Centerspace (CSR) 2008 Q4 法說會逐字稿

Hello, and welcome to the Investors Real Estate Trust fourth-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.

Thank you, Camille, and good morning, everyone. As Camille indicated, this is Investors Real Estate Trust fourth-quarter and year end fiscal 2008 earnings conference call. The earnings press release was distributed over the wire on Monday, June 30th 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 requirements set forth in Regulation G. If you do 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 may give no assurance that its expectations will be obtained. Factors and risk that could cause actual results to differ materially from those expressed or implied by forward-looking statements are detailed on Tuesday's press release and from time to time in Investors Real Estate Trust's filings with the SEC. Investors Real Estate Trust does not undertake a duty to update any forward-looking statements.

With us today then from management 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. At this time I would like to turn the call over to Tom Wentz, Sr. for his opening remarks.

Thank you, Kelly. And welcome everyone to IRET's earnings conference call for its fourth quarter and fiscal 2008 year end, which closed on April 30th. April 30, 2008 marked the completion of IRET's 38th year in business as a real estate investment trust. During this conference call we will endeavor to explain our fourth-quarter and fiscal year financial results in detail, outline our plans and goals for fiscal 2009 and do our best to answer any questions that you may have. I will begin with a brief overview of our current capital and liquidity position, our expected future dividend policy and our portfolio strategy.

IRET continues to maintain a very strong balance sheet. On April 30th cash on hand totaled some $53 million and in addition we have $32 million in unsecured credit lines, none of which are currently in use. We also have little refinance or interest rate risk; of IRET's over $1 billion of mortgage indebtedness, only 1% is variable-rate, and only 4% will mature in fiscal 2009 with an additional 15% maturing in fiscal 2010. But most of these maturing mortgages that will need to be refinanced are secured by apartments, which at this point remain quite financeable.

Thus IRET is in a strong financial position to acquire additional real estate if a buyer's market should develop. However, we have yet to see compelling purchase opportunities and plan to continue to be patient until we do. In the meantime we will deploy our equity capital in self-financing the construction of some $60 million of apartments and medical office projects now underway with permanent financing on these development projects to be placed after completion and rent up.

During the past year IRET continued its practice of regular increases in distributions to our share and unitholders. Cash distributions to shareholders have increased in each of the 38 years of IRET's existence. We plan to do our very best to continue this practice.

Turning to financial results, funds from operations were off $0.01 from last year, both for the fourth quarter, $0.22 versus $0.23, and for the full year, $0.87 versus $0.88. Having a large amount of cash on hand for nearly half of the fiscal year, which resulted from the $60 million plus follow-on stock offering last October, did impact our earnings for last year. While we are now on the way to having this cash invested in our development projects, we do always experience a lag in deploying new equity capital. IRET has always followed the practice of raising the equity capital first and then investing it in new properties. Because of this conservative practice, IRET has never had a cash flow or liquidity problem in its 38-year history.

Looking ahead, we anticipate continued improvement in the performance of our apartments and medical office, assisted living portfolios, which together represent just over one-half of our real estate assets. We are not as optimistic about commercial office and retail due to the weakening economy. For the current fiscal year we will concentrate on expanding our apartment and medical portfolio and internalizing property management. And also compacting our geographic footprint to facilitate in-house property management.

For a more comprehensive look at our fourth quarter and full year financial results I will now call on our Chief Financial Officer, Diane Bryantt.

Thank you, Tom, and good morning to everyone. My discussion today will give a brief outline of significant events in IRET's fiscal 2008 fourth quarter and their effect on the financial statements. I will then conclude with a summary of highlights for fiscal 2008 compared to fiscal 2007. IRET's fourth-quarter results were primarily impacted by the acquisition of 14 properties in the Commercial Medical segment, and one industrial property for a total of $103 million. As displayed on page 5 of the supplemental data, real estate revenue in the fourth quarter was $59 million compared to $54 million in the third quarter '08. This represents an increase of $4.5 million. The majority of this increase was due to new acquisitions in the fourth quarter. Real estate expenses also increased by $2.3 million with the most notable factor being increased utility costs.

Affecting both the balance sheet and the income statement is the effect of the allocation to intangible assets of in-place leases in accordance with FAS 141. The fourth quarter allocation to in-place lease was $35.5 million with an average lease life of 11.4 years. This allocation represents 34% of the fourth-quarter acquisition purchase price. This shorter amortization period has the effect in the short term of decreasing the Company's net income available to common shareholders computed in accordance to GAAP.

New mortgage debt placed on acquisitions in the fourth quarter or refinanced totaled $106 million, bringing IRET's total mortgage debt balance outstanding to $1.1 billion. The interest rate range of this new debt was 5.44% to 7%.

Moving on to fiscal '08 analysis, and in discussing our fiscal 2008 results compared to the prior year, I would like to make two observations at the outset. Two major practices impacted our overall results as operations in fiscal '08 in comparison. First, we had a significant gain on sale included in discontinued operations for fiscal 2007 and 2006 with no similarly large gain in fiscal 2008. And second, our per-share results in fiscal 2008 compared to fiscal 2007 were affected by the dilution resulting from our offering of 6.9 million new shares in October 2007.

Despite the dilutive effect of the new shares and the slightly delayed deployment of the offering proceeds management believes that this equity offering was well-timed, allowing IRET an equity infusion during a period of market calm, occurring between periods of greater volatility.

Fiscal year 2008 gain on sales, which is included in discontinued operations was $514,000 compared to $4.6 million and $3.3 million in fiscal '07 and '06, respectively. This resulted in a per-share decrease in net income of $0.05 per share in these comparable periods. Income from continuing operations in fiscal '08 was $11.7 million compared to $11 million in fiscal '07. Again, this increase was primarily due to acquisitions that occurred in fiscal '08.

Now turning to the balance sheet, IRET's total assets are $1.6 billion as of year end, a 12.7% increase over the prior year. As stated by Tom Wentz, Sr. available cash continues to be strong at $53.5 million as of April 30th. Total real estate acquisitions in fiscal '08 was $155 million, and other improvements which includes capital expenditures and tenant improvements for $25.8 million.

Relevant to note funds from operations as defined by the National Association of Real Estate Investment Trust increased 12.6% to $64.2 million from the prior fiscal year of $57 million. However, on a per-share basis and unit basis FFO declined by $0.01, primarily due to the dilution resulting from our sizable common share offering in the second quarter of '08. See the press release for detail on the calculation of FFO. We are nearly complete with the fiscal 2008 audit and our Form 10-K is scheduled to be filed no later than July 14th.

With that, I will turn the call over to Tom Wentz, Jr.

Thank you, Diane. I oversee the property management operations covering the IRET property portfolio, including commercial leasing and internal management. I am also responsible for coordinating the placement of debt. I will provide an overview on the following topics; multifamily and commercial operations by segment including the internal management initiative, commercial leasing trends, recent acquisitions which will also include development projects. And finally, an overview of recent financing.

Starting with multifamily operations, as compared to the previous quarter there has been no material change to IRET's previously explained multifamily strategy of focusing on a select number of communities in our target geographical area of the upper Great Plains, with the plan of creating a meaningful portfolio of apartment units covering all apartment classes in the selected community. This current plan also includes the acquisition of larger standalone projects in or near larger metropolitan areas to provide further diversification and price appreciation potential.

While occupancy levels increased only slightly as compared to the prior quarter, as well as compared to the same period a year earlier, multifamily operations are still experiencing forward progress in most of IRET's markets. The improvement is due largely to a decline in concessions combined with the ability to implement and hold modest rent increases. On a stabilized basis IRET was able to achieve low single digit increases in both gross and net collections.

While consecutive quarters of revenue growth does not yet necessarily confirm that all of IRET's apartment markets are in recovery, the continued improvement on the revenue and occupancy side of the apartment operation is in stark contrast to the very weak apartment environment that predominated in a majority of IRET's markets from approximately 2003 to 2006. Counter to a majority of the country, strength in the commodity markets including both energy and agriculture, appear to be creating good, sustainable demand for rental housing in IRET's markets. These two areas of the economy play a large role in the economic activity in many of IRET's core markets.

Combined with the tightening of single-family home lending has resulted in the rebalancing of the owner versus renter presented percentages in most markets with an increase in the renter segment. Both of these trends bode well for IRET as currently most IRET markets do not have an oversupply of rental housing, nor a meaningful amount of new products in the pipeline. It remains to be seen whether the surge in commodity prices will last and whether it will translate into meaningful population growth for the Great Plains which have basically experienced static or marginal population growth for the last 25 years. We plan to carefully monitor these trends as a driver for additional apartment development opportunities.

However, it is ironic that the very conditions that are helping our apartment portfolio also present the largest drag on translating revenue growth into net income. Increased prices for utility and other basic materials continue to be a major concern in all markets. As residential leases are short-term in nature we do have the ability to use rent increases to cover all or significant portion of any increased costs, of course subject to market conditions and income growth. To address increased operating costs IRET will continue to deploy capital improvement dollars that improve the operating efficiency of our apartments. The challenge will be to balance the accelerating costs of certain construction materials and labor, versus the savings that could be realized from these systems.

On the management side we are continuing to move forward towards managing our multifamily assets internally using the same multiyear strategy as we have implemented on the commercial side of the operation. 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 cost. We plan to begin selectively managing some multifamily communities in-house this fiscal year with internal management increasing through 2010, with a majority of the apartment portfolio internally managed by fiscal 2011. We still see this as a two to three-year process to migrate substantially all of our multifamily assets to internal management correctly and profitably.

Now moving on to commercial operations. While always being evaluated in response to changes in market conditions and tenant requirements, the commercial operation continues to remain focused on larger population centers in our geographical market that have a good depth of uses for commercial office, retail and industrial. The medical segment focuses on regional health care centers regardless of community size. The senior housing portfolio is focused on communities which are located in our geographical market that have appropriate demographics and sufficient demand for such services.

Continuing with the trend that appeared in the second half of the prior fiscal year, commercial office, retail and industrial activities have remained flat. While IRET has yet to experience any material increase in past due or other credit issues inside its commercial tenant base, the continued pressure on retailers and certain other segments of the economy may place additional stress on some IRET tenants, which may very well result in an increase in tenant defaults and space givebacks. Fortunately as a diversified REIT we are not overexposed to any particular segments of the economy. As an example, during the past quarter we had an industrial user, a residential window manufacturer downsize; while at the same time and in the same market we expanded and extended an industrial tenant that deals in agricultural equipment.

As IRET enters a new fiscal year inconsistent with past practice we will be evaluating our portfolio for those assets that may be good candidates for sale. However, at this point no assets have been definitely identified for sale.

Now turning to each individual commercial segment. Starting with industrial, which is IRET's smallest commercial segment by square footage, the recent downsize of a tenant in the Des Moines market combined with weak demand for industrial space in certain areas of Minnesota, resulted in a decline in occupancy as well as income in fiscal 2008. Both of these trends appear to be market-driven and not related to the quality or condition of IRET's assets as the vacancy and revenue issues for fiscal 2008 were basically confined to three buildings.

Recent positive leasing activity in two of the three locations will result in improved occupancy and revenue in the coming quarters assuming no unexpected credit issues. Except for continued weakness in certain Minnesota markets, the balance of IRET's industrial portfolio consisting of Des Moines, Iowa; Fargo, North Dakota and Omaha, Nebraska continued to experience steady demand in rental growth as these economies are well exposed to the agricultural sector of the economy.

Moving on to retail. This is IRET's third largest commercial segment by investment. The retail segment has remained flat, which in the current environment is good news. I do not see any significant change, positive or negative, for IRET's retail segment in the near-term as our retail portfolio consists of a more service and destination oriented retail tenant mix, centered around a number of strong, national or regional tenants such as Best Buy, Barnes & Noble and OfficeMax. There has been no change in the two large vacancies that continue to drag on IRET's retail segment. And given the current large box retail environment I do not foresee any pickup in demand for potential users in the near-term.

Moving on to medical, which is IRET's second largest commercial segment by investment; medical office and senior housing will continue to be an area of current focus due to the continued good demand for medical space and senior housing facilities. The vacancy in the medical portfolio has been primarily related to the disruption caused by the two medical building expansions currently underway. Both projects are expected to come online late second quarter of this fiscal year. Renewal and new lease rates continue to increase as previously available space has been absorbed, and the price of new on-campus medical construction eliminates this as an option for some medical tenants. In the coming fiscal year the focus will be on seeking to expand IRET's medical portfolio, including senior housing, both through acquisition and development.

Finally, moving to the commercial office segment, this is IRET's largest commercial segment by investment. As previously indicated, what started out as a positive year for fiscal 2008 weakened considerably in the second half, which resulted in the disappointing year given how it started. We remain dissatisfied with our commercial office segment performance on an occupancy and net income level. We will continue to focus time and resources to make sure IRET is in the best position possible to capture new leasing and secure the renewal of existing tenants on the best terms possible.

However, in weak to declining markets there will be certain transactions that must be refused even though the result is short-term vacancy and lower revenue. IRET has certainly experienced weak commercial markets in the past, and unlike prior periods and depressed activity the current weakness in the office market appears to be due to economic uncertainty and changes in the availability of credit as opposed to excess commercial space. In such markets we focus our efforts on maintaining our assets by concentrating on existing tenants and taking all reasonable and necessary steps to keep the assets functionally and aesthetically competitive by upgrading systems or exteriors and interiors as necessary.

Of course, it is always possible that prolonged negative economic conditions can create excess space due to tenant contractions or space being returned to the market, thereby prolonging any recovery. 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 multitenant Interlocken Corporate Center in Minneapolis, Minnesota. While our results have largely tracked national trends, certain IRET markets have experienced a positive increase in demand, driven primarily by those companies involved in the energy and agricultural or related industries. Assuming the agricultural and energy sectors continue to remain strong, I would expect to see some positive counterbalance to the weak demand from other commercial tenants as most of IRET's office markets are geographically positioned as traditional gateways to the areas currently experiencing strong commodity based growth.

As previously announced we continue to move toward internal management as a core part of our plan of improving both occupancy, as well as net income, by allowing us to focus directly on our tenants rather than through an intermediary property manager. And to capture the previously outsourced management revenue stream even though a small part of the overall operation.

Moving on to development projects; the three uncompleted development projects disclosed in the prior fiscal year remain on schedule and relatively on budget. We have experienced some additional leasing at one of the projects which has resulted in an increase in the final cost and have elected to upgrade some of the HVAC systems. Again, increasing costs but with the expectations that our additional investment will result in a more competitive and efficient asset as it pertains to utilities and energy usage.

The previously discussed Cottonwood IV apartments are now complete, and we expect it to be fully stabilized this month with debt to be placed shortly thereafter. IRET has recently acquired additional land immediately south of the Cottonwood apartment complex in Bismarck, North Dakota, and is evaluating additional multifamily units at this site. The two on-campus medical buildings will be complete with rent commencement anticipated late second quarter of fiscal 2009.

The 67 apartment units that are part of the IRET mixed-use project in Minot, North Dakota are expected to be ready late October 2008, with the balance of the approximately 60,000 square feet of rentable commercial space to be completed shortly thereafter. IRET intends to move its corporate office and occupy approximately one-third of the commercial space in the Minot, North Dakota development. We are seeing very strong interest for the Minot project but have not yet commenced formal leasing as consistent with our strategy of development.

In addition to the current projects, there has been no change in our plan to actively pursue continued internal development of multifamily and commercial projects, with a focus on medical and senior housing at similar levels as previous periods, which is in a range of approximately $50 million to $75 million annually. Even though development projects still appear to be able to generate returns at levels above most available acquisitions, this now appears to be changing as available properties are starting to reprice at higher cap rates. However, with higher interest rates and continued volatility in the lending market it is still too early to tell whether higher cap rates will actually mean higher economic returns. As previously confirmed, all development is planned to be held by IRET's portfolio.

Moving on to recent acquisitions; in the fourth quarter IRET completed the acquisition of eight of the remaining nine senior housing locations previously discussed in the prior quarter. The remaining location in Minot, North Dakota is subject to the assumption of existing debt placed by the seller. The existing lender has placed certain conditions on the assumption of the debt that are not agreeable to IRET. While the resolution may be possible, at this point I am unable to predict when or if this final part of the senior housing acquisition will close. While certainly a desirable acquisition, its absence does not change the overall positive impact of the total acquired senior housing assets.

Moving to financing; consistent with past practice IRET has traditionally placed fixed, long-term debt on its individual assets or group of assets with a goal of maintaining overall portfolio leverage of approximately 65% of cost, plus capital improvements. As previously reported, we have not yet encountered any material obstacles to either placement of new debt or refinancing maturing debt. During the last two quarters we have brought assets covering all segments of IRET's portfolio to market, and in all cases have achieved terms, rates and leverage consistent with or in many cases, better than our current weighted average interest rates and current mortgage terms. I fully expect that all fiscal 2009 maturing debt will be refinanced or extended on rates and terms that are equal to or better than IRET's maturing debt.

While interest rates have certainly increased from historically low levels and loan terms have moved back firmly to the lender's side of the table, even under current conditions I have yet to see any indication that IRET's ability to borrow on rates and terms that are materially different than from what we have experienced in the past has occurred. IRET's established borrowing ability and lender relationships will continue to offer a distinct advantage in the current credit market.

Thank you, and now back to Kelly Walters.

Thanks, Tom. We will first answer those questions we received in advance, and then I will ask the call moderator to open the call to live questions. Tom Wentz Jr. will respond to questions submitted in advance, as will Tom Sr. and potentially Tim Mihalick, as well.

First questions come from Carol Kemple of Hilliard Lyons. And I think we addressed this some, but what kind of cap rates are you seeing currently in the market?

I will answer that. We are certainly seeing more variety in cap rates than we saw just six months or a year ago, and in most cases they are higher. The exception would be apartments where there continues to be high demand and not a major change in the cap rates expected by sellers. We do see changes in certainly greater differentiation as to quality of the assets. Older properties, properties with lease rollover risks or vacancy issues are now coming with cap rates we had not seen. But, of course, come accompanied with the problems of vacancy or lease rollover risk or functional obsolescence. So I suppose a short answer is to say we don't see cap rates high enough to get us excited. And I do think that an anecdotal evidence indicates there are a lot of construction loans that need to be refinanced, a lot of maturing financing with very high leverage that at some point should prompt a reassessment of cap rates. But we are not seeing any compelling purchase opportunities at the present time.

All right. Thanks, Tom. Second question from Carol Kemple. Can you give us any acquisition or disposition guidance for fiscal 2009? If so, what would it be? Again, I think Tom addressed this somewhat in his talk, but who would like to address that question?

I would reply, and I think the operative word that we may want to leave with everyone today is uncertainty. There is certainly a lot of uncertainty in the capital markets, uncertainty in our economy and so it is difficult to make any predictions about our ability to sell some of our assets, which we are certainly going to explore. But have no compelling need to do so if we can't command a price that is attractive to us. And on the counter side of that, acquisitions, we are negotiating on several, and one aspect, a great deal of our growth in the past decade has been through UPREIT transactions where the owner of appreciated real estate can contribute that real estate in exchange for our operating partnership units without triggering any income tax consequences. That has been, and we expect it to be, a generator of additional growth in our portfolio. And we don't need cash for a good share of those acquisitions. And so we are hopeful that we can continue to negotiate an acceptable win-win outcome with UPREIT contributors because as the price of our stock varies, so does the value of their real estate.

We do think that there is likelihood of more of those kind of acquisitions that we can complete. But as far as buying assets for cash, as we have indicated earlier, I think we're going to concentrate our efforts on building apartments in the Great Plains area that is enjoying a boom, as well as pursuing our medical office and assisted living acquisition and development opportunities.

All right. Very well. The third and last question from Carol is what is your estimated FFO per share for fiscal 2009? And I think I can just take that and say it is our policy to not give any guidance numbers to the Street. We leave that to people like yourselves, Carol, and the other analysts that follow our stock.

Moving on, then, to question submitted from David Nebinski, at R. W. Baird. First question is what kind of acquisition opportunities are you seeing in the market, and I think we have addressed this some, but Tom, do you want to further emphasize anything at all?

The only thing I would add is that we certainly see an increase from joint venture want-to-be partners I guess is the best way to say that. We see a lot of people in the development business or even lenders with problem construction loans, giving us opportunities to participate in ongoing development projects. For the most part these don't appear to be very attractive to us. I think we probably answered previously where our focus is going to be as far as expanding our portfolio.

All right, very well. And that sort of dovetails into the second question from David, which is there a certain product type that would be more attractive from an economic standpoint or that fits our business strategy and more?

And again, obviously we have said senior housing and multi-family in our traditional Dakota, Minnesota and South Dakota markets.

All right. Very well. A question from David Nebinski. If opportunities do present themselves, how would you finance them? What pushback from lenders are we seeing in their willingness to lend? Have you seen anything over the past six or twelve months specifically on advanced rates and/or spreads?

We certainly are seeing spreads increasing with the possible exception of apartments where it is not as significant. But as Tom Jr. indicated earlier, we have yet to see any problem in financing the right project. And depending on the product type, apartments in the high 5% range to other commercial properties tending towards 7%, assuming leverage in the 65% to 75% range, and a little higher debt coverage requirement of 1.2 or better, forward rate locks are not as lengthy as before. The term has been shortened.

But that has never been a part of IRET's acquisition or debt strategy. So we obviously, in conformance with the policy we followed for 38 years we do not commit ourselves to buy any piece of property until we have locked on the financing. So we will just have to deal whatever market conditions present themselves.

Fourth question from Mr. Nebinski, given your cash balance and availability on your credit facilities and adjusting for development spending requirements, how much investment capacity remains at IRET?

Assuming we can finance the development projects that are some $60 million if you are going to pay cash for, and again we wouldn't buy anything on the expectation that we can finance those assets, but assuming that we can at a 65% to 75% range, we can acquire an additional $100 million or so of property with our existing equity capital. But again, we intend to be patient and to be very careful as we go about placing that capital.

Fifth question out of Baird. What is your expectations for stabilized portfolio performance by sector going forward over the next four quarters?

I think we previously indicated that we see continued improvement in our apartment portfolio and also our medical because the two development projects will come online this August or September. So we see continued growth in that area, which constitutes over half of our portfolio. But we are concerned about the balance of our portfolio, the commercial office, the retail and industrial. So I suppose if you want an idea, we think that we are going to be flat probably.

Sixth question again from David. Can you provide me with more background information related to the $14.8 million senior housing pending acquisition, and what is the hang-up there? I know Tom addressed this some, you want to reiterate?

We'll ask Tom Jr. to respond to that question.

As I indicated earlier, that has somewhat unfavorable seller placed financing that would need to be assumed. And it was placed by primarily individuals. And so that debt has conditions associated with it that we have attempted to negotiate out a change. At this point have not been successful, and we are not willing to assume that debt on the terms agreed to by the original seller. And we are still working on it, and at this point it is not possible to predict when or if that transaction will close.

Next question from David, I noticed that the total estimate costs of two of your development projects, Southdale Medical Office building and the IRET Corporate Plaza increased in the last, from last quarter's estimate. Is there a particular reason for this, and what current return on invested capital do you expect those projects to generate?

I'll answer that question. On the Southdale Medical Office building, which is located in Minneapolis, Minnesota, that was an expansion basically of the existing facility which is a result in about a 26,000 square foot addition being added on the front of the building, and also incorporating the first two floors of the existing structure into the new floor plate. At the time we started the project it was approximately 50% leased. We now have the project 100% preleased, which has resulted in additional tenant improvement and leasing commissions. And that would be the explanation for the bulk of the increased cost on the Southdale project.

On the Minot, North Dakota mixed-use project, during the construction phase we elected to do some additional site work. This is a much larger parcel than what is just being built on it, has the capability of outlot buildings. And we elected to do some additional site work in anticipation of breaking ground on those projects sooner than anticipated. Additionally, we modified the heating and ventilation and cooling system to go with the ground source system, which given a project of this size with the 67 apartment units and the 60,000 square feet of commercial was a rather large system and also is much more costly than traditional systems up front. However, our payback analysis is that this will be a very positive addition to the facility. And again, this has resulted in some additional upfront costs. That really is the explanation for those two projects. Thank you.

The last question coming from Baird, number eight, please provide some color on your dispositions program. What are the characteristics of assets you would likely sell? Is it product market or opportunity driven? Those potential dispositions be on a one-off basis, or could you see an entire property segment i.e. industrial or retail, and where you would -- it doesn't fit into the long-term business plan.

We certainly have no plans to dispose of an entire segment or portfolio. And so a disposition program has always been an opportunistic one. As we have been talking about, we are embarked on internalizing property management. So the location of assets that we are going to assume property management responsibilities for becomes more important. So we will look at disposing of some of our apartment and commercial properties in communities that we don't see as being one of our targeted investment areas. So we are exploring that, but we have always not wanted to have to sell any asset. So we are just taking our time and looking at that and expect to have some sales. But there are certainly none that are under contract or close to completion.

At this time that concludes the prepared question and answer questions from the sell side analysts. So we will now turn this over to the S&L operator and take the -- begin the live question-and-answer session. Camille?

(OPERATOR INSTRUCTIONS)

Well, Camille, it would appear we are not going to get any.

That is correct, sir. There seems to be no questions at this time.

Very well. Let's turn it over, then back into Tom Wentz, Sr. for his closing remarks.

Well, thanks to everyone for listening in to our conference call. We hope that we have given you a better picture of our Company and our future plans, but we would certainly encourage any of you who might have additional questions to contact us. And we look forward to talking to you again in another three months. So again, thank you for participating.

Thank you. That does conclude our conference call. Thank you for attending today's presentation. You may now disconnect.