UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

or 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission File Number 001-35624

INVESTORS REAL ESTATE TRUST

(Exact name of registrant as specified in its charter)

	North Dakota				45-0311232
	(State or other jurisdiction of incorporation or organization)				(I.R.S. Employer Identification No.)
1400 31st Avenue SW	Suite 60	Post Office Box 1988	Minot	ND	58702-1988
(Address of principal executive offices)					(Zip code)

(701) 837-4738

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days.

Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. 

Large accelerated filer	☑	Accelerated filer	☐	Non-accelerated filer	☐
Smaller Reporting Company	☐	Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☑

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Shares of Beneficial Interest, no par value	IRET	New York Stock Exchange
Series C Cumulative Redeemable Preferred Shares	IRET-C	New York Stock Exchange

The number of common shares of beneficial interest outstanding as of July 31, 2019, was 11,624,590.

TABLE OF CONTENTS

	Page
Part I. Financial Information
Item 1. Financial Statements - Second Quarter - 2019:	3
Condensed Consolidated Balance Sheets (unaudited) June 30, 2019, and December 31, 2018	3
Condensed Consolidated Statements of Operations (unaudited) For the Three and Six Months ended June 30, 2019 and 2018	4
Condensed Consolidated Statements of Comprehensive Income (unaudited) For the Three and Six Months ended June 30, 2019 and 2018	5
Condensed Consolidated Statements of Equity (unaudited) For the Three and Six Months ended June 30, 2019 and 2018	6
Condensed Consolidated Statements of Cash Flows (unaudited) For the Six Months ended June 30, 2019 and 2018	8
Notes to Condensed Consolidated Financial Statements (unaudited)	9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3. Quantitative and Qualitative Disclosures About Market Risk	33
Item 4. Controls and Procedures	34
Part II. Other Information
Item 1. Legal Proceedings	35
Item 1A. Risk Factors	35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3. Defaults Upon Senior Securities	35
Item 4. Mine Safety Disclosures	35
Item 5. Other Information	35
Item 6. Exhibits	36
Signatures	37

2

PART I

Item 1. Financial Statements.

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

	(in thousands, except per share data)
	June 30, 2019			December 31, 2018
ASSETS
Real estate investments
Property owned	$	1,663,539		$	1,627,636
Less accumulated depreciation	(380,321		)	(353,871		)
	1,283,218			1,273,765
Unimproved land	1,746			5,301
Mortgage loans receivable	10,140			10,410
Total real estate investments	1,295,104			1,289,476
Cash and cash equivalents	17,406			13,792
Restricted cash	4,672			5,464
Other assets	30,626			27,265
TOTAL ASSETS	$	1,347,808		$	1,335,997
LIABILITIES, MEZZANINE EQUITY, AND EQUITY
LIABILITIES
Accounts payable and accrued expenses	$	44,766		$	40,892
Revolving lines of credit	177,939			57,500
Term loans, net of unamortized loan costs of $918 and $1,009, respectively	144,082			143,991
Mortgages payable, net of unamortized loan costs of $1,490 and $1,777, respectively	370,461			444,197
TOTAL LIABILITIES	$	737,248		$	686,580
COMMITMENTS AND CONTINGENCIES (NOTE 6)
REDEEMABLE NONCONTROLLING INTERESTS – CONSOLIDATED REAL ESTATE ENTITIES	—			$	5,968
SERIES D PREFERRED UNITS (Cumulative convertible preferred units, $100 par value, 166 units issued and outstanding at June 30, 2019 and no units issued and outstanding at December 31, 2018, aggregate liquidation preference of $16,560)	$	16,560		—
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 June 30, 2019 and December 31, 2018, aggregate liquidation preference of $102,971)	99,456			99,456
Common Shares of Beneficial Interest (Unlimited authorization, no par value, 11,656 shares issued and outstanding at June 30, 2019 and 11,942 shares issued and outstanding at December 31, 2018)	888,541			899,234
Accumulated distributions in excess of net income	(450,433		)	(429,048		)
Accumulated other comprehensive income	(7,598		)	(856		)
Total shareholders’ equity	$	529,966		$	568,786
Noncontrolling interests – Operating Partnership (1,224 units at June 30, 2019 and 1,368 units at December 31, 2018)	57,902			67,916
Noncontrolling interests – consolidated real estate entities	6,132			6,747
Total equity	$	594,000		$	643,449
TOTAL LIABILITIES, MEZZANINE EQUITY, AND EQUITY	$	1,347,808		$	1,335,997

See accompanying Notes to Condensed Consolidated Financial Statements.

3

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

	(in thousands, except per share data)
	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
REVENUE	$	46,934		$	46,197		$	92,542		$	89,232
EXPENSES
Property operating expenses, excluding real estate taxes	13,942			13,934			28,746			28,180
Real estate taxes	5,574			5,003			10,806			10,024
Property management expense	1,445			1,444			2,999			2,821
Casualty loss	92			—			733			50
Depreciation and amortization	18,437			19,132			36,548			39,648
Impairment of real estate investments	—			17,809			—			17,809
General and administrative expenses	3,549			4,348			7,355			7,967
TOTAL EXPENSES	$	43,039		$	61,670		$	87,187		$	106,499
Operating income (loss)	3,895			(15,473		)	5,355			(17,267		)
Interest expense	(7,590		)	(8,562		)	(15,486		)	(16,858		)
Loss on extinguishment of debt	(407		)	(12		)	(409		)	(133		)
Interest income	402			429			809			1,102
Other income	66			31			83			47
Income (loss) before gain (loss) on sale of real estate and other investments, gain (loss) on litigation settlement, and income (loss) from discontinued operations	(3,634		)	(23,587		)	(9,648		)	(33,109		)
Gain (loss) on sale of real estate and other investments	615			—			669			2,304
Gain (loss) on litigation settlement	6,286			—			6,286			—
Income (loss) from continuing operations	3,267			(23,587		)	(2,693		)	(30,805		)
Income (loss) from discontinued operations	—			238			—			14,120
NET INCOME (LOSS)	$	3,267		$	(23,349	)	$	(2,693	)	$	(16,685	)
Dividends to preferred unitholders	(160		)	—			(217		)	—
Net (income) loss attributable to noncontrolling interests – Operating Partnership	(148		)	2,580			595			2,000
Net (income) loss attributable to noncontrolling interests – consolidated real estate entities	154			595			730			1,115
Net income (loss) attributable to controlling interests	3,113			(20,174		)	(1,585		)	(13,570		)
Dividends to preferred shareholders	(1,706		)	(1,706		)	(3,411		)	(3,411		)
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS	$	1,407		$	(21,880	)	$	(4,996	)	$	(16,981	)
Earnings (loss) per common share from continuing operations – basic and diluted	$	0.11		$	(1.85	)	$	(0.43	)	$	(2.48	)
Earnings (loss) per common share from discontinued operations – basic and diluted	—			0.02			—			1.06
NET EARNINGS (LOSS) PER COMMON SHARE – BASIC & DILUTED	$	0.11		$	(1.83	)	$	(0.43	)	$	(1.42	)

See accompanying Notes to Condensed Consolidated Financial Statements.

4

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

	(in thousands)
	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Net income (loss)	$	3,267		$	(23,349	)	$	(2,693	)	$	(16,685	)
Other comprehensive income:
Unrealized gain (loss) from derivative instrument	(4,430		)	438			(6,712		)	2,158
(Gain) loss on derivative instrument reclassified into earnings	(29		)	27			(30		)	129
Total comprehensive income (loss)	$	(1,192	)	$	(22,884	)	$	(9,435	)	$	(14,398	)
Net comprehensive (income) loss attributable to noncontrolling interests – Operating Partnership	275			2,531			1,255			1,759
Net (income) loss attributable to noncontrolling interests – consolidated real estate entities	154			595			730			1,115
Comprehensive income (loss) attributable to controlling interests	$	(763	)	$	(19,758	)	$	(7,450	)	$	(11,524	)

See accompanying Notes to Condensed Consolidated Financial Statements.

5

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (unaudited)

	(in thousands, except per share data)
	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 December 31, 2017	$	99,456	12,004		$	902,305		$	(374,365	)	$	(539	)	$	87,186		$	714,043
Net income (loss) attributable to controlling interests and nonredeemable noncontrolling interests								(13,570		)				(2,728		)	(16,298		)
Change in fair value of derivatives											2,287						2,287
Distributions - common shares and units ($1.40 per share and unit)								(16,763		)				(1,977		)	(18,740		)
Distributions – Series C preferred shares ($0.8281 per Series C share)								(3,411		)							(3,411		)
Shares issued and share-based compensation			5		611												611
Redemption of units for common shares			3		34									(34		)	—
Redemption of units for cash														(2,747		)	(2,747		)
Shares repurchased			(67	)	(3,415		)										(3,415		)
Cumulative adjustment upon adoption of ASC 606 and ASC 610-20								627									627
Other			(6	)	(55		)							(519		)	(574		)
Balance June 30, 2018	$	99,456	11,939		$	899,480		$	(407,482	)	$	1,748		$	79,181		$	672,383
Balance December 31, 2018	$	99,456	11,942		$	899,234		$	(429,048	)	$	(856	)	$	74,663		$	643,449
Net income (loss) attributable to controlling interests and nonredeemable noncontrolling interests								(1,585		)				(1,151		)	(2,736		)
Change in fair value of derivatives											(6,742		)				(6,742		)
Distributions – common shares and units ($1.40 per share and unit)								(16,389		)				(1,816		)	(18,205		)
Distributions – Series C preferred shares ($0.8281 per Series C share)								(3,411		)							(3,411		)
Shares issued and share-based compensation			3		981												981
Redemption of units for common shares			8		(521		)							521			—
Redemption of units for cash														(8,124		)	(8,124		)
Shares repurchased			(290	)	(15,677		)										(15,677		)
Acquisition of redeemable noncontrolling interests					4,529												4,529
Other			(7	)	(5		)							(59		)	(64		)
Balance June 30, 2019	$	99,456	11,656		$	888,541		$	(450,433	)	$	(7,598	)	$	64,034		$	594,000

See accompanying Notes to Condensed Consolidated Financial Statements.

6

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (unaudited)

	(in thousands, except per share data)
	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 March 31, 2018	$	99,456	11,979		$	901,312		$	(377,871	)	$	1,283		$	84,287		$	708,467
Net income (loss) attributable to controlling interests and nonredeemable noncontrolling interests								(20,174		)				(3,009		)	(23,183		)
Change in fair value of derivatives											465						465
Distributions - common shares and units ($0.70 per share and unit)								(8,358		)				(987		)	(9,345		)
Distributions – Series C preferred shares ($0.4140625 per Series C share)								(1,706		)							(1,706		)
Shares issued and share-based compensation			3		187												187
Redemption of units for cash														(510		)	(510		)
Shares repurchased			(37	)	(1,973		)										(1,973		)
Cumulative adjustment upon adoption of ASC 606 and ASC 610-20								627									627
Other			(6	)	(46		)							(600		)	(646		)
Balance June 30, 2018	$	99,456	11,939		$	899,480		$	(407,482	)	$	1,748		$	79,181		$	672,383
Balance March 31, 2019	$	99,456	11,768		$	895,381		$	(443,661	)	$	(3,139	)	$	72,355		$	620,392
Net income (loss) attributable to controlling interests and nonredeemable noncontrolling interests								3,113						(6		)	3,107
Change in fair value of derivatives											(4,459		)				(4,459		)
Distributions – common shares and units ($0.70 per share and unit)								(8,179		)				(859		)	(9,038		)
Distributions – Series C preferred shares ($0.4140625 per Series C share)								(1,706		)							(1,706		)
Shares issued and share-based compensation			3		565												565
Redemption of units for common shares			8		(521		)							521			—
Redemption of units for cash														(7,968		)	(7,968		)
Shares repurchased			(116	)	(6,863		)										(6,863		)
Other			(7	)	(21		)							(9		)	(30		)
Balance June 30, 2019	$	99,456	11,656		$	888,541		$	(450,433	)	$	(7,598	)	$	64,034		$	594,000

See accompanying Notes to Condensed Consolidated Financial Statements.

7

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

	(in thousands)
	Six Months Ended June 30,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	(2,693	)	$	(16,685	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization, including amortization of capitalized loan costs	37,136			40,345
(Gain) loss on sale of real estate, other investments, and discontinued operations	(669		)	(16,133		)
(Gain) loss on litigation settlement	(2,286		)	—
Share-based compensation expense	981			611
Impairment of real estate investments	—			17,809
Other, net	1,350			1,255
Changes in other assets and liabilities:
Other assets	(1,745		)	4,741
Accounts payable and accrued expenses	(3,468		)	(2,789		)
Net cash provided by (used by) operating activities	$	28,606		$	29,154
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in notes receivable	(159		)	(7,509		)
Proceeds from sale of real estate and other investments	9,882			34,831
Payments for acquisitions of real estate assets	(29,918		)	(129,737		)
Payments for improvements of real estate assets	(6,317		)	(7,747		)
Other investing activities	282			690
Net cash provided by (used by) investing activities	$	(26,230	)	$	(109,472	)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on mortgages payable	(74,614		)	(60,757		)
Proceeds from revolving lines of credit	146,439			99,000
Principal payments on revolving lines of credit	(26,000		)	(169,000		)
Principal payments on construction debt	—			(21,689		)
Payments for acquisition of noncontrolling interests – consolidated real estate entities	(1,260		)	—
Repurchase of common shares	(15,677		)	(3,415		)
Repurchase of partnership units	(8,124		)	(2,747		)
Distributions paid to common shareholders	(16,583		)	(16,764		)
Distributions paid to preferred shareholders	(1,705		)	(3,410		)
Distributions paid to preferred unitholders	(57		)	—
Distributions paid to noncontrolling interests – Unitholders of the Operating Partnership	(1,914		)	(1,977		)
Distributions paid to noncontrolling interests – consolidated real estate entities	(59		)	(244		)
Net cash provided by (used by) financing activities	$	446		$	(181,003	)
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH	2,822			(261,321		)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF PERIOD	19,256			286,226
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD	$	22,078		$	24,905

SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Accrued capital expenditures	$	499	$	1,569
Distributions declared but not paid to common shareholders	9,038		8,358
Distributions declared but not paid to preferred shareholders	1,706		1,706
Distributions declared but not paid to preferred unitholders	160		—
Gain on litigation settlement	2,286		—
Property acquired through issuance of Series D preferred units	16,560		—
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest	$	15,044	$	15,367

See accompanying Notes to Condensed Consolidated Financial Statements.

8

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

for the six months ended June 30, 2019 and 2018

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, primarily in Midwest markets. As of June 30, 2019, we owned interests in 88 apartment communities consisting of 13,975 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. On September 20, 2018, our Board of Trustees approved a change in our fiscal year-end from April 30 to December 31, beginning on January 1, 2019. We filed a transition report on Form 10-KT for the transition period ended December 31, 2018, in accordance with SEC rules and regulations. Beginning on January 1, 2019, all fiscal years will be from January 1 to December 31.

On December 14, 2018, the Board approved a reverse stock split of our outstanding common shares, no par value per share, and limited partnership units ("Units") at a ratio of 1-for-10. The reverse stock split was effective as of the close of trading on December 27, 2018, with trade commencing on a split-adjusted basis on December 28, 2018. We have adjusted all shares and Units and per share and Unit data for all periods presented.

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.

UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Our interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain disclosures accompanying annual consolidated financial statements prepared in accordance with GAAP are omitted. The year-end balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by GAAP. In the opinion of management, all adjustments, consisting solely of normal recurring adjustments necessary for the fair presentation of our financial position, results of operations, and cash flows for the interim periods, have been included.

The current period’s results of operations are not necessarily indicative of results which ultimately may be achieved for the year. The interim condensed consolidated financial statements and accompanying notes thereto should be read in conjunction with the consolidated financial statements and accompanying notes included in our Transition Report on Form 10-KT for the transition period ended December 31, 2018, as filed with the SEC on February 27, 2019.

USE OF ESTIMATES

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

RECENT ACCOUNTING PRONOUNCEMENTS

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

9

Standard	Description	Date of Adoption	Effect on the Financial Statements or Other Significant Matters
ASU 2016-02, Leases; ASU 2018-10, Codification Improvements to Topic 842, Leases; ASU 2018-11, Leases: Targeted Improvements; ASU 2018-20, Leases (Topic 842) - Narrow-Scope Improvements for Leases	These ASUs amend existing accounting standards for lease accounting, including requiring lessees to recognize most leases on the balance sheet and making certain changes to lessor accounting.	These ASUs are effective for annual reporting periods beginning after December 15, 2018. Early adoption is permitted. We adopted these standards using the modified retrospective approach effective January 1, 2019.	Our residential leases, where we are the lessor, will continue to be accounted for as operating leases under the new standards. As a result of adopting these standards, there were no significant changes in the accounting for lease revenue. For leases where we are the lessee, we recognized a right of use asset and lease liability of $889,000 and $1.0 million, respectively, on our consolidated balance sheets. There are also additional disclosures required under the new standard. Refer to the Leases section below for more information regarding the impact of adopting the standards on our condensed consolidated financial statements.
ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments; ASU 2018-19, Codification Improvements to Topic 326; ASU 2019-05, Financial Instruments - Credit Losses - Targeted Transition Relief	These ASUs require entities to estimate a lifetime expected credit loss for most financial assets, such as loans and other financial instruments, and to present the net amount expected to be collected. In 2018, another ASU was issued to amend ASU 2016-13, which clarifies that it does not apply to operating lease receivables. In 2019, an additional ASU was issued to provide transition relief in which an entity is allowed to elect the fair value option on an instrument-by-instrument basis for eligible instruments, upon adoption of Topic 326.	These ASUs are effective for annual reporting periods beginning after December 15, 2019. Early adoption is permitted.	We are currently evaluating the impact the new standards will have on our mortgage and note receivables.
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 condensed consolidated financial statements.
ASU 2019-01, Leases (Topic 842) - Codification Improvements	This ASU provides clarification on various lease related issues and provides for reduced transition disclosure requirements.	This ASU has two effective dates. The various lease issues are effective for annual reporting periods beginning after December 15, 2019. The transition disclosures are effective with the ASU 2016-02, Leases. We adopted this standard using the modified retrospective approach effective January 1, 2019.	The adoption of the standard did not have a material impact on our condensed consolidated financial statements. Refer to the Leases section below for transition disclosures.

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CASH, CASH EQUIVALENTS, AND RESTRICTED CASH

	(in thousands)
Balance sheet description	June 30, 2019		June 30, 2018
Cash and cash equivalents	$	17,406	$	20,451
Restricted cash	4,672		4,454
Total cash, cash equivalents and restricted cash	$	22,078	$	24,905

As of June 30, 2019, restricted cash consisted primarily of loan application deposits and escrows held by lenders for real estate taxes, insurance, and capital additions.

LEASES

Effective January 1, 2019, we adopted ASUs 2016-02, 2018-10, 2018-11, 2018-20, and 2019-01 related to leases using the modified retrospective approach. We elected to adopt the package of practical expedients permitted under the transition guidance, which permits us to not reassess prior conclusions about lease identification, classification, and initial direct costs under the new standard, and the practical expedient related to land easements, which allows us to not evaluate existing or expired land easements that were not previously accounted for under ASC 840. We made an accounting policy election to exclude leases in which we are a lessee with a term of 12 months or less from the balance sheet.

As a lessor, we primarily lease multifamily apartment homes which qualify as operating leases with terms that are generally one year or less. Rental revenues are recognized in accordance with ASC 842, Leases, using a method that represents a straight-line basis over the term of the lease. Rental income represents approximately 98.0% of our total revenues and includes gross market rent less adjustments for concessions, vacancy loss, and bad debt. Other property revenues represent the remaining 2.0% of our total revenues and are primarily driven by other fee income, which is typically recognized at a point in time.

Some of our apartment communities have commercial spaces available for lease. Lease terms for these spaces typically range from three to fifteen years. The leases for commercial spaces generally include options to extend the lease for additional terms.

Many of our leases contain non-lease components for utility reimbursement from our residents and common area maintenance from our commercial tenants. We have elected the practical expedient to combine lease and non-lease components for all asset classes. The combined components are included in lease income and are accounted for under ASC 842.

The aggregate amount of future scheduled lease income on our operating leases for commercial spaces, excluding any variable lease income and non-lease components, as of June 30, 2019, was as follows:

	(in thousands)
2019 (remainder)	$	1,672
2020	3,014
2021	3,017
2022	3,021
2023	2,895
Thereafter	7,501
Total scheduled lease income - operating leases	$	21,120

REVENUES

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

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

• Other property revenues: We recognize revenue for rental related income not included as a component of a lease, such as 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

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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.

The following table presents the disaggregation of revenue streams for the three and six months ended June 30, 2019:

		(in thousands)
		Three Months Ended June 30,				Six Months Ended June 30,
Revenue Stream	Applicable Standard	2019		2018		2019		2018
Fixed lease income - operating leases	Leases	$	44,342	$	43,193	$	88,084	$	83,314
Variable lease income - operating leases	Leases	1,548		—		2,632		—
Non-lease components	Revenue from contracts with customers	—		1,335		—		2,546
Other property revenue	Revenue from contracts with customers	1,044		1,669		1,826		3,372
Total revenue		$	46,934	$	46,197	$	92,542	$	89,232

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 June 30, 2019, we recorded no impairment charges. During the six months ended June 30, 2018, we recognized $17.8 million of impairment charges on one apartment community, three commercial properties, and three parcels of land. We recognized impairments of $12.2 million on one apartment community in Grand Forks, North Dakota; $1.4 million on an industrial property in Bloomington, Minnesota; $922,000 on an industrial property in Woodbury, Minnesota; and $630,000 on a retail property in Minot, North Dakota. These properties were written-down to estimated fair value based on independent appraisals and market data or, in the case of the retail property, receipt of a market offer to purchase and our intent to dispose of the property. We recognized impairments of $428,000 on a parcel of land in Williston, North Dakota; $1.5 million on a parcel of land in Grand Forks, North Dakota; and $709,000 on a parcel of land in Bismarck, North Dakota. These parcels were written down to estimated fair value based on independent appraisals and market data.

MORTGAGE RECEIVABLE AND NOTES RECEIVABLE

In August 2017, we sold 13 multifamily communities in exchange for cash and an $11.0 million note secured by a mortgage on the assets. As of June 30, 2019, the balance of the note was $10.1 million, with 12 communities remaining in the pool of assets used to secure the mortgage. The note bears an interest rate of 5.5% and matures in August 2020. Monthly payments are interest-only, with the principal balance payable at maturity. During the six months ended June 30, 2019 and 2018, we received and recognized approximately $285,000 and $305,000 of interest income, respectively.

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. As of June 30, 2019, the balance of the note was $16.6 million. The note bears an interest rate of 6.0%, matures in July 2023, and provides us an option to purchase the development prior to the loan maturity date.

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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.

GAIN ON LITIGATION SETTLEMENT

During the three months ended June 30, 2019, we recorded a gain on litigation settlement of $6.3 million from the settlement on a construction defect claim. The gain consisted of $4.0 million of cash received, $937,000 of cash receivable, and $1.4 million of liabilities waived under the terms of the settlement.

NOTE 3 • EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of our common shares of beneficial interest (“common shares”) outstanding during the period. We have issued restricted stock units (“RSUs”) under our 2015 Incentive Plan and Series D Convertible Preferred Units ("Series D preferred units"), which could have a dilutive effect on our earnings per share upon exercise of the RSUs or upon conversion of the Series D preferred units (refer to Note 4 for further discussion of the Series D preferred units). Other than the issuance of RSUs and Series D preferred units, we have no outstanding options, warrants, convertible stock or other contractual obligations requiring issuance of additional shares that would result in dilution of earnings. Under the terms of the Operating Partnership’s Agreement of Limited Partnership, limited partners have the right to require the Operating Partnership to redeem their limited partnership units (“Units”) any time following the first anniversary of the date they acquired such Units (“Exchange Right”). Upon the exercise of Exchange Rights, and in our sole discretion, we may issue common shares in exchange for Units on a one-for-one basis.

Performance-based restricted stock awards and RSUs of 37,625 and 9,858 for the three months ended June 30, 2019 and 2018, respectively, and 37,625 and 9,858, respectively, for the six months ended June 30, 2019 and 2018 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.

The following table presents a reconciliation of the numerator and denominator used to calculate basic and diluted earnings per share reported in the condensed consolidated financial statements for the three and six months ended June 30, 2019 and 2018:  

	(in thousands, except per share data)
	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
NUMERATOR
Income (loss) from continuing operations – controlling interests	$	3,113		$	(20,386	)	$	(1,585	)	$	(26,200	)
Income (loss) from discontinued operations – controlling interests	—			212			—			12,630
Net income (loss) attributable to controlling interests	3,113			(20,174		)	(1,585		)	(13,570		)
Dividends to preferred shareholders	(1,706		)	(1,706		)	(3,411		)	(3,411		)
Numerator for basic earnings (loss) per share – net income available to common shareholders	1,407			(21,880		)	(4,996		)	(16,981		)
Noncontrolling interests – Operating Partnership	148			(2,580		)	(595		)	(2,000		)
Numerator for diluted earnings (loss) per share	$	1,555		$	(24,460	)	$	(5,591	)	$	(18,981	)
DENOMINATOR
Denominator for basic earnings per share weighted average shares	11,729			11,928			11,746			11,950
Effect of redeemable operating partnership units	1,226			1,407			1,306			1,416
Denominator for diluted earnings per share	12,955			13,335			13,052			13,366
Earnings (loss) per common share from continuing operations – basic and diluted	$	0.11		$	(1.85	)	$	(0.43	)	$	(2.48	)
Earnings (loss) per common share from discontinued operations – basic and diluted	—			0.02			—			1.06
NET EARNINGS (LOSS) PER COMMON SHARE – BASIC & DILUTED	$	0.11		$	(1.83	)	$	(0.43	)	$	(1.42	)

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NOTE 4 • EQUITY AND MEZZANINE EQUITY

Operating Partnership Units. The Operating Partnership had 1.2 million and 1.4 million outstanding Units at June 30, 2019 and December 31, 2018, respectively.

Common Shares and Equity Awards. Common shares outstanding on June 30, 2019 and December 31, 2018, totaled 11.7 million and 11.9 million, respectively. There were 6,511 shares issued upon the vesting of equity awards under our 2015 Incentive Plan during the three months ended June 30, 2019, with a total grant-date fair value of $447,000. During the six months ended June 30, 2019, we issued 6,718 shares, with a total grant-date fair value $457,000. During the three and six months ended June 30, 2018, we issued 5,142 shares, with a total grant-date fair value of $350,000 and 6,226 shares, with a total grant-date fair value of $412,000, respectively, under our 2015 Incentive Plan. These shares vest based on performance and service criteria.

Exchange Rights. Pursuant to the exercise of Exchange Rights, we redeemed Units during the six months ended June 30, 2019 and 2018 as detailed in the table below.

	(in thousands, except per Unit amounts)
Three Months Ended June 30,	Number of Units	Aggregate Cost(1)		Average Price Per Unit
2019	133	$	7,968	$	60.01
2018	10	$	510	$	52.72
Six Months Ended June 30,
2019	135	$	8,118	$	60.00
2018	49	$	2,747	$	55.84

(1) The redemption price is determined using the volume weighted average price for the ten trading days prior to the date a unitholder provides notification of their intent to redeem units.

We also redeemed Units in exchange for common shares in connection with Unitholders exercising their Exchange Rights during the six months ended June 30, 2019 and 2018 as detailed in the table below.

	(in thousands)
Three Months Ended June 30,	Number of Units	Total Book Value
2019