Centerspace (CSR) 2010 Q4 法說會逐字稿

Good morning and welcome to the Investors Real Estate Trust fourth quarter fiscal 2010 earnings conference call. All participants will be in 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.

Thank you, Andrea. Good morning everybody, and welcome to Investors Real Estate Trust fourth quarter year-end fiscal 2010 earnings call. IRET's quarterly earnings release and supplemental disclosure package were posted to our website and also furnished on Form 8-K on June 30th. 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've 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 and 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 Wednesday's earnings release and from time to time in Investors Real Estate Trust 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'd like to turn the call over to Tim Mihalick for his opening remarks.

Thank you, Michelle and good morning, everyone. I recently celebrated my 29th year as part of the IRET organization. Initially I began with a consulting firm to IRET of O'Dell & Associates with a total of three employees, and outsourcing of all of our support services. When Tom Wentz, Sr. joined the organization we moved on O'Dell, Wentz & Associates, and grew to a number of four employees with a continued emphasis on outsourcing all of our support services. Over the years, we have continued to grow not only in asset size but geographically and in a number of employees as well.

I offer you that short history lesson to bring you up-to-date to where we stand today as IRET, the organization. Today, IRET has approximately 310 employees, more to come, and now performs virtually all of our business functions in house. In my first earnings call as President and CEO, I made you aware of the strategic plans that IRET had adopted and my previous remarks gave you some insight as to what transpired since we moved forward. I believe it is important to continue to update you, the investor and shareholders of IRET, as to the progress we have made towards the four goals I had previously laid out. Goals one and two, internalization of property Management and the hiring of personnel to accomplish that goal.

To date, we have made tremendous progress toward moving IRET to a fully integrated operating Real Estate Company, and anticipate that by the end of the second quarter of fiscal year 2011, all of the property we intend to manage in house will have been transitioned. The cost to move this goal forward has been evidenced in the increase in our property management expense attributable to the Company's internal property Management initiative in the amount of $1.4 million during fiscal year 2010. A significant portion of this cost represents start up expenses primarily in our residential segment.

Goal three, to stay focused on acquisitions that impact our bottom line. This continues to be the most challenging part of the Real Estate environment in today's market. In fiscal year 2010, we acquired in excess of $55 million in new real estate for IRET. A majority of that real estate was the purchase of five senior housing facilities in the cities of Casper, Cheyenne and Laramie, Wyoming. These assets were not placed in service until late in the Fiscal Year so we have yet to see the full impact of these properties on our income statement. We expect these assets to be strong performers in our portfolio. We do continue to search other investments within our geographic footprint that we feel will fit the investment parameters we have established.

Opposite of the acquisitions of property are the dispositions of property. I am pleased to report we currently have purchase agreements to sell our Dakota Hill apartment which is 504 units in Texas as well as our three apartment complexes in Colorado, Pinecone which is 195 units, the Miramont Apartment, which is 210 units in Fort Collins, Colorado and the Neighborhood Apartments which is 192 units in Colorado Springs. Both of these sales are still in the due diligence stage so there is no guarantee that these sales will close. We do continue to identify other assets in our portfolio that we feel are good candidates for sale and we will bring them to market when the timing is right.

Our fourth goal, which is to stay committed to our capital structure, and as you are aware the economy has experienced volatile times over the last 12 to 18 months, and in order to strengthen our balance sheet during these times we felt it was prudent to increase IRET's capital equity base during fiscal year 2010 through the issuance of common shares which we accomplished in two follow on offerings in June 2009 and October 2009 and through the use of our after market program. These issuances, along with the issuances of operating units in connection with property acquisitions and shares issued under our DRIP plan resulted in new equity capital in fiscal year 2010 of $125.9 million.

Finally, before I ask Diane Bryantt, our CFO, to discuss this past year's financial results and Tom Wentz, our COO, to discuss the operations, debt issues and market conditions, I want to bring you up-to-date on one of the most asked questions I receive, and that is "where do you see the dividend going?" As you are all aware, for the last two quarters we've held our dividend at the same level. Going forward, we will continue to examine our ability to pay out the dividend at that level based on our performance. We continue to experience the most difficult Real Estate environment I've seen in my 29 years in this business, and although some of the trends are suggesting an upward climb towards recovery, I believe that it will take jobs to take this recovery to another level. Jobs equal the need for both space on the residential and commercial side, and with those jobs, you will see an improving real estate market.

We are not there yet, and we see a grinding recovery in front of us. If we feel it is in the best interest of IRET to reduce the dividend, we will examine our need to do so based on a thorough examination, the financial results, and do what is best for the shareholders of IRET. With that, I offer you thanks and turn the call over to Diane for fourth quarter financial results.

Thank you, Tim, and good morning, everyone. This morning I will discuss the overall financial results of operations for both the quarter and 12 months ending April 30, 2010. I will also comment on notable events that affect the reported results. Highlights of the fourth quarter. Real estate revenues for the quarter were $62.2 million compared to $60.7 million in the fourth quarter of fiscal year 2009. This $1.5 million increase in revenue is due primarily to revenue generated in our commercial medical segment resulting from the acquisition of the Wyoming Assisted Living portfolio in December of 2009.

Total expenses in the quarter increased and were $3.7 million higher than in the comparative fourth quarter 2009. This increase in expenses was primarily due to the following three factors. One, increases in depreciation and amortization expense of approximately $600,000 due to acquisitions and tenant improvements; two, increase in total property Management expense of $1.8 million during the fourth quarter primarily as a result of additional internal property management transition expenses which were approximately $900,000 in the fourth quarter; and three, the total increase of $762,000 in other expenses, in the statement of operations.

$450,000 of this amount was due to the donation of the Sweetwater Apartments in Grafton, North Dakota. This small apartment property was a non-core holding that would have been difficult to manage properly under IRET's in house management strategy and by donating the property to a non-profit housing authority to use as affordable housing for seniors and disabled adults, IRET avoided the required capital improvements to the assets that would have been unlikely to generate an acceptable return. On a positive note, interest expense on real estate decreased by $378,000 in the fourth quarter of fiscal year 2010 compared to the same period in the previous year. This is a result of refinancing activity resulting in lower interest rates and also the application of equity raised to pay off some maturing mortgages.

Overall, the increase in revenue in the fourth quarter compared to the same period in the prior year was offset by an overall increase in expenses for the quarter resulting in approximately $1.5 million less than net income available to common shareholders for the quarter. Financing activity in the quarter resulted in the closing of three multi-family loans with cash out of $4.8 million. These three loans had an average interest rate of 5.6% fixed for 10 years on the two loans, and a 3.75% variable rate with a cap of 7.25%, with a seven year term on the third. We also closed on two commercial loans with approximate cash out of $6.5 million with an average interest rate of 6.6% fixed for 5.5 and 10 years.

Now moving on to the year-to-date highlights. The results of operations in fiscal year 2010 continue to show the effect of the current economic conditions with decreased revenue generated from our properties due to decreased occupancy. With multi-family and commercial office segments having the most substantial economic effect due to their relative size within the portfolio. In comparison to the prior year, physical occupancy decreased 3% and 3.2% respectively in the two largest segments in our stabilized portfolio. As detailed in the earnings release. We estimate the decrease in physical occupancy in the stabilized portfolio in dollar terms resulting in approximately $5.7 million of lost revenue.

We define stabilized properties as those properties owned for both periods being compared. A turnaround in the stabilized base of a portfolio will be dependent upon the economic recovery and job growth. As we have discussed over the past year, the internal property management initiative has expense management as its identified focus; however, necessary steps to start up this initiative had associated costs and as mentioned before, we estimate this expense to have been approximately $1.4 million in Fiscal 2010. These expenses were primarily for staffing up employees, software, purchases, and other expenses that were an expected part of the plan.

Other events that affected results of operations on a year to year comparison include the contribution of the Grafton Apartments in North Dakota for $450,000 as previously mentioned, operating expenses also include $230,000 of expense acquisition costs that are a result of the adoption of FAS 141-R, prior to the adoption of this pronouncement, these acquisitions were capitalized as part of an acquisition. In fiscal 2009, IRET was still receiving income as a result of an income guarantee on two properties located in Duluth, Minnesota. The guarantee expired in April of 2009, and accordingly, the $213,000 of income we received in 2009 was not realized in 2010.

Impairment of real estate investments. In fiscal year 2010, we realized impairment losses of approximately $1.7 million as compared to $338,000 in the prior year, an increase of $1.3 million in expense. Impairment is a non-cash charge and unlike depreciation and amortization, guidance did not provide for the add back of this non-cash expense to funds from operations. Also during the year, we settled on a statement of loss and received a final insurance payment relation to a fire loss at a 24 unit apartment building in Lincoln, Nebraska. Accounting treatment provided that we record a gain on voluntary conversion of approximately $1.7 million. Although the challenge ahead will be to find accretive acquisitions and increase occupancy in our stabilized properties, a number of events as discussed had an impact in our results of operations in fiscal year 2010, but because of efforts made and the ground work laid in Fiscal 2010, for example, interest rate reductions and our property management initiatives, we expect to realize benefits from the associated costs in 2011 and beyond.

Moving to funds from operations and per share results. Total FFO for the 12 months ended April 30 was $61.5 million compared to the year earlier amount of $64.6 million. Per share and unit funds from operations for the three and 12 months April 30 were $0.17 and $0.69 per share in units respectively as compared to $0.21 and $0.81 in the respective periods of our prior fiscal year. The per share results have been impacted because of dilutions with the issuance in new shares. As a weighted average shares outstanding for the 12 months ended April 30 was 89.9 million shares versus 79.8 million weighted average shares of the prior year. Although one can expect a drag effect until deployment of cash into accretive acquisitions and lease up of development properties coupled also with the increase in outstanding shares, the decline in revenue due to decreased occupancy are all factors causing the decrease in per share and total FFO.

I'll now move to the balance sheet and highlight significant events. Year-to-date acquisitions total $55.4 million with the assisted living portfolio within our commercial medical segment comprising 81% of this year's acquisitions. Details on the acquisitions can be found on page 25 of the supplemental data provided in the earnings release. Mortgage payables as of the quarter were $1.1 billion with a weighted average interest rate of 6.17%. Looking ahead for fiscal 2011, we have $80.8 million of maturing mortgage debt with a weighted average of 7.5%. As stated before, we will continue to monitor our refinancing strategy and pending maturities in order to protect our shareholders as the credit markets continue to be challenging.

Regarding our capital, we through two other written offerings, use of our after market program, issuance of shares pursuant to our dividend reinvestment plan, and the issuance of operated partnership units resulted in 15.2 million new shares and units in fiscal year 2010 for $125 million of new equity capital. The use of proceeds from this capital was for acquisitions, pay off the mortgage debt and completion of development projects with 88% of the funds fully invested as of April 30, 2010. The remaining balance has been committed for pending acquisitions that will be discussed by Tom Wentz, Jr. in a few moments and further described in the 10-K to be filed on July 14, 2010.

In April, the fourth quarter of fiscal year 2010, IRET paid a regular quarterly distribution of $0.1715 per common share in units. Subsequent to our quarter end the Board of Trustees declared a regular quarterly distribution in the same amount of $0.1715 per share in units to be paid today, July 1, 2010. The July distribution on the IRET's 157th consecutive quarterly distribution at equal or increasing rates. Although as I had mentioned, the challenge ahead will be to find accretive acquisitions, we also hope to see an improvement in the real estate market, leading to an increase in occupancy in our stabilized properties.

A number of individual one-time events as discussed had an impact on our results of operations in fiscal 2010; however, we expect to see in fiscal 2011 and beyond again benefits from the efforts and investment we have made regarding interest rate reduction in our property management initiatives and we will work to identify accretive acquisitions that along with these efforts will help to sustain our distribution; however, we will need to continue to monitor the real estate market closely as each quarter passes and look for positive indications of recovery.

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

Thank you, Diane. Consistent with my past presentations, this morning I will provide a general overview of the just completed quarter as well as the past fiscal year, and then briefly cover the credit markets as applicable to IRET and conclude with an overall review of IRET's property level operations as well as pending acquisitions and dispositions. From an operations perspective this past quarter and the past fiscal year, overall it remains a very challenging environment for IRET, especially as it relates to top line revenue.

Consistent with my comments over the past several years, we continue to see a generally overall weak real estate market in all segments. Only medical, which includes senior housing, continues to remain relatively stable, with some pockets of small revenue growth. Despite the negative operating pressure, I would consider this past year successful for IRET from a cash flow, cash and debt standpoint. We successfully dealt with our maturing debt, reduced our overall leverage slightly, and despite the challenging lending environment reduced our weighted average interest rate by 13 basis points, which we estimate will translate into approximately $1.5 million of reduced interest expense in the coming fiscal year.

We further expect that given the current interest rate environment we will be able to reduce the weighted interest rate on our maturing debt for the current period from the existing level of approximately 7.5% to a level closer to or below our overall rate of approximately 6.17%, generating further interest expense reduction going forward. Finally, and probably the most important accomplishment over the past year and one which continues our standing policy of many years, IRET elected not to materially reduce discretionary capital expenditures and improvements to our portfolio in order to conserve cash. We made this decision even in the face of the financial near collapse almost 24 months ago in the Fall of 2008.

This decision has provided us with the ability to more tightly control capital projects going forward if cash from operations remains pressured. This decision over the past 24 months has positioned us with a manageable level of non-discretionary capital obligations. The primary benefit from handling our maturing debt to date and having a well maintained portfolio is that our business platform remains operational as we have the ability to do commercial leasing transactions that meet our credit criteria as well as keep our residential units in a market leading physical condition for their category. While the length and the severity of the real estate downturn has exceeded almost everyone's prediction, and has now impacted all areas of the country including the few relatively remaining healthy markets that make up many of IRET's core areas of operation, we believe we still have time going forward to maintain our business as usual policy without risking a long term physical deterioration of our portfolio.

While we have certainly focused on reducing operating expenses and working to lower the cost of capital projects as we have confirmed in the past, we will not degrade the long term value of our real estate assets in favor of meeting short-term financial goals. Our primary commitment is to remain positioned for future growth when our markets recover. It appears the recovery will be choppy and inconsistent which is likely to result in a further lag before we see improved real estate demand and rent growth. It has now been over 24 months since the credit crisis first appeared concerning commercial real estate and almost three years since real estate fundamentals began their decline in many areas of the country. Despite these pressures, IRET has and continues to be able to refinance the vast majority of its commercial and multi-family 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 built up equity by pulling out cash when refinancing. I would note our expectation is that cash out refinancing on the residential side may be limited going forward, due to potential occupancy pressures and also due to a limited amount of maturing multi-family debt in the coming fiscal years. In reviewing the past quarter specifically, and the overall year, we continue to experience negative pressure on operations as confirmed by the supplemental information provided in the 8-K published yesterday. As noted in the prior quarter's call, we still don't see a further material decline in business as while even though very slight, we have moved into an environment of modest job growth as opposed to the massive job loss we experienced for the first few quarters of the past fiscal year.

We continue to see new leasing and renewal activity in the commercial segment that exceeds on a square foot basis our expiring square footage. I would note, however that this leasing does include early renewals of leases that would have otherwise expired in future periods. As a result, even though we are leasing at a rate in excess of expirations, our overall occupancy levels have declined. We will always consider opening a lease early, if in our judgment the outcome is best for IRET's long term portfolio value.

Unlike commercial, our residential segment remained strong up until the second half of the past year. We did see some limited recovery during the final quarter of fiscal 2010 and expect this trend to continue during the summer months as these are traditionally slightly better months for apartment operations in most of our markets, but we expect this also to be limited due to continued economic uncertainty and pressures in many of our residential markets as well. Our story remains largely unchanged, with borrowings still very challenging due to no clear direction on lending trends, at least from a borrower perspective, as terms to continue to become more conservative and lenders remain very selective.

There is some good news on interest rates as we generally seek lower leverage and we still fit into the category of a good borrower given our experience and overall strong cash flow. There has been no change in our policy of considering the use of cash to replace maturing commercial 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 in certain situations allows us to earn a higher real rate of return on the cash by avoiding the interest expense associated with the replacement debt and when real estate fundamentals improve, the assets should be able to be refinanced or sold, freeing the cash for growth related activities such as development or acquisitions.

This strategy works currently due to the lack of quality and immediately accretive acquisitions available in most of our markets. As for fiscal 2010, maturing debt we have dealt with all maturities with the end result being approximately $52 million of cash out and a reduction of our weighted average interest rate to 6.17%, which is one of the lowest levels in our history. Outside the use of equity in lieu of placing new debt, we are still pursuing the same debt strategy of placing long term mortgage debt secured by single or groups of assets. We are still maintaining our modified debt strategy to account for the decline in commercial lending by increasing 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 our multi-family portfolio ability to cover. We still believe that the proper long term business model for Real Estate in general and IRET specifically requires long term fixed leverage at the 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 it is unlikely we can maintain our desired leverage levels under current marketing conditions as well as due to the fact that after the coming fiscal years, IRET's maturing debt is more weighted to commercial assets; however I would note the amount of maturing debt in the next 36 months is actually slightly less than what we have successfully handled over the prior periods.

I would also note that in the current fiscal year, approximately two-thirds of our maturing debt is medical office, on campus medical office, and residential, which to date have been two of the less difficult segments of the real estate industry to finance, as commercial lenders appear to favor medical and of course the nationalized agency lenders are still very active for multi-family segments. Despite the challenges presented by the current credit markets that first appeared over 24 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. IRET does provide a detailed debt maturity schedule each quarter as part of its 8-K filing.

Before moving on to property operations I will briefly discuss sale plans and acquisition activities. As reported during the last call, we still have a senior housing complex located in Minot, North Dakota under contract for $15.2 million as well as two small medical service buildings located in Montana for $5.25 million. All three projects have now cleared due diligence, are expected to close shortly, subject to the assumption of the existing debt as well as the placement of additional debt from the same lender on the Minot, North Dakota senior project.

The debt assumption has been a very slow process, due in my opinion, to staff shortages at the lenders involved, as well as a heightened level of review. We have no other pending or planned acquisitions, even though we are looking at a lot of projects with a focus on residential in our core markets; however pricing remains elevated and returns low in our opinion given the uncertain timing on the return of normal job growth to the country as a whole and the majority of our markets. Consistent with prior quarters, IRET has no active plan to sell larger assets, except perhaps in those markets where we have a limited presence. IRET does have a number of smaller projects for sale in various locations as well as four apartment complexes under contract for sale located in Texas and Colorado.

Now moving on to operating activities. We provide 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 two and a half years, we saw no material positive change during the fourth quarter or for that matter the year as a whole, as the main driver of demand for commercial and multi-family residential real estate is employment.

While over the past year, we turned from monthly job losses to gains, employment increases have been choppy and uncertain which certainly has not added to the confidence of existing or perspective tenants to take on additional space. As mentioned during the last call, one area of concern was the rapid deterioration in our multi-family portfolio where leasing activity essentially disappeared in all but a handful of markets. We have experienced a slight recovery in the fourth quarter and see this continuing through the Summer and Fall. We were able to hold average rental rates steady even in the face of the occupancy decline and we are optimistic that with the removal of the uncertainty created by the transition from our long time third party managers to our internal management operation, our residential portfolio will see occupancy improvement during the coming fiscal year.

Even though we are seeing new multi-family product be developed in some markets, construction has basically stopped in most markets which traditionally benefits existing apartment owners. At this point, our experience in most markets for this past period seems to match overall market conditions and not be tied to factors unique to our portfolio. The winter and spring months have traditionally been weaker from a leasing perspective due to the holiday season and the impact from winter weather but there is no question that the continued poor economic conditions in the Minnesota region negatively impacted our apartment portfolio in those markets; however, as stressed in prior calls, without strong and consistent job growth, IRET sees no significant improvement to any of its real estate segments. As a result, our approach has not changed in that the absence of top line growth, we are focused on securing the tenants we have and reducing expenses in such a manner that it will not impair the building's competitive abilities or long term physical condition.

On the medical side, which includes senior housing, the situation remains basically stable; however uncertainty over how national healthcare reform will actually impact medical office real estate demand has weighed on tenant expansion decisions. On the senior housing side, we are watching a number of possible negative pressures. The longer we have weak job growth and especially weak housing conditions, the more pressure we expect to see on occupancy as seniors and their adult children lack the confidence to make the transition to a senior housing alternative.

Additionally, we are watching State budget decisions closely, especially in Minnesota, as while we intentionally seek to keep our senior portfolio below 20% of Medicaid pay, while we believe going 100% private pay is not the best operating model, a reduction in Medicaid reimbursement levels in our senior markets could have a modest impact on revenue growth and force us to move toward a higher private pay model. Our renewal success remains strong as does our ability to hold or increase rental rates. Overall, we view the path of US healthcare as favoring well located on campus projects. There is very little competitive building plan for most of our markets and many medical tenants and senior residents have fewer alternatives going forward. The demographics remain good in all of our markets for these two types of assets.

This is an area where we believe IRET's balance sheet and access to equity and debt will result in a good advantage going forward, as demand will eventually outpace supply. As medical remains stable, that section of our portfolio may present attractive opportunities for investment. A top initiative for us over the past several years has been moving toward an operating real estate Company with internal management capabilities. We have basically completed this transition during the past quarter and the first few months of this fiscal year. Our focus has now moved to evaluating our management operations with the plan to improve and increase the efficiency of our management platform.

As mentioned we did incur some transition costs in the short-term as we set up our own internal management platform, but that was by design to ensure as smooth a transition as possible. These costs will be one-time in nature and this time next year, we expect to 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 building operations, more sensitivity to control of the on site activities, and a better platform to grow each targeted market.

Now that this transition is mostly complete on the residential and commercial side, with a few exceptions based on asset location or size, our focus will be on the following areas. First, will be cost control through centralized purchasing, budgeting and control of material capital projects. A central focus on increasing or in many cases capturing ancillary revenue from application fees, vending, cable and laundry, and in many cases these areas were inconsistent among IRET's third party property managers or were beyond their local capabilities. Third, enhanced marketing to existing and perspective tenants using a redesigned web presence available 24 hours a day, seven days a week.

Fourth, integrated accounting system utilizing electronic check capture through improved collections with a centralized payable department to improve controls and reduce costs, and finally, a credit and collections department has been established now that we have the scale to handle the whole portfolio which is expected to improve past due and credit loss. All of these actions planned to add value would not have been possible or likely to be successful under IRET's prior model of using third party property management as many of our managers lack the overall scale to implement these projects on a consistent basis. Now, that our portfolio has grown to a significant size in most markets, internal management is economically feasible.

Our commitment to constantly evaluate and improve our management platform is expected to provide improvement to our operating results; however, I would stress that good management and best industry practices can't completely overcome adverse market conditions, but rather should be expected to lessen the negative impact in bad times and provide higher returns than our peer group in good times. Thank you, and I will now turn the call over to the moderator for questions.

(Operator Instructions). Our first question comes from [James Dieter] of RBC Capital Markets.

Hi, good morning. This is Jim in for Mike.

Good morning.

I just had a quick question, it seems like maybe your outlook for growth here might have changed a little slightly, maybe expecting the recovery to take place a little later than before, just given some of the commentary you've given about returns in acquisitions coming down, maybe. Is that the case or maybe not or just want to get your thoughts there?

Yes, this is Tim speaking. I guess at this point we do see a little bit of slowdown. I think we were hoping to see acquisitions out in front of us sooner than later and as we're out in the market searching deals and talking to the communities that we're a part of, they aren't there yet but we're starting to see some indications and some contacts that we're probably 6, 12, 18 months off from seeing those in front of us so you're correct in saying that those were certainly farther out than we anticipated.

Okay, and I guess kind of along the same line as it pertains to the dividend there, I think in the past you talked about maybe by calendar year-end 2010 here, you would maybe make a decision on whether to reduce that, maybe with a more conservative outlook, do you think that timeline comes forward a little bit then maybe the next quarter or so there's a decision or not?

Yes, and I guess I stated earlier, we'll continue to closely watch our financial results on a quarterly basis and make that decision based on what we see in front of us so that will be a continuing evaluation, even more so on a quarterly basis versus looking out over a calendar year.

Okay, thanks a lot. That helps a lot.

Yes.

(Operator Instructions). We have a question from Chris Lucas of Robert Baird. Please go ahead.

Tim or Tom, I guess just in terms of the operating performance, could you give us a sense as to where the weakness is? Is it in your more urban markets or is it in your smaller markets?

Chris, this is Tom. I guess from a weakness standpoint on the commercial real estate side, it's primarily in the metro markets. I think it's going to really be confined to Minneapolis, the small presence we have in St. Louis and Kansas City. I mean that's where we're really seeing the significant pressure on commercial. The commercial presence which while it's not large in smaller markets is holding up relatively well at this point.

Residential, it's more or less the opposite. I guess what we're seeing is those markets that tend to be less urban, North Dakota, Montana, for example, are performing better than the apartment complexes that are closer to the larger metro areas, specifically St. Cloud, Rochester, and I think that really is due to the tremendous amount of product that was built in the last decade and just a slowdown in household formation on the residential side which is occurring primarily in those areas, and I'd also note Minnesota and Kansas, Missouri have much higher unemployment rates than even Nebraska, South Dakota, North Dakota, Montana.

Chris, this is Tim. This is a quick follow-up on the residential side. I've had some discussion with our regional onsite people and really the $8,000, the expiration of the tax credit I think is going to help us as we move forward. That did have some impact on us so I think as that expires, we will see some growth in our occupancy at some of our residential.

And I guess sort of as a follow on to just those comments, is there -- do you see occupancy stabilizing here or can you see bottom yet or is there still some time to go here in the various product types?

I guess I can let Tom speak to this also. I think we're starting to see some stabilization and some lease up in some of those outlying communities that Tom referenced, so as I mentioned earlier, I feel like we're continuing to grind but -- and don't see the fast growth, from a recovery perspective but it's going steady and starting to see some activity.

And I guess to follow-up on that, this is Tom. I would say really on the commercial side, the job growth or really it's the lack of job loss, I mean most of that has worked through the system and I think most tenants have sized themselves to where they expect to be and I think it's really their perception of how their business is going to grow in the future that's going to determine whether they take additional space so on and so forth, so I would like to think that we're dragging along the bottom here. There may be some slight movement one way or the other but I think really until there's convincing evidence that job and employment growth has returned and that's stable, I just think there's going to be a hesitancy on the part of many of our commercial tenants and also in our residential portfolio for people to commit to space and expansion.

Okay, great. Thanks guys.

Our next question is from James Bellessa of DA Davidson.

Good morning.

Hi, Jim. How are you?

Would you please reconcile this, what I thought was an inconsistency. You have agreements to sell some apartments down in Texas and Colorado and you're also saying that you want to sell other properties that don't fit into your portfolio very well when the timing is right, and yet you're saying that there's worsening conditions in your multi-family residential segment, so why did you go ahead and agree to sell Texas and Colorado when it appears that the timing might not be a perfect time on their sales?

I guess from our perspective as we look to convince our geographic footprint, and bring the property management in house, we think it makes sense to sell those properties at cap rates that we're comfortable with and that the sellers, I'm sorry, the buyers are willing to acquire and take those proceeds and move them closer to home and take advantage of acquisition and/or new building opportunities in the Upper Midwest and I think some of you are aware the economy in the state of North Dakota continues to thrive over into Montana, we see the same thing, so I think to put those monies to work back closer to home for properties that we manage on our own does make some sense and to take a look at some of these older properties in some of those markets we referenced earlier is our thought process and maybe some of the smaller communities that we can't gain a large number of units in, it makes sense to identify those and if possible, sell them off and redeploy those funds in another direction.

You mentioned perhaps bringing back some assets to the territory you serve. I was recently in North Dakota and it was obviously a boom situation and you've been there long enough to know that some of these booms turn into bust, so why would you have a lot of confidence now to want to bring money back to North Dakota or Eastern Montana?

Well, I think one of the things we've looked at and watched closely and you're correct in your statement that we watched the boom and the bust hit the western part of North Dakota, from the research that we've been able to do, the difference this time around is that the technology to allow the oil exploration to continue in the western part of North Dakota has changed dramatically since the last boom and bust and our indications from talking to the larger explorers and oil companies is that they see this as a long term 20 to 25 year continuation of exploration of drilling in this part of the country and so from the people we've talked to, we see that as a possibility but certainly we'll move forward with cautious eyes as we have suffered through the boom and the bust in the past.

You made some acquisitions at the end of last year in Wyoming it looks like and some of those properties had significant decreases in the four month period in occupancy. What happened? Are you remodeling and you moved out of tenants or someone?

Well, Jim this is Tom and I think what we may have previously disclosed is we're expanding in each of those markets and we're bringing memory care into the State of Wyoming and as a result, we did for purposes of the renovation clear out some of the units in the impacted properties that are going to be either have the internal renovation to convert to memory care or to have the expansions, which is going to start potentially later this summer or Fall. But overall, I would note that the portfolio is performing as, in essence, as underwritten.

You raised some capital during the most recent quarter through your equity offering program sales agreement and you're also saying that you're seeking accretive acquisitions but at the same time you're saying the opportunities aren't great. Did you really need that $10 million? It sounds like you're getting dilution with capital, you can't even deploy or you haven't even deployed that which you raised earlier in the year.

Jim, this is Tim speaking. One of the things we use those as a capital for is to pay off the existing debt, to continue to shore up our balance sheet and I think as I mentioned earlier, we continue to pursue those acquisitions and think that, we thought at that point in time we would identify them and now see ourselves out a little bit farther than expected.

So the market did change in the last four to six months?

Yes, I think we anticipated a number of things and obviously with what was going on with the banks that there would be some acquisitions and/or properties available out there to pursue. Certainly, from our perspective it looks like some of that has been kicked down the road so to speak and there's a comment that I heard that a rolling loan gathers no moss so to speak, and I think some of that has been moved forward and in essence is what caused us to move our acquisition mode a little bit forward, so that has happened.

You made an explanation about the dividend and you're running near a 100% pay out ratio at the current rate.

Yes.

Do you have an anticipation that the current environment will persist for a while like I think you may be saying? Is there any problem in your mind of paying out 100% of your FFO?

I guess at this time we are comfortable. As I stated earlier, we'll look at that on a quarterly basis with what we'll be able to do through refinances but through operations as long as we're able to cover that dividend, we still are comfortable with that and again, we'll continue to explore that monthly and quarterly.

Thank you very much.

Thanks, Jim.

Our next question is from John Helfst of Schroders. Please go ahead.

Hi, guys.

Hi, John.

How you doing? So I had a question on the carried interest. I know it didn't get passed but some in Washington think it may still get passed. Would that create an opportunity for you if it were passed in raising cap rates on some of the LP GP structures out there? I guess a simpler question is do you buy properties from those types of owners and do you think they look to fill out prior to your tax rate?

John, this is Tom. I guess on the acquisitions front we just don't really see those type of real estate developers and players active as merchant builders in our markets. We just don't see that so I guess my quick answer is whatever happens with the carried interest and whether that discourages investment or development in Real Estate by certain types of individuals, I don't think is going to have a big impact on our business. We historically really haven't acquired from groups like that. We don't use it in our business model nor do we do a whole lot of joint ventures, so I would say unlikely to have a positive or negative impact on us.

Okay, thank you.

(Operator Instructions). Our next question is from Andrew DiZio of Janney Montgomery -- or Janney Capital, excuse me.

Yes, thank you, good morning. Just a question I guess on a couple of your segments. I'm looking towards your rollover for next year and when I compare it towards what you did this past year, first in the industrial segment it looks like a lot of the new leasing or what's put down as new leasing on the leasing summary was of a month to month nature. Am I reading that right?

That's probably accurate in the industrial. I guess what we're seeing is kind of matching what was being reported on the economic recovery is that manufacturing did expand. We certainly saw that in our portfolio, but I think the choppiness and a lot of the other negative signals are maybe not fully positive signals worldwide, really resulted in a lot of these industrial manufactures not wanting or not being willing to commit to the space. And so what we saw was primarily that was with existing tenants, those were expansions and so that's an accurate statement is that they are going short on the industrial side.

And with over a million square feet coming up in '11, do you have any sense of if you're hearing the same thing from those expiring tenants?

Well, I guess we don't have any real clear direction on that. I think manufacturing and industrial as many of you know in the real estate market moves very quickly one way or the other. That's usually the first one out of the gate and that's usually the first one into the ground, and they generally position themselves to move very quickly. Our industrial portfolio is, while it's large square footage wise, is very small from a dollar standpoint and it's pretty highly concentrated in markets that don't have a significant amount of supply. We're in Fargo, Des Moines, and so I would say at this point it's a little early to predict what's going to happen. Obviously there's a lot of positive news but there's also a lot of negative news hitting the headlines but what we'll need to see is what the underlying real data says and I think tomorrow is going to be very significant with the jobs report on the direction that industrial is going to go.

Sure, absolutely. And then looking at office also, I know about half your rent that expires next year is in the office segment. Do you have a similar answer, or is it --?

Yes, I guess the answer is the same there. We just have not seen a lot of confidence from our office tenants and I guess what I would say is 12 to 18 months ago we saw all of the weaker players cleared out. The tenants that are left are survivors and I think really again what they need to see are signals that give them confidence to grow. I guess anecdotally, we're seeing tenants put more people into the same amount of space but I think again if you look at our deal flow we're certainly engaged with these tenants and we're renewing them, and in certain instances we do some expansions but again I think until there's clear signals from the market that there's a recovery, it's going to be restrained.

And then just one last question. Can you say if you've issued any shares under your after market program subsequent to quarter end?

Well, that is an area that I don't necessarily handle and I'd have to turn that over to Diane, our CFO and I'm not sure whether we comment on that or not.

The last after market program was completed on April 30.

Okay, thank you.

At this time, we have no further questions. Do you have any closing remarks today, gentlemen?

Yes. This is Tim speaking again. Just thank you for participating in this morning's call and also realize if you have any questions beyond this feel free to contact our office or myself directly or anyone at Investors Real Estate Trust, and with that, I wish you a happy 4th of July and enjoy your weekend. Thank you.

I was going to say thank you too, excuse me.

No problem. This concludes today's conference. Thank you for joining us. At this time you may disconnect your lines.