Investors Real Estate Trust F1Q10 (Qtr End 07/31/09) Earnings Call Transcript

| About: Investors Real (IRET)

Investors Real Estate Trust (NASDAQ:IRET)

F1Q10 Earnings Call

September 11, 2009 10:00 am ET


Timothy P. Mihalick – Chief Operating Officer

Thomas A. Wentz Sr. – President and Chief Executive Officer

Diane K. Bryantt – Senior Vice President and Chief Financial Officer

Thomas A. Wentz Jr. – Senior Vice President of Asset Management and Finance


Carol Kemple - Hilliard Lyons

Christopher Lucas - Robert W. Baird & Co., Inc.

James Bellessa - D. A. Davidson & Co.

[John Huss – Schroders]


Hello and welcome to the Investors Real Estate Trust first quarter fiscal 2010 earnings conference call. (Operator Instructions) Please note this event is being recorded.

Now I’d like to turn the call over to Mr. Tim Mihalick. Please go ahead sir.

Timothy P. Mihalick

Good morning, and welcome to Investors Real Estate Trust’s first quarter fiscal 2010 earnings conference call.

IRET’s earnings release and supplemental disclosure package were posted to our website and also furnished on Form 8-K on Wednesday, 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 requirements set forth in Regulation G. If you have not received a copy, these documents are available on IRET’s website at in the Investor Relations 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 the expectations will be achieved. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements are detailed in Wednesday’s earnings release and from time to time in Investors Real Estate Trust’s filings with the SEC. Investors Real Estate Trust does not undertake a duty to update any forward-looking statements.

With me today from management are Thomas Wentz Sr., President and Chief Executive Officer; Diane Bryantt, Senior Vice President and Chief Financial Officer; and Tom Wentz Jr., Senior Vice President of Asset Management and Finance. At this time I would like to turn the call over to Tom Wentz Sr. for his opening remarks.

Thomas A. Wentz Sr.

Thank you, Tim. We are pleased to report the financial results for the first quarter of our 2010 fiscal year which ended on July 31.

Our fiscal year 2010 which began on May 1 of this year will be IRET’s 40th year in business. In addition to summarizing our first quarter financial results we will discuss our balance sheet including cash on hand, credit lines and maturing mortgages; our real estate portfolio including current occupancy levels, leasing activity, acquisition and disposition plans; and our impairment testing procedures and policies. We will also discuss our dividend policy, our acquisition and disposition pipeline, our plans and goals for fiscal 2010 and future years, and of course we will welcome your questions and do our very best to answer them.

Diane Bryantt will review IRET’s first quarter financial results in more detail, but I will mention a few highlights. Real estate revenues for the quarter increased to $60.8 million from $58.8 million in the prior year, an increase of 3.4%. Real estate operating expenses increased 2.6% from $23.8 million to $24.4 million, resulting in a small increase in net operating income generated by our real estate portfolio. This small increase in net operating income was offset by a 3% increase in interest expense as well as increased corporate administrative expenses.

Thus funds from operations for the quarter at $0.20 per share in unit was unchanged from the first quarter of our prior fiscal year. Total FFO for the quarter did increase to $16.5 million from the year earlier amount of $16.1 million, but shares and units outstanding during the quarter were also higher than a year ago, leaving the per share FFO figures unchanged.

Turning now to IRET’s balance sheet, at quarter end on July 31, 2009, cash on hand totaled $43.9 million compared to $33.2 million on hand at the beginning of the quarter. Another $24.5 million remains available under our unsecured credit lines.

Of continuing concern to everyone owning commercial real estate is the lack of financing available to this industry. While the situation has improved slightly since our last earnings call, one might characterize it as going from totally impossible to extremely difficult, it does remain difficult to place financing for commercial property. Our recently filed 8-K describes each of our mortgages that will mature through our fiscal year 2013. All of our real estate debt is in the form of individual mortgages with laddered maturities. Our CFO, Diane Bryantt, will give more detail on our financing activity in the first quarter.

With respect to our real estate portfolio, I will offer a brief overview. We have several possible acquisitions in the pipeline. We are seeing more attractive pricing which in our judgment will make acquisitions more compelling in the months ahead. However, until financing for commercial real estate again becomes readily available, acquisitions will be very carefully pursued. We are however continuing to aggressively seek appropriate acquisitions with assumable financing in place.

We are also working on some dispositions such as Texas, markets that we plan to exit as we move forward with internalizing all property management. We continue to focus on operating our existing portfolio more efficiently and continuing our program of internalizing property management of all of our properties.

Occupancy levels during the first quarter continued to trend down. Details of our occupancy levels, leasing experience and lease maturities will be given later in this call and are set forth in detail in our recently filed 8-K.

As we mentioned in our last earnings call, a concern to IRET and all real estate owners is the issue of impairment. We read much in the business press about a possible collapse in commercial property values. While prices have certainly retreated from their peak, we have seen no evidence in our markets of a price collapse. IRET has and will continue to work closely with our board, our audit committee and our independent auditors to carefully apply appropriate industry standard impairment testing procedures and policies.

Turning now to our dividend policy, on October 1st IRET will pay to its share and unit [holders] its 154th consecutive cash distribution. This will continue IRET’s 39 year history of never omitting or delaying a quarterly cash distribution to its owners. We remain committed to extending this record. IRET continues to have significant cash on hand, unused credit lines, manageable debt maturities and a satisfactorily performing real estate portfolio. Thus barring a multi-year extended and deepening economic crisis, IRET fully expects to keep on paying its dividends on time and in cash.

Will IRET do more follow-on public offerings of common stock? We may, if market conditions allow and most importantly we feel that we can invest the proceeds in an accretive manner that will enhance the value of IRET to its shareholders.

IRET’s plans for the future, as we’ve been saying over the past year we will continue to be very cautious in deploying our cash. We will continue to focus on our operations and especially on internalizing property management. We have been and will continue to hire new people and invest in accounting software and hardware with the expectation of continued growth in the years ahead.

Diane Bryantt our Chief Financial Officer will now review our fiscal 2010 first quarter financial results in more detail.

Diane K. Bryantt

Thank you, Tom. This morning I will give a brief overview of our first quarter results and provide some details regarding mortgage debt activity and refinancing plans.

Results for the first quarter of fiscal year 2010 showed a 3.4% increase in revenue, even though we had a decrease in occupancy levels in all property segments in comparison to the first quarter of the prior year. The increase in revenue was primarily due to stabilization of our prior year acquisition and to a lesser extent rental income increases on stabilized properties and lease termination fees compared to the same period in the prior fiscal year.

Our expenses increased 4%, most notably in real estate taxes, interest expense and depreciation amortization expense. While our asset management team is working hard to maintain and renew tenants, management is also continuing its focused efforts to offset the trend of reduced revenue stream by decreasing expenses.

As stated before, one major area we are focusing on to enhance our bottom line is our previously discussed internal property management initiative. We are well underway within our commercial segments in bringing property management in-house and the process has started in our multi-family residential segment. Our goals are to reduce expenses by centralizing and therefore maximizing our purchasing power, better controlling disbursements and better insuring the application of efficient and consistent operations at all our properties.

Of much concern and focus for our company is the management of our maturing debt. During the quarter we closed on two multi-family refinanced loans, with approximately $213,000 of cash out, with interest rates ranging from 6.41 to 6.53%. Subsequent to the quarter end, we have also closed on three additional multi-family loans for approximately cash out of $8.2 million, with interest rate ranges of 5.69 to 5.97%. These multi-family loans were funded with Freddie Mac or Fannie Mae.

Also subsequent to quarter end, we closed on a financing of a five building portfolio of commercial office buildings in Mendota Heights, Minnesota. This was a $28 million new loan with approximate cash out of $559,000 at a fixed rate of 7.3%. Although we were able to secure financing on this commercial portfolio, we chose not to proceed with the refinancing at this time on two commercial properties, one office property in Bloomington, Minnesota and a retail shopping center in Rochester, Minnesota. These loans were paid at full at maturity for approximately $7.5 million in cash with the source being proceeds from the common offering completed in June of 2009.

For what is ahead for the remainder of fiscal year 2010, we have approximately $99.1 million of mortgage debt maturing and we have either closed or have commitments on $54.1 million or 55% of that $99 million. We will continue to monitor our refinancing strategy and pending maturities in order to protect our shareholders as the credit markets work through this economic cycle.

In July of this first quarter we paid a regular quarterly distribution of $0.1705 per common share unit. Subsequent to our quarter end, the Board of Trustees declared a regular quarterly distribution of $0.1710 cents per common share and unit to be paid on October 1st, 2009. Again this October distribution will be IRET’s 154th consecutive quarterly distribution at equal or increasing rates.

Now I’ll turn the discussion over to Tom Wentz Jr., Senior Vice President of Asset Management and Finance.

Thomas A. Wentz Jr.

Thank you, Diane. Overall a very routine and quiet quarter for IRET’s property operations, as confirmed by the supplemental information provided in the 8-K filed earlier this week. I will confine my comments to the overall status of the credit markets as applicable to IRET and then a summary overview of IRET’s property operations by segment and market.

It is certainly the same story line on the debt side in that the vast majority of lenders are not reliably active in IRET’s markets, with the exception of the three agency lenders Freddie Mac, Fannie Mae and FHA or HUD, on the apartment side or senior side only. Bank lending has remained an option for IRET and one we will ultimately be required to implement if the traditional longer term lenders such as the life companies and the Wall Street CMBS market remain out of the debt markets for another 18 to 24 months.

The issue with banks becoming the main source of leverage for IRET will require a modification of IRET’s leverage strategy, as bank lending is traditionally shorter fixed terms, shorter amortization periods of 20 to 25 years and at least for now in contrast to lending practices earlier this decade, much lower leverage of 60 to 65% of appraised value using actual operating history rather than pro forming numbers and with higher levels of recourse. Current lending terms will limit IRET’s ability to pull cash from its commercial portfolio at the time of refinance to the extent bank debt is used. Each of these requirements do not match up well with IRET’s strategy of long-term fixed debt, longer amortizations to maximize cash flow as well as the positive impacts of inflation and rent growth over the term of the loan, and of course the protection afforded by non-recourse debt as it pertains to the balance of the portfolio.

While this won’t change IRET’s debt structure overnight due to IRET’s staggered debt schedule, as each quarter goes by and existing long-term commercial debt rolls, it is generally being replaced with bank debt or IRET is using cash-out from multi-family debt to pay off maturing commercial debt, or cash from other sources. The end result is a de-leveraging of the portfolio and a reduction of IRET’s target leverage levels. IRET is still of the opinion that most of our underlying markets are performing better than the majority of the country. However, lending practices are being applied uniformly regardless of market conditions.

In response, we have [modified] our debt strategy slightly to account for the decline in commercial lending by increasing leverage in our multi-family portfolio in order to maintain our overall leverage targets. We are doing this carefully and to a level that is still well within what our multi-family portfolio can handle from a coverage standpoint. We are confident that this modification will leave IRET well positioned when the economy recovers. We still believe that the proper long-term business model for real estate in general and IRET specifically requires long-term fixed leverage at 55 to 65% of our investment to real estate.

To the extent possible, IRET’s debt strategy will remain unchanged. We continue to seek to place long-term debt tied to individual or groups of assets with staggered maturities by product type. Even by increasing our multi-family debt levels to offset a reduction in commercial leverage levels we expect it will be difficult to maintain our desired leverage levels in the current market. Some commercial loans will be paid off and others will be refinanced at levels below the maturing debt, which will require the allocation of more equity. We expect that over time the market should account for this reality through higher rents. IRET provides a detailed debt maturity schedule each quarter as part of its 8-K filing, so I won’t spend any time discussing specific assets or loans.

Despite the challenges presented by the current credit markets that first appeared almost 18 months ago, we still don’t see any material liquidity or refinancing risk to IRET in the next 12 months for the same reasons previously disclosed. Diane provided details on recently closed loans. Currently IRET has pending loan applications or commitments covering 13 properties including four commercial locations and three senior housing locations with projected cash-out proceeds of $24 million, at interest rates ranging from approximately 6% to 7.25%. While there is no guarantee any or all of these pending loans will close, we are very confident that they will.

Before moving to the property operations, I will briefly discuss sales plans and activities. Consistent with our prior quarter disclosures, IRET has no active plans to sell assets except perhaps in those markets where we have a limited presence. IRET does have a number of smaller properties for sale in various locations, but the only significant asset for sale currently is a 504 unit apartment complex located in Irving, Texas for sale at an asking price of $38 million with current debt of $22.5 million maturing on February 1, 2010. Based on offers received to date it is unlikely IRET will complete the sale of this asset at an acceptable price. Since there is no pressure to sell, we have also started the process to place new debt. If refinanced, we are projecting a new loan in the amount of $25.5 to $27 million. Of course as an apartment complex both Freddie, Fannie and HUD financing are an option and are actively reviewing this asset.

We provided detailed information in the 8-K on occupancy, new and renewal rental rates and expiring leases so I’m not going to discuss any particular buildings or transactions in detail. IRET does not leak this information outside market at this point, so I will spend some time this morning in discussing each of IRET’s commercial markets.

Each market has certainly experienced an increase in unemployment and contraction of business activity. This has led to a reduction in commercial space demand across the board and by all segments. As previously stated, this down trend will not reverse until job growth returns. Unlike almost all other products, real estate is one asset where price reductions don’t increase demand. Businesses either need commercial space or they don’t. Even though most news continues to be negative, the past quarter was relatively uneventful and we saw little change in the underlying flat to slowly declining economic conditions in most of our markets.

We remain very cautious with our cash and with our capital focused on tenant retention in the areas of one time and ongoing cost reduction projects, capital improvements and moving to a fully internal management structure on both commercial and residential operations, as a means to improve operating results and capture what is currently a revenue stream going to outside vendors.

Taking a look at the Minnesota market which is by far IRET’s largest commercial investment, IRET carefully tracks each market’s overall occupancy rate and other commercial leasing terms through the use of internal as well as third party sources. While these third party information sources are deemed reliable, it is not possible to accurately pinpoint total market vacancy and overall average lease terms precisely. In Minnesota, all commercial segments continue to experience an overall reduction in demand from new and renewing tenants, with the commercial direct vacancy rate during the first half of 2009 increasing to 14.2% in Minnesota and further increasing to 16.3% when available sublease space is taken into consideration. These are the highest levels in the last five years in the Minnesota market. However, certain segments of the market are even lagging this overall commercial benchmark.

Commercial office vacancy for example increased to 17.9% of direct space and almost 21% with sublease availability, industrial rose to 15.1% direct and 17.2% when sublease space was factored in while medical office, the best performing of these segments, still grew to 12.7% direct and 13.2% when sublease space is considered. While retail vacancy is less than the overall average at 10.3%, this level represents the highest vacancy rate for this commercial category in over 10 years.

Meanwhile the Minneapolis IRET portfolio is in generally good condition, with the portfolio as a whole at least equal to or exceeding the market. Likewise IRET’s Minnesota medical office portfolio is outperforming the market. The overall vacancy rate is 9% compared to the Minnesota market average of 12.7%. The majority of IRET’s medical vacancy is confined to three assets. The short and long-term range outlook for the Minnesota medical portfolio is stable.

The industrial portfolio, including all industrial type buildings exclusive of any triple net or single users is performing in an average manner compared to the overall market, with a 79% weighted average occupancy rate. This rate is somewhat skewed by the large vacancy remaining at the former site of the Wilson’s Leather Distributions facility. The property was converted to a multiple tenant usage and slightly less than 50% has been leased thus far. If this property was removed from the equation, the new weighted average occupancy for the IRET portfolio would rise to almost 89%, well ahead of the remainder of the industrial market as a whole.

The retail portion of IRET’s portfolio is facing a number of challenges. Competition for the retail tenant is becoming increasingly intense, having the effect of lowering rents, increasing incentives and concessions, and increasing vacancy market time. Of all the market segments in which IRET has a presence, retail as a whole both in Minneapolis and the remainder of the nationwide markets will present the biggest challenge in the next two years. Until consumer confidence returns to the marketplace, retailers will continue to contract or remain static with very little absorption taking place. The out state Minnesota properties located in St. Cloud, Duluth and Rochester are all performing well with the exception of the retail locations in St. Cloud and Rochester for many of the same reasons as noted above.

Now moving to the Omaha market, which is currently in better condition than much of the rest of the nation with an unemployment rate of only 4.7% compared with the national average of 9.7%. However, some clear signs that problems may be coming are manifest by the amount of sublease spacing put on the market by some of the larger tenants in the Omaha market. Sublease availability in the second quarter of 2009 reached the highest level since 2001, with further sublease space being marketed in the next several months. Current total direct vacancy in the Omaha market is 16.8%, an increase to 18.4% with sublease space considered. This is just short of that in Minneapolis.

In contrast, the IRET Omaha office portfolio is doing relatively well. It consists of 555,000 square feet of space with a weighted average stabilized occupancy level of 97.13% with little significant lease roll through 2010. The remainder of the commercial holdings in the Omaha market are industrial projects. These properties are doing very well in another difficult market with an average occupancy of slightly over 91%.

In East St. Louis which is similar in many regards to Minneapolis in terms of size, population and amount of space in the Class A and B office market universe, yet has a significantly lower overall vacancy rate of 12.55% on average, inclusive of sublease space. This figure is likely to change in the short-term as major employers and users of space such as Anheuser-Busch and Chrysler Corporation either sublease large blocks of space currently under lease to them or abandon this space as the leases expire.

IRET’s St. Louis portfolio consists of approximately 250,000 square feet of commercial space contained in three properties, with a current average occupancy rate of 91.25%, lower than the market average.

Kansas City portrays many of the same characteristics as found in the other Midwestern cities, growing unemployment, negative absorption in the overall office market and an overall market wide vacancy of 16.1%. IRET’s presence in this market is limited with our main commercial asset currently 79% occupied compared with the submarket occupancy for that building of 77.6%.

The last market is Denver, which again has a very limited presence by IRET with a total building size of 152,000 square feet. Job growth during the first six months of 2009 was negative 3.6%, increasing the overall Denver metro area unemployment rate to 7.8%. The Denver commercial market has an overall vacancy rate of 23%, including sublease availability. IRET’s commercial properties currently have a vacancy rate of 13%.

I believe our strong cash position will prove to be an advantage in retaining commercial tenants. I expect the pressure to continue until unemployment bottoms out and consumer spending rebounds. We still see no better alternative at this point to our strategy of focusing our capital on retaining current tenants and securing new tenants provided the credit is acceptable. Longer term I see no material issues with our portfolio nor any lasting impact from scaling back certain capital expenditures, as we have adequate cash to always do life, health, safety as well as maintain the appearance and functionality of our assets to a level appropriate to their position in the market.

Now moving to the apartment segment which accounts for about one-third of IRET’s total portfolio. Our apartments continue to perform well in most markets, with the exception that job loss has now started to impact our Minnesota and Texas operations. Additionally, the first time homebuyer credit also placed pressure on certain markets in renter classes. However, this credit now appears to have run its course even though we expect to experience a spike in activity late this fall as buyers seek to get in before year end.

The growth in rent appears to have peaked. Even though we are clearly not experiencing the same conditions as many other parts of the country, we continue to position ourselves for what may come while still enjoying the current relatively good economic conditions in most of our apartment markets. Employment in IRET’s apartment markets is the number one driver of occupancy. Until the unemployment situation stabilizes and improves, IRET’s focus will be on improved management and cost control as a way to maintain or improve the bottom line.

Thank you and I will now turn the call back over to the call operator for any questions. Thank you.

Question-and-Answer Session


Thank you. (Operator Instructions) Your first question comes from Carol Kemple - Hilliard Lyons.

Carol Kemple - Hilliard Lyons

In your 10-Q you talk about a recent acquisition of a warehouse property. What attracted you all to that acquisition?

Thomas A. Wentz Sr.

That was an UPREIT transaction that was accretive and required no cash to acquire.

Carol Kemple - Hilliard Lyons


Thomas A. Wentz Sr.

And that’s part of our continuing focus on deploying our cash carefully, so we are aggressively seeking UPREIT transactions that are accretive. And that was one of those.

Carol Kemple - Hilliard Lyons

And what caused the rise in administrative expense during the quarter?

Thomas A. Wentz Jr.

Well, I think as we’ve indicated before, we are anticipating growth and we have been incurring some software and personnel costs in anticipation of that growth. And we are internalizing property management and so the expenses as we gear up to do that have caused administrative expenses to increase. But as we go forward we will be harvesting the revenues that formerly we’ve been paying to third party vendors.


Your next question comes from Christopher Lucas - Robert W. Baird & Co., Inc.

Christopher Lucas - Robert W. Baird & Co., Inc.

Tom, you’ve made some mention of recourse on loans. Can you describe the level of recourse on the mortgage loans?

Thomas A. Wentz Jr.

This is Tom Jr. I guess to answer that question, Chris, what we’re seeing on the bank financing side to the extent we’re exploring that as an option is a request for full recourse or a substantial portion of the loan, bringing the loan to value non-recourse portion down to maybe 50% or less. And that seems to really be a standard request out in the bank lending world. To the extent life companies are active in the market and are quoting IRET commercial projects, there has been some request for limited recourse but again it’s generally to cover the loan amount above a certain percentage level, 60 or 65%.

Christopher Lucas - Robert W. Baird & Co., Inc.

So in exchange for higher proceeds you would be providing some recourse?

Thomas A. Wentz Jr.

Well I think the answer to that on the bank side in exchange for any proceeds you’re going to be providing recourse. On the life company I think for higher leverage it’s clear if it’s available, the life companies are going to expect some level of recourse, whether it’s 10 or 15% of the loan amount. But at least at this point the bank lenders that IRET has been working with, it’s pretty much a universal request for total or near total recourse.

Christopher Lucas - Robert W. Baird & Co., Inc.

What’s the appetite and mind set been of the banks over the last six months? How has that changed?

Thomas A. Wentz Jr.

Well I think on the financing side what we’ve seen is certainly a number of mid to smaller banks relatively active in the market, primarily in Minnesota. So I would say there certainly is capital for projects in the $10 million or below range and I think there’s a reasonable amount of competition from that standpoint. The larger lenders, either the super regionals or the major banks clearly are not active in the commercial real estate space, in our markets and for our product types and for the type of debt we’re looking for.

Christopher Lucas - Robert W. Baird & Co., Inc.

And then just on the acquisitions front, if you could just sort of talk a little bit about you know maybe where you think cap rates have moved and how much further you’re hoping to see them move.

Thomas A. Wentz Sr.

Well I think they’ve moved for commercial property. Apartments of course where financing is still available, cap rates have obviously moved there as well but not to the same degree. Commercial properties certainly are in the eights and a really compelling acquisition I think still the first number is going to be an eight. And distressed properties, obviously there are nines and tens and depending on the degree of disarray in the particular property. I think that’s one thing we as I alluded to earlier, we read about all of the maturing debt and all of the compelling acquisition opportunities that are going to be available and I believe that’s probably correct. But I would say that at this point, the current owners are not as yet willing to really sell at a fire sale price. So there’s much more product available at much more reasonable pricing and certainly nine caps may soon be the rule for commercial property. They’re probably not quite at that level yet for the seller who has the luxury of waiting.


Your next question comes from James Bellessa - D. A. Davidson & Co.

James Bellessa - D. A. Davidson & Co.

You indicated that you may have several possible transactions in the pipeline and you also mentioned more follow on offerings of possibility. Do you pre-fund your acquisitions and transactions or do you?

Thomas A. Wentz Sr.

Yes. I guess a cardinal rule of this company for its entire history is that we have the equity capital necessary to make an acquisition before we seriously negotiate to do so and that remains unchanged. What’s different in this situation, while we still have sufficient equity capital we are mindful of the maturing commercial mortgages that are two years or three years out. And we continue to be very careful, but also lacking is reliable debt for commercial property. So we will continue to be careful until we have both the equity piece and the debt piece lined up. And while we are negotiating on lots of properties, we want to be sure that both our equity capital and real estate long-term debt is available. So I think we’re going to see some acquisitions, although we didn’t have any in this past quarter, but it will continue to be limited until the credit debt markets return to somewhere closer to normal.

James Bellessa - D. A. Davidson & Co.

You indicated or Diane went through some recently closed loans. Were those since the end of the quarter?

Thomas A. Wentz Sr.

Well, not all of them. The large one, we did the Mendota Heights office park refinancing, that was after the quarter.

James Bellessa - D. A. Davidson & Co.

The $28 million loan?

Thomas A. Wentz Sr.

Correct. Yes.

James Bellessa - D. A. Davidson & Co.

When I read the subsequent events I don’t see it listed as something itemized there. Is it not required to be outlined in that subsequent event portion of your 10-Q?

Thomas A. Wentz Sr.

I’m not sure. I think we described it. I thought we had described it. I’ll have to check.

Diane K. Bryantt

It’s not in the subsequent events as its normal course of business but it is detailed in the 8-K and the debt maturing schedule I believe on Page 12 where you’ll see the Mendota is listed there. But there is a footnote with it saying that it was refinanced and closed on August 3.


Your next question comes from [John Huss – Schroders].

[John Huss – Schroders]

I have a quick question on the future potential acquisitions of properties. Do you see those as more UPREIT structure or cash or a mixture? And then if it was a semi-distress situation, is that one that’s [inaudible] of an UPREIT?

Thomas A. Wentz Sr.

Since 1997 when we converted to the UPREIT structure we have pursued UPREIT acquisitions quite aggressively and have done a lot and we continue to negotiate on several at this point. That is obviously attractive to us because little if any cash is required to complete that acquisition.

As far as acquisition of distressed properties, we have always focused very carefully on being able to pay our dividends. And so we overly our nearly 40 year history have not done any speculative construction nor have we acquired properties that are vacant or under severe stress on the theory that some day, some how you will return that asset to an income producing property. That doesn’t fit our model of paying consistent dividends. So we’ve focused on acquiring properties that generate the income necessary to pay our dividends. So a simple analysis that each property that we acquire should immediately be able to fund its portion of the dividend on the equity capital that we’ve used to acquire that asset.

You miss some great opportunities doing that, but on the other hand as our record shows you also miss the devastation of having a lot of assets that are not producing income. So I don’t think we’re going to be active in acquiring vacant properties.


Thank you. At this time we have no further questions. I would like to ask management if they have any closing remarks.

Thomas A. Wentz Sr.

This is Tom Sr. I just want to thank everyone for participating in our earnings call. This will be my last as the Chief Executive Officer and I intend to certainly continue with this company. I’ve enjoyed the nearly 40 year ride that we have enjoyed and I think I can safely say that we intend to implement the very same business plan that we’ve used consistently throughout this period of time. We’re going to stay the course with the conservative approach that we have had and focus on our shareholders and on continuing to deliver a dividend and to pay that dividend in cash. And having focused on this obligation for nearly 40 years has served all of us well and I’m expecting that we will continue to do that for many years to come. Thank you all for participating.


This concludes today’s conference. Thank you for attending and you may now disconnect.

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