Centerspace (CSR) 2014 Q2 法說會逐字稿

Good day, and welcome to the Investors Real Estate Trust second-quarter fiscal 2014 earnings conference call and webcast. All participants will be in a listen-only mode. (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 second-quarter fiscal 2014 earnings conference call. IRET's Form 10-Q filed yesterday, and our earnings release and supplemental disclosure package for the three months ending October 31, 2013, were posted to our website and also furnished on Form 8-K on December 10. In the 10-Q and 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 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 Tuesday's earnings release and from time to time in Investors Real Estate Trust filing with the SEC. Investors Real Estate Trust does not undertake a duty to update any forward-looking statements.

With me today from management are Tim Mihalick, President and Chief Executive Officer; Diane Bryantt, 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. First of all, I want to thank all of you for taking the time to listen to our call this morning, and I hope you find the information provided to be beneficial to you. As most of you may have seen in our recent press release, IRET suffered another devastating loss last week. The Chateau Apartments, located in Minot, North Dakota were burned to the ground last Thursday morning December 5.

I am happy to state that there were no injuries reported from the fire. The fire was confined to the 15-unit and 57-unit buildings on the east side of the complex. Both buildings were currently under construction and were not occupied. The 15-unit building was anticipated to open in February 2014, and the 57-unit building was anticipated to open in the summer of 2014. As many of you may have remembered, this building was vacated during the flood that Minot suffered. And a year ago last February this same building burn to the ground.

They say things happen in threes, so for my perspective I say enough already. I would like to publicly acknowledge the quick response and the action of that Minot Fire Department to extinguish the fire and to protect the surrounding neighborhood in bitterly cold conditions. The Minot Fire Department, along with local law enforcement, will work to identify the cause of the fire as soon as it is deemed safe to do so.

Now on to the business at hand. As I note in our 8-K release yesterday, I am pleased to report that we are continuing to make progress in our planned disposition of non-core properties, sustaining the momentum we achieved in the first quarter of the current fiscal year by closing in the second quarter on the sale of five industrial and three office properties. IRET added 120 apartment units in our multifamily portfolio, following our purchase of apartment properties in Sartell, Minnesota and Grand Forks, North Dakota, and acquired during the quarter an interest in a joint venture entity currently constructing 130-unit multifamily residential properties with 10,000 square feet of commercial space in Minneapolis, Minnesota.

Our River Ridge and Cypress Court apartment developments in Bismarck, North Dakota in St. Cloud, Minnesota, respectively, are scheduled for completion in the third quarter of our current fiscal year, and we continue to expect strong lease out of these projects at completion. Additionally, results improved at our stabilized properties in the second quarter, driven price by some improvement in occupancy in our commercial office segment. I believe that we can make progress in the second quarter on maximizing the opportunities available to us in our Great Plains region. As I stated last quarter, much more work remains to be done. Thanks. And I will now turn the call over to Diane, our Executive Vice President and Chief Financial Officer.

Thank you, Tim. Good morning, everyone. Yesterday, as Lindsey stated, we filed our fiscal year 2014 second-quarter report on Form 10-Q and the 8-K earnings release and supplemental disclosure. This morning, I will provide for you a brief recap of significant items of note that occurred in the second quarter ending October 31.

First, starting with the balance sheet activity, we continued to maintain a strong cash and liquidity position. However, with less cast than prior comparative periods on the balance sheet. We had $69 million of cash on hand as compared to $93 million at the first quarter of fiscal 2014 and as compared to $84 million at the end of the comparable quarter in fiscal 2013. We did see strong cash flow from operations of $36 million in the quarter, with the most significant use of cash being for our development projects and acquisitions. Subsequent to quarter end, we increased our credit facility to $72 million and extended the maturity date to December 2016, with a current interest rate of 4.75%.

Regarding acquisitions and development, we acquired it 24-unit townhome project for a purchase price of $2.8 million with an anticipated cap rate of 6%. We also acquired a senior housing property for $12.4 million with an anticipated cap rate of 6% as well. Both these properties are in Sartell, Minnesota. We acquired a 96-apartment unit complex in Grand Forks, North Dakota for $10.6 million with an anticipated cap rate of 7%.

We invested $42.3 million in the quarter in 10 active development projects. Construction loans provided $16.5 million of source for a net use of cash of $25.8 million during the quarter. Year-to-date we have acquired $32 million of income producing assets, $4 million of unimproved land and placed 108 units in service.

We have under development 1389 apartment units with a total cost of $254 million. These developments will range in cap rates of 7% to 13%. Detail on these projects can be found on page 16 of the 10-Q.

Moving on to debt, we paid off six mortgage loans with the principal balance totaling $18.1 million. The average interest rate on these loans was 5.8%. We refinanced the multifamily project in Rochester, Minnesota, the loan having a 30-year amortization. It was nonrecourse and has a fixed rate of 4.12%. Cash out was approximately $2.9 million.

Regarding debt metrics, our mortgage debt to undepreciated costs is at 48% at quarter end, including improving from 53% one year ago. Our overall weighted average interest rate is 5.5% as compared to 5.66% at the end of the comparable quarter of the prior fiscal year.

Regarding dispositions, we continue to be very active with our disposition strategy. With eight commercial properties sold during the quarter with an approximate cash out of $45.9 million. These funds from sales were used for acquisitions and developments in process. As discussed before, deploying the sales proceeds into development projects will cause a drag on our earnings until the development properties are placed into service.

Equity issued during the quarter was 1.3 million shares under both our IRET direct and the dividend reinvestment plan. Net proceeds under the IRET direct was $6.6 million. And, again, we use these proceeds for development projects.

Year to date, 3.8 million shares have been issued with a net average price of $8.48. And finally, regarding equity during the quarter, we did execute a sales agreement for up to $75 million of shares through the at-the-market program. However, we did not issue any shares during the quarter using the ATM program.

Final comment on the balance sheet. As Tim mentioned, subsequent to our quarter end, our development project of 72 units called The Chateau II Apartments had burned down. As of quarter end, the Company had invested $6.5 million into the project, of which $1.2 million was yet to be reimbursed from the insurance as a result of the prior fire loss. We do not expect any interruption in the receipt of these proceeds from the first fire loss, and when we received, they will be recorded as a gain on involuntary conversion.

Moving on to results of operation. We are very pleased with results of the second quarter of fiscal year 2014, as we continued on a positive path with a net increase of 193,000 square feet leased up in our commercial space. We had continued strong occupancy in our stabilized multifamily properties and strong operating results from our developments that have been placed in service over the last two years.

Note that impacting comparative results to the prior quarter and prior fiscal year the effect of the involuntary game of $2.3 million that was recorded in the same quarter of fiscal year 2013. When reviewing our reports, note that the gain is included in our non-stabilized portfolio. When looking at our stabilized portfolio comparative results, we have seen NOI increases of $476,000 and $1.5 million year to date. Again, strong operating improvements in our stabilized portfolio.

Moving on to FFO, for the quarter, FFO per share was $0.16 for the quarter and $0.32 year to date. This was based upon a weighted average shares outstanding of $127 million. AFFO for the quarter was $0.12 and $0.23 per share year to date. Details on the calculation of FFO and AFFO can be found on page 8 of the 8-K earnings release and supplemental disclosure. These results are definitely impacted favorably by the positive NOI within our stabilized portfolio and the development projects placed in service.

As stated before, the disposition strategy and deployment of these funds into development projects cause drag on our per-share result and execution of commercial leases will result in tenant improvements and leasing costs that will cause drag on cash flow, or AFFO, as we lease up the space. We are staying the course and seeing the results of this course on our financial statements and cash flows. The execution of that strategy is primarily the most significant result to both the quarter and year to date for fiscal year 2014.

To close, I report that our IRET Board of Trustees declared a quarterly distribution of $0.13 per common share on units to be paid on January 15, 2014, to shareholders record on January 2, 2014. This will be IRET's 171st consecutive quarterly distribution. Thank you. And now I will turn the call over to Tom Wentz, Jr., Executive Vice President and Chief Operating Officer.

Thank you, Diane. The second quarter results for fiscal year 2014 continued the trend we have seen in previous quarters of overall improved operations, as we execute on our plan to grow by focusing on our leading segments of multifamily and healthcare real estate in our core markets while reducing our investment those assets where we are not the market leader or have no clear path to market leadership. Even though core FFO was slightly lower on a per-share basis year over year, this is primarily due to delivery timing between when we deployed new equity versus delivery of the related development. As our current group of developments come online later this fiscal year and early fiscal 2015, the FFO impact related to our increased development pipeline is expected to close.

I will focus my remarks this morning on the trends and opportunities IRET has identified in its core markets and segments, which are the development of new multifamily projects as the top growth strategy, maintaining current leverage levels, and disposing of non-core assets on an accelerating basis. In regards to development, we continued to see good income and growth opportunities in those markets that are leaders in healthcare, education, energy, food, fiber, and water. IRET plans to pursue creative development and acquisition opportunities primarily in our multifamily and healthcare segments, as well as continue to evaluate acquisitions of existing real estate as those opportunities present themselves.

As Diane mentioned, IRET has approximately 1400 apartment units under various stages of construction in five of our core markets, which is a slight increase over the prior quarter but still includes those projects where the first phase is open during the quarter and are now leasing up. Additionally, over the last 12 months, IRET has acquired land that would allow for the immediate development of a similar amount of units in calendar year 2014. We continue to remain active in the land acquisition area for the purposes of positioning IRET as the market leader in new multifamily construction in our core markets. We believe that this focus on development provides IRET with the best path to successfully executing on our primary strategy of making our overall portfolio younger, more focused by segment, and the leader in its respective categories and markets.

Our plan for the remainder of this fiscal year and the coming fiscal year will be to focus on new multifamily development to meet the market demand for apartments as well as to leverage off of the leading position IRET currently enjoys in our current operating footprint. We are also seeing select opportunities to grow our healthcare portfolio through a combination of acquisition, development, and expansion or renovation. While a primary focus on growth by development does create a temporary drag on earnings and cash flow as we raise and deploy the equity capital necessary to complete each product project as well as hold larger quantities of non-income producing land, the returns to date on development have proved to be accretive, and we believe that current market conditions certainly support additional development activities.

Additionally, in our view, there is a continuing lack of acceptable acquisition opportunities in almost all of our markets when compared to development returns. We have a strong cash position and available credit facility capacity that we expect will allow us to not only complete the projects currently underway but also to develop out our current landholdings. We are carefully monitoring all of the challenges associated with development and are continually adjusting our approach to proactively deal with these challenges. With our existing strong product position combined with being first to market with high quality projects, we believe that IRET is in a great position to execute on its portfolio growth strategy. Our focus is developing assets that will be positioned as best in market, avoiding the requirement to compete on price and keeping IRET as the market leader in our core communities.

Turning to our leverage policy, we expect no material change to our overall current levels of debt or the type of debt in that approximately -- we are now approximately below 50% debt to gross assets. We have good flexibility on how we fund our growth and operations going forward. We expect the amount of developments and acquisitions remain consistent with our current levels, with our goal being as much as $300 million over the next 12 to 18 months, again, depending on the final mix of acquisitions versus development. Our expected acquisitions and development cap rates have not changed and range from approximately 5.5% to 12% in the multifamily segment and 7% to 8.5% on the commercial segments. In certain cases, actual results have been higher for developments in the energy impacted markets of North Dakota, South Dakota, and Montana.

As for dispositions, we have successfully completed a number of sales in the commercial and non-core assets, and we are currently marketing a number of additional non-core assets for sale. Sale proceeds would be deployed into new development and general corporate purposes. Thank you. And I will now turn the call back over to the moderator for questions.

At this time, we will begin the question-and-answer session. (Operator Instructions) Rich Anderson, BMO Capital Markets.

Good morning, everybody. Just turning quickly first to development, it's running I guess $250 million with the multifamily side. How much do you think you can replenish that? Is a number of $250 million of that total development pipeline kind of your comfort zone or can you see that going up over the next year or two?

Hello, Rich, this is Tom. It's certainly possible to increase that. I think as a percentage of our existing units and just given the size of our markets that we are focused on, that's really a good comfortable number for us. And I think we had had good results. Unless we see something very compelling which would convince us to accelerate that, I think we are at a pretty good level.

Okay. You talk about the drive to go at FFO and AFFO as it relates to using disposition proceeds to fund development. As you get into your fiscal 2015, I think that that drag starts to slow as you start to deliver product. But if you are bringing on more product, you get into this treadmill. But do you think in 2015 you can actually start to see a material positive impact on your bottom line results as a consequence or do you think adding a product of its development pipeline will kind of keep that drag in place for the foreseeable future?

Rich, this is Tim. that's certainly our expectation, and as we discussed before, we see fiscal 2015 as kind of the crossover year that allows us to do that and to continue to deliver product going forward, but to see the impact of these as we bring them online.

All right. So them that brings it to the dividend question. Is the thesis then is as development starts to matriculate to the bottom line that you feel like the dividend is going to be covered and no cause for alarm there in terms of the payout being above 100?

That's certainly our goal and what we hope to accomplish.

And do you feel like the second-quarter results were a good approach to that ultimate goal? Or do you feel like it is probably kind of in line with where you were a quarter ago? Do you feel like you made progress towards that goal?

I think we've made some progress. We can always do better, but we are making progress toward the goal as we have laid it out and hope to accomplish it. So, we're in line and making progress.

Okay. On the Williston area multifamily the corporate housing for the corporate units in Williston Gardens, when do they start to expire? And what kind of roll up do you think you will get when you kind of start to lease units in a more conventional basis to individuals?

Well the first corporate, we kind of staggered that on that first project and the first ones are just starting to come up. So far we have been able to achieve close to double-digit rent increases on the renewals, and there is still definite corporate housing demand. There's also very strong individual market. So, I guess we haven't at least to date seen any material impact from the construction activity that's been taking place in western North Dakota and parts of Montana and South Dakota. The growth still seems to be there even though there definitely is more available units.

Sure. And is it -- I think this right. The new model is as opposed to an abundance of corporate units but more a stipend-driven individual employee but they kind of get a stipend from their company to live in one of your apartments. Is that the right way to think of it?

We have seen some of that. There are still a number of companies that are doing corporate housing. Most of those companies have established relationships and so a lot of the additional in companies or staffing is following that model. But there's still a lot of companies that are using the corporate housing model.

Last question for me -- multifamily expenses on a year-over-year basis went up. Can you kind of just give us some color on that? Why that happened? You would think multifamily would be an NOI growth leader at a same-store base, and it wasn't this quarter. If you can give me some color on the expense line item there, thanks.

Well, there was a couple of items in there. Obviously, the biggest component of the increases in expenses was increased depreciation and amortization. But you also have some heightened staffing in anticipation of the development and the construction. We generally like to staff in advance of that. And, again, we're pushing rents pretty aggressively.

Tom, let me just interrupt. I'm talking about the stabilized portfolio, so that would not be -- I'm looking at page 16. It was up almost $9 million --

On a six-month basis?

No. No. Three-month basis.

If you would want to go to page 37 of the 10-Q. There's a good narrative in there that explains what's going on with the multifamily. There a couple of things in there, we had some insurance under deductible losses of $231,000, if you read that narrative. So that was an -- it is not a recurring, but we did have some losses that are under deductibles that run through the maintenance expense.

I see.

And then also we had some increased property management expenses in there. Probably more so some salaries and some things we had to deal with employees in our western market, things like that. There's a few items in management, so it is not particularly just for salary, but that's probably the largest component.

Okay. I will take a look at that.

That spells it out pretty well, Rich. Gives you a recap of what's been incurred there.

Okay. Great. Thank you very much.

Dave Rodgers, Robert W. Baird.

Good morning, everybody. Maybe start with Chateau, sorry, we will go there first and then go to better topics. I assume that you still have insurance coverage on the new build. And so, you are still kind of selecting on the old and that you will have to kind of go through the process of kind of reclaiming the new build that you were in the process of?

Yes.

Okay. So, you still have coverage, which is good. And in terms of loss of rent, I mean it's been obviously a couple of years. Are you able to claim any loss of rent on the asset? I know it's traditionally a typical or a difficult thing to get completed, but now it's been a couple of years of vacancy, if you want to call it that, is there any claim there for loss of rent?

The expectations would be no on this because there's obviously a new building, no tenants in there this time. So, no.

Okay. That's fair and helpful. Thank you. Leasing volume continues to track, I think, 2X of what it was year to date a year ago. Maybe give a little bit more color to the extent that you can in terms of how much of that leasing is market driven, how much of it is IRET driven to kind of position some of these assets for sale et cetera. Maybe just a little bit more color around kind of the strength and fundamentals in the market that we are continuing to see.

Dave, this is Tom. Our assessment is really is it's all market driven. We haven't fundamentally changed our approach. We are not out there buying commercial leases -- we have really tried to avoid that. There was just general overall increased activity in our markets, both from an existing users and new users, which is positive. So, a lot of our markets as we've noted previously have basically returned to employment levels that are equal to or exceeding the downturn in 2008, 2009, which means the total number of office jobs is now equal or above where it was. Of course, there's been some population growth so is not at percentage-wise, but number-wise. And of course a lot of commercial space has gone off-line, been repurposed. Otherwise it's disappeared. It continues to be small, but it is positive. It is going in the right direction and obviously success in the commercial segment starts with occupancy. But I would say it's market; it is not anything we are doing above and beyond what we've done previously.

Outside of the energy affected areas, are you seeing any primary rent growth in the markets or are you still kind of in the occupancy gain mode? And we are still maybe a little ways around seeing away from seeing real market rent growth?

Yes. I guess we haven't seen any pricing power on the commercial office retail segments, maybe a little bit in the industrial, depending on the asset. Multifamily pricing power has been universally pretty good throughout all of our markets, obviously, much stronger in the energy impacted markets, and matching the modest increase in employment wage growth and inflation in some of the more traditional markets that aren't experiencing the energy boom.

Okay. That's helpful. In industrial, I think leasing was up in the quarter and continues to be pretty strong, but I think the occupancy stat for end of period was down. You did sell some assets during the quarter, but I guess rents were also up. So leasing was good, rents were up, but occupancy was down. Were we missing something in there? Were you able to kind of lease up and then sell some assets pretty quickly and that just kind of had an inter-quarter impact? That's what we saw.

There's a lot going on. Again, that's a smaller segment by total assets and square footage, and, obviously, with the sales those were pretty highly occupied properties. Obviously the ones that didn't sell maybe had other reasons. So there's just a lot of noise in that quarter. Difficult really to get an overall picture of what's going on but I guess what we have seen is, again, pretty good activity in the industrial space for what we've got left from that standpoint. So, no real negative trends economically; it is just really the activity you've got going in that segment on the disposition side.

Okay. Thanks. Last question. I guess with respect to -- you got several developments that are set to complete in the quarter that we are currently sitting now. I think both of those had occupancies kind of in the 80s plus or pre-leased percentage in the 80s plus. Can you kind of give us an update with that in hand where that brings the yields to? I think you talked on the call earlier about yields that were up to 12%. But can you give a little bit of color specifically on how those are shaping up relative to the pro forma's?

I think the pre-leasing numbers were as of October 31. And those projects opened in phases -- I think River Ridge, Cypress. They are now fully open and I guess at this point, we don't have all of the details and the subsequent events, but basically we are on target or exceeding what our target was both from a final cost budget standpoint and also from a projected rent and occupancy standpoint. So, I don't see it materially exceeding the ranges that we've given, but it's definitely not going to be below those ranges. So it should be right on or slightly above.

Okay. Great. Thank you.

Andrew Cowen, Badge.

Real quick question -- I'm assuming a lot of it is due to development, but I just noticed that administrative costs are now up two quarters in a row pretty aggressively -- especially in light of the increasing revenue. Can you just speak to that?

Andrew, this is Tim Mihalick. Overall compensation has been up. We have had to raise that a little bit just to compete in our markets, in our own backyard. The energy impact has had some impact on our --

That's at the corporate level, right?

Mid-corporate and upper to corporate and executive comp, also. Just overall. We saw -- we certainly saw an uptick.

Is that something we should see to stabilize versus revenue growth? Or is that something --

I would expect the stabilization there, maybe a little bit of a bump, but not much more. You're not going to see much more of an increase.

This is Tom. One of the things we implemented on the commercial side is we added some executive staffing in our Minneapolis office for purposes of addressing really what we saw as a need to aggressively deal with our existing commercial portfolio. And that occurred a little over a year ago -- maybe about 16 months ago. And those were all existing assets, but we added that really at the corporate level in our Minneapolis office, so that is part of the overall trend too.

I just saw the bump start in the first quarter and it lessened a little bit this quarter, but it still relatively high versus last year, especially in light of the revenue growth.

Correct. That's correct.

So is that something that was just like about a $2 million -- is it a $2 million pace for increase over last year? And that's over. Or are we going to look at it -- it looks like we are at about on an $8 million administrative expense pace and now we are up to about $10 million. So is $10 million the run rate going forward?

This is Tom, again. I guess -- I don't see -- we are not anticipating any material changes to corporate staff. Again, just to deal on the commercial side, which obviously we've got some corresponding increases in occupancy. That's really where we allocated the dollars on a compensation level; at corporate, added some positions and then also looked at compensation and basically bonus and other types of programs for purposes of really getting into those segments that we thought were understaffed.

Okay. Thank you.

Craig Kucera, Wunderlich Securities.

Hi, good morning. I had some questions. Some of your core markets -- particularly Minneapolis are really showing a lot of strength and I guess I was wondering, are you seeing any increase in sort of the bids or number of bids on assets that you are marketing? If so, is there a potential for you to kind of accelerate your disposition plan?

This is Tom. We have had pretty good activity on the sales packages that have gone out. We didn't really notice any corresponding increase or decrease in the number of potential buyers. One of the things you have to remember is there was a pretty significant increase in interest rates, about 150 basis points from when we started the disposition program to current, and that really didn't seem to change much here on cap rate expectations or number of potential acquirers. But the activity has really remained the same. There is a lot of buyers out there, a lot of different types of buyers, from private money to 1031 -- not as many REITs, but again most of the assets we were marketing really didn't fit the bill for REITs. And, again, we don't have a lot of public real estate investment trust operating in our market, including Minneapolis. But, no, I guess no material change that we have seen.

Okay. Thanks. There was the property in Roseville -- the industrial property. Can you give some color on kind of the expectation for redevelopment and what kind of timeframe that it might entail?

Well, at that point -- we are still evaluating that. That's a very good location. It's an older industrial asset. So that's still under evaluation on whether or not that building is completely redeveloped, or whether we deal with the existing structure. But the existing building is there now, primarily vacant. But that's in the process of being evaluated, and the decision is going to be made probably in the next couple of quarters on what direction we are going to go there.

Okay. And then finally, obviously multifamily has been pretty strong; showed a little bit of weakness this quarter because of expense growth. Do you have any commentary on renewal rates? Are you losing any tenants to home purchases?

On the multifamily?

Are you seeing any change there or is that still kind of sticking?

We haven't seen -- obviously we track, not as scientific as maybe some other types of data points, but we do track to the extent that it's provided by our tenants the reason for moveout's. And I guess I -- we haven't seen any spike to home ownership like we saw earlier in the decade.

Michael Salinsky, RBC Capital Markets.

Just first question, talk a little bit about acquisitions. Seemed like type lines firmed up a little bit relative to the last quarter, if you look in the Q. Can you talk about what you are seeing on the acquisitions? Is interest rate motivating that? Are you seeing more product come to market? And then can you talk about your capital rate expectations over the next 12 months and whether you see any impact as a result of the rise in interest rates we've seen over the last six months?

Mike, this is Tom. We haven't really seen any material increase in the availability of quality acquisitions in our markets in the multifamily. I mean, there's a few here and there, and, obviously, you can see that we did pick up a senior housing project and a few other things. But didn't really see in the material change in what's available for product. Again, there's just a lot of interest in acquiring quality real estate from a lot of different investment groups, including ourselves.

As far as capital rates, even though there has definitely been an increase in interest rates, we were coming out of a period where capital rates really seem to stabilize and didn't go below certain levels. And just the resulting -- if you were a leverage buyer, the resulting spread was just larger. Capital rates really have stayed at that level, I guess, in our assessment even though interest rates have creeped up a little bit. But a lot of lenders have really compressed their spreads. So even though you've got 100 basis, 150 basis point increase in the underlying benchmarks in certain instances, that didn't necessarily translate into the same increase just due to spread compression by some of the lenders.

So our capital rate expectations really remain the same. We are still seeing if there is a multifamily project that comes to market (inaudible) new. That's lower six capital level. Senior housing ranges from the 7s to mid-8s and suburban commercial offices -- if it's a B or higher is really and that 8.5 to maybe 9.5 range.

That's helpful. Just in your commentary you mentioned that you are seeing more buyers. Are you seeing institutional buyers or is it mostly local and regional guys?

It's a really mix. There's definitely buyers from other geographic regions looking at this part of the United States. We are seeing definitely more funds, more private money coming out of the coastal markets just looking for incrementally higher capital rates, but no real particular group.

There's no big institutionals that are coming still to our markets to aggregate holdings that we have been able to see yet, anyway.

And the second one is, we look forward to funding. You gave a $300 million development/acquisition/investment. As you think about forward funding the pipeline from here on out, to date we've done a lot of recycling. I know you have stepped up a lot of the industrial. And there is a plan to step up a bit more of office as debt matures on that. But should we expect a more balanced mix of asset sales in new equity. Or given where you are trading today, you think that you are going to focus a bit more on recycling?

Mike, Tim here. I think we will probably continue the focus on the recycling and maybe a little farther down the road look at the balanced approach. At this point in time that would be looking out six to nine months to continue the recycling process, use our liquidity as best we can, and then look to the market probably a ways out, hopefully.

So then just tying him to Diane, there. Then on the leverage, I'm assuming that you are comfortable with current leverage. There's no plans to take that down any further at this point?

No. I think we are pretty comfortable with where we are at, so we will continue down the road that we started with our deleveraging as need be, but the kind of like where we are sitting at this point in time.

Thank you much.

Rich Anderson, BMO Capital Markets.

Thanks. You said we had an hour, so I'm going to ask more questions. What are you thinking about dispositions? It is still kind of like $30 million, $50 million a year kind of number, or is it more or less than that?

Rich, Tim here. It's probably that number, or maybe a little more over the next 12 to 18 months.

Okay. And then after that 12 to 18 months, do you think your availability of non-core assets significantly goes down or do you think -- what's the pipeline of dispositions, if you look further out?

I think that continues. As we've targeted additional growth, we've got a portfolio that really ranges in age from assets that are 30 years old to newer assets, and one of the things that I've talked about in the past is the plans to continue to recycle and get younger, so to speak. So, that path will continue. Assets specifically need to be off our books.

Got you. Can you quantify the number of units that are under development in Williston?

Yes. We should be able to give you that real quick.

I'm just looking at projects in process on page 53. 288 units and 44.

That's not just -- who is that?

This is Tom. Dakota Commons.

No, I mean, I'm talking about all development going on in Williston.

Oh. All development going on in Williston? Not off the top of my head. We pull the permits, but I want to say there is probably 800 to 900, but I'm going on memory based on the last permit report. And then there is obviously there's another number that's potentially planned, but one of the things is there is still almost 10,000 special -- basically temporary type housing -- whether it's man camp's, RVs --

Special-purpose, right?

Right. Special use permits that are still in Williams County, which is the primary jurisdiction it encompasses.

So you think development is up 50% over the past year? Or is it more or less than that?

I think 2012 is probably going to be the peak, depending on how 2013 finishes out. But there is a fair number of units that are contemplated for next year. There is still some infrastructure that needs to be delivered in Williston to open up some of these areas. So, I think our assessment is there still a fair amount of permanent housing demand in that market. And, again, it's going to be a combination of lender willingness to go into that market, which we have yet to see on basically the manner that we see in other more stabilized markets. Interest rates are going to play a factor, and then construction costs. There definitely is still a lot of demand for construction capacity in western North Dakota from a lot of the energy companies just due to the size of the infrastructure projects, whether it is rail, whether it is refineries. There's a significant amount of capital investments that is being put into the market by the energy companies.

Got you. Okay, Diane, I just read page 37 of the 10-Q and it reads like the maintenance and the property management increases are kind of recurring in nature. Is that the right way to look at it for the multifamily expenses?

I wouldn't say the maintenance so much because of the insurance losses.

Okay. So the property management would be kind of a more recurring number?

Yes.

Okay. And then last for me, again, the Stone Container industrial asset that went vacant, I'm curious why that was taken out of same-store if there was no redevelopment decision made on it? It's a bummer that you lost the occupancy. But if it is not in redevelopment, why is it not still in the same-store pool?

Well, I guess to clarify, something is going to happen there. Either the existing structure is going to be substantially renovated, which would take it off-line, or that building is going to be mostly scraped and a new one put in place. So it's just really the extent of what's going to happen there, Rich. But we haven't made a decision on whether this is a much more involved project of scraping the existing or all of the existing facility or a substantial interior/exterior renovation of the existing or most of the existing structure.

Are you trying to lease it the old-fashioned way right now or is that -- you are not even bothering at this point?

Well, everything is always for lease if someone comes along -- but long-term that's not really the opportunity. We wouldn't say no if something materialized, but I think our assessment given that location and what's happened in that general area of Roseville, either a material renovation of the existing facility or a scrape, a new is going to be the best path to value creation there.

Okay. Great. Thank you.

And showing no further questions, I would like to turn the conference back over to Tim Mihalick for any closing remarks.

Thank you. Just a short remarks to say thanks again for listening in this morning and to wish everyone a Merry Christmas and a Happy New Year. And, hopefully, the weather will turn to the better here in the western part of North Dakota. So, thanks again.

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