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

FORM 10-K 

Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 

For the fiscal year ended April 30, 2007 

Commission File Number 000-14851 

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

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

12 Main Street South
Minot, North Dakota 58701
(Address of principal executive offices) 

701-837-4738
(Registrant’s telephone number, including area code) 

Securities registered pursuant to Section 12(b) of the Act:

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

Securities registered pursuant to Section 12(g) of the Act:
None

 ________________________________ 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes  þ No 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. o Yes  þ No 

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ Yes  o No 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 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).

o Yes þ No

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The aggregate market value of the Registrant’s outstanding common shares of beneficial interest held by non-affiliates (i.e., by persons other than officers and trustees of the Registrant as reflected in the table in Item 12 of this Form 10-K, incorporated by reference from the Registrant’s definitive Proxy Statement for its 2007 Annual Meeting of Shareholders) was $463,628,772 based on the last reported sale price on the NASDAQ Global Select Market on October 31, 2006.

The number of common shares of beneficial interest outstanding as of June 29, 2007, was 48,581,306.

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 2007 Annual Meeting of Shareholders to be held on September 18, 2007 are incorporated by reference into Part III (Items 10, 11, 12, 13 and 14) hereof.

 

2007 Annual Report 2

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INVESTORS REAL ESTATE TRUST 

INDEX

	PAGE
PART I
Item 1.    Business....................................................................................................................................................	5
Item 1A. Risk Factors..............................................................................................................................................	11
Item 1B. Unresolved Staff Comments................................................................................................................	20
Item 2.    Properties..................................................................................................................................................	20
Item 3.    Legal Proceedings....................................................................................................................................	30
Item 4.    Submission of Matters to a Vote of Security Holders......................................................................	30
PART II
Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities...................................................................................................................................................	30
Item 6.    Selected Financial Data.........................................................................................................................	32
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations...	32
Item 7A. Quantitative and Qualitative Disclosures about Market Risk........................................................	52
Item 8.    Financial Statements and Supplementary Data...............................................................................	53
Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....	53
Item 9A. Controls and Procedures........................................................................................................................	53
Item 9B. Other Information...................................................................................................................................	56
PART III
Item 10.  Trustees, Executive Officers and Corporate Governance...............................................................	56
Item 11.  Executive Compensation......................................................................................................................	56
Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	56
Item 13.  Certain Relationships and Related Transactions, and Trustee Independence............................	56
Item 14.  Principal Accountant Fees and Services.............................................................................................	56
PART IV
Item 15.  Exhibits, Financial Statement Schedules............................................................................................	57
Exhibit Index............................................................................................................................................................	57
Signatures..................................................................................................................................................................	59
Report of Independent Registered Public Accounting Firm and Financial Statements..............................	F-1 to F-41

 

Special Note Regarding Forward Looking Statements 

Certain statements included in this Annual Report on Form 10-K and the documents incorporated into this document by reference are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements include statements about our belief that we have the liquidity and capital resources necessary to meet our known obligations and to make additional real estate acquisitions and capital improvements when appropriate to enhance long term growth; and other statements preceded by, followed by or otherwise including words such as “believe,” “expect,” “intend,” “project,” “plan,” “anticipate,” “potential,” “may,” “will,” “designed,” “estimate,” “should,” “continue” and other similar expressions. These statements indicate that we have used assumptions that are subject to a number of risks and uncertainties that could cause our actual results or performance to differ materially from those projected. 

Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, we can give no assurance that these expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements include: 

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

•    the economic health of our commercial tenants; 

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

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

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

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

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

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

In light of these uncertainties, the events anticipated by our forward-looking statements might not occur. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The foregoing review of factors that could cause our actual results to differ materially from those contemplated in any forward-looking statements included in this Annual Report on Form 10-K should not be construed as exhaustive.

PART I 

Item 1. Business 

Overview 

Investors Real Estate Trust is a self-advised equity Real Estate Investment Trust (“REIT”) organized under the laws of North Dakota. Since our formation in 1970, our business has consisted of owning and operating income-producing real estate properties. We are structured as an Umbrella Partnership Real Estate Investment Trust or UPREIT and we conduct our day-to-day business operations though our operating partnership, IRET Properties, a North Dakota Limited Partnership (“IRET Properties” or the “Operating Partnership”). Our investments consist of multi-family residential properties and commercial office, medical, industrial and retail properties. These properties are located primarily in the upper Midwest states of Minnesota and North Dakota. For the twelve months ended April 30, 2007, our real estate investments in these two states accounted for 69.8% of our total gross revenue. Our principal executive offices are located in Minot, North Dakota. We also have offices in Minneapolis, Minnesota and Omaha, Nebraska, and property management offices in Kansas City, Kansas and St. Louis, Missouri. 

We seek to diversify our investments among multi-family residential and office, medical, industrial and retail properties. As of April 30, 2007, our real estate portfolio consisted of: 

•    69 multi-family residential properties, containing 9,397 apartment units and having a total real estate investment amount net of accumulated depreciation of $400.1 million; 

•    64 office properties containing approximately 4.8 million square feet of leasable space and having a total real estate investment amount net of accumulated depreciation of $492.2 million; 

•    34 medical properties (including senior housing/assisted living facilities) containing approximately 1.7 million square feet of leasable space and having a total real estate investment amount net of accumulated depreciation of $250.0 million; 

•    13 industrial properties (including miscellaneous commercial properties) containing approximately 2.0 million square feet of leasable space and having a total real estate investment amount net of accumulated depreciation of $67.0 million; and 

•    37 retail properties containing approximately 1.5 million square feet of leasable space and having a total real estate investment amount net of accumulated depreciation of $99.4 million. 

Our residential leases are generally for a one-year term. Our commercial properties are typically leased to tenants under long-term lease arrangements. As of April 30, 2007, no single tenant accounted for more than 10% of our total rental revenues.

Structure 

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

Since our formation, we have operated as a REIT under Sections 856-858 of the Internal Revenue Code of 1986, as amended (the “Code”), and since February 1, 1997, we have been structured as an UPREIT. Since restructuring as an UPREIT, we have conducted all of our daily business operations through IRET Properties. IRET Properties is organized under the laws of North Dakota pursuant to an Agreement of Limited Partnership dated January 31, 1997. IRET Properties is principally engaged in acquiring, owning, operating and leasing multi-family residential and commercial real estate. The sole general partner of IRET Properties is IRET, Inc., a North Dakota corporation and our wholly-owned subsidiary. All of our assets (except for qualified REIT subsidiaries) and liabilities were contributed to IRET Properties, through IRET, Inc., in exchange for the sole general partnership interest in IRET Properties. As of April 30, 2007, IRET, Inc. owned a 70.9% interest in IRET Properties. The remaining ownership of IRET Properties is held by individual limited partners. 

Investment Strategy and Policies 

Our business objective is to increase shareholder value by employing a disciplined investment strategy. This strategy is focused on growing assets in desired geographical markets, achieving diversification by property type and location, and adhering to targeted returns in acquiring properties. 

We generally use available cash or short-term floating rate debt to acquire real estate. We then replace such cash or short-term floating rate debt with fixed-rate secured debt, typically in an amount equal to 65.0% to 75.0% of a property’s appraised value. In appropriate circumstances, we also may acquire one or more properties in exchange for our common shares of beneficial interest (“common shares”) or for limited partnership units of IRET Properties (“limited partnership units” or “UPREIT Units”), which are convertible, after the expiration of a minimum holding period of one year, into cash or, at our sole discretion, into our common shares on a one-to-one basis. 

Our investment strategy is to invest in multi-family residential properties and office, medical, industrial and retail commercial properties that are leased to single or multiple tenants, usually for five years or longer, and are located throughout the upper Midwest. We operate mainly within the states of North Dakota and Minnesota, although we also have real estate investments in South Dakota, Montana, Nebraska, Colorado, Idaho, Iowa, Kansas, Michigan, Missouri, Texas and Wisconsin. 

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

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

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

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

 

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

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

Investments in real estate mortgages. While not our primary business focus, from time to time we make loans to others that are secured by mortgages, liens or deeds of trust covering real estate. We have no restrictions on the type of property that may be used as collateral for a mortgage loan; provided, however, that except for loans insured or guaranteed by a government or a governmental agency, we may not invest in or make a mortgage loan unless an appraisal is obtained concerning the value of the underlying property.  Unless otherwise approved by our Board of Trustees, it is our policy that we will not invest in mortgage loans on any one property if in the aggregate the total indebtedness on the property, including our mortgage, exceeds 85.0% of the property’s appraised value.  We can invest in junior mortgages without notice to, or the approval of, our shareholders.  As of April 30, 2007, we had no junior mortgages outstanding.  We had one contract for deed outstanding as of April 30, 2007, with a balance of $411,000 due to us.

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

Policies With Respect to Certain of Our Activities 

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

Cash distributions to shareholders and holders of limited partnership units. We intend to continue our policy of making cash distributions to our common shareholders and the holders of limited partnership units of approximately 65.0% to 90.0% of our funds from operations and to use the remaining funds for capital improvements or the purchase of additional properties. This policy may be changed at any time by our Board of Trustees without notice to, or approval of, our shareholders. We have increased our cash distributions every year since our inception 37 years ago and every quarter since 1988. 

Issuing senior securities. On April 26, 2004, we issued 1,150,000 shares of 8.25% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series A preferred shares”). Depending on future interest rate and market conditions, we may issue additional preferred shares or other senior securities which would have dividend and liquidation preference over our common shares. 

Borrowing money. We rely on borrowed funds in pursuing our investment objectives and goals. It is generally our policy to seek to borrow up to 65.0% to 75.0% of the appraised value of all new real estate acquired or developed. This policy concerning borrowed funds is vested solely with our Board of Trustees and can be changed by our Board of Trustees at any time, or from time to time, without notice to, or a vote of, our shareholders. Such policy is subject, however, to the limitation in our Bylaws, which provides that unless approved by a majority of the independent members of our Board of Trustees and disclosed to our shareholders in our next quarterly report along with justification for such excess, we may not borrow in excess of 300.0% of our total Net Assets (as such term is used in our Bylaws, which usage is not in accordance with GAAP, “Net Assets” means our total assets at cost before deducting depreciation or other non-cash reserves, less total liabilities). Our Bylaws do not impose any limitation on the amount that we may borrow against any one particular property.  As of April 30, 2007, our ratio of total real estate mortgages to total real estate assets was 72.2% while our ratio of total indebtedness as compared to our Net Assets (computed in accordance with our Bylaws) was 149.6%. 

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

 

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

  

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

During fiscal year 2007, we did not repurchase any of our outstanding common shares, preferred shares or limited partnership units, except for the redemption of a nominal amount of fractional common shares held by shareholders, upon request. 

To make loans to other persons. Our organizational structure allows us to make loans to other persons, subject to certain conditions and subject to our election to be taxed as a REIT. All loans must be secured by real property or limited partnership units of IRET Properties. Our mortgage loan receivables, net of reserves, totaled $399,000 as of April 30, 2007, and $409,000 as of April 30, 2006. 

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

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

Information about Segments 

We currently operate in five reportable real estate segments: multi-family residential, office, medical (including senior housing/assisted living facilities), industrial (including miscellaneous properties) and retail. For further information on these segments and other related information, see Note 11 of our consolidated financial statements, and Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Annual Report on Form 10-K.

Our Executive Officers 

Set forth below are the names, ages, titles and biographies of each of our executive officers as of July 1, 2007. 

Thomas A. Wentz, Sr. is a graduate of Harvard College and Harvard Law School, and has been associated with us since our formation on July 31, 1970. Mr. Wentz was a member of our Board of Trustees from 1970 to 1998, Secretary from 1970 to 1987, Vice President from 1987 to July 2000, and has been President and Chief Executive Officer since July 2000. Previously, from 1985 to 1991, Mr. Wentz was a Vice President of our former advisor, Odell-Wentz & Associates, L.L.C., and, until August 1, 1998, was a partner in the law firm of Pringle & Herigstad, P.C. 

Timothy P. Mihalick joined us as a financial officer in May 1981, after graduating from Minot State University. He has served in various capacities with us over the years and was named Vice President in 1992. Mr. Mihalick has served as the Chief Operating Officer since 1997, as a Senior Vice President since 2002, and as a member of our Board of Trustees since 1999. 

Thomas A. Wentz, Jr. is a graduate of Harvard College and the University of North Dakota School of Law, and joined us as General Counsel and Vice President in January 2000. He has served as a Senior Vice President of Asset Management and Finance since 2002 and as a member of our Board of Trustees since 1996. Prior to 2000, Mr. Wentz was a shareholder in the law firm of Pringle & Herigstad, P.C. from 1992 to 1999. Mr. Wentz is a member of the American Bar Association and the North Dakota Bar Association, and he is a Director of SRT Communications, Inc. Mr. Wentz is the son of Thomas A. Wentz, Sr. 

Diane K. Bryantt is a graduate of Minot State University, joined us in June 1996, and served as our Controller and Corporate Secretary before being appointed to the positions of Senior Vice President and Chief Financial Officer in 2002. Prior to joining us, Ms. Bryantt was employed by First American Bank, Minot, North Dakota. 

Michael A. Bosh joined us as Associate General Counsel and Secretary in September 2002, and was named General Counsel in September 2003. Prior to 2002, Mr. Bosh was a shareholder in the law firm of Pringle & Herigstad, P.C. Mr. Bosh graduated from Jamestown College in 1992 and from Washington & Lee University School of Law in 1995. Mr. Bosh is a member of the American Bar Association and the North Dakota Bar Association. 

Kelly A Walters joined IRET in October of 2006 as Vice President of Capital Markets and New Business Development. Prior to joining IRET, Mr. Walters spent ten years as Senior Vice President of Magnum Resources, Inc., a privately held real estate investment and operating firm, based in Omaha, NE, and from 1993 through 1996, he was a senior portfolio manager with Brown Brothers Harriman & Co. in Chicago, IL. Prior to 1993, Mr. Walters spent five years as the Investment Manager at Peter Kiewit and Sons, Inc. in Omaha, NE.  Mr. Walters earned his undergraduate degree in finance at the University of Nebraska at Omaha, and received his MBA from the University of Nebraska. 

Employees 

As of April 30, 2007, we had 59 employees. 

Environmental Matters and Government Regulation 

Under various federal, state and local laws, ordinances and regulations relating to the protection of the environment, a current or previous owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances released at a property, and may be held liable to a governmental entity or to third parties for property damage or personal injuries and for investigation and clean-up costs incurred in connection with

any contamination. In addition, some environmental laws create a lien on a contaminated site in favor of the government for damages and costs it incurs in connection with the contamination. These laws often impose liability without regard to whether the current owner was responsible for, or even knew of, the presence of such substances. It is generally our policy to obtain from independent environmental consultants a “Phase I” environmental audit (which involves visual inspection but not soil or groundwater analysis) on all properties that we seek to acquire. We do not believe that any of our properties are subject to any material environmental contamination. However, no assurances can be given that: 

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

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

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

Competition 

Investing in and operating real estate is a very competitive business. We compete with other owners and developers of multi-family and commercial properties to attract tenants to our properties. Ownership of competing properties is diversified among other REITs, financial institutions, individuals and public and private companies who are actively engaged in this business. Our multi-family properties compete directly with other rental apartments, as well as with condominiums and single-family homes that are available for rent or purchase in the areas in which our properties are located. Our commercial properties compete with other commercial properties for tenants. Additionally, we compete with other real estate investors, including other REITs, pension and investment funds, partnerships and investment companies, to acquire properties. This competition affects our ability to acquire properties we want to add to our portfolio and the price we pay in acquisitions. During the past year, the demand for quality real estate of all types has continued to increase. This demand caused continued high prices for all types of real estate. As a result, we were unable to purchase properties that will generate rates of return similar to those generated by properties we acquired in previous years. We do not believe we have a dominant position in any of the geographic markets in which we operate, but some of our competitors are dominant in selected markets. Many of our competitors have greater financial and management resources than we have. We believe, however, that the geographic diversity of our investments, the experience and abilities of our management, the quality of our assets and the financial strength of many of our commercial tenants affords us some competitive advantages that have in the past and will in the future allow us to operate our business successfully despite the competitive nature of our business. 

Corporate Governance  

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

Additionally, the Company’s Audit Committee has established procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters, including procedures for the confidential, anonymous submission by Company employees of concerns regarding accounting or auditing matters.

The Audit Committee also maintains a policy requiring Audit Committee approval of all audit and non-audit services provided to the Company by the Company’s independent registered public accounting firm. 

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

Website and Available Information 

Our internet address is www.iret.com. We make available, free of charge, through the “SEC filings” tab under the Investor Relations section of our internet website, our Annual Report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such forms are filed with or furnished to the SEC. Current copies of our Code of Conduct, Code of Ethics for Senior Financial Officers, and Charters for the Audit, Compensation, Executive and Nominating Committees of our Board of Trustees are also available on our website under the heading “Corporate Governance” in the Investor Relations section of our website. Copies of these documents are also available to shareholders upon request addressed to the Secretary at Investors Real Estate Trust, P.O. Box 1988, Minot, North Dakota 58701. Information on our internet website does not constitute part of this Annual Report on Form 10-K. 

Item 1A.  Risk Factors 

Risks Related to Our Properties and Business 

Our performance and share value are subject to risks associated with the real estate industry.  Our results of operations and financial condition, the value of our real estate assets, and the value of an investment in us are subject to the risks normally associated with the ownership and operation of real estate properties.  These risks include, but are not limited to, the following factors which, among others, may adversely affect the income generated by our properties: 

•   downturns in national, regional and local economic conditions (particularly increases in unemployment);

 

•   competition from other commercial and multi-family residential properties;

 

•   local real estate market conditions, such as oversupply or reduction in demand for commercial and multi-family residential space;

 

•   changes in interest rates and availability of attractive financing;

 

•   declines in the economic health and financial condition of our tenants and our ability to collect rents from our tenants;

 

•   vacancies, changes in market rental rates and the need periodically to repair, renovate and re-lease space;

 

•   increased operating costs, including real estate taxes, state and local taxes, insurance expense, utilities, and security costs;

 

•   significant expenditures associated with each investment, such as debt service payments, real estate taxes and insurance and maintenance costs, which are generally not reduced when circumstances cause a reduction in revenues from a property;

 

•   weather conditions, civil disturbances, natural disasters, or terrorist acts or acts of war which may result in uninsured or underinsured losses;  and

 

•   decreases in the underlying value of our real estate.

 

Our property acquisition activities subject us to various risks which could adversely affect our operating results. We have acquired in the past and intend to continue to pursue the acquisition of properties and portfolios of properties, including large portfolios that could increase our size and result in alterations to our capital structure.  Our acquisition activities and their success are subject to numerous risks, including, but not limited to:  

•  even if we enter into an acquisition agreement for a property, it is subject to customary closing conditions, including completion of due diligence investigations, and we may be unable to complete that acquisition after making a non-refundable deposit and incurring other acquisition-related costs; 

•  we may be unable to obtain financing for acquisitions on favorable terms or at all; 

•  acquired properties may fail to perform as expected; 

•  the actual costs of repositioning or redeveloping acquired properties may be greater than our estimates; and 

•  we may be unable quickly and efficiently to integrate new acquisitions into our existing operations. 

These risks could have an adverse effect on our results of operations and financial condition.  

Acquired properties may subject us to unknown liabilities which could adversely affect our operating results. We may acquire properties subject to liabilities and without any recourse, or with only limited recourse against prior owners or other third parties, with respect to unknown liabilities.  As a result, if liability were asserted against us based upon ownership of these properties, we might have to pay substantial sums to settle or contest it, which could adversely affect our results of operations and cash flows.  Unknown liabilities with respect to acquired properties might include liabilities for clean-up of undisclosed environmental contamination; claims by tenants, vendors or other persons against the former owners of the properties; liabilities incurred in the ordinary course of business; and claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the properties.  

Our geographic concentration in Minnesota and North Dakota may result in losses due to our significant exposure to the effects of economic and real estate conditions in those markets.  For the fiscal year ended April 30, 2007, we received approximately 69.8% of our gross revenue from properties in Minnesota and North Dakota.  As a result of this concentration, we are subject to substantially greater risk than if our investments were more geographically dispersed. Specifically, we are more significantly exposed to the effects of economic and real estate conditions in those particular markets, such as building by competitors, local vacancy and rental rates and general levels of employment and economic activity.  To the extent that weak economic or real estate conditions affect Minnesota and/or North Dakota more severely than other areas of the country, our financial performance could be negatively impacted. 

If we are not able to renew leases or enter into new leases on favorable terms or at all as our existing leases expire, our revenue, operating results and cash flows will be reduced.  We may be unable to renew leases with our existing tenants or enter into new leases with new tenants due to economic and other factors as our existing leases expire or are terminated prior to the expiration of their current terms.  As a result, we could lose a significant source of revenue while remaining responsible for the payment of our obligations.  In addition, even if we were able to renew existing leases or enter into new leases in a timely manner, the terms of those leases may be less favorable to us than the terms of expiring leases, because the rental rates of the renewal or new leases may be significantly lower than those of the expiring leases, or tenant installation costs, including the cost of required renovations or concessions to tenants, may be significant.  If we are unable to enter into lease renewals or new leases on favorable terms or in a timely manner for all or a substantial portion of space that is subject to expiring leases, our revenue, operating results and cash flows will be adversely affected. As a result, our ability to make distributions to the holders of our shares of beneficial interest may be adversely affected. As of April 30, 2007, approximately 722,000 square feet, or 7.2% of our total commercial property square footage, was vacant. Approximately 741 of our 9,397 apartment units, or 7.9%, were vacant. As of April 30, 2007, leases covering approximately 10.5% of our total commercial segments net rentable square footage will expire in fiscal year 2008, 9.1% in fiscal year 2009, 14.0% in fiscal year 2010, 14.4% in fiscal year 2011, and 14.2% in fiscal year 2012. 

 

We face potential adverse effects from commercial tenant bankruptcies or insolvencies.  The bankruptcy or insolvency of our commercial tenants may adversely affect the income produced by our properties.  If a tenant defaults, we may experience delays and incur substantial costs in enforcing our rights as landlord.  If a tenant files for bankruptcy, we cannot evict the tenant solely because of such bankruptcy.  A court, however, may authorize the tenant to reject and terminate its lease with us.  In such a case, our claim against the tenant for unpaid future rent would be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the lease, and it is unlikely that a bankrupt tenant would pay in full amounts it owes us under a lease.  This shortfall could adversely affect our cash flow and results of operations.  If a tenant experiences a downturn in its business or other types of financial distress, it may be unable to make timely rental payments.  Under some circumstances, we may agree to partially or wholly terminate the lease in advance of the termination date in consideration for a lease termination fee that is less than the agreed rental amount.  Additionally, without regard to the manner in which a lease termination occurs, we are likely to incur additional costs in the form of tenant improvements and leasing commissions in our efforts to lease the space to a new tenant, as well as possibly lower rental rates reflective of declines in market rents. 

Because real estate investments are generally illiquid, and various factors limit our ability to dispose of assets, we may not be able to sell properties when appropriate.  Real estate investments are relatively illiquid and, therefore, we have limited ability to vary our portfolio quickly in response to changes in economic or other conditions.  In addition, the prohibitions under the federal income tax laws on REITs holding property for sale and related regulations may affect our ability to sell properties.  Our ability to dispose of assets may also be limited by constraints on our ability to utilize disposition proceeds to make acquisitions on financially attractive terms, and the requirement that we take additional impairment charges on certain assets.  More specifically, we are required to distribute or pay tax on all capital gains generated from the sale of assets, and, in addition, a significant number of our properties were acquired using limited partnership units of IRET Properties, our operating partnership, and are subject to certain agreements which restrict our ability to sell such properties in transactions that would create current taxable income to the former owners.  As a result, we are motivated to structure the sale of these assets as tax-free exchanges.  To accomplish this we must identify attractive re-investment opportunities.  Recently, while capital market conditions have been favorable for dispositions, investment yields on acquisitions have been less attractive due to the abundant capital inflows into the real estate sector.  These considerations impact our decisions on whether or not to dispose of certain of our assets. 

Inability to manage our rapid growth effectively may adversely affect our operating results. We have experienced significant growth in recent years, increasing our total assets from approximately $1,151.2 million at April 30, 2005, to $1,435.4 million at April 30, 2007, principally through the acquisition of additional real estate properties. Subject to our continued ability to raise equity capital and issue limited partnership units of IRET Properties and identify suitable investment properties, we intend to continue our acquisition of real estate properties. Effective management of this level of growth presents challenges, including: 

•   the need to expand our management team and staff; 

•   the need to enhance internal operating systems and controls; 

•   increased reliance on outside advisors and property managers; and 

•   the ability to consistently achieve targeted returns on individual properties. 

We may not be able to maintain similar rates of growth in the future, or manage our growth effectively.  Our failure to do so may have a material adverse effect on our financial condition and results of operations and ability to make distributions to the holders of our shares of beneficial interest. 

Competition may negatively impact our earnings. We compete with many kinds of institutions, including other REITs, private partnerships, individuals, pension funds and banks, for tenants and investment opportunities. Many of these institutions are active in the markets in which we invest and have greater financial and other resources that may be used to compete against us. With respect to tenants, this competition may affect our ability to lease our properties, the price at which we are able to lease our properties and the cost of required renovations or tenant improvements. With respect to acquisition and development investment opportunities, this competition may cause us

to pay higher prices for new properties than we otherwise would have paid, or may prevent us from purchasing a desired property at all. 

An inability to make accretive property acquisitions may adversely affect our ability to increase our operating income. From our fiscal year ended April 30, 2005, to our fiscal year ended April 30, 2007, our operating income increased from $9.9 million to $11.6 million.  The acquisition of additional real estate properties is critical to our ability to increase our operating income.  If we are unable to continue to make real estate acquisitions on terms that meet our financial and strategic objectives, whether due to market conditions, a changed competitive environment or unavailability of capital, our ability to increase our operating income may be materially and adversely affected. 

High leverage on our overall portfolio may result in losses. As of April 30, 2007, our ratio of total indebtedness to total Net Assets (as that term is used in our Bylaws, which usage is not in accordance with GAAP, “Net Assets” means our total assets at cost before deducting depreciation or other non-cash reserves, less total liabilities) was approximately 149.6%. As of April 30, 2006 and 2005, our percentage of total indebtedness to total Net Assets was approximately 138.0% and 133.9%, respectively. Under our Bylaws we may increase our total indebtedness up to 300.0% of our Net Assets, or by an additional approximately $956 million. There is no limitation on the increase that may be permitted if approved by a majority of the independent members of our board of trustees and disclosed to the holders of our shares of beneficial interest in the next quarterly report, along with justification for any excess. 

This amount of leverage may expose us to cash flow problems if rental income decreases. Under those circumstances, in order to pay our debt obligations we might be required to sell properties at a loss or be unable to make distributions to the holders of our shares of beneficial interest. A failure to pay amounts due may result in a default on our obligations and the loss of the property through foreclosure.  Additionally, our degree of leverage could adversely affect our ability to obtain additional financing and may have an adverse effect on the market price of our common shares. 

Our inability to renew, repay or refinance our debt may result in losses. We incur a significant amount of debt in the ordinary course of our business and in connection with acquisitions of real properties. In addition, because we are unable to retain earnings as a result of the REIT distribution requirements, we will generally be required to refinance debt that matures with additional debt or equity.  We are subject to the normal risks associated with debt financing, including the risk that: 

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

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

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

We anticipate that only a small portion of the principal of our debt will be repaid prior to maturity.  Therefore, we are likely to need to refinance at least a portion of our outstanding debt as it matures.  We cannot guarantee that any refinancing of debt with other debt will be possible on terms that are favorable or acceptable to us.  If we cannot refinance, extend or pay principal payments due at maturity with the proceeds of other capital transactions, such as new equity capital, our cash flows may not be sufficient in all years to repay debt as it matures.  Additionally, if we are unable to refinance our indebtedness on acceptable terms, or at all, we may be forced to dispose of one or more of our properties on disadvantageous terms, which may result in losses to us. These losses could have a material adverse effect on us, our ability to make distributions to the holders of our shares of beneficial interest and our ability to pay amounts due on our debt. Furthermore, if a property is mortgaged to secure payment of indebtedness and we are unable to meet mortgage payments, the mortgagee could foreclose upon the property, appoint a receiver and receive an assignment of rents and leases or pursue other remedies, all with a consequent loss of our revenues and asset value. Foreclosures could also create taxable income without accompanying cash proceeds, thereby hindering our ability to meet the REIT distribution requirements of the Internal Revenue Code. 

The cost of our indebtedness may increase. We have incurred, and we expect to continue to incur, indebtedness that bears interest at a variable rate. As of April 30, 2007, $21.7 million, or approximately 2.3%, of the principal amount of our total mortgage indebtedness was subject to variable interest rate agreements.  If short-term interest rates rise, our debt service payments on adjustable rate debt would increase, which would lower our net income and could decrease our distributions to the holders of our shares of beneficial interest.  In addition, portions of our fixed-rate

indebtedness incurred for past property acquisitions come due on a periodic basis.  Rising interest rates could limit our ability to refinance this existing debt when it matures, and would increase our interest costs, which could have a material adverse effect on us, our ability to make distributions to the holders of our shares of beneficial interest and our ability to pay amounts due on our debt. 

We depend on distributions and other payments from our subsidiaries that they may be prohibited from making to us, which could impair our ability to make distributions to holders of our shares of beneficial interest.  Substantially all of our assets are held through IRET Properties, our operating partnership, and other of our subsidiaries. As a result, we depend on distributions and other payments from our subsidiaries in order to satisfy our financial obligations and make distributions to the holders of our shares of beneficial interest.  The ability of our subsidiaries to make such distributions and other payments depends on their earnings, and may be subject to statutory or contractual limitations.  As an equity investor in our subsidiaries, our right to receive assets upon their liquidation or reorganization effectively will be subordinated to the claims of their creditors.  To the extent that we are recognized as a creditor of such subsidiaries, our claims may still be subordinate to any security interest in or other lien on their assets and to any of their debt or other obligations that are senior to our claims. 

Our current or future insurance may not protect us against possible losses. We carry comprehensive liability, fire, extended coverage and rental loss insurance with respect to our properties at levels that we believe to be adequate and comparable to coverage customarily obtained by owners of similar properties. However, the coverage limits of our current or future policies may be insufficient to cover the full cost of repair or replacement of all potential losses. Moreover, this level of coverage may not continue to be available in the future or, if available, may be available only at unacceptable cost or with unacceptable terms.  Additionally, there may be certain extraordinary losses, such as those resulting from civil unrest, terrorism or environmental contamination, that are not generally, or fully, insured against because they are either uninsurable or not economically insurable. For example, we do not currently carry insurance against losses as a result of environmental contamination. Should an uninsured or underinsured loss occur to a property, we could be required to use our own funds for restoration or lose all or part of our investment in, and anticipated revenues from, the property. In any event, we would continue to be obligated on any mortgage indebtedness on the property. Any loss could have a material adverse effect on us, our ability to make distributions to the holders of our shares of beneficial interest and our ability to pay amounts due on our debt.  In addition, in most cases we have to renew our insurance policies on an annual basis and negotiate acceptable terms for coverage, exposing us to the volatility of the insurance markets, including the possibility of rate increases.  Any material increase in insurance rates or decrease in available coverage in the future could adversely affect our business and financial condition and results of operations, which could cause a decline in the market value of our securities. 

We have significant investments in medical properties and adverse trends in healthcare provider operations may negatively affect our lease revenues from these properties. We have acquired a significant number of specialty medical properties (including senior housing/assisted living facilities) and may acquire more in the future. As of April 30, 2007, our real estate portfolio consisted of 34 medical properties, with a total real estate investment amount, net of accumulated depreciation, of $250.0 million, or approximately 19.1% of the total real estate investment amount, net of accumulated depreciation, of our entire real estate portfolio.  The healthcare industry is currently experiencing changes in the demand for, and methods of delivery of, healthcare services; changes in third-party reimbursement policies; significant unused capacity in certain areas, which has created substantial competition for patients among healthcare providers in those areas; continuing pressure by private and governmental payors to reduce payments to providers of services; and increased scrutiny of billing, referral and other practices by federal and state authorities. Sources of revenue for our medical property tenants may include the federal Medicare program, state Medicaid programs, private insurance carriers and health maintenance organizations, among others. Efforts by such payors to reduce healthcare costs will likely continue, which may result in reductions or slower growth in reimbursement for certain services provided by some of our tenants.  These factors may adversely affect the economic performance of some or all of our medical services tenants and, in turn, our lease revenues. In addition, if we or our tenants terminate the leases for these properties, or our tenants lose their regulatory authority to operate such properties, we may not be able to locate suitable replacement tenants to lease the properties for their specialized uses. Alternatively, we may be required to spend substantial amounts to adapt the properties to other uses. Any loss of revenues and/or additional capital expenditures occurring as a result could hinder our ability to make distributions to the holders of our shares of beneficial interest. 

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

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

Complying with laws benefiting disabled persons or other safety regulations and requirements may affect our costs and investment strategies. Federal, state and local laws and regulations designed to improve disabled persons’ access to and use of buildings, including the Americans with Disabilities Act of 1990, may require modifications to, or restrict renovations of, existing buildings. Additionally, these laws and regulations may require that structural features be added to buildings under construction.  Legislation or regulations that may be adopted in the future may impose further burdens or restrictions on us with respect to improved access to, and use of these buildings by, disabled persons. Noncompliance could result in the imposition of fines by government authorities or the award of damages to private litigants.  The costs of complying with these laws and regulations may be substantial, and limits or restrictions on construction, or the completion of required renovations, may limit the implementation of our investment strategy or reduce overall returns on our investments. This could have an adverse effect on us, our ability to make distributions to the holders of our shares of beneficial interest and our ability to pay amounts due on our debt.  Our properties are also subject to various other federal, state and local regulatory requirements, such as state and local fire and life safety requirements.  If we fail to comply with these requirements, we could incur fines or private damage awards.  Additionally, in the event that existing requirements change, compliance with future requirements may require significant unanticipated expenditures that may adversely affect our cash flow and results of operations. 

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

Environmental laws also govern the presence, maintenance and removal of asbestos, and require that owners or operators of buildings containing asbestos properly manage and maintain the asbestos; notify and train those who may come into contact with asbestos; and undertake special precautions if asbestos would be disturbed during renovation or demolition of a building.  Indoor air quality issues may also necessitate special investigation and remediation.  These air quality issues can result from inadequate ventilation, chemical contaminants from indoor or outdoor sources, or biological contaminants such as molds, pollen, viruses and bacteria.  Such asbestos or air quality remediation programs could be costly, necessitate the temporary relocation of some or all of the property’s tenants or require rehabilitation of an affected property. 

It is generally our policy to obtain a Phase I environmental study on each property that we seek to acquire.  A Phase I environmental study generally includes a visual inspection of the property and the surrounding areas, an examination of current and historical uses of the property and the surrounding areas and a review of relevant state and federal documents, but does not involve invasive techniques such as soil and ground water sampling. If the Phase I indicates any possible environmental problems, our policy is to order a Phase II study, which involves testing the soil and ground water for actual hazardous substances. However, Phase I and Phase II environmental

studies, or any other environmental studies undertaken with respect to any of our current or future properties, may not reveal the full extent of potential environmental liabilities. We currently do not carry insurance for environmental liabilities.

We may be unable to retain or attract qualified management. We are dependent upon our senior officers for essentially all aspects of our business operations. Our senior officers have experience in the specialized business segments in which we operate, and the loss of them would likely have a material adverse effect on our operations, and could adversely impact our relationships with lenders, industry personnel and potential tenants.  We do not have employment contracts with any of our senior officers. As a result, any senior officer may terminate his or her relationship with us at any time, without providing advance notice.  If we fail to manage effectively a transition to new personnel, or if we fail to attract and retain qualified and experienced personnel on acceptable terms, our business and prospects could be harmed.  The location of our company headquarters in Minot, North Dakota, may make it more difficult and expensive to attract, relocate and retain current and future officers and employees. 

Failure to comply with changing regulation of corporate governance and public disclosure could have a material adverse effect on our business, operating results and stock price, and continuing compliance will result in additional expenses.  The Sarbanes-Oxley Act of 2002, as well as new rules and standards subsequently implemented by the Securities and Exchange Commission and NASDAQ, have required changes in some of our corporate governance and accounting practices, and are creating uncertainty for us and many other public companies, due to varying interpretations of the rules and their evolving application in practice.  We expect these laws, rules and regulations to increase our legal and financial compliance costs, and to subject us to additional risks.  In particular, if we fail to maintain the adequacy of our internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, as such standards may be modified, supplemented or amended from time to time, a material misstatement could go undetected, and we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting.  Failure to maintain an effective internal control environment could have a material adverse effect on our business, operating results, and stock price.  Additionally, our efforts to comply with Section 404 of the Sarbanes-Oxley Act and the related regulations have required, and we believe will continue to require, the commitment of significant financial and managerial resources. 

Risks Related to Our Structure and Organization 

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

 

If we failed to qualify as a REIT, we would be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at corporate rates, which would likely have a material adverse effect on us, our ability to make distributions to the holders of our shares of beneficial interest and our ability to pay amounts due on our debt. In addition, we could be subject to increased state and local taxes, and, unless entitled to relief under applicable statutory provisions, we would also be disqualified from treatment as a REIT for the four taxable years following the year during which we lost our qualification. This treatment would reduce funds available for investment or distributions to the holders of our shares of beneficial interest because of the additional tax liability to us for the year or years involved. In addition, we would no longer be able to deduct, and would not be required to make, distributions to holders of our common shares. To the extent that distributions to the holders of our shares of beneficial interest had been made in anticipation of qualifying as a REIT, we might be required to borrow funds or to liquidate certain investments to pay the applicable tax. 

Failure of our operating partnership to qualify as a partnership would have a material adverse effect on us.  We believe that IRET Properties, our operating partnership, qualifies as a partnership for federal income tax purposes.  No assurance can be given, however, that the Internal Revenue Service will not challenge its status as a partnership for federal income tax purposes, or that a court would not sustain such a challenge.  If the Internal Revenue Service were to be successful in treating IRET Properties as an entity that is taxable as a corporation, we would cease to qualify as a REIT because the value of our ownership interest in IRET Properties would exceed 5% of our assets, and because we would be considered to hold more than 10% of the voting securities of another corporation.  Also, the imposition of a corporate tax on IRET Properties would reduce significantly the amount of cash available for distribution by it. 

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

In order to maintain our REIT status, we may be forced to borrow funds during unfavorable market conditions.  In order to maintain our REIT status, we may need to borrow funds on a short-term basis to meet the REIT distribution requirements, even if the then-prevailing market conditions are not favorable for these borrowings.  To qualify as a REIT, we generally must distribute to our shareholders at least 90% of our net taxable income each year, excluding net capital gains.  In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions made by us with respect to the calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income for that year, and any undistributed taxable income from prior periods.  We intend to make distributions to our shareholders to comply with the 90% distribution requirement and to avoid the nondeductible excise tax and will rely for this purpose on distributions from our operating partnership.  However, we may need short-term debt or long-term debt or proceeds from asset sales or sales of common shares to fund required distributions as a result of differences in timing between the actual receipt of income and the recognition of income for federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves or required debt or amortization payments.  The inability of our cash flows to cover our distribution requirements could have an adverse impact on our ability to raise short and long-term debt or sell equity securities in order to fund distributions required to maintain our REIT status.

 

Our board of trustees may make changes to our major policies without approval of the holders of our shares of beneficial interest. Our operating and financial policies, including policies relating to development and acquisition of real estate, financing, growth, operations, indebtedness, capitalization and distributions, are exclusively determined by our board of trustees. Our board of trustees may amend or revoke those policies, and other policies, without advance notice to, or the approval of, the holders of our shares of beneficial interest.  Accordingly, our shareholders do not control these policies, and policy changes could adversely affect our financial condition and results of operations. 

Risks Related to the Purchase of our Shares of Beneficial Interest 

Our future growth depends, in part, on our ability to raise additional equity capital, which will have the effect of diluting the interests of the holders of our common shares. Our future growth depends upon, among other things, our ability to raise equity capital and issue limited partnership units of IRET Properties. The issuance of additional common shares, and of limited partnership units for which we subsequently issue common shares upon the redemption of the limited partnership units, will dilute the interests of the current holders of our common shares.  Additionally, sales of substantial amounts of our common shares or preferred shares in the public market, or issuances of our common shares upon redemption of limited partnership units in our operating partnership, or the perception that such sales or issuances might occur, could adversely affect the market price of our common shares. 

We may issue additional classes or series of our shares of beneficial interest with rights and preferences that are superior to the rights and preferences of our common shares. Without the approval of the holders of our common shares, our board of trustees may establish additional classes or series of our shares of beneficial interest, and such classes or series may have dividend rights, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences or other rights and preferences that are superior to the rights of the holders of our common shares. 

Payment of distributions on our shares of beneficial interest is not guaranteed. Our board of trustees must approve our payment of distributions and may elect at any time, or from time to time, and for an indefinite duration, to reduce the distributions payable on our shares of beneficial interest or to not pay distributions on our shares of beneficial interest. Our board of trustees may reduce distributions for a variety of reasons, including, but not limited to, the following: 

•    operating and financial results below expectations that cannot support the current distribution payment; 

•    unanticipated costs or cash requirements; or 

•    a conclusion that the payment of distributions would cause us to breach the terms of certain agreements or contracts, such as financial ratio covenants.

Our distributions are not eligible for the lower tax rate on dividends except in limited situations.  The tax rate applicable to qualifying corporate dividends received by individuals prior to 2009 has been reduced to a maximum rate of 15%.  This special tax rate is generally not applicable to distributions paid by a REIT, unless such distributions represent earnings on which the REIT itself had been taxed. As a result, distributions (other than capital gain distributions) paid by us to individual investors will generally be subject to the tax rates that are otherwise applicable to ordinary income which, currently, are as high as 35%.  This law change may make an investment in our common shares comparatively less attractive relative to an investment in the shares of other entities which pay dividends but are not formed as REITs. 

Changes in market conditions could adversely affect the price of our shares of beneficial interest. As is the case with any publicly-traded securities, certain factors outside of our control could influence the value of our common shares, Series A preferred shares and any other classes or series of preferred shares of beneficial interest to be issued in the future. These conditions include, but are not limited to:

•    market perception of REITs in general; 

•    market perception of REITs relative to other investment opportunities; 

•    market perception of our financial condition, performance, distributions and growth potential; 

•    prevailing interest rates; 

•    general economic and business conditions; 

•    government action or regulation, including changes in the tax laws; and 

•    relatively low trading volumes in securities of REITS. 

Higher market interest rates may adversely affect the market price of our common shares, and low trading volume on the NASDAQ Global Select Market may prevent the timely resale of our common shares. One of the factors that investors may consider important in deciding whether to buy or sell shares of a REIT is the distribution with respect to such REIT’s shares as a percentage of the price of those shares, relative to market interest rates.  If market interest rates go up, prospective purchasers of REIT shares may expect a higher distribution rate in order to maintain their investment.  Higher market interest rates would likely increase our borrowing costs and might decrease funds available for distribution.  Thus, higher market interest rates could cause the market price of our common shares to decline.  In addition, although our common shares of beneficial interest are listed on the NASDAQ Global Select Market, the daily trading volume of our shares may be lower than the trading volume for other companies and industries.  The average daily trading volume for the period of May 1, 2006, through April 30, 2007, was 93,365 shares and the average monthly trading volume for the period of May 1, 2006 through April 30, 2007 was 2,111,026 shares.  As a result of this trading volume, an owner of our common shares may encounter difficulty in selling our shares in a timely manner and may incur a substantial loss. 

Item 1B.  Unresolved Staff Comments 

None. 

Item 2. Properties 

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

Certain financial information from fiscal 2006 and 2005 was adjusted to reflect the effects of discontinued operations. See the Property Dispositions section in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the discussion in Note 12 to our Consolidated Financial Statements.

Total Real Estate Rental Revenue

As of April 30, 2007, our real estate portfolio consisted of 69 multi-family residential properties and 148 commercial properties, consisting of office, medical, industrial and retail properties, comprising 30.6%, 37.6%, 19.1%, 5.1%, and 7.6%, respectively, of our total real estate portfolio, based on the dollar amount of our original investment plus capital improvements, net of accumulated depreciation, through April 30, 2007. Gross annual rental revenue and percentages of total annual real estate rental revenue by property type for each of the three most recent fiscal years ended April 30, are as follows:

Economic Occupancy Rates 

Economic occupancy rates are shown below for each property type in each of the three most recent fiscal years ended April 30. Economic occupancy represents actual rental revenues recognized for the period indicated as a percentage of scheduled rental revenues for the period.  Percentage rents, tenant concessions, straightline adjustments and expense reimbursements are not considered in computing either actual revenues or scheduled rent revenues.  Scheduled rent revenue is determined by valuing occupied units or square footage at contract rates and vacant units or square footage at market rates. In the case of multi-family residential properties, lease arrangements with individual tenants vary from month-to-month to one-year leases. Leases on commercial properties generally vary from month-to-month to 20 years. 

Certain Lending Requirements 

In certain instances, in connection with the acquisition of investment properties, the lender financing such properties may require, as a condition of the loan, that the properties be owned by a “single asset entity.” Accordingly, we have organized a number of wholly-owned subsidiary corporations, and IRET Properties has organized several limited partnerships, for the purpose of holding title in an entity that complies with such lending conditions. All financial statements of these subsidiaries are consolidated into our financial statements. 

Management and Leasing of Our Real Estate Assets 

The day-to-day management and leasing of our real estate assets has, with the exception of certain properties managed by our Minneapolis, Omaha and Minot offices, generally been handled by locally-based third-party professional real estate management companies.  Day-to-day management activities include the negotiation of leases, the preparation of proposed operating budgets, and the supervision of routine maintenance and capital improvements that have been authorized by us.  All decisions relating to purchase, sale, insurance coverage, capital improvements, approval of commercial leases, annual operating budgets and major renovations are made exclusively by our employees and then implemented by the third-party management companies. 

In adopting this model of third-party management of our real estate assets, we considered that under most circumstances the use of locally-based management companies would allow us to benefit from local knowledge of the applicable real estate market, while avoiding the cost and difficulty associated with maintaining management personnel in every city in which we own properties.  However, following our September 2006 acquisition from Magnum Resources, Inc. of a portfolio of office properties, we opened an office in Omaha, Nebraska, and property management offices in St. Louis and Kansas City, and hired property management personnel previously with Magnum Resources to continue managing these properties for us, as our employees.  During fiscal year 2007, we have added additional property management personnel in our Minneapolis office, and have brought in-house the management of certain of our properties that we considered suitable for internal management.  As of April 30, 2007, we have under internal management 74 properties.  We believe that in certain of the locations in which we own properties, economies of scale and our own knowledge of the applicable market may make internal management more efficient and cost effective than retaining third-party management companies, and accordingly we plan

to continue evaluating our portfolio to identify other properties that may be candidates for management by our own employees. 

As of April 30, 2007, we had property management contracts and/or leasing agreements with the following companies: 

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

With respect to multi-tenant commercial properties, we rely almost exclusively on third-party brokers to locate potential tenants. As compensation, brokers may receive a commission that is generally calculated as a percentage of the net rent to be paid over the term of the lease. We believe that the broker commissions paid by us conform to market and industry standards, and accordingly are commercially reasonable. 

Summary of Real Estate Investment Portfolio

Summary of Individual Properties Owned as of April 30, 2007 

The following table presents information regarding our 217 properties owned as of April 30, 2007. We own the following interests in real estate either through our wholly-owned subsidiaries or by ownership of a controlling interest in an entity owning the real estate. We account for these interests on a consolidated basis. Occupancy rates given are the average economic occupancy rates for the fiscal year ended April 30, 2007:

 

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

(** = Primarily Parking Lot Rental) 

 

 

 

Mortgages Payable 

As of April 30, 2007, individual first mortgage loans on the above properties totaled $951.1 million. Of the $951.1 million of mortgage indebtedness on April 30, 2007, $21.7 million is represented by variable rate mortgages on which the future interest rate will vary based on changes in the interest rate index for each respective loan. The balance of fixed rate mortgages totaled $929.4 million. Principal payments due on our mortgage indebtedness are as follows: 

Future Minimum Lease Payments 

The future minimum lease payments to be received under leases for commercial properties in place as of April 30, 2007, assuming that no options to renew or buy out the leases are exercised, are as follows: 

 

Capital Expenditures 

Each year we review the physical condition of each property we own. In order for our properties to remain competitive, attract new tenants, and retain existing tenants, we plan for a reasonable amount of capital improvements. For the year ended April 30, 2007, we spent approximately $30.9 million on capital improvements. 

Contracts or Options to Sell 

We have granted options to purchase certain of our properties to tenants in these properties, under lease agreements with the tenant. In general, these options grant the tenant the right to purchase the property at the greater of such property’s appraised value or an annual compounded increase of 2.0% to 2.5% of the initial cost to us. As of April 30, 2007, our properties subject to purchase options, the cost, plus improvements, of each such property and its gross rental revenue are as follows: 

Properties by State 

The following table presents, as of April 30, 2007, an analysis by state of each of the five major segments of properties owned by us - multi-family residential, office, medical, industrial and retail: 

Item 3. Legal Proceedings 

In the ordinary course of our operations, we become involved in litigation. At this time, we know of no material pending or threatened legal proceedings, or other proceedings contemplated by governmental authorities, that would have a material impact upon us. 

Item 4. Submission of Matters to a Vote of Security Holders 

No matters were submitted to our shareholders during the fourth quarter of the fiscal year ended April 30, 2007. 

PART II 

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

Quarterly Share and Distribution Data 

Our common shares of beneficial interest trade on the NASDAQ Global Select Market under the symbol IRETS. On June 29, 2007, the last reported sales price per share of our common shares on the NASDAQ National Market was $10.33. The following table sets forth the quarterly high and low closing sales prices per share of our common shares as reported on the NASDAQ Global Select Market, and the distributions per common share and limited partnership unit declared with respect to each period. 

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

Shareholders 

As of June 29, 2007, the Company had approximately 4,196 common shareholders of record, and 48,581,306 common shares of beneficial interest (plus 20,388,754 limited partnership units potentially convertible into 20,388,754 common shares) were outstanding. 

Unregistered Sales of Shares 

Sales of Unregistered Securities. During the fiscal years ended April 30, 2007, 2006 and 2005, respectively, we issued an aggregate of 219,587, 342,242 and 595,810 unregistered common shares to holders of limited partnership units of IRET Properties upon redemption and conversion of an aggregate of 219,587, 342,242 and 595,810 limited partnership units of IRET Properties on a one-for-one basis. All such issuances of our common shares were exempt from registration as private placements under Section 4(2) of the Securities Act, including Regulation D promulgated thereunder. We have registered the re-sale of such common shares under the Securities Act.

 

Issuer Purchases of Equity Securities. The Company did not repurchase any of its equity securities during fiscal year 2007, except for repurchases of nominal amounts of fractional shares, at shareholder request. 

Comparative Stock Performance 

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

Set forth below is a graph that compares, for the five fiscal years commencing May 1, 2002, and ending April 30, 2007, the cumulative total returns for the Company’s common shares with the comparable cumulative total return of two indexes, the Standard & Poor’s 500 Index (“S&P 500”), and the NAREIT Equity Index, which is an index prepared by the National Association of Real Estate Investment Trusts, which includes all tax-qualified equity REITs listed on the New York Stock Exchange, the American Stock Exchange and the NASDAQ Market.   

The performance graph assumes that at the close of trading on April 30, 2002, the last trading day of fiscal year 2002, $100 was invested in the Company’s common shares and in each of the indexes.  The comparison assumes the reinvestment of all distributions.  Cumulative total shareholder returns for the Company’s common shares, the S&P 500 and the NAREIT Equity Index are based on the Company’s fiscal year ending April 30. 

 

 

Source:  Research Data Group, Inc.

 

Item 6. Selected Financial Data 

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

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 

The following information is provided in connection with, and should be read in conjunction with, the consolidated financial statements included in this Annual Report on Form 10-K. We operate on a fiscal year ending on April 30. The following discussion and analysis is for the fiscal year ended April 30, 2007. 

Overview 

We are a self-advised equity real estate investment trust engaged in owning and operating income-producing real properties. Our investments include multi-family residential properties and commercial properties located primarily in the upper Midwest states of Minnesota and North Dakota. Our properties are diversified in property type and location. As of April 30, 2007, our real estate portfolio consisted of 69 multi-family residential properties containing 9,397 apartment units and having a total real estate investment amount net of accumulated depreciation of $400.1 million, and 148 commercial properties containing approximately 10.0 million square feet of leasable space and having a total real estate investment amount net of accumulated depreciation of $908.6 million. Our commercial properties consist of: 

•    64 office properties containing approximately 4.8 million square feet of leasable space and having a total real estate investment amount net of accumulated depreciation of $492.2 million;

 

•    34 medical properties (including senior housing/assisted living facilities) containing approximately 1.7 million square feet of leasable space and having a total real estate investment amount net of accumulated depreciation of $250.0 million; 

•    13 industrial properties (including miscellaneous commercial properties) containing approximately 2.0 million square feet of leasable space and having a total real estate investment amount net of accumulated depreciation of $67.0 million; and 

•    37 retail properties containing approximately 1.5 million square feet of leasable space and having a total real estate investment amount net of accumulated depreciation of $99.4 million. 

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

During fiscal year 2007, IRET continued to operate in a challenging acquisition environment.  Liquidity levels in the Company’s markets remained high, and much of the abundant investment capital available continued to seek commercial real estate.  Accordingly, identifying potential acquisition properties that met IRET’s investment criteria remained difficult during fiscal year 2007, although deal flow continued to be robust.  Despite these challenges, during fiscal year 2007 the Company closed on the largest acquisition in its history, when it purchased from subsidiaries of Omaha-based Magnum Resources, Inc. a portfolio of nine office complexes, consisting of 15 buildings totaling approximately 936,568 rentable square feet, for aggregate consideration of approximately $140.8 million (the “Magnum Portfolio). As of the closing date of the acquisition, the Magnum Portfolio was approximately 94% leased to multiple tenants.  The acquisition increased the leasable space of IRET’s office portfolio by approximately 25%. 

In addition to the Magnum Portfolio, the Company during fiscal year 2007 added five apartment properties, one office property, two medical properties (excluding the acquisition of the remaining ownership interest in a medical office building previously partially owned by the Company), two industrial properties, two retail properties (including the construction of a retail drug store property to replace an existing older retail property owned by the Company) and six parcels of unimproved land to its investment portfolio, for an aggregate purchase price and construction cost  (including the Magnum properties) of approximately $220.7 million.  During fiscal year 2007, the Company disposed of two apartment complexes, one office property, one medical (assisted living) property, 11 small retail properties and two parcels of unimproved land, for sale prices totaling approximately $22.5 million. 

Total revenues of IRET Properties, our operating partnership, increased by $27.4 million to $197.8 million in fiscal year 2007, compared to $170.4 million in fiscal year 2006.  This increase was primarily attributable to the addition of new real estate properties.  Operating income increased in fiscal year 2007, to $11.6 million from $9.9 million in fiscal year 2006. We estimate that rent concessions offered to tenants during the twelve months ended April 30, 2007 lowered our operating revenues by approximately $5.0 million, compared to $5.2 million for fiscal year 2006.  Expenses increased during fiscal year 2007 as well, with real estate taxes, maintenance, utilities and property management expense all increasing from year-earlier levels.  While some of this increase was due to existing real estate, the majority was due to the addition of new real estate properties to our portfolio.

Economic occupancy levels in our total commercial property segments increased slightly to 93.2% in fiscal year 2007 from 92.8% in fiscal year 2006.  Economic occupancy rates in our commercial medical, industrial and retail segments increased; the economic occupancy rate in our commercial office segment decreased.  Economic occupancy in our multi-family residential segment increased to 93.2% in fiscal year 2007, from 91.6% in fiscal year 2006. 

Additional information and more detailed discussions of our fiscal year 2007 operating results are found in the following sections of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Critical Accounting Policies 

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

Real Estate. Real estate is carried at cost, net of accumulated depreciation, less an adjustment for impairment, if any. Depreciation requires an estimate by management of the useful life of each property as well as an allocation of the costs associated with a property to its various components. If the Company does not allocate these costs appropriately or incorrectly estimates the useful lives of its real estate, depreciation expense may be misstated. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets. The Company uses a 20-40 year estimated life for buildings and improvements and a 5-12 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 ten years. 

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

Above-market and below-market in-place lease values for acquired properties are estimated based on the present value of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The Company performs this analysis on a lease-by-lease basis. The capitalized above-market or below-market intangible is amortized to rental income over the remaining non-cancelable terms of the respective leases. 

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

Property sales or dispositions are recorded when title transfers and sufficient consideration is received by the Company and the Company has no significant continuing involvement with the property sold. The Company’s properties are reviewed for impairment if events or circumstances change indicating that the carrying amount of the assets may not be recoverable. If the Company incorrectly estimates the values at acquisition or the undiscounted cash flows, initial allocations of purchase price and future impairment charges may be different. The impact of the Company’s estimates in connection with acquisitions and future impairment analysis could be material to the Company’s financial statements.

Allowance for Doubtful Accounts. The Company periodically evaluates the collectibility of amounts due from tenants and maintains an allowance for doubtful accounts ($238,000 as of April 30, 2007) for estimated losses resulting from the inability of tenants to make required payments under their respective lease agreements. The Company also maintains an allowance for receivables arising from the straight-lining of rents ($660,000 as of April 30, 2007) and from mortgage loans ($12,500 as of April 30, 2007). The straight-lining of rents receivable arises from earnings recognized in excess of amounts currently due under lease agreements. Management exercises

judgment in establishing these allowances and considers payment history and current credit status in developing these estimates. If estimates differ from actual results this would impact reported results. 

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

•   Base Rents - income arising from tenant leases. These rents are recognized over the non-cancelable term of the related leases on a straight-line basis, which includes the effects of rent increases and abated rent under the leases.  Certain leases provide for tenant occupancy during periods for which no rent is due or where minimum rent payments increase during the term of the lease. Rental revenue is recorded for the full term of each lease on a straight-line basis. Accordingly, the Company records a receivable from tenants for rents that it expects to collect over the remaining lease term as deferred rents receivable. When the Company acquires a property, the term of the existing leases is considered to commence as of the acquisition date for the purposes of this calculation. Revenue recognition is considered to be critical because the evaluation of the reliability of such deferred rents receivable involves management's assumptions relating to such tenant's viability. 

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

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

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

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

Recent Accounting Pronouncements 

For disclosure regarding recent accounting pronouncements and the anticipated impact they will have on our operations, please refer to Note 2 to our Consolidated Financial Statements. 

RESULTS OF OPERATIONS 

Revenues 

Total revenues for fiscal year 2007 were $197.8 million, compared to $170.4 million in fiscal year 2006 and $152.9 million in fiscal year 2005. Revenues during fiscal year 2007 were $27.4 million greater than revenues in fiscal year 2006 and revenues during fiscal year 2006 were $17.5 million greater than in fiscal year 2005. 

 

For fiscal 2007, the increase in revenue of $27.4 million resulted from:

For fiscal 2006, the increase in revenue of $17.5 million resulted from:

As illustrated above, the substantial majority (81.8% in fiscal year 2007 and 94.3% in fiscal year 2006) of the increase in our gross revenue for fiscal years 2007 and 2006 resulted from the addition of new real estate properties to the IRET Properties’ portfolio, with 20.5%  and 1.2%, respectively, resulting from rental increases on existing properties.. For the next 12 months, we expect acquisitions to continue to be the most significant factor in any increases in our revenues and ultimately our net income. While acceptable real estate assets are still available for purchase, continued widespread demand for real estate from traditional and non-traditional investors has resulted in a reduction in the investment returns from all types of real estate. This reduction in rates of return will be further exacerbated to the extent that rises in interest rates increase borrowing costs. While we were able to take advantage of lower borrowing costs for most of our recent acquisitions, our borrowing costs are rising. The majority of our debt is fixed and not prepayable without significant prepayment costs and fees. 

Gain on Sale of Real Estate 

The Company realized a gain on sale of real estate, land and other investments for fiscal year 2007 of $4.6 million. This compares to $3.3 million of gain on sale of real estate recognized in fiscal 2006 and $8.6 million recognized in fiscal 2005. A list of the properties sold during fiscal year 2007, showing sales price, depreciated cost plus sales costs and net gain is included in this Item 7 under the caption “Property Dispositions.” 

Net Operating Income 

The following tables report segment financial information.  We measure the performance of our segments based on net operating income (“NOI”), which we define as total revenues less property operating expenses and real estate taxes.  We believe that NOI is an important supplemental measure of operating performance for a REIT’s operating real estate because it provides a measure of core operations that is unaffected by depreciation, amortization, financing and general and administrative expense.  NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered an alternative to net income, net income available for common shareholders or cash flow from operating activities as a measure of financial performance. 

The following tables show revenues, operating expenses and NOI by reportable operating segment for fiscal years 2007, 2006 and 2005.  For a reconciliation of net operating income of reportable segments to operating income as reported, see Note 11 of the Notes to Consolidated Financial Statements in this report. 

The tables also show net operating income by reportable operating segment on a stabilized property and non-stabilized property basis.  Stabilized properties are properties owned and in operation for the entirety of the periods being compared (including properties that were redeveloped or expanded during the periods being compared, with properties purchased or sold during the periods being compared excluded from the stabilized property category).  This comparison allows the Company to evaluate the performance of existing properties and their contribution to net income.  Management believes that measuring performance on a stabilized property basis is useful to investors because it enables evaluation of how the Company’s properties are performing year over year.  Management uses

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

  

  

 

Changes in Expenses and Net Income 

Operating income for fiscal year 2007 increased to $11.6 million from $9.9 million in fiscal year 2006, and from $8.9 million in fiscal year 2005. Our net income available to common shareholders for fiscal year 2007 was $11.7 million, compared to $9.2 million in fiscal year 2006 and $12.7 million in fiscal year 2005. On a per common share basis, net income was $.24 per common share in fiscal year 2007, compared to $.20 per common share in fiscal year 2006 and $.30 in fiscal year 2005. 

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

Changes in net income available to common shareholders for fiscal year 2007 resulted from:  

Changes in net income available to common shareholders for fiscal year 2006 resulted from:  

Factors Impacting Net Income During Fiscal Year 2007 as Compared to Fiscal Year 2006 

Our results during the fiscal year ended April 30, 2007, compared to the fiscal year ended April 30, 2006, show continued overall improvement in occupancy levels and rental revenues.  Economic occupancy rates in four of our five segments increased compared to the year-earlier period, and real estate revenue increased in fiscal year 2007 compared to fiscal year 2006 in all of our reportable segments.  Net income available to common shareholders increased to $11.7 million in fiscal year 2007, compared to $9.2 million in fiscal year 2006.  Revenue increases during fiscal year 2007 were offset somewhat by increases in maintenance, utilities, mortgage interest due to increased borrowing, real estate taxes, property management and amortization expense.  Insurance expense decreased in fiscal year 2007.

 

•   Economic Occupancy.  During fiscal year 2007, economic occupancy levels at our properties improved over year-earlier levels in each of our reportable segments other than commercial office.  Economic occupancy represents actual rental revenues recognized for the period indicated as a percentage of scheduled rental revenues for the period. Percentage rents, tenant concessions, straightline adjustments and expense reimbursements are not considered in computing either actual revenues or scheduled rent revenues.   Economic occupancy rates on a stabilized property basis for the fiscal year ended April 30, 2007 compared to the fiscal year ended April 30, 2006 are shown below: 

During fiscal year 2007, results continued to improve at our multi-family residential properties.  While we had limited success in increasing scheduled rental rates at our apartment communities, the construction of competing apartment units, single-family homes and condominium units has abated in most of our markets.  Combined with positive absorption of previously-constructed housing, this reduction in construction of competing product has allowed us to reduce vacancy and tenant concessions in our multi-family residential segment.  We also saw during fiscal year 2007 an accelerating demand for industrial space, although as in past periods rental rates in this segment continue to remain at levels lower than in prior fiscal years.  We did not see in fiscal year 2007 any consistent sustained demand for commercial office space or for existing smaller retail developments, which comprise a majority of IRET’s retail portfolio.  However, our expectation is that demand in IRET’s markets for our multi-family, medical, office and industrial locations will strengthen in fiscal year 2008. 

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

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

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

 

•   Increased Maintenance Expense.  Maintenance expenses totaled $21.7 million in fiscal year 2007, compared to $19.2 million in fiscal year 2006.  Maintenance expenses at properties newly acquired in fiscal years 2007 and 2006 added $2.5 million to the maintenance expense category during fiscal year 2007, while maintenance expenses at existing properties decreased by $31,000, resulting in a net increase of $2.5 million or 13.0% in maintenance expenses in fiscal year 2007 compared to fiscal year 2006.  Under the terms of most of our commercial leases, the full cost of maintenance is paid by the tenant as additional rent.  For our noncommercial real estate properties, any increase in our maintenance costs must be collected from tenants in the form of general rent increases. 

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

	(in thousands)
	Multi-Family Residential		Commercial Office		Commercial Medical		Commercial Industrial		Commercial Retail
2007	$	8,640	$	9,245	$	2,611	$	218	$	1,000
2006	$	7,872	$	7,582	$	2,471	$	201	$	1,107
% change (2007 vs. 2006)		9.8%		21.9%		5.7%		8.5%		(9.7%)

 

•   Increased Utility Expense.  Utility expense totaled $15.2 million in fiscal year 2007, compared to $13.5 million in fiscal year 2006.  Utility expenses at properties newly acquired in fiscal years 2007 and 2006 added $1.6 million to the utility expense category during fiscal year 2007, while utility expenses at existing properties increased by $88,000, for a total increase of $1.7 million or 12.6% in utility expenses in fiscal year 2007 compared to fiscal year 2006. 

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

	(in thousands)
	Multi-Family Residential		Commercial Office		Commercial Medical		Commercial Industrial		Commercial Retail
2007	$	6,711	$	6,290	$	1,771	$	57	$	377
2006	$	6,587	$	4,805	$	1,600	$	91	$	390
% change (2007 vs. 2006)		1.9%		30.9%		10.7%		(37.4%)		(3.3%)

 

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

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

	(in thousands)
	Multi-Family Residential		Commercial Office		Commercial Medical		Commercial Industrial		Commercial Retail
2007	$	18,745	$	20,157	$	11,291	$	2,325	$	4,070
2006	$	17,969	$	14,774	$	10,534	$	2,240	$	4,029
% change (2007 vs. 2006)		4.3%		36.4%		7.2%		3.8%		1.0%

 

•     Increased Amortization Expense. In accordance with SFAS No. 141, Business Combinations, which establishes standards for valuing in-place leases in purchase transactions, the Company allocates a portion of the purchase price paid for properties to in-place lease intangible assets.  The amortization period of these intangible assets is the term of the lease, rather than the estimated life of the buildings and improvements.  The Company accordingly initially records additional amortization expense due to this shorter amortization period, which has the effect in the short term of decreasing the Company’s net income available to common shareholders, as computed in accordance with GAAP.  Amortization expense related to in-places leases totaled $9.2 million in fiscal year 2007, compared to $6.7 million in fiscal year 2006. The increase in amortization expense in fiscal year 2007 compared to fiscal year 2006 was primarily due to a significant acquisition completed by the Company in the second quarter of fiscal year 2007, of a portfolio of properties from Magnum Resources, Inc.

•   Increased Real Estate Tax Expense.  Real estate taxes on properties newly acquired in fiscal years 2007 and 2006 added $2.9 million to real estate tax expense, while real estate taxes on existing properties increased by $638,000, for a total increase of $3.5 million or 17.7% in real estate tax expense in fiscal year 2007 compared to fiscal year 2006, from $19.8 million to $23.3 million.   

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

	(in thousands)
	Multi-Family Residential		Commercial Office		Commercial Medical		Commercial Industrial		Commercial Retail
2007	$	7,322	$	10,844	$	2,322	$	755	$	2,079
2006	$	6,982	$	8,022	$	2,283	$	771	$	1,727
% change (2007 vs. 2006)		4.9%		35.2%		1.7%		(2.1%)		20.4%

 

•   Decreased Insurance Expense.  Insurance expense decreased in fiscal year 2007 compared to fiscal year 2006, from $2.7 million to $2.4 million, a decrease of approximately 11.1%.  Insurance expense at properties newly-acquired in fiscal years 2007 and 2006 totaled $208,000, while insurance expense at existing properties decreased $488,000, for a net decrease of $280,000 in insurance expense in fiscal year 2007 compared to fiscal year 2006. 

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

	(in thousands)
	Multi-Family Residential		Commercial Office		Commercial Medical		Commercial Industrial		Commercial Retail
2007	$	1,094	$	773	$	274	$	75	$	166
2006	$	1,399	$	705	$	298	$	81	$	179
% change (2007 vs. 2006)		(21.8%)		9.6%		(8.1%)		(7.4%)		(7.3%)

 

•   Increased Property Management Expense.  Property management expense increased in fiscal year 2007 compared to fiscal year 2006, from $11.8 million to $13.9 million, an increase of $2.1 million or approximately 17.8%.  Of this increase, $1.3 million is attributable to existing properties, while $829,000 is due to properties acquired in fiscal years 2007 and 2006.  The increase at existing properties is primarily due to an increase in property revenue resulting in higher management fees payable (management fees are generally a percentage of rents received).  

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

	(in thousands)
	Multi-Family Residential		Commercial Office		Commercial Medical		Commercial Industrial		Commercial Retail
2007	$	7,808	$	3,348	$	1,697	$	148	$	853
2006	$	7,010	$	2,488	$	1,662	$	108	$	541
% change (2007 vs. 2006)		11.4%		34.6%		2.1%		37.0%		57.7%

 

Factors Impacting Net Income During Fiscal Year 2006 as Compared to Fiscal Year 2005 

A discussion of the factors having the greatest impact on our operational results in fiscal year 2006 compared to fiscal year 2005 is set forth below. 

•   Increased concessions and limited ability to raise rents.  During fiscal year 2006, economic occupancy levels at our multi-family residential and commercial properties improved.  However, our level of tenant concessions continued to rise, and, despite some positive developments in the general economy, a majority of the markets in which we operated continued to experience lower-than-expected levels of job creation and demand for multi-family residential and commercial space.  Accordingly, we were unable to raise rents

significantly at the majority of our properties.  Economic occupancy levels at our stabilized multi-family residential properties increased throughout our entire portfolio during fiscal year 2006, to 92.0% compared to 90.1% at the end of fiscal year 2005. “Stabilized properties” are those properties that we have owned for the entirety of the periods being compared, and include properties that were redeveloped or expanded during the periods being compared.  

      Economic occupancy levels at our stabilized total commercial segment properties increased to 91.1% during fiscal year 2006, from 89.9% at the end of fiscal year 2005. On an individual commercial segment basis, economic occupancy levels at our stabilized commercial office, medical and industrial properties increased to 91.5%, 94.1% and 87.2%, respectively, during fiscal year 2006, from 90.2%, 90.9% and 86.8%, respectively, during fiscal year 2005.  Economic vacancy levels at our stabilized commercial retail properties decreased to 89.3% during fiscal year 2006, compared to 89.8% during fiscal year 2005. 

      To maintain physical occupancy levels at our multi-family residential properties, we may offer tenant incentives, generally in the form of lower rents, which results in decreased revenues and income from operations at our stabilized properties.  We estimate that rent concessions offered during fiscal year 2006 lowered our operating revenues by approximately $5.2 million, compared to an estimated approximately $4.4 million reduction in operating revenues attributable to rent concessions offered in fiscal year 2005. 

•   Increased real estate taxes.  Real estate taxes on properties newly acquired in fiscal years 2005 and 2006 added $2.0 million to the real estate taxes category, while real estate taxes on existing properties decreased by $406,000, resulting in a net increase in real estate tax expense of $1.6 million, or 8.1%, for fiscal year 2006, as compared to fiscal year 2005. 

•   Increased maintenance expense.  Maintenance expenses at our properties increased by $3.2 million, or 19.7% for the fiscal year ended April 30, 2006, as compared to fiscal year 2005.  Of the increased maintenance costs for the fiscal year ended April 30, 2006, $2.4 million, or 74.5%, was attributable to the addition of new real estate acquired in fiscal 2006 and 2005, while $774,000, or 25.5%, was due to increased costs for maintenance on existing real estate assets.  Under the terms of most of our commercial leases, the full cost of maintenance is paid by the tenant as additional rent.  For our non-commercial real estate properties, any increase in our maintenance costs must be collected from tenants in the form of a general rent increase.  

•   Increased utility expense.  The utility expense category increased by $2.9 million, or 26.4%, for the fiscal year ended April 30, 2006, compared to fiscal year 2005.  Of the increased utility costs, $1.6 million, or 56.5%, was attributable to the addition of new real estate acquired in fiscal years 2006 and 2005, while $1.2 million, or 43.5%, was due to increased costs for utilities on existing real estate assets.  Under the terms of most of our commercial leases, the full cost of utilities is paid by the tenant as additional rent.  For our other non-commercial real estate properties, any increase in our utility costs must be collected from tenants in the form of a general rent increase.  Additionally, since our real estate portfolio is primarily located in Minnesota and North Dakota, the severity of winters has a large impact on our utility costs. 

•   Increased mortgage interest expense.  Our mortgage debt increased $57.3 million, or 8.1%, for the fiscal year ended April 30, 2006 compared to fiscal year 2005, to approximately $765.9 million from approximately $708.6 million.  Mortgage interest expense at properties newly acquired in fiscal years 2005 and 2006 added $4.6 million to the mortgage interest expense category, while mortgage interest expense at existing properties decreased by $549,000, resulting in a net increase of $4.0 million or 8.8% in mortgage interest expense in fiscal year 2006 compared to fiscal year 2005.

 

Comparison of Results from Commercial and Residential Properties 

The following table presents an analysis of the relative investment in (corresponding to “Property owned” on the balance sheet, i.e., cost), and net operating income of, our commercial and multi-family residential properties over the past three fiscal years: 

Analysis of Lease Expirations and Credit Risk 

The following table shows the annual lease expiration percentages and base rent of expiring leases for the total commercial segments properties owned by us as of April 30, 2007, for fiscal years 2008 through 2017, and the leases that will expire during fiscal year 2018 and beyond. Our multi-family residential properties are excluded from this table, since residential leases are generally for a one-year term. 

(1)  Includes month-to-month leases for approximately 189,900 square feet, with annualized base rent totaling approximately $1,102,662.

 

The following table lists our top ten commercial tenants on April 30, 2007, for the total commercial segments properties owned by us as of April 30, 2007, based upon minimum rents in place as of April 30, 2007:

 

Property Acquisitions 

IRET Properties paid approximately $220.7 million for real estate properties added to its portfolio during fiscal year 2007, compared to $93.4 million in fiscal year 2006. The fiscal year 2007 and 2006 additions are detailed below. 

Fiscal 2007 (May 1, 2006 to April 30, 2007) 

* Development property placed in service March 1, 2007.

** Development property placed in service May 1, 2006. 

In addition to the above property acquisitions, in the fourth quarter of fiscal year 2007 IRET Properties issued limited partnership units with a value at issuance of approximately $5.25 million to purchase an approximately 29% ownership interest in a limited liability company in which IRET already owned a 71% interest.  This entity owns the Southdale Medical Building in Edina, Minnesota, and with its acquisition of this remaining ownership interest, IRET now is the sole owner of this property.

Fiscal 2006 (May 1, 2005 to April 30, 2006) 

	(in thousands)
Fiscal 2006 Acquisitions	Acquisition Cost
Multi-Family Residential
36-unit Legacy 7 - Grand Forks, ND	$	2,445
		2,445
Commercial Property—Office
15,594 sq. ft. Spring Valley IV Office Building - Omaha, NE		1,250
23,913 sq. ft. Spring Valley V Office Building - Omaha, NE		1,375
24,000 sq. ft. Spring Valley X Office Building - Omaha, NE		1,275
24,000 sq. ft. Spring Valley XI Office Building - Omaha, NE		1,250
30,000 sq. ft. Brook Valley I Office Building - La Vista, NE		2,100
146,087 sq. ft. Northpark Corporate Center - Arden Hills, MN		18,597
		25,847
Commercial Property—Medical (including assisted living)
74,112 sq. ft. Edgewood Vista - Bismarck, ND		10,750
60,161 sq. ft. Edgewood Vista - Spearfish, SD		6,687
82,535 sq. ft. Edgewood Vista - Brainerd, MN		10,625
160,485 sq. ft. Edgewood Vista - Hermantown, MN		12,315
50,409 sq. ft. Ritchie Medical Plaza - St. Paul, MN		10,750
54,971 sq. ft. 2800 Medical Building - Minneapolis, MN		9,000
47,950 sq. ft. Stevens Point - Stevens Point, WI		4,215
		64,342
Unimproved Land
Stevens Point Unimproved - Stevens Point, WI		310
Eagan Unimproved Land - Eagan, MN		423
		733
Total Fiscal 2006 Property Acquisitions	$	93,367

 

Property Dispositions 

During fiscal year 2007, IRET Properties disposed of 14 properties and two parcels of unimproved land for an aggregate sale price of $22.5 million, compared to 17 properties and two unimproved parcels sold for an aggregate sale price of $14.2 million in total during fiscal year 2006. Real estate assets sold by IRET during fiscal years 2007 and 2006 were as follows:

Funds From Operations 

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

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

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

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

FFO applicable to common shares and limited partnership units for the fiscal year ended April 30, 2007 increased to $57.0 million, compared to $46.7 million and $42.3 million for the fiscal years ended April 30, 2006 and 2005, respectively.

 

Reconciliation of Net Income to Funds From Operations 

For the years ended April 30, 2007, 2006 and 2005: 

	(in thousands, except per share amounts)
Fiscal Years Ended April 30,	2007						2006						2005
	Amount		Weighted Avg  Shares and  Units (2)		Per  Share  and  Unit (3)		Amount		Weighted Avg  Shares and  Units (2)		Per  Share  and  Unit (3)		Amount		Weighted Avg  Shares and  Units (2)		Per Share and Unit (3)
Net income	$	14,110			$		$	11,567			$		$	15,076			$
Less dividends to preferred shareholders		(2,372)						(2,372)						(2,372)
Net income available to common shareholders		11,738		47,672		.25		9,195		45,717		.20		12,704		43,214		.30
Adjustments:
Minority interest in earnings of unitholders		4,299		17,017				2,705		13,329				3,873		12,621
Depreciation and Amortization(1)		45,568						38,104						34,342
Gains on depreciable property sales		(4,602)						(3,293)						(8,605)
Funds from operations applicable to common shares and Units(4)	$	57,003		64,689	$	.88	$	46,711		59,046	$	.79	$	42,314		55,835	$	.76

 

(1)   Real estate depreciation and amortization consists of the sum of depreciation/amortization related to real estate investments and amortization related to non-real estate investments from the Consolidated Statements of Operations, totaling $45,563, and depreciation/amortization from Discontinued Operations of $246, less corporate-related depreciation and amortization on office equipment and other assets of $241, for the fiscal year ended April 30, 2007. 

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

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

(4)   In accordance with SEC and NAREIT guidance, IRET does not exclude impairment write-downs from FFO (that is, impairment charges are not added back to GAAP net income in calculating FFO). IRET recorded impairment charges of $640, $409 and $570 for the fiscal years ended April 30, 2007, 2006 and 2005, respectively. If these impairment charges are excluded from the Company's calculation of FFO, the Company's FFO per share and unit would be $.89, $.80 and $.77 for fiscal years 2007, 2006 and 2005, respectively 

Cash Distributions 

The following cash distributions were paid to our common shareholders and UPREIT unitholders during fiscal years 2007, 2006, and 2005: 

	Fiscal Years
Quarters	2007		2006		2005
First	$	.1645	$	.1625	$	.1605
Second		.1650		.1630		.1610
Third		.1655		.1635		.1615
Fourth		.1660		.1640		.1620
	$	.6610	$	.6530	$	.6450

 

The fiscal year 2007 cash distributions increased 1% over the cash distributions paid during fiscal year 2006 and fiscal year 2005, respectively. 

Liquidity and Capital Resources 

Overview 

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

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

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

Sources and Uses of Cash 

As of April 30, 2007, the Company had three unsecured lines of credit, in the amounts of $10.0 million, $12.0 million and $10.0 million, respectively, from (1) Bremer Bank, Minot, ND; (2) First Western Bank and Trust, Minot, ND; and (3) First International Bank and Trust, Watford City, ND. The Company had no outstanding borrowings on these lines as of April 30, 2007. Borrowings under the lines of credit bear interest based on the following, respectively: (1) Bremer Financial Corporation Reference Rate, (2) 175 basis points below the Prime Rate as published in the Wall Street Journal with a floor of 5.25% and a ceiling of 8.25%, and (3) Wall Street Journal prime rate. Increases in interest rates will increase the Company’s interest expense on any borrowings under its lines of credit, and as a result will affect the Company’s results of operations and cash flows. The Company’s lines of credit with Bremer Bank, First Western Bank and First International Bank and Trust expire in September 2007, December 2011 and December 2007, respectively.  The Company will seek to renew these lines of credit prior to their expiration. 

In February 2004, the Company filed a shelf registration statement on Form S-3 to offer for sale from time to time common shares and preferred shares. This registration statement was declared effective in April 2004. We may sell any combination of common shares and preferred shares up to an aggregate initial offering price of $150 million during the period that the registration statement remains effective. The Company did not issue any common or preferred shares under this registration statement in fiscal years 2007 and 2006. The Company issued 1,652,000 common shares under this registration statement in fiscal year 2005, for net proceeds of $15.8 million. As of April 30, 2007, the Company had available securities under this registration statement in the aggregate amount of approximately $101.5 million. 

The Company has a Distribution Reinvestment Plan (“DRIP”). The DRIP provides shareholders of the Company an opportunity to invest their cash distributions in common shares of the Company at a discount of 5% from the market price. During fiscal year 2007, approximately 1.2 million common shares were issued under this plan, with an additional 1.2 million common shares issued during fiscal year 2006, and 1.1 million common shares issued during fiscal year 2005. 

The issuance of UPREIT Units for property acquisitions continues to be a source of capital for the Company.  Approximately 6.7 million units were issued in connection with property acquisitions during fiscal year 2007, and approximately 1.1 million units and 2.0 million units, respectively, were issued in connection with property acquisitions during fiscal years 2006 and 2005. 

Primarily as a result of the conversion of UPREIT units and the issuance of common shares pursuant to our distribution reinvestment plan, net of fractional shares repurchased, the Company’s equity capital increased during fiscal 2007 by $15.1 million. Additionally, the equity capital of the Company was increased by $51.4 million as a result of contributions of real estate in exchange for UPREIT units, as summarized above, resulting in a total increase in equity capital for the Company during fiscal year 2007 of $66.5 million. The Company’s equity capital increased by $26.2 million and $35.9 million in fiscal years 2006 and 2005, respectively. 

Cash and cash equivalents on April 30, 2007 totaled $44.5 million, compared to $17.5 million and $23.5 million on the same date in 2006 and 2005, respectively. Net cash provided from operating activities increased to $58.4 million

in fiscal year 2007 from $48.4 million in fiscal year 2006, due primarily to increased net income as a result of higher occupancy rates at Company properties. Net cash provided from operating activities increased to $48.4 million in fiscal year 2006 from $48.3 million in fiscal year 2005, also due primarily to increased net income as a result of higher occupancy rates at Company properties. 

Net cash used in investing activities increased to $161.4 million in fiscal year 2007, from $82.6 million in fiscal year 2006. Net cash used in investing activities was $70.4 million in fiscal year 2005. The increase in net cash used in investing activities in fiscal year 2007 compared to fiscal year 2006 was primarily a result of fewer proceeds from sales of properties. Net cash provided from financing activities also increased to $130.0 million during fiscal year 2007, from $28.2 million during fiscal year 2006, due primarily to an increase in proceeds received from mortgage borrowings and refinancings. Net cash provided from financing activities increased to $28.2 million during fiscal year 2006, from $14.0 million during fiscal year 2005, also due primarily to an increase in proceeds received from mortgage borrowings and refinancings. 

Financial Condition 

Mortgage Loan Indebtedness. Mortgage loan indebtedness increased to $951.1 million on April 30, 2007, due to the acquisition of new investment properties, from $765.9 million on April 30, 2006 and $708.6 million on April 30, 2005. Approximately 97.7% of such mortgage debt is at fixed rates of interest, with staggered maturities. This limits the Company’s exposure to changes in interest rates, which minimizes the effect of interest rate fluctuations on the Company’s results of operations and cash flows. As of April 30, 2007, the weighted average rate of interest on the Company’s mortgage debt was 6.43%, compared to 6.63% on April 30, 2006 and 6.75% on April 30, 2005. 

Revolving lines of credit. As of April 30, 2007, the Company had no amounts outstanding under its unsecured credit lines with Bremer Bank, First Western Bank and Trust, and First International Bank and Trust. As of April 30, 2006, the Company had $3.5 million outstanding under its unsecured credit line with First Western Bank and Trust.  The Company had no amounts outstanding under these credit lines as of April 30, 2005. 

Mortgage Loans Receivable. Mortgage loans receivable decreased to $399,000 at April 30, 2007, from $409,000 at April 30, 2006 and $619,000 at April 30, 2005. 

Real Estate Owned. Real estate owned increased to $1,489.3 million at April 30, 2007, from $1,269.4 million at April 30, 2006. The increases resulted primarily from the acquisition of the additional investment properties net of dispositions as described in the “Property Acquisitions” and “Property Dispositions” subsections of this Management’s Discussion and Analysis of Financial Condition and Results of Operations. 

Cash and Cash Equivalents. Cash and cash equivalents on April 30, 2007, totaled $44.5 million, compared to $17.5 million on April 30, 2006 and $23.5 million on April 30, 2005. The increase in cash on hand on April 30, 2007, as compared to April 30, 2006, was due primarily to proceeds from an increase in mortgage loan borrowings. 

Marketable Securities. During fiscal year 2007, IRET decreased its investment in marketable securities classified as available-for-sale to $2.0 million on April 30, 2007, from $2.4 million on April 30, 2006 and $2.5 million on April 30, 2005. Marketable securities are held available for sale and, from time to time, the Company invests excess funds in such securities or uses the funds so invested for operational purposes. 

Operating Partnership Units. Outstanding limited partnership units in the Operating Partnership increased to 20.0 million units on April 30, 2007, compared to 13.7 million units on April 30, 2006 and 13.1 million units on April 30, 2005. The increase in units outstanding at April 30, 2007 as compared to April 30, 2006 and 2005, resulted primarily from the issuance of additional limited partnership units to acquire interests in real estate, net of units converted to shares. 

Common and Preferred Shares of Beneficial Interest. Common shares of beneficial interest outstanding on April 30, 2007 totaled 48.6 million compared to 46.9 million common shares outstanding on April 30, 2006 and 45.2 million common shares outstanding on April 30, 2005. This increase in common shares outstanding from April 30, 2006 and 2005, to April 30, 2007, was primarily due to the issuance of common shares pursuant to our distribution reinvestment plan. Preferred shares of beneficial interest outstanding on April 30, 2007, 2006 and 2005 totaled 1.15 million.

Contractual Obligations and Other Commitments 

The primary contractual obligations of the Company relate to its borrowings under its three lines of credit and mortgage notes payable. The Company had no amounts outstanding under its lines of credit at April 30, 2007. The principal and interest payments on the mortgage notes payable for the years subsequent to April 30, 2007, are included in the table below as “Long-term debt.” The other debt category consists of two unsecured promissory notes for leasehold improvements at two of our properties, Southdale Medical Center in Edina, Minnesota, and the Wells Fargo Building in St. Cloud, Minnesota. 

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

As of April 30, 2007, the Company is a tenant under operating ground leases on eight of its properties. The Company pays a total of approximately $283,000 per year in rent under these ground leases, which have terms ranging from 7 to 90 years, and expiration dates ranging from July 2012 to April 2095. 

Purchase obligations of the Company represent those costs that the Company is contractually obligated to pay in the future. The Company’s significant contractual obligations as of April 30, 2007, which the Company expects to finance through debt and operating cash, are summarized in the following table. The significant components in this category are costs for construction and expansion projects and capital improvements at the Company’s properties. Contractual obligations that are contingent upon the achievement of certain milestones are not included in the table below, nor are service orders or contracts for the provision of routine maintenance services at our properties, such as landscaping and grounds maintenance, since these arrangements are generally based on current needs, are filled by our service providers within short time horizons, and may be cancelled without penalty. The expected timing of payment of the obligations discussed below is estimated based on current information. 

	(in thousands)
	Total		Less Than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Long-term debt (principal and interest)	$	1,364,206	$	91,016	$	284,893	$	268,557	$	719,740
Investment Certificates	$	11	$	0	$	11	$	0	$	0
Other Debt	$	146	$	72	$	74	$	0	$	0
Operating Lease Obligations	$	18,085	$	283	$	566	$	566	$	16,670
Purchase Obligations	$	25,697	$	25,697	$	0	$	0	$	0

 

Off-Balance-Sheet Arrangements 

As of April 30, 2007, we did not have any significant off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K. 

Recent Developments 

Common and Preferred Share Distributions. On July 2, 2007, the Company paid a distribution of 51.56 cents per share on the Company’s Series A Cumulative Redeemable Preferred Shares, to preferred shareholders of record on June 15, 2007. Also on July 2, 2007, the Company paid a distribution of 16.65 cents per share on the Company’s common shares of beneficial interest, to common shareholders and UPREIT unitholders of record on June 15, 2007. This distribution represented an increase of .05 cents or .3% over the previous regular quarterly distribution of 16.60 cents per common share/unit paid April 2, 2007. 

Closed and Pending Acquisitions; Pending Dispositions.  Subsequent to its April 30, 2007 fiscal year end in May 2007, the Company closed on its purchase of the two-story, approximately 18,500 square foot Barry Pointe medical office building in Kansas City, Missouri.  The Company paid approximately $3.2 million for this property, excluding closing costs.  In June 2007, the Company closed on the two-story, approximately 50,400 square foot Cedar Lake Business Center in St. Louis Park, Minnesota.  The Company paid approximately $4.04 million, excluding closing costs, for this office/warehouse property.  Also in June 2007, the Company completed its

acquisition of a one-story office/warehouse property located in Urbandale, Iowa.  The Company paid approximately $14 million, excluding closing costs (approximately $4.25 million of which purchase price consisted of the issuance of UPREIT Units), for this approximately 519,813 square foot building.  

As of April 30, 2007, the Company had signed a purchase agreement for the acquisition of an additional two office/warehouse properties, located in Minnesota, for a total purchase price of approximately $6 million, excluding closing costs.  The buildings have, respectively, approximately 70,000 and 20,000 square feet of rentable space.  These pending acquisitions are subject to various closing conditions and contingencies, and no assurance can be given that these transactions will be completed.  Subsequent to its April 30, 2007 fiscal year end, in June 2007, the Company signed a lease with an anchor tenant committing the Company to construct an approximately 26,000 square foot addition to the Company’s existing Southdale Medical Building located in Edina, Minnesota.  The estimated cost of this expansion project is approximately $6.4 million, with an additional approximately $2 million in relocation, tenant improvement and leasing costs expected to be incurred to relocate tenants in the existing facility.  This proposed construction project is subject to various conditions and contingencies, and no assurance can be given that this project will be completed.   

During the third quarter of fiscal year 2007, the tenant in four of the Company’s Edgewood Vista assisted living facilities, located in, respectively, Fremont, Nebraska; Hastings, Nebraska; Omaha, Nebraska and Kalispell, Montana, exercised its options to purchase these properties. Under the terms of the options, the specified purchase price for each of these assisted living properties is the higher of the fair market value of the property as determined by an independent appraisal, or an annual compounded increase at 2.5% per year based on the purchase price paid by the Company for the property.  Also subsequent to its April 30, 2007 fiscal year end, the Company signed an agreement for the sale of an office building located in Minnetonka, Minnesota, for a sale price of approximately $345,000.  These pending dispositions are subject to various closing conditions and contingencies, and no assurances can be given that these transactions will be completed. 

Development Project.  During fiscal year 2007, the Company purchased an unimproved parcel of land in Minot, North Dakota for approximately $1.75 million.  The Company is in the preliminary stages of planning the construction of a mixed-use project for this site, to consist of apartments and office and retail space.  The Company currently expects that it will move its Minot, North Dakota offices to this location, occupying approximately half of the proposed office/retail space.   Current estimates are that the project would be completed in the second quarter of the Company’s fiscal year 2009.  No firm cost estimates have yet been developed for this project, and no assurances can be given that this project will be undertaken as currently proposed, or completed. 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk 

Our exposure to market risk is limited primarily to fluctuations in the general level of interest rates on our current and future fixed and variable rate debt obligations, and secondarily to our deposits with and investments in certain products issued by various financial institutions. 

Variable interest rates. Because approximately 97.7% of our debt, as of April 30, 2007 (96.8% and 96.2% respectively, as of April 30, 2006 and 2005), is at fixed interest rates, we have little exposure to interest rate fluctuation risk on our existing debt, and accordingly interest rate increases during fiscal year 2007 did not have a material effect on the Company. However, even though our goal is to maintain a fairly low exposure to interest rate risk, we are still vulnerable to significant fluctuations in interest rates on any future repricing or refinancing of our fixed or variable rate debt and on future debt. We primarily use long-term (more than nine years) and medium term (five to seven years) debt as a source of capital. We do not currently use derivative securities, interest-rate swaps or any other type of hedging activity to manage our interest rate risk. As of April 30, 2007, we had the following amount of future principal and interest payments due on mortgages secured by our real estate. 

	Future Principal Payments (in thousands)
Long Term Debt		2008		2009		2010		2011		2012		Thereafter		Total
Fixed Rate	$	29,740	$	45,176	$	126,620	$	100,082	$	82,416	$	545,440	$	929,474
Variable Rate		1,091		2,525		1,127		1,200		3,297		12,425		21,665
													$	951,139
Average Interest Rate (%)		(1)		(1)		(1)		(1)		(1)		(1)		(1)

 

 

	Future Interest Payments (in thousands)
Long Term Debt		2008		2009		2010		2011		2012		Thereafter		Total
Fixed Rate	$	58,803	$	56,206	$	50,852	$	42,934	$	36,649	$	160,341	$	405,785
Variable Rate		1,382		1,239		1,148		1,076		903		1,534		7,282
													$	413,067
Average Interest Rate (%)		(1)		(1)		(1)		(1)		(1)		(1)		(1)

 

(1)  The weighted average interest rate on our debt as of April 30, 2007, was 6.43%. Any fluctuations in variable interest rates could increase or decrease our interest expenses. For example, an increase of one percent per annum on our $21.7 million of variable rate indebtedness would increase our annual interest expense by $217,000. 

Marketable Securities. IRET’s investments in securities are classified as “available-for-sale.” The securities classified as “available-for-sale” represent investments in debt and equity securities which the Company intends to hold for an indefinite period of time. As of April 30, 2007 and 2006, IRET had approximately $2.0 million and $2.4 million, respectively, of marketable securities classified as “available-for-sale,” consisting of securities of various issuers, primarily U.S. Government, U.S. agency and corporate bonds and bank certificates of deposit, held in IRET Properties’ security deposit account with Merrill Lynch. IRET had approximately $2.5 million of securities classified as “available-for-sale” as of April 30, 2005. The values of these securities will fluctuate with changes in market interest rates.  As of April 30, 2007 and 2006 the unrealized loss recorded in other comprehensive income on these securities was $16,000 and $48,000, respectively. 

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

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

Item 8. Financial Statements and Supplementary Data 

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

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

Not applicable. 

Item 9A. Controls and Procedures  

Disclosure Controls and Procedures:  As of April 30, 2007, the end of the period covered by this Annual Report on Form 10-K, our management carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Operating Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange act of 1934, as amended).  Based upon that evaluation, the Company’s Chief Executive Officer, Chief Operating Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC filings. 

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

 

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING 

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

As of April 30, 2007, management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting, based on the framework established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Based on this assessment, management has determined that the Company’s internal control over financial reporting as of April 30, 2007, is effective. 

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

Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of April 30, 2007, has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing below, which expresses unqualified opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting as of April 30, 2007.

 

 

 

 

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 

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

We have audited management's assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Investors Real Estate Trust and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of April 30, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting.  Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit. 

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

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

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

In our opinion, management's assessment that the Company maintained effective internal control over financial reporting as of April 30, 2007, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of April 30, 2007, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements  as of and for the year ended April 30, 2007, of the Company and our report dated July 13, 2007, expressed an unqualified opinion on those financial statements. 

/s/ DELOITTE & TOUCHE LLP 

Minneapolis, MN
July 13, 2007

Item 9B.  Other Information 

None. 

PART III 

Item 10. Trustees and Executive Officers of the Registrant 

Information regarding executive officers required by this Item is set forth in Part I, Item 1 of this Annual Report on Form 10-K pursuant to Instruction 3 to Item 401(b) of Regulation S-K. Other information required by this Item will be included in our definitive Proxy Statement for our 2007 Annual Meeting of Shareholders and such information is incorporated herein by reference. 

Item 11. Executive Compensation 

The information required by this Item will be contained in our definitive Proxy Statement for our 2007 Annual Meeting of Shareholders and such information is incorporated herein by reference. 

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

The information required by this Item will be contained in our definitive Proxy Statement for our 2007 Annual Meeting of Shareholders and such information is incorporated herein by reference. We do not have any equity compensation plans and, accordingly, are not required to include the disclosure required by Item 201(d) of Regulation S-K. 

Item 13. Certain Relationships and Related Transactions, and Trustee Independence 

The information required by this Item will be contained in our definitive Proxy Statement for our 2007 Annual Meeting of Shareholders and such information is incorporated herein by reference. 

Item 14. Principal Accountant Fees and Services 

The information required by this Item will be contained in our definitive Proxy Statement for our 2007 Annual Meeting of Shareholders and such information is incorporated herein by reference.

 

PART IV

 

Item 15. Exhibits, Financial Statement Schedules  

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

1.  Financial Statements 

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

2. Financial Statement Schedules 

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

III Real Estate Owned and Accumulated Depreciation 

IV Investments in Mortgage Loans on Real Estate 

3. Exhibits  

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

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

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

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

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

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

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

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

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

 

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

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

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

10.7      Description of Compensation of Executive Officers, filed as Exhibit 10 to the Company’s Form 10-Q filed December 12, 2005, and incorporated herein by reference. 

10.8      Contribution Agreement, filed as Exhibit 10.1 to the Company’s Form 8-K filed May 17, 2006, and incorporated herein by reference. 

10.09    Description of Compensation of Trustees, filed as Exhibit 10 to the Company’s Form 10-Q filed September 11, 2006, and incorporated herein by reference. 

10.10    Loan and Security Agreement, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed September 18, 2006, and incorporated herein by reference.

10.11    Description of Compensation of Executive Officers, filed as Exhibit 10 to the Company’s Form 10-Q filed March 12, 2007, and incorporated herein by reference. 

21.1      Subsidiaries of Investors Real Estate Trust, filed herewith. 

23.1      Consent of Deloitte & Touche LLP, filed herewith. 

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

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

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

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

 

Signatures 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 

Date: July 11, 2007	Investors Real Estate Trust
	By:	/s/ Thomas A. Wentz, Sr.
		Thomas A. Wentz, Sr.
		President & Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: 

Signature		Title		Date
/s/ Jeffrey L. Miller
Jeffrey L. Miller		Trustee & Chairman		July 11, 2007
Stephen L. Stenehjem		Trustee & Vice Chairman
/s/ Thomas A. Wentz. Sr.
Thomas A. Wentz, Sr.		President & Chief Executive Officer (Principal Executive Officer)		July 11, 2007
/s/ Timothy P. Mihalick
Timothy P. Mihalick		Trustee, Senior Vice President & Chief Operating Officer		July 11, 2007
/s/ Thomas A. Wentz, Jr.
Thomas A. Wentz, Jr.		Trustee & Senior Vice President		July 11, 2007
/s/ Diane K. Bryantt
Diane K. Bryantt		Senior Vice President & Chief Financial Officer (Principal Financial and Accounting Officer)		July 11, 2007
/s/ John D. Stewart
John D. Stewart		Trustee		July 11, 2007
/s/ Patrick G. Jones
Patrick G. Jones		Trustee		July 11, 2007
/s/ C.W. “Chip” Morgan
C.W. “Chip” Morgan		Trustee		July 11, 2007
/s/ Edward T. Schafer
Edward T. Schafer		Trustee		July 11, 2007
/s/ W. David Scott
W. David Scott		Trustee		July 11, 2007