Centerspace (CSR) 10-Q 2004 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.
20549

Form 10-Q

Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934

For Quarter Ended October 31, 2004

Commission File Number 0-14851

INVESTORS REAL ESTATE TRUST

(Exact name of registrant as specified in its charter)

North Dakota
(State or other jurisdiction of
incorporation or organization)
Post Office Box 1988
12 South Main Street
Minot, ND
(Address of principal executive offices) 45-0311232
(I.R.S. Employer Identification No.)



58702-1988
(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 such filing requirements for the past 90 days.

     Yesx Noo

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

     Yesx Noo

     Registrant is a North Dakota Real Estate Investment Trust. As of December 7, 2004, it had 44,009,823.139 common shares of beneficial interest outstanding.

TABLE OF CONTENTS

		Page
Part I	Financial Information
Item 1.	Financial Statements – Second Quarter — Fiscal 2005:
	Consolidated Balance Sheets October 31, 2004 (unaudited) and April 30, 2004		1
	Consolidated Statements of Operations (unaudited) For the Three Months and Six Months ended October 31, 2004 and 2003		2
	Consolidated Statement of Shareholders’ Equity (unaudited) For the Six Months ended October 31, 2004		3
	Consolidated Statements of Cash Flows (unaudited) For the Six Months ended October 31, 2004 and 2003		4
	Notes to Consolidated Financial Statements (unaudited)		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		38
Item 4.	Controls and Procedures		39
Part II	Other Information
Item 1.	Legal Proceedings		39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		39
Item 3.	Defaults Upon Senior Securities – None		39
Item 4.	Submission of Matters to a Vote of Security Holders		39
Item 5.	Other Information – None		39
Item 6.	Exhibits		40
	Signatures		41
Certification by CEO Pursuant to Section 302
Certification by CFO Pursuant to Section 302
Certifications of CEO & CFO Pursuant to Section 906

PART I

ITEM 1. FINANCIAL STATEMENTS – SECOND QUARTER — FISCAL 2005

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	(in thousands)
	(unaudited)
	October 31, 2004			April 30, 2004
ASSETS
Real estate investments
Property owned	$	1,153,547		$	1,100,434
Less accumulated depreciation/amortization		(111,115	)		(100,250	)
		1,042,432			1,000,184
Undeveloped land		5,117			2,994
Mortgage loans receivable, net of allowance		631			4,893
Total real estate investments		1,048,180			1,008,071
Other assets
Cash and cash equivalents		28,218			31,704
Marketable securities – available-for-sale		2,373			2,336
Receivable arising from straight-lining of rents, net of allowance		6,265			5,976
Accounts receivable – net of allowance		2,304			2,155
Real estate deposits		620			1,567
Prepaid and other assets		1,524			2,677
Tax, insurance, and other escrow		7,901			11,301
Property and equipment, net		2,379			2,292
Goodwill		1,441			1,441
Deferred charges and leasing costs — net		7,887			6,797
TOTAL ASSETS	$	1,109,092		$	1,076,317
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Accounts payable, accrued expenses and other liabilities	$	19,262		$	22,639
Notes payable		—			25,000
Mortgages payable		681,898			633,124
Investment certificates issued		5,429			7,074
Other debt		824			843
TOTAL LIABILITIES		707,413			688,680
COMMITMENTS AND CONTINGENCIES (NOTE 6)
MINORITY INTEREST IN PARTNERSHIPS		16,291			16,386
MINORITY INTEREST OF UNIT HOLDERS IN OPERATING PARTNERSHIP
(12,839,295 units on October 31, 2004 and 11,819,350 units On April 30, 2004)		102,161			92,622
SHAREHOLDERS’ EQUITY
Preferred shares of beneficial interest(Cumulative redeemable preferred shares, no par value, 1,150,000 shares issued and outstanding at October 31, 2004 and April 30, 2004, aggregate liquidation preference of $28,750,000)		27,317			27,343
Common shares of beneficial interest(Unlimited authorization, no par value, 42,761,092 shares issued and outstanding at October 31, 2004 and 41,693,256 shares issued and outstanding at April 30, 2004)		302,352			292,400
Accumulated distributions in excess of net income		(46,437	)		(41,083	)
Accumulated other comprehensive loss		(5	)		(31	)
TOTAL SHAREHOLDERS’ EQUITY		283,227			278,629
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,109,092		$	1,076,317

The accompanying notes are an integral part of these consolidated financial statements.

1

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS(unaudited)

for the three and six months ended October 31, 2004 and 2003

	Three Months Ended						Six Months Ended
	October 31						October 31
	(in thousands, except per share data)
	2004			2003			2004			2003
REVENUE
Real estate rentals	$	32,919		$	27,806		$	65,461		$	54,685
Tenant reimbursement		6,249			4,707			12,496			9,342
TOTAL REVENUE		39,168			32,513			77,957			64,027
OPERATING EXPENSE
Interest		11,707			10,012			23,192			19,764
Depreciation/amortization related to real estate investments		8,119			5,531			16,010			10,863
Utilities		2,355			2,148			4,982			3,962
Maintenance		4,212			3,405			8,505			6,732
Real estate taxes		4,647			4,055			9,186			7,934
Insurance		662			698			1,339			1,361
Property management expenses		2,881			2,155			5,285			4,145
Property management related party		134			201			284			330
Administrative expense		908			604			1,653			1,233
Advisory and trustee services		21			29			45			57
Other operating expenses		422			392			562			563
Amortization		283			183			558			360
Amortization of related party costs		15			12			29			17
TOTAL OPERATING EXPENSE		36,366			29,425			71,630			57,321
Operating income		2,802			3,088			6,327			6,706
Non-operating income		235			148			445			294
Income before minority interest and discontinued operations		3,037			3,236			6,772			7,000
Minority interest portion of other partnerships’ income		(116	)		(212	)		(205	)		(469	)
Minority interest portion of operating partnership income		(1,401	)		(743	)		(2,823	)		(1,528	)
Income from continuing operations		1,520			2,281			3,744			5,003
Discontinued operations, net		2,433			334			5,679			532
NET INCOME		3,953			2,615			9,423			5,535
Dividends to preferred shareholders		(593	)		0			(1,186	)		0
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	3,360		$	2,615		$	8,237		$	5,535
BASIC
Earnings per common share from continuing operations	$	.02		$	.06		$	.06		$	.13
Earnings per common share from discontinued operations		.06			.01			.14			.02
NET INCOME PER COMMON SHARE	$	.08		$	.07		$	.20		$	.15
DILUTED
Earnings per common share from continuing operations	$	.04		$	.06		$	.10		$	.14
Earnings per common share from discontinued operations		.04			.01			.10			.01
NET INCOME PER COMMON SHARE	$	.08		$	.07		$	.20		$	.15

The accompanying notes are an integral part of these consolidated financial statements.

2

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY(unaudited)

for the six months ended October 31, 2004

	(in thousands)
	NUMBER					NUMBER									ACCUMULATED
	OF					OF						DISTRIBUTIONS			OTHER			TOTAL
	PREFERRED		PREFERRED			COMMON			COMMON			IN EXCESS OF			COMPREHENSIVE			SHAREHOLDERS'
	SHARES		SHARES			SHARES			SHARES			NET INCOME			INCOME (LOSS)			EQUITY
Balance May 1, 2004		1,150	$	27,343			41,693		$	292,400		$	(41,083	)	$	(31	)	$	278,629
Comprehensive Income
Net income													9,423						9,423
Unrealized gain on securities available-for- sale																26			26
Total comprehensive income																			9,449
Distributions													(14,777	)					(14,777	)
Distribution reinvestment plan							539			5,198									5,198
Sale of shares				(26	)		343			3,281									3,255
Redemption of units for common shares							189			1,499									1,499
Fractional shares repurchased							(3	)		(26	)								(26	)
Balance October 31, 2004		1,150	$	27,317			42,761		$	302,352		$	(46,437	)	$	(5	)	$	283,227

The accompanying notes are an integral part of these consolidated financial statements.

The remainder of this page has been left blank intentionally.

3

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS(unaudited)

for the six months ended October 31, 2004 and 2003

	(in thousands)
	2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	9,423		$	5,535
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		16,885			11,760
Minority interest portion of income		2,967			2,123
Gain on sale of real estate, land and other investments		(5,873	)		(103	)
Interest reinvested in investment certificates		155			169
Bad debt expense:
Straight-line allowance		50			180
Past due rent		218			0
Changes in other assets and liabilities:
(Increase) decrease in real estate deposits		947			(2,041	)
Increase in receivable arising from straight-lining of rents		(339	)		(942	)
(Increase) decrease in accounts receivable		(368	)		429
(Increase) decrease in prepaid and other assets		1,153			(1,205	)
(Increase) decrease in tax, insurance and other escrow		3,400			(1,115	)
Increase in deferred charges and leasing costs		(1,695	)		(1,493	)
(Increase) decrease in related party capitalized leasing commissions		7			(31	)
Increase (decrease) in accounts payable, accrued expenses and other liabilities		(3,003	)		(1,542	)
Net cash provided by operating activities		23,927			11,724
CASH FLOWS FROM INVESTING ACTIVITIES
Principal payments on mortgage loans receivable		4,262			38
Investment in mortgage loans receivable		0			(1,067	)
Purchase of marketable securities – available-for-sale		(11	)		0
Proceeds from sale of real estate, land and investments		39,319			420
Payments for acquisitions and improvements of properties		(61,485	)		(47,679	)
Net cash used by investing activities		(17,915	)		(48,288	)

continued

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4

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS(unaudited, continued)
for the six months ended October 31, 2004 and 2003

	(in thousands)
	2004			2003
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common shares, net of issue costs	$	3,249		$	35,416
Issue costs for preferred shares		(26	)		0
Proceeds from mortgages payable		60,236			54,888
Proceeds from minority partner Brenwood/Dixon		161			0
Proceeds from notes payable		13			11
Repurchase of shares and minority interest units		(26	)		(3	)
Distributions paid to shareholders, net of reinvestment		(9,751	)		(6,772	)
Distributions paid to unitholders of operating partnership		(3,529	)		(3,043	)
Distributions paid to other minority partners		(460	)		(408	)
Redemption of investment certificates		(1,800	)		(941	)
Principal payments on mortgages payable		(32,533	)		(26,125	)
Principal payments on notes payable		(25,032	)		(11,258	)
Net cash (used) provided by financing activities		(9,498	)		41,765
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(3,486	)		5,201
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		31,704			18,642
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	28,218		$	23,843
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES FOR THE PERIOD
Distribution reinvestment plan	$	4,829		$	5,169
UPREIT distribution reinvestment plan		369			387
Preferred dividends payable		198			0
Property acquired through issue of shares		32			0
Real estate investment acquired through assumption of mortgage loans payable and accrual of costs		21,071			15,000
Real estate investments acquired through the issuance of minority interest units in the operating partnership		12,174			14,386
Operating partnership units converted to shares		1,499			930
Minority partner interest		0			1,294
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on mortgages		22,547			19,856
Interest on investment certificates		153			198
Interest on margin account and other		337			299
	��
	$	23,037		$	20,353

The accompanying notes are an integral part of these consolidated financial statements.

5

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)

for the six months ended October 31, 2004 and 2003

NOTE 1 • ORGANIZATION

     Investors Real Estate Trust (“IRET” or the “Company”) is a self-advised real estate investment trust engaged in acquiring, owning and leasing multi-family and commercial real estate. IRET has elected to be taxed as a Real Estate Investment Trust (“REIT”) under Sections 856-860 of the Internal Revenue Code of 1986, as amended. REITs are subject to a number of organizational and operational requirements, including a requirement to distribute 90% of ordinary taxable income to shareholders, and, generally, are not subject to federal income tax on net income. IRET’s multi-family residential properties and commercial properties are located mainly in the states of North Dakota and Minnesota, but also in the states of Colorado, Idaho, Iowa, Georgia, Kansas, Montana, Nebraska, South Dakota, Texas, Michigan and Wisconsin. As of October 31, 2004, IRET owned 64 multi-family residential properties with 8,571 apartment units and 147 commercial properties, consisting of office, medical, industrial and retail properties, totaling 7.7 million net rentable square feet. IRET conducts a majority of its business activities through its consolidated operating partnership, IRET Properties, a North Dakota Limited Partnership (the “Operating Partnership”), as well as through a number of other consolidated subsidiary entities.

     All references to IRET or the Company refer to Investors Real Estate Trust and its consolidated subsidiaries.

NOTE 2 • BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

     The accompanying consolidated financial statements include the accounts of IRET and all its subsidiaries in which it maintains a controlling interest. All significant intercompany balances and transactions are eliminated in consolidation. The Company’s fiscal year ends April 30^th.

     The accompanying consolidated financial statements include the accounts of IRET and its general partnership interest in the Operating Partnership. The Company’s interest in the Operating Partnership was 76.9% and 78.0%, respectively, as of October 31, 2004, and April 30, 2004, which includes 100% of the general partnership interest. The limited partners have a redemption option that they may exercise. IRET has the choice of redeeming the limited partners’ interests (“Units”) for IRET common shares of beneficial interest, on a one-for-one basis, or making a cash payment to the unitholder. The redemption generally may be exercised by the limited partners at any time after the first anniversary of the date of the acquisition of the Units (provided, however, that in general not more than two redemptions by a limited partner may occur during each calendar year, and each limited partner may not exercise the redemption for less than 1,000 Units, or, if such limited partner holds less than 1,000 Units, for all of the Units held by such limited partner). The Operating Partnership and some limited partners have contractually agreed to a holding period of greater than one year and/or a greater number of redemptions during a calendar year.

6

NOTE 2 •continued

     The consolidated financial statements also reflect the ownership by the Operating Partnership of certain joint venture entities in which the Operating Partnership has a general partner or controlling interest. These entities are consolidated into IRET’s other operations, with minority interests reflecting the minority partners’ share of ownership and income and expenses.

UNAUDITED INTERIM FINANCIAL STATEMENTS

     The interim consolidated financial statements of IRET have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America are omitted. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments, consisting solely of normal recurring adjustments, necessary for the fair presentation of the Company’s 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 consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 8-K dated October 5, 2004, for the fiscal year ended April 30, 2004, filed with the SEC.

RECLASSIFICATIONS

     Certain previously reported amounts have been reclassified to conform to the current financial statement presentation.

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 common shares outstanding during the period. The Company has no outstanding options, warrants, convertible stock or other contractual obligations requiring issuance of additional common shares that would result in a dilution of earnings. While Units can be exchanged for common shares on a one-for-one basis after a minimum holding period of one year, the exchange of Units for common shares has no effect on net income per share, as Unitholders and common shareholders effectively share equally in the net income of the Operating Partnership. The following table presents a reconciliation of the numerator and denominator used to calculate basic and diluted earnings per share reported in the consolidated financial statements for the three and six months ended October 31, 2004 and 2003:

7

NOTE 3•continued

	Three Months					Six Months
	Ended October 31					Ended October 31
	(in thousands, except per share data)
	2004			2003		2004			2003
NUMERATOR
Income from continuing operations	$	1,520		$	2,281	$	3,744		$	5,003
Discontinued operations		2,433			334		5,679			532
Net income		3,953			2,615		9,423			5,535
Dividends to preferred shareholders		(593	)		0		(1,186	)		0
Numerator for basic earnings per share – net income available to common shareholders		3,360			2,615		8,237			5,535
Minority interest portion of operating partnership income		1,287			811		2,762			1,654
Numerator for diluted earnings per share	$	4,647		$	3,426	$	10,999		$	7,189
DENOMINATOR
Denominator for basic earnings per share – weighted average shares	$	42,475		$	38,327	$	42,228		$	37,342
Effect of dilutive securities – convertible operating partnership units		12,477			11,547		12,299			10,848
Denominator for diluted earnings per share	$	54,952		$	49,874	$	54,527		$	48,190
BASIC
Earnings per common share from continuing operations	$	.02		$	.06	$	.06		$	.13
Earnings per common share from discontinued operations		.06			.01		.14			.02
NET INCOME PER COMMON SHARE	$	.08		$	.07	$	.20		$	.15
DILUTED
Earnings per common share from continuing operations	$	.04		$	.06	$	.10		$	.14
Earnings per common share from discontinued operations		.04			.01		.10			.01
NET INCOME PER COMMON SHARE	$	.08		$	.07	$	.20		$	.15

NOTE 4 • SHAREHOLDERS’ EQUITY

     On July 1, 2004 and October 1, 2004 we issued approximately 259,000 shares and approximately 280,000 shares, respectively, pursuant to our distribution reinvestment plan, for total value of $5.2 million. In addition, as of October 31, 2004, approximately 190,000 Units have been converted to shares during fiscal year 2005, with a total value of $1.5 million included in shareholders’ equity. As of October 31, 2004, the Company had issued 74,000 common shares of beneficial interest at $10.15 per share under a “best efforts” offering of up to 1.5 million common shares, for gross proceeds to the Company of $753,000, before payment of commissions of six percent per share to the broker-dealers selling the shares, and before payment of other expenses of the offering.

8

NOTE 5 • SEGMENT REPORTING

     IRET is engaged in acquiring, owning and leasing multi-family residential and commercial real estate. Each property is considered a separate operating segment. Each segment on a stand-alone basis is less than 10% of the revenues, profit or loss, and assets of the combined reported operating segments, and meets the majority of the aggregation criteria under SFAS 131. Previously, IRET’s operating segments were aggregated and classified as multi-family residential and commercial properties, producing two reportable segments. Beginning with the first quarter of IRET’s current fiscal year, IRET is reporting its results in five segments: multi-family residential properties, office, industrial (including miscellaneous commercial properties), retail, and medical (including assisted living facilities) properties.

     IRET expanded its number of reportable segments in response to its growth and to the increased diversity of its properties, in particular the increase in the number of retail and medical properties IRET owns. This growth and increased diversity of property type prompted IRET to reorganize its asset management group, effective July 2004, in order to permit greater management specialization by property type. It also provides a basis for aggregating properties with similar economic characteristics. While IRET will continue to separately evaluate the performance of each of its properties, management will also assess IRET’s performance in each of its five segments.

     The revenues, profit and assets for these reportable segments are summarized as follows as of and for the three and six-month periods ended October 31, 2004 and 2003, along with reconciliations to the consolidated financial statements:

Three Months Ended October 31, 2004

	(in thousands)
	Commercial-		Commercial-		Commercial-		Commercial-		Multi-Family
	Office		Medical		Industrial		Retail		Residential		Total
Real Estate Revenue	$	12,366	$	6,409	$	1,533	$	3,434	$	15,426	$	39,168
Expenses
Mortgage interest		3,023		2,321		589		1,040		4,640		11,613
Depreciation/amortization related to real estate investments		2,884		1,338		379		698		2,775		8,074
Utilities and maintenance		2,423		505		44		152		3,443		6,567
Real estate taxes		1,760		491		223		486		1,687		4,647
Insurance		118		60		20		50		414		662
Property management		562		377		26		67		1,983		3,015
Total segment expense		10,770		5,092		1,281		2,493		14,942		34,578
Segment operating profit	$	1,596	$	1,317	$	252	$	941	$	484		4,590
Reconciliation to consolidated operations
Interest discounts and fee revenue												235
Other interest expense												(94	)
Depreciation – furniture and fixtures												(45	)
Administrative, advisory and trustee fees												(929	)
Operating expenses												(422	)
Amortization												(298	)
Income before minority interest and discontinued operations											$	3,037

9

NOTE 5 •continued

Three Months Ended October 31, 2003

	(in thousands)
	Commercial-		Commercial-		Commercial-		Commercial-		Multi-Family
	Office		Medical		Industrial		Retail		Residential		Total
Real Estate Revenue	$	8,636	$	3,950	$	1,675	$	2,921	$	15,331	$	32,513
Expenses
Mortgage interest		2,556		1,412		527		896		4,316		9,707
Depreciation/amortization related to real estate investments		1,381		673		310		472		2,656		5,492
Utilities and maintenance		1,771		520		36		262		2,964		5,553
Real estate taxes		1,287		381		186		487		1,714		4,055
Insurance		99		34		16		37		512		698
Property management		447		275		27		12		1,595		2,356
Total segment expense		7,541		3,295		1,102		2,166		13,757		27,861
Segment operating profit	$	1,095	$	655	$	573	$	755	$	1,574		4,652
Reconciliation to consolidated operations:
Interest discounts and fee revenue												148
Other interest expense												(305	)
Depreciation – furniture and fixtures												(39	)
Administrative, advisory and trustee fees												(633	)
Operating expenses												(392	)
Amortization												(195	)
Income before minority interest and discontinued operations											$	3,236

Six Months Ended October 31, 2004

	(in thousands)
	Commercial-		Commercial-		Commercial-		Commercial-		Multi-Family
	Office		Medical		Industrial		Retail		Residential		Total
Real Estate Revenue	$	23,496	$	12,457	$	3,224	$	8,078	$	30,702	$	77,957
				��
Expenses
Mortgage interest		6,020		4,225		1,153		1,993		9,299		22,690
Depreciation/amortization related to real estate investments		5,664		2,591		757		1,393		5,516		15,921
Utilities and maintenance		4,605		1,415		123		697		6,647		13,487
Real estate taxes		3,466		928		456		970		3,366		9,186
Insurance		245		129		41		101		823		1,339
Property management		1,026		644		47		142		3,710		5,569
Total segment expense		21,026		9,932		2,577		5,296		29,361		68,192
Segment operating profit	$	2,470	$	2,525	$	647	$	2,782	$	1,341		9,765
Reconciliation to consolidated operations:
Interest discounts and fee revenue												445
Other interest expense												(502	)
Depreciation – furniture and fixtures												(89	)
Administrative, advisory and trustee fees												(1,698	)
Operating expenses												(562	)
Amortization												(587	)
Income before minority interest and discontinued operations											$	6,772

10

NOTE 5 •continued

Six Months Ended October 31, 2003

	(in thousands)
	Commercial-		Commercial-		Commercial-		Commercial-		Multi-Family
	Office		Medical		Industrial		Retail		Residential		Total
Real Estate Revenue	$	17,476	$	7,954	$	3,392	$	5,795	$	29,410	$	64,027
Expenses
Mortgage interest		5,144		2,831		1,048		1,729		8,515		19,267
Depreciation/amortization related to real estate investments		2,725		1,419		621		936		5,086		10,787
Utilities and maintenance		3,392		1,025		75		469		5,733		10,694
Real estate taxes		2,591		691		372		974		3,306		7,934
Insurance		199		65		32		77		988		1,361
Property management		747		603		50		25		3,050		4,475
Total segment expense		14,798		6,634		2,198		4,210		26,678		54,518
Segment operating profit	$	2,678	$	1,320	$	1,194	$	1,585	$	2,732		9,509
Reconciliation to consolidated operations:
Interest discounts and fee revenue												294
Other interest expense												(497	)
Depreciation – furniture and fixtures												(76	)
Administrative, advisory and trustee fees												(1,290	)
Operating expenses												(563	)
Amortization												(377	)
Income before minority interest and discontinued operations											$	7,000

Segment Assets and Accumulated Depreciation

October 31, 2004

	(in thousands)
	Commercial-			Commercial-			Commercial-			Commercial-			Multi-Family
	Office			Medical			Industrial			Retail			Residential			Total
Segment assets
Property owned	$	332,916		$	210,362		$	58,657		$	121,615		$	429,997		$	1,153,547
Less accumulated depreciation/ amortization		(22,503	)		(10,747	)		(4,622	)		(8,979	)		(64,264	)		(111,115	)
Total property owned	$	310,413		$	199,615		$	54,035		$	112,636		$	365,733		$	1,042,432

April 30, 2004

	(in thousands)
	Commercial-			Commercial-			Commercial-			Commercial-			Multi-Family
	Office			Medical			Industrial			Retail			Residential			Total
Segment assets
Property owned	$	301,401		$	171,180		$	58,573		$	123,108		$	446,172		$	1,100,434
Less accumulated depreciation/ amortization		(17,307	)		(9,135	)		(3,860	)		(8,338	)		(61,610	)		(100,250	)
Total property owned	$	284,094		$	162,045		$	54,713		$	114,770		$	384,562		$	1,000,184

11

NOTE 6 • COMMITMENTS AND CONTINGENCIES

     Litigation.IRET is involved in various lawsuits arising in the normal course of business. Management believes that such matters will not have a material effect on the Company’s financial statements.

     Insurance.IRET carries insurance coverage on its properties in amounts and types that the Company believes are customarily obtained by owners of similar properties.

     Purchase Options.The Company has granted options to purchase certain Company properties to various parties. In general, the options grant the parties the right to purchase these properties at the greater of their appraised value or an annual compounded increase of 2% to 2.5% of the initial cost of the property to the Company. As of October 31, 2004, the total property cost of the 17 properties subject to purchase options was approximately $76.1 million, and the gross rental revenue from these properties was approximately $2.0 million for the three months ended October 31, 2004.

     During the quarter ended October 31, 2004, we sold one property under option, an Edgewood Vista assisted living facility located in Minot, North Dakota. See Note 8, Acquisitions and Dispositions, for further information on this sale. In addition, in November 2004, the tenant of four of our Edgewood Vista assisted living facilities exercised the purchase option contained in the leases for these properties. See Note 9, Subsequent Events, for further information on these pending transactions.

     Real Estate Expansions and Development.The Company has certain funding commitments under contracts for property development and expansion projects. As of October 31, 2004, IRET’s funding commitments included the following:

     Grand Forks Apartment Construction. The Company is obligated under a construction contract and an excavating contract for the construction of a multi-family residential property in Grand Forks, ND. The Company is obligated to pay approximately $7.5 million under the construction contract, subject to additions and deductions as provided in the contract, and approximately $340,000 under the excavating contract, for this development project. As of October 31, 2004, approximately $4.5 million and $305,000 have been paid under the construction contract and the excavating contract, respectively.

     Lithia Springs, Georgia Expansion Project. The Company is obligated to pay up to $575,000 to construct expansion premises at its Lithia Springs, Georgia assisted living facility. As of October 31, 2004, the Company had paid approximately $96,000 of this obligation.

     Kalispell Retail Center, Kalispell, MT. The Company has entered into a ten-year lease agreement with Conlin’s Furniture, Inc. The Company is obligated to pay approximately $620,000 for tenant improvements and leasing commissions under the lease agreement. As of October 31, 2004, the Company has paid approximately $169,000 of this obligation.

     Crosstown Circle Office Building, Eden Prairie, MN. The Company’s Crosstown Circle Office Building in Eden Prairie, Minnesota was acquired in October 2004 from Best Buy Company, which is leasing all but 7,500 square feet of the 185,000 square foot building under a master lease expiring September 30, 2010. Under the terms of the financing obtained by the

12

NOTE 6 •continued

Company for this building, the Company is obligated to fund a leasing reserve account in the event that a specified occupancy level is not met at the time the Best Buy master lease expires. The amount to be deposited in the leasing reserve account would be calculated by multiplying a specified amount per square foot by the difference between the specified occupancy level and the building’s actual occupied square feet. The maximum amount the Company would be required to deposit in such leasing reserve account is $4,625,000. Funds in the leasing reserve account would be released as leases for vacant space in the building are executed.

     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 IRET currently has no knowledge of any violation of environmental laws, ordinances or regulations at any of its properties, there can be no assurance that areas of contamination will not be identified at any of the Company’s properties, or that changes in environmental laws, regulations or cleanup requirements would not result in significant costs to the Company.

     Pending Acquisitions and Dispositions.As of October 31, 2004, the Company was a party to purchase agreements to acquire a residential townhome complex and a commercial property, for purchase prices totaling approximately $5.9 million. Also as of October 31, 2004, the Company was a party to contracts to sell one multi-family residential property, one parcel of vacant land, and one retail property, for sale prices totaling approximately $6.0 million and an estimated gain on sale of approximately $2.3 million. The Company expects to complete these pending acquisitions and dispositions over the next several months; however, the purchase or sale of each of these properties is subject to the Company’s or the buyer’s completion of due diligence and the satisfaction of other customary closing conditions, and there can be no assurance that any or all of these pending transactions will be consummated.

NOTE 7 • DISCONTINUED OPERATIONS

     SFAS No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets,” requires the Company to report in discontinued operations the results of operations of a property that has either been disposed of or is classified as held for sale. It also requires that any gains or losses from the sale of a property be reported in discontinued operations. There were no properties classified as held for sale as of October 31, 2004 or 2003. The following information shows the effect on net income, net of minority interest, and the gains or losses from the sale of properties classified as discontinued operations for the three and six months ended October 31, 2004 and 2003:

The remainder of this page has been left blank intentionally.

13

NOTE 7 •continued

	Three Months Ended						Six Months Ended
	October 31						October 31
	(in thousands)
	2004			2003			2004			2003
REVENUE
Real Estate Rentals	$	274		$	1,291		$	1,408		$	2,579
Tenant Reimbursements		90			125			215			258
Total Revenue		364			1,416			1,623			2,837
OPERATING EXPENSE
Interest		117			396			484			794
Depreciation/amortization		57			245			277			490
Utilities and maintenance		68			203			253			445
Real estate taxes		30			115			130			229
Insurance		4			22			22			44
Property management expenses		8			124			130			252
Administrative expense		0			1			0			2
Operating expense		1			0			1			1
Amortization		4			12			11			29
Loss on impairment of real estate		564			0			571			0
Total operating expense		853			1,118			1,879			2,286
Operating income (loss)		(489	)		298			(256	)		551
Non-operating income		0			1			1			4
Income (loss) before minority interest and discontinued operations		(489	)		299			(255	)		555
Minority interest		114			(68	)		61			(126	)
Gain on sale of discontinued operations		2,808			103			5,873			103
Discontinued operations, net	$	2,433		$	334		$	5,679		$	532

The remainder of this page has been left blank intentionally

14

NOTE 8 • ACQUISITIONS AND DISPOSITIONS

     During the three months ended October 31, 2004, IRET acquired one office property, and sold one multi-family residential property, one medical property (an assisted living facility), and one office property, as follows:

Acquisitions and Dispositions During Three Months Ended October 31, 2004:

Acquisitions

	(in thousands)
	Acquisition Cost
Commercial Property — Office
177,500 sq. ft. — Crosstown Circle Office Building – Eden Prairie, MN	$	22,000

     This office property was acquired from Best Buy Company for a purchase price of $22,000,000. Of this amount, the Company paid $16,250,000 in cash and cash equivalents, with the remaining $5,750,000 of the purchase price consisting of the value of the Company’s Flying Cloud Office Building in Eden Prairie, MN, which was acquired by Best Buy Company as part of the transaction. Best Buy Company is leasing all but 7,500 square feet of the 177,500 square foot Crosstown Circle building under a master lease expiring September 30, 2010.

Dispositions

	(in thousands)
			Book Value and
	Sales Price		Sales Cost		Gain/Loss
Multi-Family Residential
100 - unit Van Mall Woods Apartments – Vancouver, WA	$	6,900	$	5,626	$	1,274
Commercial Property – Medical (assisted living facility)
97,821 sq. ft. Edgewood Vista – Minot, ND		7,210		5,676		1,534
Commercial Property — Office
62,585 sq. ft. Flying Cloud Drive Office Building – Eden Prairie, MN		5,750		5,750		—
Total Property Dispositions	$	19,860	$	17,051	$	2,808

     During the six months ended October 31, 2004, IRET has acquired and disposed of the following properties:

The remainder of this page has been left blank intentionally.

15

NOTE 8 •continued

Acquisitions and Dispositions During Six Months Ended October 31, 2004:

Acquisitions

	(in thousands)
	Acquisition Cost
Commercial Property — Medical
52,300 sq. ft. Nebraska Orthopedic Hospital Expansion Project – Omaha, NE	$	20,597
45,081 sq. ft. Pavilion I Clinic — Duluth, MN		10,900
60, 294 sq. ft. High Pointe Health Campus Phase I (East Metro Medical Building) – Lake Elmo, MN		13,050
Commercial Property – Industrial (miscellaneous commercial property)
46,720 sq. ft. Sleep Inn Hotel – Brooklyn Park, MN		2,750
Commercial Property — Office
26,186 sq. ft. Plymouth I Office Building – Plymouth, MN		1,864
26,186 sq. ft. Plymouth II Office Building – Plymouth, MN		1,748
26,186 sq. ft. Plymouth III Office Building – Plymouth, MN		2,214
79,377 sq. ft. Northgate I Office Building –Maple Grove, MN		8,175
177,500 sq. ft. Crosstown Circle Office Building – Eden Prairie, MN		22,000
Total Property Acquisitions	$	83,298

Dispositions

	(in thousands)
			Book Value
	Sales Price		and Sales Cost		Gain/Loss
Multi-Family Residential
204-unit Ivy Club Apartments – Vancouver, WA	$	12,250	$	12,070	$	180
26-unit Beulah Condominiums – Beulah, ND		96		96		0
36-unit Parkway Apartments – Beulah, ND		159		159		0
18-Unit Dakota Arms Apartments – Minot, ND		825		566		259
100-Unit Van Mall Woods Apartments – Vancouver, WA		6,900		5,625		1,275
Commercial – Retail
30,000 sq. ft. Barnes & Noble Store – Fargo, ND		4,590		2,916		1,674
8,040 sq. ft. Petco Store – Fargo, ND and Petco		2,160		1,209		951
Commercial — Medical (assisted living facility)
97,821 sq. ft. Edgewood Vista – Minot, ND		7,210		5,676		1,534
Commercial – Office
62,585 sq. ft. Flying Cloud – Eden Prairie, MN		5,750		5,750		0
Vacant Land
205,347 sq. ft. parcel of vacant land – Libby, MT		151		151		0
Total Property Dispositions	$	40,091	$	34,218	$	5,873

16

NOTE 9 • SUBSEQUENT EVENTS

     Common Share Offering.In November 2004, the Company concluded its best efforts offering, commenced in October 2004, of up to 1.5 million of its common shares of beneficial interest. In this offering the Company sold approximately 1.4 million common shares at $10.15 per share, for total gross proceeds of approximately $14.3 million. Commissions to the broker-dealers selling the shares totaled approximately $860,000.

     Edgewood Vista Purchase Options.In November 2004, the tenant in four of our Edgewood Vista assisted living facilities, located in, respectively, Belgrade, Montana; Columbus, Nebraska; Grand Island, Nebraska and East Grand Forks, Minnesota, exercised the purchase options contained in the leases for these properties. The sales of these four properties, which would be separate transactions, are scheduled to close from the end of December 2004 through mid-January 2005. The proceeds to the Company from the sales of these four properties, after commissions and debt repayment, would total approximately $3.1 million. These pending dispositions are subject to customary closing conditions, and no assurance can be given that any or all of them will be completed.

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 consolidated financial statements included in this report, as well as the Company’s audited financial statements for the fiscal year ended April 30, 2004, which are included in the Company’s Form 8-K dated October 5, 2004 filed with the Securities and Exchange Commission.

     Forward Looking Statements.Certain matters included in this discussion are forward looking statements within the meaning of the federal securities laws. Although we believe that the expectations reflected in the following statements are based on reasonable assumptions, we can give no assurance that the expectations expressed will actually be achieved. Many factors may cause actual results to differ materially from our current expectations, including general economic conditions, local real estate conditions, the general level of interest rates and the availability of financing, timely completion and lease-up of properties under construction and various other economic risks inherent in the business of owning and operating investment real estate.

     Overview.IRET is a self-advised equity real estate investment trust engaged in owning and operating income-producing real properties. Our investments include multi-family residential properties and office, industrial, medical and retail properties located primarily in the upper Midwest states of Minnesota and North Dakota. Our properties are diversified by type and location. As of October 31, 2004, our real estate portfolio consisted of 64 multi-family residential properties containing 8,571 apartment units and having a total carrying amount (net of accumulated depreciation) of $366 million, and 147 commercial properties containing approximately 7.7 million square feet of leasable space and having a total carrying amount (net of accumulated depreciation) of $677 million. Our commercial properties consist of:

17

• 47 office properties containing approximately 3.2 million square feet of leasable space and having a total carrying amount (net of accumulated depreciation) of $310 million;

• 11 industrial properties (including miscellaneous commercial properties) containing approximately 1.7 million square feet of leasable space and having a total carrying amount (net of accumulated deprecation) of $54 million;

• 60 retail properties containing approximately 1.6 million square feet of leasable space and having a total carrying amount (net of accumulated depreciation) of $113 million; and

• 29 medical properties (including assisted living facilities) containing approximately 1.2 million square feet of leasable space and having a total carrying amount (net of accumulated depreciation) of $200 million.

     Our primary source of income and cash is rents associated with multi-family residential and commercial leases. Our business objective is to increase shareholder value by employing a disciplined investment strategy. This strategy is focused on growing assets in desired geographical markets, achieving diversification by property type and location, and adhering to targeted returns in acquiring properties. We intend to continue to achieve our business objective by investing in multi-family residential properties and in office, industrial, retail and medical commercial properties that are leased to single or multiple tenants, usually for five years or longer, and are located throughout the upper Midwest. We operate mainly within the states of North Dakota and Minnesota, although we also have real estate investments in South Dakota, Montana, Nebraska, Colorado, Georgia, Idaho, Iowa, Kansas, Michigan, Texas and Wisconsin.

     We compete with other owners and developers of multi-family and commercial properties to attract tenants to our properties, and we compete with other real estate investors to acquire properties. Principal areas of competition for tenants are in respect of rents charged and the attractiveness of location and quality of our properties. Competition for investment properties affects our ability to acquire properties we want to add to our portfolio, and the price we pay for acquisitions.

     Critical Accounting Policies.In preparing the 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 the Company’s critical accounting policies is included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2004, in Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in the Company’s Form 8-K dated October 5, 2004 for the fiscal year ended April 30, 2004, in the footnotes to the consolidated financial statements, Note 2 — Basis of Presentation and Significant Accounting Policies. There have been no significant changes to those policies during fiscal year 2005.

18

RECENT ACCOUNTING PRONOUNCEMENTS

     There are no accounting standards or interpretations that have been issued, but which have not yet been adopted, that we believe will have a material impact on our financial statements.

RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED OCTOBER 31, 2004 AND 2003

     Throughout this section, we have provided certain information on a “stabilized property” basis. Information provided on a stabilized property basis is provided only for those properties owned for the entirety of both periods being compared, and includes properties which were redeveloped or expanded during the periods being compared. Properties purchased or sold, and properties under development during the periods being compared, are excluded from our stabilized property analysis.

REVENUES

     Total IRET revenues for the second quarter of fiscal year 2005 were $39.2 million, compared to $32.5 million received in the second quarter of the prior fiscal year. This is an increase of $6.7 million or 20.6%. This increase in revenue resulted primarily from the additional investments in real estate made by IRET during the second quarter of fiscal year 2005, as well as other factors shown by the following analysis:

	(in thousands)
	Increase in Total Revenue			Increase in Total Revenue
	Three Months ended			Six Months ended October
	October 31, 2004			31, 2004
Rent from 28 properties acquired in Fiscal 2004 in excess of that received in 2004 from the same 28 properties	$	5,401		$	11,653
Rent from 10 properties acquired in Fiscal 2005		2,126			2,989
Decrease in rental receipts and accruals on existing properties due to changes in scheduled rent and lease renewals/termination		(872	)		(712	)
Net increase in total revenue	$	6,655		$	13,930

SEGMENT EXPENSES AND OPERATING PROFIT

     The following table shows the changes in revenues, operating expenses, interest, and depreciation by reportable operating segment for the three and six months ended October 31, 2004, as compared to the three and six months ended October 31, 2003. For a reconciliation of segment revenues, profit (loss) and assets to the consolidated financial statements, see Note 5 of the Notes to Consolidated Financial Statements beginning on page 6 of this report.

19

Three Months Ended October 31

	(in thousands)
Commercial-Office	2004		2003		Change		%
Real estate revenue	$	12,366	$	8,636	$	3,730		43.2	%
Expenses
Mortgage interest		3,023		2,556		467		18.3	%
Depreciation and amortization		2,884		1,381		1,503		108.8	%
Utilities and maintenance		2,423		1,771		652		36.8	%
Real estate taxes		1,760		1,287		473		36.8	%
Insurance		118		99		19		19.2	%
Property management		562		447		115		25.7	%
Total segment expense		10,770		7,541		3,229		42.8	%
Segment operating profit	$	1,596	$	1,095	$	501		45.8	%

	(in thousands)
Commercial-Medical	2004		2003		Change			%
Real estate revenue	$	6,409	$	3,950	$	2,459			62.3	%
Expenses
Mortgage interest		2,321		1,412		909			64.4	%
Depreciation and amortization		1,338		673		665			98.8	%
Utilities and maintenance		505		520		(15	)		(2.9	%)
Real estate taxes		491		381		110			28.9	%
Insurance		60		34		26			76.5	%
Property management		377		275		102			37.1	%
Total segment expense		5,092		3,295		1,797			54.5	%
Segment operating profit	$	1,317	$	655	$	662			101.1	%

	(in thousands)
Commercial-Industrial	2004		2003		Change			%
Real estate revenue	$	1,533	$	1,675	$	(142	)		(8.5	%)
Expenses
Mortgage interest		589		527		62			11.8	%
Depreciation and amortization		379		310		69			22.3	%
Utilities and maintenance		44		36		8			22.2	%
Real estate taxes		223		186		37			19.9	%
Insurance		20		16		4			25.0	%
Property management		26		27		(1	)		(3.7	%)
Total segment expense		1,281		1,102		179			16.2	%
Segment operating profit	$	252	$	573	$	(321	)		(56.0	%)

	(in thousands)
Commercial-Retail	2004		2003		Change			%
Real estate revenue	$	3,434	$	2,921	$	513			17.6	%
Expenses
Mortgage interest		1,040		896		144			16.1	%
Depreciation and amortization		698		472		226			47.9	%
Utilities and maintenance		152		262		(110	)		(42.0	%)
Real estate taxes		486		487		(1	)		(0.2	%)
Insurance		50		37		13			35.1	%
Property management		67		12		55			458.3	%
Total segment expense		2,493		2,166		327			15.1	%
Segment operating profit	$	941	$	755	$	186			24.6	%

20

	(in thousands)
Multi-Family Residential	2004		2003		Change			%
Real estate revenue	$	15,426	$	15,331	$	95			0.6	%
Expenses
Mortgage interest		4,640		4,316		324			7.5	%
Depreciation and amortization		2,775		2,656		119			4.5	%
Utilities and maintenance		3,443		2,964		479			16.2	%
Real estate taxes		1,687		1,714		(27	)		(1.6	%)
Insurance		414		512		(98	)		(19.1	%)
Property management		1,983		1,595		388			24.3	%
Total segment expense		14,942		13,757		1,185			8.6	%
Segment operating profit	$	484	$	1,574	$	(1,090	)		(69.3	%)

Six Months Ended October 31

	(in thousands)
Commercial-Office	2004		2003		Change			%
Real estate revenue	$	23,496	$	17,476	$	6,020			34.4	%
Expenses
Mortgage interest		6,020		5,144		876			17.0	%
Depreciation and amortization		5,664		2,725		2,939			107.9	%
Utilities and maintenance		4,605		3,392		1,213			35.8	%
Real estate taxes		3,466		2,591		875			33.8	%
Insurance		245		199		46			23.1	%
Property management		1,026		747		279			37.3	%
Total segment expense		21,026		14,798		6,228			42.1	%
Segment operating profit	$	2,470	$	2,678	$	(208	)		(7.8	%)

	(in thousands)
Commercial-Medical	2004		2003		Change		%
Real estate revenue	$	12,457	$	7,954	$	4,503		56.6	%
Expenses
Mortgage interest		4,225		2,831		1,394		49.2	%
Depreciation and amortization		2,591		1,419		1,172		82.6	%
Utilities and maintenance		1,415		1,025		390		38.0	%
Real estate taxes		928		691		237		34.3	%
Insurance		129		65		64		98.5	%
Property management		644		603		41		6.8	%
Total segment expense		9,932		6,634		3,298		49.7	%
Segment operating profit	$	2,525	$	1,320	$	1,205		91.3	%

	(in thousands)
Commercial-Industrial	2004		2003		Change			%
Real estate revenue	$	3,224	$	3,392	$	(168	)		(5.0	%)
Expenses
Mortgage interest		1,153		1,048		105			10.0	%
Depreciation and amortization		757		621		136			21.9	%
Utilities and maintenance		123		75		48			64.0	%
Real estate taxes		456		372		84			22.6	%
Insurance		41		32		9			28.1	%
Property management		47		50		(3	)		(6.0	%)
Total segment expense		2,577		2,198		379			17.2	%
Segment operating profit	$	647	$	1,194	$	(547	)		(45.8	%)

21

	(in thousands)
Commercial-Retail	2004		2003		Change			%
Real estate revenue	$	8,078	$	5,795	$	2,283			39.4	%
Expenses
Mortgage interest		1,993		1,729		264			15.3	%
Depreciation and amortization		1,393		936		457			48.8	%
Utilities and maintenance		697		469		228			48.6	%
Real estate taxes		970		974		(4	)		(0.4	%)
Insurance		101		77		24			31.2	%
Property management		142		25		117			468.0	%
Total segment expense		5,296		4,210		1,086			25.8	%
Segment operating profit	$	2,782	$	1,585	$	1,197			75.5	%

	(in thousands)
Multi-Family Residential	2004		2003		Change			%
Real estate revenue	$	30,702	$	29,410	$	1,292			4.4	%
Expenses
Mortgage interest		9,299		8,515		784			9.2	%
Depreciation and amortization		5,516		5,086		430			8.5	%
Utilities and maintenance		6,647		5,733		914			15.9	%
Real estate taxes		3,366		3,306		60			1.8	%
Insurance		823		988		(165	)		(16.7	%)
Property management		3,710		3,050		660			21.6	%
Total segment expense		29,361		26,678		2,683			10.1	%
Segment operating profit	$	1,341	$	2,732	$	(1,391	)		(50.9	%)

FACTORS IMPACTING NET INCOME:

     During the first three months and six months of fiscal year 2005, the following factors were the most significant causes of the limited growth of our total revenue. These factors ultimately also negatively impacted our net income per share:

•

Increased Economic Vacancy & Concessions.Our stabilized apartment vacancy increased to 8.6% from 8.2% for the three months ended October 31, 2004 and 2003, respectively. Vacancy levels at our stabilized commercial properties increased to 10.9% from 6.1% for the three months ended October 31, 2004 and 2003, respectively. Our stabilized apartment vacancy for the six months ended October 31, 2004 and 2003 was 8.9% for both periods. Vacancy levels at our stabilized commercial properties increased to 10.2% from 5.9% for the six months ended October 31, 2004 and 2003, respectively.

To maintain physical occupancy levels at our multi-family residential properties, we may offer tenants incentives, generally in the form of lower rents, which results in decreased revenues and income from operations at our stabilized properties. We estimate that rent concessions offered during the three and six months ended October 31, 2004 lowered our operating revenues by approximately $0.9 million and $1.9 million, respectively, as compared to an estimated approximately $0.7 million and $1.2 million reduction in operating revenues attributable to rent concessions offered in the three and six months ended October 31, 2003.

22

	Our commercial vacancy levels are primarily due to our inability to either renew existing leases or to re-lease space being vacated by tenants at the expiration of their lease. As we previously reported to our shareholders, despite some positive economic developments, we have yet to see a significant increase in demand for apartments or for commercial space. Our expectation is that demand in IRET’s markets for both apartments and commercial space will continue to remain weak through the third quarter of fiscal year 2005. Additionally, we generally see a seasonal reduction in demand for both commercial space and apartments during winter. As a result, we do not expect our occupancy levels to improve significantly, or a reduction in the level of rent concessions offered, during our fiscal year 2005, which ends April 30, 2005.
•	Increased maintenance expense.The maintenance expense category increased by $807,000 or 24% for the three months ended October 31, 2004, and $1,773,000 or 26% for the six months ended October 31, 2004, as compared to the corresponding periods in fiscal 2004. Of the increased maintenance costs for the three months ended October 31, 2004, $672,000 or 83% is attributable to the addition of new real estate acquired in fiscal 2005, while $135,000 or 17% is due to increased costs for maintenance on existing real estate assets. Of the increased maintenance costs for the six months ended October 31, 2004, $1,359,000 or 77% is attributable to the addition of new real estate acquired in fiscal 2005, while $414,000 or 23% is due to increased costs for maintenance on existing real estate assets. Under the terms of most of our commercial leases, the full cost of maintenance is paid by the tenant as additional rent. For our noncommercial real estate properties, any increase in our maintenance costs must be collected from tenants in the form of a general rent increase. While we have implemented selected rent increases, the current economic conditions and increased vacancy levels have prevented us from raising rents in the amount necessary to fully recover our increased maintenance costs.
•	Increased Utility Expense.The utility expense category increased by $207,000, or 10%, for the three months ended October 31, 2004, and by $1,020,000 or 26% for the six months ended October 31, 2004, as compared to the corresponding periods of fiscal year 2004. Of the increased utility costs for the three months ended October 31, 2004, $393,000, or 190%, is attributable to the addition of new real estate, while $(186,000), or (90)%, is due to decreased costs for utilities on existing real estate assets. Of the increased utility costs for the six months ended October 31, 2004, $820,000 or 80% is attributable to the addition of new real estate, while $200,000, or 20% is due to increased costs for utilities on existing real estate assets. For the three and six months ended October 31, 2004, no one property accounts for a significant portion of this increase, as we have seen a general increase for natural gas, water, sewer and garbage disposal in the communities where our properties are located.
•	Increased Administrative and Operating Expenses.Administrative and operating expenses increased by $334,000, or 34%, for the three months ended October 31, 2004, and by $419,000 or 23% for the six months ended October 31, 2004, as compared to the corresponding periods of fiscal year 2004, primarily because of increased salary and other expense resulting from our hiring of additional employees. We added a total of six additional employees during fiscal year 2004 and six additional employees through the

23

	second quarter of fiscal year 2005. The increase in administrative and operating expenses also includes costs related to our 2004 Annual Meeting of Shareholders held in September 2004. Additionally, in common with other public companies, we have seen a significant increase in accounting fees and other costs, primarily as a result of certain provisions of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), in particular the internal controls report and attestation requirements of Section 404 of Sarbanes-Oxley.
•	Increased Mortgage Interest Expense.Our mortgage debt increased $48.8 million, or 8%, to $681.9 million as of October 31, 2004, as compared to $633.1 million on April 30, 2004. Our mortgage interest expense increased by $1.9 million, or 20%, for the three months ended October 31, 2004 and by $3.4 million, or 18%, for the six months ended October 31, 2004. Of the increased mortgage interest expense for the three months ended October 31, 2004, $1.9 million is attributable to the addition of new real estate. Of the increased mortgage interest expense for the six months ended October 31, 2004, $3.5 million is attributable to the addition of new real estate, while mortgage interest expense on existing real estate assets declined by $0.1 million. Our overall weighted average interest rate on all outstanding mortgage debt is 6.68% as of October 31, 2004.
•	Increased Amortization Expense.In accordance with SFAS No. 141, “Business Combinations,” which establishes standards for valuing in-place leases in purchase transactions, the Company allocates a portion of the purchase price paid for properties to in-place lease intangible assets. The amortization period of these intangible assets is the term of the lease, rather than the estimated life of the buildings and improvements. The Company accordingly initially records additional amortization expense due to this shorter amortization period, which has the effect in the short term of decreasing the Company’s net income available to common shareholders.

RESULTS ON A “STABILIZED PROPERTY” BASIS

     The following table presents results on a stabilized property basis for the three months and six months ended October 31, 2004 and 2003, for our multi-family residential and commercial properties, consisting of office, medical, industrial and retail properties. Property Segment Operating Profit should not be considered as an alternative to operating net income as determined in accordance with GAAP as a measure of IRET’s performance. The Company analyzes and compares results of operations on properties owned and in operation for the entirety of the periods being compared (including properties that were redeveloped or expanded during the periods being compared, with properties purchased or sold during the periods being compared being excluded from this analysis). This comparison allows the Company to evaluate the performance of existing properties and their contribution to net income.

     Management believes that measuring performance on a stabilized property basis is useful to investors because it enables evaluation of how the Company’s properties are performing year over year. Management uses this measure to assess whether or not it has been successful in increasing net operating income, renewing the leases of existing tenants, controlling operating costs and appropriately handling capital improvements.

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	(in thousands)
	For the Three Months
	Ended October 31,
	2004		2003		% Change
Multi-family residential
Real Estate Revenue	$	14,167	$	14,321		(1.1	%)
Expenses:
Utilities & maintenance		3,057		2,771		10.3	%
Property management		1,739		1,479		17.6	%
Real estate taxes		1,576		1,622		(2.8	%)
Insurance		376		476		(21.0	%)
Depreciation and amortization		2,535		2,446		3.6	%
Mortgage interest		4,250		4,063		4.6	%
Total expenses		13,533		12,857		5.3	%
Property segment operating profit	$	634	$	1,464		(56.7	%)
Commercial — office
Real estate revenue	$	8,617	$	8,529		1.0	%
Expenses:
Utilities & maintenance		1,742		1,760		(1.0	%)
Property management		411		441		(6.8	%)
Real estate taxes		1,296		1,269		2.1	%
Insurance		78		98		(20.4	%)
Depreciation and amortization		1,393		1,358		2.6	%
Mortgage interest		2,446		2,556		(4.3	%)
Total expenses		7,366		7,482		(1.6	%)
Property segment operating profit	$	1,251	$	1,047		19.5	%
Commercial — medical
Real estate revenue	$	3,660	$	3,950		(7.3	%)
Expenses:
Utilities & maintenance		319		520		(38.7	%)
Property management		211		268		(21.3	%)
Real estate taxes		363		379		(4.2	%)
Insurance		35		31		12.9	%
Depreciation and amortization		685		673		1.8	%
Mortgage interest		1,341		1,413		(5.1	%)
Total expenses		2,954		3,284		(10.0	%)
Property segment operating profit	$	706	$	666		6.0	%

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	(in thousands)
	For the Three Months
	Ended October 31,
	2004		2003		% Change
Commercial – Industrial
Real Estate Revenue	$	1,403	$	1,675		(16.2	%)
Expenses:
Utilities & maintenance		40		36		11.1	%
Property management		22		26		(15.4	%)
Real estate taxes		202		186		8.6	%
Insurance		18		16		12.5	%
Depreciation and amortization		312		311		0.3	%
Mortgage interest		550		527		4.4	%
Total expenses		1,144		1,102		3.8	%
Property Segment Operating Profit	$	259	$	573		(54.8	%)
Commercial – Retail
Real Estate Revenue	$	2,650	$	2,896		(8.5	%)
Expenses:
Utilities & maintenance		139		259		(46.3	%)
Property management		4		12		(66.7	%)
Real estate taxes		406		487		(16.6	%)
Insurance		35		37		(5.4	%)
Depreciation and amortization		478		465		2.8	%
Mortgage interest		835		896		(6.8	%)
Total expenses		1,897		2,156		(12.0	%)
Property segment operating profit	$	753	$	740		1.8	%
Total Stabilized Segment Operating Profit	$	3,603	$	4,490		(19.8	%)
Reconciliation to Segment Operating Profit
Real Estate Revenue – Non-Stabilized		8,671		1,142
Expenses – Non-Stabilized
Utilities & Maintenance		1,270		207
Property Management		628		130
Real Estate Taxes		804		112
Insurance		120		40
Depreciation and Amortization		2,671		239
Mortgage Interest		2,191		252
Total Segment Operating Profit	$	4,590	$	4,652

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	(in thousands)
	For the Six Months Ended October 31,
	2004		2003		% Change
Multi-family residential
Real Estate Revenue	$	28,046	$	28,400		(1.2	%)
Expenses:
Utilities & maintenance		5,988		5,540		8.1	%
Property management		3,279		2,934		11.8	%
Real estate taxes		3,150		3,214		(2.0	%)
Insurance		753		952		(20.9	%)
Depreciation and amortization		5,047		4,877		3.5	%
Mortgage interest		8,517		8,226		3.5	%
Total expenses		26,734		25,743		3.8	%
Property segment operating profit	$	1,312	$	2,657		(50.6	%)
Commercial — office
Real estate revenue	$	16,979	$	17,334		(2.0	%)
Expenses:
Utilities & maintenance		3,368		3,379		(0.3	%)
Property management		773		741		4.3	%
Real estate taxes		2,596		2,568		1.1	%
Insurance		173		197		(12.2	%)
Depreciation and amortization		2,782		2,703		2.9	%
Mortgage interest		4,907		5,144		(4.6	%)
Total expenses		14,599		14,732		(0.9	%)
Property segment operating profit	$	2,380	$	2,602		(8.5	%)
Commercial — medical
Real estate revenue	$	7,705	$	7,954		(3.1	%)
Expenses:
Utilities & maintenance		1,106		1,025		7.9	%
Property management		415		567		(26.8	%)
Real estate taxes		726		689		5.4	%
Insurance		71		63		12.7	%
Depreciation and amortization		1,386		1,419		(2.3	%)
Mortgage interest		2,699		2,831		(4.7	%)
Total expenses		6,403		6,594		(2.9	%)
Property segment operating profit	$	1,302	$	1,360		(4.3	%)

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	(in thousands)
	For the Six Months Ended October 31,
	2004		2003		% Change
Commercial – Industrial
Real Estate Revenue	$	2,974	$	3,392		(12.3	%)
Expenses:
Utilities & maintenance		117		75		56.0	%
Property management		41		49		(16.3	%)
Real estate taxes		413		372		11.0	%
Insurance		37		32		15.6	%
Depreciation and amortization		623		621		0.3	%
Mortgage interest		1,098		1,048		4.8	%
Total expenses		2,329		2,197		6.0	%
Property Segment Operating Profit	$	645	$	1,195		(46.0	%)
Commercial – Retail
Real Estate Revenue	$	6,434	$	5,770		11.5	%
Expenses:
Utilities & maintenance		522		466		12.0	%
Property management		26		25		4.0	%
Real estate taxes		807		974		(17.1	%)
Insurance		70		77		(9.1	%)
Depreciation and amortization		950		928		2.4	%
Mortgage interest		1,670		1,729		(3.4	%)
Total expenses		4,045		4,199		(3.7	%)
Property segment operating profit	$	2,389	$	1,571		52.1	%
Total Stabilized Segment Operating Profit	$	8,028	$	9,385		(14.5	%)
Reconciliation to Segment Operating Profit Real Estate Revenue – Non-Stabilized		15,819		1,177
Expenses – Non-Stabilized Utilities & Maintenance		2,386		209
Property Management		1,035		159
Real Estate Taxes		1,494		117
Insurance		235		40
Depreciation and Amortization		5,133		239
Mortgage Interest		3,799		289
Total Segment Operating Profit	$	9,765	$	9,509

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ECONOMIC OCCUPANCY RATES

     IRET monitors both physical vacancy rates and economic vacancy rates at each of its properties. Physical vacancy for multi-family residential properties is calculated as the number of total habitable units that are vacant divided by the total number of units in the property. Physical vacancy for commercial buildings is calculated as the total number of vacant square feet in a particular building, divided by the total number of square feet (vacant and occupied) in the building. Economic vacancy is defined as total possible revenue less vacancy loss as a percentage of total possible revenue. Total possible revenue is determined by valuing occupied units or square footage at contract rates, and vacant units or square footage at market rates.

     Economic occupancy rates are calculated as a percentage of the actual rent paid to IRET versus the scheduled rent charged by IRET for the period of time presented. The following tables compare economic occupancy rates on a “stabilized property” basis for the three and six months ended October 31, 2004 and 2003:

Three Months Ended October 31

	2004			2003			Percent Change
Commercial-Office		89.94	%		93.00	%		(3.06	%)
Commercial-Medical		92.88	%		95.12	%		(2.24	%)
Commercial-Industrial		82.26	%		94.57	%		(12.31	%)
Commercial-Retail		86.90	%		94.25	%		(7.35	%)
Multi-Family Residential		91.40	%		91.84	%		(0.44	%)

Six Months Ended October 31

	2004			2003			Percent Change
Commercial-Office		90.30	%		92.94	%		(2.64	%)
Commercial-Medical		92.24	%		95.28	%		(3.04	%)
Commercial-Industrial		85.95	%		95.60	%		(9.65	%)
Commercial-Retail		88.11	%		94.85	%		(6.74	%)
Multi-Family Residential		91.06	%		91.15	%		(0.09	%)

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29

CREDIT RISK

     The following table lists our top ten commercial tenants on October 31, 2004, for all commercial properties owned by us. No single tenant accounted for more than 10% of revenues from commercial properties during the second quarter of fiscal year 2005.

			% of Total Rental
			Income from
Lessee	Monthly Rent		Commercial Properties
St. Lukes Edgewood Living Communities, Inc. Best Buy Healtheast – Woodbury & Maplewood Allina Health Microsoft Great Plains Northland Insurance Company Nebraska Orthopaedic Hospital Smurfit – Stone Container Corp. Wilson’s the Leather Experts, Inc. All Others	$	297,000 276,000 207,000 169,000 156,000 156,000 147,000 141,000 131,000 119,000 4,646,000		4.61 4.28 3.21 2.62 2.42 2.42 2.28 2.19 2.03 1.85 72.09	% % % % % % % % % % %
Total Monthly Rent as of October 31, 2004	$	6,445,000		100.00	%

PROPERTY ACQUISITIONS AND DISPOSITIONS

During the six months ended October 31, 2004, IRET acquired and disposed of the following properties:

Acquisitions and Dispositions During Six Months Ended October 31, 2004:

Acquisitions

	(in thousands)
	Acquisition Cost
Commercial Property — Medical
52,300 sq. ft. Nebraska Orthopedic Hospital Expansion Project – Omaha, NE	$	20,597
45,081 sq. ft. Pavilion I Clinic—Duluth, MN		10,900
60, 294 sq. ft. High Pointe Health Campus Phase I (East Metro Medical Building) – Lake Elmo, MN		13,050
Commercial Property – Industrial (miscellaneous commercial property)
46,720 sq. ft. Sleep Inn Hotel – Brooklyn Park, MN		2,750
Commercial Property — Office
26,186 sq. ft. Plymouth I Office Building – Plymouth, MN		1,864
26,186 sq. ft. Plymouth II Office Building – Plymouth, MN		1,748
26,186 sq. ft. Plymouth III Office Building – Plymouth, MN		2,214
79,377 sq. ft. Northgate I Office Building –Maple Grove, MN		8,175
177,500. Crosstown Circle Office Building – Eden Prairie, MN		22,000
Total Property Acquisitions	$	83,298

30

Dispositions

	(in thousands)
			Book Value
	Sales Price		and Sales Cost		Gain/Loss
Multi-Family Residential
204-unit Ivy Club Apartments – Vancouver, WA	$	12,250	$	12,070	$	180
26-unit Beulah Condominiums – Beulah, ND		96		96		0
36-unit Parkway Apartments – Beulah, ND		159		159		0
18-Unit Dakota Arms Apartments – Minot, ND		825		566		259
100-Unit Van Mall Woods Apartments – Vancouver, WA		6,900		5,625		1,275
Commercial – Retail
30,000 sq. ft. Barnes & Noble Store – Fargo, ND		4,590		2,916		1,674
8,040 sq. ft. Petco Store – Fargo, ND and Petco		2,160		1,209		951
Commercial — Medical (assisted living facility)
97,821 sq. ft. Edgewood Vista – Minot, ND		7,210		5,676		1,534
Commercial – Office
62,585 sq. ft. Flying Cloud – Eden Prairie, MN		5,750		5,750		0
Vacant Land
205,347 sq. ft. parcel of vacant land – Libby, MT		151		151		0
Total Property Dispositions	$	40,091	$	34,218	$	5,873

FUNDS FROM OPERATIONS FOR THE THREE AND SIX MONTHS ENDED OCTOBER 31, 2004 AND 2003

     IRET considers Funds from Operations (“FFO”) a useful measure of performance for an equity REIT. IRET uses the definition of FFO adopted by the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”) in 1991, as clarified in 1995, 1999 and 2002. NAREIT defines FFO to mean “net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect funds from operations on the same basis.”

     While IRET uses the NAREIT definition of FFO, the components of that definition in many cases require interpretation, and IRET accordingly has made certain interpretations in applying the definition. In particular, in calculating FFO per share, IRET “adds back” to net income computed in accordance with GAAP the allocations made to limited partners, and divides this amount by the total number of IRET common shares of beneficial interest and UPREIT Units outstanding.

     Under the partnership agreement pursuant to which IRET’s UPREIT Units are issued, UPREIT Unitholders effectively have the same claim on the earnings and assets of IRET as do IRET’s common shares of beneficial interest shareholders, and therefore IRET considers that the UPREIT Units also should be included with the common shares of beneficial interest in calculating FFO per share. IRET believes that, while this particular adjustment made by IRET in

31

calculating FFO is not specifically provided for in the NAREIT definition, it is consistent with the definition.

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

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

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

     FFO applicable to common shares and Units for the three and six months ended October 31, 2004 increased to $10.1 million and $21.5 million, respectively, compared to $9.1 million and $18.5 million for the comparable periods ended October 31, 2003, an increase of 11.0% and 16.2%, respectively.

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RECONCILIATION OF NET INCOME AVAILABLE TO COMMON
SHAREHOLDERS TO FUNDS FROM OPERATIONS

	(in thousands, except per share amounts)
	2004							2003
													Per
				Weighted		Per					Weighted		Share
Three Months Ended				Avg Shares		Share and					Avg Shares		and
October 31,	Amount			and Units(2)		Unit(3)		Amount			and Units(2)		Unit(3)
Net income	$	3,953				$		$	2,615				$
Less dividends to preferred shareholders		(593	)						—
Net income available to common shareholders		3,360			42,475		.08		2,615			38,327		.07
Adjustments:
Real estate depreciation and amortization(1)		8,218							5,795
Minority interest in earnings of Unitholders		1,287			12,477				811			11,547
Gains on depreciable property sales		(2,808	)						(103	)
Funds from operations applicable to common shares and Units	$	10,057			54,952	$	.18	$	9,118			49,874	$	.18

(1)	Real estate depreciation and amortization consists of the sum of depreciation/amortization related to real estate investments; amortization; and amortization of related party costs from the Consolidated Statements of Operations, totaling $8,417 and $5,726, and depreciation and amortization from Discontinued Operations (excluding amortization of financing charges) of $60 and $255, less corporate-related depreciation and amortization on office equipment and other assets of $45 and $38 and less amortization of financing costs of $214 and $148, for the three months ended October 31, 2004 and 2003, respectively.
(2)	UPREIT Units of the Operating Partnership are exchangeable for common shares of beneficial interest on a one-for-one basis.
(3)	Net income is calculated on a per share basis. Funds from Operations is calculated on a per share and unit basis.

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33

	(in thousands, except per share amounts)
	2004							2003
													Per
				Weighted		Per					Weighted		Share
Six Months Ended				Avg Shares		Share and					Avg Shares		and
October 31,	Amount			and Units(2)		Unit(3)		Amount			and Units(2)		Unit(3)
Net income	$	9,423				$		$	5,535				$
Less dividends to preferred shareholders		(1,186	)						—
Net income available to common shareholders		8,237			42,228		.20		5,535			37,342		.15
Adjustments:
Real estate depreciation and amortization(1)		16,356							11,373
Minority interest in earnings of Unitholders		2,762			12,299				1,654			10,848
Gains on depreciable property sales		(5,873	)						(103	)
Funds from operations applicable to common shares and Units	$	21,482			54,527	$	.39	$	18,459			48,190	$	.38

(1)	Real estate depreciation and amortization consists of the sum of depreciation/amortization related to real estate investments; amortization; and amortization of related party costs from the Consolidated Statements of Operations, totaling $16,597 and $11,240, and depreciation and amortization from Discontinued Operations (excluding amortization of financing charges) of $286 and $517, less corporate-related depreciation and amortization on office equipment and other assets of $89 and $75 and less amortization of financing costs of $438 and $309, for the six months ended October 31, 2004 and 2003, respectively.
(2)	UPREIT Units of the Operating Partnership are exchangeable for common shares of beneficial interest on a one-for-one basis.
(3)	Net income is calculated on a per share basis. Funds from Operations is calculated on a per share and unit basis.

DISTRIBUTIONS

     The following distributions per common share and unit were paid during the six months ended October 31 of fiscal year 2005 and 2004:

	Fiscal Year		Fiscal Year		Percent
Date	2005		2004		Change
July 1	$	.1605	$	.1585		1.3	%
October 1		.1610		.1590		1.3	%
Total	$	.3215	$	.3175		1.3	%

     In addition, during the six months ended October 31, 2004, the Company paid, on each of June 30, 2004 and September 30, 2004, a distribution of 51.56 cents per share on the Company’s

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1,150,000 preferred shares of beneficial interest, to preferred shareholders of record on, respectively, June 15, 2004 and September 15, 2004.

LIQUIDITY AND CAPITAL RESOURCES

OVERVIEW

     The Company’s principal liquidity demands are distributions to the holders of the Company’s common and preferred shares of beneficial interest and UPREIT Units, capital improvements and repairs and maintenance for the properties, redemption of outstanding investment certificates, acquisition of additional properties, property development, tenant improvements and debt repayments.

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

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

SOURCES AND USES OF CASH

     As of October 31, 2004, the Company had three unsecured lines of credit in the amounts of $10 million dollars, $10 million dollars, and $4.4 million dollars from (1) Bremer Bank, (2) First Western Bank and Trust, and (3) First International Bank and Trust, respectively. The Company had no outstanding balances under these lines of credit as of October 31, 2004. Borrowings under the lines of credit bear interest based on the following for each of the line of credit described above (1) Bremer Financial Corporation Reference Rate, (2) highest New York Prime as published in the Wall Street Journal, and (3) highest New York Prime as published in the Wall Street Journal. Accordingly, increases in interest rates will increase the Company’s interest expense on its lines of credit and as a result will affect the Company’s results of operations and cash flows. The Company’s lines of credit with First Western Bank and Bremer Bank expire September 1, 2005, and September 14, 2005, respectively. The Company’s line of credit with First International Bank and Trust expires on December 12, 2004. The Company expects to renew this line prior to its expiration.

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     The issuance of UPREIT Units for property acquisitions continues to be a source of capital for the Company. In the second quarter of fiscal year 2005, 528,290 Units were issued in connection with property acquisitions, compared to 123,615 Units issued in connection with property acquisitions during the second quarter of fiscal year 2004.

     In October 2004, the Company commenced a best efforts offering of up to 1.5 million of its common shares of beneficial interest at a price of $10.15 per share. This offering terminated in November 2004 with approximately 1.4 million common shares sold, for aggregate proceeds to the Company of approximately $13.4 million, after selling commissions of six percent paid to the broker-dealers who sold the shares but before other expenses of the offering.

     The Company has a Distribution Reinvestment Plan (“DRIP”). The DRIP provides common shareholders and UPREIT Unitholders of the Company an opportunity to invest their cash distributions in common shares of the Company at a discount of five percent from the market price. The Company issued 258,661 common shares under its DRIP during the first quarter of fiscal year 2005, and 279,980 common shares during the second quarter of fiscal year 2005.

     Cash and cash equivalents on October 31, 2004 totaled $28.2 million, compared to $23.8 million on the same date in 2003. Net cash provided from operating activities increased to $23.9 million in the second quarter of fiscal year 2005 from $11.7 million in the second quarter of fiscal year 2004, due primarily to an increase in cash provided from the operations of new and existing properties.

     Cash used for real estate acquisitions increased by $13.8 million in the second quarter of fiscal year 2005, to $61.5 million from $47.7 million in the second quarter of fiscal year 2004. The Company used proceeds received from the sale of real estate, land and investments to fund investing activities, and accordingly, despite this increase in cash used for real estate acquisitions, net cash used in investing activities decreased to $17.9 million in the second quarter of fiscal year 2005 from $48.3 million in the second quarter of fiscal year 2004. Proceeds from the sale of real estate, land and investments in the second quarter of fiscal year 2005 increased $38.9 million, to $39.3 million from $420,000 in the second quarter of fiscal year 2004.

     Net cash from financing activities decreased during the second quarter of fiscal year 2005, compared to the same period of the prior fiscal year. Cash used during the second quarter of fiscal year 2005 was $9.5 million, compared to cash provided from financing activities of $41.8 million during the second quarter of fiscal year 2004. Net cash provided from financing activities was higher during the second quarter of fiscal year 2004 because of an offering of common shares carried out by the Company during that quarter.

FINANCIAL CONDITION

     Mortgage Loan Indebtedness.Mortgage loan indebtedness increased to $682 million on October 31, 2004, due to new debt placed on new and existing properties, from $633 million on April 30, 2004. Ninety-four percent of such mortgage debt is at fixed rates of interest, with staggered maturities. This limits the Company’s exposure to changes in interest rates, which minimizes the effect of interest rate fluctuations on the Company’s results of operations and cash

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flows. As of October 31, 2004, the weighted average rate of interest on the Company’s mortgage debt was 6.68%, compared to 7.17% on April 30, 2004.

     Mortgage Loans Receivable.Mortgage loans receivable decreased to $631,000 at October 31, 2004 from $4.9 million at April 30, 2004. This decrease resulted from repayment of a mortgage loan receivable in respect of the Company’s Nebraska Orthopedic property.

     Real Estate Owned.Real estate owned increased to $1,047.6 million at October 31, 2004 from $1,008.0 million at April 30, 2004. The increase resulted primarily from the acquisition of the additional investment properties net of dispositions as described above in the “Property Acquisitions and Dispositions” subsection of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     Investment Certificates.The Company discontinued the issuance of investment certificates in April 2002. As of October 31, 2004, investment certificates outstanding totaled $5.4 million, compared to $7.1 million of such certificates outstanding on April 30, 2004. This decrease resulted from the redemption of maturing investment certificates during the six months ended October 31, 2004.

     Cash and Cash Equivalents.Cash and cash equivalents on hand on October 31, 2004 were $28.2 million, compared to $31.7 million on April 30, 2004. The decrease in cash on hand on October 31, 2004, as compared to April 30, 2004, was due primarily to the acquisition of real estate.

     Marketable Securities.The Company investment in marketable securities classified as available-for-sale was $2.4 million on October 31, 2004, and $2.3 million on April 30, 2004. Marketable securities are held available for sale and, from time to time, the Company invests excess funds in such securities or uses the funds so invested for operational purposes.

     Operating Partnership Units.Outstanding units in the Operating Partnership increased to 12.8 million Units on October 31, 2004, compared to 11.8 million Units outstanding on April 30, 2004. This increase resulted primarily from the issuance of additional limited partnership units to acquire interests in real estate, net of Units converted to common shares.

     Common and Preferred Shares of Beneficial Interest.Common shares of beneficial interest outstanding on October 31, 2004 totaled 42.8 million, compared to 41.7 million outstanding on April 30, 2004. This increase in common shares outstanding was primarily due to the issuance of common shares pursuant to our Distribution Reinvestment Plan, consisting of 259,000 shares issued on July 1, 2004 and 280,000 shares issued on October 1, 2004, for total value of $5.2 million, and conversions of 190,000 UPREIT Units to common shares, for a total of $1.5 million in shareholders’ equity. Preferred shares of beneficial interest outstanding on October 31, 2004 and April 30, 2004 totaled 1.15 million.

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PENDING ACQUISITIONS AND DISPOSITIONS

     As of October 31, 2004, the Company was a party to purchase agreements to acquire a residential townhome complex and a commercial property, for purchase prices totaling approximately $5.9 million. Also as of October 31, 2004, the Company was a party to contracts to sell one multi-family residential property, one parcel of vacant land, and one retail property, for sale prices totaling approximately $6.0 million and an estimated gain on sale of approximately $2.3 million. In November 2004, the tenant in four of our Edgewood Vista assisted living facilities, located in, respectively, Belgrade, Montana; Columbus, Nebraska, Grand Island, Nebraska and East Grand Forks, Minnesota, exercised the purchase options contained in the leases for these properties. The proceeds to the Company from the sales of these four properties, after commissions and debt repayment, would total approximately $3.1 million. Also in November 2004, the Company signed agreements to purchase two commercial properties, an office/warehouse building and a multi-tenant office building, for purchase prices totaling approximately $18.8 million. The Company expects to close these pending transactions over the next several months; however, these pending acquisitions and dispositions are subject to customary closing conditions, and no assurance can be given that any of these pending transactions will be consummated.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Our exposure to market risk is limited primarily to fluctuations in the general level of interest rates on our current and future fixed and variable rate debt obligations.

     Variable interest rates.Even though our goal is to maintain a fairly low exposure to interest rate fluctuation risk, we are still vulnerable to significant fluctuations in interest rates on variable rate debt, on any future repricing or refinancing of our fixed rate debt and on future debt. We primarily use long-term (more than nine years) and medium term (five to seven years) debt as a source of capital. We do not currently use derivative securities, interest-rate swaps or any other type of hedging activity to manage our interest rate risk. As of October 31, 2004, we had the following amounts of future principal payments due on mortgages secured by our real estate:

	Fiscal Years Ending April 30th (in thousands)
Long Term	Remaining
Debt	2005			2006			2007			2008			2009			Thereafter			Total
Fixed Rate	$	8,398		$	17,323		$	18,646		$	45,103		$	42,829		$	511,764		$	644,063
Variable Rate		620			1,333			2,158			1,418			1,705			30,601			37,835
																			$	681,898	(1)
Average Interest Rate (%)		(1	)		(1	)		(1	)		(1	)		(1	)		(1	)		(1	)

(1) The weighted average interest rate on our debt as of October 31, 2004, was 6.68%. Any fluctuations in variable interest rates could increase or decrease our interest expenses. For example, an increase of one percent per annum on our $37.8 million of variable rate indebtedness would increase our annual interest expense by $378,000.

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ITEM 4. CONTROLS AND PROCEDURES

     IRET carried out an evaluation, under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of IRET’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that IRET’s disclosure controls and procedures are effective in timely alerting them to material information required to be disclosed in our periodic reports filed with the Securities and Exchange Commission.

     There were no changes in IRET’s internal control over financial reporting that occurred during IRET’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

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

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

     During the second quarter of fiscal year 2005, the Company issued an aggregate of 126,000 common shares to holders of limited partnership units of IRET Properties, on a one-for-one basis upon redemption and conversion of an equal number of limited partnership 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. The Company has registered the re-sale of such common shares under the Securities Act.

Item 3 is not applicable and has been omitted.

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

     At the Company’s Annual Meeting of Shareholders, held on September 21, 2004, the following action was taken:

     The shareholders elected the eight individuals nominated to serve as trustees of the Company until the 2005 Annual Meeting of Shareholders or until the election and qualification of their successors, as set forth in Proxy Item No. 1 in the Company’s Notice of the Annual Meeting and the Proxy Statement relating to the Annual Meeting. The eight individuals elected, and the number of votes cast for, or withheld, with respect to each of them, follows:

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Nominee	Votes For		Votes Withheld
Daniel L. Feist		30,886,439		310,319
Charles Wm. James		30,903,338		293,421
Patrick G. Jones		31,054,104		142,655
Timothy P. Mihalick		31,051,168		145,591
Jeffrey L. Miller		31,052,177		144,581
Stephen L. Stenehjem		31,055,114		141,645
John D. Stewart		31,020,053		176,705
Thomas A. Wentz, Jr.		30,926,854		269,905

     The proposal to approve the appointment of Deloitte & Touche LLP as independent auditors for fiscal year 2005 received the following votes:

30,415,762 Votes for Approval
545,362 Votes Against
235,634 Abstentions

     There were no broker non-votes for this item.

Item 5 is not applicable and has been omitted.

Item 6. Exhibits

Exhibit No.	Description
31.1	Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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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)

By:	/s/ Thomas A. Wentz, Sr.
	Thomas A. Wentz, Sr., President & Chief
	Executive Officer
By:	/s/ Diane K. Bryantt
	Diane K. Bryantt, Senior Vice President &
	Chief Financial Officer
Date: December 10, 2004

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