Centerspace (CSR) 2013 Q2 法說會逐字稿

Good morning and welcome to the Investors Real Estate Trust second quarter fiscal 2013 earnings conference call and webcast. 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 Ms. Lindsey Anderson, Director of Investor Relations. Please go ahead.

Good morning and welcome to Investors Real Estate Trust's second quarter fiscal 2013 earnings conference call. IRET's earnings release and supplemental disclosure package for the three months ended October 31, 2012 were posted to our website and also furnished on the Form 8-K on December 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 regulations 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 Jr, 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. Over the last couple of earnings calls, I have talked about IRET's appeal to investors as geographic pure play REIT investment. This morning, I intend to continue that theme. In doing so, I want to reference two recent articles. The first being in the USA Today, November 27, 2012 and the second being in numerous newspapers in the Midwest. But I will reference the article in the finance and commerce newspaper of Minneapolis, Minnesota dated December 1, 2012.

The first article in USA Today is titled Wealth Rises in the USA's Heartland. If you have a chance, I encourage you to research the article and read it for yourself. But it's point only reinforces what I have been relaying to you in previous earnings call. As this map indicates, IRET's geographic footprint overlays the continued income growth in USA's heartland.

I believe that as we continue as a nation to search out a way to become energy self-sufficient, IRET's markets will continue to see the benefit of that growth. As we have said in the past, and I will reiterate again today, the states that IRET operates in our net exporters of energy including wind, oil, coal and natural gas, as well as commodities and water. We have the things that the rest of the country needs, as well as the world.

On a side note, to the continued employee demand on the economy and Western North Dakota, I wanted to bring your attention to an article titled Menard Inc. to fly Wisconsin workers to North Dakota store in the Finance and Commerce newspaper. The content of the article states the intention of the home improvement retailer to fly 50 workers from its home base in Wisconsin to its Minot, North Dakota location on a weekly basis to fill the needs of staffing their Minot location. This is yet another example of the continued economic climate we are experiencing in the Midwest.

In the past, we have made reference to the need for infrastructure to fund this economic growth and I am happy to report that the governor of North Dakota, in unveiling his 2013 to 2015 budget, intends to recommend $2.7 billion to address the states road system and infrastructure and -- to address the states road system and statewide infrastructure. I believe that shows the anticipated commitment of the state of North Dakota as this economic opportunity moves from a boom to a permanent industry for the state.

Lastly, I wanted to comment on IRET's move to the New York Stock Exchange. I would like to thank NASDAQ for its service and help over the past 15 years. The NASDAQ exchange has been a great partner for IRET and I commend them on their help with IRET's growth over the last years. IRET's move was based on our research that showed that approximately 92% of all listed REIT's are listed on the New York Stock Exchange. As we continue down the path of increasing our visibility in the REIT space, we decided to join many of our peers on the New York Stock Exchange.

Thank you and I will now turn the call over to Diane Bryantt, our Executive Vice President and CFO, for her remarks.

Thanks, Tim. Good morning everyone. This morning I will give a brief summary of highlights and results of operations in the second quarter of fiscal 2013 which ended on October 31.

We were pleased with the results of the second quarter. Even though we had positive financial impact due to gains from involuntary conversion and sale of properties, we also have seen positive results due to acquisitions, developments, and performance of our stabilized properties. Overall, net operating income increased $7.7 million, or 22.3% in the second quarter, as compared to the second quarter of last year. Year to date increase is $10.4 million, or 15%. Acquisitions and development projects placed in service account for the majority of this increase.

To summarize, these non-stabilized properties accounted for $3.5 million for the quarter and $6.5 million year to date of increased NOI. All acquisitions and development this fiscal year have been in the multi-family segment. These new properties are operating above 90% occupancy. Even on the new development projects of Quarry Ridge in Rochester, Minnesota and Williston Garden's in Williston, North Dakota.

Stabilized properties provided for a combined overall NOI increase of $1.9 million for the quarter and $1.7 million year to date. Although we have not seen significant changes in occupancy in the comparative period, revenue has increased, primarily in the multi-family segment as high occupancy allows us to increase rent.

Also, we're seeing decreases in operating expenses as a percentage of revenue. For the quarter, operating expenses as a percentage of revenue was 38.2% versus 42.4% in the prior fiscal quarter. Raised rents, lower expenses has always been IRET's model and we have seen that result in our operations in fiscal 2013. Details can be found by segment on the stabilized property that is provided in the 10-Q in the net operating income section.

Also over the past year, we have been discussing on these calls the insured flood and fire loss on two of our Minot, North Dakota properties. During the second quarter, we received a settlement of actual cash value on the fire loss for the 32 unit Chateau apartment building, which represented the $2.3 million non-stabilized gains. Outstanding yet is the final settlement on the flood damage which we expect to occur yet this fiscal year.

Also during the quarter, we received a final payment of $666,000 business interruption payment for these properties. Overall, the comparative NOI increases are very positive. And we are continuing to look at those opportunities that allow us to continue to perform at these levels.

We also have sold our apartment properties in Fargo, North Dakota. Two closed during the quarter and provided for a gain on sale of approximately $2.8 million. The third property sold subsequent to quarter end and we estimate that gain to be approximately $700,000. This information is detailed in the 10-Q within the discontinued operations note seven.

Other items to note, our acquisition expenses in the quarter were $23,000, $73,000 year to date -- or $73,000 in the first quarter and year to date of $96,000. In fiscal 2012, acquisition expenses were $426,000 year to date.

Moving to FFO, we had FFO performance of $0.18 per share in units for the quarter and $0.34 year to date. This represents a $0.02 increase over the first quarter and $0.03 over the prior-year. Part of this increase was due to the inclusion of the $2.4 million gain on involuntary conversion, which represents approximately $0.02 of FFO. As this is considered ordinary income per GAAP. FFO on an absolute basis is continuing to increase, but on a per-share basis, the effects of the larger weighted shares outstanding still is resulting in dilution.

AFFO per share was $0.13 as compared to $0.10 in the same quarter of the prior fiscal year, as well as the first quarter of the current fiscal year. Note that the $2.4 million gain on involuntary conversion was excluded from our AFFO calculation. Again, detail on AFFO is provided in the earnings 8-K.

But taking a look at the details, tenant improvements and leasing commissions were lower this quarter than the prior comparative period. However, we are still seeing opportunity for renewals and quarter results are lower as prior periods had some high levels of tenant improvements and leasing commissions. Tom Wentz Jr. will discuss in more detail the trends we're seeing for leasing in our commercial properties.

Moving on to the balance sheet, the main event for the quarter was the preferred stock offering of $4.6 million Series B preferred shares for net proceeds of $111.2 million after underwriting discounts and estimated expenses. As of October 31, $79 million of this has been applied to debt pay off and subsequent to quarter end, we have paid off an additional $9.2 million of debt for a total application of $88.2 million for debt pay down. The remaining proceeds of $23.2 million will be used to fund acquisitions or developments that are in the pipeline. As of quarter end, the overall cash on hand was $84.2 million, as compared to $37 million on July 31, a net increase of $47.2 million.

To summarize, the major sources of cash that make up this increase were $111 million from preferred stock proceeds, $17.5 million of loan proceeds, $7.8 million of construction loan proceeds and $6.2 million of IRET direct shares offering proceeds. The major uses of cash were $79 million to pay down debt, $5 million for acquisitions with the going in cap rate of around 6%, and $9.9 million for development projects. Development projects under weighed, all in investment will be $62.3 million with approximate remaining funding needs of $11.5 million.

Also, as per note 12 subsequent events, we have under contract two properties totaling $36.2 million in the multi-family acquisition with approximate cap rates of around 6.7%. And also $3.6 million in land purchases are being looked at.

Moving to debt refinancing activity, two loans were closed in the quarter. The loans closed included the 7401 Boone Avenue refinance which produced $7.5 million in proceeds. This loan is a two-year variable-rate loan at prime plus 50 basis points, beginning at 3.75% and has a 25 year amortization.

Secondly, we placed financing on the Edina 6363 France Medical building. This is a fixed rate loan at 3.4% and is interest only for one year, then going to a 25 year amortization in month 13, netting to IRET's gross cash proceeds of $10 million. Current mortgage debt was $1.045 million at quarter end as compared to $1.080 million as of last quarter.

Our weighted average interest rate for the portfolio dropped from 5.72% on July 31, to 5.66% at quarter end. For the remaining of the fiscal year 2013, we only have $12.2 million of maturing debt and management is reviewing refinance or payoff as loans mature, or are open for prepay as we apply the use of the proceeds from the recent preferred stock offering, sales of properties, or other sources of capital that are available to us.

And finally, IRET Board of Trustees has declared a distribution of $0.13 per common share and unit to be paid on January 15 to the shareholders of record on January 2. This will be IRET's 167th 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 an overview of IRET's fiscal 2013 second quarter that ended October 31, 2012. I will also provide a review of recent events and trends impacting IRET. Finally, I will 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 second quarter results continued the trend of improving operations with almost all metrics up as compared to the same three and six-month period from last year. Compared to the same quarter last year, gross revenue was up, income is up and more importantly, our focus on expense control continues to improve cash flow and income. The year to date period reflecting our first six months has basically the same trend with revenue up in all segments except medical and income up in all segments except office.

And again, year over year expenses are down by approximately $520,000 through the first six months and gross revenue was up by almost $7.5 million, with income also up by the same amount primarily due to cost control and strong rental growth in our portfolio. Our revenue and profit are up both due to the growth in the size of our portfolio, but more importantly to continued strength in our multi-family operations and some improvement in our other segments.

While occupancy is down slightly overall, all segments except commercial office and commercial retail our operating above 90% occupancy. Commercial office continues to be a drag on overall operations. The slight occupancy declines in our other segments have been offset by higher gross revenues and good expense control through our internal management platform. At the start of the last fiscal year, IRET outlined a number of areas of focus in an attempt to make progress in what we viewed would be continued challenging economic conditions due to a slow and uneven recovery, and low employment and wage growth.

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, both through acquisition and development. Second, working aggressively to control expenses using our internal property management platform. Finally, we have added a third component to our plan to increase value by seeking to dispose of those assets that do not fit our targeted segments, markets or meet our return expectations.

While selling is not a means to achieve overall growth, done properly, it will improve the quality of our assets and income stream, and lower recurring expenses and capital obligations as we trim older, less productive properties. We recently completed the sale of our smaller Fargo, North Dakota residential portfolio and are now focusing on various commercial properties. Again, with the goal of improving the quality of our overall portfolio and not necessarily exiting a segment completely in one transaction.

While challenges remain due to the slow pace of economic recovery, and the political uncertainty that remains in Washington, we again made progress in all three of our focused areas as confirmed by our second quarter results. We continue to prudently move capital to strategically grow the strongest segments of our portfolio, multi-family and medical, as well as grow in our strongest markets in our portfolio, the energy impacted regions of North Dakota, South Dakota, and Montana.

Like our previous quarter, we expect that are recently completed and announced acquisitions and developments will position IRET well to capitalize on what should be a sustained economic expansion in mostly Western North Dakota, Eastern Montana and of course portions of South Dakota. But also, the overall greater region due to the energy development that is taking place in this part of the country. We've started construction on new multi-family products in Bismarck, North Dakota and St. Cloud, Minnesota, with completion expected fall of 2013. We will continue to focus resources on growing these segments, primarily through development but also possibly by acquisitions.

This past quarter continued the trend from last fiscal year where almost every meaningful operating and financial metric continues to improve. Again, we still have a ways to grow in commercial office and commercial retail. But we don't expect a quick turnaround in the commercial segments, we are confident that remaining focused on growth in our best performing segments, combined with strong expense control measures and disposition of non-core properties, will all work together to generate increased gross revenue, improve cash flow, and ultimately earnings.

Absent a significant backtrack in the US economy, and a resolution of the fiscal cliff, our expectation is that existing commercial office and retail operations will improve modestly, while we expect slightly better improvement in our other commercial segments of industrial. With both multi-family and medical already performing at strong levels, there will only be modest growth in the existing portfolio as we focus on rent increases and expense control. However, we expect to achieve higher growth in these two segments, multi-family and medical, through continued acquisitions and development.

We have both acquired a meaningful number of apartments over the last 12 months and also have a number projects under construction with more in the development process. We plan to continue to be a leading multi-family operator in our core residential markets. In our medical portfolio, we have continue to look to add assets that fit well with our overall operating footprint, through both previously announced development projects and expansion of existing facilities.

IRET CFO provided the details on recently closed debt, so I won't spend any time reviewing other than to confirm that low interest rates and well functioning debt markets for IRET continue to provide opportunities to lower our overall interest rate cost. IRET is currently experiencing no problems or obstacles in securing favorable debt terms and rates. We have multiple options to leverage our existing portfolio, as well as acquisitions and involvements.

Again, this past quarter, we lowered our overall weighted average interest rate, providing yet another measure of expense savings. The amount of maturing debt over the next several years is low compared to prior periods. 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 and capital improvements.

We do not anticipate any material change to our leverage policy of fixing most debt on longer-term periods and secured by individual or groups of specific assets. However, we do plan to focus on debt options with more flexibility on prepayment to better align with our plans to selectively trim non-core assets. Additionally, with our recent preferred offering and improved operations, we're 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 provide more flexibility when it comes to funding acquisitions and developments.

Moving onto dispositions, acquisitions, and development. Including last year and now through the first six months of fiscal 2013, we continue to be very active in growing our portfolio. We have broken ground on apartments in St. Cloud, Minnesota and Bismarck, North Dakota. Additionally, we have acquired development land in Williston, North Dakota and are actively seeking out other land parcels in our core multi-family markets. We encountered some slight delays on completing the industrial project in Minot, North Dakota previously discussed, due to additions to the site requested by the user. But we expect to complete this project in the third quarter of this fiscal year.

The Jamestown medical office building is scheduled for completion yet this month with rent commencing during the fourth quarter of this fiscal year after tenant fit up period for their medical equipment. The previously announced senior housing expansions in Wyoming and Montana are basically complete and will begin to generate revenue as IRET moves forward. We're 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 range from approximately 6% on the multi-family side for acquisitions to approximately 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 projects. However, it appears that much higher rates are achievable for development projects in the energy impacted markets of North Dakota, South Dakota, Montana and Wyoming.

As we head into the second half of our fiscal year, our acquisition pipeline is not as large as we would like. We are seeing -- not seeing as much quality real estate available as in past periods. However, we do have approximately $100 million of projects under advanced consideration covering a number of our best performing markets and segments. These projects are about evenly split between existing product and development.

As for dispositions, as noted above, we expect to dispose of mature and non-core assets on a more consistent basis going forward. But still at a much smaller level than total acquisitions as our plan is to grow IRET. To this end, we are currently marketing a group of our smaller single tenant net leased industrial buildings. The portfolio is unpriced and we expect to evaluate purchase offers in the next several months.

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

Thank you.

(Operator Instructions)

Michael Salinsky, RBC Capital Markets.

Good morning, guys. First question, in prior releases you talked about positive leasing momentum. I noticed that was absent this quarter. Can you talk about what you're seeing on the commercial office side in terms of leasing success? And also, as we think about the back half of the year you have been fairly active on the leasing front over the last couple of quarters, are there any leases that take affect that are not in the numbers at this point?

Mike, this is Tom. Again, given the size of our commercial portfolio, it is difficult to see a trend in any particular quarter. Just because our commercial office portfolio, while large, is not extremely large. To answer your question, I think this past quarter was actually pretty good. It may not show up in the numbers but if you look at the trend over the last year or longer, we have made some pretty good progress in the commercial space, industrial, retail, and some incremental improvement in the office.

In every period, yes there always are leases that are signed or in progress that are not going to show up. Obviously this cut off was October 31. We are six weeks later than that. The overall trend has been good, better in commercial office. But I wouldn't say it's been outstanding. I think consistent with our past presentations, there are still a lot of uncertainty out there in the commercial office user space. It is certainly not being helped by what is going on in Washington right now.

That is helpful. Second of all, can you give us an update in terms of sales? You talked about marketing in industrial portfolio there of properties. But how much would you estimate the non-core pipeline to be currently in light of recent disposition activity? And in terms of transaction activity also, the $38 million of project you commenced during the quarter, what is the return expectations on those two multi-family developments?

The return expectations on the two multi-family developments, the Bismarck, North Dakota and the St. Cloud, are projected at probably a low 8% cap on a pro forma basis. I think that is going to be consistent with what we are seeing on projects that were delivered in the market. We delivered some projects in North Dakota so we are expecting good strong returns in Bismarck, and then we delivered some projects in Minnesota. So that is really what we're basing our return expectations on.

And at this point, both of those markets remain very strong on the multi-family side. Our expectation is we will achieve those return targets, which are approximately 200, 250 basis points above what we're seeing on acquisition cap rates. Development definitely appears to be a higher returning game on the multi-family at this point.

I will jump in. Mike, this is Tim. On the disposition side, I think we have talked about in the past anywhere from $100 million to $150 million of non-core assets probably over the next 12 to 24 months as we look forward.

The timing and sale of those, is that dependent upon redeployment opportunities or is there an impetus to just advance those to clean up the portfolio a little bit faster?

I think probably more of an emphasis on that to the philosophy of trim from the bottom and add quality to the top as we look to move forward and improve our overall balance sheet.

Okay. And final question. You guys benefited from a very mild winter in 2012. Can you quantify how much benefit that was versus the normalized run rate? And also, the last couple of quarters you guys have benefited from lower expenses. Much of that is recurring related to the internalization of management and other changes versus one-time in nature?

This is Tom. Mild weather, that is difficult to quantify. We have had some periods where we have had very extreme weather winters with a lot of snowfall. But really, we don't see that as material impact one way or the other given the overall size of the operation. Really, debt expense, real estate taxes, labor cost, those are really our top line energy use, snow removal, those really are way down the list. And so mild or extreme weather really does not seem to have a huge impact one way or the other, favorable or unfavorable.

Okay and the and the cost reductions over the last couple of quarters, how much of that is recurring versus one-time in nature related to prior restructuring and things of that nature?

I think a lot of the cost savings, we have some issues associated with how we changed our operations on the senior housing. A lot of those expenses don't run through anymore because we have gone to a net lease environment. But really our internal management platform is really driving a lot of the success we have had on cost control. And we really look at it as a percentage of gross revenue on the multi-family side. And one of the things, by trying to add assets in our core markets, we can leverage off existing staffing, existing operations so we can add property without really adding a lot of top line expense in the form of management and labor.

I think we're feeling pretty good. It is going to fluctuate a little bit, but I think now that we are several years into the internal management platform, really all the portfolio that is going to be internally managed is in-house. I think we are really seeing where we are going to be from an expense standpoint. We don't expect meaningful fluctuations one way or the other.

That's helpful, thanks guys.

Rich Anderson a BMO Capital Markets.

In terms of the office side of the business, is there anything about recent investments being made by Sam Zell in the Minneapolis suburb and some of the activity by Target in downtown Minneapolis that have gotten you a little bit more optimistic about the office side, or are those one-off type deals that don't really move the needle in terms of your mindset about commercial office?

We have always been sort of optimistic about commercial office. Yes, there's definitely an increase in transaction activity and I think we have reflected that in our calls. You go back several years, there really was no activity. There just was no demand, and there were no users in the market. But I think now, if you look through our 8-K, we've had very good renewal success and we're just not seeing the departure of commercial tenants and we're not seeing the consistent downsizing when leases come up.

So we are definitely holding our own on renewals and we are certainly seeing transaction activity. As evidenced in our retail, that has climbed up, industrial, that has climbed up. Those are two much smaller segments. I think commercial office is going to come because there's certainly activity in the market.

What you are referring to is obviously investment activity and it's always good to see that other people are getting a little bit more bullish on commercial office. There has really been absolutely no development for the last five to six years. So hopefully that will translate into some pent-up demand when the economy gets back on track and we resolve some of these political uncertainties that are out there. And again, we have maintained our portfolio, it is well-positioned from a physical condition standpoint, and location.

Okay. Did you say that the subsequent to quarter end land purchases, where that was and what it was?

We have not. And at this point, those parcels are in due diligence so I don't believe we disclose location. The one thing I would say is obviously it's going to be consistent with our existing markets. But I don't believe we have disclosed locations and I don't think we're in a position where we would want to do that at this point, other than Williston, that land.

Actually, we did say Grand Forks and Rapid City, excuse me, in the subsequent events. Grand Forks, North Dakota 10-acre parcel and then a 9-acre parcel in Rapid City.

Both multi-family?

Yes. Those two were zoned multi-family and then we have a much larger parcel in Rochester, Minnesota.

Okay. Back to the disposition strategy. You mentioned, I think Tim, you said, $100 million plus in non-core that could be executed over the next 12 to 24 months. That's a substantially faster pace than what you guys have done in the past. To what extent do you think a bigger disposition program could slow the process of getting the dividend covered?

I think part of the thought process there, Rich, is to continue to recycle those proceeds towards new acquisitions that will cover the lost revenue from the sale. I think as we look out and look forward, we feel pretty comfortable that we can get to that full coverage on AFFO with that process.

Okay so it actually maybe would help the process as opposed to impede it?

Yes.

Okay. In terms of leverage, I think I asked on the last call, where you think leverage could ultimately end up after it is all said and done. I believe your answer had a five handle on it. Is it possible that with a greater emphasis on dispositions and other activity that you might even see leverage drop to something in the 40s on a gross asset basis or is that a little bit too much of a stretch at this point?

I think at this point in time, that's probably a little bit of a stretch. I think we might be right at that five number, but to get below that at this point in time is still a little challenging.

And the time frame to get there?

I think we are still within to potentially fiscal year '14.

Okay. And then the last question is just generally about the Bakken Shale influence and Williston maybe in particular. Is there a hesitation on your part to over emphasize that element of the story even though you have had this great success in the first development there, 16% return on the first multi-family development?

Are you hesitant to overstate that opportunity because, more than likely, that number is not sustainable, and you think that you are trying to tell the story while the Bakken influence is important, you are thinking more of a bigger sphere of influence and not to over emphasize that? I assume the next deal in Williston would be something lower than 16. Some color on your thought process about the immediate area of the Bakken region.

I think as we have talked about, we don't feel that, that is our only story. As we step back and looked at it and evaluated the Bakken, the impact that it has had from Williston all the way east to probably St. Cloud, Minnesota and West over to Billings and South down to Rapid City, we look at that as a whole regional play for us. Again, those are our markets and we're on the ground and see the opportunity.

As I mentioned in my opening remarks, they continue to bring employees from Wisconsin into these markets and what you're seeing is opportunities and companies moving from that far away to take advantage of what is here. And as we look at it, that is our region and our opportunity so the effect is not only on the Bakken and certainly that is a focus of ours, but our focus also sees opportunity in these other communities that have the things that we want to see, the universities, the large shopping and regional healthcare. And so we see continued growth in demand in those markets, and they also focus around the Bakken and we see the opportunity to take advantage of that.

Is there anything about that 40-acre parcel that you have that are you hesitating at all at any level? Is it just a process of -- you mentioned the infrastructure opportunity outlined by the governor. Are there other things that are stopping you from starting that development? What is the timeline there, would you say?

This is Tom. It is in progress. That land is entitled obviously, that parcel was raw land that needed all of the underlying infrastructure roads, water and sewer. That is in progress.

There really hasn't been any hesitation. We are always evaluating projects and development. Development has got a much longer time horizon to it and just given the heightened economic activity in this part of the country, it is not as easy to execute on from a timing standpoint as maybe in some of the other areas where there is a lot more labor availability, and contractor availability.

But we have certainly executed on development in North Dakota. The medical office building is near completion, on target. The industrial building ended up being slightly expanded and that delayed it slightly. But we have done some smaller projects, multi-family in Minot and so we are not hesitating. I think we have always said that we're not going to pivot the entire portfolio towards oil.

It's a very nice growth story and it is going to provide some development and acquisition opportunities that we might not otherwise have had, but for the energy development. But we are continuing to focus on all aspects of our portfolio, acquisitions in Topeka for example over the last year, development in Rochester, Minnesota for example. Sioux Falls, South Dakota, senior portfolio in Boise, Idaho. We continue to be active in all of our markets so we remain balanced.

Fair enough. And just last quick one on that, back to the 40 acres in Williston. Would that more than likely be a joint venture relationship too or could you put that all on your balance sheet?

We could do it all but it's going to be a joint venture relationship with our same partner we had in Williston Garden's. When we joint venture, obviously capital is not an issue for us. It is execution and so generally we have historically entered into joint ventures with partners that bring either construction, self performance expertise or some other specialty to the table. And so that's going to be the case in Williston. That is anticipated to be a joint venture with the same group that we have at Williston Garden's.

Great, thanks for the color.

Thanks.

Carol Kemple, Hilliard Lyons.

Good morning.

Morning, Carol.

Early on the call you all talked about a flood damage settlement. How much are you expecting from that?

At this time, the flood portion is still undetermined. We're still in good communication with the carrier and again, that should occur within the next third quarter or fourth quarter at the latest. But what you did see in this quarter was the fire portion. It gets a little complicated once that fire came in with the flood claim but again, all going well, it's just a matter of timing for recording.

Do think it would be a similar amount or lesser or is it too hard to determine at this point?

It is too hard to determine. There are just so many variables and again, I can't record anything until I actually get cash in the bank. I do the accounting rules and things like that. We will get a claim and we will get another gain, but at this time I can't estimate that.

Carol, just to explain the complicated nature. This building was flooded then was restored, cleaned up from the flood, and then burned down. And so that was part of the complicated aspect here. Obviously all the costs to restore it from the flood were spent and incurred, and those are part of the reimbursement claim. And then, of course, it burned down after the fact which was a separate claim.

That is what is making it more complicated. We don't see it as being a material issue, one way or the other. There is no question about coverage, we are going to get compensated for it. There's going to be a gain and we're likely to rebuild in that location.

And do you have any dispositions under contract at the current time?

No.

And then with the single tenant industrial assets you all want to sell, have you talk to any of the users? Is there an interest from them to buy the assets?

Of course. That's obviously in the process. That is the first place we start, neighbors and users from that standpoint. Some of those buildings may end up being purchased by the user, but for the most part, what we have in these buildings are businesses, companies that as a matter of course choose to rent as opposed to own for their business model. We are anticipating that most of these will go out to the investor community.

Okay, thanks.

(Operator Instructions)

[Dave Rogers], Robert W. Baird.

Good morning. Following along the lines of some of the development questions, as you look at your pipeline today and think about where that is headed over the next year, what do you think your development pipeline, the total budget looks like, and where you comfortable running that to as a company, what levels can you handle running development and construction at, at this point?

I think we can handle quite a bit. Historically, we have developed in all the markets we have owned and all the markets that we are looking at. We have built in Rochester before, we have built in Sioux Falls, we have done it in all these markets. So I think we have the scale. I think conceptually our preference is to acquire, but obviously if you can't acquire in those markets, a lot of these markets don't have a lot of depth of investment quality assets, so you're going to be left with development.

But I think at the peak, we were growing $200 million, $250 million of acquisitions annually. I think if you look at our size, close to $2 billion. That is a reasonable expectation if we want to grow, that, that's what our target needs to be. Whether we can meet it or not, that is going to be a challenge. But that's what I think we want to target.

I think you said earlier 200 basis point spread in development versus acquisition yields, and Rich Anderson touched on the question a little bit. Where are disposition yields with respect to what you want to sell in that matrix?

You mean the cap rates on what we are selling?

Yes.

What our expectations mean?

That is correct.

There is a difference right now between multi-family. The cap rates in multi-family acquisitions are definitely lower in our markets than the industrial cap rates for what we are selling. There's going to be a difference if we take those proceeds out and reinvest them. The one primary difference is multi-family can be leveraged at a much more favorable level than commercial through the agency's. And so there is definitely a benefit there, by redeploying that capital and leveraging it as opposed to what we're getting in industrial.

Again, the assets we are looking at really are not core. These are not the gems of the portfolio. These are assets that have been run their course, good steady performers but older, smaller, not strategically located, and just a good time to exit out of those primarily just to get out of them. Not because we need the capital or we are going to rotate into some better sector.

Have you thought about what percentage of your capital spend or acquisition you would like to fund through recycling annually? In a sense, how quickly you would like to make that move?

Again, as I said in my presentation, I don't think we've used selling as a growth strategy. That is more an expense control and a equality of portfolio activity. I think in the past, we have always grown by additional capital. I don't see that changing. Of course, we can reposition the sale proceeds into additional growth, but that isn't really the primary focus. I think we are just looking to move some of these assets that have run their course or smaller, non-core out of the portfolio.

Okay, last question on the retail leasing in the quarter, which appeared to be pretty healthy, was that seasonal or permanent or any thoughts about how much of that stays or goes after the first of the year?

I don't think there's a lot of seasonal in there. We did a couple of little seasonal deals, if I recall correctly, but I think the most part those were permanently leases. That retail portfolio is pretty small. It doesn't take a lot of leases to move it one way or the other. But that was, I think, pretty routine, basic leasing.

Okay, thank you.

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

Thank you. Again, I would like to thank you for your continued interest in IRET. And the recognition of the exciting times that we see in front of us. And wish you all a Merry Christmas and happy New Year. Thank you.

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