18,447

Net income (loss)
 
84,822

(5,320
)
127,629

30,525

76,602

28,684

Net income (loss) attributable to controlling interests
 
78,669

(4,398
)
116,788

43,347

72,006

24,087

 
 
 
 
 
 
 
 
Consolidated Balance Sheet Data
 
 
 
 
 
 
 
Total real estate investments
 
1,311,472

1,289,476

1,380,245

1,121,385

1,204,654

1,057,356

Total assets
 
1,392,418

1,335,997

1,426,658

1,474,514

1,755,022

1,992,092

Revolving lines of credit
 
50,079

57,500

124,000

57,050

17,500

60,500

Notes payable
 
269,058

143,991

69,514




Mortgages payable
 
329,664

444,197

509,919

565,978

648,173

453,928

Total Investors Real Estate Trust shareholders’ equity
 
619,053

568,786

605,663

553,721

618,758

652,110

 
 
 
 
 
 
 
 
Consolidated Per Common Share Data (basic and diluted)
 
 
 
 
 
 
 
Earnings (loss) from continuing operations – basic
 
$
6.06

$
(0.79
)
$
(3.54
)
$
(3.01
)

$
(0.32
)
Earnings (loss) from discontinued operations – basic
 
$

$
0.04

$
12.25

$
5.59

$
4.91

$
1.37

Net income (loss) per common share - basic
 
$
6.06

$
(0.75
)
$
8.71

$
2.58

$
4.91

$
1.05

 
 
 
 
 
 
 
 
Earnings (loss) from continuing operations – diluted
 
$
6.00

$
(0.79
)
$
(3.54
)
$
(3.01
)

$
(0.32
)
Earnings (loss) from discontinued operations – diluted
 
$

$
0.04

$
12.25

$
5.59

$
4.91

$
1.37

Net income (loss) per common share - diluted
 
$
6.00

$
(0.75
)
$
8.71

$
2.58

$
4.91

$
1.05

 
 
 
 
 
 
 
 
Distributions
 
$
2.80

$
2.10

$
2.80

$
4.60

$
5.20

$
5.20

 
 
 
 
 
 
 
 
Other Data
 
 
 
 
 
 
 
Total apartment communities
 
69

87

90

87

99

100

Total homes
 
11,953

13,702

14,176

13,212

12,974

11,844

 
 
 
 
 
 
 
 
Funds from operations applicable to common shares and units
 
$
52,866

$
30,559

$
38,941

$
55,207

$
103,874

$
86,575

 
CALENDAR YEAR 
 
2019

2018

2017

2016

2015

2014

Tax status of distributions
 
 
 
 
 
 
 
Capital gain
 
38.53
%
100.00
%
48.87
%
87.57
%
11.99
%
23.09
%
Ordinary income
 
23.43
%

14.59
%
12.43
%
36.28
%
25.74
%
Return of capital
 
38.04
%

36.54
%

51.73
%
51.17
%

24


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes appearing elsewhere in this report. Historical results and trends which might appear in the consolidated financial statements should not be interpreted as being indicative of future operations.
We are presenting our result of operations for the years ended December 31, 2019 and 2018, the eight months ended December 31, 2018 and 2017, and the fiscal years ended April 30, 2018 and 2017. For additional comparison of results of operations for the eight months ended December 31, 2018 and 2017, and the fiscal years ended April 30, 2018 and 2017, please refer to our Transition Report on from 10-KT filed with the SEC on February 27, 2019. Unaudited data is shown for the year ended December 31, 2018 and the eight months ended December 31, 2017.
We consider this and other sections of this Report to contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act, with respect to our expectations for future periods. Forward-looking statements do not discuss historical fact, but instead include statements related to expectations, projections, intentions or other items related to the future.
Executive Summary 
We own, manage, acquire, redevelop, and develop apartment communities. We primarily focus on investing in markets characterized by stable and growing economic conditions, strong employment, and an attractive quality of life that we believe, in combination, lead to higher demand for our apartment homes and retention of our residents. As of December 31, 2019, we owned interests in 69 apartment communities consisting of 11,953 homes as detailed in Item 2 - Properties. Property owned, as presented in the consolidated balance sheet, was $1.6 billion at December 31, 2019, compared to $1.6 billion and $1.7 billion at December 31, 2018, and April 30, 2018, respectively.
Renting apartment homes is our primary source of revenue, and our business objective is to provide great homes. We strive to maximize resident satisfaction and retention by investing in high-quality assets in desirable locations and creating vibrant apartment communities through resident-centered operations. We believe that delivering superior resident experiences will drive consistent profitability for our shareholders. We have paid quarterly distributions continuously since our first distribution in 1971.
Significant Transactions and Events for the Year Ended December 31, 2019
Financial Highlights. For the year ended December 31, 2019, our financial highlights included the following:
Net income of $6.00 per diluted share for the year ended December 31, 2019, compared to a loss of $1.83 per diluted share for the year ended December 31, 2018.
Same-store year-over-year revenue growth of 3.7%, driven by 3.0% growth in rental revenue and 0.7% growth in occupancy.
Acquisitions and Dispositions. During the year ended December 31, 2019, we completed the following transactions in furtherance of our strategic plan:
Continued our focus on key growth markets, expanding in Minneapolis, Minnesota and Denver, Colorado, acquiring a total of three apartment communities in these markets, consisting of 696 homes, for an aggregate purchase price of $169.3 million.
Exited from secondary and tertiary markets in Topeka, Kansas, Sioux City, Iowa, and Sioux Falls, South Dakota and decreased our exposure in Bismarck, North Dakota. In total, we disposed of 21 apartment communities, two other properties, and three parcels of unimproved land for an aggregate sale price of $203.1 million.
Financing Transactions. During the year ended December 31, 2019, we completed the following financing transactions:    
Entered into an equity distribution agreement for 2019 ATM Program, through which we may offer and sell common shares having an aggregate gross sales price of up to $150.0 million, in amounts and at times as we determine. During the year ended December 31, 2019, we issued 308,444 common shares under the 2019 ATM Program for total consideration, net of commissions and issuance costs, of approximately $22.0 million.

25


Entered into a private shelf agreement for the issuance of up to $150.0 million of unsecured senior promissory notes. Under this agreement, we issued $75.0 million of Series A notes due September 13, 2029, bearing interest at a rate of 3.84% annually, and $50.0 million of Series B notes due September 30, 2028, bearing interest at a rate of 3.69% annually. We have $25.0 million remaining available under the private shelf agreement.
Outlook
We intend to continue our focus on maximizing the financial performance of the properties in our existing portfolio. To accomplish this, we have introduced initiatives to expand our operating margin by enhancing the resident experience, making value-add investments, and implementing technology solutions and expense controls. We will actively manage our existing portfolio and strategically pursue acquisitions of multifamily communities in our target markets of Minneapolis, Minnesota and Denver, Colorado as opportunities arise and market conditions allow and to explore potential new markets and acquisition opportunities. Our continued management of a strong balance sheet should provide us with flexibility to pursue both internal and external growth.

26


RESULTS OF OPERATIONS 
Reconciliation of Operating Income (Loss) to Net Operating Income
 
 
(in thousands, except percentages)
 
 
Twelve Months Ended December 31,
 
 
2019
2018
$ Change

% Change

 
 
 
 
 
 
Operating income (loss)
 
$
11,417

$
(13,602
)
$
25,019

(183.9
)%
Adjustments:
 
 
 
 
 
Property management expenses
 
6,186

5,537

649

11.7
 %
Casualty loss
 
1,116

815

301

36.9
 %
Depreciation and amortization
 
74,271

77,624

(3,353
)
(4.3
)%
Impairment
 

19,030

(19,030
)
(100.0
)%
General and administrative expenses
 
14,450

14,883

(433
)
(2.9
)%
Net operating income
 
$
107,440

$
104,287

$
3,153

3.0
 %
Consolidated Results of Operations
The following consolidated results of operations cover the years ended December 31, 2019 and 2018, the eight months ended December 31, 2018 and 2017, and the fiscal years ended April 30, 2018 and 2017.
 
 
(in thousands)
 
 
Year Ended December 31,
2019 vs. 2018
 
 
2019

2018

$ Change

% Change

 
 
 
(unaudited)

 
 
Revenue
 
 
 
 
 
Same-store
 
$
135,939

$
131,149

$
4,790

3.7
 %
Non-same-store
 
25,495

15,646

9,849

62.9
 %
Other properties and dispositions
 
24,321

33,573

(9,252
)
(27.6
)%
Total
 
185,755

180,368

5,387

3.0
 %
Property operating expenses, including real estate taxes
 
 
 
 
 
Same-store
 
58,155

56,047

2,108

3.8
 %
Non-same-store
 
9,031

5,518

3,513

63.7
 %
Other properties and dispositions
 
11,129

14,516

(3,387
)
(23.3
)%
Total
 
78,315

76,081

2,234

2.9
 %
Net operating income
 
 
 
 
 
Same-store
 
77,784

75,102

2,682

3.6
 %
Non-same-store
 
16,464

10,128

6,336

62.6
 %
Other properties and dispositions
 
13,192

19,057

(5,865
)
(30.8
)%
Total
 
$
107,440

$
104,287

$
3,153

3.0
 %
Property management expense
 
(6,186
)
(5,537
)
649

11.7
 %
Casualty loss
 
(1,116
)
(815
)
301

36.9
 %
Depreciation and amortization
 
(74,271
)
(77,624
)
(3,353
)
(4.3
)%
Impairment of real estate investments
 

(19,030
)
(19,030
)
(100.0
)%
General and administrative expenses
 
(14,450
)
(14,883
)
(433
)
(2.9
)%
Operating income (loss)
 
11,417

(13,602
)
25,019

(183.9
)%
Interest expense
 
(30,537
)
(32,733
)
(2,196
)
(6.7
)%
Loss on extinguishment of debt
 
(2,360
)
(678
)
1,682

248.1
 %
Interest and other income
 
2,092

2,027

65

3.2
 %
Income (loss) before gain (loss) on sale of real estate and other investments, gain (loss) on litigation settlement, and income (loss) from discontinued operations
 
(19,388
)
(44,986
)
25,598

56.9
 %
Gain (loss) on sale of real estate and other investments
 
97,624

12,011

85,613

712.8
 %
Gain (loss) on litigation settlement
 
6,586


6,586

100.0
 %
Income (loss) from continuing operations
 
84,822

(32,975
)
117,797

(357.2
)%
Income (loss) from discontinued operations
 

14,690

(14,690
)
(100.0
)%
NET INCOME (LOSS)
 
$
84,822

$
(18,285
)
$
103,107

(563.9
)%
Dividends to preferred unitholders
 
(537
)

(537
)
(100.0
)%
Net (income) loss attributable to noncontrolling interests – Operating Partnership
 
(6,752
)
2,553

(9,305
)
(364.5
)%
Net (income) loss attributable to noncontrolling interests – consolidated real estate entities
 
1,136

709

427

60.2
 %
Net income (loss) attributable to controlling interests
 
78,669

(15,023
)
93,692

(623.7
)%
Dividends to preferred shareholders
 
(6,821
)
(6,821
)


NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
 
$
71,848

$
(21,844
)
$
93,692

(428.9
)%

27



 
 
Year Ended
 
 
Eight Months Ended
 
 
Year Ended
 
 
December 31,
 
 
December 31,
 
 
April 30,
Weighted Average Occupancy (1)
 
2019

2018

 
 
2018

2017

 
 
2018

2017

Same-store
 
94.3
%
93.6
%
 
 
93.7
%
93.1
%
 
 
93.7
%
91.5
%
Non-same-store
 
94.1
%
88.7
%
 
 
90.3
%
73.1
%
 
 
87.9
%
77.0
%
Total
 
94.3
%
93.0
%
 
 
93.2
%
92.1
%
 
 
92.5
%
89.3
%
(1)
Weighted average occupancy is defined as the percentage resulting from dividing actual rental revenue by scheduled rental revenue. Scheduled rental revenue represents the value of all homes, with occupied homes valued at contractual rental rates pursuant to leases and vacant homes valued at estimated market rents. When calculating actual rents for occupied homes and market rents for vacant homes, delinquencies and concessions are not taken into account. The currently offered effective rates on new leases at the community are used as the starting point in determination of the market rates of vacant homes. We believe that weighted average occupancy is a meaningful measure of occupancy because it considers the value of each vacant unit at is estimated market rate. Weighted average occupancy may not completely reflect short-term trends in physical occupancy, and our calculation of weighted average occupancy may not be comparable to that disclosed by other real estate companies.
 
 
December 31,
 
 
December 31,
 
 
April 30,
Number of Homes
 
2019

2018

 
 
2018

2017

 
 
2018

2017

Same-store
 
10,402

10,402

 
 
12,347

12,344

 
 
11,320

11,320

Non-same-store
 
1,551

1,355

 
 
1,355

965

 
 
2,856

1,892

Total
 
11,953

11,757

 
 
13,702

13,309

 
 
14,176

13,212

Net operating income. Net Operating Income (“NOI”) is a non-GAAP measure which we define as total real estate revenues less property operating expenses, including real estate taxes, which is reconciled to operating income (loss) in the table above. We believe that NOI is an important supplemental measure of operating performance for real estate because it provides a measure of operations that is unaffected by depreciation, amortization, financing, property management overhead, casualty losses, and general and administrative expense. NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered an alternative to net income, net income available for common shareholders, or cash flow from operating activities as a measure of financial performance.
Throughout this Annual Report on Form 10-K, we have provided certain information on a same-store and non-same-store basis. Same-store apartment communities are owned or in service for the entirety of the periods being compared, and, in the case of development properties, have achieved a target level of physical occupancy of 90%. On the first day of each calendar year, we determine the composition of our same-store pool for that year as well as adjust the previous year, which allows us to evaluate the performance of existing apartment communities and their contribution to net income. Management believes that measuring performance on a same-store basis is useful to investors because it enables evaluation of how our communities are performing year-over-year. Management uses this measure to assess whether or not it has been successful in increasing NOI, renewing the leases of existing residents, controlling operating costs, and making prudent capital improvements. The discussion below focuses on the main factors affecting real estate revenue and real estate expenses from same-store apartment communities because changes from one year to another in real estate revenue and expenses from non-same-store communities are due to the addition of those properties to or from our real estate portfolio, and accordingly provide less useful information for evaluating the ongoing operational performance of our real estate portfolio.   
For the comparison of the twelve months ended December 31, 2019 and 2018, 63 apartment communities were classified as same-store and six apartment communities were non-same-store. See Item 2 - Properties for the list of communities classified as same-store and non-same-store. Sold communities and communities designated as held for sale are in "Other." "Other" also includes non-multifamily properties and the non-multifamily components of mixed use properties.
Revenue.  Total revenue increased by 3.0% to $185.8 million for the year ended December 31, 2019 compared to $180.4 million in the year ended December 31, 2018. Six non-same-store apartment communities contributed $9.8 million to the increase, offset by a $9.3 million decrease from dispositions and other properties. Revenue from same-store communities increased by 3.7% or $4.8 million in the year ended December 31, 2019, compared to the same period in the prior year. Approximately 3.0% of the increase was attributable to growth in average rental revenue. Approximately 0.7% of the increase was due to higher occupancy as weighted average occupancy increased from 93.6% to 94.3% for the years ended December 31, 2018 and 2019, respectively.
Property operating expenses, including real estate taxes.  Total property operating expenses, including real estate taxes, increased by 2.9% to $78.3 million in the year ended December 31, 2019 compared to $76.1 million in the year ended December 31, 2018. A total of $3.5 million of the increase was attributable to non-same-store apartment communities but was

28


partially offset by a decrease of $3.4 million from other properties, primarily due to dispositions. Property operating expenses at same-store communities increased by 3.8% or $2.1 million in the year ended December 31, 2019, compared to the same period in the prior year. Insurance and real estate taxes comprised $1.1 million and $263,000 of the increase, respectively, and rose by a combined 8.1%. The increase in insurance expense was due to a $324,000 adjustment in the prior year from the favorable resolution of insurance claims and $478,000 of higher deductible costs, with the remainder from an increase in premiums. Controllable operating expenses, which exclude insurance and real estate taxes, increased by $697,000 or 1.8%, primarily driven by snow removal and other maintenance costs.
Net operating income. NOI increased by 3.0% to $107.4 million in the year ended December 31, 2019 compared to $104.3 million in the year ended December 31, 2018.
Property management expense. Property management expense, consisting of property management overhead and property management fees paid to third parties, was $6.2 million in the year ended December 31, 2019 and $5.5 million in the year ended December 31, 2018. The increase was primarily driven by technology initiatives and compensation costs, including severance.
Casualty gain (loss). Casualty loss increased by 36.9% to $1.1 million in the year ended December 31, 2019, compared to $815,000 in the year ended December 31, 2018. During the year ended December 31, 2019, many of our markets were impacted by a series of adverse weather-related events. These events included extreme cold and record-setting snowfall, which caused excess ice and snow accumulation, resulting in water damage to some of our apartment communities. Substantially all of the damage from these weather-related events will be covered by insurance. We recorded casualty losses of $641,000 during the year, representing the aggregate annual stop loss under our insurance coverage. The remaining increase is a result of uninsured water intrusion damage at one apartment community and uninsured water damage due to mechanical failure at another apartment community. In the same period of the prior year, we recorded $50,000 in aggregate stop loss under our insurance coverage as a result of favorable claims experience.
Depreciation and amortization.  Depreciation and amortization decreased by 4.3% to $74.3 million in the year ended December 31, 2019, compared to $77.6 million in the year ended December 31, 2018. This decrease was primarily due to sold properties, certain intangible assets becoming fully amortized, and an adjustment in the prior year due to shortening the estimated useful life of a non-multifamily property, which elevated depreciation expense in the prior year.
Impairment of real estate investments.  During the year ended December 31, 2019, we had no impairment losses, reflecting the overall improvement in the quality of our current portfolio, compared to $19.0 million in the same period of the prior year. See Note 2 to our consolidated financial statements contained in this Annual Report on Form 10-K for additional information on impairments. 
General and administrative expenses.  General and administrative expenses decreased by 2.9% to $14.5 million in the year ended December 31, 2019, compared to $14.9 million in the year ended December 31, 2018, primarily attributable to decreases of $737,000 in legal fees related to our pursuit of a recovery on a construction defect claim, $608,000 in severance-related costs, and $296,000 in real estate tax on sold parcels of land. These decreases were partially offset by an increase of $871,000 in compensation costs as result of a decrease in open positions and higher incentive compensation related to expanding the participant pool in the long-term incentive plan.
Operating income (loss). Operating income increased by 183.9% to $11.4 million in the year ended December 31, 2019, compared to a loss of $13.6 million in the year ended December 31, 2018.
Interest expense.  Interest expense decreased 6.7% to $30.5 million in the year ended December 31, 2019, compared to $32.7 million in the year ended December 31, 2018, primarily due to the replacement of maturing debt with lower rate debt.
Loss on extinguishment of debt. We recorded loss on extinguishment of debt in the years ended December 31, 2019 and 2018 of $2.4 million and $678,000, respectively, primarily due to prepayment penalties associated with the disposal of assets and the write-off of unamortized loan costs.
Interest and other income.  We recorded interest and other income in the years ended December 31, 2019 and 2018 of $2.1 million and $2.0 million, respectively.
Gain (loss) on sale of real estate and other investments.  In the years ended December 31, 2019 and 2018, we recorded gains on sale of real estate and other investments in continuing operations of $97.6 million and $12.0 million, respectively, primarily related to increased dispositions in 2019.

29


Gain (loss) on litigation settlement. In the year ended December 31, 2019, we recorded a gain on litigation settlement of $6.6 million from the settlement of a construction defect claim.
Income (loss) from discontinued operations.  We had no income from discontinued operations in the year ended December 31, 2019 compared to $14.7 million in the year ended December 31, 2018.
Acquisitions and Dispositions
We added $171.4 million of new real estate to our portfolio during the year ended December 31, 2019. We continued our portfolio transformation by disposing of our portfolios in Topeka, Kansas, Sioux Falls, South Dakota, Sioux City, Iowa, and certain communities in Bismarck, North Dakota. We sold 21 apartment communities, two commercial properties, and three parcels of land for an aggregate sale price of $203.1 million during the year ended December 31, 2019. See Note 9 of the notes to consolidated financial statements in this Annual Report for a table detailing our acquisitions and dispositions for the year ended December 31, 2019, for the transition period ended December 31, 2018, and for the fiscal year ended April 30, 2018.
Funds From Operations
We use the definition of Funds from Operations ("FFO") adopted by the National Association of Real Estate Investment Trusts, Inc. (“Nareit”). Nareit defines FFO as net income or loss calculated in accordance with GAAP, excluding:
depreciation and amortization related to real estate;
gains and losses from the sale of certain real estate assets; and
impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity.
Due to limitations of the Nareit FFO definition, we have made certain interpretations in applying the definition. We believe all such interpretations not specifically provided for in the Nareit definition are consistent with the definition. Nareit's FFO White Paper 2018 Restatement clarified that impairment write-downs of land related to a REIT's main business are excluded from FFO and a REIT has the option to exclude impairment write-downs of assets that are incidental to the main business.
We believe that FFO, which is a standard supplemental measure for equity REITs, is helpful to investors in understanding our operating performance, primarily because its calculation excludes depreciation and amortization expense on real estate assets, thereby providing an additional perspective on our operating results. We believe that GAAP historical cost depreciation of real estate assets is not correlated with changes in the value of those assets, whose value does not diminish predictably over time, as historical cost depreciation implies. The exclusion in Nareit’s definition of FFO of impairment write-downs and gains and losses from the sale of real estate assets helps to identify the operating results of the long-term assets that form the base of our investments, and assists management and investors in comparing those operating results between periods.
While FFO is widely used by us as a primary performance metric, not all real estate companies use the same definition of FFO or calculate FFO 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 or any other GAAP measurement of performance, but rather should be considered as an additional, supplemental measure. FFO also 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 our needs or our ability to service indebtedness or make distributions.
Net income available to common shareholders for the year ended December 31, 2019 increased to $71.8 million compared to a loss of $21.8 million for the year ended December 31, 2018. FFO applicable to common shares and Units for the year ended December 31, 2019, increased to $52.9 million compared to $43.9 million for the year ended December 31, 2018, a change of 20.4%, primarily due to a $6.6 million gain on litigation settlement, as well as higher NOI at same-store and non-same-store communities and reductions in interest expense and general and administrative expenses. The increase in FFO was partially offset by decreases in NOI from sold properties and increases in loss on extinguishment of debt, property management expenses, and weather-related casualty loss. For a comparison of FFO applicable to common shares and Units for the eight months ended December 31, 2018 and 2017, and the fiscal years ended April 30, 2018 and 2017, please refer to our Transition Report on from 10-KT filed with the SEC on February 27, 2019.


30


Reconciliation of Net Income Available to Common Shareholders to Funds From Operations 
 
(in thousands, except per share and unit amounts)
 
Years Ended December 31,
 
 
Eight Months Ended December 31,
 
 
Fiscal Years Ended April 30,
 
2019
2018
 
 
2018
2017
 
 
2018
 
2017
Net income (loss) available to common shareholders
$
71,848

 
$
(21,844
)
 
 
$
(8,945
)
 
$
117,461

 
 
$
104,562

 
$
31,366

Adjustments:
 
 
 
 
 
 

 
 

 
 
 
 
 
Noncontrolling interests – Operating Partnership
6,752

 
(2,553
)
 
 
(1,032
)
 
14,222

 
 
12,702

 
4,059

Depreciation and amortization
74,271

 
77,624

 
 
50,456

 
63,345

 
 
90,515

 
55,025

Less depreciation – non real estate
(322
)
 
(305
)
 
 
(203
)
 
(234
)
 
 
(339
)
 
(210
)
Less depreciation – partially owned entities
(2,059
)
 
(2,795
)
 
 
(1,828
)
 
(1,911
)
 
 
(2,877
)
 
(2,251
)
Impairment of real estate

 
19,030

 
 
1,221

 
256

 
 
18,065

 
57,028

Less impairment - partially owned entities

 

 
 

 

 
 

 
(14,963
)
(Gain) loss on sale of real estate
(97,624
)
 
(25,245
)
 
 
(9,110
)
 
(167,553
)
 
 
(183,687
)
 
(74,847
)
Funds from operations applicable to common shares and Units
$
52,866

 
$
43,912

 
 
$
30,559

 
$
25,586

 
 
$
38,941

 
$
55,207

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Funds from operations applicable to common shares and Units
$
52,866

 
$
43,912

 
 
$
30,559

 
$
25,586

 
 
$
38,941

 
$
55,207

Dividends to preferred unitholders
537

 

 
 

 

 
 

 

Funds from operations applicable to common shares and Units - diluted
$
53,403

 
$
43,912

 
 
$
30,559

 
$
25,586

 
 
$
38,941

 
$
55,207

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Per Share Data
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings (loss) per common share - diluted
$
6.00

 
$
(1.83
)
 
 
$
(0.75
)
 
$
9.78

 
 
$
8.71

 
$
2.59

FFO per share and Unit - diluted
$
4.05

 
$
3.29

 
 
$
2.29

 
$
1.90

 
 
$
2.89

 
$
4.02

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares and Units - diluted
13,182

 
13,344

 
 
13,324

 
13,498

 
 
13,459

 
13,730

Liquidity and Capital Resources 
Overview
We desire to create and maintain a strong balance sheet that offers financial flexibility and enables us to pursue and acquire apartment communities that enhance our portfolio composition, operating metrics, and cash flow growth prospects. We intend to strengthen our capital and liquidity positions by continuing to focus on improving our core fundamentals, which include generating positive cash flows from operations, maintaining appropriate debt levels and leverage ratios, and controlling overhead costs.
Our primary sources of liquidity are cash and cash equivalents on hand, and cash flows generated from operations. Other sources include availability under our unsecured lines of credit, proceeds from property dispositions, including restricted cash related to net tax deferred proceeds, offerings of preferred and common shares under our shelf registration statement, including offerings of common shares under our 2019 ATM Program, and unsecured debt or long-term secured mortgages.
Our primary liquidity demands are normally-recurring operating and overhead expenses, debt service and repayments, capital improvements to our communities, distributions to the holders of our preferred shares, common shares, Series D preferred units, and Units, value-add redevelopment, and acquisition of additional communities.
We intend to maintain a strong balance sheet and preserve our financial flexibility, which we believe should enhance our ability to capitalize on appropriate investment opportunities as they may arise. We intend to maintain our capital structure by taking certain actions, including:
extending and sequencing our debt maturity dates;
managing interest rate exposure through the appropriate use of a mix of fixed and floating debt and utilizing our lines of credit and term loans as appropriate;
maintaining adequate coverage ratios on our debt obligations; and

31


where appropriate, accessing the equity markets through our 2019 ATM Program and other offerings under our shelf registration statement.
We have historically met our short-term liquidity requirements through net cash flows provided by our operating activities and, from time to time, through draws on our lines of credit. We consider our ability to generate cash from property operating activities and draws on our lines of credit to be adequate to meet all operating requirements and to make distributions to our 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 also generally expected to be funded from existing cash on hand, cash flow generated from property operations, draws on our lines of credit and/or new borrowings, and we believe we will have sufficient liquidity to meet our commitments over the next twelve months.
To maintain our qualification as a REIT, we must pay dividends to our shareholders aggregating annually at least 90% of our REIT taxable income, excluding net capital gains. Under a separate requirement, we must distribute 100% of net capital gains or pay a corporate level tax in lieu thereof. While we have historically satisfied this distribution requirement by making cash distributions to our shareholders, we may choose to satisfy this requirement by making distributions of other property, including, in limited circumstances, our own common shares. As a result of this distribution requirement, our Operating Partnership cannot rely on retained earnings to fund ongoing operations. We pay dividends from cash available for distribution. Until it is distributed, cash available for distribution is typically invested in investment grade securities or is used to reduce balances outstanding under our line of credit. In the event of deterioration in property operating results, we may need to consider additional cash preservation alternatives, including reducing development activities, capital improvements, and renovations. For the year ended December 31, 2019, we declared cash distributions of $36.4 million to common shareholders and unitholders of IRET Properties, as compared to net cash provided by operating activities of $69.6 million and FFO of $52.9 million
Factors that could increase or decrease our future liquidity include, but are not limited to, changes in interest rates or sources of financing, general volatility in capital and credit markets, changes in minimum REIT dividend requirements, and our ability to access the capital markets on favorable terms, or at all. As a result of the foregoing conditions or general economic conditions in our markets that affect our ability to attract and retain residents, we may not generate sufficient cash flow from operations. If we are unable to obtain capital from other sources, we may not be able to pay the distribution required to maintain our status as a REIT, make required principal and interest payments, make strategic acquisitions or make necessary routine capital improvements or undertake re-development opportunities with respect to our existing portfolio of operating assets. 
As of December 31, 2019, we had total liquidity of approximately $226.5 million, which included $199.9 million available on our line of credit based on the value of properties contained in our unencumbered asset pool ("UAP") and $26.6 million of cash and cash equivalents. As of December 31, 2018, we had total liquidity of approximately $188.8 million, which included $175.0 million available on our line of credit based on the UAP and $13.8 million of cash and cash equivalents. As of April 30, 2018, we had total liquidity of approximately $187.9 million, which included $176.0 million available under our line of credit based on the UAP and $11.9 million of cash and cash equivalents.
Debt
We have an unsecured credit facility for $395.0 million, with the commitment allocated to a revolving line of credit for $250.0 million and the remaining $145.0 million allocated between two term loans: a $70.0 million unsecured term loan that matures on January 15, 2024 and a $75.0 million term loan that matures on August 31, 2025.
As of December 31, 2019, our line of credit had total commitments of $250.0 million, with borrowing capacity based on the value of properties contained in the UAP. The UAP provided for a borrowing capacity of approximately $250.0 million at year-end, offering additional borrowing availability of $199.9 million beyond the $50.1 million drawn, including the balance on our operating line of credit, as of December 31, 2019. At December 31, 2018, the line of credit borrowing capacity was $232.5 million based on the UAP, of which $57.5 million was drawn on the line. The multi-bank line of credit bears interest either at the lender's base rate plus a margin ranging from 35 to 85 basis points, or the LIBOR, plus a margin ranging from 135 to 190 basis points based on our consolidated leverage. The line of credit is utilized to refinance existing indebtedness, to finance property acquisitions, to finance capital expenditures, and for general corporate purposes.This credit facility matures on August 31, 2022, with one twelve-month option to extend the maturity date at our election.
During the year ended December 31, 2019, we entered into a $50.0 million interest rate swap to fix the interest rate on a portion of our primary line of credit.

32


During the year ended December 31, 2019, we entered into a private shelf agreement for the issuance of up to $150.0 million of unsecured senior promissory notes. We issued $75.0 million of Series A notes due September 13, 2029, bearing interest at a rate of 3.84% annually, and $50.0 million of Series B notes due September 30, 2028, bearing interest at a rate of 3.69% annually, under this facility. An additional $25.0 million remains available under this agreement.
We also have a $6.0 million operating line of credit. This operating line of credit is designed to enhance treasury management activities and more effectively manage cash balances. This operating line has a one-year term, with pricing based on a market spread plus the one-month LIBOR index rate.
Mortgage loan indebtedness was $331.4 million on December 31, 2019, $446.0 million on December 31, 2018, and $512.1 million on April 30, 2018. All of our mortgage debt is at fixed rates of interest, with staggered maturities. This reduces the exposure to changes in interest rates, which minimizes the effect of interest rate fluctuations on our results of operations and cash flows. As of December 31, 2019, the weighted average rate of interest on our mortgage debt was 4.02%, compared to 4.58% on December 31, 2018, and 4.69% on April 30, 2018. Refer to Note 6 of our consolidated financial statements contained in this Annual Report on Form 10-K for the principal payments due on our mortgage indebtedness and other tabular information.
Equity
In November 2019, we entered into an equity distribution agreement in connection with the 2019 ATM Program through which we may offer and sell common shares having an aggregate gross sales price of up to $150.0 million, in amounts and at times that we determine. The proceeds from the sale of common shares under the 2019 ATM Program are intended to be used for general corporate purposes, which may include the funding of future acquisitions and the repayment of indebtedness. During the year ended December 31, 2019, we issued 308,444 common shares under the 2019 ATM Program at an average price of $72.29 per share, net of commissions. Total consideration, net of commissions and issuance costs, was approximately $22.0 million. As of December 31, 2019, common shares having an aggregate offering price of up to $127.7 million remained available under the 2019 ATM Program.
On December 7, 2016, our Board of Trustees authorized a share repurchase program to repurchase up to $50 million of our common shares and/or Series B preferred shares over a one-year period, and subsequently reauthorized the program for two additional one-year periods.
On December 5, 2019, our Board of Trustees terminated this share repurchase program and authorized a new share purchase program to repurchase up to $50 million of our common shares or preferred shares over a one-year period. Under this new repurchase program, we may repurchase common shares or preferred shares in open-market purchases, including pursuant to Rule 10b5-1 and Rule 10b-18 plans, as determined by management and in accordance with the requirements of the SEC. The extent to which we repurchase our shares, and the timing of such repurchases, will depend upon a variety of factors, including market conditions, regulatory requirements, and other corporate considerations, as determined by our executive management team. The program may be suspended or discontinued at any time. As of December 31, 2019, $50.0 million remained available under our new repurchase program. During the year ended December 31, 2019, we repurchased and retired approximately 329,000 common shares for an aggregate cost of $18.0 million, including commissions, at an average price per share of $54.69, under the previous repurchase program. During the transition period ended December 31, 2018, we repurchased and retired approximately 42,000 common shares for an aggregate cost of $2.2 million, including commissions, at an average price per share of $51.36. During the fiscal year ended April 30, 2018, we repurchased and retired approximately 178,000 common shares for an aggregate cost of $9.9 million, including commissions, at an average price per share of $55.82.
As of December 31, 2019, December 31, 2018, and April 30, 2018, we had 4.1 million Series C preferred shares outstanding. On October 30, 2017, we completed the redemption of all the outstanding 7.95% Series B Cumulative Redeemable Preferred Shares ("Preferred B Shares") for an aggregate redemption price of $115.0 million, and such shares are no longer outstanding as of such date.
Changes in Cash, Cash Equivalents, and Restricted Cash
As of December 31, 2019, we had restricted cash consisting of $2.3 million of escrows held by lenders for real estate taxes, insurance, and capital additions and $17.2 million in net tax-deferred exchange proceeds remaining from a portion of our dispositions. We had restricted cash consisting of $5.5 million and $4.2 million of escrows held by lenders for real estate taxes, insurance, and capital additions as of December 31, 2018 and April 30, 2018, respectively.

33


The following discussion relates to changes in consolidated cash, cash equivalents, and restricted cash which are presented in our consolidated statements of cash flows in Item 15 of this report.
Operating Activities. For the year ended December 31, 2019, our net cash provided by operating activities was $69.6 million and impacted by:
The receipt of $5.2 million from the settlement of our pursuit of recovery on a construction defect claim.
Investing Activities. Net cash provided by investing activities was $7.0 million for the year ended December 31, 2019, due primarily to:
The disposition of 21 apartment communities, two commercial properties, and three land parcels for a total sales price of $203.1 million;
Acquiring SouthFork Townhomes, a 272-home apartment community located in Lakeville, Minnesota, FreightYard Townhomes and Flats, a 96-home apartment community located in Minneapolis, Minnesota, and Lugano at Cherry Creek, a 328-home apartment community located in Denver, Colorado, for an aggregate purchase price of $169.3 million;
Acquiring an office building for $2.1 million, which will become our Minot, North Dakota corporate office building after renovations have been completed; and
Funding capital expenditures for apartment communities of approximately $21.0 million.
Financing Activities. During the year ended December 31, 2019, net cash used by financing activities was $49.8 million which was primarily due to:
Repaying approximately $177.7 million of mortgage principal;
Repurchasing 465,000 common shares and Units for an aggregate cost of approximately $26.2 million;
Paying distributions on common shares and Units of $36.4 million;
The receipt of $59.9 million from a mortgage secured by four apartment communities and $125.0 million from a private shelf agreement; and
The receipt of $22.0 million from the issuance of 308,444 common shares under our 2019 ATM Program.
Contractual Obligations and Other Commitments
Our primary contractual obligations relate to borrowings under our lines of credit, term loans, unsecured senior notes, and mortgages payable. The primary line of credit matures in August 2022 and had a $50.1 million balance outstanding at December 31, 2019. We also had two term loans with an aggregate balance of $145.0 million at December 31, 2019: a $70.0 million term loan that matures in January 2024 and a $75.0 million term loan that matures in August 2025.
In addition, we had unsecured senior notes with an aggregate balance of $125.0 million at December 31, 2019. The $75.0 million of Series A senior notes mature on September 13, 2029 and the $50.0 million of Series B senior notes mature on September 30, 2028.
 
 
(in thousands)
 
 
 
 
Less than

 
 
 
 
 
More than

 
 
Total

 
1 Year

 
1-3 Years

 
3-5 Years

 
5 Years

Mortgages payable (principal and interest)
 
$
412,626

 
$
28,124

 
$
102,009

 
$
69,220

 
$
213,273

Lines of credit (principal and interest)(1)
 
$
54,849

 
$
1,818

 
$
53,031

 

 

Notes payable (principal and interest)
 
$
346,289

 
$
10,976

 
$
21,892

 
$
89,625

 
$
223,796

Total
 
$
813,764

 
$
40,918

 
$
176,932

 
$
158,845

 
$
437,069

(1)
The future interest payments on the lines of credit were estimated using the outstanding principal balance and interest rate in effect as of December 31, 2019. 

34


Inflation
Our apartment leases generally have terms of one year or less, which means that, in an inflationary environment, we would have the ability to increase rents upon the commencement of new leases or renewal of existing leases, thereby minimizing the risk of inflation. However, the cost to operate and maintain communities could increase at a rate greater than our ability to increase rents, which could adversely affect our results of operations.
Off-Balance-Sheet Arrangements
As of December 31, 2019, we had no significant off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
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 asset 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 management. If we do not allocate these costs appropriately or incorrectly estimate the useful lives of our real estate, depreciation expense may be misstated. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets. We use a 10-37 year estimated life for buildings and improvements and a 5-10 year estimated life for furniture, fixtures, and equipment. Maintenance and repairs are charged to operations as incurred. Renovations and improvements that improve and/or extend the useful life of the asset are capitalized over their estimated useful life, generally five to twenty years.
In the first quarter of fiscal year 2018, we determined it was appropriate to review and adjust our estimated useful lives to be specific to our remaining asset portfolio. Effective May 1, 2017, we changed the estimated useful lives of our real estate assets to better reflect the estimated periods during which they will be of economic benefit. Refer to Note 2 of our consolidated financial statements contained in this Annual Report on Form 10-K for further discussion on this change and its impact.
Property sales or dispositions are recorded when control of the assets are transferred to the buyer and we have no significant continuing involvement with the property sold. The gain or loss on disposal is recognized net of certain closing and other costs associated with the disposition.
Acquisition of Investments in Real Estate. Upon acquisitions of real estate, we assess 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 consider whether there were significant intangible assets acquired (for example, above-and below-market leases, the value of acquired in-place leases and resident relationships) and assumed liabilities, and allocate the purchase price based on these assessments. The as-if-vacant value is allocated to land, buildings, and personal property based on our determination of the relative fair value of these assets. 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 a relative fair value allocation if acquired in a portfolio acquisition.
Other intangible assets acquired include amounts for in-place lease values that are based upon our evaluation of the specific characteristics of the leases. Factors considered in the fair value analysis include an estimate of carrying costs and foregone rental income during hypothetical expected lease-up periods, consideration of current market conditions, and costs to execute similar leases. We also consider information about each property obtained during our pre-acquisition due diligence, marketing and leasing activities in estimating the relative fair value of the tangible and intangible assets acquired.
Capitalization of Costs. We follow the real estate project costs guidance in ASC 970, Real Estate – General, in accounting for the costs of development and re-development projects. As real estate is undergoing development or re-development, all project costs directly associated with and attributable to the development and construction of a project, including interest expense and real estate tax expense, are capitalized to the cost of the real property. The capitalization period begins when development activities and expenditures begin and ends upon completion, which is when the asset is ready for its intended use. Generally, rental property is considered substantially complete upon issuance of a certificate of occupancy.

35


Real Estate Held For Sale.  Properties are classified as held for sale when they meet the necessary criteria, which include: (a) management, having the authority to approve the action, commits to a plan to sell the asset, and (b) the sale of the asset is probable and expected to be completed within one year. We generally consider these criteria to be met when the transaction has been approved by our Board of Trustees, there are no known significant contingencies related to the sale, and management believes it is probable that the sale will be completed within one year. 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.
We report in discontinued operations the results of operations and the related gains or losses on the sales of properties that have either been disposed of or classified as held for sale and meet the classification of a discontinued operation as described in ASC 205 - Presentation of Financial Statements and ASC 360 - Property, Plant, and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. Under these standards, a disposal (or classification as held for sale) of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.
Impairment.  We periodically evaluate our long-lived assets, including our investments in real estate, for impairment indicators. The impairment evaluation is performed on assets by property such that assets for a property form an asset group. The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions, expected holding period of each asset group, and legal and environmental concerns. If indicators exist, we compare the expected future undiscounted cash flows for the long-lived asset group against the carrying amount of that asset group. If the sum of the estimated undiscounted cash flows is less than the carrying amount of the asset group, an impairment loss is recorded for the difference between the estimated fair value and the carrying amount of the asset group. If our anticipated holding period for properties, the estimated fair value of properties, or other factors change based on market conditions or otherwise, our evaluation of impairment charges may be different and such differences could be material to our consolidated financial statements. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results. Plans to hold properties over longer periods decrease the likelihood of recording impairment losses.
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 appearing elsewhere in this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk  
Our exposure to market risk is primarily related to fluctuations in the general level of interest rates on our current and future fixed and variable rate debt obligations. We currently use interest rate swaps to offset the impact of interest rate fluctuations on our $70.0 million and $75.0 million variable-rate term loans and a portion of our line of credit. The swap on our $70.0 million term loan has a notional amount of $70.0 million and an average pay rate of 2.16%. The swap on our $75.0 million term loan has a notional amount of $75.0 million and an average pay rate of 2.81%. The swap on our line of credit has a notional amount of $50.0 million and an average pay rate of 2.02%. The aggregate fair value of our interest rate swaps is a liability of $7.6 million, as of December 31, 2019. We do not enter into derivative instruments for trading or speculative purposes. The interest rate swaps expose us to credit risk in the event of non-performance by the counterparty under the terms of the agreement.
During the year ended December 31, 2019, we entered into a private shelf agreement for the issuance of up to $150.0 million of unsecured senior promissory notes ("unsecured senior notes"). Under this agreement, we issued $75.0 million of Series A notes due September 13, 2029, bearing interest at a rate of 3.84% annually, and $50.0 million of Series B notes due September 30, 2028, bearing interest at a rate of 3.69% annually. The proceeds from this facility were used to repay outstanding amounts under our unsecured credit facility, retire mortgage debt, and partially fund our acquisition of Lugano at Cherry Creek. As a result of entering into this facility, we have been able to lengthen our average debt maturity duration and lower our weighted average interest rate of debt.
As of December 31, 2019, we had no variable-rate mortgage debt outstanding and $195.1 million of variable-rate borrowings under our line of credit and term loans, of which $195.0 million is fixed through interest rate swaps. We estimate that a change in 30-day LIBOR of 100 basis points with constant risk spreads would not have an impact on our net income due to our interest rate swaps on our existing variable rate debt.
Mortgage loan indebtedness decreased by $114.6 million as of December 31, 2019, compared to December 31, 2018, primarily due to loan payoffs related to property dispositions. As of December 31, 2019 and December 31, 2018, 100.0% of our $331.4 million of mortgage debt was at fixed rates of interest, with staggered maturities. As of December 31, 2019, the weighted

36


average rate of interest on our mortgage debt was 4.02%, compared to 4.58% on December 31, 2018. Even though our goal is to maintain a fairly low exposure to interest rate risk, we may become vulnerable to significant fluctuations in interest rates on any future repricing or refinancing of our fixed or variable rate debt or future debt.
The following table provides information about our financial instruments that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. Average variable rates are based on rates in effect at the reporting date.
 
 
Future Principal Payments (in thousands, except percentages)
 
 
 
 
 
 
 
 
 
Fair

Debt
 
2020

2021

2022

2023

2024

Thereafter

Total

Value

Fixed Rate
 
$
14,897

$
40,523

$
37,352

$
48,111

$
3,777

$
311,716

$
456,376

$
457,471

Average Interest Rate(1)
 
4.31
%
4.39
%
4.25
%
4.00
%
3.83
%
3.76
%
3.95
%
 
Variable Rate(2)
 
$
79


$
50,000

$

$
70,000

$
75,000

$
195,079

$
195,079

Average Interest Rate(1)
 
4.21
%

3.81
%

3.61
%
4.58
%
4.05
%
 
 
(1)
Interest rate is annualized and includes the effect of our interest rate swaps.
(2)
Includes $50.1 million under our line of credit and $145.0 million on our term loans.
Item 8. Financial Statements and Supplementary Data
 
Our consolidated financial statements and related notes, together with the Report of the Independent Registered Public Accounting Firm, are set forth beginning on page F-1 of this Annual Report on Form 10-K and are incorporated herein by reference. 
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
None.

Item 9A. Controls and Procedures  
Disclosure Controls and Procedures: As of December 31, 2019, 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 our Chief Executive 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 Exchange Act). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting: There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the fourth quarter of the year to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2019. Our internal control over financial reporting is a process designed under the supervision of our principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with GAAP.
As of December 31, 2019, management conducted an assessment of the effectiveness of our internal control over financial reporting, based on the framework established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management has determined that our internal control over financial reporting as of December 31, 2019, was effective.
Our internal control over financial reporting includes policies and procedures that:

37


pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions, acquisitions and dispositions of assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and the trustees; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to changes in conditions or deterioration in the degree of compliance with the policies or procedures.
Our internal control over financial reporting as of December 31, 2019 has been audited by Grant Thornton LLP, an independent registered public accounting firm, as stated in their report on page F-4 of our consolidated financial statements contained in our Annual Report on Form 10-K, which expresses an unqualified opinion on the effectiveness of our internal control over financial reporting as of December 31, 2019.
Item 9B.  Other Information
None.
PART III 
Item 10. Trustees, Executive Officers and Corporate Governance
The information required by this Item regarding Trustees is incorporated by reference to the information under “Election of Trustees,” “Information About Our Executive Officers,” “Code of Conduct and Code of Ethics for Senior Financial Officers,” and “Board Committees” in our definitive proxy statement for our 2020 Annual Meeting of Shareholders to be filed with the SEC no later than 120 days after the end of the year covered by this Annual Report on Form 10-K.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference to the information under “Trustee Compensation,” “Compensation Discussion and Analysis” and “Executive Officer Compensation Tables” in our definitive proxy statement for our 2020 Annual Meeting of Shareholders to be filed with the SEC no later than 120 days after the end of the year covered by this Annual Report on Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The information required by this Item is incorporated by reference to the information under “Securities Authorized for Issuance Under Equity Compensation Plans” and “Security Ownership of Certain Beneficial Owners and Management” in our definitive proxy statement for our 2020 Annual Meeting of Shareholders to be filed with the SEC no later than 120 days after the end of the year covered by this Annual Report on Form 10-K.
Item 13. Certain Relationships and Related Transactions, and Trustee Independence
The information required by this Item is incorporated by reference to the information under “Relationships and Related Party Transactions” and “Corporate Governance and Board Matters” in our definitive proxy statement for our 2020 Annual Meeting of Shareholders to be filed with the SEC no later than 120 days after the end of the year covered by this Annual Report on Form 10-K.
Item 14. Principal Accounting Fees and Services
The information required by this Item is incorporated by reference to the information under “Accounting and Audit Committee Matters” in our definitive proxy statement for our 2020 Annual Meeting of Shareholders to be filed with the SEC no later than 120 days after the end of the year covered by this Annual Report on Form 10-K.
PART IV 
Item 15. Exhibits, Financial Statement Schedules  
The following documents are filed as part of this report:  

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1. Financial Statements 
See the “Table of Contents” to our consolidated financial statements on page F-1 of this Annual Report on Form 10-K.
2. Financial Statement Schedules 
See the “Table of Contents” to our consolidated financial statements on page F-1 of this Annual Report on Form 10-K.
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: Schedule III Real Estate and Accumulated Depreciation 
3. Exhibits 
See the Exhibit Index set forth in part (b) below. 
The Exhibit Index below lists the exhibits to this Annual Report on Form 10-K. We will furnish a printed 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.
Item 16. 10-K Summary
None.

39


EXHIBIT INDEX
 
EXHIBIT NO.
    
DESCRIPTION
1.1
 
 
 
 
3.1.
 
 
 
 
3.2
 
 
 
 
3.3
 
 
 
 
4.1
 
 
 
 
4.2
 
 
 
 
4.3
 
 
 
 
4.4
 
 
 
 
4.5
 
 
 
 
10.1**
 
 
 
 
 
10.2**
 
 
 
 
10.3**
 
 
 
 
10.4**
 
 
 
 
10.5**
 
 
 
 
10.6**
 
 
 
 
10.7**
 
 
 
 


40


EXHIBIT NO.
    
DESCRIPTION
10.8**
 
 
 
 
10.9**
 
 
 
 
10.10**
 
 
 
 
10.11
 
 
 
 
10.12
 
 
 
 
10.13
 
 
 
 
10.14
 
 
 
 
10.15
 
Third Amendment to the Amended and Restated Agreement of Limited Partnership of IRET Properties, A North Dakota Limited Partnership (incorporated herein by reference to Exhibit 3.2 to the Registrant's Current Report on Form 8-K filed on October 2, 2017).
 
 
 
10.16
 
 
 
 
21.1
 
 
 
 
23.1
 
 
 
 
24.1
 
Power of Attorney (included on the signature page to this Annual Report on Form 10-K and incorporated by reference herein).
 
 
 
31.1
 
 
 
 
31.2
 
 
 
 
32.1
 
 
 
 
32.2
 
 
 
 
101
 
The following materials from our Annual Report on Form 10-K for the twelve-months ended December 31, 2019 formatted in Inline eXtensible Business Reporting Language ("iXBRL"): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Equity, (iv) the Consolidated Statements of Cash Flows, (v) notes to these consolidated financial statements, and (vi) the Cover Page to our Annual Report on From 10-K.
 
 
 
104
 
Cover Page Interactive Data File (formatted as Inline iXBRL and contained in Exhibit 101)
† Filed herewith
** Indicates management compensatory plan, contract or arrangement.

41


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: February 19, 2020
Investors Real Estate Trust
 
 
 
 
By:
/s/ Mark O. Decker, Jr.
 
 
Mark O. Decker, Jr.
 
 
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 P. Caira
 
 
 
 
Jeffrey P. Caira
 
Trustee & Chairman
 
February 19, 2020
 
 
 
 
 
/s/ Mark O. Decker, Jr.
 
 
 
 
Mark O. Decker, Jr.
 
President & Chief Executive Officer
(Principal Executive Officer); Trustee
 
February 19, 2020
 
 
 
 
 
/s/ John A. Kirchmann
 
 
 
 
John A. Kirchmann
 
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
 
February 19, 2020
 
 
 
 
 
/s/ Michael T. Dance
 
 
 
 
Michael T. Dance
 
Trustee
 
February 19, 2020
 
 
 
 
 
/s/ Emily Nagle Green
 
 
 
 
Emily Nagle Green
 
Trustee
 
February 19, 2020
 
 
 
 
 
/s/ Linda J. Hall
 
 
 
 
Linda J. Hall
 
Trustee
 
February 19, 2020
 
 
 
 
 
/s/ Terrance P. Maxwell
 
 
 
 
Terrance P. Maxwell
 
Trustee
 
February 19, 2020
 
 
 
 
 
/s/ John A. Schissel
 
 
 
 
John A. Schissel
 
Trustee
 
February 19, 2020
 
 
 
 
 
/s/ Mary J. Twinem
 
 
 
 
Mary J. Twinem
 
Trustee
 
February 19, 2020
 
 
 
 
 

42

Table of Contents

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
 
TABLE OF CONTENTS
 
 
 
PAGE
F-2
CONSOLIDATED FINANCIAL STATEMENTS
 
 
F-5
 
F-6
 
F-7
 
F-8
 
 
ADDITIONAL INFORMATION
 
 
 
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.


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Table of Contents




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 

Board of Trustees and Shareholders
Investors Real Estate Trust

Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Investors Real Estate Trust (a North Dakota real estate investment trust) and subsidiaries (the “Company”) as of December 31, 2019 and 2018, and April 30, 2018, the related consolidated statements of operations, comprehensive income, equity, and cash flows for the year ended December 31, 2019, eight month period ended December 31, 2018, and the years ended April 30, 2018 and 2017, and the related notes and financial statement schedule in Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and April 30, 2018, and the results of its operations and its cash flows for the year ended December 31, 2019, eight month period ended December 31, 2018 and the years ended April 30, 2018 and 2017, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 19, 2020 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Mortgage Loans Receivable and Notes Receivable
As described in Note 2 to the consolidated financial statements, in December 2019, the company originated a $29.9 million construction loan and a $15.3 million mezzanine loan to an unconsolidated variable interest entity ("unconsolidated VIE"), for the development of a multifamily development located in Minneapolis, Minnesota. The loans are secured by mortgages and mature on December 31, 2023, and the agreement provides the Company with an option to purchase the development. The Company concluded it is not the primary beneficiary of the unconsolidated VIE as the Company does not have the power to direct the activities which most significantly impact its economic performance nor do they have significant influence over the unconsolidated VIE. We identified the Company's VIE determination for the unconsolidated VIE transaction as a critical audit matter.
The principal consideration for our determination that the VIE determination for the unconsolidated VIE transaction is a critical audit matter is that it involves a high degree of judgment in assessing management's conclusions that the Company does not exert

F-2

Table of Contents

control over the activities that are most significant in impacting the economics of the unconsolidated VIE and therefore is not the primary beneficiary and does not consolidate the VIE.
Our audit procedures related to the VIE determination for the unconsolidated VIE transaction included the following, among others.
We tested the design and operating effectiveness of management's internal controls over their VIE determination, including controls over the evaluation and application of the appropriate accounting principles.
We inspected the construction and mezzanine loan agreements to identify and understand the provisions relevant to management's conclusion.
We evaluated those relevant provisions to determine whether management's conclusions were consistent with the relevant accounting guidance, specifically whether the protective rights granted to the Company through the loan agreements gave the Company the power to direct the activities most significant to the unconsolidated VIE.
We consulted our national office regarding the appropriateness of management’s conclusions that the Company was not the primary beneficiary of the VIE as the Company does not exert control over the activities that are most significant in impacting the economics of the VIE.

/s/ GRANT THORNTON LLP

We have served as the Company’s auditor since 2013.

Minneapolis, Minnesota
February 19, 2020


F-3

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Trustees and Shareholders
Investors Real Estate Trust
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Investors Real Estate Trust (a North Dakota real estate investment trust) and subsidiaries (the “Company”) as of December 31, 2019 based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2019, and our report dated February 19, 2020 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ GRANT THORNTON LLP
 
Minneapolis, Minnesota
February 19, 2020


F-4

Table of Contents


INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES 
CONSOLIDATED BALANCE SHEETS 
 
 
(in thousands)
 
 
December 31, 2019

December 31, 2018

April 30, 2018

ASSETS
 
 
 
 
Real estate investments
 
 
 
 
Property owned
 
$
1,643,078

$
1,627,636

$
1,669,764

Less accumulated depreciation
 
(349,122
)
(353,871
)
(311,324
)
 
 
1,293,956

1,273,765

1,358,440

Unimproved land
 
1,376

5,301

11,476

Mortgage loans receivable
 
16,140

10,410

10,329

Total real estate investments
 
1,311,472

1,289,476

1,380,245

Cash and cash equivalents
 
26,579

13,792

11,891

Restricted cash
 
19,538

5,464

4,225

Other assets
 
34,829

27,265

30,297

TOTAL ASSETS
 
$
1,392,418

$
1,335,997

$
1,426,658

LIABILITIES, MEZZANINE EQUITY, AND EQUITY
 
 
 
 
LIABILITIES
 
 
 
 
Accounts payable and accrued expenses
 
$
47,155

$
40,892

$
29,018

Revolving lines of credit
 
50,079

57,500

124,000

Notes payable, net of unamortized loan costs of $942, $1,009 and $486, respectively
 
269,058

143,991

69,514

Mortgages payable, net of unamortized loan costs of $1,712, $1,777 and $2,221, respectively
 
329,664

444,197

509,919

TOTAL LIABILITIES
 
$
695,956

$
686,580

$
732,451

COMMITMENTS AND CONTINGENCIES (NOTE 14)
 



REDEEMABLE NONCONTROLLING INTERESTS – CONSOLIDATED REAL ESTATE ENTITIES
 
$

$
5,968

$
6,644

SERIES D PREFERRED UNITS (Cumulative convertible preferred units, $100 par value, 165,600 units issued and outstanding at December 31, 2019 and no units issued and outstanding at December 31, 2018 and April 30, 2018, aggregate liquidation preference of $16,560,000)
 
16,560



EQUITY
 
 
 
 
Series C Preferred Shares of Beneficial Interest (Cumulative redeemable preferred shares, no par value, 4,118,460 shares issued and outstanding at December 31, 2019, December 31, 2018, and April 30, 2018, aggregate liquidation preference of $102,971,475)
 
99,456

99,456

99,456

Common Shares of Beneficial Interest (Unlimited authorization, no par value, 12,098,379 shares issued and outstanding at December 31, 2019, 11,942,372 shares issued and outstanding at December 31, 2018, and 11,952,598 shares issued and outstanding at April 30, 2018)
 
917,400

899,234

900,097

Accumulated distributions in excess of net income
 
(390,196
)
(429,048
)
(395,669
)
Accumulated other comprehensive income (loss)
 
(7,607
)
(856
)
1,779

Total shareholders’ equity
 
$
619,053

$
568,786

$
605,663

Noncontrolling interests – Operating Partnership (1,058,142 units at December 31, 2019, 1,367,502 units at December 31, 2018, and 1,409,943 units at April 30, 2018)
 
55,284

67,916

73,012

Noncontrolling interests – consolidated real estate entities
 
5,565

6,747

8,888

Total equity
 
$
679,902

$
643,449

$
687,563

TOTAL LIABILITIES, MEZZANINE EQUITY, AND EQUITY
 
$
1,392,418

$
1,335,997

$
1,426,658

See Notes to Consolidated Financial Statements.

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Table of Contents

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 
(in thousands, except per share data)
 
 
Year Ended December 31,
 
Eight Months Ended December 31,
 
Fiscal Years Ended April 30,
 
 
2019
 
2018
 
2018
2017
REVENUE
 
$
185,755

 
$
121,871

 
$
169,745

$
160,104

EXPENSES
 
 
 
 
 
 
 
Property operating expenses, excluding real estate taxes
 
57,249

 
37,198

 
54,292

47,587

Real estate taxes
 
21,066

 
13,521

 
18,742

16,739

Property management expense
 
6,186

 
3,663

 
5,526

5,046

Casualty loss
 
1,116

 
915

 
500

414

Depreciation and amortization
 
74,271

 
50,456

 
82,070

44,253

Impairment of real estate investments
 

 
1,221

 
18,065

57,028

General and administrative expenses
 
14,450

 
9,812

 
14,203

15,871

Acquisition and investment related costs
 

 

 
51

3,276

TOTAL EXPENSES
 
174,338

 
116,786

 
193,449

190,214

Operating income (loss)
 
11,417

 
5,085

 
(23,704
)
(30,110
)
Interest expense
 
(30,537
)
 
(21,359
)
 
(34,178
)
(34,314
)
Loss on extinguishment of debt
 
(2,360
)
 
(556
)
 
(940
)
(1,651
)
Interest and other income
 
2,092

 
1,233

 
1,508

1,146

Income (loss) before gain (loss) on sale of real estate and other investments, gain (loss) on litigation settlement, and income (loss) from discontinued operations
 
(19,388
)
 
(15,597
)
 
(57,314
)
(64,929
)
Gain (loss) on sale of real estate and other investments
 
97,624

 
9,707

 
20,120

18,701

Gain (loss) on litigation settlement
 
6,586

 

 


Income (loss) from continuing operations
 
84,822

 
(5,890
)
 
(37,194
)
(46,228
)
Income (loss) from discontinued operations
 

 
570

 
164,823

76,753

NET INCOME (LOSS)
 
84,822

 
(5,320
)
 
127,629

30,525

Dividends to preferred unitholders
 
(537
)
 

 


Net (income) loss attributable to noncontrolling interests – Operating Partnership
 
(6,752
)
 
1,032

 
(12,702
)
(4,059
)
Net (income) loss attributable to noncontrolling interests – consolidated real estate entities
 
1,136

 
(110
)
 
1,861

16,881

Net income (loss) attributable to controlling interests
 
78,669

 
(4,398
)
 
116,788

43,347

Dividends to preferred shareholders
 
(6,821
)
 
(4,547
)
 
(8,569
)
(10,546
)
Redemption of preferred shares
 

 

 
(3,657
)
(1,435
)
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
 
$
71,848

 
$
(8,945
)
 
$
104,562

$
31,366

 
 
 
 
 
 
 
 
BASIC
 
 
 
 
 
 
 
Earnings (loss) per common share from continuing operations – basic
 
$
6.06

 
$
(0.79
)
 
$
(3.54
)
$
(3.01
)
Earnings (loss) per common share from discontinued operations – basic
 

 
0.04

 
12.25

5.59

NET EARNINGS (LOSS) PER COMMON SHARE – BASIC
 
$
6.06

 
$
(0.75
)
 
$
8.71

$
2.58

 
 
 
 
 
 
 
 
DILUTED
 
 
 
 
 
 
 
Earnings (loss) per common share from continuing operations – diluted
 
$
6.00

 
$
(0.79
)
 
$
(3.54
)
$
(3.01
)
Earnings (loss) per common share from discontinued operations – diluted
 
$

 
$
0.04

 
$
12.25

$
5.59

NET EARNINGS (LOSS) PER COMMON SHARE – DILUTED
 
$
6.00

 
$
(0.75
)
 
$
8.71

$
2.58

See Notes to Consolidated Financial Statements.


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Table of Contents

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
 
(in thousands)
 
 
Year Ended
December 31,
 
Eight Months Ended December 31,
 
Fiscal Years Ended April 30,
 
 
2019
 
2018
 
2018
 
2017
Net income (loss)
 
$
84,822

 
$
(5,320
)
 
$
127,629

 
$
30,525

Other comprehensive income:
 
 
 
 
 
 
 
 
Unrealized gain (loss) from derivative instrument
 
(7,040
)
 
(2,794
)
 
1,627

 

(Gain) loss on derivative instrument reclassified into earnings
 
289

 
159

 
152

 

Total comprehensive income (loss)
 
$
78,071

 
$
(7,955
)
 
$
129,408

 
$
30,525

Net comprehensive (income) loss attributable to noncontrolling interests – Operating Partnership
 
(6,058
)
 
1,032

 
(12,888
)
 
(4,059
)
Net comprehensive (income) loss attributable to noncontrolling interests – consolidated real estate entities
 
1,136

 
(110
)
 
1,861

 
16,881

Comprehensive income (loss) attributable to controlling interests
 
$
73,149

 
$
(7,033
)
 
$
118,381

 
$
43,347


See Notes to Consolidated Financial Statements.

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Table of Contents

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF EQUITY
 
 
(in thousands)
 
 
 
NUMBER
 
ACCUMULATED
ACCUMULATED
 
 
 
 
 
OF
 
DISTRIBUTIONS
OTHER
NONREDEEMABLE
 
 
 
PREFERRED
COMMON
COMMON
IN EXCESS OF
COMPREHENSIVE
NONCONTROLLING
TOTAL
 
 
SHARES
SHARES
SHARES
NET INCOME
INCOME
INTERESTS
EQUITY
Balance at April 30, 2016
 
$
138,674

12,110

$
922,084

$
(442,000
)

$
99,504

$
718,262

Net income (loss) attributable to controlling interest and noncontrolling interests
 
 

 

 

43,347

 
(12,400
)
30,947

Distributions – common shares and Units ($4.60 per share and Unit)
 
 

 

 

(55,907
)
 
(7,453
)
(63,360
)
Distributions – Series A preferred shares (1.0312 per Series A share)
 
 

 

 

(1,403
)
 
 

(1,403
)
Distributions – Series B preferred shares ($1.9875 per Series B share)
 
 

 

 

(9,143
)
 
 

(9,143
)
Shares issued and share-based compensation
 
 

39

358

 

 
 

358

Redemption of Units for common shares
 
 

50

875

 

 
(875
)

Redemption of Units for cash
 
 
 
 
 
 
(966
)
(966
)
Shares repurchased
 
(27,317
)
(79
)
(4,501
)
(1,435
)
 
 
(33,253
)
Contributions from nonredeemable noncontrolling interests – consolidated real estate entities
 
 

 

 

 

 
7,188

7,188

Conversion of equity of notes receivable from noncontrolling interests - consolidated real estate entities
 
 

 

 

 

 
(7,366
)
(7,366
)
Acquisition of nonredeemable noncontrolling interests - consolidated real estate entities
 
 
 
(9,893
)
 
 
5,019

(4,874
)
Other
 
 
 
(18
)
 

 
(214
)
(232
)
Balance at April 30, 2017
 
$
111,357

12,120

$
908,905

$
(466,541
)

$
82,437

$
636,158

Net income (loss) attributable to controlling interests and noncontrolling interests
 
 
 
 
116,788

 
11,582

128,370

Change in fair value of derivatives
 
 
 
 
 
1,779

 
1,779

Distributions – common shares and Units ($2.80 per share and Unit)
 
 
 
 
(33,689
)
 
(4,096
)
(37,785
)
Distributions – Series B preferred shares ($0.9938 per Series B share)
 
 
 
 
(4,571
)
 
 
(4,571
)
Distributions – Series C preferred shares ($1.65625 per Series C share)
 
 
 
 
(3,999
)
 
 
(3,999
)
Shares issued and share-based compensation
 
 
10

1,663

 
 
 
1,663

Issuance of Series C preferred shares
 
99,456

 

 

 
 
 
99,456

Redemption of Units for common shares
 
 
3

34

 
 
(34
)

Redemption of Units for cash
 
 
 
 
 
 
(8,775
)
(8,775
)
Shares repurchased
 
(111,357
)
(178
)
(9,935
)
(3,657
)
 
 

(124,949
)
Contributions from nonredeemable noncontrolling interests – consolidated real estate entities
 
 
 
 
 
 
619

619

Other
 
 
(2
)
(570
)
 
 
167

(403
)
Balance at April 30, 2018
 
$
99,456

11,953

$
900,097

$
(395,669
)
1,779

$
81,900

$
687,563

 
See Notes to Consolidated Financial Statements.

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Table of Contents

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF EQUITY (continued)
 
 
 
(in thousands)
 
 
 
NUMBER
 
ACCUMULATED
ACCUMULATED
 
 
 
 
 
OF
 
DISTRIBUTIONS
OTHER
NONREDEEMABLE
 
 
 
PREFERRED
COMMON
COMMON
IN EXCESS OF
COMPREHENSIVE
NONCONTROLLING
TOTAL
 
 
SHARES
SHARES
SHARES
NET INCOME
INCOME
INTERESTS
EQUITY
Balance at April 30, 2018
 
$
99,456

11,953

$
900,097

$
(395,669
)
$
1,779

$
81,900

$
687,563

Cumulative adjustment upon adoption of ASC 606 and ASC 610-20
 
 
 
 
627

 
 
627

Balance on May 1, 2018
 
99,456

11,953

900,097

(395,042
)
1,779

81,900

688,190

Net income (loss) attributable to controlling interests and noncontrolling interests
 
 
 
 
(4,398
)
 
(480
)
(4,878
)
Change in fair value of derivatives
 
 
 
 
 
(2,635
)
 
(2,635
)
Distributions – common shares and Units ($2.10 per share and Unit)
 
 
 
 
(25,060
)
 
(2,917
)
(27,977
)
Distributions – Series C preferred shares ($1.2422 per Series C share)
 
 
 
 
(4,548
)
 
 
(4,548
)
Share-based compensation, net of forfeitures
 
 
3

1,042

 
 
 
1,042

Redemption of Units for common shares
 
 
33

649

 
 
(649
)

Redemption of Units for cash
 
 
 

 

 
 
(498
)
(498
)
Shares repurchased
 


(42
)
(2,172
)


 
 
(2,172
)
Distributions to nonredeemable noncontrolling interests - consolidated real estate entities
 
 
 
 
 
 
(2,432
)
(2,432
)
Conversion to equity of notes receivable from nonredeemable noncontrolling interests – consolidated real estate entities
 
 
 
 

 
 
(392
)
(392
)
Acquisition of nonredeemable noncontrolling interests – consolidated real estate entities
 
 
 
(175
)
 
 
131

(44
)
Other
 
 
(5
)
(207
)
 
 


(207
)
Balance at December 31, 2018
 
$
99,456

11,942

$
899,234

$
(429,048
)
$
(856
)
$
74,663

$
643,449

Net income (loss) attributable to controlling interests and noncontrolling interests
 
 
 
 
78,669

 
5,790

84,459

Change in fair value of derivatives
 
 
 
 
 
(6,751
)
 
(6,751
)
Distributions – common shares and Units ($2.80 per common share and Unit)
 
 
 
 
(32,996
)
 
(3,414
)
(36,410
)
Distributions – Series C preferred shares ($1.65625 per Series C share)
 
 
 
 
(6,821
)
 
 
(6,821
)
Share-based compensation, net of forfeitures
 
 
11

1,905

 
 
 
1,905

Sale of common shares, net
 
 
308

22,019

 
 
 
22,019

Redemption of Units for common shares
 
 
173

7,823

 
 
(7,823
)

Redemption of Units for cash
 
 
 
 
 
 
(8,147
)
(8,147
)
Shares repurchased
 
 
(329
)
(18,023
)
 
 
 
(18,023
)
Acquisition of redeemable noncontrolling interests
 
 
 
4,529

 
 
 
4,529

Distributions to nonredeemable noncontrolling interests – consolidated real estate entities
 
 
 
 
 
 
(220
)
(220
)
Other
 
 
(7
)
(87
)
 
 
 
(87
)
Balance at December 31, 2019
 
$
99,456

12,098

$
917,400

$
(390,196
)
$
(7,607
)
$
60,849

$
679,902

 
See Notes to Consolidated Financial Statements.


F-9

Table of Contents

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

 
 
(in thousands)
 
 
Year Ended December 31,
 
Eight Months Ended December 31,
 
Fiscal Year Ended April 30,
 
 
2019

 
2018

 
2018

2017

CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
 
 

 

Net income (loss)
 
$
84,822

 
$
(5,320
)
 
$
127,629

$
30,525

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
 
 

 

Depreciation and amortization
 
75,408

 
51,394

 
83,276

46,135

Depreciation and amortization from discontinued operations
 

 

 
8,526

10,477

(Gain) loss on sale of real estate, land, other investments and discontinued operations
 
(97,624
)
 
(10,277
)
 
(183,687
)
(74,847
)
(Gain) loss on extinguishment of debt and discontinued operations
 
2,360

 
482

 
6,839

3,848

(Gain) loss on litigation settlement
 
(1,349
)
 

 


Share-based compensation expense
 
1,905

 
845

 
1,587

6

Impairment of real estate investments
 

 
1,221

 
18,065

57,028

Other, net
 
1,096

 
629

 
1,457

3,660

Changes in other assets and liabilities:
 
 
 
 
 
 

 

Other assets
 
1,076

 
(1,145
)
 
(646
)
(214
)
Accounts payable and accrued expenses
 
1,930

 
2,205

 
(7,851
)
2,434

Net cash provided (used) by operating activities
 
$
69,624

 
$
40,034

 
$
55,195

$
79,052

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
 
 

 

Issuance of loans receivable
 
(6,279
)
 
(918
)
 
(15,480
)

Purchase of marketable securities
 
(6,942
)
 

 


Proceeds from sale of discontinued operations
 

 

 
426,131

237,135

Proceeds from sale of real estate and other investments
 
199,282

 
62,695

 
64,639

47,354

Payments for acquisitions of real estate assets
 
(158,466
)
 
(977
)
 
(374,081
)

Payments for development of real estate assets
 

 

 
(2,655
)
(18,274
)
Payments for improvements of real estate assets
 
(20,954
)
 
(11,518
)
 
(17,980
)
(41,083
)
Other investing activities
 
366

 
1,889

 
(462
)
(972
)
Net cash provided (used) by investing activities
 
$
7,007

 
$
51,171

 
$
80,112

$
224,160

CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
 
 

 

Proceeds from mortgages payable
 
59,900

 

 

84,150

Principal payments on mortgages payable
 
(177,743
)
 
(67,016
)
 
(205,159
)
(298,984
)
Proceeds from revolving lines of credit
 
245,397

 
53,017

 
370,350

246,000

Principal payments on revolving lines of credit
 
(252,818
)
 
(119,517
)
 
(303,400
)
(206,450
)
Proceeds from notes payable and other debt
 
124,878

 
74,352

 
72,714

19,341

Principal payments on notes payable and other debt
 

 

 
(21,689
)
(49,080
)
Payoff of financing liability
 

 

 
(7,900
)

Proceeds from sale of common shares, net of issuance costs
 
22,019

 

 


Additions to notes receivable from noncontrolling partner –  consolidated real estate entities
 

 

 

(9,211
)
Proceeds from noncontrolling partner – consolidated real estate entities
 

 

 

9,749

Payments for acquisition of noncontrolling interests – consolidated real estate entities
 
(1,260
)
 

 

(4,938
)
Proceeds from sale of preferred shares
 

 

 
99,467


Repurchase of common shares
 
(18,023
)
 
(2,172
)
 
(9,935
)
(4,501
)
Repurchase of preferred shares
 

 

 
(115,017
)
(28,752
)
Repurchase of partnership units
 
(8,147
)
 
(498
)
 
(8,775
)
(966
)
Distributions paid to common shareholders
 
(32,891
)
 
(16,724
)
 
(33,689
)
(55,907
)
Distributions paid to preferred shareholders
 
(6,821
)
 
(5,116
)
 
(8,763
)
(10,744
)
Distributions paid to noncontrolling interests – Unitholders of the Operating Partnership
 
(3,630
)
 
(1,959
)
 
(4,096
)
(7,453
)
Distributions paid to noncontrolling interests – consolidated real estate entities
 
(220
)
 
(2,432
)
 
(99
)
(174
)
Distributions paid to preferred unitholders
 
(377
)
 

 


Other financing activities
 
(34
)
 

 


Net cash provided (used) by financing activities
 
$
(49,770
)
 
$
(88,065
)
 
$
(175,991
)
$
(317,920
)
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
 
26,861

 
3,140

 
(40,684
)
(14,708
)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF YEAR
 
19,256

 
16,116

 
56,800

71,508

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF YEAR
 
$
46,117

 
$
19,256

 
$
16,116

$
56,800




F-10

Table of Contents

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)


 
 
Twelve Months Ended December 31,
 
Eight Months Ended December 31,
 
Fiscal Year Ended April 30,
 
 
2019

 
2018

 
2018

2017

SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
 
 
 
 
 
 

 

Accrued capital expenditures
 
$
1,273

 
$
(329
)
 
$
(3,415
)
$
(1,851
)
Distributions declared but not paid
 
9,210

 

 


Property acquired through issuance of Series D preferred units
 
16,560

 

 


Conversion to equity of notes receivable from noncontrolling interests - consolidated real estate entities
 

 
670

 

9,846

Construction debt reclassified to mortgages payable
 

 

 
23,300

10,549

Increase in mortgage notes receivable
 

 

 
10,329


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
 
 
 
 
 

 

Cash paid for interest, net of amounts capitalized of $0, $0, $0 and $431, respectively
 
28,679

 
24,135

 
35,758

34,432

See Notes to Consolidated Financial Statements.






F-11

Table of Contents

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, December 31, 2018, April 30, 2018 and 2017

NOTE 1 • ORGANIZATION 
Investors Real Estate Trust (“IRET,” “we” or “us”) is a real estate investment trust (“REIT”) focused on the ownership, management, acquisition, redevelopment and development of apartment communities. As of December 31, 2019, we held for investment 69 apartment communities with 11,953 homes. We conduct a majority of our business activities through our consolidated operating partnership, IRET Properties, a North Dakota Limited Partnership (the “Operating Partnership”), as well as through a number of other subsidiary entities. 
All references to IRET, we, or us 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 our accounts and the accounts of all our subsidiaries in which we maintain a controlling interest, including the Operating Partnership. All intercompany balances and transactions are eliminated in consolidation.
On September 20, 2018, our Board of Trustees approved a change in our fiscal year-end from April 30 to December 31, effective as of January 1, 2019. As a result of this change, we filed a transition report on Form 10-KT for the eight-month transition period ended December 31, 2018, in accordance with SEC rules and regulations. The references in these notes to the consolidated financial statements to the terms listed below reflect the respective periods presented in the consolidated financial statements:
Term
 
Financial Reporting Period
Year ended December 31, 2019
 
January 1, 2019 through December 31, 2019
Transition period ended December 31, 2018
 
May 1, 2018 through December 31, 2018
Fiscal year ended April 30, 2018
 
May 1, 2017 through April 30, 2018
Fiscal year ended April 30, 2017
 
May 1, 2016 through April 30, 2017
Our interest in the Operating Partnership was 92.0%, 89.7%, and 89.4%, respectively, of the limited partnership units of the Operating Partnership (“Units”) as of December 31, 2019, December 31, 2018, and April 30, 2018, which includes 100% of the general partnership interest.
On December 14, 2018, the Board approved a reverse stock split of our outstanding common shares and Units, no par value per share, at a ratio of 1-for-10. The reverse stock split was effective as of the close of trading on December 27, 2018, with trading commencing on a split-adjusted basis on December 28, 2018. The number of common shares and Units was reduced from 119.4 million to 11.9 million and 13.7 million to 1.4 million, respectively. We have retroactively restated all shares and Units and per share and Unit data for all periods presented.
The 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's or controlling interest. These entities are consolidated into our other operations with noncontrolling interests reflecting the noncontrolling partners’ share of ownership, income, and expenses.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.


F-12

Table of Contents

RECENT ACCOUNTING PRONOUNCEMENTS
The following table provides a brief description of recent GAAP accounting standards updates (“ASUs”).
Standard
Description
Date of Adoption
Effect on the Financial Statements or Other Significant Matters
ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments; ASU 2018-19, Codification Improvements to Topic 326; ASU 2019-05, Financial Instruments - Credit Losses - Targeted Transition Relief; ASU 2019-11, Codification improvements to Topic 326, Financial Instruments - Credit Losses
These ASUs require entities to estimate a lifetime expected credit loss for most financial assets, such as loans and other financial instruments, and to present the net amount expected to be collected. In 2018, another ASU was issued to amend ASU 2016-13 which clarifies that it does not apply to operating lease receivables. In 2019, an additional ASU was issued to provide transition relief in which an entity is allowed to elect the fair value option on an instrument-by-instrument basis for eligible instruments, upon adoption of Topic 326.
These ASUs are effective for annual reporting periods beginning after December 15, 2019. Early adoption is permitted.
We will elect the fair value option, as allowed by ASU 2019-05, for our mortgages receivable and notes receivable at January 1, 2020. The fair value option election is not expected to have a material impact on our consolidated financial statements but will require additional disclosures.

ASU 2018-13, Fair Value Measurements (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirement for Fair Value Measurements
This ASU eliminates certain disclosure requirements affecting all levels of measurement, and modifies and adds new disclosure requirements for Level 3 measurements.
This ASU is effective for annual reporting periods beginning after December 15, 2019. Early adoption is permitted.
The new standard will not have a material impact on our condensed consolidated financial statements.
ASU 2019-01, Leases (Topic 842) - Codification Improvements
This ASU provides clarification on various lease related issues and provides for reduced transition disclosure requirements.
This ASU has two effective dates. The various lease issues are effective for annual reporting periods beginning after December 15, 2019. The transition disclosures are effective with ASU 2016-02, Leases. We adopted this standard using the modified retrospective approach effective January 1, 2019.
The adoption of the standard did not have a material impact on our condensed consolidated financial statements. Refer to the "Leases" section below for transition disclosures.
ASU 2019-07, Codification Updates to SEC Sections: Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates
This ASU clarifies or improves the disclosure and presentation requirements of a variety of codification topics by aligning them with the SEC's regulations, thereby eliminating redundancies and making the codification easier to apply.
This ASU was effective upon issuance.
The adoption of this ASU did not have a material impact on our condensed consolidated financial statements and the related disclosures.

RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to conform to the current financial statement presentation. These reclassifications had no impact on net income as reported in the consolidated statement of operations, total assets, liabilities or equity as reported in the consolidated balance sheets and total shareholder’s equity. We report in discontinued operations the results of operations and the related gains or losses of properties that have either been disposed or classified as held for sale and for which the disposition represents a strategic shift that has or will have a major effect on our operations and financial results.
REAL ESTATE INVESTMENTS
Real estate investments are recorded at cost less accumulated depreciation and an adjustment for impairment, if any. Property, consisting primarily of real estate investments, totaled $1.3 billion, $1.3 billion, and $1.4 billion as of December 31, 2019, December 31, 2018, and April 30, 2018, respectively. Upon acquisitions of real estate, we assess the fair value of acquired

F-13


tangible assets (including land, buildings and personal property), which is determined by valuing the property as if it were vacant, and consider whether there were significant intangible assets acquired (for example, above- and below-market leases, the value of acquired in-place leases and resident relationships) and assumed liabilities, and allocate the purchase price based on these assessments. The as-if-vacant value is allocated to land, buildings, and personal property based on our 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 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 a relative fair value allocation if acquired in a portfolio acquisition.
Other intangible assets acquired include amounts for in-place lease values that are based upon our evaluation of the specific characteristics of the leases. Factors considered in the fair value analysis 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. We also consider information about each property obtained during pre-acquisition due diligence, marketing, and leasing activities in estimating the relative fair value of the tangible and intangible assets acquired.
Acquired above- and below-market lease values are recorded as the difference between the contractual amounts to be paid pursuant to the in-place leases and management’s estimate of fair market value lease rates for the corresponding in-place leases. The capitalized above- and below-market lease values are amortized as adjustments to rental revenue over the remaining terms of the respective leases.
Depreciation is computed on a straight-line basis over the estimated useful lives of the assets. We use a 10-37 year estimated life for buildings and improvements and a 5-10 year estimated life for furniture, fixtures, and equipment.
We follow the real estate project costs guidance in ASC 970, Real Estate – General, in accounting for the costs of development and redevelopment projects. As real estate is undergoing development or redevelopment, all project costs directly associated with and attributable to the development and construction of a project, including interest expense and real estate tax expense, are capitalized to the cost of the real property. The capitalization period begins when development activities and expenditures begin and are identifiable to a specific property and ends upon completion, which is when the asset is ready for its intended use. Generally, rental property is considered substantially complete upon issuance of a certificate of occupancy. General and administrative costs are expensed as incurred. Interest of approximately $4,000 and $431,000 was capitalized in continuing and discontinued operations for the years ended April 30, 2018 and 2017, respectively. We did not capitalize interest during the year ended December 31, 2019 or the transition period ended December 31, 2018.
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 twenty years. Property sales or dispositions are recorded when control of the assets transfers to the buyer and we have no significant continuing involvement with the property sold.
We periodically evaluate our long-lived assets, including real estate investments, 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 group, and legal and environmental concerns. If indicators exist, we compare the expected future undiscounted cash flows for the long-lived asset group against the carrying amount of that asset. 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 group. If our anticipated holding period for properties, the estimated fair value of properties or other factors change based on market conditions or otherwise, our evaluation of impairment charges may be different and such differences could be material to our consolidated financial statements. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future physical occupancy, rental rates, and capital requirements that could differ materially from actual results. Plans to hold properties over longer periods decrease the likelihood of recording impairment losses.
During the year ended December 31, 2019, we did not incur a loss for impairment on real estate.
During the transition period ended December 31, 2018, we incurred a loss of $1.2 million due to impairment of a parcel of land in Bismarck, North Dakota. The parcel was written-down to estimated fair value based on receipt of a market offer to purchase and our intent to dispose of the property.
During the fiscal year ended April 30, 2018, we incurred a loss of $18.1 million due to impairment of one apartment community, three other commercial properties, and four parcels of land. We recognized impairments of $12.2 million on one

F-14


apartment community in Grand Forks, North Dakota; $1.4 million on an industrial property in Bloomington, Minnesota; $922,000 on an industrial property in Woodbury, Minnesota; and $630,000 on a retail property in Minot, North Dakota. These properties were written-down to estimated fair value based on independent appraisals and market data or, in the case of the retail property, receipt of a market offer to purchase and our intent to dispose of the property. We recognized impairments of $428,000 on a parcel of land in Williston, North Dakota; $1.5 million on a parcel of land in Grand Forks, North Dakota; and $256,000 and $709,000 on two parcels of land in Bismarck, North Dakota. These parcels were written down to estimated fair value based on independent appraisals and market data.
During the fiscal year ended April 30, 2017, we incurred a loss of $57.0 million due to impairment of 16 apartment communities and two parcels of unimproved land. We recognized impairments of $40.9 million, $5.8 million, $4.7 million, and $2.8 million, respectively, on three apartment communities and one parcel of unimproved land in Williston, North Dakota, due to deterioration of this energy-impacted market, which resulted in poor leasing activity and declining rental rates, which should generally be a strong leasing period. These properties were written down to estimated fair value based on an independent appraisal in the case of one property and management cash flow estimates and market data in the case of the remaining assets. The properties impaired for $40.9 million, $4.7 million, and $2.8 million were owned by joint venture entities in which, at the time of impairment, we had an approximately 70%, 60%, and 70% interest, respectively, but which were consolidated in our consolidated financial statements. We recognized impairments of $2.9 million on 13 properties and one parcel of land in Minot, North Dakota. These properties were written down to estimated fair value based on management cash flow estimates and market data and, in the case of the 13 properties, our intent to dispose of the properties.
CHANGE IN DEPRECIABLE LIVES OF REAL ESTATE ASSETS
Effective May 1, 2017, we changed the estimated useful lives of our real estate assets to better reflect the estimated periods during which they would be of economic benefit. Generally, the estimated lives of buildings and improvements that previously were 20-40 years were decreased to 10-37 years, while those that were previously nine years were changed to 5-10 years. The effect of this change in estimate for the fiscal year ended April 30, 2018, was to increase depreciation expense by approximately $29.3 million, decrease net income by $29.3 million, and decrease earnings per share by $0.22.
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. Our determination of fair value is based on inputs management believes are consistent with those that market participants would use. Estimates are significantly impacted by estimates of sales price, selling velocity, and other factors. Due to uncertainties in the estimation process, actual results could differ from such estimates. Depreciation is not recorded on assets classified as held for sale.
We classify properties as held for sale when they meet the GAAP criteria, which include: (a) management commits to and initiates a plan to sell the asset; (b) the sale is probable and expected to be completed within one year under terms that are usual and customary for sales of such assets; and (c) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. We generally consider these criteria met when the transaction has been approved by our Board of Trustees, there are no known significant contingencies related to the sale, and management believes it is probable that the sale will be completed within one year. We had no properties classified as held for sale at December 31, 2019, December 31, 2018, and April 30, 2018.
We report in discontinued operations the results of operations and the related gains or losses on the sales of properties that have either been disposed of or classified as held for sale and meet the classification of a discontinued operation as described in ASC 205 - Presentation of Financial Statements and ASC 360 - Property, Plant, and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. Under these standards, a disposal (or classification as held for sale) of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. 
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
 
(in thousands)
Balance sheet description
December 31, 2019
 
December 31, 2018
 
April 30, 2018

Cash and cash equivalents
$
26,579

 
$
13,792

 
$
11,891

Restricted cash
19,538

 
5,464

 
4,225

Total cash, cash equivalents and restricted cash
$
46,117

 
$
19,256

 
$
16,116



F-15


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 our bank deposits, short-term investment certificates acquired subject to repurchase agreements, and our deposits in a money market mutual fund. We are potentially exposed to credit risk for cash deposited with FDIC-insured financial institutions in accounts which, at times, may exceed federally insured limits. We have not experienced any losses in such accounts.
As of December 31, 2019 restricted cash consisted of $17.2 million of net tax-deferred exchange proceeds remaining from a portion of our dispositions and $2.3 million in escrows held by lenders for real estate taxes, insurance, and capital additions. As of December 31, 2018, and April 30, 2018, restricted cash consisted primarily of escrows held by lenders for real estate taxes, insurance, and capital additions. Tax, insurance, and other escrows include funds deposited with a lender for payment of real estate taxes 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.
LEASES
Effective January 1, 2019, we adopted ASUs 2016-02, 2018-10, 2018-11, 2018-20, and 2019-01 related to leases using the modified retrospective approach. We elected to adopt the package of practical expedients permitted under the transition guidance, which permits us to not reassess prior conclusions about lease identification, classification, and initial direct costs under the new standard, and the practical expedient related to land easements, which allows us to not evaluate existing or expired land easements that were not previously accounted for under ASC 840. We made an accounting policy election to exclude leases in which we are a lessee with a term of 12 months or less from the balance sheet.
As a lessor, we primarily lease multifamily apartment homes which qualify as operating leases with terms that are generally one year or less. Rental revenues are recognized in accordance with ASC 842, Leases, using a method that represents a straight-line basis over the term of the lease. Rental income represents approximately 98.1% of our total revenues and includes gross market rent less adjustments for concessions, vacancy loss, and bad debt. Other property revenues represent the remaining 1.9% of our total revenues and are primarily driven by other fee income, which is typically recognized when earned, at a point in time.
Some of our apartment communities have commercial spaces available for lease. Lease terms for these spaces typically range from three to fifteen years. The leases for commercial spaces generally include options to extend the lease for additional terms.
Many of our leases contain non-lease components for utility reimbursement from our residents. We have elected the practical expedient to combine lease and non-lease components for all asset classes. The combined components are included in lease income and are accounted for under ASC 842.
The aggregate amount of future scheduled lease income on our operating leases for commercial spaces, excluding any variable lease income and non-lease components, as of December 31, 2019, was as follows:
 
 
(in thousands)
2020
 
$
2,993

2021
 
3,020

2022
 
3,024

2023
 
2,847

2024
 
2,308

Thereafter
 
4,793

Total scheduled lease income - operating leases
 
$
18,985


REVENUE
We adopted ASU 2014-09, Revenue from Contracts with Customers, as of May 1, 2018, using the modified retrospective approach. We elected to apply the new standard to contracts that were not complete as of May 1, 2018. We also elected to omit disclosing the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. Under the new standard, revenue is recognized in accordance with the transfer of goods and services to customers at an amount that reflects the consideration the company expects to be entitled for those goods and services.

F-16


Revenue streams that are included in ASU 2014-09 include:
Other property revenues: We recognize revenue for rental related income not included as a component of a lease, such as other application fees, as earned, and have concluded that this is appropriate under the new standard.
Gains or losses on sales of real estate: Subsequent to the adoption of the new standard, a gain or loss is recognized when the criteria for derecognition of an asset are met, including when (1) a contract exists and (2) the buyer obtained control of the nonfinancial asset that was sold. As a result, we may recognize a gain on real estate disposition transactions that previously did not qualify as a sale or for full profit recognition under the previous accounting standard. Any gain or loss on real estate dispositions is net of certain closing and other costs associated with the disposition.
We concluded that the adoption of the new standard required a cumulative adjustment of $627,000 to the opening balance of retained earnings as of May 1, 2018, due to the sale of a group of properties in the prior fiscal year. The sale of properties was previously accounted for using the installment method. Under the installment method, we recorded a mortgage receivable net of the deferred gain on sale, which was to be recognized as payments were received. The gain on sale under the new revenue standard is recognized when control of the assets is transferred to the buyer. As a result of our adoption of the new standard, we recorded a cumulative adjustment to retained earnings and increased the mortgage receivable by $627,000 to recognize the previously deferred gain on sale.
The following table presents the disaggregation of revenue streams of our rental income for the year ended December 31, 2019 and the transition period ended December 31, 2018:
 
 
 
(in thousands)
 
 
 
Year ended
Transition period ended
Revenue Stream
Applicable Standard
 
December 31, 2019
December 31, 2018
Fixed lease income - operating leases
Leases
 
$
176,706

$
114,047

Variable lease income - operating leases
Leases
 
5,586

3,528

Non-lease components
Revenue from contracts with customers
 


Other property revenue
Revenue from contracts with customers
 
3,463

4,296

Total revenue
 
 
$
185,755

$
121,871

INCOME TAXES
We operate in a manner intended to enable us 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, excluding capital gains, 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. For the year ended December 31, 2019, the transition period ended December 31, 2018 and the fiscal years ended April 30, 2018, and 2017, we distributed in excess of 90% of our taxable income and realized capital gains from property dispositions within the prescribed time limits. Accordingly, no provision has been made for federal income taxes in the accompanying consolidated financial statements. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate rates (including any alternative minimum tax) and may not be able to qualify as a REIT for the four subsequent taxable years. Even as a REIT, we may be subject to certain state and local income and property taxes, and to federal income and excise taxes on undistributed taxable income. In general, however, if we qualify as a REIT, no provisions for federal income taxes are necessary except for taxes on undistributed REIT taxable income and taxes on the income generated by a taxable REIT subsidiary (TRS).
We have one TRS, acquired during the second quarter of fiscal year 2014, which is subject to corporate federal and state income taxes on its taxable income at regular statutory rates. For the year ended December 31, 2019, we estimate that the TRS will have no taxable income. There were no income tax provisions or material deferred income tax items for our TRS for the year ended December 31, 2019, the transition period ended December 31, 2018 and the fiscal years ended April 30, 2018, and 2017.
We conduct our business activity as an Umbrella Partnership Real Estate Investment Trust (“UPREIT”) through our Operating Partnership. UPREIT status allows us 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. 

F-17


The following table indicates how distributions were characterized for federal income tax purposes for the years ended December 31, 2019, December 31, 2018, and December 31, 2017,
CALENDAR YEAR 
 
2019

2018

2017

Tax status of distributions
 
 
 
 
Capital gain
 
38.53
%
100.00
%
48.87
%
Ordinary income
 
23.43
%

14.59
%
Return of capital
 
38.04
%

36.54
%

VARIABLE INTEREST ENTITY
We have determined that our Operating Partnership and each of our less-than-wholly owned real estate partnerships is a variable interest entity (“VIE”), as the limited partners or the functional equivalent of limited partners lack substantive kick-out rights and substantive participating rights. We are the primary beneficiary of the VIEs, and the VIEs are required to be consolidated on our balance sheet because we have a controlling financial interest in the VIEs and have both the power to direct the activities of the VIEs that most significantly impact the economic performance of the VIEs as well as the obligation to absorb losses or the right to receive benefits from the VIEs that could potentially be significant to the VIEs. Because our Operating Partnership is a VIE, all of our assets and liabilities are held through a VIE.
OTHER ASSETS 
As of December 31, 2019, December 31, 2018, and April 30, 2018, other assets consisted of the following amounts:
 
in thousands
 
December 31, 2019

December 31, 2018

April 30, 2018

Receivable arising from straight line rents
$
785

$
1,145

$
1,458

Accounts receivable, net of allowance
154

71

81

Fair value of interest rate swaps

818

1,779

Loans receivable
16,557

16,399

15,480

Marketable securities
7,055



Prepaid and other assets
4,866

3,802

5,334

Intangible assets, net of accumulated amortization
1,212

498

1,469

Property and equipment, net of accumulated depreciation
1,277

686

820

Goodwill
1,086

1,546

1,553

Deferred charges and leasing costs
1,837

2,300

2,323

Total Other Assets
$
34,829

$
27,265

$
30,297


PROPERTY AND EQUIPMENT
Property and equipment consists primarily of office equipment located at our headquarters in Minot, North Dakota and corporate office in Minneapolis, Minnesota. The consolidated balance sheets reflects these assets at cost, net of accumulated depreciation, and are included within Other Assets. As of December 31, 2019, December 31, 2018, and April 30, 2018, property and equipment cost was $2.9 million, $2.2 million, and $2.1 million, respectively. Accumulated depreciation was $1.7 million, $1.4 million, and $1.3 million as of December 31, 2019, December 31, 2018, and April 30, 2018, respectively, and are included within other assets in the consolidated balance sheets.
MORTGAGE LOANS RECEIVABLE AND NOTES RECEIVABLE
In August 2017, we sold 13 apartment communities in exchange for cash and an $11.0 million note secured by a mortgage on the assets. As of December 31, 2019, December 31, 2018, and April 30, 2018 the remaining balance on the mortgage was $10.0 million, $10.4 million, and $11.0 million, respectively. As of December 31, 2019, 12 communities remained in the pool of assets used to secure the mortgage. The note bears an interest rate of 5.5% and matures in August 2020. Monthly payments are interest-only, with the principal balance payable at maturity. We received and recognized approximately $570,000, $448,000, and $372,000 of interest income during the year ended December 31, 2019, the transition period ended December 31, 2018, and the fiscal year ended April 30, 2018, respectively.

F-18


In July 2017, we originated a $16.2 million loan in a multifamily development located in New Hope, MN, a Minneapolis suburb. We funded an additional $341,000 upon satisfaction of certain conditions set forth in the loan agreement. The note bears an interest rate of 6%, matures in July 2023, and provides us an option to purchase the development prior to the loan maturity date. Interest payments are due when the note matures. As of December 31, 2019, the balance of the note, including accrued interest, was $16.6 million, which appears in other assets on our consolidated balance sheets.
In December 2019, we originated a $29.9 million construction loan and a $15.3 million mezzanine loan for the development of a multifamily development located in Minneapolis, Minnesota. The construction and mezzanine loans bear interest at 4.5% and 11.5%, respectively. As of December 31, 2019, we had funded $6.2 million of the construction loan, which appears within mortgages receivable in our consolidated balance sheets. The loans are secured by mortgages and mature on December 31, 2023, and the agreement provides us with an option to purchase the development. The loans represent an investment in an unconsolidated variable interest entity. We are not the primary beneficiary of the VIE as we do not have the power to direct the activities which most significantly impact the entity’s economic performance nor do we have significant influence over the entity.
MARKETABLE SECURITIES
As of December 31, 2019, marketable securities consisted of equity securities. We report equity securities at fair value based on quoted market prices (Level 1 inputs). Any unrealized gains or losses are included in interest and other income on the consolidated statements of operations.
GAIN ON LITIGATION SETTLEMENT
During the year ended December 31, 2019, we recorded a gain on litigation settlement of $6.6 million from the settlement on a construction defect claim. The gain consisted of $5.2 million of cash received and $1.4 million of liabilities waived under the terms of the settlement.
NOTE 3 • EARNINGS PER SHARE 
Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. We have issued restricted stock units ("RSUs") under our 2015 Incentive Plan and Series D Convertible Preferred Units ("Series D preferred units"), which could have a dilutive effect on our earnings per share upon exercise of the RSUs or upon conversion of the Series D preferred units (refer to Note 4 for further discussion of the preferred units). Other than the issuance of RSUs and Series D preferred units, we have no outstanding options, warrants, convertible stock, or other contractual obligations requiring issuance of additional common shares that would result in a dilution of earnings. Under the terms of the Operating Partnership's Agreement of Limited Partnership, limited partners have the right to require the Operating Partnership to redeem their limited partnership units ("Units") any time following the first anniversary of the date they acquired such Units ("Exchange Right"). Upon the exercise of Exchange Rights, and in our sole discretion, we may issue common shares in exchange for Units on a one-for-one-basis.
For the year ended December 31, 2019, performance-based restricted stock awards of 37,822 were excluded from the calculation of diluted earnings per share because the assumed proceeds per share plus the average unearned compensation were greater than the average market price of the common shares for the periods presented and, therefore, were anti-dilutive. Refer to Note 16 - Share-Based Compensation for discussion of the terms for these awards.
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 year ended December 31, 2019, the transition period ended December 31, 2018, and the fiscal years ended April 30, 2018 and 2017:

F-19


 
 
(in thousands, except per share data)
 
 
For Year Ended
 
For Period Ended
 
For Year Ended
 
 
December 31, 2019

 
December 31, 2018

 
April 30, 2018

April 30, 2017

NUMERATOR
 
 
 
 

 
 

 

Income (loss) from continuing operations – controlling interests
 
$
78,669

 
$
(4,908
)
 
$
(30,266
)
$
(24,473
)
Income (loss) from discontinued operations – controlling interests
 

 
510

 
147,054

67,820

Net income (loss) attributable to controlling interests
 
78,669

 
(4,398
)
 
116,788

43,347

Dividends to preferred shareholders
 
(6,821
)
 
(4,547
)
 
(8,569
)
(10,546
)
Redemption of preferred shares
 

 

 
(3,657
)
(1,435
)
Numerator for basic earnings per share – net income available to common shareholders
 
71,848

 
(8,945
)
 
104,562

31,366

Noncontrolling interests – Operating Partnership
 
6,752

 
(1,032
)
 
12,702

4,059

Dividends to preferred unitholders
 
537

 

 


Numerator for diluted earnings (loss) per share
 
$
79,137

 
$
(9,977
)
 
$
117,264

$
35,425

DENOMINATOR
 
 
 
 

 
 

 

Denominator for basic earnings per share weighted average shares
 
11,744

 
11,937

 
11,998

12,117

Effect of redeemable operating partnership units
 
1,237

 
1,387

 
1,462

1,613

Effect of Series D preferred units
 
193

 

 


Effect of diluted restricted stock awards and restricted stock units
 
8

 

 


Denominator for diluted earnings per share
 
13,182

 
13,324

 
13,460

13,730

 
 
 
 
 
 
 
 
Earnings (loss) per common share from continuing operations – basic
 
$
6.06

 
$
(0.79
)
 
$
(3.54
)
$
(3.01
)
Earnings (loss) per common share from discontinued operations – basic
 

 
0.04

 
12.25

5.59

NET EARNINGS (LOSS) PER COMMON SHARE – BASIC
 
$
6.06

 
$
(0.75
)
 
$
8.71

$
2.58

 
 
 
 
 
 
 
 
Earnings (loss) per common share from continuing operations – diluted
 
$
6.00

 
$
(0.79
)
 
$
(3.54
)
$
(3.01
)
Earnings (loss) per common share from discontinued operations – diluted
 

 
0.04

 
12.25

5.59

NET EARNINGS (LOSS) PER COMMON SHARE – DILUTED
 
$
6.00

 
$
(0.75
)
 
$
8.71

$
2.58


 
NOTE 4 • EQUITY AND MEZZANINE EQUITY
Operating Partnership Units. Outstanding Units in the Operating Partnership were 1.1 million Units at December 31, 2019, 1.4 million Units at December 31, 2018, and 1.4 million Units at April 30, 2018.
Exchange Rights.  Pursuant to the exercise of Exchange Rights, we redeemed Units during the year ended December 31, 2019, the transition period ended December 31, 2018, and the fiscal year ended April 30, 2018 as detailed in the table below.
 
 
(in thousands, except per Unit amounts)
 
 
Number of
Aggregate
Average Price
 
 
Units
Cost
Per Unit
Year Ended December 31, 2019
 
136

$
8,142

$
60.02

Transition Period Ended December 31, 2018
 
9

499

53.12

Fiscal Year Ended April 30, 2018
 
149

8,775

58.90


F-20


We also redeemed Units in exchange for common shares during the year ended December 31, 2019, the transition period ended December 31, 2018, and the fiscal year ended April 30, 2018 as detailed in the table below.
 
 
(in thousands)
 
 
Number of
Total Book
 
 
Units
Value
Year Ended December 31, 2019
 
174

$
7,823

Transition Period Ended December 31, 2018
 
33

649

Fiscal Year Ended April 30, 2018
 
3

34


Common Shares and Equity Awards. Common shares outstanding on December 31, 2019, December 31, 2018, and April 30, 2018, totaled 12.1 million, 11.9 million, and 12.0 million, respectively. During the year ended December 31, 2019, the transition period ended December 31, 2018, and the fiscal year ended April 30, 2018, we issued approximately 18,000, 5,600, and 9,300 common shares, respectively, with a total grant-date value of $1.1 million, $347,000, and $536,000, respectively, under our 2015 Incentive Plan, for officer and trustee share-based compensation for future performance. During the year ended December 31, 2019, the transition period ended December 31, 2018, and the fiscal year ended April 30, 2018, approximately 3,300, 200, and 3,200 common shares were forfeited under the 2015 Incentive Plan, respectively.
Equity Distribution Agreement. In November 2019, we entered into an equity distribution agreement in connection with an at-the-market offering ("2019 ATM Program") through which we may offer and sell common shares having an aggregate sales price of up to $150.0 million, in amounts and at times as we determine. The proceeds from the sale of common shares under the 2019 ATM Program are intended to be used for general corporate purposes, which may include the funding of future acquisitions, community renovations, and the repayment of indebtedness. During the year ended December 31, 2019, we issued 308,444 common shares under the 2019 ATM Program at an average price of $72.29 per share, net of commissions. Total consideration, net of commissions and issuance costs, was approximately $22.0 million. As of December 31, 2019, we had common shares having an aggregate offering price of up to $127.7 million remaining available under the 2019 ATM Program.
Share Repurchase Program. On December 7, 2016, our Board of Trustees authorized a share repurchase program to repurchase up to $50 million of our common shares over a one year period. On December 5, 2017, our Board of Trustees reauthorized this share repurchase program for an additional one year period. On December 5, 2018, our Board of Trustees reauthorized this share repurchase program for a third one-year period. On December 5, 2019, our Board of Trustees terminated this share repurchase program and authorized a new share purchase program to repurchase up to $50 million of our common or preferred shares over a one-year period. Under this new repurchase program, we may repurchase common or preferred shares in open-market purchases, including pursuant to Rule 10b5-1 and Rule 10b-18 plans, as determined by management and in accordance with the requirements of the SEC. The extent to which we repurchase our shares, and the timing of such repurchases, will depend upon a variety of factors, including market conditions, regulatory requirements, and other corporate considerations, as determined by our executive management team. The program may be suspended or discontinued at any time. As of December 31, 2019, $50.0 million remained available under our repurchase program. Common shares repurchased during the year ended December 31, 2019, the transition period ended December 31, 2018, and the fiscal year ended April 30, 2018 are detailed in the table below.
 
(in thousands, except per share amounts)
 
Number of Shares
Aggregate Cost(1)
Average Price Per Share(1)
Year ended December 31, 2019(2)
329

$
18,023

$
54.69

Transition period ended December 31, 2018
42

2,200

51.56

Fiscal year ended April 30, 2018
178

9,900

55.82

(1)
Amount includes commissions.
(2)
Repurchases during the year were under the prior repurchase program.
Issuance of Preferred Shares and Redemption of Series B Preferred Shares. In the year ended April 30, 2018, we issued 4,118,460 shares of our 6.625% Series C Cumulative Redeemable Preferred Shares ("Series C preferred shares") and redeemed all 4,600,000 shares of our 7.95% Series B Cumulative Redeemable Preferred Shares. The Series C preferred shares are nonvoting and redeemable for cash at $25.00 per share at our option on or after October 2, 2022. Holders of these shares are entitled to cumulative distributions, payable quarterly (as and if declared by the Board of Trustees). Distributions accrue at an annual rate of $1.65625 per share, which is equal to 6.625% of the $25.00 per share liquidation preference ($103.0 million liquidation preference in the aggregate).

F-21


Series D Preferred Units (Mezzanine Equity). On February 26, 2019, we issued 165,600 newly created Series D preferred units at an issuance price of $100 per preferred unit as partial consideration for the acquisition of SouthFork Townhomes. The Series D preferred unit holders receive a preferred distribution at the rate of 3.862% per year. The Series D preferred units have a put option which allows the holder to redeem any or all of the Series D preferred units for cash equal to the issue price. Each Series D preferred unit is convertible, at the holder's option, into 1.37931 Units, representing a conversion exchange rate of $72.50 per unit. Changes in the redemption value are charged to common shares on our consolidated balance sheets from period to period. The holders of the Series D preferred units do not have any voting rights. Distributions to Series D unitholders are presented in the consolidated statements of equity within net income (loss) attributable to controlling interests and noncontrolling interests.
Redeemable Noncontrolling Interests (Mezzanine Equity). Redeemable noncontrolling interests on our consolidated balance sheets represent the noncontrolling interest in a joint venture in which our unaffiliated partner, at its election, could require us to 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. Redeemable noncontrolling interests are presented at the greater of their carrying amount or redemption value at the end of each reporting period. Changes in the value from period to period are charged to common shares on our consolidated balance sheets. During the year ended December 31, 2019, we acquired the remaining 34.5% noncontrolling interests in the real estate partnership that owns Commons and Landing at Southgate for $1.3 million. Below is a table reflecting the activity of the redeemable noncontrolling interests.
 
 
(in thousands)
 
 
Year ended December 31,
 
Transition period ended December 31,
 
Years ended April 30,
 
 
2019

 
2018

 
2018

2017

Balance at beginning of fiscal year
 
$
5,968

 
$
6,644

 
$
7,117

$
7,522

Contributions
 

 

 
268

17

Net (loss) income
 
(174
)
 
(676
)
 
(741
)
(422
)
Acquisition of redeemable noncontrolling interests
 
(5,794
)
 
 
 
 
 
Balance at close of fiscal year
 
$

 
$
5,968

 
$
6,644

$
7,117

NOTE 5 • NONCONTROLLING 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 noncontrolling interests in accordance with the terms of the Operating Partnership’s Agreement of Limited Partnership.
We reflect noncontrolling interests in consolidated real estate entities on the Balance Sheet for the portion of properties consolidated by us that are not wholly owned by us. The earnings or losses from these properties attributable to the noncontrolling interests are reflected as net income attributable to noncontrolling interests – consolidated real estate entities in the consolidated statements of operations. Our noncontrolling interests – consolidated real estate entities at December 31, 2019, December 31, 2018, and April 30, 2018 were as follows:
 
 
(in thousands)
 
 
December 31, 2019

December 31, 2018

April 30, 2018

IRET - 71 France, LLC
 
$
4,817

$
5,918

$
6,606

IRET - Cypress Court Apartments, LLC
 
748

829

890

IRET - Williston Garden Apartments, LLC
 


1,635

IRET - WRH 1, LLC
 


(467
)
WRH Holding, LLC
 


224

Noncontrolling interests – consolidated real estate entities
 
$
5,565

$
6,747

$
8,888

 

F-22


NOTE 6 • DEBT
As of December 31, 2019, we owned 69 apartment communities, of which 24 served as collateral for mortgage loans. All of these mortgage loans were non-recourse to us other than for standard carve-out obligations. Interest rates on mortgage loans range from 3.47% to 5.73%, and the mortgage loans have varying maturity dates from November 1, 2020, through September 1, 2031. As of December 31, 2019, we believe there are no material defaults or instances of material noncompliance in regards to any of these mortgage loans.
During the year ended December 31, 2019, we closed on a $59.9 million mortgage loan. This mortgage is secured by four apartment communities, is interest only, and is priced at a fixed rate of 3.88% for the full twelve-year term of the loan. Proceeds from this loan were used to pay down balances under our line of credit.
During the year ended December 31, 2019, we entered into a private shelf agreement for the issuance of up to $150.0 million of unsecured senior promissory notes ("unsecured senior notes"). Under this agreement, we issued $75.0 million of Series A notes due September 13, 2029, bearing interest at a rate of 3.84% annually, and $50.0 million of Series B notes due September 30, 2028, bearing interest at a rate of 3.69% annually. We have $25.0 million remaining available under the private shelf agreement.
As of December 31, 2019, we owned 45 apartment communities that were not encumbered by mortgages, with all of these apartment communities providing credit support for our unsecured borrowings. Our primary unsecured credit facility ("unsecured credit facility") is a revolving, multi-bank line of credit, with the Bank of Montreal serving as administrative agent. Our line of credit has total commitments of $250.0 million, with borrowing capacity based on the value of properties contained in the unencumbered asset pool (“UAP”). The UAP provided for a borrowing capacity of $250.0 million at December 31, 2019, providing additional borrowing availability of $199.9 million beyond the $50.1 million drawn, including the balance on our operating line of credit (discussed below), priced at an interest rate of 3.81%, including the impact of our interest rate swap. This credit facility matures on August 31, 2022, with one 12-month option to extend the maturity date at our election. At December 31, 2018, the line of credit borrowing capacity was $232.5 million based on the UAP, of which $57.5 million was drawn on the line. At April 30, 2018, the line of credit borrowing capacity was $300.0 million based on the UAP, of which $124.0 million was drawn on the line.
Under our unsecured credit facility, we also have unsecured term loans of $70.0 million and $75.0 million, included within notes payable on the consolidated balance sheets, which mature on January 15, 2024 and August 31, 2025, respectively.
The interest rates on the line of credit and term loans are based, at our option, on the lender's base rate plus a margin, ranging from 35-85 basis points, or the London Interbank Offered Rate (“LIBOR”), plus a margin that ranges from 135-190 basis points based on our consolidated leverage. Our unsecured credit facility and unsecured senior notes are subject to customary financial covenants and limitations. We believe that we are in compliance with all such financial covenants and limitations as of December 31, 2019.
We also have a $6.0 million operating line of credit. This operating line of credit is designed to enhance treasury management activities and more effectively manage cash balances. This operating line has a one-year term, with pricing based on a market spread plus the one-month LIBOR index rate.

F-23


The following table summarizes our indebtedness:
 
 
(in thousands)
 
 
 
December 31, 2019

December 31, 2018

April 30, 2018

Weighted Average Maturity in Years
Lines of credit
 
$
50,079

$
57,500

$
124,000

2.67
Term loans(1)
 
145,000

145,000

70,000

4.88
Unsecured senior notes(1)
 
125,000



9.33
Unsecured debt
 
320,079

202,500

194,000

6.27
Mortgages payable - fixed
 
331,376

445,974

489,401

5.79
Mortgages payable - variable
 


22,739


Total debt
 
$
651,455

$
648,474

$
706,140

6.02
 
 
 
 
 
 
Annual Weighted Average Interest Rates
 
 
 
 
 
Lines of credit (rate with swap)
 
3.81
%
3.72
%
3.35
%
 
Term loans (rate with swaps)
 
4.11
%
4.01
%
3.86
%
 
Unsecured senior notes
 
3.78
%


 
Mortgages payable
 
4.02
%
4.58
%
4.69
%
 

(1)
Included within notes payable on our consolidated balance sheets.
The aggregate amount of required future principal payments on mortgages payable and notes payable as of December 31, 2019 is as follows:
 
 
(in thousands)
2020
 
$
14,897

2021
 
40,523

2022
 
37,352

2023
 
48,111

2024
 
73,777

Thereafter
 
386,716

Total payments
 
$
601,376


NOTE 7 • DERIVATIVE INSTRUMENTS
Our objective in using an interest rate derivatives is to add stability to interest expense and to manage our exposure to interest rate fluctuations. To accomplish this objective, we primarily use interest rate swap contracts to fix the variable rate interest on our term loans and a portion of our primary line of credit. The interest rate swap contracts qualify as cash flow hedges.
The ineffective portion of a hedging instrument is not recognized currently in earnings or disclosed. Changes in the fair value of cash flow hedges are recorded in accumulated other comprehensive income and subsequently reclassified into earnings in the period that the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income for our interest rate swap will be reclassified to interest expense as interest payments are made on our term loan and line of credit. During the next 12 months, we estimate an additional $1.5 million will be reclassified as an increase to interest expense.
At December 31, 2019, we had three interest rate swap contracts in effect with a notional amount of $195.0 million and one additional interest rate swap that becomes effective on January 31, 2023 with a notional amount of $70.0 million.
The table below presents the fair value of our derivative financial instruments as well as their classification on our consolidated balance sheets as of December 31, 2019, December 31, 2018, and April 30, 2018.
 
 
 
(in thousands)
 
 
 
(in thousands)
 
 
 
December 31, 2019
 
December 31, 2018
 
April 30, 2018
 
 
 
December 31, 2019
 
December 31, 2018
 
April 30, 2018
 
Balance Sheet Location
 
Fair Value

 
Fair Value
 
Fair Value
 
Balance Sheet Location
 
Fair Value

 
Fair Value
 
Fair Value
Total derivative instruments designated at hedging instruments - interest rate swaps
Other Assets
 
$

 
$
818

 
1,779

 
Accounts Payable and Accrued Expenses
 
$
7,607

 
$
1,675

 



F-24


The table below presents the effect of the Company's derivative financial instruments on the consolidated statements of operations as of December 31, 2019, December 31, 2018, and April 30, 2018.
 
(in thousands)
 
Gain (Loss) Recognized in OCI
 
Location of Gain (Loss) Reclassified from Accumulated OCI into Income
 
Gain (Loss) Reclassified from Accumulated OCI into Income
 
Year Ended December 31,
 
Transition Period Ended December 31,
 
Year Ended April 30,
 
 
 
Year Ended December 31,
 
Transition Period Ended December 31,
 
Year Ended April 30,
 
2019
 
2018
 
2018
 
 
 
2019
 
2018
 
2018
Total derivatives in cash flow hedging relationships - interest rate swaps
$
(7,040
)
 
$
(2,794
)
 
1,627

 
Interest expense
 
$
289

 
$
(159
)
 
(152
)

NOTE 8 • FAIR VALUE MEASUREMENTS  
Cash and cash equivalents, restricted cash, accounts payable, accrued expenses, and other liabilities are carried at amounts that reasonably approximate their fair value due to their short-term nature. For variable rate line of credit debt that re-prices frequently, fair values are based on carrying values.
In determining the fair value of other financial instruments, we apply Financial Accounting Standard Board ASC 820, Fair Value Measurement and Disclosures. Fair value hierarchy under ASC 820 distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (Levels 1 and 2) and the reporting entity’s own assumptions about market participant assumptions (Level 3). Fair value estimates may differ from the amounts that may ultimately be realized upon sale or disposition of the assets and liabilities.
Fair Value Measurements on a Recurring Basis
The fair value of our interest rate swaps is determined using the market standard methodology of netting discounted expected variable cash payments and receipts. The variable cash payments and receipts are based on an expectation of future interest rates (a forward curve) derived from observable market interest rate curves. We consider both our own nonperformance risk and the counterparty's nonperformance risk in the fair value measurement.
 
Fair Value Measurements on a Nonrecurring Basis
Non-financial assets measured at fair value on a nonrecurring basis at December 31, 2018 and April 30, 2018, consisted of real estate investments that were written-down to estimated fair value during the transition period ended December 31, 2018 and the fiscal year ended April 30, 2018, respectively. We had no non-financial assets measured at fair value on a nonrecurring basis at December 31, 2019. The aggregate fair value of these assets by their levels in the fair value hierarchy are as follows: 
 
 
(in thousands)
 
 
Total

Level 1

Level 2

Level 3
December 31, 2018
 
 

 

 

 
Real estate investments valued at fair value
 
$
3,049



$
3,049

 
 
 
 
 
 
April 30, 2018
 
 

 

 

 
Real estate investments valued at fair value
 
$
52,145



$
52,145



As of December 31, 2018 and April 30, 2018, we estimated the fair value of our real estate investments using appraisals, a market offer to purchase, market comparisons, and other market data.
Financial Assets and Liabilities Not Measured at Fair Value 
For mortgages payable, the fair value of fixed rate loans is estimated based on the discounted cash flows of the loans using market research and management estimates of comparable interest rates (Level 3).
The estimated fair values of our financial instruments as of December 31, 2019, December 31, 2018, and April 30, 2018 are as follows:

F-25


 
 
(in thousands)
 
 
12/31/2019
12/31/2018
4/30/2018
 
 
Amount

Fair Value

Amount

Fair Value

Amount

Fair Value

FINANCIAL ASSETS
 
 

 

 

 

 

 

Cash and cash equivalents
 
$
26,579

$
26,579

$
13,792

$
13,792

$
11,891

$
11,891

Restricted cash
 
19,538

19,538

5,464

5,464

4,225

4,225

Mortgage and note receivables
 
32,810

32,810

26,809

26,809

25,809

25,809

FINANCIAL LIABILITIES
 
 
 
 
 
 

 
Revolving lines of credit(1)
 
50,079

50,079

57,500

57,500

124,000

124,000

Notes payable(1)
 
270,000

270,000

145,000

145,000

70,000

70,000

Mortgages payable
 
331,376

332,471

445,974

444,241

509,919

510,803

(1)
Excluding the effect of the interest rate swap agreement.
NOTE 9 • ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS 
We acquired $171.4 million of new real estate during the year ended December 31, 2019, none in the transition period ended December 31, 2018, and $373.1 million during the fiscal year ended April 30, 2018.
Year Ended December 31, 2019
 
 
 
(in thousands)
 
 
 
Total

Form of Consideration
Investment Allocation
 
 
Date
Acquisition

    

    

 

 

Intangible

Acquisitions
 
Acquired
Cost

Cash

Units(1)

Land

Building

Assets

Multifamily
 
 
 
 
 
 
 
 
272 homes - SouthFork Townhomes - Lakeville, MN
 
February 26, 2019
$
44,000

$
27,440

$
16,560

$
3,502

$
39,950

$
548

96 homes - FreightYard Townhomes and Flats - Minneapolis, MN
 
September 6, 2019
26,000

26,000


1,889

23,615

496

328 homes - Lugano at Cherry Creek - Denver, CO(3)
 
September 26, 2019
99,250

99,250


7,679

89,365

1,781

 
 
 
$
169,250

$
152,690

$
16,560

$
13,070

$
152,930

$
2,825

 
 
 
 
 
 
 
 
 
Other
 
 
 
 
 
 
 
 
Minot 3100 10th St SW - Minot, ND(2)
 
May 23, 2019
$
2,112

$
2,112


$
246

$
1,866


 
 
 
 
 
 
 
 
 
Total Acquisitions
 
 
$
171.362

$
154,802

$
16,560

$
13,316

$
154,796

$
2,825

(1)
Value of Series D preferred units at the acquisition date.
(2)
Acquired for use as our Minot corporate office building after renovations have been completed.
(3)
Investment allocation excludes a $425,000 acquisition credit related to retail space lease-up.

Fiscal 2018 (May 1, 2017 to April 30, 2018)
 
 
 
(in thousands)
 
 
 
Total

Form of Consideration
Investment Allocation
 
 
Date
Acquisition

    

 

 

Intangible

Acquisitions
 
Acquired
Cost

Cash

Land

Building

Assets

191 homes - Oxbo - St. Paul, MN (1)
 
May 26, 2017
$
61,500

$
61,500

$
5,809

$
54,910

$
781

500 homes - Park Place - Plymouth, MN
 
September 13, 2017
92,250

92,250

10,609

80,711

930

274 homes - Dylan - Denver, CO
 
November 28, 2017
90,600

90,600

12,155

77,249

1,196

390 homes - Westend - Denver, CO
 
March 28, 2018
128,700

128,700

25,525

102,101

1,074

Total Acquisitions
 
 
$
373,050

$
373,050

$
54,098

$
314,971

$
3,981

 
(1)
Property includes 11,477 square feet of retail space.

F-26


DISPOSITIONS 
During the year ended December 31, 2019, we continued our portfolio transformation by disposing of our portfolios and certain communities in tertiary and secondary markets. We sold our portfolios in Topeka, Kansas, Sioux Falls, South Dakota, and Sioux City, Iowa. We also sold certain apartment communities in Bismarck, North Dakota. We sold 21 apartment communities, two commercial properties and three parcels of unimproved land for a total sales price of $203.1 million. Dispositions totaled $63.4 million and $515.1 million in the transition period ended December 31, 2018 and the fiscal year ended April 30, 2018, respectively. The dispositions for the year ended December 31, 2019, the transition period ended December 31, 2018, and the fiscal year ended April 30, 2018 are detailed below.
Year Ended December 31, 2019
 
 
 
(in thousands)
 
 
Date
 
Book Value
 
Dispositions
 
Disposed
Sales Price
and Sale Cost
Gain/(Loss)
Multifamily
 
 
 
 
 
21 homes - Pinehurst - Billings, MT
 
July 26, 2019
$
1,675

$
961

$
714

160 homes - Brookfield Village - Topeka, KS
 
September 24, 2019
10,350

5,853

4,497

220 homes - Crown Colony - Topeka, KS
 
September 24, 2019
17,200

7,876

9,324

54 homes - Mariposa - Topeka, KS
 
September 24, 2019
6,100

4,290

1,810

300 homes - Sherwood - Topeka, KS
 
September 24, 2019
26,150

11,536

14,614

308 homes - Villa West - Topeka, KS
 
September 24, 2019
22,950

15,165

7,785

152 homes - Crestview - Bismarck, ND
 
October 29, 2019
8,250

2,681

5,569

73 homes - North Pointe - Bismarck, ND
 
October 29, 2019
5,225

3,179

2,046

108 homes - Kirkwood - Bismarck, ND
 
October 29, 2019
5,400

2,518

2,882

65 homes - Westwood Park - Bismarck, ND
 
October 29, 2019
4,250

1,931

2,319

16 homes - Pebble Springs - Bismarck, ND
 
October 29, 2019
875

573

302

192 homes - Arbors - Sioux City, IA
 
December 11, 2019
16,200

6,110

10,090

120 homes - Indian Hills - Sioux City, IA
 
December 11, 2019
8,100

5,302

2,798

132 homes - Ridge Oaks - Sioux City, IA
 
December 11, 2019
7,700

4,006

3,694

50 homes - Cottage West - Sioux Falls, SD
 
December 12, 2019
6,991

4,391

2,600

24 homes - Gables - Sioux Falls, SD
 
December 12, 2019
2,515

2,052

463

79 homes - Oakmont - Sioux Falls, SD
 
December 12, 2019
7,010

3,917

3,093

160 homes - Oakwood - Sioux Falls, SD
 
December 12, 2019
12,090

3,056

9,034

120 homes - Oxbow Park - Sioux Falls, SD
 
December 12, 2019
10,452

2,713

7,739

48 homes - Prairie Winds - Sioux Falls, SD
 
December 12, 2019
3,763

1,112

2,651

44 homes - Sierra Vista - Sioux Falls, SD
 
December 12, 2019
3,178

2,292

886

 
 
 
$
186,424

$
91,514

$
94,910

Other
 
 
 
 
 
Minot 1400 31st Ave SW - Minot, ND(1)
 
May 23, 2019
$
6,530

$
6,048

$
482

Woodbury 1865 Woodland - Woodbury, MN
 
November 1, 2019
5,765

4,079

1,686

 
 
 
$
12,295

$
10,127

$
2,168

 
 
 
 
 
 
Unimproved Land
 
 
 
 
 
Creekside Crossing - Bismarck, ND
 
March 1, 2019
$
3,049

$
3,205

$
(156
)
Minot 1525 24th Ave SW - Minot, ND
 
April 3, 2019
725

593

132

Weston - Weston, WI
 
July 31, 2019
600

427

173

 
 
 
$
4,374

$
4,225

$
149

 
 
 
 
 
 
Total Dispositions
 
 
$
203,093

$
105,866

$
97,227

(1)
This property currently houses our Minot corporate office. During the second quarter of 2019, we purchased an office building which will become our Minot corporate office after renovations are completed. We will lease space in the Minot 1400 31st Ave SW building until the new office is placed in service.


F-27


Transition Period Ended December 31, 2018 (May 1, 2018 to December 31, 2018)
 
 
 
(in thousands)
 
 
Date
 
Book Value
 
Dispositions
 
Disposed
Sales Price
and Sale Cost
Gain/(Loss)
Multifamily
 
 
 
 
 
44 unit - Dakota Commons - Williston, ND
 
July 26, 2018
$
4,420

$
3,878

$
542

145 unit - Williston Garden - Williston, ND(1)
 
July 26, 2018
12,310

11,313

997

288 unit - Renaissance Heights - Williston, ND(2)
 
July 26, 2018
24,770

17,856

6,914

 
 
 
$
41,500

$
33,047

$
8,453

 
 
 
 
 
 
Other
 
 
 
 
 
7,849 sq ft Minot Southgate Retail - Minot, ND
 
July 12, 2018
$
1,925

$
2,056

$
(131
)
9,052 sq ft Fresenius - Duluth, MN
 
July 27, 2018
1,900

1,078

822

15,000 sq ft Minot 2505 16th St SW - Minot, ND
 
October 12, 2018
1,710

1,814

(104
)
81,594 sq ft Minot Arrowhead - Minot, ND
 
November 30, 2018
6,622

5,907

715

100,850 sq ft Bloomington 2000 W 94th Street - Bloomington, MN
 
December 19, 2018
4,550

4,550


 
 
 
$
16,707

$
15,405

$
1,302

 
 
 
 
 
 
Unimproved Land
 
 
 
 
 
Grand Forks - Grand Forks, ND
 
July 16, 2018
$
3,000

$
2,986

$
14

Renaissance Heights - Williston, ND(3)
 
July 26, 2018
750

684

66

Badger Hills Unimproved - Rochester, MN
 
August 29, 2018
1,400

1,528

(128
)
 
 
 
$
5,150

$
5,198

$
(48
)
 
 
 
 
 
 
Total Property Dispositions
 
 
$
63,357

$
53,650

$
9,707

(1)
This apartment community was owned by a joint venture entity in which we had an interest of approximately 74.11%.
(2)
This apartment community was owned by a joint venture entity in which we had an interest of approximately 87.14%.
(3)
This parcel of land was owned by a joint venture entity in which we had an interest of approximately 70.00%

F-28


Fiscal 2018 (May 1, 2017 to April 30, 2018)
 
 
 
(in thousands)
 
 
Date
 

Book Value

 

Dispositions
 
Disposed
Sales Price

and Sales Cost

Gain/(Loss)

Multifamily
 
 
 
 
 
327 homes - 13 apartment communities - Minot, ND (1)(2)
 
August 22, 2017
$
12,263

$
11,562

$
701

48 homes - Crown - Rochester, MN
 
December 1, 2017
5,700

3,318

2,382

16 homes - Northern Valley - Rochester, MN
 
December 1, 2017
950

690

260

 
 
 
$
18,913

$
15,570

$
3,343

Other
 







4,998 sq ft Minot Southgate Wells Fargo Bank - Minot, ND
 
May 15, 2017
$
3,440

$
3,332

$
108

90,260 sq ft Lexington Commerce Center - Eagan, MN
 
August 22, 2017
9,000

3,963

5,037

17,640 sq ft Duckwood Medical - Eagan, MN
 
August 24, 2017
2,100

1,886

214

279,834 sq ft Edgewood Vista Hermantown I & II - Hermantown, MN
 
October 19, 2017
36,884

24,697

12,187

518,161 sq ft Urbandale - Urbandale, IA
 
November 22, 2017
16,700

12,857

3,843

36,053 sq ft 3075 Long Lake Road - Roseville, MN
 
November 28, 2017
18,650

12,766

5,884

1,205,432 sq ft 25 Healthcare properties
 
December 29, 2017
370,268

232,778

137,490

43,404 sq ft Garden View - St. Paul, MN
 
January 19, 2018
14,000

6,191

7,809

52,116 sq ft Ritchie Medical - St. Paul, MN
 
January 19, 2018
16,500

10,419

6,081

22,187 sq ft Bismarck 715 East Broadway and Unimproved Land - Bismarck, ND
 
March 7, 2018
5,500

3,215

2,285

 
 
 
$
493,042

$
312,104

$
180,938

Unimproved Land
 
 
 

 

 

Bismarck 4916 Unimproved Land - Bismarck, ND
 
August 8, 2017
$
3,175

$
3,188

$
(13
)
 
 
 
 
 
 
Total Dispositions
 
 
$
515,130

$
330,862

$
184,268

 
(1)
These communities include: 4th Street 4 Plex, 11th Street 3 Plex, Apartments on Main, Brooklyn Heights, Colton Heights, Fairmont, First Avenue (Apartments and Office), Pines, Southview, Summit Park, Temple (includes 17 South Main Retail), Terrace Heights, and Westridge.
(2)
The properties included: 2800 Medical, 2828 Chicago Avenue, Airport Medical, Billings 2300 Grand Road, Burnsville 303 Nicollet Medical, Burnsville 305 Nicollet Medical, Duluth Denfeld Clinic, Edina 6363 France Medical, Edina 6405 France Medical, Edina 6517 Drew Avenue, Edina 6225 France SMC II, Edina 6545 France SMC I, Gateway Clinic, High Pointe Health Campus, Lakeside Medical Plaza, Mariner Clinic, Minneapolis 701 25th Avenue Medical, Missoula 3050 Great Northern, Park Dental, Pavilion I, Pavilion II, PrairieCare Medical, St. Michael Clinic, Trinity at Plaza 16 and Wells Clinic.

NOTE 10 • DISCONTINUED OPERATIONS 
We report in discontinued operations the results of operations and the related gains or losses on the sales of properties that have either been disposed of or classified as held for sale and meet the classification of a discontinued operation as described in ASC 205 - Presentation of Financial Statements and ASC 360 - Property, Plant, and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. Under this standard, a disposal (or classification as held for sale) of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.
We determined that our strategic decision to exit our healthcare segment met the criteria for discontinued operations, and we consequently classified 27 property dispositions as discontinued operations during the fiscal year ended April 30, 2018. We classified no dispositions as discontinued operations during the year ended December 31, 2019, the transition period ended December 31, 2018 and the fiscal year ended April 30, 2017. During the fiscal year ended April 30, 2017, we determined that our strategic plan to exit the office and retail segments met the criteria for discontinued operations. Accordingly, 48 office properties, 17 retail properties, and 1 healthcare property were classified as discontinued operations and subsequently sold during the fiscal year ended April 30, 2017. The following information shows the effect on net income and the gains or losses from the sale of properties classified as discontinued operations for the year ended December 31, 2019, the transition period ended December 31, 2018, and the fiscal years ended April 30, 2018 and 2017.

F-29


 
 
(in thousands)
 
 
Year Ended
Eight Months Ended
Year Ended
 
 
December 31, 2019

December 31, 2018

April 30, 2018

April 30, 2017

REVENUE
 
 
 
 
 
Real estate rentals
 
$

$

$
19,744

$
43,984

Tenant reimbursement
 


11,650

16,110

TRS senior housing revenue
 



3,218

TOTAL REVENUE
 


31,394

63,312

EXPENSES
 
 
 

 

 

Property operating expenses, excluding real estate taxes
 


6,350

9,051

Real estate taxes
 


5,191

6,848

Property management expense
 


206

574

Depreciation and amortization
 


8,445

10,772

TRS senior housing expenses
 



3,113

TOTAL EXPENSES
 


20,192

30,358

Operating income (loss)
 


11,202

32,954

Interest expense(1)
 


(4,172
)
(11,628
)
Gain (loss) on extinguishment of debt(1)
 


(6,508
)
(3,238
)
Interest income
 


661

2,179

Other income
 


73

340

Income (loss) from discontinued operations before gain on sale
 


1,256

20,607

Gain (loss) on sale of discontinued operations
 

570

163,567

56,146

INCOME (LOSS) FROM DISCONTINUED OPERATIONS
 
$

$
570

$
164,823

$
76,753

Segment Data
 
 
 

 

 

All other
 
$

$
570

$
164,823

$
76,753

Total
 
$

$
570

$
164,823

$
76,753

 
 
(in thousands)
 
 
Year Ended
Eight Months Ended
Year Ended
 
 
December 31, 2019

December 31, 2018

April 30, 2018

April 30, 2017

Property Sale Data
 
 
 

 

 

Sales price
 

$

$
437,652

$
239,436

Net book value and sales costs
 


(274,085
)
(183,290
)
Gain on sale of discontinued operations
 

$

$
163,567

$
56,146


 
As of December 31, 2019, December 31, 2018, and April 30, 2018, we had no assets or liabilities classified as held for sale.
NOTE 11 • SEGMENTS
We operate in a single reportable segment which includes the ownership, management, development, redevelopment, and acquisition of apartment communities. Each of our operating properties is considered a separate operating segment because each property earns revenues, incurs expenses, and has discrete financial information. Our chief operating decision-makers evaluate each property's operating results to make decisions about resources to be allocated and to assess performance. We do not group our operations based on geography, size, or type. Our apartment communities have similar long-term economic characteristics and provide similar products and services to our residents. No apartment community comprises more than 10% of consolidated revenues, profits, or assets. Accordingly, our apartment communities are aggregated into a single reportable segment. "All other" is composed of non-multifamily properties, non-multifamily components of mixed use properties, and properties disposed or designated as held for sale.
Prior to the third quarter of fiscal year 2018, we reported our results in two reportable segments: multifamily and healthcare. We sold substantially all of our healthcare portfolio during the third quarter of fiscal year 2018 and classified it as discontinued operations, at which point healthcare no longer met the quantitative thresholds for reporting as a separate reportable segment.
Our executive management team comprises our chief operating decision-makers. This team measures the performance of our reportable segment based on net operating income (“NOI”), which we define as total real estate revenues less property operating expenses, including real estate taxes. We believe that NOI is an important supplemental measure of operating performance for real estate because it provides a measure of operations that is unaffected by depreciation, amortization, financing, property management overhead, and general and administrative expense. NOI does not represent cash generated by

F-30


operating activities in accordance with GAAP and should not be considered an alternative to net income, net income available for common shareholders, or cash flow from operating activities as a measure of financial performance.
The following tables present NOI for the year ended December 31, 2019, the transition period ended December 31, 2018, and the fiscal years ended April 30, 2018 and 2017 from our reportable segment and reconcile net operating income to net income as reported in the consolidated financial statements. Segment assets are also reconciled to total assets as reported in the consolidated financial statements.
 
 
(in thousands)
Year ended December 31, 2019
 
Multifamily

All Other

Total

Revenue
 
$
161,434

$
24,321

$
185,755

Property operating expenses, including real estate taxes
 
67,186

11,129

78,315

Net operating income
 
$
94,248

$
13,192

$
107,440

Property management expenses
 
 
 
(6,186
)
Casualty loss
 
 
 
(1,116
)
Depreciation and amortization
 
 
 
(74,271
)
General and administrative expenses
 
 
 
(14,450
)
Interest expense
 
 
 
(30,537
)
Loss on debt extinguishment
 
 
 
(2,360
)
Interest and other income
 
 
 
2,092

Income (loss) before gain (loss) on sale of real estate and other investments, gain (loss) on litigation settlement, and income (loss) from discontinued operations
 
 
 
(19,388
)
Gain (loss) on sale of real estate and other investments
 
 
 
97,624

Gain (loss) on litigation settlement
 
 
 
6,586

Gain (loss) from continuing operations
 
 
 
84,822

Income (loss) from discontinued operations
 
 
 

Net income (loss)
 
 
 
$
84,822


 
 
(in thousands)
Transition period ended December 31, 2018
 
Multifamily

All Other

Total

Revenue
 
$
100,136

$
21,735

$
121,871

Property operating expenses, including real estate taxes
 
41,391

9,328

50,719

Net operating income
 
$
58,745

$
12,407

$
71,152

Property management expenses
 
 
 
(3,663
)
Casualty loss
 
 
 
(915
)
Depreciation and amortization
 
 

 

(50,456
)
Impairment of real estate investments
 
 

 

(1,221
)
General and administrative expenses
 
 

 

(9,812
)
Interest expense
 
 

 

(21,359
)
Loss on debt extinguishment
 
 

 

(556
)
Interest and other income
 
 

 

1,233

Income (loss) before gain on sale of real estate and other investments and income (loss) from discontinued operations
 
 

 

(15,597
)
Gain (loss) on sale of real estate and other investments
 
 

 

9,707

Gain (loss) from continuing operations
 
 

 

(5,890
)
Income (loss) from discontinued operations
 
 

 

570

Net income (loss)
 
 

 

$
(5,320
)
 

F-31

Table of Contents

 
 
(in thousands)
Year ended April 30, 2018
 
Multifamily (1)

All Other (1)

Total

Revenue
 
$
159,983

$
9,762

$
169,745

Property operating expenses, including real estate taxes
 
70,460

2,574

73,034

Net operating income
 
$
89,523

$
7,188

$
96,711

Property management expenses
 
 
 
(5,526
)
Casualty loss
 
 
 
(500
)
Depreciation and amortization
 
 

 

(82,070
)
Impairment of real estate investments
 
 

 

(18,065
)
General and administrative expenses
 
 

 

(14,203
)
Acquisition and investment related costs
 
 

 

(51
)
Interest expense
 
 

 

(34,178
)
Loss on debt extinguishment
 
 

 

(940
)
Interest and other income
 
 

 

1,508

Income (loss) before gain on sale of real estate and other investments
 
 

 

(57,314
)
Gain (loss) on sale of real estate and other investments
 
 

 

20,120

Income (loss) from continuing operations
 
 

 

(37,194
)
Income (loss) from discontinued operations
 
 

 

164,823

Net income (loss)
 
 

 

$
127,629

(1)
Revenue, property operating expenses, including real estate taxes, and net operating income for the year ended April 30, 2018 have not been updated for properties sold during the year ended 2019.
 
 
(in thousands)
Year ended April 30, 2017
 
Multifamily (1)

All Other (1)

Total

Revenue
 
$
142,214

$
17,890

$
160,104

Property operating expenses, including real estate taxes
 
60,895

3,431

64,326

Net operating income
 
$
81,319

$
14,459

$
95,778

Property management expenses
 
 
 
(5,046
)
Casualty loss
 
 
 
(414
)
Depreciation and amortization
 
 

 

(44,253
)
Impairment of real estate investments
 
 

 

(57,028
)
General and administrative expenses
 
 

 

(15,871
)
Acquisition and investment related costs
 
 

 

(3,276
)
Interest expense
 
 

 

(34,314
)
Loss on debt extinguishment
 
 
 
(1,651
)
Interest and other income
 
 

 

1,146

Income (loss) before loss on sale of real estate and other investments and income (loss) from discontinued operations
 
 

 

(64,929
)
Gain (loss) on sale of real estate and other investments
 
 

 

18,701

Income (loss) from continuing operations
 
 

 

(46,228
)
Income (loss) from discontinued operations
 
 

 

76,753

Net income (loss)
 
 

 

$
30,525


(1)
Revenue, property operating expenses, including real estate taxes, and net operating income for the year ended April 30, 2017 have not been updated for properties sold during the year ended 2019.

F-32

Table of Contents


Segment Assets and Accumulated Depreciation 
 
 
(in thousands)
As at December 31, 2019
 
Multifamily

All Other

Total

Segment assets
 
 

 

 

Property owned
 
$
1,609,471

$
33,607

$
1,643,078

Less accumulated depreciation
 
(339,272
)
(9,850
)
(349,122
)
Total property owned
 
$
1,270,199

$
23,757

$
1,293,956

Cash and cash equivalents
 
 
 
26,579

Restricted cash
 
 
 
19,538

Other assets
 
 
 
34,829

Unimproved land
 
 
 
1,376

Mortgage loans receivable
 
 
 
16,140

Total Assets
 
 
 
$
1,392,418


 
 
(in thousands)
As at December 31, 2018
 
Multifamily

All Other

Total

Segment assets
 
 

 

 

Property owned
 
$
1,428,226

$
199,410

$
1,627,636

Less accumulated depreciation
 
(277,709
)
(76,162
)
(353,871
)
Total property owned
 
$
1,150,517

$
123,248

$
1,273,765

Cash and cash equivalents
 
 

 

13,792

Restricted cash
 
 
 
5,464

Other assets
 
 

 

27,265

Unimproved land
 
 
 
5,301

Mortgage loans receivable
 
 

 

10,410

Total Assets
 
 

 

$
1,335,997

 
 
 
(in thousands)
As at April 30, 2018
 
Multifamily

All Other

Total

Segment assets (1)
 
 

 

 

Property owned
 
$
1,606,421

$
63,343

$
1,669,764

Less accumulated depreciation
 
(294,477
)
(16,847
)
(311,324
)
Total property owned
 
$
1,311,944

$
46,496

$
1,358,440

Cash and cash equivalents
 
 

 

11,891

Restricted cash
 
 

 

4,225

Other assets
 
 
 
30,297

Unimproved land
 
 

 

11,476

Mortgage loans receivable
 
 
 
10,329

Total Assets
 
 

 

$
1,426,658


(1)
Segment assets as of April 30, 2018 have not been updated for properties sold during the year ended 2019.
NOTE 12 • RETIREMENT PLANS  
We sponsor a defined contribution 401(k) plan to provide retirement benefits for employees that meet minimum employment criteria. We currently match, dollar for dollar, employee contributions to the 401(k) plan in an amount equal to up to 5.0% of the eligible wages of each participating employee. 401(k) matching contributions are fully vested when made. We recognized expense of approximately $738,000, $476,000, $838,000, and $565,000 in the year ended December 31, 2019, the transition period ended December 31, 2018, and the fiscal years ended April 30, 2018 and 2017, respectively.

F-33

Table of Contents

NOTE 13 • TRANSACTIONS WITH RELATED PARTIES  
Transactions with BMO Capital Markets
We have an historical and ongoing relationship with BMO Capital Markets (“BMO”). On July 17, 2017, we engaged BMO to provide financial advisory services in connection with the proposed disposition of our healthcare property portfolio. A family member of Mark O. Decker, Jr., our President and Chief Executive Officer, is an employee of BMO and could have an indirect material interest in any such engagement and related transaction(s). The Board pre-approved the engagement of BMO. During the fiscal year ended April 30, 2018, we completed the disposition of 27 of our 28 healthcare properties and paid BMO a transaction fee of $1.8 million in connection with this engagement.
NOTE 14 • COMMITMENTS AND CONTINGENCIES  
Legal Proceedings. We are involved in various lawsuits arising in the normal course of business. We believe that such matters will not have a material adverse effect on our consolidated financial statements.
Environmental Matters. It is generally our policy to obtain a Phase I environmental assessment of each property that we seek to acquire. Such assessments have not revealed, nor are we aware of, any environmental liabilities that we believe would have a material adverse effect on our financial position or results of operations. We own properties that contain or potentially contain (based on the age of the property) asbestos or lead. For certain of these properties, we estimated the fair value of the conditional asset retirement obligation and chose not to book a liability because the amounts involved were immaterial. With respect to certain other properties, we have not recorded any related asset retirement obligation as the fair value of the liability cannot be reasonably estimated due to insufficient information. We believe we do not have sufficient information to estimate the fair value of the asset retirement obligations for these properties because a settlement date or range of potential settlement dates has not been specified by others and, additionally, there are currently no plans or expectation of plans to demolish these properties or to undertake major renovations that would require removal of the asbestos, lead and/or underground storage tanks. These properties are expected to be maintained by repairs and maintenance activities that would not involve the removal of the asbestos, lead and/or underground storage tanks. Also, a need for renovations caused by resident changes, technology changes or other factors has not been identified.  
Insurance. We carry insurance coverage on our properties in amounts and types that we believe are customarily obtained by owners of similar properties and are sufficient to achieve our risk management objectives.
Restrictions on Taxable Dispositions. Twenty-four of our apartment communities, consisting of approximately 4,443 homes, are subject to restrictions on taxable dispositions under agreements entered into with some of the sellers or contributors of the properties and are effective for varying periods. We do not believe that the agreements materially affect the conduct of our business or our decisions whether to dispose of restricted properties during the restriction period because we generally hold these and our other properties for investment purposes rather than for sale. Where we deem it to be in our shareholders’ best interests to dispose of such properties, we generally seek to structure sales of such properties as tax deferred transactions under Section 1031 of the Internal Revenue Code. Otherwise, we may be required to provide tax indemnification payments to the parties to these agreements.
Redemption Value of Units. Pursuant to a Unitholder’s exercise of its Exchange Rights, we have the right, in our sole discretion, to acquire such Units by either making a cash payment or acquiring the Units for our common shares, on a one-for-one basis. All Units receive the same per Unit cash distributions as the per share dividends paid on common shares. Units are redeemable for an amount of cash per Unit equal to the average of the daily market price of our common shares for the ten consecutive trading days immediately preceding the date of valuation of the Unit. As of December 31, 2019, December 31, 2018, and April 30, 2018, the aggregate redemption value of the then-outstanding Units owned by limited partners, as determined by the ten-day average market price for our common shares, was approximately $76.6 million, $68.4 million, and $74.7 million, respectively. 

F-34

Table of Contents

NOTE 15 • QUARTERLY RESULTS OF CONSOLIDATED OPERATIONS (unaudited) 
 
 
(in thousands, except per share data)
QUARTER ENDED
 
March 31, 2019

June 30, 2019

September 30, 2019

December 31, 2019

Revenues
 
$
45,608

$
46,934

$
47,436

$
45,777

Net income (loss) attributable to controlling interests
 
$
(4,698
)
$
3,113

$
31,596

$
48,658

Net income (loss) available to common shareholders
 
$
(6,403
)
$
1,407

$
29,891

$
46,953

Net income (loss) per common share - basic
 
$
(0.54
)
$
0.11

$
2.57

$
3.95

Net income (loss) per common share - diluted
 
$
(0.54
)
$
0.11

$
2.54

$
3.89

 
 
(in thousands, except per share data)
TRANSITION PERIOD
 
First Quarter

Second Quarter

Two Months Ended December 31, 2018

 
Revenues
 
$
45,946

$
45,638

$
30,287

 
Net income (loss) attributable to controlling interest
 
$
2,916

$
(4,558
)
$
(2,756
)
 
Net income (loss) available to common shareholders
 
$
1,211

$
(6,264
)
$
(3,892
)
 
Net income (loss) per common share - basic & diluted
 
$
0.10

$
(0.52
)
$
(0.33
)
 
 
 
(in thousands, except per share data)
QUARTER ENDED
 
July 31, 2017

October 31, 2017

January 31, 2018

April 30, 2018

Revenues
 
$
40,978

$
41,866

$
42,716

$
44,185

Net income (loss) attributable to controlling interests
 
$
(11,264
)
$
12,821

$
136,105

$
(20,874
)
Net income (loss) available to common shareholders
 
$
(13,550
)
$
6,360

$
134,331

$
(22,579
)
Net income (loss) per common share - basic & diluted
 
$
(1.12
)
$
0.53

$
11.22

$
(1.89
)

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 16 • SHARE BASED COMPENSATION 
Share-based awards are provided to officers, non-officer employees, and trustees under our 2015 Incentive Plan approved by shareholders on September 15, 2015, which allows for awards in the form of cash, unrestricted, and restricted common shares, and restricted stock units ("RSUs") up to an aggregate of 425,000 shares over the ten-year period in which the plan will be in effect. Under our 2015 Incentive Plan, officers and non-officer employees may earn share awards under a long-term incentive plan, which is a forward-looking program that measures long-term performance over the stated performance period. These awards are payable to the extent deemed earned in shares. The terms of the long-term incentive awards granted under the program may vary from year to year. Through December 31, 2019, awards under the 2015 Incentive Plan consisted of restricted and unrestricted common shares and RSUs. We account for forfeitures of restricted and unrestricted common shares and RSUs when they occur instead of estimating the forfeitures.
Year Ended December 31, 2019 LTIP Awards
Awards granted to trustees on May 17, 2019 consisted of 812 RSUs, which vested immediately, awards granted to trustees on June 13, 2019 consisted of 7,521 time-based RSU awards, which vest on June 13, 2020, and an award granted to a trustees on November 25, 2019 consisted of 49 RSUs, which vested immediately. All of these awards are classified as equity awards. We recognize compensation expense associated with the time-based awards ratably over the requisite service period. The fair value of share awards at grant date for non-management trustees was approximately $505,000, $348,000, $389,000, and $365,000 for the year ended December 31, 2019, the transition period ended December 31, 2018, and each of the fiscal years ended April 30, 2018 and 2017, respectively.
Awards granted to management on March 8, 2019, consist of time-based RSUs for 6,391 shares and performance RSUs based on total shareholder return ("TSR") for 12,781 shares. The time-based RSUs vest as to one-third of the shares on each of March 8, 2020, March 8, 2021, and March 8, 2022. Awards granted to management on June 15, 2019, consist of 169 time-based RSUs that vest on June 15, 2020. Awards granted on August 10, 2019, consist of 100 time-based RSUs that vest on August 10, 2020. Awards granted on August 29, 2019, consist of 98 time-based awards that vest as to one-third on each of March 8, 2020, March 8, 2021, and March 8, 2022; 197 performance RSUs based on TSR; and 444 time-based RSUs that vest as to one-third on each of August 29, 2020, August 29, 2021, and August 29, 2022. All of these awards are classified as equity awards.

F-35


The TSR performance RSU awards are earned based on our TSR as compared to the MSCI US REIT Index over a forward looking three-year period. The maximum number of RSUs eligible to be earned is 25,562 RSUs, which is 200% of the RSUs granted. Earned awards (if any) will fully vest as of the last day of the measurement period. These awards have market conditions in addition to service conditions that must be met for the awards to vest. We recognize compensation expense ratably based on the grant date fair value, as determined using the Monte Carlo valuation model, regardless of whether the market conditions are achieved and the awards ultimately vest. Therefore, previously recorded compensation expense is not adjusted in the event that the market conditions are not achieved. We based the expected volatility on the historical volatility of our daily closing share price, the risk-free interest rate on the interest rates on U.S. treasury bonds with a maturity equal to the remaining performance period of the award, and the expected term on the performance period of the award. The assumptions used to value the TSR performance RSU awards were an expected volatility of 25.5%, a risk-free interest rate of 2.43%, and an expected life of 2.82 years. The share price at the grant date, March 8, 2019, was $58.06 per share. 
Share-Based Compensation Expense 
Total share-based compensation expense recognized in the consolidated financial statements for the year ended December 31, 2019, the transition period ended December 31, 2018, and the fiscal years ended April 30, 2018 and 2017, for all share-based awards was as follows:
 
 
(in thousands)
 
 
Year Ended December 31,
Transition Period Ended
Fiscal Year Ended April 30, 
 
 
2019
December 31, 2018
2018
2017
Share based compensation expense
 
$
1,905

$
845

$
1,587

$
6


 
Restricted Share Awards
The total fair value of time-based share grants vested during the year ended December 31, 2019, the transition period ended December 31, 2018, and the fiscal years ended April 30, 2018 and 2017 was $310,000, $147,000, $1.1 million, and $127,000, respectively.
The activity for the year ended December 31, 2019, the transition period ended December 31, 2018, and the fiscal years ended April 30, 2018 and 2017, related to our restricted share awards was as follows:
 
 
Awards with Service Conditions
 
 
 
Wtd Avg Grant-

 
 
Shares

Date Fair Value

Unvested at April 30, 2016
 

 

Granted
 
25,326

$
61.59

Vested
 
(2,132
)
$
59.50

Forfeited
 
(3,683
)
$
62.40

Unvested at April 30, 2017
 
19,511



Granted
 
9,136

$
57.55

Vested
 
(18,545
)
$
59.89

Forfeited
 
(202
)
$
62.40

Unvested at April 30, 2018
 
9,900



Granted
 


Vested
 
(2,709
)
$
63.21

Forfeited
 


Unvested at December 31, 2018
 
7,191



Granted
 



Vested
 
(4,999
)
$
61.06

Forfeited
 


Unvested at December 31, 2019
 
2,192

$
59.20


 
Restricted Stock Units
During the year ended December 31, 2019, we issued 7,702 time-based RSUs to employees and 8,382 to trustees. The RSUs to employees generally vest over a three-year period and the RSUs to trustees generally vest over a one-year period. The fair value of the time-based RSUs granted during the year ended December 31, 2019 was $961,000. The total compensation cost

F-36


related to non-vested time-based RSUs not yet recognized is $547,000, which we expect to recognize over a weighted average period of 1.3 years.
RSUs with market conditions were granted under the LTIP during the year ended December 31, 2019 with a fair market value, as determined using a Monte Carlo simulation, of $1.0 million. The unamortized value of awards and RSUs with market conditions as of December 31, 2019, December 31, 2018, and April 30 2018, was approximately $1.3 million, $1.1 million, and $448,000, respectively.
The activity for the year ended December 31, 2019, the transition period ended December 31, 2018, and the fiscal years ended April 30 2018 and 2017, related to our RSUs was as follows:
 
 
RSUs with Service Conditions
 
RSUs with Market Conditions
 
 
 
Wtd Avg Grant-

 
 
Wtd Avg Grant-

 
 
Shares

Date Fair Value

 
Shares

Date Fair Value

Unvested at April 30, 2017
 

 
 

 
Granted
 
6,994

$
60.54

 
11,538

$
70.90

Vested
 
(207
)
$
50.30

 

 
Forfeited
 

 
 

 
Unvested at April 30, 2018
 
6,787

$
60.85

 
11,538

$
70.90

Granted
 
14,878

$
53.60

 
15,461

$
57.70

Vested
 
(2,943
)
$
60.83

 


Forfeited
 
(462
)
$
53.60

 
(1,680
)
$
70.90

Unvested at December 31, 2018
 
18,260


 
25,319

$
62.84

Granted
 
16,084

$
59.76

 
12,978

$
79.49

Vested
 
(11,633
)
$
55.35

 


Forfeited
 
(365
)
$
51.73

 
(475
)
$
57.70

Unvested at December 31, 2019
 
22,346

$
58.41

 
37,822

$
68.62



F-37


INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
December 31, 2019
Schedule III - REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands)
 
 
 
 
 
Gross amount at which carried at
 
 
Life on which
 
 
Initial Cost to Company
 
close of period
 
 
depreciation in
 
 
 
 
Costs capitalized
 
 
 
 
Date of
latest income
 
 
 
Buildings &
subsequent to
 
Buildings &
 
Accumulated
Construction
statement is
Description
Encumbrances(1)

Land

Improvements
acquisition
Land

Improvements
Total

Depreciation
or Acquisition
computed
Same-Store
 

 

 

 

 

 

 

 

 
 
 
71 France - Edina, MN
$
54,459

$
4,721

$
61,762

$
312

$
4,801

$
61,994

$
66,795

$
(11,070
)
2016
30-37
years
Alps Park - Rapid City, SD
3,426

287

5,551

397

333

5,902

6,235

(1,350
)
2013
30-37
years
Arcata - Golden Valley, MN

2,088

31,036

262

2,130

31,256

33,386

(6,946
)
2015
30-37
years
Ashland - Grand Forks, ND
4,993

741

7,569

329

824

7,815

8,639

(2,016
)
2012
30-37
years
Avalon Cove - Rochester, MN

1,616

34,074

498

1,731

34,457

36,188

(4,573
)
2016
30-37
years
Boulder Court - Eagan, MN

1,067

5,498

3,276

1,576

8,265

9,841

(4,014
)
2003
30-37
years
Canyon Lake - Rapid City, SD
2,573

305

3,958

2,404

420

6,247

6,667

(3,006
)
2001
30-37
years
Cardinal Point - Grand Forks, ND

1,600

33,400

200

1,702

33,498

35,200

(1,829
)
2013
30-37
years
Cascade Shores - Rochester, MN
11,400

1,585

16,710

99

1,587

16,807

18,394

(2,299
)
2016
30-37
years
Castlerock - Billings, MT

736

4,864

2,452

1,045

7,007

8,052

(4,185
)
1998
30-37
years
Chateau - Minot, ND

301

20,058

1,023

326

21,056

21,382

(5,095
)
2013
30-37
years
Cimarron Hills - Omaha, NE
8,700

706

9,588

5,016

1,590

13,720

15,310

(7,214
)
2001
30-37
years
Colonial Villa - Burnsville, MN

2,401

11,515

10,568

2,987

21,497

24,484

(11,044
)
2003
30-37
years
Colony - Lincoln, NE
11,936

1,515

15,730

1,984

1,845

17,384

19,229

(4,686
)
2012
30-37
years
Commons and Landing at Southgate - Minot, ND

5,945

47,512

1,801

6,419

48,839

55,258

(11,401
)
2015
30-37
years
Cottonwood - Bismarck, ND

1,056

17,372

5,956

2,001

22,383

24,384

(11,253
)
1997
30-37
years
Country Meadows - Billings, MT

491

7,809

1,788

599

9,489

10,088

(5,457
)
1995
30-37
years
Crystal Bay - Rochester, MN

433

11,425

299

438

11,719

12,157

(1,528
)
2016
30-37
years
Cypress Court - St. Cloud, MN
11,934

1,583

18,879

443

1,619

19,286

20,905

(4,474
)
2012
30-37
years
Deer Ridge - Jamestown, ND

711

24,129

269

778

24,331

25,109

(4,877
)
2013
30-37
years
Evergreen - Isanti, MN

1,129

5,524

531

1,145

6,039

7,184

(1,782
)
2008
30-37
years
Forest Park - Grand Forks, ND

810

5,579

8,894

1,532

13,751

15,283

(8,519
)
1993
30-37
years
French Creek - Rochester, MN

201

4,735

238

207

4,967

5,174

(619
)
2016
30-37
years
Gardens - Grand Forks, ND

518

8,702

125

535

8,810

9,345

(1,387
)
2015
30-37
years
Grand Gateway - St. Cloud, MN

814

7,086

1,969

961

8,908

9,869

(2,962
)
2012
30-37
years
GrandeVille at Cascade Lake - Rochester, MN
36,000

5,003

50,363

1,843

5,095

52,114

57,209

(8,040
)
2015
30-37
years
Greenfield - Omaha, NE

578

4,122

1,513

872

5,341

6,213

(2,064
)
2007
30-37
years
Heritage Manor - Rochester, MN

403

6,968

3,487

731

10,127

10,858

(5,712
)
1998
30-37
years
Homestead Garden - Rapid City, SD

655

14,139

784

723

14,855

15,578

(2,845
)
2015
30-37
years
Lakeside Village - Lincoln, NE
11,806

1,215

15,837

1,475

1,401

17,126

18,527

(4,458
)
2012
30-37
years
Landmark - Grand Forks, ND

184

1,514

1,262

425

2,535

2,960

(1,588
)
1997
30-37
years
Legacy - Grand Forks, ND
13,565

1,362

21,727

10,738

2,431

31,396

33,827

(16,893
)
1995-2005
30-37
years
Legacy Heights - Bismarck, ND

1,207

13,742

338

1,226

14,061

15,287

(2,091
)
2015
30-37
years
Meadows - Jamestown, ND

590

4,519

1,993

733

6,369

7,102

(3,438
)
1998
30-37
years
Monticello Crossings - Monticello, MN

1,734

30,136

110

1,761

30,219

31,980

(4,013
)
2017
30-37
years
Monticello Village - Monticello, MN

490

3,756

1,211

638

4,819

5,457

(2,161
)
2004
30-37
years

F-38


INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
December 31, 2019
Schedule III - REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands)
 
 
 
 
 
Gross amount at which carried at
 
 
Life on which
 
 
Initial Cost to Company
 
close of period
 
 
depreciation in
 
 
 
 
Costs capitalized
 
 
 
 
Date of
latest income
 
 
 
Buildings &
subsequent to
 
Buildings &
 
Accumulated
Construction
statement is
Description
Encumbrances(1)

Land

Improvements
acquisition
Land

Improvements
Total

Depreciation
or Acquisition
computed
Northridge - Bismarck, ND
$

$
884

$
7,515

$
278

$
1,057

$
7,620

$
8,677

$
(1,342
)
2015
30-37
years
Olympic Village - Billings, MT
9,533

1,164

10,441

4,031

1,836

13,800

15,636

(7,584
)
2000
30-37
years
Olympik Village - Rochester, MN

1,034

6,109

2,805

1,450

8,498

9,948

(3,790
)
2005
30-37
years
Park Meadows - Waite Park, MN
7,768

1,143

9,099

10,092

2,140

18,194

20,334

(11,216
)
1997
30-37
years
Park Place - Plymouth, MN

10,609

80,781

7,280

10,782

87,888

98,670

(7,255
)
1997
30-37
years
Plaza - Minot, ND

867

12,784

3,069

1,002

15,718

16,720

(5,063
)
2009
30-37
years
Pointe West - Rapid City, SD

240

3,538

2,140

463

5,455

5,918

(3,548
)
1994
30-37
years
Ponds at Heritage Place - Sartell, MN

395

4,564

492

419

5,032

5,451

(1,327
)
2012
30-37
years
Quarry Ridge - Rochester, MN
24,680

2,254

30,024

2,133

2,412

31,999

34,411

(9,705
)
2006
30-37
years
Red 20 - Minneapolis, MN
21,755

1,900

24,116

280

1,908

24,388

26,296

(5,532
)
2015
30-37
years
Regency Park Estates - St. Cloud, MN
7,623

702

10,198

2,709

1,148

12,461

13,609

(3,777
)
2011
30-37
years
Rimrock West - Billings, MT

330

3,489

2,096

543

5,372

5,915

(2,930
)
1999
30-37
years
River Ridge - Bismarck, ND

576

24,670

1,078

936

25,388

26,324

(7,027
)
2008
30-37
years
Rocky Meadows - Billings, MT

656

5,726

1,651

840

7,193

8,033

(4,370
)
1995
30-37
years
Rum River - Isanti, MN
3,141

843

4,823

536

870

5,332

6,202

(1,927
)
2007
30-37
years
Silver Springs - Rapid City, SD
2,043

215

3,007

974

267

3,929

4,196

(772
)
2015
30-37
years
South Pointe - Minot, ND

550

9,548

5,834

1,445

14,487

15,932

(9,239
)
1995
30-37
years
Southpoint - Grand Forks, ND

576

9,893

227

666

10,030

10,696

(1,919
)
2013
30-37
years
Southwind - Grand Forks, ND

400

4,938

4,627

929

9,036

9,965

(5,347
)
1995
30-37
years
Sunset Trail - Rochester, MN
7,310

336

12,814

3,430

785

15,795

16,580

(8,294
)
1999
30-37
years
Thomasbrook - Lincoln, NE
13,100

600

10,306

5,451

1,708

14,649

16,357

(7,648
)
1999
30-37
years
Valley Park - Grand Forks, ND

294

4,137

4,243

1,323

7,351

8,674

(4,498
)
1999
30-37
years
Village Green - Rochester, MN

234

2,296

1,056

361

3,225

3,586

(1,528
)
2003
30-37
years
West Stonehill - Waite Park, MN
16,425

939

10,167

7,932

1,903

17,135

19,038

(10,848
)
1995
30-37
years
Whispering Ridge - Omaha, NE
20,120

2,139

25,424

1,858

2,459

26,962

29,421

(6,573
)
2012
30-37
years
Winchester - Rochester, MN

748

5,622

2,676

1,104

7,942

9,046

(3,942
)
2003
30-37
years
Woodridge - Rochester, MN
5,411

370

6,028

4,161

752

9,807

10,559

(5,566
)
1997
30-37
years
Total Same-Store
$
309,701

$
77,779

$
928,945

$
159,026

$
96,675

$
1,069,075

$
1,165,750

$
(319,456
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Same-Store
 
 
 
 
 
 
 
 
 
 
 
Dylan - Denver, CO
$

$
12,155

$
77,215

$
870

$
12,217

$
78,023

$
90,240

$
(5,536
)
2013
30-37
years
FreightYard Townhomes & Flats - Minneapolis, MN

1,889

23,616

124

1,895

23,734

25,629

(289
)
2019
30
years
Lugano at Cherry Creek - Denver, CO

7,679

87,766

103

7,679

87,869

95,548

(1,075
)
2019
30
years
Oxbo - St Paul, MN

5,809

51,586

176

5,809

51,755

57,564

(5,096
)
2015
30-37
years
SouthFork Townhomes - Lakeville, MN
21,675

3,502

40,153

2,883

3,502

43,036

46,538

(1,433
)
2019
30
years
Westend - Denver, CO

25,525

102,180

497

25,525

102,677

128,202

(6,389
)
1995
30-37
years
Total Non-Same-Store
$
21,675

$
56,559

$
382,516

$
4,653

$
56,627

$
387,094

$
443,721

$
(19,818
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Multifamily
$
331,376

$
134,338

$
1,311,461

$
163,679

$
153,302

$
1,456,169

$
1,609,471

$
(339,274
)
 
 
 

F-39


INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
December 31, 2019
Schedule III - REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands)
 
 
 
 
 
 
Gross amount at which carried at
 
 
Life on which
 
 
 
Initial Cost to Company
 
close of period
 
 
depreciation in
 
 
 
 
 
Costs capitalized
 
 
 
 
Date of
latest income
 
 
 
 
Buildings &
subsequent to
 
Buildings &
 
Accumulated
Construction
statement is
Description
 
Encumbrances(1)

Land

Improvements
acquisition
Land

Improvements
Total

Depreciation
or Acquisition
computed
Other - Mixed Use
 
 

 

 

 

 

 

 

 

 
 
 
71 France - Edina, MN
 

$

$
5,879

$
885

$

$
6,764

$
6,764

$
(873
)
2016
30-37
years
Lugano at Cherry Creek - Denver, CO
 


1,600



1,600

1,600

(18
)
2019
30
years
Oxbo - St Paul, MN
 


3,472

54


3,526

3,526

(315
)
2015
30-37
years
Plaza - Minot, ND
 

389

5,444

3,839

601

9,071

9,672

(3,899
)
2009
30-37
years
Red 20 - Minneapolis, MN
 


2,525

419


2,944

2,944

(541
)
2015
30-37
years
Total Other - Mixed Use
 

$
389

$
18,920

$
5,197

$
601

$
23,905

$
24,506

$
(5,646
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other - Commercial
 
 
 
 
 
 
 
 
 
 
 
 
3100 10th St SW - Minot, ND
 

$
246

$
1,866

$
(1
)
$
246

$
1,865

$
2,111

$
(41
)
2019
30
years
Dakota West Plaza - Minot , ND
 

92

493

37

106

516

622

(202
)
2006
30-37
years
Minot IPS - Minot, ND
 

416

5,952


416

5,952

6,368

(3,959
)
2012
30-37
years
Total Other - Commercial
 

$
754

$
8,311

$
36

$
768

$
8,333

$
9,101

$
(4,202
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subtotal
 
$
331,376

$
135,481

$
1,338,692

$
168,912

$
154,671

$
1,488,407

$
1,643,078

$
(349,122
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unimproved Land
 
 
 
 
 
 
 
 
 
 
 
 
Rapid City - Rapid City, SD
 

$
1,376



$
1,376


$
1,376


2014
 
 
Total Unimproved Land
 

$
1,376


$

$
1,376


$
1,376


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
331,376

$
136,857

$
1,338,692

$
168,912

$
156,047

$
1,488,407

$
1,644,454

$
(349,122
)
 
 
 
(1)
Amounts in this column are the mortgages payable balance as of December 31, 2019. These amounts do not include amounts owing under the Company's multi-bank line of credit or term loans.


F-40


INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
December 31, 2019
Schedule III - REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands)

Reconciliations of the carrying value of total property owned for the year ended December 31, 2019, the transition period ended December 31, 2018, and the fiscal years ended April 30, 2018 and 2017 are as follows:
 
 
(in thousands)
 
 
Year Ended
Transition Period Ended
Year Ended April 30,
 
 
December 31, 2019
December 31, 2018
2018
2017
Balance at beginning of year
 
$
1,627,636

$
1,669,764

$
1,358,529

$
1,369,893

Additions during year
 
 
 
 
 
Multifamily and Other
 
168,504


369,332

61,565

Improvements and Other
 
21,868

11,620

15,065

34,761

 
 
1,818,008

1,681,384

1,742,926

1,466,219

Deductions during year
 
 
 

 

 

Cost of real estate sold
 
(171,112
)
(53,653
)
(46,001
)
(21,601
)
Impairment charge
 


(15,192
)
(51,401
)
Write down of asset and accumulated depreciation on impaired assets
 


(8,597
)
(7,144
)
Properties classified as held for sale during the year
 



(24,156
)
Other (1)
 
(3,819
)
(95
)
(3,372
)
(3,388
)
Balance at close of year
 
$
1,643,077

$
1,627,636

$
1,669,764

$
1,358,529

 
Reconciliations of accumulated depreciation/amortization for the year ended December 31, 2019, the transition period ended December 31, 2018, and the fiscal years ended April 30, 2018 and 2017, are as follows:
 
 
(in thousands)
 
 
Year Ended
Transition Period Ended
Year Ended April 30,
 
 
December 31, 2019
December 31, 2018
2018
2017
Balance at beginning of year
 
$
353,871

$
311,324

$
255,599

$
237,859

Additions during year
 
 
 

 

 

Provisions for depreciation
 
71,787

49,208

78,785

42,960

Deductions during year
 
 
 

 

 

Accumulated depreciation on real estate sold or classified as held for sale
 
(72,758
)
(6,609
)
(11,033
)
(14,687
)
Write down of asset and accumulated depreciation on impaired assets
 


(8,597
)
(7,144
)
Other (1)
 
(3,778
)
(52
)
(3,430
)
(3,389
)
Balance at close of year
 
$
349,122

$
353,871

$
311,324

$
255,599








F-41


INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
December 31, 2019
Schedule III - REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands)

Reconciliations of development in progress for the year ended December 31, 2019, the transition period ended December 31, 2018 and the fiscal years ended April 30, 2018 and 2017, are as follows:
 
 
 
(in thousands)
 
 
Year Ended
Transition Period Ended
Year Ended April 30,
 
 
December 31, 2019
December 31, 2018
2018
2017
Balance at beginning of year
 



$
51,681

Additions during year
 
 
 
 
 
Unimproved land moved to development in progress
 




Improvements and other
 



7,762

Deductions during year
 
 
 
 
 
Development placed in service (2)
 



(59,443
)
Balance at close of year
 




 

F-42


INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
December 31, 2019
 
Schedule III - REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands)

Reconciliations of unimproved land for the year ended December 31, 2019, the transition period ended December 31, 2018 and the fiscal years ended April 30, 2018 and 2017 are as follows: 
 
 
 
(in thousands)
 
 
Year Ended
Transition Period Ended
Year Ended April 30,
 
 
December 31, 2019
December 31, 2018
2018
2017
Balance at beginning of year
 
$
5,301

$
11,476

$
18,455

$
20,939

Additions during year
 
 
 

 

 

Improvements and other
 



1,024

Deductions during year
 
 
 

 

 

Cost of real estate sold
 
(3,925
)
(4,954
)
(1,000
)

Impairment charge
 

(1,221
)
(2,617
)
(3,508
)
Properties classified as held for sale during the year
 


(3,288
)

Unimproved land moved to development in progress
 




Other (1)
 


(74
)

Balance at close of year
 
1,376

5,301

11,476

18,455

 
 
 
 
 
 
Total real estate investments, excluding mortgage notes receivable (3)
 
$
1,295,331

$
1,279,066

$
1,369,916

$
1,121,385

 
(1)
Consists of miscellaneous disposed assets.
(2)
Includes development projects that are placed in service in phases.
(3)
The net basis, including held for sale properties, for Federal Income Tax purposes was $1.3 billion, $1.2 billion, $1.5 billion and $1.4 billion at December 31, 2019, December 31, 2018, April 30, 2018, and April 30, 2017, respectively.


F-43



DESCRIPTION OF THE REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934
Investors Real Estate Trust (the “Trust”) has two classes of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”): (1) our common shares of beneficial interest, no par value (our “common shares”); and (2) our 6.625% Series C Convertible Redeemable Preferred Shares (the “Series C Preferred Shares”).
The following description of our common shares and our Series C Preferred Shares is a summary and does not purport to be complete. It is subject to and qualified in its entirety by reference to our Articles of Amendment and Third Restated Declaration of Trust, as amended and supplemented (“Declaration of Trust”), and our Sixth Restated Trustees' Regulations (“Bylaws”), each of which is incorporated by reference as an exhibit to the Annual Report on Form 10-K, of which this Exhibit is a part. We encourage you to read our Declaration of Trust and our Bylaws for additional information.
Description of Common Shares
General
We are authorized, under our Declaration of Trust, to issue an unlimited number of our shares of beneficial interest. Our Board of Trustees is authorized, under our Declaration of Trust, to provide for the issuance of shares of beneficial interest upon such terms and conditions as our Board of Trustees may determine and, further, to establish by resolution more than one class or series of shares of beneficial interest and to fix the relative rights and preferences of these different classes or series. The rights and preferences of any class or series of shares of beneficial interest will be stated in the articles supplementary to our Declaration of Trust establishing the terms of that class or series adopted by our Board of Trustees and will become part of our Declaration of Trust.
The voting rights and rights to distributions of the holders of common shares are subject to the prior rights of the holders of our preferred shares that may be outstanding from time to time. Unless otherwise required by applicable law or regulation, classes or series of preferred shares are issuable without further authorization by holders of the common shares and on such terms and for such consideration as may be determined by our Board of Trustees. Classes or series of preferred shares may have varying voting rights, redemption, and conversion features, distribution (including liquidating distribution) rights and preferences, and other rights, including rights of approval of specified transactions. Any class or series of preferred shares could be given rights that are superior to rights of holders of common shares and a class or series having preferential distribution rights could limit common share distributions and reduce the amount holders of common shares would otherwise receive on dissolution.
Voting Rights
Subject to the provisions of our Declaration of Trust regarding the restriction on the transfer of our common shares, holders of our common shares are entitled to one vote per share on all matters voted on by shareholders, including the election of trustees. Our common shares do not have cumulative voting rights.
Our Declaration of Trust generally provides that whenever any action is to be taken by the holders of our common shares, including the amendment of our Declaration of Trust if such amendment is previously approved by our Board of Trustees, such action will be authorized by a majority of the voting power of the holders of our common shares present in person or by proxy at a meeting at which a quorum is present, except as otherwise required by law, our Declaration of Trust or our Bylaws. Our Declaration of Trust further provides the following:
1.
That the following actions will be authorized by the affirmative vote of our common shares possessing a majority of the voting power of our common shares then outstanding and entitled to vote on such action:
our termination;
our merger with or into another entity;
our consolidation with one or more other entities into a new entity;
the disposition of all or substantially all of our assets; and
the amendment of the Declaration of Trust, if such amendment has not been previously approved by our Board of Trustees.

1



2.
That a member of our Board of Trustees may be removed with or without cause by the holders of our common shares by the affirmative vote of not less than two-thirds of our common shares then outstanding and entitled to vote on such matter.
Our Declaration of Trust also permits our Board of Trustees, by a two-thirds vote and without any action by the holders of our common shares, to amend our Declaration of Trust from time to time as necessary to enable us to continue to qualify as a real estate investment trust (“REIT”) under the Internal Revenue Code (the “Code”).
 Dividend, Distribution, Liquidation and Other Rights.    
Subject to the preferential rights to holders of shares of our Series C Preferred Stock, other preferred shares that we may issue from time to time, and the provisions of our Declaration of Trust regarding the restriction on the transfer of our common shares, holders of our common shares are entitled to receive dividends on their common shares if, as, and when authorized and declared by our Board of Trustees and to share ratably in our assets legally available for distribution to our shareholders in the event of our liquidation, dissolution or winding up after payment of, or adequate provision for, all known debts and liabilities. Our common shares have equal dividend, distribution, liquidation, and other rights. Our common shares have no preference, conversion, exchange, sinking fund, or redemption rights.
Ownership and Transfer Restrictions
Our Declaration of Trust contains provisions that are intended to help preserve our status as a REIT for federal income tax purposes. Specifically, our Declaration of Trust provides that any transaction that would result in our disqualification as a REIT under Section 856 of the Code, including any transaction that would result in (1) a person owning shares of beneficial interest in excess of the ownership limit of 9.8%, in number or value, of our outstanding shares of beneficial interest, (2) less than 100 people owning our shares of beneficial interest, (3) us being "closely held" (within the meaning of Section 856(h) of the Code), or (4) 50% or more of the fair market value of our shares of beneficial interest being held by persons other than United States persons, will be void ab initio. If such transaction is not void ab initio, then the shares of beneficial interest that are 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, would 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.
In such event, any distributions on excess shares will be paid to the excess share trust for the benefit of the charitable beneficiaries. The excess share trustee will be entitled to vote the excess shares, if applicable, on any matter. The excess share trustee may only transfer the excess shares held in the excess share trust as follows:
if shares of beneficial interest were transferred to the excess share trustee due to a transaction or event that would have caused a violation of the ownership limit or would have caused us to be closely held then, at the direction of our Board of Trustees, the excess share trustee will transfer the excess shares to the person who makes the highest offer for the excess shares, pays the purchase price and whose ownership will not violate the ownership limit or cause us to be closely held; or
if excess shares were transferred to the excess share trustee due to a transaction or event that would have caused persons other than United States persons to own more than 50% of the value of our shares of beneficial interest then, at the direction of our Board of Trustees, the excess share trustee will transfer the excess shares to the United States person who makes the highest offer for the excess shares and pays the purchase price.
We have certain rights to purchase excess shares from the excess share trustee and must have waived these rights prior to a transfer as described above.
Power to Reclassify Our Unissued Shares of Beneficial Interest
Our Declaration of Trust authorizes our Board of Trustees to classify and reclassify any unissued common or preferred shares into other classes or series of shares of beneficial interest. Prior to the issuance of shares of each class or series, our Board of Trustees is required by our Declaration of Trust to set, subject to the provisions of our Declaration of Trust regarding the restrictions on ownership and transfer of shares of beneficial interest, the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each class or series. Therefore, our Board of Trustees could authorize the issuance of common shares or preferred shares that have priority over our common shares as to voting rights, dividends or upon liquidation or with terms and conditions that could

2



have the effect of delaying, deferring or preventing a change in control or other transaction that might involve a premium price for our common shares or otherwise be in the best interests of our common shareholders.
Fully Paid Shares
The common shares will be duly authorized, fully paid, and nonassessable when issued.
Anti-Takeover Provisions Contained in Our Declaration of Trust and Bylaws
Certain provisions of our Declaration of Trust and Bylaws may make it less likely that our management would be changed or someone would acquire control of our company without the consent of our Board of Trustees. These provisions may delay, defer, or prevent a change in control or takeover attempts that shareholders may believe are in their best interests, including tender offers or attempts that might allow shareholders to receive premiums over the market price of their common shares.
Trustee Nomination and Election Procedures.  In order to nominate candidates for the Board of Trustees, a shareholder must follow the advance notice procedures described in our Bylaws. In general, a shareholder must give written notice of such nomination to our secretary no earlier than the close of business on the 120th day and no later than the close of business on the 90th day prior to the first anniversary of the preceding year’s annual meeting, together with required information regarding the shareholder proponent and the nominee and the written consent of the nominee to serve as trustee. (Notwithstanding the foregoing, in the event that the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary, date, the proposed notice must be no earlier than the close of business on the 120th day prior to the date of such annual meeting and no later than the close of business on the later of the 90th day prior to the date of such annual meeting or, if the first public announcement of the date of such annual meeting is less than 100 days prior to the date of such annual meeting, no later than the 10th day following the day on which public announcement of the date of such meeting is first made by the Trust.) At each shareholder meeting, 33-1/3% of the outstanding shares entitled to vote represented in person or by proxy shall constitute a quorum at such meeting, and at any such meeting, trustees are elected by a majority of shareholders present in person or by proxy at a meeting at which a quorum is present.
Trustee Removal Procedures. A trustee may be removed with or without cause (1) by the affirmative vote of shareholders holding shares of beneficial interest possessing not less than two-thirds of the voting power of shares of beneficial interest then outstanding and entitled to vote thereon, or (2) by the trustees then in office by a two-thirds vote (which action shall be taken only by vote at a meeting and not by authorization without a meeting, notwithstanding anything in the Declaration of Trust to the contrary); provided, however, that an independent trustee may only be removed by the other independent trustees then in office by a two-thirds vote of such other independent trustees and, in the case of any trustees elected by holders of a class or series of preferred shares of beneficial interest, such trustee may be removed without cause by the affirmative vote of shareholders holding shares of beneficial interest possessing not less than two-thirds of the voting power of such class or series of preferred shares of beneficial interest.
Shareholder Proposal Procedures.  Shareholders can propose that business other than nominations to the Board of Trustees be considered at an annual meeting of shareholders only if a shareholder follows the advance notice procedures described in our Bylaws. In general, a shareholder must submit a written notice of the proposal together with required information regarding the shareholder (or the shareholder group) and the shareholder's interest in the proposal to the Secretary of the Trust no earlier than the close of business on the 120th day and no later than the close of business on the 90th day prior to the first anniversary of the preceding year’s annual meeting. (Notwithstanding the foregoing, in the event that the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary, date, the proposed notice must be no earlier than the close of business on the 120th day prior to the date of such annual meeting and no later than the close of business on the later of the 90th day prior to the date of such annual meeting or, if the first public announcement of the date of such annual meeting is less than 100 days prior to the date of such annual meeting, no later than the 10th day following the day on which public announcement of the date of such meeting is first made by the Trust.). Shareholders seeking to have a proposal, other than trustee nominations, considered for inclusion in our annual proxy statement must comply with the requirements of Regulation 14A of the Exchange Act and the rules and regulations promulgated thereunder.
Transfer Restrictions and Ownership Limitations of Shares. As described in greater detail under “Ownership and Transfer Restrictions” above, our Declaration of Trust places limitations on share ownership that would result in our disqualification as a REIT under Section 856 of the Code, including any transaction that would result in (1) a person

3



owning shares of beneficial interest in excess of the ownership limit of 9.8%, in number or value, of our outstanding shares of beneficial interest, (2) less than 100 people owning our shares of beneficial interest, (3) us being "closely held" (within the meaning of Section 856(h) of the Code), or (4) 50% or more of the fair market value of our shares of beneficial interest being held by persons other than United States persons, will be void ab initio. Although our Board of Trustees may from time to time increase or decrease the current 9.8% ownership limit, our Declaration of Trust provides that the ownership limit may not be increased if, after giving effect to such increase, five individual beneficial owners of our shares could beneficially own, in the aggregate, more than 49.9% in number or value of our outstanding shares. These ownership restrictions may impair the ability of someone to take over or otherwise acquire control of the Trust without the Board of Trustees’ consent.
Listing 
Our common shares are traded on the New York Stock Exchange under the symbol “IRET.”       
Description of Series C Preferred Shares
General
We currently are authorized to issue an unlimited number of preferred shares of beneficial interest, no par value, in one or more classes or series. Each class or series will have designations, powers, preferences, rights, qualifications, limitations or restrictions as North Dakota law may permit and our Board of Trustees may determine by adoption of applicable articles supplementary to our Declaration of Trust. Our Board of Trustees may, without notice to or the consent of holders of Series C Preferred Shares, authorize the issuance and sale of additional Series C Preferred Shares and authorize and issue additional shares of our parity equity securities from time to time.
Prior to the redemption of our Series A preferred shares, we had 1,150,000 Series A preferred shares outstanding. On December 2, 2016, we completed the redemption of all outstanding Series A Preferred Shares. Prior to the redemption of our Series B Preferred Shares, we had 4,600,000 Series B Preferred Shares issued and outstanding. On October 30, 2017, we completed the redemption of all outstanding Series B Preferred Shares. We currently have 4,118,460 shares of our Series C Preferred Shares outstanding, the material terms of which are described below. We have no other series of preferred shares currently outstanding.
Ranking
The Series C Preferred Shares will rank senior to our common shares and any class or series of our junior equity securities, pari passu with any of our parity equity securities, and junior to any class or series of our senior equity securities. The affirmative vote of the holders of at least two-thirds of the outstanding Series C Preferred Shares at the time and all of our parity equity securities upon which like voting rights have been conferred and are exercisable (voting together as a single class) is required for us to authorize, create or increase the number of any class or series of senior equity securities. Any convertible or exchangeable debt securities that we may issue will not be considered to be equity securities for these purposes. The Series C Preferred Shares will rank junior in right of payment to all of our existing and future indebtedness.
Dividends
Subject to the preferential rights of holders of any class or series of our senior equity securities, holders of Series C Preferred Shares will be entitled to receive, when, as and if authorized by our Board of Trustees, out of funds legally available for the payment of dividends, cumulative cash dividends at the rate of 6.625% per annum of the $25.00 per share liquidation preference, equivalent to $1.65625 per annum per Series C Preferred Share. Dividends on the Series C Preferred Shares will accrue and be cumulative from, but excluding, the original date of issuance of any Series C Preferred Shares and will be payable quarterly in arrears on or about the last day of March, June, September and December of each year. Dividends payable on the Series C Preferred Shares for any partial period will be computed on the basis of a 360-day year consisting of twelve 30-day months. We will pay dividends to holders of record as they appear in our share records at the close of business on the applicable record date, which will be the fifteenth day of the calendar month in which the applicable dividend payment date falls, or such other date as designated by our Board of Trustees for the payment of dividends that is not more than 90 days nor fewer than 10 days prior to the dividend payment date.
Our Board of Trustees will not authorize, and we will not pay, any dividends on the Series C Preferred Shares or set aside funds for the payment of dividends if the terms of any of our agreements, including agreements relating to our indebtedness, prohibit that authorization, payment or setting aside of funds or if the authorization, payment or setting aside of

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funds would constitute a breach of or a default under any such agreement, or if the authorization, payment or setting aside of funds is restricted or prohibited by law. We are and may in the future become a party to agreements that restrict or prevent the payment of dividends on, or the purchase or redemption of, our shares. Under certain circumstances, these agreements could restrict or prevent the payment of dividends on or the purchase or redemption of Series C Preferred Shares. These restrictions may be indirect (for example, covenants requiring us to maintain specified levels of net worth or assets) or direct. These restrictions currently do not have any adverse impact on our ability to pay dividends on the Series C Preferred Shares.
Notwithstanding the foregoing, dividends on the Series C Preferred Shares will accrue whether or not we have earnings, whether or not there are funds legally available for the payment of dividends, whether or not dividends are authorized, and whether or not the restrictions referred to above exist. Accrued but unpaid dividends on the Series C Preferred Shares will not bear interest, and the holders of Series C Preferred Shares will not be entitled to any dividends in excess of full cumulative dividends as described above. All of our dividends on Series C Preferred Shares, including any capital gain dividends, will be credited to the previously accrued and unpaid dividends on the Series C Preferred Shares. We will credit any dividend made on the Series C Preferred Shares first to the earliest accrued and unpaid dividend due.
We will not declare or pay any dividends (other than in the form of our common shares or any other junior equity securities), or set aside any funds for the payment of dividends, on our common shares or our other junior or parity equity securities, or redeem, purchase or otherwise acquire, or set aside or make available payment for a sinking fund for the redemption of, our common shares or our other junior or parity equity securities, unless we also have declared and either paid or set aside for payment the full cumulative dividends on the Series C Preferred Shares for all past dividend periods, except by conversion into or exchange for shares of, or options, warrants, or rights to purchase or subscribe for, our junior equity securities or pursuant to an exchange offer made on the same terms to all holders of Series C Preferred Shares and our parity equity securities. This restriction will not limit our redemption or other acquisition of our common shares made for purposes of and in compliance with any incentive, benefit or share purchase plan of ours or for the purposes of enforcing restrictions upon ownership and transfer of our equity securities contained in our Declaration of Trust. Notwithstanding the foregoing, subject to applicable law and the terms of our outstanding indebtedness, we may purchase common shares and Series C Preferred Shares in the open market from time to time, by tender or by private agreement. If we do not declare and either pay or set aside for payment the full cumulative dividends on the Series C Preferred Shares and our parity equity securities, if any, the amount which we declare will be allocated pro rata to the Series C Preferred Shares and our parity equity securities, if any, so that the amount declared per share is proportionate to the accrued and unpaid dividends on those shares.
If we do not declare and either pay or set aside for payment the full cumulative dividends on the Series C Preferred Shares and our parity equity securities, if any, the amount which we declare will be allocated pro rata to the Series C Preferred Shares and our parity equity securities, if any, so that the amount declared per share is proportionate to the accrued and unpaid dividends on those shares.
Liquidation Rights
In the event of our liquidation, dissolution or winding up, whether voluntary or involuntary, the holders of Series C Preferred Shares will be entitled to be paid out of our assets legally available for distribution to our shareholders a liquidation preference in cash or property, at fair market value as determined by our Board of Trustees, of $25.00 per share, plus any accrued and unpaid dividends to and including the date of the payment. Holders of Series C Preferred Shares will be entitled to receive this liquidating distribution before we distribute any assets to holders of our common shares and our other junior equity securities, if any, and will be on parity with the rights of holders of any parity equity securities. The rights of holders of Series C Preferred Shares to receive their liquidation preference would be subject to preferential rights of the holders of our existing and future indebtedness and our senior equity securities, if any.
Written notice will be given to each holder of Series C Preferred Shares of any such liquidation no fewer than 30 days and no more than 60 days prior to the payment date. After payment of the full amount of the liquidating distribution to which they are entitled, the holders of Series C Preferred Shares will have no right or claim to any of our remaining assets. If we consolidate or merge with any other entity, sell, lease, transfer or convey all or substantially all of our assets, or engage in a statutory share exchange, we will not be deemed to have liquidated if, following the transaction, the Series C Preferred Shares remain outstanding as duly authorized shares of beneficial interest of any successor entity having the same rights and preferences as prior to the transaction. In the event our assets are insufficient to pay the full liquidating distributions to the holders of Series C Preferred Shares and our parity equity securities, then we will distribute our assets to the holders of Series C Preferred Shares and our parity equity securities, ratably in proportion to the full liquidating distributions they would have otherwise received.

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Redemption
Except as provided in the Declaration of Trust, no distributions shall be declared and paid or set apart for payment, and no other distribution of cash or other property may be declared and made, directly or indirectly, on or with respect to, shares of any class or series of parity shares or junior shares (other than a distribution paid in, or options, warrants or rights to subscribe for or purchase, junior shares) for any period, nor shall shares of any class or series of parity shares or junior shares be redeemed, purchased or otherwise acquired for any consideration (other than a redemption, purchase or acquisition of common shares made for purposes of and in compliance with requirements of any incentive, benefit or share purchase plan of the Trust or any subsidiary thereof, or as permitted under the Declaration of Trust), nor shall any funds be paid or made available for a sinking fund for the redemption of any such shares by the Trust, directly or indirectly (except by conversion into or exchange for, or options, warrants or rights to purchase or subscribe for, junior shares, and except for purchases or exchanges pursuant to a purchase or exchange offer made on the same terms to all holders of Series C Preferred Shares and all holders of parity shares), unless full cumulative distributions on the Series C Preferred Shares for all past distribution periods shall have been or contemporaneously are declared and paid or declared and sum sufficient for the payment thereof is set apart for such payment.
Unless full cumulative distributions on all Series C Preferred Shares shall have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for all past distribution periods, (1) no Series C Preferred Shares or parity shares shall be redeemed unless all outstanding Series C Preferred Shares are simultaneously redeemed, and (2) the Trust shall not purchase or otherwise acquire directly or indirectly for any consideration, nor shall any monies be paid to or be made available for a sinking fund for the redemption of, any Series C Preferred Shares or parity shares (except by conversion into or exchange for, or options, warrants or rights to purchase or subscribe for, junior shares); provided, however, that the foregoing shall not prevent the redemption or purchase by the Trust of Series C Preferred Shares or parity shares pursuant to the Declaration of Trust or otherwise in order to ensure that the Trust remains qualified as a REIT for federal income tax purposes or the purchase or acquisition of Series C Preferred Shares pursuant to a purchase or exchange offer made on the same terms to all holders of Series C Preferred Shares.
Unless full cumulative distributions on all Series C Preferred Shares shall have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for all past distribution periods, (1) no Series C Preferred Shares shall be redeemed pursuant to a change of control unless all outstanding Series C Preferred Shares are simultaneously redeemed, and (2) the Trust shall not purchase or otherwise acquire directly or indirectly for any consideration, nor shall any monies be paid to or be made available for a sinking fund for the redemption of, any Series C Preferred Shares (except by conversion into or exchange for, or options, warrants or rights to purchase or subscribe for, junior shares); provided, however, that the foregoing shall not prevent the redemption or purchase by the Trust of Series C Preferred Shares pursuant to the Declaration of Trust or otherwise in order to ensure that the Trust remains qualified as a REIT for federal income tax purposes or the purchase or acquisition of Series C Preferred Shares pursuant to a purchase or exchange offer made on the same terms to all holders of Series C Preferred Shares.
Optional Redemption
We may not redeem the Series C Preferred Shares prior to October 2, 2022, except as described below under ‘‘-Special Optional Redemption’’ and ‘‘-Restrictions on Ownership and Transfer.’’ On and after October 2, 2022, upon no fewer than 30 days’ nor more than 60 days’ written notice, we may, at our option, redeem the Series C Preferred Shares, in whole or from time to time in part, by paying $25.00 per share, plus any accrued and unpaid dividends to, but not including, the date of redemption. Any decision we may make at any time to propose a redemption of the Series C Preferred Shares, if and when we have the right to do so, will depend upon, among other things, our evaluation of our capital position, the composition of our stockholders’ equity and general market conditions at that time. We are under no obligation, and holders of Series C Preferred Shares should not expect us, to exercise our redemption right. If we elect to redeem any or all of the Series C Preferred Shares, we will mail notice of the redemption to each holder of record of Series C Preferred Shares at the address shown on our share transfer books. A failure to give notice of redemption or any defect in the notice or in its mailing will not affect the validity of the redemption of any Series C Preferred Shares except as to the holder to whom notice was defective. Each notice will state the following:
the redemption date;
the redemption price;
the number of Series C Preferred Shares to be redeemed;
the place or places where the certificates, if any, representing the Series C Preferred Shares to be redeemed are to be surrendered for payment;
the procedures for surrendering non-certificated shares for payment; and

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that dividends on the Series C Preferred Shares to be redeemed will cease to accrue on the redemption date.
If we redeem fewer than all of the Series C Preferred Shares, the notice of redemption mailed to each shareholder will also specify the number of Series C Preferred Shares that we will redeem from each shareholder. In this case, we will determine the number of Series C Preferred Shares to be redeemed on a pro rata basis or by lot.
If we elect to redeem any of the Series C Preferred Shares in connection with a Change of Control (as defined below under ‘‘-Special Optional Redemption’’) and we intend for such redemption to occur prior to the applicable Change of Control Conversion Date (as defined below under ‘‘-Conversion Rights’’), our redemption notice will also state that the holders of Series C Preferred Shares to which the notice relates will not be able to tender such Series C Preferred Shares for conversion in connection with the Change of Control and each Series C Preferred Share tendered for conversion that is selected for redemption prior to the Change of Control Conversion Date will be redeemed on the related date of redemption instead of converted on the Change of Control Conversion Date.
If we have given a notice of redemption and have paid or set aside sufficient funds for the redemption in trust for the benefit of the holders of Series C Preferred Shares called for redemption, then from and after the redemption date, those Series C Preferred Shares will be treated as no longer being outstanding, no further dividends will accrue and all other rights of the holders of those Series C Preferred Shares will terminate. The holders of those Series C Preferred Shares will retain their right to receive the redemption price for their shares and any accrued and unpaid dividends to, but not including, the redemption date.
The holders of Series C Preferred Shares at the close of business on a dividend record date will be entitled to receive the dividend payable with respect to the Series C Preferred Shares on the corresponding payment date notwithstanding the redemption of the Series C Preferred Shares between such record date and the corresponding payment date or our default in the payment of the dividend due. Except as provided above and in connection with a redemption pursuant to our special optional redemption, we will make no payment or allowance for unpaid dividends, whether or not in arrears, on Series C Preferred Shares to be redeemed.
The Series C Preferred Shares have no stated maturity and will not be subject to any sinking fund or mandatory redemption provisions. However, in order to ensure that we continue to meet the requirements for qualification as a REIT, the Series C Preferred Shares will be subject to restrictions on ownership and transfer, as described under ‘‘-Restrictions on Ownership and Transfer’’ below.
Subject to applicable law and the terms of our outstanding indebtedness, we may purchase common shares and Series C Preferred Shares in the open market from time to time. Any Series C Preferred Shares that we reacquire will return to the status of authorized but unissued shares.
Special Optional Redemption
In the event of a Change of Control, we may, at our option, redeem the Series C Preferred Shares, in whole or in part and within 120 days after the first date on which such Change of Control occurred, by paying $25.00 per share, plus any accrued and unpaid dividends to, but not including, the date of redemption. If, prior to the Change of Control Conversion Date, we provide or have provided notice of our election to redeem some or all of the Series C Preferred Shares (whether pursuant to our optional redemption right or our special optional redemption right), the holders of Series C Preferred Shares will not be permitted to exercise the conversion right described below under ‘‘-Conversion Rights’’ in respect of their shares called for redemption.
If we elect to redeem any or all of the Series C Preferred Shares, we will mail notice of the redemption to each holder of record of Series C Preferred Shares at the address shown on our share transfer books no fewer than 30 days nor more than 60 days before the redemption date. A failure to give notice of redemption or any defect in the notice or in its mailing will not affect the validity of the redemption of any Series C Preferred Shares except as to the holder to whom notice was defective.
Each notice will state the following:
the redemption date;
the redemption price;
the number of Series C Preferred Shares to be redeemed;

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the place or places where the certificates, if any, evidencing the Series C Preferred Shares to be redeemed are to be surrendered for payment;
the procedures for surrendering non-certificated shares for payment;
that the Series C Preferred Shares are being redeemed pursuant to our special optional redemption right in connection with the occurrence of a Change of Control and a brief description of the transaction or transactions constituting such Change of Control;
that the holders of Series C Preferred Shares to which the notice relates will not be able to tender such Series C Preferred Shares for conversion in connection with the Change of Control and each Series C Preferred Share tendered for conversion that is selected, prior to the Change of Control Conversion Date, for redemption will be redeemed on the related date of redemption instead of converted on the Change of Control Conversion Date; and
that dividends on the Series C Preferred Shares to be redeemed will cease to accrue on the redemption date.
If we redeem fewer than all of the Series C Preferred Shares, the notice of redemption mailed to each shareholder will also specify the number of Series C Preferred Shares that we will redeem from each shareholder. In this case, we will determine the number of Series C Preferred Shares to be redeemed on a pro rata basis or by lot.
If we have given a notice of redemption and have paid or set aside sufficient funds for the redemption in trust for the benefit of the holders of Series C Preferred Shares called for redemption, then from and after the redemption date, those Series C Preferred Shares will be treated as no longer being outstanding, no further dividends will accrue and all other rights of the holders of those Series C Preferred Shares will terminate. The holders of those Series C Preferred Shares will retain their right to receive the redemption price for their shares and any accrued and unpaid dividends to, but not including, the redemption date.
The holders of Series C Preferred Shares at the close of business on a dividend record date will be entitled to receive the dividend payable with respect to the Series C Preferred Shares on the corresponding payment date notwithstanding the redemption of the Series C Preferred Shares between such record date and the corresponding payment date or our default in the payment of the dividend due. Except as provided above, we will make no payment or allowance for unpaid dividends, whether or not in arrears, on Series C Preferred Shares to be redeemed.
A ‘‘Change of Control’’ is when, after the original issuance of the Series C Preferred Shares, the following have occurred and are continuing:
the acquisition by any person, including any syndicate or group deemed to be a ‘‘person’’ under Section 13(d)(3) of the Exchange Act, of beneficial ownership, directly or indirectly, through a purchase, merger or other acquisition transaction or series of purchases, mergers or other acquisition transactions of shares of the Trust entitling that person to exercise more than 50% of the total voting power of all shares of the Trust entitled to vote generally in elections of trustees (except that such person will be deemed to have beneficial ownership of all securities that such person has the right to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition); and
following the closing of any transaction referred to in the bullet point above, neither we nor the acquiring or surviving entity has a class of common securities (or ADRs representing such securities) listed on the NYSE, the NYSE American or Nasdaq or listed or quoted on an exchange or quotation system that is a successor to the NYSE, the NYSE American or Nasdaq.
Conversion Rights
Upon the occurrence of a Change of Control, each holder of Series C Preferred Shares will have the right (subject to our right to redeem the Series C Preferred Shares in whole or in part, as described under ‘‘-Redemption,’’ prior to the Change of Control Conversion Date) to convert some or all of the Series C Preferred Shares held by such holder (the ‘‘Change of Control Conversion Right’’) on the Change of Control Conversion Date into a number of our common shares per share of Series C Preferred Shares (the ‘‘Common Share Conversion Consideration’’) equal to the lesser of:
the quotient obtained by dividing (1) the sum of the $25.00 liquidation preference plus the amount of any accrued and unpaid dividends to, but not including, the Change of Control Conversion Date (unless the Change of Control Conversion Date is after a record date for a Series C Preferred Share dividend payment and prior to the corresponding Series C Preferred Share dividend payment date, in which case no additional

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amount for such accrued and unpaid dividend will be included in this sum) by (2) the Common Share Price; and
8.5616 (the ‘‘Share Cap’’).
The Share Cap is subject to pro rata adjustments for any share splits (including those effected pursuant to a dividend of our common shares), subdivisions or combinations (in each case, a ‘‘Share Split’’) with respect to our common shares. The adjusted Share Cap as the result of a Share Split will be the number of our common shares that is equivalent to the product obtained by multiplying (1) the Share Cap in effect immediately prior to such Share Split by (2) a fraction, (a) the numerator of which is the number of our common shares outstanding after giving effect to such Share Split and (b) the denominator of which is the number of our common shares outstanding immediately prior to such Share Split.
For the avoidance of doubt, subject to the immediately succeeding sentence, the aggregate number of our common shares (or equivalent Alternative Conversion Consideration (as defined below), as applicable) issuable in connection with the exercise of the Change of Control Conversion Right will not exceed 35,260,607 shares (or equivalent Alternative Conversion Consideration, as applicable) (the ‘‘Exchange Cap’’). The Exchange Cap is subject to pro rata adjustments for any Share Splits on the same basis as the corresponding adjustment to the Share Cap and for additional issuances of Series C Preferred Shares, if any.
In the case of a Change of Control pursuant to which our common shares will be converted into cash, securities, or other property or assets (including any combination thereof) (the ‘‘Alternative Form Consideration’’), a holder of Series C Preferred Shares will receive upon conversion of such Series C Preferred Shares the kind and amount of Alternative Form Consideration which such holder would have owned or been entitled to receive upon the Change of Control had such holder held a number of our common shares equal to the Common Share Conversion Consideration immediately prior to the effective time of the Change of Control (the ‘‘Alternative Conversion Consideration,’’ and the Common Share Conversion Consideration or the Alternative Conversion Consideration, as may be applicable to a Change of Control, is referred to as the ‘‘Conversion Consideration’’).
If the holders of our common shares have the opportunity to elect the form of consideration to be received in the Change of Control, the consideration that the holders of Series C Preferred Shares will receive will be the form and proportion of the aggregate consideration elected by the holders of our common shares who participate in the determination (based on the weighted average of elections) and will be subject to any limitations to which all holders of our common shares are subject, including, without limitation, pro rata reductions applicable to any portion of the consideration payable in the Change of Control.
We will not issue fractional common shares upon the conversion of the Series C Preferred Shares. Instead, we will pay the cash value of such fractional shares based on the Common Share Price. Within 15 days following the occurrence of a Change of Control, we will provide to holders of record of Series C Preferred Shares a notice of occurrence of the Change of Control that describes the resulting Change of Control Conversion Right. This notice will state the following:
the events constituting the Change of Control;
the date of the Change of Control;
the last date on which the holders of Series C Preferred Shares may exercise their Change of Control Conversion Right;
the method and period for calculating the Common Share Price;
the Change of Control Conversion Date;
that if, prior to the Change of Control Conversion Date, we provide or have provided notice of our election to redeem all or any portion of the Series C Preferred Shares, holders will not be able to convert Series C Preferred Shares and such shares will be redeemed on the related redemption date, even if such shares have already been tendered for conversion pursuant to the Change of Control Conversion Right;
if applicable, the type and amount of Alternative Conversion Consideration entitled to be received per Series C Preferred Share;
the name and address of the paying agent and the conversion agent; and
the procedures that the holders of Series C Preferred Shares must follow to exercise the Change of Control Conversion Right.

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To exercise the Change of Control Conversion Right, a holder of Series C Preferred Shares will be required to deliver, on or before the close of business on the Change of Control Conversion Date, the certificates (if any) evidencing Series C Preferred Shares to be converted, duly endorsed for transfer, together with a written, completed conversion notice to our transfer agent. The conversion notice must state:
the relevant Change of Control Conversion Date;
the number or percentage of Series C Preferred Shares to be converted; and
that the Series C Preferred Shares are to be converted pursuant to the applicable provisions of the Series C Preferred Shares.
The ‘‘Change of Control Conversion Date’’ is the date the Series C Preferred Shares are to be converted, which will be a business day that is no fewer than 20 days nor more than 35 days after the date on which we provide the notice described above to the holders of Series C Preferred Shares.
The ‘‘Common Share Price’’ will be: (1) the amount of cash consideration per common share, if the consideration to be received in the Change of Control by the holders of our common shares is solely cash; and (2) the average of the closing prices for our common shares on Nasdaq or the NYSE as the case may be, for the ten consecutive trading days immediately preceding, but not including, the effective date of the Change of Control, if the consideration to be received in the Change of Control by the holders of our common shares is other than solely cash.
Holders of Series C Preferred Shares may withdraw any notice of exercise of a Change of Control Conversion Right (in whole or in part) by a written notice of withdrawal delivered to our transfer agent prior to the close of business on the business day prior to the Change of Control Conversion Date. The notice of withdrawal must state:
the number of withdrawn Series C Preferred Shares;
if certificated Series C Preferred Shares have been issued, the certificate numbers of the withdrawn Series C Preferred Shares; and
the number of Series C Preferred Shares, if any, which remain subject to the conversion notice.
Notwithstanding the foregoing, if the Series C Preferred Shares are held in global form, the conversion notice and/or the notice of withdrawal, as applicable, must comply with applicable procedures of the Depository Trust Company (“DTC”).
Series C Preferred Shares as to which the Change of Control Conversion Right has been properly exercised and for which the conversion notice has not been properly withdrawn will be converted into the applicable Conversion Consideration in accordance with the Change of Control Conversion Right on the Change of Control Conversion Date, unless prior to the Change of Control Conversion Date we provide or have provided notice of our election to redeem such Series C Preferred Shares, whether pursuant to our optional redemption right or our special optional redemption right. Holders of Series C Preferred Shares will not have the right to convert any shares that we have elected to redeem prior to the Change of Control Conversion Date. Accordingly, if we have provided a redemption notice with respect to some or all of the Series C Preferred Shares, holders of any Series C Preferred Shares that we have called for redemption will not be permitted to exercise their Change of Control Conversion Right in respect of any of their shares that have been called for redemption, and such Series C Preferred Shares will not be so converted and the holders of such shares will be entitled to receive on the applicable redemption date $25.00 per share, plus any accrued and unpaid dividends thereon to, but not including, the redemption date.
We will deliver amounts owing upon conversion no later than the third business day following the Change of Control Conversion Date. In connection with the exercise of any Change of Control Conversion Right, we will comply with all federal and state securities laws and stock exchange rules in connection with any conversion of Series C Preferred Shares into our common shares. Notwithstanding any other provision of the Series C Preferred Shares, no holder of Series C Preferred Shares will be entitled to convert such Series C Preferred Shares into our common shares to the extent that receipt of such common shares would cause such holder (or any other person) to exceed the share ownership limits contained in our Declaration of Trust and the articles supplementary setting forth the terms of the Series C Preferred Shares, unless we provide an exemption from this limitation for such holder. See ‘‘-Restrictions on Ownership and Transfer’’ below.
These Change of Control conversion and redemption features may make it more difficult for a party to take over the Trust or discourage a party from taking over the Trust.
Except as provided above in connection with a Change of Control, the Series C Preferred Shares are not convertible into or exchangeable for any other securities or property.

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Voting Rights
Holders of Series C Preferred Shares generally will have no voting rights, except as set forth below.
Whenever dividends on the Series C Preferred Shares are in arrears for six quarterly periods, whether or not consecutive (a ‘‘Preferred Dividend Default’’), the number of trustees then constituting our Board of Trustees will be increased by two and holders of Series C Preferred Shares and any other parity equity securities upon which like voting rights have been conferred and are exercisable will be entitled to vote (voting together as a single class) for the election of two additional trustees to serve on our Board of Trustees (the ‘‘Preferred Share Trustees’’). The election of the Preferred Share Trustees will occur at a special meeting called by the holders of at least 10% of the outstanding Series C Preferred Shares or any other parity equity securities upon which like voting rights have been conferred and are exercisable if the request is received 90 or more days before the next annual meeting of shareholders, or, if the request is received fewer than 90 days before the date fixed for the next annual or special meeting of shareholders, at the next annual or special meeting of shareholders, and at each subsequent annual meeting of shareholders until all dividends accumulated on the Series C Preferred Shares for the past dividend periods and the then-current dividend period have been paid or declared and set aside for payment in full. Each Preferred Share Trustee will be elected by a majority of the outstanding Series C Preferred Shares and our parity equity securities upon which like voting rights have been conferred and are exercisable (voting together as a single class) in the election to serve until our next annual meeting of shareholders and until such trustee’s successor is duly elected and qualified or until such trustee’s right to hold the office terminates as described below, whichever occurs earlier.
If and when all accumulated dividends in arrears for all past dividend periods and dividends for the then-current dividend period on the Series C Preferred Shares shall have been paid in full, the holders of Series C Preferred Shares will immediately be divested of the voting rights described above (subject to revesting in the event of each and every Preferred Dividend Default) and, if all accumulated dividends in arrears and the dividends for the then-current dividend period have been paid in full or set aside for payment in full on all our parity equity securities upon which like voting rights have been conferred and are exercisable, the term of office of each Preferred Share Trustee so elected will immediately terminate. Any Preferred Share Trustee may be removed at any time, with or without cause, by the vote of, and shall not be removed otherwise than by the vote of, the holders of record of at least two-thirds of the outstanding Series C Preferred Shares when they have the voting rights described above and any other parity equity securities upon which like voting rights have been conferred and are exercisable (voting together as a single class). So long as a Preferred Dividend Default continues, any vacancy in the office of a Preferred Share Trustee may be filled by written consent of the Preferred Share Trustee remaining in office or, if none remains in office, by a vote of the holders of record of the outstanding Series C Preferred Shares when they have the voting rights described above and all our parity equity securities upon which like voting rights have been conferred and are exercisable (voting together as a single class). Each Preferred Share Trustee will be entitled to one vote on any matter.
So long as any Series C Preferred Shares remain outstanding, we will not, without the affirmative vote or consent of the holders of at least two-thirds of the then-outstanding Series C Preferred Shares and our other parity equity securities (voting together as a single class):
authorize or create (including by reclassification), or increase the authorized or issued amount of, any class or series of senior equity securities, or reclassify any authorized shares of the Trust into any such senior equity securities, or create, authorize or issue any obligation or security convertible into, exchangeable for or evidencing the right to purchase or otherwise acquire any such senior equity securities; or
amend, alter, or repeal the provisions of our Declaration of Trust, whether by merger, consolidation, share exchange, or otherwise, or consummate a merger, consolidation, share exchange, or transfer involving the Trust, so as to materially and adversely affect any right, preference, privilege, or voting power of the Series C Preferred Shares or any of our parity equity securities, except that if such amendment, alteration or repeal of provisions of our Declaration of Trust materially and adversely affect any right, preference, privilege or voting power of the Series C Preferred Shares disproportionately relative to any of our other parity equity securities, the affirmative vote or consent of the holders of at least two-thirds of the then-outstanding Series C Preferred Shares (voting separately as a single class) shall be required.
Notwithstanding the preceding sentence, with respect to the occurrence of a merger or consolidation, if there are no senior equity securities (or, if applicable, equity securities of the surviving entity that rank, as to the payment of distributions or upon the liquidation, dissolution or winding up of the surviving entity, senior to our Series C Preferred Shares or any other of our parity equity securities) outstanding after any such merger or consolidation that were not outstanding immediately prior to such merger or consolidation, so long as (1) the Series C Preferred Shares or any other of our parity equity securities remain outstanding with the terms thereof materially unchanged or (2) the holders of Series C Preferred Shares and any other of our parity equity securities receive shares with rights, preferences, privileges and voting powers substantially the same as those of

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the Series C Preferred Shares or any other of our parity equity securities, as applicable, then, the occurrence of any such merger or consolidation will not be deemed to materially adversely affect any right, privilege or voting power of the Series C Preferred Shares or any other of our parity equity securities, or the holders thereof. In addition, any increase in the amount of authorized Series C Preferred Shares, the issuance of additional Series C Preferred Shares or the creation or issuance, or increase in the amounts authorized, of any other of our parity equity securities, will not be deemed to materially and adversely affect the rights, preferences, privileges or voting powers of the Series C Preferred Shares.
In any matter in which the holders of Series C Preferred Shares are entitled to vote separately as a single class, each Series C Preferred Share will be entitled to one vote. If the holders of Series C Preferred Shares and any other of our parity equity securities are entitled to vote together as a single class on any matter, the Series C Preferred Shares and the shares of any other of our parity equity securities will have one vote for each $25.00 of liquidation preference.
Restrictions on Ownership and Transfer
For us to qualify as a REIT under the Code, not more than 50% in value of our outstanding shares of capital stock may be owned, directly or indirectly, by five or fewer individuals, as defined in the Code. In order to assist us in meeting these requirements, among other purposes, our Declaration of Trust and the articles supplementary for the Series C Preferred Shares provide that any transaction that would result in our disqualification as a REIT under Section 856 of the Code, including any transaction that would result in (1) a person owning shares of beneficial interest in excess of the ownership limit of 9.8%, in number or value, of our outstanding shares of beneficial interest, (2) fewer than 100 people owning our shares of beneficial interest, (3) us being ‘‘closely held’’ (within the meaning of Section 856(h) of the Code), or (4) 50% or more of the fair market value of our shares of beneficial interest being held by persons other than United States persons, will be void ab initio.
Any ownership limit also applies to our outstanding shares of beneficial interest in the aggregate. Our Board of Trustees may, in its sole discretion, exempt a person from the ownership limits. Notwithstanding any other provision of the Series C Preferred Shares, no holder of Series C Preferred Shares will be entitled to convert any Series C Preferred Shares into our common shares to the extent that receipt of our common shares would cause such holder or any other person to exceed the ownership limit contained in our Declaration of Trust.
For more information regarding restrictions on ownership and transfer of our shares of beneficial interest, see "Ownership and Transfer Restrictions" under “Description of Common Shares,” which applies to ownership of Series C Preferred Shares as a separate class pursuant to Article II of our Declaration of Trust, under which Series C Preferred Shares owned by a shareholder in excess of the ownership limit will be transferred to a charitable trust and may be purchased by us under certain circumstances. Our Board of Trustees may, in its discretion, exempt a person from the 9.8% ownership limits under certain circumstances.
Preemptive Rights
No holders of Series C Preferred Shares shall, as the holders, have any preemptive rights to purchase or subscribe for our common shares or any other security of the Trust.
Stock Exchange Listing
Our Series C Preferred Shares are listed on the NYSE under the symbol "IRET-PC."
Book-Entry Procedures
The DTC will act as securities depositary for the Series C Preferred Shares. We may issue one or more fully registered global securities certificates in the name of DTC’s nominee, Cede & Co (or such other nominee as may be requested by DTC). Any such certificates will represent the total aggregate number of Series C Preferred Shares. We will deposit any such certificates with DTC or a custodian appointed by DTC. Unless otherwise required by our Declaration of Trust, we will not issue certificates for the Series C Preferred Shares, unless DTC’s services are discontinued as described below.
Title to book-entry interests in the Series C Preferred Shares will pass by book-entry registration of the transfer within the records of DTC in accordance with its procedures. Book-entry interests in the securities may be transferred within DTC in accordance with procedures established for these purposes by DTC. Each person owning a beneficial interest in the Series C Preferred Shares must rely on the procedures of DTC and the participant through which such person owns its interest to exercise its rights as a holder of the Series C Preferred Shares.

12



DTC has advised us that it is a limited-purpose trust company organized under the New York Banking Law, a ‘‘banking organization’’ within the meaning of the New York Banking Law, a member of the Federal Reserve System, a ‘‘clearing corporation’’ within the meaning of the New York Uniform Commercial Code and a ‘‘clearing agency’’ registered under the provisions of Section 17A of the Exchange Act. DTC holds securities that its participants (‘‘Direct Participants’’) deposit with DTC.
DTC also facilitates the settlement among Direct Participants of securities transactions, such as transfers and pledges, in deposited securities through electronic computerized book-entry changes in Direct Participants’ accounts, thereby eliminating the need for physical movement of securities certificates. Direct Participants include securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations.
Access to the DTC system is also available to others such as securities brokers and dealers, including the underwriters, banks and trust companies that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (‘‘Indirect Participants’’). The rules applicable to DTC and its Direct and Indirect Participants are on file with the SEC.
When you purchase Series C Preferred Shares within the DTC system, the purchase must be by or through a Direct Participant. The Direct Participant will receive a credit for the Series C Preferred Shares on DTC’s records. You, as the actual owner of the Series C Preferred Shares, are the ‘‘beneficial owner.’’ Your beneficial ownership interest will be recorded on the Direct and Indirect Participants’ records, but DTC will have no knowledge of your individual ownership. DTC’s records reflect only the identity of the Direct Participants to whose accounts Series C Preferred Shares are credited.
You will not receive written confirmation from DTC of your purchase. The Direct or Indirect Participants through whom you purchased the Series C Preferred Shares should send you written confirmations providing details of your transactions, as well as periodic statements of your holdings. The Direct and Indirect Participants are responsible for keeping an accurate account of the holdings of their customers like you.
Transfers of ownership interests held through Direct and Indirect Participants will be accomplished by entries on the books of Direct and Indirect Participants acting on behalf of the beneficial owners. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to beneficial owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.
We understand that, under DTC’s existing practices, in the event that we request any action of the holders, or an owner of a beneficial interest in a global security such as you desires to take any action which a holder is entitled to take under our Declaration of Trust, DTC would authorize the Direct Participants holding the relevant shares to take such action, and those Direct Participants and any Indirect Participants would authorize beneficial owners owning through those Direct and Indirect Participants to take such action or would otherwise act upon the instructions of beneficial owners owning through them.
Any redemption notices with respect to the Series C Preferred Shares will be sent to DTC. If fewer than all of the Series C Preferred Shares are being redeemed, DTC will reduce each Direct Participant’s holdings of Series C Preferred Shares in accordance with its established procedures.
In those instances where a vote is required, neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the Series C Preferred Shares unless authorized by a Direct Participant in accordance with DTC's established procedures. Under its usual procedures, DTC would mail an omnibus proxy to us as soon as possible after the record date. The omnibus proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants whose accounts the Series C Preferred Shares are credited to on the record date, which are identified in a listing attached to the omnibus proxy.
Dividends and distributions on the Series C Preferred Shares will be made directly to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC). DTC's practice is to credit participants' accounts upon DTC's receipt of funds in accordance with their respective holdings shown on DTC's records. Payments by Direct and Indirect Participants to beneficial owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name." These payments will be the responsibility of the participant and not of DTC, us or any agent of ours, subject to any statutory or regulatory requirements as may be in effect from time to time.
DTC may discontinue providing its services as securities depositary with respect to the Series C Preferred Shares at any time by giving reasonable notice to us. Additionally, we may decide to discontinue the book-entry only system of transfers

13



with respect to the Series C Preferred Shares. In that event, we will print and deliver certificates in fully registered form for the Series C Preferred Shares. If DTC notifies us that it is unwilling to continue as securities depositary, or it is unable to continue or ceases to be a clearing agency registered under the Exchange Act and a successor depositary is not obtained, we will issue the Series C Preferred Shares in definitive form, at our expense, upon registration of transfer of, or in exchange for, such global security.
According to DTC, the foregoing information with respect to DTC has been provided to the financial community for informational purposes only and is not intended to serve as a representation, warranty or contract modification of any kind.


14



First Amendment to Second Amended and Restated Credit Agreement
This First Amendment to Second Amended and Restated Credit Agreement (this “Amendment”) is entered into as of June 10, 2019, among IRET PROPERTIES, a North Dakota Limited Partnership, a North Dakota limited partnership (the “Borrower”), the Guarantors party hereto, the several financial institutions party hereto, as Lenders, and Bank of Montreal, as Administrative Agent.
Preliminary Statements
A.    The Borrower, the Guarantors party thereto, the Lenders party thereto, and the Administrative Agent have heretofore entered into that certain Second Amended and Restated Credit Agreement dated as of August 31, 2018 (the “Credit Agreement”). All capitalized terms used herein without definition shall have the same meanings herein as such terms have in the Credit Agreement.
B.    The Borrower has requested that the Administrative Agent and the Lenders make certain amendments to the Credit Agreement, and the Administrative Agent and the Lenders are willing to do so pursuant to the terms below.
C.    This Amendment shall constitute a Loan Document and these Preliminary Statements shall be construed as part of this Amendment.
Now, Therefore, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:
Section 1.
Amendment to Credit Agreement.
Subject to the satisfaction of the conditions precedent set forth in Section 3 below, the Credit Agreement shall be and hereby is amended as follows:
2.1.    Clause (d) of the defined term “Borrowing Base Requirements” appearing in Section 1 of the Credit Agreement shall be and hereby is amended and restated in its entirety to read as follows:
(d)    Borrowing Base Properties located in the Metropolitan Statistical Area designated the “Rochester, MN Metro Area”, together with Borrowing Base Properties in Metropolitan Statistical Areas with Reported Populations of greater than or equal to 500,000 shall constitute at least 50% of the Borrowing Base.
2.2.    The defined term “Fiscal Year Change Date” appearing in Section 1 of the Credit Agreement shall be and hereby is amended and restated in its entirety to read as follows:
“Fiscal Year Change Date” means May 1st in any calendar year in which the Borrower elects pursuant to Section 8.15 to adjust its Fiscal Year from a twelve-month period ending on April 30th to a twelve-month period ending on December 31st. In the calendar year 2018 the Borrower elected pursuant to Section 8.15 to adjust its Fiscal Year to a twelve-month period ending on December 31st. For purposes of this Agreement, the Fiscal Year Change Date is May 1, 2018.





Section 2.
Reaffirmation of Guaranties.
Each Guarantor hereby (i) acknowledges and consents to the terms of this Amendment and the Credit Agreement as amended by this Amendment, (ii) confirms that its Guaranty in favor of the Administrative Agent, for the benefit of the Lenders, and all of its obligations thereunder, as amended, remain in full force and effect and (iii) reaffirms all of the terms, provisions, agreements and covenants contained in its Guaranty. Each Guarantor agrees that its consent to any further amendments or modifications to the Credit Agreement and other Loan Documents shall not be required solely as a result of this acknowledgment and consent having been obtained, except to the extent, if any, required by any Guaranty.
Section 3.
Conditions Precedent.
The effectiveness of this Amendment is subject to the satisfaction of the following conditions precedent:
3.1.    The Administrative Agent shall have received this Amendment duly executed by the Borrower, each Guarantor, the Administrative Agent, and the Required Lenders.
3.2    The Administrative Agent shall have received such other agreements, instruments, documents and certificates as the Administrative Agent may reasonably request, and legal matters incident to the execution and delivery of this Amendment shall be reasonably satisfactory to the Administrative Agent and its counsel.
Section 4.
Representations.
In order to induce the Administrative Agent and the Lenders to execute and deliver this Amendment, the Borrower and each other Guarantor hereby represents to the Administrative Agent and the Lenders that (a) the representations and warranties set forth in Section 6 of the Credit Agreement are and shall be and remain true and correct in all material respects (where not already qualified by materiality or Material Adverse Effect, otherwise in all respects) as of the date hereof (or, if any such representation and warranty is expressly stated to have been made as of a specific date, as of such specific date) and (b) as of the date of this Amendment, no Default or Event of Default has occurred and is continuing under the Credit Agreement or shall result immediately after giving effect to this Amendment.
Section 5.
Miscellaneous.
5.1.    Except as specifically amended herein, the Credit Agreement shall continue in full force and effect in accordance with its original terms. Reference to this specific Amendment need not be made in the Credit Agreement, the Notes, the other Loan Documents, or any other instrument or document executed in connection therewith, or in any certificate, letter or communication issued or made pursuant to or with respect to the Credit Agreement, any reference in any of such items to the Credit Agreement being sufficient to refer to the Credit Agreement as amended hereby. This Amendment is a Loan Document.
5.2.    The Borrower shall pay all reasonable and documented out-of-pocket expenses incurred by the Administrative Agent and its Affiliates (including the reasonable and documented fees, charges and disbursements of counsel for the Administrative Agent), in connection with the preparation, negotiation, execution and delivery of this Amendment.





5.3.    This Amendment may be executed in any number of counterparts, and by the different parties on different counterpart signature pages, all of which taken together shall constitute one and the same agreement. Any of the parties hereto may execute this Amendment by signing any such counterpart and each of such counterparts shall for all purposes be deemed to be an original. Delivery of an executed counterpart of a signature page of this Amendment by facsimile or in electronic (e.g., “pdf” or “tif”) format shall be effective as delivery of a manually executed counterpart of this Amendment. This Amendment, and the rights and duties of the parties hereto, shall be construed and determined in accordance with the laws of the State of New York (including Section 5‑1401 and Section 5‑1402 of the General Obligations law of the State of New York) without regard to conflicts of law principles that would require application of the laws of another jurisdiction.
[Signature Pages Follow]






This First Amendment to Second Amended and Restated Credit Agreement is entered into as of the date and year first above written.
“Borrower”
IRET Properties, a North Dakota Limited Partnership
By: IRET, Inc.
Its: General Partner
By:/s/ John Kirchmann    
Name:     John Kirchmann
Title:    Chief Financial Officer
“Guarantors”
IRET, Inc.
By:/s/ John A. Kirchmann    
Name:     John Kirchmann
Title:    Chief Financial Officer
Investors Real Estate Trust
By:/s/ John A. Kirchmann    
Name:     John Kirchmann
Title:    Chief Financial Officer

IRET - Grand Gateway Apartments, LLC
IRET - Homestead Gardens I, LLC
IRET - River Ridge Apartments, LLC
IRET - Homestead Gardens II, LLC

By:/s/ John Kirchmann    
Name:     John Kirchmann
Title:    Vice President and Treasurer





“Administrative Agent”
Bank of Montreal, as Administrative Agent
By:
/s/ Michael Kauffman_________________
Name:    Michael Kauffman
Title:    Managing Director






“L/C Issuer”
BMO Harris Bank N.A., as L/C Issuer
By:
/s/ Michael Kauffman_____________
Name:    Michael Kauffman
Title:    Managing Director






“Lenders”
BMO Harris Bank N.A., as a Lender
By:
/s/ Michael Kauffman_____________
Name:    Michael Kauffman
Title:    Managing Director







KeyBank, National Association, as a Lender
By:/s/ Jonathan Bond_____________________
Name:    Jonathan Bond
Title:    Assistant Vice President






PNC Bank, National Association, as a Lender
By: /s/ James A. Harmann_________________
Name:    James A. Harmann
Title:    Senior Vice President







Royal Bank of Canada, as a Lender
By: /s/ Brian Gross_______________________
Name:    Brian Gross
Title:    Authorized Signatory





U.S. Bank National Association, as a Lender
By: /s/ Michael Raarup___________________
Name:    Michael Raarup
Title:    Vice President






Associated Bank, National Association, as a Lender
By: /s/ Mitchell Vega_____________________
Name:    Mitchell Vega
Title:    Vice President






Bank of North Dakota, as a Lender
By: /s/ Kim Kautzman____________________
Name:    Kim Kautzman
Title:    Business Banker






Raymond James Bank, N.A., as a Lender
By: /s/ Douglas Marron___________________
Name:    Douglas Marron
Title:    Senior Vice President





Exhibit 21.1



SUBSIDIARIES OF INVESTORS REAL ESTATE TRUST
Name of Subsidiary
    
State of
Incorporation or
Organization
 
 
 
IRET-71 France, LLC
 
North Dakota
IRET - Ashland Apartments, LLC
 
Delaware
IRET - Canyon Lake, LLC
 
North Dakota
IRET - Cardinal Point, LLC
 
North Dakota
IRET - Cimarron Hills, LLC
 
North Dakota
IRET - Colony Apartments (NE), LLC
 
Delaware
IRET Corporate Plaza, LLC
 
North Dakota
IRET-Cypress Court Apartments, LLC
 
North Dakota
IRET – Grandeville, LLC
 
North Dakota
IRET - Grand Gateway Apartments, LLC
 
Delaware
IRET - Homestead Gardens II, LLC
 
Delaware
IRET, Inc.
 
North Dakota
IRET - Lakeside Apartments (NE), LLC
 
Delaware
IRET - Olympic Village (MT), LLC
 
North Dakota
IRET - Park Meadows, LLC
 
Delaware
IRET Properties, a North Dakota Limited Partnership
 
North Dakota
IRET-QR, LLC
 
Delaware
IRET-Quarry Ridge, LLC
 
Delaware
IRET-RED 20, LLC
 
North Dakota
IRET - Rimrock, LLC
 
North Dakota
IRET - River Ridge Apartments, LLC
 
North Dakota
IRET - Rocky Meadows, LLC
 
North Dakota
IRET - SH1, LLC
 
North Dakota
IRET - Silver Spring, LLC
 
Delaware
IRET - South Fork Apartments, LLC
 
North Dakota
IRET - Sunset Trail, LLC
 
Delaware
IRET - Thomasbrook Apartments, LLC
 
North Dakota
IRET - Valley Park Manor, LLC
 
North Dakota
IRET - West Stonehill Apartments, LLC
 
North Dakota
IRET - Whispering Ridge Apartments, LLC
 
Delaware




Exhibit 23.1



 
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
We have issued our reports dated February 19, 2020, with respect to the consolidated financial statements, schedule, and internal control over financial reporting included in the Annual Report of Investors Real Estate Trust on Form 10‑K for the year ended December 31, 2019. We consent to the incorporation by reference of said reports in the Registration Statements of Investors Real Estate Trust on Form S-8 (File Nos. 333-206947 and 333-173393) and on Form S-3 (File Nos. 333-220378, 333-212204, 333-212203, 333-191539, 333-189637, 333-189554, 333-187620, 333-182165, 333-177143, 333-173568, 333-169710, 333-169205, 333-166162, 333-163267, 333-160948, 333-158001, 333-153714, 333-149081, 333-148529, 333-145714, 333-141341, 333-137699, 333-131894, 333-128745, 333-122289, 333-119547, 333-117121, 333-115082, 333-114162, 333-112272, 333-110003, 333-109387, 333-106748, 333-104267, 333-102610, 333-101782, 333-100272, 333-98575, 333-91788, 333-85352, 333-76266, 333-57676, 333-89761, and 333-67317). 
 
/s/ GRANT THORNTON LLP
 
Minneapolis, Minnesota
February 19, 2020



Exhibit 31.1


 
Certification 
I, Mark O. Decker, Jr., certify that: 
1. I have reviewed this Annual Report on Form 10-K of Investors Real Estate Trust; 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: 
(a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): 
(a)
all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
(b)
and any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 
 
 
Date:
    
February 19, 2020
 
 
 
 
 
By:
 
/s/ Mark O. Decker, Jr.
 
 
 
Mark O. Decker, Jr., President & CEO
 



Exhibit 31.2



 
Certification 
I, John A. Kirchmann, certify that: 
1. I have reviewed this Annual Report on Form 10-K of Investors Real Estate Trust;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: 
(a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; 
(b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; 
(c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and 
(d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): 
(a)
all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and 
(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date:
    
February 19, 2020
 
 
 
 
 
By:
 
/s/ John A. Kirchmann
 
 
 
John A. Kirchmann, Chief Financial Officer
 



Exhibit 32.1



 
Certification
 
The following certification is furnished as provided by Rule 13a-14(b) promulgated under the Securities Act of 1934 and Item 601(b)(32)(ii) of Regulation S-K.
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Annual Report of Investors Real Estate Trust (the “Company”) on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission on February 19, 2020 (the “Report”), I, Mark O. Decker, Jr., President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. 
 
/s/ Mark O. Decker, Jr.
 
Mark O. Decker, Jr.
 
President and Chief Executive Officer
 
February 19, 2020
 
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.



Exhibit 32.2



 
Certification
 
The following certification is furnished as provided by Rule 13a-14(b) promulgated under the Securities Act of 1934 and Item 601(b)(32)(ii) of Regulation S-K.
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Annual Report of Investors Real Estate Trust (the “Company”) on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission on February 19, 2020 (the “Report”), I, John A. Kirchmann, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: 
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
 
 
/s/ John A. Kirchmann
 
John A. Kirchmann
 
Chief Financial Officer 
 
 
February 19, 2020
 
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.