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Investors Real Estate Trust. (NYSE:IRET)

F2Q13 Earnings Conference Call

December 11, 2012 10:00 AM ET

Executives

Timothy P. Mihalick - President and CEO

Diane K. Bryantt - Executive Vice President & CFO

Thomas A. Wentz Jr. - Executive Vice President and COO

Lindsey Knoop Anderson - Director, Investor Relations

Analysts

Michael Salinsky - RBC Capital Markets

Richard Anderson - BMO Capital Markets

Carol Kemple - Hilliard Lyons

Dave Rogers - Robert W. Baird

Operator

Good morning and welcome to the Investors Real Estate Trust Second Quarter Fiscal 2013 Earnings conference call and webcast. All participants will be in listen-only mode. (Operator Instructions). 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.

Lindsey Anderson

Good morning and welcome to Investors Real Estate Trust Second quarter fiscal 2013 earnings conference call. IRET’s earnings release and supplemental disclosure package for the three months ended October 31, 2012 were posted to our website and also furnished on the Form 8-K on December 10.

In the earnings release and supplemental disclosure package, Investors Real Estate Trust has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with the regulations set forth in Regulation G. If you have not received a copy, these documents are available on IRET's website at iret.com in the 'Investor Section'. Additionally, a webcast and transcript of this call will be archived on the IRET website for one year.

At this time, management would like to inform you that certain statements made during this call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Investors Real Estate Trust believes the expectations reflected in the forward-looking statements are based on reasonable assumptions. Investors Real Estate Trust can give no assurance that its expectations will be achieved.

Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements are detailed in Monday's earnings release, and from time-to-time in Investors Real Estate Trust filings with the SEC. Investors Real Estate Trust does not undertake a duty to update any forward-looking statements.

With me today from management are Tim Mihalick, President and Chief Executive Officer; Diane Bryantt, Executive Vice President and Chief Financial Officer and Thomas Jr., Executive Vice President and Chief Operating Officer.

At this time, I would like to turn the call over to Tim Mihalick for its opening remarks.

Timothy Mihalick

Thank you Lindsey and good morning everyone. Over the last couple of earnings calls, I have talked about IRET’s appeal to investors as geographic peer play REIT investment. This morning, I intend to continue that thing. In doing so, I want to reference two recent articles. The first being in the USA today on November 27, 2012 and the second being numerous newspapers in the Midwest. But I will reference the article in the finance and commerce newspaper of Minneapolis, Minnesota, dated December 1, 2012.

The first article in the USA today is titled “Wealth rises in the USA’s heartland.” If you have a chance, I encourage you to research the article and read it for yourself. But its point only reinforces what I have been relaying to in previous earnings calls.

As this map indicates, IRET’s geographic footprint overlays the continued income growth in USA’s heartland. I believe that as we continue as a nation to search out a way to become energies self sufficient. IRET’s markets will continue to see the benefit of that growth. As we have said in the past and I will reiterate again today. The states that IRET operates in are net exporters of energy, including wind, oil, coal and natural gas, as well as commodities and water.

We have the things that the rest of the country needs as well as the world. On a side note to the continued employee demand on the economy in western North Dakota, I wanted to bring your attention to an article titled Minard Inc. to fly Wisconsin workers to North Dakota store in the finance and commerce newspaper. The content of the article states the intention of the home improvement retailer to fly 50 workers from its home base in Wisconsin to its Minot location on a weekly basis to fill the needs of staffing in the Minot location. This is yet another example of the continued economic climate we are experiencing in the Midwest.

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

Lastly, I wanted to comment on IRET’s move to the New York Stock exchange. I would like to thank NASDAQ for its service and help over the past 15 years. The NASDAQ exchange has been a great partner for IRET and I commend them on their help with IRET’s growth over the last year.

IRET’s move was based on a research that showed that approximately 92% of all listed [ph]REITs are listed on the New York Stock Exchange, as we continue down the past of increasing our visibility in the week days. We decided to join many of our peers on the New York Stock Exchange.

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

Dianne Bryantt

Thanks Tim. Good morning everyone. This morning I will give a brief summary of highlights and results of operations in the second quarter of fiscal 2013, which ended on October 31. We were pleased with the results of the second quarter, even though we had positive financial impact due to gains from involuntary conversion and sale of properties. We also have seen positive results due to acquisitions development and performance of our stabilized properties.

Overall, net operating income increased $7.7 million or 22.3% in the second quarter, as compared to the second quarter of last year. Year-to-date increase is $10.4 million or 15%. Acquisitions and development projects placed in service account for the majority of this increase. To summarize these non-stabilized properties accounted for $3.5 million for the quarter and $6.5 million year-to-date of increased NOI.

All acquisitions and developments this fiscal year have been in the multi-family segment. These new properties are operating above 90% occupancy. Even on the development projects of Torrey Ridge in Rochester, Minnesota and Williston Gardens, Williston, North Dakota. Stabilized properties provided for a combined overall NOI increase of $1.9 million for the quarter, and $1.7 million year-to-date. Although, we have not seen significant changes in occupancy in the comparative periods, revenue has increased primarily in the multi-family segment as high occupancy allows us to increase rent.

Also, we are seeing decreases in operating expenses as a percentage of revenue. For the quarter operating expenses as a percentage revenue was 38.2% versus 42.4% in the prior fiscal quarter. Raised rents, lower expenses has always been IRET’s model. And we have seen that results in

our operations in fiscal 2013. Details can be found by segment on the stabilized properties that is provided in the 10-Q in the net operating income section. Also, over the past year, we have been discussing on these cause, the insured flood and fire loss on two of our Minot, North Dakota properties. During the second quarter we received a settlement of actual cash value on the fire loss for the 32-unit Chateau apartment building which represented the 2.3 million non-stabilized gain. Outstanding yet is the final settlement on the flood damage, which we expect to occur yet this fiscal year. Also, during the quarter we received the final payment of $666,000 (inaudible) interruption payment for these properties.

Overall, the comparative NOI increases are very positive and we are continuing to look at those opportunities that allow us to continue to perform at these levels. We also have sold our apartment properties in Fargo, North Dakota, [ph]too close during the quarter and provided for a gain on sales of approximately $2.8 million. The third property sold subsequent to quarter end and we estimate that gain to be approximately $700,000. This information is detailed in the 10-Q within the discontinued operations note 7. Other items to note are acquisition expenses in the quarter were $73,000 in the first quarter and then year-to-date of $96,000. In fiscal 2012, acquisition expenses were $426,000 year-to-date.

Moving to FFO, we had FFO performance of $0.18 per share in unit for the quarter and $0.34 year-to-date. This represents a 2% increase over the first quarter and $0.03 over the prior year. Part of this increase was due to the inclusion of the $2.4 million gain on involuntary conversion which represents approximately $0.02 of FFO. As this is considered, ordinary income per GAAP. FFO on an absolute basis is continuing to increase on a per share basis the effects of the larger weighted average shares outstanding still is resulting in dilution. AFFO per share was $0.13 as compared to $0.10 in the same quarter of the prior fiscal year. As well as the first quarter of the current fiscal year. Note that the $2.4 million gain on involuntary conversion was excluded from our AFFO calculations. Again, detail on AFFO is provided in the earnings eight K. By taking a look at the details tenant improvements and leasing commissions were lower this quarter than the prior comparative period. However, we are still seeing opportunities for renewals in quarter results are lower as prior periods had some high levels of tenant improvements and releasing commissions. Thomas Jr. will discuss in more detail the trends we are seeing for leasing in our commercial properties.

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

To summarize, the major sources of cash that make up this increase were 111 million from preferred stock proceeds, 70.5 million of loan proceeds, 7.8 million of construction loan proceeds and 6.2 million of IRET direct share offering proceeds. The major uses of cash were 79 million paid on dept, 5 million for acquisition with a going in Cap rate of around 6% and 9.9 million for development projects. Development projects underway all investment will be 62.3 million with approximate remaining funding needs of $11.5 million. Also as per note 12 subsequent events we have under contract two properties totaling 36.2 million in the multi-family acquisition with approximate Cap rates of around 6.7% and also 3.6 million in land purchases are being looked at.

Moving to debt re-financing activity. Two loans were closed in the quarter, the ones closed included the 7401 (inaudible) avenue, re-finance which produced 7.5 million in proceeds. This loan is a two-year variable rate loan at prime plus 50 basis points beginning at 3.75% and has a 25-year amortization. Secondly, we placed financing on the Dinah 6363, France medical building. This is a fixed rate loan at 3.4% and it has interest only for one year in going to a 25-year amortization in 01/2013. Net [ph]entirety gross cash proceeds up $10 million. Current mortgage debt was 145,000 at quarter end as compared to 180,000 as of last quarter. Our weighted average interest rate for the portfolio dropped from 5.72% on July 31 is 5.66% at quarter end. For the remaining of the fiscal year 2013 we only have 12.2 million of maturing debt. The management is reviewing re-finance or payoffs as loans mature or opened for free pay. As we imply the use of the proceeds from the recent preferred stock offering, sales of property or other source of capital that are available to us. And finally I received (inaudible) declared a distribution of $0.13 per common share in unit to be paid on January 15 to the shareholder’s records of January 2. This will be IRET’s 167th consecutive quarterly distribution. With that I will turn it over to Thomas Jr., Chief Operating Officer.

Thomas Wentz Jr.

Thank you, Diane. Consistent with my past presentations, this morning, I will provide an overview of IRET’s fiscal 2013 second quarter that ended on October 31st, 2012. I will also provide a review of recent events and trends impacting IRET. Finally, I will cover the credit markets as they pertain to IRET and conclude with an overview of IRET’s segment operations as well as pending acquisitions, dispositions and development.

Our second quarter results continued the trend of improving operations with almost all metrics compared to the same three and six-month period from last year. Compared to the same quarter last year, gross revenue was up, income was up, and more importantly our focus on expense control continues to improve cash flow and income.

The year-to-date period reflecting our first six months has basically the same trend, with revenue up in all segments except medical and income up in all segments except office. And again, year-over-year expenses are down by approximately $520,000 through the first six months and gross revenue was up by almost $7.5 million, with income also up by the same amount primarily due to cost control and strong rental growth in our portfolio.

Our revenue and profit are up both due to the growth in the size of our portfolio, but importantly to continued strength in our multi-family operations and some improvement in our other segments. While occupancy is down slightly overall, all segments except commercial office and commercial retail are operating above 90% occupancy.

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

Our first focus is on growing revenue by improving occupancy and adding assets to our core segments of multi-family, medical office and senior housing, both through acquisition and development. Second, working aggressively to control expenses using our internal property management platform. Finally, we have added the third component to our plan to increase value by seeking to dispose of those assets that do not fit our targeted segments, markets or meet our return expectations. While selling is not the means to achieve overall growth, done properly, it will improve the quality of our assets and income stream, and lower reoccurring expenses and capital obligations as we trim older, less productive properties.

We recently completed the sale of our smaller Fargo, North Dakota residential portfolio and are now focusing on various commercial properties, again with a goal of improving the quality of our overall portfolio and not necessarily exiting a segment completely in one transaction.

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

Like our previous quarter, we expect that our recently completed and announced acquisitions and developments will position IRET well to capitalize on what should be a sustained economic expansion in mostly western North Dakota, eastern Montana and of course portion of South Dakota, but also the overall greater region due to the energy development that is taking place in this part of the country.

We have started construction on new multi-family projects in Bismarck, North Dakota and St. Cloud, Minnesota, with completion expected fall of 2013. We will continue to focus resources on growing these segments primarily through development, but also possibly by acquisitions. This past quarter continued the trend from last fiscal year where almost every meaningful operating and financial metrics continues to improve. But again, we still have ways to go in commercial office and commercial retail. While we don’t expect a quick turnaround in the commercial segments, we are confident that remaining focused on growth in our best-performing segments combined with strong expense-control measures and disposition of non-core properties will all work together to generate increased gross revenue, improved cash flow and ultimately earnings.

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

We have both acquired a meaningful number of apartments over the last 12 months and also have a number of projects under construction, with more in the development process. We plan to continue to be a leading multi-family operator in our core residential markets.

In our medical portfolio, we have continued to look to add assets that fit well with our overall operating footprint through both previously-announced development projects and expansion of existing facilities. IRET’s CFO provided the details on recently-closed debts, so I won’t spend any time reviewing other than confirm that low interest rates and well-functioning debt markets for IRET continue to provide opportunities to lower our overall interest rate costs.

IRET is currently experiencing no problems or obstacles in securing favorable debt terms and rates. We have multiple options to leverage our existing portfolio as well as acquisitions and development. Again, this past quarter, we lowered our overall weighted average interest rate providing yet another measure of expense savings. The amount of maturing debt over the next several years is low compared to prior periods, but we continuously review all loans for refinance opportunities, as this provides IRET with the least expense of source of capital for acquisitions, funding of operations and capital improvement.

We do not anticipate any material change to our leverage policy of fixing most debt on longer-term periods and secured by individual or groups of specific assets. However, we do plan to focus on debt options with more flexibility on prepayment to better align with our plans to selectively trim non-core assets.

Additionally, with our recent preferred offering and improved operations, we are turning our attention to reduced leverage on those assets where we have shorter-term debt. Again, this is designed to improve our balance sheet and provide more flexibility when it comes to funding acquisitions and developments.

Moving on to dispositions, acquisitions and development. Including last year and now through the first six months of fiscal 2013, we continue to be very active in growing our portfolio. We have broken ground on apartments in St. Cloud, Minnesota and Bismarck, North Dakota. Additionally, we have acquired development land in Williston, North Dakota and are actively seeking out other land parcels in our core multi-family markets.

We encountered some slight delays on completing the industrial projects in Minot, North Dakota previously discussed, due to additions to the site requested by the user, but we expect to complete this project in the third quarter of this fiscal year.

The Jamestown medical office building is scheduled for completion yet this month, with rent commencing during the fourth quarter of this fiscal year after a tenant set up period for their medical equipment. The previously-announced senior housing expansions in Wyoming and Montana are basically complete and will begin to generate revenue as IRET moves forward. We are seeing a number of additional development opportunities on the commercial and residential side, which we hope to finalize for construction during the coming fiscal year with potential delivery in the second half of fiscal 2014 or early fiscal 2015.

Our acquisition and development cap range from approximately 6% on the multi-family side for acquisitions to approximately 10.5% on the commercial developments, with an expected average on all projects to be approximately 8% to 8.5%, subject to lease-up on the under construction multi-family projects.

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

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

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

Question-and-Answer Session

Operator

(Operator Instructions) And our first question is from Michael Salinsky of RBC Capital Markets.

Michael Salinsky - RBC Capital Markets

Good morning guys. First question, on your entire release that you talked about positively see momentum. I know that was absent this quarter. Can you kind of talk about what you are seeing on the commercial office side in terms of leasing success? And also, as you think about the back half of the year, I know you guys have been fairly active on leasing for the last couple of quarters, are there any leases that take effect that are not in the numbers at this point?

Thomas Wentz Jr.

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

And I guess in every period, yes, there always are leases that are signed or in progress that are not going to show up. I mean, obviously, this cut-off was October 31st, we are six weeks later than that. So, I guess the overall trend has been good, better in commercial office, but I wouldn’t say it’s been outstanding, I think consistent with our past presentations. There is still a lot of uncertainty out there in the commercial office user space, certainly not being helped by what’s going on in Washington right now.

Michael Salinsky - RBC Capital Markets

Okay. That’s helpful. Second of all, can you give us an update on, in terms of sales, I mean, I think you talked about marketing in industrial portfolio there of properties. How much would you estimate the non-core pipeline to be currently in light of recent disposition activity? And just in terms of transaction activity, also the $38 million of projects you commenced during the quarter, what’s kind of the return expectations on those two multi-family developments?

Thomas Wentz Jr.

The return expectations on the two multi-family developments, the Bismarck, North Dakota and the St. Cloud are projected at probably an eight, low eight cap on a pro forma basis. And I think that’s going to be consistent with what we are seeing on projects that were delivered in the market. We delivered some projects in North Dakota. So, we are expecting good strong returns in Bismarck, and then we delivered some projects in Minnesota. And so, that’s really what we are basing our return expectations on. And I guess at this point, both of those markets remain very strong on the multi-family side. So, our expectations, this will achieve both return targets, which approximately 200 basis points to 250 basis points above what we are seeing on acquisition cap rates. Development definitely appears to be a higher returning gain on the multi-family at this point.

Timothy Mihalick

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

Michael Salinsky - RBC Capital Markets

This (inaudible) on sale, is that dependent upon redeployment opportunities or is there an impetus to just advance those to clean up the portfolio a little bit faster?

Timothy Mihalick

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

Michael Salinsky - RBC Capital Markets

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

Thomas Wentz Jr.

Well, this is Tom. I guess mild weather, that’s difficult to quantify. We have had some periods where we had very extreme weather, winters with a lot of snowfall, but really we don’t see that as material impact one way or the other, given the overall size of the operation, and really get expense, real estate taxes, labor costs, I mean, those are really our top line. Energy use, snow removal, those really are way down the list. And so, mild or extreme weather just really does not seem to have a huge impact one way or the other, favorable or unfavorable.

Michael Salinsky - RBC Capital Markets

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

Thomas Wentz Jr.

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

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

Michael Salinsky - RBC Capital Markets

That’s helpful. Thanks guys.

Timothy Mihalick

Thanks Mike.

Operator

And the next question is from Richard Anderson of BMO Capital Markets.

Richard Anderson - BMO Capital Markets

Hi, good morning everybody.

Timothy Mihalick

Good morning, Rich.

Richard Anderson - BMO Capital Markets

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

Timothy Mihalick

We have always been sort of optimistic about commercial office. Yes, I mean, there is definitely an increase in transaction activity, and I think we have reflected that in our calls. I mean, you go back several years, there really was no activity. There was just no demand and there were no users in the market. But I think now, if you look through our 8-Ks, we have had very good renewal success, and we are just not seeing the departure of commercial tenants and we are not seeing the consistent downsizing when leases come up. So, we are definitely holding our own on renewals and we are certainly seeing transaction activity as evidenced in our retail. That’s climbed up. Industrial, that’s climbed up. Now, those are two much smaller segments and I think commercial office is going to come because there certainly is activity in the market.

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

Richard Anderson - BMO Capital Markets

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

Thomas Wentz Jr.

We have not and I guess at this point, those parcels are in due diligence. So, I don’t believe we disclosed locations. The one thing I would say is obviously it’s going to be consistent with our existing markets, but I don’t believe we disclosed locations and I don’t think we are in a position where we would want to do that at this point other than Williston, that land. Well, actually, I guess we did say Grand Forks and Rapid City, in the subsequent events. So, Grand Forks, North Dakota 10-acre parcel and then a 9-acre parcel in Rapid City.

Richard Anderson - BMO Capital Markets

And both multi-family?

Thomas Wentz Jr.

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

Richard Anderson - BMO Capital Markets

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

Timothy Mihalick

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

Richard Anderson - BMO Capital Markets

Okay. So, it actually maybe would help the process as opposed to impede it?

Timothy Mihalick

Yes.

Richard Anderson - BMO Capital Markets

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

Timothy Mihalick

Yes, I think at this point in time, that’s a little bit of a stretch. I think w might be a right at that 5 number, but to get below that at this point in time is still little challenging.

Richard Anderson - BMO Capital Markets

And the time frame to get there?

Timothy Mihalick

I think we are still within the potentially fiscal year ’14.

Richard Anderson - BMO Capital Markets

Okay. And then, the last question is just generally about the Bakken influence and Williston, maybe in particular, is there a hesitation on your part to overemphasize that element of the story, even though you had this great success in the first development there? You kind of 16% return on the first multi-family development. Are you hesitant to overstate that opportunity because more than likely that number is not sustainable, and do you think that you are trying to tell the story, while the Bakken influence is important, it’s more of a – you are thinking more of a bigger sphere of influence and not to overemphasize that, because I assume the next deal in Williston would be something lower than 16. I just would like to get some color on what your thought process about the immediate area of the Bakken region?

Timothy Mihalick

I think as we have talked about, we don’t feel that is our only story, and I think as we step back and look that and evaluate the Bakken, the impact that it’s had from Williston all the way east to probably St. Cloud Minnesota and west over to (inaudible) down the Rapid City, we look at that as the whole, regional play for us. And again, those are our markets and we are on the ground and see the opportunity. I mean, as I mentioned in my opening remarks, they continue to bring employees from Wisconsin into these markets, and what you are seeing is opportunities and companies moving from that far away to take advantage of what’s here. And as we look at it, those are our region, that is our region and our opportunity so that the effect is not only on the Bakken, and certainly that’s the focus of ours, but our focus also sees opportunity, these other communities that have the things that we want to see the university, the large shopping and regional healthcare.

And so, we see a continued growth demand in those markets and they also focus around the Bakken, and we see the opportunity take advantage of that.

Richard Anderson - BMO Capital Markets

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

Thomas Wentz Jr.

Well, this is Tom. I mean, it’s in progress. That land is entitled, obviously that parcel was raw land that needed all of the underlying infrastructure roads, water, sewer. That’s in progress. So, I guess there really hasn’t been any hesitation, we’re always evaluating projects and developments. Developments got a much longer time horizon to it and just given the heightened economic activity in this part of the country is not as easy to executive on from a timing standpoint is maybe, in some of other areas, where there is a lot more labor availability and contractor availability. But, we’ve certainly executed on development in North Dakota, the medical office building is near completion on target. The industrial building and that being slightly expanded and that delayed it slightly but, we’ve done some smaller projects multi-family in Minot. So I guess we’re not hesitating and I think we’ve always said that we’re not going to pivot the entire portfolio to over its oil. It’s a very nice growth story and it’s going to provide some development and acquisition opportunities that we might not otherwise have had, but for the energy development, but we’re continuing to focus on all aspects of our portfolio acquisitions in to peak up for example over the last year development Rochester, Minnesota, for example, Sioux Falls, South Dakota, senior housing portfolio in Sioux Falls, South Dakota. We continue to be active in all of our market, so we remain balanced.

Richard Anderson - BMO Capital Markets

And then just last quick one on that, back to that 40 acres and lows, would that more than likely be a joint venture relationship too, or could you put that all on your balance sheet.

Timothy Mihalick

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

Richard Anderson - BMO Capital Markets

Great, thanks for the color.

Timothy Mihalick

Thanks.

Operator

And our next question is from Carol Kemple of Hilliard Lyons.

Carol Kemple - Hilliard Lyons

Good morning. Earlier in the call, you all talked about a flood damage. I don’t know, how much are you expecting from that.

Diane Bryantt

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

Carol Kemple - Hilliard Lyons

You think it would be a similar amount or lesser, or is too hard to determine at this point.

Diane Bryantt

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

Timothy Mihalick

And Carol, just to explain the complicated nature, this building was flooded, then was restored and cleaned up from the flood and then burned down. So that was part of the complicated aspect here, because obviously all the cost to restore it from the flood were spent and incurred, and those are part of the reimbursement claim and then of course, it burned down after the fact, which was separate claim. So that’s what is making it more complicated. But I guess, we don’t see it as being a material issue one, where the other there is no question about coverage, we’re going to get compensated for it. There is going to be a gain and we’re likely to rebuild in that location.

Carol Kemple - Hilliard Lyons

And do you have any of this decisions under contract at the current time?

Timothy Mihalick

No.

Carol Kemple - Hilliard Lyons

And then with the single tenant industrial asset. that you all want to sell. Have you talked to any of the users if there is an interest from them to buy the assets?

Timothy Mihalick

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

Carol Kemple - Hilliard Lyons

Okay, thanks.

Operator

(Operator Instructions) And our next question is from Dave Rogers of Robert W. Baird.

Dave Rogers - Robert W. Baird

Good morning. I have been following along the development question. As you look at your pipeline today and think about where that’s headed over the next year. What do you think your development pipeline, maybe the total budget looks like and where are you comfortable running that to, as a company. What do think, at what levels can you handle running development and construction out at this point?

Timothy Mihalick

Well I think we can handle quite a bit. I mean, historically we have developed in all the markets, we owned in all the markets that we’re looking at. We built Rochester before we build in two folds, done it in all these markets. So, I think we have the scale, I think conceptually our preferences to acquire, but obviously if you can’t acquire in those markets, a lot of these markets don’t have a lot of depth of investment of quarterly assets. So you’re going to be left with development. But I think at the peak, we were growing maybe, $200 to $250 million of acquisitions annually. I think if you look at our size, close to $2 billion, that’s a reasonable expectation if we want to grow in the depths what our target needs to be, now whether we can meet it or not, that’s going to be challenge. But that’s what I think we want a target.

Dave Rogers - Robert W. Baird

And I think you said earlier, 200 bps spread in development versus acquisition yields. And I think Rich Anderson touched on that question a little bit, but where are disposition yields respect to what you want to sell in kind of that matrix?

Timothy Mihalick

You mean the cap rates on what we’re selling or the? What our expectations mean or?

Dave Rogers - Robert W. Baird

Yeah that’s correct.

Timothy Mihalick

Well, I guess there is a difference right now between multi family. I mean the cap rates in multi-family acquisitions are definitely lower in our markets than the industrial cap rates for what we’re selling. So I mean there is going to be a difference if we take those proceeds out and reinvest, now the one primary difference is multi-family can be leveraged at a much more favorable level than commercial through the agencies. And so there is definitely a benefit there by redeploying that capital and leveraging it, as oppose to -- in industrial. But again, the assets were looking at really a not core, these aren’t the gems of the portfolio, these are assets that have been around their course could steady improve performers but all their smaller not strategically located and just a good time to exit out of those primarily just to get out of them, not because we need the capital or we’re going to rotate into some better sector.

Dave Rogers - Robert W. Baird

Okay, and have you thought about what percentage of your capital spend or of acquisitions you’d like to fund through recycling annually? I’m guessing that sometime quickly you’d like to make that move?

Timothy Mihalick

Well, again as I said in my presentation, I don’t think we view selling as a growth strategy. That’s more expense control and a quality portfolio activity. I think in the past, we’ve always grown by additional capital. I don’t see that change, I mean of course we can reposition these sale proceeds into additional growth, but that isn’t really the primary focus. I mean, I think we’re just looking to move some of these assets that have run their course or a smaller non-core out of the portfolio.

Dave Rogers - Robert W. Baird

Okay, last question. On the retail leasing in the quarter which appeared to be pretty healthy, was that seasonal or permanent or any thoughts about how much of that stays or goes, and maybe after the 1st of the year?

Timothy Mihalick

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

Dave Rogers - Robert W. Baird

Okay, thank you.

Operator

And this concludes our question and answer session. I would not like to turn the conference back over to Tim Mihalick for any closing remarks.

Timothy Mihalick

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

Operator

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

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