Centerspace (CSR) Q4 2013 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to the Fourth Quarter Fiscal 2013 Earnings Conference Call. [Operator Instructions] Please note that today's event is being recorded. At this time, I'd like to turn the conference call over to Ms. Lindsey Anderson, Director of Investor Relations. Ma'am, please go ahead.

Thank you. Good morning, and welcome to Investors Real Estate Trust's Fourth Quarter and Year End Fiscal 2013 Earnings Conference Call. IRET's earnings release and supplemental disclosure package for the 3 and 12 months ended April 30, 2013, were posted to our website and also furnished on Form 8-K on July 1. And our Form 10-K was also filed with the SEC yesterday. In the Form 10-K and 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 of our earnings release and supplemental disclosure package, 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 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 our 2013 Form 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 statement. With me today from management are Tim Mihalick, President and its 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.

Thank you, Lindsey, and good morning, everyone. First off, let me apologize as the cottonwood trees in North Dakota are producing a lot of cotton and affecting my allergies and wrecking havoc with them, but -- the reason for my heavy-sounding voice. Fiscal year 2013 was a busy year for IRET and one that has showed the promise that lies in front of IRET. 12 to 18 months ago, when I stepped back and took a good hard look at what IRET needed to do to shape the future for this company, the senior team and I discovered some key metrics -- AFFO, debt-to-EBITDA, debt-to-market cap, as well as a need to focus on our overall portfolio makeup, were going to be crucial as we fine-tune IRET. It's funny where analogies come from as you think about challenges in your life. But if you'll allow me to wander for a moment, I will share a short story from my personal life that relates to the challenges we face at IRET. My wife, my daughter and I decided to venture back into growing a vegetable garden this summer after 25 years of being without one. As with all things, you remember the good but not necessarily the bad. And this quickly returned as I was helping my wife pull weeds that I believed I had pulled 2 days ago. Then that 25-year lapse, my memory returned quickly as I recalled what was ahead of us. Weed, fertilize, water, repeat, with the goal of having our own homegrown vegetables by the end of the summer. So you might ask, where does IRET fit into this story? Well, I know we want to accomplish the changes in our portfolio as quickly as the summer growing season. But we have begun to weed our portfolio through dispositions, some of which will be highlighted in the call. We add fertilizer, or capital, as I will phrase it, to shore up our balance sheet to address the metrics we are focusing on. Improving our liquidity allows us to sprinkle the right amount of water to fund the opportunities, both through development and acquisitions that grow our portfolio. Obviously, growing IRET will require more time, but I found the need to work hard fit well both in our vegetable garden and in improving the key metrics at IRET. Thanks for allowing my digression. Now back to the wonderful year we have just experienced at IRET. I know that most of this information has been highlighted in our recent filings, but I would like to reiterate that we have been quite active on many fronts and continue -- and intend to continue down that road. On the operations front, we expect to continue comparable performance on our property segments in the upcoming year, while realizing the impact from our 2 capital raises and the sale of selected assets will have a drag on our earnings. On the acquisitions front, we increased our apartment units by a net number of approximately 1,127 units in fiscal year 2013. We have begun numerous development projects that will allow us to take advantage of the dynamic energy markets that we are part of. On the dispositions front, during fiscal year 2013, our tenant exercised their options to purchase our assisted living property in Stevens Point, Wisconsin. We have sold 4 industrial properties and 1 retail property since the end of fiscal year 2013. Additionally, we have signed agreements to sell 4 more industrial properties and 3 office properties, which are subject to various contingencies. On the capital front, through a common share offering in which we raised approximately $53 million and a preferred share offering with the net proceeds of approximately $111.2 million, we made strong progress to reposition our balance sheet. Lastly, before I let Tom and Diane give you more detail on some of the things I mentioned above, I want to repeat that IRET is committed to creating shareholder value, and the things I highlighted above are just part of that commitment. Thank you, and I will now turn the call over to Diane Bryantt, Executive Vice President and Chief Financial Officer.

Thank you, Tim. Good morning everyone. I'm pleased to give you the results of operations for IRET's fourth quarter and fiscal year 2013. Let me say that first of all, it was a busy year for IRET as we executed on a number of initiatives that relate to the overall strategy and mission of increasing shareholder value. The company has focused on acquisitions, developments, dispositions and leverage reduction, and along with this, raising equity to help meet the demands of these initiatives. Funds from operations in the quarter were $22.1 million or $0.19 per share as compared to $19.1 million and $0.18 per share in the prior comparative quarter. Fiscal 2013 overall FFO was $78.9 million or $0.69 per share compared to $0.65 in the prior fiscal year 2012. The increases in FFO and net income are directly related to 4 primary factors: gain on involuntary conversion; sale of properties; solid returns on non-stabilized or new properties; and increased NOI on our stabilized portfolio. I will discuss each of these individually and how they impacted our results. Starting with gain on involuntary conversion, as we have discussed a lot over the past year, we indicated that we were expected to receive settlement on the flood and fire claim on 2 of our Minot, North Dakota properties. In the fourth quarter, the company recognized $2.8 million, gain with the year-to-date number being $5.1 million of gain on involuntary conversion. This was approximately $0.04 FFO for fiscal year 2013. However, the gain on involuntary conversion is a deduct from AFFO as these funds were and will be invested back into properties and become income-producing assets once again. In fiscal '14, we expect to receive an approximate $2 million of gain on involuntary conversion as we rebuild the one property that was lost due to fire. Moving on to sale of properties. As discussed by CEO Tim Mihalick, during the quarter, we sold our assisted living property in Stevens Point, Wisconsin for a net gain of approximately $3.4 million. This sale was due to the exercise by our tenant of a purchase option in the lease. We continue to execute on our strategy to dispose of non-core, older assets, as 6 properties were sold in fiscal 2013 that fit into that strategy for a net gain on sale of $3.5 million. As Tim mentioned, subsequent to year end, we disposed 4 industrial properties and 1 retail property, with several others under contract for sale. Please note the attending sales are still subject to various closing contingencies and cannot be assured that these will sell. Gain on sale is an exclusion from funds from operations, and accordingly, these gains had no impact on FFO per share. However, we will see a drag on earnings as we replace the income stream from these properties, as they will primarily go first into acquisitions and loan payouts and then further drag will be realized with the investment of this cash into development projects. IRET earnings have been impacted by new acquisitions and development properties placed into service. These non-stabilized properties accounted for $19.5 million or 12% of NOI in fiscal 2013. Development projects, especially in our energy-impacted markets, are delivering higher returns than our other markets. However, the impact from all has been positive and met our strategy of growing our multi-family segment and giving us newer product to lease out to commercial tenants. Our stabilized portfolio occupancy increased in all segments except for a slight decrease in retail. Excluding the gain on involuntary conversion, our stabilized properties provided for a $3.6 million of NOI growth. Multi-family, again, continues to be the main driver as we have achieved high occupancy levels that allow for increased rent. Our office portfolio had a slight NOI decrease. However, as of year end, it had a 1.6% higher physical occupancy than the previous year, increasing to 80.2%. The increase in occupancy in the office segment is a trend that is key to increasing our FFO and AFFO coverage. However, note that with increased occupancy in this segment, we will require significant tenant improvement dollars that will drag on AFFO until we reach a more desirable occupancy level in the office segment. Moving on to the balance sheet. Overall, we have improved our balance sheet metrics from the prior year and have sufficient liquidity to meet the obligations and development and our continued focus on deleveraging certain assets and asset acquisitions. Cash on hand at the year end was $94 million, with $50 million available on our line of credit. As of April 30, we still had not yet deployed all the funds raised during the April 2013 common share offering. However, we have identified use of these funds for committed development projects. During the quarter, we acquired a 336 (sic) [336-unit] apartment complex in Omaha, Nebraska for $28.3 million and paid $7 million for unimproved land for future development. We also placed into service a redevelopment multi-family project in Minot, North Dakota with an investment cost of $2.4 million. Overall, for fiscal year '13, we acquired $85 million of multi-family projects, $22.5 million of unimproved land and placed into service $57.6 million of income-producing assets. These additions and dispositions that I've previously discussed are all detailed in Note 10 of Form 10-K. In regard to the equity raised in fiscal '13, the most significant events were the issuance of our preferred stock in August 2012 for net proceeds of $111 million and our recently completed common stock offering in April 2013 for net proceeds of approximately $53 million. The preferred stock has been fully deployed, and we have approximately $20 million available from the common offering yet to invest. Moving on to debt. During the quarter, we closed on 5 loans totaling $141.4 million. Total closed debt for the year was $216 million. This included $88.7 million in construction debt. Cash-out for the year was $18.7 million as compared to $46 million last year. As we continue with the strategy of deleveraging, we have, in many cases, paid off debt as it matured rather than refinancing, resulting in less cash-out and proceeds. Accordingly, we paid off $14.5 million mortgage debt during the quarter using sales proceeds and available cash. The debt retired had an average interest rate of 6.26% and a loan constant of 10.85%. The outstanding balance of the line of credit remains at the minimum requirement of $10 million. The interest rate on the line of credit remains at 5.15%, and the credit line has a maturity of August 2014. The weighted average interest rate on our mortgage debt at year end was 5.55% as compared to 5.65% from the previous quarter and 5.78% from 1 year ago. Our weighted average term to maturity is 6 1/4 years. Some improved metrics. Our outstanding debt to total market cap was 47% at year end versus 58% 1 year ago. Outstanding debt to undepreciated cost was 50% as compared to 55% 1 year ago. Outstanding debt to depreciated cost was 63% versus 70% 1 year ago, and outstanding debt-to-EBITDA was 7.16x as compared to 7.63x 1 year ago. Overall, we had a strong balance sheet at year end with improved-upon metrics as compared to the prior year and in line with our debt strategy. And finally, the IRET Board of Trustees paid and declared a quarterly distribution of $0.13 per common share that was paid on July 1 to the shareholders of record on June 14. This was IRET's 169th consecutive quarterly distribution. With that, I'll turn it over to Tom Wentz, Jr., Executive Vice President and Chief Operating Officer.

Thank you, Diane. Our fourth quarter results continue the trends seen in previous quarters of overall improved operations. At the start of the year, we outlined a number of areas of focus as a continuation of our plan to grow IRET while working to minimize the expected drag from our commercial office portfolio as we worked to resolve the existing vacancy in our suburban office assets. As the recently filed financial statements confirmed, we have continued to make progress in the areas of our focus identified at the beginning of the fiscal year. Over the past year, we have materially reduced our leverage, focused capital on our multi-family and healthcare segments, where we have leading market positions, implemented an increased disposition program to sell non-core and underperforming assets, aggressively refinanced existing debt to lock in historically low interest rates and raised over $200 million of new equity capital, all with the goal of strengthening our balance sheet and improving our ability to grow through development and acquisitions in our targeted markets. Going forward, our plan for the coming fiscal year will be to continue to focus on these same areas. Of course, as we deal with the reduced -- as we deal with and reduce the impact from our legacy challenges in the commercial office segment, our current plan with this emphasis on development is not without its own set of new challenges. Our return to larger-scale development over the last several years in many of our multi-family markets, due to the lack of quality acquisition options, is expected to create a temporary drag on earnings and cash flow as we raise and deploy the equity capital necessary to complete our announced development pipeline of over $200 million, as well as prepare to develop the recently acquired land holdings over the coming 12 to 18 months at approximately the same level. Our expectation is to keep overall leverage at current levels, and accordingly, in order to grow at our historic average rate of approximately 7% over the next 24 months, would require a roughly $150 million of equity in the form of new equity capital, net sale proceeds and cash-out from debt finance -- refinancings to recapture the approximately $30 million of annual principal paydown we incur currently. Additionally, development and construction costs continue to increase in all of our markets, which we believe will require corresponding wage and job growth in order to support the higher rents necessary to justify the increased cost structure. Finally, as expected with strong economies in many of our multi-family markets, as well as the slow improvement nationally, we expect more competitive development to occur. We are carefully monitoring these challenges. And as a very experienced developer in all of our markets, we have adjusted our approach to proactively deal with these issues. With our existing strong product position, combined with being first-to-market, as well as high-quality projects, IRET is in a great position to execute on its portfolio growth strategy. Our focus is 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 and our strongest segments. Now turning to the recently completed fiscal quarter or end year. Over the last 12 months, most every meaningful operating and financial metric has improved, with the primary exception being commercial office gross revenue and income. The overall slower office employment trend, along with the continued focus by companies on cost-cutting through reducing rental space, continues to stubbornly drag on across virtually our entire commercial office portfolio. However, even though revenue remains under pressure in the commercial office segment, we have been making progress in the occupancy area, which we expect will translate into improved revenue going forward. Additionally, we have made positive progress in our smaller commercial segments of retail and industrial on a revenue basis. We plan to continue aggressively focusing on our commercial portfolio, including our increased sale program, as well as the careful commitment of capital to lease up vacant space. Absent to significant backtrack in the U.S. economy, our expectation is commercial operations will continue to improve modestly, so when combined with our disposition program and the growth in our multi-family and healthcare segments, debt [ph] from commercial office is expected to lessen over the coming quarters. In our multi-family segment, given current occupancy, our focus is on growth in revenue from existing customers and proactive expense control, as limited additional revenue can be captured by improving the occupancy. Material growth in our multi-family segment will be driven by development and acquisition. Finally, our healthcare portfolio continues to perform on a very consistent basis with no material change expected from the existing operations. Again, like multi-family, growth in the healthcare segment will come from acquisitions and developments. IRET's CFO provided the details on recently closed debt, so I won't spend any time reviewing individual mortgages other than [indiscernible] But even with the recent increase in interest rates, IRET has continued to reduce its overall interest expense through refinancing at lower rates as well as our program of reducing overall leverage. The rolldown in rates over the last decade has been one of the most positive aspects of the real estate industry and has allowed IRET to lock in what should be very favorable interest rates going forward. Rates still remain at historic low levels. Debt markets continue to operate very well for IRET as we have multiple options to leverage our existing portfolio as well as acquisitions and developments. Currently, most new rates remain below the rates on our maturing debt, so we anticipate that at least for the very near term, we will be able to continue to lower our debt cost. Unlikely it will match what we've accomplished over the last several years, but still we expect it to be a positive impact. The one negative to lower rates is the increased costs associated with early debt retirement or prepayment, which has and will create an obstacle to sale or accessing built-up equity in our long-term assets. The amount of maturing debt over the next several years is low compared to prior year's, but we will continuously 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, but we are evaluating an increasing number of assets with maturing debt for refinance options with more flexibility on prepayment, as we expect this to be something that will afford us the opportunity to consider more options as we turn our focus to finding positive solutions for our commercial operations. Moving to dispositions, acquisitions and development. As Diane discussed, year-to-date, we have been very active with acquisitions, including our portfolio in our strongest segment of residential. We closed on all previously disclosed multi-family acquisitions and we are actively working on additional apartment acquisitions in our core markets. The development projects are all detailed in the 8-K. We are seeing a number of additional development opportunities on the residential and healthcare side, which we hope to finalize for construction during the coming fiscal year, with potential delivery in the second half of the current fiscal year of 2014 or early fiscal 2015. We expect the amount of developments and acquisitions to remain consistent with our current levels, with our minimum goal being approximately $300 million over the next 12 to 18 months, depending on the final mix of acquisitions versus developments. Our expected acquisition and development cap rates range from approximately 5.5% to 12% in the multi-family segment and 7% to 8.5% on the commercial segments. In certain cases, actual results have been higher for development in the energy-impacted markets of North Dakota, South Dakota and Montana. However, even if IRET completed all currently available opportunities, the overall amount of development IRET can actually complete in many of these communities is limited due to infrastructure constraints, contractor capacity and in many cases, the availability of suitable capital. As for dispositions, we've successfully completed the sale of a number of smaller industrial assets as well as a non-core senior housing project. And we are currently marketing a number of additional industrial assets that we expect to sell in the next several quarters. Sale proceeds will be deployed into new development and general corporate purposes. Thank you, and I will now turn the call over to the moderator for questions.

[Operator Instructions] And our first question comes from Neil Malkin from RBC Capital Markets.

First question. As you noted in your comments, the TI's, leasing commissions on the office side looked really high, I think 2 or 3 times the level of -- average level during this fiscal year. Is that in an effort to sort of get those office occupancy levels to around 85%, which is kind of that magic number to make buyers and banks more willing to lend? And if so, sort of what's the time period you see that happening? And I guess, the elevated cost associated with that?

Diane or Tom?

Well, Neil, this is Tom speaking. Yes, obviously, we had positive leasing and absorption, if you look in the 8-K. 166,000 square feet, I believe, of net positive absorption, which is probably one of the higher points for us across all of the commercial segments. And so correspondingly, there is a requirement for heightened capital. Now of course, that capital has a return associated with it, as these customers start paying rent, also start paying operating expenses, CAMs, so we have kind of a double benefit there as we generate revenue but we also start avoiding the expenses. But I think you're exactly right. If you look at our debt maturity level, then you look -- tie that back to our commercial office, you'll see a lot of that debt starts to roll in the next 18 to 36 months. And so, depending on really what the economic environment is, the target is to take the assets that we believe there's value creation and really press to get those leased up either for potential refinance and/or sale. So I would expect -- what your -- I mean, to answer your question, I would expect what you've seen in the prior quarter, hopefully that increases because that means we're leasing the space up.

Okay. Great, that's helpful. And then it sounds like you guys are seeing pretty good traction on your asset sales. Can you just clarify, what sort of is your -- I guess, target over the next 12 to 18 months, that you have marketing or you will be marketing? How are people perceiving or viewing the sales you have? What's the sentiment from the buyer community? And then on the industrial side, are you looking to exit that outright? I know it's not a big part of the portfolio, but how do you kind of see that from a strategic standpoint going forward?

I think as we've talked in the past, the continued expectations would be to look to probably sell off in the neighborhood of $100 million to $150 million, which we've had a good start on. As far as the industrial portfolio, I talked also in the past about trimming from the bottom and adding high-quality product to the top. We may hold a few of those assets, but from a materiality perspective, I don't think it's going to have an impact as we look at our overall holdings. There's opportunities out there in the industrial side that we may continue to pursue. It won't be a large part of our portfolio, but the mix, as we've talked about, will go towards newer and better-located assets. And certainly, there's challenges out there. As we look at our markets, some of our properties are in tertiary communities and the number of buyers really gets whittled down when you look at those kinds of people, so you're dealing with different types of buyers. You're not going to find a portfolio buyer that wants to acquire some of our assets, so you end up breaking up the portfolio and selling them off to individual buyers. We've been very successful in being able to do that so far, and we'll continue down that road as we look to the future.

Okay, great. And then last question, if I may. It looked like besides multi-family, all operating expenses went up pretty significantly across the portfolio and you said in your release that it had to do with snow removal. But I wonder, if that is the case, why was multi-family, I guess, negative? And then can you just speak to the whole increase of operating cost? Is that a function of, I guess, weather, seasonality, because it seems like if occupancy is up and healthcare is triple net now, you should have pretty, I guess relatively muted expenses.

Well, this is Tom. Not necessarily, because on the commercial office portfolio, which is heavily concentrated in Minnesota, which had probably the most unusual late spring snow patterns, that's where the vacancy is and that's where we lack the ability to pass back 100% of that expense. Multi-family is a little bit more diverse. It's not as heavily concentrated in Minnesota. If you look at where our multi-family is versus our commercial office, you'll see it's scattered around all the way from Montana, South Dakota, Nebraska, North Dakota, and not heavily concentrated in a few larger metropolitan areas like our commercial portfolio is.

And I'd just like to add, are you looking at the stabilized portfolio regarding expense increases or overall? Because we did have a significant amount of new acquisitions and developments coming online and that will provide for a lot of the increase. Looking in the 8-K, if you look at stabilized expenses, we're actually up maybe around -- about $600,000. So a lot of those increased expenses were due to acquisitions.

Sure. I mean, I was just looking at the stabilized trends...

Wasn't that stabilized trends?

For the last 6 or so quarters. But yes, I mean that makes sense, I suppose -- if you have more vacancy.

Yes.

Our next question comes from Rich Anderson from BMO Capital Markets.

Just a quick question here. First, why do you include gain from involuntary conversion to stabilized portfolio for retail and the unstabilized portfolio for multi-family?

The answer to that is the retail was a shopping center that we continued to receive rents due to -- the insurance loss of rents. So that property actually stayed within operations and performed as if it was still full during that whole period in time. The Chateau Apartments, the multi-family, if you recall, there was a turndown in actual. We could not lease out, so that's the difference.

Okay, that's fair, thanks. You mentioned getting real small -- much smaller in industrial and maybe retail as well over time. But what about markets? Do you see yourself exiting any incremental markets over the next year or 2 through the disposition program?

Rich, Tim here. Probably not, other than some of the tertiary markets, where we have some of the one-off properties, so really not an exit. Certainly, an identification of potential new markets as we look at the Great Plains region, as I've talked about in the past. But most of the markets, the core markets, we're comfortable with. And again, most of the exit will be in the tertiary markets 1, 2, 3-property type markets.

Okay. Tom, you mentioned $150 million of equity needs to maintain your balance sheet. Would you say the vast majority of that is targeted with dispositions or are there other forms of equity raise that you're contemplating in the next 12 months?

Well, I think if you look at what our mix was over the last fiscal year, it's probably going to stay about the same. If we achieve our target of looking to dispose of up to $100 million of existing assets, just using our existing barometer of leverage, which is about 50%, that's probably going to generate gross cash proceeds of $40 million to $50 million, depending on the assets. Then of course, we've got the direct program dividend or distribution reinvestment, which ran about $14 million or higher last year. And then of course, refinancings, which I think are going to probably run about the same, which was about $20 million. So if you just kind of walk that back, there's probably need for additional equity in that $75 million to $100 million new share sales ATM program DRIP waiver endpoint. So I think the mix is going to stay the same. And again, we still have a pretty good cash position on our balance sheet and we've got the credit facility. And assuming we want to keep our debt roughly where we've achieved it, which is slightly below 50% on most of the metrics, which appears to be a good rate to remain.

Where we want to be and intend to continue down that road.

Okay. One of the things that people obviously talk about with you guys is you're this gateway to the Bakken and the real estate opportunity and you've talked a lot about that with multi-family, I guess, to some degree, industrial. And it's kind of like 10% to 20% of the portfolio, or something like that, maybe, depending on how you define it. Is there any interest in making that be a bigger number? In other words, people liken you to that opportunity, and yet when they hear the number at the top end of 20%, they kind of like, not quite as big as maybe people would have thought going in. Do you have any interest in making that a bigger part of the story? Maybe with an application of medical office even in the area, I don't know if that would work out. Any comment around those issues?

Sure, Rich. This is Tim again. I think the important thing to remember as you take a look at the energy-impacted markets, really, that stretches well beyond just the Bakken formation. Really, that's impacted all the way from Billings, Montana, as I've talked in the past, to Rapid City. And you feel the impact throughout the whole state of North Dakota over to Grand Forks, where we own a number of units. And so from our perspective, as you look at our portfolio, that probably is a larger number than just what's happening in the Williston Bakken. I mean, the amount of development that's going on in Williston from IRET, as well as Minot as well as Grand Forks, Bismarck, those are all what we term as energy-impacted markets. So we really are taking advantage of that. We maybe need to tell that story in a different light, but that is part of that whole energy-impacted market.

So is the number, in terms of what you think is -- touches the whole Bakken opportunity, is it much higher than 20% then in your opinion?

I think, certainly, as we look at it right now, yes, it is a higher number. I'd have to step back and give you a calculation on that. But Bismarck, as I said, and Grand Forks are all being impacted by that. And so if you step back and the outsider looking in is thinking it's only Williston that's impacted and that's the identification that you make with our relationship to that. It is a larger number.

Okay. Are you contemplating a RIDEA execution in your senior housing portfolio?

Well, I think to answer that question, our comments really are is that portfolio is basically getting fully aligned. We've aligned the term in a lot of -- it's really kind of divided into 3 categories. We've got the Idaho portfolio, the Wyoming portfolio, and then we've got the balance of the legacy Edgewood assets. And over the last several years, we've worked to align all of the lease terms and we've moved most of the debt into a flexible situation. Either those assets are free and clear or they're in the par period or they're in a percentage of 1% or 2%. So I think we're still evaluating that and not necessarily to be the innovator in the RIDEA structure. I mean, it's obviously becoming more popular. We're seeing a lot of other REITs do it. And I think our decision there would really be prompted by what type of premium we would be able to capture in the RIDEA structure for the heightened risk versus staying with the triple net. But it's under active review.

Okay. And then my last question is on dividend policy. Obviously, at least by our numbers, you're not covering the dividend. And I think if we were to look out, you'd get into fiscal 2015, you start to see coverage. But you also mentioned a temporary drag on earnings because of the focus on development versus acquisition. Is there anything about how things are changing that are making you reconsider your dividend policy?

At this point, again, that's a decision that we'll continue to look out. The board makes that decision on a quarterly basis. But I wouldn't anticipate moving forward with where we're at. And so again, we'll leave that decision up the board. But at this point, no.

Our next question comes from Dave Rogers from Baird. David B. Rodgers - Robert W. Baird & Co. Incorporated, Research Division: I guess, thanks for the color on the sources that you provided Tom. I guess, maybe to go to the use side of that, I know that you continue to look at acquisitions. Maybe talk a little bit about the acquisition backlog that you see today and deploying money there. And then maybe a second question, tying into that, is you got $150 million left to spend to finish current development, and I think you'd like to start some more. So kind of walk us through both the acquisition pipeline and then the development end as you see that ramping up this year in new projects.

Well, I think the primary difference between acquisitions and developments in our markets, and I can't really speak to the coast or markets we're not in, but basically, there's a premium to be captured with development, even though it's got heightened risk. Basically, what we're seeing in our markets is there's certainly product available for sale, but it's older product or it's established product. And given current cap rates and agency debt available, it would or is trading at levels which, on a per unit basis, don't make a lot of economic or business sense to us when we can take 6 to 12 months, we can build brand-new product without a material spread in cost per unit. It's higher per unit, but not materially. And the additional rent for the new product justifies it. And in the most cases, what we're doing in our market is we're building the leading product. I mean, we're building product that is not going to compete on price. And these markets are going to have high-paying jobs. Now the number of jobs may increase or decrease over time, but the bottom line is these international and national oil companies are going to be in these markets. They're going to have the top people rotating through as part of their corporate obligations. And they're going to want to live in the better communities, which we are the only one that has those. And so we really see that strategy as having good, long-term growth and income opportunities. Now whether we switch back more to acquisitions, that's really just going to be a function of the product we see in our markets and whether it fits into what we've got. And we've got a lot of existing product in our markets that we don't necessarily need more of that type. We want more of the better product which we're developing. David B. Rodgers - Robert W. Baird & Co. Incorporated, Research Division: Okay. So as you look at development, you've got $150 million left to spend through kind of the middle of fiscal 2015 to finish the current developments. What do you see as the development starts over the next 6 to 12 months? And what's the full development spend that you would expect over the next 12 months?

Well, I think, as I indicated in my prepared remarks, if you look at the land we've acquired, obviously, we've got a big parcel in Rochester. We've got Phases 2 and 3 in Williston. We've got land in Bismarck. We've got land in Grand Forks. I think if you just look at that acreage versus the acreage that we have under development, you can see that we have the ability to do the same number or more units over the next 12 to 18 months that we currently have in the pipeline. So if we've got about 1,000 units under development, currently, we've got enough land to do that or more, really in basically all of the same markets. David B. Rodgers - Robert W. Baird & Co. Incorporated, Research Division: And how comfortable are you starting that type of a volume of product without going back to the capital market?

Well, I mean, I think we're pretty confident in doing that. Again, just given the timing on development, it's not like all that money goes out the door immediately. So I mean, it's something we have to watch and we've got to calculate. But given our current cash position, given our credit facility, I think that there's basically enough cash and credit access on the existing balance sheet to execute on those opportunities and finish what we've got. David B. Rodgers - Robert W. Baird & Co. Incorporated, Research Division: Okay, good, that's helpful. I guess, maybe talk about on the commercial office side, and I guess, the commercial portfolio overall. Can you talk about leased but yet to be commenced space, in terms of the impact on overall occupancy, essentially getting at what is a leased percentage versus occupied today and how that'll -- should move up over the next couple of quarters?

Well, yes. I mean, really, it starts with getting an actual tenant customer in the building that's occupying, using it and paying rent. And again, each transaction we evaluate very carefully as to whether or not it's going to create value. I mean, there's no question, there's probably some commercial assets that are going to be sold without being leased up. That's what we currently got going too. I mean, some assets that just don't fit are too small to take the time and capital necessary and are better opportunities for other real estate players. But I think, we continue the trend that we've got going and continue on that momentum, I think we're going to make good progress this year, which is going to reduce the drag. I mean, that's really the goal. I mean, if you go through the financials, I mean, you can see commercial office is a net-zero contributor. At the end of the day, it does not contribute to overall operations. And so the first step is you need to get it back to neutral and then start it to be positive. And again, our plan is, is we're going to lease up some of these assets. For the most part, these are good quality assets that just from an economic standpoint are struggling due to the job situation and the use of space. And we're going to sell some of them and we're going to grow the best parts of our portfolio so it becomes a smaller and smaller percentage. David B. Rodgers - Robert W. Baird & Co. Incorporated, Research Division: Okay, last question. On the apartments, I think there was some commentary, I think it was just maybe risk disclosures in your overall press release about more and more competition in multi-family. In either the development pipeline or as you look to underwrite rents for apartments, are you physically seeing that type of pressure where rents are flattening out or coming under some downward pressure? Or is that just cautionary language but you're continuing to see fairly healthy performance?

Yes, we're not seeing any of the negative signs yet, but I guess we are all real estate people and we've been in this business a long time and nothing lasts forever, whether it's acquisitions, whether it's interest rates, whether it's development. Something will change. And historically, that change has been increased costs, whether it's through higher interest rates or higher material costs, or you're going to have increased competition. I mean, that's historically have been the risk factors that get it. Really, what we're seeing is tremendous lease-up and kind of to go back to your previous question, one of the mitigating factors on funding these development opportunities is these apartment buildings literally fill up immediately, so you're not looking at the traditional 9, 12, 16 months to stabilization. I mean, these projects are stabilizing in 30, 60, 90 days or as fast as we can physically process people moving in. And so you're able to leverage them, you're able to basically put them on the books immediately, which really minimizes the drag and allows you to get that capital back out to redeploy. So I guess, to go back to your other question, I think, again, things are going to change in the development, and we're not naïve enough to think that it's just going to go on forever and ever. And we want to make sure that people who are unfamiliar with our markets, that we point out some of the limiting factors. There's physical limiting factors out there that are going to prevent us from building 10,000 units in Williston, North Dakota, and there are the traditional risk factors. But to date, we are not seeing them.

But it's cautious, as you can imagine, Dave.

[Operator Instructions] Our next question comes from Carol Kemple from Hilliard Lyons.

Just a couple of follow-up questions. You're talking about the apartments and the success in leasing them up so well. Could you give any color on what the pre-leased rate is on the apartments that are expected to be completed in the second quarter of '14?

Well, if you look at pre-leasing, we don't disclose that. But if you go back to what we've delivered, basically, they've been 100% pre-leased. You look at the prior projects, whether it's the small one we did in Minot of 20 units, Williston, those have been high pre-lease rates. And so we're expecting really and seeing every indication that it's going to be the same.

Yes. And I guess the good run rate would even be -- expectation is 75% delivery. It's been pretty strong.

Actually, I correct myself. Diane pointed out that we do have pre-leased or committed as of April 30. So that's Page 27.

Okay. And then, you all talked about a $2 million gain on involuntary conversions in 2014. Can you give any thoughts on timing of what quarter we should expect that or if it will be over several quarters?

That is contingent upon us making improvements to that property, so it's basically a depreciation reserve and payout. So when we start rebuilding that Château 2 fire project, when we spend the dollars, so it'll be in fiscal '14. I'd say, probably second quarter, possibly, maybe some in the first quarter, we'll realize some of that gain.

Yes, our plan is to move forward with that project, so over the course of the year, we will see most of that recaptured.

So is it likely to be split between the first and second quarter or maybe a little heavier in the second?

Correct.

Yes.

And at this time, I'm showing no additional questions. I'd like to turn the conference call back over for any closing remarks.

Thank you. This is Tim Mihalick, again. And just to give you a reminder, there will be a press release out today. IRET will be hosting its first Analyst Investor Day next Wednesday and Thursday in Minneapolis. We intend to have a presentation on Thursday, July 11, as well as a property tour that day. On the night before, there's an opportunity to come in and have an opportunity to tour Lake Minnetonka and to enjoy a beautiful night -- we hope weather cooperates -- and an opportunity to see what is happening in the Upper Midwest, as well as some very informative presentations that will give you a good, strong feel for IRET and the markets that we're a part of and what we intend to do as we move forward. With that, again, I thank you for your time this morning. Have a great Fourth of July. And hopefully, we get to see you next week. Last thing, if you are interested in the Investor Day, reach out to Lindsey Anderson here at IRET, who takes care of our Investor Relations. Thanks, again.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your telephone lines.