Centerspace (CSR) 2015 Q1 法說會逐字稿

Good day, and welcome to the Investors Real Estate Trust first-quarter FY15 earnings conference call and webcast.

(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 first-quarter FY15 earnings conference call.

IRET's earnings release and supplemental disclosure package for the three months ended July 31, 2014, were posted to our website, and also furnished on Form 8-K on September 9. 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 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 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. I hope you'll find the information provided to you to be beneficial. To be honest, I was surprised to look back at my notes and realize that it has only been a little over two months since our last call.

Although Tom and Diane will explain this quarter's activity to you in more detail, I remain quite pleased with the continued execution on our strategic plan. We disposed of two properties during the quarter, and placed development property located in Williston, North Dakota, in service. In line with our plan, we also have over 1,400 multi-family residential units throughout our target markets either under construction or recently completed at the end of the quarter, as well as two medical properties totaling approximately 147,000 square feet. This development activity remains squarely in line with our goal of putting more emphasis on our multi-family and healthcare segments.

Additionally, year-over-year same-store NOI increased, as well as occupancy in four out of the five of our reportable segments during the same time frame. Simply put, we are hard at work at implementing a plan, which continues to change the way IRET will look into the future. Buyers continue to be available for our older, smaller, or low-performing assets in our portfolio, allowing IRET to recycle those sales proceeds into our development projects. All in all, it has been a busy summer here at IRET, and I look forward to the future when the results of our development projects should have a significant impact on the operations of IRET.

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

Thank you, Tim. This morning I will provide a brief recap of items of note as reported in the 8-K press release and the 10-Q for first quarter of FY15, which ended on July 31, 2014.

Let's start with operations in the first quarter. As detailed in yesterday's filings, revenues continued to increase quarter over quarter, primarily driven by development projects coming online and the strong leaseup. In addition, same-store multi-family revenue is still increasing, as we are able to push market rents.

Overall, revenues have increased $2.7 million when compared to Q1 of FY14. Of this, non-same-store makes up around $2.5 million, with multi-family same-store approximately $500,000 higher than in Q1 of FY14. This increase in multi-family, however, was offset by a decrease in revenue in non-same-store industrial segment due to the redevelopment of our Roseville industrial property.

Real estate expenses were up $878,000, of which $731,000 is associated with non-same-store properties, with same-store overall increase in expense of approximately $147,000 when comparing to first quarter of FY14. As discussed on the last conference call, in the fourth quarter of FY14, or the previous quarter that we met on with our conference call, we experienced a significant increase in utility costs due to extreme cold conditions and increased utility rates in our markets.

In the current quarter, utility costs decreased, as weather stabilized, and also the rate increases that were implemented by some utility companies in our markets were not approved by the regulatory authorities at the level the utility companies had begun charging. And accordingly, we realized some refunds and a decrease in utility rates. Also, same-store expenses, primarily in the multi-family segment, were impacted by insurance-related events of hail damage, which accounted for self-insurance expense of $358,000, or $202,000 over the prior year first quarter.

Regarding impairment and loss on sale of real estate and other investments: We continue with our strategy of disposing of assets, and reallocating the dollars to our development pipeline. As a result, we realized some non-cash losses in the quarter of $2.3 million due to impairment, and $3 million due to loss on sale for a total non-cash expense of $5.3 million. These assets have sold or will be sold in future quarters, and as stated before, proceeds will be deployed into funding development projects and acquisitions. This causes some drag on earnings, as not only we lose the income generated by these assets, but we do not realize any earnings until development properties are placed in service or new properties acquired.

Administrative expenses increased approximately $900,000 over the prior quarter, and of prior fiscal year first quarter. This increase is primarily due to a non-cash expense attributable to our share-based long-term executive compensation plan.

Another factor that impacted earnings on a comparative basis was a gain on involuntary conversion. The amount recognized in Q1 of FY14 was $966,000. Even though we have a significant insurance proceeds outstanding at quarter end, we do not anticipate any recognition of involuntary gain in FY15.

Moving on to the balance sheet and first-quarter events: Regarding cash and liquidity, cash on hand at quarter end was $60.6 million, as compared to $47.3 million at the beginning of the fiscal year. In addition to continued strong cash flow from operations, during the first quarter we raised cash equity of approximately $16.9 million through our dividend reinvestment program using the DRIP waiver and IRET Direct features. This equity raise will be used to fund our development projects. Our line of credit has $39.5 million available as of quarter end.

Regarding acquisitions and development, and sales of real estate: Acquisitions and developments placed in service provided for an increase in real estate owned of $36.8 million, of which $8.3 million was in undeveloped land and $28.5 million in income-producing properties with average cap rates of approximately 8.8%. We disposed of properties with carrying value of $9.7 million, with a net loss of approximately $3 million. NOI on these disposed assets is no longer reported as discontinued operations, but can be found in the footnotes in the NOI section of the MD&A within the 10-Q. The Company also invested $36.9 million in development projects during the quarter.

Regarding debt: During the quarter, we closed on two loans totaling $25 million. The average variable interest rate at date of closing was 3.38%. These assets were unencumbered, and cash out was approximately $25 million.

We assumed $12.2 million of mortgage debt on the Rapid City apartment acquisitions; the average interest rate is 6.16% with maturities ranging from two to six years. Current mortgage debt was $1 billion as of quarter end, and compared to prior year end of $998 million. Outstanding mortgage debt to undepreciated property owned was 48% at quarter end versus 49% one year ago.

Our overall weighted average interest rate on our mortgage debt, excluding our line of credit and construction debt, is 5.32%, as compared to 5.54% at the end of the prior year's first quarter. And we also paid off one mortgage loan for $2.3 million on a retail property in Omaha, Nebraska. Overall, regarding debt, we are staying on course, making progress towards our goals of improving our debt ratios and other targeted key metrics, freeing assets from leverage for potential disposition and an overall strengthening of the balance sheet.

FFO and AFFO as reported on a per-share basis were $0.14 and $0.12 for the quarter ended July 31. In addition to the factors mentioned above that affected earnings, the issuance of shares to provide equity for development has increased the weighted average shares outstanding and is providing for dilution. As the projects come online and provide earnings, the dilutive effect will decrease.

Overall, I feel we had a very strong quarter of operations from same-store properties. We continue on the path of redeploying sales proceeds into desired segments of multi-family and healthcare, and diligently manage a large development pipeline to meet the objectives of increased earnings and ultimately AFFO coverage.

To close, I report that the IRET Board of Trustees declared a quarterly distribution of $0.13 per common share and unit to be paid October 1, 2014, to the shareholders of record on September 15. This will be IRET's 174th 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. Despite continued unfavorable weather this past spring and summer, IRET made continued progress on our strategic plan of improving our overall portfolio by focusing on growing our best-performing segments of multi-family and healthcare, combined with disposing of non-core assets to remove those properties which are underperforming, while also adding more cost-efficient and newer assets to the portfolio through development.

Even though many challenges remain, including delivery delays on our larger, apartment-development pipeline due to weather, as well as pressure on property values in our commercial segments due to the sluggish improvement in those segments, we were able to continue steady improvement in a number of important areas, including occupancy and revenue growth. We remain committed to the strategy we followed in FY14 of focusing on growing our operations where IRET is the market leader or we have a path to market leadership, and disposing of non-core assets that are either not positively contributing to our financial performance or are in markets or segments where we see limited growth potential going forward.

As noted over the prior year, and confirmed by this first-quarter financial results, as we continue to grow our best segments of multi-family and healthcare, primarily through development, combined with the disposing of older non-core assets, we expect continued near-term pressure on funds from operation due to the mismatch in timing between the outlay of funds necessary for developments compared to the delivery of completed projects, as well as the loss of current income from those assets that have been sold. However, now that we are starting our fourth year of increased development, and with projects in process now at approximately $354 million due to the commencement of five projects this past quarter totaling approximately $120 million, we expect that the delivery of projects commenced last summer in 2013 will begin to somewhat offset the FFO pressure created by our higher levels of development.

Delivery time is important, and as noted during the last quarter's call, we were concerned about weather-related impacts. Now, after a very wet summer in many of our development markets, following the wet spring and harsh winter, we did experience delivery delays on a number of larger projects, and we fell behind schedule as well on recently commenced projects.

We previously projected delivery delays of as much as 8 to 10 weeks, and it appears that that was basically accurate for a number of these larger projects. Fortunately, the weather conditions have not materially increased our cost of construction. Rather, the financial impact has been due to delayed delivery, which does slightly increase development costs in the form of imputed or actual interest costs. But the biggest impact, of course, is delayed receipt of rental revenue, as all of these projects continue to experience very positive lease-up rates, and are achieving actual rents as projected, or in some cases, rents slightly above projections.

In regard 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 experiencing higher construction costs, as well as competitive development from other real estate owners, unit demand and rent levels continue to support our strategy of growing primarily through development and, when available, acquisition opportunities. IRET currently has 1,477 apartment units under construction in six of our core markets, which is a slight increase in the number of apartment units under construction over the prior quarter, as we delivered a total of 98 units in Williston, North Dakota, during the first quarter of FY15 as compared to the delivery of 386 units during FY14. We are now also developing in six of our core markets, which is an increase of one market, with the commencement of a project in Jamestown, North Dakota, this past quarter. Additionally, we have two medical assets under construction comprising approximately 147,000 square feet of office space, and these are in our core medical market of Minneapolis, Minnesota.

Finally, during the past quarter, IRET continued to add to its land holdings for future multi-family development with the acquisition of a large parcel in Bismark, North Dakota, that can accommodate approximately 900 apartment units, bringing our multi-family land holdings to over $23 million, and also allowing for the development up to approximately 2,800 additional units in the coming years. We continue to remain active in land acquisitions for the purpose of positioning IRET as the market leader in new, multi-family 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 and more efficient, more focused by segment, and the leader in its respective categories and markets.

Our plan for the coming fiscal year will be to continue to focus primarily on growing our apartment operation, as well as expanding our healthcare segment in the area of medical office and senior housing. It is expected that most of our growth will continue to come from new ground-up development, as there continues to be a lack of acceptable acquisition opportunities in almost all of our markets when compared to development returns. However, as we enter another construction season this spring and summer, we will carefully monitor and evaluate all the challenges associated with development.

As a result of these observations, we are constantly adjusting our approach to proactively deal with existing and new challenges. Our focus remains on 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. Our leaseup to stabilization, both in terms of time and rental rates achieved on delivered projects, has confirmed the correctness of our approach.

Financial improvement does remain slow, and continues to be challenging in the commercial segments of industrial, retail, and office. Our strategy this past year and for the coming year will be to seek improvement through a combination of an aggressive focus on new leasing and renewals, as well as the disposition of non-core assets that are weaker performers or have a limited ability to contribute financially or will require higher capital investment with limited corresponding financial return.

Moving on to leverage, and continuing the trend that we have experienced over the last several years, this past quarter saw a reduction in our average weighted interest rate, as we continued to take advantage of the low interest rate environment by employing a conservative use of debt. We do not expect any material change to our current overall leverage of debt or type of debt, as our target is to remain at approximately 50% of all debt, including construction loans, to gross assets, excluding our preferred stock. We believe this approach will provide us with good flexibility on how we fund our growth and operations going forward.

Depending on the level of development opportunities that we see, we may slightly increase leverage levels on the existing portfolio by as much as 5%, or approximately $50 million, bringing total leverage as a percentage of gross assets closer to the 55% range. To maintain overall interest expense at current levels, or even lower, we may use more floating-rate debt to capture the advantage of lower rates during development or on those assets which are likely to be disposed of through sale over the next 3 to 18 months.

During our last call, we discussed a non-cash impairment to a number of commercial assets, with the majority of the impairment being attributable to eight commercial office properties owned by a subsidiary of IRET. We provided detailed supplemental information in the form of two slides during our last call. During the first quarter, this portfolio continued to maintain a high occupancy level of approximately 93%, with almost no change to its financial performance. As a result, we did not update the slides, as there's been no material change.

The loan is current, and cash flow is currently projected as adequate to service the loan before any capital improvements, leasing commissions, or tenant improvements. The loan has been transferred to special servicing, and we are engaged in discussions with the special servicer on various options with regard to this loan. The loan is non-recourse to our subsidiary Company, subject only to standard industry carve-out guarantees by both the borrower, as well as IRET. It is early in a very uncertain process, and IRET can make no assurances about any possible outcomes.

Looking forward, we expect the amount of development and acquisitions to remain consistent with our current levels, with our capacity remaining as high as [$350] 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 5.5% to 12% in the multi-family segment, and 7% to 8.5% in the commercial segments. In certain cases, actual results have been higher for development in the energy-impacted markets of North Dakota, South Dakota, and Montana.

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

(Operator Instructions)

The first question comes from Dave Rodgers of Robert W. Baird.

Good morning, guys. Appreciate all the detail that you gave in your prepared comments, and I think it was very helpful. But you wanted to go back to the acquisitions and dispositions that you had to start the year. You've talked about the strategic plan as part of the disposition and strategy of the Company.

I guess, one, can you put a little more color maybe around that strategic plan? And I know you've been a little bit hesitant to this point, but as it's coming to fruition here, can you give us a little bit more color maybe numerically on how you see that playing out in timing?

And then the second would be maybe to dovetail into that is, again, you spent a lot more money buying land and apartment buildings during the quarter than I think you sold. Is that a timing mismatch, and how do we see that reversing over the next three, six, nine months?

Dave, I'll start, and let Tom jump in as we talk about the acquisition side.

On the disposition side, I guess we've been pretty clear of our intent to get younger and dispose of properties. In regards to a numerical number, we laid out very similar to what we've done over the last year regarding sales which I think are somewhere in the neighborhood of $75 million last year, if I remember correctly, and I think we'll continue to do that.

Again, we talked about exiting the retail part of our segment looking into FY16, so if you add those numbers in, that puts us a little farther out. But that continues to move forward, that continues to be a focus of ours.

And as I stated in my comments to -- the market is very receptive, there's a lot of cash and money out there looking for real estate. And it's given us the opportunity to take some of our lower performers and properties that aren't within our geographic footprint or where we want to continue to be a part of and sell those out and take them into market. I think that's going to continue.

We're going to continue to be active as that's available to us. I don't see that changing as we look to move forward. We've been very clear on that, and that's our intent.

Also, as I stated, we're going to continue to focus on the multi-family and healthcare segments and growing those in our portfolio, and you look to see the shift as we move that forward. I'll let Tom talk a little bit about the acquisition of the land and the timing issues there.

Yes, I think -- Dave, that's a good point, and you're correct. The ideal scenario would be the day we sell something that's providing income, the very next day we turn those proceeds into an asset that is also newer and providing current income.

Unfortunately, that's very difficult trick to pull off. And so when we see acquisitions that make strategic sense or are accretive, we're not going to hold off on those until we sell something. We're going to grow the portfolio.

And so I think to answer your question, yes, there's always going to be some timing mismatch. And of course, during the summer months, historically that isn't a lot that gets done from a sales standpoint. There's a lot of vacations from buyers from those types of situations.

I think going forward, you can expect to see heightened dispositions, that's really what we've said, past couple of years we've confirmed that. And then of course, we've provided pretty detailed information on our development projects as well, so.

And run me through then, if you would, a little bit on the sources of the uses. And I guess what I'm ultimately getting at is any need for external equity as you go forward through the remainder of your FY15.

If you can run me through your development spend for the remainder of the year and then how you look at -- the DRIP as obviously a component of the funding there. You get the $39.5 million available on the line of credit and then what are the plug figures that get you comfortable with the idea you shouldn't need to come back to the equity market?

Yes, and the real wild card in there is not necessarily development, because there we've got a pretty methodical approach and we know what's coming. It would be acquisitions. If the market changes course and we start to see more acquisition opportunities, that would probably precipitate us going back to the market.

As far as funding mismatches and sources and uses, Dianne's got all of the actual numbers. I don't want to go from memory, but we did have a pretty detailed disclosure of what we have committed and spent to date.

What we have in the form of committed construction debt, and there really isn't a big gap between those two. I think it totals up to pretty close to that $320 million. And then if you look, of course, at our balance sheet and our credit facility, we have the cash on the balance sheet to basically fund that gap.

But again, I guess we can't promise there won't be some mismatches if we see acquisitions. And I think if they make sense and they are accretive, we are going to go get the equity that's necessary to grow the portfolio and do what's best for the long term financial profit of the Company.

And last question for me, just on the fundamental side, maybe bigger picture. Any areas where you're feeling too much or excessive competitive supply? And I guess I'm thinking most specifically in residential or anywhere that fundamentals have turned one way or the other since we talked, as Tim mentioned a couple months ago.

Well, I guess one potential market we're watching would be Grand Forks, North Dakota. We've -- and that's purely based on the number of units.

It's not based on the underlying fundamentals because basically, our projects are full there and have leased up. And what we're seeing in the market, the absorption seems to be fine with no impact on rents.

Other than that, the markets that we're currently developing in, and of course, a lot can change, the demand metrics, revenue, everything continues to be extremely favorable and basically uncharacteristically strong if you look back historically. And these markets just continue to grow with jobs, with people, and higher wages.

And one other comment on that, Dave, would be the addition. As you look at the renter profile from a demographic perspective, we continue to see the renter by choice increasing in our markets which historically has been the other way, where they're looking to buy homes. There's been a fundamental shift, not only in our markets, but across the country, and we see that continuing as we look at our 10 to 12 core markets.

Thank you for all the color.

The next question comes from Carol Kemple of Hilliard Lions.

Good morning.

Good morning, Carol.

In your press release, your occupancy in the industrial segment greatly improved from last quarter. Did you all do something different there, or what caused that boost?

I think there was a, and I don't have it in front of me, we have the lease up of the one building that took it to -- our property down in Iowa, it's in Urbandale, Iowa. We leased up over 90,000 square feet, which took that occupancy to 100%, so that's kind of why you see that big increase and that big jump.

Okay, I don't think I've ever seen 100% occupancy before, so it's kind of nice.

As you know, we've got such a small amount of industrial, leasing out that much space is able to take it to 100%.

And then with your recent dispositions, are you selling properties at the prices you expected when you first started marketing, or are they coming in better or worse than expectations?

This is Tom, Carol. They're coming in basically in line with what we're projecting with in certain instances may be a little bit higher. Again, we're not seeing any surprises one way or the other in the market.

Most of these assets are in markets that we've been in for a long time or we have multi-family. So, we have a pretty good understanding of what the trading patterns and sale patterns are in these markets.

Okay, great, thank you.

Thanks, Carol.

The next question comes from Michael Salinsky of RBC Capital Markets.

Good morning, guys.

Good morning, Mike.

You mentioned the G&A spike in the quarter was related to stock comp, among other things. What -- is that expected to continue for the year, or is that a one-time catch up?

There's some prior year numbers in there. I would expect -- it would be fairly consistent with what was maybe around $400,000 less going forward on a monthly -- or a quarterly basis.

Okay, that's helpful there. Second question, you mentioned your -- that the portfolio is cash flow -- the [night office] portfolio is cash flowing before TIs, LCs, maintenance CapEx. But when you net it against that, when you net against the additional cash flow impact, is it cash flowing after that? Are you generating positive cash flow to the entity after CapEx and stuff?

This is Tom. At this point, yes. That portfolio is about 93% occupied. IRET, we have no obligation to fund into that subsidiary, and we have not. And so basically, at this point on our projections, the property as a portfolio is generating enough cash flow to cover anticipated transactions, leasing or renewals.

Now, again, in any portfolio, there are scenarios further out with certain tenants that would potentially make that not the case, but those are off in the future. I guess to answer your question, at this point, the portfolio is cash flow positive. It's servicing all its obligations, and IRET is not contributing cash into the subsidiary.

Okay, so you're not contributing cash into, so it's basically -- the negotiations are ongoing, but is it still your intent to convey those assets or work through some resolution other than where they're sitting at today?

Well all options are open, and we are engaged with the special servicer and are open to all possibilities, including a conveyance back to the lender or a deed in lieu discounted payoff or various other structures which we've seen occur in the CMBS world. Again, it's a slow process, but we are fully engaged with the special servicer.

Okay, I'll go back to Dave's question, too. You added $117 million of proportion at development during the quarter in terms of starts. Walk us through where the funding is going to come for that.

How much of that is identified asset sales, how much of that is construction loans? And then just given the, if I'm understanding correctly, additional acquisitions from here on out will be funded with new equity? Can you just walk us through how you're thinking about that on a funding basis?

Yes, and I think if you go to the table, and Dianne can give the page, it's basically laid out. The funding is either going to be with cash that's already on the balance sheet that we've built up and the construction loans that are basically put in place.

If you look at, with all the new development and then the footnotes for the tables below which provides what we've spent to date or the cash that's already been put into the projects to date combined with the available debt on the construction loans that are closed and we're entitled to advance on, I think the gap is maybe about $20 million. And again, if you look at our balance sheet and you look at our credit facility, we've got probably close to $85 million of capacity on our balance sheet in the form of cash.

Again, upcoming acquisitions are just going to add to that, and of course, that's the money we would put in first. We don't necessarily have to advance on those construction loans. We can not draw as deeply into them and of course, save the construction interest expense.

At this point, it's fully covered, plus we have some capacity to do acquisitions here and there. If at the current pace, again, we don't see a high level of acquisitions unless there's real turn in the market that we're in or that we're focused on, we just don't see that changing in the near term which would require us to go out and get equity or accelerate sales to fund a larger acquisition.

And finally a question for you, Tim. I think you mentioned early 2016, but I just want to make sure that we're clear on this. Sounds like dividend coverage now not in 2015, more 2016 event, just given delays. Am I understanding that correctly?

Well, we continue to shoot for 2015, but with the delays that have occurred, maybe first quarter annualized and then for the whole year in 2016 we should see dividend coverage.

So, 2016 is the expectation at this point, correct?

Still trying for 2015, so we're still making that a goal, but.

Okay, well that's all for me guys, thanks.

(Operator Instructions)

The next question comes from Craig Kucera of Wunderlich Securities.

Yes, hi, guys, good morning.

Good morning, Craig.

I wanted to follow up on Dianne's comments about G&A. I know G&A this first quarter was maybe about $3.5 million, you said maybe $400,000 less was normalized. Are you saying then we should expect sort of $3 million to $3.1 million of G&A as a quarterly run rate going forward?

At this point, that would be my best estimate, yes.

Okay.

And then -- but also that --just note about $1.2 million of that would be non-cash on the -- so it will be a deduct for FFO, but it's an add-back for AFFO.

Got it, so it would be $3.1 million all-in and maybe $2.7 million on a cash basis, correct? Something like that?

Correct.

Okay, and secondarily, I want to follow back on your comments, Tom, on the development delays. I know earlier in this year there were issues with the weather. Were you saying that based on the wet weather this summer, that you thought your prior estimate was still correct or that things were going to be delayed even further?

No, I think to clarify, the last quarter, I think there was hope and some possible expectations just given our markets, that we would be able to catch up during the summer. But unfortunately, a lot of the markets experienced unusually high rain moisture, and that prevented us, really, from catching up to that 8 to 10 weeks that we lost.

We didn't incur any additional delays. It's just the projects -- several large projects which we had expected would fully deliver or mostly deliver during this past quarter or early in this past quarter did not deliver at all. That's basically where the 2 to 2.5 months came from, and that's where we sit currently.

Not that it -- you equate it to the same, but for those of you that follow the agricultural world, there's been so much moisture that they are worrying about crop disease. So, if that gives you an idea of what's been going on up in our neck of the woods, that's the building -- where we face in on the building side, there's been so much moisture that it just presents challenges.

Right. I wanted to ask about -- you mentioned there's a lack of acquisition opportunities which would indicate that cap rates are low relative to what you think is reasonable, relative to your cost of capital. But when you're selling assets, you're having to take impairments.

Is it just that when the assets that you're selling and the assets that you want, there's just very, very high demand for healthcare and multi-family and not as much within your other commercial real estate sectors? Or can you give us a little bit of color on what's going on there?

Yes, there's definitely different cap rates. If you look at suburban commercial office rates, B product, A minus product, the cap rates have certainly started to come down, but they are 300 basis points higher than multi-family.

I think the real issue is, we're not even seeing acquisitions at any price of assets that we would add to our portfolio. We're just not seeing, really, any product that is coming to market on any scale in the markets we're in for multi-family and healthcare and senior housing.

It's not that we don't want to pay low cap rates. It's just even if we did, there's no product available. And of course, what we're selling is in different segments and not as sought after as healthcare or multi-family.

The one difference would maybe be industrial where we did see strong demand and we did see pretty aggressive cap rates and that segment. But in commercial office, that's not the case.

If I could just add an impairment, the assets we are selling have some vacancy issues, so that the strategic decision not to allocate those dollars for lease-up is causing the impairment with the short holding periods. If we lease these assets up, the carrying value would be there. It's just the shortened holding period and the decision not to push those dollars into -- TIs into those buildings.

Yes, we're seeing much better opportunities to deploy capital. Again, what we're saying is those segments and markets where IRET is the leader or the dominant player. And that's not the case in commercial office, so we're not aggressively deploying capital in there to, as Diane said, resolve some of the vacancy issues.

And again, if you look at discontinued operations, we are basically selling non-contributing assets. Assets that are neutral at best to our P&L. And so again, that's just part of the overall plan to focus on those segments where we've got growth, we've got scale and we're actually making money.

Okay appreciate the color, guys, thanks.

Thanks, Craig.

The next question is a follow-up from Dave Rodgers of Robert W. Baird.

Maybe just to follow-up on the G&A. Sorry, Diane, I think the increase in G&A, just running the numbers, maybe $2 million year-over-year, sounds like obviously the LTIP is some of that. One, is that a new stock incentive plan that was just put into place and that's why it's hitting?

And the second is, what else in G&A is causing those number to go up? And is none of that related to development where you'd be capitalizing any of that?

Correct, the executive compensation plan with the long-term incentive has been in place for a couple years; however, in FY14 was the first year that the metrics were achieved. And so that's the first time you're seeing it hit the financial statements. We did have some corrections that were posted in this FY15 of $457,000 that were actually related to FY14, so that's why, on a go forward, you could expect the LTIP to be about $1.2 million of non-cash every quarter.

The other increases in G&A, this is just on a corporate side. We've had to add some additional staff and some normal increases in labor expenses. Development of those property-related items will be found within the property management expenses in their segments.

Does that answer your question?

I think it does, thank you.

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

Thank you. A couple of closing remarks. One, obviously, we're very focused on the -- closing the gap on the FFO on our dividend, and I know that continues to be a concern. Obviously a concern of ours, we're working hard to get that accomplished.

We feel we made great strides here in this first quarter on the expectations as we continue to prune our low performers and those that require additional TIs and CapEx. As Tom said, we feel we're able to put those dollars to work in development projects and/or potential acquisitions, if we can find them. That will continue to be a focus of ours so that we can get that one-to-one coverage and below solved as we look to move forward.

Secondly, I just wanted to remind all of you that I hope if you haven't made your airplane reservations or hotel reservations to get here Monday for our grand opening of our apartment complex, The Commons, as well as our annual meeting on Tuesday night, there's still time. So, hopefully we'll see you Tuesday night. If not, we'll talk to you later on. Thanks, everybody.

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