Centerspace (CSR) 2015 Q2 法說會逐字稿

Good morning and welcome to the Investors Real Estate Trust second-quarter FY15 earnings conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Timothy Mihalick, President and CEO. Please go ahead, sir.

Thank you. Good morning. And thank you for joining us today for IRET's second-quarter FY15 earnings conference call.

IRET's Form 10-Q was filed with the Securities and Exchange Commission yesterday, December 10, and our earnings release and supplemental disclosure package was posted to our website at IRET.com, and also furnished yesterday on Form 8-K. Before we begin our remarks this morning, I want to remind you that during the call we will be making forward-looking statements, which are predictions, projections, or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results can materially differ because of factors discussed in yesterday's Form 10-Q and the comments made during this conference call, and in the risk factors section of our annual and quarterly reports and other filings with the Securities and Exchange Commission. IRET does not undertake any duty to update any forward-looking statements. With me today from management are Diane Bryantt, our Executive Vice President and Chief Financial Officer; and Tom Wentz, Executive Vice President and Chief Operating Officer.

Now for my remarks. In the summer of July 2013, during both our earnings call and our investor analyst's day, I laid out some specific strategies for IRET to improve operating and financial results and change the perception of IRET. Over the last 16 months, IRET has made tremendous strides to accomplish many of the strategic initiatives I laid out last summer; namely, disposing of non-core assets in our commercial segments in order to focus on our multi-family, residential, and healthcare segments. And in particular, on development projects in those segments.

As published in our earnings release last night, I believe investors were able to see the impact of the plan we implemented taking hold. The sale of property as we determined to have functional deficiencies, which created obsolescence in the marketplace, has occurred and will continue in the future. The recycling of the proceeds from those sales has allowed us to continue down a path of funding our development projects as we expected, and again, results reflected in our earnings release last night.

These efforts bring IRET to the point it is at today, and that is the delivery on the strategic plan. As I have stated repeatedly, this ship is turning. And maybe not fast enough for some of you, but we will continue down the path I have continued to discuss. I believe IRET should be recognized for the implementation of the plan to date and for what we expect to happen into the future.

Before I turn the call over to Diane, I want to address the question that I am sure is at the top of everyone's list. And that is, what impact will falling oil prices have on IRET? As you can imagine, we are sensitive to the continued drop in oil prices as it relates to the developments we have under construction and the energy impacted markets surrounding the Bakken. At this point, and as indicated in our 8-K, we continue to be pleased with the lease up in our developments and continue to monitor the demand for housing in these markets.

Since there's a wealth of information available about at what price drilling will continue in the Bakken. I reference the following quote from the Department of Mineral Resources Director of the State of North Dakota, Lynn Helms, in an article written by Jeff Beach in the Prairie Business Magazine that was dated November 17, 2014, in which he states, 165 out of the 186 rigs are in the core drilling areas of Williams, McKenzie, Dunn, and Mountrail County, and the State of North Dakota where operators can make money as long as prices stay above $29 to $45 per barrel. These counties are at ground zero, as it relates to the energy activity in western North Dakota, and continue to produce strong activity. In an article published in the Wall Street Journal on December 8, 2014, by Tess Steins, titled ConocoPhillips Cuts Drilling Budget by 20%, ConocoPhillips noted that about $5 billion of the spending plan is allocated toward Conoco's development drilling program, down roughly from $6.5 billion in 2014, with the spending in the lower 48 states to remain focused on the Eagle Ford and Bakken shale regions.

This indicates that at least one major development driller plans to continue to commit resources to the Bakken. Even though current oil prices have prompted budget cuts in other drilling areas.

In summary, we carefully monitor a variety of sources on Bakken activity, and we currently remain optimistic that the Bakken region activity will remain sufficiently robust to support the projections used to underwrite our development projects in the region. For more information, I would suggest that you take a look -- for more information regarding the state's energy activity, I would suggest that you log onto the North Dakota Department of Mineral Resources website, oil and gas division, at www.dmr.nd.go/oilandgas. This site will provide up-to-date activity on current well activity and energy production in general and the region.

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

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

Let's start with operations in the three and six month ending October 31. In review of our financial statements, I would note, in particular, two significant items in the second quarter that each contributed to meeting our two main long-term objectives. AFFO dividend coverage and growth through deployment of sales proceeds.

First, let's discuss AFFO dividend coverage and results of operations in the second quarter. We had very strong operating performance in the second quarter in our real estate operations. As detailed on page 8 of the supplemental data included in our 8-K earnings release, FFO and AFFO in the second quarter were significantly higher than reported in the previously two quarters.

This increase in NOI from our developments placed in service and from our acquisition over the past year was $2.9 million. We have realized a fact lease up in strong market rents for our development properties when they have opened. Also important, is that our overall total same-store NOI increased by $500,000. The same-store increase is primarily driven by our multi-family segments as continued high occupancy provides for the ability to increase rental rates in those markets.

This leads up to AFFO and dividend coverage. As detailed on page 14 of the supplemental information, for the six months ended October 31, our AFFO payout ratio was 96.3%. Barring an extremely severe winter in our markets that would affect snow removal and utility expenses or other unforeseen events, we anticipate this trend to obtaining coverage to continue for the remaining quarters of FY15.

Moving onto to our sale strategy. As we have previously discussed, we have strategically identified and sold assets that have significant lease expense, tenant improvements, or other investment needs. The goal was to redeploy those dollars into higher income producing properties in our multi-family and healthcare segments.

First, selling properties with some occupancy challenges and shortening the holding period of these individual assets has caused some impairment recognition over the past few quarters. This non-cash expense has been realized over the past quarters, and while it is not a factor in our reported FFO and AFFO, it nonetheless has an impact on our financial statements.

Although not all sales have been impaired properties, year to date we have sold and have pending sales, including our held-for-sale assets, of approximately $64 million of property. This also, in comparison to FY14, in which we had property sales totaling $69 million.

The proceeds from these sales over the past two fiscal years have been redeployed into our development projects. Currently, we have projects in various stages of construction with a total anticipated cost of $355 million, with estimated equity needs to finance the development of $65 million. Using our cash on hand, sales proceeds, and equity rates from our dividend reinvestment program, we have sufficient equity to complete these projects.

Our view is that our continued focus on repositioning our balance sheet and asset allocation and our continued focus on operations and getting our development projects delivered to the market will enable us to achieve these two main strategic objectives that affect our financial performance, dividend coverage, and continued growth.

Other items of significance that occurred in the quarter are as follows. Regarding debt, we increased our line of credit availability to $90 million from $75 million, with $50 million still remaining of borrowing capacity currently available. During the quarter, we refinanced two loans totaling $14.1 million and placed new debt of $6.5 million, and we closed on a new construction loan for $15 million. The interest rate ranges at close on these loans were from 2.7% to 4.4%. We also paid off five loans totaling $4 million.

Other items of note is that we received the final insurance proceeds from the Chateau fire number two of approximately $4 million. As previously discussed, we will not be recording any gain on involuntary conversion for this second fire event.

We also acquired a 68-unit multi-family apartment complex in Bismarck, North Dakota, and placed into service 227 units within our development pipeline for an increase of 295 units in our multi-family portfolio in the second quarter. These properties estimated cap rate ranges were from 6% to 14%, however, tenant demand and market rents are exceeding our initial pro forma.

As stated earlier, we are pleased with the first six months of operations in FY15, with FFO of $0.31 and AFFO of $0.27 per share. We continue on the path of redeploying sales proceeds into our desired segments in multi-family and healthcare, and are diligently managing our large development pipeline to meet the objectives of increased earnings and AFFO coverage.

To close, I report that IRET Board of Trustees have declared a quarterly distribution of $0.13 per common share in unit to be paid January 16, 2015 to the shareholders of record on January 2. This will be IRET's 175th consecutive quarterly distribution.

Thank you, and I will now turn the call over to Tom Wentz, Jr., Executive Vice President and Chief Operating Officer.

Thank you, Diane. As a follow-up on that comments so far, this past quarter continues the trend of improved operations, primarily due to our plan to shift away from non-core segments and assets, in order to focus on growing those segments and asset types where IRET is the market leader or has a good path to market leadership.

We continue to grow our best segments of multi-family and healthcare, primarily through development, and while some individual development projects are behind schedule as it pertains to delivery dates, overall, our development portfolio is on track in terms of cost, and more importantly, slightly ahead of projections in the area of revenue. While nothing is ever certain when it comes to ground-up development, our expectation is that our commitment to development that was implemented approximately 3 years ago, in combination with the other elements of our plan, will continue to drive improved results.

While we are primarily focused on delivering the development projects that are currently in progress, as well as disposing of non-core assets, as the key element of our plan to continue to grow and improve operations. We still remain active in land acquisition to ensure a future foundation for growth through development, as well as through a limited amount of acquisitions.

To echo Tim's comments on oil activity in our region, I would note that our development focus in our energy impacted markets has been on what we view as the permanent resident created by the energy sector, as opposed to the man-camp type development. But again, we certainly prefer $90 oil as opposed to $60 oil.

However, we are only about 45 days into the current price decline, and accordingly, it is difficult to assess at this point if oil prices are being driven totally by actual demand or political reasons or a combination of both. Either way, as we said at the beginning of the energy boom in North Dakota over five years ago, we have a widely dispersed portfolio of quality real estate and did not go all in, in a tightly focused market or segment.

As it pertains to debt and leverage, we do not expect any material change to our current overall levels of debt or type of debt. We have good flexibility on how we fund our growth and operations going forward. Depending on the level of development opportunities, we may slightly increase leverage levels on the existing portfolio. To maintain overall interest expense at current levels, we have continued the strategy of using more variable rate debt to capture the advantage of lower rates during development, as well as to provide more flexibility when it comes to our assets in terms of sale or repositioning.

In regards to the previously discussed MR9 loan portfolio, the loan is still current and the metrics disclosed by us in June have not changed significantly as of this quarter end. Continuing to confirm no material negative impact to either operations or balance sheet should IRET elect to convey the underlying real estate back to the lender in lieu of paying to loan at maturity in September 2016.

Looking forward, we expect the amount of development and acquisitions to remain consistent with our current levels with our capacity being 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 going forward range from approximately 5.5% to 12% in the multi-family segment, and 7% to 8.5% in the healthcare segments.

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

Thank you.

(Operator Instructions)

The first question will come from Dave Rodgers of Robert W. Baird. Please go ahead.

Yes, good morning. I probably can't help myself on the energy topics, I'll have to ask a question to start there. With regard to your developments in Williston, I know you're active on delivering one in the quarter and it has additional phases to deliver.

Can you dive in a little bit on any color regarding that particular property and the demand for additional units that you'll be bringing online? And any color around that would be really helpful?

Well, I guess, Dave, this is Tom, that project is slightly behind on delivery. Obviously, we've delivered the first several buildings of that project. Lease up is on track, very robust, we are not offering concessions.

I guess, we have not seen any material backup in demand or activity in the energy impacted markets at this point. And, I guess, we are not really expecting it just given the viability price point for energy development in North Dakota.

I think it's pretty much an established fact that in the United States, and even worldwide, this is the lowest cost energy producing area with the highest quality oil. And so, I think there's a lot of room to go to the downside before there's a backup in activity, and at this point, we have not seen anything that would cause us to change our opinion.

Dave, this is Tim, just on the follow-up, I guess, as I stated, I did pull out a couple quotes regarding the activity in the region, but if you go out, and I'm sure you'll have the opportunity to and talk to your energy guys, but the indications we continue to get is the productivity from those four counties that I mentioned earlier, as Tom just touched on, are so strong that they expect they'll continue that drilling of those larger companies.

On the flipside of that, we are also hearing manufacturing sales companies like Titan lowered sales guidance in terms of maybe some of the land moving equipment. I mean, are you seeing less competitive supply up there? Or any slowdown or pause from potential developers in that area related to the oil pressure?

Not, I guess, still not at this point. I mean, we are not that far into it, and maybe as we get a little closer to spring we'll see a shift on that. But right now, we're in the, I don't want to say the dead part of the season, but the concrete is in and buildings are being built. And maybe a little better indication come spring when the ground begins to thaw and the need for that kind of equipment comes more relevant.

Okay.

And Dave, it may have an impact in the long term. I think, again, we've really focused on operating with a very disciplined wide-ranging strategy, and we did not ignore the other good markets. I mean, it wasn't, probably only a year or two ago, we were questioned why we weren't investing more in Williston.

And why were we putting money into Rochester, Minnesota or Minneapolis, Minnesota or South Dakota or some of those markets. But again, we've employed a very wide-ranging strategy and did not ignore other markets. And so, we will see where energy goes, but so far so good at this point for us.

All right. Switching to the capital. Thanks for the color. Switching to the capital recycling.

You put nine additional assets and then a total 10 assets in the held-for-sale bucket. The nine office assets, are those are related to the MR9 assets that you're talking about and the mark-to-market, I guess, on the write down?

And if then, second part of that question would be can you talk about what the plan is in terms of monetizing additional assets if, in fact, those are all the MR9 assets? What do you do going forward in terms of monetizing additional assets that aren't in that bucket?

Dave, this is Tim, those assets that we did put on the market are not the MR9 portfolio. Those are dis --

Okay, so those are completely separate?

Right.

That's right.

So the timing and the plan for monetizing those 10, I think nine office and one retail asset, is that this quarter? Next quarter? Is it a function of development? How are you thinking about that?

Yes. I mean, certainly within, long term, within a year, but we expect it that those will move quicker than that. That they're out to market. I mean, there's a lot of demand as we've seen and we expect we'll be able to move those quicker, still probably within this fiscal year, and to allow us to continue to fund the development.

Looking forward, we've made it very clear that we are going to continue down this path to sell additional assets. As we mentioned in past, they're a retail portfolio and continued to look at other assets and other product segments. We're not giving up on that plan and we intend to continue down that path.

That's good to hear. Last question for me and then I'll get back in the queue. With regard to the dividend coverage, I think by our estimates dividend coverage was positive in the quarter, but I think at the end of your release there was a comment that you're still on track for your prior expectation, which I think was sometime by the end of this year.

So, a little bit of color would be helpful around do we go, do we take one step back and go two steps forward later this year? How are you thinking about the dividend coverage for the remainder of the year?

No, I think the expectation is, as we've outlined in the -- going back, as I mentioned early and I think it was July of 2013, expectations and plans were to have dividend coverage, full-year dividend covered by the end of FY15. And we still intend to accomplish that.

Okay, great. Thank you.

Yes.

(Operator Instructions)

And at this time, I'm showing no additional questions in the queue, so we will conclude the question-and-answer session. I would like to hand the conference back over to Tim Mihalick for his closing remarks.

Well, thanks, everybody, for taking the time to listen in on the update on IRET. As I mentioned earlier in the beginning of the call, we are very excited about the implementation and the progress we've made on our strategic plan.

Certainly pleased but not satisfied. We will continue to move forward and accomplish what needs to be done to make IRET relevant in the REIT world. Thanks again, and happy holidays to everybody. Thank you.

Ladies and gentlemen, the conference has now concluded. We thank you for your attending today's presentation. You may now disconnect your lines.