Centerspace (CSR) 2008 Q3 法說會逐字稿

Hello, and welcome to the Investors Real Estate Trust third quarter fiscal year 2008 earnings conference call. All participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (OPERATOR INSTRUCTIONS) Please note this conference is being recorded.

Now, I would like to turn the conference over to Mr. Kelly Walters. Mr. Walters, please begin.

Very well. Good morning, and welcome to Investors Real Estate Trust's third quarter fiscal 2008 earnings conference call. The earnings press release was distributed over the wire on Tuesday, March 11, and the release and supplemental disclosure package has been furnished on Form 8-K.

In the press release and supplemental disclosure package Investors Real Estate Trust has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with the requirements set forth in Regulation G. If you did not receive a copy, these documents are available on IRET's website at www.IRET.com in the Investor Relations section. Additionally, an archive of today's webcast will be available on our website for the next two weeks.

At this time, management would like to inform you that certain statements made during this call which are not historical may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Investors Real Estate Trust believes the expectations reflected in the forward-looking statements are based on reasonable assumptions, Investors Real Estate Trust can give no assurance that its expectations will be obtained.

Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements are detailed in Tuesday's press release and from time to time in the Investors Real Estate Trust filings with the SEC. Investors Real Estate Trust does not undertake a duty to update any forward-looking statements.

With with us today from management are Tom Wentz, Sr., President and Chief Executive Officer; Tim Mihalick, Senior Vice President and Chief Operating Officer; Diane Bryantt, Senior Vice President and Chief Financial Officer; and Tom Wentz, Jr., Senior Vice President of Asset Management and Finance, as well as the entire senior management team. At this time, I'd like to turn the call over to Tom Wentz, Sr. for his opening remarks.

Thank you, Kelly, and welcome to our third quarter conference call. We will endeavor to fully explain our third quarter year-to-date results and to answer any questions you may have about our Company. While this is our first earnings call, IRET will soon complete its 38th year as an investment trust. Beginning in 1970 with assets of $120,000, IRET has grown to its present size of over $1.5 billion in assets by following a consistent business model that we do not intend to change in any fundamental way.

Our choice as a REIT has been to be a patient, long-term owner of quality real estate which is maintained in excellent condition. We have over our 38-year history assembled a diversified portfolio using a very conservative cash management policy which has avoided exposure to sudden changes in the marketplace, and we have operated with administrative costs substantially below industry averages.

This has allowed us to deliver on our goal at which we intend to continue to deliver a dependable and growing dividend stream to our shareholders, and on April 1, we will pay our 148th consecutive dividend with each year's dividend having been higher than the previous year and now will represent an attractive 7% plus return on our current stock price.

Over our 38-year history, IRET has experienced the cyclical forces that are and will continue to be inevitably a part of the world of real estate investing. Periods of strong demand, growing rents, and growing profits, leading to over building, a diminished income followed by absorption of the over supply and a return to profitable conditions.

The past several years have indeed been a period of excess exuberance and we are today concerned about the resulting disarray in the capital markets. Because of our conservative debt structure with very small refinancings in the next two years, and our lease rollover schedules spread over several years, we have no immediate direct exposure to the sudden market changes that seem to be enveloping the real estate area. However, a recession, if indeed it develops, will limit our tenants' demand for space and their ability to pay increasing rents.

However, inevitably significant inflation seems a likely consequence of our nation's financial situation which will result in the benefit to IRET and other owners of real estate. Eventually, rents and asset values will inflate, while mortgage debt will be repayable with deflated dollars. IRET's strong balance sheet allows us to make significant future acquisitions, but at this time until we see more stability in the marketplace, we intend to be very careful about committing our remaining equity capital, and will concentrate our acquisitions on our medical, senior housing and apartment development projects that we are now working on.

We will be very careful about committing any additional equity capital. We will now have our senior management team review our third quarter and year-to-date results, beginning with our Chief Operating Officer, Tim Mihalick, who will describe our activities in the capital markets during this fiscal year.

Thank you, Tom. Before I comment on our third quarter financial results, which IRET's CFO, Diane Bryantt, will also discuss in detail, I would like to make a few comments on IRET's recent activities in the capital markets area.

Last year, IRET made the decision to increase investor awareness in the Company by becoming more proactive with the investment community and last October during our second quarter we successfully completed our largest capital raise to date with the sale of 6.9 million shares of our common equity at a share price of $10.20. Net proceeds from this transaction were $66.4 million.

The purpose of the capital raise was to fund pending or planned acquisitions, two of the most significant of which have now closed, and the impact of those transactions will start to be felt in the fourth quarter. Tom Wentz, Jr. will discuss these acquisitions when we get to his comments.

We were obviously pleased with the overall success of this offering and particularly with the distribution of share. By design, we placed just over 50% of the stock in the hands of institutional investors, most of which were new first time investors in IRET.

Historically, IRET has been largely held by retail investors and we felt we needed to increase the institutional investors participation in our Company to bolster our liquidity and the plan worked. Our average daily volume is up significantly and thus far we have not experienced an increase in our relative price volatility.

In terms of our equity performance during the third quarter, IRET's share price held up comparatively well in a most difficult market. At the end of our second quarter, IRET's closing share price stood at $10.85, and on January 31, 2008, the end of our third quarter, IRET's share closed at $9.80, off 9.26% on a price return basis. During the same period, NAREIT's all REIT index was down approximately 14.6%.

Next I would like to make a few comments on our financial results before I turn it over to Diane who will take you through the results in more detail. By now most of you have probably reviewed our most recent 10-K and 10-Q and 8-K and are aware that during the third quarter our revenues increased to $54.5 million from $51.1 million for the same period during fiscal 2007.

For the nine-month period ended January 31, 2008, our revenues increased to $162.4 million from $144.1 million in 2007. For the third quarter, our FFO increased to $15.7 million or $0.21 per share.

These results were slightly below the consensus estimate of $0.22 per share due mainly to falling short-term deals on our cash portfolio which was unusually large due to our October capital raise, coupled with the fact that these closings, that the closings on our recent acquisitions in the medical sector took longer than we originally forecast. With that I'll turn the discussion over to Diane Bryantt, IRET's CFO.

Thank you, Tim, and good morning to everyone. During the third quarter of fiscal 2008, IRET acquired four properties which consisted of 163 apartment units and 143,000 square feet of commercial office properties for a total purchase price of $24 million. Cash used to complete these transactions in the third quarter was approximately $19 million and approximately $5 million of limited partnership units were issued to complete these transactions.

In addition, during the quarter, we closed on three mortgage loans with net proceeds of $14 million. The interest rate on these new fixed rate loans was 5.82% to 6.35% with an average term of 9.5 years. These rates, still below our weighted average interest rate of all of our loans at 6.44%. At the end of the quarter, we had approximately $975 million in mortgage debt outstanding which equates to 62% loan-to-value of property owned.

Cash on hand was still strong at the end of the of the quarter at $76.4 million with the primary component being the cash balance from proceeds from the $6.9 million common stock offering in October of 2007. Revenues for both the third quarter and year-to-date have increased over the comparative periods. The primary source of the increase in revenue is due to new acquisitions.

For the third quarter overall operating expenses have increased compared to prior periods. This increase was not only due to the acquisitions but also due to seasonal elements such as snow removal and heating and cooling costs in the markets where our properties are located. Details of these expenses and revenues are discussed on pages 16-24 of the Form 10-Q which was just filed on March 11.

Funds from operations, a non-GAAP measure for the first nine months of fiscal 2008 is up $7.8 million from the year earlier period. This is a 12% increase. On a per share basis, however, we have only had a 1.5% increase due to the effect of the common share issuance in October.

Now, I'd like to turn the discussion over to Tom Wentz, Jr., IRET's Senior Vice President of Asset Management and Finance.

Thank you, Diane. As indicated, I have responsibility over the Asset Management and Property Management operations for the IRET portfolio. I also am responsible for coordinating the placement of debt on the individual assets or groups of assets.

This morning, I plan to provide an overview on the following topics: Multi-family and commercial operations by segment; internal management project; leasing trends; recent acquisitions, which will include our development projects; and then I'll finally touch on some more detail concerning our recent financing over the last several months.

First, turning to multi-family operations. On the apartment side, our focus is on establishing a meaningful portfolio of apartment units covering a broad range of unit types focused on select communities in our target geographical area of the Upper Great Plains states including standalone projects in or near larger metropolitan areas to provide further diversification and price appreciation potential.

Multi-family operations continue to show forward progress in most markets with measurable increases in overall gross collections, as well as net income. On a stabilized basis we have achieved low single-digit increases in both gross and net collections. The slight improvement in conditions is a contrast to the very weak compartment environment predominated in a majority of IRET's markets from approximately 2003 to 2006.

While we are still dealing with some of the reasons that created the weak market earlier this decade, the primary causes appear to have largely disappeared in almost all of IRET's apartment markets except St. Cloud, Minnesota and the suburbs of Minneapolis. Despite the improvement over the past 18 months the latest quarter saw the acceleration of certain conditions on the expense side that left unaddressed could slow net income growth.

I do not see these trends impacting top line revenue growth for apartments as they are almost exclusively cost related. Increased commodity prices, most notably energy and other utilities, have started to appear portfolio-wide on the maintenance and operations side. This is not a new trend, but finally now appears to have reached the end user in a measurable way.

Most of our apartment leases are on a three to 12-month basis so even though there may be a slight lag we do have the ability to use rent increases to cover all or a significant portion of any increased costs, subject of course to market conditions. We will continue to place an emphasis on capital projects that improve the operating efficiency of our apartment portfolio, such as heating and cooling systems, higher grade roofs when replacement is necessary, utility build back technology and more efficient lighting systems.

Many projects now have a positive payback over the useful life of the capital improvement due to the higher utility costs. While such projects may distort our capital expenditures in the near term, long term the benefits have clearly been favorable on the sale and net income side.

Additionally, we are currently developing a plan to begin managing our multi-family assets internally using the same multi-family or multi-year strategy as we have implemented on the commercial side of the operation. Similar to our experience with commercial, we expect internal management to increase occupancy, lower expenses, and deliver a measurable increase in net rental income with little or no overall increase in costs. We are planning to begin selectively managing some multi- family communities in-house as early as fiscal 2009 and increasing it to 2010 and beyond.

We see this as a two to three-year process to migrate substantially all of our multi-family assets to internal management correctly and profitably.

Now moving to commercial operations, including comments on commercial leasing activity and trends. As compared to IRET's apartment strategy, the commercial operation is focused on larger communities with a good depth of users for commercial office, retail and industrial. The medical segment focuses on regional healthcare centers regardless of community size.

Finally, the senior housing portfolio is focused on communities that have attractive demographics and sufficient demand for services that are located in our traditional area of operations. While commercial activities have largely remained flat to down year-to-date, primarily due to vacancy, this trend has been mitigated to a small degree by slight improvements in retail, industrial and medical. To date, IRET has not seen any meaningful increase in past due or other credit issues inside its commercial tenant base.

Our exposure to those firms that one might expect to be most at-risk to the subprime mortgage industry or financial market volatility is small. Companies such as title companies, mortgage brokers and home improvement industry do not represent a significant portion of IRET's tenant base.

Specifically, on the individual segments, I'll start with industrial, which is our smallest commercial segment by investment. Outside of the Minneapolis market, which represents approximately 45% of our industrial segment, demand in rental rate growth continue to expand. However, in Minneapolis even though there was very strong growth over the past 18 months, this now appears to have completely halted due to a wait and see approach by most industrial users.

The Minneapolis market had a meaningful amount of new industrial space coming online, but unlike past periods, it does not appear that results will be pressured by excess space, but rather the pause in demand growth.

The other half of IRET space is located in Des Moines, Iowa, Omaha, Nebraska and the Fargo, North Dakota markets. All of these markets have experienced steady demand in rental growth as those economies are benefiting directly from the surge in farm commodity prices.

Turning now to retail. This is IRET's third largest commercial segment by investment. For the most part, IRET's retail portfolio has an established base of more service and destination oriented retail tenants centered around a number of well capitalized national and regional tenants such as Best Buy, Barnes & Noble, Office Max or regional grocery anchor stores.

We continue to deal with two large vacancies that account for the majority of the current vacancy both due to retail bankruptcies in previous periods. The two vacant spaces comprise close to 100,000 rentable square feet and are located in Rochester, Minnesota and St. Cloud, Minnesota.

At present, we have only a limited number of viable candidates to fill the two large vacancies with no resolution expected in the next few quarters.

Moving to medical, which includes senior housing, this is IRET's second largest commercial segment by investment, and the segment which had the most recent activity. Medical office and senior housing will continue to be an area of current focus due to the continued strong demand for on-campus medical space and senior housing facilities.

Despite an increase in vacancy rates and associated decline in net income, we see this as a temporary condition caused primarily by the disruption and relocations necessary due to the two medical building expansions currently underway in Minneapolis, Minnesota and set for rent commencement later this summer, as well as vacancy issues at one project located in St. Paul, Minnesota. We continue to have good pricing power for new and renewing leases.

Upon completion of the current development projects, the focus will be on increasing occupancy but not at the expense of rental rates. IRET currently manages internally two off-campus medical buildings but we'll be taking four more medical office properties in-house by the end of this summer. Given the high rent structure, medical properties provides most attractive opportunity to incrementally add to revenue through internal management.

Finally, turning to the commercial multi-tenant office segment, this was IRET's largest commercial segment by investment. Even though occupancy for stabilized locations has held steady as compared to prior periods we are not satisfied with our results year-to-date concerning occupancy or net income.

Rental rate growth for new and renewal leases is expected to remain under pressure in the coming fiscal year due to the loss of a large tenant from our multi-tenant Interlachen Corporate Center building located in Minneapolis, Minnesota. This tenant will be relocating to a newly constructed non- IRET owned building as the only single tenant.

While our results have largely tracked the market and are due more to general economic conditions rather than specific building or tenant issues, we see our measured move toward internal management as improving both occupancy as well as net income by allowing us to focus directly on our tenants rather than through an intermediary property manager.

Additionally, internal management allows us to capture the previously outsourced management revenue stream even though a small part of the overall operation. Results to date at the limited number of buildings that are managed in-house has confirmed improvement is possible if done correctly.

We expect our continued move toward in-house management to provide a slight offset to the occupancy and rental rate pressure that has appeared in the Minneapolis office market. We currently manage 82 of our properties internally with plans to continue adding assets as we move forward.

Moving now to development projects, the four development projects disclosed in the recent filings are on schedule and budget with the delivery of the Cottonwood apartments now complete and lease-up on schedule. We expect this market to be fully stabilized by July of this summer with debt to be placed shortly thereafter.

The Bismarck, North Dakota market continues to be very strong on the multi-family side. The two on-campus medical buildings will be complete with rent commencement anticipated late to second quarter 2009 or by this August. Both projects have enjoyed strong pre-leasing with stabilized cap rates projected at approximately 9%.

We see development in our core markets on both the multi-family and commercial segments continuing at similar levels as previous periods in a range of $50 million to $75 million annually. Cap rates for development projects still appear to be at levels above most available acquisitions, however, this may change as assets reprice rapidly due to the credit market volatility. All development is planned for IRET's portfolio and not for sale.

Turning now to details on the recent acquisitions. Our recent addition of five on-campus medical office buildings, one smaller off-campus medical building, and eight new senior housing facilities will provide immediate positive increase to net income and FFO as the going in gross actual cap rate on the six medical office portfolio is in excess of 10%. Even though in our opinion, rents are currently slightly below market.

On the senior housing portfolio, we increased our relationship with an existing operator that replaced one of IRET's longtime senior housing operator and tenants. We acquired eight new senior housing locations for a total purchase price excluding closing and acquisition costs of approximately $44.7 million. Additionally, IRET paid $14.8 million to extinguish purchase options held by our current tenant on 11 of IRET's senior housing facilities.

We have released these locations to the new tenants on terms and rates in excess of existing lease terms resulting in increased new annual net rent of approximately $935,000 in the first year, $1.6 million in the second year, and $1.8 million for the final, or for the third lease year respectively. The new leases are on a triple net basis with 21-year initial terms.

The blended lease constant over the entire senior housing portfolio, for the first lease year is 8.53% of IRET's total acquisition cost increasing to 9.14% for lease year two, and then stabilizing at 9.3% for lease year three through seven. Pending closing of the remaining senior housing facility for approximately $14.7 million, the 20-building senior housing portfolio leased to Sunwest Management will add approximately $6.1 million of net revenue in fiscal 2009, $7.1 million of net revenue in fiscal 2010, and $7.4 million in net revenue in fiscal 2011.

At the time of the acquisition, we placed new debt with the 10-year term with five years fixed at 5.44% with the debt repricing at 200 basis points over the five-year LIBOR swap rate after year five, unless IRET elects to repay the debt at par.

Moving now to financing. Traditionally, IRET has placed long-term debt on its individual assets, or group of assets, with the goal of maintaining overall portfolio leverage of approximately 60% to 65 % of cost plus capital improvements. Despite the recent turmoil and volatility in the credit markets, we have not yet encountered any material obstacles to either placement of new debt or refinancing maturing debt.

Over the past three months, we have brought assets covering all market segments to the lending market and in all cases we have been able to achieve terms, rates, and leverage consistent with or in most cases better than our current weighted average interest rate or long terms. All maturing debt for fiscal 2008 at approximately 50% of the fiscal 2009 maturing debt has been refinanced or extended on rates and terms below our weighted average rate, and in many cases well below our average weighted interest rate.

Based on current market conditions, we have no reason to believe our ability to borrow on rates and terms at or below historical averages or norms will change materially. In fact, I am optimistic that IRET's borrowing ability and established lender relationships will offer distinct advantage in the current credit market.

Currently, absent an established history, good building fundamentals and most importantly equity, many would be competitors are unable to get past the planning stage which has definitely resulted in an increased number of real estate acquisition opportunities appearing over just the past few months.

Thank you, and with that, I will turn the presentation back to Kelly Walters to start the question-and-answer portion of the call.

Thanks, Tom. In our press release announcing this call, we asked for questions to be submitted in advance of the call, and we're going to deal with those questions first and then I'll ask the moderator to open the call to live questions.

First question coming from the Schroder's Investment Management [John House], regarding the senior living portfolio what is the breakout of private pay, Medicare and other payment forms? The portfolio is leased ona net basis to the operator. While IRET receives current financial information and evaluated the underlying operations at all locations, no detailed breakout of revenue type was performed other than to confirm that on a portfolio basis private pay represents 80% or more of the gross revenue.

Second question, what are the cash and cash unlevered returns that you are investing at on new properties? As discussed by Tom, Jr., the most recent acquisitions have actual gross cap rates of 10% on the medical portfolio and 8.53% climbing to 9.30% on the senior housing portfolio.

Next, what does the pipeline look like for future acquisitions? Actually it's quite good. The environment we are in favors a buyer like IRET as the financing market and more highly leveraged owners and cash-strapped developers are generating opportunities for us, as well as probably all well capitalized real estate investment trusts.

While cap rates remain a little sticky, in a falling market there is clearly cap rate expansion going on. We're seeing sellers adjust to the new environment. However, as Tom Wentz, Sr. indicated in his opening remarks, we're going to proceed in a conservative fashion in the near term until we feel the economic climate is a little clearer for us.

Fourth question, did the cap rate expansion cause delays in acquisitions and/or is it impacting sellers going forward? We touched on this a little bit. No, as indicated by both Tom and Diane, we have not seen any material negative impact in our ability to borrow or refinance our debt.

We have limited debt maturing in the next 12 to 24 months and what debt is maturing is, the majority of which is in the multi-family sector which is performing reasonably well. The delays in completing the recent acquisitions really had more to do with the overall size of the acquisitions and our policy of completing a very thorough evaluation prior to close.

For the debt placed on the medical and senior housing acquisitions it was basically four weeks from the selection of the lender to actual funding.

Touch on the overall economy vis-a-vis occupancy and rents, sounds as though you are seeing lower occupancy but ironically lower [tap rent] concessions. Economic conditions always have some impact on real estate operations, either through reduced demand, credit stress in your tenant base, or the need for more space.

Likewise, negative economic conditions can also result in more favorable labor prices or other counterintuitive positive results. The reduction in concessions is due primarily to the lack of significant excess space or apartment units and in our opinion it is too soon to really tell which way the economy is going.

Our commercial tenants seem to be doing well financially, as do our apartment tenants, even though the perception is to be cautious, and not to expand to take on extra space until someone blows the all clear sign.

Is the senior level, excuse me, is the senior living triple net lease structure or what is the, is the senior living triple net lease structure and who is the operator of these properties?

Again, I think Tom touched on this. The leases are all on a fully net 21-year term with cap CPI increases in years eight and 15. The new operator of all IRET senior housing locations is Sunwest Management Inc. You can see the reference to them or check them on their website at www.sunwestmanagement.com. The Company is privately held, but IRET has received and reviewed full financial statements.

Are the senior living assets bumped under the commercial medical segment? Would we break this out at some point? The answer is, yes. They are included as part of the commercial medical. We currently have no plans to break this into its own segment, but certainly willing to discuss the idea, and of course, the, as the segment grows, such a break out may become necessary. That concludes John's questions.

Next group, I believe is coming from Joe Mueller. Does IRET have secured funding for the projects in progress or does IRET plan to issue more shares to complete funding? If IRET uses funding what are the terms that they're getting, and also has the current credit conditions impacted IRET?

We've not presented any of the current development projects through the lending market as our practice has generally been to complete, stabilize and then place debt. There has been no negative change to our leverage assumptions, our interest rate assumptions used in the pro forma projections.

Assuming the current conditions continue through 2008, we would expect to secure leverage at approximately 65% to 75% LTV at a rate of 6% to 6.5%. We currently have sufficient cash and capacity on our unsecured credit lines to complete all committed projects without the need for additional capital or debt.

Commercial retail NOI's increase 6.7% even though economic occupancy has declined from 89.4% to 87.1%, why is this? Retail increased two percentage (inaudible) has increased as rent reimbursements paid during the quarter, so I have been reading of record profits in the grain belt, how important is agriculture to the economic growth in your major markets?

As with any positive economic element it is very important to our target market, but not the single driving factor. We have performed well during the period of low agriculture and energy prices. Generally speaking, the economy is well diversified across our region, but it just so happens that the agriculture, energy, Canadian exchange rate and military spending all rallied at the same time.

Please discuss the population trends in your major markets?

For the most part stable to low growth, below the national average. Recently, however, population growth has more closely matched the national averages, the world is slowing but the (inaudible) markets are not as much. So --

Moving to questions, the next question comes from Robert (inaudible) Those were from Robert, I beg your pardon. Next, we'll move to questions from Jim Bellessa, D.A. Davidson. How much equity do you use to complete the four recent transactions and one pending deal, the $14 million senior housing complex in Minot?

The (inaudible) minus net cash, (inaudible) cash needed was $14.9 million after loan proceeds. On the BTO transaction net cash needed to close was $7.4 million after loan. So we used approximately $22.3 million of our cash to complete those acquisitions.

What are the potential yield from these real estate acquisitions, option buybacks and what is the cost of debt for these transactions?

As noted by Tom, Jr., the options buyouts resulted in approximately 9.75%, 89.75% return on investment in the form of increased rent but also allowed us to assemble the entire portfolio. We placed new debt of 5.44% but also assume some debt at rates ranging from 6.5% to 7.4%.

What impacts might there be on the Company from the national debt market turmoil?

Again, as previously addressed, we don't currently see any impact on our operations except that the volatility pushes the country into recession and places undue stress on our tenants.

What is the outlook for future acquisitions?

Given the disappearance of irrational money and lending standards our assessment is acquisition opportunities should improve as compared to the last several years of manic activity. Of course, this assumes the causes for the lack of easy money don't materially damage the overall economy.

What are the Company's future financing plans?

We have no plans to change our model placing fixed debt on individual properties or groups of assets.

How much remains of the companies $66.4 million in net equity raised from last October's share offering?

For all intents and purposes, we have fully committed the $66.4 million. This is not to say we're out of liquidity as we are in the process of completing some refinancings, but the $66.4 million has effectively now been spoken for. With that, I'll turn it over to the moderator, Camille, and we'll take the live question-and-answer period.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Tony Howard from Hilliard Lyons. Please go ahead, sir.

Good morning, Tom, Sr., Tom, Jr., Tim, Diane and Kelly, thanks for setting this up. Appreciate this, and congratulations on your first conference call.

Thanks.

Tom, Jr., I thought you did a very detailed information and I appreciate that. Some of it would have been helpful if it was in writing though.

(laughter)

I do have a question as far as the [purses] options from Edgewood, the $14 million. How is that going to be accounted for on the balance sheet, and does that increase the cost of the properties and it would be amortized over the life of the contract of the deal?

Tony, I'll let Diane handle that as the chief financial officer, but that's basically correct.

Tony, the $14.8 million will be added to the cost of the investment of those current properties. It will be classified as an intangible asset and amortized over the life of the leases.

Okay. And Tom, Jr., as far as the increase in the rent that you're getting from Sunwest, is that what you were getting to as far as the cap rate for the option purchase or for what the cost of the property is worth?

Well to clarify that, that $14.8 million, Tony, directly resulted in not only that group of assets staying on our portfolio, but I didn't see it as correct to double count that rent since we already had it on the books. But by paying to extinguish those options and bringing in the new tenant on the new lease terms, the rent at those locations increased on an annual basis by the $935,000, $1.6 million or $1.8 million.

So in essence, we paid $14.8 million in exchange for increasing revenue of that amount, just in those first three years. And obviously, you could project it out the full period of time, so that's really where I come up with the 9.7 cap on that.

That's a good point. Go into a little bit more color as far as what brought these properties available to our IRET as far as all of a sudden you came up with these medical properties opportunities? Were they in the works for some time or is it because of Edgewood wanting to get out? Or, give me a little bit more color on that.

You're talking about the senior housing, Tony?

Yes.

Really was a decision by the four private investors that owned our existing senior housing project. They were looking to exit the business space. They were done with their careers and had basically matched up with Sunwest, which is a previous tenant or was already a tenant in our portfolio.

We had some exposure to them. We've done some other deals with them, one that's no longer on our balance sheet in Georgia that's been sold, but two projects in Wisconsin. So we were familiar with both of them, so really was a decision by Sunwest, the larger operator to acquire the business operation of our existing tenant, which really presented this opportunity to keep the existing portfolio, but also expand it.

Okay, good. What would this do as far as increasing G&A costs as far as the additional properties? Has there been any input as far as what you expect on that?

Well, on the senior housing portfolio, these are on a triple net basis so outside of quarterly review of the tenant financials, both on a corporate level and at the individual properties, along with either annual or semi-annual inspections by us as the owner, we really don't see any increase in our G&A from the senior housing acquisition.

Those responsibilities are going to be assigned to existing staff at IRET, so if it is any increase for travel or other things, I see it as minimal in the scheme of the overall size of the transaction.

To follow-up on that, has there, Diane, been any increase in G&A because of the equity offering, and also having to deal with people like myself and having your first conference call, et cetera?

We're just working harder. So, no, we haven't had anymore staff to deal with those two issues you mentioned.

And have you established a run rate for G&A going forward?

No, I have not.

What would be a good run rate?

2.5%.

Yes, our goal over time, this is Tom, Sr., is trying to get our G&A down to a 2% of revenues, we're currently about 2.5%. We are in an expansion mode and with our IT endeavors and so forth, but our goal remains to get down in that 2% of revenue area.

Okay. Question as far as the multi-purpose property that you're doing in your hometown and as far as moving your corporate offices, how is that going? I didn't catch that.

Well it's on schedule. Completion this fall. It consists of apartments and office and retail space and we've had very good leasing interest in the apartments, and we will occupy about a third of the the first floor space and so it's going well, on schedule, on budget.

Okay. Final question, it was mentioned that the proceeds from the offering have been basically used up. You said that there's a possibility that refinancing other opportunities as far as -- what is your credit line and where does your availability for acquisitions stand right now?

The credit line, Tony, is your question?

Yes.

We have not advanced on any of our credit lines available which is approximately $32 million available of credit.

Okay. All right, and again congratulations on your conference call.

Thanks, Tony.

Thank you.

Thank you. Our next question will come from Chris Lucas from Robert W. Baird. Please go ahead.

Hi, good morning, everyone.

Good morning.

Just a quick follow-up to Tony's question. In terms of investment capital available for future investments, if we eliminate the committment to the development projects and the commitments to the planned acquisitions plus what's already closed, can you give me a sense as to what is available in terms of capital available for additional investments?

Diane Bryantt is going to handle that, Chris.

Chris, we've got a lot of cash that comes in with the REIT financing as well as with the share offering, but after these last two acquisitions here in March, the cash remaining was about $27.2 million from that share offering. We still have some commitments out for development projects. They're all at multiple stages.

Some loans will close in between. We do have sufficient cash on hand to fully fund those committed development projects using the cash we have plus the pending financing.

Okay, so it sounds like that between the cash and your pending financing that will be utilized for the development projects, we're really then talking about the availability on the line for any additional commitments to new investments, is that correct?

Well, when the development projects are finished they will be refinanced, so we will have the equity capital to invest as a result of that, but that's six months away.

Right.

So in the meantime, we intend to self-fund the full cost of the development projects and utilize the capital in that manner.

And then --

If we find opportunities in the meantime, we may get construction loans and proceed, but as we've indicated earlier, I think we want to wait and see. We feel that there may be more attractive acquisition opportunities developing a few months down the road.

Okay, thank you. And then my last question, just in terms of internalizing the property management process, what's the expected time frame on that?

This is Tom, Jr. I think that's a fairly long process and when I say long, probably another 24 to 36 months on both the commercial and multi-family portfolio which hasn't started. One of the challenges that we have and I don't think we'll ever get to 100% internal management is that we are spread over a very large geographical area, land mass-wise with not a lot of activity in between the population centers.

But I would see it as a 24 to 36-month process to properly and correctly because property management is critical to the underlying success of the assets. You have to have proper infrastructure, people, and systems in place.

And I guess then this is a quick follow-up. What percentage of your portfolio do you expect to ultimately be internalized?

Well, I think that's difficult for us to say now. We look at them on a case-by-case basis, but obviously our goal is 100%.

I don't think that's achievable, but I think that's going to be our target. If I was going to assess in looking at our portfolio as it exists today, again, I can't take into account future acquisitions, I'd say we're getting close to 90% of the portfolio.

Thank you very much.

Thanks, Chris. Camille?

Yes, thank you. Our next question comes from Jim Bellessa from D.A. Davidson. Please go ahead.

Good morning.

Good morning, Jim.

When I saw this press release last Friday night, you purchased in two transactions eight senior living facilities for $44.7 million, and I divided it by the number of units or beds and was coming up with $136,000, and then on the other transaction that's pending, I was coming up with $80,000 per unit or bed. Is the location in the difference in the price tag per bed?

Jim, this is Tom, Jr. I can address that. The eight locations, I think, really the answer is that we have a mixed bag of senior housing projects in there, and the one that's pending, if that's the one you're referring to which is $14.7 million, that actually of the group is the oldest senior housing facility.

It's approximately 10 years old and that does have an impact or bearing on price as opposed to that group of eight that came in which represents a much newer basket of senior housing facilities. And so that really is the explanation, the difference between the assets.

I don't know the senior housing market very well, but I do follow a couple of skilled nursing facilities and it seems like their acquisition costs are significantly below these figures. Can you comment?

That's a difficult one for me to assess not knowing what I'm comparing it to. I guess when we looked at these transactions, they fit within the parameters of what we see in our market. We've built senior housing facilities, most recently if you go back through our filings, we constructed a brand new senior housing facility addition in Stevens Point, Wisconsin, saw the construction costs first hand for new construction, and really viewed this as consistent.

Now, these are established, seasoned, leased up locations with the exception of the Fargo, North Dakota facility, which just was completed. Otherwise, all of these are extremely profitable at the operator level and have a long established history in most cases. So as far as what we've seen, we saw these prices as consistent with the marketplace on a per square foot or a unit basis and afforded us an above market cap rate in our opinion.

Tom, Sr. talked about how conservative you are and how careful you will be about committing to new real estate and new equity. If you have a downturn here, and I don't know when the bottom is, but what the is your sense of how long before the bottom is reached?

Well, if I knew that, Jim, I think it's several months, certainly three to six months before we get a better sense of whether we have achieved the bottom. I think in my 38 years in this business, this is the most unsettling time that I've experienced unless my memory has faded. We really don't know is the short answer and until we feel we know, we want to be careful.

Thank you very much.

Thanks, Jim.

Our next question comes from Greg Sukenik from Zacks Investment Research.

Hello, good morning.

Good morning, Greg.

You guys have a sense of a dollar amount of acquisitions you estimate over the next year and dispositions? Do you have that planned or anything?

Well, we are looking through our portfolio to determine assets that we would think about putting on the market but we hesitate to quantify that. Historically, we've been acquiring from $100 million to $200 million of property. Because of the comments about our concern over the volatility in the market, I think we wouldn't want to suggest we're going to be able to acquire at our historic levels because I think we want to sit and be a little more careful, although as our history indicates, transactions appear and are favorable.

But I just think conditions are such that we don't want to anticipate significant acquisitions for the next three to six months. Other than the ones we're working on which are not insignificant development projects. And I think the trend may be that we will develop more of our own properties.

That seems to change at certain periods in the cycle. You can acquire existing or favorable terms. Right now we look to build both senior housing, medical and apartments in our core, the Great Plains area where the markets are extremely strong. So I think that will probably take up our time and our money and will be our focus for the period going forward.

Okay, anything on dispositions you think or you don't really --

As I say, we're looking through our portfolio and in conjunction with our desire to bring our management in-house, we are looking at outlying investments that we might sell and try to reinvest in a more compact geographic area. So we are studying that, but at this point we haven't come to any conclusion yet.

Okay. One more question. I didn't see anything published. Do you have leasing spreads like on your office leases that were signed in the quarter? Anything like that, like numbers?

Diane?

In the supplemental exhibit to the press release, there is a section on the leasing trends for new and renewed leases. My only comment on those is that they aren't apples-to-apples. It's leases that expired, leases that came on new in a different building within those segments.

The difficulty, Greg, obviously, is the non-homogeneous nature of our portfolio. It makes it difficult for any sort of metric to be meaningful, but we attempt it.

Right.

That's on page 14 of the 8-K supplemental package that was also filed on March 11.

Okay, I'll take a look at that. Okay, that's all my questions, thank you.

Thanks, Greg.

Thank you.

That does conclude today's question-and-answer session. I would like to turn the conference back over to Mr. Tom Wentz, Sr. for closing remarks.

Yes. On behalf of IRET, I want to thank all of the participants in the call. This was our first effort and we will look forward to future conference calls, and encourage all of you to contact us if you have any additional questions. Thank you very much.

Thank you. Thank you, Camille.

Thank you. That does conclude today's conference call. You may disconnect now.