Centerspace (CSR) 2013 Q1 法說會逐字稿

Good morning, everyone, and welcome to the Investors Real Estate Trust fiscal 2013 first quarter 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. I would now like to turn the conference call over to Ms. Lindsey Anderson, Director of Investor Relations. Ma'am, you may begin.

Good morning and welcome to Investors Real Estate Trust's first quarter fiscal 2013 earnings conference call.

IRET's earnings release and supplemental disclosure package for the three months ended July 31, 2012 were posted to our website and also furnished on Form 8-K on September 10. In the earnings release and supplemental disclosure package, Investors Real Estate Trust has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with the requirements set forth in Regulation G. If you have not received a copy, these documents are available on IRET's website, at IRET.com, in the Investor 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 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, Executive Vice President and Chief Financial Officer, and Tom Wentz, Junior, Executive 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.

Last week, I had the pleasure of being part of a panel at which a number of pertinent questions were asked regarding IRET's position in the REIT world. And with my apologies to the moderator of the panel, I thought some of the questions posed would make for great talking points for my opening remarks.

In the past, I have stated that IRET is the only publicly traded REIT in our markets. While I believe that to be true, I should have noted an exception for competition from other REITs that we face in and around the Minneapolis-St. Paul area. I do believe, however, that IRET is the largest fully integrated operating company with experience in all facets of the real-estate industry throughout our 12-state region. And most importantly, we have demonstrated the ability to access capital, and we all know how crucial capital is to the real estate business. As Tom and Diane will touch on later in the call, our ability to access capital was evident by the recent successful preferred offering we completed, in which we were able to raise net proceeds in excess of $111.2 million. This capital raise falls in line with our strategic plan that I have talked about over the last year, as this will allow us to pay down our line of credit, as well as other targeted mortgages, which will enhance our cash flow. Additionally, the funds raised will provide with us the balance sheet strength necessary to continue our focus on acquiring and developing projects in our core markets, most notably, the North Dakota market, home to the Bakken Shale formation, where the energy-related activity remains robust.

I truly believe that the diversified portfolio that IRET holds is of a great benefit to our investors. But that is not to say that our portfolio will not look different five years down the road. As I have talked about in the past, we continue to look to dispose of non core assets in outlying geographic areas, and we continue the process of evaluating the assets that best fit our portfolio. As indicated by our recent filings, we continue to be bullish on the core markets I have discussed in previous earnings calls. The change will you note is a move towards more development, as we take advantage of the numerous opportunities being located at the gateway of the Bakken Shale oil formation affords IRET. We believe we have been able to demonstrate that we are able to see the same type of returns on new construction that we can on acquisitions, and that positions our portfolio well for the future. The unfortunate part of the development process is the drag we will see on our earnings, as the capital needed to fund those projects will not reflect the same return as seen from those projects upon completion.

Although we feel very comfortable with the state of our balance sheet, we also recognize that some of the key metrics used by the industry, AFFO and debt to EBITDA coverage, to name a few, need to be improved upon to be more in line with what's expected by the industry investors. We believe that over the next 30 -- or over the next 24 to 30 months, most of IRET's key metrics will be significantly improved, and that is the goal we are working towards. We do recognize and are working hard to address the challenges that our commercial office portfolio in the Minneapolis market presents for us. We know the need for job continues to weigh on the office market, but we are optimistic that we are seeing a slowly increasing demand for space. I honestly believe that some of these questions may be clear once the election in November is over.

Lastly, IRET was found over 40 years ago with a guiding principle to creating shareholder value. I have been part of this organization for over 31 years, and over that time we have fostered strong and enduring relationships with lenders, builders, and the investment community by operating on the simple philosophy that our word and our handshake are evidence that we will do what we say. I truly believe that those values are what have positioned IRET to be where it is at today. And that is at the beginning of an exciting time to continue creating shareholder value.

Thank you. And I will now turn the call over to Diane Bryantt, our Executive Vice President and Chief Financial Officer.

Thank you, Tim. This morning, I will give a brief summary of highlights and results of operations of the first quarter of fiscal year 2013, ending July 31.

We were pleased with the operating results in the first quarter. Revenue increased 4.8%, to $62 million, as compared to the first quarter of fiscal year 2012. The primary source of increased revenues was from acquisitions and development properties placed in service. Net operating income increased $2.6 million, or 7.6%, for all properties. Again, acquisitions are the primary driver of this increase, and detail by segment can be found in the operating results in the MD&A section of the 10-Q. But to summarize, non-stabilized or acquisition properties provided for an additional NOI of $2.9 million. Stabilized properties, however, provided for a combined overall NOI decrease of $261,000.

To break down by segment, multi-family segment stabilized NOI was $966,000 greater than the prior fiscal year, showing the effects of continuing increase in occupancy and reduced operating expenses. This increase in the multi-family segment was offset by decreases in the office and medical segments. The office segment is not showing significant changes in occupancy; however, financial statement variances were caused by reduced tenant reimbursements, increases in real estate taxes, and allocated property management expenses. These type of expenses will be offset with occupancy increases through tenant reimbursements. the decrease in the commercial medical segment was primarily a result of vacancy at the Startell location and other reductions in the senior housing portfolio as a result of changes in operating structures. Again, detail by segment is found in the 10-Q. Overall occupancy percentage in our stabilized segments increased in three of our five segments, with multi-family again leading the way. Tom Wentz, Junior, will later discuss more what we see in the marketplace, as far as leasing trends and expectations for these segments.

Consistent with our conversation last quarter, we anticipate final settlement on our pending claims and gain to be realized in the second quarter for our losses as a result of the flooding and fire at our Minot, North Dakota locations of Arrowhead Shopping Center and Chateau Apartments. In the fourth quarter of fiscal '12, we had realized a gain due to involuntary conversion on Arrowhead Shopping Center of $274,000. At this time, we estimate that that gain will be less than $500,000 in total. We do not have an estimate on the gain of -- gain as of today for the flood and fire loss at the Chateau Apartments. Also during the quarter, we did not have any lease termination fees as compared to only $65,000 in the prior comparative quarter. Also, acquisition expenses in the quarter were $73,000, whereas we did not have any of these fees in the prior comparative quarter.

Moving to FFO, we reported first quarter FFO of $0.16 per sharing unit. This is consistent with the comparative quarter of the prior year, however, $0.02 less than the fourth quarter ended April 30. The prior year-end quarter ended April 30 realized some additional FFO activity as a result of a payment of bankruptcy claim and the capture of ensured rental income from our flood and fire loss. The effects of the larger weighted average shares outstanding, resulting in dilution, is still a factor affecting FFO per share. And in addition, we will continue to have this earnings drag, as we venture into more development opportunities.

AFFO per share was $0.10, as compared to $0.11 in the prior fiscal quarter. Detail on AFFO is provided in the earnings 8-K. Although down $0.01 per share, in looking at adjustments to FFO, tenant improvements and leasing commissions were significantly higher in the comparative period. This is favorable as we look forward, knowing that the lease-up of commercial space will cause increase in these type of payments, but the corresponding rents will begin to show in revenue in later periods.

Moving on to the balance sheet, cash on hand at the end of the quarter was $37 million, with $15.5 million available on our credit facility. During the quarter, the major sources and uses of cash were as follows. Regarding acquisitions, in the first quarter, we acquired three multi-family properties consisting of 748 units for a total purchase price of $52.4 million, with a blended underwritten cap rate of 6.9%. Placed into service were two development projects, the 159-unit Cory Ridge apartment development in Rochester, Minnesota, as of today, this new facility is 95% leased.

The total investment is $16.5 million, with an anticipated stabilized cap rate to be around 7.7%. Also, the completion of the final 73 units of the Company's 145-unit Williston Garden development in Williston, North Dakota. The total investment in the four-building complex is $16.2 million. The new development is 100% leased, with realized cap rate approximately 16%. We also have additional development projects underway as of quarter end of $23.5 million, with an additional commitment subsequent to quarter end of $38.5 million. Again, with total developments underway of $62 million. Please note that we are seeing rapid lease-up on these properties; however, it will take time to build and develop these properties into income producing assets.

Moving on to debt, during the quarter we closed on $35.5 million of mortgage loans. This consisted of $27.8 million of new acquisition debt, with interest rates ranging from 3.86% to 3.99% fixed for 10 years. We also closed on one refinance debt of $7.7 million and generated $650,000 cash out proceeds. The interest rate was 4.75% with a 10-year term.

The line of credit interest rate floor was lowered to 5.15%, from 5.65%, and was $44.5 million outstanding at quarter end. Subsequent to quarter end, the line of credit was paid down to $10 million, with $34.5 million of proceeds from the preferred stock offering. Also subsequent to quarter end, we paid down an additional $30.5 million of mortgage debt. Average interest rate on paid-off loans was approximately 6%. Overall, $65 million of debt has been paid off subsequent to quarter end. For the remaining of the fiscal year 2013, we have $19.2 million of maturing debt, and management is reviewing the refinance or payoff as these loans mature, as we look to apply the use of proceeds from the recent preferred stock offering.

Equity raised during the quarter came primarily from the voluntary share purchase program under our dividend reinvestment plan, where we issued additional -- we issued approximately 1.5 million shares with net proceeds of $11.4 million. Regarding equity, as previously mentioned, on August 7 we completed the public offering of the Series B preferred shares at a price of $25 per share, for net proceeds of approximately $111 million. The plan of use for these proceeds are to fund acquisitions, development projects, and debt pay down.

And finally, the IRET Board of Trustees has declared a quarterly distribution of $0.13 per common share and unit to be paid on October 1, 2012 to the shareholders of record on September 17. This will be IRET's 166th consecutive quarterly distribution.

With that, I will turn it over to Tom Wentz, Junior, Chief Operating Officer.

Thank you, Diane.

Consistent with my past presentations, this morning I will provide an overview of our fiscal 2013 first quarter ending July 31, 2012, as well as provide a review of recent events and trends impacting IRET. I will also cover the credit markets as they pertain to IRET, and conclude with an overview of IRET's segment operations, as well as pending acquisitions, dispositions, and development.

Our first quarter results continued the trend of improving operations, with revenue up primarily due to acquisitions as well as, more importantly, continued strength in our multi-family operations. While commercial office continues to be a drag on overall operations, the slight declines in our medical segment are primarily confined to one building and a change in operating structure at our Wyoming senior housing properties and the related accounting treatment. At the start of the last fiscal year, we outlined a number of areas of focus in an attempt to make positive progress in what we viewed would be continued challenging economic conditions due to a slow and uneven recovery, and low employment and wage growth. With our move to internal management mostly complete, our first focus is on growing revenue by improving occupancy and adding assets to our core segments of multi-family, medical office, and senior housing through acquisitions and development, controlling expenses and seeking to dispose of those assets that fit our -- that do not fit our priority segments and markets. While commercial office continues to be challenged by the slow pace of economic recovery, we again made good progress in our areas of focus, as confirmed by our first quarter results.

Second, we continued to prudently move capital to strategically grow the strongest segments of our portfolio, multi-family and medical, as well as the strongest markets in our portfolio, the Bakken energy region of North Dakota. Like our previous quarter, our recently completed and announced acquisitions and developments will position IRET well to capitalize on what should be a sustained economic expansion, mostly in western North Dakota, eastern Montana, portions of South Dakota, but also to a certain degree, the overall greater region, due to energy development. Third, even though we continue to focus significant resources on growing our strongest performing segments, it is clear that in order to properly position IRET, the commercial office segment's performance must be improved. The commercial office market has remained mired in a very challenging environment for what is now approaching almost six years. We will remain focused on this segment, with the goal of improving performance as well as carefully evaluating all operational and strategic options, including sales of selected assets to more quickly rebalance our overall mix of property assets and provide greater capital to grow those segments as we see offering more prospects for positive growth.

The only real solution to the problems facing commercial real estate will be an accelerated economic recovery that not only reduces unemployment, but also creates real income growth. Until this occurs, corporate real estate users will likely continue with their push towards smaller footprints and denser employee counts in smaller spaces. Larger public companies continue to see real estate as a controllable expense line item that can be reduced. Even so, as mentioned in our last call, we are still seeing improved commercial leasing interest, as compared to prior periods. Whether this will actually translate interest a material amount of new commercial leases still remains to be seen.

Over the last several quarters, we were pleased with the improvements in occupancy in retail and industrial, and overall increased net revenues across the entire operation. This past quarter continued the trend from last fiscal year, where almost every meaningful operating and financial metric continues to improve. While we have further to go in many areas and are not satisfied, we are positioned well to continue to execute on our plan to grow in our core markets and segments, including through development in the multi-family area. We believe our current plan to focus on the areas of operation just mentioned will continue to accretively grow IRET's revenue while carefully controlling expenses.

Absent a significant backtrack in the US economy, our expectation is that existing commercial office operations will improve modestly, while we expect slightly better improvements in our other commercial segments of retail and industrial. But with both multi-family and medical already performing at strong levels, there will be only modest growth in the existing portfolio, as we focus on rent increase and expense control. However, we expect to achieve higher growth in these two segments through acquisitions and developments. We have both acquired a meaningful number of apartment units over the last 12 months and have also a number of project under construction and more in the early development process. We plan to continue to be a leading multi-family operator in our core residential market. Likewise, in our medical portfolio, we have continued to look to add assets that fit well with our overall operating footprint, such as our medical office building under construction in Jamestown, North Dakota. We will continue to work to offset the drag from commercial office segments by growing our strongest segments and markets.

IRET's CFO provided the details on recently closed debt, so I won't spend any time reviewing, other than to confirm low interest rates and open debt markets for IRET continue to provide opportunities to lower our overall interest rate cost. Debt markets continue to operate very well for IRET, as we have multiple options to leverage not only our existing portfolio, as well as acquisitions and developments. The historically low interest rates will continue to provide IRET with the ability to reduce our interest rate expense costs on maturing debt, as current rates, for the most part, are well below the rates on maturing debt. The amount of maturing debt over the next several years is low compared to prior years, but we continuously review all loans for refinance opportunities, as this provides IRET with the least expensive source of capital for acquisitions, funding of operations, capital improvements, and also allows us to further reduce our interest rate expense, which is the single largest expense for IRET.

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 prepayment to provide with more options should we elect to continue to hold these assets. Additionally, with our recent preferred offering and improved operations, we are turning our attention to reduced leverage on those assets where we have shorter term debt. Again, this is designed to improve our balance sheet and to provide more flexibility when it comes to funding acquisitions and developments.

Moving to dispositions, acquisitions, and development. Including last year and now through the first three months of fiscal 2013, we continue to be very active with acquisitions in increasing our portfolio. The development projects are all detailed in the 8-K, with both Cory Ridge in Rochester, Minnesota, and Williston Garden Apartments in Williston, North Dakota now complete and basically fully stabilized. We have also broken ground on 132 units in St. Cloud, Minnesota and 146 apartment units in Bismarck, North Dakota. Additionally, we acquired an approximately 2.5-acre site in the city of Williston, North Dakota that will potentially accommodate up to 44 units. This is in addition to the 40 acres that we acquired earlier this year.

We expect to complete the industrial build to suit in Minot, North Dakota later this month, with rent commencing yet this fall of 2012. And the Jamestown medical office building is scheduled for early 2013 completion, with rent commencing hopefully yet this fourth quarter of fiscal 2013. The Kalispell, Montana senior housing expansion is basically complete, with additional rent expected to start during the second quarter or early third quarter of this fiscal year 2013. 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, with potential delivery in the second half of fiscal 2014 or early fiscal 2015. Our acquisition and development cap rates range from approximately 6.5% on the multi-family to 10.5% on the commercial developments, with an expected average on all project to approximately be 8% to 8.5%, of course subject to lease-up on the under construction multi-family and senior housing expansions. However, it appears much higher rates are achievable for development in the energy-impacted markets of North Dakota and Montana, as evidenced by the returns on our Williston Garden Apartments in Williston, North Dakota. However, even if IRET completed all currently available opportunities, the overall scale in many of these communities is limited due to the infrastructure constraints, contractor capacity, and in many cases, the available of suitable debt capital for construction.

As for dispositions, we have listed for sale a number of smaller and non core assets which we expect to sell over the next several months and years, with the proceeds to be deployed into new development and general corporate purposes. As mentioned by Tim, we expect to dispose of mature assets on a more consistent basis for purposes of funding the expansion of our core markets and product types.

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

At this time, we will begin the question-and-answer session.

(Operator Instructions)

And our first question comes from Rich Anderson from BMO Capital Markets. Please go ahead with your question.

Thanks, and good morning, everybody.

Good morning, Rich.

I don't know who that joker moderator was, but (inaudible) discussion. (laughter) So, you talked about leverage targets in the next 30 months. Can you quantify where you think you can get from an absolute leverage perspective, whatever ratio you want to choose?

Well, Rich, this is Tom. I don't know if we've necessarily set a leverage target, per se, but I think our focus going forward is to reduce our leverage on our existing portfolio and our matured assets, purely to provide more flexibility going forward in the event of sale or repositioning. I think with the current capital -- or the debt markets where they're at, for our new acquisitions and new developments, I think we're still going to seek our target leverage levels of that 65% to 75%, depending on product type length of ability to fix. But I think going forward you will see our overall leverage come down into probably the high 50%s, low 50%s, but not a real meaningful reduction from where it's at.

And would that generally be done through the sale of encumbered assets? How do you expect that leverage number to tick down over the course -- ?

I think it's a combination of, you know, if that's the best use of sale proceeds. I mean, I think, again, our primary focus is on growth. But again, every dollar we get in capital, whether it's from sale proceeds or new equity or operating revenue, we evaluate what the best home for that is. And in certain instances, that's to pay down debt, primarily for cash flow improvement, improved liquidity and flexibility. But, again, we have to look at growth opportunities and evaluate what the best use of that dollar is.

I think, again, it probably would be additional equity for purposes of reducing leverage, depending on the stock price and what the net proceeds to IRET would be. So, I think it's really a combination. We haven't absolutely dedicated any particular source for this use or that use.

What percentage of your debt would you say is friendly, from an early pay-down perspective?

I would say of the $1 billion that we're at, we probably have 15% to 20% friendly, from the standpoint of we're maybe 1 or 2 percentage point on a pay down, or it's at par. We have a fair amount of debt overall that still has pretty good term left on it, but is open either at 1% or 2%, or is open at par, or the prepay period is burned off.

Got you. And on dispositions, you said a more consistent basis. Could you provide any kind of color or quantify what you think a disposition run rate might be on an annual basis?

Rich, this is Tim. I guess that's somewhat of a challenge, again. We've talked in the past about those non-core assets and trying to get a feel for where the market sees our properties. I certainly have discovered it's challenging to take a look at some of those outlying markets outside of the Twin Cities to try to nail a number down. So, that's been somewhat of a struggle, other than to say that, as Tom mentioned, we've listed some of these properties for sale that are in our markets, and hope to continue that plan moving forward.

Okay. Looked as if during this first quarter you had an uptick in property management and maintenance expenses. Anything to be read into there? Is that a one-timish type of thing? What was that all about?

Well, usually a lot of that is seasonal. Just given our markets, a lot of activity on repair, renovation, capital improvement, construction is really crammed into the first and second quarters, just because that's the Summer months. So, I think our review is there really isn't anything from a trend standpoint that we saw necessary to comment on. So, I guess our response is nothing material or trend-like.

Okay. Last question from me. Tim, you mentioned development returns on the same level of acquisition returns, except for in the Williston area. Is that -- did I hear you right, and why aren't you willing, or why don't you need a premium return on development to justify that incremental risk?

Well, yes, obviously in the Bakken and the energy plays --

outside of there, I mean.

Outside of there?

Yes.

I still think from a premium perspective, we're probably at 7%, 7.5%, with the anticipation that those numbers will be higher. I think we are going to be able to occupy those, rent them up. We've got the opportunity still to lend on those from the agencies, so you're looking at debt cost probably at below 4%. We're looking at a spread anywhere from 300, 400 basis points as we put those projects in place. So, I guess that 7.5% to 8% range probably is attainable.

Okay. So, there is a spread in terms of what you will develop for and what you will acquire.

Yes.

Yes.

Okay. Great. That's all I have. Thanks.

Thanks, Rich.

Our next question comes from Michael Salinsky from RBC Capital Markets. Please go ahead with your question.

Good morning, guys. The two properties you list in the Q there as under contract, should those close in the second quarter, and what should we expect in terms of pricing on those? And also, I'm not sure if you mentioned this, but the three acquisitions you closed in the first quarter, can you give us a sense of where pricing came in on that?

Yes, this is Tom. Diane probably has the exact numbers. The two acquisitions that are pending in Billings, Montana and Sartell, Minnesota, I think -- correct me if I'm wrong, $25.2 million, $25.1 million approximately for those two projects, and that's about 250-plus units. Those should close, no assurances can be given, probably in the next 45 to 60 days would be our expectation. But again, that's subject to a lot of variables from that standpoint. The other pending -- I mean, the recently closed acquisitions, Lincoln -- we had the two in Lincoln, Nebraska and then Topeka, Kansas.

What were the cap rates on those, though?

Blended was 6.9%, per Diane's. That's our net projected cap. That's not the gross. That's the net.

Okay. So, that includes CapEx and management fee, correct?

Correct. That's going to be after our projected CapEx and after a management fee. Debt on those acquisitions probably averaged 3.8%, 3.9%. We assumed some debt on the Topeka asset. So, overall, good accretive projects, good spread in the underlying difference between the going-in cap and the underlying leverage.

Okay. Appreciate the color there. Second question, you mentioned positive leasing momentum again this quarter, yet we didn't see it really translate into actual leasing volume. The retention ratio was also a little bit lower. What seems to be the disconnect there in terms of leasing volume we're seeing versus actual lease signed? Is it pricing? Is it people waiting to make decisions based upon the election? Can you give us a sense of what you're hearing from the tenants?

And then also, the TIs and leasing commissions, you mentioned those were pretty high during the quarter. Do you expect that to continue?

I think on the first part, really what we're seeing are much smaller tenants in the market. I think it goes back to some of our earlier commentary on these calls, where we noted that for the first time we're actually seeing new businesses, we're seeing small businesses. We're seeing some positive signs. And I think what I'd take away from my commentary is the larger corporate users really is the counterweight to that trend. They still are in a hold pattern, and they still are viewing large blocks of space as controllable expenses.

So, I think it's really, again, we're seeing more activity from a more diverse group of tenants that we hadn't seen before, but it's a much smaller scale. And again, I think what I commented is, we still have to wait and see what this is going to translate into. But I think there is definitely a longer time horizon here. These are companies that are not capitalized as well, generally are smaller, take a little bit longer to make a decision.

I think on your second question about the TI costs, again, what I think we've tried to say is look out over a longer period of time, in our 8-K. Even though obviously it's a lot of real estate, in the scheme of things it's pretty small on a square footage basis, and we've got a pretty diverse portfolio in there. So, very -- individual transactions can skew the deal pretty significantly one way or the other. And in this past quarter, we had a class-A-plus building, Golden Hills, where we had leasing activity take place. A-building, credit tenant, that's going to be a much higher TI cost. So, that's just really going to skew the results.

So, again, what we kind of look at is our trend out over several quarters in the 8-K, and not necessarily quarter to quarter. But that would be the explanation for the prior quarter.

Appreciate the color there. Just as a follow-up to that then, the retention ratio dropped pretty significantly. Was that one large tenant or was that a combination? And also, just to go back to the comment there, you talked about the larger guys downsizing. Is it a price sensitivity, or are they still continuing to shed jobs there? What's the driver there? Are they coming back to you with price, willing to take the space, or is it just that they want to downsize at any cost?

It's primarily smaller footprints. Again, it goes back to my comment on higher density. We're not really seeing job loss as the driver. What we're just really seeing still in the market is higher density requirements. And so, if there's multiple offices, they're not necessarily reducing the staff count, they're just basically putting the same staff count in smaller space or a space, and then giving back the other space. And that's still the phenomenon we're seeing among larger corporate users, public companies that really have an expense control motivation.

And as far as the retention ratio, again, that really fluctuates depending on who comes up. But yes, there have been some larger tenants that we've been in discussion with on downsizing, from that standpoint. So, that's going to impact -- we're going to retain them, but they're going to downsize. So, that's going to impact the retention ratio negatively. Even though we've retained them, we've retained them in a smaller space.

Okay. And just the final question there. You talked a little bit about development. How many additional projects should we look for, for the balance of the year here, as you're laying out your capital plans for the year?

Well, you know, I think there's going to be a number of them. I think if you look back out over the last 12 to 18 months, and I think really our commentary is -- there isn't a lot of existing product that can be acquired in these markets. And so, historically we've built in the Billings, Montana's, the Sioux Falls, South Dakota's, the Bismarck, North Dakota's. I think if you look back over the last 12 months, where we probably did half a dozen projects, I think that's a pretty good guesstimate going forward.

But again, development is substantially different from acquisition. It takes time. Not all projects get out of the ground. And there's a drag. There's a cost to development that's not associated with acquisition. So, I wouldn't see it going all development, but I think it is going to be at the heightened level that we're at.

That's all from me, guys. Appreciate the color. Thank you.

(Operator Instructions)

Our next question comes from Dan Donlan from Janney Capital Markets. Please go ahead with your question.

Thank you. Just going back to the development question, as you guys are looking at the Bakken Shale area, is this going to be more multi-family, industrial, office, or is it kind of going to run the gamut?

Dan, I think at this point, we've focused on the multi-family opportunities in the Bakken Shale, really within the heart of the Bakken Shale, which is Williston, North Dakota itself. And we'll continue to pursue opportunities around the periphery of that field. Obviously back in Minot, which has seen the impact of the energy play, as Tom mentioned, we should begin collecting rent from industrial build-to-suit with IPS here later this year. We've leased space out to Hess Corp, as well as Enbridge, and continue to pursue other opportunities from the industrial perspective in the larger markets where we could see a second use for those properties.

Obviously, as we've touched on in the past, the challenge of the infrastructure needs in the Williston market, as well as Minot itself, and as those continue to get developed, we'll continue to take advantage of those opportunities. But our focus will probably be more on the multi-family and industrial, with some commercial office space as we address larger users.

Right. And how do you think about the longevity of these assets? I don't know how long the boom is going to last. What is your feeling there, and are these assets that you think you can continue to maintain occupancy for 10, 15 years? Any thoughts there would be helpful.

I think -- and then Tom can add a little color on this. We take a look at the play to be there for a while. A while -- 5, 10 years. We've been through a couple of boom and busts, but there's certainly some different characteristics in this energy play. We're going to continue to take a look at those markets. The 145 units that we mentioned earlier, we were able to master lease the majority of that project with three- to four-year leases. So, we look at that as an opportunity to reduce the cost of that project.

In regards to the length of the play, everybody tells us we have legs. Both parties seem to be focused -- both political parties, that is -- seem to be focused on bringing energy production back to the US and being active in domestic production of that. And so, that was certainly good to hear, as I look at the election outcome. So, I think that bodes well for what we see in western North Dakota. The length of the play, obviously, is going to be dependent on pricing. And if I had an answer to that, we'd all be sitting in a different room. But we're comfortable with it's going to continue to play and continue to move forward.

Okay. Thank you very much. That's it for me.

And our final question comes from James Bellessa from DA Davidson and Company. Please go ahead with your question.

Good morning.

Good morning, Jim.

I'd like to go back to property management expenses. They've been running at over $5 million. And then in the fourth quarter, your April quarter, they dipped below $3 million. That was partly explained by proceeds from a settlement of a claim. But one of the inquirers on this call asked, and management response, at least the way I interpreted it, was that it was going to be staying down towards this $3 million level. But in the first quarter, it did jump up above $4 million. What did we misinterpret, what did we misunderstand, and will this $4 million level be where you're going to be, or is this just a variable, it's going to vacillate?

Jim, this is Diane. I think probably the discussion should look at, in the 10-K, the detail by segment. The effect of the TRS change in comparative periods is going to be there for another year, and I believe we detailed out the expenses in that medical segment. But overall, if you look at the stabilized properties and their expenses in that detail, I think you are going to see that they're holding their own, they're going down. But you almost have to look by segment. And that TRS change, if you look just at the big picture, it is going to cause you some issues in your comparative-period analysis.

And I'm not aware of what TRS stands for. Can you -- ?

That's that taxable REIT subsidiary, and it has to do with our Wyoming senior housing change from a taxable REIT subsidiary to a triple net structured lease. Again, it's a bit complicated. The net result is approximately the same, but in the comparative financial categories of revenue and expenses, you are seeing significant adjustments either way. But the NOI, the bottom line, is the key focus that you need to look at in that segment.

And this taxable situation, we don't any longer -- there was a few quarters there where you did have a taxable line item, but that's not showing up any longer.

Right, because that structure was dissolved. It basically went from operating like an apartment building to a single tenant rent structure. So, the TRS has been dissolved, and those facilities are operating as a triple net single tenant, just one line item revenue that comes in.

And how does that have a bearing on property management expense line item then?

Because in your prior comparative periods, you would have had expenses running through.

I see. Okay. Now, going forward, is this first quarter level, $4.1 million, a reasonable base to look at your cost of property management expenses, or is it going to vacillate, I guess is the question.

Okay. Probably I would say that would be consistent. In the fourth quarter of fiscal [30], we did have that bankruptcy claim that reduced expenses. So, if you are looking just at first quarter, I would say you're probably correct.

Thank you very much.

(Operator Instructions)

And at this time, in showing no additional questions, I would like to turn the conference call back over to management for any closing remarks.

This is Tim Mihalick again, and I would just like to offer my thanks for those of you listening in this morning. It's an exciting time at IRET, as we look forward. The completion of the preferred offering gives us some flexibility in our balance sheet that we haven't seen in a long time. And the opportunities that are in front of us from a development perspective as we begin to also restructure our balance sheet and address the metrics that the industry also measures us off of allows us to be excited about what's in front of us.

As I mentioned earlier, we've had 42 years of success, and excited about starting phase 2, moving on for the next 40 years. So, with that, thank you all for being present this morning, and good day.

The conference call has now concluded. We do thank you for attending today's presentation. You may now disconnect your telephone lines.