Centerspace (CSR) Q3 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to the Investors Real Estate Trust Third Quarter Fiscal 2013 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Lindsey Anderson. Please go ahead.

Good morning, and welcome to Investors Real Estate Trust's Third Quarter Fiscal 2013 Earnings Conference Call. IRET's earnings release and supplemental disclosure package for the 3 months ended January 31, 2013, were posted to our website and also furnished on Form 8-K on March 12. In the 10-Q 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 1 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 these 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 Tuesday'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 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'd like to turn the call over to Tim Mihalick for his opening remarks.

Thank you, Lindsey, and good morning, everyone. Although I risk sounding like a broken record, I want to continue on with the theme I started over a year ago as I discuss the future of IRET with you. I have repeatedly talked about the Great Plains and the impact this region has not only on the United States, but also the world. Recently, I came across a study titled, The Rise of the Great Plains: Regional Opportunity in the 21st Century by Joel Kotkin. And for those of you who have not had a chance to read it, I suggest you do. Over the years, much has been written about North Dakota and the Great Plains region. Some have suggested that it be turned into Buffalo Commons. Others have predicted that the region will become almost totally depopulated. Well, as you can imagine, I am here today to completely dispute those statements. I believe much the opposite is true, and as noted in the study I referenced above, the Plains is now home to some of the healthiest economy in terms of jobs, growth and unemployment on the North American continent. In our recently released filings, and as Tom and Diane will discuss, IRET delivered a strong quarter that was bolstered by solid property operations, increased rents in our Multi-family Residential segment, stable occupancy in our Commercial Office segment and improving occupancy in our industrial segment. With the significant development activities we have underway in our home market of North Dakota, where the Bakken energy field continues to drive regional economic growth, complemented by the strong -- by the continued strong performance in our Multi-family Residential portfolio and what we expect will be improving leasing trends in our Commercial Office segment, we are confident in our ability to continue to provide value to our shareholders going forward. In both calls last summer, I touched on our need to focus on the key metrics used by the industry, AFFO and debt-to-EBITDA coverage, to name a few, needed to be improved upon. And I believe we are making great strides to accomplish what investors expect of IRET. We are not where we want to be yet, but I believe we have made significant progress to close the gap. Lastly, I want to touch on an initiative to increase awareness of the IRET brand and it's important as IRET strives to become the predominant REIT in the Great Plains region. In the second quarter of fiscal year 2014, we intend to roll out a new look to our web page, which will be user-friendly and offer you, the investor, up-to-date news on happenings at IRET. We will also incorporate social media as a way to stay in touch with the investing public as we believe this is important informational tool. I believe IRET is well positioned to take advantage of its strong financial fundamentals and that when coupled with the opportunities we see throughout the Great Plains region, we can continue to deliver financial results similar to those as we have in the past. Thank you, and I will now turn the call over to Diane Bryantt, our Chief Financial Officer.

Thank you, Tim, and good morning, everyone. This morning, I will give a brief summary of highlights and results of operations in the third quarter and 9 months ending January 31, 2013. As reported yesterday in IRET's Form 10-Q and earnings release and supplemental information, we continue to see earnings increase from operations for the third quarter and 9 months ended January 31, 2013. Acquisitions and development projects placed in service and strong levels of occupancy in our multi-family segment continue to provide a positive impact on net operating income. FFO increased to $18.5 million or 8% for the quarter and year-to-date, FFO was $56.8 million, an increase of 18% over the prior comparative year. On a per share basis, FFO for the quarter was $0.16 per share and year-to-date, $0.15 -- $0.50 per share as compared to $0.16 and $0.47 in the prior-year comparative period. Operations are providing for this increase in absolute FFO, but we understand that the per-share results are going to not increase proportionally as we go through the development process and will -- and these projects will have a dilutive effect on our per-share results. In our overall operations, net operating income increased $3.9 million or 10.8% in the third quarter as compared to the third quarter of last year and a year-to-date increase of $14.3 million or 13.6%. For the 3 and 9 months of fiscal '13, acquisitions and development projects placed in service or are non-stabilized properties represents 75% and 82% of this increase. On a stabilized basis, in the third quarter, the annual recognition of $476,000 of percentage rents within our senior housing portfolio, which is included in our Commercial Medical segment, are coming from most of the NOI growth within stabilized properties. Year-to-date, however, the multi-family segment is still leading in our year-over-year growth as jobs occupancy numbers allow for raising rents. Also, as noted on Page 7 of the supplemental package, we continue to see decreases in real estate expenses as a percentage of revenue. For the 9 months, real estate expenses as a percentage of revenue was 39.4% versus 41.6% in the prior fiscal year. Detail can be found by segment in the -- on the stabilized properties is provided in the 10-Q in the net operating income section. Regarding the gain on involuntary conversion, you will recall that during the second quarter, we received a cash settlement for -- the cash value of the fire loss from the 32-unit Chateau Apartment building in Minot, North Dakota. This represented the $2.3 million non-stabilized gains. We are still expecting to receive, in the fourth quarter, the final settlement on the flood damage for these properties located in Minot, North Dakota, and we'll report gain on involuntary conversion when the funds are received. Overall, the comparative NOI increases are very positive, and we are continuing to look at those opportunities that allow us to continue to perform at these levels. During the quarter, we closed on the sale of the Candlelight Apartments in Fargo, North Dakota. This sale was the final property sale in our 3 apartment communities in Fargo, North Dakota. The total net gain on the sale of these properties was $3.6 million. Other small items to note during the quarter, acquisition expenses were $29,000 for the quarter and $125,000 year-to-date, as compared to $466,000 in the prior fiscal year. Moving on to the balance sheet. This quarter's acquisition activity was primarily focused on acquiring land for potential development and 3 development projects were placed into service. Our land acquisitions in the quarter totaled $7.2 million, and placed into the service was a 28,000 square-foot industrial facility in Minot, North Dakota; a 45,000 square-foot medical office building in Jamestown, North Dakota; and a 26,000 square-foot expansion at a senior housing facility in Laramie, Wyoming. Year-to-date, acquisitions and development projects placed in service totaled $95.2 million. We currently have underway 6 development projects with $20.1 million invested to date. On our debt activity, for the quarter, we closed on one $9 million construction loan. This loan is for the development of the Cypress Court Apartments in St. Cloud, Minnesota. We paid off $9.1 million mortgage during the quarter using the preferred proceeds from the August offering as our cash source. The debt retired had an average interest rate of 5.56%. Year-to-date, in fiscal 2013, we have paid off debt that has not been refinanced, totaling approximately $89.9 million. The outstanding balance of the line of credit remains at a minimum requirement of $10 million as of quarter end. The interest rate on this line remains at 5.15% with a maturity date of August 12, 2014. We also continue to see lower weighted average interest rates quarter-over-quarter. For January 31, 2013, our weighted average was 5.65% as compared to 5.66% from the previous quarter and the beginning of the year at 5.78%. Our weighted average term to maturity remains at 7 years. For the remaining of fiscal 2013, we only have 1 loan with a balance of $2.9 million that will mature. In fiscal 2014, we have $36.9 million of maturing debt. Management is reviewing refinance or payout as these loans mature as we look to either take advantage of low interest rates on mortgage debt or reduce our leverage. And finally, on the distribution. IRET Board of Trustees has declared the distribution of $0.13 per common share in unit to be paid April 1, 2013, to the shareholders of record on March 18, 2013. This will be IRET's 168th consecutive quarterly distribution. With that, I'll turn it over to Tom Wentz, Jr., Chief Operating Officer.

Thank you, Diane. Having overall responsibility for property operations, development and acquisition strategy, I'm pleased to report that in the third quarter, we continued on our path of improved property operations that have grown income and improved the value of our entire portfolio. While there is still a lot of work left to do in the Commercial Office segment, since assuming the Chief Operating Officer responsibilities in the fall of 2009, I have worked with our executive team to develop and implement our strategy of focusing on expense control, properly maintaining the physical condition of all of our assets despite the increased CapEx cost and resulting impact on adjusted funds from operations, and most importantly, on growing in our strongest markets and segments. All of these initiatives have combined to improve almost all of our measurable economic metrics. From the lows almost 3 years ago, we've increased residential occupancy to 93.6% from a low of 85.8% in the spring of 2010, while also adding the net of almost 1,600 apartment units. This has been accomplished due to the outstanding efforts of IRET's internal resident -- residential management group led by Senior Vice President, Andy Martin. We have increased industrial occupancy to almost 96% from a low of 80.9% in the summer of 2010, and retail occupancy from a low of 82% in the fall of 2010 to the current level of 87.9%, while also increasing net income from both of these 2 smaller commercial segments. For the first time in approximately 3 years, occupancy in the Commercial Office segment did not decline and actually increased slightly. Again, these trends in occupancy are due in large part to the successful execution of our strategy by IRET's internal commercial management group and our entire executive team of Senior Vice President Chuck Greenberg, as well as the addition of Mark Reiling as Executive Vice President of overall asset operations last summer of 2012. In the Commercial Medical segment, we've maintained occupancy at over 94% and despite a small decline in same-store income, we've grown the portfolio by over 7% on a square footage basis, with the addition over the last 18 months of almost 0.25 million square feet of fully leased projects at cap rates averaging above 8%, resulting in overall medical segment NOI growth due to these additions to the medical portfolio. Since our low points in late calendar year 2009 and early 2010, IRET has grown the best segments of our portfolio and in our best markets, residential and medical, in relation to our weakest segment, Commercial Office. And also improved our 2 smaller commercial segments, retail and industrial, to a point that both are now making a positive impact to NOI. We believe that IRET is well positioned to continue executing on our plan of growing residential, medical and senior housing through both development and acquisitions. This past quarter, we added to our developable land holdings in 2 of our top markets: Grand Forks, North Dakota, with the addition of approximately 48 acres; and Rochester, Minnesota, with the purchase of approximately 24 acres. We currently have control of over 42 acres of entitled and shovel-ready land in Williston, North Dakota, and are also actively pursuing development land for more residential projects in many of our current markets. Diane provided details on the financial results and balance sheet, so I won't go over these items in detail, other than to comment on our continued improvement in almost all areas. This is being driven by overall good-to-improving economic conditions in many of our markets. But also by the strategic additions to our portfolio over the last several periods and perhaps most importantly, by a strong focus on controllable expenses and occupancy improvement. In order to make money, one needs to spend money, and even though this can put short-term pressure on a company, we believe that our decision to maintain, improve and expand our existing portfolio, as well as to direct resources to growth, has and will positively impact results. We will continue to employ the same strategy in our Commercial Office segment, which has the potential to have a much bigger impact due to its overall size. However, continued improvement in our commercial segments, excluding medical, is still highly dependent on overall economic conditions. The economy is certainly showing signs of improvement nationally as well as in many of IRET's Commercial Office markets, such as Minneapolis, Kansas City and Omaha. However, uncertainty is still present with federal spending reductions and Washington remains unable to reach an overall plan on spending and revenue. Absent a significant backtrack in the U.S. economy, however, our expectation is that existing Commercial Office operations will improve modestly over the coming quarters. As a result, our first focus is still on growing revenue by improving occupancy and adding assets to our core segment of multi-family, medical office and senior housing through acquisitions and development. Second, to work aggressively on controlling expenses using our internal property management platform. As discussed last quarter, we have added a third component to our plan to increase value by increasing the pace of our dispositions of those assets that do not fit our priority segments, markets or return expectations. Done properly, selling select assets will improve the quality of our overall portfolio and income stream and lower reoccurring expenses and capital obligations as we trim older, less productive properties. By focusing on better growth opportunities in our best markets and segments, while also working to improve commercial operations, our strategy should lower the drag created by our underperforming office sector. We continue to execute on our top priority of growth. We have multiple residential development projects previously announced and currently underway in St. Cloud, Minnesota, and Bismarck, North Dakota. We have also started construction on new joint venture multi-family projects in Minot, North Dakota, and Williston, North Dakota, with completions of buildings expected to start in late fall 2013, with final completion of both projects projected for the fall of 2014. These 2 projects combined will have over 625 units costing approximately $115 million at projected stabilized cap rates in excess of 9%. IRET has a majority ownership position in each project at 51% for Minot and 70% for Williston, and will provide certain fee-generating services such as management, accounting and financing back to the joint ventures, providing further but limited income back to the IRET. We will continue to focus resources on growing these segments primarily through development, but also acquisitions. With both multi-family and medical already performing at strong levels, we expect that there will be only modest growth in these existing portfolios as we focus on rent increases and expense control. However, we expect to achieve higher overall growth in these 2 segments, multi-family and medical, through acquisitions and developments. We plan to continue to be the leading multi-family operator in our core residential markets. In our medical portfolio, we have continued to look to add to assets that fit well with our overall operating footprint as well as grow our senior housing portfolio with the same goal of remaining and becoming the primary operator in many of the same geographic markets where we already have a strong residential presence. IRET's CFO provided the details on recently closed debt, so I won't spend any time reviewing other than confirm that low interest rates and open debt markets for IRET continue to provide opportunities to lower our overall interest rate costs. As stated during my presentation last quarter, IRET is currently experiencing no problems or obstacles in securing favorable debt terms and rates. We have multiple options to leverage our existing portfolio, as well as acquisitions and developments. We have successfully dealt with all maturing debt, as well as lowered our overall weighted average interest rate, providing yet another measure of expense savings. The amount of maturing debt over the next several years is low compared to prior periods. So further meaningful reductions in our interest expense will be more elusive absent further deleveraging. However, IRET's Senior Vice President of Finance continues to actively review all loans for refinance opportunities as this provides IRET with the least expensive source of capital for acquisitions, funding of operations and capital improvements. We do not anticipate any material change to our leverage policy of fixing most debt long. We are focusing on debt options with more flexibility on prepayment to better align with our plans to selectively trim non-core assets. Additionally, with our most recent preferred offering and improved operations, we are turning our attention to reduced leverage on those assets where we have shorter-term debt. Again, this is designed to improve our balance sheet and provide more flexibility when it comes to funding acquisitions and developments. As noted in the 8-K release, IRET's leverage levels have declined materially over the last several periods. Moving to dispositions, acquisitions and development. Including last year and now, the first 9 months of fiscal 2013, we continue to be very active with acquisitions increasing our portfolio. While the third quarter is traditionally less active on the development front as it covers the winter months in our markets, IRET was very active in identifying and acquiring multiple residential development parcels in core markets. We completed a number of previously disclosed development projects, which are now online and generating rental revenue. Our acquisition and development cap rates range from approximately 5.5% to maybe 6%, to as high as 9% or above in the economically impacted markets of the Bakken. However, it appears much higher cap rates are achievable for development projects in many of these markets. As for dispositions, as noted above, we expect to dispose the mature and non-core assets on a more consistent basis going forward, but still at a much smaller level than total acquisitions as our plan is to grow IRET. To this end, and as noted last quarter, we are currently marking a group of our smaller single-tenant, net lease industrial buildings. The portfolio went to market unpriced, and IRET is currently evaluating offers. In total, the current group of industrial assets on which we have received the offers represents less than 3% of our entire portfolio. Thank you, and I will now turn the call over to our moderator for questions.

[Operator Instructions] The first question comes from Neil Malkin of RBC Capital Markets.

Just a couple of questions, one on the development side. You guys, as you said, were very active this quarter acquiring land parcels in your sort of core North Dakota areas. Just wondering, how comfortable are you or at what level do you become uneasy of having your land bank running going forward? And kind of what do you see as your development timeline on those land parcels? And then lastly, I know the infrastructure in the Bakken area isn't fully built out. So do you see that as a sort of hindering the timeline for a larger build out?

I'll answer 2. This is Tim, and I'll let Tom talk a little bit about -- as we continue to look out to our markets, and one of the reasons we do bank land in those -- our core markets is, again, as we've explained in the past, they're not large markets, and our ability to have land to go into the development side allows us to keep up with the competition or, in some cases, hopefully keep the competition from building. And that's been part of our philosophy as we move forward. So we see those as opportunities. Again, we know those markets well. We'll continue to do that, and like the returns that we can get on that development. In regard to the infrastructure, in the western part of North Dakota in the Bakken, again, as I talked about, the state did commit money to continue to develop that. And our piece of ground in Williston is entitled to 42 acres -- or the 40 acres that we purchased will have water, sewer and streets improve to that if they'll allow us to continue to move forward. And that will be some challenges as we look out for some of the competitors in those markets, but we think we can handle those as we look to move forward. Tom, do you want to add anything regarding the time and how long it takes to put those?

Well, I think on the land bank, historically, IRET has not banked a lot of land. Obviously, as a real estate investment trust, holding non-income-producing property is not the wisest of strategies. Generally, we're looking at no more than a 12- to 24-month turnaround from acquisition to online. Occasionally, we will hold land for 1 calendar year period. So for example, some of the parcels we have under contract now were just recently acquired would potentially be slated for development yet this summer, starting this summer. Other projects, land projects that are maybe going to close in subsequent quarters, which we haven't disclosed yet, those are more likely to probably be held for about 18 months before they come online with the development project. So pretty much anything we've acquired to date or would close shortly will be built out this summer. Generally, we don't develop raw land. I mean, we buy it when it's in the city and it's ready, in essence, shovel-ready. That, in certain instances, costs a little bit more. But in this business, time is money. And so our analysis is that buying it at the later stage of the development actually results in the same returns by buying it early on, tying that money up throughout the entire entitlement process. And to answer your question, if all the property we have is basically entitled, properly zoned or can be rezoned to what we need, has the infrastructure. And in fact, in Williston, all of that property, in essence, has infrastructure and is shovel-ready. I mean, we were an early entrant into that market, had been in that market in the past. So lack of infrastructure actually is a barrier to future competition from that standpoint. So I guess to answer the question, no real worries on land banking because we turn it around relatively quickly.

Okay. Great. That's helpful. And then my follow-up question is on the leasing side. It looked like with office and medical, there is pretty significant roll downs. Now on the office side, is that just a function of new leases in different markets than the expiring? Is it you guys trying to build occupancy? And then on the medical side, was the roll down -- is that a function of going from -- or going to the net lease structure? Or can you explain those?

Well, I think to answer all of those in the operation segment, on our 8-K report on commercial leasing trends, I think the first thing I would advise everyone is our entire Commercial Office portfolio is 5 million square feet. Now that's a lot in certain context, but that's actually pretty small compared to most other REITs. So as we've said in prior quarters, we need to be careful looking at quarter-to-quarter trends and missing the bigger picture of year-over-year, year over -- and that type of comparison. So I think what we have in there when Diane and I, Tim looked at it is, is we've got a lot of timing issues. We do, do a lot of early renewals. And so those renewals get reflected in prior periods, but the expiration still stays stuck in later periods of time. So that's primarily the larger explanation. I think to answer some of your other questions is, yes, I mean, we are trying to build occupancy in all these segments, which I stressed in my comments. Again, on the theory with the improving economy, there's no way to improve income if you don't even have a tenant to begin with or a customer to begin within these buildings. And so we're comfortable spending the revenue to build occupancy with good quality tenants, customers in these commercial assets. So I think again, we don't see really any negative trends. And I think going back to some of my prior comments, depending on where people think we are in this whole economic cycle and you look at our average lease term, I mean, if you think the financial crisis, recession started 2008, 2009, the average term in our Commercial Office segment has always run about 5 years. So as we've said in previous quarters, we did anticipate that some of those leases that were signed right at the beginning point of the current economic cycle are now just maturing. And there's no question that rents in all commercial markets in the office segment are not at the same levels that they were in 2007, 2008. But again, as previously said, when you look at our lease expiration, we really have rolled through almost the entire balance of our portfolio by the end of this fiscal year, calendar year of 2013.

[Operator Instructions] The next question comes from Rich Anderson of BMO Capital Markets.

Okay. So couple of questions here. I'm sorry, I'm looking through -- so you talked about how you're going to grow the portfolio through acquisitions and development and also reduced leverage, and I hear you clearly on all this kind of moving parts, and some of the pieces of mortgage debt that you're going after. But how do you -- how do you reduce leverage at -- in the same breath say that you're going to increase acquisitions and development? Maybe the best question is, where do you see leverage going to when you think about all the moving parts that are going on right now?

You're talking on the metrics?

Yes, just debt to EBITDA or -- Tim, you mentioned that you're not there yet. I mean, when do you get there, I guess, when you consider all the activity going on?

Yes, I think as we look at our debt-to-EBITDA numbers now, a little north of 7, and that may stay in that range as we continue to roll out and complete development projects. I think when we shake through and complete that, we'd like to see ourselves probably closer to that to 6. But that can take some time due to the construction lending and some of the things we've had to put in place to get these projects up and running. And our long-term goal will be to get to that 6 number on the debt to EBITDA.

Okay. So that makes sense. And you guys also mentioned attacking or looking at assets with shorter-term debt on them. Can you talk about that strategy? How much of it are we talking about in terms of that's available to have a conversation about? How much of it is pre-payable, and how much of it you expect to refinance?

Well, I think, Rich, that strategy really is a function of lower leverage. Obviously, leverage brings risk and in the past, we carried higher leverage, but we had really no near-term maturity risk. I mean, we're very careful about staggering it. So if you go back and look at our profile several years ago, we certainly carried higher leverage, but we had a very staggered extended maturity. I think with the preferred offering and some other uses of additional equity and overall deleveraging, what we see as an opportunity is lower leverage. You can entertain a little bit more risk by going short and then capturing really what are unbelievably low interest rates. And driving down -- really driving down one of our biggest expense line items. I mean, debt, if it's not number 2 or 3 after people, is right up there. And so that's really the explanation on the strategy. Plus, it allows us to be a little bit more flexible on how we hold our portfolio. Really, one of our biggest barriers to selling assets was we use longer-term fixed rate debt, which came with prepay penalties or lockouts. And so again, it just goes back to what I alluded to is that by going shorter, we increase our flexibility. But we also understand that by going shorter, you increase your leverage risk profile, general growth properties, some of the -- First Industrial, Prologis. So a whole list of names that had near-death experiences because of short-term leverage, and that's really what's behind the strategy.

Okay. So I -- and I misunderstood what you're saying. So you're -- when you consider future -- the future debt strategy, you will go shorter term, lower rates, higher risk, as you acknowledge. But would you say then, from an LTV perspective, it would be significantly lower than what it was in the past?

Well, I mean, if you look at it now, depending on what you think we're worth, I mean, we're at 50% if you throw out the preferred -- I mean, if you include the preferred. If you throw out the preferred, we're down high-40s, 46, 47. And again -- I mean, obviously, you know what all the peer groups look like, and that puts us pretty much close to the middle of the pack, not in the 75th percentile where we were before. So I think by getting down into that 50 to 45 range, that really mitigates the risk. I mean, we're down probably 14, 15 basis points on our leverage levels overall. And so I think we're still going to maintain a strategy of going along with the vast majority of our debt. But we want to be able to entertain the use of shorter-term debt for construction, for assets that are maybe going to be disposed of in the near term and free ourselves up from the encumbrances of going long. And so we're probably at the right level on leverage or pretty close to it.

Yes, I think Rich -- this is Tim, and just a quick follow-up. As we restructure our portfolio, we're certainly going to go long and take advantage of interest rates on properties we intend to hold for the longer term.

Okay. I understood. In terms of the average interest rate declining very slightly to 5.65%, what do you think is embedded in the overall portfolio when you consider where interest rates are today? And if you were to kind of look out a couple of years and think about some of the refinancing and debt pay-down that you might do, how much lower could that 5.65% go if you were to take a snapshot of the market today?

Well, if you look at Page 10 in the press release 8-K, I mean, that pretty much gives you an indication that we don't really have a whole lot of opportunity in the near term. So I mean, there really isn't a lot of further opportunity. I mean, there is some. And again, we're only really going to achieve that by going shorter. I mean, at 5.65%, we're within pretty close range of current long-term 7-, 10-year fixed rates on the commercial side of maybe 5, 5.25. Obviously, debt on the multi-family is still down in the 4, 4.25 range on fixed year debt. So we break it out and you can go through and see what we've got coming out. There isn't a whole lot of multi-family in the near term. If you look at Page 11, you look at 11 on the commercial. So I wouldn't discount it. But I mean, Ted, our Vice President -- Senior Vice President of Finance, is not on the line. But I think he's going to tell you that there isn't a whole lot of room left without going shorter term, which has its associated risks. And I don't think we're ready to fully depart from our strategy of fixing. I mean, I think we view long-term leverage placed now or in the near term, hopefully, will ultimately become an asset on these properties going forward as the economy improves and interest rates have to increase at some point.

Okay. A couple more, just quickly here, multi-family same-store NOI kind of lackluster for the third quarter, it looks like revenues didn't -- revenue growth didn't keep up with expense growth. How would you characterize that, as a point in time anomaly? Or do you think now that you've kind of achieved occupancy in the 94% range, that you might see same-store NOI growth in the multi-family segment sort of slowdown a little bit?

Well, I think there's a couple of answers there. I mean, obviously, the quarter we just came out of represents probably one of the more challenging one in our markets. It covers 2 multiple major holiday periods, and it's the winter months. And that's really a period of time where we don't encourage our customers to the part by raising revenue. And so -- and it's also a period where we incur expenses, but also try and deliver enhanced service during that period of time for purposes of just keeping everybody put. Spring and fall are really the big movement periods. And so I guess we've never really looked at this quarter we're coming out of as a trendsetter one way or the other. In fact, if you maintain occupancy during these periods of time over the holidays, year end, so on and so forth, that's really a very good sign for your spring, summer months. And again, I think if you go back over prior longer periods, for our markets, we've had a pretty good track record of growing revenue. I mean, you have to remember a lot of our apartment markets really did not get as distressed as some of the coastal markets. So consequently, we didn't see the same type of rent roll down that a lot of other markets saw. So our percentage same-store sales have not been as dramatic, but they've been steady. We've got positive trends there.

How big was the office segment in 2010? I know it's like 30-some-odd percent now. How big was it back then?

You know what, we'd have to double check on that. I could guess at it, but the lawyers tell me never to do that on these calls.

Okay. I can look back myself. That's a lead-in to my final question. Commercial leasing overall for the quarter, you lost 148,000 square feet, when you consider what you leased and what expired. Can you just talk about what happened there? Is that, again, a seasonality issue? Or is that something more systemic?

Well, I think as I alluded in -- to the first question, I mean, we've really got a lot of timing issues in that portfolio. And I think really what I would stress is focus on our overall occupancy. I know occupancy doesn't necessarily translate into positive revenue. I mean, you can fill your buildings up and still go backwards on the revenue standpoint. But again, our strategy, we really are focused on the fact that we need to start with the basics, and that is get the buildings occupied with quality tenants and then focus on the revenue and the expenses. So if you look at our occupancy trends, I think they're very favorable over the last 36 months, which I tried to stress. And I think also for the first time, and it's probably longer than 3 years, Commercial Office has finally appeared to stabilize and actually increase slightly. Now it's hard to predict what's going to happen going forward, but the comment was I think we're cautiously optimistic that Commercial Office has got some modest growth in front of it. So those are the trends I would stress and look at, which in essence, even though we had a quarter of declining absorption, overall, our metrics are all positive. Occupancy up, income up. Now I realize we've had some share growth and other things. But overall, I think that has translated into positive movement in the right direction.

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Tim Mihalick for any closing remarks.

Thank you. And again, I would just like to thank you all for participating in the call this morning and your continued interest in Investors Real Estate Trust. As I talked about in my opening remarks, we see the Great Plains region as opportunity in front of us. As the world looks to need what we have up here, stretching from North Dakota down to the north tip of Texas and all the markets that we're involved in, we see opportunity and the opportunity to provide the real estate needs for that part of the country. And as we move forward, we think IRET is extremely well positioned to take advantage of that. Thank you, again.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your line.