Centerspace (CSR) 2014 Q3 法說會逐字稿

Good morning, and welcome to the Investors Real Estate Trust third-quarter fiscal 2014 earnings conference call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Lindsay Anderson, Director of Investor Relations. Please go ahead.

Good morning, and welcome to Investors Real Estate Trust's third-quarter fiscal 2014 earnings conference call. IRET's earnings release and supplemental disclosure package for the three months ended January 31, 2014 were posted to our website, and also furnished on Form 8-K on March 12th.

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 Wednesday's earnings release, and from time to time on Investors Real Estate Trust's 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. 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 will find the information provided to you to be beneficial. We are pleased to report solid operating results for the quarter, with revenues from our stabilized properties increasing during the third quarter compared to the same period of the prior year, due primarily to increased rental revenue and tenant reimbursements in our Commercial Office and Healthcare segments, and to increased rental rates in our Residential segment. IRET's Executive Vice President and CFO, Diane Bryantt, and our COO, Tom Wentz, will have details on these results for you shortly in their remarks today.

Subsequent to the quarter-end, IRET's senior management team carried out a strategic planning process, and we recently presented results of the process to our Board of Trustees. We summarized this plan in Form 10-Q we filed yesterday, but I want today to comment in more detail on some aspects of the plan.

As noted in the 10-Q, we plan to continue our focus on identifying for disposition properties whose location, age or need for significant tenant improvements or capital expenditures suggest the Company's investments may be better deployed elsewhere. After studying the needs of tenants and evaluating IRET's commercial office space, and the markets we are in, we continue to observe a shift in space needs of certain commercial tenants.

Per person space needs have been reduced, and we do not see this as a trend reversing any time soon. Evaluating our portfolio on this basis, we expect, over the next 12 to 18 months, to identify properties primarily in our Commercial Office segment as candidates for disposition. We do still see some opportunity in well-located office properties. We expect that any future commercial office property acquisitions will be focused in the Minneapolis-St. Paul market. However, we plan to direct new investments primarily toward our Healthcare segment, in particular, senior housing, and our multi-family residential segment. We believe that these segments will provide the best opportunities for growth.

Within our Healthcare segment, we plan to target on-campus medical office properties in larger markets in the Great Plains region, and to pursue the relationship-driven build-to-suit opportunities. For example, our Southdale medical property office -- I'm sorry -- for example, our Southdale office property in Edina, Minnesota, is approximately 90% leased, and we are currently evaluating approximately 50,000 -- 54,000 square foot expansion of this medical office property. While no contracts have yet been signed, and as with any development project still in the planning stages, there are many contingencies that could result in the project not being finalized. This is a project we are interested in doing and one that would fit well within our strategic plan.

Within our Multi-family Residential segment, we plan to continue to target tertiary markets within the Great Plains region -- cities such as Rochester, Minnesota, and Sioux Falls, South Dakota -- that offer us operating efficiencies and a critical mass for brand presence. We also plan to further deemphasize our retail segment, with a goal of identifying for-sale assets within this portfolio by fiscal year 2016. We are optimistic that this strategic plan will help us create a strong foundation for growth in the long-term. In particular, we believe that bringing our current development projects online and identifying for-sale certain non-tier -- non-core core performing assets within our portfolio will provide a path to AFFO coverage within fiscal year 2015, a goal that we have discussed in previous earnings calls.

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

Thank you, Tim, and good morning, everyone. Yesterday, we filed our fiscal-year 2014 third-quarter report on Form 10-Q, and furnished our 8-K earnings release and supplemental disclosure. This morning, again, as before, I will provide a brief recap of significant items of note that occurred in the third quarter, which ended on January 31, 2014.

First, we'll start with the balance sheet, and regarding cash and liquidity. Cash on-hand at quarter-end was $53.5 million as compared to $94.1 million at the beginning of the fiscal year. We continue to see strong cash flow from operations to support our property operations and improvements. Dispositions proceed received during the quarter of $78 million, use of our available cash on-hand, and loan proceeds, have allowed us to invest approximately $130 million during the year on our acquisitions and development projects.

During the quarter, we advanced $12.5 million on our line of credit. $2.5 million of this was due to the line of credit increased minimum balance outstanding requirements, and $10 million was for pre-funding of an equity with the lender on our Cardinal Point development project. Overall, as of quarter-end, with cash on-hand and available line of credit, we have liquidity of $103 million.

Regarding acquisitions and developments -- during the quarter, we placed in service two of our multi-family residential development projects -- the 132-unit Cypress Court property in St. Cloud, Minnesota, in which we have an 86% interest; and our 146-unit River Ridge project in Bismarck, North Dakota. Both of these projects had a strong lease-up, with Cypress Court currently today at 73% occupied, and River Ridge at 91% occupied. Upon stabilization, we anticipate a cap rate range of around 7% to 9% on these projects.

During the quarter, we sold two residential properties, three industrial properties, and two retail properties for a total sales price of $11.7 million. We are continuing our focus on identifying for-sale non-core assets or assets where we believe our investment capital can be better deployed elsewhere. Acquisition activity in the quarter was light, as we only acquired a parcel of vacant land in Fruitland, Idaho, for $335,000. This acquisition was next to an assisted living facility that was purchased subsequent to quarter-end for $7.1 million.

Another notable event in the -- in Q3 was the fire in December at our Chateau II Apartments, where we were rebuilding following a previous fire. You have all -- are familiar with the story of the flood, fire number one, and now fire number two. We have spent considerable amount of time discussing the impact of these unfortunate events. In Q3, we realized final settlement with the insurance company due to the flood and fire number one rebuild. The total gain realized in the quarter was $1.5 million, and year-to-date, total of $2.4 million. This will finally close out that claim.

The December fire loss number two will be recoverable from insurance proceeds. At the time of loss, IRET's investment into the project was approximately $8.8 million. It has been determined that $7.1 million of this investment was lost due to the fire; and accordingly, that is the amount that the claim to the insurance company. However, note that we do not estimate that there will be any gains on involuntary conversion on this loss as our basis on the new assets is basically at replacement cost.

Also note that we are estimating approximately we lost $882,000 due to the second fire based upon anticipated rents that we would have had received, had the Chateau structures been placed in service as originally scheduled. These rents, unlike the first fire loss, will not be reimbursable by insurance, because there were no leases in place at date of loss.

Moving on to debt, we closed two loans in the quarter totaling $33.2 million. The first was a construction loan for the Cardinal Point Apartments development in Grand Forks, North Dakota. This loan totaled $24.5 million. It has a 30-month term with a one-year option, and is priced at 240 basis points over the 30-day LIBOR, which today, would be approximately 2.56%. The second loan was a refinance for Park Meadow Apartments in St. Cloud, Minnesota. This loan was for $8.7 million. It has a 30-year amortization, nonrecourse, with a fixed rate for seven years at 4.55%. During the quarter, we also paid off two loans totaling $5.4 million. The reason for the loan payoffs included available debt at par with higher interest rates, or a payoff due to a pending sale.

Mortgage debt to unappreciated cost is at 48% at quarter-end, improving from 52% one year ago. Overall, our weighted average interest rate on our mortgage debt, excluding our line of credit and construction debt, is 5.48%, continuing to see progress as compared to 5.65% as at the end of the comparable prior fiscal year.

Results of operations. Net in operating income for both the three and nine-months comparative periods have increased $5.5 million and $9 million, respectively. Analysis by segment has provided for all periods in the 10-Q, but primarily, the same positive factors impact all periods. They are -- continued occupancy strength in our multi-family stabilized and non-stabilized properties, which has allowed us to increase rents; increase in our occupancy in our Commercial Office and Healthcare segments; occupancy increases in the Commercial Office segment has immediate positive impact due to tenant reimbursement of common area operating expenses that are otherwise an owner expense, if the space is vacant. In addition to the occupancy increase, NOI for the Healthcare segment had a favorable variance, due to increase percentage rents collected and recognized during the quarter.

Moving to FFO, we reported FFO of $0.17 per share and $0.49 year-to-date. Rounded on a standalone quarterly basis, FFO per share would be $0.18; but our year-to-date rounding convention provided for a rounding adjustment in the third quarter. AFFO for the -- per-share for the quarter was $0.11, and $0.34 year-to-date. Adjustments to FFO can be found on page 8 of the 8-K. And, as you will note, in the third quarter, the primary adjustment was for tenant improvements of $4.2 million as compared to $1.8 million in the prior quarter. We will continue to focus on leasing up our commercial space, but these upfront costs to tenant these properties have an immediate impact to AFFO; but in the long run, rental income will return this capital outlay.

To close, I report that the Board of Trustees declared a quarterly distribution of $0.13 per common share and unit to be paid on April 1, 2014 to shareholders of record on March 17th. This will be IRET's 172nd consecutive quarterly distribution.

Thank you. And now I will turn the call over to Tom Wentz, Jr.

Thank you, Diane. While the third quarter ending January 31, 2014 saw some weather-related impacts -- primarily in terms of delays in completing and opening our two new developments mentioned by Diane, as well as in residential leasing traffic -- the third quarter results for fiscal 2014 still continued the trends seen in previous quarters of improved operations. Our focus remains on our leading segments of Multifamily and Healthcare Real Estate in our core markets where we are or have the ability to be the leading provider of these types of real estate, and, also, on reducing our investment in those real estate assets where we do not have market leadership.

As we continue to grow our best segments, we anticipate some slight pressure on FFO due to the mismatch in timing between the outlay of funds necessary for developments, compared to the delivery and lease-up of completed projects. We do anticipate this pressure will continue through the balance of fiscal 2014, as well as the coming fiscal year.

We had initially projected that, as a group of current in-progress developments came online later this spring and first-quarter of fiscal 2015, the FFO impact related to our height and development pipeline would begin to lessen. While still to be fully measured, it is likely we experienced some marginally-negative weather impacts that could delay the delivery of our in-progress development projects. However, we are optimistic that any lost time this past winter can be made up during the spring. But if not, it is possible some projects could be four, to as much as eight, weeks behind our initial delivery dates.

Fortunately, the weather conditions this past winter did not materially increase the cost of construction. Rather, we expect any financial impact would be due to delayed delivery, which while does slightly increase development costs, the biggest impact is delayed receipt of rental revenue due to delayed lease-up. In regards to development, we continue to see good income and growth opportunities in our markets that are leaders in healthcare, education, energy and food. Even though we are seeing higher construction costs, as well as competitive developments from other real estate owners, unit demand and rent levels continue to support our strategy of growing primarily through development, as well as available acquisition opportunities.

IRET currently has approximately 1183 apartment units under construction in four of our core markets, which is a slight change from the prior quarter; as during the quarter, we delivered all the units in Bismarck, North Dakota and St. Cloud, Minnesota. Additionally, over the last 12 months, IRET has also acquired land that would allow for the development of a similar amount of units starting yet in calendar 2014, with delivery late-2015.

We continue to remain active in the land acquisition area for the purpose 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 execute on our primary strategy of making our overall portfolio younger, more focused by segment, and the leader in its respective categories end markets.

Our plan for the remainder of this fiscal year and the coming fiscal year will be to continue to focus on new multifamily development to meet the market demand for apartments, as well as to leverage off the leading position IRET currently enjoys in our current operating footprint. While there continues to be a low amount of acceptable acquisition opportunities in almost all of our markets when compared to development returns, we continue to work to also acquire existing projects that meet our strategic objectives. We currently have 204 units under contract in Rapid City, South Dakota that are expected to close the first quarter of fiscal 2015. The total acquisition price is approximately $18 million, at a going-in cap rate of approximately 6.5%. We are also carefully monitoring all the challenges associated with development, including increased construction costs, as well as competitive developments from other developers.

We 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 strong position to execute on its portfolio growth strategy. Our focus is on developing assets that will be positioned as the best-in-market, avoiding the requirement to compete on price, and keeping IRET as the market leader in our core communities.

We are also seeing select opportunities to grow our healthcare portfolio through a combination of acquisitions, development, and expansion renovation of existing locations. Subsequent to quarter-end, IRET purchased on a sale-leaseback a 55-unit newly-constructed senior housing facility located in Fruitland, Idaho, that has been net-leased back to affiliates of our long-term senior housing provider, Edgewood Vista. The purchase price was approximately $7.1 million, and the initial going-in cap rate is 8.5%. This property fits within IRET's Idaho Spring Creek senior housing portfolio, bringing the total number of buildings in this portfolio to 9, and the units to 326.

The commercial segments of industrial, retail and office continue to slowly improve with a combination of our aggressive focus on new leasing and renewals, as well as the disposition of non-core assets that are weak performers. Subsequent to quarter-end, we have two commercial buildings under contract to sell for gross proceeds of approximately $10.3 million, with expected net proceeds of approximately $5 million. While no assurances can be given that these sales will actually close, we remain committed to our strategy of focusing on our best-performing commercial assets and disposing of the weaker performers.

We experienced a slight increase in our office occupancy, and remain on track to meet our previously discussed leasing goals. While our renewal rate over the last quarter was weaker than our historical rate, after careful analysis and review, we concluded the lower renewal percentage was due mostly to one-time events involving tenants that had either closed their offices in the market or consolidated back to an existing location. So these non-renewals were, in reality, inevitable, regardless of what we did.

Also, with the recent sales of a majority of our industrial portfolio, the remaining vacancy is basically isolated to just one industrial building, while the remaining assets in the industrial segment are all at 90% occupied or greater. The same is basically true in retail with the vacancy confined to a handful of buildings. We will continue to focus on improving occupancy and selectively disposing of assets in these three segments.

Moving now to leverage, we expect no material change to our current overall levels of debt or type, in that approximately 47% debt to gross assets, excluding our preferred stock, we have good flexibility on how we fund our growth and operations going forward. Depending on development activity, we may slightly increase overall leverage levels on the existing portfolio by 5% to 7%, bringing leverage as a percentage of gross assets to slightly over 50%.

To maintain overall interest expense at current levels, we may use more floating rate debt to capture the advantages of lower interest rates. However, we remain very cautious on the use of leverage and non-fixed rates, and we will remain well below our historic levels of 65% leverage. We expect the amount of developments and acquisitions to remain consistent with our current levels, with our capacity remaining as high as $300 million over the next 12 to 18 months, depending on the final mix of acquisitions versus development.

Our expected acquisition and development cap rates range from approximately 6.5% to 13% 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.

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

(Operator Instructions). Dave Rodgers, Robert W. Baird.

Matt Spencer here with Dave. I was wondering if you can dive into a little bit more detail regarding your updated strategic plan, maybe with regards to timing, volume and yield that we can expect? And any impact to your expectation to cover the dividend by mid-2015?

Matt, Tim Mihalick here. Just, again, as we mentioned and talked about in both the filings, and as I did here on the call this morning, from a timing perspective, our anticipation is to take a look at the next 12 to 18 months to identify those non-core assets and poor performers in our portfolio that we need to move towards a disposition. As we've mentioned in the past, our expectation again would be to look for coverage of our AFFO number through probably fourth quarter -- third/fourth quarter of fiscal year 2015, so that we can move that process to get to that number that we've all talked about, to cover our dividend as it has been declared by our Board in the past.

From a yield perspective, I guess I'm not sure what you are referencing there?

Maybe just the cap rate on dispositions, maybe the range that you're seeing in the market?

Okay, now I'll let -- maybe have Tom touch on that a little bit.

Well, that -- this is Tom. I mean, dispositions -- that's difficult to determine on what the sale cap rate is going to be. I mean, it varies depending on the building. But given what we are selling, I mean, we're basically achieving market results. But some buildings have little or no income in place. And so, it's difficult to provide a cap rate on those. Those are really more price per square foot. So, it's really impossible for us to say. I mean, we're really looking at getting more focused through dispositions rather than what the sale cap rate is.

Got it. That's helpful. Thank you for that color. And then maybe, also, in the quarter, it looked like there was a bigger focus on limiting the tenant improvements. Was this more of a focus on strategic properties or a broader market improvement?

Well, I think if you're looking at the lease schedule, that really wasn't a conscious decision. Again, I repeat myself, but our portfolio is relatively small in those commercial segments. So, quarter-to-quarter, you can have pretty significant variances on what the TI level is, what the commissions are, what the rates are. And so, it's, I guess, really no conscious trend. It probably was just more deal-specific in there.

Actually, Dave, if you look on page 8 of the 8-Ks, there was actually quite significant tenant improvements in the quarter.

Okay.

We can take a look at that. I think that the conscious decision on tenant improvements are on properties that we are looking to sell, and to make sure that you will realize that cash upon sale, that it's a good tenant when you put in.

Okay, that's fair. Thank you for the help. That's all for me. Thank you.

Thanks, Matt.

Rich Anderson, BMO Capital Markets.

So, Tim, with the new kind of refocused strategy going forward regarding dispositions, is there -- I know you're still targeting 2015 -- fiscal 2015 for dividend coverage, but is it now like pushed back later in that year or earlier? Is there any change from this activity you expect to accomplish?

No, I would say, again, it's a continuation of the strategic plan. Maybe, as you said, just a little more focused.

Right.

Obviously, the impact of the Chateau income sets us back, as Diane discussed, approximately [$180,000] in bottom-line revenue. And so that maybe sets us a little closer to the end of fiscal 2015. So, it just extends out a little bit. So if you look at that [$880,000], that's three-quarters of $0.01 thereabout that we didn't anticipate due to the fire. But so that backs it up a little bit. But we will continue to push and move that forward.

Okay. Tom, you mentioned leverage creeping up over 50%. Do you have a -- is that kind of your long-term number, 50% plus or minus? Or do you think that the Company -- and maybe this is a question for Diane or whomever -- is the leverage target somewhat lower, call it three, four years from now, after you kind of get through this process?

Well, that's hard to predict, but I think it's just looking at the best available source of capital for purposes of executing on the strategy. And as the loan markets continue to get healthier and healthier, we are certainly seeing very attractive opportunities with a number of our long-term lenders.

So, hard to predict where the leverage would be. That's going to depend a lot on market conditions three, four years from now. But we certainly remain committed to a very conservative approach on leverage, and the vast majority of the debt is going to remain fixed. So, it's just one slight change we are possibly considering as we come into the new construction season for 2014 and 2015.

Okay. And as it relates to dispositions, could you quantify the amount of office sales potential in that 12 to 18-month period?

Well, again, that's going to be difficult to quantify. I mean, it's really going to come down to picking out those assets that do not really fit any longer in that segment -- outliers, poor performers from that standpoint. But I think it's safe to say that our disposition level is going to remain heightened. So, I mean, if you look back over the last 12 months and what we disposed of, and what Diane's comment are, I would say it's reasonable to assume we are going to maintain that level.

Okay. And is it, like, kind of in a perverse way, a good thing in the sense that if you sell assets that are underoccupied, you sell them at a -- I don't know -- a 5 cap? I mean, maybe I am being a little extreme, but it is, in fact, an accretive event to sell some of these assets?

Yes, obviously, there is a couple of ways to make money in real estate. One is through the revenue and the other is eliminating the expenses. And, so, those assets that are negative drags or don't add anything to the bottom line, you're exactly right. And that's why you can also see and expect some fairly dramatic shifts in occupancy, because in a lot of these commercial segments, the vacancy is confined to a handful of buildings. And if those buildings are disposed of, that also impacts the occupancy levels. But, yes, you are exactly right. And those are the buildings we're looking at.

And who would be, like, the type of buyer for an asset like that?

I guess we've seen a whole range of buyers, as we discussed previously. I mean, there has been some institutional interest. There's been some private fund interest. We have 1031 buyers that are exiting out of other types of assets, primarily multifamily or farmland, that are at historic high levels. And owner-occupiers or owner-users that now see a good time to get into assets. And then private individual investors that are able to provide more time and better intelligence in those markets that we are exiting. So it's a broad range.

Okay. And then my last question is kind of back to the balance sheet. I assume now is not maybe the time to be considering the equity markets, but I mean, is that a consideration at some point down the road? And can you just talk to us about how you think about equity at this stage in the game?

Well, it's Tim here. I guess if we look at the equity needs, obviously, that will be part of our capital plans going forward. We want to continue to look to use those disposition proceeds as the ability to fund our development projects, but probably a ways out, I would think, from an equity perspective. And that would be part of the capital plan and stack. But we'd like to see the stock recover and move a little bit pricing-wise before we tap the equity markets.

Okay. All right, great. Thank you very much.

Michael Salinsky, RBC Capital Markets.

Just going back to the capital plan. I want to put some parameters around the numbers, just try to see kind of where we are heading here, just as you completed the strategic process. Can you give us a sense, as you look at the portfolio today, how much would you -- how much falls into that core bucket versus non-core bucket? And as you see the portfolio moving forward, what's the right allocation to Healthcare and Multifamily versus the other sectors, maybe where you are at today versus where you expect to be, call it, 18, 24 months from now?

Mike, off the top of my head, I'm thinking, as we've discussed in the past, the larger percentage of our portfolio being the multifamily, probably that 35 to 40. Large component being on the Healthcare segments, which would include senior housing; and interim will be of 35 number, somewhere in there. And then looking at the balance of our portfolio, holding the better quality commercial office and some identified potential industrial and/or retail that may go along with mixed-use in our multifamily.

Okay, that's helpful. But in terms of how much of the portfolio today would you -- falls within that non-core bucket?

I'm trying to think, again off -- I would guess probably at 15% to 20%.

Okay. In terms of dollar volume, I mean, what realistically, just as we're thinking about sources and uses and funding the next kind of round of development?

Maybe, Tom, if you can help me here a little bit?

Yes. Well, I guess, Mike, I mean, to go back to what -- we don't really have any set targets on what we're going to be percentage Multifamily and Healthcare. I mean, I think the limiting factor is going to be -- we need to make money in these segments. And so we will continue to grow in those segments as long as there is accretive opportunities available, and we can grow our earnings, grow our FFO, and all the good things that come from that.

In real estate someday that's going to stop. And that's even going to stop in Multifamily; for a period of time, it's probably going to stop in Healthcare. And, so, it's hard to predict at what point that is going to occur, but we monitor that very carefully. And we are not going to invest in two segments that are not going to be accretive for the Company and benefit the shareholders.

As far as non-core assets, again, that's hard to predict. I mean, Tim is probably right to say that you look at our portfolio today, commercial retail, commercial and industrial, how small those two segments are; there's probably $150 million to maybe $200 million left in that category. So if you fully exit that, if we fully exit that, that would be one number; but there aren't any immediate plans to do that.

And then commercial office is currently at about 30% of the overall portfolio; $500 million or so, give or take a little bit. I think, again, if you look back over our disposition history, which has been heightened over the last 12 to 18 months, that's a pretty consistent number of what I think we would seek to do over the next 12 to 24 months.

Okay. Just as we're thinking about dispositions then in light of dividend coverage, I mean, what's a realistic target for the next kind of 12 to 18 months in terms of dispositions?

Well, again, I think it's going to be the same as what we've been doing. I mean, I think we've had a heightened disposition strategy over the last 12 to 18 months. And I think we are pretty comfortable with what we accomplished, and see that as a good proxy going forward. I mean, we're not going to give these assets away, and we are not under extreme pressure.

I mean, coverage from a percentage point is one issue, but from a dollar standpoint, which I think we have discussed, the difference between where we are at and where we need to be really is not that great on a dollar basis. And, so, we're not going to panic and get into wholesale fire sales on our commercial portfolio. We've got some good assets in there, and some good contributors. And so I think we are comfortable with what we have done over the last 12 months, and I think that's a good number to use going forward, which I think Diane referenced about $80 million of dispositions year-to-date, so.

And the dispositions aren't -- they're going to be a part of achieving that AFFO coverage, but the development properties coming online and hitting their marks, that's really going to be the primary factor to hit our AFFO coverage.

Right, yes. Thanks.

Yes. Selling is not a growth strategy. And so it's part of it, but it's not our primary focus.

Well, it's a funding strategy. I mean, if you are selling assets (multiple speakers) development, I mean.

That's correct.

On Chateau, I mean, is that -- I mean, is there any -- that property that was burned down by the fire, what's kind of the new timeline on that? In terms of (multiple speakers) reconstruction?

This is Tom. We are going to rebid all the material subs for that. We are doing that right now. This time of year, it really doesn't pay to start at this point in the spring. You're not really going to get any timing advantage, so the anticipation is, is we'll come back out of the ground probably early summer 2014. So, it's going to be probably fourth quarter of fiscal 2015. So it will be a 9 to 12 month process before we finish that project up.

Okay, then finally, just on the commercial side. You mentioned you are on target to hit your leasing targets on the commercial side for the year. Any vacates or large leases we should expect to be commencing in the next couple months?

No, I -- oh, yes, I mean -- (multiple speakers) nothing out of the ordinary.

Appreciate the color. Thanks, guys.

Carol Kemple, Hilliard Lyons.

The 10-K, it said under the tax section that you all got a property tax relief credit in North Dakota. Is that a one-time credit? Or is that expected to continue?

This is Tom. The legislation is for two years. And it's difficult to measure the impact in North Dakota, because North Dakota basically built an arrears, so to speak. Your property is assessed or the value is determined in the February of the year, but then you don't know the mill rate or the mill levy until December at the earliest. I mean, it looks backwards for that year. But the legislation that triggered this was for two years.

And, of course, North Dakota legislature meets every other year. It's not every year. And, so, hard to predict what they will do. But, obviously, if you look at the revenue that's being generated due to the energy taxes, and if you look at the positive variances in the North Dakota budget and the surplus, it's possible or reasonable to expect that it might be extended.

And is this the first quarter that you all have received that credit?

Well, it's for the year. So that number is a year -- yearly number.

That was for calendar 2013.

Right, but --.

That's a look-back.

It's a look-back, but you don't -- like I said, you really don't know the whole year until that third quarter. So we will probably have something similar next year.

Okay, next year in the third quarter as well?

Yes, it shouldn't be as dramatic, because I think we will be able to accrue a little bit better for it, because now we know what the process is. The other -- real estate taxes are a two-pronged approach. One is your assessed value and one is your mill levy. So, you can have a reduced mill levy, but what we are seeing also is heightened valuations in a lot of our markets. So the mill levy may go down, but it's a lower mill levy applied against a higher value results in the same number. So, there's a lot of pressure around our market still from local jurisdictions to raise money through real estate taxes, so.

Okay. And then when you all talk about you're going to look at your retail portfolio to deemphasize it, at this point, I know you haven't given it in depth. Are you thinking it's going to be -- you're going to sell off 25% of your retail 50%? Is there any kind of rough number you're thinking at this time?

No, no rough number. I mean, we are evaluating it. Some properties are appropriate for disposition. Some really are not ready, due to what the underlying debt is, maybe because it's got yield maintenance or prepayment penalties. But, again, there's no absolute strategy that all of this has to go. I mean, again, we've got extremely good performing assets in the retail segment, like the industrial and in the office, that just cannot be replaced from a return standpoint or an income standpoint, and are still in the prime of their lifecycle. So, again, difficult to predict which ones are going to go or what percentage.

Okay, thanks.

Craig Kucera, Wunderlich Securities.

I wanted to know if you could comment on the drop in multifamily occupancy at your stabilized properties? I know it has been awfully cold in the upper Midwest, and probably had an impact on traffic, but do you have any thought on maybe what that impact might have been?

Well, this is Tom. Yes, that historically is the worst quarter. There just is not a lot of traffic for a number of reasons, primarily the holidays. And then, of course, this winter did not help -- was pretty -- I mean, basically our entire markets or all regions were impacted by either extreme cold or incredible amounts of snowfall, which impacted it.

And, additionally, when we go back and trace this, it really goes back to just a handful of multifamily assets. And I know we don't report by underlying market segment, but it really goes back to just a few assets. And so, if those were removed or eliminated, it would be a much different story. But nothing from a trend standpoint or concerning the occupancy demand level still remained heightened, and pretty much all our markets for new product from that standpoint.

Got it. So does that mean -- I mean, just given weather-related issues, would you expect demand kind of to pick up? Or have you seen any improvement in trends as we enter into February and March as far as traffic levels?

Yes, that's the expectation. I mean, this is traditionally the strong -- one of the strong leasing times of the year, as people kind of get set for the spring/summer plans along with August and September. So, yes, our expectation is increased traffic going forward.

And sort of along those lines, when we think about your margins, I think your NOI margins especially have been on a nice, upward trend for the last three, four quarters. Do you attribute that -- is that primarily just the improvements in occupancy in your office and healthcare? Or are you having any better expense controls?

Well, expense controls are always a big, important component of that. But, yes, it's primarily occupancy, especially on the commercial. Because, really, occupancy provide two benefits. One, it removes the additional expenses that flow back to the landlord, because those are now recoverable as part of the commercial lease or mostly recoverable. So, occupancy has an outsized positive impact in the commercial segments from that standpoint.

Got it. And kind of going a little further into commercial, you made a comment earlier on the call on office and how you were seeing -- I think you mentioned a shift in space needs. And I was sort of curious to see if you can provide some additional color on what you are seeing, your tenants and tenants in the market kind of wanting today versus a year or two ago?

Craig, this is Tim. As I mentioned earlier on in my comments talking about space needs, we've really seen a reduction of, in some cases, [$225] per square foot from square footage per person down to maybe [$150], even as far as [$125] per person. Obviously, the challenge for that is more people in the building needs for parking, which create some challenges for us on some of those properties. But, really, just an overall reduction in per person space needs.

Okay, thanks. And then, finally, when you look at Healthcare, is there a certain segment that you find more attractive today? Is it assisted living? Is it MLP? What is more appealing to you in the current environment?

I think both are. We continue to be the largest owner in the Twin Cities of MLB space by private owner, so to speak. And then -- so that gives us a strong foothold to take advantage of those, as I mentioned, build-to-suit opportunities and relationship-driven transactions.

And then as we have built our senior housing portfolio again, we have been very active in those tertiary markets that we know well and with our operator. And we -- you certainly see a two-pronged approach being an opportunity for us to stay in that -- those two segments of the healthcare industry.

Okay, great. Thanks a lot.

And this will conclude our question-and-answer session. I would like to turn the conference back over to Tim Mihalick for any closing remarks.

Again, just thanks, everybody, for taking the time this morning to listen to our update on IRET. We're excited about where we are headed. We like the strong economies that continue to be exhibited in the Upper Great Plains. We feel well-positioned, as I have mentioned in the past, to provide real estate needs for those people and those companies in this part of the country.

Again, thanks, and have a good spring.

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