Centerspace (CSR) 2009 Q4 法說會逐字稿

Hello and welcome to the Investors Real Estate Trust fourth quarter fiscal 2009 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. Timothy Mihalick, Senior Vice President and Chief Operating Officer.

Good morning, and welcome to Investors Real Estate Trust's fourth quarter fiscal 2009 earnings conference call. First off I would like to apologize for the tardiness this morning, we had a power outage in the northwest quadrant of the city of Minot, which caused the whole part of the neighborhood to go down, so we are able to power back up, and we're ready to go.

IRET's earnings release and supplemental disclosure package were posted to our website and also furnished on Form 8-K on Tuesday, June 30. In the earnings 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 have not received 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 achieved.

Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements are detailed in yesterday's earnings 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 me today from management are Tom Wentz, Sr., President and Chief Executive 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 Tim. We are pleased to report the financial results for IRET's 39th year which ended on April 30 of this year. In addition to summarizing IRET's fiscal 2009 financial results, we will discuss this morning our balance sheet including cash on hand, credit lines, and maturing mortgages; our real estate portfolio including current occupancy levels, leasing activity, acquisition and disposition plans, and our impairment testing procedures and policies. We will also discuss our dividend policy, our recent follow-on stock offering and equity capital goals, and our plans and goals for fiscal 2010 and future years.

Of course we will welcome your questions at the end of our presentation and do our very best to answer them.

Diane Bryantt will review IRET's fiscal 2009 financial results in more detail. But I will mention a few highlights. Real estate revenues for the year increased to $240 million from $221.2 million, an increase of 8.5%. Real estate expenses, however, increased by 10.2% from $208.9 million to $230.7 million, which resulted in reduced earnings from our real estate portfolio. As a consequence, funds from operations for the full year declined from $0.87 per share and unit to $0.81, a 6.9% decline.

For the fourth quarter, FFO was $0.21 per share in unit compared to $0.22 last year, a 4.5% decline.

While we are not satisfied to be reporting declining earning results, we do note and take some comfort in the fact that this decline is quite modest when compared to most real estate companies operating in this most difficult economic climate.

Turning now to IRET's balance sheet, at year end on April 30, 2009 cash on hand totaled some $33 million with another $32 million available under our unsecured and unused credit line. In addition, in June IRET raised an additional nearly $25 million in a public offering of its common stock.

Of concern to everyone owning commercial real estate is a collapse of the financing available to this industry. This situation has gotten worse since our last earnings call, and we have focused carefully on this problem. I invite everyone to study our recently filed 8-K, which describes each of our mortgages that will mature through our fiscal year 2013. I would also note that all of our real estate debt is in the form of individual mortgages that are not cross-collateralized and have laddered maturities.

As our 8-K details, during fiscal 2010 some $115 million of mortgages will mature. Of this amount, approximately $58 million is secured by apartments, and we already have and anticipate being able to successfully refinanced all of these mortgages. Of the remaining $57 million secured by commercial real estate, a loan commitment is in place to refinance the largest mortgage that is going to mature during this fiscal year, which is in the amount of $27.6 million. And we continue to negotiate refinances of the remaining $30 million of commercial real estate mortgages.

With respect to our real estate portfolio, I'll offer a brief overview. Until financing from commercial real estate again becomes available, IRET does not anticipate making much change to its portfolio. Both purchases and sales of real estate assets will be difficult without readily available debt financing. We will, however, continue to seek UPREIT acquisitions with assumable financing in place. We will focus on operating our existing portfolio more efficiently, including continuing our program of internalizing property management of all of our properties.

There has not been any material change in our occupancy levels or leasing activity. The slightly downward trend continues. Details of our occupancy levels, leasing experience and lease maturities will be given later in this call and are set forth in detail in our recently filed 8-K.

Another concern to IRET and all real estate owners is the issue of impairment. At what point will it be necessary to reduce current earnings by decreasing the value of our real estate properties? IRET has and will continue to work closely with our Board, our audit committee and our independent auditors to carefully apply appropriate industry-standard impairment testing procedures and policies. During fiscal 2009, IRET took impairment charge of $338,000. Any future impairment disclosed by our impairment testing will be immediately reflected in our reported financial results.

Yesterday IRET paid to its share and unit holders it 153rd consecutive cash distribution. Over its 39 year history IRET has never omitted or delayed a quarterly cash distribution to its owners. We remain committed to extending this record. As we have previously detailed, IRET has significant cash on hand, unused credit lines, manageable debt, and most importantly, a real estate portfolio that is producing income satisfactory to meet our dividend obligations to our shareholders. Thus, barring a multi-year extended and deepening economic crisis, IRET fully expects to keep on paying its dividends on time and in cash.

As I previously mentioned, IRET raised nearly $25 million in June by selling some 3 million of its common shares in a follow-on public offering. Why did we do this? And wasn't this dilutive to existing shareholders? We did it because in our judgment, having cash during this financial crisis is very important because it ensures that we do not run the risk of having to sell good real estate assets at a fire sale price because a maturing mortgage can't be refinanced. And more likely we view this cash to allow us to purchase additional real estate at bargain prices in the future.

Was it dilutive to existing shareholders? Only slightly. We calculate only pennies per share as there were some 80 million outstanding shares and units prior to the offering, so the 3 million of new shares represent only 3.6% of the resulting shares and units. We think the benefits of having this extra cash will soon recapture this slight dilution.

Will IRET do more follow-on public offerings of common stock? We may, if market conditions allow and we feel that we can invest the proceeds in an accretive manner that will enhance the value of our shareholders' interests.

We note that an anomaly seems to exist today between the equity and debt markets. Real estate companies have been -- including IRET have been successfully selling their common stock while borrowing money secured by good real estate assets has been difficult. Accordingly, we'll continue to assess the market for our common stock as a means of raising capital to grow our business.

What are IRET's plans for the future? As we have been saying over the past year, we will continue to be cautious in deploying our cash until we see the debt markets stabilize. We will continue to focus on our operations, especially on internalizing property management. We are optimistic about the future. We are hiring new people and investing substantial sums in state-of-the-art accounting software and hardware with the expectation of continued growth in the years ahead.

I'll now turn the presentation over to Diane Bryantt, our Chief Financial Officer, who will review our fiscal 2009 fourth-quarter and full-year financial results in more detail.

Thank you Tom. This morning I will give a brief overview of our fourth-quarter results and financial highlights of fiscal year 2009. For the three months ended April 30, 2009, IRET's revenues increased by approximately 2.8% compared to the same period last year, primarily due to new acquisitions or development properties placed in service during this fiscal year.

We have seen more typical real estate operating expenses in the fourth quarter, and we rebounded from the effects of the snow removal cost as discussed last quarter.

While revenues increased during the quarter, income from continuing operations decreased by $644,000. Major factors for the decrease compared to the same quarter of the previous fiscal year were an increase in operating costs on new properties placed in service in the fourth quarter, $397,000 less of interest income earned, and a non-cash impairment charge of $338,000, this resulting in a quarter-to-quarter decrease in net income available to common shareholders of approximately $1 million.

Year-to-date results as displayed in detail on page seven of the 8-K supplemental data filed on June 30 showed positive results for our real estate operations compared to the same prior years. Net operating income provided from real estate increased by $8.1 million to $142 million from $134 million.

Recoveries in the fourth quarter from tenants for their share of increased operating costs, continued strength in our multi-family occupancy rates, and new development projects placed in service during the year all factored into favorable results in the real estate operations. However, the items of interest expense, depreciation amortization, impairment and decrease in nonoperating income were the significant factors in a decrease of net income to common shareholders in fiscal year 2009 compared to the prior year. Of these items, though, only interest expense increases of $5.3 million and the decrease of interest income of $1.8 million represent a true cash expenditure.

The other increases and decreases in depreciation amortization and impairment expense totaled $5.5 million are non-cash expenses. What this means for IRET shareholders is that although net income decreased, the major factors and the causes were non-cash expenses. And accordingly, we continue to consider that the net cash flows provided by our operating activities are sufficient to support our common and preferred share distribution.

As we have emphasized before and as Tom, Sr., reiterated, we do value our 38 year distribution history. However, we do want to acknowledge that the Midwest markets in which we own real estate are now catching up with the rest of the country in facing the challenges and economic uncertainties affecting the real estate industry along with other sectors of the economy.

Turning to the balance sheet, in the fourth quarter we did not have any acquisitions or disposition. We also closed on four mortgage loans, three of which were multi-family refinancing, and one a new commercial office loan for a total cash-out of approximately $9 million.

Interest rate ranges were 5.89% to 6.05% on the multi-family loans with 10-year maturities and 30-year amortizations. The commercial loan terms were 6.25% fixed interest rate, three-year term, 25-year amortization. Also, subsequent to the end of the quarter, we renewed financing on two multi-family apartment complexes in Moorhead, Minnesota and Wade Park, Minnesota. The interest rates on these two loans were 6.53% and 6.41% with a 10-year fixed rate and 30-year amortization. Approximate cash-out was $213,000. Although these rates on recent debts are above the 6.3% weighted average of our mortgage portfolio, we are currently able to obtain rates on our multi-family projects as low as sub 6%. However, commercial loan rates, if available, will exceed our weighted average and are currently above the 7% range. Tom Wentz, Jr., will discuss in more detail our outlook in the current lending environment.

For the year, funds used to acquire real estate and place development project in service were $33.8 million. IRET had significant investment dollars applied to our development arm this past fiscal year as we placed into service two medical facilities, completed one small apartment conversion, and completed the multi-use facility and company headquarters known as IRET Corporate Plaza. The all-in cost for these development projects totaled $43.3 million. Financing has not yet been placed on these projects, as all were funded with cash on hand.

Even with the unlevereged investment in our development projects, cash remained strong. It was at $33 million as of April 30. We currently have $32 million available on our lines of credit.

In April of this fourth quarter we paid a regular quarterly distribution of $0.17 per common share and unit. Subsequent to our quarter end, we paid yesterday on July 1 a regular quarterly distribution of $0.1705 per common share and unit. The July distribution was IRET's 153rd consecutive quarterly distribution at equal or increasing rates.

Now I will turn the discussion over to Tom, Jr., Senior Vice President of Asset Management and Finance.

I will begin with an overview of the current lending environment and a general discussion of IRET's pending debt maturities. I will then also discuss property operating and leasing trends by segment.

Consistent with our presentations over the past 12 months, the ability to borrow has become increasingly difficult, except as it pertains to multi-family assets. IRET is no longer isolated from what I suspect is the same experience being felt by most real estate operators in other parts of the country. While our opinion is that our underlying markets are performing better than the vast majority of the country, lending practices are being applied uniformly, regardless of market conditions.

In response, we have modified our debt strategy slightly to account for the decline in commercial lending by increasing leverage on our multi-family portfolio in order to maintain our overall leverage targets. We are doing this carefully and to a level that is still well within what our multi-family portfolio can handle from a coverage standpoint. We are confident that this modification will leave IRET well-positioned when the economy recovers.

We still believe that the profit long-term business model for real estate in general and IRET specifically requires leverage in a range of 55% to 65% of investment in the real estate. The critical part of the strategy is proper leverage. It's not generally the amount of debt but rather the type of debt. On this point IRET's debt strategy remains unchanged. We place long-term debt tied to individual or groups of assets with staggered maturities by product type. This is not always the least expensive or most flexible type of debt, but it generally avoids some of the negative aspects of higher leverage while still providing the advantages associated with fixed leverage over an extended period of time.

Even by increasing our multi-family debt levels to offset a reduction in commercial leverage levels, we expect it will be difficult to maintain our desired leverage levels in the current market. Some commercial loans will be paid off, and others will be refinanced at levels below the maturing debt, which will require the allocation of additional equity dollars. We expect that over time the market should account for this reality through higher rents. IRET provides a detailed debt maturity schedule each quarter as part of its 8-K filings, so I won't spend any time this morning discussing the specific assets.

Now moving to the debt maturity schedule, which is a slide that's being presented as part of this conference call, I would like to discuss our current debt maturities.

IRET has successfully completed a number of commercial loans on terms close to our current average weighted interest rate and loan terms. But the trend seems to clearly indicate that our debt costs have bottomed and the impact of commercial loan terms will over time cause our debt costs to increase.

Even though IRET's leverage has been by design higher than our peer group, our debt strategy is still very conservative. Except for our credit facilities, which are unsecured, we secure our debt with individual or limited groups of assets which are not cross defaulted or cross collateralized with other assets. We generally fix our debt for longer terms of 10 years on average and generally amortize principal as opposed interest only. The vast majority of our debt is non-recourse except for standard industry carve-outs which present no material risk to IRET.

Despite the continuation of tightening credit markets that appeared over 12 months ago, we still don't see any material liquidity or financing risk as it pertains to IRET in the near term for the same reasons previously disclosed. Again, briefly, those are our good relationship with a large pool of lenders that while declining, many are still active in the market. Second, we are still in a period where we have a strong group of multi-family assets with good underlying operating fundamentals opening to refinance in the coming months and years.

Diane provided details of recently closed multi-family loans. Currently we have pending loan applications covering five apartment projects with projected cash-out proceeds of $10.5 million at interest rates ranging from 5% to 6%. Assuming performance at each location remains constant over the coming months, even with the increased leverage due to cash-out, the cash flow will remain neutral or improve due to the better loan terms concerning rate and amortization period.

Finally, we have engaged a number of our existing non-agency lenders that cover current multi-family assets about early refinancings without penalty. These are generally lenders that have a need to improve their balance sheets immediately by accepting an early prepayment in full. This initiative implemented by IRET may allow an opportunity to re-leverage certain well-performing multi-family assets ahead of schedule with the benefit of lowering our interest expense and providing even more liquidity to IRET for business growth, or if necessary, a prolonged shutdown of the commercial lending market. Our plan is to access a reasonable amount of Freddie and Fannie debt as quickly as possible on our multi-family portfolio, since these two lenders are operating independently from the market forces squeezing the commercial lenders.

Finally, even though close at hand the commercial debts maturing later in 2009 are relatively small, with the exception of the debt covering IRET's joint venture commercial project located in Mendota Heights in Minnesota, which is currently under commitment to be refinanced, at this point we are prepared to pay off the pending commercial loans when they mature, even though we are still actively negotiating with the existing lenders and new lenders for placement debt. These will go to the last few days before maturity, but we have the cash necessary to handle the payoffs with no material impact on our operations or other cash needs for tenant improvements or tenant retention programs.

Despite earlier statements that we might consider selling some assets, at this time we do not see sales as necessary, given current market conditions impacting commercial real estate. But nothing has been ruled out concerning asset sales.

I believe our consistent debt strategy has positioned IRET well to withstand even further economic or credit market deterioration and, if we so choose, to take advantage of any development or acquisition opportunities that may appear over the coming quarters.

Now I will move to leasing trends and the internal management initiative.

IRET provides detailed information in the 8-K supplemental filing on occupancy, new and renewal rental rates covering both our commercial and residential folio, as well as expiring lease tables, so I am not planning to discuss any buildings or particular transactions in detail.

Even though most economic news continues to be negative, the past quarter was relatively uneventful for IRET, and we saw little change in the underlying flat to declining economic conditions in most of our markets. We remain very cautious with our cash and with our capital, focused on tenant retention in the areas of one-time and ongoing cost reduction projects, especially with the appearance of federal stimulus money for energy efficiency projects, capital improvements, and moving to a fully internal management structure as a means to improve operations and capture what is currently a small revenue stream going to outside vendors.

I will also provide some short comments on each segment that IRET operates as part of its real estate portfolio.

Our apartments continue to perform well, and I see this continuing absence of sharp increase in unemployment in many of our apartment markets. The growth in rents appears to have peaked. Many of our markets have unemployment rates that are still well below the national average, and combined with the tightened lending terms for homeownership and the lack of capital for new multi-family construction, have all combined to make a very good rental market in most of IRET's apartment markets. Even though we are clearly not experiencing the same conditions as many other parts of the country, we continue to position ourselves for what may come while still enjoying the current relatively good economic conditions in most of our apartment markets.

Moving to the commercial segments -- previously I've discussed each commercial segment in detail. But again, with the enhanced information in our 8-K, I will provide a more broad overview.

There has been no significant change in the commercial side of IRET's operation except as previously noted, the downward trend continues. We are still meeting our historical renewal rates, but as each commercial lease matures under the current climate, we are generally experiencing either a reduction in rent or space, or in some cases both. We've not seen a dramatic spike in rent concessions, improvement allowances or commissions. I believe our strong cash position will prove to be an advantage in retaining commercial tenants. I expect the pressure to continue until unemployment bottoms out and consumer spending rebounds. We see no better alternative at this point to our strategy of focusing our capital on retaining current tenants and securing new tenants, provided the credit as acceptable.

Longer term, I see no material issues with our portfolio, nor any lasting impact from scaling back certain cattle expenditures, as we have adequate cash to continue doing life, health, safety as well as maintain the appearance of our assets to a level appropriate to their position in the market.

Moving to the industrial segment -- one of our largest industrial tenants, Stone Container, has filed Chapter 11 bankruptcy but is current on base rent and additional rent at both facilities the tenant leases. We will continue to monitor both leases, but the longer negative economic conditions continue, the more likely it becomes that the leases at one or both of these locations will be rejected or will expire without a renewal. We are being proactive with Stone Container to make sure we are offering a market lease rate for them to remain in the space.

I would expect increased rent and occupancy pressure in the industrial segment the longer the recession continues. The one advantage of IRET's industrial portfolio is our cost structure is very favorable and will allow us to be very competitive to retain or attract tenants.

Moving to our medical portfolio, which includes senior housing. This segment is holding even despite the credit issues plaguing our two tenants that are affiliates of Sunwest Management, Inc., which have resulted in a shutdown of the Fox River development project and a reduction in rent at the Stevens Point facility in Wisconsin. We have switched operators on the Edgewood portfolio to a non-Sunwest entity. The new operator is the original developer and previous long-time tenant prior to the Sunwest transaction.

The largest facility located in Fargo, North Dakota is behind lease-up schedule, which will impact our net income going forward, but not materially.

With the changes to the REIT rules effective May 1, 2009 for IRET, we are now able to directly operate senior housing through a taxable subsidiary and the use of a third-party independent manager. We plan to study the implementation of a taxable REIT subsidiary which would allow us to capture 100% of the operating revenue at these senior housing locations as opposed to just the lease payment.

Our medical office portfolio continues to perform adequately, and we have seen no direct impact due to economic conditions. What the national healthcare debate may hold is unknown. But we continue to believe that on-campus medical office buildings will be winners under any significant healthcare overhaul. On-campus medical office buildings comprises the majority of our medical office building holdings.

We have fully leased our new developed -- two new medical developments in Minneapolis, in line with our development pro forma, except we have been on the unable to place debt on the project. Our past practice has been to develop with free cash flow, so even though our inability to place debt was unexpected, we have no time pressures to refinance due to maturing construction loans or debt.

Like all commercial segments, the retail sector is also under pressure. For the most part we are successfully renewing expiring retail leases but at lower rates and shorter terms. I do not anticipate much in the way of new leasing in the retail segment as the transaction cost to convince a retailer to open a new location simply make no economic sense to IRET. We fully expect continued declines in occupancy as -- in rents as retailers evaluate their cost structure and retail locations going forward.

Finally, our largest commercial segment is commercial office. Again, repeating myself, this area is under a significant amount of negative economic pressure. However, we are still doing lease transactions. Unfortunately, the pace of new leases does not offset the loss of lease space from downsizes and terminating tenants, but it has slowed the decline. I expect both rents and occupancy to decline through calendar year 2009. Our focus is one of tenant retention, securing those tenants that are in the market, and cost control to bring our assets through the current economic environment in the best shape possible.

The last topic I will briefly discuss is acquisitions and development projects. While we certainly have what appear to be viable development and acquisition opportunities -- but as stated earlier, we see no real reward to pursuing traditional real estate acquisitions or developments using cash and leverage until the real estate and credit markets return to an understandable pattern of operation.

That concludes my presentation this morning, and I will turn the call back over to IRET's Chief Operating Officer, Tim Mihalick.

Since there are no questions submitted in advance, I will now turn the call over to the conference call operator for audio questions.

(Operator Instructions). David [Navinsky], [Robert Baird].

Just a couple questions. As one of the few REITs that not only has not cut their dividend but continue to modestly increase it, would you remind us on your dividend policy?

Well, I think as we stated, this has been a long-standing policy, and I have been involved with this company throughout its 39-year history. And this will be the third serious downturn in real estate during the lifetime of our company. And both in the '80s and '90s, we continued to pay our dividend just as we have this time, and came through it in good shape, and at this point, as I have indicated earlier, unless this goes on for many years, this too shall end and real estate will rebound.

And we have been careful not to get ahead of ourselves increasing our dividend when things are going well so that we can continue to meet the expectations of our shareholders when we hit the rough patch, which we certainly are in at this point. So we see the road clear to maintain this dividend policy of increasing at roughly 1% a year, paying it all in cash and on time, as we have done for 39 years. We are mindful that if this turns into instead of the Great Recession into the Great Depression, we may need to change that. But that's some -- in my opinion at least two years down the road.

And then with a look back to how your markets have changed since the end of February, could you please rank the property sectors from best to worst in terms of incremental demand?

I think the apartments have continued to modestly increase during this period, and our medical portfolio, which was benefited by two development projects coming online, also showed an increase but was stable. So those two segments of our portfolio, or constitute about 55% of our portfolio, have shown modest improvement since our last call. And as the been indicated, the other three sectors, both retail and industrial are very small, each less than 10% of our portfolio. And our suburban office, that has been difficult, and the trend line is still down, not -- not a cliff that we are falling off of, but certainly a continued trend of inability to raise rents and increased -- modest increases in vacancy.

But overall there has really not been any significant change in any of these factors in our markets. It's a flat to downward trend, and as I say, at some point we will get our confidence back as a nation and start hiring people and things will return to normal.

Is there any way you can kind of quantify any types of -- any of the changes? Other than you said they are not really significant, is there any (multiple speakers)

Well, I think the 8-K of course indicates the changes in our occupancy levels and our rent levels, and I think an analysis of that, you'd come to the conclusion that the changes are very modest. There has been no significant deterioration, but the trend line is down in the suburban office, for sure.

What about more potential showings for leasing activity? Have you seen any of that?

I'll ask Tom, Jr., to comment on that.

Well, I think as far as commercial leasing activity goes, we really haven't seen throughout this downturn a noticeable decline in prospects. Tenants are obviously being much more cautious about this space. And actually our retention levels are running at or above our historical level. And again, I think that's a product of tenants are hesitant to move in the current environment and increase the -- expose themselves to increased costs, and I think the lack of new construction are both positive factors in that area. Of course there is a lot of available space due to vacancy, but there are still being -- still deals being done, as far as we can see.

And then going forward, can you please rank the property sectors from best to worst in terms of where you expect to invest incremental capital. And could you comment a little bit on where cap rates have moved since the fall of last year?

Well, obviously apartments continue to be an attractive area to look at, for the simple reason that financing is available. But of course the pricing is still very aggressive, because you could still borrow money at less than 6%, and so we are a little nervous about committing a lot of capital to that area because we think the pricing is still a little higher than it ought to be.

There is really very little activity going on in commercial real estate because there is just no financing available. We are beginning to see some very attractive opportunities, and certainly for commercial cap rates of 9%, 10% or even higher are now readily available. But the financing is not available.

So we've always been an opportunistic investor. If you wanted to -- us to rank where we would like to expand our portfolio, it would certainly be medical and multi-family. These are areas that I believe we will seek to expand in over the years that come. But again, I would emphasize we have always been more of an opportunistic investor looking to place whatever equity capital we have in the very best way for our shareholders.

Okay. And then could you just provide a little bit more information related to the impairment and what the process is like there, and --?

Well, we did impair one asset this last year, and obviously like everyone in our industry, I feel this will be given a lot of attention by our outside auditors, by our audit committee, our Board of Directors and ourselves. There are very little sales occurring in the markets in which we operate, which to judge the current value of real estate, we of course disclose in our financial statements the historic cost, what we paid for the particular property and what depreciation we have taken to this point in time.

And we have a quarterly process where we carefully review the income being produced by each property and study that property very carefully. And if we do determine that the existing prospects for that property indicate that it has a value below our historic depreciated cost, we will take an impairment charge, bring the stated value of that property down to the level that we determine that it has at this particular point in time.

So that's -- this is an issue that we take very seriously and are going to continue to monitor and do whatever is appropriate as the -- this economy develops in the future.

And then last question, you talked a little bit about it, you said there's -- you're seeing better opportunities out there, but is there any specific examples that you can point to of whether that's downtown office or building or anything like that that you could talk about? It would be great.

Well, I guess we are not at a point that we are close to making any specific acquisition. We are basing our comments on discussions with local brokers and indications of asking prices for properties that we see on a daily basis to indicate that cap rates have indeed moved up significantly. But there really are very few transactions actually taking place from which to make a judgment as to what actual values are.

I think everyone is like we are. If you see no loans being offered for commercial real estate, and -- I think we are all going to just sit and wait until that situation changes. I believe that it will. In a matter of months I think somebody is going to -- the government or someone will step forward and lending dollars will again become somewhat available, certainly not on a scale that they were and what got us into the mess that we're in now -- too much credit.

So I'm not sure that really answers your question. I think everybody is -- both sellers and buyers are sitting on the sidelines waiting to see what direction this economic crisis takes.

Great. Thanks.

Jim Bellessa, D. A. Davidson.

Good morning. During the prepared remarks, I think Tom, Sr., talked about the long-term mortgage debt schedule in the handout and said that there was -- the largest one was $27,000 commercial loan coming due. I ran my eyes down there, and I didn't see that. Which one is it? Or what are you -- what were you (multiple speakers)

No, it was actually a series of buildings called Mendota Heights, which we are a 51% owner. And there are four buildings in 8-K under the commercial office.

I see them, and I see that they would total that. Okay.

Yes. And we have a loan commitment for State Farm on those. It has not closed, but we anticipate that it will.

During the ending of the comments by Tom, Jr., this is not a exact quote, but it's close enough -- no new developments or acquisitions until markets return to an understandable pattern.

What's not understandable about the current pattern?

Well Jim, what I am referencing there is, given the lack of commercial financing for new acquisitions, in my opinion or our opinion, that's really what's driving the cap rates up, because commercial acquisitions are requiring an inordinate amount of equity capital, which has traditionally been more expensive. And it really -- pricing is being determined by the pressure on the seller and their debt maturity and not what we would consider normal market forces. So it's really case-by-case pricing, asset-by-asset pricing, which makes appraisals difficult, which makes preparing pro formas on what would be expecting for financing difficult, so there is really no clear understanding out there. That's what I was trying to convey.

In your income statement on the expense line item, you've been running about almost $1.2 million in [adminis] state of expenses for seven quarters, and then all of a sudden it drops below $900,000 in the most recent quarter. Is this a new standard? Is this just the catch-up adjustment? Or is there something unique about the posting there that was down in terms of expenses?

Jim, I would just -- this is Diane. G&A has maintained fairly consistent. There are some timing issues with accrual items, things that would go into that category. I would say probably the allocation and setting up our own property management, internal division, where we have a number of employees that are completely dedicated just to property management, those fees are allocated to the properties versus a general G&A because their focus is entirely on property management rather than paying out that third-party management fee to our previous providers, we take these properties in-house.

Talking about property management, how far along are you in integrating this in the house?

Well, we are well past 60% on our commercial, and we believe we will make a significant change in our multi-family later in this year or early next. So we are making, as I mentioned earlier, very substantial investments in state-of-the-art software and hardware for accounting to handle this, because that -- this is a big change for us -- as well as hiring new personnel. So we are addressing this carefully to make sure we have the infrastructure in place to adequately handle this transition. But it's underway, and we'll get to the finish line, hopefully within this fiscal year.

You have said during the narrative that things changed since the last call. Would I presume correctly that they changed since your offering a month ago?

What reference -- what (multiple speakers)

This would be the deterioration in the commercial real estate (multiple speakers)

Well, no. I don't think -- I think there's been -- really hasn't been a change. The trend line in suburban office as an the example has been slightly down, and it continues to be slightly down. No material event has occurred, either before or after our stock offering. But the economic conditions really haven't changed a whole lot. Our apartments have been trending slightly up. Our medical office, flat to slightly up as a result of new development projects, and everything else on a modest downward decline.

Given the current environment, do you believe that your FFO can post an improvement in the next years? Or is it going to be a tough hoe to row?

Yes, I think -- while we don't try to predict earnings -- it's -- conditions -- we don't see a major upswing, let's put it that way, in the immediate future. I think if you read the prognosticators, we see much more positive comments about the economy is bottoming out and green shoots and all of that than we saw before. But there are certainly many months ahead before hiring takes place and lending increases.

So we are going to do the best we can, but we are not predicting any sharp rebound.

Thank you very much.

(Operator Instructions). Carol Kemple, Hilliard Lyons.

Good morning. Do you all expect going forward that your weighted average interest rate will decline since you're going to try to put loans on more multi-family properties and those are at lower rates, or would you expect it to increase, or stay the same?

Well, it's probably going to stay somewhat the same. To the extent that we refinance any commercial debt, that's very clearly going to be above our weighted interest rate of roughly 6.3%. In the short term, when we are going to be refinancing mostly apartments, we may see a slight decline, but we are talking about a $1 billion loan obligation, so the percentage isn't going to change very much based on refinancing 5% or so percent of our port -- of our loans.

That makes sense. Thank you.

We show no further questions at this time. I would like to turn the conference back over to Mr. Thomas Wentz, Sr., for any closing remarks.

Well, thank you all for your interest in IRET and participating in this morning's call. And we appreciate your interest, and I would like to close with again being somewhat optimistic, as I mentioned earlier. We have all been through these type of situations before, and we always seem to extrapolate whatever trend line is in place to its illogical conclusion. We've just finished the boom times, when we had the conventional wisdom that things only went up and went up double digits forever. And I think better times are coming and that we are very well positioned to get through this situation as we did the prior downturns, and for that reason we are expanding our staff and preparing for continued growth and prosperity in the future.

So we look forward to talking to you again in three months. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may all disconnect.