Centerspace (CSR) 2011 Q4 法說會逐字稿

Good morning, and welcome to the Investors Real Estate Trust fourth-quarter fiscal 2011 earnings call. All participants will be in listen-only mode. (Operator Instructions). Please note, this conference is being recorded. I would now like to turn the conference over to Lindsey Anderson. Please go ahead.

Good morning, and welcome to Investors Real Estate Trust's fourth-quarter and year-end fiscal 2011 earnings conference call. IRET's earnings release and supplemental disclosure package for the three and twelve months ended April 30, 2011 were posted to our website and also furnished on Form 8-K, on June 30. In the earnings release and supplemental disclosure package, Investors Real Estate Trust has reconciled all non-GAAP financial measures to the most directly-comparable GAAP measures in accordance with the requirements set forth in Regulation G. If you have not received a copy, these documents are available on IRET's website at 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 Thursday'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, Lindsey, and good morning. Last night after the close of business, IRET issued its earnings release for the three months and fiscal year-ended April 30, 2011. The financial and operational results reported in the earnings release are reflective of the continuing challenges presented to IRET, and to the economic climate in the markets in which we operate. Before I turn the call over to Diane Bryantt, our CFO, I would like to touch on the following three items. The status of our dividend, the changes in our Board of Trustees, an update on the flood conditions throughout the upper Midwest.

At last year's annual meeting I discussed our dividend at length. At the time, I informed the shareholders that unless IRET had debt issues to handle, a need to buy back IRET's stock, or an acquisition that appeared that had a substantial impact on IRET's income statement, that the dividend should be paid out the to our shareholders. As published yesterday in our 8-K earnings release, the Board of Trustees has approved a plan to reduce the Company's quarterly distribution to $0.13, from $0.1715 cents per common share and limited partnership unit, effective the next quarterly distribution planned for October 3, 2011. The Board currently intends to maintain this level of cash distribution for at least the next four quarters, and anticipates growing the distribution over time in line with FFO growth.

I recently completed by 30th year of employment with IRET and I certainly recognize the importance of the distribution to our shareholders, and after a 40-year history of paying distributions at equal or increasing rates, I certainly understand the significance of this decision. However, I believe it is the correct action at this time to continue to strengthen our Company for the long term. The revised distribution still provides an attractive return to our shareholders, with an annualized yield of 5.97%, based on the most recent closing price of our shares on June 29th, 2011, of $8.70. This return is even more attractive when the tax-advantaged status of real estate investment trust distributions is considered. For example, approximately 71% of our calendar year 2010 distributions were classified as return of capital, which is non-taxable until a shareholder's basis in our stock is fully recovered.

The Board's decision to reduce the distribution reflects our expectations that revenues and FFO will continue to be under pressure in the current fiscal year. Accordingly, I believe it prudent to recommend to our Board an adjustment in our distribution payout to a more manageable level, reflective of our current earnings and FFO trends. We still believe our revised distribution is competitive and reflects an appropriate payout in today's market.

On a positive note, IRET continued to generate strong cash flow, even in this challenging economic environment. I believe we have identified markets that we are currently in that will allow for more investment from IRET, thereby solidifying our holdings in these communities. I also believe that with access to ample liquidity and the funds saved through this planned distribution reduction, we will have additional flexibility to continue to improve our existing properties, and fund these build-outs necessary to attract desirable tenants at our commercial properties, which continue to see the effects of the economy.

Finally, I believe that this reduction allows us to position IRET for future long-term growth, which is the premise that IRET was built on. I see acquisition opportunities in our home state of North Dakota, particularly in the Bakken shale formation and the Western part of the state where oil and gas activity abounds. Commodity prices continue to stay strong and that, coupled with the energy activity, allows North Dakota to experience a strong economy. My plan, along with the senior management team, and the employees at IRET is to grow the distribution over time in line with FFO growth. We, the Board of Trustees, will continue to evaluate the earnings of IRET on a quarterly basis to help us determine the distribution payout on a quarterly basis.

Next, I would like to offer a few comments on the Board changes, as noted in our press release dated June 23, 2011. Pat Jones, Chip Morgan and Ed Schafer have each informed the Company that they will not seek re-election to the IRET Board of Trustees when their term expires this fall, September 20, 2011. I would like to personally thank Pat, Chip and Ed for their contribution to IRET during their years of service as a Trustee. Their integrity, vision, and guidance have helped IRET navigate the current difficult economy and build for the future. I am grateful for their service to the Company's shareholders. I would also like to take this opportunity to welcome Jeff Woodbury to the Board of trustees. Jeff has a strong understanding of all aspects of commercial real estate. I expect his guidance will be invaluable as we execute our mission of increasing shareholder value.

Lastly, I would like to bring you up-to-date regarding the flooding which has occurred in Minot, North Dakota where IRET's headquarters are located. As previously stated in a press release dated June 23, 2011, the City of Minot was placed under an order of emergency and parts of the city were placed under mandatory evacuation orders. I would like to thank many of you on the call today for your calls and e-mails expressing concerns for IRET and the citizens of Minot. We appreciate your thoughtfulness and appeal to help us. We may reach out to you in the future as we begin to recover from this catastrophe.

IRET has two properties that have been directly affected by the extensive flooding of the Souris River. Despite taking all protective measures available, IRET's Arrowhead Shopping Center and Chateau Apartments flooded to the depths of approximately four to five feet. As we speak, the flood waters are slowly receding, and we have not been able to gain access to the properties to assess the damage and the timing for that assessment is still unknown. In the meantime, IRET continues to assist tenants and to make preparations to review the damage and begin clean-up as soon as possible, and have selected a general contractor to carry out the work.

Also, IRET has three other properties that could potentially be impacted by the flooding elsewhere in the Dakotas and Nebraska. We have the Westwood and Cottonwood Apartments in Bismarck, North Dakota, and the Arbors Apartments in South Sioux City, Nebraska. I am happy to report that all the properties are covered by flood insurance, and that IRET does not expect any material financial issues due to the flood issues. Thank you, and with that I will turn the call over to Diane.

Thank you, Tim, and good morning, everyone. This morning, I will briefly discuss highlights of the fourth quarter, but will focus primarily on results of fiscal 2011. As discussed in the earnings report filed yesterday, we continue to experience stress on our top line revenue in fiscal 2011. However, we were able to maintain and finish the fiscal year with a strong balance sheet. At year-end, we had $41.2 million of available cash, and $20 million available on our line of credit for a total liquidity of $61.2 million, as compared to the prior fiscal year-end liquidity of $75.3 million.

Significant sources and uses of cash were as follows. Cash flow from operations were $58.8 million, a decrease of $2.6 million, and $1.4 million respectively from the prior two fiscal years. While there are other factors that affect this decrease in operating cash flow, they can see across our segments during the year, primarily caused the continued downward trends. Cash flow from investing activities most significant source were proceeds from the sale of our Texas and Colorado apartments and other small commercial properties of $81.5 million. Approximate net cash provided after loan payoff and other closing costs was $26.1 million.

The most significant use of cash for investing was $45.6 million for new acquisitions, and $17.2 million for improvements to existing real estate, for a total of $62.8 million. Acquisitions during the year were made in each of our five operating segments. $23.2 million was deployed to the commercial medical segment. $4.2 million into the multi-family which consisted of two communities, both which closed in the fourth quarter. $8.3 million in the commercial office segment, $1.6 million in industrial, and $8.2 million in a mixed-use office and retail facility.

Cash flow from financing includes equity proceeds, primarily from shares issued under our on-demand program in the first quarter, and the voluntary cash contributions under our DRIP for a total of $19.6 million. These proceeds were applied to mortgage loans payoffs and various development projects. A significant source of cash for us is a result of our new loans and refinancing of mortgage debt. In the fourth quarter, we closed on $75 million worth of mortgage debt made up by 11 loans, with gross cash out of $16.7 million. The average interest rate was 5.6%, with maturities ranging from 3.5 to 10 years.

In fiscal 2011 overall, we closed on $180 million in mortgage debt, consisting of 26 loans. The previous weighted average interest rate of loans refinanced in fiscal 2011 was 7.36%. The new weighted average of these new loans was 5.51%. The weighted average interest rate at the end of the quarter overall portfolio was 5.92% versus 6.05% at the end of the last quarter, and 6.17% at the end of the last fiscal year. The outstanding balance of our line of credit was increased to $30 million in February to help retire $14 million worth of other mortgage debt. The commitment capacity remains at $50 million, as of year-end, with $20 million available for advance. Looking forward, while there continues to be adequate liquidity in the land markets, given the slowing pace of pending maturities in the coming 12 months, we will likely experience some more modest impact to our cash flow statement from refinance activity.

Moving on to the income statement and results of fourth quarter and fiscal year-end. Revenues in the fourth quarter were relatively consistent with the fourth quarter the prior fiscal year of $59.1 million, compared to $59.4 million, a $300,000 decrease. Year-to-date revenues compared to the prior year showed an increase of $5.9 million. Acquisitions in fiscal 2011 and 2010 provided $10.2 million of additional revenue. However, in our stabilized properties, revenues had a comparative decrease of $4.3 million, again, due to vacancy.

The commercial medical segment has been strong during the entire fiscal year, with increasing revenue and net income, and we are seeing improvement in the fourth quarter in the multi-family segment. Tom Wentz, Jr. will comment on segment results. However, a detailed report is provided on segment results within the earnings release which was filed yesterday on June 30. Total expenses in the quarter were $43.3 million, $1 million higher than the comparative fourth quarter, and year-to-date expenses were $169.4 million, or $6.3 million higher than the prior year. This increase in expenses in the fourth quarter was primarily due to increases in property expenses in the areas of utilities, maintenance, real estate taxes and depreciation expense.

Utilities, real estate taxes and depreciation expense increases are primarily a result of acquisition and other general increases. However, included in maintenance is a significant expense of snow removal. Consistent with the third quarter, fourth quarter results, we saw significant snow removal expenses as snowfall continued into our markets well into March 2011. Snow removal costs year-to-date are $4.0 million as compared to $2.7 million in the prior fiscal year. Of these costs, approximately 86.5% is attributable to our commercial properties. However, our ability to recover these costs is lessened due to the vacancy in our commercial segments, primarily in the commercial office segment.

Non-recurring expenses of $540,000 have also impacted earnings, of which $362,000 are attributable to our internal property management transition that was basically complete at the end of the first quarter, and approximately $178,000 of acquisition costs in fiscal year 2011. My previous discussion on our loan financing activity noted that this activity had a favorable effect on our interest expense, as we have lower interest expense compared to prior comparable periods. Interest expense on real estate decreased by $1.6 million in fiscal 2011, compared to fiscal 2010.

Moving to funds from operations and per share results. Total funds from operations was $62.2 million, an increase of $690,000 as compared to the prior year. On a per share and unit basis, FFO was $0.15 in the fourth quarter, and $0.63 for fiscal 2011, as compared to $0.69 in the prior fiscal year. The issuance of shares in fiscal year 2010 and 2011, and the time lags for revenue generation where funds have been invested in development properties, have caused dilution in our FFO earnings per share.

Today, July 1st, we paid a regular quarterly distribution of $0.1715 per common share and unit. The July distribution was IRET's 161st consecutive quarterly distribution at equal or increasing rates. As mentioned by Mr. Mihalick, the decision to break this equal or increasing distribution history has been difficult. However, given the prolonged economic recovery, the modest refinance activity anticipated the next 12 months, and given the opportunities for acquisitions available to us in the near term, we believe this is the best decision for the long term of IRET and its shareholders. 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 recently-completed fourth quarter, as well as our past fiscal year 2011, that also closed on April 30th, 2011. Then briefly I will cover the credit market outlook as applicable to IRET, and conclude with an overview of IRET's property level operations as well as pending acquisitions, dispositions, and development.

From an operations perspective, this past quarter continued the trend of the previous quarters, in that we had no material net economic improvement, despite good occupancy improvement in multifamily, starting with our low point in the second quarter. While this has not translated into the same percentage increase in revenue due to our careful approach on increasing rents in the residential portfolio, we expect occupancy to improve slightly in residential going forward. Our primary focus going into the late summer and fall leasing seasons will be to push rents in order to translate this increased occupancy into revenue.

Medical is the only segment that had both a slight increase in occupancy as well as revenue. Medical occupancy is likely to remain steady, and we have been able to increase rental rates for both new and renewing tenants. The commercial operation continues to be challenging, primarily in the office segment, as not only has occupancy continued to remain under pressure, but as we enter basically the third year of the economic slowdown and weak recovery, we have rolled over a higher percentage of our commercial office leases. We continued to have a very strong retention percentage, but this has come with tenants down sizing their space and lease rate reductions. We closely monitor overall market occupancy levels, as those provide a very rough indication of what most landlords can expect. Obviously, very difficult to compare real estate, even within a given market, but based on overall occupancy levels in our markets, we now appear to have matched the market concerning occupancy.

Commercial retail and industrial appear to have stabilized as those segments were impacted first during the economic downturn several years ago and reached a much lower occupancy level quicker. Like commercial office, the primary issue continues to be declining market lease rate as existing leases expire and renew. Absent a backtrack for the economy, or an unexpected credit event with a larger existing tenant, we expect both retail and industrial occupancy to hold at current levels, as again, we have basically matched overall market occupancy levels in most of our respective markets. Given the lack of prospective new tenants on the commercial side, we continue to remain focused on tenant retention, credit quality, as well as operations to hold the line on expenses.

Expense control, however, becomes increasingly difficult at lower occupancy levels. Expenses are up on both a quarterly and annual basis, but not have not outpaced revenue growth. However, absent any meaningful increase in occupancy in our commercial segment that actually translates into revenue growth, combined with holding residential occupancy and increasing apartment rents, expense control must and will remain a core focus.

IRET's CFO provided the details on recently-closed debt so I won't spend any time reviewing the details, other than to confirm that for the most part, debt markets are operating adequately for IRET, as we have multiple options to leverage our existing portfolio as well as acquisitions. Low rates and our interest expense has been one of the consistent counter-balances to the poor economic climate over the past several years. For the most part, we are able to refinance maturing debt at lower rates as well as access the equity that has built up over the debt term. Going forward, this benefit will lessen somewhat as the amount of maturing debt for coming years is substantially less than what we actually successfully dealt with over the past several years. The weighted average rate on upcoming debt is still slightly higher than current rates so we do expect to continue the trend of improving our overall interest rate which of course translates into reduced interest expense.

Absent a spike in rates, we should be able to continue the trend of reducing our overall cost of borrowing. We also have the ability to move back to our historical higher target leverage levels of 60% to 65% as additional cash is necessary for acquisitions or development projects. We remain actively focused on early debt refinance of higher-rate debt, extending amortization periods to increase cash flow, and when or if necessary, access the additional cash to fund accretive acquisitions or development projects by increasing our overall leverage level back to our historical target levels. We are not projecting any further reduction to our overall leverage levels going forward, as our total debt as measured against our portfolio cost has declined over the past several years, below our historical levels.

Debt continues to be the most cost-effective source of capital, so as we identify growth opportunities, we are likely to access the equity in our existing portfolio as well as our cash flow. Our approach to leverage remains consistent with our primary focus over the past three years of protecting our balance sheet and operating flexibility. Even though all of our markets are off their high unemployment rates achieved during the downturn, we still have a long way to go before the current level of job growth creates meaningful demand for real estate.

As a result, our best option remains to offset the revenue decline as best as possible with cost control and improved operating efficiencies. We have been very successful renewing tenants in all commercial segments and have also completed more new leasing this past period as compared to prior periods. However, this past fiscal year had the expiration of two large commercial leases, with only some marginal offsetting in occupancy at one location. These two lease expirations resulted in a majority of the occupancy decline during the year in our commercial office segment.

As noted in our previous call, while significant, we do not believe these expirations signal a trend of accelerating overall commercial office vacancy. We do not expect much improvement in the commercial occupancy over the coming quarters, however. As expected, we continue to experience a rebound in residential occupancy, as this past quarter's operations were under our internal management program, with the exception of a few assets. As expected, being able to hold or improve occupancy during the third quarter in our residential segment, which includes the winter months and holiday season, did translate into a solid spring leasing season during our fourth quarter.

Before moving to property operations, I will briefly discuss sales plans, acquisitions and development. We had no dispositions during the fourth quarter, and we completed the acquisition of two smaller apartment projects previously disclosed, located in Sioux Falls, South Dakota of 44 units and Bismarck, North Dakota of 24 units. We currently have five multi-family projects under contract with approximately 257 units and at various stages of due diligence. All these projects are located in existing IRET markets of St. Cloud, Minnesota, Billings, Montana and Sioux Falls, South Dakota.

We also have a senior housing portfolio under contract located in Idaho, consisting of six existing facilities, as well as one facility under construction that we expect to be completed at or before closing. The total number of units for the senior housing portfolio is approximately 261. These acquisitions are expected to all close on or before the end of the second quarter of the current fiscal year. If all of the projects close, the total cost is expected to be $54 million, excluding any adjustments, as well as acquisition expenses and costs. Construction continues on the medical office building in Minot, North Dakota, with scheduled completion for late summer of 2011.

We have also started on a $4.7 million expansion to our senior housing project located in Casper, Wyoming. This expansion will add both Memory Care units, as well as additional assisted living units and is expected to be completed and opened by early 2012. We have also commenced construction on Phase II of the Corey Ridge Apartments located in Rochester, Minnesota, at an expected cost of $19.4 million for approximately 159 units, with an expected completion date of mid to late summer 2012. We currently have no assets under contract for sale.

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 am not planning to discuss any particular buildings or transactions in detail. We are still not where we want to be on occupancy, and this past year saw us lose even more ground in our largest segment, commercial office. Revenue will remain a challenge, as without tenants, there is no way to generate revenue. We have basically completed our move to internal property management on the residential side.

With the uncertainty created by the transition from our long-time third-party property managers to our internal management platform now well behind us, we will be focused on continued occupancy improvement, rent growth and moving our costs as a percentage of revenue back down toward our target range as the transitory cost of our move to internal management dissipate. However, as discussed in prior calls, without strong and consistent job growth, IRET sees no significant improvement to any of its real estate segments in either occupancy, increased rents or both. As a result, our best option remains to focus on tenants that we already have in place, controlling expenses in such a manner that will not impair the building's competitive abilities, or long-term physical condition.

In the medical portfolio, our overall occupancy has remained solid. We expect our entire medical portfolio will remain stable, with continued improvements in rent as the barriers to new medical construction are quite significant. On the senior housing side, slow or no job growth and a lingering weak housing market continue to create a drag to pushing occupancy higher. We are still seeing almost no competitive building in most of our markets, and many medical tenants and senior housing residents have fewer and fewer alternatives. The demographics remain positive in all of our markets and should continue to outweigh the issues that have negatively pressured rents and occupancy during the last few years in both medical and senior housing.

Overall, operations remain challenging due to basically flat revenue in the majority of our segments, combined with increased expense pressures. As a result, until we see the return of meaningful demand for commercial real estate, our focus will be on the areas of expense control in all segments, stemming further occupancy declines in our commercial segments, and to leverage off higher occupancy in our medical and residential portfolio by increasing rents. Thank you. And I will now turn the call over to moderator for questions.

(Operator Instructions). Our first question comes from Carol Kemple at Hilliard Lyons.

Good morning.

Good morning, Carol.

Good morning, Carol.

I just had one question. On the tenant reimbursement, looked like as a percent of expenses it declined, and I know some of that was due to snow removal in the quarter. What would be a good run rate for that going forward?

Carol, this is Tom. I think the issue really there is primarily the lease terms themselves, as well as the increasing vacancy in the commercial portfolio. Obviously, we strive for net leases, but of course in the current economic environment, as well as the commercial leasing environment, that's become more and more difficult to achieve. I guess our expectation is that should match occupancy fairly closely, with maybe a little movement on either side of that percentage. But we don't expect any dramatic acceleration or reversal, except in the case of occupancy moving one direction or the other.

Okay. And then I know on the last call, you all mentioned the goal of acquiring $150 million of assets through the end of fiscal 2012. You all still think that's realistic or will it take a little longer?

Carol, this is Tim. I think it may take a little longer, but I think as evidenced by Tom's talk about the acquisitions we've got in front of us, we do see opportunities in our markets, but we may be out another six months beyond that.

Okay. So about halfway through fiscal 2013 is realistic?

Yes, I think so.

Okay. Great. Thank you all.

Thanks.

Thanks, Carol.

The next question comes from Chris Lucas of Robert W. Baird.

Good morning, everyone.

Good morning, Chris.

I guess first question, Tim, just on the dividend, the new dividend rate, how did you guys approach at what level was the right level to cut to and how does this relate to sort of taxable income in terms of -- are you at 100% of taxable income? Is this still in excess of taxable income? I guess I'm trying to understand why $0.52? Why not $0.40 or $0.60?

We made the decision and Diane can help me with the taxable income number, but we spent a lot of time getting a feel for what our FFO number is, as well as AFFO, need for tenant improvements, and where we felt we were going for in the next four quarters, took a look at the peer group and where we felt we needed to be to stay competitive. But we wanted to make sure we had coverage overall and we felt our FFO number, additionally will leave a little there to allow for tenant improvement. That $0.52 number, where we expect our earnings to move to gives us what we feel is sufficient coverage.

So the $0.52 you think is covered by sort of the cash flow for the next year?

Yes.

Okay. Go ahead.

I was just going to say, regarding to the taxable, we are still well above our taxable payout rate, so it's not an issue of meeting that 90%.

Okay. And then Tom, or Tim, on the disposition side, it's been a little bit quiet. Do you have targeted assets or are there still things that are on the list for disposition or are you guys pretty much done with that?

Chris, this is Tim. I think as we look forward out over the next 12 months, we will take a hard look at our markets and those that we are a part of and evaluate needs for disposition and thereby trimming and unloading some of the assets that we think we need to. That will be part of the plan as we move forward over the next 12 months, 12 to 18, identifying assets that we need to move away from.

Okay. And then on the acquisition front, I guess what's surprising to me is really just what we read, what we see, is how red-hot the North Dakota economy is, and yet most of your investments are not in that market. I guess I'm just trying to figure out -- clearly, some of your markets are still going through some pretty tough economic conditions, and yet North Dakota from everything that we read outside of it is just -- it's red-hot, there's just another article in the AP this morning talking about the very low unemployment, the tough conditions for housing. I guess I'm just wondering why not a more aggressive move into your home state, particularly on the apartment development side.

I guess I would offer to you that we are in the middle of taking a look at those markets and are certainly aware of that, and I would hope over the next three months, if not sooner, to give you an update on that, potential acquisitions and development projects that we are currently negotiating on. We certainly recognize that and understand it. I think as we all are well aware, real estate takes a little time. But we are in the middle of that, without being able to offer anything else to you at the moment but we're aware of it and we will be able to get you some info on that going forward.

And then Tom, on the office tenant retention rate, can you give us a sense of what that actual number is? And then also, I guess just trying to understand whether or not on that figure, whether that includes the -- if you get a tenant that's renewing but scaling down, how that factors in.

I direct your attention to the 8-K. Obviously in the scheme of things, we still are such a size you can have quarter-over-quarter skewing by certain leases. I think if you look at our 8-K on the lease rates that we disclosed and the transition or transaction costs, you can see is basically double-digit declines when you look at renewing leases versus expiring lease rates, with the exception of medical. And that's been pretty consistent for the last several years from that standpoint.

So if you average it all out, basically that's what we're seeing. And as far as how the down sizing translates into, I mean, I think obviously the occupancy has continued to slip in commercial office, and so clearly even though we are renewing and doing some new leasing, that's being outweighed by downsizing or departing tenants. I mean, we really are not seeing any credit issues anymore like we did early on, and we're not seeing more departures than renewals or new leasing. I mean, basically, what we're now seeing is staying static, downsizing and occasionally some expansions.

Okay. Great. Thanks, guys.

(Operator Instructions). Our next question comes from Andrew DiZio at Janney Capital Markets.

Hi, good morning, guys.

Good morning, Andrew.

First, Tom, just a question going back to the office leasing. You talked about reaching market occupancy in a lot of your markets but I'm trying to think about it from the rental rate side of things, just from the standpoint of your leasing last year average rent rate was 1173, versus expirations at 1355 this coming year. If we should expect to see some roll-down on the rate side of things.

Well, I think, Andrew, there's probably a little bit more rate roll-down, but I think as I commented on, basically depending on what your bright line is for the start of this whole process on commercial real estate, and the underlying stress on our tenants, we've pretty much rolled through a majority of our portfolio in the office. There's obviously always leases left, but we've cycled through over the last 36 months, plus. And so I don't see a whole lot of further roll-down but again, if you have backtracking unemployment numbers, if you have backtracking on economic activity, corporate users have become very, very sensitive to this and pay a lot of attention to all operating costs, of which real estate rental is one of them.

Sure. Okay. So when I think about the stuff that's coming due in 2012, I think your average office lease is usually five years. Is this not 2007 vintage higher rental rates so it needs to be rolled down more. Am I thinking about that wrong?

I think you're probably right. The 8-K has, we disclose in there what our expiring percentage is. We also disclose in there what our average lease term is. And I would say historically, we've been under or right around that five-year. One of the things we have done in this period of stress on commercial real estate is we've tended to look a little bit closer at shorter lease terms, so we don't lock in some of these rates at extra long periods of time, and impair the building for longer than is necessary. But that's not really a concerted effort. It's just something that we look at on a case by case basis.

But I would say there still is some roll-down left in the commercial portfolio on the commercial office. Industrial and retail, a lot of those tenants came to us right away. One of the things, if you note on our leasing activity, which exceeds our expiring, and that's been a trend for a long time. What you have is a lot of early renewals, where tenants have approached landlords and us early in the cycle for purposes of renegotiating the lease, and originally we started out stiff-arming them, but after about 12 months we embraced that, and so we've dealt with a lot of our commercial leasing at this point. So I guess without knowing or giving you any exact percentages, I would say the majority is behind us.

Okay. That's helpful. Thanks. And then just one other question, going along with that. Following up on Chris' question, I guess, about how you got to $0.52. If I think, about you did $0.15 this past quarter, which would be a $0.60 run rate. If the you're going to see some roll-down in rate, maybe offsetting what you get in occupancy, maybe that's around $0.60, and then the last few years, you spent about $10 million in cash on tenant improvements and leasing commissions, so that's another $0.10 would get us down to $0.50 in cash flow on the AFFO line which is below that $0.52 dividend rate. Just wondering if I'm thinking about that wrong or just going back to is $0.52 enough.

Andrew, this is Tim again. I think we're comfortable with that in the numbers that we took a look at, would be to address the impact of these acquisitions that we have in front of us, as well as the completion of the medical office building here in Minot that's yet to be a part of the number that you're reflecting upon, and operations and the general overall increase or the betterment of improving the residential side of our portfolio. I think as we see that come back, we do feel that that's enough to address that number.

Okay. And then just a last question. On the $54 million in properties, you mentioned you have under contract, what kind of cap rates are you looking at with those?

On the multifamily and the senior housing, we're ranging from low 7s to mid-8s.

Okay. Great. Thanks a lot, guys.

Thanks, Andrew.

The next question comes from Mike Salinsky at RBC Capital Markets.

Good afternoon. Actually, good morning, guys.

Good morning.

Most of my questions have been answered. Just had a couple quick follow-ups. Can you talk, the flood insurance, what's the deductible there on that, and can you give us a timeline on when you expect to bring those properties back online?

This is Tom. The flood insurance that we had placed is basically a special policy. It's private insurance. It's not through the Federal Government. It has a $200,000 deductible, which if we haven't already spent, we're pretty close to it with some of the diking and preparation in Sioux City, Bismarck and obviously in Minot. It's got $30 million of coverage, and it also has a 12 month loss of rents provision. From an economic or material impact, we don't expect the flooding in Minot, even though completely devastating to the community and our two properties, to have a financial impact on IRET.

Timing, the water has not receded in Minot, so we just simply are not in a position to comment or know what the state of that property's going to be, the Chateau Apartments or the Arrowhead Shopping Center until we get in had there. Could range anywhere from repairable to total loss. And we also have the question of according to FEMA Corps Of Engineers, the Valley of Minot was not in a flood plain because of the three upstream dams, so obviously that was an incorrect assessment, because both Arrowhead and Chateau were not considered in a high-risk flood zone, were not in a 100 year floodplain, so the question is really going to be what type of renovation or rebuilding is going to be allowed absent further flood control efforts in Minot.

That's helpful. Second question for Diane. Just based upon your comments and talking about leverage, sounds like you guys are willing to take leverage up a bit at this point after -- given what we've seen in the credit markets. Is that an accurate statement?

I'll probably answer that question. I think as I alluded to on our call, I think we certainly have the ability -- one thing, and this goes back to Andrew's question on the distribution. Obviously in real estate, earnings and cash flow are completely different animals, and we remain and have very strong cash flow in this operation. And I think one of the things that we've alluded to is, we've paid down principal, which is a little bit different than most of our peer group, and that historically has run at about $28 million of cash and of course at some point hopefully you get to access that.

I think what I was alluding to and what management is focused on is we have that cash banked and should have the ability to access it by increasing our leverage. But of course, we only want to increase our leverage on our existing portfolio if we're seeing attractive growth opportunities. So I don't think there's really any plan at this point, but we certainly have access to that cash as well as cash from our operations as well as the increased cash flow due to the reduced distribution, which I think all three position us very well to take advantage of development opportunities as well as acquisitions.

Okay. So you got the -- I think it was $56 million you had mentioned of acquisitions, then. How is -- and doesn't sound like there's anything on the immediate horizon to recycle. I'm just curious, will you open up the ATM to fund that on a leverage-neutral basis? I guess I'm just looking kind of sources and uses here.

I think at this point, I mean, on the balance sheet as well as access to leverage our existing portfolio, we believe we have adequate cash close that $54 million. Obviously, some of it comes with existing debt, we're going to assume. Some of it's going to have new debt placed at closing. So it's not going to be a $54 million cash obligation out-the-the door on that portfolio, if and when it closes, and obviously it's still in various stages of due diligence so we're really not at the point to provide the underlying details of the financial aspects of the transaction, how much debt, how much cash, but at this point we view it as doable.

That's helpful. Finally, I want to make sure I understand the baseline assumptions you guys have kind of talked about, in reducing the dividend there, kind of your outlook for 2012. You're assuming some occupancy pick-up, but you're not assuming any kind of rent growth on that. Is that correct?

Well, I think in the residential, I mean, obviously we've gotten the occupancy back up into the low 90s. I think you have to go way back to recall that we really view 95% as full, in the residential. And if you get above that, your rents are either too low or you need to build into that market. So if our trends hold, we're approaching what we consider full in residential and obviously the next step is to translate that occupancy into revenue. And that requires, one, you renew your tenants, let your concessions burn off and they stay at higher rents.

Now, in the past, when we've gotten higher occupancy and we've tried that, the economic climate was such that these tenants had other options, parents' basement, roommates, so on and so forth, and again, that's a function of jobs. So this time, we believe since we're off some of the low points of unemployment, that rent increases, we're a little more optimistic are going to stick. I think in all the other segments outside of commercial medical, we really don't have any pricing power, and that's not in the foreseeable future where we're going to move to raise rents on commercial real estate outside of the medical arena.

I mean, just in arriving at that $0.52, though, have you assumed an occupancy pick-up? I know there's no rent integrity at this point. I'm trying to make sure I understand the assumptions in how you get to that $0.52 covered by FFO.

Well, I'll let Tim answer that.

Yes, I guess, Mike we do anticipate -- I think we like what we see in the trending in the residential real estate side of our portfolio, and I think if you look at quarter to quarter numbers, you've seen the increase and we anticipate that will continue going on into fiscal year 2012.

Okay. So if the I understanding you correctly, you expect multifamily then to continue to rise but -- and you're holding a flat case scenario then on the commercial side, aside from medical office?

Right.

Okay. Thank you. That was my question.

Okay.

(Operator Instructions). And our next question comes from James Bellessa at D.A. Davidson.

Good morning.

Good morning, Jim.

I would like to talk about or ask about the property management expense line item. In the last two fourth quarters, fiscal fourth quarters, it's bumped up from the run rate of the previous three quarters. What causes that bump-up?

Jim, I can answer that. This is Diane. If you recall, we discussed before, in comparative periods we do have some changes because of the set-up with the taxable REIT subsidiary in our Wyoming assisted living. There are considered more management-type expenses, so I believe in the fourth quarter, we're now finally getting some comparable numbers where you're not going to see those significant jumps in management expense.

The fourth quarter on a level of $5.8 million, then is a reasonable number going forward if you don't expand your portfolio?

Correct, correct. If you compare to the prior fourth quarter, yes. I think we have caught up that time lag where you have had the unstabilized versus stabilized comparison.

And then the laws of probability would suggest some of your employees in Minot have suffered losses. What can happen to morale? What can happen to efficiencies of your employees during the next six months as they try to recover?

Sure. It's Tim, I'll comment on that. I think certainly the things you touched on are true, but I will say that we're a hardy group up here in Minot, North Dakota, and it's been amazing what the staff has done, and how they've responded to the necessary work that has to be completed. Obviously, the completion of the 8-K, today's call with the 10-K scheduled in two weeks, we're doing all we can on our end to help them with those issues, and the emotions that are going to flow. The challenge is going to be, as I've talked to different people, is when this water does recede, and people are able to go back and see their homes. I think that's going to be true for all of us, once our properties, our two properties have the same issues. But I will guarantee that this is a group of people in the city and the State of North Dakota that will respond and we'll get through this and income out better on the end. So we might come over to Montana for a little help too, if you don't mind, so --

I'd love to have you.

Thank you.

Thanks.

You bet.

This concludes our question-and-answer session. I would like to turn the conference back over to Tim Mihalick for any closing remarks.

Thank you, Amy. Again, just a thanks for those of you that have inquired regarding the flood issues. It has been a very traumatic experience in the city but I do truly feel as we step back over the last few years, two and-a-half years and suffered through some pretty trying economic times, that we have done some things from the internalization of property management to addressing our dividend reduction, to looking out to the future of this organization, and feel very comfortable and very excited about what's in front of us.

There are certainly opportunities within our state and in the midwestern part of this country that we can be a very vital part of, with the ultimate goal of continuing to increase shareholder value for the benefit of our shareholders, and to position IRET to being a strong real estate player in the midwestern part of this country. With that, I would thank you again for listening in and being a vital part of the future of this organization. Thank you.

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