Filed
Pursuant to Rule 424(b)(5)
Registration
Nos.: 333-153715 and 333-162349
PROSPECTUS
Supplement
(To
Prospectus dated October 10, 2008)
8,000,000
Common Shares of Beneficial Interest
We are a
self-advised equity real estate investment trust that owns and operates
commercial office, medical, industrial and retail properties and multi-family
residential properties located primarily in the upper Midwest.
We are
offering 8,000,000 common shares of beneficial interest, no par
value. Our common shares are traded on the NASDAQ Global Select
Market under the symbol “IRET.” On October 5, 2009, the last reported
sale price of our common shares, as reported on the NASDAQ Global Select Market,
was $8.71 per share.
Investing
in our common shares involves substantial risks. See “Risk Factors” beginning on
page 8 of the accompanying prospectus, and page 10 of our Annual Report on Form
10-K for the fiscal year ended April 30, 2009.
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Per
Share
|
Total
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|||||||
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Public
offering price
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$ | 8.25 | $ | 66,000,000 | ||||
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Underwriting
discount
|
$ | 0.4125 | $ | 3,300,000 | ||||
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Proceeds,
before expenses, to us
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$ | 7.8375 | $ | 62,700,000 | ||||
The
underwriters have a 30-day option to purchase up to an additional 1,200,000
common shares from us on the same terms set forth above, to cover
over-allotments, if any.
In part
so that we can continue to qualify as a real estate investment trust for federal
income tax purposes, our declaration of trust generally does not permit anyone
to own more than 9.8% of our outstanding common shares. See
“Description of Common Shares” in the accompanying prospectus.
Delivery
of the shares will be made on or about October 9 2009.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved these securities or determined if this prospectus
supplement or the accompanying prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
Robert
W. Baird &
Co. RBC
Capital Markets
Janney Montgomery Scott
D.A.
Davidson &
Co. J.J.B.
Hilliard, W.L. Lyons, LLC
October
5, 2009
Prospectus
Supplement
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Certain
statements included in this prospectus supplement, the accompanying prospectus
and the documents incorporated into this prospectus supplement and the
accompanying prospectus by reference are “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended, or the
Securities Act, and Section 21E of the Securities Exchange Act of 1934, as
amended, or the Exchange Act. These forward-looking statements include
statements about our intention to invest in properties that we believe will
increase in income and value; our belief that the real estate markets in which
we invest will continue to perform well; 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,”
“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 forward-looking statements are
based on reasonable assumptions, you should not place undue reliance on our
forward-looking statements because the matters they describe are subject to
known and unknown risks, uncertainties and other unpredictable factors, many of
which are beyond our control. Important factors that could cause our actual
results to differ materially from the expectations reflected in our
forward-looking statements are discussed in “Risk Factors” on page 8 of the
accompanying prospectus and page 10 of our Annual Report on Form 10-K for the
fiscal year ended April 30, 2009 and include:
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·
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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;
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·
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the
economic health of our commercial
tenants;
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·
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market
rental conditions, including occupancy levels and rental rates, for
multi-family residential and commercial
properties;
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·
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our
ability to identify and secure additional multi-family residential and
commercial properties that meet our criteria for
investment;
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·
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the
level and volatility of prevailing market interest rates and the pricing
of our shares of beneficial
interest;
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·
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financing
risks, such as our inability to obtain debt or equity financing on
favorable terms, or at all;
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·
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our
ability to timely complete and lease-up properties under
construction;
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·
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compliance
with applicable laws, including those concerning the environment and
access by persons with
disabilities;
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·
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the
availability and cost of casualty insurance for losses;
and
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·
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other
factors discussed under the heading “Risk Factors” in the accompanying
prospectus, in our Annual Report on Form 10-K for the fiscal year ended
April 30, 2009, and in other documents filed with the Securities and
Exchange Commission, or SEC, and incorporated by reference into this
prospectus supplement.
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In light
of these uncertainties, the events anticipated by our forward-looking statements
might not occur and we caution you not to place undue reliance on any of our
forward-looking statements. We undertake no obligation to update or revise our
forward-looking statements, whether as a result of new information, future
events or otherwise, and those statements speak only as of the date made. The
foregoing review of factors that could cause our actual results to differ
materially from those contemplated in any forward-looking statements should not
be construed as exhaustive.
The SEC
allows us to incorporate by reference our publicly-filed reports into this
prospectus supplement, which means that information included in those reports is
considered part of this prospectus. Information that we file with the
SEC after the date of this prospectus will automatically update and supersede
the information contained in this prospectus supplement and in prior
reports. We incorporate by reference the documents listed below and
any future filings made with the SEC under Sections 13(a), 13(c), 14 or 15(d) of
the Exchange Act until all of the securities offered pursuant to this prospectus
supplement have been sold. Unless expressly incorporated into this
prospectus supplement, a report, or part of a report, furnished, but not filed,
on Form 8-K under the Exchange Act shall not be incorporated by reference into
this prospectus supplement. The following documents filed with the
SEC are incorporated by reference in this prospectus supplement:
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·
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Annual
Report on Form 10-K for the year ended April 30, 2009 filed on July 14,
2009;
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·
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Quarterly
Report on Form 10-Q for the quarter ended July 31, 2009 filed on September
9, 2009;
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·
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Current
Reports on Forms 8-K filed on September 18,
2009;
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·
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The
description of our common shares of beneficial interest contained in our
Registration Statement on Form 10 (File No. 0-14851), dated July 29, 1986,
as amended by the Amended Registration Statement on Form 10, dated
December 17, 1986, and the Second Amended Registration Statement on Form
10, dated March 12, 1987; and
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·
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The
description of our Series A Cumulative Redeemable Preferred Shares of
Beneficial Interest contained in our registration statement on Form 8-A,
dated April 21, 2004 and filed April 22,
2004.
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You may
request a copy of these documents, and any exhibits we have specifically
incorporated by reference as an exhibit in this prospectus supplement, at no
cost by writing to us at the following address or calling us at the telephone
number listed below:
Investors
Real Estate Trust
3015 16th
Street SW, Suite 100
Minot,
ND 58702-1988
Attn: Shareholder
Relations
Telephone: (701)
837-4738
Facsimile:
(701) 838-7785
You
should rely only on the information provided or incorporated by reference in
this prospectus supplement. We have not, and the underwriters have
not, authorized anyone to provide you with additional or different
information. You should not assume that the information in this
prospectus supplement is accurate as of any date other than the date on the
front cover of the document.
And
the Accompanying Prospectus
We are
providing information to you about this offering of our common shares in two
parts. The first part is this prospectus supplement, which provides the specific
details regarding this offering and the terms of the common shares. The second
part is the accompanying base prospectus, which provides general information.
Generally, when we refer to this “prospectus,” we are referring to both
documents combined. This prospectus supplement adds, updates and changes
information contained in the accompanying prospectus and the information
incorporated by reference. To the extent the information contained in this
prospectus supplement differs or varies from the information contained in the
accompanying prospectus or any document incorporated by reference, the
information in this prospectus supplement shall control.
You
should not assume that the information appearing in this prospectus supplement,
the accompanying prospectus and the documents incorporated by reference is
accurate as of any date other than the date on the front of the documents. Our
business, financial condition, results of operations and prospects may have
changed since then. Updated information may have been subsequently provided as
explained under “Where You Can Find More Information” in this prospectus
supplement and the accompanying prospectus.
It is
important for you to read and consider all of the information contained in this
prospectus supplement, the accompanying prospectus and the documents
incorporated by reference in making your decision to invest in our common
shares. You should also read and consider the information in the incorporated
documents we have referred you to in “Where You Can Find More Information” in
this prospectus supplement and the accompanying prospectus.
You
should rely only on the information contained or incorporated by reference in
this prospectus supplement and the accompanying prospectus. We have not, and the
underwriters have not, authorized any other person to provide you with different
or additional information. If anyone provides you with different or additional
information, you should not rely on it.
We are
not, and the underwriters are not, making an offer to sell these securities in
any jurisdiction where the offer or sale is not permitted.
As used
in this prospectus supplement and the accompanying prospectus, references to
“we,” “our,” “us,” the “Company,” “IRET” and similar references are to Investors
Real Estate Trust and its consolidated subsidiaries, unless otherwise expressly
stated or the context otherwise requires. References to “shares” and to “common
shares” or “Shares” are to our common shares of beneficial interest, no par
value. References to “Series A preferred shares” are to our 8.25% Series A
Cumulative Redeemable Preferred Shares of Beneficial Interest, no par value.
References to “shares of beneficial interest” are to all of our shares of
beneficial interest including, without limitation, our common shares, our
Series A preferred shares and any other shares of beneficial interest that
we may issue in the future.
This
section summarizes information contained elsewhere in this prospectus supplement
and the accompanying prospectus and does not contain all the information you
should consider before investing in our common shares. You should read this
summary together with the more detailed information appearing elsewhere in this
prospectus supplement and the accompanying prospectus, or incorporated by
reference into this prospectus supplement and the accompanying prospectus,
including the sections of this prospectus supplement and the accompanying
prospectus entitled “Risk Factors,” before making a decision to invest in our
common shares. Unless otherwise stated or the context otherwise requires, the
information contained in this prospectus supplement assumes that the
underwriters do not exercise their option to purchase additional Shares to cover
over-allotments.
We are a
self-advised real estate investment trust, or REIT, that owns and operates
commercial office, medical, industrial and retail properties and multi-family
residential properties located primarily in the upper Midwest. The
charts below show, as of July 31, 2009, the geographic distribution of our
properties and their classification by type, in both cases measured on the basis
of our investment in our properties (original investment plus improvements, if
any) net of accumulated depreciation.
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Geographic
Distribution of Properties
Property
Investments
(percentage
by state, by investment amount,
net
of accumulated depreciation)
|
Classification
of Properties by Type
Real
Estate Portfolio Mix
(percentage
by segment, by investment amount, net of accumulated
depreciation)
|
 |
 |
As of
July 31, 2009, our real estate portfolio consisted of:
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·
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77
multi-family residential properties, containing 9,645 apartment units and
having a total real estate investment amount net of accumulated
depreciation of approximately $424.5 million;
and
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·
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167
commercial properties, containing approximately 11.7 million square feet
of leasable space, as follows:
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o
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67
office properties containing approximately 5.0 million square feet of
leasable space and having a total real estate investment amount net of
accumulated depreciation of approximately $499.0
million;
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o
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49
medical properties (including senior housing/assisted living facilities)
containing approximately 2.3 million square feet of leasable space and
having a total real estate investment amount net of accumulated
depreciation of approximately $344.4
million;
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o
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18
industrial properties containing approximately 2.9 million square feet of
leasable space and having a total real estate investment amount net of
accumulated depreciation of approximately $95.7 million;
and
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o
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33
retail properties containing approximately 1.5 million square feet of
leasable space and having a total real estate investment amount net of
accumulated depreciation of approximately $99.4
million.
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Our
commercial properties are typically leased to tenants under long-term lease
arrangements, with no single tenant accounting for more than approximately 9.8%
of our total annualized commercial rental revenues as of July 31,
2009. At July 31, 2009, the economic occupancy rates for our
stabilized properties were as follows:
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Property
Type
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Economic
Occupancy
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|||
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Multi-family
Residential
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91.1 | % | ||
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Commercial
Office
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88.5 | % | ||
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Commercial
Medical
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94.1 | % | ||
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Commercial
Industrial
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89.8 | % | ||
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Commercial
Retail
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85.5 | % | ||
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 revenues.
Our
principal executive office is located at 3015 16th Street SW, Suite 100, Minot,
North Dakota, 58702-1988, and our telephone number is (701)
837-4738.
We seek
to employ a disciplined investment strategy focused on growing assets in our
target geographical markets, achieving diversification by property type,
adhering to targeted returns in acquiring properties, and regularly increasing
funds from operations. We believe this investment strategy has enabled us to
achieve our goal of regularly increasing distributions on our common shares. We
have increased our distributions per common share every year since our inception
39 years ago and every quarter since 1988.
We
attempt to concentrate our multi-family residential properties in communities
with populations of approximately 50,000 to 500,000, and we attempt to
concentrate our commercial properties in metropolitan areas with populations of
approximately 100,000 to 3.0 million. We focus most of our investment activity
in markets in the upper Midwest, due to our greater familiarity with these
markets, our existing market presence and our belief that these markets attract
less competition from other leading REITs and institutional
investors.
We
continually receive, evaluate and identify opportunities for the acquisition and
development of commercial and multi-family residential properties, particularly
in the states in which we currently own properties. These investment and
development opportunities are sourced through various channels, including real
estate brokers, property owners, property management firms and our own business
development efforts. In evaluating commercial properties for acquisition, we
consider such factors as market size, economic and market rental conditions,
property type, property quality, existing occupancy and lease rates, tenant
makeup and quality, lease rollover risk and current and prospective cash flow
levels. In evaluating multi-family residential properties for acquisition, we
consider such factors as market size and growth characteristics, demographics,
apartment rental conditions and trends, market rent and occupancy levels,
property quality, operating expense and maintenance considerations, property
occupancy rates and current and prospective cash flow levels. Upon identifying
properties that meet our investment criteria, we conduct financial analyses,
perform property inspections, identify lending sources and terms and submit or
negotiate acquisition proposals on terms that we expect will allow us, under
reasonable assumptions, to meet our targeted investment returns. In
evaluating multi-family residential and commercial development opportunities, we
consider factors that include property site location, access, soil conditions
and other physical characteristics of the site, market size and growth
characteristics, demographics, existing property development adjacent or near
the site, prospective tenants and cash flow levels.
Typically,
we seek to acquire well-maintained properties with strong tenant bases and lease
or rental revenues and terms that immediately support our return on investment
objectives. Due to varying market conditions over time, this investment focus
can lead to a greater concentration of acquisition activity in certain property
types during particular market cycles. For instance, during the 12 months ended
August 31, 2009, approximately 70.3% of our property acquisitions, based on
investment amount, were commercial industrial properties, due to the greater
availability of these properties on terms that met our return on investment
objectives. As market conditions evolve, however, this trend may be reversed and
we may again purchase a greater percentage of multi-family residential
properties, or other commercial properties. We typically seek to
develop commercial properties when we have identified or secured an anchor
tenant for the property. We typically seek to develop multi-family
residential properties when we have identified a community with attractive
economic and market rental conditions.
We
generally use available cash or short-term floating rate debt to acquire real
estate. We then replace the cash or short-term floating rate debt
with fixed-rate secured debt. We generally finance development
projects with available cash or short-term floating rate debt and re-finance
with fixed-rate secured debt. In appropriate circumstances, we also
may acquire one or more properties in exchange for our common shares or for
limited partnership units, or LP units, of our operating partnership, IRET
Properties, which typically are redeemable for our common shares on a one-to-one
basis or, at our option, cash, after the expiration of a minimum one-year
holding period.
We
conduct our operations from offices in Minot, North Dakota and Minneapolis,
Minnesota. We also have property management offices in St.
Louis, Missouri, Omaha, Nebraska and Kansas City, Kansas. In Minot,
our 50-person staff is engaged in activities that include management and
planning, financial analysis and accounting, marketing, property sourcing and
evaluation, legal and compliance, information management and investor
relations. In Minneapolis, our 19-person staff is primarily engaged
in sourcing, evaluating and managing commercial properties in the
Minneapolis/St. Paul metropolitan area.
The
day-to-day management of our commercial properties is carried out by our own
employees and by third-party property management companies. In
markets where the amount of rentable square footage we own does not justify
self-management, when properties acquired have effective pre-existing property
management in place, or when for other reasons particular properties are in our
judgment not attractive candidates for self-management, we may utilize
third-party professional management companies for day-to-day
management. As of July 31, 2009, we have under internal management
105 commercial properties. The remaining 62 properties are managed by
third parties. The management and leasing of most of our multi-family
residential properties is handled by locally-based, third-party management
companies. We are currently working to transition to internal
management approximately 3,726 apartment units now being managed for us by a
third-party management company. We expect this transition to be
completed within the current fiscal year.
We
believe that our administrative, property management and corporate overhead
expenses as a percentage of our revenues are among the lowest of all
publicly-traded REITs. We believe that this serves the interests of
the holders of our common shares by moderating the impact of cyclical downturns
and enhancing funds available for distribution.
The
tables set forth below present summary financial information regarding our
commercial and multi-family residential properties.
Commercial
and Multi-Family Residential Properties by State
The
following table presents, as of July 31, 2009, an analysis by state of each of
the five categories of properties owned by us — multi-family residential and
commercial office, medical, industrial and retail:
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As
of July 31, 2009
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||||||||||||||||||||||||||||
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(in
thousands)
|
||||||||||||||||||||||||||||
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Multi-Family
Residential
|
Commercial
Office
|
Commercial
Medical
|
Commercial
Industrial
|
Commercial
Retail
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Total
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Total
%
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||||||||||||||||||||||
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Minnesota
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$ | 147,028 | $ | 363,688 | $ | 296,021 | $ | 74,659 | $ | 73,895 | $ | 955,291 | 55.0 | % | ||||||||||||||
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North
Dakota
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146,072 | 26,337 | 31,582 | 7,141 | 28,466 | 239,598 | 13.8 | % | ||||||||||||||||||||
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Nebraska
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36,534 | 80,416 | 24,820 | 0 | 3,699 | 145,469 | 8.4 | % | ||||||||||||||||||||
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Colorado
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43,617 | 22,545 | 0 | 0 | 0 | 66,162 | 3.8 | % | ||||||||||||||||||||
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Kansas
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43,579 | 14,903 | 0 | 0 | 0 | 58,482 | 3.4 | % | ||||||||||||||||||||
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Montana
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41,374 | 0 | 4,319 | 0 | 5,273 | 50,966 | 2.9 | % | ||||||||||||||||||||
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South
Dakota
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34,533 | 7,088 | 7,445 | 0 | 0 | 49,066 | 2.8 | % | ||||||||||||||||||||
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Texas
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39,768 | 0 | 0 | 0 | 0 | 39,768 | 2.3 | % | ||||||||||||||||||||
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All
Other States
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11,491 | 60,798 | 25,266 | 27,349 | 7,760 | 132,664 | 7.6 | % | ||||||||||||||||||||
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Total
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$ | 543,996 | $ | 575,775 | $ | 389,453 | $ | 109,149 | $ | 119,093 | $ | 1,737,466 | 100.0 | % | ||||||||||||||
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 the
financial contribution of (i.e., the net operating income produced by), our
commercial and multi-family residential properties over the past three fiscal
years.
|
Fiscal
Years Ended April 30
|
||||||||||||||||||||||||
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(in
thousands)
|
||||||||||||||||||||||||
|
2009
|
%
|
2008
|
%
|
2007
|
%
|
|||||||||||||||||||
|
Real
Estate Investments – (cost)
|
||||||||||||||||||||||||
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Multi-Family
Residential
|
$ | 542,547 | 31.4 | % | $ | 510,697 | 31.0 | % | $ | 489,644 | 32.9 | % | ||||||||||||
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Commercial
Office
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571,565 | 33.0 | % | 556,712 | 33.8 | % | 536,431 | 36.0 | % | |||||||||||||||
|
Commercial
Medical
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388,219 | 22.4 | % | 359,986 | 21.8 | % | 274,779 | 18.4 | % | |||||||||||||||
|
Commercial
Industrial
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108,103 | 6.3 | % | 104,060 | 6.3 | % | 75,257 | 5.1 | % | |||||||||||||||
|
Commercial
Retail
|
119,151 | 6.9 | % | 116,804 | 7.1 | % | 113,176 | 7.6 | % | |||||||||||||||
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Total
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$ | 1,729,585 | 100.0 | % | $ | 1,648,259 | 100.0 | % | $ | 1,489,287 | 100.0 | % | ||||||||||||
|
Net
Operating Income(1)
|
||||||||||||||||||||||||
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Multi-Family
Residential
|
$ | 40,554 | 28.6 | % | $ | 38,190 | 28.6 | % | $ | 35,518 | 29.4 | % | ||||||||||||
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Commercial
Office
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45,802 | 32.3 | % | 47,836 | 35.8 | % | 43,128 | 35.6 | % | |||||||||||||||
|
Commercial
Medical
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36,518 | 25.7 | % | 28,656 | 21.4 | % | 26,108 | 21.5 | % | |||||||||||||||
|
Commercial
Industrial
|
9,489 | 6.7 | % | 9,162 | 6.8 | % | 6,838 | 5.6 | % | |||||||||||||||
|
Commercial
Retail
|
9,491 | 6.7 | % | 9,921 | 7.4 | % | 9,614 | 7.9 | % | |||||||||||||||
|
Total
|
$ | 141,854 | 100.0 | % | $ | 133,765 | 100.0 | % | $ | 121,206 | 100.0 | % | ||||||||||||
_____________________
|
1)
|
We
define net operating income as total revenues less property operating
expenses and real estate taxes. We believe that net operating
income 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. Net operating income does
not represent cash generated by operating activities in accordance with
accounting principles generally accepted in the United States, or GAAP,
and should not be considered as an alternative to net income, net income
available to common shareholders or cash flow from operating activities as
a measure of financial performance. A reconciliation of net
operating income to income from continuing operations before sale of other
investments is as follows:
|
|
(in
thousands)
|
||||||||||||||||||||||||
|
Year
Ended April 30, 2009
|
Multi-Family
Residential
|
Commercial-
Office
|
Commercial-Medical
|
Commercial-Industrial
|
Commercial-Retail
|
Total
|
||||||||||||||||||
|
Real
estate revenue
|
$ | 76,716 | $ | 83,446 | $ | 52,564 | $ | 12,711 | $ | 14,568 | $ | 240,005 | ||||||||||||
|
Real
estate expenses
|
36,162 | 37,644 | 16,046 | 3,222 | 5,077 | 98,151 | ||||||||||||||||||
|
Net
operating income
|
$ | 40,554 | $ | 45,802 | $ | 36,518 | $ | 9,489 | $ | 9,491 | $ | 141,854 | ||||||||||||
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Interest
|
(68,743 | ) | ||||||||||||||||||||||
|
Depreciation/amortization
|
(56,714 | ) | ||||||||||||||||||||||
|
Administrative,
advisory and trustee fees
|
(4,882 | ) | ||||||||||||||||||||||
|
Other
expenses
|
(1,440 | ) | ||||||||||||||||||||||
|
Impairment
of real estate investment
|
(338 | ) | ||||||||||||||||||||||
|
Other income
|
922 | |||||||||||||||||||||||
|
Income
from continuing operations before sale of other
investments
|
$ | 10,659 | ||||||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||
|
Year
Ended April 30, 2008
|
Multi-Family
Residential
|
Commercial-
Office
|
Commercial-Medical
|
Commercial-Industrial
|
Commercial-Retail
|
Total
|
||||||||||||||||||
|
Real
estate revenue
|
$ | 72,827 | $ | 84,042 | $ | 38,412 | $ | 11,691 | $ | 14,198 | $ | 221,170 | ||||||||||||
|
Real
estate expenses
|
34,637 | 36,206 | 9,756 | 2,529 | 4,277 | 87,405 | ||||||||||||||||||
|
Net
operating income
|
$ | 38,190 | $ | 47,836 | $ | 28,656 | $ | 9,162 | $ | 9,921 | $ | 133,765 | ||||||||||||
|
Interest
|
(63,439 | ) | ||||||||||||||||||||||
|
Depreciation/amortization
|
(51,518 | ) | ||||||||||||||||||||||
|
Administrative,
advisory and trustee fees
|
(5,203 | ) | ||||||||||||||||||||||
|
Other
expenses
|
(1,344 | ) | ||||||||||||||||||||||
|
Other
income
|
2,760 | |||||||||||||||||||||||
|
Income
from continuing operations before sale of other
investments
|
$ | 15,021 | ||||||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||
|
Year
Ended April 30, 2007
|
Multi-Family
Residential
|
Commercial-
Office
|
Commercial-Medical
|
Commercial-Industrial
|
Commercial-Retail
|
Total
|
||||||||||||||||||
|
Real
estate revenue
|
$ | 66,972 | $ | 73,603 | $ | 34,783 | $ | 8,091 | $ | 14,089 | $ | 197,538 | ||||||||||||
|
Real
estate expenses
|
31,454 | 30,475 | 8,675 | 1,253 | 4,475 | 76,332 | ||||||||||||||||||
|
Net
operating income
|
$ | 35,518 | $ | 43,128 | $ | 26,108 | $ | 6,838 | $ | 9,614 | $ | 121,206 | ||||||||||||
|
Interest
|
(58,424 | ) | ||||||||||||||||||||||
|
Depreciation/amortization
|
(45,501 | ) | ||||||||||||||||||||||
|
Administrative,
advisory and trustee fees
|
(4,451 | ) | ||||||||||||||||||||||
|
Other
expenses
|
(1,240 | ) | ||||||||||||||||||||||
|
Other
income
|
2,665 | |||||||||||||||||||||||
|
Income
from continuing operations before sale of other
investments
|
$ | 14,255 | ||||||||||||||||||||||
Acquisition
and Disposition Activities
During
the
first quarter of fiscal year 2010, we had no acquisitions or
dispositions. On August 5, 2009, we closed on the purchase of an
approximately 42,180 square foot showroom/warehouse property located in a
western suburb of Des Moines, Iowa, which is triple-net leased to a single
tenant. We paid a total of approximately $3.4 million for this
property, a portion of which was paid in LP units valued at a total of
approximately $2.9 million, or $10.25 per unit, and the remainder was paid in
cash. We
currently have no material pending acquisitions or dispositions.
During
the fiscal year ended April 30, 2009, we acquired or placed in-service
properties with development and acquisition costs totaling approximately $33.8
million. In the fourth fiscal quarter we substantially completed construction of
a mixed-use project in Minot, North Dakota, consisting of 71 apartments, of
which 70 were leased as of July 31, 2009, and approximately 50,360 rentable
square feet of office and retail space. We occupy approximately 21,764
square feet of this office and retail space, having moved our Minot headquarters
to this location; we are actively marketing the remainder of the office and
retail space.
We are
reviewing non-core properties for potential selective sale based on our
assessment of pricing and capital requirements. No assurance can be given
that any of the properties currently under contract, being marketed or
considered for sale will actually be sold, or will be sold on the terms
currently contemplated.
Financing
Update
During
the first quarter of fiscal year 2010, we refinanced two apartment properties
located in Minnesota, placing debt totaling approximately $11.3 million with the
Federal Home Loan Mortgage Corporation, or Freddie Mac. Since the
beginning of the second quarter of fiscal year 2010, we have financed or
refinanced with Freddie Mac and with the Federal National Mortgage Association,
or Fannie Mae, four apartment properties located in Montana, Nebraska and North
Dakota, placing debt totaling approximately $22.4 million, and generating
cash-out proceeds totaling approximately $16.2 million before closing
costs. These loans have ten-year maturities with fixed interest rates
ranging from 5.59% to 6.53%. Also during the second quarter of fiscal year
2010, we, with our joint venture partner, refinanced a five-building commercial
office property located in a suburb of Minneapolis, Minnesota; the $28.0 million
loan has a seven-year term and an interest rate of
7.30%.
We
currently have pending loan applications or loan commitments for financing on
four apartment properties, four industrial properties and three assisted living
facilities, with Fannie Mae, Freddie Mac and three commercial banks. These
financings would total approximately $27.6 million, with estimated cash-out
proceeds totaling approximately $16.6 million. However, no assurances can
be given that these loans will be completed on the terms currently expected, or
at all.
As of
July 31, 2009, we had approximately $24.5 million available under our three
unsecured revolving credit facilities with Bremer Bank, First Western Bank and
Trust and First International Bank and Trust. These lines of credit
expire in November 2009, December 2011, and December 2009, respectively; we
expect to renew each of these lines of credit prior to its expiration. As of
July 31, 2009, we had on hand consolidated cash and cash equivalents totaling
approximately $43.9 million.
During
the first quarter of fiscal year 2010, we sold 3,000,000 newly-issued common
shares in a public offering with Robert W. Baird & Co. Incorporated as
underwriter, for total proceeds to us (after sales commissions but before
expenses) of approximately $24.8 million.
Distributions
We paid a
distribution of $0.1705 per common share and LP unit of IRET Properties in the
first quarter of fiscal year 2010, on July 1, 2009, and we paid a distribution
of $0.1710 per share and LP unit in the second quarter of fiscal year 2010,
on October 1, 2009.
|
Shares
Offered
|
8,000,000
Shares(1)
|
|
Shares
Outstanding After this Offering
|
71,787,568
Shares (1)(2)
|
|
Our
Shares are subject to certain restrictions on ownership and transfer
designed to preserve our qualification as a REIT for federal income tax
purposes. See “Description of Common Shares” in the
accompanying prospectus.
|
|
|
Use
of Proceeds
|
We
estimate that the net proceeds we will receive from this offering will be
approximately $62,600,000, or approximately $72,005,000 if
the underwriters exercise their over-allotment option in
full. We intend to contribute the net proceeds to our operating
partnership, IRET Properties, to use for general business purposes,
including the acquisition, development, renovation, expansion or
improvement of income-producing real estate properties and debt
repayment. Pending such use, the net proceeds may be invested
in short-term income-producing investments, such as U.S. treasury bonds
with terms of six months or less. See “Use of Proceeds”
below.
|
|
Risk
Factors
|
An
investment in our common shares involves substantial risks, and
prospective investors should carefully consider the matters discussed
under the caption entitled "Risk Factors" on page 8 of the accompanying
prospectus and on page 10 of our Annual Report on Form 10-K for the year
ended April 30, 2009, which is incorporated by reference in this
prospectus supplement and the accompanying prospectus.
|
|
NASDAQ
trading symbol
|
IRET
|
|
(1)
|
Excludes
1,200,000 common shares that we may issue upon exercise of the
underwriters’ over-allotment
option.
|
|
(2)
|
Based
on 63,787,568 common shares outstanding as of July 31, 2009; excludes
20,836,972 common shares potentially issuable upon redemption of
outstanding LP units of our operating
partnership.
|
The
following table sets forth summary consolidated financial data, which should be
read in conjunction with, and is qualified by reference to, the consolidated
financial statements and related notes and Management’s Discussion and Analysis
of Financial Condition and Results of Operations in the documents filed with the
SEC that are incorporated by reference into this prospectus supplement. Our
summary consolidated financial data as of and for each of the fiscal years ended
April 30, 2009, 2008 and 2007, is derived from our consolidated financial
statements, which have been audited by Deloitte & Touche LLP. Our summary
consolidated financial data for the three-month periods ended July 31, 2009 and
2008, has been derived from our unaudited financial statements. Our unaudited
financial statements have been prepared on the same basis as our audited
financial statements and include all adjustments, consisting only of normal
recurring adjustments, that we consider necessary for a fair presentation of our
financial position and our results of operations for these periods. Operating
results for the three months ended July 31, 2009 are not necessarily indicative
of the results that may be expected for the full year.
|
Three
Months Ended
July
31
|
Fiscal
Year Ended
April
30
|
|||||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
2007
|
||||||||||||||||
|
(in
thousands, except per share data)
|
||||||||||||||||||||
|
Operating
Data:
|
||||||||||||||||||||
|
Revenue
|
$ | 60,821 | $ | 58,846 | $ | 240,005 | $ | 221,170 | $ | 197,538 | ||||||||||
|
Operating
expenses:
|
||||||||||||||||||||
|
Interest
|
17,401 | 16,888 | 68,743 | 63,439 | 58,424 | |||||||||||||||
|
Depreciation/Amortization
|
14,068 | 13,318 | 54,646 | 50,042 | 44,419 | |||||||||||||||
|
Utilities
and maintenance
|
11,374 | 11,433 | 46,578 | 42,375 | 36,848 | |||||||||||||||
|
Property
management
|
4,098 | 4,251 | 18,079 | 15,273 | 13,826 | |||||||||||||||
|
Taxes
|
7,971 | 7,370 | 30,443 | 27,133 | 23,281 | |||||||||||||||
|
Other
expenses
|
3,469 | 2,892 | 11,779 | 10,647 | 9,150 | |||||||||||||||
|
Total
expenses
|
58,381 | 56,152 | 230,268 | 208,909 | 185,948 | |||||||||||||||
|
Other
income
|
129 | 248 | 922 | 2,760 | 2,665 | |||||||||||||||
|
Income
from continuing operations before sale of other
investments
|
2,569 | 2,942 | 10,659 | 15,021 | 14,255 | |||||||||||||||
|
Gain
(loss) gain on sale of other investments
|
0 | 0 | 54 | 42 | (38 | ) | ||||||||||||||
|
Income
from continuing operations
|
2,569 | 2,942 | 10,713 | 15,063 | 14,217 | |||||||||||||||
|
Discontinued
operations
|
0 | 0 | 0 | 566 | 4,166 | |||||||||||||||
|
Net
income
|
2,569 | 2,942 | 10,713 | 15,629 | 18,383 | |||||||||||||||
|
Net
income attributable to noncontrolling interests – Operating
Partnership
|
(479 | ) | (647 | ) | (2,227 | ) | (3,677 | ) | (4,299 | ) | ||||||||||
|
Net
loss attributable to noncontrolling interests – consolidated real estate
entities
|
(73 | ) | 63 | 40 | 136 | 26 | ||||||||||||||
|
Net
income attributable to Investors Real Estate Trust
|
2,017 | 2,358 | 8,526 | 12,088 | 14,110 | |||||||||||||||
|
Dividends
to preferred shareholders
|
(593 | ) | (593 | ) | (2,372 | ) | (2,372 | ) | (2,372 | ) | ||||||||||
|
Net
income available to common shareholders
|
$ | 1,424 | $ | 1,765 | $ | 6,154 | $ | 9,716 | $ | 11,738 | ||||||||||
|
Other
Data:
|
||||||||||||||||||||
|
Funds
from operations(1)
|
$ | 16,502 | $ | 16,053 | $ | 64,622 | $ | 64,182 | $ | 56,994 | ||||||||||
|
Cash
distributions to holders of common shares and unitholders(2)
|
14,370 | 13,332 | 53,995 | 48,890 | 42,535 | |||||||||||||||
|
Per Share
Data:
|
||||||||||||||||||||
|
Net
income from continuing and discontinued operations
|
$ | .02 | $ | .03 | $ | .11 | $ | .18 | $ | .24 | ||||||||||
|
Funds
from operations(1)
|
.20 | .20 | .81 | .87 | .88 | |||||||||||||||
|
Cash
distributions
|
.1705 | .1685 | .6770 | .6690 | .6610 | |||||||||||||||
|
Balance Sheet
Data:
|
||||||||||||||||||||
|
Total
real estate investments, net
|
$ | 1,468,842 | $ | 1,466,419 | $ | 1,472,575 | $ | 1,456,178 | $ | 1,316,534 | ||||||||||
|
Total
assets
|
1,614,353 | 1,616,161 | 1,605,091 | 1,618,026 | 1,435,389 | |||||||||||||||
|
Total
liabilities
|
1,102,668 | 1,102,014 | 1,109,947 | 1,098,593 | 981,030 | |||||||||||||||
|
Noncontrolling
interests - consolidated real estate entities
|
12,248 | 12,310 | 12,199 | 11,739 | 12,089 | |||||||||||||||
|
Noncontrolling
interests - Operating Partnership
|
145,120 | 159,984 | 148,199 | 161,818 | 156,465 | |||||||||||||||
|
Total
equity
|
509,777 | 512,696 | 493,407 | 517,631 | 453,365 | |||||||||||||||
_____________________
|
(1)
|
We
consider funds from operations, or FFO, a useful measure of performance
for an equity REIT. We consider 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 our 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. 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 of gains and losses from the sales of previously depreciated
operating real estate assets in calculating FFO allows our management and
investors better to identify the operating results of the long-term assets
that form the core of our investments, and assists in comparing those
operating results between periods. FFO is used by our management 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. We use the definition of FFO adopted by the National
Association of Real Estate Investment Trusts, or 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, or
GAAP), excluding gains (or losses) from sales of depreciated 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 FFO on the same basis.
|
|
(2)
|
Includes
amounts reinvested in IRET common shares under our Distribution
Reinvestment and Share Purchase
Plan.
|
A
reconciliation of FFO to net income attributable to Investors Real Estate Trust
computed in accordance with GAAP is as follows:
|
Three
Months Ended
July
31
|
Fiscal
Year Ended
April
30
|
|||||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
2007
|
||||||||||||||||
|
(in
thousands, except per share data)
|
||||||||||||||||||||
|
Net
income attributable to Investors Real Estate Trust
|
$ | 2,017 | $ | 2,358 | $ | 8,526 | $ | 12,088 | $ | 14,110 | ||||||||||
|
Less
dividends to preferred shareholders
|
(593 | ) | (593 | ) | (2,372 | ) | (2,372 | ) | (2,372 | ) | ||||||||||
|
Net
income available to common shareholders
|
1,424 | 1,765 | 6,154 | 9,716 | 11,738 | |||||||||||||||
|
Add
back:
|
||||||||||||||||||||
|
Noncontrolling
interests – Operating Partnership
|
479 | 647 | 2,227 | 3,677 | 4,299 | |||||||||||||||
|
Depreciation
and amortization(a)
|
14,599 | 13,641 | 56,295 | 51,303 | 45,559 | |||||||||||||||
|
(Gain)
loss from depreciable property sales
|
0 | 0 | (54 | ) | (514 | ) | (4,602 | ) | ||||||||||||
|
Fully
diluted FFO
|
16,502 | 16,053 | 64,622 | 64,182 | 56,994 | |||||||||||||||
|
Weighted
averages shares outstanding:
|
||||||||||||||||||||
|
Common
shares
|
62,386 | 57,916 | 58,603 | 53,060 | 47,672 | |||||||||||||||
|
Common
shares issuable to holders of LP units(b)
|
20,837 | 21,298 | 21,217 | 20,417 | 17,017 | |||||||||||||||
|
Total
|
83,223 | 79,214 | 79,820 | 73,477 | 64,689 | |||||||||||||||
|
Net income per common
share(c)
|
$ | .02 | $ | .03 | $ | .11 | $ | .18 | $ | .24 | ||||||||||
|
FFO per common
share(c)
|
$ | .20 | $ | .20 | $ | .81 | $ | .87 | $ | .88 | ||||||||||
_____________________
|
a)
|
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, and
depreciation/amortization from Discontinued Operations, less
corporate-related depreciation and amortization on office equipment and
other assets.
|
|
b)
|
LP
units of IRET Properties are redeemable at the option of the holder for
cash or, at our option, common shares on a one-for-one
basis.
|
|
c)
|
Net
income per common share is calculated using the number of outstanding
common shares. FFO per common share is calculated using the number of
common shares outstanding and the number of common shares issuable to
holders of outstanding LP units.
|
While we
use the NAREIT definition of FFO, the components of that definition in many
cases require interpretation and, accordingly, we have made certain
interpretations in applying the definition. In particular, in calculating FFO
per share, we add back to net income attributable to Investors Real Estate Trust
computed in accordance with GAAP the allocations made to limited partners of
IRET Properties, and divide this amount by the total outstanding number of our
common shares and LP units of IRET Properties. Under the partnership agreement
pursuant to which the LP units of IRET Properties are issued, holders of LP
units effectively have the same claim on our earnings and assets as do the
holders of our common shares and, therefore, we consider that the LP units of
IRET Properties also should be included with the common shares in calculating
FFO per share.
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 attributable to
Investors Real Estate Trust as determined in accordance with GAAP as a measure
of our performance, but rather should be considered as an additional,
supplemental measure. FFO does not represent cash generated from operating
activities in accordance with GAAP, and is not necessarily indicative of cash
flow to fund our cash needs or our ability to service indebtedness or make
distributions.
Our
common shares are traded on the NASDAQ Global Select Market, or NASDAQ, under
the symbol “IRET.” At July 31, 2009, there were approximately 3,898
record holders of our common shares. The following table sets forth,
for the periods indicated, the range of the high and low sales prices of our
common shares on the NASDAQ and distributions per Share.
|
High
|
Low
|
Distribution
per Share
|
||||||||||
|
Fiscal
Year 2007
|
||||||||||||
|
First
Quarter
|
$ | 9.50 | $ | 8.85 | $ | .1645 | ||||||
|
Second
Quarter
|
10.15 | 9.22 | .1650 | |||||||||
|
Third
Quarter
|
10.68 | 9.65 | .1655 | |||||||||
|
Fourth
Quarter
|
11.00 | 9.66 | .1660 | |||||||||
|
Fiscal
Year 2008
|
||||||||||||
|
First
Quarter
|
$ | 10.86 | $ | 9.40 | $ | .1665 | ||||||
|
Second
Quarter
|
11.59 | 9.35 | .1670 | |||||||||
|
Third
Quarter
|
10.55 | 8.84 | .1675 | |||||||||
|
Fourth
Quarter
|
10.47 | 8.95 | .1680 | |||||||||
|
Fiscal
Year 2009
|
||||||||||||
|
First
Quarter
|
$ | 10.68 | $ | 9.54 | $ | .1685 | ||||||
|
Second
Quarter
|
11.19 | 7.66 | .1690 | |||||||||
|
Third
Quarter
|
10.71 | 7.43 | .1695 | |||||||||
|
Fourth
Quarter
|
10.43 | 8.60 | .1700 | |||||||||
|
Fiscal
Year 2010
|
||||||||||||
|
First
Quarter
|
$ | 9.47 | $ | 8.30 | $ | .1705 | ||||||
The last
reported sale price for our common shares on NASDAQ on October 5, 2009 was $8.71
per share.
We have
paid regular quarterly distributions since July 1,
1971. Distributions are paid in January, April, July and October of
each year. Our last quarterly distribution of $0.1705 per share was
paid on July 1, 2009.
We
estimate that the net proceeds from the sale of our common shares in this
offering will be approximately $62,600,000, or approximately $72,005,000 if the
underwriters exercise their over-allotment option in full. “Net proceeds” is
what we expect to receive after deducting the underwriting discount and our
estimated expenses. We currently plan to contribute the net proceeds of this
offering to our operating partnership, IRET Properties, to use for general
business purposes, including the acquisition, development, renovation, expansion
or improvement of income-producing real estate properties and debt repayment.
Pending such use, the net proceeds may be invested in short-term
income-producing investments, such as U.S. treasury bonds with terms of six
months or less.
The
following table sets forth our capitalization as of July 31, 2009 on an actual
basis, and on a pro forma basis to give effect to our receipt of approximately
$62,600,000 in estimated net proceeds from our sale of 8,000,000 common shares
in this offering. This table does not give effect to up to 1,200,000
additional common shares that may be sold pursuant to the underwriters’
over-allotment option. You should read the following table in conjunction with
the consolidated financial statements and related notes and Management’s
Discussion and Analysis of Financial Condition and Results of Operations in the
documents filed with the SEC that are incorporated by reference into this
prospectus supplement.
|
July
31, 2009
|
||||||||
|
Actual
|
Pro
Forma
|
|||||||
|
Consolidated
|
Consolidated
|
|||||||
|
(in
thousands)
|
||||||||
|
Debt:
|
||||||||
|
Mortgages
payable
|
$ | 1,055,705 | $ | 1,055,705 | ||||
|
Other
|
14,455 | 14,445 | ||||||
|
Total
Debt
|
1,070,160 | 1,070,160 | ||||||
|
Investors
Real Estate Trust shareholders’ equity:
|
||||||||
|
Preferred
Shares of Beneficial Interest (Cumulative redeemable
preferred shares, no par value, 1,150,000 shares issued and outstanding at
July 31, 2009 and April 30, 2009, aggregate liquidation preference of
$28,750,000)
|
27,317 | 27,317 | ||||||
|
Common
Shares of Beneficial Interest (Unlimited authorization, no
par value, 63,787,568 shares issued and outstanding at July 31,
2009)(1)
|
490,441 | 553,041 | ||||||
|
Accumulated
distributions in excess of net income
|
(165,349 | ) | (165,349 | ) | ||||
|
Total
Investors Real Estate Trust shareholders’ equity
|
352,409 | 415,009 | ||||||
|
Total
capitalization
|
$ | 1,422,569 | $ | 1,485,169 | ||||
_____________________
|
1)
|
Does
not include up to 20,836,972 common shares potentially issuable upon
exchange of outstanding limited partnership units of our operating
partnership.
|
Earnings
to Combined Fixed Charges
and
Preferred Share Dividends
The
following table sets forth our ratios of earnings to fixed charges and earnings
to combined fixed charges and preferred share dividends for the periods
indicated. The ratio of earnings to fixed charges was computed by dividing
earnings by our fixed charges. The ratio of earnings to combined fixed charges
and preferred share dividends was computed by dividing earnings by our combined
fixed charges and preferred share dividends. For purposes of calculating
these ratios, earnings consist of income from continuing operations plus fixed
charges. Fixed charges consist of interest charges on all
indebtedness, whether expensed or capitalized, the interest component of rental
expense and the amortization of debt discounts and issue costs, whether expensed
or capitalized. Preferred share dividends consist of dividends on our
Series A preferred shares.
|
Fiscal
Year ended April 30,
|
Three
Months ended
|
|||||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
July
31, 2009
|
|||||||||||||||||||
|
Consolidated
ratio of earnings to fixed charges
|
1.14 | x | 1.23 | x | 1.24 | x | 1.21 | x | 1.20 | x | 1.14 | x | ||||||||||||
|
Consolidated
ratio of earnings to combined fixed charges and preferred share
dividends
|
1.10 | x | 1.19 | x | 1.19 | x | 1.16 | x | 1.14 | x | 1.11 | x | ||||||||||||
The
following discussion supplements the discussion under the heading “Material
Federal Income Tax Considerations” in the accompanying
prospectus. The following is a summary of certain additional material
federal income tax considerations with respect to the acquisition, ownership and
disposition of our common shares.
You
should consult your own tax advisor regarding the specific tax consequences of
the acquisition, ownership and disposition of our common shares.
Federal
Income Taxation of Investors Real Estate Trust
We
elected to be taxed as a REIT under the federal income tax laws commencing with
our taxable year ended April 30, 1971. In the opinion of Hunton &
Williams LLP, we qualified to be taxed as a REIT under the federal income tax
laws for our taxable years ended April 30, 2006 through April 30, 2009, and our
organization and current and proposed method of operation will enable us to
continue to qualify as a REIT for our taxable year ended April 30, 2010 and in
the future. You should be aware that Hunton & Williams LLP’s
opinion is based on existing federal income tax law governing qualification as a
REIT, which is subject to change, possibly on a retroactive basis, is not
binding on the Internal Revenue Service, or IRS, or any court and speaks as of
the date issued. In addition, Hunton & Williams LLP’s opinion is
based on customary assumptions and is conditioned upon certain representations
made by us as to factual matters, including representations regarding the nature
of our assets and the future conduct of our business. Moreover, our continued
qualification and taxation as a REIT depends on our ability to meet, on a
continuing basis, through actual operating results, certain qualification tests
in the federal income tax laws. Those qualification tests involve the
percentage of our income that we earn from specified sources, the percentages of
our assets that fall within specified categories, the diversity of share
ownership and the percentage of earnings that we distribute. While
Hunton & Williams LLP has reviewed those matters in connection with its
opinion, Hunton & Williams LLP will not review our compliance with those
tests on a continuing basis. Accordingly, no assurance can be given
that the actual results of our operations for any particular taxable year will
satisfy such requirements. For a discussion of the tax consequences
of the failure to qualify as a REIT, see “Material Federal Income Tax
Considerations—Federal Income Taxation of Investors Real Estate Trust—Failure to
Qualify” in the accompanying prospectus.
Annual
Distribution Requirements
The IRS
recently issued Revenue Procedure 2009-15, which permits publicly-traded REITs
to satisfy the annual distribution requirements by paying taxable dividends of
cash and shares of stock or beneficial interest, at the election of each
shareholder, for taxable years ending on or before December 31,
2009. Under Revenue Procedure 2009-15, up to 90% of any such taxable
dividend could be payable in shares of stock or beneficial
interests. Taxable shareholders receiving such dividends would be
required to include the full amount of the dividend as ordinary income to the
extent of current and accumulated earnings and profits for federal income tax
purposes. As a result, a U.S. shareholder receiving such dividends
may be required to pay income taxes with respect to such dividends in excess of
the cash dividends received. If a U.S. shareholder sells the shares
it receives as a dividend in order to pay this tax, the sales proceeds may be
less than the amount included in income with respect to the dividend, depending
on the market price of the shares at the time of distribution and the amount
received upon sale of the shares. Furthermore, withholding of U.S.
tax on such dividends paid to non-U.S. shareholders may be required. With
respect to a shareholder who receives all or a portion of a dividend in common
shares, such shareholder would have a tax basis in such shares equal to the
amount of cash that could have been received instead of such shares as described
above, and the holding period in such shares would begin on the day following
the payment date of the dividend. We currently do not intend to make taxable
distributions of our common shares or other securities in order to satisfy the
annual distribution requirements. See “Material Federal
Income Tax Considerations—Federal Income Taxation of Investors Real Estate
Trust—Annual Distribution Requirements” in the accompanying
prospectus.
Robert W.
Baird & Co. Incorporated and RBC Capital Markets Corporation are acting as
representatives of the underwriters named below. Subject to the terms
and conditions stated in the underwriting agreement dated the date of this
prospectus supplement, each underwriter named below has agreed to purchase, and
we have agreed to sell to that underwriter, the number of common shares set
forth opposite the underwriter’s name.
|
Underwriter
|
Number
of Shares
|
|||
|
Robert
W. Baird & Co.
Incorporated
|
4,000,000 | |||
|
RBC
Capital Markets
Corporation
|
2,400,000 | |||
|
Janney
Montgomery Scott
LLC
|
800,000 | |||
|
D.A.
Davidson &
Co.
|
400,000 | |||
|
J.J.B.
Hilliard, W.L. Lyons,
LLC
|
400,000 | |||
|
Total
|
8,000,000 | |||
The
underwriting agreement provides that the obligation of the underwriters to
purchase the common shares in this offering is subject to approval of legal
matters by counsel and to other conditions. The underwriters are
obligated to purchase all the common shares (other than those covered by the
over-allotment option described below) if they purchase any of the common
shares.
The
underwriters have advised us that they propose to offer some of the common
shares to the public at the public offering price set forth on the cover page of
this prospectus and to certain dealers at the public offering price less a
concession not in excess of $0.2475 per share. The underwriters may
allow, and dealers may re-allow, a concession not in excess of $0.10per share to
some other dealers. After the offering, the offering price and other
selling terms may be changed by the underwriters.
We have
granted to the underwriters an option, exercisable for 30 days from the date of
this prospectus supplement, to purchase up to an aggregate of 1,200,000
additional common shares at the public offering price less the underwriting
discount. The underwriters may exercise the option solely for the
purpose of covering over-allotments, if any, in connection with this
offering. To the extent the option is exercised, each underwriter
must purchase a number of additional common shares approximately proportionate
to that underwriter’s initial purchase commitment.
We and
our executive officers and trustees have agreed that, for a period of 60 days
from the date of this prospectus, we and they will not, without the prior
written consent of the representatives, dispose of or hedge any common shares or
any securities convertible into or exchangeable for our common shares, subject
to certain exceptions set forth in each lock-up agreement. This
lock-up provision applies to our common shares and to securities convertible
into or exchangeable or exercisable for or repayable with our common shares. In
the event that either (x) during the last 17 days of the lock-up period referred
to above, we issue an earnings release or material news or a material event
relating to the Company occurs or (y) prior to the expiration of the lock-up
period, we announce that we will release earnings results during the 16-day
period beginning on the last day of the lock-up period, the restrictions
described above shall continue to apply until the expiration of the 18-day
period beginning on the issuance of the earnings release or the occurrence of
the material news or material event. The representatives, in
their sole discretion, may release any of the securities subject to these
lock-up agreements at any time without notice.
Our
common shares trade on the NASDAQ under the symbol “IRET.”
The
following table shows the underwriting discount in connection with this
offering. These amounts are shown assuming both no exercise and full
exercise of the underwriters’ option to purchase additional common
shares:
|
No
Exercise
|
Full
Exercise
|
|||||||
|
Per
Share
|
$ | 0.4125 | $ | 0.4125 | ||||
|
Total
|
$ | 3,300,000 | $ | 3,795,000 | ||||
In
connection with this offering, the representatives, on behalf of the
underwriters, may purchase and sell our common shares in the open
market. These transactions may include short sales, syndicate
covering transactions and stabilizing transactions. Short sales
involve syndicate sales of common shares in excess of the number of shares to be
purchased by the underwriters in the offering, which creates a syndicate short
position. “Covered” short sales are sales of shares made in an amount
up to the number of shares represented by the underwriters’ over-allotment
option. In determining the source of shares to close out the covered
syndicate short position, the underwriters will consider, among other things,
the price of our common shares available for purchase in the open market as
compared to the price at which they may purchase our common shares through the
over-allotment option. Transactions to close out the covered
syndicate short position involve either purchases of shares in the open market
after the distribution has been completed or the exercise of the over-allotment
option. The underwriters will not make “naked” short sales of common
shares in excess of the number of shares represented by the underwriters’
over-allotment option. Stabilizing transactions consist of bids for,
or purchases of, common shares in the open market while the offering is in
progress.
The
underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when the
representatives repurchase common shares originally sold by that syndicate
member in order to cover syndicate short positions or to make stabilizing
purchases.
Any of
these activities may have the effect of preventing or retarding a decline in the
market price of our common shares. They may also cause the price of
our common shares to be higher than the price that would otherwise exist in the
open market in the absence of these transactions. The underwriters
may conduct these transactions in the NASDAQ or in the over-the-counter market,
or otherwise. If the underwriters commence any of these transactions,
they may discontinue them at any time.
We
estimate that our total expenses of this offering will be approximately
$100,000.
Certain
of the underwriters have performed investment banking and advisory services for
us from time to time for which they have received customary fees and
expenses. The underwriters may, from time to time, engage in
transactions with, and perform services for, us in the ordinary course of
business.
A
prospectus in electronic format may be made available on the websites maintained
by one or more of the underwriters. Other than the prospectus in
electronic format, the information on the underwriters’ website and any
information contained in any other website maintained by the underwriters is not
part of this prospectus or the registration statement for which this prospectus
forms a part, has not been approved or endorsed by us or the underwriters and
should not be relied upon by investors.
We have
agreed to indemnify the underwriters against certain liabilities, including
liabilities under the Securities Act or to contribute to payments the
underwriters may be required to make because of any of those
liabilities.
Certain
legal matters in connection with this offering will be passed upon for us by
Hunton & Williams LLP and by Pringle & Herigstad,
P.C. Certain federal income tax matters will be passed upon for us by
Hunton & Williams LLP. Certain legal matters in connection with
this offering will be passed upon for the underwriters by Bass, Berry & Sims
PLC. Hunton & Williams LLP and Bass, Berry & Sims PLC may rely on the
opinion of Pringle & Herigstad, P.C. as to matters of North Dakota
law.
The
consolidated financial statements and the related financial statement schedules
incorporated in the accompanying prospectus by reference from Investors Real
Estate Trust’s Current Report on Form 8-K dated September 18, 2009, and the
effectiveness of Investors Real Estate Trust’s internal control over financial
reporting, have been audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their report, which is
incorporated herein by reference (which report (1) expresses an
unqualified opinion on the consolidated financial statements and financial
statement schedules and includes an explanatory paragraph relating to the
retrospective effects of the adoption of Statement of Financial Accounting
Standard No. 160, Noncontrolling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51, and (2)
expresses an unqualified opinion on the effectiveness of internal control over
financial reporting). Such consolidated financial statements and financial
statement schedules have been so incorporated in reliance upon the report of
such firm given upon their authority as experts in accounting and
auditing.
We are
subject to the reporting requirements of the Exchange Act, and file annual,
quarterly and periodic reports, proxy statements and other information with the
SEC. Our SEC filings may be found on our website at
www.iret.com. The SEC also maintains a website (http://www.sec.gov)
on which our reports, proxy statements and other information are made
available. You may also read and copy any document we file with the
SEC at the public reference facilities maintained by the SEC at 100 F Street,
N.E., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
facilities. Our common shares of beneficial interest are listed on
the NASDAQ and, as a result, we also file our reports, proxy statements and
other information with NASDAQ.
We filed
with the SEC a Registration Statement on Form S-3 (Registration File No.:
333-153715) under the Securities Act with respect to the securities offered by
this prospectus supplement. This prospectus supplement, which
constitutes part of such Registration Statement, does not contain all of the
information set forth in such Registration Statement, certain parts of which
have been omitted in accordance with the rules and regulations of the
SEC. Reference is hereby made to such Registration Statement and the
exhibits to such Registration Statement for further information with respect to
our company and the securities offered pursuant to this prospectus
supplement.
Prospectus
$150,000,000
Common
Shares of Beneficial Interest
Preferred
Shares of Beneficial Interest
Investors
Real Estate Trust may from time to time offer to sell: (i) our common
shares of beneficial interest, no par value, and (ii) in one or more classes or
series, our preferred shares of beneficial interest, no par value, all with an
aggregate public offering price of up to $150,000,000, on terms to be determined
at the time of the offering. In this prospectus, we refer to our
common shares of beneficial interest as our common shares, our preferred shares
of beneficial interest as our preferred shares, and we refer to our common
shares and our preferred shares collectively as our securities. Our
securities may be offered, separately or together, in amounts, at prices and on
terms to be set forth in one or more supplements to this prospectus (each, a
prospectus supplement). The aggregate public offering price and terms
of the securities will be determined by market conditions at the time the
securities are offered.
The
specific terms of any securities we sell and the terms on which we are offering
such securities will be set forth in a prospectus supplement. The
specific terms may include limitations on direct or beneficial ownership and
restrictions on transfer of the securities, in each case as may be appropriate
to preserve our status as a real estate investment trust for federal income tax
purposes. The applicable prospectus supplement will also contain
information, where applicable, about material federal income tax considerations
relating to, and any listing on a securities exchange of, the securities offered
by the prospectus supplement. The applicable prospectus supplement
may also add to, update or change information contained in this
prospectus. You should carefully read this prospectus and any
applicable prospectus supplement, together with the addition information
described under the heading “Where You Can Find More Information,” before you
invest in any of our securities.
Our
common and preferred shares are traded on the NASDAQ Global Select Market under
the symbols “IRET” and “IRETP”, respectively. Our executive offices
are located at 12 Main Street South, Minot, North Dakota 58701, telephone
number: 701-837-4738. Our website address is
www.iret.com. The information set forth on, or otherwise accessible
through, our web site is not incorporated into, and does not form a part of,
this prospectus or any other report or document we file with or furnish to the
Securities and Exchange Commission (SEC).
We may
sell the securities offered by this prospectus directly, through agents
designated by us from time to time or to or through underwriters or
dealers. If any agents, underwriters or dealers are involved in the
sale of any of our securities, their names, and any applicable purchase price,
fee, commission or discount arrangements between or among them, will be set
forth, or will be calculable from the information set forth, in the applicable
prospectus supplement. None of our securities may be sold without
delivery of a prospectus supplement.
Investing
in our securities involves certain risks. See “Risk Factors” in our
Annual Report on Form 10-K for the fiscal year ended April 30, 2008 and “Risk
Factors” beginning on page 8 of this prospectus.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a
criminal offense.
The date
of this prospectus is October 10, 2008.
|
3
|
|
|
3
|
|
|
3
|
|
|
8
|
|
|
17
|
|
|
17
|
|
|
18
|
|
|
19
|
|
|
24
|
|
|
25
|
|
|
25
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|
|
44
|
|
|
44
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45
|
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45
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|
45
|
This
prospectus is part of a registration statement that we filed with the SEC
utilizing a “shelf” registration process. Under this shelf registration process,
we may sell any combination of the securities described in this prospectus in
one or more offerings up to a total dollar amount of
$150,000,000. This prospectus provides you with a general description
of the securities we may offer. Each time we sell securities, we will
provide a prospectus supplement that will contain specific information about the
terms of that offering. The prospectus supplement may also add,
update or change information contained in this prospectus. You should
read both this prospectus and any prospectus supplement together with additional
information described under the heading “Where You Can Find More
Information.”
You
should rely only on the information contained and incorporated by reference in
this prospectus. We have not authorized any other person to provide
you with different or inconsistent information from that contained in this
prospectus and the applicable prospectus supplement. If anyone
provides you with different or inconsistent information, you should not rely on
it. You should assume that the information in this prospectus and the
applicable prospectus supplement, as well as the information we previously filed
with the SEC and incorporated by reference, is accurate only as of the date on
the front cover of this prospectus and the applicable prospectus
supplement. Our business, financial condition, results of operations
and prospects may have changed since those dates.
FORWARD-LOOKING
STATEMENTS
This
prospectus contains or incorporates by reference forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended
(Securities Act) and Section 21E of the Securities Exchange Act of 1934, as
amended (Exchange Act). You can identify some of the forward-looking
statements by their use of forward-looking words, such as “believes,” “expects,”
“may,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” or
“anticipates,” or the negative of those words or similar
words. Forward-looking statements involve inherent risks and
uncertainties regarding events, conditions and financial trends that may affect
our future plans of operation, business strategy, results of operations and
financial position. A number of important factors could cause actual
results to differ materially from those included within or contemplated by such
forward-looking statements, including, but not limited to, the status of the
economy, the status of capital markets including prevailing interest rates,
compliance with and changes to regulations within environmental protection
regimes, changes in financing terms, competition within the commercial office,
medical (including senior housing), industrial, retail and multi-family housing
industries, and changes in federal, state and local legislation. For
a discussion of these and other factors that could cause actual results to
differ from those contemplated in the forward-looking statements in this
prospectus and in documents incorporated by reference in this prospectus, see
the discussion under “Risk Factors” contained in this prospectus and in other
information contained in our publicly available filings with the SEC, including
our annual report on Form 10-K for the year ended April 30, 2008. We
do not undertake any responsibility to update any of these factors or to
announce publicly any revisions to forward-looking statements, whether as a
result of new information, future events or otherwise.
INVESTORS
REAL ESTATE TRUST
Our
Company
We are a
self-advised real estate investment trust that owns and operates commercial
office, medical, industrial and retail properties and multi-family residential
properties located primarily in the upper Midwest. The charts below
show, as of July 31, 2008, the geographic distribution of our properties and
their classification by type, in both cases measured on the basis of our
investment in our properties (original investment plus improvements, if
any).
|
Geographic
Distribution of Properties
|
Classification
of Properties by Type
|
 |
 |
As of
July 31, 2008, our real estate portfolio consisted of:
|
·
|
76
multi-family residential properties, containing 9,528 apartment units and
having a total real estate investment amount net of accumulated
depreciation of $409.6 million; and
|
|
·
|
163
commercial properties, containing approximately 11.5 million square feet
of leasable space and having a total real estate investment amount net of
accumulated depreciation of $1.0 billion, as
follows:
|
|
o
|
65
office properties containing approximately 4.9 million square feet of
leasable space and having a total real estate investment amount net of
accumulated depreciation of $497.3
million;
|
|
o
|
48
medical properties (including senior housing) containing approximately 2.3
million square feet of leasable space and having a total real estate
investment amount net of accumulated depreciation of $325.5
million;
|
|
o
|
17
industrial properties containing approximately 2.8 million square feet of
leasable space and having a total real estate investment amount net of
accumulated depreciation of $93.1 million;
and
|
|
o
|
33
retail properties containing approximately 1.5 million square feet of
leasable space and having a total real estate investment amount net of
accumulated depreciation of $100.6
million.
|
Our
commercial properties are typically leased to tenants under long term lease
arrangements, with no single tenant accounting for more than approximately 10.8%
of our total annualized commercial rental revenues as of July 31,
2008. At July 31, 2008, the economic occupancy rates for our
stabilized properties were as follows:
|
Multi-family
Residential
|
92.8 | % | ||
|
Commercial
Office
|
88.9 | % | ||
|
Commercial
Medical
|
95.7 | % | ||
|
Commercial
Industrial
|
95.9 | % | ||
|
Commercial
Retail
|
86.6 | % |
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 revenues.
Our
principal executive office is located at 12 Main Street South, Minot, North
Dakota, 58701, and our telephone number is (701) 837-4738.
Investment
Strategy
We employ
a disciplined investment strategy focused on growing assets in our target
geographical markets, achieving diversification by property type, adhering to
targeted returns in acquiring properties, and regularly increasing funds from
operations. We believe this investment strategy has enabled us to
achieve our goal of regularly increasing distributions on our securities. We
have increased our distributions per common share every year since our inception
37 years ago and every quarter since 1988.
We
attempt to concentrate our multi-family residential properties in communities
with populations of approximately 50,000 to 500,000 and we attempt to
concentrate our commercial properties in metropolitan areas with populations of
approximately 100,000 to 3.0 million. We focus most of our investment activity
in markets in the upper Midwest, due to our greater familiarity with these
markets, our existing market presence and our belief that these markets attract
less competition from other leading REITs and institutional investors. As of
July 31, 2008, approximately 67.7% of our properties, measured by investment
amount, net of accumulated depreciation, are located in the greater
Minneapolis/St. Paul metropolitan area.
We
continually receive, evaluate and identify opportunities for the acquisition and
development of commercial and multi-family residential properties, particularly
in the states in which we currently own properties. These investment and
development opportunities are sourced through various channels, including real
estate brokers, property owners, property management firms and our own business
development efforts. In evaluating commercial properties for acquisition, we
consider factors that include market size, economic and market rental
conditions, property type, property quality, existing occupancy and lease rates,
tenant makeup and quality, lease rollover risk and current and prospective cash
flow levels. In evaluating multi-family residential properties for acquisition,
we consider factors that include market size and growth characteristics,
demographic considerations, apartment rental conditions and trends, market rent
and occupancy levels, property quality, operating expense and maintenance
considerations, property occupancy rates and current and prospective cash flow
levels. Upon identifying properties that meet our investment criteria, we
conduct financial analyses, perform property inspections, identify borrowing
sources and terms and submit or negotiate acquisition proposals on terms that
allow us, under reasonable assumptions, to meet our targeted investment
returns. In evaluating multi-family residential and commercial
development opportunities, we consider factors that include property site
location, access, soil conditions and other physical characteristics of the
site, market size and growth characteristics, demographic considerations,
existing property development adjacent or near the site, prospective tenants and
cash flow levels.
Typically,
we seek to acquire existing, well-maintained properties that have a strong
tenant base and lease or rental revenues and terms that immediately support our
return on investment objectives. Due to varying market conditions over time,
this can lead to a greater concentration of investment activity in certain
property types during particular market cycles. For instance, during the 12
months ended July 31, 2008, approximately 74.1% of our property acquisitions,
based on investment amount, have been medical office and senior housing
properties, due to the greater availability of these properties on terms that
meet our return on investment objectives. As market conditions evolve, however,
this trend may be reversed and we may again purchase a greater percentage of
multi-family residential properties, or commercial, retail and industrial
properties. We typically seek to develop commercial projects when we
have identified or secured a tenant for the project. We typically
seek to develop multi-family residential projects when we have identified a
community with attractive economic and market rental conditions.
We
generally use available cash or short-term floating rate debt to acquire real
estate. We then replace the cash or short-term floating rate debt with
fixed-rate secured debt, typically in an amount equal to 65% to 75% of the
acquisition cost. In appropriate circumstances, we also may acquire one or more
properties in exchange for our shares of beneficial interest or LP units of IRET
Properties, which typically are convertible into our common shares on a
one-to-one basis or, at our option, cash, after the expiration of a minimum
one-year holding period. Subject to our continued ability to raise equity
capital and issue LP units of IRET Properties, we anticipate acquiring $100
million to $200 million of real estate assets on an annual basis. We
generally finance development projects with available cash or short-term
floating rate debt, and then replace the cash or short-term floating rate debt
with fixed-rate secured debt, typically in an amount equal to 65% to 75% of the
property’s appraised value.
Operations
We
conduct our operations from offices in Minot, North Dakota; Minneapolis,
Minnesota and Omaha, Nebraska. We also have property management
offices in St. Louis, Missouri and Kansas City, Kansas. In Minot, our
43-person staff is engaged in activities that include management and planning,
financial analysis and accounting, marketing, property sourcing and evaluation,
legal and compliance, information management and investor
relations. In Minneapolis, our 15-person staff is
primarily engaged in sourcing, evaluating and managing commercial properties in the Minneapolis/St. Paul metropolitan area. In Omaha, Nebraska, our 7-person staff is engaged in sourcing, evaluating and managing commercial properties in the Omaha metropolitan area, and in managing our capital markets activities.
The
day-to-day management of our commercial properties is carried out by a
combination of our own employees and third-party property management
companies. In locations where the amount of rentable square footage
we own does not justify self-management, when properties acquired have effective
pre-existing property management in place, or when for other reasons particular
properties are in our judgment not attractive candidates for self-management, we
may utilize third-party professional management companies for day-to-day
management. As of July 31, 2008, we have under internal management 93
commercial properties. The management and leasing of our multi-family
residential properties is currently handled by locally-based, third-party
management companies, which we believe allows us to benefit from local knowledge
of the applicable real estate markets.
We
believe that our administrative, property management and corporate overhead
expenses as a percentage of our revenues are among the lowest of all public
REITs. We believe that this serves the interests of the holders of
our shares of beneficial interest by moderating the impact of cyclical downturns
and enhancing funds available for distribution.
Properties
The
tables set forth below present summary financial information regarding our
commercial and multi-family residential properties.
Commercial
and Multi-Family Residential Properties by State
The
following table presents, as of July 31, 2008, an analysis by state of each of
the five categories of properties owned by us — multi-family residential and
commercial office, medical, industrial and retail:
Total
Real Estate by Investment Amount
|
As
of July 31, 2008
|
||||||||||||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||||||
|
Multi-Family
Residential
|
Commercial-Office
|
Commercial-Medical
|
Commercial-Industrial
|
Commercial-Retail
|
Total
|
Total
%
|
||||||||||||||||||||||
|
Minnesota
|
$ | 141,214 | $ | 359,154 | $ | 266,812 | $ | 69,979 | $ | 73,215 | $ | 910,374 | 55.0 | % | ||||||||||||||
|
North
Dakota
|
126,839 | 16,712 | 31,582 | 7,141 | 27,688 | 209,962 | 12.7 | % | ||||||||||||||||||||
|
Montana
|
40,848 | 0 | 4,335 | 0 | 5,270 | 50,453 | 3.0 | % | ||||||||||||||||||||
|
Colorado
|
43,224 | 22,454 | 0 | 0 | 0 | 65,678 | 4.0 | % | ||||||||||||||||||||
|
South
Dakota
|
33,928 | 7,088 | 7,472 | 0 | 0 | 48,488 | 2.9 | % | ||||||||||||||||||||
|
Texas
|
39,565 | 0 | 0 | 0 | 0 | 39,565 | 2.4 | % | ||||||||||||||||||||
|
Nebraska
|
35,851 | 79,512 | 24,820 | 0 | 3,699 | 143,882 | 8.7 | % | ||||||||||||||||||||
|
Kansas
|
42,779 | 14,733 | 0 | 0 | 0 | 57,512 | 3.5 | % | ||||||||||||||||||||
|
All
Other States
|
10,505 | 59,443 | 25,170 | 26,986 | 7,760 | 129,864 | 7.8 | % | ||||||||||||||||||||
|
Total
|
$ | 514,753 | $ | 559,096 | $ | 360,191 | $ | 104,106 | $ | 117,632 | $ | 1,655,778 | 100.0 | % | ||||||||||||||
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 the
financial contribution of (i.e., the net operating income produced by), our
commercial and multi-family residential properties over the past three fiscal
years.
|
Fiscal
Years Ended April 30
|
||||||||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||
|
2008
|
%
|
2007
|
%
|
2006
|
%
|
|||||||||||||||||||
|
Real
Estate Investments – (cost)
|
||||||||||||||||||||||||
|
Multi-Family
Residential
|
$ | 510,697 | 31.0 | % | $ | 489,644 | 32.9 | % | $ | 452,251 | 35.6 | % | ||||||||||||
|
Commercial
Office
|
556,712 | 33.8 | % | 536,431 | 36.0 | % | 383,280 | 30.2 | % | |||||||||||||||
|
Commercial
Medical
|
359,986 | 21.8 | % | 274,779 | 18.4 | % | 263,300 | 20.7 | % | |||||||||||||||
|
Commercial
Industrial
|
104,060 | 6.3 | % | 75,257 | 5.1 | % | 59,583 | 4.7 | % | |||||||||||||||
|
Commercial
Retail
|
116,804 | 7.1 | % | 113,176 | 7.6 | % | 111,009 | 8.8 | % | |||||||||||||||
|
Total
|
$ | 1,648,259 | 100.0 | % | $ | 1,489,287 | 100.0 | % | $ | 1,269,423 | 100.0 | % | ||||||||||||
|
Net
Operating Income (1)
|
||||||||||||||||||||||||
|
Multi-Family
Residential
|
$ | 38,190 | 28.6 | % | $ | 35,518 | 29.3 | % | $ | 31,967 | 30.9 | % | ||||||||||||
|
Commercial
Office
|
47,836 | 35.8 | % | 43,128 | 35.6 | % | 33,882 | 32.8 | % | |||||||||||||||
|
Commercial
Medical
|
28,656 | 21.4 | % | 26,108 | 21.5 | % | 23,356 | 22.6 | % | |||||||||||||||
|
Commercial
Industrial
|
9,162 | 6.8 | % | 6,838 | 5.7 | % | 5,120 | 5.0 | % | |||||||||||||||
|
Commercial
Retail
|
9,921 | 7.4 | % | 9,614 | 7.9 | % | 9,033 | 8.7 | % | |||||||||||||||
|
Total
|
$ | 133,765 | 100.0 | % | $ | 121,206 | 100.0 | % | $ | 103,358 | 100.0 | % | ||||||||||||
_____________________
|
(1)
|
We
define net operating income as total revenues less property operating
expenses and real estate taxes. We believe that net operating
income is an important supplemental measure of operating performance for a
real estate investment trust’s operating real estate because it provides a
measure of core operations that is unaffected by depreciation,
amortization, financing and general and administrative
expense. Net operating income does not represent cash generated
by operating activities in accordance with GAAP, and should not be
considered as an alternative to net income, net income available to common
shareholders or cash flow from operating activities as a measure of
financial performance. A reconciliation of net operating income
to Income before minority interest and discontinued operations and gain on
sale of other investments is as
follows:
|
|
(in
thousands)
|
||||||||||||||||||||||||
|
Year
Ended April 30, 2008
|
Multi-Family
Residential
|
Commercial-Office
|
Commercial-Medical
|
Commercial-Industrial
|
Commercial-Retail
|
Total
|
||||||||||||||||||
|
Real
estate revenue
|
$ | 72,827 | $ | 84,042 | $ | 38,412 | $ | 11,691 | $ | 14,198 | $ | 221,170 | ||||||||||||
|
Real
estate expenses
|
34,637 | 36,206 | 9,756 | 2,529 | 4,277 | 87,405 | ||||||||||||||||||
|
Net
operating income
|
$ | 38,190 | $ | 47,836 | $ | 28,656 | $ | 9,162 | $ | 9,921 | 133,765 | |||||||||||||
|
Interest
|
(63,439 | ) | ||||||||||||||||||||||
|
Depreciation/amortization
|
(51,518 | ) | ||||||||||||||||||||||
|
Administrative,
advisory and trustee fees
|
(5,203 | ) | ||||||||||||||||||||||
|
Other
expenses
|
(1,344 | ) | ||||||||||||||||||||||
|
Other
income
|
2,760 | |||||||||||||||||||||||
|
Income
before minority interest and discontinued operations and gain on sale of
other investments
|
$ | 15,021 | ||||||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||
|
Year
Ended April 30, 2007
|
Multi-Family
Residential
|
Commercial-Office
|
Commercial-Medical
|
Commercial-Industrial
|
Commercial-Retail
|
Total
|
||||||||||||||||||
|
Real
estate revenue
|
$ | 66,972 | $ | 73,603 | $ | 34,783 | $ | 8,091 | $ | 14,089 | $ | 197,538 | ||||||||||||
|
Real
estate expenses
|
31,454 | 30,475 | 8,675 | 1,253 | 4,475 | 76,332 | ||||||||||||||||||
|
Net
operating income
|
$ | 35,518 | $ | 43,128 | $ | 26,108 | $ | 6,838 | $ | 9,614 | 121,206 | |||||||||||||
|
Interest
|
(58,424 | ) | ||||||||||||||||||||||
|
Depreciation/amortization
|
(45,501 | ) | ||||||||||||||||||||||
|
Administrative,
advisory and trustee fees
|
(4,451 | ) | ||||||||||||||||||||||
|
Other
expenses
|
(1,240 | ) | ||||||||||||||||||||||
|
Other
income
|
2,665 | |||||||||||||||||||||||
|
Income
before minority interest and discontinued operations and gain on sale of
other investments
|
$ | 14,255 | ||||||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||
|
Year
Ended April 30, 2006
|
Multi-Family
Residential
|
Commercial-Office
|
Commercial-Medical
|
Commercial-Industrial
|
Commercial-Retail
|
Total
|
||||||||||||||||||
|
Real
estate revenue
|
$ | 61,669 | $ | 57,483 | $ | 31,670 | $ | 6,372 | $ | 12,977 | $ | 170,171 | ||||||||||||
|
Real
estate expenses
|
29,702 | 23,601 | 8,314 | 1,252 | 3,944 | 66,813 | ||||||||||||||||||
|
Net
operating income
|
$ | 31,967 | $ | 33,882 | $ | 23,356 | $ | 5,120 | $ | 9,033 | $ | 103,358 | ||||||||||||
|
Interest
|
(50,677 | ) | ||||||||||||||||||||||
|
Depreciation/amortization
|
(37,639 | ) | ||||||||||||||||||||||
|
Administrative,
advisory and trustee fees
|
(3,894 | ) | ||||||||||||||||||||||
|
Other
expenses
|
(1,269 | ) | ||||||||||||||||||||||
|
Other
income
|
1,240 | |||||||||||||||||||||||
|
Income
before minority interest and discontinued operations and gain on sale of
other investments
|
$ | 11,119 | ||||||||||||||||||||||
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:
|
o
|
downturns
in national, regional and local economic conditions (particularly
increases in unemployment);
|
|
o
|
competition
from other commercial and multi-family residential
properties;
|
|
o
|
local
real estate market conditions, such as oversupply or reduction in demand
for commercial and multi-family residential
space;
|
|
o
|
changes
in interest rates and availability of attractive
financing;
|
|
o
|
declines
in the economic health and financial condition of our tenants and our
ability to collect rents from our
tenants;
|
|
o
|
vacancies,
changes in market rental rates and the need periodically to repair,
renovate and re-lease space;
|
|
o
|
increased
operating costs, including real estate taxes, state and local taxes,
insurance expense, utilities, and security
costs;
|
|
o
|
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;
|
|
o
|
weather
conditions, civil disturbances, natural disasters, or terrorist acts or
acts of war which may result in uninsured or underinsured
losses; and
|
|
o
|
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, 2008, we received
approximately 67.4% of our gross revenue from properties in Minnesota and North
Dakota. As a result of this concentration, we are subject to
substantially greater risk than if our investments were more geographically
dispersed. Specifically, we are more significantly exposed to the effects of
economic and real estate conditions in those particular markets, such as
building by competitors, local vacancy and rental rates and general levels of
employment and economic activity. To the extent that weak economic or
real estate conditions affect Minnesota and/or North Dakota more severely than
other areas of the country, our financial performance could be negatively
impacted.
If we are not able to renew leases
or enter into new leases on favorable terms or at all as our existing leases
expire, our revenue, operating results and cash flows will be
reduced. We may be unable to renew leases with our existing
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 July 31, 2008, approximately 1.0 million square feet, or 8.7% of our total commercial property square footage, was vacant. Approximately 853 of our 9,528 apartment units, or 9.0%, were vacant. As of July 31, 2008, leases covering approximately 5.4% of our total commercial segments net rentable square footage will expire in fiscal year 2009, 10.7% in fiscal year 2010, 13.0% in fiscal year 2011, 13.4% in fiscal year 2012, and 9.3% in fiscal year 2013.
We face potential adverse effects
from commercial tenant bankruptcies or insolvencies. The
bankruptcy or insolvency of our commercial tenants may adversely affect the
income produced by our properties. If a tenant defaults, we may
experience delays and incur substantial costs in enforcing our rights as
landlord. If a tenant files for bankruptcy, we cannot evict the
tenant solely because of such bankruptcy. A court, however, may
authorize the tenant to reject and terminate its lease with us. In
such a case, our claim against the tenant for unpaid future rent would be
subject to a statutory cap that might be substantially less than the remaining
rent actually owed under the lease, and it is unlikely that a bankrupt tenant
would pay in full amounts it owes us under a lease. This shortfall
could adversely affect our cash flow and results of operations. If a
tenant experiences a downturn in its business or other types of financial
distress, it may be unable to make timely rental payments. Under some
circumstances, we may agree to partially or wholly terminate the lease in
advance of the termination date in consideration for a lease termination fee
that is less than the agreed rental amount. Additionally, without
regard to the manner in which a lease termination occurs, we are likely to incur
additional costs in the form of tenant improvements and leasing commissions in
our efforts to lease the space to a new tenant, as well as possibly lower rental
rates reflective of declines in market rents.
Because real estate investments are
generally illiquid, and various factors limit our ability to dispose of assets,
we may not be able to sell properties when appropriate. Real
estate investments are relatively illiquid and, therefore, we have limited
ability to vary our portfolio quickly in response to changes in economic or
other conditions. In addition, the prohibitions under the federal
income tax laws on REITs holding property for sale and related regulations may
affect our ability to sell properties. Our ability to dispose of
assets may also be limited by constraints on our ability to utilize disposition
proceeds to make acquisitions on financially attractive terms, and the
requirement that we take additional impairment charges on certain
assets. More specifically, we are required to distribute or pay tax
on all capital gains generated from the sale of assets, and, in addition, a
significant number of our properties were acquired using limited partnership
units of IRET Properties, our operating partnership, and are subject to certain
agreements which restrict our ability to sell such properties in transactions
that would create current taxable income to the former owners. As a
result, we are motivated to structure the sale of these assets as tax-free
exchanges. To accomplish this we must identify attractive
re-investment opportunities. Recently, while capital market
conditions have been favorable for dispositions, investment yields on
acquisitions have been less attractive due to the abundant capital inflows into
the real estate sector. These considerations impact our decisions on
whether or not to dispose of certain of our assets.
Inability to manage our rapid growth
effectively may adversely affect our operating results. We have
experienced significant growth in recent years, increasing our total assets from
approximately $1.2 billion at April 30, 2006, to $1.6 billion at April 30, 2008,
principally through the acquisition of additional real estate properties.
Subject to our continued ability to raise equity capital and issue limited
partnership units of IRET Properties and identify suitable investment
properties, we intend to continue our acquisition of real estate properties.
Effective management of this level of growth presents challenges,
including:
|
|
•
|
the
need to expand our management team and
staff;
|
|
|
•
|
the
need to enhance internal operating systems and
controls;
|
|
|
•
|
increased
reliance on outside advisors and property managers;
and
|
|
|
•
|
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, 2008, our operating income increased from $9.9
million to $12.3 million. The acquisition of additional real estate
properties is critical to our ability to increase our operating
income. If we are unable to continue to make real estate acquisitions
on terms that meet our financial and strategic objectives, whether due to market
conditions, a changed competitive environment or unavailability of capital, our
ability to increase our operating income may be materially and adversely
affected.
High leverage on our overall
portfolio may result in losses. As of April 30, 2008, our ratio of total
indebtedness to total Net Assets (as that term is used in our Bylaws, which
usage is not in accordance with GAAP, “Net Assets” means our total assets at
cost before deducting depreciation or other non-cash reserves, less total
liabilities) was approximately 143.8%. As of April 30, 2007 and 2006, our
percentage of total indebtedness to total Net Assets was approximately 149.6%
and 138.0%, respectively. Under our Bylaws we may increase our total
indebtedness up to 300.0% of our Net Assets, or by an additional approximately
$1.2 billion. There is no limitation on the increase that may be permitted if
approved by a majority of the independent members of our board of trustees and
disclosed to the holders of our securities 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 securities.
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 have a limited ability to retain
earnings as a result of the REIT distribution requirements, we will generally be
required to refinance debt that matures with additional debt or
equity. We are subject to the normal risks associated with debt
financing, including the risk that:
|
|
•
|
our
cash flow will be insufficient to meet required payments of principal and
interest;
|
|
|
•
|
we
will not be able to renew, refinance or repay our indebtedness when due;
and
|
|
|
•
|
the
terms of any renewal or refinancing will be less favorable than the terms
of our current indebtedness.
|
These
risks increase when credit markets are tight, as they are now; in general, when
the credit markets are constrained, we may encounter resistance from lenders
when we seek financing or refinancing for properties or proposed acquisitions,
and the terms of such financing or refinancing are likely to be less favorable
to us than the terms of our current indebtedness.
We
anticipate that only a small portion of the principal of our debt will be repaid
prior to maturity. Therefore, we are likely to need to refinance at
least a portion of our outstanding debt as it matures. We cannot
guarantee that any refinancing of debt with other debt will be possible on terms
that are favorable or acceptable to us. If we cannot refinance,
extend or pay principal payments due at maturity with the proceeds of other
capital transactions, such as 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.
As of
July 31, 2008, approximately $16.2 million of our mortgage debt will come due in
the remainder of fiscal year 2009, and approximately $132.3 million of our
mortgage debt is due for repayment in fiscal year 2010. As of July 31, 2008, we
had approximately $36.5 million of principal payments due on fixed and
variable-rate mortgages secured by our real estate in the remainder of fiscal
year 2009, and approximately $153.9 million due in fiscal year 2010. As of July
31, 2008, we had approximately $50.4 million and approximately $61.2 million,
respectively, of interest payments due on fixed and variable-rate mortgages
secured by our real estate in the remainder of fiscal year 2009 and fiscal year
2010.
The cost of our indebtedness may
increase. Portions of our fixed-rate indebtedness incurred for past
property acquisitions come due on a periodic basis. Rising interest
rates could limit our ability to refinance this existing debt when it matures,
and would increase our interest costs, which could have a material adverse
effect on us, our ability to make distributions to the holders of our shares of
beneficial interest and our ability to pay amounts due on our
debt. In addition, we have incurred, and we expect to continue to
incur, indebtedness that bears interest at a variable rate. As of April 30,
2008, $11.7 million, or approximately 1.1%, of the principal amount of our total
mortgage indebtedness was subject to variable interest rate
agreements. If short-term interest rates rise, our debt service
payments on adjustable rate debt would increase, which would lower our net
income and could decrease our distributions to the holders of our shares of
beneficial interest.
We depend on distributions and other
payments from our subsidiaries that they may be prohibited from making to us,
which could impair our ability to make distributions to holders of our shares of
beneficial interest. Substantially all of our assets are held
through IRET Properties, our operating partnership, and other of our
subsidiaries. As a result, we depend on distributions and other payments from
our subsidiaries in order to satisfy our financial obligations and make
distributions to the holders of our shares of beneficial
interest. The ability of our subsidiaries to make such distributions
and other payments depends on their earnings, and may be subject to statutory or
contractual limitations. As an equity investor in our subsidiaries,
our right to receive assets upon their liquidation or reorganization effectively
will be subordinated to the claims of their creditors. To the extent
that we are recognized as a creditor of such subsidiaries, our claims may still
be subordinate to any security interest in or other lien on their assets and to
any of their debt or other obligations that are senior to our
claims.
Our current or future insurance may
not protect us against possible losses. We carry comprehensive liability,
fire, extended coverage and rental loss insurance with respect to our properties
at levels that we believe to be adequate and comparable to coverage customarily
obtained by owners of similar properties. However, the coverage limits of our
current or future policies may be insufficient to cover the full cost of repair
or replacement of all potential losses. Moreover, this level of coverage may not
continue to be available in the future or, if available, may be available only
at unacceptable cost or with unacceptable terms. Additionally, there
may be certain extraordinary losses, such as those resulting from civil unrest,
terrorism or environmental contamination, that are not generally, or fully,
insured against because they are either uninsurable or not economically
insurable. For example, we do not currently carry insurance against losses as a
result of environmental contamination. Should an uninsured or underinsured loss
occur to a property, we could be required to use our own funds for restoration
or lose all or part of our investment in, and anticipated revenues from, the
property. In any event, we would continue to be obligated on any mortgage
indebtedness on the property. Any loss could have a material adverse effect on
us, our ability to make distributions to the holders of our shares of beneficial
interest and our ability to pay amounts due on our debt. In addition,
in most cases we have to renew our insurance policies on an annual basis and
negotiate acceptable terms for coverage, exposing us to the volatility of the
insurance markets, including the possibility of rate increases. Any
material increase in insurance rates or decrease in available coverage in the
future could adversely affect our business and financial condition and results
of operations, which could cause a decline in the market value of our
securities.
We have significant investments in
medical properties and adverse trends in healthcare provider operations may
negatively affect our lease revenues from these properties. We have
acquired a significant number of specialty medical properties (including senior
housing/assisted living facilities) and may acquire more in the future. As of
July 31, 2008, our real estate portfolio consisted of 48 medical properties,
with a total real estate investment amount, net of accumulated depreciation, of
$325.5 million, or approximately 22.8% 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 REIT, 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 certain
passive sources that are itemized in the REIT tax laws, and we are prohibited
from owning specified amounts of debt or equity securities of some
issuers. Thus, to the extent revenues from non-qualifying sources,
such as income from third-party management services, represent more than 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 securities 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
regular 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 securities 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 securities. To the extent that distributions to the holders of our securities 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 (such as
a publicly traded partnership taxable as a corporation), we would cease to
qualify as a REIT because the value of our ownership interest in IRET Properties
would exceed 5% of our assets, and because we would be considered to hold more
than 10% of the voting securities and value of the outstanding securities of
another corporation. 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, (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 securities,
(ii) less than 100 people owning our securities, (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 securities 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 securities 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
securities 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 securities.
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.
Complying with REIT requirements may
force us to forego otherwise attractive opportunities or liquidate otherwise
attractive investments. To qualify and maintain our status as
a REIT, we must satisfy certain requirements with respect to the character of
our assets. If we fail to comply with these requirements at the end
of any quarter, we must correct such failure within 30 days after the end of the
quarter (by, possibly, selling asses not withstanding their prospects as an
investment) to avoid losing our REIT status. If we fail to comply
with these requirements at the end of any quarter, and the failure exceeds a
minimum threshold, we may be able to preserve our REIT status if (a) the failure
was due to reasonable cause and not to willful neglect, (b) we dispose of the
assets causing the failure within six months after the last day of the quarter
in which we identified the failure, (c) we file a schedule with the IRS
describing each asset that caused the failure, and (d) we pay an additional tax
of the greater of $50,000 or the product of the highest applicable tax rate
multiplied by the net income generated on those assets. As a result,
compliance with the REIT requirements may require us to liquidate or forego
otherwise attractive investments. These actions could have the effect
of reducing our income and amounts available for
distribution to our shareholders.
Even if we qualify as a REIT, we may
face other tax liabilities that reduce our cash flow. Even if
we qualify for taxation as a REIT, we may be subject to certain federal, state
and local taxes on our income and assets, including taxes on any undistributed
income, tax on income from some activities conducted a a result of a
foreclosure, and state or local income, property and transfer taxes, such as
mortgage recording taxes. Any of these taxes would decrease cash
available for distribution to our shareholders. In addition, in order
to meet the REIT qualification requirements, or to avert the imposition of a
100% tax that applies to certain gains derived by a REIT from dealer property or
inventory, we may in the future hold some of our assets through a taxable REIT
subsidiary.
We may be subject to adverse
legislative or regulatory tax changes that could reduce the market price of our
common shares. At any time, the federal income tax laws
governing REITs or the administrative interpretations of those laws may be
amended. Any of those new laws or interpretations may take effect
retroactively and could adversely affect us or the market price of our common
shares of beneficial interest.
The U.S. federal income tax laws
governing REITs are complex. We intend to operate in a manner
that will qualify us as a REIT under the U.S. federal income tax
laws. The REIT qualification requirements are extremely complex,
however, and interpretations of the U.S. federal income tax laws governing
qualification as a REIT are limited. Accordingly, we cannot be certain that we
will be successful in operating so we can continue to qualify as a
REIT. At any time, new laws, interpretations, or court decisions may
change the federal tax laws or the U.S. federal income tax consequences of our
qualification as a REIT.
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:
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operating
and financial results below expectations that cannot support the current
distribution payment;
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unanticipated
costs or cash requirements; or
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a
conclusion that the payment of distributions would cause us to breach the
terms of certain agreements or
contracts,
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such
as financial ratio covenants in our debt financing
documents.
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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 shareholders taxed at individual rates prior to 2010 has
been reduced to a maximum rate of 15%. This special tax rate is
generally not applicable to distributions paid by a REIT, unless such
distributions represent earnings on which the REIT itself had been taxed. As a
result, distributions (other than capital gain distributions) paid by us to
shareholders taxed at individual rates will generally be subject to the tax
rates that are otherwise applicable to ordinary income which, currently, are as
high as 35%. Although the earnings of a REIT that are distributed to
its shareholders are still generally subject to less federal income taxation
than earnings of a non-REIT C corporation that are distributed to its
shareholders net of corporate-level income tax, this law change may make an
investment in our securities 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 securities. 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 securities to be issued in the future. These conditions include, but
are not limited to:
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market
perception of REITs in general;
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market
perception of REITs relative to other investment
opportunities;
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market
perception of our financial condition, performance, distributions and
growth potential;
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prevailing
interest rates;
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general
economic and business conditions;
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government
action or regulation, including changes in the tax laws;
and
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relatively
low trading volumes in securities of
REITS.
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Higher market interest rates may
adversely affect the market price of our securities, and low trading volume on
the NASDAQ Global Select Market may prevent the timely resale of our securities. One
of the factors that investors may consider important in deciding whether to buy
or sell shares of a REIT is the distribution with respect to such REIT’s shares
as a percentage of the price of those shares, relative to market interest
rates. If market interest rates rise, prospective purchasers of REIT
shares may expect a higher distribution rate in order to maintain their
investment. Higher market interest rates would likely increase our
borrowing costs and might decrease funds available for
distribution. Thus, higher market interest rates could cause the
market price of our common shares to decline. In addition, although
our common shares of beneficial interest are listed on the NASDAQ Global Select
Market, the daily trading volume of our shares may be lower than the trading
volume for other companies. The average daily trading volume for the
period of May 1, 2007, through April 30, 2008, was 194,469 shares and the
average monthly trading volume for the period of May 1, 2007 through April 30,
2008 was 4,100,054 shares. As a result of this trading volume, an
owner of our securities may encounter difficulty in selling our shares in a
timely manner and may incur a substantial loss.
USE
OF PROCEEDS
Unless
otherwise described in the applicable prospectus supplement, we intend to use
the net proceeds from any sale of our securities for general business purposes,
including the acquisition, development, renovation, expansion or improvement of
income-producing real estate properties. Pending such use, the net
proceeds may be invested in short-term income-producing investments, such as
United States Treasury Bonds with terms of six months or less.
GENERAL
DESCRIPTION OF THE OFFERED SECURITIES
We may
offer under this prospectus one or more of the following categories of our
securities:
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common
shares of beneficial interest, no par value per share;
and
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preferred
shares of beneficial interest, no par value per share, in one or more
series.
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The terms
of any specific offering of securities will be set forth in a prospectus
supplement relating to such offering.
Pursuant
to our Third Restated Declaration of Trust, we are authorized to issue an
unlimited number of our common shares of beneficial interest, and an unlimited
number of our preferred shares of beneficial interest. As of July 31,
2008, 58,202,448 common shares were outstanding, and 1,150,000 of our 8.25%
Series A Cumulative Redeemable Preferred Shares of Beneficial Interest, no par
value (“Series A Preferred Shares”) were outstanding. For a
description of our Series A Preferred Shares, we refer you to our registration
statement on Form 8-A, filed with the SEC on April 22, 2004 and incorporated
into this prospectus pursuant to SEC rules. The SEC allows us to
“incorporate by reference” the information we file with the SEC, which means
incorporated documents are considered to be part of the prospectus and we may
disclose important information to you by referring you to those documents. See
the section entitled “Documents Incorporated By Reference” below.
Our
common shares are listed on the NASDAQ Global Select Market under the symbol
“IRET.” Our Series A Preferred Shares are listed on the NASDAQ Global
Select Market under the symbol “IRETP.” We may apply to list the
securities which are offered and sold hereunder, as described in the prospectus
supplement relating to such securities.
DESCRIPTION
OF COMMON SHARES
The
following description of our common shares sets forth certain general terms and
provisions of the common shares to which any prospectus supplement may relate,
including a prospectus supplement providing that common shares will be issuable
upon conversion of preferred shares. The statements below describing
our common shares are in all respects subject to and qualified in their entirety
by reference to the applicable provisions of our Third Restated Declaration of
Trust and Bylaws, including any applicable amendments. The
description of our common shares is also subject to any terms specified in any
applicable prospectus supplement. All of our common shares offered by
this prospectus will be duly authorized, fully paid and
nonassessable.
General. Our Third Restated
Declaration of Trust authorizes the issuance of an unlimited number of our
common shares. As of September 22, 2008, (i) there were 58,270,296 of
our common shares outstanding and 21,409,361 limited partnership units of IRET
Properties, our operating partnership, outstanding, of which 12,648,548 were
then eligible for redemption for cash or (at our option) for common shares on a
one-to-one basis; (ii) we had no classes or series of shares other than our
common shares and our Series A Preferred Shares, and (iii) there were no
warrants, stock options or other contractual arrangements, other than the
limited partnership units, requiring redemption for cash or through the issuance
of our common shares or other shares.
Voting
Rights. Subject to the provisions of our Third Restated
Declaration of Trust regarding the restriction on the transfer of our common
shares, our common shares have non-cumulative voting rights at the rate of one
vote per common share on all matters submitted to the shareholders, including
the election of members of our Board of Trustees.
Our Third
Restated Declaration of Trust generally provides that whenever any action is to
be taken by the holders of our common shares, including the amendment of our
Third Restated Declaration of Trust if such amendment is previously approved by
our Board of Trustees, such action will be authorized by a majority of the
holders of our common shares present in person or by proxy at a meeting at which
a quorum is present, except as otherwise required by law, our Third Restated
Declaration of Trust or our Bylaws. Our Third Restated Declaration of
Trust further provides the following:
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(i)
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that
the following actions will be authorized by the affirmative vote of the
holders of our common shares holding common shares possessing a majority
of the voting power of our common shares then outstanding and entitled to
vote on such action:
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our
termination;
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the
merger of us with or into another
entity;
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our
consolidation with one or more other entities into a new
entity;
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the
disposition of all or substantially all of our assets,
and
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·
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the
amendment of the Third Restated Declaration of Trust, if such amendment
has not been previously approved by our Board of Trustees;
and
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(ii)
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that
a member of our Board of Trustees may be removed with or without cause by
the holders of our common shares by the affirmative vote of not less than
two-thirds of our common shares then outstanding and entitled to vote on
such matter.
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Our Third
Restated Declaration of Trust also permits our Board of Trustees, by a
two-thirds vote and without any action by the holders of our common shares, to
amend our Third Restated Declaration of Trust from time to time as necessary to
enable us to continue to qualify as a real estate investment trust under the
Code.
Dividend, Distribution, Liquidation
and Other Rights. Subject to the preferential rights of any
preferred shares that we may issue in the future and the provisions of the Third
Restated Declaration of Trust regarding the restriction on the transfer of our
common shares, holders of our common shares are entitled to receive dividends on
their common shares if, as and when authorized and declared by the Board of
Trustees and to share ratably in our assets legally available for distribution
to our shareholders in the event of our liquidation, dissolution or winding up
after payment of, or adequate provision for, all known debts and
liabilities. Our common shares have equal dividend, distribution,
liquidation and other rights. Our common shares have no preference,
conversion, exchange, sinking fund or redemption rights.
Ownership and Transfer
Restrictions. Our common shares are fully transferable and
alienable subject only to certain restrictions set forth in our Third Restated
Declaration of Trust that are intended to help preserve our status as a REIT for
federal income tax purposes. For a summary description of these
restrictions, see “Restrictions on Ownership and Transfer” below.
Transfer Agent and
Registrar. We act as our own transfer agent and registrar with
respect to our common shares.
DESCRIPTION
OF PREFERRED SHARES
Our Third
Restated Declaration of Trust authorizes the issuance of an unlimited number of
preferred shares. Our Board of Trustees has the authority, under our
Third Restated Declaration of Trust, to establish by resolution one or more
classes or series of preferred shares and to fix the number and relative rights
and preferences of such different classes or series of preferred shares without
any further vote or action by our shareholders. Unless otherwise
designated in our Third Restated Declaration of Trust, all series of preferred
shares will constitute a single class of preferred shares.
The
following description of our preferred shares sets forth certain general terms
and provisions of the preferred shares to which any prospectus supplement may
relate. The statements below describing our preferred shares are in
all respects subject to and qualified in their entirety by reference to our
Third Restated Declaration of Trust and our Bylaws, including any amendments
thereto, and by reference to any applicable designating amendment to our Third
Declaration of Trust establishing terms of a class or series of our preferred
shares. Our preferred shares will, when issued, be fully paid and
nonassessable.
General
As our
Board of Trustees has the power to establish the rights and preferences of each
class or series of our preferred shares, our Board of Trustees may afford the
holders of any class or series of our preferred shares rights and preferences,
voting or otherwise, senior to the rights of holders of our common
shares. The issuance of classes or series of preferred shares could
have the effect of delaying or preventing a change of control that might involve
a premium price for shareholders or otherwise be in their best
interest.
The
rights and preferences of our preferred shares of each class or series will be
fixed by the designating amendment relating to the class or series. A
prospectus supplement, relating to each class or series, will specify the terms
of our
preferred shares, as follows:
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the
title and stated value of our preferred
shares;
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the
number of preferred shares offered, the liquidation preference per share
and the offering price of our preferred
shares;
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·
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the
dividend rate(s), period(s) and/or payment date(s) or method(s) of
calculation applicable to our preferred
shares;
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the
date from which dividends on our preferred shares will accumulate, if
applicable;
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the
procedures for any auction and remarketing, if any, for our preferred
shares;
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the
provision for a sinking fund, if any, for our preferred
shares;
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the
provision for redemption, if applicable, of our preferred
shares;
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any
listing of our preferred shares on any securities exchange or
association;
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the
transfer agent and registrar for our preferred
shares;
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the
terms and conditions, if applicable, upon which our preferred shares will
be convertible into our common shares, including the conversion price (or
manner of calculation) and conversion
period;
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a
discussion of certain material federal income tax considerations
applicable to our preferred shares;
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the
relative ranking and preferences of our preferred shares as to dividend
rights and rights upon the liquidation, dissolution or winding up of our
affairs;
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any
limitation on issuance of any series of our preferred shares ranking
senior to or on a parity with the series of preferred shares as to
dividend rights and rights upon the liquidation, dissolution or winding up
of our affairs;
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any
limitations on direct or beneficial ownership and restrictions on transfer
of our preferred shares, in each case as may be appropriate to preserve
our status as a REIT; and
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any
other specific terms, preferences, rights, limitations or restrictions of
our preferred shares.
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Rank
Unless
otherwise specified in the applicable prospectus supplement, our preferred
shares will, with respect to rights to the payment of dividends and distribution
of our assets and rights upon our liquidation, dissolution or winding up, rank
(i) senior to our common shares and all other equity securities the terms of
which provide that such equity securities are junior to our preferred shares;
(ii) on a parity with all equity securities other than those referred to in
clauses (i) and (iii); and (iii) junior to all equity securities the terms of
which provide that such equity securities will rank senior to our preferred
shares.
Dividends
Holders
of our preferred shares will be entitled to receive, when, as and if authorized
by our Board of Trustees and declared by us, out of our assets legally available
for payment, cash dividends at rates and on dates as will be set forth in the
applicable prospectus supplement. Each dividend will be payable to holders of
record as they appear in our records on the record dates as will be fixed by our
Board of Trustees.
Dividends
on any class or series of our preferred shares may be cumulative or
non-cumulative, as provided in the applicable prospectus supplement. Dividends,
if cumulative, will accumulate from and after the date set forth in the
applicable prospectus supplement. If our Board of Trustees fails to authorize a
dividend payable on a dividend payment date on any class or series of our
preferred shares for which dividends are noncumulative, then the holders of that
class or series of our preferred shares will have no right to receive a dividend
in respect of the dividend period ending on that dividend payment date, and we
will have no obligation to pay the dividend accrued for that period, whether or
not dividends on that class or series are declared payable on any future
dividend payment date.
If any
class or series of our preferred shares are outstanding, no full dividends will
be authorized or paid or set apart for payment on any other class or series of
our preferred shares ranking, as to dividends, on a parity with or junior to
that class or series of our preferred shares for any period unless (i) with
respect to classes or series of our preferred shares having a cumulative
dividend, full cumulative dividends have been or contemporaneously are
authorized and paid or authorized and a sum sufficient for the payment thereof
set apart for payment for all past dividend periods and the then current
dividend period, or (ii) with respect to classes or series of our preferred
shares not having a cumulative dividend, full dividends have been or
contemporaneously are authorized and paid or authorized and a sum sufficient for
the payment thereof set aside for payment,
When
dividends are not paid in full (or a sum sufficient for their full payment is
not so set apart) upon any class or series of our preferred shares and any other
class or series of our preferred shares ranking on a parity as to dividends with
that class or series of our preferred shares, all dividends declared upon that
class or series of preferred shares and any other class or series of our
preferred shares ranking on a parity as to dividends with those preferred shares
will be authorized pro rata so that the amount of dividends authorized per share
on that class or series of preferred shares and that other class or series of
our preferred shares will in all cases bear to each other the same ratio that
accrued and unpaid dividends per share on that class or series of our preferred
shares (which will not include any accumulation in respect of unpaid dividends
for prior dividend periods if those preferred shares do not have a cumulative
dividend) and that other class or series of our preferred shares bear to each
other. No interest, or sum of money in lieu of interest, will be payable in
respect of any dividend payment or payments on our preferred shares of that
series that may be in arrears.
Except as
provided in the immediately preceding paragraph, unless (i) with respect to
classes or series of our preferred shares having a cumulative dividend, full
cumulative dividends have been or contemporaneously are authorized and paid or
authorized and a sum sufficient for the payment thereof set apart for payment
for all past dividend periods and the then current dividend period, or (ii) with
respect to classes or series of our preferred shares not having a cumulative
dividend, full dividends have been or contemporaneously are authorized and paid
or authorized and a sum sufficient for the payment thereof set aside for payment
for the then current dividend period, no dividends (other than in our common
shares or other equity securities ranking junior to our preferred shares of that
class or series as to dividends and upon our liquidation, dissolution or winding
up) will be authorized or paid or set aside for payment, no other distribution
will be authorized or made upon our common shares or any other equity securities
ranking junior to or on a parity with our preferred shares of that class or
series as to dividends or upon liquidation, and no common shares or other equity
securities ranking junior to or on a parity with our preferred shares of such
class or series as to dividends or upon our liquidation, dissolution or winding
up will be redeemed, purchased or otherwise acquired for any consideration (or
any monies be paid to or made available for a sinking fund for the redemption of
any shares) by us (except by conversion into or exchange for other equity
securities ranking junior to our preferred shares of that class or series as to
dividends and upon our liquidation, dissolution or winding up).
Any
dividend payment made on a class or series of our preferred shares will first be
credited against the earliest accrued but unpaid dividend due with respect to
shares of that class or series which remains payable.
Redemption
If the
applicable prospectus supplement so states, our preferred shares will be subject
to mandatory redemption or redemption at our option, in whole or in part, in
each case on the terms, at the times and at the redemption prices set forth in
that prospectus supplement.
The
prospectus supplement relating to a class or series of our preferred shares that
is subject to mandatory redemption will specify the number of our preferred
shares that will be redeemed by us in each year commencing after a date to be
specified, at a redemption price per share to be specified, together with an
amount equal to all accrued and unpaid dividends thereon (which will not, if our
preferred shares do not have a cumulative dividend, include any accumulation in
respect of unpaid dividends for prior dividend periods) to the date of
redemption. The redemption price may be payable in cash or other property, as
specified in the applicable prospectus supplement. If the redemption price for
any class or series of our preferred shares is payable only from the net
proceeds of the issuance of our common shares or other equity securities, the
terms of
our preferred shares may provide that, if no such common shares or other equity securities have been issued or to the extent the net proceeds from any issuance are insufficient to pay in full the aggregate redemption price then due, that our preferred shares will automatically and mandatorily be converted into our common shares or other equity securities, as applicable, pursuant to conversion provisions specified in the applicable prospectus supplement.
None of
our preferred shares of any class or series will be redeemed unless all
outstanding shares of that class or series of our preferred shares are
simultaneously redeemed; provided, however, that the foregoing will not prevent
the purchase or acquisition of our preferred shares of that class or series
pursuant to a purchase or exchange offer made on the same terms to holders of
all outstanding shares of that class or series of our preferred
shares.
In
addition, unless (i) with respect to classes or series of our preferred shares
having a cumulative dividend, full cumulative dividends have been or
contemporaneously are authorized and paid or authorized and a sum sufficient for
the payment thereof set apart for payment for all past dividend periods and the
then current dividend period, or (ii) with respect to classes or series of our
preferred shares not having a cumulative dividend, full dividends have been or
contemporaneously are authorized and paid or authorized and a sum sufficient for
the payment thereof set aside for payment for the then current dividend period,
we will not purchase or otherwise acquire directly or indirectly any of our
preferred shares of that class or series (except by conversion into or exchange
for common shares or other equity securities ranking junior to our preferred
shares of that class or series as to dividends and upon our liquidation,
dissolution or winding up).
If fewer
than all of the outstanding shares of any class or series of our preferred
shares are to be redeemed, the number of shares to be redeemed will be
determined by us and those shares may be redeemed pro rata from the holders of
record of those shares in proportion to the number of those shares held by those
holders (with adjustments to avoid redemption of fractional shares) or any other
equitable method determined by us that will not result in the issuance of any
excess shares.
Notice of
redemption will be mailed at least 30 days but not more than 60 days before
the redemption date to each holder of record of any class or series of our
preferred shares to be redeemed at the address shown in our records. Each notice
will state:
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the
redemption date;
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the
number of shares and class or series of our preferred shares to be
redeemed;
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the
redemption price;
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the
place or places where certificates for our preferred shares are to be
surrendered for payment of the redemption
price;
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that
dividends on the shares to be redeemed will cease to accrue on that
redemption date; and
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the
date upon which the holder’s conversion rights, if any, as to those shares
will terminate.
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If fewer
than all of shares of any class or series of our preferred shares are to be
redeemed, the notice mailed to each holder thereof will also specify the number
of shares to be redeemed from each holder. If notice of redemption of any of our
preferred shares has been given and if the funds necessary for that redemption
have been set apart by us in trust for the benefit of the holders of any of our
preferred shares so called for redemption, then from and after the redemption
date dividends will cease to accrue on those shares, those shares will no longer
be deemed outstanding and all rights of the holders of those shares will
terminate, except the right to receive the redemption price.
Liquidation
Preference
Upon our
voluntary or involuntary liquidation, dissolution or winding up, then, before
any distribution or payment will be made to the holders of our common shares or
other equity securities ranking junior to that class or series of our preferred
shares in the distribution of assets upon our liquidation, dissolution or
winding up, the holders of each class or series of our preferred shares will be
entitled to receive out of our assets legally available for distribution to
shareholders liquidating distributions in the amount of the liquidation
preference per share (set forth in the applicable prospectus supplement), plus
an
amount equal to all dividends accrued and unpaid on such preferred shares (which will not include any accumulation in respect of unpaid dividends for prior dividend periods if that class or series of preferred shares does not have a cumulative dividend). After payment of the full amount of the liquidating distributions to which they are entitled, the holders of that class or series of our preferred shares will have no right or claim to any of our remaining assets. If, upon our voluntary or involuntary liquidation, dissolution or winding up, our legally available assets are insufficient to pay the amount of the liquidating distributions on all outstanding shares of that class or series of our preferred shares and the corresponding amounts payable on all shares of other classes or series of shares ranking on a parity with that class or series of our preferred shares in the distribution of assets upon our liquidation, dissolution or winding up, then the holders of that class or series of our preferred shares and all other classes or series of shares will share ratably in that distribution of assets in proportion to the full liquidating distributions to which they would otherwise be respectively entitled.
If
liquidating distributions have been made in full to all holders of shares of
that class or series of our preferred shares, our remaining assets will be
distributed among the holders of our common shares and other equity securities
ranking junior to that class or series of our preferred shares upon our
liquidation, dissolution or winding up, according to their respective rights and
preferences and in each case according to their respective number of shares. For
those purposes, neither our consolidation or merger with or into any other
corporation, trust or other entity, nor the sale, lease, transfer or conveyance
of all or substantially all of our property or business, will be deemed to
constitute our liquidation, dissolution or winding up.
Voting Rights
Except as
otherwise described below, as otherwise required by law or as indicated in the
applicable prospectus supplement, holders of our preferred shares will not have
any voting rights. Whenever dividends on any class or series of our preferred
shares are in arrears for six or more quarterly periods, regardless of whether
those quarterly periods are consecutive, the holders of that class or series of
our preferred shares (voting separately as a class with all other classes or
series of our preferred shares upon which like voting rights have been conferred
and are exercisable) will be entitled to vote for the election of two additional
directors to our Board of Trustees (and our entire Board of Trustees will be
increased by two trustees) until (i) with respect to classes or series of our
preferred shares having a cumulative dividend, full cumulative dividends have
been or contemporaneously are authorized and paid or authorized and a sum
sufficient for the payment thereof set apart for payment for all past dividend
periods and the then current dividend period, or (ii) with respect to classes or
series of our preferred shares not having a cumulative dividend, full dividends
have been or contemporaneously are authorized and paid or authorized and a sum
sufficient for the payment thereof set aside for payment for the then current
dividend period.
Unless
otherwise provided for any class or series of our preferred shares, so long as
any preferred shares remain outstanding, we will not, without the affirmative
vote or consent of the holders of at least two-thirds of each class or series of
our preferred shares outstanding at the time, given in person or by proxy,
either in writing or at a meeting (that class or series voting separately as a
class):
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i.
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authorize
or create, or increase the authorized or issued amount of, any class or
series of our preferred shares ranking senior to that class or series of
our preferred shares with respect to payment of dividends or the
distribution of assets upon our liquidation, dissolution or winding up, or
reclassify any of our equity securities into equity securities that rank
senior to those preferred shares with respect to payment of dividends or
the distribution of assets upon our liquidation, dissolution or winding
up, or create, authorize or issue any obligation or equity security
convertible into or evidencing the right to purchase any equity securities
that rank senior to those preferred shares with respect to payment of
dividends or the distribution of assets upon our liquidation, dissolution
or winding up; or
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ii.
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amend,
alter or repeal the provisions of our Third Restated Declaration of Trust,
including any applicable amendments and designating amendments, whether by
merger, consolidation or otherwise, so as to materially and adversely
affect any right, preference, privilege or voting power of that class or
series of our preferred shares; provided, however, that any increase in
the amount of the authorized preferred shares or the authorization or
issuance of any other equity securities, or any increase in the number of
authorized shares of that class or series of our preferred shares or any
other equity securities, in each case ranking on a parity with or junior
to any class or series of our preferred shares with respect to payment of
dividends and the distribution of assets upon liquidation, dissolution or
winding up, will not be deemed to materially and adversely affect those
rights, preferences, privileges or voting
powers.
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The
foregoing voting provisions will not apply if, at or prior to the time when the
act with respect to which that vote would
otherwise be required to be effected, all outstanding shares of that class or series of our preferred shares has been redeemed or called for redemption upon proper notice and sufficient funds have been irrevocably deposited in trust to effect that redemption.
Conversion Rights
The terms
and conditions, if any, upon which any class or series of our preferred shares
are convertible into our common shares or other equity securities will be set
forth in the applicable prospectus supplement. Such terms will include the
number of common shares or other equity securities into which our preferred
shares are convertible, the conversion price (or manner of calculation of the
conversion price), the conversion period, provisions as to whether conversion
will be at our option or at the option of the holders of that class or series of
our preferred shares, the events requiring an adjustment of the conversion price
and provisions affecting conversion in the event of the redemption of that class
or series of our preferred shares.
Restrictions on
Ownership
Our
preferred shares are fully transferable and alienable subject only to certain
restrictions to be set forth in the applicable designating amendment to our
Third Restated Declaration of Trust, which are intended to help preserve our
status as a REIT for federal income tax purposes. For a summary description of
these restrictions, see “Restrictions on Ownership and Transfer” below.
RESTRICTIONS
ON OWNERSHIP AND TRANSFER
In
addition to other qualifications, for us to qualify as a REIT, (1) not more than
50% in value of our outstanding capital stock may be owned, actually or
constructively, by five or fewer individuals during the last half of our taxable
year, and (2) such capital stock must be beneficially owned by 100 or more
persons during at least 335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year.
To ensure
that we continue to meet the requirements for qualification as a REIT, our Third
Restated Declaration of Trust, subject to some exceptions, provides that any
transaction, other than a transaction entered into through the NASDAQ National
Market or other similar exchange, that would result in (i) a person owning our
securities in excess of 9.8%, in number or value, of our outstanding securities
(the “Ownership Limit”), (ii) fewer than 100 people owning our securities, (iii)
us being “closely held” within the meaning of Section 856(h) of the Code, (iv)
50.0% or more of the fair market value of our securities being held by persons
other than United States Persons, as defined in Section 7701(a)(30) of the Code
(“Non-U.S. Persons”), or (v) our disqualification as a REIT under Section 856 of
the Code, will be void ab initio. If any transaction is not void ab
initio, then the securities in excess of the Ownership Limit, that cause us to
be “closely held,” that result in 50.0% or more of the fair market value of our
securities to be held on Non-U.S. Persons or that result in our disqualification
as a REIT, would automatically be exchanged for an equal number of “Excess
Shares,” and these Excess Shares will be transferred to an “Excess Share
Trustee” for the exclusive benefit of the charitable beneficiaries named by our
Board of Trustees.
In such
event, any dividends on Excess Shares will be paid to the Excess Share Trust for
the benefit of the charitable beneficiaries. The Excess Share Trustee
will be entitled to vote the Excess Shares, if applicable, on any
matter. The Excess Share Trustee may only transfer the Excess Shares
held in the Excess Share Trust as follows: (i) at the direction of
our Board of Trustees to a person whose ownership of our securities would not
violate the Ownership Limit; (ii) if securities were transferred to the Excess
Share Trustee due to a transaction or event that would have caused a violation
of the Ownership Limit or would have caused us to be “closely held,” the Excess
Share Trustee will transfer the Excess Shares to the person who makes the
highest offer for the Excess Shares, pays the purchase price and whose ownership
will not violate the Ownership Limit or cause us to be “closely held”; and (iii)
if Excess Shares were transferred to the Excess Share Trustee due to a
transaction or event that would have caused Non-U.S. Persons to own more than
50% of the value of our securities, the Excess Share Trustee will transfer the
Excess Shares to the United States person who makes the highest offer for the
Excess Shares, pays the purchase price and whose ownership will not violate the
Ownership Limit or cause us to be “closely held.”
When the
Excess Share Trustee makes any transfer, the person whose shares were exchanged
for Excess Shares (the “Purported Record Transferee”) will receive (i) the
lesser of (A) the price paid by the Purported Record Transferee, or if the
Purported Record Transferee did not give value for the securities, the market
price of the securities on the day the securities were exchanged for Excess
Shares, and (B) the price received by the Excess Share Trust for securities,
minus (ii) any dividends received by the Purported Record Transferee that the
Purported Record Transferee was under an obligation to pay
over to the Excess Share Trustee but has not repaid at the time of the distribution of proceeds, and minus (iii) any compensation for or expense of the Excess Share Trustee.
The
preceding description of the restrictions on ownership and transfer of our
capital stock is only a summary. For a complete description, we refer
you to our Third Declaration of Trust and Bylaws and any amendments
thereto. We have incorporated by reference our Third Declaration of
Trust and Bylaws as exhibits to the registration statement of which this
prospectus is a part.
RATIO
OF EARNINGS TO FIXED CHARGES AND
EARNINGS
TO COMBINED FIXED CHARGES
AND
PREFERRED SHARE DIVIDENDS
The
following table sets forth our ratios of earnings to fixed charges and earnings
to combined fixed charges and preferred share dividends for the periods
indicated. The ratio of earnings to fixed charges was computed by
dividing earnings by our fixed charges. The ratio of earnings to
combined fixed charges and preferred share dividends was computed by dividing
earnings by our combined fixed charges and preferred share
dividends. For purposes of calculating these ratios, earnings consist
of income from continuing operations before minority interest plus fixed
charges. Fixed charges consist of interest charges on all
indebtedness, whether expensed or capitalized, the interest component of rental
expense and the amortization of debt discounts and issue costs, whether expensed
or capitalized. Preferred share dividends consist of dividends on our
Series A Preferred Shares.
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Fiscal
Year ended April 30,
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Three
Months ended
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|||||||||||||||||||||||
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2008
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2007
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2006
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2005
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2004
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July
31, 2008
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Consolidated
ratio of earnings to fixed charges
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1.23 | x | 1.24 | x | 1.21 | x | 1.20 | x | 1.23 | x | 1.15 | x | ||||||||||||
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Consolidated
ratio of earnings to combined fixed charges and preferred
distributions
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1.19 | x | 1.19 | x | 1.16 | x | 1.14 | x | 1.23 | x | 1.12 | x | ||||||||||||
MATERIAL
FEDERAL INCOME TAX CONSIDERATIONS
The
following is a summary of material federal income tax
considerations relating to our qualification and taxation as a REIT and
the acquisition, ownership, and disposition of our securities, which are anticipated to
be material to purchasers of the securities to which any prospectus supplement
may relate. However, because this is only a summary, it may not contain all of
the information that may be important in your specific circumstances. As you
review this discussion, you should keep in mind that:
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the
tax consequences to you may vary depending upon your particular tax
situation;
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special
rules that we do not discuss below may apply if, for example, you are a
tax-exempt organization (except to the extent discussed below), a
broker-dealer, a non-U.S. person (except to the extent discussed below), a
trust, an estate, a regulated investment company, a financial institution,
an insurance company or otherwise subject to special tax treatment under
the Internal Revenue Code;
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this
summary generally does not address alternative minimum tax, state, local or
non-U.S. tax considerations;
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·
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this
summary deals only with shareholders that hold our common shares as
“capital assets” within the meaning of Section 1221 of the Internal
Revenue Code; and
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·
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we
do not intend this discussion to be, and you should not construe it as,
tax advice.
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You should review the following discussion and
any applicable prospectus
supplement and consult with your own tax advisor to
determine the tax consequences to you of the acquisition, ownership and
disposition of the securities to which any applicable prospectus supplement may
relate, including the federal, state, local, foreign and
other tax consequences.
We base
the information in this discussion on the current Internal Revenue Code,
current,
final, temporary and proposed Treasury regulations, the legislative history of
the Internal Revenue Code, current administrative interpretations and practices
of the Internal Revenue Service (the “IRS”), including its practices and
policies as endorsed in private letter rulings, which are not binding on the
IRS, and existing court decisions. Future legislation, regulations,
administrative interpretations and court decisions could change current law or
adversely affect existing interpretations of current law. Any change could apply
retroactively. It is possible that the IRS could challenge the statements in
this discussion, which do not bind the IRS or the courts, and that a court could
agree with the IRS.
Taxation of Investors Real Estate
Trust as a REIT
We
elected to be taxed as a REIT under the federal income tax laws commencing with
our taxable year ended April 30, 1971. We believe that, commencing with such
taxable year, we have been organized and have operated in such a manner as to
qualify for taxation as a REIT under the Internal Revenue Code, and we intend to
continue to be organized and to operate in such a manner. However, we cannot
assure you that we have operated or will operate in a manner so as to qualify or
remain qualified as a REIT. Qualification as a REIT depends on our continuing to
satisfy numerous asset, income, stock ownership and distribution tests described
below, the satisfaction of which depends, in part, on our operating results. The
sections of the Internal Revenue Code relating to qualification and operation as
a REIT, and the federal income taxation of a REIT and its shareholders, are
highly technical and complex. The following discussion sets forth only the
material aspects of those sections. This summary is qualified in its entirety by
the applicable Internal Revenue Code provisions and the related rules and
regulations.
Federal Income Taxation of Investors
Real Estate Trust
In the
opinion of Pringle & Herigstad, P.C., we qualified to be taxed as a REIT for
our taxable years ended April 30, 2001 through April 30, 2008, and our
organization and current and proposed method of operation will enable us to
continue to qualify as a REIT for our taxable year ending April 30, 2009 and in
the future. Investors should be aware that Pringle & Herigstad’s opinion is
based upon customary assumptions, is conditioned upon certain representations
made by us as to factual matters, including representations regarding the nature
of our properties and the future conduct of our business, and is not binding
upon the Internal Revenue Service or any court. In addition, Pringle &
Herigstad’s opinion is based on existing federal income tax law governing
qualification as a REIT, which is subject to change, possibly on a retroactive
basis. Moreover, our continued qualification and taxation as a REIT depend upon
our ability to meet on a continuing basis, through actual annual operating
results, certain qualification tests set forth in the federal tax laws. Those
qualification tests involve the percentage of income that we earn from specified
sources, the percentage of our assets that falls within specified categories,
the diversity of our share ownership, and the percentage of our earnings that we
distribute. While Pringle & Herigstad has reviewed those matters in
connection with the foregoing opinion, Pringle & Herigstad will not review
our compliance with those tests on a continuing basis. Accordingly, with respect
to our current and future taxable years, no assurance can be given that the
actual results of our operations for any particular taxable year will satisfy
such requirements. For a discussion of the tax consequences of our failure to
qualify as a REIT, see “-Failure to Qualify.”
If we
qualify as a REIT, we generally will not be subject to federal corporate income
tax on that portion of our ordinary income or capital gain that is timely
distributed to shareholders. The REIT provisions of the Internal Revenue Code
generally allow a REIT to deduct distributions paid to its shareholders,
substantially eliminating the federal “double taxation” on earnings (that is,
taxation at the corporate level when earned, and again at the shareholder level
when distributed) that usually results from investments in a corporation.
Nevertheless, we will be subject to federal income tax as follows:
First, we
will be taxed at regular corporate rates on our undistributed “REIT taxable
income,” including undistributed net capital gains.
Second,
under some circumstances, we may be subject to the “alternative minimum tax” as
a consequence of our items of tax preference, including any deductions of net
operating losses.
Third, if
we have net income from the sale or other disposition of “foreclosure property”
that we hold primarily for sale to customers in the ordinary course of business
or other non-qualifying income from foreclosure property, we will be subject to
tax at the highest corporate rate on such income.
Fourth,
if we have net income from “prohibited transactions” (which are, in general,
certain sales or other dispositions of property, other than foreclosure
property, held primarily for sale to customers in the ordinary course of
business), such income will be subject to a 100% tax.
Fifth, if
we should fail to satisfy one or both of the 75% gross income test or the 95%
gross income test as described below under “—Requirements for
Qualification—Income Tests,” but have nonetheless maintained our qualification
as a REIT because we have met other requirements, we will be subject to a 100%
tax on the greater of (1)(a) the amount by which we fail the 75% gross income
test or (b) the amount by which 90% (or 95% commencing with taxable years
beginning on or after January 1, 2005) of our gross income exceeds the amount of
our income qualifying for the 95% gross income test, multiplied in either case
by (2) a fraction intended to reflect our profitability.
Sixth, if
we fail any of the asset tests (other than a de minimis failure of the 5% asset
test or the 10% vote or value test) commencing with taxable years beginning on
or after January 1, 2005, as described below under “— Requirements for
Qualification — Asset Tests,” as long as (1) the failure was due to reasonable
cause and not to willful neglect, (2) we file a description of each asset that
caused such failure with the IRS, and (3) we dispose of the assets or otherwise
comply with the asset tests within six months after the last day of the quarter
in which we identify such failure, we will pay a tax equal to the greater of
$50,000 or 35% of the net income from the nonqualifying assets during the period
in which we failed to satisfy the asset tests.
Seventh,
if we fail to satisfy one or more requirements for REIT qualification commencing
with taxable years beginning on or after January 1, 2005, other than the gross
income tests and the asset tests, and such failure
is due to reasonable cause and not to willful neglect, we will be required to
pay a penalty of $50,000 for each such failure.
Eighth,
if we fail to distribute during each year at least the sum of:
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85%
of our REIT ordinary income for such
year,
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95%
of our capital gain net income for such year,
and
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any
undistributed taxable income required to be distributed from prior
periods,
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then we
will be subject to a 4% excise tax on the excess of this required distribution
amount over the amounts actually distributed.
Ninth, if
we should acquire any asset from a “C” corporation (i.e., a corporation
generally subject to full corporate-level tax) in a carryover-basis transaction
and no election is made for the transaction to be currently taxable, and we
subsequently recognize gain on the disposition of such asset during the 10-year
period beginning on the date on which we acquired the asset, we generally will
be subject to tax at the highest regular corporate rate applicable on the lesser
of the amount of gain that we recognize at the time of the sale or disposition
and the amount of gain that we would have recognized if we had sold the asset at
the time we acquired the asset, the “Built-in Gains Tax.”
Tenth, if
we own taxable REIT subsidiaries, we will be subject to a 100% excise tax on
transactions with them that are not conducted on an arm’s-length basis.
Currently we do not own any direct or indirect interests in taxable REIT
subsidiaries.
Eleventh,
we may elect to retain and pay income tax on our net long-term capital gain. In
that case, a U.S. shareholder would be taxed on its proportionate share of our
undistributed long-term capital gain (to the extent that we make a timely
designation of such gain to the shareholder) and would receive a credit or
refund for its proportionate share of the tax we paid.
Twelfth,
we may be required to pay monetary penalties to the Internal Revenue Service in
certain circumstances, including if we fail to meet record-keeping requirements
intended to monitor our compliance with rules relating to the composition of a
REIT’s shareholders, as described below in “—Recordkeeping
Requirements.”
Thirteenth,
the earnings of our lower-tier entities, if any, that are subchapter C
corporations, including taxable REIT subsidiaries, are subject to federal
corporate income tax.
In
addition, we may be subject to a variety of taxes, including payroll taxes and
state, local and foreign income, property and other taxes on our assets and
operations. We could also be subject to tax in situations and on
transactions not presently contemplated.
Requirements for
Qualification
To
qualify as a REIT, we must elect to be treated as a REIT and must meet the
requirements, discussed below, relating to our organization, sources of income,
nature of assets and distributions.
The
Internal Revenue Code defines a REIT as a corporation, trust or
association:
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that
is managed by one or more trustees or
directors;
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the
beneficial ownership of which is evidenced by transferable shares or by
transferable certificates of beneficial
interest;
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that
would be taxable as a domestic corporation but for application of the REIT
rules;
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that
is neither a financial institution nor an insurance company subject to
certain provisions of the Internal Revenue
Code;
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that
has at least 100 persons as beneficial owners (determined without
reference to any rules of
attribution);
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during
the last half of each taxable year, not more than 50% in value of the
outstanding stock of which is owned, directly or indirectly, through the
application of certain attribution rules, by five or fewer individuals (as
defined in the Internal Revenue Code to include certain
entities);
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which
elects to be a REIT, or has made such election for a previous taxable
year, and satisfies all relevant filing and other administrative
requirements established by the IRS that must be met to elect and maintain
REIT status;
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that
(unless the entity qualified as a REIT for any taxable year beginning on
or before October 4, 1976, which is the case with us) uses the calendar
year as its taxable year and complies with the recordkeeping requirements
of the federal income tax laws; and
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that
satisfies the income tests, the asset tests, and the distribution tests,
described below.
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The
Internal Revenue Code provides that REITs must satisfy all of the first four,
the eighth (if applicable) and the ninth preceding requirements during the
entire taxable year. REITs must satisfy the fifth requirement during at least
335 days of a taxable year of 12 months or during a proportionate part of a
taxable year of less than 12 months. For purposes of determining stock ownership
under the sixth requirement, an “individual” generally includes a supplemental
unemployment compensation benefits plan, a private foundation, or a portion of a
trust permanently set aside or used for charitable purposes. An
“individual,” however, generally does not include a trust that is a qualified
employee pension or profit sharing trust under the federal income tax laws, and
beneficiaries of such a trust will be treated as holding our stock in proportion
to their actuarial interests in the trust for purposes of the sixth requirement
above.
We will be treated as having met the sixth requirement if we comply with certain
Treasury Regulations for ascertaining the ownership of our securities for such
year and if we did not know (or after the exercise of reasonable diligence would
not have known) that the sixth condition was not satisfied for such year. Our
Third Restated Declaration of Trust currently includes restrictions regarding
transfer of our securities that, among other
things, assist us in continuing to satisfy the fifth and sixth of these
requirements.
If a REIT
owns a corporate subsidiary that is a “qualified REIT subsidiary,” the separate
existence of that subsidiary from its parent REIT will be disregarded for
federal income tax purposes. Generally, a qualified REIT subsidiary is a
corporation, other than a taxable REIT subsidiary, all of the capital stock of
which is owned by the REIT. All assets, liabilities and items of income,
deduction and credit of the qualified REIT subsidiary will be treated as assets,
liabilities and items of income, deduction and credit of the REIT itself for
purposes of applying the requirements herein. Our qualified REIT subsidiaries
will
not be subject to federal corporate income taxation, although they may be subject to state and local taxation in some states.
An
unincorporated domestic entity, such as a partnership or limited liability
company that has a single owner, generally is not treated as an entity separate
from its parent for federal income tax purposes. An unincorporated
domestic entity with two or more owners is generally treated as a partnership
for federal income tax purposes. In the case of a REIT that is a
partner in a partnership, the REIT is deemed to own its proportionate share of
the assets of the partnership and to earn its proportionate share of the
partnership’s gross income for purposes of the applicable REIT qualification
tests. The character of the
assets and gross income of the partnership retain the same character in the
hands of the REIT for purposes of the gross income and asset tests. Thus, our
proportionate share of the assets, liabilities and items of income of IRET
Properties, our operating partnership (including our operating partnership’s
share of the assets, liabilities and items of income with respect to any
partnership in which it holds an interest) is treated as our assets, liabilities
and items of income for purposes of applying the requirements described herein.
For purposes of the 10% value test (see “—Asset Tests”), our proportionate share
is based on our proportionate interest in the equity interests and certain debt
securities issued by the partnership. For all of the other asset and
income tests, our proportionate share is based on our proportionate interest in
the capital of the partnership.
A REIT is
permitted to own up to 100% of the stock of one or more “taxable REIT
subsidiaries.” A taxable REIT subsidiary is a fully taxable corporation that may
earn income that would not be qualifying income if earned directly by the parent
REIT. However, a taxable REIT subsidiary may not directly or indirectly operate
or manage any hotels or health care facilities or provide rights to any brand
name under which any hotel or health care facility is operated, unless such
rights are provided to an “eligible independent contractor” to operate or manage
a hotel (or, with respect to taxable years beginning after July 30, 2008, a
health care facility) if such rights are held by the taxable REIT subsidiary as
a franchisee, licensee, or in a similar capacity and such hotel (or, with
respect to taxable years beginning after July 30, 2008, such health care
facility) is either owned by the taxable REIT subsidiary or leased to the
taxable REIT subsidiary by its parent REIT. A taxable REIT subsidiary
will not be considered to operate or manage a “qualified health care property”
or a “qualified lodging facility” solely because the taxable REIT subsidiary
directly or indirectly possesses a license, permit, or similar instrument
enabling it to do so. Further, a taxable REIT subsidiary will not be
considered to operate or manage a qualified health care property or qualified
lodging facility located outside of the United States, as long as an “eligible
independent contractor” is responsible for the daily supervision and direction
of such individuals on behalf of the taxable REIT subsidiary pursuant to a
management agreement or similar service contract. The subsidiary and the REIT
must jointly elect to treat the subsidiary as a taxable REIT subsidiary. A
taxable REIT subsidiary will pay income tax at regular corporate rates on any
income that it earns. In addition, the taxable REIT subsidiary rules limit the
deductibility of interest paid or accrued by a taxable REIT subsidiary to its
parent REIT to assure that the taxable REIT subsidiary is subject to an
appropriate level of corporate taxation. Further, the rules impose a 100% excise
tax on transactions between a taxable REIT subsidiary and its parent REIT or the
REIT’s tenants that are not conducted on an arm’s-length basis. Although we
previously owned an interest in a taxable REIT subsidiary, currently we do not
own any direct or indirect interests in taxable REIT subsidiaries. However, it
is possible that in the future we may engage in activities indirectly through
one or more taxable REIT subsidiaries to obtain the benefit of income or
services that would jeopardize our REIT status if we engaged in the activities
directly.
Income Tests. In
order to maintain qualification as a REIT, we must satisfy two gross income
requirements. First, we must derive, directly or indirectly, at least 75% of our
gross income (excluding gross income from prohibited transactions) for each
taxable year from investments relating to real property or mortgages on real
property, including “rents from real property,” gains on disposition of real
estate, dividends paid by another REIT and interest on obligations secured by
real property or on interests in real property, or from certain types of
temporary investments. Second, we must derive at least 95% of our gross income
(excluding gross income from prohibited transactions) for each taxable year from
any combination of income qualifying under the 75% test and dividends, interest,
and gain from the sale or disposition of stock or securities. For taxable years
beginning on or after January 1, 2005, income and gain from “hedging
transactions,” as defined below, that are clearly and
timely identified as such will be excluded from both the numerator and the
denominator for
purposes of the 95% gross income test (but not the 75% gross income test).
Income and gain from “hedging transactions” entered into after July 30, 2008
that are clearly and timely identified as such will also be excluded from both
the numerator and the denominator for purposes of the 75% gross income
test. In addition, as discussed below, certain foreign currency gains
recognized after July 30, 2008 will be excluded from gross income for purposes
of one or both of the gross income tests. The following paragraphs
discuss the specific application of the gross income tests to us.
Rents
that we receive from our real property will qualify as “rents from real
property” in satisfying the gross income requirements for a REIT described above
only if several conditions are met.
First,
the amount of rent must not be based in whole or in part on the income or
profits of any person but can be based on a fixed percentage of gross receipts
or gross sales, provided that such percentage (a) is fixed at the time the lease
is entered
into, (b) is not renegotiated during the term of the lease in a manner that has the effect of basing percentage rent on income or profits, and (c) conforms with normal business practice.
Second,
“rents from real property” generally excludes any amount received directly or
indirectly from any tenant if we, or an owner of 10% of more of our outstanding
shares, directly or constructively, own 10% or more of such tenant taking into
consideration the applicable attribution rules, which we refer to as a “related
party tenant.” Under a pair of exceptions from the related-party tenant rule for
taxable REIT subsidiaries, rent that we receive from a taxable REIT subsidiary
will qualify as “rents from real property,” (i) so long as (a) at least 90% of
the leased space in the property in question is leased to persons other than
taxable REIT subsidiaries and related-party tenants, (b) the amount paid by the
taxable REIT subsidiary to rent space at the property is substantially
comparable to rents paid by other tenants of the property for comparable space,
and (c) the amount paid is not attributable to increased rent as a result of a
modification of a lease with a taxable REIT subsidiary in which we own, directly
or indirectly, more than 50% of the voting power or value of the stock, or (ii)
if we lease a “qualified lodging facility” to a taxable REIT subsidiary and such
facility is operated by an “eligible independent contractor.” For taxable years
beginning after July 30, 2008, rental payments from a taxable REIT subsidiary
will also qualify as “rents from real property” if we lease a “qualified health
care property” to a taxable REIT subsidiary and such property is operated by an
“eligible independent contractor.” If in the future we receive rent
from a taxable REIT subsidiary, we will seek to comply with these
exceptions.
Third,
“rents from real property” excludes rent attributable to personal property
except where such personal property is leased in connection with a lease of real
property and the rent attributable to such personal property is less than or
equal to 15% of the total rent received under the lease. The rent attributable
to personal property under a lease is the amount that bears the same ratio to
total rent under the lease for the taxable year as the average of the fair
market values of the leased personal property at the beginning and at the end of
the taxable year bears to the average of the aggregate fair market values of
both the real and personal property covered by the lease at the beginning and at
the end of such taxable year.
Finally,
amounts that are attributable to services furnished or rendered in connection
with the rental of real property, whether or not separately stated, will not
constitute “rents from real property” unless such services are customarily
provided in the geographic area. Customary services that are not considered to
be provided to a particular tenant (e.g., furnishing heat and light, the
cleaning of public entrances, and the collection of trash) can be provided
directly by us. Where, on the other hand, such services are provided primarily
for the convenience of the tenants or are provided to such tenants, such
services must be provided by an independent contractor from whom we do not
receive any income or a taxable REIT subsidiary. Non-customary services that are
not performed by an independent contractor or taxable REIT subsidiary in
accordance with the applicable requirements will result in impermissible tenant
service income to us to the extent of the income earned (or deemed earned) with
respect to such services. If the impermissible tenant service income exceeds 1%
of our total income from a property, all of the income from that property will
fail to qualify as rents from real property. If the total amount of
impermissible tenant services does not exceed 1% of our total income from the
property, the services will not cause the rent paid by tenants of the property
to fail to qualify as rents from real property, but the impermissible tenant
services income will not qualify as “rents from real property.”
We do not
currently charge and do not anticipate charging rent that is based in whole or
in part on the income or profits of any person (unless based on a fixed
percentage or percentages of receipts or sales, as is permitted). We also do not
anticipate either deriving rent attributable to personal property leased in
connection with real property that exceeds 15% of the total rents or receiving
rent from related party tenants.
Our
operating partnership does provide some services with respect to our properties.
We believe that the services with respect to our properties that are and will be
provided directly are usually or customarily rendered in connection with the
rental of space for occupancy only and are not otherwise considered rendered to
particular tenants and, therefore, that the provision of such services will not
cause rents received with respect to the properties to fail to qualify as rents
from real property. Services with respect to the properties that we believe may
not be provided by us or the operating partnership directly without jeopardizing
the qualification of rent as “rents from real property” are and will be
performed by independent contractors or taxable REIT subsidiaries.
We may,
directly or indirectly, receive fees for property management and brokerage and
leasing services provided with respect to some properties not owned entirely by
the operating partnership. These fees, to the extent paid with respect to the
portion of these properties not owned, directly or indirectly, by us, will not
qualify under the 75% gross income test or the 95% gross income test. The
operating partnership also may receive other types of income with respect to the
properties it owns that will not qualify for either of these tests. We believe,
however, that the aggregate amount of these fees and other non-qualifying income
in any taxable year will not cause us to exceed the limits on non-qualifying
income under either the 75% gross income test or the 95% gross income
test.
Tenants
may be required to pay, besides base rent, reimbursements for certain amounts we
are obligated to pay to third parties (such as a lessee’s proportionate share of
a property’s operational or capital expenses), penalties for nonpayment or late
payment of rent or additions to rent. These and other similar payments should
qualify as “rents from real property.” To the extent they do not, they should be
treated as interest that qualifies for the 95% gross income test.
A REIT
will incur a 100% tax on the net income derived from any sale or other
disposition of property, other than foreclosure property, that the REIT holds
primarily for sale to customers in the ordinary course of a trade or business.
Whether a REIT holds an asset “primarily for sale to customers in the ordinary
course of a trade or business” depends, however, on the facts and circumstances
in effect from time to time, including those related to a particular asset. A
safe harbor to the characterization of the sale of property by a REIT as a
prohibited transaction and the 100% prohibited transaction tax is available if
the following requirements are met:
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the
REIT has held the property for not less than four years (or, for sales
made after July 30, 2008, two
years);
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the
aggregate expenditures made by the REIT, or any partner of the REIT,
during the four-year period (or, for sales made after July 30, 2008,
two-year period) preceding the date of the sale that are includable in the
basis of the property do not exceed 30% of the selling price of the
property;
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either
(1) during the year in question, the REIT did not make more than seven
sales of property, other than foreclosure property or sales to which
Section 1033 of the Internal Revenue Code applies, (2) the aggregate
adjusted bases of all such properties sold by the REIT during the year did
not exceed 10% of the aggregate bases of all of the assets of the REIT at
the beginning of the year or (3) for sales made after July 30, 2008, the
aggregate fair market value of all such properties sold by the REIT during
the year did not exceed 10% of the aggregate fair market value of all of
the assets of the REIT at the beginning of the
year;
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in
the case of property not acquired through foreclosure or lease
termination, the REIT has held the property for at least four years (or,
for sales made after July 30, 2008, two years) for the production of
rental income; and
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if
the REIT has made more than seven sales of non-foreclosure property during
the taxable year, substantially all of the marketing and development
expenditures with respect to the property were made through an independent
contractor from whom the REIT derives no
income.
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We will
attempt to comply with the terms of the safe-harbor provisions in the federal
income tax laws prescribing when an asset sale will not be characterized as a
prohibited transaction. We cannot assure you, however, that we can comply with
the safe-harbor provisions or that we will avoid owning property that may be
characterized as property held “primarily for sale to customers in the ordinary
course of a trade or business.” We may, however, form or acquire a taxable REIT
subsidiary to hold and dispose of those properties we conclude may not fall
within the safe-harbor provisions.
We will
be subject to tax at the maximum corporate rate on any income from foreclosure
property, which includes certain foreign currency gains and related deductions
recognized subsequent to July 30, 2008, other than income that otherwise would
be qualifying income for purposes of the 75% gross income test, less expenses
directly connected with the production of that income. However, gross income
from foreclosure property will qualify under the 75% and 95% gross income tests.
“Foreclosure property” is any real property, including interests in real
property, and any personal property incident to such real property (a) that is
acquired by a REIT as the result of such REIT having bid on the property at
foreclosure, or having otherwise reduced such property to ownership or
possession by agreement or process of law after actual or imminent default on a
lease of the property or on indebtedness secured by the property, (b) for which
the related loan or leased property was acquired by the REIT at a time when the
default was not imminent or anticipated, and (c) for which the REIT makes a
proper election to treat the property as foreclosure property.
A REIT
will not be considered to have foreclosed on a property where the REIT takes
control of the property as a mortgagee-in-possession and cannot receive any
profit or sustain any loss except as a creditor of the mortgagor. Property
generally ceases to be foreclosure property at the end of the third taxable year
following the taxable year in which the REIT acquired the property (or longer if
an extension is granted by the Secretary of the Treasury). This period (as
extended, if applicable) terminates, and foreclosure property ceases to be
foreclosure property on the first day:
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on
which a lease is entered into for the property that, by its terms, will
give rise to income that does not qualify for purposes of the 75% gross
income test, or any amount is received or accrued, directly or indirectly,
pursuant to a lease entered into on or after such day that will give rise
to income that does not qualify for purposes of the 75% gross income
test;
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on
which any construction takes place on the property, other than completion
of a building or, any other improvement, where more than 10% of the
construction was completed before default became imminent;
or
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which
is more than 90 days after the day on which the REIT acquired the property
and the property is used in a trade or business which is conducted by the
REIT, other than through an independent contractor from whom the REIT
itself does not derive or receive any
income.
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From time
to time, we may enter into hedging transactions with respect to our assets or
liabilities. Our hedging activities may include entering into interest rate
swaps, caps, and floors, options to purchase such items, and futures and forward
contracts. For taxable years beginning prior to January 1, 2005, any periodic
income or gain from the disposition of any financial instrument for these or
similar transactions to hedge indebtedness we incurred to acquire or carry “real
estate assets” was qualifying income for purposes of the 95% gross income test,
but not the 75% gross income test. To the extent we hedged with other types of
financial instruments, or in other situations, it is not entirely clear how the
income from those transactions should have been treated for the gross income
tests. For taxable years beginning on or after January 1, 2005, income and gain
from “hedging transactions” will be excluded from gross income for purposes of
the 95% gross income test, but not the 75% gross income test. For hedging
transactions entered into after July 30, 2008, income and gain from “hedging
transactions” will be excluded from gross income for purposes of both the 75%
and 95% gross income tests. For those taxable years, a “hedging transaction”
means either (1) any transaction entered into in the normal course of our trade
or business primarily to manage the risk of interest rate, price changes, or
currency fluctuations with respect to borrowings made or to be made, or ordinary
obligations incurred or to be incurred, to acquire or carry real estate
assets or (2) for
transactions entered into after July 30, 2008, any transaction entered into
primarily to manage the risk of currency fluctuations with respect to any item
of income or gain that would be qualifying income under the 75% or 95% gross
income test (or any property which generates such income or gain). We will be
required to clearly identify any such hedging transaction before the close of
the day on which it was acquired, originated, or entered into and to satisfy
other identification requirements. We intend to structure any hedging or similar
transactions so as not to jeopardize our status as a REIT.
The term
“interest” generally does not include any amount received or accrued, directly
or indirectly, if the determination of the amount depends in whole or in part on
the income or profits of any person. However, an amount received or accrued
generally will not be excluded from the term “interest” solely because it is
based on a fixed percentage or percentages of receipts or sales. Furthermore, to
the extent that interest from a loan that is based on the profit or net cash
proceeds from the sale of the property securing the loan constitutes a “shared
appreciation provision,” income attributable to such participation feature will
be treated as gain from the sale of the secured property.
Certain
foreign currency gains recognized after June 30, 2008 will be excluded from
gross income for purposes of one or both of the gross income
tests. “Real estate foreign exchange gain” will be excluded from
gross income for purposes of the 75% gross income test. Real estate
foreign exchange gain generally includes foreign currency gain attributable to
any item of income or gain that is qualifying income for purposes of the 75%
gross income test, foreign currency gain attributable to the acquisition or
ownership of (or becoming or being the obligor under) obligations secured by
mortgages on real property or on interest in real property and certain foreign
currency gain attributable to certain “qualified business units” of a
REIT. “Passive foreign exchange gain” will be excluded from gross
income for purposes of the 95% gross income test. Passive foreign
exchange gain generally includes real estate foreign exchange gain as described
above, and also includes foreign currency gain attributable to any item of
income or gain that is qualifying income for purposes of the 95% gross income
test and foreign currency gain attributable to the acquisition or ownership of
(or becoming or being the obligor under) obligations secured by mortgages on
real property or on interest in real property. Because passive
foreign exchange gain includes real estate foreign exchange gain, real estate
foreign exchange gain is excluded from gross income for purposes of both the 75%
and 95% gross income test. These exclusions for real estate foreign
exchange gain and passive foreign exchange gain do not apply to any certain
foreign currency gain derived from dealing, or engaging in substantial and
regular trading, in securities. Such gain is treated as nonqualifying
income for purposes of both the 75% and 95% gross income tests.
If we
fail to satisfy one or both of the 75% gross income test or the 95% gross income
test for any taxable year, we may nevertheless qualify as a REIT for that year
if we are eligible for relief under the Internal Revenue Code. For taxable years
beginning prior to January 1, 2005, the relief provisions generally will be
available if:
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our
failure to meet these tests was due to reasonable cause and not due to
willful neglect;
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we
file a disclosure schedule with the IRS after we determine that we have
not satisfied one of the gross income tests;
and
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any
incorrect information on the schedule is not due to fraud with intent to
evade tax.
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Commencing
with taxable years beginning on or after January 1, 2005, those relief
provisions will be available if:
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our
failure to meet these tests is due to reasonable cause and not to willful
neglect; and
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we
file a disclosure schedule with the IRS after we determine that we have
not satisfied one of the gross income tests in accordance with regulations
prescribed by the Secretary of the
Treasury.
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We cannot
predict whether in
all circumstances we would be entitled to the benefit of the relief provisions.
For example, if we fail to satisfy the gross income tests because non-qualifying
income that we intentionally earn exceeds the limits on such income, the IRS
could conclude that our failure to satisfy the tests was not due to reasonable
cause. Even if this relief provision applies, the Internal Revenue Code imposes
a 100% tax with respect to a portion of the non-qualifying income, as described
above.
Asset Tests. At
the close of each quarter of our taxable year, we also must satisfy the
following asset tests to maintain our
qualification as a REIT:
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At
least 75% of the value of our total assets must be represented by real
estate assets (including interests in real property (including leaseholds
and options to acquire real property and leaseholds), interests in
mortgages on real property, and stock in other REITs), cash and cash items
(including receivables), government securities and investments in stock or
debt instruments during the one year period following our receipt of new
capital that we raise through equity offerings or public offerings of debt
with at least a five-year-term.
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No
more than 25% of the value of our total assets may be represented by
securities of taxable REIT subsidiaries or other assets that are not
qualifying for purposes of the 75% asset
test.
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Except
for equity investments in REITs, partnerships, qualified REIT subsidiaries
or taxable REIT subsidiaries or other investments that qualify as “real
estate assets” for purposes of the 75% asset
test:
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the
value of any one issuer’s securities that we own may not exceed 5% of the
value of our total assets (the “5% asset
test”);
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we
may not own more than 10% of the voting power or value of any one issuer’s
outstanding voting securities (the “10% vote or value
test”).
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No
more than 20% of our total assets (or, with respect to taxable years
beginning after July 30, 2008, 25% of the value of our total assets) may
be represented by securities of one of more taxable REIT
subsidiaries.
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Certain
types of securities are disregarded as securities for purposes of the 10% value
limitation discussed above, including (i) straight debt securities (including
straight debt that provides for certain contingent payments); (ii) any loan to
an individual or an estate; (iii) any rental agreement described in Section 467
of the Internal Revenue Code, other than with a “related person”; (iv) any
obligation to pay rents from real property; (v) certain securities issued by a
State or any political subdivision thereof, the District of Columbia, a foreign
government, or any political subdivision thereof, or the Commonwealth of Puerto
Rico; (vi) any security issued by a REIT; and (vii) any other arrangement that,
as determined by the Secretary of the Treasury, is excepted from the definition
of a security. In addition, (a) a REIT’s interest as a partner in a partnership
is not considered a “security” for purposes of applying the 10% value test to
securities issued by the partnership; (b) any debt instrument issued by a
partnership (other than straight debt or another excluded security) will not be
considered a security issued by the partnership if at least 75% of the
partnership’s gross income (excluding income from prohibited transactions) is
derived from sources that would qualify for the 75% REIT gross income test, and
(c) any debt instrument issued by a partnership (other than straight debt or
another excluded security) will not be considered a security issued by the
partnership to the extent of the REIT’s interest as a partner in the
partnership. For taxable years beginning after October 22, 2004, a
special look-through rule applies for determining a REIT’s share of securities held by a partnership in which the REIT holds an interest for purposes of the 10% value test. Under that look-through rule, our proportionate share of the assets of a partnership is our proportionate interest in any securities issued by the partnership, without regard to securities described in items (b) and (c) above.
We
believe that substantially all of our assets consist of (1) real properties, (2)
stock or debt investments that earn qualified temporary investment income, (3)
other qualified real estate assets, and (4) cash, cash items and government
securities. We monitor the status of our assets for purposes of the various
asset tests, and manage our portfolio in order to comply with such
tests.
After
initially meeting the asset tests at the close of any quarter, we will not lose
our qualification as a REIT for failure to satisfy the asset tests at the end of
a later quarter solely by reason of changes in asset values. If the failure to
satisfy the asset tests results from an acquisition of securities or other
property during a quarter, we can cure the failure by disposing of a sufficient
amount of non-qualifying assets within 30 days after the close of that quarter.
We intend to maintain adequate records of the value of our assets to ensure
compliance with the asset tests and to take such other actions within 30 days
after the close of any quarter as necessary to cure any
noncompliance.
Commencing
with taxable years beginning on or after January 1, 2005, after the 30-day cure
period, if a REIT violates the 5% asset test or the 10% vote or value test
described above, a REIT may avoid disqualification as a REIT by disposing of
sufficient assets to cure a violation that does not exceed the lesser of 1% of
the REIT’s assets at the end of the relevant quarter or $10,000,000, provided
that the disposition occurs within six months following the last day of the
quarter in which the REIT first identified the assets causing the violation. In
the event of any other failure of the asset tests for taxable years beginning on
or after January 1, 2005, a REIT may avoid disqualification as a REIT after the
30-day cure period, if such failure was due to reasonable cause and not due to
willful neglect, by taking certain steps, including the disposition of
sufficient assets within the six month period described above to meet the
applicable asset test, paying a tax equal to the greater of $50,000 or the
highest corporate tax rate multiplied by the net income generated by the
non-qualifying assets during the period of time that the assets were held as
non-qualifying assets, and filing a schedule with the IRS that describes the
non-qualifying assets.
Annual Distribution
Requirements
To
qualify for taxation as a REIT, the Internal Revenue Code requires that we make
distributions (other than capital gain distributions and deemed distributions of
retained capital gain) to our shareholders in an amount at least equal to (a)
the sum of: (1) 90% of our “REIT taxable income” (computed without regard to the
dividends paid deduction and our net capital gain or loss), and (2) 90% of the
net income, if any, from foreclosure property in excess of the special tax on
income from foreclosure property, minus (b) the sum of certain items of non-cash
income.
Generally,
we must pay distributions in the taxable year to which they relate. Dividends
paid in the subsequent calendar year, however, will be treated as if paid in the
prior calendar year for purposes of the prior year’s distribution requirement if
the dividends satisfy one of the following two sets of criteria:
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We
declare the dividends in October, November or December, the dividends are
payable to shareholders of record on a specified date in such a month, and
we actually pay the dividends during January of the subsequent year;
or
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We
declare the dividends before we timely file our federal income tax return
for such year, we pay the dividends in the 12-month period following the
close of the prior year and not later than the first regular dividend
payment after the declaration, and we elect on our federal income tax
return for the prior year to have a specified amount of the subsequent
dividend treated as if paid in the prior
year.
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The
distributions under the first bullet point above are treated as received by
shareholders on December 31 of the prior taxable year, while the distributions
under the second bullet point are taxable to shareholders in the year
paid.
Even if
we satisfy the foregoing distribution requirements, we will be subject to tax
thereon to the extent that we do not distribute all of our net capital gain or
“REIT taxable income” as adjusted. Furthermore, if we fail to distribute at
least the sum of 85% of our REIT ordinary income for that year; 95% of our REIT
capital gain net income for that year; and any undistributed taxable income from
prior periods, we would be subject to a 4% non-deductible excise tax on the
excess of the required distribution over the amounts actually
distributed.
We may
elect to retain rather than distribute all or a portion of our net capital gains
and pay the tax on the gains. In that case, we may elect to have our
shareholders include their proportionate share of the undistributed net capital
gains in income as long-term capital gains and receive a credit for their share
of the tax we paid. For purposes of the 4% excise tax described, any such
retained amounts would be treated as having been distributed.
We intend
to make timely distributions sufficient to satisfy the annual distribution
requirements. We expect that our REIT taxable income will be less than our cash
flow due to the allowance of depreciation and other non-cash charges in
computing REIT taxable income. Accordingly, we anticipate that we generally will
have sufficient cash or liquid assets to enable us to satisfy the 90%
distribution requirement. It is possible, however, that we, from time to time,
may not have sufficient cash or other liquid assets to meet the 90% distribution
requirement or to distribute such greater amount as may be necessary to avoid
income and excise taxation. In this event, we may find it necessary to arrange
for borrowings or, if possible, pay taxable dividends in order to meet the
distribution requirement or avoid such income or excise taxation.
In the
event that we are subject to an adjustment to our REIT taxable income (as
defined in Section 860(d)(2) of the Internal Revenue Code) resulting from an
adverse determination by either a final court decision, a closing agreement
between us and the IRS under Section 7121 of the Internal Revenue Code, or an
agreement as to tax liability between us and an IRS district director, or, an
amendment or supplement to our federal income tax return for the applicable tax
year, we may be able to rectify any resulting failure to meet the 90% annual
distribution requirement by paying “deficiency dividends” to shareholders that
relate to the adjusted year but that are paid in a subsequent year. To qualify
as a deficiency dividend, we must make the distribution within 90 days of the
adverse determination and we also must satisfy other procedural requirements. If
we satisfy the statutory requirements of Section 860 of the Internal Revenue
Code, a deduction is allowed for any deficiency dividend we subsequently paid to
offset an increase in our REIT taxable income resulting from the adverse
determination. We, however, must pay statutory interest on the amount of any
deduction taken for deficiency dividends to compensate for the deferral of the
tax liability.
Recordkeeping
Requirements
We must
maintain certain records in order to qualify as a REIT. In addition, to avoid
paying a penalty, we must request on an annual basis information from our
shareholders designed to disclose the actual ownership of our outstanding
shares. We have complied and intend to continue to comply with these
requirements.
Failure To
Qualify
Commencing
with taxable years beginning on or after January 1, 2005, a violation of a REIT
qualification requirement other than the gross income tests or the asset tests
will not disqualify us if the violation is due to reasonable cause and not due
to willful neglect and we pay a penalty of $50,000 for each such violation. If
we fail to qualify for taxation as a REIT in any taxable year and the relief
provisions do not apply, we will be subject to tax (including any applicable
alternative minimum tax) on our taxable income at regular corporate rates.
Distributions to shareholders in any year in which we fail to qualify as a REIT
will not be deductible by us nor will they be required to be made. In that
event, to the extent of our positive current and accumulated earnings and
profits, distributions to shareholders will be dividends, generally taxable to
non-corporate shareholders at long-term capital gains tax rates (through 2010,
as described below) and, subject to certain limitations of the Internal Revenue
Code, corporate distributees may be eligible for the dividends received
deduction. Unless we are entitled to relief under specific statutory provisions,
we also will be disqualified from taxation as a REIT for the four taxable years
following the year during which we lost our REIT qualification. We cannot state
whether in all circumstances we would be entitled to such statutory relief. For
example, if we fail to satisfy the gross income tests because non-qualifying
income that we intentionally earn exceeds the limit on such income, the IRS
could conclude that our failure to satisfy the tests was not due to reasonable
cause.
Taxation of U.S.
Shareholders
As used
in this prospectus, the term “U.S. Shareholder” means a holder of our securities
that, for federal income tax purposes:
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is
a citizen or resident of the United
States;
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is
a corporation (including an entity treated as a corporation for federal
income tax purposes) created or organized in or under the laws of the
United States or of any political subdivision
thereof;
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is
an estate, the income of which is subject to federal income taxation
regardless of its source;
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is
a trust and a court within the United States is able to exercise primary
supervision over the administration of the trust, and one or more United
States persons have the authority to control all substantial decisions of
the trust; or
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is
an eligible trust that elects to be taxed as a U.S. person under
applicable Treasury Regulations.
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If a
partnership, entity, or arrangement treated as a partnership for federal income
tax purposes holds our securities, the federal income tax treatment of a partner
in the partnership will generally depend on the status of the partner and the
activities of the partnership. If you are a partner in a partnership
holding our securities, you should consult your tax advisor regarding the
consequences of the purchase, ownership, and disposition of our securities by
the partnership.
For any
taxable year for which we qualify for taxation as a REIT, amounts distributed to
taxable U.S. Shareholders will be taxed as discussed below.
Distributions
Generally. Distributions to taxable U.S. Shareholders, other
than capital gain dividends discussed below, will constitute dividends up to the
amount of our positive current and accumulated earnings and profits and, to that
extent, will constitute ordinary income to U.S. Shareholders. For purposes of
determining whether a distribution is made out of our current or accumulated
earnings and profits, our earnings and profits will be allocated first to our
preferred share distributions and then to our common share
distributions.
These
distributions are not eligible for the dividends received deduction generally
available to corporations. Certain “qualified dividend income” received by U.S.
Shareholders in taxable years 2003 through 2010 is subject to tax at the same
tax rates as long-term capital gain (generally, a maximum rate of 15% for such
taxable years). Qualified dividend income generally includes dividends paid to
U.S. Shareholders taxed at individual rates by domestic corporations and certain
qualified foreign corporations. Dividends received from REITs, however,
generally do not constitute qualified dividend income, are not eligible for
these reduced rates and, therefore, will continue to be subject to tax at higher
ordinary income rates (generally, a maximum rate of 35% for taxable years 2003
through 2010), subject to two narrow exceptions. Under the first exception,
dividends received from a REIT may be treated as “qualified dividend income”
eligible for the reduced tax rates to the extent that the REIT itself has
received qualified dividend income from other corporations (such as taxable REIT
subsidiaries). Under the second exception, dividends paid by a REIT in a taxable
year may be treated as qualified dividend income in an amount equal to the sum
of (i) the excess of the REIT’s “REIT taxable income” for the preceding taxable
year over the corporate-level federal income tax payable by the REIT for such
preceding taxable year and (ii) the excess of the REIT’s income that was subject
to the Built-in Gains Tax in the preceding taxable year over the tax payable by
the REIT on such income for such preceding taxable year. We do not anticipate
that a material portion of our distributions will be treated as qualified
dividend income. In general, to qualify for the reduced tax rate on qualified
dividend income, a U.S. Shareholder must hold our securities for more than 60
days during the 121-day period beginning on the date that is 60 days before the
date on which our securities become ex-dividend.
To the
extent that we make a distribution in excess of our positive current and
accumulated earnings and profits, the distribution will be treated first as a
tax-free return of capital, reducing the tax basis in the U.S. Shareholder’s
shares, and then the distribution in excess of such basis will be taxable to the
U.S. Shareholder as gain realized from the sale of its shares. Such gain will
generally be treated as long-term capital gain, or short-term capital gain if
the securities have been held for less than one year, assuming the securities
are a capital asset in the hands of the U.S. Shareholder. Dividends we declared
in October, November or December of any year payable to a U.S. Shareholder of
record on a specified date in any such month will be treated as both paid by us
and received by the shareholders on December 31 of that year, provided that we
actually pay the dividends during January of the following calendar
year.
Capital Gain
Distributions. Distributions to U.S. Shareholders that we
properly designate as capital gain dividends will be treated as long-term
capital gains (to the extent they do not exceed our actual net capital gain) for
the taxable year without regard to the period for which the U.S. Shareholder has
held his or her shares. However, corporate U.S. shareholders may be required to
treat up to 20% of certain capital gain dividends as ordinary income. Capital
gain dividends are not eligible for the dividends received deduction for
corporations. If, for any taxable year, we elect to designate as capital gain
dividends any portion of the distributions paid for the year to our
shareholders, the portion of the amount so designated (not in excess of our net
capital gain for the year) that will be allocable to holders of our preferred
shares will be the amount so designated, multiplied by a fraction, the numerator
of which will be the total dividends (within the meaning of the Internal Revenue
Code) paid to holders of our preferred shares for the year and the denominator
of which will be the total dividends paid to holders of all classes of our
shares for the year.
We may
elect to retain and pay income tax on net long-term capital gain that we
recognized during the tax year. In this instance, U.S. Shareholders will include
in their income their proportionate share of our undistributed long-term capital
gains. U.S. Shareholders will also be deemed to have paid their proportionate
share of the tax we paid, which would be credited against such shareholders’
U.S. income tax liability (and refunded to the extent it exceeds such
liability). In addition, the basis of the U.S. Shareholders’ shares will be
increased by the excess of the amount of capital gain included in our income
over the amount of tax it is deemed to have paid.
Any
capital gain with respect to capital assets held for more than one year that is
recognized or otherwise properly taken into account before January 1, 2011,
generally will be taxed to U.S. Shareholders taxed at individual rates at a
maximum rate of 15%. In the case of capital gain attributable to the sale of
real property held for more than one year, such gain will be taxed at a maximum
rate of 25% to the extent of the amount of depreciation deductions previously
claimed with respect to such property. With respect to distributions we
designated as capital gain dividends (including any deemed distributions of
retained capital gains), subject to certain limits, we may designate, and will
notify our shareholders, whether the dividend is taxable to U.S. Shareholders
taxed at individual rates at regular long-term capital gains rates (currently at
a minimum rate of 15%) or at the 25% rate applicable to unrecaptured
depreciation. Thus, the tax rate differential between capital gain and ordinary
income for non-corporate taxpayers may be significant. In addition,
the characterization of income as capital gain or ordinary income may affect the
deductibility of capital losses. A non-corporate taxpayer may deduct capital
losses not offset by capital gains against its ordinary income only up to a
maximum of $3,000 annually. A non-corporate taxpayer may carry unused capital
losses forward indefinitely. A corporate taxpayer must pay tax on its net
capital gain at corporate ordinary-income rates. A corporate taxpayer may deduct
capital losses only to the extent of capital gains, with unused losses carried
back three years and forward five years.
Passive Activity Loss and Investment
Interest Limitations. Distributions from us and gain from the
disposition of our shares will not be treated as passive activity income and,
therefore, U.S. Shareholders will not be able to apply any “passive activity
losses” against such income. Dividends from us (to the extent they do not
constitute a return of capital) generally will be treated as investment income
for purposes of the investment interest limitations. Net capital gain from the
disposition of our shares or capital gain dividends generally will be excluded
from investment income unless the U.S. Shareholder elects to have the gain taxed
at ordinary income rates. Shareholders are not allowed to include on their own
federal income tax returns any net operating losses that we incur. Instead,
these losses are generally carried over by us for potential affect against
future income.
Dispositions of Securities. In
general, U.S. Shareholders who are not dealers in securities will realize
capital gain or loss on the disposition of our securities equal to the
difference between the amount of cash and the fair market value of any property
received on the disposition and that shareholder’s adjusted basis in the
securities. The applicable tax rate will depend on the U.S. Shareholder’s
holding period in the asset (generally, if the U.S. Shareholder has held the
asset for more than one year, it will produce long-term capital gain) and the
shareholder’s tax bracket (the maximum long-term capital gain rate for U.S.
Shareholders taxed
at individual rates currently being 15%). The maximum tax rate on
long-term capital gain from the sale or exchange of “section 1250 property”
(i.e., generally, depreciable real property) is 25% to the extent the gain would
have been treated as ordinary income if the property were “section 1245
property” (i.e., generally, depreciable personal property). In general, any loss
recognized by a U.S. Shareholder upon the sale or other disposition of
securities that the U.S. shareholder has held for six months or less, after
applying the holding period rules, will be treated as a long-term capital loss,
to the extent of distributions received by the U.S. Shareholder from us that
were required to be treated as long-term capital gains.
Redemptions of Preferred
Shares. A redemption of our preferred shares will be treated
under Section 302 of the Internal Revenue Code as a distribution that is taxable
as dividend income (to the extent of our current or accumulated earnings and
profits), unless the redemption satisfies certain tests set forth in Section
302(b) of the Internal Revenue Code enabling the redemption to be treated as a
sale of our preferred shares (in which case the redemption will be treated in
the same manner as a sale described above in “—Dispositions of Securities”). The
redemption will satisfy such tests if it (i) is “substantially disproportionate”
with respect to the holder's interest in our shares of beneficial interest, (ii)
results in a “complete termination” of the holder’s interest in all our classes
of beneficial interest, or (iii) is “not essentially equivalent to a dividend”
with respect to the holder, all within the meaning of Section 302(b) of the
Internal Revenue Code. In determining whether any of these tests have
been met, shares considered to be owned by the holder by reason of certain
constructive ownership rules set forth in the Internal Revenue Code, as well as
shares actually owned, generally must be taken into account. Because
the determination as to whether any of the three alternative tests of Section
302(b) of the Internal Revenue Code described above will be satisfied with
respect to any particular holder of our preferred shares depends upon the facts
and circumstances at the time that the determination must be made, prospective
investors are urged to consult their tax advisors to determine such tax
treatment.
If a
redemption of our preferred shares does not meet any of the three tests
described above, the redemption proceeds will be treated as a distribution, as
described above. In that case, a shareholder's adjusted tax basis in
the redeemed preferred shares will be transferred to such shareholder's
remaining share holdings in us. If the shareholder does not retain any of our
shares, such basis could be transferred to a related person that holds our
shares or it may be lost.
Treatment of Tax-Exempt
Shareholders.
Tax-exempt entities, including qualified employee pension and profit sharing
trusts and individual retirement accounts and annuities, generally are exempt
from federal income taxation. However, they are subject to taxation on their
“unrelated business taxable income” (“UBTI”). While many investments
in real estate generate unrelated business taxable income, the Internal Revenue
Service has issued a ruling that dividend distributions from a REIT to an exempt
employee pension trust do not constitute unrelated business taxable income so
long as the exempt employee pension trust does not otherwise use the shares of
the REIT in an unrelated trade or business of the pension trust. Based on that
ruling, distributions from us to tax-exempt shareholders generally will not
constitute UBTI, unless the shareholder has borrowed to acquire or carry its
shares or has used the securities in an unrelated trade or
business.
However,
for tax-exempt shareholders that are social clubs, voluntary employee benefit
associations, supplemental unemployment benefit trusts and qualified group legal
services plans exempt from federal income taxation under Sections 501(c)(7),
(c)(9), (c)(17) and (c)(20) of the Internal Revenue Code, respectively, income
from an investment in us will constitute UBTI unless the organization properly
sets aside or reserves such amounts for purposes specified in the Internal
Revenue Code. These tax-exempt shareholders should consult their own tax
advisors concerning these “set aside” and reserve requirements.
Qualified
trusts that hold more than 10% (by value) of the shares of “pension-held REITs”
may be required to treat a certain percentage of such a REIT’s distributions as
UBTI. A REIT is a “pension-held REIT” only if the REIT would not qualify as a
REIT for federal income tax purposes but for the application of a “look-through”
exception to the five or fewer requirement applicable to shares held by
qualified trusts and the REIT is “predominantly held” by qualified trusts. A
REIT is predominantly held if either (1) at least one qualified trust holds more
than 25% by value of the REIT’s shares or (2) a group of qualified trusts, each
owning more than 10% by value of the REIT’s shares, holds in the aggregate more
than 50% of the REIT’s shares. The percentage of any REIT dividend treated as
UBTI is equal to the ratio of (a) the UBTI earned by the REIT (treating the REIT
as if it were a qualified trust and therefore subject to tax on UBTI) to (b) the
total gross income (less certain associated expenses) of the REIT. In the event
that this ratio is less than 5% for any year, then the qualified trust will not
be treated as having received UBTI as a result of the REIT dividend. For these
purposes, a qualified trust is any trust described in Section 401(a) of the
Internal Revenue Code and exempt from tax under Section 501(a) of the Internal
Revenue Code.
Special Tax Considerations For
Non-U.S. Shareholders
A
“non-U.S. Shareholder” is a shareholder that is not a U.S. Shareholder or a
partnership (or entity treated as a partnership for federal income tax
purposes). The rules governing the federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
shareholders are complex. This section is only a summary of such rules. We urge
non-U.S. Shareholders to consult their own tax advisors to determine the impact
of federal, foreign, state, and local income tax laws on the purchase,
ownership, and disposition of our securities, including any reporting
requirements.
In
general, non-U.S. Shareholders will be subject to federal income tax at
graduated rates with respect to their investment in us if the income from the
investment is “effectively connected” with the non-U.S. Shareholder’s conduct of
a trade or business in the United States in the same manner that U.S.
shareholders are taxed. A corporate non-U.S. Shareholder that receives income
that is (or is treated as) effectively connected with a U.S. trade or business
also may be subject to the branch profits tax under Section 884 of the Internal
Revenue Code, which is imposed in addition to regular federal income tax at the
rate of 30%, subject to reduction under a tax treaty, if applicable. Effectively
connected income that meets various certification requirements will generally be
exempt from withholding. The following discussion will apply to non-U.S.
Shareholders whose income from their investments in us is not so effectively
connected (except to the extent that the “FIRPTA” rules discussed below treat
such income as effectively connected income).
Distributions
by us that are not attributable to gain from the sale or exchange by us of a
“United States real property interest” (a “USRPI”), as defined below, and that
we do not designate as a capital gain distribution will be treated as an
ordinary income dividend to the extent that we pay the distribution out of our
current or accumulated earnings and profits. Generally, any ordinary income
dividend will be subject to a federal income tax, required to be withheld by us,
equal to 30% of the gross amount of the dividend, unless an applicable tax
treaty reduces this tax. Such a distribution in excess of our earnings and
profits will be treated first as a return of capital that will reduce a non-U.S.
Shareholder’s basis in its shares (but
not below zero) and then as gain from the disposition of such securities, the tax treatment of which is described under the rules discussed below with respect to dispositions of securities. Because we generally cannot determine at the time we make a distribution whether the distribution will exceed our current and accumulated earnings and profits, we normally will withhold tax on the entire amount of any distribution at the same rate as we would withhold on a dividend. However, a non-U.S. Shareholder may obtain a refund of amounts we withhold if we later determine that a distribution in fact exceeded our current and accumulated earnings and profits.
For any
year in which we qualify as a REIT, a non-U.S. Shareholder may incur tax on
distributions that are attributable to gain from our sale or exchange of a USRPI
under the Foreign Investment in Real Property Tax Act of 1980
(“FIRPTA”). The term USRPI includes certain interests in real
property and stock in corporations at least 50% of whose assets consist of
interests in real property. Under the FIRPTA rules, a non-U.S.
Shareholder is taxed on distributions attributable to gain from sales of USRPIs
as if such gain were effectively connected with a U.S. business of the non-U.S.
Shareholder. A non-U.S. Shareholder thus would be taxed on such a
distribution at the normal capital gains rates applicable to U.S. Shareholders,
subject to applicable alternative minimum tax and a special alternative minimum
tax in the case of a nonresident alien individual. A corporate non-U.S.
Shareholder not entitled to treaty relief or exemption also may be subject to
the 30% branch profits tax on such a distribution. Unless the exception
described in the next paragraph applies, we must withhold 35% of any
distribution that we could designate as a capital gain dividend. A
non-U.S. Shareholder may receive a credit against its tax liability for the
amount we withhold.
Distributions
by us with respect to our securities that are attributable to gain from the sale
or exchange of a USRPI will be treated as ordinary dividends (taxed as described
above) to a non-U.S. Shareholder rather than as gain from the sale of a USRPI as
long as (1) the applicable class of shares are “regularly traded” on an
established securities market in the United States and (2) the non-U.S.
Shareholder did not own more than 5% of such class of shares at any time during
the one-year period preceding the date of the distribution. Capital gain
dividends distributed to a non-U.S. Shareholder that held more than 5% of the
applicable class of shares in the year preceding the distribution, or to all
non-U.S. Shareholders in the event that the applicable class of shares
ceases to be
regularly traded on an established securities market in the United States, will
be taxed under FIRPTA as described in the preceding paragraph. Moreover, if a
non-U.S. Shareholder disposes of our shares during the 30-day period preceding a
dividend payment, and such non-U.S. Shareholder (or a person related to such
non-U.S. Shareholder) acquires or enters into a contract or option to acquire
our shares within 61 days of the 1st day of the 30-day period described above,
and any portion of such dividend payment would, but for the disposition, be
treated as a USRPI capital gain to such
non-U.S. Shareholder, then such non-U.S. Shareholder shall be treated as having
USRPI capital gain in an amount that, but for the disposition, would have been
treated as USRPI capital gain.
Although
the law is not clear on this matter, it appears that amounts designated by us as
undistributed capital gains in respect of our shares generally should be treated
with respect to non-U.S. Shareholders in the same manner as actual distributions
by us of capital gain dividends.
Although
tax treaties may reduce our withholding obligations, we generally will be
required to withhold from distributions to non-U.S. Shareholders, and remit to
the IRS, 30% of ordinary dividends paid out of earnings and profits. Special
withholding rules apply to capital gain dividends that are not recharacterized
as ordinary dividends. In addition, we may be required to withhold 10% of
distributions in excess of our current and accumulated earnings and profits.
Consequently, although we intend to withhold at a rate of 30% on the entire
amount of any distribution, to the extent we do not do so, we may withhold at a
rate of 10% on any portion of a distribution not subject to a withholding rate
of 30%. If the amount of tax withheld by us with respect to a distribution to a
non-U.S. Shareholder exceeds the shareholder’s U.S. tax liability, the non-U.S.
Shareholder may file for a refund of such excess from the IRS.
We expect
to withhold federal income tax at the rate of 30% on all distributions
(including distributions that later may be determined to have been in excess of
current and accumulated earnings and profits) made to a non-U.S. Shareholder
unless:
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a
lower treaty rate applies and the non-U.S. Shareholder files with us an
IRS Form W-8BEN evidencing eligibility for that reduced treaty
rate;
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the
non-U.S. Shareholder files with us an IRS Form W-8ECI claiming that the
distribution is income effectively connected with the non-U.S.
Shareholder’s trade or business so that no withholding tax is required;
or
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the
distributions are treated for FIRPTA withholding tax purposes as
attributable to a sale of a USRPI, in which case tax will be withheld at a
35% rate.
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Unless our securities constitute a USRPI within the meaning of FIRPTA, a sale of our shares by a non-U.S. Shareholder generally will not be subject to federal income taxation. Our securities will not constitute a USRPI if we are a “domestically controlled qualified investment entity.” A REIT is a domestically controlled qualified investment entity if at all times during a specified testing period less than 50% in value of its shares is held directly or indirectly by non-U.S. Shareholders. We believe that we are a domestically controlled qualified investment entity and, therefore, that the sale of our securities will not be subject to taxation under FIRPTA. However, because our common shares and Series A preferred shares are publicly traded, we cannot assure you that we are or will be a domestically controlled qualified investment entity at all times in the future. If we were not a domestically controlled qualified investment entity, a non-U.S. Shareholder’s sale of our securities would be a taxable sale of a USRPI unless the shares were “regularly traded” on an established securities market (such as NASDAQ) and the selling shareholder owned, actually or constructively, no more than 5% of the shares of the applicable class throughout the applicable testing period. If the gain on the sale of securities were subject to taxation under FIRPTA, the non-U.S. Shareholder would be subject to the same treatment as a U.S. Shareholder with respect to the gain (subject to applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals). However, even if our securities are not a USRPI, a nonresident alien individual’s gains from the sale of securities will be taxable if the nonresident alien individual is present in the United States for 183 days or more during the taxable year and certain other conditions apply, in which case the nonresident alien individual will be subject to a 30% tax on his or her U.S. source capital gains.
A
purchaser of our securities from a non-U.S. Shareholder will not be required to
withhold under FIRPTA on the purchase price if the purchased securities are
“regularly traded” on an established securities market or if we are a
domestically controlled qualified investment entity. Otherwise, the purchaser of
our shares from a non-U.S. Shareholder may be required to withhold 10% of the
purchase price and remit this amount to the IRS. Our shares currently are traded
on the NASDAQ. We believe that our common shares and Series A preferred shares
qualify as “regularly traded” and that we are a domestically controlled
qualified investment entity but we cannot provide any assurance to that
effect.
Upon the
death of a nonresident alien individual, that individual’s ownership of our
shares will be treated as part of his or her U.S. estate for purposes of the
U.S. estate tax, except as may be otherwise provided in an applicable estate tax
treaty.
Information
Reporting Requirements and Backup Withholding Tax
U.S.
Shareholders. In general, information reporting requirements
will apply to payments of distributions on our securities and payments of the
proceeds of the sale of our securities, unless an exception applies. Further, a
payee may be subject to backup withholding at a rate of up to 28%
if:
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the
payee fails to furnish a taxpayer identification number to the payer or to
establish an exemption from backup
withholding;
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the
IRS notifies the payer that the taxpayer identification number furnished
by the payee is incorrect;
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a
notified payee has been under-reporting with respect to interest,
dividends or original issue discount described in Section 3406(c) of the
Internal Revenue Code; or
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the
payee has failed to certify under the penalty of perjury that the payee is
not subject to backup withholding under the Internal Revenue
Code.
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Some
shareholders, including corporations, will be exempt from backup withholding.
Any amounts withheld under the backup withholding rules from a payment to a
shareholder will be allowed as a credit against the shareholder’s federal income
tax and may entitle the shareholder to a refund, provided that the shareholder
furnishes the required information to the IRS. A U.S. Shareholder who does not
provide us with its correct tax identification number may be subject to
penalties imposed by the IRS.
Non-U.S.
Shareholders. Generally, information reporting will apply to
payments of distributions on our securities, and backup withholding may apply,
unless the payee certifies that it is not a U.S. person or otherwise establishes
an exemption.
The
payment of the proceeds from the disposition of our securities to or through the
U.S. office of a U.S. or foreign broker
will be subject to information reporting and, possibly, backup withholding unless the non-U.S. Shareholder certifies as to its non-U.S. status or otherwise establishes an exemption, provided that the broker does not have actual knowledge that the shareholder is a U.S. person or that the conditions of any other exemption are not, in fact, satisfied. The proceeds of the disposition by a non-U.S. Shareholder of our securities to or through a foreign office of a broker generally will not be subject to information reporting or backup withholding. However, if the broker is a U.S. person, a controlled foreign corporation for U.S. tax purposes or a foreign person 50% or more whose gross income from all sources for specified periods is from activities that are effectively connected with a U.S. trade or business, information reporting generally will apply unless the broker has documentary evidence as to the non-U.S. Shareholder’s foreign status and has no actual knowledge to the contrary.
Applicable
Treasury regulations provide presumptions regarding the status of shareholders
when payments to the shareholders cannot be reliably associated with appropriate
documentation provided to the payer. Because the application of
these Treasury
regulations varies depending on the shareholder’s particular
circumstances, you
should consult your tax advisor regarding the information reporting
requirements applicable
to you.
Other Tax
Consequences
Tax Aspects of Our Investments in
the Operating Partnership. The following discussion summarizes
certain material federal income tax considerations applicable to our direct or
indirect investment in our operating partnership and any subsidiary partnerships
or limited liability companies we form or acquire that are treated as
partnerships for federal income tax purposes, each individually referred to as a
“Partnership” and, collectively, as “Partnerships.” The following discussion
does not cover state or local tax laws or any federal tax laws other than income
tax laws.
Classification as
Partnerships. We are entitled to include in our income our
distributive share of each Partnership’s income and to deduct our distributive
share of each Partnership’s losses only if such Partnership is classified for
federal income tax purposes as a partnership (or an entity that is disregarded
for federal income tax purposes if the entity has only one owner or member),
rather than as a corporation or an association taxable as a corporation. An
organization with at least two owners or members will be classified as a
partnership, rather than as a corporation, for federal income tax purposes if
it:
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is
treated as a partnership under the Treasury regulations relating to entity
classification (the “check-the-box regulations”);
and
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is
not a “publicly traded”
partnership.
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Under the
check-the-box regulations, an unincorporated entity with at least two owners or
members may elect to be classified either as an association taxable as a
corporation or as a partnership. If such an entity does not make an election, it
generally will be treated as a partnership for federal income tax purposes. We
intend that each Partnership will be classified as a partnership for federal
income tax purposes (or else a disregarded entity where there are not at least
two separate beneficial owners).
A
publicly traded partnership is a partnership whose interests are traded on an
established securities market or are readily tradable on a secondary market (or
a substantial equivalent). A publicly traded partnership is generally treated as
a corporation for federal income tax purposes, but will not be so treated if,
for each taxable year beginning after December 31, 1987 in which it was
classified as a publicly traded partnership, at least 90% of the partnership’s
gross income consisted of specified passive income, including real property
rents (which includes rents that would be qualifying income for purposes of the
75% gross income test, with certain modifications that make it easier for the
rents to qualify for the 90% passive income exception), gains from the sale or
other disposition of real property, interest, and dividends (the “90% passive
income exception”).
Treasury
regulations, referred to as PTP regulations, provide limited safe harbors from
treatment as a publicly traded partnership. Pursuant to one of those safe
harbors (the “private placement exclusion”), interests in a partnership will not
be treated as readily tradable on a secondary market or the substantial
equivalent thereof if (1) all interests in the partnership were issued in a
transaction or transactions that were not required to be registered under the
Securities Act of 1933, as amended, and (2) the partnership does not have more
than 100 partners at any time during the partnership’s taxable year. For the
determination of the number of partners in a partnership, a person owning an
interest in a partnership, grantor trust, or S corporation that owns an interest
in the partnership is treated as a partner in the partnership only if (1)
substantially all of the value of the owner’s interest in the entity is
attributable to the entity’s direct or indirect interest in the partnership and
(2) a
principal purpose of the use of the entity is to permit the partnership to satisfy the 100-partner limitation. Each Partnership (excluding the operating partnership, which has more than 100 partners) should qualify for the private placement exclusion.
The
operating partnership does not qualify for the private placement exclusion.
While units of the operating partnership are not and will not be traded on an
established securities market, and while the exchange rights of limited partners
of the operating partnership are restricted by the agreement of limited
partnership in ways that we believe, taking into account all of the facts and
circumstances, prevent the limited partners from being able to buy, sell or
exchange their limited partnership interests in a manner such that the limited
partnership interests would be considered “readily tradable on a secondary
market or the substantial equivalent thereof” under the PTP regulations, no
complete assurance can be provided that the IRS will not successfully assert
that the operating partnership is a publicly traded partnership.
As noted
above, a publicly traded partnership will be treated as a corporation for
federal income tax purposes unless at least 90% of such partnership’s gross
income for each taxable year in which the partnership is a publicly traded
partnership consists of “qualifying income” under Section 7704 of the Code.
“Qualifying income” under Section 7704 of the Code includes interest, dividends,
real property rents, gains from the disposition of real property, and certain
income or gains from the exploitation of natural resources. In addition,
qualifying income under Section 7704 of the Code generally includes any income
that is qualifying income for purposes of the 95% gross income test applicable
to REITs. We believe the operating partnership has satisfied the 90% qualifying
income test under Section 7704 of the Code in each year since its formation and
will continue to satisfy that exception in the future. Thus, the operating
partnership has not and will not be taxed as a corporation.
There is
one significant difference, however, regarding rent received from related party
tenants. For a REIT, rent from a tenant does not qualify as rents from real
property if the REIT and/or one or more actual or constructive owners of 10% or
more of the REIT actually or constructively own 10% or more of the tenant. Under
Section 7704 of the Code, rent from a tenant is not qualifying income if a
partnership and/or one or more actual or constructive owners of 5% or more of
the partnership actually or constructively own 10% or more of the
tenant.
Accordingly,
we will need to monitor compliance with both the REIT rules and the publicly
traded partnership rules. The operating partnership has not requested, nor does
it intend to request, a ruling from the IRS that it will be treated as a
partnership for federal income tax purposes. In the opinion of Pringle &
Herigstad, which is based on the provisions of the limited partnership agreement
of the operating partnership and on certain factual assumptions and
representations made by us, the operating partnership has since its formation
and will continue to be taxed as a partnership rather than a corporation.
Pringle & Herigstad’s opinion is not binding on the IRS or the
courts.
We have
not requested, and do not intend to request, a ruling from the Internal Revenue
Service that the Partnerships will be classified as partnerships (or disregarded
entities, if the entity has only one owner or member) for federal income tax
purposes. If for any reason a Partnership were taxable as a corporation, rather
than as a partnership, for federal income tax purposes, we would not be able to
qualify as a REIT. See “–Requirements for Qualification – Income Tests” and
“–Requirements for Qualification – Asset Tests.” In addition, any change in a
Partnership’s status for tax purposes might be treated as a taxable event, in
which case we might incur tax liability without any related cash distribution.
See “–Annual Distribution Requirements.” Further, items of income and deduction
of such Partnership would not pass through to its partners, and its partners
would be treated as shareholders for tax purposes. Consequently, such
Partnership would be required to pay income tax at corporate rates on its net
income, and distributions to its partners would constitute dividends that would
not be deductible in computing such Partnership’s taxable income.
Income Taxation of the Partnerships
and Their Partners
Partners, Not the Partnerships,
Subject to Tax. A partnership is not a taxable entity for
federal income tax purposes. We will therefore take into account our allocable
share of each Partnership’s income, gains, losses, deductions, and credits for
each taxable year of the Partnership ending with or within our taxable year,
even if we receive no distribution from the Partnership for that year or a
distribution less than our share of taxable income. Similarly, even if we
receive a distribution, it may not be taxable if the distribution does not
exceed our adjusted tax basis in our interest in the Partnership.
Partnership
Allocations. Although a partnership agreement generally will
determine the allocation of income and losses among partners, allocations will
be disregarded for tax purposes if they do not comply with the provisions of the
federal income tax laws governing partnership allocations. If an allocation is
not recognized for federal income tax purposes, the item subject to the
allocation will be reallocated in accordance with the partners’ interests in the
partnership, which will be determined by taking into account all of the facts
and circumstances relating to the economic arrangement of the
partners
with respect to such item. Each Partnership’s allocations of taxable income, gain, and loss are intended to comply with the requirements of the federal income tax laws governing partnership allocations.
Tax Allocations With Respect to
Contributed Properties. Income, gain, loss, and deduction
attributable to (a) appreciated or depreciated property that is contributed to a
partnership in exchange for an interest in the partnership or (b) property
revalued on the books of a partnership must be allocated in a manner such that
the contributing partner is charged with, or benefits from, respectively, the
unrealized gain or unrealized loss associated with the property at the time of
the contribution. The amount of such unrealized gain or unrealized loss,
referred to as “built-in gain” or “built-in loss,” is generally equal to the
difference between the fair market value of the contributed or revalued property
at the time of contribution or revaluation and the adjusted tax basis of such
property at that time, referred to as a book-tax difference. Such allocations
are solely for federal income tax purposes and do not affect the book capital
accounts or other economic or legal arrangements among the partners. The U.S.
Treasury Department has issued regulations requiring partnerships to use a
“reasonable method” for allocating items with respect to which there is a
book-tax difference and outlining several reasonable allocation methods. Unless
we as general partner select a different method, our operating partnership will
use the traditional method for allocating items with respect to which there is a
book-tax difference.
Basis in Partnership
Interest. Our adjusted tax basis in any partnership interest
we own generally will be:
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the
amount of cash and the basis of any other property we contribute to the
partnership;
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increased
by our allocable share of the partnership’s income (including tax-exempt
income) and our allocable share of indebtedness of the partnership;
and
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reduced,
but not below zero, by our allocable share of the partnership’s loss, the
amount of cash and the basis of property distributed to us, and
constructive distributions resulting from a reduction in our share of
indebtedness of the partnership.
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Loss
allocated to us in excess of our basis in a partnership interest will not be
taken into account until we again have basis sufficient to absorb the loss. A
reduction of our share of partnership indebtedness will be treated as a
constructive cash distribution to us, and will reduce our adjusted tax basis.
Distributions, including constructive distributions, in excess of the basis of
our partnership interest will constitute taxable income to us. Such
distributions and constructive distributions normally will be characterized as
long-term capital gain.
Depreciation Deductions Available to
Partnerships. The initial tax basis of property is the amount
of cash and the basis of property given as consideration for the property. A
partnership in which we are a partner generally will depreciate property for
federal income tax purposes under the alternative depreciation system of
depreciation, referred to as ADS. Under ADS, the partnership generally will
depreciate (1) furnishings and equipment over a nine year recovery period using
a straight line method and a mid-month convention, (2) buildings and
improvements over a 40-year recovery period using a straight line method and a
mid-month convention, and (3) land improvements such as landscaping and parking
lots over a 20-year recovery period using a straight line method. The
partnership’s initial basis in properties acquired in exchange for units of the
partnership should be the same as the transferor’s basis in such properties on
the date of acquisition. Although the law is not entirely clear, the partnership
generally will depreciate such property for federal income tax purposes over the
same remaining useful lives and under the same methods used by the transferors.
The partnership’s tax depreciation deductions will be allocated among the
partners in accordance with their respective interests in the partnership,
except to the extent that the partnership is required under the federal income
tax laws governing partnership allocations to use a method for allocating tax
depreciation deductions attributable to contributed or revalued properties that
results in our receiving a disproportionate share of such
deductions.
Sale of a Partnership’s
Property. Generally, any gain realized by a Partnership on the
sale of property held for more than one year will be long-term capital gain,
except for any portion of the gain treated as depreciation or cost recovery
recapture. Any gain or loss recognized by a Partnership on the disposition of
contributed or revalued properties will be allocated first to the partners who
contributed the properties or who were partners at the time of revaluation, to
the extent of their built-in gain or loss on those properties for federal income
tax purposes. The partners’ built-in gain or loss on contributed or revalued
properties is the difference between the partners’ proportionate share of the
book value of those properties and the partners’ tax basis allocable to those
properties at the time of the contribution or revaluation. Any remaining gain or
loss recognized by the Partnership on the disposition of contributed or revalued
properties, and any gain or loss recognized by the Partnership on the
disposition of other properties, will be allocated among the partners in
accordance with their percentage interests in the Partnership.
Our share
of any Partnership gain from the sale of inventory or other property held
primarily for sale to customers in the ordinary course of the Partnership’s
trade or business will be treated as income from a prohibited transaction
subject to a 100% tax. Income from a prohibited transaction may have an adverse
effect on our ability to satisfy the gross income tests for REIT status. See
“–Requirements for Qualification – Income Tests.” We do not presently intend to
acquire or hold, or to allow any Partnership to acquire or hold, any property
that is likely to be treated as inventory or property held primarily for sale to
customers in the ordinary course of our, or the Partnership’s, trade or
business.
State
and Local Tax
We and
our shareholders may be subject to state and local tax in various states and
localities, including those in which we or they transact business, own property
or reside. The tax treatment of us and our shareholders in such jurisdictions
may differ from the federal income tax treatment described above. Consequently,
prospective shareholders should consult their own tax advisors regarding the
effect of state and local tax laws on an investment in our securities.
PLAN
OF DISTRIBUTION
We may
sell the securities offered by this prospectus directly, through agents
designated by us from time to time or to or through underwriters or
dealers. If any agents, underwriters or dealers are involved in the
sale of any of our securities, their names, and any applicable purchase price,
fee, commission or discount arrangements between or among them, will be set
forth, or will be calculable from the information set forth, in the applicable
prospectus supplement. Underwriters may sell the securities offered
by this prospectus to or through dealers, and those dealers may receive
compensation in the form of discounts, concessions or commissions from the
underwriters and/or commissions from the purchasers for whom they may act as
agent.
The
securities may be offered and sold at a fixed price or prices, which may be
subject to change, at prices related to the prevailing market prices at the time
of sale, at negotiated prices or at other prices determined at the time of
sale.
If so
indicated in an applicable prospectus supplement, we may authorize dealers
acting as our agents to solicit offers by certain institutions to purchase the
securities offered by this prospectus from us at the public offering price set
forth in that prospectus supplement pursuant to delayed delivery contracts
providing for payment and delivery on the date or dates stated and the terms set
forth in that prospectus supplement.
Any
underwriting compensation paid by us to underwriters or agents in connection
with the offering of the securities offered by this prospectus, and any
discounts, concessions or commissions allowed by underwriters to participating
dealers, will be set forth in any applicable prospectus
supplement. Underwriters, dealers and agents participating in the
distribution of the securities offered by this prospectus may be deemed to be
underwriters, and any discounts and commissions received by them and any profit
realized by them on resale of the securities offered by this prospectus may be
deemed to be underwriting discounts and commissions, under the Securities
Act. Underwriters, dealers and agents may be entitled, under
agreements entered into with us, to indemnification against and contribution
toward certain civil liabilities, including liabilities under the Securities
Act.
Unless
otherwise indicated in an applicable prospectus supplement, the obligations of
the underwriters to purchase any offered securities will be subject to
conditions precedent and the underwriters will be obligated to purchase all of
the offered securities if any are purchased.
Underwriters,
agents and dealers, and their affiliates, may be customers of, engage in
transactions with, and perform services for us and our subsidiaries in the
ordinary course of business.
LEGAL
MATTERS
The
validity of the securities offered by this prospectus, the federal and state tax
aspects of the organization and operation of the Company and IRET Properties and
other legal matters will be passed upon for us by Pringle & Herigstad, P.C.,
Minot, North Dakota.
EXPERTS
The
consolidated financial statements and the related financial statement schedules
incorporated in this Prospectus by reference from the Company’s Annual Report on
Form 10-K, and the effectiveness of the Company’s internal control over
financial reporting, have been audited by Deloitte & Touche LLP, an
independent registered public accounting firm, as stated in their reports, which
are incorporated herein by reference. Such consolidated financial statements and
financial statement schedules have been so incorporated in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
WHERE
YOU CAN FIND MORE INFORMATION
This
prospectus is part of a registration statement on Form S-3 that we have filed
with the SEC covering the securities that may be offered under this prospectus.
The registration statement, including the attached exhibits and schedules,
contains additional relevant information about the securities.
We file
annual, quarterly and current reports, proxy statements and other information
with the SEC. You may read and copy the registration statement and
any reports, statements or other information on file at the SEC’s public
reference room at 100 F Street, N.E., Washington, D.C. 20549. You can
request copies of those documents upon payment of a duplicating fee to the
SEC. Please call the SEC at 1-800-SEC-0330 for further information on
the operation of the public reference room. You can review our SEC
filings, including the registration statement, by accessing the SEC’s Internet
site at http://www.sec.gov or our web site at
http://www.irets.com. The information set forth on, or otherwise
accessible through, our website is not incorporated into, and does not form a
part of, this prospectus or any other report or document we file with or furnish
to the SEC.
DOCUMENTS
INCORPORATED BY REFERENCE
The SEC
allows us to “incorporate by reference” the information we file with the SEC,
which means that we consider incorporated documents to be part of the
prospectus; we may disclose important information to you by referring you to
those documents; and information we subsequently file with the SEC will
automatically update and/or supersede the information in this
prospectus. This prospectus incorporates by reference the following
documents:
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Our
Annual Report on Form 10-K for the year ended April 30,
2008;
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Our
Quarterly Report on Form 10-Q for the quarter ended July 31,
2008;
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Our
Current Report on Form 8-K, filed with the Securities and Exchange
Commission on May 20, 2008;
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The
description of our common shares contained in our Registration Statement
on Form 10 (File No. 0-14851), dated July 29, 1986, as amended by the
Amended Registration Statement on Form 10, dated December 17, 1986, and
the Second Amended Registration Statement on Form 10, dated March 12,
1987; and
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The
description of our Series A Cumulative Redeemable Preferred Shares of
Beneficial Interest contained in our registration statement on Form 8-A,
dated April 21, 2004 and filed with the Securities and Exchange Commission
on April 22, 2004.
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We also
incorporate by reference into this prospectus all documents that we file with
the Securities and Exchange Commission pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this prospectus and prior to the
termination of the sale of our securities offered by this
prospectus.
We will
provide copies of all documents that are incorporated by reference into this
prospectus and any applicable prospectus Supplement (not including the exhibits
other than exhibits that are specifically incorporated by reference) without
charge to each person who so requests in writing or by calling us at the
following address and telephone number:
Investors
Real Estate Trust
12 Main
Street South
Minot,
N.D. 58701
Attn: Michael
Bosh, General Counsel and Corporate Secretary
(701)
837-4738
46
8,000,000
Common Shares of Beneficial Interest
______________________________________
Prospectus
Supplement
October
5, 2009
______________________________________
Robert
W. Baird & Co.
RBC
Capital Markets
Janney
Montgomery Scott
D.A.
Davidson & Co.
J.J.B.
Hilliard, W.L. Lyons, LLC