Investors Real Estate Trust (IRET) SEC Quarterly Report (10-Q) for Q4 2018

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 October 31, 2018

☐ 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 31 st 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)

N/A

(Former name, former address, and former fiscal year, if changed since last report.)

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 and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted 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, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.



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 ☑

The number of common shares of beneficial interest outstanding as of December 3, 2018, was 119,709,471.

Table of Contents

TABLE OF CONTENTS



	Page
Part I. Financial Information
Item 1. Financial Statements - Second Quarter - Fiscal 2019:	3
Condensed Consolidated Balance Sheets (unaudited) October 31, 2018, and April 30, 2018	3
Condensed Consolidated Statements of Operations (unaudited) For the Three and Six Months ended October 31, 2018 and 2017	4
Condensed Consolidated Statements of Comprehensive Income (unaudited) for the Three and Six Months ended October 31, 2018 and 2017	5
Condensed Consolidated Statements of Equity (unaudited) For the Six Months ended October 31, 2018 and 2017	6
Condensed Consolidated Statements of Cash Flows (unaudited) For the Six Months ended October 31, 2018 and 2017	7
Notes to Condensed Consolidated Financial Statements (unaudited)	9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3. Quantitative and Qualitative Disclosures About Market Risk	37
Item 4. Controls and Procedures	38

Part II. Other Information
Item 1. Legal Proceedings	39
Item 1A. Risk Factors	39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3. Defaults Upon Senior Securities	39
Item 4. Mine Safety Disclosures	39
Item 5. Other Information	39
Item 6. Exhibits	40
Signatures	41

Table of Contents

PART I

ITEM 1. FINANCIAL STATEMENTS - SECOND QUARTER - FISCAL 2019

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)



	(in thousands, except per share data)
	October 31, 2018			April 30, 2018
ASSETS
Real estate investments
Property owned	$	1,638,072		$	1,669,764
Less accumulated depreciation	(345,015		)	(311,324		)
	1,293,057			1,358,440
Unimproved land	6,522			11,476
Mortgage loans receivable	10,530			10,329
Total real estate investments	1,310,109			1,380,245
Cash and cash equivalents	12,777			11,891
Restricted cash	5,085			4,225
Other assets	29,769			30,297
TOTAL ASSETS	$	1,357,740		$	1,426,658
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS, AND EQUITY
LIABILITIES
Accounts payable and accrued expenses	27,920			29,018
Revolving line of credit	69,500			124,000
Term loans, net of unamortized loan costs of $1,044 and $486, respectively	143,956			69,514
Mortgages payable, net of unamortized loan costs of $1,865 and $2,221, respectively	447,549			509,919
TOTAL LIABILITIES	$	688,925		$	732,451
COMMITMENTS AND CONTINGENCIES (NOTE 6)
REDEEMABLE NONCONTROLLING INTERESTS – CONSOLIDATED REAL ESTATE ENTITIES	6,078			6,644
EQUITY
Series C Preferred Shares of Beneficial Interest (Cumulative redeemable preferred shares, no par value, $25 per share liquidation preference, 4,118 shares issued and outstanding at October 31, 2018 and April 30, 2018, aggregate liquidation preference of $102,971)	99,456			99,456
Common Shares of Beneficial Interest (Unlimited authorization, no par value, 119,727 shares issued and outstanding at October 31, 2018 and 119,526 shares issued and outstanding at April 30, 2018)	900,526			900,097
Accumulated distributions in excess of net income	(416,819		)	(395,669		)
Accumulated other comprehensive income	$	3,321		$	1,779
Total shareholders' equity	586,484			605,663
Noncontrolling interests – Operating Partnership (13,678 units at October 31, 2018 and 14,099 units at April 30, 2018)	69,334			73,012
Noncontrolling interests – consolidated real estate entities	6,919			8,888
Total equity	$	662,737		$	687,563
TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS, AND EQUITY	$	1,357,740		$	1,426,658

See accompanying Notes to Condensed Consolidated Financial Statements.

Table of Contents

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)



	(in thousands, except per share data)
	Three Months Ended October 31,						Six Months Ended October 31,
	2018			2017			2018			2017
REVENUE	$	45,638		$	41,866		$	91,584		$	82,844
EXPENSES
Property operating expenses, excluding real estate taxes	14,247			14,108			28,706			26,982
Real estate taxes	5,089			4,610			10,159			9,263
Property management expense	1,319			1,372			2,686			2,728
Casualty loss	225			115			450			600
Depreciation and amortization	19,191			17,270			37,803			42,608
Impairment of real estate investments	-			-			-			256
General and administrative expenses	3,374			3,118			7,244			7,120
TOTAL EXPENSES	$	43,445		$	40,593		$	87,048		$	89,557
Operating income (loss)	2,193			1,273			4,536			(6,713		)
Interest expense	(7,997		)	(8,509		)	(16,382		)	(16,640		)
Loss on extinguishment of debt	(4		)	(334		)	(556		)	(533		)
Interest income	410			199			891			220
Other income	19			56			54			263
Income (loss) before gain on sale of real estate and other investments and income (loss) from discontinued operations	(5,379		)	(7,315		)	(11,457		)	(23,403		)
Gain (loss) on sale of real estate and other investments	(232		)	5,324			8,992			5,448
Income (loss) from continuing operations	(5,611		)	(1,991		)	(2,465		)	(17,955		)
Income (loss) from discontinued operations	-			15,130			570			17,815
NET INCOME (LOSS)	$	(5,611	)	$	13,139		$	(1,895	)	$	(140	)
Net (income) loss attributable to noncontrolling interests – Operating Partnership	722			(773		)	587			871
Net (income) loss attributable to noncontrolling interests – consolidated real estate entities	331			455			(334		)	826
Net income (loss) attributable to controlling interests	(4,558		)	12,821			(1,642		)	1,557
Dividends to preferred shareholders	(1,706		)	(2,812		)	(3,411		)	(5,098		)
Redemption of preferred shares	-			(3,649		)	-			(3,649		)
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS	$	(6,264	)	$	6,360		$	(5,053	)	$	(7,190	)
Earnings (loss) per common share from continuing operations – basic and diluted	$	(0.05	)	$	(0.06	)	$	(0.04	)	$	(0.19	)
Earnings (loss) per common share from discontinued operations – basic and diluted	-			$	0.11		-			0.13
NET EARNINGS (LOSS) PER COMMON SHARE – BASIC & DILUTED	$	(0.05	)	$	0.05		$	(0.04	)	$	(0.06	)
DIVIDENDS PER COMMON SHARE	$	0.07		$	0.07		$	0.14		$	0.14

See accompanying Notes to Condensed Consolidated Financial Statements.

Table of Contents

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)



	(in thousands)
	Three Months Ended October 31,						Six Months Ended October 31,
	2018			2017			2018			2017
Net income (loss)	$	(5,611	)	$	13,139		$	(1,895	)	$	(140	)
Other comprehensive income:
Unrealized gain (loss) from derivative instrument	1,333			-			1,542			-
(Gain) loss on derivative instrument reclassified into earnings	90			-			119			-
Total comprehensive income (loss)	$	(4,188	)	$	13,139		$	(234	)	$	(140	)
Net comprehensive (income) loss attributable to noncontrolling interests – Operating Partnership	585			(733		)	428			871
Net comprehensive (income) loss attributable to noncontrolling interests – consolidated real estate entities	331			455			(334		)	826
Comprehensive income (loss) attributable to controlling interests	$	(3,272	)	$	12,861		$	(140	)	$	1,557

See accompanying Notes to Condensed Consolidated Financial Statements.

Table of Contents

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (unaudited)




	PREFERRED SHARES			NUMBER OF COMMON SHARES		COMMON SHARES			ACCUMULATED DISTRIBUTIONS IN EXCESS OF NET INCOME			ACCUMULATED OTHER COMPREHENSIVE INCOME		NONREDEEMABLE NONCONTROLLING INTERESTS			TOTAL EQUITY
Balance April 30, 2017	$	111,357		121,199		$	908,905		$	(466,541	)	-		$	82,437		$	636,158
Net income (loss) attributable to controlling interests and nonredeemable noncontrolling interests									1,557					(1,328		)	229
Distributions – common shares and units									(16,881		)			(2,089		)	(18,970		)
Distributions – Series B preferred shares									(4,571		)						(4,571		)
Distributions – Series C preferred shares									(527		)						(527		)
Shares issued and share-based compensation				75		844											844
Series C preferred shares issued	99,467																99,467
Redemption of units for cash														(5,982		)	(5,982		)
Shares repurchased	(111,357		)	(1,080	)	(6,253		)	(3,649		)						(121,259		)
Contributions from nonredeemable noncontrolling interests – consolidated real estate entities														239			239
Distributions to nonredeemable noncontrolling interests – consolidated real estate entities														(41		)	(41		)
Other				(5	)	(29		)									(29		)
Balance October 31, 2017	$	99,467		120,189		$	903,467		$	(490,612	)	-		$	73,236		$	585,558


Balance April 30, 2018	$	99,456		119,526		$	900,097		$	(395,669	)	$	1,779	$	81,900		$	687,563
Cumulative adjustment upon adoption of ASC 606 and ASC 610-20									627								627
Balance on May 1, 2018	$	99,456		119,526		$	900,097		$	(395,042	)	$	1,779	$	81,900		$	688,190
Net income (loss) attributable to controlling interests and nonredeemable noncontrolling interests									(1,642		)			79			(1,563		)
Other comprehensive income - derivative instrument												1,542					1,542
Distributions – common shares and units									(16,724		)			(1,960		)	(18,684		)
Distributions – Series C preferred shares									(3,411		)						(3,411		)
Shares issued and share-based compensation				27		777											777
Redemption of units for common shares				331		649								(649		)	-
Redemption of units for cash														(482		)	(482		)
Shares repurchased				(119	)	(615		)									(615		)
Distributions to nonredeemable noncontrolling interests – consolidated real estate entities														(2,374		)	(2,374		)
Other				(38	)	(382		)						(261		)	(643		)
Balance October 31, 2018	$	99,456		119,727		$	900,526		$	(416,819	)	$	3,321	$	76,253		$	662,737

See accompanying Notes to Condensed Consolidated Financial Statements.

Table of Contents

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)



	(in thousands)
	Six Months Ended October 31,
	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	(1,895	)	$	(140	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization, including amortization of capitalized loan costs	38,522			43,176
Depreciation and amortization from discontinued operations, including amortization of capitalized loan costs	-			7,077
(Gain) loss on sale of real estate, land, other investments and discontinued operations	(9,562		)	(17,686		)
Share-based compensation expense	580			751
Other, net	956			1,164
Changes in other assets and liabilities:
Other assets	(725		)	(1,853		)
Accounts payable and accrued expenses	(662		)	(4,756		)
Net cash provided by operating activities	$	27,214		$	27,733
CASH FLOWS FROM INVESTING ACTIVITIES
Principal proceeds on mortgage loans receivable	425			-
Increase in notes receivable	(736		)	(6,126		)
Proceeds from sale of discontinued operations	-			35,775
Proceeds from sale of real estate and other investments	52,156			18,039
Insurance proceeds received	1,266			530
Payments for acquisitions of real estate assets	(837		)	(154,122		)
Payments for development and re-development of real estate assets	-			(2,817		)
Payments for improvements of real estate assets	(8,547		)	(10,178		)
Payments for improvements of real estate assets from discontinued operations	-			(803		)
Net cash provided by (used by) investing activities	$	43,727		$	(119,702	)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on mortgages payable, including prepayment penalties	(63,481		)	(52,143		)
Proceeds from revolving lines of credit	53,017			293,350
Principal payments on revolving lines of credit	(107,517		)	(102,900		)
Proceeds from term loan	74,352			-
Proceeds from construction debt	-			3,124
Payment on financing liability	-			(7,900		)
Repurchase of common shares	(615		)	(6,253		)
Proceeds from issuance of Series C preferred shares, net of issue costs	-			99,467
Repurchase of Series B preferred shares	-			(115,005		)
Repurchase of partnership units	(482		)	(5,982		)
Distributions paid to common shareholders	(16,724		)	(16,881		)
Distributions paid to preferred shareholders	(3,411		)	(5,333		)
Distributions paid to noncontrolling interests – Unitholders of the Operating Partnership	(1,960		)	(2,089		)
Distributions paid to noncontrolling interests – consolidated real estate entities	(2,374		)	(40		)
Net cash provided by (used by) financing activities	$	(69,195	)	$	81,415
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH	1,746			(10,554		)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF PERIOD	16,116			56,800
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD	$	17,862		$	46,246

See accompanying Notes to Condensed Consolidated Financial Statements.

Table of Contents

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, continued)



	(in thousands)
	Six Months Ended October 31,
	2018			2017
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Operating partnership units converted to shares	$	649		$	-
Decrease to accounts payable included within real estate investments	(329		)	(2,106		)
Notes and accounts receivable converted to equity	670			-
Construction debt reclassified to mortgages payable	-			23,300

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest	$	17,059		$	17,122

See accompanying Notes to Condensed Consolidated Financial Statements.

Table of Contents

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

for the six months ended October 31, 2018 and 2017

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 October 31, 2018 , we owned interests in 87 apartment communities consisting of 13,702 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. Our fiscal year currently ends on April 30. On September 20, 2018, our Board of Trustees approved a change in our fiscal year-end, beginning January 1, 2019, from April 30 to December 31. We will file a transition report on Form 10-K for the period ended December 31, 2018, in accordance with SEC rules and regulations, and all subsequent fiscal years, beginning in 2019, will be from January 1 to December 31. Our Sixth Restated Trustee's Regulations (Bylaws) reflecting this change in fiscal year-end is attached hereto as Exhibit 3.3.

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.

PRIOR PERIOD FINANCIAL STATEMENT CORRECTION OF AN IMMATERIAL MISSTATEMENT

During the first quarter of fiscal year 2019, we identified certain adjustments required to correct balances within total equity related to noncontrolling interests in our joint venture entities. Related to our acquisition of additional ownership interest in the joint venture entities, noncontrolling interest - consolidated real estate entities was understated and common shares of beneficial interest was overstated beginning in fiscal year 2017. The adjustments did not impact total assets, total liabilities, revenue, net income, net income available to common shareholders, number of common shares, or earnings per share.

Based on an analysis of Accounting Standards Codification ("ASC") 250 - "Accounting Changes and Error Corrections" ("ASC 250"), Staff Accounting Bulletin 99 - "Materiality" ("SAB 99") and Staff Accounting Bulletin 108 - "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" ("SAB 108"), we determined that these errors were immaterial to the previously-issued financial statements. The misstatement was corrected in the condensed consolidated balance sheets as of April 30, 2018 and the condensed consolidated statements of equity as of April 30, 2017, October 31, 2017 and April 30, 2018.

The effect of these revisions on our condensed consolidated balance sheet is as follows:



	(in thousands)
	As previously reported at April 30, 2018		Adjustment			As revised at April 30, 2018
Common shares of beneficial interest	$	907,843	$	(7,746	)	$	900,097
Noncontrolling interests - consolidated real estate entities	1,078		7,810			8,888
Redeemable noncontrolling interests - consolidated real estate entities	6,708		(64		)	6,644

The effect of these revisions on our condensed consolidated statements of equity is as follows:



	(in thousands)
	As previously reported at April 30, 2017		Adjustment			As revised at April 30, 2017
Common shares of beneficial interest	$	916,121	$	(7,216	)	$	908,905
Nonredeemable noncontrolling interests	75,157		7,280			82,437

Table of Contents



	(in thousands)
	As previously reported at October 31, 2017		Adjustment			As revised at October 31, 2017
Common shares of beneficial interest	$	910,683	$	(7,216	)	$	903,467
Nonredeemable noncontrolling interests	65,956		7,280			73,236



	(in thousands)
	As previously reported at April 30, 2018		Adjustment			As revised at April 30, 2018
Common shares of beneficial interest	$	907,843	$	(7,746	)	$	900,097
Nonredeemable noncontrolling interests	74,090		7,810			81,900

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 ("U.S. 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 U.S. GAAP are omitted. The year-end balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by U.S. 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 fiscal year ended April 30, 2018 , as filed with the SEC on June 28, 2018.

USE OF ESTIMATES

The preparation of financial statements in conformity with U.S. 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.

TAX CUTS AND JOBS ACT OF 2017

The Tax Cuts and Jobs Act of 2017 was passed on December 22, 2017. This Act includes a number of changes to the corporate income tax system, including (1) a reduction in the statutory federal corporate income tax rate from 35% to 21% for non-REIT "C" corporations, (2) changes to deductions for certain pass-through business income, and (3) potential limitations on interest expense, depreciation, and the deductibility of executive compensation. As a REIT, we generally will not be subject to federal income tax on our taxable income at the corporate level and do not believe that any of the changes from the 2017 Tax Cut and Jobs Act of 2007 will have a material impact on our consolidated financial statements. However, the impact of this Act is not yet fully known, and there can be no assurance that it will not have an adverse impact on our results of operations.

RECENT ACCOUNTING PRONOUNCEMENTS

The following table provides a brief description of recent accounting standards updates ("ASUs").

Table of Contents



Standard	Description	Date of Adoption	Effect on the Financial Statements or Other Significant Matters
ASU 2014-09, Revenue from Contracts with Customers	This ASU will eliminate the transaction- and industry-specific revenue recognition guidance under current GAAP and replace it with a principle-based approach for determining revenue recognition. The standard outlines a five-step model whereby revenue is recognized as performance obligations within a contract are satisfied.	This ASU is effective for annual reporting periods beginning after December 15, 2017, as a result of a deferral of the effective date arising from the issuance of ASU 2015-14, Revenue from Contracts with Customers - Deferral of the Effective Date . We adopted the new standard effective May 1, 2018 using the modified retrospective approach.	The majority of our revenue is derived from rental income, which is scoped out from this standard and will be accounted for under ASC 840, Leases. Our other revenue streams, which were evaluated under this ASU, include but are not limited to other income from residents determined not to be within the scope of ASC 840 and gains and losses from real estate dispositions. Refer to the Revenues section below for information regarding the impact of adopting the standard on our condensed consolidated financial statements.
ASU 2016-02, Leases	This ASU amends existing accounting standards for lease accounting, including by requiring lessees to recognize most leases on the balance sheet and making certain changes to lessor accounting.	This ASU is effective for annual reporting periods beginning after December 15, 2018. Early adoption is permitted.	We expect our residential leases, where we are the lessor, will continue to be accounted for as operating leases under the new standard. As a result, we do not expect significant changes in the accounting for lease revenue. For leases where we are the lessee, we will recognize a right of use asset and related lease liability on our consolidated balance sheets upon adoption. We are continuing to evaluate the impact the new standard may have on our consolidated financial statements.
ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments	This ASU addresses eight specific cash flow issues with the objective of reducing diversity in practice. The cash flow issues include debt prepayment or debt extinguishment costs and proceeds from the settlement of insurance claims.	This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We adopted the new standard effective May 1, 2018.	The standard requires we present combined inflows and outflows of cash, cash equivalents, and restricted cash in the consolidated statement of cash flows. See additional disclosures regarding the required change below.
ASU 2017-05, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets	This ASU clarifies the definition of an in-substance nonfinancial asset and changes the accounting for partial sales of nonfinancial assets to be more consistent with the accounting for a sale of a business pursuant to ASU 2017-01. This ASU allows for either a retrospective or modified retrospective approach.	This ASU is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. We adopted the new standard effective May 1, 2018 using the modified retrospective approach.	Refer to the Revenues section below for information regarding the impact of adopting the standard on our condensed consolidated financial statements.
ASU 2018-10, Codification Improvements to Topic 842, Leases	This ASU was issued to increase shareholders' awareness of narrow aspects of the guidance issued in the amendments and to expedite the improvements under ASU 2016-02.	This ASU is effective for annual reporting periods beginning after December 15, 2018. Early adoption is permitted.	We are currently evaluating the impact the new standard may have on our consolidated financial statements.
ASU 2018-11, Leases: Targeted Improvements	This ASU allows lessors to account for lease and non-lease components, by class of underlying assets, as a single lease component if certain criteria are met. The new standard also indicates that companies are permitted to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption in lieu of the modified retrospective approach and provides other practical expedients.	This ASU is effective for annual reporting periods beginning after December 15, 2018. Early adoption is permitted.	We are currently evaluating the impact the new standard may have on our consolidated financial statements.

Table of Contents



Standard	Description	Date of Adoption	Effect on the Financial Statements or Other Significant Matters
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.	We are currently evaluating the impact the new standard may have on our disclosures.
ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Topic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract	This ASU reduces the complexity for the accounting for costs of implementing a cloud computing service arrangement. The standard aligns various requirements for capitalizing implementation costs.	This ASU is effective for annual reporting periods beginning after December 15, 2019. Early adoption is permitted.	We are currently evaluating the impact the new standard may have on our consolidated financial statements.

RECLASSIFICATIONS

Certain previously reported amounts have been reclassified to conform to the current financial statement presentation. These reclassifications had no impact on net income as reported in the condensed consolidated statement of operations, total assets, liabilities, or equity as reported in the condensed consolidated balance sheets and total shareholders' equity. We report in discontinued operations the results of operations and the related gains or losses of properties that have either been disposed or classified as held for sale and for which the disposition represents a strategic shift that has or will have a major effect on our operations and financial results.

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH

Effective May 1, 2018, we adopted ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments which affects the presentation and disclosure of the statements of cash flows. Previously our consolidated statements of cash flows presented transfers between restricted cash and unrestricted cash as operating, financing, and investing cash activities based upon the required or intended purpose for the restricted cash. We revised our condensed consolidated statements of cash flows for the six months ended October 31, 2017 to conform to this presentation, and the effect of the revisions to net cash flows from operating and investing activities as previously reported for the six months ended October 31, 2017 are summarized in the following table:

Table of Contents



	(in thousands)
	As previously reported			Impact of ASU			As adjusted and currently reported
	October 31, 2017			2016-15			October 31, 2017
Net cash provided by operating activities	$	26,932		$	801		$	27,733
Net cash provided by (used by) investing activities	(95,112		)	(24,590		)	(119,702		)
Net cash provided by (used by) financing activities	81,825			(410		)	81,415

Net increase (decrease) in cash, cash equivalents	13,645			(13,645		)	-
Net increase (decrease) in cash, cash equivalents, and restricted cash	-			(10,554		)	(10,554		)

Cash and cash equivalents at beginning of period	28,819			(28,819		)	-
Cash, cash equivalents, and restricted cash at beginning of period	-			56,800			56,800
Cash and cash equivalents at end of period	$	42,464
Cash, cash equivalents, and restricted cash at end of period				$	3,782		$	46,246



	(in thousands)
Balance sheet description	October 31, 2018	October 31, 2017
Cash and cash equivalents	12,777	42,464
Restricted cash	5,085	3,782
Total cash, cash equivalents and restricted cash	17,862	46,246

As of October 31, 2018 , restricted cash consisted of $5.1 million of escrows held by lenders for real estate taxes, insurance, and capital additions.

REVENUES

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

We primarily lease multifamily apartments under operating leases generally with terms of one year or less . Rental revenues are recognized in accordance with ASC 840, Leases , using a method that represents a straight-line basis over the term of the lease. Rental income represents approximately 94.3% of our total revenues and includes gross market rent less adjustments for concessions, vacancy loss, and bad debt. Other property revenues represent the remaining 5.7% of our total revenue and are primarily driven by utility reimbursement from our residents and other fee income, which is typically recognized at a point in time.

Revenue streams that are included in ASU 2014-09 include:


•	O ther property revenues: We recognize revenue for rental related income not included as a component of a lease, such as utility reimbursement and application fees, as earned, and have concluded that this is appropriate under the new standard.

•

Gains or losses on sales of real estate: Subsequent to the adoption of the new standard, a gain or loss is recognized when the criteria for derecognition of an asset are met, including when (1) a contract exists and (2) the buyer obtained control of the nonfinancial asset that was sold. As a result, we may recognize a gain on real estate disposition transactions that previously did not qualify as a sale or for full profit recognition under the previous accounting standard.

We concluded that the adoption of the new standard required a cumulative adjustment of $627,000 to the opening balance of retained earnings as of May 1, 2018, due to the sale of a group of properties in the prior fiscal year. The sale of properties was

Table of Contents

previously accounted for using the installment method. Under the installment method, we recorded a mortgage receivable net of the deferred gain on sale, which was to be recognized as payments were received. The gain on sale under the new revenue standard is recognized when control of the assets is transferred to the buyer. As a result of our adoption of the new standard, we recorded a cumulative adjustment to retained earnings and increased the mortgage receivable by $627,000 to recognize the previously deferred gain on sale.

The following table presents the disaggregation of revenue streams of our rental income for the six months ended October 31, 2018 :



		(in thousands, except percentages)
		Six Months Ended October 31, 2018
Revenue Stream	Applicable Standard	Amount of Revenue	Percent of Revenue
Rental revenue	Leases	86,394	94.3	%
Other property revenue	Revenue Recognition	5,190	5.7	%
		91,584	100.0	%

IMPAIRMENT OF LONG-LIVED ASSETS

We periodically evaluate our long-lived assets, including investments in real estate, for impairment indicators. The impairment evaluation is performed on assets by property such that assets for a property form an asset group. The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions, expected holding period of each asset group, and legal and environmental concerns. If indicators exist, we compare the expected future undiscounted cash flows for the long-lived asset group against the carrying amount of that asset group. If the sum of the estimated undiscounted cash flows is less than the carrying amount of the asset group, an impairment loss is recorded for the difference between the estimated fair value and the carrying amount of the asset group. If our anticipated holding period for properties, the estimated fair value of properties, or other factors change based on market conditions or otherwise, our evaluation of impairment charges may be different and such differences could be material to our consolidated financial statements. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates, and capital requirements that could differ materially from actual results. Reducing planned property holding periods may increase the likelihood of recording impairment losses.

During the six months ended October 31, 2018 , we recorded no impairment charges.

During the six months ended October 31, 2017 , we recognized impairment charges of $256,000 on a parcel of land in Bismarck, ND. This property was written down to estimated fair value during the first quarter of fiscal year 2018 based on receipt of a market offer to purchase and our intent to dispose of the property. We disposed of the property during the second quarter of fiscal year 2018.

CHANGE IN DEPRECIABLE LIVES OF REAL ESTATE ASSETS

We review the estimated useful lives of our real estate assets on an ongoing basis. Prior to our strategic shift to become a multifamily-focused REIT, which began in fiscal year 2016, we operated in five segments (office, retail, industrial, healthcare and multifamily). Accordingly, our estimated useful lives represented a blend of these segments.

During fiscal years 2016, 2017, and 2018, we disposed of the bulk of our office, retail, industrial, and healthcare portfolios. In the first quarter of fiscal year 2018, we determined it was appropriate to review and adjust our estimated useful lives to be specific to our remaining asset portfolio. Effective May 1, 2017, we changed the estimated useful lives of our real estate assets to better reflect the estimated periods during which they will be of economic benefit. Generally, the estimated lives of buildings and improvements that previously were 20 - 40 years have been decreased to 10 - 37 years, while those that were previously nine years were changed to 5 - 10 years. The effect of this change in estimate for the six months ended October 31, 2017 , was to increase depreciation expense by approximately $20.3 million , decrease net income by $20.3 million , and decrease earnings per share by $0.15 . Of the expense increase, $9.0 million , or $0.07 per share, represented depreciation on assets that were fully depreciated under the new estimated useful lives in the first quarter of fiscal year 2018.

MORTGAGE RECEIVABLE AND NOTES RECEIVABLE

In August 2017, we sold 13 multifamily properties in exchange for cash and a note secured by a mortgage on the assets. As of October 31, 2018 , the remaining balance on the mortgage was $10.5 million . The note bears an interest rate of 5.5% and matures in August 2020. Monthly payments are interest-only, with the principal balance payable at maturity. During the six

Table of Contents

months ended October 31, 2018 and 2017 , we received and recognized approximately $350,000 and $119,000 of interest income, respectively. During the six months ended October 31, 2018 , we received a payment of $425,000 to pay down the balance of the mortgage receivable and released one of the 13 properties from the assets used to secure the mortgage.

In July 2017, we originated a $16.2 million loan in a multifamily development located in New Hope, MN, a Minneapolis suburb. As of July 31, 2018, we had funded the full initial loan balance, which appears in other assets on our Condensed Consolidated Balance Sheets; however, we may fund additional amounts upon satisfaction of certain conditions set forth in the loan agreement. The note bears an interest rate of 6% , matures in July 2023, and provides us an option to purchase the development prior to the loan maturity date.

VARIABLE INTEREST ENTITIES

We have determined that our Operating Partnership and each of our less-than-wholly owned real estate partnerships is a variable interest entity ("VIE"), as the limited partners or the functional equivalent of limited partners lack substantive kick-out rights and substantive participating rights. We are the primary beneficiary of the VIEs, and the VIEs are required to be consolidated on our balance sheet because we have a controlling financial interest in the VIEs and have both the power to direct the activities of the VIEs that most significantly impact the economic performance of the VIEs as well as the obligation to absorb losses or the right to receive benefits from the VIEs that could potentially be significant to the VIEs. Because our Operating Partnership is a VIE, all of our assets and liabilities are held through a VIE.

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") under our 2015 Incentive Plan, which could have a dilutive effect on our earnings per share upon exercise of the RSUs. Other than the issuance of RSUs, 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. 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 October 31, 2018 and 2017 :



	(in thousands, except per share data)
	Three Months Ended October 31,						Six Months Ended October 31,
	2018			2017			2018			2017
NUMERATOR
Income (loss) from continuing operations – controlling interests	$	(4,558	)	$	(679	)	$	(2,153	)	$	(14,330	)
Income (loss) from discontinued operations – controlling interests	-			13,500			511			15,887
Net income (loss) attributable to controlling interests	(4,558		)	12,821			(1,642		)	1,557
Dividends to preferred shareholders	(1,706		)	(2,812		)	(3,411		)	(5,098		)
Redemption of preferred shares	-			(3,649		)	-			(3,649		)
Numerator for basic earnings (loss) per share – net income available to common shareholders	(6,264		)	6,360			(5,053		)	(7,190		)
Noncontrolling interests – Operating Partnership	(722		)	773			(587		)	(871		)
Numerator for diluted earnings (loss) per share	$	(6,986	)	$	7,133		$	(5,640	)	$	(8,061	)
DENOMINATOR
Denominator for basic earnings per share weighted average shares	119,396			120,144			119,320			120,282
Effect of redeemable operating partnership units	13,789			14,623			13,924			14,912
Denominator for diluted earnings per share	133,185			134,767			133,244			135,194
Earnings (loss) per common share from continuing operations – basic and diluted	$	(0.05	)	$	(0.06	)	$	(0.04	)	$	(0.19	)
Earnings (loss) per common share from discontinued operations – basic and diluted	-			0.11			-			0.13
NET EARNINGS (LOSS) PER COMMON SHARE – BASIC & DILUTED	$	(0.05	)	$	0.05		$	(0.04	)	$	(0.06	)

Table of Contents

Performance-based restricted stock awards of 253,000 and 115,000 for the three months ended October 31, 2018 and 2017 , respectively, and 253,000 and 115,000 for the six months ended October 31, 2018 and 2017 , 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 the common stock for the periods presented and, therefore, were anti-dilutive. Refer to Note 13 - Share-Based Compensation for discussion of the terms for these awards.

NOTE 4 • EQUITY

Operating Partnership Units. Outstanding Units in the Operating Partnership were 13.7 million Units at October 31, 2018 and 14.1 million Units at April 30, 2018 .

Common Shares and Equity Awards . Common Shares outstanding on October 31, 2018 and April 30, 2018 , totaled 119.7 million and 119.5 million , respectively. There were 13,000 shares issued under our 2015 Incentive Award Plan during the three months ended October 31, 2018 , with a total grant-date fair value of $83,000 . During the six months ended October 31, 2018 , we issued 56,000 restricted common shares, with a total grant date fair value of $347,000 . During fiscal year 2018, there were no shares issued during the three months ended October 31, 2017 . During the six months ended October 31, 2017 , we issued 75,000 restricted Common Shares, with a total grant-date fair value of $445,000 . These shares are issued under our 2015 Incentive Award Plan for executive officer and trustee share-based compensation. These shares vest based on performance and service criteria.

Exchange Rights . Pursuant to the exercise of Exchange Rights, during the six months ended October 31, 2018 , we redeemed 91,000 Units for an aggregate cost of $482,000 , at an average price per Unit of $5.30 . During the six months ended October 31, 2017 , we redeemed 999,500 Units for an aggregate cost of $6.0 million , at an average price per Unit of $5.98 . During the three and six months ended October 31, 2018 , we redeemed 217,000 and 331,000 Units, respectively, in exchange for common shares in connection with Unitholders exercising their Exchange Rights, with a total book value of $358,000 and $649,000 , respectively. During the three and six months ended October 31, 2017 , we redeemed no Units in exchange for common shares.

Share Repurchase Program . On December 7, 2016, our Board of Directors authorized a share repurchase program to repurchase up to $50 million of our Common Shares over a one -year period. On December 5, 2017, our Board of Trustees reauthorized this share repurchase program for an additional one -year period. See Note 15 - Subsequent Events for additional information regarding our recent reauthorization of the share repurchase program. Under this program, we may repurchase Common Shares in open-market purchases, including pursuant to Rule 10b5-1 and Rule 10b-18 plans, as determined by management and in accordance with the requirements of the SEC. The extent to which we repurchase our shares, and the timing of repurchases, will depend on a variety of factors, including market conditions, regulatory requirements, and other corporate considerations, as determined by the executive management team. This program may be suspended or discontinued at any time. During the six months ended October 31, 2018 , we repurchased and retired 118,000 common shares for an aggregate cost of $615,000 , including commissions, at an average price per share of $5.20 . During the six months ended October 31, 2017 , we repurchased and retired 1.1 million common shares for an aggregate cost of $6.3 million , including commissions, at an average price per share of $5.79 . As of October 31, 2018 , $34.9 million remained available under the $50 million authorized share repurchase program.

NOTE 5 • SEGMENT REPORTING

We operate in a single reportable segment, which includes the ownership, management, development, redevelopment, and acquisition of apartment communities. Each of our operating properties is considered a separate operating segment because each property earns revenues, incurs expenses, and has discrete financial information. Our chief operating decision-makers evaluate each property's operating results to make decisions about resources to be allocated and to assess performance. We do not group our operations based on geography, size, or type. Our apartment communities have similar long-term economic characteristics and provide similar products and services to our residents. No apartment community comprises more than 10% of consolidated revenues, profits, or assets. Accordingly, our apartment communities are aggregated into a single reportable segment.

Prior to the third quarter of fiscal year 2018, we reported our results in two reportable segments: multifamily and healthcare. We sold substantially all of our healthcare portfolio during the third quarter of fiscal year 2018 and classified it as discontinued operations (see Note 7 for additional information). Healthcare no longer meets the quantitative thresholds for reporting as a separate reportable segment and therefore is included in "all other" with other non-multifamily properties. As of July 31, 2018, we no longer owned any healthcare properties.

Our executive management team comprises our chief operating decision-makers. This team measures the performance of our reportable segment based on net operating income ("NOI"), which we define as total real estate revenues less real estate

Table of Contents

expenses. Real estate expenses consist of property operating expenses and real estate tax expense and do not include property management expense. We believe that NOI is an important supplemental measure of operating performance for a REIT's operating real estate because it provides a measure of operations that is unaffected by depreciation, amortization, financing, and general and administrative expenses. NOI does not represent cash generated by operating activities in accordance with U.S. GAAP and should not be considered an alternative to net income, net income available for common shareholders, or cash flow from operating activities as a measure of financial performance.

The revenues and NOI for the multifamily reportable segment are summarized as follows for the three and six month periods ended October 31, 2018 and 2017 , respectively, along with reconciliations to the condensed consolidated financial statements. Segment assets are also reconciled to total assets as reported in the condensed consolidated financial statements.



	(in thousands)
Three Months Ended October 31, 2018	Multifamily		All Other		Total
Real estate revenue	$	43,874	$	1,764	$	45,638
Real estate expenses	18,768		568		19,336
Net operating income	$	25,106	$	1,196	$	26,302
Property management expenses					(1,319		)
Casualty loss					(225		)
Depreciation and amortization					(19,191		)
General and administrative expenses					(3,374		)
Interest expense					(7,997		)
Loss on debt extinguishment					(4		)
Interest and other income					429
Income (loss) before gain on sale of real estate and other investments and income (loss) from discontinued operations					(5,379		)
Gain (loss) on sale of real estate and other investments					(232		)
Income (loss) from continuing operations					(5,611		)
Income (loss) from discontinued operations					-
Net income (loss)					$	(5,611	)



	(in thousands)
Three Months Ended October 31, 2017	Multifamily		All Other		Total
Real estate revenue	$	37,457	$	4,409	$	41,866
Real estate expenses	17,201		1,517		18,718
Net operating income	$	20,256	$	2,892	$	23,148
Property management expenses					(1,372		)
Casualty loss					(115		)
Depreciation and amortization					(17,270		)
General and administrative expenses					(3,118		)
Interest expense					(8,509		)
Loss on debt extinguishment					(334		)
Interest and other income					255
Income (loss) before gain on sale of real estate and other investments and income (loss) from discontinued operations					(7,315		)
Gain (loss) on sale of real estate and other investments					5,324
Income (loss) from continuing operations					(1,991		)
Income (loss) from discontinued operations					15,130
Net income (loss)					$	13,139

Table of Contents



	(in thousands)
Six Months Ended October 31, 2018	Multifamily		All Other		Total
Real estate revenue	$	86,963	$	4,621	$	91,584
Real estate expenses	37,254		1,611		38,865
Net operating income	$	49,709	$	3,010	$	52,719
Property management expenses					(2,686		)
Casualty loss					(450		)
Depreciation and amortization					(37,803		)
Impairment of real estate investments					-
General and administrative expenses					(7,244		)
Interest expense					(16,382		)
Loss on debt extinguishment					(556		)
Interest and other income					945
Income (loss) before gain on sale of real estate and other investments and income (loss) from discontinued operations					(11,457		)
Gain (loss) on sale of real estate and other investments					8,992
Income (loss) from continuing operations					(2,465		)
Income (loss) from discontinued operations					570
Net income (loss)					$	(1,895	)



	(in thousands)
Six Months Ended October 31, 2017	Multifamily		All Other		Total
Real estate revenue	$	73,455	$	9,389	$	82,844
Real estate expenses	32,934		3,311		36,245
Net operating income	$	40,521	$	6,078	$	46,599
Property management expenses					(2,728		)
Casualty loss					(600		)
Depreciation and amortization					(42,608		)
Impairment of real estate investments					(256		)
General and administrative expenses					(7,120		)
Interest expense					(16,640		)
Loss on debt extinguishment					(533		)
Interest and other income					483
Income (loss) before gain on sale of real estate and other investments and income (loss) from discontinued operations					(23,403		)
Gain (loss) on sale of real estate and other investments					5,448
Income (loss) from continuing operations					(17,955		)
Income (loss) from discontinued operations					17,815
Net income (loss)					$	(140	)

Segment Assets and Accumulated Depreciation

Segment assets are summarized as follows as of October 31, 2018 , and April 30, 2018 , respectively, along with reconciliations to the condensed consolidated financial statements:

Table of Contents



	(in thousands)
As of October 31, 2018	Multifamily			All Other			Total
Segment assets
Property owned	$	1,580,260		$	57,812		$	1,638,072
Less accumulated depreciation	(328,075		)	(16,940		)	(345,015		)
Total property owned	$	1,252,185		$	40,872		$	1,293,057
Cash and cash equivalents							12,777
Restricted cash							5,085
Other assets							29,769
Unimproved land							6,522
Mortgage loans receivable							10,530
Total Assets							$	1,357,740



	(in thousands)
As of April 30, 2018	Multifamily			All Other			Total
Segment assets
Property owned	$	1,606,421		$	63,343		$	1,669,764
Less accumulated depreciation	(294,477		)	(16,847		)	(311,324		)
Total property owned	$	1,311,944		$	46,496		$	1,358,440
Cash and cash equivalents							11,891
Restricted cash							4,225
Other assets							30,297
Unimproved land							11,476
Mortgage loans receivable							10,329
Total Assets							$	1,426,658

NOTE 6 • COMMITMENTS AND CONTINGENCIES

Litigation. We are subject to a variety of legal actions for personal injury or property damage arising in the ordinary course of our business, most of which are covered by liability insurance. Various resident claims are also brought periodically, most of which are covered by insurance. While resolution of these matters cannot be predicted with certainty, management believes that the final outcome of these claims and legal proceedings will not have a material effect on our liquidity, financial position, cash flows, or results of operations.

Environmental Matters. Under various federal, state, and local laws, ordinances, and regulations, a current or previous owner or operator of real estate may be liable for the costs of removal of, or remediation of, certain hazardous or toxic substances in, on, around, or under the property. While we currently have no knowledge of any material violation of environmental laws, ordinances, or regulations at any of our properties, there can be no assurance that areas of contamination will not be identified at any of our properties or that changes in environmental laws, regulations, or cleanup requirements would not result in material costs to us.

Restrictions on Taxable Dispositions. Twenty-four of our properties, consisting of 4,099 apartment units, are subject to restrictions on our ability to resell in taxable transactions. These restrictions are contained in agreements we entered into with some of the sellers or contributors of the properties and are effective for varying periods. The real estate investment amount of these properties (net of accumulated depreciation) was $536.9 million at October 31, 2018 . We do not believe that these agreements materially affect the conduct of our business or our decisions whether to dispose of restricted properties during the restriction period because we generally hold these and our other properties for investment purposes rather than for sale. In addition, where we deem it to be in our shareholders' best interests to dispose of such properties, we generally seek to structure sale of such properties as tax deferred transactions under Section 1031 of the Internal Revenue Code (the "Code").

If we decide to sell one or more of these properties and are unable to structure sales of such properties as tax deferred transactions under Section 1031 of the Code, we may be required to provide tax indemnification payments to the parties to these agreements.

Table of Contents

NOTE 7 • DISCONTINUED OPERATIONS

We report in discontinued operations the results of operations and the related gains or losses on the sales of properties that have either been disposed of or classified as held for sale and meet the classification of a discontinued operation as described in ASC 205, " Presentation of Financial Statements," and ASC 360, " Property, Plant, and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." Under this standard, a disposal (or classification as held for sale) of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results.

We classified no new dispositions or properties held for sale as discontinued operations during the three and six months ended October 31, 2018 and 2017 .

The following information shows the effect on net income and the gains or losses from the sales of properties classified as discontinued operations for the three and six months ended October 31, 2018 and 2017 , respectively:



	(in thousands)
	Three Months Ended October 31,					Six Months Ended October 31,
	2018		2017			2018		2017
REVENUE	$	-	$	12,047		$	-	$	24,002
EXPENSES
Property operating expenses, excluding real estate taxes	-		2,387			-		4,644
Real estate taxes	-		1,946			-		3,907
Property management	-		68			-		140
Depreciation and amortization	-		3,424			-		7,013
General and administrative	-		15			-		15
TOTAL EXPENSES	$	-	$	7,840		$	-	$	15,719
Operating income (loss)	-		4,207			-		8,283
Interest expense	-		(1,436		)	-		(3,421		)
Loss on extinguishment of debt	-		(6		)	-		(6		)
Interest income	-		117			-		661
Other income	-		10			-		60
Income (loss) from discontinued operations before gain (loss) on sale	-		2,892			-		5,577
Gain (loss) on sale of discontinued operations	-		12,238			570		12,238
INCOME (LOSS) FROM DISCONTINUED OPERATIONS	$	-	$	15,130		$	570	$	17,815

As of October 31, 2018 and April 30, 2018 , we had no assets or liabilities classified as held for sale.

NOTE 8 • ACQUISITIONS AND DISPOSITIONS

PROPERTY ACQUISITIONS

We added no new real estate to our portfolio through property acquisitions during the three and six months ended October 31, 2018 , compared to $153.8 million in the six months ended October 31, 2017 . Our acquisitions during the six months ended October 31, 2017 are detailed below.

Table of Contents

Six Months Ended October 31, 2017



	Date Acquired		(in thousands)
		Total Acquisition Cost			Investment Allocation
Acquisitions			Land			Building		Intangible Assets
Multifamily
191 unit - Oxbo - St. Paul, MN (1)	May 26, 2017		$	61,500		$	5,809	$	54,910	$	781
500 unit - Park Place - Plymouth, MN	September 13, 2017		92,250			10,609		80,711		930

Total Property Acquisitions			$	153,750		$	16,418	$	135,621	$	1,711


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

PROPERTY DISPOSITIONS

During the three months ended October 31, 2018 , we sold one commercial property and one parcel of land for a total sale price of $3.1 million . During the three months ended October 31, 2017 , we sold 13 apartment communities, three healthcare properties, one industrial property, and one parcel of unimproved land for a total sale price of $63.4 million . The following table details our dispositions for the six months ended October 31, 2018 and 2017 :

Six Months Ended October 31, 2018



		(in thousands)
Dispositions	Date Disposed	Sales Price		Book Value and Sale Cost		Gain/(Loss)
Multifamily
44 unit - Dakota Commons - Williston, ND	July 26, 2018	$	4,420	$	3,878	$	542
145 unit - Williston Garden - Williston, ND (1)	July 26, 2018	12,310		11,313		997
288 unit - Renaissance Heights - Williston, ND (2)	July 26, 2018	24,770		17,856		6,914
		41,500		33,047		8,453

Other
7,849 sq ft Minot Southgate Retail - Minot, ND	July 12, 2018	1,925		2,056		(131		)
9,052 sq ft Fresenius - Duluth, MN	July 27, 2018	1,900		1,078		822
15,000 sq ft Minot 2505 16th St SW - Minot, ND	October 12, 2018	1,710		1,814		(104		)
		5,535		4,948		587

Unimproved Land
Grand Forks - Grand Forks, ND	July 16, 2018	3,000		2,986		14
Renaissance Heights - Williston, ND (3)	July 26, 2018	750		684		66
Badger Hills Unimproved - Rochester, MN	August 29, 2018	1,400		1,528		(128		)
		5,150		5,198		(48		)

Total Property Dispositions		$	52,185	$	43,193	$	8,992


(1)	This apartment community was owned by a joint venture entity in which we had an interest of approximately 74.11% . The joint venture was consolidated in our financial statements at October 31, 2018.


(2)	This apartment community was owned by a joint venture entity in which we had an interest of approximately 87.14% . The joint venture was consolidated in our financial statements at October 31, 2018.


(3)	This parcel of land was owned by a joint venture entity in which we had an interest of approximately 70.00% . The joint venture was consolidated in our financial statements at October 31, 2018.

Table of Contents

Six Months Ended October 31, 2017



		(in thousands)
Dispositions	Date Disposed	Sale Price		Book Value and Sale Cost		Gain/(Loss)
Multifamily
327 unit - 13 Multifamily properties - Minot, ND (1)	August 22, 2017	$	12,263	$	11,562	$	701

Other
4,998 sq ft Minot Southgate Wells Fargo Bank - Minot, ND	May 15, 2017	3,440		3,332		108
90,260 sq ft Lexington Commerce Center - Eagan, MN	August 22, 2017	9,000		3,963		5,037
17,640 sq ft 1440 Duckwood Medical - Eagan, MN	August 24, 2017	2,100		1,886		214
279,834 sq ft Edgewood Vista Hermantown I & II - Hermantown, MN	October 19, 2017	36,884		24,697		12,187
		51,424		33,878		17,546

Unimproved Land
Bismarck 4916 Unimproved Land - Bismarck, ND	August 8, 2017	3,175		3,188		(13		)

Total Property Dispositions		$	66,862	$	48,628	$	18,234


(1)	These properties include: 4th Street 4 Plex, 11th Street 3 Plex, Apartments on Main, Brooklyn Heights, Colton Heights, Fairmont, First Avenue (Apartments and Office), Pines, Southview, Summit Park, Temple (including 17 South Main Retail), Terrace Heights and Westridge.

NOTE 9 • DEBT

As of October 31, 2018 , we owned 93 properties, of which 52 multifamily and other properties served as collateral for mortgage loans. The majority of these mortgage loans were non-recourse to us other than for standard carve-out obligations. As of October 31, 2018 , we believe that there are no material defaults or compliance issues with respect to any mortgages payable.

The aggregate amount of required future principal payments on mortgages payable as of October 31, 2018 , was as follows:



	(in thousands)
Year Ended April 30,	Mortgage Loans
2019	$	4,870
2020	71,833
2021	92,177
2022	70,506
2023	27,494
Thereafter	182,534
Total payments	$	449,414

As noted above, as of October 31, 2018 , we owned 41 multifamily and other properties that were not encumbered by mortgages, with 32 of those properties providing credit support for our unsecured borrowings. Our primary unsecured credit facility is a revolving, multi-bank line of credit, with the Bank of Montreal serving as administrative agent. Our line of credit has total commitments of $250.0 million , with borrowing capacity based on the value of properties contained in the unencumbered asset pool ("UAP"). The UAP currently provides for a borrowing capacity of $246.0 million , providing additional borrowing availability of $176.5 million beyond the $69.5 million drawn as of October 31, 2018 . This credit facility matures on August 31, 2022 , with one twelve -month option to extend the maturity date at our election.

During the three months ended October 31, 2018, we amended our primary unsecured credit facility. We extended the maturity date on our existing $70.0 million unsecured term loan, which now matures on January 15, 2024. We also added a new $75.0 million , seven -year term loan which matures on August 31, 2025.

Table of Contents

The interest rates on the line of credit and term loans are based, at our option, on the lender's base rate plus a margin, ranging from 35-85 basis points, or the London Interbank Offered Rate ("LIBOR"), plus a margin that ranges from 135-190 basis points based on our consolidated leverage. Our line of credit and term loan are subject to customary financial covenants and limitations. We believe that we are in compliance with all such financial covenants and limitations as of October 31, 2018 .

We also have a $6.0 million operating line of credit. This operating line of credit is designated to enhance treasury management activities and more effectively manage cash balances. This operating line has a one -year term, with pricing based on a market spread plus the one-month LIBOR index rate. As of October 31, 2018 and April 30, 2018 , we have no outstanding balance on this operating line.

The following table summarizes our indebtedness at October 31, 2018 :



	(in thousands)
	October 31, 2018			April 30, 2018			Weighted Average Maturity in Years at October 31, 2018
Unsecured line of credit	$	69,500		$	124,000		3.8
Term loan A	70,000			70,000			5.2
Term loan B	75,000			-			6.8
Unsecured debt	214,500			194,000
Mortgages payable - fixed	449,414			489,401			4.5
Mortgages payable - variable	-			22,739
Total debt	$	663,914		$	706,140		4.8
Weighted average interest rate on unsecured line of credit	3.72		%	3.35		%
Weighted average interest rate on term loan A (rate with swap)	3.75		%	3.86		%
Weighted average interest rate on term loan B (rate with swap)	4.60		%
Weighted average interest rate on mortgages payable	4.59		%	4.69		%

NOTE 10 • DERIVATIVE INSTRUMENTS

Our objective in using interest rate derivatives is to add stability to interest expense and to manage our exposure to interest rate fluctuations. To accomplish this objective, we primarily use interest rate swap contracts to fix the variable interest rate on our term loans. The interest rate swap contracts qualify as cash flow hedges.

Under ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities , which we adopted on November 1, 2017, the ineffective portion of a hedging instrument is no longer required to be recognized currently in earnings or disclosed. Changes in the fair value of cash flow hedges are recorded in accumulated other comprehensive income and subsequently reclassified into earnings in the period that the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income for our interest rate swap will be reclassified to interest expense as interest expense is incurred on our term loans. During the next twelve months, we estimate an additional $320,000 will be reclassified as a decrease to interest expense.

At October 31, 2018 , we had two interest rate swap contracts in effect with a notional amount of $145.0 million and one additional interest rate swap that becomes effective on January 31, 2023 with a notional amount of $70.0 million .

The table below presents the fair value of our derivative financial instruments as well as their classification on our Condensed Consolidated Balance Sheets as of October 31, 2018 and April 30, 2018 .



		(in thousands)
		October 31, 2018		April 30, 2018
	Balance Sheet Location	Fair Value		Fair Value
Derivative instruments - interest rate swaps	Other Assets	$	3,321	$	1,779

Total derivatives designated as hedging instruments		$	3,321	$	1,779

Table of Contents

The table below presents the effect of the Company's derivative financial instruments on the Condensed Consolidated Statements of Operations as of October 31, 2018 and 2017 .



	(in thousands)
	Gain (Loss) Recognized in OCI			Location of Gain (Loss) Reclassified from Accumulated OCI into Income	Gain (Loss) Reclassified from Accumulated OCI into Income
	2018		2017		2018		2017
Three months ended October 31,
Interest rate contracts	$	1,247	-	Interest expense	$	90	-

Total derivatives in cash flow hedging relationships	$	1,247	-		$	90	-

Six months ended October 31,
Interest rate contracts	$	1,455	-	Interest expense	$	119	-

Total derivatives in cash flow hedging relationships	$	1,455	-		$	119	-

NOTE 11 • FAIR VALUE MEASUREMENTS

Cash and cash equivalents, restricted cash, accounts payable, accrued expenses, and other liabilities are carried at amounts that reasonably approximate their fair value due to their short-term nature. For variable rate debt that re-prices frequently, fair values are based on carrying values. The fair values of our financial instruments approximate their carrying amount in the consolidated financial statements except for fixed rate debt.

In determining the fair value of other financial instruments, we apply FASB ASC 820, " Fair Value Measurement and Disclosures ," or ASC 820. ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Fair value hierarchy under ASC 820 distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (Levels 1 and 2) and the reporting entity's own assumptions about market participant assumptions (Level 3). Fair value estimates may differ from the amounts that may ultimately be realized upon sale or disposition of the assets and liabilities.

Fair Value Measurements on a Recurring Basis

The fair value of our interest rate swaps are determined using the market standard methodology of netting discounted expected variable cash payments and receipts. The variable cash payments and receipts are based on an expectation of future interest rates (a forward curve) derived from observable market interest rate curves. We also consider both our own nonperformance risk and the counterparty's nonperformance risk in the fair value measurement.

Fair Value Measurements on a Nonrecurring Basis

There were no non-financial assets or liabilities measured at fair value on a nonrecurring basis at October 31, 2018 . Non-financial assets measured at fair value on a nonrecurring basis at April 30, 2018 , consisted of real estate investments that were written-down to estimated fair value during fiscal year 2018 . See Note 2 for additional information on impairment losses recognized during fiscal year 2018 . The aggregate fair value of these assets by their levels in the fair value hierarchy is as follows:



	(in thousands)
	Total		Level 1	Level 2	Level 3
April 30, 2018
Real estate investments	$	52,145	-	-	$	52,145

As of April 30, 2018 , we estimated the fair value of our real estate investments using appraisals, a market offer to purchase, market comparisons, and other market data.

Financial Assets and Liabilities Not Measured at Fair Value

For mortgages payable, the fair value of fixed rate loans is estimated based on the discounted cash flows of the loans using market research and management estimates of comparable interest rates (Level 3).

Table of Contents

The estimated fair values of our financial instruments as of October 31, 2018 , and April 30, 2018 , respectively, are as follows:



	(in thousands)
	October 31, 2018				April 30, 2018
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
FINANCIAL ASSETS
Cash and cash equivalents	$	12,777	$	12,777	$	11,891	$	11,891
FINANCIAL LIABILITIES
Revolving line of credit	$	69,500	$	69,500	$	124,000	$	124,000
Term loan A (1)	$	70,000	$	70,000	$	70,000	$	70,000
Term loan B (1)	$	75,000	$	75,000	$	-	$	-
Mortgages payable	$	449,414	$	446,360	$	509,919	$	510,803


(1)	Excluding the effect of the interest rate swap agreement.

NOTE 12 • REDEEMABLE NONCONTROLLING INTERESTS

Redeemable noncontrolling interests on our Condensed Consolidated Balance Sheets represent the noncontrolling interest in joint ventures in which our unaffiliated partner, at its election, could require us to buy its interest at a purchase price to be determined by an appraisal conducted in accordance with the terms of the agreement, or at a negotiated price. Below is a table reflecting the activity of the redeemable noncontrolling interests.



	(in thousands)
Balance at April 30, 2018	$	6,644
Net income	(566		)
Balance at October 31, 2018	$	6,078

NOTE 13 • SHARE-BASED COMPENSATION

Share-based awards are provided to officers, non-officer employees, and trustees under our 2015 Incentive Plan approved by shareholders on September 15, 2015, which allows for awards in the form of cash, unrestricted and restricted common shares, and restricted stock units ("RSUs") up to an aggregate of 4,250,000 shares over the ten -year period in which the plan will be in effect. Under our 2015 Incentive Plan, officers and non-officer employees may earn share awards under a revised long-term incentive plan, which is a forward-looking program that measures long-term performance over the stated performance period. These awards are payable to the extent deemed earned in shares. The terms of the long-term incentive awards granted under the revised program may vary from year to year.

Fiscal Year 2019 LTIP Awards

Awards granted to trustees on July 20, 2018, consist of 64,972 time-based RSU awards. All of these awards are classified as equity awards. The time-based RSUs vest on July 20, 2019.

Awards granted to management on July 20, 2018, consist of time-based RSU awards for 74,920 shares and performance RSU awards based on total shareholder return ("TSR"), for 149,846 shares. All of these awards are classified as equity awards. The time-based RSU awards vest as to one-third of the shares on each of July 20, 2019, April 30, 2020, and April 30, 2021.

Awards granted on August 10, 2018, consist of 2,368 time-based RSU awards that vest as to one-third on each of August 10, 2019, April 30, 2020, and April 30, 2021; 4,736 performance RSU awards based on TSR; and 5,535 time-based RSU awards that vest as to one-third on each of August 10, 2019, August 10, 2020, and August 10, 2021. All of these awards are classified as equity awards.

The TSR performance RSU awards are earned based on our TSR as compared to the MSCI U.S. REIT Index over a forward-looking three -year period. The maximum number of RSUs eligible to be earned under this performance based award is 299,692 RSUs, which is 200% of the RSUs granted. Earned awards (if any) will fully vest as of the last day of the measurement period. These awards have market conditions in addition to service conditions that must be met for the awards to vest. We recognize compensation expense ratably based on the grant date fair value, as determined using the Monte Carlo valuation model, regardless whether the market conditions are achieved and the awards ultimately vest. Therefore, previously recorded compensation expense is not adjusted in the event that the market conditions are not achieved. We based the expected volatility

Table of Contents

on the historical volatility of our daily closing share price, the risk-free interest rate on the interest rates on U.S. treasury bonds with a maturity equal to the remaining performance period of the award, and the expected term on the performance period of the award. The assumptions used to value the performance RSU awards were an expected volatility of 28.6% , a risk-free interest rate of 2.66% , and an expected life of 2.78 years . The share price at the grant date, July 20, 2018, was $5.36 per share.

Total Compensation Expense

Share-based compensation expense recognized in the consolidated financial statements for all outstanding share-based awards was $579,811 and $751,000 for the six months ended October 31, 2018 and 2017 , respectively.

NOTE 14 • RELATED PARTY TRANSACTIONS

Transactions with BMO Capital Markets

We have an historical and ongoing relationship with BMO Capital Markets ("BMO"). On July 17, 2017, we engaged BMO to provide financial advisory services in connection with the proposed disposition of our healthcare property portfolio. A family member of Mark O. Decker, Jr., our President and Chief Executive Officer, is an employee of BMO and could have an indirect material interest in any such engagement and related transaction(s). The Board pre-approved the engagement of BMO. During the quarter ended January 31, 2018, we completed the disposition of 27 healthcare properties and paid BMO a transaction fee of $ 1.8 million in connection with this engagement.

NOTE 15 • SUBSEQUENT EVENTS

Completed Disposition. On November 30, 2018 we sold a commercial property in Minot, ND for a sale price of $6.6 million .

Share Repurchase Program. On December 5, 2018, our Board of Trustees reauthorized our common share repurchase program for an additional one -year period.

Table of Contents

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements included in this report, our audited financial statements for the fiscal year ended April 30, 2018 , which are included in our Form 10-K filed with the SEC on June 28, 2018, and the risk factors in Item 1A., "Risk Factors," of our Form 10-K for the fiscal year ended April 30, 2018 .

We consider this and other sections of this Report to contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), with respect to our expectations for future periods. Forward-looking statements do not discuss historical fact, but instead include statements related to expectations, projections, intentions or other items related to the future. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," and variations of those words and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance, or achievements to be materially different from the results of operations, financial conditions, or plans expressed or implied by the forward-looking statements. Although we believe the expectations reflected in our forward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be achieved. Any statements contained herein that are not statements of historical fact should be deemed forward-looking statements. As a result, reliance should not be placed on these forward-looking statements, as these statements are subject to known and unknown risks, uncertainties, and other factors beyond our control and could differ materially from our actual results and performance.

The following factors, among others, could cause our future results to differ materially from those expressed in the forward-looking statements:


•	economic conditions in the markets where we own properties or markets in which we may invest in the future;


•	rental conditions in our markets, including occupancy levels and rental rates, our potential inability to renew residents or obtain new residents upon expiration of existing leases, changes in tax and housing laws, or other factors;

•

adverse changes in real estate markets, including future demand for apartment homes in our significant markets, barriers of entry into new markets, limitations on our ability to increase rental rates, our ability to identify and consummate attractive acquisitions and dispositions on favorable terms, our ability to reinvest sales proceeds successfully, and our inability to accommodate any significant decline in the market value of real estate serving as collateral for our mortgage obligations;


•	inability to succeed in any new markets we enter;


•	failure of new acquisitions to achieve anticipated results or be efficiently integrated;


•	inability to complete lease-up of our projects on schedule and on budget;


•	inability to sell our non-core properties on terms that are acceptable;


•	failure to reinvest proceeds from sales of properties into tax-deferred exchanges, which could necessitate special dividend and tax protection payments;


•	inability to fund capital expenditures out of cash flow;


•	inability to pay, or need to reduce, dividends on our common shares;


•	financing risks, including our potential inability to obtain debt or equity financing on favorable terms, or at all;


•	level and volatility of interest or capitalization rates or capital market conditions;


•	changes in operating costs, including real estate taxes, utilities, and insurance costs;


•	the availability and cost of casualty insurance for losses;


•	inability to continue to satisfy complex rules in order to maintain our status as a REIT for federal income tax purposes, inability of the Operating Partnership to satisfy the rules to maintain its status as a partnership for federal income tax purposes, and the risk of changes in laws affecting REITs;


•	inability to attract and retain qualified personnel;


•	cyber liability or potential liability for breaches of our privacy or information security systems;


•	inability to comply with environmental laws and regulations; and


•	other risks identified in this Report, in other SEC reports, or in other documents that we publicly disseminate.

New factors may also arise from time to time that could have a material adverse effect on our business and results of operations. Except as otherwise required by law, we undertake no obligation to publicly update or revise these forward-looking statements to reflect events, circumstances, or changes in expectations after the date on which this Report is filed. Readers also should review the risks and uncertainties detailed from time to time in our filings with the SEC, including the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" contained in our Annual Report on Form 10-K for the fiscal year ended April 30, 2018 .

Table of Contents

Executive Summary

We own, manage, acquire, redevelop, and develop apartment communities. We primarily focus on investing in markets characterized by stable and growing economic conditions, strong employment, and an attractive quality of life that we believe, in combination, lead to higher demand for our apartment homes and retention of our residents. As of October 31, 2018 , we owned interests in 87 apartment communities consisting of 13,702 apartment homes. Property owned was $1.6 billion at October 31, 2018 , compared to $1.7 billion at April 30, 2018 .

Renting apartment homes is our primary source of revenue, and our business objective is to provide great homes for our residents. We strive to maximize resident satisfaction and retention by investing in high-quality assets in desirable locations and creating vibrant apartment communities through service-oriented operations. We believe that delivering superior resident experiences will enhance resident satisfaction while also driving profitability for our business and our shareholders. We have paid quarterly distributions continuously since our first distribution in 1971.

Overview of the Three Months Ended October 31, 2018

For the three months ended October 31, 2018 , revenues increased by $3.7 million to $45.6 million , compared to $41.9 million for the three months ended October 31, 2017 . Expenses increased by $2.8 million to $43.4 million for the three months ended October 31, 2018 , compared to $40.6 million for the three months ended October 31, 2017 . The drivers of these changes are discussed in the "Results of Operations" section below.

Summarized below are significant transactions that occurred during the second quarter of our fiscal year 2019 :


•	On August 31, 2018, we amended our credit agreement to:


◦	increase the overall unsecured facility from $370 million to $395 million, reallocating the commitment for the revolving line of credit to $250 million and the remaining $145 million between two term loans;


◦	extend the maturity of the revolving line of credit to August 2022;


◦	extend the existing $70 million unsecured term loan maturity to January 2024; and


◦	add a new $75 million, 7-year unsecured term loan maturing in August 2025.

Under the amendment, the interest rate on our existing facilities decreased by 25-35 basis points (depending on our overall leverage). We also entered into a swap agreement for the entire $75 million and full term of the new unsecured 7-year term loan in our ongoing effort to reduce floating interest rate exposure.


•	On September 10, 2018, we entered into a swap agreement covering the extension of the $70 million term loan from January 2023 to January 2024, resulting in both term loans being covered by swap agreements for the duration of the terms.


•	We sold one commercial property and one parcel of land for a total sale price of $3.1 million.

Subsequent to quarter-end, we engaged in the following transaction:


•	On December 5, 2018, we reauthorized our common share repurchase program for an additional one-year period.


•	On November 30, 2018, we sold a commercial property in Minot, North Dakota for a sale price of $6.6 million.

Table of Contents

RESULTS OF OPERATIONS

Consolidated Results of Operations for the Three and Six Months Ended October 31, 2018 and 2017

The discussion that follows is based on our consolidated results of operations for the three and six months ended October 31, 2018 and 2017 . Information about our same-store property results is contained in the Net Operating Income section below.



	(in thousands, except percentages)
	Three Months Ended											Six Months Ended October 31,
	October 31,						2018 vs. 2017					October 31,						2018 vs. 2017
	2018			2017			$ Change			% Change		2018			2017			$ Change			% Change
REVENUE	$	45,638		$	41,866		$	3,772		9.0	%	$	91,584		$	82,844		$	8,740		10.5	%
Property operating expenses, excluding real estate taxes	14,247			14,108			139			1.0	%	28,706			26,982			1,724			6.4	%
Real estate taxes	5,089			4,610			479			10.4	%	10,159			9,263			896			9.7	%
Property management expenses	1,319			1,372			(53		)	(3.9	)%	2,686			2,728			(42		)	(1.5	)%
Casualty loss	225			115			110			95.7	%	450			600			(150		)	(25.0	)%
Depreciation and amortization	19,191			17,270			1,921			11.1	%	37,803			42,608			(4,805		)	(11.3	)%
Impairment of real estate investments	-			-			-			n/a		-			256			(256		)	n/a
General and administrative expenses	3,374			3,118			256			8.2	%	7,244			7,120			124			1.7	%
TOTAL EXPENSES	$	43,445		$	40,593		$	2,852		7.0	%	$	87,048		$	89,557		$	(2,509	)	(2.8	)%
Operating income (loss)	2,193			1,273			920			72.3	%	4,536			(6,713		)	11,249			(167.6	)%
Interest expense	(7,997		)	(8,509		)	512			(6.0	)%	(16,382		)	(16,640		)	258			(1.6	)%
Loss on extinguishment of debt	(4		)	(334		)	330			(98.8	)%	(556		)	(533		)	(23		)	4.3	%
Interest income	410			199			211			106.0	%	891			220			671			305.0	%
Other income	19			56			(37		)	(66.1	)%	54			263			(209		)	(79.5	)%
Income (loss) before gain on sale of real estate and other investments and income (loss) from discontinued operations	(5,379		)	(7,315		)	1,936			(26.5	)%	(11,457		)	(23,403		)	11,946			(51.0	)%
Gain (loss) on sale of real estate and other investments	(232		)	5,324			(5,556		)	(104.4	)%	8,992			5,448			3,544			65.1	%
Income (loss) from continuing operations	(5,611		)	(1,991		)	(3,620		)	181.8	%	(2,465		)	(17,955		)	15,490			(86.3	)%
Income (loss) from discontinued operations	-			15,130			(15,130		)	(100.0	)%	570			17,815			(17,245		)	(96.8	)%
NET INCOME (LOSS)	$	(5,611	)	$	13,139		$	(18,750	)	(142.7	)%	$	(1,895	)	$	(140	)	$	(1,755	)	1,253.6	%
Net (income) loss attributable to noncontrolling interests – Operating Partnership	722			(773		)	1,495			(193.4	)%	587			871			(284		)	(32.6	)%
Net (income) loss attributable to noncontrolling interests – consolidated real estate entities	331			455			(124		)	(27.3	)%	(334		)	826			(1,160		)	(140.4	)%
Net income (loss) attributable to controlling interests	(4,558		)	12,821			(17,379		)	(135.6	)%	(1,642		)	1,557			(3,199		)	(205.5	)%
Dividends to preferred shareholders	(1,706		)	(2,812		)	1,106			(39.3	)%	(3,411		)	(5,098		)	1,687			(33.1	)%
Redemption of Preferred Shares	-			(3,649		)	3,649			(100.0	)%	-			(3,649		)	3,649			(100.0	)%
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS	$	(6,264	)	$	6,360		$	(12,624	)	(198.5	)%	$	(5,053	)	$	(7,190	)	$	2,137		(29.7	)%

Table of Contents

Revenues. Revenues for the three months ended October 31, 2018 , were $45.6 million , compared to $41.9 million in the three months ended October 31, 2017 , an increase of $3.8 million or 9.0% . The increase in revenue for the three months ended October 31, 2018 , resulted primarily from properties acquired in fiscal year 2018 and same-store properties, as shown in the table below.



	(in thousands)
Increase in Total Revenue	Three Months Ended October 31, 2018
Increase in revenue from non-same-store apartment communities	$	5,119
Increase in revenue from same-store apartment communities	1,298
Decrease in revenue from other properties and dispositions	(2,645		)
Net increase in total revenue	$	3,772

Revenues for the six months ended October 31, 2018 , were $91.6 million , compared to $82.8 million in the six months ended October 31, 2017 , an increase of $8.7 million or 10.5% . The increase in revenue for the six months ended October 31, 2018 , resulted primarily from properties acquired in fiscal year 2018 and same-store properties, as shown in the table below.



	(in thousands)
Increase in Total Revenue	Six Months Ended October 31, 2018
Increase in revenue from non-same-store apartment communities	$	11,140
Increase in revenue from same-store apartment communities	2,368
Decrease in revenue from other properties and dispositions	(4,768		)
Net increase in total revenue	$	8,740

Property Operating Expenses, Excluding Real Estate Taxes . Property operating expenses, excluding real estate taxes, increased by 1.0% to $14.2 million in the three months ended October 31, 2018 , compared to $14.1 million in the same period of the prior fiscal year. An increase of $1.4 million at non-same-store properties was offset by decreases of $517,000 at same-store properties and $769,000 from sold properties.

Property operating expenses, excluding real estate taxes, increased by 6.4% to $28.7 million in the six months ended October 31, 2018 , compared to $27.0 million in the same period of the prior fiscal year. An increase of $3.0 million at non-same-store properties was partially offset by decreases of $188,000 at same-store properties and $1.1 million from sold properties.

Real Estate Taxes. Real estate taxes increased by 10.4% to $5.1 million in the three months ended October 31, 2018 , compared to $4.6 million in the same period of the prior fiscal year. An increase of $584,000 at non-same-store properties and $123,000 at same-store properties was partially offset by a decrease of $228,000 from sold and other properties.

Real estate taxes increased by 9.7% to $10.2 million in the six months ended October 31, 2018 , compared to $9.3 million in the same period of the prior fiscal year. An increase of $1.2 million at non-same-store properties and $309,000 at same-store properties was partially offset by a decrease of $794,000 from sold properties.

Property Management Expenses . Property management expense decreased by 3.9% to $1.3 million in the three months ended October 31, 2018 , compared to $1.4 million in the same period of the prior fiscal year. P roperty management expense was $2.7 million in each of the six months ended October 31, 2018 and 2017 .

Depreciation and Amortization. Depreciation and amortization increased by 11.1% to $19.2 million in the three months ended October 31, 2018 , compared to $17.3 million in the same period of the prior fiscal year, primarily attributable to non-same-store properties.

Depreciation and amortization decreased by 11.3% to $37.8 million in the six months ended October 31, 2018 , compared to $42.6 million in the same period of the prior fiscal year. This decrease was primarily due to a change in the estimated useful lives of our assets in the prior fiscal year, offset by increased depreciation from non-same-store properties.. In the six months ended October 31, 2017 , we recognized an additional $9.0 million in depreciation expense due to a one-time adjustment for

Table of Contents

assets that were fully depreciated under the new estimated useful lives. See Note 2 of the Notes to the Condensed Consolidated Financial Statements in this report for additional information.

Impairment of Real Estate Investments. We recognized no impairment in the six months ended October 31, 2018 , compared to $256,000 in the same period of the prior fiscal year. See Note 2 of the Notes to the Condensed Consolidated Financial Statements in this report for additional information.

General and Administrative Expenses. General and administrative expenses increased by 8.2% to $3.4 million in the three months ended October 31, 2018 , compared to $3.1 million in the same period of the prior fiscal year, due primarily to higher estimated incentive compensation related to the expected achievement of certain financial metric targets. General and administrative expenses increased by 1.7% to $7.2 million in the six months ended October 31, 2018 , compared to $7.1 million in the same period of the prior fiscal year.

Interest Expense. Interest expense decreased by 6.0% to $8.0 million in the three months ended October 31, 2018 , compared to $8.5 million in the same period of the prior fiscal year, due primarily to a decrease in average debt outstanding. Interest expense decreased by 1.6% to $16.4 million in the six months ended October 31, 2018 , compared to $16.6 million in the same period of the prior fiscal year, due primarily to a decrease in debt outstanding.

Gain (loss) on Sale of Real Estate and Other Investments. We recorded a net loss of $232,000 and a net gain of $5.3 million in continuing operations in the three months ended October 31, 2018 and 2017 , respectively. We recorded net gains of $9.0 million and $5.4 million in continuing operations in the six months ended October 31, 2018 and 2017 , respectively. Properties sold in the three and six months ended October 31, 2018 and 2017 , are detailed below in the section captioned "Property Acquisitions and Dispositions."

Income from Discontinued Operations. We recorded no income from discontinued operations in the three months ended October 31, 2018 , compared to $15.1 million in the same period of the prior fiscal year. We recorded income from discontinued operations of $570,000 and $17.8 million , respectively, in the six months ended October 31, 2018 and 2017 . See Note 7 of the Notes to the Condensed Consolidated Financial Statements in this report for further information on discontinued operations.

Net Operating Income

Net Operating Income ("NOI") is a non-U.S. GAAP measure, which we define as total real estate revenues less real estate expenses. Real estate expenses consist of property operating expenses and real estate tax expense and do not include property management expense. We believe that NOI is an important supplemental measure of operating performance for a REIT's operating real estate because it provides a measure of operations that is unaffected by depreciation, amortization, financing, and general and administrative expenses. NOI does not represent cash generated by operating activities in accordance with U.S. GAAP and should not be considered an alternative to net income, net income available for common shareholders, or cash flow from operating activities as a measure of financial performance.

The following table shows real estate revenue, real estate operating expenses, and NOI for the three and six months ended October 31, 2018 and 2017 , respectively, for our multifamily and other properties. For a reconciliation of NOI to net income as reported, see Note 5 of the Notes to the Condensed Consolidated Financial Statements in this report.

The table also shows multifamily NOI on a same-store and non-same-store properties basis. Same-store properties are properties owned or in service for the entirety of the periods being compared, and, in the case of development or re-development properties, those that have achieved a target level of occupancy of 90%. For comparison of the six months ended October 31, 2018 and 2017 , four apartment communities were categorized as non-same-store.

This comparison allows us to evaluate the performance of existing properties and their contribution to net income. Management believes that measuring performance on a same-store property basis is useful to investors because it enables evaluation of how our properties are performing year-over-year. Management uses this measure to assess whether or not it has been successful in increasing NOI and controlling operating costs. The discussion below focuses on the main factors affecting real estate revenue and real estate expenses from same-store properties.

Table of Contents



	(in thousands, except percentages)
	Three Months Ended October 31,											Six Months Ended October 31,
	2018			2017			$ Change			% Change		2018			2017			$ Change			% Change

Real estate revenue
Same-store	$	37,208		$	35,910		$	1,298		3.6	%	$	73,946		$	71,578		$	2,368		3.3	%
Non-same-store	6,666			1,547			5,119			330.9	%	13,017			1,877			11,140			593.5	%
Other properties and dispositions	1,764			4,409			(2,645		)	(60.0	)%	4,621			9,389			(4,768		)	(50.8	)%
Total	$	45,638		$	41,866		$	3,772		9.0	%	$	91,584		$	82,844		$	8,740		10.5	%

Real estate expenses
Same-store	$	16,079		$	16,473		$	(394	)	(2.4	)%	$	32,172		$	32,051		$	121		0.4	%
Non-same-store	2,689			728			1,961			269.4	%	5,082			883			4,199			475.5	%
Other properties and dispositions	568			1,517			(949		)	(62.6	)%	1,611			3,311			(1,700		)	(51.3	)%
Total	$	19,336		$	18,718		$	618		3.3	%	$	38,865		$	36,245		$	2,620		7.2	%

Net operating income
Same-store	$	21,129		$	19,437		$	1,692		8.7	%	$	41,774		$	39,527		$	2,247		5.7	%
Non-same-store	3,977			819			3,158			385.6	%	7,935			994			6,941			698.3	%
Other properties and dispositions	1,196			2,892			(1,696		)	(58.6	)%	3,010			6,078			(3,068		)	(50.5	)%
Total	$	26,302		$	23,148		$	3,154		13.6	%	$	52,719		$	46,599		$	6,120		13.1	%

Reconciliation of NOI to net income (loss) available to common shareholders
Property management	$	(1,319	)	$	(1,372	)						$	(2,686	)	$	(2,728	)
Casualty loss	(225		)	(115		)						(450		)	(600		)
Depreciation/amortization	(19,191		)	(17,270		)						(37,803		)	(42,608		)
Impairment of real estate investments	-			-								-			(256		)
General and administrative expenses	(3,374		)	(3,118		)						(7,244		)	(7,120		)
Interest expense	(7,997		)	(8,509		)						(16,382		)	(16,640		)
Loss on debt extinguishment	(4		)	(334		)						(556		)	(533		)
Interest and other income	429			255								945			483
Income (loss) before gain on sale of real estate and other investments and income (loss) from discontinued operations	(5,379		)	(7,315		)						(11,457		)	(23,403		)
Gain (loss) on sale of real estate and other investments	(232		)	5,324								8,992			5,448
Income (loss) from continuing operations	(5,611		)	(1,991		)						(2,465		)	(17,955		)
Income (loss) from discontinued operations	-			15,130								570			17,815
Net income (loss)	$	(5,611	)	$	13,139							$	(1,895	)	$	(140	)



Occupancy (1)	October 31, 2018		October 31, 2017
Same-store	95.4	%	95.2	%
Non-same-store	92.7	%	92.4	%
Total	95.1	%	94.8	%

(1) Occupancy represents the actual number of units leased divided by the total number of units at the end of the period.



Number of Units	October 31, 2018	October 31, 2017
Same-store	12,347	11,384
Non-same-store	1,355	2,192
Total	13,702	13,576

Table of Contents

Real estate revenue from same-store properties increased by 3.6% or $1.3 million in the three months ended October 31, 2018 , compared to the same period in the prior fiscal year, due to growth in average rental revenue.

Real estate revenue from same-store properties increased by 3.3% or $2.4 million in the six months ended October 31, 2018 , compared to the same period in the prior fiscal year. Approximately 3.0% of the increase was attributable to growth in average rental revenue, and 0.3% of the increase was attributable to higher average occupancy.

Real estate expenses at same-store properties decreased by 2.4% or $394,000 in the three months ended October 31, 2018 , compared to the same period in the prior fiscal year. The decrease was primarily attributable to lower property operating expenses due to cost containment initiatives implemented at the end of the first quarter of fiscal year 2019 and lower insurance costs due to favorable loss experience, partially offset by an increase in real estate taxes due to increases in levy rates in select markets.

Real estate expenses at same-store properties increased by 0.4% or $121,000 in the six months ended October 31, 2018 , compared to the same period in the prior fiscal year. Increases occurred in utilities and in real estate taxes due to increases in levy rates in select markets, offset by lower insurance costs due to favorable loss experience.

PROPERTY ACQUISITIONS AND DISPOSITIONS

During the second quarter of fiscal year 2019 , we sold one commercial property and one parcel of unimproved land for a total sale price of $3.1 million . During the second quarter of fiscal year 2019 , we had no acquisitions of properties. See Note 8 of the Notes to Condensed Consolidated Financial Statements in this report for a table detailing our acquisitions and dispositions during the six -month periods ended October 31, 2018 and 2017 .

FUNDS FROM OPERATIONS

We consider Funds from Operations ("FFO") to be a useful measure of performance for an equity REIT. We use the definition of FFO adopted by the National Association of Real Estate Investment Trusts, Inc. ("NAREIT"). NAREIT currently defines FFO as net income or loss attributable to common shareholders computed in accordance with GAAP, adjusted for:


•	depreciation and amortization related to real estate;


•	gains and losses from the sale of certain real estate assets;


•	gains and losses from change in control; and


•	impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity.

Due to limitations of the FFO definition adopted by NAREIT, we have made certain interpretations in applying the definition. We believe that all such interpretations not specifically provided for in the NAREIT definition are consistent with the definition. Effective for the third quarter of fiscal year 2018, we included impairment charges in FFO for assets incidental to our main business.

We believe that FFO, which is a standard supplemental measure for equity real estate investment trusts, is helpful to investors in understanding our operating performance, primarily because its calculation excludes depreciation and amortization expense on real estate assets, thereby providing an additional perspective on our operating results. We believe that GAAP historical cost depreciation of real estate assets generally is not correlated with changes in the value of those assets, whose value does not diminish predictably over time, as historical cost depreciation implies. The exclusion in NAREIT's definition of FFO of impairment write-downs and gains and losses from the sale of previously depreciated operating real estate assets helps to identify the operating results of the long-term assets that form the base of our investments, and assists management and investors in comparing those operating results between periods. FFO is also used by our management and investors to identify trends in occupancy rates, rental rates, and operating costs.

While FFO is widely used by us as a primary performance metric, not all real estate companies use the same definition of FFO or calculate FFO the same way. Accordingly, FFO presented here is not necessarily comparable to FFO presented by other real estate companies. FFO should not be considered as an alternative to net income or any other GAAP measurement of performance, but rather should be considered as an additional, supplemental measure. FFO also does not represent cash generated from operating activities in accordance with U.S. GAAP, and is not necessarily indicative of sufficient cash flow to fund all of our needs or our ability to service indebtedness or make distributions.

Table of Contents

FFO applicable to Common Shares and Units for the three months ended October 31, 2018 , increased to $11.7 million compared to $9.5 million for the comparable period ended October 31, 2017 , an increase of 23.5% . This increase was primarily due to higher net operating income at same-store and non-same-store properties, reduction in preferred dividends, and costs incurred in the prior comparable period for the redemption of preferred shares. The increase was partially offset by the reduction in net operating income from dispositions. FFO applicable to Common Shares and Units for the six months ended October 31, 2018 , decreased to $22.2 million compared to $22.5 million for the comparable period ended October 31, 2017 , a reduction of 1.2% .

RECONCILIATION OF NET INCOME ATTRIBUTABLE TO

CONTROLLING INTERESTS TO FUNDS FROM OPERATIONS



	(in thousands, except per share and unit amounts)
Three Months Ended October 31,	2018							2017
	Amount			Weighted Avg Shares and Units (1)	Per Share and Unit (2)			Amount			Weighted Avg Shares and Units (1)	Per Share and Unit (2)
Net income (loss) attributable to controlling interests	$	(4,558	)					$	12,821
Less dividends to preferred shareholders	(1,706		)					(2,812		)
Less redemption of preferred shares	-							(3,649		)
Net income (loss) available to common shareholders	(6,264		)	119,396	$	(0.05	)	6,360			120,144	$	0.05
Adjustments:
Noncontrolling interests – Operating Partnership	(722		)	13,789				773			14,623
Depreciation and amortization	18,446							19,894
Impairment of real estate attributable to controlling interests	-							-
Gains on depreciable property sales attributable to controlling interests	232							(17,562		)
Funds from operations applicable to common shares and Units	$	11,692		133,185	$	0.09		$	9,465		134,767	$	0.07



	(in thousands, except per share and unit amounts)
Six Months Ended October 31,	2018							2017
	Amount			Weighted Avg Shares and Units (1)	Per Share and Unit (2)			Amount			Weighted Avg Shares and Units (1)	Per Share and Unit (2)
Net income attributable to controlling interests	(1,642		)					1,557
Less dividends to preferred shareholders	(3,411		)					(5,098		)
Less redemption of preferred shares	-							(3,649		)
Net income available to common shareholders	(5,053		)	119,320	(0.04		)	(7,190		)	120,282	(0.06		)
Adjustments:
Noncontrolling interests – Operating Partnership	(587		)	13,924				(871		)	14,912
Depreciation and amortization	36,282							48,013
Impairment of real estate attributable to controlling interests	-							256
Gains on depreciable property sales attributable to controlling interests	(8,395		)					(17,686		)
Funds from operations applicable to common shares and Units	$	22,247		133,244	$	0.17		$	22,522		135,194	$	0.17

(1) Upon the exercise of Exchange Rights, Units of the Operating Partnership are exchangeable for cash or, at our discretion, for common shares on a one-for-one basis.


(2)	Net income attributable to Investors Real Estate Trust is calculated on a per common share basis. FFO is calculated on a per common share and Unit basis.

DISTRIBUTIONS

Distributions of $0.07 and $0.14 per Common Share and Unit were paid, respectively, during the three and six months ended October 31, 2018 and 2017 .

Table of Contents

LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Financial Condition

We desire to create and maintain a strong balance sheet that offers financial flexibility and enables us to pursue and acquire properties that enhance our portfolio composition, operating metrics, and cash flow growth prospects. We intend to strengthen our capital and liquidity positions by continuing to focus on improving our core fundamentals, which include generating positive cash flows from operations, maintaining appropriate debt levels and leverage ratios, and controlling overhead costs.

Our primary sources of liquidity are cash and cash equivalents on hand and cash flows generated from operations. Other sources include availability under our unsecured lines of credit, proceeds from property dispositions, offerings of preferred and common stock under our shelf registration statement, and unsecured term loans or long-term secured mortgages.

Our primary liquidity demands are normally-recurring operating and overhead expenses, debt service and repayments, capital improvements to our properties, distributions to the holders of our preferred shares, Common Shares, and Units, value-add redevelopment, and acquisition of additional properties.

We believe that our financial condition and liquidity are sufficient to meet our reasonably anticipated liquidity demands during 2019 and 2020. Factors that could increase or decrease our future liquidity include, but are not limited to, volatility in capital and credit markets, our ability to access capital and credit markets, the minimum REIT dividend requirements, and our ability to complete asset purchases, sales, or developments.

Capital Resources and Cash Flows

As of October 31, 2018 , we had total liquidity of approximately $195.3 million , which includes $176.5 million available on our line of credit, $12.8 million of cash and cash equivalents, and $6.0 million under an operating line of credit described below. As of April 30, 2018 , we had total liquidity of approximately $193.9 million , which included $176.0 million on our line of credit, $11.9 million of cash and cash equivalents, and $6.0 million under an operating line of credit.

As of October 31, 2018 , we also had restricted cash consisting of $5.1 million of escrows held by lenders for real estate taxes, insurance, and capital additions. As of April 30, 2018 , we had restricted cash consisting of $4.2 million of escrows held by lenders for real estate taxes, insurance, and capital additions.

During the three months ended October 31, 2018, we amended our primary unsecured credit facility. We increased our overall unsecured facility from $370.0 million to $395.0 million, reallocating the commitment for the revolving line of credit from $300.0 million to $250.0 million and reallocating the remaining $145.0 million between two term loans: a $70.0 million unsecured term loan that matures on January 15, 2024 and a $75.0 million unsecured term loan that matures on August 31, 2025. As of October 31, 2018 , our line of credit had total commitments of $250.0 million , with borrowing capacity based on the value of properties contained in an unencumbered asset pool (UAP). The UAP provided for a borrowing capacity of approximately $246.0 million at quarter-end, offering additional borrowing availability of $176.5 million beyond the $69.5 million drawn as of October 31, 2018 . At April 30, 2018 , the line of credit borrowing capacity was $300.0 million based on the UAP, of which $124.0 million was drawn on the line.

During the year ended April 30, 2018 , we entered into a $6.0 million operating line of credit. This operating line of credit is designed to enhance treasury management activities and more effectively manage cash balances. This operating line has a one-year term, with pricing based on a market spread plus the one-month LIBOR index rate.

For information regarding our cash flows for the six months ended October 31, 2018 and 2017 , see the Condensed Consolidated Statements of Cash Flows in Part I, Item 1 above.

In addition to cash flow from operations, during the six months ended October 31, 2018 , we generated cash from various activities, including:


•	The disposition of three apartment communities, three commercial properties, and three parcels of land for a total sale price of $52.2 million . The net proceeds of these transactions was $21.6 million after pay down of debt, and we distributed $1.9 million of the net proceeds to our joint venture partners in those transactions.

During the six months ended October 31, 2018 , we used cash for various activities, including:


•	Repaying $62.7 million of mortgage principal; and


•	Funding capital expenditures for apartment communities of approximately $6.8 million .

Table of Contents

CRITICAL ACCOUNTING POLICIES

In preparing the condensed consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. A summary of our critical accounting policies is included in our Form 10-K for the fiscal year ended April 30, 2018 , filed with the SEC on June 28, 2018 under the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations." Effective May 1, 2018, we adopted ASU 2014-09, " Revenue from Contracts With Customers, " which eliminates the transaction- and industry-specific revenue recognition guidance under current GAAP and replaces it with a principle-based approach for determining revenue recognition Refer to Note 2 of the Notes to Condensed Consolidated Financial Statements in this report for additional information. There have been no other significant changes to our critical accounting policies during the six months ended October 31, 2018 .

Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk is primarily related to fluctuations in the general level of interest rates on our current and future fixed and variable rate debt obligations. We currently use interest rate swaps to offset the impact of interest rate fluctuations on our $70.0 million and $75.0 million variable-rate term loans. The swap on our $70.0 million term loan has a notional amount of $70.0 million and an average pay rate of 2.16% . The swap on our $75.0 million term loan has a notional amount of $75.0 million and an average pay rate of 2.81% . The fair value of our interest rate swap contracts is $3.3 million . We do not enter into derivative instruments for trading or speculative purposes. The interest rate swap exposes us to credit risk in the event of non-performance by the counterparty under the terms of the agreement.

As of October 31, 2018 , we had no variable-rate mortgage debt outstanding and $214.5 million of variable-rate borrowings under our line of credit and term loans, of which, $145.0 million is fixed through interest rate swaps. We estimate that an increase in 30-day LIBOR of 100 basis points with constant risk spreads would result in our net income being reduced by approximately $695,000 on an annual basis. We estimate that a decrease in 30-day LIBOR of 100 basis points would increase the amount of net income by a similar amount.

Mortgage loan indebtedness decreased by $62.7 million as of October 31, 2018 , compared to April 30, 2018 , due to loan payoffs and property dispositions. As of October 31, 2018 , 100% of our $449.4 million of mortgage debt was at fixed rates of interest, with staggered maturities, compared to 95.6% as of April 30, 2018 . As of October 31, 2018 , the weighted average rate of interest on our mortgage debt was 4.59% , compared to 4.69% on April 30, 2018 . Our goal is to minimize exposure to interest rate risk; however, we may become vulnerable to significant fluctuations in interest rates on any future repricing or refinancing of our fixed or variable rate debt and on future debt.

The following table provides information about our financial instruments that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. Average variable rates are based on rates in effect at the reporting date.



	(in thousands, except for interest rates)
	Remaining Fiscal 2019			Fiscal 2020			Fiscal 2021			Fiscal 2022			Fiscal 2023			Thereafter		Total		Fair Value
Debt
Fixed Rate	$	4,870		$	71,833		$	92,177		$	70,506		$	27,494		$	182,534	$	449,414	$	446,360
Average Interest Rate (1)	4.60		%	5.28		%	5.03		%	4.51		%	4.12		%
Variable Rate (2)	-			-			-			-			$	69,500		$	145,000	$	214,500	$	214,500
Average Interest Rate (1)	-			-			-			-			3.72		%


(1)	Interest rate is annualized.


(2)	Excludes the effect of the interest rate swap agreement.

Table of Contents

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures :

Management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Exchange Act), as of the end of the period covered by this report. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of October 31, 2018 , such disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Internal Control Over Financial Reporting :

As of May 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers. There were no significant changes to the internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) due to the adoption of this new standard.

Table of Contents

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 1A. Risk Factors

There have been no material changes to the Risk Factors previously disclosed in Item 1A in our Annual Report on Form 10-K for the fiscal year ended April 30, 2018 .

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Sales of Securities

During the second quarter of fiscal year 2019 , we issued 124,000 unregistered Common Shares to limited partners of the Operating Partnership, upon exercise of their exchange rights regarding an equal number of Units. All such issuances of Common Shares were exempt from registration as private placements under Section 4(2) of the Securities Act, including Regulation D promulgated thereunder.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

None

Table of Contents

Item 6. Exhibits

The following exhibits are filed as part of this Report.

EXHIBIT INDEX



Exhibit No.	Description
1.1	Underwriting Agreement, dated September 26, 2017, by and among Investors Real Estate Trust, IRET Properties, A North Dakota Limited Partnership, and the several Underwriters listed on Schedule I attached thereto, for whom BMO Capital Markets Corp. and Raymond James & Associates, Inc. are acting as representatives (incorporated by reference to Exhibit 1.1 to the Registrant's Current Report on Form 8-K filed on October 2, 2017).
3.1	Articles Supplementary to the Registrant's Articles of Amendment and Third Restated Declaration of Trust designating the Registrant's 6.625% Series C Cumulative Redeemable Preferred Shares, no par value per share (incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form 8-A filed on September 28, 2017).
3.2	Third Amendment to the Agreement of Limited Partnership of IRET Properties, A North Dakota Limited Partnership (incorporated by reference to Exhibit 3.2 to the Registrant's Current Report on Form 8-K filed on October 2, 2017).
3.3*	Sixth Restated Trustee's Regulations (Bylaws) of Investors Real Estate Trust, adopted on September 20, 2018.
10.1	Second Amended and Restated Credit Agreement, dated as of August 31, 2018, among IRET Properties, A North Dakota Limited Partnership, as Borrower, the Guarantors from time to time party thereto, the Lenders from time to time party thereto, KeyBank, National Association and PNC Bank, National Association, as Syndication Agents, and Bank of Montreal, as Administrative Agent (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on September 6, 2018).
31.1*	Section 302 Certification of Chief Executive Officer
31.2*	Section 302 Certification of Executive Vice President and Chief Financial Officer
32.1*	Section 906 Certifications of Chief Executive Officer
32.2*	Section 906 Certifications of Executive Vice President and Chief Financial Officer
101 INS**	INSTANCE DOCUMENT
101 SCH**	SCHEMA DOCUMENT
101 CAL**	CALCULATION LINKBASE DOCUMENT
101 LAB**	LABELS LINKBASE DOCUMENT
101 PRE**	PRESENTATION LINKBASE DOCUMENT
101 DEF**	DEFINITION LINKBASE DOCUMENT


*	Filed herewith

Submitted electronically herewith. Attached as Exhibit 101 are the following materials from our Quarterly Report on Form 10-Q for the quarter ended October 31, 2018 , formatted in eXtensible Business Reporting Language ("XBRL"): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Operations; (ii) the Condensed Consolidated Statements of Equity; (iv) the Condensed Consolidated Statements of Cash Flows; and (v) notes to these condensed consolidated financial statements.

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

INVESTORS REAL ESTATE TRUST

(Registrant)



/s/ Mark O. Decker, Jr.
Mark O. Decker, Jr.
President and Chief Executive Officer

/s/ John A. Kirchmann
John A. Kirchmann
Executive Vice President and Chief Financial Officer

Date: December 10, 2018