Centerspace (CSR) 2010 Q3 法說會逐字稿

Good morning, and welcome to the Investors Real Estate Trust third quarter fiscal 2010 earnings conference call. All participants will be in a listen-only mode. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Michelle Saari. Please go ahead. Ma'am.

Good morning, and welcome to Investors Real Estate Trust third quarter fiscal 2010 earnings conference call. IRET's quarterly report on Form 10-Q for the quarter was filed Friday, March 12, and our earnings release and supplemental disclosure package were posted on our website and also furnished on form 8-K on March 12, as well. In the 10-Q, 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, a webcast and transcript of this call will be archived on the IRET website for one year.

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 Friday'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 Tim Mihalick, President and Chief Executive Officer, Diane Bryantt, Senior Vice President and Chief Financial Officer, and Tom Wentz Jr., Senior Vice President and Chief Operating Officer.

At this time, I would like to turn the call over to Tim Mihalick for his opening remarks.

Thank you, Michelle. And good morning. During our last earnings call, I informed you of the strategic claim that IRET had put in place by identifying four major goals that IRET intends to accomplish as we move forward into fiscal year 2011 and beyond. In my following comments, I will update you as to the progress we have made in each of these four areas. I will then touch on our recent dividend declaration before asking our CFO, Diane Bryantt to discuss this past quarter's financial results and our COO, Tom Wentz, to discuss operations, debt issues and market conditions.

I believe it is important that IRET make sure that shareholders understand our commitment to working within the fundamental statement that IRET operates under and we continue to commit ourselves to for our shareholders. Although the state of North Dakota continues to see positive activity due to energy development, we are aware that most of the nation continues to operate in the most challenging economic conditions we have seen in a generation. Rest assured that IRET will continue to seek out ways to improve our business model for the benefit of its shareholders. Goal one, internalization of property management, and goal two, to make better use of IRET's personnel go hand in hand as IRET moves forward to become a fully-operating real estate Company. As of June 21, 2010, IRET has under in term management 119 properties in our commercial, industrial, medical, office, and retail segments, totaling approximately 7.4 million square feet.

As we move forward, we will continue to evaluate our portfolio of commercial properties to determine additional suitable candidates for internal management and to establish the time line to complete this transition. The transition on the multi-family side is still in the early stages, and as of January 31, 2010, we have transitioned approximately 367 units of the 9,969 units to internalized property management. But during the third quarter of fiscal year 2010, we added 21 new employee, 15 of which were hired to work on the residential property management. Subsequent to the end of the third quarter, in February 2010, IRET opened regional property management offices in Rochester, and St. Cloud, Minnesota to manage our residential portfolio in those communities.

The initiative to move on these two goals, forward by -- to move on these two goals forward by adding staff and investing equipment and accounting and other support systems, represent a significant expense to the Company, which is reflected in the increase in property management expense of approximately 568,000, for the nine months ended January 31, 2010. Again, most of this expense was primarily in our residential segment. The third goal is to continue to stay focused on acquisitions that impact our bottom line. This continues to be a challenge. We are seeing a lot of properties being presented to IRET but not necessarily priced where we feel comfortable in pursuing. We feel confident that we are seeing properties that are available in a geographic footprint and will continue to be active in our markets.

Goal four is to stay committed to addressing our capital structure. I'm happy to say that in addressing our capital needs to share offerings for the first nine months of the fiscal year 2010, we have a balance sheet that is in good shape. We will continue to seek out other transactions as we believe this is a great way to add to our capital base. This method is evidenced by the issuance of 292,000 units, valued at an issuance price of 2.9 million. In connection with the addition -- in connection with the acquisition of two properties for the first nine months of fiscal year 2010.

Finally, as we have touched on repeatedly during our previous two earnings calls we are seeing our operating results soften somewhat. No precipitous declines. Just an overall slow grind. And in light of that at its most recent meeting of February 2010, IRET's Board of Trustees find it prudent given the current economic environment and the challenges facing the real estate industry in particular to maintain the Company's common share/unit distribution at the current level, $0.1715 per share, rather than continue the small quarterly increases in the distribution that had previously been IRET's practice. Thank you. And with that, I will now ask Diane to review our third quarter financial results.

Thank you, Tim. This morning, I will highlight the most significant areas of financial results of operations, for both the quarter and nine months ending January 31, 2010. The results of operations in the third quarter continue to show the effect of the current economic condition with decreased revenue generated from our properties. In the quarter, we have seen an increase in vacancy across all of our operating segments, most notably in the multi-family segment. While we continue on the path of increased pressure on our top line, we are focused on continued management of expenses that we are able to control and bring positive results for the future. As Tim mentioned above, we are in transition state of our internal property management initiatives, and as a result, year to date expenses have been increased by approximately $568,000, due to identifiable transition costs mainly from the residential segment. It is during this time that we must hire management staff and accounting personnel in order to ensure a smooth transition before we are able to terminate the management contract with our third party managers. We anticipate this transition will be complete by August 1, 2010, for the majority of our residential properties.

Two other notable events affected third quarter results. A noncash impairment charge and the recognition of a gain on involuntary conversions. The impairment loss in the amount of 818,000 was related to a former Pamida retail store in Ladysmith, Wisconsin. This charge was based upon a market offer to purchase and IRET's probable intention to sell. Year to date, noncash impairment losses taken total $1,678,000, with one other retail property and -- in our former headquarters in Minot South Dakota accounting for $860,000 of this total amount. During the quarter, IRET also settled a statement of loss and received a final insurance payment in relation to the fire loss at a 24-unit apartment building in Lincoln, Nebraska. Then net book value of the lost building was $743,000. Insurance proceeds received were $2.4 million to replace the building, and accordingly, we recorded a gain on involuntary conversion of approximately $1.7 million.

Moving to results of operations, real estate revenues for the quarter were approximately $800,000 less than third quarter 2009. Again, primarily due to increased vacancy over comparative quarters. However, year to date revenue is $1.2 million greater than the prior fiscal year, as rents from acquisitions and developing properties placed in service are greater than the effect of the increased vacancies. Total real estate expenses in the quarter increased 3.8% to $61.8 million, from $59.4 million. This increase in expense of $2.2 million in the quarter was primarily due to the noncash impairment charge. Other factors were increases in depreciation, amortization expense, real estate taxes, insurance, interest, property management, and administrative expense. For the nine months ending January 31, these same factors produced the increase in year-over-year expense of $7.3 million. The variances in depreciation, amortization and impairment expense represent $4.1 million of these increases. All of which are noncash charges that do not affect the cash flow from operations. Expenses relating to operation of real estate in the areas of utilities and maintenance are below prior year, due to favorable weather in the markets in which we own real estate, and concerted efforts to reduce maintenance costs where possible. However, other operating costs relating to interest expense, real estate taxes, property management and administrative expense in the aggregate represent the remaining increases in expenses.

FFO for the nine months was $45.7 million, compared to the year earlier of $48 million. Per share, and unit funds for operations for the three and nine months ended January 31, were $0.16, and $0.52 per share, in unit, respectively, as compared to $0.19 and $0.60 in the third quarter and nine months of our prior fiscal year. As discussed earlier, for FFO calculations, guidance provided a depreciation and amortization of real estate is added back to compute FFO. However, noncash expense of impairment is not. As described in footnote five of the funds from operations note, on page 33 in our third quarter 10-Q, impairment charges lowered FFO by $0.01 and $0.02 respectively for the three and nine months ended January 31, 2010. Dilution has also occurred with the issuance of new shares, as the weighted average of shares outstanding for the nine months ended January 31, was 88.2 million, versus 79.6 million weighted average shares outstanding as of January 31, 2009. Although one can expect a drag effect until the deployment cash of accretive acquisitions and lease-up of development properties, coupled with the increased outstanding shares, the decline in revenue due to vacancy is a factor causing a decrease in per share in total FFO.

Moving to the balance sheet, the most notable effects during the quarter were the acquisition of the -- on December 30, 2009, of a portfolio of five assisted living facilities in the state of Wyoming. The total acquisition price was $45 million, mortgage debt was placed at closing of $36.5 million, at a rate of 4.5%, with the corresponding deposit equal to the loan amount earning interest of 2.5%. The operations of these properties are held within a new taxable REIT subsidiary which will allow the economic benefits of assisted living facilities to flow through the Company. Mortgages payable as of the quarter end, were $1.09 billion, with the weighted average interest rate of 6.21%. Refinance activity in the quarter, included the closing of two multifamily property refinances with interest rate ranges of 5.77, to 5.96%, with a net cash-out of $8.4 million. Year to date refinance activity has had the net effect of cash-out of $37.4 million.

Looking ahead for the remainder of fiscal year 2010, we have $35.9 million of mortgage debt maturing, of which $35 million has already been closed subsequent to quarter end. We have loan applications, the commitments to close on $14.5 million in maturing debt, as well as debt on unencumbered properties. We will continue to monitor our refinancing strategy, and pending maturities in order to protect our shareholders as the credit market continues to be challenging. In January of the third quarter, IRET paid a regular quarterly distribution of $0.1715 per common share and unit. Subsequent to our quarter end, the Board of Trustees declared a regular quarterly distribution of $0.1715 per common share in units to be paid on April 1, 2010. The April distribution will be IRET's 156th consecutive quarterly distribution at equal or increasing rates.

Now I will turn it over to Tom Wentz Jr., Senior Vice President and Chief Operating Officer.

Thank you, Diane. From an operations perspective, this past quarter, and so far in the final quarter of this fiscal year, it remains very challenging with continued significant pressure on top line revenue in all segments. Only our medical segment which includes senior housing has remained stable with pockets of small growth throughout this portfolio. However, I would stress that from a cash flow, cash and debt standpoint, this past quarter was positive for IRET, and that we still have the ability to successfully deal with our maturing debt, our commercial leasing costs, and necessary capital improvements. All other operational issues, even though negative, do not represent a threat to IRET's ability to do business or our platform for future growth, once our markets recover.

Although we have not been able to make as much money as in past years, and this will likely be the case going forward for at least the balance of calendar year 2010, our ability to maintain our buildings, fund tenant improvements and execute on attractive acquisitions remains in place. It has now been over 18 months since the credit crisis appeared and over 24 months since real estate fundamentals began to decline in most of IRET's markets. IRET has and continues to be able to refinance the vast majority of its commercial and multifamily assets on acceptable terms and in many cases on better terms than the maturing debt. Additionally, on the residential side, IRET is still able to access its equity by pulling cash out when refinancing. I would note that cash out refinancing on the residential side may be limited going forward if residential occupancy trends do not improve. In reviewing the past quarter once again, no positive change in that we continued to experience negative pressure on operations as confirmed by the supplemental information provided in the 8-K furnished last Friday. As noted in the prior quarter's call, the only positive news is we don't see a material increase in revenue deterioration on the commercial side of the business. Rather, again, just dragging across what hopefully will be the bottom for the economy. We have been experiencing new leasing and renewal leasing activity in the commercial segment. Not -- just not at a significant level concerning rental rates or square footage.

Unlike commercial, our residential segment remained strong up until this past quarter. We are expecting some limited recovery this quarter and during the summer months as those are traditionally better months for apartment operations. But expect residential occupancy to be limited due to economic pressures in many of our residential markets. As during prior periods of weak operating fundamentals, in the current market, we are just not seeing quality accretive acquisitions that would allow us to counter-balance revenue pressure inside our existing portfolio, by adding assets to grow our revenues on a per share basis.

This morning, I will cover the credit markets, as applicable to IRET, and then provide a brief overview of IRET's property level operations, as well as pending acquisitions and dispositions. It remains very challenging on the debt side, there is still no clear direction on lending trends, terms, or rates. Outside of multi-family, only the highest quality commercial assets are capable of being refinanced on what we would consider favorable terms. In a number of cases, we have elected to use available cash to replace maturing debt rather than refinance on terms that we view as limiting our flexibility going forward. Our expectation based on the information we have available today is that using our excess cash in lieu of debt makes the most economic sense in that we earn a higher real return on the cash by avoiding the interest expense associated with replacement debt. The underlying assets should be able to be refinanced at some point in the future or sold, freeing the cash for future growth-related activities such as development, or acquisitions.

This strategy currently offers the best economic returns due to the immediately accretive -- due to the fact that our immediately accretive acquisitions are not readily available in most of our markets. As for fiscal 2010 maturing debt, we have dealt with all maturities, with the end result being over $37.4 million of cash out, and a reduction of our weighted average interest rate to 6.21%, which is one of the lowest levels in IRET's history. Outside of the use of excess cash in lieu of placing new debt, we are still pursuing the same debt strategy of placing long-term debt secured by single or group -- single or groups of assets. To account for the decline in commercial lending, we have increased leverage on our multi-family assets as much as possible, 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 still believe that the proper long-term business models for real estate in general and IRET specifically requires long-term fixed leverage at 55 to 65% of our investment in real estate. Even by increasing our multi-family debt levels to offset a reduction in commercial leverage levels, we realize that it is unlikely we can maintain our desired leverage levels under current market conditions. As in the coming 24 months, IRET's maturing debt is tied more to commercial real estate than multi-family. However, the amount of maturing debt in the next 24 months is actually only slightly more than what IRET successfully handled over the past 24 months. I would note that in the coming fiscal year, a large portion of the maturing commercial debt is actually medical office, which to date has been the most stable segment and one that has provided some modest revenue growth. IRET does provide a detailed debt maturity schedule each quarter as part of its 8-K filings so I won't spend a significant amount of time discussing individual debt or specific assets.

Despite the challenges presented by the current credit markets that first appeared over 20 months ago, we still don't see any material liquidity or refinancing risk to IRET in the next 12 months for the same reasons previously disclosed. Diane provided details on recently closed loans. As mentioned, we have successfully addressed all of our current fiscal year debt maturities and are now focused on fiscal 2011. We expect no near-term change to our ability to handle the debt maturities due over the coming 12 months as actually a smaller amount than what we dealt with during the current fiscal year. Almost two thirds of the maturing debt covers multi-family assets or on campus medical buildings, both of which are among the best type of asset classes to refinance with cash-out and relatively good terms. As a result, we are optimistic that this will hold true, concerning the apartments and medical buildings for the next 12 months.

Before moving on to property operations, I will briefly discuss sales plans and acquisition activities. IRET currently has two apartment complexes under contract for a total cost of approximately $4.3 million. Both are located in Rochester, Minnesota, with closing expected in the next month, subject to debt assumption approval by the current lender. Additionally, we have a senior housing complex located in Minot, North Dakota under contract for $15.2 million, as well as two smaller medical service buildings located in Montana for approximately 5.3 million. The commercial assets are expected to close in the next few months, again subject to assumption of the existing debt. IRET has closed on the five senior housing projects located in Wyoming. Consistent with prior quarters, IRET has no active plans to sell assets, except perhaps in those markets where we have a limited presence. IRET does have a number of smaller properties for sale in various locations.

Previously we reported that our Texas department was under contract for sale. However, the potential buyer of the irving Texas apartment complex elected to terminate the sale. As a result, we have refinanced the asset using a cap ARM loan from Freddie Mac. Even though IRET refinanced this apartment project we continue to hold this asset out to the market for sale provide we get an acceptable price.

Now moving on to operating activities. We provided detailed information in the 8-K on occupancy, new and renewal rental rates and expiring leases so I'm not planning to discuss any particular buildings or transactions in detail. Consistent with the past 24 months, we saw no material positive changes during the previous quarter in our commercial real estate portfolio. Other than the pace of job loss has slowed and in a few markets there have been slight increases in certain employment categories. Of more concern was the rapid deterioration in our multi-family portfolio where leasing activity essentially disappeared in all but a handful of markets. At this point, our experience in the residential market seems to match overall market conditions, and not be tied to factors unique to our residential portfolio.

The past quarter has traditionally been the weakest in the residential portfolio, due to the holiday season, and the impact of winter. But there is no question that the continued poor economic conditions in the Minnesota region have begun to impact our apartment portfolio, in those markets. Add in the continuation of the first-time home buyer incentive, general consumer unease, and continued construction of competitive product in certain markets, and the result was a significant impact on residential occupancy. Residential real estate can move very quickly in either direction, as leases are short. We are carefully monitoring the spring leasing season, along with our move-out data for any signs that economic factors may create additional stress in our multi-family portfolio, or whether we have experienced a majority of the impact already. However, as stressed in prior calls, without job growth, IRET sees no improvement to any of its real estate segment.

As a result, our approach has not changed in that absent top line revenue, we are focused on securing the tenants we have, and reducing expenses in such a manner as does not impair the building's competitive abilities or long-term physical aspects of the asset. Despite the continued pressure on gross revenue, we plan to continue to hold off on any meaningful reduction to budgeted discretionary capital improvements for the remaining two months of our current fiscal year. As we complete our budget for the upcoming fiscal year, we will closely evaluate all operating costs, including capital improvements. However, we are in the business of long-term assets and strongly believe that the proper maintenance of our assets is a top priority after payment of operating expenses and debt service. As a result, even though we are currently dealing with very real revenue pressure, free cash flow will need to be invested in our assets. As in past periods, this approach has left IRET in a very strong position when the market improves, as well as when or if an asset is sold. We still believe that capital investment in our real estate now will result in stronger revenue growth in the future. Of course, we continue to watch this very closely, as the longer the market remains depressed, the sooner this policy will need to be adjusted. We expect our cash position and policy on capital improvements to be an advantage in retaining existing tenants as well as securing new tenants. We see no better alternative at this point to our strategy of focusing our capital on retaining tenants, securing new tenants, provided the credit is acceptable and improving our assets for the long term.

On the medical side, the situation remains one where tenants are holding off on new leases, as well as any expansion. Our renewal success remains strong, as does our ability to hold or increase rates. Overall, we review current -- we view current US health care trends as favoring well located on campus projects. This is where IRET is focused and will remain focused. The senior housing assets continue to remain stable with some positive improvement in occupancy and performance, being experienced by our underlying tenants. There is very little competition planned for most of our markets, and many senior residents have fewer housing alternatives. The demographics remain good in all of our markets and new competition has basically disappeared with many announced or planned projects being abandoned for lack of equity and debt capital. This is an area where we believe IRET's balance sheet will result in a good advantage going forward, as demand seems likely to clearly outpace supply with no new product in the pipeline in almost all of IRET's senior housing markets. Due to its current stability, this section of our portfolio may present attractive opportunities for investment in the coming quarters. Unfortunately, as the current economic climate persists, this strong performance in IRET's multi-family segments have flattened and materially declined in some markets.

In residential, the decline in occupancy on a portfolio basis is being driven by weak economic conditions in the Minnesota market, first-time home buyer credit in IRET's generally stronger markets, and some new construction in the North Dakota, South Dakota, and Montana markets that remained economically strong during the current economic downturn. However, job loss from national employers based in these markets has now appeared over the last several months, as declining worldwide demand has negatively impacted export-driven industries based in many of IRET's markets. In these markets, the economies remain good to excellent for such an extended period of time that new projects have been developed and have started to come online just as employment has started to weaken for the first time in many of these markets. So far, the markets appear capable of positive absorption and of course, we have also built additional residential units into these markets. However, the result has been to reduce the occupancy levels from close to 100% to the mid-90s, and now to the low 90% range.

Residential operations are still strong for IRET in a few markets but have flattened out overall with large percentage declines in the Minnesota market. Even though we are clearly not experiencing the same conditions in most of our residential markets as many other parts of the country, we have always maintained our focus on improving residential operations, knowing the overall US economic decline would find our markets eventually. The employment in IRET's apartment markets is the number one driver of occupancy. While unemployment is not significantly increasing, and still well below that of the national number, and most other markets in the United States, just like commercial real estate, until employment or growth returns and people feel more secure, IRET's focus will be on improved management and cost control as a way to maintain and grow the bottom line in the residential portfolio. We are well into moving half of our residential portfolio to internal management as we have set up the necessary platform. As mentioned, we did incur some double costs in the short term, but that was anticipated and necessary to ensure a smooth transition. Those costs will be one time in nature. And by this time next year, we should realize improved operating efficiencies. Again, we modeled internal management to be revenue neutral from a cost structure standpoint with the benefits coming in the form of better operations, more sensitivity and control of our assets and a better platform to grow in each targeted market.

Thank you. And I will now turn the call over to the moderator for questions. Thank you.

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Michael Salinsky of RBC Capital Markets.

Good morning, guys.

Good morning.

First, on the acquisitions during the quarter, can you give us a sense of what the cap rate was on those, as well as the pending acquisitions, can you give us a sense of where those pencil out at, in terms of pricing?

This is Tom Wentz. On the Wyoming acquisition, that was put into a taxable REIT subsidiary. Our underlying cap rate was approximately 8.75%. We are planning to expand those assets to construct some additional units. On the pending acquisitions, the apartments are approximately 7.25 cap, and both of the commercial or medical assets are over a 10 cap.

That's helpful. Beyond the assets you have pending right now, what does the acquisition pipeline look like? And Tim, I think you mentioned you weren't comfortable with where pricing was. Where would you be comfortable with pricing today and are you seeing any distress in the markets at this point?

This is Tim speaking. Again as we look out, the comfort level is trying to get the pricing back where we continue to get the spread that we fundamentally have gotten in the past, more so on the multi-family side, where we've looked for a 2% spread between our cost of funds and the cap rates, and we're just not seeing that. And to answer the other part of your question, regarding distressed assets, we're still not seeing that out in our markets that we're in. We continue to hear that that is going to come, and we continue to monitor our markets again very closely, but we're just not seeing that.

Okay. By my calculation, right now, it looks like you're paying out a pretty hefty premium to AFFO. Just given your comments there, how do you expect to continue to grow into that and what would cause you to revisit your payout levels at this point?

Well, I guess as we mentioned, what we see, and have seen historically, is the residential side of our portfolio recover quickly, and I think we're hoping that as the jobs get back to the market, and the markets that we're in, we will see that turn-around come quickly. That's kind of where we're looking to move towards. The other part of your question--?

The other part was just at what point, if you don't see jobs come back, would you make -- would you move to, in light of -- you're talking about investing within the portfolio, would you make a move to reduce payout ratio so you can invest it in the portfolio and grow over time?

We continue to make that evaluation on a quarterly basis when the Board meets. Obviously, we look to budget out for our next fiscal year, we will continue to evaluate that. But again, I would think over the next year, we will continue to take a look, more so to the end of this calendar year to make that decision.

Okay. The leasing activity for the third quarter, what was the average concessions on the new leases?

This is Tom. We have that in the 8-K. Diane -- off the top of my head, I can't give you a specific number. Are you talking on residential or commercial?

On the commercial side there, I mean have you seen that move materially either way or?

Oh, from a -- as an overall trend, I would say no, we haven't seen a marked increase in transaction costs. There is certainly pressure on rate to retain tenants. But as far as transaction costs go, we really haven't seen the market move in that area. Where we've seen the pressure is our competitors moving on rate. I think that is just a function of a lot of building owners just really don't have the cash to fund big tenant improvements, and would prefer to give that to the tenant in the form of rate reduction.

And finally, just on the internalization process here, I just wondered, you talked about synergistics, strategic ways, is there any way to quantify how much of a benefit you would expect as you continue to roll this out? I think you quoted $566,000 in costs and wondering if you can provide any numbers behind that in terms of the benefit you're kind of anticipating.

Well, this is Tom again. I think from internal management, we really didn't look at it from the standpoint of a revenue generating portion of the operation. I mean we view management really as a function of real estate. I mean it is very important and it is critical to have good management but again our primary business is owning the real estate and renting it to tenants. What we modeled was revenue neutral, because as you're well aware, we're just replacing what third parties were doing. However, we thought, in our opinion, that such a platform would give us better operational control, move us closer to the tenant by removing a third party intermediary, and just align us a lot more closely with the people inside our building, since they would be our employees. And our expectation is yes, that will translate into better renewal percentage, better operating efficiencies, but again, we just don't see any ability to quantify that other than in future years, we will be able to go back and compare those buildings to prior periods, but again, there will be several years in between that may obscure any benefits from comparison.

That's helpful. Thanks, guys.

Thanks, Mike.

(Operator Instructions) Our next question is from Carol Kemple, Hilliard Lyons.

Good morning. You talked earlier in the call that you hired new employees for the internal property management. Is that expense going to the administrative line on the income statement currently?

Some is for the asset management structure but the majority of all of that will be flowing through the property management in the residential segment.

Okay. So that's currently where the expense in the third quarter were showing for the new hires?

Correct.

And what is your alternate balance and availability on your credit line?

Right now would be $22 million available.

Okay. Thank you.

Our next question is from Chris Lucas of Robert Baird.

Good morning, everyone.

Good morning, Chris.

I apologize, I joined the call late, so if you covered this, I will just either follow up offline, or just read the transcript, but I did want to understand the quarterly performance in some of the specific property categories, and the same store overall number was the worst one you guys reported so far this cycle. So I'm just curious, a couple of questions. One is was there anything specific to some of these same store metrics that we should be aware of? And second is, do you feel comfortable that we're -- are you at the bottom of that performance? Is it going to get better? Or do you have continued concerns about the portfolio performance going forward?

Well, this is Tom. Chris, from an operational standpoint, I wouldn't say it was one particular event or one particular commercial tenant. I think we can trace it back to particular markets. From a commercial standpoint, the commercial office in Minnesota is weak. We also have significant weakness now in the multi-family portfolio in primarily the Minnesota market. And again, we just trace that back to job loss. And one thing we look at very closely is our portfolio's performance versus the market, and versus similar asset classes, to just see if there is something operational that makes us different or whether our asset is somehow at a disadvantage competitively. And I guess we just don't see that across the majority of our portfolio. Of course we do have certain assets that have their issues but on average our portfolio competes very well in the markets that we're in.

Whether this is the bottom or not, that is really hard for us to predict. I mean obviously this has gone on for a very significant amount of time. You have other events that are conspiring. Not only do you have poor economic conditions, you have a lot of general uneasiness, a lot of risk aversion, by commercial tenants, for leasing space, or retaining the same amount of space, and you also have very unusual debt markets, which have all collaborated to make it very challenging from an operational standpoint.

Okay. And then again, I'm assuming you have touched on this other topic, but -- and so if you have, I apologize, which is just in terms of the acquisitions environment, broadly, what is your sense about the opportunities that are there, and what if anything has changed since the last call?

Well, Chris, this is Tim. I will just jump in. We continue to see what is available in our footprint, we have been active to continue to look for pricing that fit in our model of a 2% spread over our cost of fund, and really, we continue to search out anything that makes sense in those markets and we're not finding assets that make sense to acquire. We continue also to pursue on the operating side where we think there is still some opportunity to acquire portfolios. But overall we're not seeing distressed assets hitting our markets. Our geographic footprint is just to continue to stay active with our finger on the pulses and the markets that we're comfortable going.

A lot of the primary markets on the Coast have suggested that cap rates have compressed fairly meaningfully over the last call it 90 days. Are you guys seeing that change? Or is that -- or is it just really similar to last quarter, but still a tough environment?

I guess in our -- I think we're still seeing it similar to where we were 90 days ago. It is just a challenging environment to find assets that we're comfortable with pursuing.

Great. Thank you, guys.

(Operator Instructions) Our next question is from Andrew DiZio of Janney Montgomery Scott.

Good morning, thank you. Just a couple of questions on the financing side. I guess first, the loan that you did with First international Bank and Trust of $36.5 million, is the corresponding deposit restricted to withdrawal for the life of the loan?

This is Tom. It is. And that loan was set up to position those assets for very specific refinancing, and at this point, that is really the explanation. It was more of a temporary loan, not something that we needed to do. The cash is restricted for the short duration of that loan. But that loan was specifically put in place to qualify those assets for a targeted type of refinancing.

Okay. That's helpful. Thank you. And then the other question, in your Q, you mentioned you're letting the $10 million line of credit with Bremer Bank lapse, and planning to replace that with secured financing?

Yes, this is Tom again. Basically, the explanation for that is Bremer, we've got a long relationship with Bremer, and have significant amount of permanent debt out with them primarily on our senior housing assets, and that was -- got a remaining term of I think about 7.5 or maybe 7 years remaining. But they have limited capacity. As all federally regulated institutions, and as a result, we have not used that credit facility on a routine basis, and we feel that it is better used by converting that $10 million of capacity to permanent loan capacity on other asset, whether they be senior housing or commercial assets.

Okay. Thank you.

Our next question is from James Bellessa of D.A. Davidson & Co.

Good morning.

Good morning.

In the recent past, you've been saying that the traditional lenders to you were drying up and that you may be turning to banks. What are you seeing now?

Well, this is Tom. I mean obviously, the agencies are still active. Freddie, Fannie, HUD, are still financing apartments on probably the lowest rates we've seen in the past decade. Some of the underwriting standards have tightened up. And some of the loan terms have changed. But from a rate perspective, and leverage perspective, it is interesting to note that that's probably as good as we've seen it in the past decade. The commercial side obviously Wall Street or the CMBS market is basically out of action. Even though we have seen some limited reports of certain Wall Street lenders back into the market on very high quality A, A plus assets. Same on the life side. I guess we've seen some stirrings on the life company side. We've certainly seen rate come down on the life company side. Leverage remains low by historical standards. And that's primarily due to their underwriting. Not necessarily anything else. Banks are still hit or miss from that standpoint. So I guess the overall assessment is, is we've seen some improvement, but no identifiable trend. And certainly far from what we would consider historical lending norms.

On the first international borrowing, did you say it was quite temporary, or what is the duration here? What's the maturity of this?

Well, the loan is a 12-month term, but we have the right to extend it for a five-year period. We can purchase an extension with another origination fee, and then the rate will readjust. But it was designed to be temporary in nature, for purposes of qualifying us for replacement debt, which just given the timing of the acquisition, and some of the planned expansion that we plan to do there, wasn't able to be placed or set up at the time of closing. But we did need to qualify the assets for refinance debt.

Thank you very much.

This concludes today's question-and-answer session. I would like to turn the conference back over to our speakers for any closing remarks.

This is Tim Mihalick again. Just thanking you all for participating in the call this morning and the continued interest in Investors Real Estate Trust and with that, we all thank you.

This concludes today's conference. Thank you for attending the presentation. You may now disconnect.