Centerspace (CSR) 2012 Q3 法說會逐字稿

Good morning, and welcome to the Investors Real Estate Trust Third-Quarter Fiscal 2012 Earnings Conference Call and Webcast. All participants will be in listen-only mode.

(Operator Instructions)

As a reminder, today's conference is being recorded. I would now like to turn the conference over to Lindsey Anderson, Director of Investor Relations. Please go ahead.

Good morning and welcome to Investors Real Estate Trust's Third-Quarter Fiscal 2012 Earnings Conference Call. IRET's quarterly report on Form 10-Q for the quarter was filed on Monday, March 12, and our earnings release and supplemental disclosure package are posted to our website, and also furnished on form 8-K on March 12. In the 10-Q earnings release and supplemental disclosure package, Investors Real Estate Trust has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with the requirements set forth in regulation G. If you have not received a copy, these documents are available on IRET's website at www.iret.com in the Investors 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 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 statement.

With me today from Management are Tim Mihalick, President 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. The business model that has served IRET well for the last 40 years is still in place, and continues to be the foundation for IRET's future. As Tom and Diane will touch on later in the call, our commercial office segment continues to lag as leasing slowly returns, but that goes with the territory of our diverse real estate portfolio. Our multi-family portfolio is doing very well for us, and we had expense reductions in a number of areas during the recently concluded quarter. Also, last quarter I touched on the strategic plan that has been put in place to identify 10 core markets, and that continues as we speak today through development in Rochester, Minnesota, and recent acquisitions in St. Cloud, Minnesota, and Sioux Falls, South Dakota. I also reference plans to put in place a dispositions program, and you will hear more about our dispositions in the near future.

You may ask, why is this an opportune time to invest in IRET? I assume most of you have seen or heard of the opportunities in western North Dakota, or more commonly referred to as the Bakken shale formation. We at IRET refer to this formation as the Bakken shale opportunity, and my goal for you today is to recap IRET's recognition of this opportunity. As you may know, Minot, North Dakota, where our headquarters is located, is on the eastern edge of this formation, and as you can imagine, IRET is seeking out ways to take advantage of our presence here. To date, we have taken advantage of the following investments which are directly related to the Bakken formation. We have a 15-year triple-net lease with the Hess Corporation for 50,000 square feet of commercial office space, with a blended net rate of approximately $18 per foot. We have a $5.8 million build-to-suit for Integrated Production Services, Inc, a fracking-related business on a 10-year, triple-net lease, at a going end-cap rate of 10.5%.

We have a 10-year, triple-net lease with Catco Parts and Services in Fargo, North Dakota, with a cap rate of 9.5%. Catco is a service provider for trucks in the western North Dakota oil fields. We have a 60% ownership of a joint venture formed to build 144 unit multi-family property at a cost of $134,000 per unit, with a total cost of $19.5 million, and an expected cap rate in excess of 10%. Additionally, we are exploring opportunities to enhance IRET's ownership in the Bakken formation with additional development projects, including more office space, multi-family units, and industrial space with similar cap rates as mentioned above.

As we look to the future, it is important to remember the following things -- North Dakota has the lowest unemployment rate in the nation at 3.3%; North Dakota's output of oil and related liquid topped 500 barrels per day in 2011, up nearly 50% from November of 2010; and that North Dakota is projected to become the nation's second-largest domestic provider of oil in the near future, exceeding Alaska. I believe that all of the positives mentioned above would suggest that you step back and look at IRET as an opportunity to invest in a diversified real estate portfolio with an opportunity to invest in the real estate and the most talked about energy play in North America, the Bakken shale formation.

Thanks, and I will now turn the call over to Diane Bryantt, IRET's Chief Financial Officer.

Thank you, Tim, and good morning, everyone. As reported yesterday, we had strong third-quarter results with income from continuing operations at $2.5 million, and year-to-date of $4.9 million, showing much improvement as compared to the previous quarter and prior fiscal year. On the expense side, favorable results in operations occurred in all segments due to the mild winter in the Midwest. Most notable was related to snow removal included in maintenance expense, as year-to-date we have spent $1.7 million less than the prior fiscal year.

On the revenue side, the multi-family segment continues to out-perform quarter over quarter, and occupancy is now at 93% as of quarter end. Commercial office occupancy percentage continued on a decreasing trend with 77.9% occupied, as compared to 78% in the prior quarter, and 80% in the prior fiscal year. Given recent leasing activities, however, we expect the trend to move in a more positive direction in future quarters. Tom Wentz will discuss further in his market discussions.

We reported third-quarter FFO of $0.16 per share a unit, which is $0.02 greater than the third quarter of the prior fiscal year. Year-to-date FFO is $0.47, as compared to $0.48 per share a unit in the prior fiscal year. Although we have seen positive contributions to FFO from operations, significant movement in FFO growth has been slowed due to the continued vacancy in our commercial office segment as previously discussed. And on a per-share unit basis, the lag effect of dilution also flows FFO growth as we raise equity to fund our development projects and to close on acquisitions.

Moving on to specific activity in the quarter. As you recall, we experienced a flood in Minot, North Dakota, in late June 2011, and two properties, the Arrowhead Shopping Center and the 64-unit Chateau Apartments sustained substantial damage. In this third quarter, we received payment for loss of income totaling $246,000 for both of these properties. This amount was for the period of June 23 through September 30, 2011. We anticipate approximately $328,000 of income yet to be realized this fiscal year on these two properties. We also anticipate recording an approximate $1.7 million gain on involuntary conversion in the fourth quarter related to the Arrowhead Shopping Center. Regarding Chateau, an unfortunate event occurred on February 22, 2012 where one of the 32-unit buildings burnt to the ground. We expect additional losses to be -- we expect that our additional losses will be fully recovered by insurance, but at this time, we are unable to estimate any gain or loss on involuntary conversions. Also during the quarter, we recorded a small impairment charge of $135,000 on a retail location located in Kentwood, Michigan.

During the quarter, we also sold our wholly owned TRS entity to our operator of the Edgewood Senior Living portfolio. This was done to restructure our assisted living portfolio following our acquisition of additional senior housing projects, notably our Idaho acquisitions in November 2011. The net effect of this transaction to the financial statement is that we now have a triple-net lease with the operator, similar to the other Edgewood portfolio, whereas before gross rents and expenses both ran through the income statement.

Moving on to the balance sheet, cash on hand at the end of the quarter was $35.5 million, with $11 million available on our credit facility. Major sources and uses of cash in the quarter were as follows -- regarding acquisitions, we closed on one multi-family acquisition located in Isanti, Minnesota, for a total purchase price of $3.5 million, initial cap rate of 6.38%. Note that additional land is also included in this purchase price that would facilitate an additional 72 units. During the quarter, we placed into service a $3.8-million development project at our senior housing project in Casper, Wyoming. Projects currently under way are detailed in our recent filings, but to summarize, we have a total of $49.3 million in various stages of development. Three of these projects have construction financing in place that will provide approximately $32 million of construction funding.

Regarding our debt during the quarter, we successfully closed on $13.5 million of refinancing in the quarter, which consisted of $6.2 million in new and acquisition debt, and we refinanced $7.3 million of maturing loans. On the maturing loans, we generated $5.2 million of cash-out proceeds, bringing the total cash out year-to-date of $40.2 million. We paid off one loan which was not refinanced during the quarter -- the Meadows Three Apartments loan, which had a maturing balance of $927,000.

The outstanding balance of our line of credit was $49 million by the end of the quarter, and the commitment capacity remains at $60 million. We have $6 million of maturing debt in the upcoming fourth quarter 2012, which includes one office loan and one industrial loan. Commitments to renew these loans have been issued by existing lenders. Equity raised during the quarter came primarily from two sources -- using our at-the-market program, and through the drip waiver feature of our dividend reinvestment plan. The two combined for approximately one million shares, with net proceeds of $7.7 million.

And finally, IRET Board of Trustees has declared a quarterly distribution of $0.13 per common share and unit to be paid on April 2, 2012, to the shareholders of record on March 19, 2012. This will be IRET's 164th consecutive quarterly distribution. With that, I'll 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 third quarter ending January 31, 2012, then cover the credit markets' outlook as applicable to IRET, and conclude with a discussion of IRET's property-level operations, as well as pending acquisitions, dispositions, and development.

From an occupancy perspective, this past quarter saw a slight step backwards in all segments except residential and industrial, which did limit income growth slightly. But on a year-to-date basis, the trend remains positive in all segments, except again our commercial office segment. Commercial office continues to experience negative pressure in basically all metrics. Even though revenue remains under pressure in all commercial segments and is somewhat capped in our residential portfolio, our ability to effectively manage controllable expenses through our internal management platform, along with favorable seasonal conditions, combined with improved occupancy to generate growth in revenue and earnings per share, even with an expansion of our equity base.

Absent a significant back-track in the US economy, IRET remains in a very good position to continue to grow revenue and income going forward. In our multi-family portfolio, expenses continue to be a significant concern, and our primary focus as the lack of wage growth has hampered our ability to drive sustainable rent increases, as almost all of the growth to date has come from the declining use of rent concessions as opposed to actual scheduled rent increases.

On the commercial side, the overall slower office employment trends, along with the continued focus on cost cutting through reducing space needs continues to stubbornly drag on across basically our entire commercial office portfolio. While a smaller percentage of our commercial portfolio, both retail and industrial have experienced improved leasing activity, with improvements in occupancy, even though the effective rental rates remain below desired levels. The difference between having a customer and vacant space will prove to be positive for IRET going forward.

Our medical portfolio continues to perform on a consistent basis, with no real changes as our on-campus assets are performing well in the areas of renewal and rent increases. Our off-campus portfolio, which is really only a handful of buildings, continues to struggle as health care real estate needs have turned their focus to locations near established hospital campuses. We do not see any major changes to our medical portfolio in the near term, butt are carefully watching the budget discussions at the federal and even the state level, as health care costs are likely to be a part of any meaningful spending reductions.

As I discussed in IRET's prior call, increased expenses incurred during the summer of 2011 flooding throughout many of our markets, as well as lease-up costs in our multi-family portfolio, abated during the third quarter, resulting in overall improved income. Most notable was the very favorable winter weather as compared to prior periods. The concern of higher oil prices still remains, but is partially offset by record low prices for natural gas, which is the primary heating fuel used in many of our markets.

With limited occupancy increases available in our multi-family portfolio, our focus continues to be to move rents while holding expenses. While employment numbers remain positive, personal income growth remains weak to negative in all of IRET's multi-family markets except western North Dakota. Again, without both job growth and income growth, the ability to grow rents in the multi-family segment will be limited. For the third straight quarter, we are still seeing lease -- positive leasing activity in all commercial segments except office, which continues to lag.

As I mentioned during our last call, the positive news in the commercial office segment is we continue to see some limited leasing activity by new businesses, as well as small non-public company businesses. This area of the commercial leasing market has been almost completely absent until the previous quarter. However, large users continue to reduce space and focus on reducing costs, with the net effect out-weighing leasing gains we have made with new smaller tenants.

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 tenant expansion in future quarters. The most recent quarter did have a negative new lease and renewal percentage versus expiring leases, but fiscal year-to-date, we remain positive in this area. As we enter the summer months, we expect commercial leasing overall to remain favorable, with retail and industrial being leading indicators of a sustained economic recovery. However, until the overall commercial vacancy rate returns to lower teens or single digits, we expect that our policy of accepting market rate leases is likely to result in reduced revenue despite occupancy gains.

IRET's CFO provided the details on recently closed debt, so I won't spend any time reviewing these, other than to confirm that the debt markets continue to operate very 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 interest expenses on maturing debt as current rates for the most part are well below the rates on our maturing debt.

The primary negative to lower rates is the increased costs with early debt retirement or pre-payment, which creates an obstacle to sale or accessing built-up equity in our long-term assets. However, IRET continuously reviews all loans for refinancing or pre-payment, as this provides IRET with the least expensive source of capital for acquisitions or existing portfolio improvements. The amount of maturing debt over the next several years is low compared to prior years, as we have successfully refinanced much of our debt early. We do not anticipate any material change to our leverage policy of fixing most debt long, but we are evaluating an increasing number of assets with maturing debt for refinance options with more flexibility on pre-payment.

Moving to dispositions, acquisitions, and development. As Diane discussed, year-to-date we have been very active with acquisitions, increasing our portfolio in two of our stronger segments, residential and senior housing. We currently have a number of multi-family projects either under contract or in active discussions. While no assurances can be given that we will be able to actually close on these additional opportunities, we plan to remain active on the residential side in all of our existing markets.

The development projects are all detailed in our recently filed 8-K report, with Quarry Ridge 2 in Rochester, Minnesota, and Williston Garden Apartments in Williston, North Dakota, both scheduled for delivery mid-first-quarter fiscal 2013. Williston is a basically fully pre-leased due to the strong demand related to the energy boom in western North Dakota. We are seeing a number of additional development opportunities on the commercial and residential side, which we hope to finalize for construction during the coming fiscal year, and potential delivery in the second half of fiscal 2013 or early fiscal 2014.

Contrary to prior statements on IRET's development plans, we are now seeing increased opportunity in this area, in basically all of our segment and markets, and especially in western North Dakota. 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 on the under-construction multi-family and senior housing expansions. However, it appears that much higher cap rates are achievable for development in the energy-impacted markets of North Dakota and Montana.

However, even if IRET completed all currently available opportunities, the overall scale in many of these communities is limited due to infrastructure constraints, contractor capacity, and in many cases, the availability of suitable debt capital. We anticipate all currently discussed development projects will be completed early to mid fiscal 2013, providing at least three to six months of income during the next fiscal year.

As for dispositions, we have listed for sale a number of smaller non-core assets which we expect to sell in the next several months, with the proceeds to be deployed into new development and for general corporate purposes. As mentioned by Tim, we expect to dispose of mature assets on a more consistent basis, but do not expect a significant sale program to be implemented.

Thank you, and I will now turn the call back over to the moderator for questions.

(Operator Instructions)

Michael Salinsky, RBC Capital Markets.

Tim, first question, you talked about the disposition plan, expect to hear more. Can we hear what more is -- kind of the plan going forward? I know you talked about a couple of properties you're looking, but is there any kind of strategy in terms of reducing exposure to certain markets, reducing certain asset classes?

I think I touched on that in the last quarter's call, but I think if you take a look at our map geographically, to continue to condense our footprint and look at those assets that are maybe in one-off markets that we currently hold, those would certainly be ones we identify as we look to move forward. As far as any specific asset class, I don't think we've identified that at this point.

Okay, fair enough. Second of all, the expense reductions in the quarter. Obviously the winter has been a bit more favorable than last year. How much of the expense reduction is what you would call permanent and how much it's seasonal?

Mike, that's a challenge really to come up with that number, because it's obviously based on where we're at. We've budgeted again this past year what we expected the winter to be, and obviously came in under that number. It's really hard to quantify that. I don't know, Diane, if you want to add anything?

The last three or four years have been very heavy in expense categories, with snow removal and higher utilities. To get a one-year break, I would have to look more of a trend in the last few prior-years in that. That is a hard one to determine, because this year was -- there was basically no snow removal, and we know that will happen in our markets. I don't have a good answer for that as far as, we'd have to do some trending over some few years to determine that.

Okay if you strip out utilities and you strip out snow removal, how did it -- how were expenses for the quarter, I guess is probably the way to look at it on a seasonal basis?

Yes. Basically, everything -- for the quarter -- real estate operates very consistent quarter to quarter, so those are really the two variables that you can't control would be the snow removal and the utilities. If you strip those out, I think you're going to come up with a very comparable in our stabilized portfolio. Any changes you'll see will be because of the addition of acquisitions, which would cause increase in expenses.

Okay, that's helpful. You talked a little bit about the acquisition pipeline, I think you mentioned a couple properties. Can you give us an update -- where you stand, and I think before you talked about a couple apartment communities you were looking at? How much of that -- would you expect any to close in the fourth quarter? What the pipeline -- whether you're seeing that pick-up, and what you're hearing in terms of pricing?

This is Tom. I don't expect any of the current potential opportunities that we're looking at to close yet this fiscal year that we haven't already disclosed. I would expect those opportunities, if we can come to completion on the purchase agreements, probably this summer. Pricing is aggressive out there just given the interest rate environment. There's no question about it. I guess, again, what we're seeing are probably some of the largest spreads between debt and going-in cap rates that we've seen in the last 10 years. I think one of the trends is -- there's more development that we've undertaken in the last year or so, just because of the lack of opportunities for acquisition of existing product in many of our markets.

Okay. Final question, you said you're seeing limited wage growth in the markets. Curious as to where your rent to median income is today and how much upside you see to that number on the apartment side?

Well, I think if you go into our 8-K, you can see what are scheduled rent increases have been, and than what our actual collections have been. You can see there has been really not a whole lot of growth in scheduled rent, but then has been very significant growth in actual collections per unit. I think we see some upside on rent growth, just primarily because we do have a good concentration of units in Minot, Bismarck, and Billings, Montana, which have very strong wage growth trends. I think really our focus is going to be capturing the remaining few percentage points on occupancy, which we believe is doable, focusing on expenses, and then moderately pushing rent.

Okay, but do you actually have the percent -- the rent as a percentage of median renter -- as a percentage of median income, meaning the household income as a percentage of --

Oh, I see what your question is. We don't track that portfolio-wide from the standpoint of the median income, for example, in Grand Forks is $35,000, and our rent is $700, from that standpoint. What we really look at is what our comparable -- our competition is doing in those markets for purposes of setting rent. What we look anecdotally is what is happening for wages, but really the information we get is backward-looking from the Census Bureau. We're not getting real-time information, so we really use what we're seeing as occupancy and as competitor rents for purposes of pushing and setting our rents.

Carol Kemple, Hilliard Lyons.

I noticed in the press release, the property-managed expenses were down year over year and then also from the second quarter. Is the $5 million amount a good run rate for modeling purposes, or was there something special this quarter?

Carol, this is Diane. The property management expenses as we talked about before included in prior periods the operations at our TRS assisted living facilities. During this quarter we did sell that entity, so they -- basically we're going to have a change in our financial statements for comparative purposes. You are going to see some changes within that, and we will try to quantify that for you and others in our future calls, what that change is going to be. It happened just recently so we're still evaluating that, but you will see some decreases in property management expenses, and it's most notably to that TRS change in operations.

Is the $5 million amount -- is that pretty close to what you are expecting for each quarter for next year?

Again, I like to quantify that.

Okay, that's fine.

And get a little bit more information on that, but it will be significant.

Okay, great, thank you.

James Bellessa, Davidson & Company

On that comment, you were talking about TRS. In the narrative, I see something called LSREF Goldwin ops. Is that the same thing?

That's the same entity. That was the taxable REIT subsidiary that we owned 100% of, which actually was the tenant. That is the entity that was sold to the operator. The underlying lease payment and percentage rent clauses did not change. It's just that we don't run all of the expenses and all of the income through our operations. We're just collecting the net rent, and any percentage rent above certain break points.

Okay. In the narrative, I think Tim talked about these Bakkan-related developments. I read through what was in the 10-Q, but I didn't hear precisely the one that wasn't discussed there -- something about a trucking firm? Could you go over that again, please?

Yes, Jim, that's actually one that we put in place earlier. That was the Catco over in Fargo, North Dakota, which services the western part of the state. That wouldn't have been in there. That was what we have done -- that was the previous lease, probably in place a little over a year ago.

I see, okay. Then, business interruption insurance proceeds that you received almost a $0.25 million. What line item do those proceeds go into?

That's going to be in real estate rentals.

Very good. Thank you very much.

(Operator Instructions)

Chris Lucas, Robert Baird.

Tim, just to go back to this disposition program, can you give us a sense as to what your thoughts are on the scale and the time frame over which you hope to accomplish this?

I think as we look forward and look out, probably over the next three to five years to continue this process. I know that's a ways out, but as you well know, it takes time to reposition our assets and where we're at in the markets we're in. I think from a timing perspective, it's going to be a ways out, but it's certainly something that will continue to be in place on a quarterly basis. Something we'll be able to report on as we move forward, and certainly I would expect we will be very active in that, but it is going to take time. As we look forward, there's opportunities to exit markets as I talked about that are outside our normal geographic footprint, and we hope to get that accomplished as we restructure in the years ahead.

In terms of the scale, is there -- is it a 5% of portfolio size, is it a $200 million, is there some quantification that you guys can give us that gives us a sense as to how significant this will be, potentially?

Not really at this point.

Okay.

I will give that some thought.

Okay. Tom, a question about the speed to market on some of these apartment developments. Is there a different product, both in terms of maybe quality of construction, or is there some differentiation that between what you would build in say, a St. Cloud versus what you would build in western North Dakota?

Yes, there's going to be some slight difference. Obviously, we're seeing extremely elevated construction costs in western North Dakota, Minot included, Williston, anywhere from 50% to 100% higher. Of course your rents are double to triple in the near term. really we're looking at is to build a quality product going forward, and we're quite confident that the product we have in the ground now in Williston North Dakota, that's going to be delivered in the next 30 to 60 days in multiple phases, is a good quality product that is going to stand the test of time in that market as, basically, equilibrium returns. Long-term, there is little to no barrier to entry other than time in western North Dakota. We view that time horizon as relatively significant, just given the lack of infrastructure and other existing limitations in those markets.

I think to answer your question, we're building a quality product which does add some cost, but given the elevated rents that are achievable in the near term, we're basically recapturing those costs very quickly. Case in point in Williston is probably 100 of those units are furnished corporate units on 28 to 36-month leases with larger credit energy companies. We're incurring approximately $9,900 in additional costs in FF&E. In essence, that's being amortized in the first 12 months of those corporate leases, based on the elevated rents we are capturing.

Can you talk to us a bit about some of the barriers that do exist in terms -- whether it's material, available land, water. What are the barriers in western North Dakota that are dampening the new supply at this point, relative to the demand?

Well really, the primary barrier is connection and incorporation into the city. Basically, the availability of municipal services and primarily heavy contractors for purposes of putting in streets, sewer, and necessary underground. Williston really lacks capacity for any additional meaningful development until they expand their water and sewer supply. They're basically at capacity. Now they have plans to do that, and they have received bonding or funding approval from the North Dakota legislature, but that system is still in design phase.

Williston really has a limited amount of land for residential development that can be incorporated into the city in the near term. Long-term, that's not going to be a barrier, it's just a matter of getting it done. Obviously, you have some of the same challenges in both Bismarck and Minot, which are on the edge. It's just a struggle to get connected to the city and expand the necessary capacity to add these additional units.

Are there competitors in the market right now developing? Can you describe them and their access to capital?

Yes, there's a significant amount of activity. At this point there's a lot more talk than actual development materializing. A lot of capital and a lot of the initial development is flowed into hotels and basically semi-permanent or temporary housing, which is referred to as man camps. There's no real reliable numbers on how many workers are in this type of semi-permanent or temporary housing. At this point, based on our own experience, I can't comment on our competitors, but there certainly are some barriers to access to debt capital from the traditional lenders.

Scale is difficult without a meaningful amount of equity or stronger balance sheet. For example Freddie and Fannie are not actively in these markets on new developments. Historically, they are out there. HUD is not out there on new developments from that standpoint. Really, you're left with bank financing, and a lot of North Dakota banks are at capacity with their exposure to western North Dakota. We see that as a challenge, not a block or an insurmountable obstacle, but it's certainly a challenge, which is going to require a strong balance sheet and some demonstrated experience for the ability to execute.

Michael Salinsky, RBC Capital Markets.

Just as a follow-up to the prior question in my original question going back to dispositions. As you think about the investment plan for the next couple of years in your recycle, should the disposition proceeds be enough to fund the equity component of new investment as we try to get a handle on the size?

As we look out into the future, I would expect that that would not handle all we're going to need into the future, if that answers your question. I think are going to see some tremendous opportunities as we reference and look at what's in front of us, and just recycling disposition capital probably won't be enough to fund that.

Okay, and just a follow up on the acquisition question I had asked earlier. As you look at opportunities today, be it multi-family, health care, office, where are you seeing the better opportunities, both in terms of product on the market as well as pricing?

From a acquisition of established?

Yes, established.

Well, it's really on multi-family, just because Freddie Mac and Fannie Mae continue to offer really the best leverage options, and as opposed to commercial. That's really a function of the fact that that's the federal government lending, and so really those are what we see as the best opportunity, because you've got good favorable occupancy trends, not a whole lot of new construction, and you're able to achieve very good spreads on going in cap rates versus your leverage levels.

(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, and thank you again for participating in our call this morning. I think as evidenced by our comments this morning we're excited about what IRET has in front of us, opportunities to take advantage of the midwestern part of the US, and again to offer you the opportunity to invest in real estate in a diverse portfolio, and recognize that there are opportunities out there, and that the midwest is a good place to be. Thank you much, and appreciate your participation.

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