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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
or 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 001-35624
INVESTORS REAL ESTATE TRUST
(Exact name of registrant as specified in its charter)
 
North Dakota
 
 
45-0311232
 
(State or other jurisdiction of incorporation or organization)
 
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
 
1400 31st Avenue SW
Suite 60
Post Office Box 1988
Minot
ND
58702-1988
(Address of principal executive offices)
 
 
(Zip code)
(701) 837-4738
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days.
Yes
 
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes
 
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. 
Large Accelerated Filer
Accelerated filer
Non-accelerated filer
Smaller Reporting Company
Emerging growth company
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
 
No
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Shares of Beneficial Interest, no par value
IRET
New York Stock Exchange
Series C Cumulative Redeemable Preferred Shares
IRET-PC
New York Stock Exchange
The number of common shares of beneficial interest outstanding as of July 27, 2020, was 12,826,707.
 


Table of Contents

TABLE OF CONTENTS
 
Page
 
 
 
 

2

Table of Contents

PART I
Item 1. Financial Statements.

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
 
(in thousands, except per share data)
 
June 30, 2020
 
December 31, 2019
ASSETS
 
 
 
Real estate investments
 
 
 
Property owned
$
1,694,033

 
$
1,643,078

Less accumulated depreciation
(383,917
)
 
(349,122
)
 
1,310,116

 
1,293,956

Unimproved land

 
1,376

Mortgage loans receivable
10,961

 
16,140

Total real estate investments
1,321,077

 
1,311,472

Cash and cash equivalents
52,714

 
26,579

Restricted cash
2,535

 
19,538

Other assets
16,484

 
34,829

TOTAL ASSETS
$
1,392,810

 
$
1,392,418

LIABILITIES, MEZZANINE EQUITY, AND EQUITY
 
 
 
LIABILITIES
 
 
 
Accounts payable and accrued expenses
$
54,883

 
$
47,155

Revolving lines of credit
63,000

 
50,079

Notes payable, net of unamortized loan costs of $845 and $942 respectively
269,155

 
269,058

Mortgages payable, net of unamortized loan costs of $1,525 and $1,712, respectively
323,705

 
329,664

TOTAL LIABILITIES
$
710,743

 
$
695,956

COMMITMENTS AND CONTINGENCIES (NOTE 10)

 

SERIES D PREFERRED UNITS (Cumulative convertible preferred units, $100 par value, 166 units issued and outstanding at June 30, 2020 and December 31, 2019, aggregate liquidation preference of $16,560)
$
16,560

 
$
16,560

EQUITY
 
 
 
Series C Preferred Shares of Beneficial Interest (Cumulative redeemable preferred shares, no par value, $25 per share liquidation preference, 3,883 shares issued and outstanding at June 30, 2020, aggregate liquidation preference of $97,085 and 4,118 shares issued and outstanding at December 31, 2019, aggregate liquidation preference of $102,971)
93,579

 
99,456

Common Shares of Beneficial Interest (Unlimited authorization, no par value, 12,827 shares issued and outstanding at June 30, 2020 and 12,098 shares issued and outstanding at December 31, 2019)
958,292

 
917,400

Accumulated distributions in excess of net income
(421,515
)
 
(390,196
)
Accumulated other comprehensive income (loss)
(18,139
)
 
(7,607
)
Total shareholders’ equity
$
612,217

 
$
619,053

Noncontrolling interests – Operating Partnership (1,022 units at June 30, 2020 and 1,058 units at December 31, 2019)
52,558

 
55,284

Noncontrolling interests – consolidated real estate entities
732

 
5,565

Total equity
$
665,507

 
$
679,902

TOTAL LIABILITIES, MEZZANINE EQUITY, AND EQUITY
$
1,392,810

 
$
1,392,418

See accompanying Notes to Condensed Consolidated Financial Statements.

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Table of Contents

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

 
(in thousands, except per share data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
REVENUE
$
43,910

 
$
46,934

 
$
88,316

 
$
92,542

EXPENSES
 
 
 
 
 
 
 
Property operating expenses, excluding real estate taxes
12,360

 
13,942

 
25,828

 
28,746

Real estate taxes
5,410

 
5,574

 
10,875

 
10,806

Property management expense
1,345

 
1,445

 
2,899

 
2,999

Casualty loss
913

 
92

 
1,240

 
733

Depreciation and amortization
18,156

 
18,437

 
36,316

 
36,548

General and administrative expenses
3,202

 
3,549

 
6,630

 
7,355

TOTAL EXPENSES
$
41,386

 
$
43,039

 
$
83,788

 
$
87,187

Operating income (loss)
2,524

 
3,895

 
4,528

 
5,355

Interest expense
(6,940
)
 
(7,590
)
 
(13,851
)
 
(15,486
)
Loss on extinguishment of debt
(17
)
 
(407
)
 
(17
)
 
(409
)
Interest and other income (loss)
538

 
468

 
(2,239
)
 
892

Income (loss) before gain (loss) on sale of real estate and other investments, and gain (loss) on litigation settlement
(3,895
)
 
(3,634
)
 
(11,579
)
 
(9,648
)
Gain (loss) on sale of real estate and other investments
(190
)
 
615

 
(190
)
 
669

Gain (loss) on litigation settlement

 
6,286

 

 
6,286

NET INCOME (LOSS)
$
(4,085
)
 
$
3,267

 
$
(11,769
)
 
$
(2,693
)
Dividends to preferred unitholders
(160
)
 
(160
)
 
(320
)
 
(217
)
Net (income) loss attributable to noncontrolling interests – Operating Partnership
447

 
(148
)
 
1,139

 
595

Net (income) loss attributable to noncontrolling interests – consolidated real estate entities
(5
)
 
154

 
140

 
730

Net income (loss) attributable to controlling interests
(3,803
)
 
3,113

 
(10,810
)
 
(1,585
)
Dividends to preferred shareholders
(1,609
)
 
(1,706
)
 
(3,314
)
 
(3,411
)
Discount on redemption of preferred shares
25

 

 
298

 

NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
$
(5,387
)
 
$
1,407

 
$
(13,826
)
 
$
(4,996
)
 
 
 
 
 
 
 
 
BASIC
 
 
 
 
 
 
 
NET EARNINGS (LOSS) PER COMMON SHARE – BASIC
$
(0.44
)
 
$
0.11

 
$
(1.13
)
 
$
(0.43
)
 
 
 
 
 
 
 
 
DILUTED
 
 
 
 
 
 
 
NET EARNINGS (LOSS) PER COMMON SHARE – DILUTED
$
(0.44
)
 
$
0.11

 
$
(1.13
)
 
$
(0.43
)
See accompanying Notes to Condensed Consolidated Financial Statements.

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Table of Contents

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)


 
(in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
Net income (loss)
$
(4,085
)
 
$
3,267

 
$
(11,769
)
 
$
(2,693
)
Other comprehensive income:
 
 
 
 
 
 
 
Unrealized gain (loss) from derivative instrument
(1,696
)
 
(4,430
)
 
(11,105
)
 
(6,712
)
(Gain) loss on derivative instrument reclassified into earnings
917

 
(29
)
 
573

 
(30
)
Total comprehensive income (loss)
$
(4,864
)
 
$
(1,192
)
 
$
(22,301
)
 
$
(9,435
)
Net comprehensive (income) loss attributable to noncontrolling interests – Operating Partnership
504

 
275

 
1,967

 
1,255

Net (income) loss attributable to noncontrolling interests – consolidated real estate entities
(5
)
 
154

 
140

 
730

Comprehensive income (loss) attributable to controlling interests
$
(4,365
)
 
$
(763
)
 
$
(20,194
)
 
$
(7,450
)

See accompanying Notes to Condensed Consolidated Financial Statements.


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Table of Contents

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (unaudited)

 
(in thousands, except per share data)
Six Months Ended June 30, 2019
PREFERRED
SHARES
NUMBER
OF
COMMON
SHARES
 
COMMON
SHARES
 
ACCUMULATED
DISTRIBUTIONS
IN EXCESS OF
NET INCOME
 
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
 
NONREDEEMABLE
NONCONTROLLING
INTERESTS
 
TOTAL
EQUITY
Balance December 31, 2018
$
99,456

11,942

 
$
899,234

 
$
(429,048
)
 
$
(856
)
 
$
74,663

 
$
643,449

Net income (loss) attributable to controlling interests and nonredeemable noncontrolling interests
 
 
 
 
 
(1,585
)
 
 
 
(1,151
)
 
(2,736
)
Change in fair value of derivatives
 
 
 
 
 
 
 
(6,742
)
 


 
(6,742
)
Distributions - common shares and units ($0.70 per share and unit)
 
 
 
 
 
(16,389
)
 
 
 
(1,816
)
 
(18,205
)
Distributions – Series C preferred shares ($0.4140625 per Series C share)
 
 
 
 
 
(3,411
)
 
 
 
 
 
(3,411
)
Share-based compensation, net of forfeitures
 

3

 
981

 
 
 
 
 
 
 
981

Redemption of units for common shares


8

 
(521
)
 
 
 
 
 
521

 

Redemption of units for cash
 



 


 
 
 
 
 
(8,124
)
 
(8,124
)
Shares repurchased

(290
)
 
(15,677
)
 

 
 
 
 
 
(15,677
)
Acquisition of redeemable noncontrolling interests
 
 
 
4,529

 
 
 
 
 
 
 
4,529

Other
 
(7
)
 
(5
)
 
 
 
 
 
(59
)
 
(64
)
Balance June 30, 2019
$
99,456

11,656

 
$
888,541

 
$
(450,433
)
 
$
(7,598
)
 
$
64,034

 
$
594,000

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2020
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2019
$
99,456

12,098

 
$
917,400

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

 
$
679,902

Net income (loss) attributable to controlling interests and noncontrolling interests
 
 
 
 
 
(10,810
)
 
 
 
(1,279
)
 
(12,089
)
Change in fair value of derivatives
 
 
 
 
 
 
 
(10,532
)
 
 
 
(10,532
)
Distributions - common shares and units ($0.70 per share and unit)
 
 
 
 
 
(17,493
)
 
 
 
(1,446
)
 
(18,939
)
Distributions – Series C preferred shares ($0.4140625 per Series C share)
 
 
 
 
 
(3,314
)
 
 
 
 
 
(3,314
)
Share-based compensation, net of forfeitures
 

19

 
967

 
 
 
 
 
 
 
967

Sale of common shares, net
 
674

 
48,141

 
 
 
 
 
 
 
48,141

Redemption of units for common shares
 
36

 
118

 
 
 
 
 
(118
)
 

Redemption of units for cash
 

 

 
 

 
 
 
 
 
(23
)
 
(23
)
Shares repurchased
(5,877
)

 

 
298

 
 
 
 

 
(5,579
)
Acquisition of noncontrolling interests
 
 
 
(7,584
)
 
 
 
 
 
(4,637
)
 
(12,221
)
Other
 


 
(750
)
 
 
 
 
 
(56
)
 
(806
)
Balance June 30, 2020
$
93,579

12,827

 
$
958,292

 
$
(421,515
)
 
$
(18,139
)
 
$
53,290

 
$
665,507


See accompanying Notes to Condensed Consolidated Financial Statements.



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Table of Contents

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (unaudited)
 
(in thousands, except per share data)
Three Months Ended June 30, 2019
PREFERRED
SHARES
NUMBER
OF
COMMON
SHARES
 
COMMON
SHARES
 
ACCUMULATED
DISTRIBUTIONS
IN EXCESS OF
NET INCOME
 
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
 
NONREDEEMABLE
NONCONTROLLING
INTERESTS
 
TOTAL
EQUITY
Balance March 31, 2019
$
99,456

11,768

 
$
895,381

 
$
(443,661
)
 
$
(3,139
)
 
$
72,355

 
$
620,392

Net income (loss) attributable to controlling interests and nonredeemable noncontrolling interests
 
 
 
 
 
3,113

 
 
 
(6
)
 
3,107

Change in fair value of derivatives
 
 
 
 
 
 
 
(4,459
)
 
 
 
(4,459
)
Distributions - common shares and units ($0.70 per share and unit)
 
 
 
 
 
(8,179
)
 
 
 
(859
)
 
(9,038
)
Distributions – Series C preferred shares ($0.4140625 per Series C share)
 
 

 
 

 
(1,706
)
 
 
 
 
 
(1,706
)
Share-based compensation, net of forfeitures
 

3

 
565

 
 
 
 
 
 
 
565

Redemption of units for common shares


8

 
(521
)
 
 
 
 
 
521

 

Redemption of units for cash
 

 
 
 
 
 
 
 
 
(7,968
)
 
(7,968
)
Shares repurchased

(116
)
 
(6,863
)
 
 
 
 
 
 
 
(6,863
)
Other
 
(7
)
 
(21
)
 
 
 
 
 
(9
)
 
(30
)
Balance June 30, 2019
$
99,456

11,656

 
$
888,541

 
$
(450,433
)
 
$
(7,598
)
 
$
64,034

 
$
594,000

 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2020
 
 
 
 
 
 
 
 
 
 
 
 
Balance March 31, 2020
$
96,046

12,163

 
$
912,653

 
$
(407,150
)
 
$
(17,360
)
 
$
55,527

 
$
639,716

Net income (loss) attributable to controlling interests and noncontrolling interests
 
 
 
 
 
(3,803
)
 
 
 
(442
)
 
(4,245
)
Change in fair value of derivatives
 
 
 
 
 
 
 
(779
)
 
 
 
(779
)
Distributions - common shares and units ($0.70 per share and unit)
 
 
 
 
 
(8,978
)
 
 
 
(715
)
 
(9,693
)
Distributions – Series C preferred shares ($0.4140625 per Series C share)
 
 
 
 
 
(1,609
)
 
 
 
 
 
(1,609
)
Share-based compensation, net of forfeitures
 

18

 
502

 
 
 
 
 
 
 
502

Sale of common shares, net
 
624

 
44,789

 
 
 
 
 
 
 
44,789

Redemption of units for common shares
 
22

 
1,048

 
 
 
 
 
(1,048
)
 

Redemption of units for cash
 

 
 
 

 
 
 
 
 
(9
)
 
(9
)
Shares repurchased
(2,467
)
 
 
 
 
25

 
 
 
 

 
(2,442
)
Other
 


 
(700
)
 
 
 
 
 
(23
)
 
(723
)
Balance June 30, 2020
$
93,579

12,827

 
$
958,292

 
$
(421,515
)
 
$
(18,139
)
 
$
53,290

 
$
665,507



7

Table of Contents

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

 
(in thousands)
 
Six Months Ended
June 30,
 
2020
 
2019
CASH FLOWS FROM OPERATING ACTIVITIES
 

 
 

Net income (loss)
$
(11,769
)
 
$
(2,693
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 

 
 

Depreciation and amortization, including amortization of capitalized loan costs
36,829

 
37,136

(Gain) loss on sale of real estate and other investments
190

 
(669
)
Realized (gain) loss on marketable securities
3,378

 

(Gain) loss on litigation settlement

 
(2,286
)
Share-based compensation expense
967

 
981

Other, net
909

 
1,350

Changes in other assets and liabilities:
 

 
 

Other assets
(2,036
)
 
(1,745
)
Accounts payable and accrued expenses
(3,192
)
 
(3,468
)
Net cash provided by (used by) operating activities
$
25,276

 
$
28,606

CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

Proceeds from sale of marketable securities
3,856

 

Principal proceeds on mortgage loans receivable
10,020

 

Increase in mortgages and notes receivable
(11,162
)
 
(159
)
Proceeds from sale of real estate and other investments
1,162

 
9,882

Payments for acquisitions of real estate assets
(22,770
)
 
(29,918
)
Payments for improvements of real estate assets
(12,428
)
 
(6,317
)
Other investing activities
633

 
282

Net cash provided by (used by) investing activities
$
(30,689
)
 
$
(26,230
)
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

Principal payments on mortgages payable
(6,392
)
 
(74,614
)
Proceeds from revolving lines of credit
41,578

 
146,439

Principal payments on revolving lines of credit
(28,656
)
 
(26,000
)
Payments for acquisition of noncontrolling interests – consolidated real estate entities
(12,221
)
 
(1,260
)
Proceeds from issuance of common shares
48,141

 

Repurchase of common shares

 
(15,677
)
Repurchase of Series C preferred shares
(5,579
)
 

Repurchase of partnership units
(23
)
 
(8,124
)
Distributions paid to common shareholders
(16,984
)
 
(16,583
)
Distributions paid to preferred shareholders
(3,314
)
 
(1,705
)
Distributions paid to preferred unitholders
(320
)
 
(57
)
Distributions paid to noncontrolling interests – Unitholders of the Operating Partnership
(1,472
)
 
(1,914
)
Other financing activities
(213
)
 
(59
)
Net cash provided by (used by) financing activities
$
14,545

 
$
446

NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
9,132

 
2,822

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF PERIOD
46,117

 
19,256

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD
$
55,249

 
$
22,078

SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
 

 
 

Accrued capital expenditures
$
(458
)
 
$
499

Distributions declared but not paid to common shareholders
9,694

 
9,038

Distributions declared but not paid to preferred shareholders

 
1,706

Distributions declared but not paid to preferred unitholders

 
160

Gain on litigation settlement

 
2,286

Real estate assets acquired through exchange of note receivable
17,663

 

Note receivable exchanged through real estate acquisition
(17,663
)
 

Property acquired through issuance of Series D preferred units

 
16,560

 
 
 
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 

 
 

Cash paid for interest
$
13,120

 
$
15,044

See accompanying Notes to Condensed Consolidated Financial Statements.

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Table of Contents

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
for the six months ended June 30, 2020 and 2019
NOTE 1 • ORGANIZATION 
Investors Real Estate Trust, collectively with our consolidated subsidiaries (“IRET,” “we,” “us,” or “our”), is a real estate investment trust (“REIT”) focused on the ownership, management, acquisition, redevelopment, and development of apartment communities. As of June 30, 2020, we owned interests in 70 apartment communities consisting of 12,135 apartment homes.
NOTE 2 • BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES 
BASIS OF PRESENTATION
We conduct a majority of our business activities through our consolidated operating partnership, IRET Properties, A North Dakota Limited Partnership (the “Operating Partnership”), as well as through a number of other consolidated subsidiary entities. The accompanying condensed consolidated financial statements include our accounts and the accounts of all our subsidiaries in which we maintain a controlling interest, including the Operating Partnership. All intercompany balances and transactions are eliminated in consolidation.
The condensed consolidated financial statements also reflect the Operating Partnership's ownership of certain joint venture entities in which the Operating Partnership has a general partner or controlling interest. These entities are consolidated into our operations, with noncontrolling interests reflecting the noncontrolling partners’ share of ownership, income, and expenses.
SIGNIFICANT RISKS AND UNCERTAINTIES
The COVID-19 pandemic is a source of significant risk and uncertainty that could have an adverse impact on our business. The COVID-19 pandemic has adversely impacted the global economy and financial markets, and multifamily residents and commercial tenants have experienced financial hardship or closures. We have received requests for rent relief in the form of rent deferrals or rent abatements due to these financial hardships and government-mandated closures. As of June 30, 2020, $68,000 remained outstanding under the rent deferral agreements offered to multifamily residents. During the three months ended June 30, 2020, we recognized a reduction in revenue of $402,000 due to rent abatements to commercial tenants.
The extent to which the COVID-19 pandemic could have an adverse effect on our financial condition, results of operations, and cash flows is uncertain and will depend on future developments. The COVID-19 pandemic has not had a significant adverse effect on our financial condition, results of operations, and cash flows for the six months ended June 30, 2020; however, we continue to monitor the impact of the COVID-19 pandemic on all aspects of our business and cannot predict the impact it may have on our financial condition, results of operations, and cash flows in the future.
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Our interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain disclosures accompanying annual consolidated financial statements prepared in accordance with GAAP are omitted. The year-end balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by GAAP. In the opinion of management, all adjustments, consisting solely of normal recurring adjustments necessary for the fair presentation of our financial position, results of operations, and cash flows for the interim periods, have been included.
The current period’s results of operations are not necessarily indicative of results which ultimately may be achieved for the year. The interim condensed consolidated financial statements and accompanying notes thereto should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC on February 19, 2020.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

9

Table of Contents

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

ASU 2018-13, Fair Value Measurements (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirement for Fair Value Measurements
This ASU eliminates certain disclosure requirements affecting all levels of measurement, and modifies and adds new disclosure requirements for Level 3 measurements.
This ASU is effective for annual reporting periods beginning after December 15, 2019. Early adoption is permitted.
The new standard did not have a material impact on our condensed consolidated financial statements but did require additional disclosures.

ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting
This ASU contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur.
This ASU is optional and may be elected over time.
We are currently evaluating the practical expedients and the impact they may have on our condensed consolidated financial statements.

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
 
(in thousands)
Balance sheet description
June 30, 2020

 
December 31, 2019

 
June 30, 2019

Cash and cash equivalents
$
52,714

 
$
26,579

 
$
17,406

Restricted cash
2,535

 
19,538

 
4,672

Total cash, cash equivalents and restricted cash
$
55,249

 
$
46,117

 
$
22,078


As of June 30, 2020, restricted cash consisted primarily of escrows held by lenders for real estate taxes, insurance, and capital additions.
LEASES
Effective January 1, 2019, we adopted ASUs 2016-02, 2018-10, 2018-11, 2018-20, and 2019-01 related to leases using the modified retrospective approach. We elected to adopt the package of practical expedients permitted under the transition guidance, which permits us to not reassess prior conclusions about lease identification, classification, and initial direct costs under the new standard, and the practical expedient related to land easements, which allows us to not evaluate existing or expired land easements that were not previously accounted for under ASC 840. We made an accounting policy election to exclude leases in which we are a lessee with a term of 12 months or less from the balance sheet.
As a lessor, we primarily lease multifamily apartment homes which qualify as operating leases with terms that are generally one year or less. Rental revenues are recognized in accordance with ASC 842, Leases, using a method that represents a straight-line basis over the term of the lease. Rental income represents approximately 98.4% of our total revenues and includes gross market rent less adjustments for concessions, vacancy loss, and bad debt. Other property revenues represent the remaining 1.6% of our total revenues and are primarily driven by other fee income, which is typically recognized when earned, at a point in time.

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Some of our apartment communities have commercial spaces available for lease. Lease terms for these spaces typically range from three to fifteen years. The leases for commercial spaces generally include options to extend the lease for additional terms.
Beginning in April 2020, we offered multifamily residents suffering from financial hardship related to the COVID-19 pandemic the option to apply for rent deferral. We also abated rent, common area maintenance, and tax expenses for commercial tenants that experienced government-mandated interruptions or closures of their businesses. We elected to account for these accommodations as though enforceable rights and obligations for the accommodation existed without evaluating if such a right or obligation existed under the lease agreement, as allowed by the FASB Q&A released on April 10, 2020 related to lease modification guidance under ASC 842. The accommodations were recognized as variable lease payments. As of June 30, 2020, $68,000 remained outstanding under the rent deferral agreements offered to multifamily residents. During the three months ended June 30, 2020, we recognized a reduction in revenue of $402,000 due to rent abatements to commercial tenants.
Many of our leases contain non-lease components for utility reimbursement from our residents and common area maintenance from our commercial tenants. We have elected the practical expedient to combine lease and non-lease components for all asset classes. The combined components are included in lease income and are accounted for under ASC 842.
The aggregate amount of future scheduled lease income on our operating leases for commercial spaces, excluding any variable lease income and non-lease components, as of June 30, 2020, was as follows:
 
 
(in thousands)
2020 (remainder)
 
$
1,490

2021
 
3,044

2022
 
3,047

2023
 
2,870

2024
 
2,339

Thereafter
 
5,021

Total scheduled lease income - operating leases
 
$
17,811


REVENUES
Revenue is recognized in accordance with the transfer of goods and services to customers at an amount that reflects the consideration to which the company expects to be entitled for those goods and services. We elected to omit disclosing the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
Revenue streams that are included in revenues from contracts with customers include:
Other property revenues: We recognize revenue for rental related income not included as a component of a lease, such as application fees, as earned.
Gains or losses on sales of real estate: A gain or loss is recognized when the criteria for derecognition of an asset are met, including when (1) a contract exists and (2) the buyer obtained control of the nonfinancial asset that was sold.
The following table presents the disaggregation of revenue streams for the three and six months ended June 30, 2020:
 
 
 
(in thousands)
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Revenue Stream
Applicable Standard
 
2020
2019
 
2020
2019
Fixed lease income - operating leases
Leases
 
$
41,910

$
44,342

 
$
83,843

$
88,084

Variable lease income - operating leases
Leases
 
1,302

1,548

 
3,082

2,632

Other property revenue
Revenue from contracts with customers
 
698

1,044

 
1,391

1,826

Total revenue
 
 
$
43,910

$
46,934

 
$
88,316

$
92,542



IMPAIRMENT OF LONG-LIVED ASSETS
We evaluate our long-lived assets, including investments in real estate, for impairment indicators at least quarterly. The impairment evaluation is performed on assets by property such that assets for a property form an asset group. The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions, expected holding period of each asset group, and legal and environmental concerns. If indicators exist, we compare the expected future undiscounted cash flows for the long-lived asset group against the carrying amount of that asset group. If the

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sum of the estimated undiscounted cash flows is less than the carrying amount of the asset group, an impairment loss is recorded for the difference between the estimated fair value and the carrying amount of the asset group. If our anticipated holding period for properties, the estimated fair value of properties, or other factors change based on market conditions or otherwise, our evaluation of impairment charges may be different and such differences could be material to our consolidated financial statements. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates, and capital requirements that could differ materially from actual results. Reducing planned property holding periods may increase the likelihood of recording impairment losses.
During the six months ended June 30, 2020 and 2019, we recorded no impairment charges.
MORTGAGE LOANS RECEIVABLE AND NOTES RECEIVABLE
In August 2017, we sold 13 multifamily communities in exchange for cash and an $11.0 million note secured by a mortgage on the assets. As of June 30, 2020, the note was paid in full. As of December 31, 2019, the balance of the note was $10.0 million, with 12 communities remaining in the pool of assets used to secure the mortgage. During the six months ended June 30, 2020 and 2019, we received and recognized approximately $279,000 and $285,000 of interest income, respectively.
In July 2017, we originated a $16.2 million loan in a multifamily development located in New Hope, Minnesota, a Minneapolis suburb. We funded an additional $341,000 upon satisfaction of certain conditions set forth in the loan agreement. During the six months ended June 30, 2020, we executed the purchase option for the apartment community (refer to Note 8 for details on acquisition). This note was paid in full as part of our acquisition of this apartment community. As of December 31, 2019, the balance of the note was $16.6 million.
In December 2019, we originated a $29.9 million construction loan and a $15.3 million mezzanine loan for the development of a multifamily development located in Minneapolis, Minnesota. In conjunction with the loans, we received a guaranty for the substantial completion of the project improvements from an investment grade guarantor. The construction and mezzanine loans bear interest at 4.5% and 11.5%, respectively. As of June 30, 2020 and December 31, 2019, we had funded $11.0 million and $6.2 million, respectively, of the construction loan, which appears within mortgage loans receivable in our condensed consolidated balance sheets. The loans are secured by mortgages and mature on December 31, 2023, and the agreement provides us with an option to purchase the development. The loans represent an investment in an unconsolidated variable interest entity. We are not the primary beneficiary of the variable interest entity ("VIE") as we do not have the power to direct the activities which most significantly impact the entity’s economic performance nor do we have significant influence over the entity.
In March 2020, in connection with our acquisition of Ironwood, an apartment community in New Hope, Minnesota, we acquired a tax increment financing note receivable ("TIF") with a principal balance of $6.6 million. The note bears an interest rate of 4.5% with payments due in February and August of each year.
VARIABLE INTEREST ENTITIES
We have determined that our Operating Partnership and each of our less-than-wholly owned real estate partnerships is a VIE, as the limited partners or the functional equivalent of limited partners lack substantive kick-out rights and substantive participating rights. We are the primary beneficiary of the VIEs, and the VIEs are required to be consolidated on our balance sheet because we have a controlling financial interest in the VIEs and have both the power to direct the activities of the VIEs that most significantly impact the economic performance of the VIEs as well as the obligation to absorb losses or the right to receive benefits from the VIEs that could potentially be significant to the VIEs. Because our Operating Partnership is a VIE, all of our assets and liabilities are held through a VIE.
During the six months ended June 30, 2020, we acquired the 47.4% noncontrolling interests in the real estate partnership that owns 71 France for $12.2 million.
MARKETABLE SECURITIES
Marketable securities consisted of equity securities. We report equity securities at fair value based on quoted market prices (Level 1 inputs). Any unrealized gains or losses are included in interest and other income on the consolidated statements of operations. As of June 30, 2020, we had no marketable securities. As of December 31, 2019, the cost basis of marketable securities was $6.9 million, the gross unrealized gain was $113,000, and the carrying value was $7.1 million. During the six months ended June 30, 2020, we had a realized loss of $3.4 million.

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NOTE 3 • EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of our common shares of beneficial interest (“common shares”) outstanding during the period. We have issued restricted stock units (“RSUs”) and incentive stock options ("ISOs") under our 2015 Incentive Plan and Series D Convertible Preferred Units ("Series D preferred units"), which could have a dilutive effect on our earnings per share upon exercise of the RSUs or ISOs or upon conversion of the Series D preferred units (refer to Note 4 for further discussion of the Series D preferred units). Other than the issuance of RSUs, ISOs, and Series D preferred units, we have no outstanding options, warrants, convertible stock or other contractual obligations requiring issuance of additional shares that would result in dilution of earnings. Under the terms of the Operating Partnership’s Agreement of Limited Partnership, limited partners have the right to require the Operating Partnership to redeem their limited partnership units (“Units”) any time following the first anniversary of the date they acquired such Units (“Exchange Right”). Upon the exercise of Exchange Rights, and in our sole discretion, we may issue common shares in exchange for Units on a one-for-one basis.
Performance-based RSUs of 27,964 and 37,625 for the three months ended June 30, 2020 and 2019, respectively, and 27,964 and 37,625 for the six months ended June 30, 2020 and 2019, respectively, were excluded from the calculation of diluted earnings per share because they were anti-dilutive.
For the three months ended June 30, 2020 and 2019, Series D preferred units of 228,000 and, for the six months ended June 30, 2020 and 2019, Series D preferred units of 228,000 and 157,000, respectively, were excluded from the calculation of diluted earnings per share because they were anti-dilutive. For the three months ended June 30, 2020 and 2019, RSUs of 13,000 and 14,000, respectively, and, for the six months ended June 30, 2020 and 2019, RSUs of 15,000 and 11,000, respectively, were excluded from the calculation of diluted earnings per share because they were anti-dilutive.
Stock options of 63,527 and 31,764 for the three and six months ended June 30, 2020, respectively, were excluded from the calculation of diluted earnings per share because the assumed proceeds per share plus the average unearned compensation were greater than the average market price of common shares for the periods ended and, therefore were anti-dilutive.
The following table presents a reconciliation of the numerator and denominator used to calculate basic and diluted earnings per share reported in the condensed consolidated financial statements for the three and six months ended June 30, 2020 and 2019:  
 
(in thousands, except per share data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
NUMERATOR
 

 
 

 
 
 
 
Net income (loss) attributable to controlling interests
$
(3,803
)
 
$
3,113

 
$
(10,810
)
 
$
(1,585
)
Dividends to preferred shareholders
(1,609
)
 
(1,706
)
 
(3,314
)
 
(3,411
)
Redemption of preferred shares
25

 

 
298

 

Numerator for basic earnings (loss) per share – net income available to common shareholders
(5,387
)
 
1,407

 
(13,826
)
 
(4,996
)
Noncontrolling interests – Operating Partnership
(447
)
 
148

 
(1,139
)
 
(595
)
Dividends to preferred unitholders
160

 
160

 
320

 
217

Numerator for diluted earnings (loss) per share
$
(5,674
)
 
$
1,715

 
$
(14,645
)
 
$
(5,374
)
DENOMINATOR
 

 
 

 
 

 
 

Denominator for basic earnings per share weighted average shares
12,280

 
11,729

 
12,192

 
11,746

Effect of redeemable operating partnership units
1,037

 
1,226

 
1,047

 
1,306

Denominator for diluted earnings per share
13,317

 
12,955

 
13,239

 
13,052

 
 
 
 
 
 
 
 
NET EARNINGS (LOSS) PER COMMON SHARE – BASIC
$
(0.44
)
 
$
0.11

 
$
(1.13
)
 
$
(0.43
)
 
 
 
 
 
 
 
 
NET EARNINGS (LOSS) PER COMMON SHARE – DILUTED
$
(0.44
)
 
$
0.11