Centerspace (CSR) 2012 Q1 法說會逐字稿

Good morning, and welcome to the Investors Real Estate Trust's 2012 earnings conference call and webcast. All participants will be in a listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity for you to ask questions. (Operator Instructions). Please also note that today's event is being recorded. At this time, I would like to turn the conference call over to Lindsey Knoop Anderson, Director of Investor Relations. Ms. Anderson, please go ahead.

Good morning and welcome to Investors Real Estate Trust's first-quarter fiscal 2012 earnings conference call. IRET's quarterly reports on Form 10-Q for the quarter was filed on Friday, September 9th, and our earnings release and supplemental disclosure package were posted to our website and furnished on Form 8-K on September 9th. In the 10-Q earnings release and supplemental disclosure package, Investors Real Estate Trust has reconciled all non-GAAP financial measures to the most directly-comparable GAAP measures, in accordance with the requirements set forth in Regulation G. If you have not received a copy, these documents are available on IRET's website at 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 this forward-looking statement are based on reasonable assumptions, Investors Real Estate Trust can give no assurance that its expectations will be achieved. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements are detailed in Friday's earnings release, and from time to time in Investors Real Estate Trust's filings with the SEC. Investors Real Estate Trust does not undertake a duty to update any forward-looking statements.

With me today from management are Tim Mihalick, President and Chief Executive Officer, Diane Bryantt, Senior Vice President and Chief Financial Officer, and Tom Wentz, Junior, 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. When I last spoke to you, the City of Minot was under a mandatory evacuation order, and we were waiting for the water to recede so we could assess the damage done by the flooding. To be blunt, the damage done to our hometown community was devastating, and will take years to rebuild. But as we note in our 10-Q filing, we fully expect complete restoration of our 2 damaged properties, and are thankful for the insurance coverage on those 2 assets.

I offer you that insight more on a personal note, as this past summer, coupled with the anniversary of 9/11 yesterday, allows me to reflect on generous, caring and thoughtful people can be in a time of need. Thank you again to all of you who reached out to us at IRET in our time of need. So besides fighting flood waters, helping evacuated employees and moving into a new corporate headquarters building, you might want to know what IRET has been up to. It is no secret that the State of North Dakota continues to receive national attention due to its low unemployment numbers, and more specifically, for the energy activity that continues at a rapid pace in the western half of North Dakota.

Additionally, as evidenced by increasing occupancy in our residential portfolio, we continue to see increased demand for multi-family housing in our markets located in North and South Dakota, Montana, and Minnesota. I've expressed our desire over the last couple of years to condense our footprint geographically, which we began by the sale of our multi-family properties in Texas and Colorado, and used the proceeds from those sales to invest in our markets closer to home. As listed in our 10-Q, we are in various stages to continue that trend, as we have in excess of $106 million in development, expansion and renovation projects in our target markets, reaching from Williston, North Dakota to Rochester, Minnesota.

Included in that $106 million are 2 of our most recent acquisitions, the first being a 147-unit apartment complex in Saint Cloud, Minnesota, at a price of $10.9 million, and the second was the acquisition of 7 senior housing projects, located in Boise, Idaho, and the towns surrounding Boise at a total price of $33.8 million. Although we continue to see the effects of the challenging economic climate, we are encouraged by the amount of interest we have received from potential tenants looking to lease space in our Minneapolis market. As our most recent press release noted, we signed a lease for approximately 20,000 square feet at Gateway Corporate Center, located in Woodbury, Minnesota. A recent article in the Minneapolis Star Tribune noted positive absorption in the first 6 months of 2011, which indicates a nice trend, but, as noted, we are not out of the woods just yet.

Finally, before I turn the call over to Diane to discuss our first-quarter financial results, I would like to say that I am excited about the direction that IRET is headed. Over the last couple of years, I have discussed a number of goals that IRET has initiated, such as internalizing property management, condensing our geographic footprint, focusing on specific asset types and markets that we want to be a part of. I believe that we are beginning to see the fruits of those goals. IRET is far from done, and we continue to invest the numerous opportunities that exist right in our target markets. Thank you, and I will now turn the call over to Diane Bryantt, our CFO.

Thank you, Tim, and good morning, everyone. I will briefly discuss the highlights of the first quarter of 2012, which ended on July 31, 2011. At quarter-end, we had $37 million of available cash, and $16 million available on our line of credit, for a total liquidity of $53 million.

Significant sources and uses of cash during the quarter were as follows. Cash flow from operations were $10.3 million, an increase of $1.7 million from the first quarter of last year. The factors that affect this increase, our operating cash flows, are primarily due to an increase in revenues and lower property expenses. Net cash flow used for investing activities was $11.9 million, with the primary use of cash being for development projects, tenant improvements, and capital improvements.

Notable development projects in process in the first quarter include the $4.5 million addition to the Meadow Wind Assisted Living Facility in Casper, Wyoming and the $17.3 million, 159-unit Quarry Ridge apartment complex in Rochester, Minnesota. We did not have any acquisitions that closed in the first quarter, however, a $2.2 million movie theater expansion in Jamestown, North Dakota was placed into service.

As detailed in the subsequent events section of the 10-Q, within the last 2 weeks, we have started development on a $19.5 million apartment complex in Williston, North Dakota, and closed on a $416,000 land acquisition for an industrial building in Minot, North Dakota. We also closed on an 147-unit apartment complex in Saint Cloud, Minnesota for $10.9 million, and a portfolio of 7 assisted living facilities in the state of Idaho for a total acquisition price of $33.8 million.

Within the cash flows from financing, the most notable items here were from mortgage loan proceeds. In the first quarter, we closed on $20.7 million of mortgage debt, consisting of 11 loans, with gross cash-outs of $19.4 million. The average interest rate was 5.39%. Excluding our secured line of credit, as of July 31st, our overall weighted average interest rate is 5.9%. As stated before, while in our experience, there continues to be adequate liquidity in the lender markets, given the slowing pace of our pending maturities in the coming 12 months, we will likely experience a more modest impact to our cash flow statement from refinance activity.

Moving on to the income statements and results of the first quarter. I was very pleased with the progress in revenue, when comparing first quarter to the prior quarter and year-over-year comparison. The most notable improvements were in our multi-family and industrial segments where occupancy increased 5.7% and 5.6% respectively, as compared to last year at this time. Commercial, medical and retail basically held at the same levels. However, the quarter-over-quarter comparison shows a 3.5% decrease in our commercial office segment.

As Tim discussed, we have seen some larger leases executed recently on vacant space. Their impact will be reflected in future quarters. Overall, revenues were $59.6 million, an increase of approximately $500,000, as compared to the year-earlier quarter. Total expenses were $42.3 million, which is $1 million higher than in the comparative first quarter.

This increase in expense is primarily due to, 1, the non-cash increase in depreciation amortization expense, and 2, the increase in property management expense, which is primarily attributable to increases in operating expenses at our assisted living facility in Wyoming. These facilities are held within our taxable REIT subsidiary, and the nature of these specialized operations provide for non-traditional operating expenses that fall into this category. And increases shown in this quarter are a result of units coming online after the development. Also within our property management review, we evaluate the effectiveness of the internal property management initiative, and given the prolonged unstable economic conditions in most of our markets except in North Dakota, we are seeing positive indicators with increased occupancy and expense control.

Another factor in our increased expenses is related to insurance. Expense in the first quarter was $175,000, due to the recording of the deductible due to the flood event in Minot, North Dakota, and the remainder is an effect of a prior year accrual in our self-insurance reserves. Since I have discussed the flood event, details on the accounting treatment and financial impact can be found in the 10-Q, Note 2, in the paragraph titled Involuntary Conversion of Assets. While we are still in initial stages of estimating the cost to repair and the time to bring back to lease-up conditions, we did carry private insurance and anticipate we will recover the incurred loss.

We have determined that the financial statement impact for the first quarter was $137,000 in lost rent and a write-down of net book value with an offsetting insurance receivable of $2.2 million. Our insurance does include a business continuation policy, which will provide for income to be added back when insurance proceeds are received, and proceeds received above the net book value write-down will be recorded as a gain on the income statement in future quarters.

To summarize, the first-quarter income statement effect due to the flood event, including the insurance deductible and lost rent, net income in the first quarter was reduced by $312,000. Another factor, interest expense decreased from the prior-year quarter end by $146,000, but it's important to note that quarter-to-quarter comparison would have been even greater except in the first quarter of 2012, we did record a prepayment penalty included in interest expense of $341,000.

Moving to funds from operations and per-share results. Total FFO was $15.8 million, and on a per-share basis was $0.16. This is an increase from $0.15 per share, as reported from the quarter ending April 30, 2011. The positive movement in FFO from the prior quarter was attributable to increase in total revenue and reduced property expenses. On October 3rd, we will pay a regular quarterly distribution of $0.13 per common share and unit.

This October distribution will be IRET's 162nd consecutive quarterly distribution. During the first quarter of fiscal 2012, our Board of Trustees approved the plan to pay a reduced distribution from the prior quarter, based upon many factors, but the primary factor being to preserve cash to fund opportunities for acquisitions in development properties that we have in the pipeline. Again, we believe this is the best decision for the long-term benefit of IRET and its shareholders. Now, I will turn the discussion over to Tom Wentz, Junior, 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 first quarter, then briefly 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 developments.

From an operations perspective, this past quarter continued the trend of the previous quarters in that we had no meaningful net economic improvement, despite continued good occupancy trends in multi-family and small occupancy gains in all other segments, except commercial office, which declined a further 3.5% on an all-property basis year-over-year. Despite these occupancy gains, we incurred increased expenses in the multi-family portfolio, as we turned units and secured tenants. These costs should continue to lessen, and we expect multifamily to continue to produce positive results.

Despite some meaningful leasing activity involving larger blocks of space in the Minneapolis office market, as well as our industrial portfolio, resulting in a net positive gain of almost 97,000 square feet, we are still experiencing pressure on all commercial rental rates, as we enter the fourth year of the economic slowdown and weakened recovery. With each quarter, where demand for commercial space remains weak, combined with significant market vacancies, we continue to roll over an increasing percentage of all of our commercial leases.

Obviously, it is not an ideal situation to have a period of weak to poor economic conditions, combined with high market vacancy in our core markets for a period of time equal to or exceeding our average lease term. The result is basically the entire rent structure in the commercial portfolio reprices lower over time. One option is to hold space back in anticipation of improved market conditions, allowing competitors to take the lower rental rates. This has been considered, and was actually a position we took on certain assets early on in the downturn back in 2008 and 2009.

However, given the severity and length, our commercial leasing policy has remained focused on securing all transactions with new or existing tenants, subject to credit. We continue to have a very strong retention policy, but again, like previous quarters, this has come with tenants downsizing their space and lease rate reduction. Throughout the quarter, it certainly appears things have stabilized, as we saw small but at least positive job growth. However, after the close of the quarter, significant volatility appears to have returned to all financial markets, and of course, a series of revised and poor jobs reports were issued later in the summer.

We are still seeing positive interest in commercial space, but how this will translate going forward is now less certain, given recent market disruptions. Assuming the renewed market volatility does not cause a backtrack in business activity, we expect our trend of net positive commercial leasing to continue heading into the fall and winter. However, until the overall market vacancy rates return to the lower teens or single digits, we expect that our policy of accepting market leases will continue to result in reduced revenue, despite higher occupancy gains.

IRET's CFO provided the details on recently-closed debt, so I won't spend any time reviewing, 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 place debt on acquisitions and developments. One positive to current market volatility is rates have set new historic lows. Low rates and our interest expense has been one consistent counter-balance to the weak economic climate over the past several years. So far, there has been no issues for IRET to access the credit markets, but as discussed in previous calls, going forward, the amount of maturing debt is substantially less than what we have dealt with since the credit crisis in 2008. 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 will of course translate into reduced interest rate expense.

We continue to evaluate all of our debt for early prepayment or refinance, or extending amortization periods to increase cash flow. 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 improved cash flow from a reduced distribution level, and combine this with new debt to add accretive assets, as well as improve our existing portfolio. Our approach to leverage remains consistent with our primary focus over the past 4 years, of protecting our balance sheet and operating flexibility by fixing both the rate and seeking longer maturities.

Despite some positive signs in the labor market, it has become increasingly clear that we still have a long way to go concerning job creation. As a result, our best option concerning our current commercial portfolio remains to offset the revenue decline as best as possible, with cost control and improved operating efficiencies, combined with aggressively retaining tenants. We have been very successful in renewing tenants as previously mentioned, in all of our commercial segments, and have also completed more new leasing than was completed in the past few years.

The other strategy is to engage in more higher return development activities in our existing markets, as well as expand our investments in those real estate segments that have other growth drivers, in addition to general economic conditions, such as senior housing and medical office. This produces some lag in revenue, but allows us to leverage off our existing management portfolio, as well as seek increased economies of scale in our core markets.

Before moving to property operations, I will briefly discuss sales plans, acquisitions and development. We had no acquisitions or dispositions completed during the first quarter. However, subsequent to quarter end, we did close on most of the pending acquisitions, as well as complete a number of development projects discussed during our prior call in July. We currently have 5 multi-family projects with approximately 146 units under contract and at various stages of due diligence, All located in existing IRET markets of Isanti, Minnesota, Billings, Montana, and Sioux Falls, South Dakota.

We closed on the multifamily project located in Saint Cloud, we also closed on the senior housing portfolio located in Idaho, consisting of 7 facilities plus vacant land for possible future expansion at four of the locations. These remaining pending acquisitions are all expected to close on or before the end of the current calendar year. If all of the remain acquisitions under contract close, the total cost is expected to be $13.5 million, excluding any adjustments, as well as acquisition expenses and costs.

Our construction obligation on the 24,000 square foot medical office building in Minot, North Dakota is basically complete, with rent commencement scheduled this fall. Construction continues on both phase 2 of the Quarry Ridge Apartments on a parcel of property IRET acquired several years ago, this is located in Rochester, Minnesota, and has a target completion date of mid-to-late Summer 2012, and construction has also commenced on an 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 spring of 2012.

Additionally, we have started construction on 145 apartment units located in Williston, North Dakota. This project is structured as a joint venture with an established multi-family developer and owner with operations already established in Williston, North Dakota. Finally, we have entered into a build-to-suit agreement with a national energy company to construct a special purpose industrial building in Minot, North Dakota. However, this development is still subject to numerous contingencies, so still possible that it may not proceed. Our acquisition and development cap rates range from approximately 7% on the multifamily to over 10.5% on the commercial developments, with an expected average on all projects to be approximately 8% to 8.5% cap rate, subject to lease-up on the under-construction multi-family and senior housing.

Additionally, we expect to leverage the projects at our normal range of approximately 70% to 75% on our multifamily, to approximately 60% to 65% on our commercial projects, and at rates provided at least a 200 basis point or 2% spread, and in some cases, higher. We currently have no assets under contract for sale, except subsequent to quarter-end we entered into and completed the sale of a small net lease retail building located in Livingston, Montana.

Now moving on to operating activities. We provided detailed information in the 8-K on occupancy, new and renewal rental rates and expiring leases, so I'm not planning to discuss any particular buildings or transactions in detail. We continue to have a lot of work ahead of us in our commercial segments to improve occupancy and also increase rental rates in our multi-family operations. Once again, despite the early headlines that the recovery is under way, this past year, we lost additional ground in our largest segment, commercial office. Revenue will remain a challenge, as without first improving occupancy, there is no way to generate increased revenue.

We have basically completed our move to internal property management on the residential side. We still have room to move our costs, as a percentage of rent, down, as we optimize our management portfolio, and most importantly, grow revenue, which is the best method to reduce operating expenses as a percentage of rent. Despite all of these efforts for our portfolio to show meaningful growth and return to previous levels, we need job growth in our core commercial markets, positive wage growth to impact our multi-family segment, and stabilization and price appreciation in the housing market for our senior housing segment occupancy to move higher.

When this will occur is uncertain, so our commitment is to maintain our portfolio and operating platform ready, so we are in the best situation possible to increase both occupancy and revenue, when the opportunity presents itself. Thank you. And I will now turn the call back over to the moderator for questions.

At this time, we'll begin the question-and-answer session. (Operator Instructions). Our first question comes from Michael Salinsky from RBC Capital Markets. Please go ahead with your question.

Good morning, guys.

Good morning.

First question, the transaction activity you closed subsequent to quarter-end, could you give us a sense of pricing? And also, as you look at the pipeline right now, where is pricing on that? And how does that compare to 6 months ago?

This is Tom. Mike, you're talking about pricing from a cap rate standpoint, or per unit?

Yes, on a cap rate standpoint.

I think we're basically still seeing the same cap rate level of high 6s to low 7s on newer product that's probably within the last 10 years, and then the cap rates will march up from there. One issue I guess we're seeing is -- those assets that have existing debt, which of course, now with the last 6 months of pretty significant interest rate reduction. Even though this is very compelling debt historically, a lot of these assets now have above-market debt, which we're starting to see maybe is going to impact some possible transactions, just because we don't have the ability to place new debt, therefore can't be as aggressive on the cap rate.

Okay. And among asset classes, where are you seeing the best opportunities to date?

Well, I think, again, our focus really is on multi-family in our existing markets, senior housing. I think as I alluded to, just given the uncertainty and the stop and starting of the economic recovery, I think some of these other assets that have other drivers than economic activity appear to be more appealing at this point in time. That would be senior housing with demographics, medical with the demographics, and then also apartments. Just given the housing market, there's definitely a class of renters that are just not interested in buying, even though they could.

Okay. On the multi-family side, you mentioned expenses were up because turnover -- it sounded like turnover was up. What was turnover for the quarter, and how does that compare on a year-over-year basis, on multi-family --?

I think if you look at the occupancy and you go back to the 8-K, obviously we're off from the bottom of about 85% occupancy, and so just depending on what demand is out in the market, we may not turn the units as quickly. And I think in prior calls, we also alluded to the fact that we did delay some of our residential lease-up until we completed our full transition over to internal management.

Hopefully that answers your question. Otherwise, we certainly have more detailed information on expenses, and what the categories are.

Okay. That's fair. Was turnover up in the quarter on a year-over-year basis?

Turnover from the standpoint of --?

Turnover in terms of move-outs.

One tenant moving in, 1 tenant moving out?

Exactly.

No, I don't think we saw any marked increase in that. I think what we saw overall was the general trend of increased occupancy. We didn't see a complete turnover in our portfolio. I mean, on any 12-month basis, we turn over almost 100% of our portfolio anyways on the multi-family. That's just the way it's generally been. So there's always very high turnover. It's just what level of tenant you can get to stick to maintain the necessary occupancy.

I guess I'd comment, this is Diane, the turnover and expenses were up, but then the revenue more than 3 times that increased, with that expense going up, so to increase that revenue, you do turn tenants. You bring them in at higher rates. You do have turnover costs that come into play. But that is a function of increasing expenses to generate that revenue.

Fair enough. In terms of, on the office retail industrial side, a decent amount of leasing activity -- are you having to give out higher TIs to get that traffic, or have they maintained on some of the forward leases here, or has it been pretty consistent with what you've seen in the past?

Well, it's been pretty consistent or a little bit lower. Again, in the 8-K, we do provide some detail on what our transaction costs are. I guess the 1 thing we've certainly seen in the market is the move towards trading rent, as opposed to giving cash to tenants. And I think that's just really a product of the uncertainty created by the economic downturn, loss of face, and just pretty much everybody's credit. And so really what we've seen in most of our markets is -- landlords have preferred to compete with lower rental rates as opposed to heightened transaction costs. And I think that trend's pretty much remained the same for us. We have a lot of variation quarter to quarter, but really year over year, looking at our 8-K detail, it's probably come down slightly -- the transaction costs.

Okay. And then finally, you've mentioned now on a couple of quarters about the strong growth you're seeing in western North Dakota there. Can you just talk about kind of the plan to take advantage of that? If you look at the portfolio, most of your office is in Minneapolis there. I'm just kind of wondering what the growth opportunity is, and how you expect to capitalize on that growth.

Mike, this is Tim. I think we will continue to take a good look at that. One of the things you have to recognize in these communities in western North Dakota is the need for infrastructure, and you have to be developed. So as that continues to progress, and I think that's 1 of the things the state's going to discuss, they're going in a special session this fall, but infrastructure to address the needs for office space, for multi-family, for roads and such, all needs to be developed. And as that continues to be provided, that gives us an opportunity to take advantage, to acquire, and to build for both multi-family and office in this part of the state. And take advantage of that energy ramp-up.

So it's more of a development strategy then it is opposed to an acquisition strategy, it sounds like.

In some cases, yes. We'll invite you out here when you get bored, you can come out and see what's going on, but it's just the need to ramp up to get these things rolling is going to require some infrastructure development. We are continuing to talk to a number of oil companies, as well as -- or energy-related companies, I should say, in this part of the state.

That's all for me, guys. Thanks.

Our next question comes from James Bellessa from DA Davidson & Company. Please go ahead with your question.

Good morning.

Good morning.

Good morning, Jim.

The announcement last week of an acquisition or acquisitions in Idaho, looked like your exposure to Edgewood Vista moved up to over 12% of your total commercial space. What is the size that you would like to max out at, to any 1 credit, any 1 tenant?

Well, Jim, this is Tom. There's a couple of issues at play with REITs and senior housing. Obviously, under the current structure, we are prohibited by the REIT statute from fully self-managing. And so as a result, our exposure to any 1 particular operator or manager is limited by some of these sliding scale IRS rules that require that the operator be independent of us, and that has a financial test. So I think from that standpoint, that's 1 factor that will limit our exposure to Edgewood Vista as we go forward.

I think the other issue is -- we don't really look at it like a traditional commercial tenant like Boeing or Best Buy or Kmart, from the standpoint that each of these properties have underlying tenants. And so what we look at is really the market. In essence, these are apartment buildings that are either master leased or turned back over for an operation purposes to a manager.

And so what we really focus on, and what we pay most attention to is what's going on at the property, because at the end of the day, even if Edgewood Vista would default, you're still going to have X number of residents in that community that are paying their rent, from that standpoint. So we view that as a little bit different of a factor. And I think going forward, as we grow the senior housing portfolio, what our plan to do is to provide really a lot more color on the underlying operations as we move towards the taxable REIT subsidiary structure that we discussed previously.

Thank you very much.

(Operator Instructions). Our next question comes from Chris Lucas from Robert W. Baird.

Good morning, everyone.

Good morning, Chris.

Good morning.

Just a couple of follow-up questions. On the apartment side, looks like on the year-over-year basis for the same portfolio, the rents were almost flat, and yet the rent collected per unit, or I guess receipts per unit, were up a little over 7%. Can you maybe provide some color as to what is driving that improvement, and how sustainable is that improvement?

Well, I think if I understand the question correctly, what numbers you're focusing on -- we've got a wide variety of projects and rent levels, and so really that number is a function of where our improvement is taking place in our portfolio. And we may have a little play between stabilized and unstabilized from that standpoint. What we really are trying to add, over the last several years, were newer product in the markets that we were in, either through development or acquisition. And so I think we kind of focused on adding that as a profile, and so I think that's probably the biggest explanation of what we're seeing as far as revenue.

But again, as I alluded to, when we look at our scheduled rent, even in some of these markets that have remained strong or relatively stable, that's been basically flat over this last decade. Even though we've certainly improved occupancy, I think any multi-family operator in our markets would confirm -- there's a long way to go on improving scheduled rent and rent per unit.

Just as a practical matter, how far can you push occupancy in the multi-family arena?

Well, I think in the past when we touched up to 95% -- I mean, our policy really is at 95% you're effectively full, and that means you need to push the rents to the point where you get occupancy back to 95%, or you need to build into that market. Running at 100%, under our management philosophy, really means you're leaving money on the table, and you need to really dynamically explore what that market will support. And since we have a pretty big presence in most of our markets, I think we're pretty good at that, and we really have never viewed 100% occupancy as the goal. It's really 95%, and then boost revenue, push rents.

Okay. And then on the build-to-suit project, seems like the per-square-foot, at least to me, appears pretty high. Is there something unique about what you're doing for them that boosts the per-square-foot number, or is it just because of the size of the project being relatively small?

There's a couple of factors at play. Obviously, you've got elevated pricing that's taking place in western North Dakota, just due to a lack of construction infrastructure for 1 thing, and just really the overall reduction of construction capacity in this country as a whole. That's 1 thing.

And I think really the other -- this is not, for the most part, traditional energy development. It's a highly technical and specialized process called fracking, which involves pretty significant investment in each of the well sites, and a lot of technology. And so these companies have very specialized equipment and very specialized products that require a building in kind. So those are really the 2 factors that are driving it. I think our answer to that is higher cap rate return and longer-term lease for purposes of amortizing that higher investment cost.

Okay. And then the last question from me is just on the retail leasing -- looks like the rent bumped quite a bit. I guess I was just curious as to whether that was specific to a single lease that might have been aged a lot that was renewed, or what's driving that? I know these numbers can be pretty volatile.

This is Tom again. Really, the retail segment is pretty small, and that's probably the best explanation. I didn't go in and look at any specific trend on that. But that's the best, or the most likely, outcome is that we had a legacy lease, those retail leases tend to be a little bit longer in term. And when the retail location is strong, you're definitely going to get your bump or your increase.

What we've seen in retail, if the site is marginal or the tenant is struggling, they've closed, they've gone. Really what we've got left in the retail portfolio are tenants that need to be there, are making money in that location, and consequently, we're not experiencing as much rate pressure on the retail side, because really all the tenants that were going to do that to us have left or gone bankrupt.

Okay. Great. Thanks a lot.

And at this time, and showing no additional questions, I would like to turn the conference call over to Mr. Mihalick for any closing remarks.

Thank you, again. We appreciate your interest in IRET, and your participation in this morning's call. We would invite you all to attend the annual meeting, to be held Tuesday, September 20, 2011, at 7 PM at the Grand International in Minot, North Dakota, and we'll invite all of you, and we'll even try to find you a hotel room, which might be a little tough to do. Thanks again for participating.

That concludes today's conference call. We thank you for attending. You may now disconnect your telephone lines.