Whitestone REIT (WSR) Q3 2012 Earnings Report, Transcript and Summary

Good day and welcome to the Whitestone REIT Third Quarter 2012 Earnings Conference Call. Today's conference is being recorded. At this time I would like to turn the conference over to Anne Gregory. Please go ahead, ma'am.

Thank you, operator. Good morning, and thank all of you for joining the Whitestone REIT third quarter 2012 earnings conference call. Joining me on today's call will be Jim Mastandrea, our Chairman and Chief Executive Officer; and Dave Holeman, our Chief Financial Officer. Please note that some statements made during this call are not historical and may be deemed forward-looking statements. Actual results may differ materially from those indicated by the forward-looking statements due to a variety of risks and uncertainties. Please refer to the company's filings with the Securities and Exchange Commission, including the company's Form 10-K and Form 10-Q for a detailed discussion of these risks. Acknowledging of the fact that this call maybe webcast for a period of time, it is also important to note that today's call includes time sensitive information that may be accurate only as of today's date, November 8, 2012. The company's earnings press release, third quarter supplemental operating and financial data package and Form 10-Q have been filed with the SEC. The filings are on our website, whitestonereit.com, in the investors' session. Also included in the supplemental data package are the reconciliations from GAAP financial measures to non-GAAP financial measures. And with that let me pass the call to Jim Mastandrea.

Thank you, Anne, and thank you all for joining us at this early hour in the morning. Today we are going to review our third quarter operating results and update you on the recent progress of our initiatives. My comments will focus on the continued execution of our business strategy, which is built upon and operates around the community center operating model. Dave's portion of our call will focus on our financial results and the overall strong financial condition of Whitestone. As we have stated on our previous calls, our focus for this year has been on creating value through lease-up, redeveloping and repositioning, and acquisitions of value-add properties. For the balance of 2012, and in 2013, we will continue to focus on these business drivers, as well as begin our program of selectively selling assets which have limited upside, and deploying the proceeds into new assets which we believe will provide greater value. I will comment further on our capital recycling program later in my remarks. We acquire, own, lease, manage and redevelop community center properties in high-growth markets. We focus primarily on service-providing tenants rather than traditional goods-oriented retailers. This tactic drives cost traffic into our centers. Our tenants provide a strong base of revenues, which minimizes Whitestone's downside, as no individual tenant impacts our revenues by more than 1.2%. Our tenants tend to occupy smaller spaces, typically less than 3000 square feet, that meet the needs of individuals and families within a 5-mile radius of our properties. In the third quarter, we further grew our customer base to a tenant count of 1051, an increase of 201 tenants or 24% from one year ago. Our average small space tenant tends to sign shorter term leases, which we prefer, because it gives us the ability to go back…

Thank you, Jim. I will start by reviewing our balance sheet or financial position, then turn to a review of our key operating results, and conclude with a few comments regarding our outlook. During the quarter, we continued to strengthen our balance sheet by growing our real estate assets by $85 million, or 28% from the second quarter of 2012, and $148 million or 61% from a year ago. We also strengthened our balance sheet by lowering our weighted average interest cost as of the quarter to 4.7% as compared to 5.6% a year ago. We strengthened our balance sheet by successfully completing a 4.8 million common share offering in August, raising net proceeds of approximately $60 million. The offering was significantly oversubscribed, and we were able to fully exercise the over-allotment, and most importantly, put the proceeds accretively to work in acquisitions of high-quality community centers in under 30 days. We strengthened our balance sheet by lowering our ratio of debt to undepreciated book value to 41%, down from 45% as of the second quarter, and we strengthened our balance sheet by increasing our pool of unencumbered properties, that is properties without secured financings, to 23. The cost basis of our pool of unencumbered assets now exceeds $185 million, which represents approximately half of the cost basis of our total assets. Our $125 million unsecured revolving credit facility remains largely available, with $80 million undrawn as of the end of the quarter. During 2013, we have approximately $80 million of debt which matures, $14 million in June and the remaining $66 million in October. $56 million of this debt is at fixed interest rates with a weighted average interest rate of 6.3%. The majority of this debt is with insurance companies and was entered into during late 2008 with…

Thank you, Dave. Let me summarize and say that we are very pleased with the results that our community center property operating and value added investment strategies have produced. Our internal growth opportunity remains robust, given our headroom in occupancy, our redevelopment opportunities, and our short-term leases. Our substantial acquisition pipeline offers opportunities for additional external growth, and our balance sheet is strong with low debt leverage, providing us with financial flexibility and the ability to move very quickly to capitalize on acquisition opportunities. With our plans to refinance in 2013, we expect to lower our overall cost of capital and add additional funds from operations per share. And with that I would like to conclude the review of our results, and operators I will turn the call back to you.

[Operator instructions] And our first question we will hear from Paul Adornato with BMO Capital Markets.

Jim, I appreciate all of the color regarding the embedded upside, I was wondering if you could just talk a little bit about balancing embedded upside versus going out and acquiring new value add properties, that is the near term deletion, if you will, from acquiring assets that are still in process, if you will, in terms of achieving their stabilized returns.

Paul, what we look at is our -- the cost of our debt, which continues to go down, and it's going down now by almost 150 basis points to 200 basis points. So what we're looking at is properties that have in place cash flow that meet or exceed our dividend rate currently, so that we can bring that in line and pick up the spread. And we utilize our line of credit to do so until we have significantly achieved the excess of FFO over our current dividend rate. We look at that and that is one of the things that we have struggled with is that we pay $1.14 a share in dividend, and every time we are so close to exceeding it, we have done a secondary offering because of the opportunities that are available. We are very careful to buy properties that have cash flow, but also have some equity component significantly, and then we try to balance the overall volume of our acquisition activity so that we get cash flow, plus we have that upside opportunity, and that is how we see the embedded intrinsic value of the properties.

And on the topic of the dividend, I was wondering if you might talk a little bit about the timing of getting to full coverage.

Sure, Paul. This is Dave. So when we look at -- really the biggest driver for getting to coverage in the short-term will be, as Jim mentioned, additional acquisitions and then using the spread we have on our debt cost. Today's leverage is approximately 40%. We feel very comfortable doing $60 million to $70 million in acquisitions using debt, bringing that leverage to a little under 50%. And the contribution of that pretty much brings us very close to dividend coverage. We expect to do that in 2013. The other areas we have for and obviously will contribute, I think we mentioned lease up. If you look at our Houston region, over the last couple of years we have leased up Houston from 83% to 87%. It is always difficult to predict the timing of lease up, but we feel very confident that that region can lease-up into the 95% range, and we have a track record of doing that over the last couple of years. If you look at the assets in Phoenix, as you mentioned, we have acquired properties that have a little bit more vacancy, but obviously have a lot of upside. So we are very confident in our ability to lease-up Phoenix, which will contribute as well in 2013. And then as Jim mentioned, the overall lowering of our cost will partially contribute to 2013, and really more fully contribute to 2014. So we feel all of those items will help us to get to the dividend coverage in 2013.

Dave, let me add to that. Paul, one thing I would like to say is that we spend a considerable time discussing our dividend with our trustees, and they really look at and we look at as well financial projections, of course, based on the actual information that we have, and the data that we provide them so that they can make the dividend decision. What I would like to say is if they had any concerns at all, or any doubts, that that would come forth very quickly from our board.

And next we will move to Joshua Levin with JMP Securities.

Curious, can you just flesh out some additional details on the asset sales, possibly types of properties, location, whatever information you could possibly share with us?

Sure. For example, when the assets were rolled into the REIT a number of years ago, we have some properties that -- for example, we have 19 town homes, down southeast of Houston that are very well occupied, threw a lot of cash off. They were converted to office buildings. We can't do anything with it to get any more value out of them. I mean we can lease them, we can roll them over and increase the rents on them, but we have no land nearby, it is completely surrounded. They are very small in terms of the time we take and manage them. They have cash flow, they are like little cash cows. But we can't get any upside out of them. And the kinds of returns that we are seeing to buy properties, for example, like Dana Park, when you can buy a property like that, and really focus attention on it, where we have over 0.5 million square feet of space of our type of product, and then development opportunities, it is not to our shareholders' best interests to continue with these small properties. We have another -- 2 other small assets we are looking at down in that area. It is called Clear Lake, and it is about an hour to an hour and a half southeast of Houston. And we just think they are great little assets. They have a value to all our investors, and we just think there is some -- still a terrific pipeline that we have to redeploy that information. Dave, do you want to add something as well?

The only thing I would add is, obviously anyone that has an investment of benefits, we continually evaluate the properties we have. We look at the financial returns, the expected future returns, and we are looking just to redeploy capital into other assets that obviously produce a greater return. If you look at the 11 properties we have identified, they tend to be, as Jim mentioned, smaller properties, fit less nicely into our operating model, and then really many of them also are not among our better performers. So they tend to be underperformers. As we mentioned, we are going to begin listing some of these properties. Obviously getting the right selling price is important. So we're looking to redeploy capital through selling some of these smaller properties. They are all in our Texas market, and we will, based on the prices we are able to get, really will make final decisions on redeployment of that capital.

And just by comparison, Mitch to -- Josh, to our business model, moving ahead -- and that is when we buy a property, we look for anywhere from 5% to about 30% of the in place square footage, where we can add additional square footage, about 5% or 30% regardless of the size. We always have that kind of upside built into the property. And the other upside we look at is if can buy -- when we are buying something that has not full occupancy, how we can get it up to stabilized occupancy. And by doing that, we just have some embedded upside in these properties. The properties we look at to sell, when Dave says they are not performing the way we want them to, that means that you just can't get any of that upside in, and that is what we are -- We're revved up to look at upside in every deal we have.

So, the likelihood is you are not going to be selling anything that you acquired in Phoenix, and stabilized at this point? You are really looking at some of the legacy properties, correct?

Yes, legacy properties, and then what we will do is we will look to redeploy part of that or maybe all of that assets in the Houston market. The Houston market is absolutely booming right now. And we are planning to buy some assets that we think are coming our way, that have some problems with them. And we are beginning to -- our reputation is beginning to get more solidly on the radar screen, where a lot of banks that are looking to close quickly are bringing deals to us.

And there are no tax indemnification issues with these properties, correct?

That is correct. No issues.

Okay. And then how do you approach, I think you talked -- I know it is probably small, we talked about the town homes, how do you approach -- you talked about that they are a cash cow. How do you approach your dividend with regards to selling cash flowing assets versus acquiring more value adds?

So, if you look at these group of assets we have identified, they only contribute about 10% of our NOIs. So while the town home was producing a decent cash return, we expect to be able to redeploy the proceeds into assets that have a -- both a better in place cash flow, as well as greater upside. So I think the answer is we expect to redeploy proceeds accretively for dividend coverage and for best value creation.

Great, and then Jim, I always appreciate your commentary on the acquisition pipeline, a, and then b, are you seeing any tax-motivated sellers concerned about the potential rise in cap gains tax?

We are, but not cap gains so far. The ones we're talking to are sellers who are underwater in terms of what they have invested, and they are looking at a part of our -- using a part of our OP Units to avoid any recapture dollars they might have to pay. For example, we have 2 assets we have been in negotiations with it seems like forever; I'll give you just an idea of it. I won't identify the properties. It is about $100 million worth of properties, and they were bought at a TIC at that level. We value it at around $36 million to $37 million, and they're with a servicer, and the debt on it is around $49 million to $50 million. So, there is no way that these TICs are going to recover their $100 million. In fact, it will be questionable whether they can recover enough to pay for the debt. Now that deal hasn't come to us yet, but we have been doing due diligence. So if and when it does, we will be prepared for it. What we are finding is, we are still working with the sellers of the property, who are really the managers, the TIC managers, who are trying to avoid the tax consequences of the investors that came into their properties that will have a significant recapture. So those are the kinds of things that we are seeing, Josh.

Great, and then it seems like the University of Phoenix move out is something new, or at least new to me, I don't recall hearing about it previously, it may be a rather new development, but what are the prospects for that space and does it require any fix up work to retenant it to a more traditional user?

That came as a surprise to us too. They haven't moved out yet. They are expected to move out I believe in the first quarter of next year. We have talked to them. That space is a great space. It is an end cap. We put significant improvements in it. They put improvement in it. They probably have close to $2 million remaining under their lease term. It is corporate guaranteed. And so they are working to look for a tenant for it. We have the ability to look for a tenant as well, and we will work with them on the remaining rent as well. But right now we have got the cash in place, and we are not really concerned about it. We're disappointed. We are not concerned about it from a financial perspective. But one of the reasons why we like to have the types of tenants that we have is that no one single tenant, including them, I don't think impacts us more than that 1.2%. So that is what we like about that Josh.

[Operator instructions] Next we will move to Paula Poskon with Robert W. Baird.

Well, thank you. Could you give us a little color on how you are thinking about the retenanting opportunities in the assets of Phoenix that you bought?

Sure. We have, first of all in Fountain Park, which I had mentioned earlier that we purchased, that was in the 8% range cash on cash. It was 70% occupied. We have just completed the TI and moved in a tenant called Planet Fitness. We also have, we are negotiating a lease and a, with I want to say a -- not a cosmetology, but a Botox center. A spa, Botox, and I guess I call them -- Ann calls it a spa; I call it Botox centers. And they actually have a really strong balance sheet. So that will really work towards adding tenants there. We have in Dana Park, we have a couple of tenants that were interested in the property before we took it over. And what we found was the -- because it was going into a short sale, the owners of the property weren't willing to put any additional cash in the TI, and so our deal was with the bank in place, and the sellers in place, it essentially amounted to a short sale. So we now are working with those tenants, and we may have anywhere from 25,000 to 45,000 square foot of tenants in place in the first half of 2013 at Dana Park. We also have -- it is interesting there, and you haven't seen the properties yet, I don't believe. But we will -- we have 6 out parcels, and these out parcels are fully developed, and we are in discussions with some restaurant operators that want to do ground leases on those properties. So, we have got a number of potential tenants that we think that will start filling in some of those properties. We also -- probably more importantly is that we put a team together out there that has 2 very experienced with the marketplace Phoenix individuals. One is the leader of the team, which is Richard, and the second is a fellow named Chris, and Chris was with a major company -- it was a development, owner operator out there that was essentially struggling and he was with them for I want to say about 7 or 8 years. He joined us about 30 days ago, and he brought with him 4 or 5 classic rolodexes filled with potential tenants. So we have got a lot of activity in that Phoenix market right now.

The only thing I might add, Jim, just a couple of points was, as -- , Paula we're very research driven. So one of the things we do in all of our properties is really understand the surrounding community. We look for the services that are underserved, and so we are in the process of that obviously in all of our assets, and we will look to add tenants in Dana, Fountain Square, and the other properties that will tend to be smaller, service-based tenants that really meet the needs of the surrounding communities.

And then could you just characterize a little bit the acquisition pipeline, or the opportunities that you are seeing? And would any of those represent entering into new markets, are you focused on just growing footprints in your existing markets?

Yes, that is a good question. The $400 million or $500 million that we have right now is primarily in the Phoenix marketplace. What we'd like to do is to acquire about another $100 million in Phoenix because we think that there is still that much remaining of the kind of quality of assets we like. And then it could be getting a little thin, although we think that maybe only 20% of the assets have freed up that are really distressed. A lot of them have gone into the service companies, and the service companies will hold them for a few months. So, it takes some fees off them and then they roll them out, and we are usually pretty well at the top of their list right now. We're looking at some assets in Houston. We are focused in -- on any place we have kind of an anchor asset, which like is in San Antonio, or in Dallas, or Houston. We are looking at those markets very carefully. We are not as focused on Chicago. We have one property there. We think there is growth in our type of business there. But we are reluctant to do so because of the tax changes that have taken place in the state, and what it costs to do business there. Now, our property, when we acquired it in Chicago, it was close to 90% occupied. It is now about 95% occupied. So it is cash flowing very, very well. But there is a couple of things in Illinois that are a little more troubling to us. One is the corporate income taxes that you pay when you are out of state, which is new to us. The second is the rights of owners versus the tenants, and the rights are biased to the tenants versus the owners. And so we like to say as long as we can buy properties in Texas and in Arizona, that we think we have an advantage of how we operate, plus we don't like the cold weather as much anymore.

Can't argue with that. And then finally, in terms of your acquisition opportunity sourcing, are you sourcing most of those yourselves independently, or are you responding more to marketed transactions?

We have a team of well-trained, well-experienced snipers, and they have these scopes on their acquisition rifles, and they are out doing one at a time deals.

And we will move on to Carol Kemple with Hilliard Lyons.

I was looking at your other revenue line item, and it looks like it was about 57% of your total property expenses in the quarter. Is that a good run rate going forward, or should we expect that to be a little higher, or a little lower?

I think it is a good run rate. I'm flipping myself to look at it. There was nothing really unusual in the quarter on our other revenues. Our other revenues are primarily reimbursements of CAM taxes and insurance from our tenants. So, I think the quarter -- I tend to look at a little longer period, but the quarter to the 9 months should be a good run rate for us.

Okay, and was there anything in particular that drove the negative leasing spreads in the quarter? It looks like you have had a couple of quarters of positive leasing spreads, and this quarter it looks like they ticked down a little?

Leasing spreads to me are you got to look at a longer period than a quarter, especially with just the number of leases that come through each quarter. So while the quarterly leases, I think it was a small amount of leases were signed, were a little more negative than in the prior quarter. I tend to look at a rolling 12 month period. So if you look at our rolling 12 month period, the spreads were up about 4% on a straight line basis and I think down about 4% on a cash basis. We think that the run rate for our lease, about a 4% increase on a straight line basis, and until we see more quarters, we tend to look at a 12 month number as opposed to a one quarter number.

And then on dispositions, can you quantify either or square footage wise the amount you are looking to sell and any kind of proceeds that you all would just expect today kind of based on tax assessment?

Square footage wise we are looking at -- it is probably less than 10% of our square footage. So we're are looking at a small amount of square footage, these are smaller properties, and then from a cost basis, it is similar; less than 10% of our asset value. Obviously sale price is dependent on a buyer. So from a cost basis these tend to be properties that we have a nice cost basis in, and we are hopeful to be able to sell the properties at a gain.

I would say the first tranche of sales would be somewhere around 150,000 to maybe 200,000 square feet, maybe even less than that.

Is that the first 3 or so you are marketing?

The first 3 we are looking at. We haven't marketed them yet. We haven't signed a broker yet. The first 3 would be somewhere between 100,000 and 200,000 square feet.

And our final question today will come from Ronald White [ph] with Value Forum.

I always appreciate these quarterly calls. I have a 3 part question, which I could ask at one time if you would like, or I will ask each one individually. Let me do them individually. The first one is I read in one of the analyst reports going back a month or 2 that you have a long-term 5-year goal of holding about $1 billion in assets, is that basically correct?

We do -- it is probably actually shorter than 5 years, but our first goal is $1 billion, and the next is $3 billion. We think we can take this operating model up to $3 billion without too much effort because we have got the systems in place to do it. And we have got the people, and in particular we have what we call our REIT, our executive training program, so that we continue to advance the culture and philosophy of this business model.

Okay, then that leads me to the question I had, as you grow your business over the years from $1 billion -- up to $1 billion, up to $3 billion whatever, do you envision the same type of business model you are having now, and just the same cities you are in, or do you see yourself changing the model a bit, and maybe expanding into new cities like you are not currently in?

We would expand into cities that we think have the demographics to grow the type of properties that we like. We have been offered a lot of properties across the Midwest. For example, we were offered a -- the people who brought us Dana Park, brought us a similar asset, which is a lifestyle community center, which is an upgrade of a community center, the lifestyle, if you're familiar with those. For example, like some of the tenants include the California Pizza Kitchen and a Chico's, and you get some of those blended in with our service tenants. And it was in Indiana, and we felt we couldn't get the returns out of it in the marketplace, and then we felt the cost to get there, there weren't as many economies of scale. So we gave them a quick no. We have had a couple of very large portfolios of people who are tired of running portfolios, you could call them a company if you want, who looked for us to acquire their business, and because they were spread out too far, we felt that that just would take away from all the benefits that we have been building in our model. So we like being able to get on a Southwest airline or a Continental airline and go from Houston to Phoenix in 2.5 hours, and get a car and look at all of our properties in 6 hours. So we would be looking for -- that would be one of the drivers, the transportation to these markets, and how quickly we can get in and out of them and move people around because we find that that is a tremendous asset in doing business. So we are looking at markets that, once we think we are at capacity, we would probably go to another market like that.

Which, with your current model basically caters to Hispanic or Asian clientele. Is that still your model or would you open up community centers that just are in middle-class, working-class or upper-middle-class neighborhoods, where they have community centers that are not Hispanic and Asian?

We cater to Asian, Latinos, Indian, Anglos. We look at those markets. We have a lot of multiple language fluent employees in our company, and we hire them specifically because of that particular trait. What is important to our model, Ron, is that we really do a lot of research on a 5-mile radius around the property. And we do that while it is in our pipeline, and we look for characteristics that we can -- that jump out at us in the marketplace. I will give you a good example with the property we have in South Richey. Kroger had a grocery store. It was a 40,000 square foot building, and they were moving 3 miles away and they couldn't sell it to an Hispanic market. So that is one of the areas we are very good at. All the -- when their lease ran out, everything went to auction and all the HVAC was gutted, and all the refrigeration units were gutted. And so we had an empty shell there, and this was about a year and a half ago. We knew the strength of the Hispanic market. We found a Hispanic grocer called Bravo market. If you get into Houston, we would love to take you down and show it to you. It took us about 9 months to do the tenant improvements with them. They opened up just last week to a gangbuster opening, and it has just been going -- We expect they are probably going to sell in excess of $1 million a month out of that store. And all of a sudden, we have Dollar Tree, who has come in with a LOI, and we are negotiating a lease with them to go next to it. We have Hispanic dentist that we have signed a lease with to go there. We are down to about 1500 square foot of empty space from an empty property. And now we're getting some of these adjacent landowners, who want us to buy those properties. So we look at opportunities within the markets we are in, and then we -- but found an opportunity there just by studying the market when Kroger was there, and they just didn't want to operate in that kind of business. So it doesn't have to be Hispanic, it doesn't have to be Asian.

Okay. That was my question. The next question is very brief, and probably require brief answers, a lot of folks invest on Whitestone in tax-deferred accounts, or IRAs; others invest in taxable accounts, where obviously return of capital is a plus because of tax deferred. When I spoke with -- I think it was Jim, sometime ago, several months ago, I believe in 2011, your return of capital was about 66% based on my memory and notes I have, and I think the estimate for this current year we are in right now that's closing in a couple of months or whenever, is going to be about the same. I guess my question is, where do you see it this year and next year? I know you can't give me an exact number. It has to be calculated at the end of the year, but with all the growing you do, it is not just coverage of the distribution, it is also depreciation and a lot of other things that can go into return of capital. Do you see it continuing to be at or about the same level?

Good question, Ron. So, as -- one of the benefits of investing in a REIT is that the shareholder gets the benefit of the depreciation from a REIT, and it comes in the form of a return of capital. So we have -- had a higher percent of return of capital because of the growth, and because we are distributing a little bit more than our FFO. We expect that return of capital probably this year to be similar to the last year, and then begin to decrease as we go forward as our FFO grows. But you will still have a -- one of the real benefits is obviously there will still be a nice return of capital that comes from the depreciation expense that a REIT passes on to our shareholders. So shareholders have the benefit of not paying tax on a portion of the dividends.

Last question, even briefer: Even though our Fed Chairman said he's going to keep interest rates real low, probably into 2015, there are some very smart people that think regardless of what he's saying we are going to have an inflation problem. I happen to be in that camp and that will require interest-rate increases before 2015. If we have that and some inflation, what impact would that have on your model and the way you run your business?

I will talk to a couple of measures. So, we have about 60% of our debt is currently fixed rate. We will continue to maintain a mixture of fixed and variable rates. We will continue to evaluate that, and we think it is important to lock in some fixed rate, and to lock that in on long-term assets. Our current rate as we mentioned is above market because it was entered into in '08. So we think there is the ability to enter into new fixed rates at lower rates, and then obviously the variable rate loans are even lower right now. So I think we will continue to keep a conservative mix of fixed and variable rates. We will continue to look to ladder our maturities on our debt out for a period of time, and so right now we have some upside on the interest rate side, but we are going to continue to monitor that and obviously have a significant portion of our debt at a fixed-rate going forward.

The only thing I would add to that Ron is, one, is that as you know, it is good to be in real estate when there is an inflationary period, which could happen along with some of the things you are talking about. So we're trying to fix in on the best quality of assets in the best markets that we have tenants that will stay as you roll their leases over. But one of the things we do when we buy the value-added properties, we look at properties that if we don't -- we're not buying properties counting on inflation, but we're buying properties saying that if it is 70% occupied, and we just bring it up to a stabilized occupancy of 90% to 95%, that is a home run. If inflation comes along and pushes it with a tail wind, then that is even better than a home run. But we count on just getting properties up to stabilized, we think we win on those results. Another thing is that we at this time are trying to stay with, and we think we will do this for a significant period of time, one class of stock. We don't want to confuse investors, we don't want to make it difficult for analysts with having all different classes of stock. We have avoided joint ventures, and there are some really good ones out there, for a couple of reasons. One is we are vertically integrated and we do a lot of our work ourselves, but also it complicates it. If it is a relatively small cap company, it complicates the analysis that our analysts do, and we have some terrific analysts who are looking at our properties. So we try to keep it from getting complicated. In time, you will see the projections that are put on net asset value that as we get bigger, as we have a longer track record, they'll bring their cap rates down into that 7% or 8% from the 9% to 11%. Our lines of credit are based on the higher cap rates and we think that eventually we'll earn a lower cap rate on some of our properties. So, we think we're going to start freeing up a lot of intrinsic value in our portfolio over the next 24 months. That is kind of how we have been structuring it.

And that will conclude our question-and-answer session. At this time, I would like to turn the call back over to Mr. Mastandrea for any additional or closing remarks.

Well, thank you, operator, and I like to thank everyone who has joined us on this call. We look forward to these calls, and we look forward to speaking with you again on our year-end call, and hopefully in between now and then. If any of you would like us to meet with you, Dave and me, we would be happy to do so and just please let us know. With that we will say goodbye.

And that will conclude today's call. We thank you for your participation.