Good morning, and welcome to the Investors Real Estate Trust Third Quarter Fiscal 2014 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Lindsey Anderson, Director of Investor Relations. Please go ahead.

Good morning, and welcome to Investors Real Estate Trust’s third quarter fiscal 2014 earnings conference call. IRET’s earnings release and supplemental disclosure package for the three months ended January 31, 2014 were posted to our website and also furnished on Form 8-K on March 12. In the earnings release and supplemental disclosure package, Investors Real Estate Trust has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with the requirements set forth in Regulation G. If you have not received a copy, these documents are available on IRET’s website at iret.com in the Investors section. Additionally, a webcast and transcript of this call will be archived on the IRET website for one year. At this time, management would like to inform you that certain statements made during this call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Investors Real Estate Trust believes the expectations reflected in the forward-looking statements are based on reasonable assumptions, Investors Real Estate Trust can give no assurance that its expectations will be achieved. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements are detailed in Wednesday’s earnings release and from time-to-time on Investors Real Estate Trust’s filings with the SEC. Investors Real Estate Trust does not undertake a duty to update any forward-looking statements. With me today from management are Tim Mihalick, President and Chief Executive Officer; Diane Bryantt, Executive Vice President and Chief Financial Officer; and Tom Wentz, Jr., Executive Vice President and Chief Operating Officer. At this time, I would like to turn the call over to Tim Mihalick for his opening remarks.

Thank you, Lindsey and good morning everyone. First of all, I want to thank all of you for taking the time to listen to our call this morning and I hope you will find the information provided to you to be beneficial. We are pleased to report solid operating results for the quarter. With revenues from our stabilized properties increasing during the third quarter compared to the same period of the prior year due primarily to increase rental revenue and tenant reimbursements in our commercial office and healthcare segments and to increase rental rates in our residential segment. IRET’s Executive Vice President and CFO, Diane Bryantt and COO, Tom Wentz will have details on these results for you shortly in their remarks today. Subsequent to the quarter end, IRET senior management team carried out a strategic planning process and we recently presented the results of the process to our Board of Trustees. We summarized this plan and formed 10-Q we filed yesterday, but I want today to comment in more detail on some aspects of the plan. As noted in the 10-Q we plan to continue our focus on identifying for disposition properties whose location, age or need for significant tenant improvements or capital expenditures suggest the company’s investments maybe better deployed elsewhere. After studying the needs of tenants and evaluating IRET’s commercial office space and the markets we are in, we continue to absorb a shift in space needs of certain commercial tenants. Per person space needs have been reduced. We do not see this as a trend reversing anytime soon. Evaluating our portfolio on this basis, we expect over the next 12 to 18 months to identify properties, primarily in our commercial office segment as candidates for disposition. We do still see some opportunity in well-located office properties.…

Thank you, Tim and good morning everyone. Yesterday we filed our fiscal year 2014 third quarter report on Form 10-Q and furnished our 8-K earnings release and supplemental disclosure. This morning again as before I will provide a brief recap of significant items of note that occurred in the third quarter which ended on January 31, 2014. First, we will start with the balance sheet and regarding the cash and liquidity, cash on hand at quarter end was $53.5 million as compared to $94.1 million at the beginning of the fiscal year. We continue to see strong cash flow from operations to support our property operations and improvements. Dispositions proceed received during the quarter of $78 million, use of our available cash on hand and loan proceeds have allowed us to invest approximately $130 million during the year on our acquisitions and development projects. During the quarter we advanced $12.5 million on our line of credit. $2.5 million of this was due to the line of credit increased minimum balance outstanding requirement and $10 million was for prefunding of an equity with the lender on our Cardinal Point development project. Overall, as of quarter end with cash on hand and available line of credit, we have liquidity of $103 million. Regarding acquisitions and developments, during the quarter we placed into service two of our multi-family residential development projects. The 132-unit Cypress Court property in St. Cloud, Minnesota in which we have 86% interest and our 146-unit River Ridge project in Bismarck, North Dakota. Both of these projects had a strong lease up with Cypress Court currently today at 73% occupied and River Ridge at 91% occupied. Upon stabilization we anticipate a cap rate range of around 7% to 9% on these projects. During the quarter we sold two residential properties,…

Thank you, Dianne. While the third quarter ending January 31, 2013 saw some weather related impact primarily in terms of delays in completing and opening our two new developments mentioned by Diane as well as in residential leasing traffic. The third quarter results for fiscal 2014 still continue the trends seen in previous quarters of improved operations. Our focus remains on our leading segments of multi-family and healthcare real estate in our core markets where we are or have the ability to be the leading provider of these types of real estate. And also on reducing our investment in those real estate assets where we do not have market leadership. As we continue to grow our best segments, we anticipate some slight pressure on FFO due to mismatch in timing between the outlay of funds necessary for developments compared to the delivery and release up of completed projects. We do anticipate this pressure will continue through the balance of fiscal 2014 as well as the coming fiscal year. We had initially projected that as the group of current in progress developments came online later this spring and first quarter of fiscal 2015, the FFO impact related to our heightened development pipeline would begin to lessen. While still to be fully measured, it is likely we experienced some marginally negative weather impacts that could delay the delivery of our in progress development projects. However, we are optimistic that any loss time this past winter can be made up during the spring. But if not, it is possible some projects could be four to as much as eight weeks behind our initial delivery dates. Fortunately, the weather conditions this past winter did not materially increase the cost of construction, rather we expect any financial impact would be due to delayed delivery which…

(Operator Instructions) And our first question will come from Dave Rodgers of Robert W. Baird.

Hey, good morning. Matt Spencer here with Dave. I was wondering if you can dive into a little bit more detail regarding your updated strategic plan maybe with regards to timing, volume and yield that we can expect and any impact to your expectation to cover the dividend by mid 2015?

Matt, Tim Mihalick here. Just again as we mentioned and talked about in both the filings and as I did here on the call this morning, from a timing perspective, our anticipation is to take a look at the next 12 months to 18 months to identify those non-core assets and then core performers in our portfolio that we need to move towards disposition. As we mentioned in the past, our expectation again would be to look for coverage of our AFFO number through probably third and fourth quarter of fiscal year ‘15. So that we can move that process to get to that number that we have all talked about to cover our dividend as it’s been declared in our prior board in the past. From a yield perspective, I guess I am not sure which you are referencing, Matt.

I mean, maybe just a cap rate on dispositions maybe the range that you are seeing in your market?

Okay. Now, I will let maybe Tom touch on that a little bit.

Well, that, this is Tom I mean dispositions that’s difficult to determine on what the sale cap rate is going to be. I mean it varies depending on the building, but given what we are selling, I mean we are basically achieving market results, but some buildings have little or no income in place. And so it’s difficult to provide a cap rate on those. Those are really more price per square foot. So, it’s really impossible for us to say I mean we are really looking at getting more focused through dispositions rather than what the sale cap rate is.

Got it. That’s helpful. Thank you for the color. And then maybe also in the quarter, it looked like there was a bigger focus on limiting the tenant improvements. Was this more of a focus on strategic properties or a broader market improvement?

Well, I think if you are looking at the lease schedule that really wasn’t the conscious decision again, I have to keep myself, but our portfolio is relatively small in those commercial segments. So quarter-to-quarter, you can have pretty significant variances on what the TI level is, what the commissions are, what the rates are. And so it’s I guess really no conscious trend, it probably was just more deal specific in there.

Actually, Dave, if you on Page 8 of the 8-K there was actually quite significant tenant improvements in the quarter.

Okay.

We can take a look at that, but I think that the conscious decision on tenant improvements on property that we are looking to sell into make sure that you will realize that cash when you upon sale that it’s a good tenant when you put in.

Okay, that’s fair. Thank you for the help. That’s all for me. Thank you.

Thanks, Matt.

And the next question is from Rich Anderson of BMO Capital Markets.

Hey, good morning everyone.

Good morning.

So, Tim with the kind of the new kind of refocused strategy going forward, regarding dispositions, is there – I know you are still targeting ‘15 – fiscal ‘15 for dividend coverage, but is it now like pushed back later in that year or earlier? Is there any change from this activity you expect to accomplish?

No, I would say again it’s a continuation of the strategic plan maybe as you said it’s little more focused.

Right.

Obviously the impact of the Chateau income set us back as Diane discussed approximately 880,000 in bottom line revenue. And so that maybe sets us little closer to the end of fiscal ‘15. So it just extends that a little bit. So if you look at that 880,000, that’s $0.75 or thereabout that we didn’t anticipate due to the flier, but set backs up a little bit, but we will continue to push and move that forward.

Okay. Tom, you mentioned leverage creeping up over 50%, do you have a – is that kind of your long-term number 50% plus or minus or do you think that the company and maybe this is the question for Diane or whomever, is the leverage target somewhat lower call it three, four years from now after you kind of get through this process?

Well, that’s hard to predict, but I think it’s just looking at the best available source of capital for purposes of executing on the strategy. And as the loan markets continue to get healthier and healthier, we are certainly seeing a very attractive opportunities with a number of our long-term lenders. So, hard to predict where the leverage would be. That’s going to depend a lot on market conditions three, four years from now, but we certainly remain committed to a very conservative approach on leverage and the vast majority of the debt is going to remain fixed. So it’s just one slight change we’re possibly considering as we come into the new construction season for 2014 and 2015.

Okay. And as it relates to dispositions could you quantify the amount of office sales potential in that 12 to 18 months period?

Well again that’s going to be difficult to quantify I mean it’s really going to come down to picking out those assets that do not really fit any longer in that segment, outliers, poor performers from that standpoint. But I think it’s safe to say that our disposition level is going to remain heightened. So I mean if you look back over the last 12 months and what we’ve disposed off and what Diane’s comments are I would say it’s reasonable to assume we’re going to maintain that level.

Okay. And is it like kind of in a perverse way a good thing in a sense that if you sell assets that are under-occupied you sell home at a I don’t know five cap I mean maybe I’m being a little extreme, but that – it is in fact an accretive event to sell some of these assets?

Yes. Obviously there is a couple of ways to make money in real estate. One is through the revenue and the other is eliminating expenses and so those assets that are negative drags or don’t add anything to the bottom line, you’re exactly right. And that’s why you can also see and expect some fairly dramatic shifts in occupancy because lot of these commercial segments, the vacancy is confined to a handful of buildings. And if those buildings are disposed off that also impacts the occupancy levels, but yes you’re exactly right, those are the buildings we’re looking at.

And who would be like the type of buyer for an asset like that?

I guess we’ve seen a whole range of buyers as we discussed previously I mean there has been some institutional interest; there has been some private fund interest. We have 10/31 buyers that are exiting out of other types of assets primarily multi-family or farmland that our historic high levels. And owner occupiers are owner users that now see a good time to get into assets and then private individual investors that are able to provide more time and better intelligence in those markets that we’re exiting. So it’s a broad range.

Okay. And then my last question is kind of back to the balance sheet. I assume now it’s not maybe the time to be considering the equity markets but I mean is that a consideration at some point down the road. Can you just talk to us about how you think about equity at this stage in the game?

Rich, it’s Tim. I guess if you look at the equity needs obviously that will be part of our capital plan going forward. We want to continue to look to use those disposition proceeds as the ability to fund our development projects but probably are ways out I would think from an equity perspective and that will be part of the capital plan and stack. But we’d like to see the stock recover and move a little bit pricing wise before we tap the equity markets.

Okay, alright, great. Thank you very much.

Thanks.

And our next question comes from Michael Salinsky of RBC Capital Markets.

Good morning guys.

Good morning, Mike.

Just with respect to the capital plan I want to put some parameters around the numbers, just try to see kind of where we’re heading here as you completed the strategic process. Can you give us a sense as you look at the portfolio today how much would you – how much falls in that core bucket versus non-core bucket? And as you see the portfolio moving forward, what’s the rate allocation to healthcare and multi-family versus the other sectors maybe where you are at today versus where you expect to be call it 18, 24 months from now?

Mike off the top of my head I was thinking as we’ve discussed in the past larger percentage of our portfolio being in the multi-family, part of that 35 to 40 large components than being on the healthcare segments which would include senior housing and our (MOB) of 35 number somewhere in there than looking at the balance of our portfolio holding the better quality commercial office and some identified potential industrial and or retail may go along mixed use in our multi-family.

Okay. That’s helpful. But in terms of how much of the portfolio today would you – falls within that non-core bucket?

I’m trying – again I would guess probably at 15% to 20%.

Okay. In terms of dollar volume I mean what realistically this is worth thinking about sources and uses and funding the next kind of run of development?

Maybe Tom if you can help me here a little bit.

Yes. Well I guess Mike I mean to go back to what – we don’t really have any set targets on what we’re going to be percentage multi-family and healthcare. I mean I think the limiting factor is going to be we need to make money in these segments and so we’ll continue to grow in those segments as long as there is accretive opportunities available and we can grow our earnings, grow our FFO and all the good things that come from that. In real estate someday that’s going to stop and that’s even going to stop in multi-family for a period of time and it’s probably going to stop at healthcare. And so it’s hard to predict at what point that’s going to occur but we monitor that very carefully. And we’re not going to invest into segments that are not going to be accretive for the company and benefit the shareholders. As far as non-core assets again that’s hard to predict I mean Tim is probably right to say that if you look at our portfolio today commercial retail, commercial industrial how small those two segments are. There’s probably a $150 million to maybe $200 million left in that category. So if you fully exit that, if we fully exit that, that would be one number, but there aren’t any immediate plans to do that. And then commercial office currently at about 30% of the overall portfolio, $500 million or so give or take a little bit. I think again if you look back over our disposition history which has been heightened over the last 12 to 18 months that’s a pretty consistent number of what I think we would seek to do over the next 12 to 24 months.

Okay. Just as we’re thinking about dispositions than in light of different coverage I mean what’s a realistic target for the next kind of 12 to 18 months in terms of dispositions?

Well again I think it’s going to be the same as what we’ve been doing. I mean I think we’ve had a heightened disposition strategy over the last 12 to 18 months. And I think we’re pretty comfortable with what we accomplished and see that as a good proxy going forward. I mean we’re not going to give these assets away and we’re not under extreme pressure I mean coverage from a percentage point is one issue but from a dollar standpoint which I think we’ve discussed the difference between where we’re at and where we need to be really is not that great on a dollar basis. And so we’re not going to panic and get into wholesale, fire sales on our commercial portfolio. We’ve got some good assets in there and some good contributors. And so I think we’re comfortable with what we’ve done over the last 12 months and I think that’s a good number to use going forward which I think Diane referenced about $80 million of dispositions year-to-date. So..

The dispositions they’re going to be a part of achieving that AFFO coverage, but the development properties coming online, hitting their marks that’s really going to be the primary factor to hit our AFFO coverage.

Right. Yes.

Okay.

Yes, selling is not a growth strategy and so it’s part of it but it’s not our primary focus.

That’s a funding strategy I mean if you’re selling assets for development I mean…

Correct.

On Chateau I mean is that – is – I mean is there any the property was burned down by the fire. What’s kind of the new timeline on that in terms of direction?

This is Tom. We’re going to rebid all the material subs for that, we’re doing that right now. This time a year it really doesn’t paid to start at this point in the spring, you’re not really going to get any timing advantage. So the anticipation is it will come back out of the ground probably early summer 2014. So it’s going to be probably fourth quarter of fiscal 2015. So it will be a nine to 12 month process before we finis that project up.

Okay. Then finally just on the commercial side, you mentioned you’re on target at your leasing targets on the commercial side for the year. Any vacates or large leasings we expect to be commencing in the next couple of months?

No.

No, yes I mean nothing out of the ordinary.

I appreciate the color. Thanks guys.

And the next question is from Carol Kemple of Hilliard Lyons.

Good morning.

Good morning, Carol.

Good morning, Carol.

The 10-K you said under the tax section that you all got a property tax relief credit in North Dakota. Is that a one-time credit or is that expected to continue?

This is Tom. The legislation is for two years and it’s difficult to measure the impact in North Dakota because North Dakota basically builds in arrear so to speak. Your property is assessed or the values determined in the February of the year but then you don’t know the mill rate or the mill levy until December at the earliest. It looks backward for that year but the legislation that triggered this was for two years. And of course North Dakota legislature meets every other year, it’s not every year. And so hard to predict what they will do but obviously if you look at the revenue that’s been generated due to the energy taxes and if you look at the positive variances in the North Dakota budget in the surplus it’s possible or reasonable to expect that it might be extended.

And is this the first quarter that you all received that credit?

Well it’s for the year so that number is a yearly number, but…

That was for calendar 2013.

Right, but..

You’ve to look back.

To look back but you don’t like I said you really don’t know the whole year until that third quarter. So we’ll probably have something similar next year.

Okay, next year and the third quarter as well?

Yes, it shouldn’t be as dramatic because I think we’ll be able to accrue a little bit better for it because now we know what the process is. The other real estate taxes are a two-pronged approach, one is your assessed value and one is your mill levy. So you can have a reduced mill levy but what we’re seeing also is heightened valuations in a lot of our markets. So the mill levy may go down but it’s lower mill levy applied against to higher value results in the same number. So, there is a lot of pressure around our market still from local jurisdictions to raise money to real estate taxes. So…

Okay. And then when you all talk about you’re going to look at your retail portfolio to deemphasize it. At this point I know you haven’t given a in-depth. Are you thinking it’s going to be – you’re going to sell off 25% of your retail 50%. Is there any kind of rough number you’re thinking at this time?

No, no, no rough number. I mean we’re valuating it, some properties are appropriate for disposition, some really are not ready due to what the underlying debt is, maybe because it’s got yield maintenance or prepayment penalties but again there is no absolute strategy that all of this has to go. I mean again we’ve got extremely good performing assets in the retail segment like the industrial and then the office. That just cannot be replaced from a return standpoint or an income standpoint and are still in the prime of their lifecycle. So again difficult to predict which ones are going to go or what percentage.

Okay. Thanks.

And the next question will come from Craig Kucera of Wunderlich Securities.

Yes, hi, good morning guys.

Hello Craig.

Good morning.

I’m wondering if you could comment on the drop in multi-family occupancy, your stabilized properties are I know it’s been roughly cold in the upper Midwest and probably had an impact on traffic. But do you have any thought on maybe what that impact might have been?

Well this is Tom. Yes I mean that historically is the worse quarter , there is not a lot of traffic for a number of reasons primarily the holidays and then of course this winter did not help was pretty I mean basically our entire markets or all regions were impacted by either extreme cold or incredible amounts of snowfall which impacted it. And additionally when we go back and trace this it really goes back to just a handful of multi-family assets. I know we don’t repot by underlying market segment but it really goes back to just a few assets. And so if those were removed or eliminated it would be a much different story. But nothing from a trend standpoint or concerning the occupancy demand level still remain heightened in pretty much all our markets for new product from that standpoint.

Got it. So does that mean I mean just given weather related issues, would you expect demand kind of the pickup or have you seen any improvement in trends kind of as we enter into February, March as far as traffic level?

Yes. That’s the expectation. I mean this is traditionally the strong, one of the strong leasing times of the year as people kind of get set for this spring summer plans along with August and September. So yes our expectation is increased traffic going forward.

Sort of along those lines when we think about your margins, I think your NOI margins have actually been on the nice upward trend for the last three, four quarters. You attribute that – is that primarily just improvements in occupancy in your office and healthcare or are you having any better expense controls?

Well expense controls are always a big important component of that. But yes it’s primarily occupancy especially on the commercial because really occupancy provides two benefits, one it removes the additional expenses that flow back to the landlord because those are now recoverable as part of the commercial lease or mostly recoverable. So occupancy has an outsized positive impact in the commercial segments from that standpoint.

Got it. And kind of going a little further into commercial, you made a comment earlier in the call on office and how you’re seeing a I think you mentioned a shift in space needs? And I was just curious if you could provide some additional color on kind of what you’re seeing your tenants and tenants in the market kind of warning today versus a year or two ago?

Craig, this is Tim. As I mentioned earlier on in my comments talking about space needs; we’ve really seen a reduction and in some cases 225 per square foot – square footage per person down to maybe 150 even as far as 125 per person. Obviously the challenge for that is more people in the building needs for parking which creates some challenges for us on some of those properties, they’re really just an overall reduction in per person space needs.

Okay. Thanks. And then finally when you look at healthcare is there a certain segment that you find more traffic today, is it assisted living, is it MOB, what is more appealing to you in the current environment?

I think both are. We continue to be the largest owner in the Twin Cities of MOB space a private owner so to speak. And then so that gives a strong foothold to take advantage of those. As I mentioned build-to-suit opportunities and relationship driven transactions and then as we’ve built our senior housing portfolio again we’ve been very active in those treasury markets that we know well. And with our operator and we certainly see two-pronged approach being an opportunity for us to stay in that – those two segments of the healthcare industry.

Okay, great. Thanks a lot.

And this will concluded our question-and-answer session. I would like to turn the conference back over to Tim Mihalick for any closing remarks.

Again, thanks everybody for taking the time this morning to listen to our update on IRET. We’re excited about where we’re headed. We like the strong economy. We continue to be exhibited in the upper Great Plains. We feel well positioned as I’ve mentioned in the past provide real estate needs for those people or in those companies in this part of the country. Again, thanks and have a good spring.

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