Centerspace (CSR) 2012 Q2 法說會逐字稿

Good morning and welcome to the Investors Real Estate Trust second quarter fiscal 2012 earnings conference call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event 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 second quarter fiscal 2012 earnings conference call. IRET's quarterly report on Form 10Q for the quarter was filed on Monday, December 12; and our earnings release and supplemental disclosure package were posted to our website and also furnished on Form 8K on December 12. In the 10Q earnings release and supplemental disclosure package, Investors Real Estate Trust has reconciled all non-GAAP financial measures to the most directly comparable to 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 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 these 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 Monday's earnings release and from time to time in Investors Real Estate Trust's filing 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, everyone. Just about a month ago, I had the opportunity to attend REIT World in Dallas. It was good to be back in and amongst peers within the industry. IRET in the past has not been very active in industry trade associations such as NAREIT or other organizations that help us associate and learn from our peers. I'm here to tell you that today we intend to change that moving forward. We also have not been on the road talking about the outstanding history that IRET has built over the last 41 years, and that too needs to change moving forward. And lastly, we need to do a better job of offering insight to you, the investor, about what IRET has in store for our future.

Before I turn the call over to Diane Bryantt, our CFO, to discuss this quarter's financial results, I would like to give you a brief outline of the future of IRET. As many of you know, IRET has a long and storied history in the REIT industry. IRET was initially created to simply allow North Dakota investors the opportunity to own shares in a publicly traded real estate company. Over the years through many challenges, IRET has continued down that same ownership philosophy but has expanded the base of ownership to include holders of stock to be from a global market. Ideally as we move forward, I believe it is important for IRET to strike the right balance through its performance and ownership of real estate that will allow IRET to be recognized as a quality investment to be held by both institutional and retail owners of our stock for the long-term.

As one of my peers recently stated, it is a great time to be buying real estate, but it is also a great time to be selling real estate. On the acquisition front, IRET has identified 10 core markets we currently operate in. As we move forward, we intend to increase our holdings in these markets to allow us to take advantage of our recently completed initiative to internalize residential property management. We believe that getting back to the basics and operating in the cities we know best such as Rochester, Minnesota; and Billings, Montana and our hometown of Minot, North Dakota will serve us well as IRET moves forward.

As we noted in our most recent 10Q filing, we experienced increase in all but our commercial office occupancy as we continue to experience challenges in that segment of our portfolio. Although we noted the recent signing of leases in both Minneapolis and Des Moines, which totaled in excess of 137,000 square feet, we continue to keep the pedal to the metal as we search out tenants which will allow our shareholders to realize the benefits of increased occupancy. Additionally we intend to put in place a plan to dispose of those property which no longer fit inside of our geographic footprint or our core markets. As you all know, our least expensive way to raise capital is by using the proceeds from the sale of assets and using them to help fund acquisition or address other capital needs. We continue to examine our portfolio from top to bottom to identify which assets may best fit the dispositions list.

Finally and most importantly, I plan to do a better job of telling the story of IRET. IRET has a 41 year history of delivering to its shareholders a competitive return on their investment. We continue to operate in the states which are experiencing lowest unemployment in the nation. North Dakota, Nebraska and South Dakota are ranked number one, two, and three in that category. Although our growth has been challenged by the global economic times we have experienced over the last three to four years, I believe that IRET is in position to take advantage of its experience and knowledge in the markets in which we operate. Through prudent use of our sources of funds using debt, capital market raises through the disposition of identified assets, and by seeking out investment in our core markets, which now includes the famous Bakken shale formation; IRET is poised with a strong plan in place to move us to that quality investment that we believe everyone should have as a part of their investment portfolio. Thank you and I will now turn the call over to Diane Bryantt, IRET's Chief Financial Officer.

Thank you, Tim, and good morning, everyone. This morning I'm going to briefly highlight items of note in our operating activities and then identify the major sources and uses of our cash in the quarter and year-to-date. We reported second quarter FFO of $0.15 per share or $0.02 less than the second quarter of the prior fiscal year. Year-to-date FFO is $0.31 as compared to $0.34 per share in the prior fiscal year. Although we see positive trends in most of our property operating segments, FFO growth has been slowed to due to the continued increase in vacancy in our commercial office segment.

Other significant factors that cause lower results in the quarter are as follows. As you recall, we experienced a flood in Minot, North Dakota in late June; and in the second quarter, we were able to assess the losses and quantify the receivables from the insurance. Accordingly, we recorded our deductible expense of $200,000 in this second quarter. Along with the deductible, we have also determined that we have unrecorded rents of approximately $474,000. We anticipate recording these lost rents when insurance proceeds are received in the third or fourth quarter of this current year.

Acquisition costs were significant in the quarter. We expensed approximately $426,000 in acquisition costs relating primarily to the acquisition of the Idaho Senior Living Portfolio. These events as mentioned above had a $1.1 million total affect on year-to-date earnings. However, I want to point out that we anticipate that we will recover the $474,000 of lost rent in the future quarters.

Moving on to major sources and uses of cash. Acquisitions. The second quarter was busy in bringing of a number of acquisitions to close. The total purchase price of these acquisitions was $52.8 million. The largest transaction was a seven property portfolio of assisted living facilities located in Idaho. The total purchase price was $33.8 million with an approximate cap rate of 8.5%. These properties are fully leased to an operator and rent commenced on September 1st. We also acquired $17.9 million of multi-family properties, two in Sioux Falls, South Dakota and one in St. Cloud, Minnesota with a cap rate average of 7.5%. These multi-family projects are located in our core markets and fit well into the strategy of growing in markets where we can gain efficiencies with internal management.

Development. During the quarter, we placed into service an $8.2 million development project in Minot, North Dakota with an 8.1% cap rate return with rent commencing on October 1. Projects currently underway are detailed in our recent filings, but to summarize, we have a total of $56 million in various stages of development. Three of these projects have construction financing in place that will provide approximately $32 million construction funding, with IRET investing year-to-date $14 million in these projects and with $10 million yet to fund.

Now on to debt refinancing activity. We successfully closed $12.6 million in refinancings in the second quarter. We also closed on approximately $37 million in new and acquisition debt and an assumed loan of $7.2 million. Total debt activity for the quarter totaled $56.5 million. On existing assets we generated approximately $16 million in cash-out proceeds. Average interest rate on these loans was 5.34%.

We also paid off three loans which were not refinanced during the quarter. Livingston Pamida for $1.2 million due to the sale of the assets, Canyon Lake apartments for $2.6 million, which is being refinanced; and our Arrowhead shopping center for $2.3 million, which is under reconstruction due to flooding in Minot, North Dakota. No prepayment penalties were incurred on any of these payoffs. The outstanding balance of the line of credit was increased to $47 million by quarter end, and the commitment capacity increased to $60 million subsequent to quarter end. We have $3.4 million in maturing debt in the upcoming third quarter on to apartment loans. Commitments have been received to refinance upon maturity.

Moving on to equity. In the quarter, we did use the waiver feature under our Dividend Reinvestment Plan. Efforts under this waiver provided approximately $8.8 million of equity issuing approximately 1.2 million shares. These proceeds were invested into the acquisitions and developments that I previously mentioned. And finally, IRET Board of Trustees has declared a quarterly distribution of $0.13 per common share and unit to be paid on January 16, 2012, to the shareholders of record on January 3, 2012. This will be IRET's 163rd consecutive quarterly distribution. With that, I will turn it over to Tom Wentz, Jr., Chief Operating Officer.

Thank you, Diane. Consistent with my past presentations, this morning I will provide a general overview of the recently completed second quarter then 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 saw a positive improvement from previous quarters in occupancy in all segments except commercial office. Even though net income remains under pressure, improved occupancy should place IRET in a better position to grow revenue and income going forward. Increased expenses prevented us from fully capitalizing on the improved occupancy, however, we do not expect to see the same level of expenses and operations as increased customer activity as well as the number of casualty events including the flooding in multiple IRET markets drove increases in the areas of maintenance; and of course, additional activity in our buildings will increase all other expense categories. As the costs with new leases burn off going forward and rent payments commence, we expect these costs are likely to lessen. And with increased occupancy industrial and small gains in retail and medical, we expect to recover an increased amount of additional rent in the form of CAM and operating expense reimbursement.

As always, in all IRET markets, winter conditions such as snow removal and increased utility costs remain an unknown. So far, compared to last year, we have experienced a very mild winter across our entire portfolio with the benefits hopefully to appear in the current and future quarters, assuming things continue to hold. However, I would note oil and other energy prices are approximately 20% higher than this time last year, which could very well have an impact to the extent of snowfall, which would require heavy equipment for removal, increased heating costs, and other maintenance issues associated with winter conditions. At our current levels of occupancy, our focus in the multi-family segment is to move rents while holding expenses. We have seen modestly encouraging employment numbers, but personal income growth remains weak to negative in all of IRET's markets except Western North Dakota. Again, without job growth and income growth the ability to increase rents in the multi-family segment will be limited.

For the second straight quarter, we've experienced good leasing activity in all commercial segments except office which continues to lag. However, the positive news in the commercial office segment is we're finally starting to see some limited leasing activity by new business startups as well as small non-public businesses. This is an area of the commercial leasing market that has been almost completely absent for the last 48 months. It certainly remains to be seen if this is a meaningful trend or just an isolated quarterly event. Lease rates remain pressured and transaction costs remain elevated in comparison to rent levels, so the net economic impact of commercial leasing is negligible. But again, without first securing tenants, there is no possibility of raising rents or expanding the tenants.

We continue to have a very strong retention percentage, but again, like previous quarters, this has come with tenants either downsizing their space in the commercial office segment or lease reduction rates. Like last quarter, we are still seeing positive interest in all commercial space segments, but as discussed, the concern is how market uncertainty may impact, translating this increased interest into actual leases. Once again, Europe, the US debt ceiling debate, the payroll tax holiday extension, along with all other economic headlines do appear to have a disruptive effect on business confidence and real estate decisions. Assuming the renewed market volatility does not cause a backtrack in business activity, we expect commercial leasing to remain overall favorable with retail and industrial as the leading indicators. However until the overall market vacancy rates return to the lower teens or single digits, we expect that our policy of accepting market rate leases will continue to result in reduced revenue despite higher occupancy.

IRET's CFO has provided the details on recently closed debt, so I won't spend any time reviewing other than to confirm that the debt markets are operating well for IRET as we have multiple options to leverage our existing portfolio as well as acquisitions and developments. Interest rates remain at historic lows, which will continue to provide IRET with the ability to lower its interest rate expense on maturing debt as current rates for the most part are below or well below the rates on maturing debt. The primary negative to lower rates is the increased costs associated with early debt retirement or prepayment, which creates an obstacle for us to access built-up equity or pursue sale opportunities with our longer-term assets. However, we continue to closely monitor all loans as refinanced proceeds remain IRET's least expensive source of capital for acquisitions or expansion of the existing portfolio. The amount of maturing debt over the next several years is very low compared to prior years as we have successfully refinanced much of this debt early or prior to its actual maturity date. We do not anticipate any material change to our leverage policy of fixing most debt long-term. But we are evaluating an increasing number of assets with maturing debt for refinance options with more flexibility on prepayment going forward.

Now, moving on to dispositions, acquisitions, and development. As Diane discussed, we had a very active quarter with acquisitions increasing our portfolio in two of our stronger segments, residential and medical. We currently have two multi-family projects under contract with both expected to close early 2012. The third potential acquisition pending during the quarter, a small apartment project in Billings, Montana which was briefly noted in our earnings 8K; but we consider this unlikely to close now for various reasons and accordingly did not detail in the commitments and contingencies note of our 10Q. Active pending acquisitions entered into subsequent to quarter end, are our multi-family residential property in St. Cloud, Minnesota and two multi-family properties in Grand Forks, North Dakota.

We remain active on the residential side in all of our existing markets. The development projects are all detailed in the 8K. We are seeing a number of additional development opportunities on both the commercial and residential side, which we hope to finalize for spring construction. However, it is not expected that development will grow to a level beyond our current activity and is likely to move back closer to the $35 million annual level. Our acquisition and development cap rates range from approximately 7% on the multi-family to 10.5% on the commercial developments with an expected average on all projects to be approximately 8% to 8.5%, subject to lease-up of course on the multi-family construction and senior housing expansions. We expect to leverage our projects at our normal range of 70% to 75% on the multi-family to approximate 60% to 65% on the commercial projects and at rates providing at least a 2% or higher spread. We are currently evaluating several assets for sale, which are currently not leveraged. No final decision at this point has been made to sell any assets.

Now moving on to operating activities. We have provided detailed information in the 8K on occupancy, new and renewal rental rates, and expiring leases so I'm not planning to discuss any particular buildings or transactions in detail. I would note we continue to have a lot of hard work ahead of us in the commercial office segment to improve occupancy and also increase rental rates in our multi-family operations. Again, for our portfolio to show meaningful growth and to return to previous levels, we not only need job growth in our core commercial markets, but also positive wage growth and stabilization and price appreciation in the housing market for our senior housing occupancy to move higher. When this will occur is uncertain, so our commitment remains the same to maintain our portfolio and operating platform in the strongest position possible as well as to add selective properties in our core markets so we can 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.

We will now begin the question-and-answer session. (Operator Instructions) At this time we will pause momentarily to assemble our roster. The first question comes from Jim Bellessa of DA Davidson. Please go ahead.

Good morning.

Good morning, Jim.

How do you recover the nearly $0.5 million of lost rents due to flooding related activities?

Well, Jim, this is Tom, under our insurance policy basically that is a reimbursement once the insurance company goes through our leases. So it is really just a timing issue. We have received a significant amount of funds for both reconstruction and renovation at both the Arrowhead shopping center and the Chateau. So we just expect it to be a timing issue. And Diane can probably comment further, but really it is one of those things we don't booked until we actually receive the check. But there's no question that the money will be coming.

I see. And then is that likely to be a third quarter check that you are going to receive, or is that pushed out further?

It could be pushed off further. It's really a timing issue with our insurance company. And obviously it is a long complicated process to reconstruct the shopping center as well as go through the leases and determine what the actual lost income is. We do have some tenants that are not going to be coming back. We have expanded some tenants there. We got some new tenants.

So it's going to be an issue that we are going to have to sort out with the insurance company. And the mall was basically 100% occupied prior to the flood event. And so there's going to be some offsets because we do have some new tenants coming in that are potentially going to be at higher rents. And like I said, we have some tenants that have left or did not get invited back. But at the end, we expect to be made whole, of course, less the $200,000 deductible.

The magnitude of the flood was extraordinary. But are there any things that you have done to mitigate the future risk of floods?

I think, Jim, we continue to monitor along with the city what their flood recovery plans are into the future and what the expectations are to dike and to put levies in place. And I guess as we have assessed it and looked at it, we feel comfortable that where our properties are located should be outside of the planned new flood way. And the other issues it sounds like the United States and Canada have gotten together to address the flow down to the river. The river obviously originates in Canada, comes down through Minot, goes back up to Canada. Hopefully we are able to better manage the flow as we move forward.

You have talked about disposing some non-core real estate, which I interpret to be real estate that is not in your geographical footprint. What is the potential magnitude of dispositions? If you dispose of certain assets then what is your redeployment rate? Can they match each other so that your earnings don't lag during a disposition period?

I guess as we continue to take a look at that, we will have to give that some good evaluation. To be honest, I think as we look at it, there may be some lag. But we feel as we move forward, it's going to be important to us to concentrate on those core markets as we move IRET into the future.

And what would be the potential magnitude of raising of funds from dispositions?

We are really not prepared to give that information. We're still taking a look at that at this point in time.

Can you just rough it in? Is it $50 million, is it $500 million?

Well, I think if you look at those properties that are outside of our core market maybe that gives you an idea of what we are looking to exit.

Okay. Thank you very much.

The next question comes from Chris Lucas of Robert Baird. Please go ahead.

Yes. Just to follow-up on a couple of those points. On the dispositions, just in terms of the timeframe in terms of identifying assets and then over the timeframe under which you would expect to go through and meet your expectations, how much time are we talking about?

I would guess over the next 18 to 24 months, it would be the expectations to put that in place if not sooner. To identify those assets currently and to get that process rolling out.

And the purpose here is to streamline the Company rather than --?

Right. You have to get -- as I mentioned earlier, get back to the core markets that we know well and to the properties that we understand. As I touched on our initiative to bring internal management in place and then to put and redeploy those proceeds into those markets that we know well and do what we do best.

And just wanted to confirm, you don't have any assets that are currently mortgaged that are parts of securitizations do you?

Yes. We have some conduit or CMBS debt on our balance sheet. There's a number of assets. It isn't a large percentage of our overall debt. But we do have assets that are encumbered by CMBS or conduit debt.

And would any of the potential dispositions be party to those securitizations?

Well, it could be. Obviously when we look at a disposition where we have got debt that hasn't matured, we just have to calculate either the yield maintenance or the defeasance costs associated with that. And that's just a function of where the loan is versus current interest rates versus the debt rate. So it's just basically a financial decision. So I don't think we would rule out any assets that are encumbered by those types of debt. But as you well know, those are more problematic to sell either from an assumption standpoint or a prepayment standpoint.

Okay. And then, Tom, just changing gears slightly. On the -- what's the sort of time delay that we should expect between when leases -- particularly office leases are signed versus when rent actually commences?

Well, from a financial reporting standpoint, that rent's going to show up on the income statements right away because we straight line it. So any concessions really are just amortized over the term. From a cash standpoint and an operating expense standpoint, we can have a pretty good lag of four to six months, and that really shows up on the operating expense side. Just because the tenants in occupancy and we generally don't abate the gross rent. We generally abate the base rent or the actual rent for the building, and try and bill out operating expenses right away. But that isn't always the case. So occasionally we have tenants occupying the space in essence for free on the operating expense side, and that's really where we see the lag in the earnings because it shows up on the operating expense side with no corresponding reimbursement.

Okay. And then maybe, Diane, if we could get a little bit deeper in understanding the flood -- sort of the lost revenue side. How much of lost revenue related to flooding was in the second quarter?

In the second quarter? Well, we -- July was probably the first full month in the first quarter, so we have had four months and it's $474,000 total. So probably $300,000 in the second quarter. And that's a combination of both the apartment and the shopping center.

Okay. And then just in terms of the reimbursement for lost revenues. Is that a one-time thing or does that get bled in, or how do you -- how is that received from the insurance company?

The accounting rules say from insurance proceeds you have to have a definite number from your insurance company and know the funds are basically on their way. We are submitting to the insurance company the lost rent numbers, and they just need to identify in their reimbursement. So that will be coming, but it is quite a process to get there.

And then for tenants move outs, as part of that, is that recoverable, or is that something that is just part and parcel to the process that you are not going to be able to recover?

Well, for tenants that actually had leases that extended beyond the loss of rents term, obviously, that is speculative from a recovery standpoint. Because we only have a certain period of lost rent of business interruption income coverage. Now, we didn't really have a lot of tenants who had leases that expired during this coming year. So we really don't expect to see any meaningful reduction in revenue. What we are expecting is that between insurance and returning tenants, we are going to in essence be whole or probably in a better position, because we have some legacy leases that had some rates that were probably below-market from that standpoint.

The center is back open and a number of tenants are already back in occupancy. So, of course, the loss of rents drops off for those particular tenants. So it is complicated. Obviously when the mall's not being operated, your operating expense reimbursement is that much lower. So the insurance company takes that into account.

Last question, just on conditions. Tom or Tim, can you just provide maybe a little guidance as to where sort of the better or most improved markets have been over the last three to six months and where you have seen weakness or a lack of traction?

Well, I think on the residential side, I'd really point out St. Cloud. I think that market really has improved dramatically from an occupancy standpoint. We still have some isolated pockets in our multi-family; but for the most part, every corner of our portfolio is performing well. We have a few buildings inside markets that are struggling. But if I was going to pick a market on the multi-family side, the Minneapolis metro and the St. Cloud market, which is about 60 miles outside of Minneapolis; Rochester, Minnesota, those markets have improved dramatically both in occupancy and rent. And as you know, we're building now in Rochester and we have had some acquisition activity in St. Cloud.

On the commercial side, there really hasn't been any one market over the other, they have all really kind of moved in tandem. Omaha was really about the only market where we didn't see the depth of decline on the commercial side. But at this point, really all of the markets appear to be operating about the same and seem to basically move in similar fashion. And then industrial, that really is concentrated. We have got a pretty good position in Iowa, Des Moines area. And Fargo and then around the Minneapolis market. And again, that is just really improved in all of the markets at the same time. That seems to really move nationally.

Okay great. Thanks a lot.

The next question comes from Michael Salinsky of RBC Capital Markets. Please go ahead.

Good morning. You talked about the 10 core markets. I think most of them should be obvious, but are there any surprises in there? Are there any markets where you don't have significant exposure at this point that would be in the 10?

No. I think I could name them off the top of my head. You would start with Billings, Montana through Minot, over down into Bismarck, Jamestown area of North Dakota, Grand Forks. Then you go down I-29 corridor to Sioux City, Sioux Falls, South Dakota down to Omaha into Lincoln, Nebraska; Topeka, Kansas where we've had large holdings, then you go back up to Minnesota, the Minneapolis suburban markets and then Rochester and St. Cloud. I think that's all 10. Those are the markets that we certainly are involved in and know well. And that would be what we identify as our 10 core markets.

So the recent expansion out to Boise and out to Wyoming would not be considered within the 10?

Yes. I'm sorry, Mike, in that sense, I'm referencing more the residential side of our core portfolio. But we'll continue in those other markets, but I guess my reference is more to the residential portfolio.

Okay fair enough. You touched a little bit upon recycling. Are you marketing anything currently at this point?

We do have some buildings that we are potentially marketing. That we are out with, but have no commitments for sale. But we have gone out publicly on a few assets on an informal basis from that standpoint. But that is really going to be subject to market response and a few other things.

So nothing you would expect to close in the third quarter it sounds like?

Well, the assets that we're looking at are free and clear. So I think our expectation is that those could move very quickly, really depending on market response. And the market on the acquisition side, there's really a pretty strong appetite for well leased, well-positioned buildings. There isn't a lot of investor interest in turnaround stories or distressed real estate, unless it is a trophy type asset. So I think we could move some of our unencumbered assets rather quickly. And so I wouldn't rule out third quarter dispositions being under contract and actually closing because the assets are unencumbered that we are looking at.

Okay. Fair enough. That's helpful. Third, Diane, can you talk a little bit about debt markets? I think you mentioned that debt markets were open. Can you talk about kind of the commercial terms you are seeing right now, as well as what you are seeing on the multi-family side just in terms of pricing LTB's, things of that nature?

This is Tom. That is probably a little closer, Ted Holmes out of our Minneapolis office really handles the day-to-day of that. But we are really seeing probably the best terms that we have ever seen. Multi-family is pretty much exclusively through the agency. If you want higher leverage and longer-term, Freddie and Fannie. We are seeing low 4%s, mid-4%s depending on the leverage and the terms you are looking for.

On the commercial for well-positioned, well leased buildings with life companies and/or banks, low 5%s, high 4% range with 20 to 25 year amortizations, 10 year fixed terms on both of those. So if you have got quality real estate, there is really no barrier to borrowing. And I think you may be noticed or picked up in my comments that I move more to a little bit more positive on the debt markets as far as IRET's concerned. We really have seen excellent lending terms.

I did pick up on that, so that was the reason for the question there. Tim, can you reconcile for me a little bit -- you seem more optimistic on the office side in your commentary on the call. Yet in the earnings release, you indicated that the pickup has been slower than expected on the commercial office side. I guess can you just reconcile kind of what you are seeing? And if you saw anything -- if you go back to last quarter, you seemed pretty optimistic on it as well. And it seems that the commentary in the press release seems a bit different than what you guys have talked about here on the call.

Yes. I think I like to be optimistic, but in that sense, Mike, I think that we continue to see activity in more markets as Tom touched on, that we haven't seen in the past. We're starting to see an interest in our assets over in the Denver market, which for quite a while we weren't able to. And I think, again, we touched on some startup businesses and those normally have not been part of our exposure here recently now we are back into the market looking for space. In a smaller sense, but for me, from our perspective, it create some optimism. But it's a challenge, as we stated. Globally, you step forward and you step back and you continue to push forward. But in talking to our asset manager in the Twin Cities, in the markets that we are in, they are excited about the activity and the calls that we are getting. So that leads me to believe that there is some future as we move forward in the commercial occupancy side.

Okay, so just kind of characterizing the last four months, you haven't seen any slowing or anything like that in terms of new leasing demand on the office side? Is that correct?

That's correct.

Okay, thank you. And then finally, just because you talked about the Bakkan shale, can you kind of talk about the strategy there, whether you actually expect to kind of go into the Bakken shale? I know you talked about needing infrastructure there. Or the plan is to kind of play around the markets there? Can you just walk us through kind of the strategy over the next several years of how you expect to use that to your advantage?

Yes, I think as we have talked about it off and on over the last couple of calls, we have approached it a little differently although we are under construction in Williston on apartments. We have stepped back and looked at the outlying markets of which Minot is one of those. And as we have mentioned in the past, we have got Hess as a tenant in our property. We've got Ambridge as one of our tenants, a pipeline company. IPS, which is associated with a frac drilling.

And so we felt we have established a reputation with these larger companies to build and to build the suits for them and sign 10 to 15 year long-term leases. And we look at that as our opportunity to continue to grow in this market in the Bakken shale formation market. And so that is our strategy to approach more so the commercial side of this opportunity where you can get the Hesses or the Ambridges on the lease for 10 to 15 years. And we are continuing to pursue that we do see some opportunities in that as we move forward.

Great. That's all I have got. Thank you.

(Operator Instructions) The next question comes from Andrew DiZio of Janney Capital Markets. Please go ahead.

Hi. Good morning.

Good morning, Andrew.

Sounds like you are rethinking a lot of different parts of the Company. Wondering if the leverage level going forward is something you're thinking about as well. Do you want to keep it at the higher level where it's been, or is that something you look to reduce?

Well, this is Tom. I guess leverage obviously can be bad or it can be good. I think going along, we have a lot of flexibility on how we want to deal with it. I think, frankly, at the current point, if you look at our average weighted interest rates and you look at the cost of our equity at our current distribution level, it really doesn't make a lot of sense to replace that debt with equity at this point just because there is a cost differential. Now that may change.

And I think that if we do move more into the sale side of the business, obviously, you're going to have to have a little bit more flexibility on the loan terms, maybe hold more assets free and clear or hold them at lower leverage levels to reduce the risk when the loan or debt matures. So I would say that is something that we continually evaluate. But debt has been so inexpensive over the last decade that it is difficult from a business standpoint to justify moving away from that given the relative cost of equity. Now, that may change, and then I think we would again evaluate the leverage levels.

Okay, that's fair. Thanks. And then looking at your development pipeline, I know you all have a construction loan in place for Williston Garden. Do you have construction loans in place for any of those other projects?

We are using construction loans on all of the projects that we are developing. So we have a construction loan of the Rochester apartments that are currently under construction. We have a construction loan for the IPS industrial build to suit in Minot and Williston. Actually, I should correct that, we're using cash on the expansions for the Wyoming senior housing and memory care.

But those are relatively smaller projects compared to the $18 million or $19 million apartment projects, and that really will be our expectation going forward just given the magnitude of the development that we have done this last year versus historically. We are probably going to top $60 million this past fiscal year. And that's a lot of cash, especially on the apartment side to just sit there pending lease up.

Okay, thanks. And then just one question for Diane. On the extension of the credit facility, with the bank committing the additional $10 million, is there any change to covenants or terms associated with the facility or is it just a straight expansion?

It is straight expansion. No change in terms.

Okay, great. Thank you.

(Operator Instructions) 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. Just again, thanks for your interest in IRET. We continue to move forward, I think, as we are positioned for an exciting time into the future. And with that, I'd wish you all a Merry Christmas and a Happy New Year and we will see you in 2012. Thanks.

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