Investors Real Estate Trust F3Q08 (Qtr End 2/29/08) Earnings Call Transcript

Mar.13.08 | About: Investors Real (IRET)

Investors Real Estate Trust. (NASDAQ:IRET)

F3Q08 Earnings Call

March 13, 2008; 10:00 am ET

Executives

Tom Wentz Sr. - President and Chief Executive Officer

Timothy Mihalick Sr. - Vice President, Chief Operating Officer

Diane Bryantt - Senior Vice President and Chief Financial Officer

Tom Wentz Jr. - Senior Vice President of Asset Management and Finance

Analysts

Tony Howard - Hilliard Lyons

Chris Lucas - Robert W. Baird

Jim Bellessa - D.A. Davidson

Greg Sukenik - Zacks Investment Research

Operator

Hello and welcome to the Investors Real Estate Trust third quarter fiscal year 2008 earnings conference call. (Operator Instructions) Now I would like to turn the conference over to Mr. Kelly Walters. Mr. Walters, please begin.

Kelly Walters

Well, good morning and welcome to Investors Real Estate Trust third quarter fiscal 2008 earnings conference call. The earnings press release was distributed over the wire on Tuesday, March 11 and the release and supplemental disclosure package has been furnished on Form 8-K. In the press 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 did not receive a copy, these documents are available on IRET’s website at www.iret.com in the Investor Relations section. Additionally an archive of today’s webcast will be available on our website for the next two weeks.

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

With us today from management our Tom Wentz, Sr. President and Chief Executive Officer, Timothy Mihalick Sr. Vice President, Chief Operating Officer, Diane Bryantt, Senior Vice President and Chief Financial Officer and Tom Wentz Jr. Senior Vice President of Asset Management and Finance as well as the entire senior management team. At this time I would like to turn the call over to Tom Wentz Sr. for his opening remarks.

Tom Wentz Sr.

Thank you Kelly and welcome to our third quarter conference call. We endeavor to fully explain our third quarter, year-to-date historic results and to answer any questions you may have about our Company. While this is our first earnings call, IRET will soon completed its 38th year as a Real Estate Investment Trust. Beginning in 1970 with assets of a $120,000 IRET has grown to its present size of over $1.5 billion in assets, by following a consistent business model that we do not intend to change in any fundamental way.

Our choice as a REIT has been to be a patient long term owner of quality real estates which is maintained in excellent condition. We have over our 38 year of history assembled that the versified portfolio using a very conservative cash management policy which has voided exposure to sudden changes in the market place and we have operated with administrative costs substantially below industry averages. This has allowed us to deliver on our total at which we tend to continue to deliver a dependable and growing dividend stream to our share holders and on April 1 we will pay our 148 consecutive dividend with each years dividend having been higher than the previous year and now we will represent in the track of 7% plus return than our current stock price.

Over our 38 year of history, IRET has experienced the cyclical forces that are and will continue to be inevitably a part of the world of real estate investing. Periods of strong demand, growing profits leading to overbuilding a diminished income followed by absorption of the over supply and a return to profitable conditions. The past several years have indeed been a period of excess exuberance and we are today concerned about the resulting disarray in the capital markets. Because of our conservative debt structures with very small refinancing for the next two years and our lease rollover schedules spread over several years, we have no immediate direct exposure to the sudden market features that seem to be developing the real estate area. However a recession if indeed it develops well to limit our tenants demand for space and their ability to pay increasing rents.

However, inevitably significant inflation seems a likely consequence of our nation’s financial situation which will result in the benefit to IRET and other owners of real estate. Eventually rents and asset value is well in place, while mortgage debt will be repayable with deflated dollars. IRET’s strong balance sheet allows us to make significant future acquisitions but at this time until we see more stability in the market place we intend to be very careful about committing our remaining equity capital and will concentrate our acquisitions on our medical senior housing and apartment development projects that we are now working on. We will be very careful about committing any addition equity capital.

We will now have our senior management team review our third quarter and year-to-date results beginning with our Chief Operating Officer, Tim Mihalick describe our activities in the capital markets during this fiscal year.

Timothy Mihalick

Thank you, Tom. Before I comment on our third quarter financial results with IRET’s CFO Diane Bryantt, who will also discuss in detail, I would like to make a few comments on IRET’s recent activities in the capital markets area. Last year IRET made the decision to increase investor awareness in the Company by becoming more proactive with the investment community. In last October during our second quarter we successfully completed our largest capital raised to date, the sale of 6.9 million shares of our common equity share price of $10.20.

Net proceeds from this transaction were $56.4 million. The purpose on the capital raised was to fund pending or planned activities, still the most significant of which have now closed and the impact of those transactions starts results in the fourth quarter. Tom Wentz Jr., will discuss these acquisitions when it gets to his comments. We are obviously pleased with the overall success of this offering and particularly with the distribution of the share. By design we placed to sell over 50% of the stock in hands to institutional investment, most of which are new first time investors in IRET.

Historically IRET has been largely helped by retail investors and we felt we needed to increase the institutional investor’s participation in our Company both for our liquidity and the plan worked. Our average daily volume is up significantly and thus far we have not extended increase in our relative price volatility. In terms of our equity performance during the third quarter IRET share price held up comparatively well than most difficult markets. At the end of our second quarter IRET’s closing share price stood at $10.85 and on January 31, 2008, the end of our third quarter IRET’s shares closed at 980 up 9.26% on a price return basis. During the same period (inaudible) was down approximately 14.6%.

Next I would like to make a few comments on our financial results before I turn it over to Diane, who will take you through results in more detail. By now most of you have probably viewed our most recent 10-Q and 8-K and aware that during the third quarter our revenues increased $54.5 million from $51.1 million for the same period during the fiscal 2007. For the nine months period ended January 31, 2008 our revenues increased to $162.4 million from $144.1 million in 2007. In the third quarter our FFO increased to $15.7 million or $0.21 per share. These results were slightly below the consensus estimate of $0.22 per share due mainly to following short-term deals on our cash portfolio which was unusually large due to our October capital raise coupled with the fact that the closings on our recent acquisitions in the medical sector took longer than we had originally forecasted.

With that, I will turn the discussion over to Diane Bryantt, IRET’s CFO.

Diane Bryantt

Thank you, Tom and good morning to everyone. During the third quarter of fiscal 2008 IRET acquired four properties which consisted of 163 apartment units and 143,000 square feet of commercial office property for a total purchase price of $24 million.

Cash used to complete these transactions in the third quarter was approximately $19 million and approximately $5 million of limited partnership units were issued to complete these transactions. In addition during the quarter we closed on three mortgage loans with net proceeds of $14 million. The interest rate on these new fixed rate loans was 5.82% to 6.35% with an average term of 9.5 years. These rates are still below our weighted average interest rate of all our loans at 6.44%. At the end of the quarter we had approximately $975 million in mortgage debt outstanding which equates to 62% loan to value of property owned.

Cash-on-hand was still strong at the end of the quarter at $76.4 million with the primary component being the cash balance from proceeds from the $6.9 million common stock offerings in October of 2007.

Revenues for both the third quarter and year-to-date have increased over the comparative periods. The primary source of the increase in revenue is due to new acquisition. For the third quarter overall operating expenses have increased compared to prior periods. This increase is not only due to the acquisitions but also due to seasonal elements such as snow removal and heating and cleaning costs in the markets where our properties are located. Details of these expenses and revenues are discussed on pages 16 to 24 of the Form 10-Q which was just filed on March 11.

Funds from operations, a non-GAAP measure for the first nine months of fiscal 2008 is up $7.8 million from the year earlier period, this is a 12% increase. On a per share basis however we have only had 1.5% increase due to the effect of the common share issuance in October.

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

Thomas Wentz, Jr.

Thank you, Diane. As indicated I have responsibility over the asset management and property management operations for the IRET portfolio. I also am responsible for coordinating the placement of debt on the individual assets the grouped assets.

This morning I plan to provide an overview on the following topics, multi-family and commercial operations by segment, internal managements project, leasing trends, recent acquisitions which will include our development projects and then I will finally touch on to more detail concerning our recent financing over the last several months.

First turning to multi-family operations. On the apartment side, our focus is on establishing a meaningful portfolio of apartment units covering a broad range of unit types focused on select communities in our target geographical area of the Upper Great Plains states including stand-alone projects in all the other larger metropolitan areas to provide further diversification and price appreciation potential. Multi-family operations continue to show forward progress in those markets with measurable increases in overall gross collections as well as net income.

On a stabilized basis we have achieved low single digit increases in both gross and net collection. The slight improvement in conditions is the contrast to the very weak and poor environment with predominated it in a majority of IRET’s markets of approximately 2003 to 2006. While we are still dealing with some of the reasons it created a weak market earlier this decade, the primary causes appear to have largely disappeared in almost all of IRET’s permanent markets (inaudible) Despite the improvement over the past 18 months, the latest quarters saw the acceleration of certain conditions of the expense side that left unaddressed has slow that income growth and I see these trends impact the top line revenue growth for apartments as they are almost exclusively cost related.

Increased commodity prices most notably energy and other utilities have started to appear portfolio wise on the maintenance and operations side. This is not a new trend but finally now appears to have reached the end user in a measurable way. Most of our apartment leases are on a three to 12 months basis, so even though there maybe a slight lag we do have the ability to use rent increases to cover all or a significant portion of the interest increased cost subject of course to market conditions.

We will continue to place an emphasis on capital projects that improve the operating efficiency of our apartment portfolio, such as heating and cooling systems, higher grade roofs when the replacement is necessary, utility bill back technology and more efficient lights. Many projects now have a positive payback over the useful life of the capital improvement due to the higher utility costs. While such projects made distort our capital expenditures in the near term, long term the benefits have clearly been favorable on the sale and net income side. Additionally we are currently developing a plan to begin managing our multi-family assets internally using the same multi-family -- the multi-year strategy that we have implemented on the commercial side of the operation.

Similar to our experience with commercial we expect internal management to increase occupancies, lower expenses and deliver a measurable increase in net rentals that account for an overall increase in cost. We are planning to begin selectively managed some multi-family renewals in-houses as early as fiscal 2009 and increasing it to 2010 and beyond. We see this as a two to three year process to migrate substantially to all of our multi-family assets, internal management correctly and profitably.

Now moving to commercial operations including comments on commercial leasing activity and trends. As compared to IRET’s apartment strategy the commercial operations focused on larger communities with good debt of users for commercial office, retail and industrial. The medical segments focus on retail health care centers regardless of community size.

Finally the senior housing portfolio is focused on communities that have attractive demographics of sufficient demands for services that are located in our traditional area of operations. While commercial activities have largely remained flat to down year-to-date, primarily due to vacancy, this trend has been mitigated to a small degree by slight improvements in retail, industrial and medical. Today IRET has not seen any meaningful increase in the past to other credit issues inside this commercial tenant base. Our exposure to those firms that one might expect to be posted risk to the sub prime mortgage industry or financial market volatility is small. Companies such as title companies, mortgage brokers and home improvement industry did not represent a significant portion of IRET’s tenant based.

Specifically on the individual segments, I will start with industrial which is our smallest commercial segment by investments. Outside of the Minneapolis market which represents approximately 45% of our industrial segment, demand and rental rate growth continue to expand. However at Minneapolis even though there was very strong growth over the past 18 months, this now appears to have completely altered due to a wait-and-see approach by most industrial users. The Minneapolis market had a meaningful amount of new industrial space coming online but unlike past periods, it’s not a period that results will be pressured by excess space but rather the pause, it demand growth.

The other half of IRET’s space is located in Des Moines, Iowa; Omaha, Nebraska; and the Fargo, North Dakota markets. All of these markets have experienced steady demand in the rental growth as those economies are benefiting directly from a surge and farm commodity prices.

Turning now to retail. This is IRET’s third largest commercial segment by investment. For the most part IRET’s retail portfolio has established base, more service and destination oriented retail tenants centered around a number of well capitalized national and regional tenants such as Best Buy, Barnes & Noble, OfficeMax, or regional grocery and liquor stores. We continue to deal with two large vacancies that account for the majority of the current vacancies, sold due to retail tenant vacancies in previous periods. The two vacant spaces comprise close to 100,000 rentable square feet and are located in Rochester, Minnesota and St. Cloud, Minnesota. At present we have only a limited number of viable candidates to fill the two large vacancies with no resolution expected in the next few quarters.

Moving to medical which includes senior housing. This is IRET’s second largest commercial segment by investment and the segment which had the most recent activity. Medical office and senior housing will continue to be an area of current focus due to the continued strong demand for on-campus medical space and senior housing facilities. Despite an increase in vacancy rate and associated decline to net income we see this as a temporary condition caused primarily by the disruption and relocations necessary due to the two medical building expansions currently underway in Minneapolis, Minnesota and set for rent commencement later this summer as well as vacancy issues of one project located in St. Paul, Minnesota. We continue to have good pricing power for new and renewing leases. Upon completion of the current development projects the focus will be on increasing the occupancy but not at the expense of rental rates. IRET currently manages internal a two off campus medical buildings, but we will be taking four more medical office properties in-house by the end of this summer. Given the high rent structure medical properties provide the most attractive opportunities to incrementally add to revenue through internal management.

Finally turning to the commercial multi-tenant office segment. This is IRET’s largest commercial segment by investment. Even though occupancy for stabilized locations have held as steady compared to prior periods we are not satisfied with our results year-to-date concerning occupancy or net income. Rental rate growth for new and renewal lease is expected to remain under pressure in the coming fiscal year due to the loss of a large tenant from our multi-tenant inter locket corporate center building located in Minneapolis, Minnesota. This tenant will be relocating to a newly constructed non IRET owned building as the only single tenant. While our results have largely tracked the market and are due more to general economic conditions rather than specific building or tenant issues we see our measure move towards internal management as improving both occupancy as well as net income by allowing us to focus directly on our tenants rather than through an intermediary property manager. Additionally internal management allows us to capture the previously outsourced management revenue stream even though a small part of the overall operation results today with the limited number of buildings that are managed in-house is confirmed that improvement if possible if done correctly. We expect our continued move towards in-house management to provide a slight offset to the occupancy and the rental rates pressure that is appeared in the Minneapolis office market. We currently managed 82 of our properties internally with plans to continue adding assets as we move forward.

Moving now to development projects; the four development projects disclosed in the recent filings are on schedule and budget with delivery of the Cottonwood apartments now complete and fixed up on schedule. We expect this market to be fully stabilized by July of this summer with that to be placed shortly thereafter. But this North Dakota market seems to be very strong at multi-family size. The two on campus medical buildings will be complete with rent commencement anticipated late to second quarter of 2009 by this August. Both projects have enjoyed strong pre-leasing with stabilized cap rate projected at approximately 9%.

We see development in our core markets on both multifamily and commercial segments continuing at similar levels as previous periods in a range of $50 million to $75 million. Cap rates for development projects still appear to be at levels above gross available acquisition. However this may change as assets reprise rapidly to the credit market volatility. All development is planned for IRETs portfolio and not for sale.

To renounce details on the recent acquisition, our recent addition of five on campus medical office building, one smaller off campus medical building and eight new senior housing facilities will provide immediate positive increases to net income and FFO as the going in growth actual cap rate of six medical office portfolio is in excess of 10% even though in our opinion rents are currently slightly below market.

On the senior housing portfolio we increased our relationship with an existing operator that replaced one of IRET’s long time senior housing operator and tenant. We acquired eight new senior housing locations for a total purchase price excluding closing and acquisition cost of approximately 44.7 million. Additionally IRET paid 14.8 million to extinguish purchase option held by our current tenants on 11 of IRET’s senior housing facilities. We have re-leased these locations to the new tenants on terms and rates in excess of existing lease terms resulting in increased new annual net rent of approximately $935,000 in the first year, $1.6 million in the second year and $1.8 million for the final -- for the third lease year respectively.

The new leases are on a triple net basis with 21 year initial current. The blended lease cost included higher senior housing portfolio for the first lease year at 8.53% of IRETs total acquisitions cost increasing to 9.14% for lease year or two and then stabilizing at 9.3% for lease years three through seven. Pending closing of the remaining senior housing facility for approximately $14.7 million, the 20 building senior housing portfolio leased to Sunwest Management were at approximately $6.1 million net revenue at fiscal 2009, $7.1 million of net revenue for fiscal 2010 and $7.4 million and net revenue of fiscal 2011. At the time of the acquisition took place new debt with a ten year term was five years fixed at 5.44% with the debt re-pricing at 200 basis points over the five year LIBOR swap rate after year five unless IRET elected to repay the debt at par.

Moving now to finance; traditionally IRET has placed long term debts on its individual assets -- group of assets with a goal of maintaining overall portfolio leverage of approximately 60% to 65% of cost towards capital improvements. Despite the recent turmoil and volatility of the credit markets we have not yet encountered any material obstacle due to placement of due debts or refinancing maturing debt. Over the past three months we have brought assets covering all market segments to the lending markets and in all cases we have been able to achieve terms, rates and leveraged consistent risk or in most cases better than our current weighted average interest rate for long term.

All maturing debts for fiscal 2008 at approximately 50% of the fiscal 2009 maturing debt has been refinanced or expanded on rates of terms below our weighted average rate and at many cases well below our average rated to constraint. Based on current market conditions we have no reason to believe our ability to borrow on rates and terms at or below historical averages or norms will change materially. In fact I am optimistic that IRET’s borrowing ability in established length of relationships will offer distinct advantage in the current credit market. Currently with an established history, good building fundamentals and most importantly equity many would be competitor are unable to get past the planning states which is definitely resulting at an increased number of real estate acquisition opportunities appearance over just the past few months.

Thank you and with that I will turn the presentation back to Kelly Walters to start the question-and-answer portion of the call.

Kelly Walters

Thanks Tom. In our press release announcing this quarter we asked for questions for these submitted in advance of the call and we are going to deal with those questions first and then I will ask the moderator to open the call to live questions.

First question coming from insurance and investment management, John Ellis regarding the senior living portfolio what is the breakout of private aid Medicare and other payment forums? The portfolio is leased on a net basis to be operated. While IRET receives current financial information and evaluated the underlying operations or locations, no detail breakout of revenue was performed other than to confirm that on a portfolio basis private pay represents 80% or more of the gross revenue.

Second question; what are the cash and cash unleveled returns that you are investing at on new properties? As discussed by Tom Junior, the most recent acquisitions have actual gross cap rates of 10% on the medical portfolio an 8.53 climbing to 9.30 on the senior housing portfolio.

Next what does the pipeline look like the future acquisitions? Actually it’s quite good. The environment we are in favors of buyer like IRTE as the financing market and more highly leveraged owners and cash cap developers are generating opportunities for us as well as probably all well capitalized real state investment trust. While cap rates remain a little sticky in a falling market there is fairly cap rate expansion going on and that we are seeing so as to just the new environment, however someone senior indicate in this opening remarks that we are going proceed in a conservative batch in the near term till we feel the economical climb as a little fair for us.

Fourth question; did the cap rate expansion cause delays in acquisitions and or does it impact in sellers going forward? We touched on this a little bit. No it’s indicated by both Tom and Dian we have not seen any material negative impact in our ability to borrow or refinance our debts. We have limited debt maturing in the next 12 to 24 months and what debt is maturing in the next 12 to 24 months and what debt is maturing is the majority of which is in the multi-family sector which is performing reasonably well. The delays in completing the recent acquisitions really had more to do with the overall size of the acquisitions and our policy of completing the very thorough evaluation of verticals. For the debt placed on the medical and senior housing acquisitions it was basically four weeks from the selection of the lender to the actual funding.

Touch on the overall economy and occupancy in a glance? Sounds as though you are seeing lower occupancy but ironically lower tax rent concessions. Economic conditions always have some impact on real estate operations either through reduced demand, credit stress in your tenant base or the need for more space. Likewise negative economic conditions can also result in more favorable labor prices or other counter intuitive positive results. Reduction in concessions is due primarily to the lack of significant excess base or apartment tenants. In our opinion it is too soon to really tell which way the economy is going. Our commercial tenants seem to be doing well financially as to our apartment tenants even though the perception is to be cautious and not to expand; stick on extra space until someone borrows the all clear sum.

Is the senior living triple net lease structure -- what is the senior living triple net restructure and who is the operator of these properties? I think Tom touched on this. The leases are all on a fully net 21 year term with cap CPI increases in nearest 8 to 15. The new operator of all IRET’s senior housing locations at Sunwest Management Inc. You can see the -- reference them or check them on their website www.sunwestmanagement.com. The Company has spirally held what IRET has received and reviewed full financial statements.

Are the senior living assets pumped under the commercial medical segment? Would they break this -- would we break this out at some point? The answer is yes. They are included as part of the commercial medical. We currently have no plans to break this into its own segment but certainly going to discuss the idea and of course the senior -- if the segment grows, such a break out may become necessary.

That concludes John’s questions. Next group I believe is coming from Joe Miller. Does IRET have secured funding for the projects in progress or does IRET plan to issue more shares to complete funding? If IRET uses funding what are the terms that they are getting also as the current credit conditions impacted IRET? We have not presented any of the current development projects to the lending market if practice is generally been to complete stabilize and then placed that -- there has been no negative chance in our leverage assumptions or interest rate assumptions used in the ProForma projections. Assuming the current conditions continue through 2008, we would expect to secure leverage at approximately 65% to75% LPB at a rate of 6% to 6.5%. We currently have sufficient cash and capacity on our unsecured credit lines to complete all committed projects without the need for additional capital or debt.

Commercial retail analyzed the increase 6.7 even though economic statues declined from 89.4% to 87.1% why is this? Retail increased 2%, rents has increased in term of reimburses paid during the quarter, so I have been reading a record profits in the Grand (inaudible) how important is it -- agriculture to the economic growth in your major markets? As with any positive economic element it is very important to our market but not the single deriving factor. We have performed well during a period of low agriculture and energy prices. Generally speaking the economy is well diversified across our region but it just so happens that the agriculture, energy, Canadian exchange rate and military spending all rallied at the same time.

Please discuss population trends in your major markets? For the most part stable to low growth, that’s below the national average. Recently our population growth has more closely matched the national average so to say. It was slowing but it will be -- markets are not as much.

So moving to questions, the next question comes from Richard Robert Data Pool. The stable to low growth -- those weren’t from Robert, beg your pardon. Next move to questions from Jim (inaudible) How much equity have you used to complete the four recent transactions and one pending deal, $40 million, the $40 million senior housing complex at Minot? The agri gross environments net cash, agri gross to be on net cash was $14.9 million after loan proceeds. On the BTO transaction, net cash needed to close at $7.4 million after loan. So we used approximately $22.3 million of our cash to complete those acquisitions.

What are the potential yields from these real estate acquisitions, option buybacks and what is the cost of that -- for these acquisitions? As noted by Tom, Jr. the options buyout resulted in approximately 9.8%, 9.75% return on investment in the form of increased rent but also let us just (inaudible) entire portfolio. We placed new debt at 5.44% but also assumed some debt at rates ranging from 6.5% to 7.4%.

What impacts might there be on the Company from the national debt market term loan? Again as previously addressed, we don’t currently see any impact on our operations except the volatility pushes the country into recession, places undue stress on our tenants.

What is the outlook of future acquisitions? Given the disappearance of irrational money and lending standards, our assessment is acquisition opportunities should improve as compared to the last several years of manic activity. Of course this assumes the causes for the lack of easy money don’t materially damage deal for all.

What are the Company’s future financing plans? We have no plans to change our model of placing fixed debt on individual properties and groups of assets.

How much remains of the Company’s $66.4 million in net equity raised last October share offering? And for all taxing purposes we have fully committed the $66.4. It’s not to say that we are out of liquidity as we are in process of completing some refinancing, but the 66.4 has collectively now been fully committed.

With that, I will turn it over to the moderator Camillia and we will also take the live question-and-answer period.

Question-and-Answer Session

Operator

Our first question comes from Tony Howard from Hilliard Lyons. Please go ahead sir.

Tony Howard - Hilliard Lyons

Good morning Tom Sr. and Tom Jr., Tim, Diane, and Kelly thanks for setting this up.

Kelly Walters

Certainly.

Tony Howard - Hilliard Lyons

I appreciate the -- and congratulations on your first conference call.

Tom Wentz Sr.

Thank you.

Tony Howard - Hilliard Lyons

Tom, Jr., I thought you did very detailed information and I appreciate that. Some of it would have been helpful if it was in writing though. I do have a question as far as the purchase options from Edgewood, the $14 million, how is that going to be accounted for on the balance sheet and does it that increase the cost of the properties and that will be amortized over the life of the contract with the deal.

Tom Wentz Sr.

Tony. I’ll let Diane handle that, she is the financial officer but that’s basically correct.

Diane Bryantt

Tony the $14.8 million will be added to the cost of these investments of acquired properties. It will be classified as tangible asset and amortized over the life of the leases.

Tony Howard - Hilliard Lyons

Okay and Tom Jr. as far as the increase in the rent that you are getting from Sunwest and is that what you were getting too as far as the cap rate for the option process or for what do you think the cost of the properties worth.

Thomas Wentz Jr

Well to clarify that $14.8 million Tony directly resulted in not only that group of assets staying on our portfolio but I did see it’s correct double count at rents that we already counted on the books but I paid to extinguish those (inaudible) that bring you the new tenant on the new lease terms. The rent of those locations increased on an annual basis filed at $935,000 and $1.6 or $1.8, so in absence we paid $14.8 million in exchange for increasing revenue of that amount just in those first three years and obviously you can project it out to a full period of time so that’s really where I come with a 9.7 cap on that.

Tony Howard - Hilliard Lyons

That’s a good point. Going a little bit more to color as far as what brought these properties available to IRET as far as the all of a sudden you came up with these medical properties opportunities. Where they in the watch for sometime or is it because of the Edgewood wants to get out or give me some little bit more little color that?

Thomas Wentz Jr.

You are talking about senior housing Tony.

Tony Howard - Hilliard Lyons

Yes.

Thomas Wentz Jr.

Really it was a decision by the fore private investors that had owned to our existing senior housing project they were looking to exit the business states, they were done with their carriers and basically matched up with Sunwest which years of previous tenants -- was already a tenant in our portfolio. We had some exposure to them, we got some other deals with them, one that’s no longer on our balance sheet, in Georgia that’s been sold but got two projects at Wisconsin, so we were familiar with both of them, so really was a decision by Sunwest a larger operator to acquire the business operation of our existing tenant which really presented this opportunity to keep the existing portfolio but also expand it.

Tony Howard - Hilliard Lyons

Okay well what will they just do as far as increasing G&A cost as far as the additional properties. Has there been any input as far as what you expect on that.

Thomas Wentz Jr.

Well on the senior housing portfolio, these are on a triple net basis, so our side of quarterly reviews of the tenants financials both on a corporate level and its individual properties of want with either annual or semi-annual inspection by us as the owner. We really don’t see any increase in our G&A for these senior housing acquisitions. Those responsibilities are going to be assigned to existing staff at IRET’s so if there is any increase for travel or other things I see it as minimal looking at the overall size of the transaction.

Tony Howard - Hilliard Lyons

Follow-up on that, has their Diane been any increased in G&A because of the equity offering and also have to dealt with people like myself and having your first conference call etcetera?

Diane Bryantt

We are just working harder, so we haven’t had anymore staff to deal with those two issues.

Tony Howard - Hilliard Lyons

Have you established a run rate for G&A?

Diane Bryantt

No I have not.

Tony Howard - Hilliard Lyons

What will be a good run rate?

Diane Bryantt

2.5%.

Tom Wentz Sr.

Yes Diane going over time this is easy as trying to get our G&A down to a 2% of revenues. We are currently about 2.5, we are in an expansion forward with a couple of IT endeavors and so forth, but out goals remain -- still get down about that 2% of revenue for the period.

Tony Howard - Hilliard Lyons

Okay especially as far as the multipurpose property that you are doing in your hometown and as far as you are moving your corporate offices there, how is that going? How is that headset?

Tom Wentz Sr.

On top of schedule at least in this fall on a consistent apartment and office and retail space that made that very good leasing interest in the apartments and we will occupy about a third of the first floor space and though it’s going well on schedule on budget.

Tony Howard - Hilliard Lyons

Okay. Final question it was mentioned that proceeds from the offering have been virtually used up, you said that there is still possibility to refinancing other opportunities as far as -- what is your credit line and where does you availability for acquisition stand right now?

Diane Bryantt

I accept the credit line Tony.

Tony Howard - Hilliard Lyons

Yes.

Diane Bryantt

But your questions have not advanced on any of our credit lines available. It’s approximately $32 million available of credit.

Tony Howard - Hilliard Lyons

Okay. Alright and again, congratulations on your conference call.

Thomas Wentz Sr.

Thanks Tony.

Thomas Wentz Jr.

Thank you.

Operator

Thank you. Our next question will come from Chris Lucas from Robert W. Baird. Please go ahead.

Chris Lucas - Robert W. Baird

Good morning everyone.

Tom Wentz Sr.

Good morning.

Chris Lucas - Robert W. Baird

Just a quick follow to Tony’s question. In terms of the investment capital available for future investments if we eliminate the commitment to the development projects and the commitments to sort of planned acquisitions plus for authority closed can you give me a sense as to what is available in terms of capital available for additional investments?

Tom Wentz Sr.

Diane perhaps can handle that Chris.

Diane Bryantt

Chris, we’ve go a lot of cash that come in with the refinancing as well as the share I think, but after these last two acquisition here in march the cash remaining was about $27.2 million from that share offering. We still have some commitments out for our development projects. They are all at multiple stages, some loans have been closed and between we do have sufficient cash on hand to fully final commit a development projects or using the cash we have plus the pending financing.

Chris Lucas - Robert W. Baird

Okay so its sounds like they are between the cash and your pending financing that will be utilized for the development projects, we were really then talking about the availability on the line for any additional commitments to undue investments? Is that correct?

Tom Wentz Sr.

Well, when to development projects are finished they will be refinanced so we will have equity capital to invest as a result of that but that’s six months away, so in the mean time we content to self fund the full cost of the development projects utilized, the capital spend. Now if we find opportunities in the meantime we pay -- get construction loans and proceed but as we have indicated earlier I think we feel that maybe there are more attractive acquisition opportunities developing a few months down the road.

Chris Lucas - Robert W. Baird

Okay, thank you. And then my last question. Just in terms of internalizing the property management process, what’s the expected timeframe on that?

Tom Wentz Jr.

This is Tom, Jr. I think that’s a fairly long process and when I say long probably another 24 to 36 months on both the commercial and multi-family portfolio which has started. I mean one of the challenges we have and I don’t think we’ll ever get to 100% internal management is that we are spread over a very large geographical area landmass-wise, not a lot of activity in between the population center. Well I would see it as a 24 to 36 months process to be profitably correctly because property management is critical to the underlying success we have to have probably of the structure of people and systems in place.

Chris Lucas - Robert W. Baird

There’s a quick follow-up. What percentage of your portfolio do you expect to ultimately be internalized?

Tom Wentz Jr.

Well, I think that’s difficult for us to say now. I mean we look at it on a case by case basis but obviously our goal is 100%. I don’t think that’s achievable, but I think that’s going to be our target. If I was going to assess looking at our portfolio as it exist today –- to the end of the –- like we can take into account future acquisitions, I would say we would get close to 90% of the portfolio.

Chris Lucas - Robert W. Baird

Thank you very much.

Tom Wentz Sr.

Thanks Chris. Operator.

Operator

Yes, thank you. Our next question comes from Jim Bellessa -- I'm sorry from D.A. Davidson. Please go ahead.

Jim Bellessa - D.A. Davidson

Good morning.

Tom Wentz Sr.

Good morning Jim.

Tom Wentz Jr.

Good morning Jim.

Jim Bellessa - D.A. Davidson

When I saw this press release last Friday night you purchased in two transactions eight senior living facilities for $44.7 million and I divided it by the number of units or beds and I was coming up with $136,000 and then on the other transaction that’s pending I was coming up with $80,000 per unit or bed. Is the location in the difference in the price tag per bed?

Tom Wentz Jr.

This is Tom Jr. I like to address that. These locations I think really that the answer is that we have a mixed bag of senior housing projects in there and the one that’s pending, that’s the one you are referring to which is $14.7 million. That actually out of the group -- is the oldest senior housing facility. It’s approximately ten years old and that does have an impact or bearing on price as opposed to that group of eight that came in which represents a much newer basket of senior housing facilities and so that really is the explanation. It’s the difference between the assets.

Jim Bellessa - D.A. Davidson

I don’t know the senior housing market very well but I do follow a couple of skilled nursing facilities. It seems like their acquisition costs are significantly below these figures. Can you comment?

Tom Wentz Jr.

That’s a difficult one for me to assess, not going where I am preparing it to. I guess when we look at these transactions; they fit within the parameters of what we see in our market. We have built senior housing facilities most recently if you go back through our filings being constructed, a brand new senior housing facility addition its given point with Wisconsin by the construction cost first hands for new construction and really view this as consistent and these are established, even leased up locations with the exception of the far going North Dakota facility which just was completed as soon as leased up otherwise all of these are extremely profitable at the offer rate or level have a long established history in both cases so. As far as what we’ve seen, we saw these prices as consistent with the market price on a per square foot there are unit basis and afforded us to an above market cap rate in our opinion.

Jim Bellessa - D.A. Davidson

Tom senior talked about how conservative you are and how careful you will be about committing the new real estate and new equity. If you have a downturn here and I don’t know when the bottom is but what is your sense of how long before the bottom is reached.

Tom Wentz Sr.

Well if I knew that Jim -- I think it’s several months, certainly its three to six months before we get a better sense of whether we have achieved the bottom. I think in my 38 years in this business this is the most out settling type that I’ve experienced because my memory has faded. We really don’t know, it’s a short answer and until we feel we know we want to be careful.

Jim Bellessa - D.A. Davidson

Thank you very much.

Tom Wentz Sr.

Thanks Jim. Operator.

Operator

Our next question comes from Greg Sukenik from Zacks Investment Research.

Greg Sukenik - Zacks Investment Research

Hello good morning.

Tom Wentz Sr.

Good morning Greg.

Greg Sukenik - Zacks Investment Research

Do you guys have a sense of a dollar amount of acquisitions you estimate over the next year and dispositions? Do you have that planned or anything?

Tom Wentz Sr.

Well, we are looking through a portfolio to determine assets that we would think about putting on the market, but we hesitate to quantify that till historically we have been acquiring from $100 to $200 million of property. Because of the comments about our concern over the volatility of the market I think we wouldn’t want to suggest we are going to be able to acquire at our historic levels because I think we want to settle that and be a little bit more careful. Although as our history indicates transaction is up here at the favorable, but idealistic conditions are such that we don’t want to anticipate significant acquisitions for the next three to six months. Other than the ones that we are looking at which are not insignificant is the lease projects. And I think the trend may be that we will develop more of our own properties that seem -- the changes of certain periods and the cycle you can acquire existing or more favorable terms Right now we look to build both senior housing medical and apartments are on a core rate lanes at the area where the markets are extremely strong so I think that will probably take up our time and our money and will be our focus with it at period going forward.

Greg Sukenik - Zacks Investment Research

Okay anything on dispositions you think or…

Tom Wentz Sr.

We are as I say we are looking through our portfolio and in conjunction with our desire to bring our management in-house we are looking at outline investments that we might sell and try to reinvest in more a compact geographic area. So we are studying that but at this point we have nothing to conclude that.

Greg Sukenik - Zacks Investment Research

Okay, one more question. Even I didn’t see anything published you have leasing spreads on like your office leases that were signed in the quarter? Anything like that, like numbers?

Tom Wentz Sr.

Diane.

Diane Bryantt

In the supplemental exhibits to the press release there is a section on the leasing trends of -- for new and renewed leases. I will finally comment on those if they are not (inaudible) leases that expired, leases that came on to in a different building.

Tom Wentz Sr.

Right the difficulty grade is obviously the non-homogeneous nature of our portfolio that makes it difficult for any sort of effort to be meaningful.

Diane Bryantt

That’s on page 14 of the 80 supplemental packet that was also filed on March 11.

Greg Sukenik - Zacks Investment Research

Okay I’ll take a look at them. Okay. That’s all my questions. Thank you.

Tom Wentz Sr.

Thanks Greg.

Tom Wentz Jr.

Thank you.

Operator

That does conclude today’s question and answer session. I would like to turn the conference back over to Ton Wentz Sr. for closing remarks.

Thomas Wentz Sr.

On behalf of IRET, I want to thank all of the participants in the call. This one is our first effort and we will look forward to future conference call and encourage all of you to contact us if you have any additional questions. Thank you very much. Thank you.

Operator

Thank you. That does conclude today’s conference call you may disconnect now.

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