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Investors Real Estate Trust (NYSE:IRET)

Q4 2014 Results Earnings Conference Call

July 01, 2014, 10:00 AM ET

Executives

Lindsey Anderson - Director of Investor Relations

Tim Mihalick - President, Chief Executive Officer

Diane Bryantt - Chief Financial Officer, Executive Vice President

Tom Wentz, Jr. - Chief Operating Officer, Executive Vice President

Analysts

Dave Rodgers - Robert W. Baird

Michael Salinsky - RBC Capital Markets

Carol Kemple - Hilliard Lyons

Craig Kucera - Wunderlich Securities

Operator

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

I would now like to turn the conference over to Ms. Lindsey Anderson. Ms. Anderson, the floor is yours, ma'am.

Lindsey Anderson

Good morning, and welcome to Investors Real Estate Trust's fourth quarter and year-end fiscal 2014 earnings conference call. IRET's annual report on Form 10-K was filed yesterday and the company's earnings release and supplemental disclosure package for the three and twelve months ended April 30, 2014 were posted to our website and also furnished on Form 8-K on June 30.

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

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

Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements are detailed in IRET's 2014 10-K 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 Tim Mihalick, President and Chief Executive Officer, Diane Bryantt, Executive Vice President and Chief Financial Officer and Tom Wentz, Jr., Executive Vice President and Chief Operating Officer.

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

Tim Mihalick

Thank you, Lindsey, and good morning everyone. First of all, I want to thank all of you for taking the time to listen to our call this morning and I hope you will find the information provided to you to be beneficial.

As I stated in our 8-K earnings release last night, I am pleased with our financial and operational results for fiscal year 2014. Although the harsh winter and rainy spring have impacted the delivery of our development projects, the weather has not impacted our expected lease up and financial performance of the projects. IRET will continue down the strategic path I discussed during last quarter's call and I expect the priorities of that plan to continue to drive change for IRET over the next several years.

IRET continues to be bullish on the Great Plains region and the markets we are located in. In the recent investor presentation posted to our website earlier this month, it is worth noting the Wall Street Journal's MarketWatch recently published a list of the Top 10 small metropolitan areas in which to retire and IRET has a presence in five of those Top 10 markets, but even more importantly, a presence in the number one market Sioux Falls, South Dakota, the number three market, Bismarck, North Dakota and the number five market Rochester, Minnesota.

As I discussed earlier, I was pleased with the fiscal 2014 results and the steps taken to meet our long-term strategic goals. We expect to further enhance our financial flexibility by initiating steps to resolve the $122.6 million non-recourse loan that is secured by nine properties located in the four states of Nebraska, Missouri, Kansas and Minnesota. Although these buildings are 90.3% occupied at the end of fiscal year 2014, the loan balance greatly exceeds the estimate of fair value of these properties.

Dianne and Tom will discuss in more detail the process we have taken to address this loan. As IRET moves forward, execution of our strategy, including delivery of development projects will be key to meeting our long-term objective of AFFO coverage in fiscal year 2015, an overall improvement to IRET's operating metrics.

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

Diane Bryantt

Thank you, Tim. Good morning, everyone. Yesterday, IRET filed our fiscal year 2014 fourth quarter report on Form 10-K and furnished our current 8-K earnings release and supplemental disclosure. For you this morning I will just provide a brief recap of significant items of note that occurred in the fourth quarter and year-to-date financial results for year-ended April 30.

Let's start with the operations in the fourth quarter and the impact to FFO. I have three main points that I would like to discuss with you. First, revenues have increased $2.8 million when compared to the fourth quarter of fiscal year 2013. As we have been discussing the strong lease up in our development placed in service account primarily for this increase.

Multifamily same-store operations increased 411,000 as compared to the prior year fourth quarter. The ability to raise rent [and concurrently] [ph] have consistent high occupancy. We have seen in our multifamily segment occupancy of 93% to 95% range over the past fiscal year.

Secondly, the execution of our sales strategy has impacted our earnings and that the NOI and revenue delivered by these properties has not yet been replaced as the proceeds from these sale have been redirected into our development projects. This strategy of redeployment has shown to be effective but the result is a drag on our earnings until these properties are placed in service. The first two points have somewhat offset each other this quarter relating to same-store growth. Overall in fiscal year 2014, revenue grew $17.4 million of which $6.3 million was from same-store properties.

Thirdly, regarding expenses in the quarter. We were significantly impacted by the cold harsh winter. We expect to experience increased expenses in the winter season. However, we had an unusually long cold season, which typically is not a factor in Q4 but this year it did carry through to the month of February and March of 2014. Some of the increases were associated with our non-same-store properties however the utility expense in our same-store properties in Q4 was $1.5 million than the prior quarter and $1.1 million as compared to the fourth quarter of prior year. We are able to recover some of these costs in our commercial portfolio as tenants will bear the increases, however we cannot recover these costs in our vacant space and in our multifamily space except through increased rents.

Detail on our operating expenses and revenues can be found by segment starting on page 51 of the company's Annual Report on Form 10-K. Other factors, year-to-date, that impacted FFO was the gain on involuntary conversions. The amount recognized in fiscal year 2014 was $2.5 million and in fiscal year 2013, this was $5.1 million. On a per share basis, this was $0.02 for fiscal year 2014 and $0.04 in the prior fiscal year. Although we still have insurance proceeds yet to come on the Chateau II fire, we do not anticipate any significant gain on involuntary conversions reflected going forward on our financial statements.

Although no impact to FFO, as reported in our 10-K, impairment was significant in Q4 and in fiscal 2014. During the fiscal year, the company recognized non-cash impairments of $44.4 million on 15 properties, of which $1.9 million of this is included in discontinued operations. Information regarding these impairment is contained in note to the financial statements in the fiscal year 10-K. Additionally, we have provided additional financial analysis in our 8-K pertaining to the possible outcomes related to eight of these assets, which comprised majority of the impairment.

The total impairment includes recognition in the fourth quarter of $34.9 million impairment on eight commercial properties located in four states. These properties are part of the portfolio of nine commercial properties with a total of approximately 936,000 rentable square feet securing a $122.6 million non-recourse CMBS loan with a maturity date of October 6, 2016. Due to concerns of the borrower's ability to refinance the portfolio at loan maturity for impairment testing purposes, the company revised its assumptions regarding the holding period of these assets. The company commissioned a third-party appraisal of the properties and the results of which indicates a fair value of the portfolio below net book value, and accordingly the impairment was recorded for the difference.

Cash flow from the portfolio currently covers debt service on the loan and the borrowers, a special purpose subsidiary of the company, is current under all payments on this loan. A $9.5 million impairment on the other seven properties were in relation to the execution of our strategic plan, in that we are reallocating dollars from the disposal of properties that are in need of significant tenant improvements or capital improvements and moving these funds toward healthcare or multifamily segments.

Moving on to the balance sheet and year-to-date results. Regarding cash and liquidity, cash on hand at year-end was $47.3 million as compared to $94.1 million at the beginning of the fiscal year. We continued, again, to see strong cash flow from operations to support our property operations and improvements and also, we have $49.5 million available on our line of credit as of year-end.

Regarding acquisitions, development and sale of real estate. Overall, acquisitions and development placed in service provided for an increase in real estate owned of $96 million. We disposed the properties with a carrying value of $74 million with a net gain of $7 million. The company also invested $124 million in development projects during the year.

On to liability side and debt. We had very successful year in matching our debt strategy to our overall strategy of reducing leverage, reducing weighted average interest rates, improving metrics and providing a source of capital for our development projects. Our current mortgage debt was $998 million at the year-end compared to the prior year-end of $1.1 billion. The outstanding mortgage debt to undepreciated property owned was 50% at year-end versus 52% one year ago. Our overall weighted average rate on our mortgage debt, excluding our line of credit and construction debt, is 5.37% as compared to 5.55% at the end of the prior fiscal year. And finally, we closed on five construction loans which will provide capital of approximately $86 million for our development projects.

Funds from operations and AFFO and our strategic objectives. FFO for the quarter was $0.14 per share and $0.63 year-to-date. AFFO for the quarter was $0.11 and $0.45 year-to-date. Although we have some seasonal issues that impacted fourth quarter results as it relates to FFO and AFFO, we feel we have made good progress in meeting our longer-term strategic objectives of the redeploying assets and capital into those areas of real estate investments that will provide for long-term growth and increased returns.

To close, I report that IRET Board of Trustees declared a quarterly distribution of $0.13 per common share and unit to be paid today, July 1, to the shareholders of record of June 16. This will be IRET's 173rd consecutive quarterly distribution.

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

Tom Wentz, Jr.

Thank you, Diane. Both the quarterly and full-year results continued the trend of improved operations, as we maintained a tighter focus on growing our best-performing segments of multifamily and healthcare along with continued emphasis on disposing of non-core assets to remove underperforming properties in order to improve the quality of our remaining portfolio.

Despite all the positives during the last fiscal year, this past year was not without challenges, ranging from the impact of weather on both development delivery times and utility expenses to the pressure on property values due to the continued slow improvement in the commercial office segment. However, we remain committed to the strategy we followed in the prior fiscal year of focusing on growing those segments and markets where IRET is the leader or has a viable path to market leadership and disposing of non-core assets that are not contributing to our financial performance or are in markets or segments where IRET does not have market leadership. We made great progress in both of these areas over the past fiscal year.

As noted over the prior year and confirmed by fiscal 2014 financial results, as we continue to grow our best segments of multifamily and healthcare primarily through development, we expected continued near-term pressure on FFO due to the mismatch in timing between the outlay of funds necessary for developments compared to the delivery of completed projects. However now that we are into the third year of increased development and with this past fiscal year having the highest amount at approximately $235 million of development commenced, we expect the delivery of prior projects will somewhat offset the FFO pressure created by our higher levels of development.

Delivery time is important and as noted during the last quarter's call, we were concerned about weather related impacts and now with an unusually wet spring in many of our markets following the cold winter, it is likely we will experience some additional delay in the delivery of our in-progress development projects as well as some drag or slowdown on recently commenced projects. However we are optimistic that lost time can be made up this summer but if not then we could deliver as much as eight to 10 weeks after our most optimistic delivery dates.

Fortunately so far the weather conditions have not materially increased our cost of construction, rather we expect any financial impact would be due to delayed delivery which does slightly increase development costs in the form of imputed or actual interest costs but the biggest impact is delayed receipt of rental revenue. In regards to development, we continue to see good income and growth opportunities in our markets that are leaders in healthcare, education, energy and food. Even though we are experiencing higher construction costs as well as competitive developments from other real estate owners, unit demand and rent levels continue to support our strategy of growing primarily through development and, when available, acquisition opportunities.

IRET currently has approximately 1,500 apartment units under construction in five of our core markets, which is an increase in the number of apartment units under construction that we reported in the prior quarter. We delivered 386 units during fiscal 2014. Additionally, over the last 12 months, IRET has also acquired land that would allow for development of a similar amount of units starting yet in calendar 2014, as well as spring of 2015. We continue to remain active in the land acquisition area for purposes of positioning IRET as the market leader in new multifamily projects in our core markets.

We believe that this focus on development provides IRET with the best path to successfully execute on our primary strategy of making our overall portfolio younger and more focused by segment and the leader in its respective categories and markets. Our plan for the coming fiscal year will be to continue to focus primarily on new multifamily developments to meet the market demand for apartments as well as to leverage off the leading position IRET currently enjoys in many of our markets.

We also plan to continue to pursue selective healthcare developments to expand our healthcare segment in the areas of both medical office as well as senior housing. While there continues to be a lack of acceptable acquisition opportunities in almost all of our markets when compared to development returns, however, as we enter another construction season this spring and summer, we are carefully monitoring all the challenges associated with development.

As a result of our observations, we are constantly adjusting our approach to proactively deal with these challenges. Our focus remains on developing assets that will be positioned as the best in market, avoiding the requirement to compete on price and keeping IRET as the market leader in our core communities. Our lease percentage at delivery on the three development projects we delivered last fiscal year has confirmed our approach as evidenced by strong pre-leasing and extremely quick stabilization with 100% occupancy in the case of two of the projects.

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

Moving to leverage, and continuing the trend that we experienced over the last several years, we have been able to reduce not only the cost of our debt, but also the total amount of the debt as it pertains to the overall portfolio. We do not expect any material change to our current overall leveraged levels of debt or type of debt and that at approximately 50% of mortgage debt to real estate owned 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 by as much as 5% or approximately $50 million, bringing total leverage as a percentage of real estate owned closer to 55%. To maintain overall interest expense at current levels, we may use more floating rate debt to capture the advantage of lower rates during development or on those assets which are likely to be disposed through sale over the next three to 18 months.

As Tim and Dianne have noted, we had a significant non-cash impairment in fiscal year 2014 with the non-cash impairment of 15 commercial assets. The majority of this impairment was attributable to eight commercial office properties owned by a subsidiary of IRET. This portfolio was acquired in September 2006 and while occupancy levels in the portfolio have generally been satisfactory, during the fourth quarter of fiscal year 2014 we determined that these assets were impaired.

While the loan is current and cash flow is currently projected as adequate to service the loan before any capital improvements, leasing commissions or tenant improvements, we have contacted the lender to discuss various options with regard to the loan. The loan is non-recourse to our subsidiary company, subject only to industry standard carve out guarantees by both the borrower as well as Investors Real Estate Trust.

It is early in a very uncertain process and IRET can make no assurances about any possible outcomes of the discussion with the lender. However we have analyzed various possibilities, including the conveyance of the portfolio back to the lender pursuant to the loan terms. Using fiscal 2014 financial results from this specific portfolio as measured against our financial results for fiscal 2014, a subtraction of this portfolio in its entirety is neutral financially at worst, and could have slightly financially positive impacts to IRET. We will continue to monitor this group of assets closely as we pursue discussions with the lender in advance of the loan maturities in October 2016.

Looking forward, we expect the amount of developments and acquisitions to remain consistent with our current levels, with our capacity remaining as high as $300 million over the coming 12 to 18 months, depending on the final mix of acquisitions versus development. Our expected acquisition and development cap rates still range from approximately 6% to 12% in the multifamily segment and 7% to 8.5% in the commercial sector. In certain cases, actual results have been higher for development in the energy impacted markets of North Dakota, South Dakota and Montana.

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

Question-and-Answer Session

Operator

(Operator Instructions) The first question we have comes from Dave Rodgers of Robert W. Baird. Please go ahead.

Dave Rodgers - Robert W. Baird

Good morning out there. I wanted to start on the revenue side and I don't know if this is a good one for Tom to start with maybe or Diane can chip in as well. But on the revenue side, I guess, two questions that I wanted to cover. The first one, can you give us a little bit more color on the impact of revenue timing from the weather in the fourth quarter? How that is translating also into the second quarter? Any impacts in the second quarter revenues? And then maybe to ask it from a different way, you talked about new supply, Tom, and can you give us a little bit of color on how rents are coming out versus expectations, particularly in the multifamily lease up assets, so far that you have seen in this calendar year?

Tom Wentz, Jr.

Well, yes. Dave, this is Tom. I think as we indicated in the prior quarter's call where we were a little bit concerned about some delivery delay, I think that we definitely showed up in the final quarter as we did experience some delay due to the winter conditions and that's going to carryover. We have experienced a very wet spring early summer in a lot of our markets where we have construction. So I think we will continue to expect some delay. I don't think it is going to be a huge impact as ultimately we are going to get the revenue.

All of these markets still continue to exhibit strong demand and we haven't really seen any slowdown on those pre-leasing or the leasing activity or traffic. It's just really a matter of timing. So I think what we are looking at is really just delayed revenue and then there will be some additional costs in the form of construction loan, interest and/or our imputed interest due to the delay in delivery. But we don't anticipate anything material and so far we have not seen any increase in construction costs or use of a contingency or weather winter conditions type increased construction costs.

And I think, just to follow-up on the second part on demand, yes, we are seeing some increased competition in certain markets, but at this point, our pro forma rents are on target or our actual rents are exceeding pro forma in the case of many of our markets. So at this point, we are very optimistic at what we have got under construction for delivery; the 1,500 units is going to meet or exceed our expectations.

Dave Rodgers - Robert W. Baird

Okay, thanks, and with regard to strategy, I think you have put something in the press release yesterday that referenced investments in multifamily as well as healthcare, which I think we know, I think in parentheses there is something about particularly senior housing, and I just wanted to maybe dive in, if this is a shift in your view with regard to medical office or any color around that that you could provide.

Tom Wentz, Jr.

No. I don't think there is any shift. I think we are still favor both of those. It just really is a matter of opportunity. They may not consistently present themselves, medical office versus senior housing, but we are not focusing on one to the exclusion of the other from that standpoint. I mean, we are focused on both equally but it's just a matter of when the opportunities present themselves or matter of timing on when we announce or start them.

Tim Mihalick

Yes. Dave, this is Tim, and I think just to follow-up on that. As you reference in the press release, we did put in in parentheses senior housing. That certainly has been a focus and it somewhat mirrors our multifamily markets and we look for opportunities in that as we focus on those markets and that type of asset acquisitions

Dave Rodgers - Robert W. Baird

Okay. On the loan conveyance, can you update us a little bit on what you are thinking in terms of the timing? It sounds like this is somewhat of a conclusion that you will move forward in one form or the other if you can't get release, you would go ahead with the conveyance which I think is the right move to do, but I guess, maybe give us a little update on timing? And then two, can you answer, are there any tax protection on those assets that we have to think about going forward?

Tom Wentz, Jr.

Well, timing is a difficult one for us to answer. That's something we are not really completely in control of. Again, what I would emphasize is, the loan is current. It's got good occupancy. It's cash flow positive. So we have a lot of options. And again, it doesn't mature until 2016. So it is going to be difficult for us to give you any idea on that.

Tim Mihalick

As Tom stated earlier, Dave, we are very early in the process. So for us to have a feel for the timing is still not there. We will continue to move forward.

Diane Bryantt

And we are evaluating various options.

Dave Rodgers - Robert W. Baird

Any tax protection on those assets?

Tim Mihalick

Go ahead, Diane.

Diane Bryantt

We are evaluating all of that and again, at this point yet, it is too soon to comment but we are evaluating all those impacts.

Dave Rodgers - Robert W. Baird

Okay. Last question. I guess we will talk about the dividend. Obviously it has been a rough winter. Spring sounds like it's a little bit slow. I think your prior goal was a third quarter fiscal 2015 dividend coverage or at least sometime during this fiscal year. Do you have any updates with regard to how that looks given what we have seen so far this year?

Tim Mihalick

Well, as I mentioned earlier in my remarks, that still is our goal, would be coverage in fiscal 2015, but obviously it's going to depend on the delivery of the development projects. We are optimistic that we can get that done but we have to see how these come to fruition in lease up.

Dave Rodgers - Robert W. Baird

Okay, great. Thank you.

Operator

The next question we have comes from Michael Salinsky with RBC Capital Markets.

Michael Salinsky - RBC Capital Markets

Good morning, guys. Just going back to the revenue question. Just as we think about, you have the big industrial vacate there during the fourth quarter. Can you just give us an update, is there any move outs that are expected in the first half of the year of size? And then as we think about additional lease commencements on the commercial side, anything of substance we should be expecting?

Tom Wentz, Jr.

Mike, this is Tom. Nothing that we are aware of. Obviously if you look at our top [tenant customers] [ph], there are some large users inside our portfolio, but there is nothing unusual that that we see and I think some of our larger, which was detailed in our earnings release is the case, we were successful in backfilling some of those move outs pretty quickly in our markets and a lot of the vacancy or the decline in occupancy was attributable to sales of highly occupied assets over the prior fiscal year. But I guess to answer your question we are not anticipating anything that we know of. There can always be surprises, but we don't see anything.

Michael Salinsky - RBC Capital Markets

Tom, in your prepared comments, I think you mentioned investment of up to $300 million split between development and acquisitions. Can you talk a little bit about finance? How do you plan to fund that for 2014, your fiscal year 2015? What's the disposition plan for 2015 versus financing plan there and how much is being marketed currently?

Tom Wentz, Jr.

Well, I think Mike, the best answer is to just look at our cash flow statement and our sources and uses from fiscal 2014. We are really operating under the same strategic plan. I think we sold close to $85 million last year. Diane can give the exact answer. Probably raised in various forms about $50 million of equity and then construction loans line of credit. We don't really see any change in the mix at this point. Now of course, it could, depending on market conditions. We are out marketing approximately the same amount of assets for sale. So I think the best guidance is look at what we did in 2014 and apply it going forward.

Michael Salinsky - RBC Capital Markets

Yes, that's helpful. Third question just relates to development there? Can you talk, you mentioned the yields are coming in there? Can you just remind us what the yields are on many of the multifamily properties that you expect to bring online? And then just in terms of revenues, what's the average concession package going in to lease up there? And are you are expensing that upfront or are you prorating that over the lease? Just trying to get to a sense of why the revenue numbers came in short further in the quarter?

Tom Wentz, Jr.

Well, the first question, development cap rates are slightly higher or higher than acquisitions, our range really remain the same. As I indicated, we are anywhere from that 6% on cost as much as 12%, and that's really what we are delivery at. I guess, the question of concessions, are you talking multifamily or commercial?

Michael Salinsky - RBC Capital Markets

Well, multifamily makes up the bulk of your portfolio right now. What I am just trying to get at is, as you think about lease up concessions, are you expensing those upfront? And how are those trending relative to expectations? When you talk about the yield, are getting a stabilized deal? What I am just trying to understand is how is that initial yield coming online and how is that revenue ramping up?

Tom Wentz, Jr.

That revenue is ramping up. We are really not seeing a lot of concessions. We are not really using concessions to lease up our multifamily at this point, like one month free. So I mean, at this point in the development cycle, I mean we are still seeing extremely strong demand in pretty much all of our markets without the use of concessions, either on new leases or on renewals. There may be certain cases inside the portfolio, but it's not a consistent multifamily wide strategy at this point, Mike.

Michael Salinsky - RBC Capital Markets

Yes. It was just more reference to the development properties in terms of recent concessions.

Tom Wentz, Jr.

Yes. We are not using concessions as far as lease up. The only scenario may be if there is some delay in delivery and we have got some free leasing, we would have a delay in the delivery or the receipt of that rent, but it's not a strategy that were using to hit those occupancy numbers on development.

Michael Salinsky - RBC Capital Markets

Okay. Fair enough. Then final question. Just going back to the conveyance there. You talked about the portfolio. I think its nine assets with the CMBS. Are there additional assets in the portfolio today that have non-recourse loan on them that are on the largely agreed that conveyance would make sense in terms of improving AFFO and dividend coverage?

Tom Wentz, Jr.

Not that we have identified. We do have a significant amount non-recourse debt in the portfolio and again, our strategy really has been to fix the debt to particular assets and use traditional mortgages with majority being non-recourse. But we evaluate every asset every quarter and our external auditors also look at our evaluation testing and to the extent those opportunities present themselves, we will certainly do what is best for the shareholders within the confines of our mortgage terms.

Michael Salinsky - RBC Capital Markets

Okay. The additional impairment that were recognized relate to assets that are panned to be sold then?

Diane Bryantt

Correct.

Tom Wentz, Jr.

Yes.

Operator

The next question we have comes from Carol Kemple of Hilliard Lyons. Please go ahead.

Carol Kemple - Hilliard Lyons

Good morning.

Tom Wentz, Jr.

Hi, Carol.

Diane Bryantt

Hi.

Carol Kemple - Hilliard Lyons

On the impairment you talked about earlier I think in the call, Tom. You said if you gave the keys back to the bank, that there would probably be a negative at worst for the company or a slight positive, but then in the earnings release, it talked about a $0.02 per share reduction in annual FFO. Those seem a little different to me. Is there something on this in there?

Tom Wentz, Jr.

Well, no on an FFO basis, but again our really focus is cash flow and that AFFO metric and I think if you look at the slide as part of the presentation, and these are April 30 numbers. So we took year-end fiscal operations in that subsidiary portfolio and applied it to our overall metrics that we actually release or provide. And so not all of them are positive, but I mean I think if you look at debt, you look at various coverage ratios and if you look at AFFO, those are all, at least in our opinion, slightly positive as of last year's numbers.

Carol Kemple - Hilliard Lyons

Okay. And then, your property management expense grew a little more in the quarter than I was expecting. Is that anything one-time or should we expect about that current level going forward?

Diane Bryantt

Well, we are still filling up staff and we are still impacted by the energy markets and the labor demand. The year-to-date numbers should be consistent with what you could expect going forward. I wouldn't necessarily look in fourth quarter but look at the year-to-date.

Carol Kemple - Hilliard Lyons

Okay. Thank you.

Operator

The next question we have comes from Craig Kucera with Wunderlich Securities.

Craig Kucera - Wunderlich Securities

Hi. Good morning, guys.

Diane Bryantt

Hello, Craig.

Tom Wentz, Jr.

Hi, Craig.

Craig Kucera - Wunderlich Securities

I wanted to just go back to the pool of assets that you did take the impairments on. There is a mention in the press release that NOI today is about $9.3 million. Can you discuss how that's trended over time in light of the fact that occupancy has been reasonably good?

Tom Wentz, Jr.

Well, this is Tom. I mean, it's trended down, which is the story. If you go back and listen, we sound like a broken record really over the last five years. You know, we have had pretty good renewal percentages over the years, but really what's happened in the commercial office segment in all our markets is, in the event of renewals or new tenants, the lease rates are substantially lower and in many cases 40%, 50% lower than rents to prior to probably 2007, 2008 is the demarcation of that. And that's really what happened in this portfolio. So NOI is down substantially from the point of acquisition. This portfolio had a good run like a lot of our commercial assets, but in the last several years, the lease rates have reset.

Craig Kucera - Wunderlich Securities

Got it. So are you basically saying that your NOI, maybe at the time of acquisition, was maybe 40% to 50% higher? Maybe pushing the $14 million level or is it that meaningful?

Tom Wentz, Jr.

Not quite that high, but close. This portfolio didn't have that large of a roll down but pretty close. I think if you go back, we did a specific 8-K on this acquisition where we outlined and attached the loan documents back in 2006. This was an 8-K event and so all the details, I am going from memory on what that NOI was, but I know we disclosed it or gave some projections back in 2006.

Tim Mihalick

Craig, Tim here. My estimation would be probably about a 25% drop in NOI from acquisitions down to the existing.

Craig Kucera - Wunderlich Securities

Got it. You haven't have had that much of a roll down presumably in 2014 to drive it. Or was there enough roll down for you to take impairment? Or is it related to the decision to sell the assets?

Tom Wentz, Jr.

Well I think it was kind of a combination, but you know it was really driven by the approaching loan maturity and how we evaluate the whole period of these assets and really what are the prospects of refinancing or redoing that loan in 2016. And if we pay that loan down or off, does that make financial sense at the current carrying value of those assets. And so again, we really don't know what the outcome is going to be. We have got various options and so what we want to do is basically be proactive on how we deal with this pending maturity.

Craig Kucera - Wunderlich Securities

Got it. And just from an acquisition age or the age of the portfolio, can you put a band around the other assets that you acquired sort of when the market was a little bit choppy, maybe assets acquired in 2006 and 2007? Or is this the bulk of it?

Tom Wentz, Jr.

This is going to be the bulk of it. So if you go back and look at acquisitions in that timeframe and if you look at our debt maturity schedule, this really is the biggest piece. I mean, it's over 900,000 square feet, pretty substantial portion of our commercial office portfolio that's left. We have sold a lot over the last several years as well.

Craig Kucera - Wunderlich Securities

Okay. Thanks a lot.

Operator

(Operator Instructions). Well, at this time, it appears that we have no further questions. We will go ahead and conclude our question-and-answer session. Excuse me, I will now like to turn the conference back over to Mr. Tim Mihalick for any closing remarks. Sir?

Tim Mihalick

Thank you, and thank you again for your continued interest in IRET's and your participation in this morning's call. We hope that we get to see summer sometime here in North Dakota and the rain stops and we go on with the business in hand. And lastly and most importantly, go U.S.A. this afternoon and let's continue on in the World Cup. Thanks, everybody.

Operator

And we thank you, sir, and to the rest of the management team for your time today. The conference call has now concluded. Again, we thank you all for attending today's presentation. At this time, you may disconnect your lines. Thank you. Have a great day, everyone.

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Source: Investors Real Estate Trust's (IRET) CEO Tim Mihalick on Q4 2014 Results - Earnings Call Transcript
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