Elme Communities (ELME) 2003 Q2 法說會逐字稿

Welcome to Washington Real Estate Investment Trust Second Quarter 2003 Earnings Conference Call. As a reminder today's call is being recorded. Before turning over the call towards the Chairman, CEO, and President, Ed Cronin, Sara Grootwassink will provide some introductory information. Ms. Grootwassink, you may go ahead.

Thank you and good morning everyone. After the market closed yesterday, our earnings press release was passed during the interview. If there is anyone on the call who needs a copy of the release, please contact me after the call at 301-984-9400 or you may access the document from our website www.writ.com. Second quarter supplemental financial information is also available on our website. First, I must remind all of you at the onset that certain statements during this call regarding anticipated operating results and future events are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although such statements and projections are based upon what we believe to be reasonable assumption, actual results may differ from the projected key factors that can cause actual results to differ materially [inaudible] [change in the economy, the accessible time to] complete an acquisition, change in interest rate, leasing activities, and other related [inaudible] with the commercial real estate business and is detailed in our filings from time to time with the Securities and Exchange Commission. Now, I would like to turn the call over to Ed Cronin.

Good morning. With me today are Sara Grootwassink, our Chief Financial Officer from whom you've just heard; Skip McKenzie, our Executive Vice President, Real Estate; and Laura Franklin, our Senior Vice President, Accounting, Administration and Corporate Secretary. We all know from experience that all economic cycles are like a wind ranging from no wind to too much. At this point in our region particularly with modest job growth now are occurring and more growth predicted the outlook to modest to near-term improvement in real estate sector, the economy is positive, but the velocity is below range. We are still waiting for the expected Federal Government expansion, which in turn will drive the private sector growth. I am sure it is in progress, but, I believe, we are still several quarters away before it will be truly noticed in this region of this office market sector. Fortunately, in general, vacancies are not on the rise. Indeed in some sub-market, they have declined. In a moment, you will hear comments from Skip on general market conditions and specifically their effect on our portfolio. Based on a recent interview in total review of our annual projections for yearend and potential acquisitions around our pipeline, I am comfortable in reaffirming our earlier FFO guidance of $2.00-2.05 per share. I will now turn the call over to Sara who will take us through the numbers in more detail.

Thanks Ed. I will start with net income. As a note, all per share amounts are represented on a fully diluted basis. Net income for the second quarter totaled $11.3m, 29 cents per share compared to $11.8m or 30 cents per share in the second quarter of 2002. Funds from operations for the second quarter totaled $19.5m or 50 cents per share as compared to FFO for the second quarter last year of $18.9m or 48 cents per share, representing a 4% increase on a per share basis. After adjusting for recurring capital expenditures, tenant improvements, leasing commissions and a straight lining of rents, our funds available for distribution for the second quarter totaled $15.9m compared to $15.6m for the second quarter of last year. Recurring CAPEX has returned to a more normal level and we expect the run rate to be $1.5-2m per quarter. A reconciliation of net income to both funds from operation and funds available for distribution can be found in our second quarter supplemental financial report available on our website.

During the second quarter, we increased our quarterly dividend 5.7% to $37.25 resulting in a 75% FFO pay out ratio and a 92% FAD pay out ratio. Same store cash NOI for the core portfolio increased 0.2% this quarter over the same quarter last year. Same-store occupancy dropped in multifamily and industrial and increased in office and retail. Breaking out the same-store NOI result [standard] property sector, same store office sector cash NOI increased to 3.4% for the second quarter due widely to the new Sunrise Assisted Living as well as annual rent increases and decreased utility cost. Same-store industrial cash NOI increased to 1.3% over the second quarter of 2002 with the drop in occupancy from 93% to 86.4%. The increased vacancies occurred primarily in our Amendable property located in Baltimore Maryland; Sullyfield in Chantilly, Virginia; Tech 100 is located in the [DWI Quarter]; and [NBIT] in Springfield, Virginia. Correspondingly, expense reimbursement decreased with the lower occupancy levels.

Industrial market remains difficult but appears to be improving. Skip will provide an update on our portfolio shortly. Apartment same store cash NOI decreased 5.2% in the second quarter with occupancy of 91% compared to 95.3% in the second quarter of 2002. Keep in mind with these results include 37 of the 50 former hub units at the [Ashpi], taken off the market for renovation. The 37 units account for approximately 190 basis points in economic occupancy. As these units are completed, we will renovate the remaining 13 former hub units. We expect the first renovated units to begin leaping in August.

While the resale sector has held out better than the other sectors, same store retail sector cash NOI actually decreased 2.8% in the second quarter compared to second quarter of 2002, while occupancy increased slightly. The drop in same store NOI was due to small increase in bad debts reserve and primarily the recognition of lower recoveries in second quarter of 2003 versus second quarter of 2002. As always, the company takes a conservative approach to reserves for doubtful accounts. At June 30th our allowance for doubtful accounts was a 17% of cash base receivable and 12% of straight-line receivable. Our actual bad debt expense for the quarter totaled 1% of revenues on a cash basis and 1.3% of revenues on a GAAP basis.

While the economy has certainly taken its toll on the region, our smaller tender base is holding up relatively well. At this time there are no delinquencies of a significant amount. At June 30th our total market capitalization was $1.5b with $418m in debts, resulting in a debt to total market capitalization ratio of 28%. The company's debt service coverage ratio was 3.4:1 for the quarter. The 418m in debt outstanding at quarter end is comprised of 345m in unsecured debt and 93m in secured debt. For that period, the weighted average interest rate of 7% and a weighted average maturity of 8 years. Return on invested capital for the second quarter was 11.7%, down from 12.2% in the year 2002. Now I'll turn the call over to Skip to speak of our other markets in more detail.

As of June 30th our portfolio totaled 60 properties consisting of 11 retail centers, 24 office buildings, 16 industrial properties, and 9 multifamily properties. Our office portfolio was 89.6% occupied in the second quarter, relatively flat from the first quarter of 2003. In general, office markets have been flat to date, but leasing activity is increasing in most markets. Suburban markets are not experiencing robust improvement, to say the least. However, several large leases have been executed during the second quarter and the slow recovery is underway.

During second quarter vacancy including sub-let space in the Northern Virginia office markets improved slightly, decreasing from 17.8% last quarter to 16.7% at June 30th with a positive absorption of 1.6m sq ft. However, the large amount of available space which is 22.5m sq ft continues to provide downward pressure on effective run rate. At quarter end the vacancies within Northern Virginian sub-markets ranged from a low of 10.6% in Alexandria and 10.4% in Arlington to 23.2% in [inaudible] and 21.8% in Tysons. Arlington experienced positive absorption and a decrease in the vacancy. During the quarter several large leases were signed by federal government agencies and contractors and more are expected and needed to be completed by year end. Tysons Corner continues to be the market of most concern to risk. The vacancy rate including sub-leased base in the Tysons market was 21.8% at quarter end, effectively flat from year end. Leasing velocity is slow but improving and the best news is that there is no speculative construction activity taking place.

The West Northern Virginia office portfolio consists of 1,564,000 sq ft and it's 86.6% occupied. The downtown Washington DC office market continues to be the strongest in our region with quarter end vacancies of 6% including sub-leased space down from 6.2% at the end of the first quarter. Net absorption for the quarter in DC was 128,000 sq ft overall and 658,000 sq ft year-to-date. Sub-leased base increased during the quarter, providing economical alternatives for cost-conscious space [age], space choppers. Eight buildings totaling 2.5m sq ft are expected to be completed during the second half of the year, and since just one-third of the space is pre-leased, these new deliveries will add to the short-term vacancy rate and thus should provide downward pressure on rental rates. The WRIT DC office portfolio consists of a 199,000 square feet with 96% leased at quarter-end. The Maryland office market, primarily Montgomery county continues to be slow but relatively stable. Overall vacancy in the market rose slightly to 11.5% from 11.1% at the end of the first quarter. There was a decent level of leasing during the quarter, but there were also several blocks of space returned to the market. The problem in the market continues to be the scarcity of large and mid-sized users looking to absorb vacancies. Although overall vacancy is reasonably under control, the market is not substantially improving overall occupancies. The WRIT Maryland office portfolio consists of 1.6m square feet and was 90.7% leases at quarter-end. During the second quarter, WRIT released a 165,347 square feet of office space achieving a 1.3% increase in rents on a cash basis. There is an improvement cost in the leasing commission averaged $12 per square foot. Our office retention rate for the second quarter was 51.4%.

In summary, our office portfolio is holding up reasonably well despite lackluster market condition. Additions to supply have slowed significantly with the exception of the district. The Tyson's Towers quarter in the Northern Virginia continues to be soft. Significant blocks of vacancy will continue to post a flat rent in properties in this region for the foreseeable future. We are beginning to see signs of increased activity, however, the climb back to equilibrium will take time before significant [dense] in vacancies occur and rents increase.

Occupancy within our retail center remained strong at 95.8%. We have no un-leased or uncommitted blocks of significant size in the portfolio. The stability of this property type combined with our generally infill locations have served WRIT well. We continue to see rental rate growth upon lease explorations and we anticipate continued positive conditions going forward at our properties. During the second quarter, we released 84,965 square feet of retail space achieving a 54% increase in rents on a cash basis. Included in that number, but not in lease explorations, was the new lease with the national grosser of 37,650 square feet for the second phase of our renovation of Westminster shopping center. Our retail portfolio retention rate for the second quarter was 83.9%.

The apartment market in the DC metro area was relatively soft in the second quarter; however, we are now seeing increased traffic and slowly rising occupancy. Close-in markets are beginning to rebound and we have experienced increased occupancies over the last 60 days. Over the quarter, rents in [all] property products types remained generally flat to slightly up although price sensitivity continued to affect shoppers in many markets. Construction activity in the district, particularly the east end, has had a negative impact on occupancies and rents at all levels in the district, particularly the high-end and will continue to do so for the near future. Interest rates continued to make home buying attractive and markets with rents approximate debt service payments will continue to be soft. We are confident our mostly infill locations will service well and insulate us from this phenomenon as the economy recovers. We anticipate occupancies in the 92-95% range across our portfolio for the balance of the year.

Overall, we've been able to modestly increase our rental rates to grow over and occupancies have dropped year-over-year to 91% for the second quarter. Keep in mind that this occupancy rate includes the 37 former HUD units of [Ashpi] that have been taken off the market for complete renovation. Had these units not been included, our occupancy would have been 93%. As Ed mentioned in the past, the historical economic occupancy levels for apartments in this region is approximately 94% for high-rise and in the suburbs], it's 91% for Garden pipes. So as job growth continues to escalate, we should see improvement in this sector.

The Baltimore-Washington metro area industrial market, which was slow in 2002 and the first quarter continued to be challenging during the second quarter with an overall vacancy rate of 11.9% down slightly from 12.3% at year-end. While some sub markets are better than other, overall the weak economy has had an adverse effect on the small based tenant market, as tenant have been hesitant to expand and cost controls sub-lease space and bankruptcies have negatively effected occupancies. The overall vacancy in a region is 10.5% down from 10.8% at year-end 2002. Absorption is relatively modest and rental rates are flat-to-down. Overall there are 2.2m square feet under construction, which is down from 3.8m square feet a year ago. The first half of 2003, 2.1m square feet were delivered in the region at 48% leased upon delivery.

The WRIT industrial portfolio experienced a difficult second quarter as vacancies overall increased as occupancy for the quarter was 88%. The increased vacancy was caused primarily by three tenant moves totaling 60,000 square feet. We are now experiencing increased activity in the portfolio and expect improvement by the end of the third quarter. In the second quarter we released a 134,790 square feet achieving a 7% rental rate increase on a cash basis with $3.29 of TIs and leasing cost. Our industrial portfolio retention rate for the second quarter was 80%.

In summary although conditions in the region appear to be improving, we do not expect to see dramatic strides made in the third and fourth quarters of the year. However, we do expect the recent activity gains we have seen in all sectors to continue the slow [inaudible] and send back to a more [proper] time. Certain market [inaudible] sectors, such as office space in [inaudible] will take longer [inaudible] as the space [inaudible] but other sectors should rebound in a very steady fashion such as we anticipate in multifamily. We are cautiously confident that markets are on track for slow but steady improvement going forward for the balance of 2003 and 2004. Now we would be happy to answer any questions you may have.

At this time I would like to inform everyone if you would like to ask a question please press "" then the "1" on your telephone keypad; if you would like to withdraw your question press "" then the number "2" on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Our first question comes from Bill Camp of A.G. Edmunds

Good morning.

Good morning Bill how are you.

Doing all right. A couple of questions first is you bought a small little building in Alexandria, can you give an idea what the plans are for that -- I know that fills out that block?

Right that's [718] deficit. That is the bare feet in that block and what our plans are, we are in the process of going to entitlement process, itself at the moment, is as you know we have retailer on the front which is a key. The back is a parking lot with a couple of small of buildings on there, one of them being the recent purchase. We are going to scrap the site and we have plans build an apartment over a parking garage back there, and we have gotten our earlier approvals to first go around in meeting with Alexandria for the development process. We anticipate that we would start if we're successful, I should say with the development processes itself -- I anticipate to start construction in about 18 months.

What kind of return do you think you are going to get out of a project like that?

And Bill we're still working our construction estimates for this, but you know we're hoping to be somewhere at close to 10%, slightly below that, but again we are still finalizing how much it's going to cost to build this site.

And what's the progress on the other apartment complex that you guys are--?

We're finalizing plan.

And when do you expect to break ground?

Well if we move ahead -- we are looking at the market place right now, we are looking at probably a September start date.

Okay

And let me caution everybody, we are studying that market really hard and at moment we are prompting to go ahead with it, but we are still completing it to determine whether or now we want to start.

And can you just refresh me what do you think construction cost on a per unit basis is for that space?

GEORGE MCKENZIE Somewhere in the 200,000 per unit range.

Okay.

That's exclusive of land.

Sure. Can you give me an idea -- switching topics, can you give me an idea -- you had obviously significant increases in rents, in retail, you have got just a little bit of space left this year and kind of looking forward into next year. Do you think you are going to get those kinds of rent increases on what's coming [due]?

And you're thoughts specifically on the retail portfolio.

Yes just kind of curious I mean those were nice two increases.

Well, we always tend to be somewhat conservative when we're looking forward. I wouldn't project we'd have the increases we are seeing today. But we certainly expect double-digit increases on a percentage basis.

Okay. And my last question is kind of for Sara I think. Debt didn't change in the quarter but interest expense went up 500 grand.

Yes, I just recall last quarter we -- for most of the quarter, we had 52m out on our lines, LIBOR plus 70 basis points, and of course we re-financed that at 5.18% with 10-year bonds. So, that's the differential.

Okay. That's what I thought it was. All right, thanks.

Okay.

Our next question comes from of Ken Weinberg of Legg Mason.

Good morning Ken.

Good morning, how are you doing?

Good.

You guys report your occupancy numbers on a weighted average basis, I believe. Do you have what the lease percentages are, I guess, by property type at quarter end?

Yeah, it's an economic occupancy for the quarter, okay.

Okay.

We have those lease numbers, sure.

I didn’t hear the numbers--

These are lease numbers, Ken where office building were at 89.1% leased, where shopping centers were 97.4, and industrial were 88.6. For a total, if we added all three of those commercial sectors together, we're 90.6.

Okay, great. In terms of roll over exposure, you have about a -- roughly a third portfolio maturating over the next 18 months. Is there any I guess big known move-outs in there? Do you have a sense of where you would expect retention to be or what your guidance implies?

We have one rollout that we know we'll probably be doing, the Lockheed Martin. However, at the same time, its difficult to give you the numbers, and at the same time what is interesting is we know that they will going -- will be going out with some -- another piece of space in the building they want to rent. So you never know with these types of government contractors, it's difficult--

Sure. Ed pretty much answered the first part of your question. I mean, yes, the one known large tenant that we believe is going out is Lockheed Martin, which was formally we refer to them as OAO, which was a prior firm that Lockheed required. And there are 99,914 sq. feet. And as Ed referenced, there is a possibility releasing some of that. But as of right now, I mean, taking the most pessimistic scenario that’s in the [job vacating], and that space really releases in two blocks that's 1,231 of this year and 131 of ’04, approximately half. It is only a month apart so it's not particularly germane. Now in terms of the other sort of large tenants in the [lay of the land], there aren't any others that I would say definitively that we know are coming or going. However, I would mention that on the industrial front, we have EDS expiring in this -- I believe it's the third quarter, and we are renewing them and they are 40,000 sq. feet. So they are on the positive note. Also we have another large industrial tenant, Raytheon, which is 44,000 sq. feet out in the [Shantelle] area. We know we are going to renew them. So in terms of the actual known commodities of the large tenants coming up, we have those two I had mentioned on the positive side and OAO on the negative, and then everything else is -- you know who knows.

We are taking as I had just mentioned [inaudible] suggestions on the guidance we are giving you. We are being pretty conservative in this environment at this point.

Okay. On that note, Ed, would the -- and I think the assumptions you have laid out in the past that you basically gained occupancy in the 91% range and you'd do 100m of acquisitions. Are those assumptions still intact?

Yes, I think we'll hit our target on the acquisitions referred to in pipeline right now, and the occupancy levels will be closed. But we don't see any reasons to change our suggestions at the moment.

And last question I had was on the Sunrise lease. Assuming majority of the tenant [inaudible] does not be completed -- till date -- just wanted to get -- when do you expect that to be completed and also whether or not the -- lease [admission] cost has been -- has hit the numbers [inaudible] add as well?

Go ahead Laura.

Lease [admission] cost actually hit the numbers in Q1 for that year-to-date figures that you've seen -- as of June 30th will be 8.9 and the offloading pressure included 5.7 PI mutual fund in Q1 and note the PI value does not occurred as of Q2 and I will let Skip speak about that as when he expects interest to be incurred.

Yes, I think that project is going to finish up in the third quarter.

And that one actually moved in ending of the third quarter

That's when the construction will be completed and we'll actually move in. Although, the lease commenced already. The lease commenced effective

February 13th.

February -- What was it?

March

March 13th.

Okay but there is a bit of free rent period.

George Mckenzie Yes, there was, the construction period. Dave -- the construction was done by Sunrise that we really -- we gave them possession of the premises and they were in charge of doing the build out.

That they begin paying rent on what September 1st, or August 1st.

I will have to look that up to be exact.

They start paying rent over the next month or so. I think it's September 1st.

Okay, thank you.

At this time I would like to inform everyone if you would like to ask a question press "" then the number "1" on your telephone keypad. We have a follow up question form Bill Camp of A. G. Edmunds.

Hi Bill?

Hi, just a question about what [Ken] was asking about on the Sunrise lease. Have you started -- has that hit the income statement on a straight line basis?

Yes.

Yes.

Okay.

Since April.

That's what I feel. Okay. In terms of one other question, I just kind of want to give you -- push the ball off for a second and ask about the markets. In general you tend to talk about their, it sounds like they're bouncing around the bottom maybe starting to show signs of life. If you had to rank the markets today on a scale of one to ten versus where they were a year ago, where would you put them versus a year ago?

Well add to everything else that they were probably in the four or five range…

And where were we a year ago?

In the one or two range.

Okay. So it has improved, do you think, over the last year the markets have improved?

There has been a couple of improvements take the worse sector the one in Virginia, on the North [inaudible] area. As a result of a couple of consolidations of high-tech type particularly the telecommunications. Taking over in consolidating couple of these companies what we have seen is them take some very large space that was vacant. And so consequently that was positive to a certain degree and there is still a lot behind is Skip pointed out. More importantly, I think we are -- we were all a little bit misguided possibly is that the federal government has not moved as quickly as some people thought they would in regards to issuing intelligence and security types of contracts on a board basis. And we think that that is really beginning to occur and it's just not those two types of agencies, but the number of other agencies in the healthcare field particularly as well as the defense department are now beginning to issue some contracts and that's why in my comment I feel that we are going to really start taking some positive growth probably in the second quarter of next year. But in the early stages we're going to start seeing some of it by year-end. I think -- it's definitely getting more positive. Another note that I think that’s important in that regard is Washington was one of only two areas in the major cities in the country. On the most recent reports it had actual informing growth on the capital basis and actually that is continuing. So I think we had a real positive note here and we are still taking a rather conservative approach as how rapidly we think things can ease up, but we do thing it will be positive.

Okay, great. Last question is on your acquisition guidance. You are still comfortable with the $100m where is that money -- where do you anticipate given the flow of offers in your hand, where is that money being spend and what categories?

Well we are looking at a couple of things very seriously; one is the very attractive off building -- on occasion and the both [inaudible]. The other is the medical complex and those are to the [well into] pipeline. Plus we have a small medical complex, which they were looking at. And then at the moment, we've been noticing some of the recent prices on apartments around town here those numbers are still crazy about [inaudible] up as far as we are concerned. So we just -- other than keeping track of what's going on there in pricing and looking at the properties we are not even trying to make offers. On retail, there has been no activities to any degree in our portfolio. You may have read in some of the releases that are even -- [inaudible] -- they deal with Giant Food, which is a company owned by Ahold now. That was, [sort of made in heaven], how that deal was done in that Eaton [inaudible] paid up for property we did look at and they paid a lot when boarded on about 7% [CAP Rate] with very little growth in it. But Ahold was pushing very hard as we understand that they get a big cash dollar upfront and at the same time liquidate some of the other shopping centers they had in the region and there were six of them that followed by loss and was announced about 2-3 weeks ago were closed. Those deals I understand are close to about the 8% range and this [inaudible]. But no one really got a chance to look at it, because they said the deal was made by quick basis between the seller and the buyer.

Okay I appreciate it. Thank you.

Our next question comes from Jay Habermann of CSFB.

Is that the same guy as Jay Habermann.

It is. Good morning. Questions for Skip on office retention. You mentioned that it was right about 51%, what are the principal reasons why clients are moving out of this, this downside thing is this picking up by the rent -- just you know little bit color there?

Well, of course it's a little bit of everything as usually is probably the biggest area we've had difficulties in Northern Virginia. And the market is just, you know, it's soft there and one of the buildings in fact and most of the pricing to me personally is 7700 at lease per square foot, I think short against your flavor for where the things are. 7700 lease prototype is a small tenant building and we've seen a lot of tenants in that building either they are out of business, downsized moving to there basements, moving themselves to lease space, you know, a lot of different thing. So I guess the short answer to your question is it's been a little bit of everything, but particularly in Northern Virginia the difficult market we've seen people very price sensitive tenants either downsizing or moving into the sub lease space or moving into their basement.

Okay.

I might have answered in the follow up 7700 lease of [inaudible] mentioned nothing around that building for over 20 years. I don’t' know this is a building I've ever known it to truly have any vacancies in it. And I think that is probably example of the total market has been like for all users.

Okay, great thank you.

Once again I would like to remind everyone if you would like to ask a question press "" then the "1" on your telephone keypad. I will pause for just a minute to compile the Q&A roster. Our next question comes from Chris Haley of Wachovia.

Hi Chris.

Hi, how are you doing?

Good and you.

All right, thanks. Congratulations on good year of that result.

Well thank you.

I had a question for you on given the balance sheet capacity and given some of the weakness that's occurring in the Virginia markets. I mean some of the choppiness close to the -- we've heard that there is a backlog on sale activity number of sales, volume of sales suddenly increasing potentially resulting in a more significant amount of investment opportunities in those sub markets later on this year into '04. Could you comment on that, or is that what you are hearing and how do you -- how would you look at underwriting that type of investment those investment opportunities in those markets?

Well, first of there is we are beginning to see some activity suddenly the office sector in Northern Virginia on buildings that are leased on a long-term basis to the government and or to IBM in one case and up in the [Boston Carter] there was one building that was sold at a very high price per square foot around $300. So where it was a credit tenant for most of the building and very [inaudible] with joint venture with [Cal Burns] and so what we are seeing is activity where the buildings have to be released regardless as to where they are located to high quality credits. The properties are being filled and the cap rates appear to be in the 7-7.5% range. So that's pretty much where we are in that environment. There has not been any noticeable attempt to sell properties that has significant vacancies in and there have been no bankruptcies or foreclosures to speak out taking place in the region anywhere.

On the acquisition side from the approach that we've been taking that's what the something that maybe you missed the boat on little bit over the past year to some degree is, you still are in environment that was started investing in one of the problem that I've had is lot of the acquisitions here early on this year have been supported by short-term financing anywhere from one apartment deal that sold for two year financing on at a very low cap rate and at the same time balanced by a 2 year financing model up to 5 and 7 years and we just offered not to release the cap rates being where they are, I'll take that risk at having a refinancing after 7 years as we feel that would probably reduce most of your equity if not all of it. If interest rates were high you have to refinance at that moment. Correspondingly, that occurred I think sort of interesting is if you go back and look a couple of years ago we were acquiring real estate not just results from others in the 9-10% cap rate range and your property type, we were borrowing money if you had the credit to go with it between 7-7.5%, and where interest rates have fallen now even with the little cap rates, the spreads are about the same as long as the property is good quality and has inbuilt -- and most of the properties we look at have embedded in their leases the 2, 3, or 4% bumps in the rents on an annualized basis over the term. So, I am not so sure that we can take a look at how we acquire these assets as long as we can fund those with 10-12 year financing, these spreads, I think, we are probably doing quite well over the years.

And when you look at underwriting every deal is different, but given some of the transactions that have required -- transpired this year and I guess looking over the 6-12 month period, how are you looking at pricing in the market today relative to the replacement cost?

Well, frankly replacement cost hasn't come down. [Something that you'll see other business]. [Inaudible] I've never seen construction cost really decline to any degree. But what we're looking at today is the fact that the downtown Washington is an example, there is a large piece of ground that's owned by the Washington Post in which they have a parking garage that the rumor on the street right now is that they're selling that for about $110 square foot and so when you take a look at that -- I'm sorry, not a square foot but FAR foot, we take a look at it with cost in downtown Washington, that's going to be $400 square foot building when it is completed. So -- and some other buildings that are being built today in downtown Washington, I know they are also approaching the 350-400 range. So, if you take a look at some recent sales that were made, Boston property sold a building of theirs, 24 and M to the Blue Group part of Germany and that was in excess of $400 a square foot. There are a couple of other buildings in downtown Washington, we're very close [us and] recently sold [from all] the things under contract. And those prices are in the 325-350 range which is probably -- if you bought the ground right about reproduction cost today for most of their property type. The question in DC that people will have to look at is that because of the way it zones, there is very little ground on which to build any large buildings and I can't foresee over the near-term the city is going to change their zonings to permit greater density.

How about in Northern Virginia outside of Roswell and Alexandria?

Well, outside of Roswell and Alexandria. The buildings I mentioned that have sold have been in the -- they really have been in the 300 hour range because of the credit leases that were there and some--.

Is that replacement costs?

Replacement cost could be probably more in the 250 range there, unless its, you know, medical or something like that.

All right.

But I would say around 200-250 max. So that's depends on the quality. Now there really isn't any construction taking place out there to speak of, as Skip mentioned, particularly outside the [inaudible]. We'll keep our eyes open, hopefully there is something in the right location came along with some substantial leasing in the 60-70% range. We will try to buy that at a level that will be under what we think today's reproduction costs would be. If we get a, you know, 6.5-7% entry level yield on it.

Okay. Great, thank you.

You're welcome.

Your next question comes from Frank Graywood (ph.) with McDonald Investments.

[inaudible] guys.

Hi Frank.

A question for you. Looks like you signed a lease with [inaudible]?

Yeah, it was in the first quarter.

I have to look that one up, I barely remember.

Yeah, that was in the first quarter at 1,700 research boulevard.

First quarter?

Yeah.

Yeah. The only place we have a significant presence north of the 1,700 research.

Did you say, I guess, there's a lease exploration coming up where it impinges upon a contract intervention with the government today when you see that?

That was the Northrop-Grumman (ph), correct. I don't recall it right now.

You're speaking about the north of [inaudible] we saw in the first quarter that was a contract contingent.

Okay.

That was straight, I believe.

Okay. And then the contract contingent lease, is there any news on that or--.

No.

Okay. Were there any lease term fees during the quarter?

$16,000.

Okay. All right, great, thanks.

Your next question comes from Chris Lucas of Ferris Baker Watts.

Hi Chris.

Hi, close enough.

Yes. This is Guy Ackers (ph.).

Hi. I don't know, well we have got a few acres actually there but -- the quarter guys. A couple of quick questions. Just, can you give some scope as to the development projects, the first one in Arlington, what your thoughts are and total costs? And then also sort of big range I know what your Alexandria project generally would run?

Well, on the Roslyn apartments that we are talking about building, as Skip (ph.) mentioned earlier, it is still running somewhere around $2000 a unit. And we only have nominal land costs. And our estimates there is that our return on invested capital will be somewhere around 10%. What we have found out that leasing has been going reasonably well on a couple of competitive projects. One of the things we are looking at though is Donahue (ph.) sold or I should say the continued contract that Donahue sold a project there is just a few blocks away which has -- was that 300 units Skip (ph.).

I think it was 400.

Maybe 400 units were sold to GW. GW opted out of the deal and so it has been that it slows their leasing down when that occurred. So we are taking a look at that project, just two blocks away, to see how it is doing. However, two other projects on the Boston Cartor has done very well in the marketplace and the rents that they are getting are in excess of what we have estimated in our location and the locations are both good. However, we have much better pipelines over the city than the two of them in the Boston Carter. On Alexandria, we are too far away really to finalize our cost there. Going through the development process in Alexandria is one that you never know what you have to do until it's almost over so as to speak and whether it will be pricey because we had to put an underground garage there and how many units are there?

That will be 75 units. 2 acres site have 45,000 square feet of retail in the front. So we are talking about a very limited site, but it will be total 75 units. So if you're breaking down again that in the neighborhood of 2000 a unit. You know, you are talking about a $15m project. Somewhere in that ballpark.

And the main -- and we're being conservative when we think on our investment potential there. That is really a solid [infield] location and Alexandria, as you know, is one of the most expensive areas in Washington.

Right. How many units are going to be in the Roslyn project?

224.

224. Okay. And then you have a medium term note that is coming due here in the next month or so. What thoughts do you have on how you are taking that out?

Chris, it comes here on August 13th, and we will be likely looking at that in the long -- with the long-term debt -- 10-12 years unsecured bonds.

Okay. What kind of pricing are you seeing or hearing about right now? I know the 10 years obviously, despite in the last month. But what thoughts do you have there?

Based on the current raise in 10 years we are looking at 530-540 -- in that range.

Which is only the reason we -- sales have fallen. We have been talking about spreads on the 10 year in the 130 range. We a have notice, we believe its 10 years [inaudible].

The current note out there is 7.25.

Fine. And then the last question is just, is West Minster for now completed?

No. West Minstr is a property where we have just executed a supermarket lease, the [food line]. So the leasing is done. However, we still need to go to store. That requires to demolish the portion of the shopping center. So the construction activity is still moving forward, and we do have a small block of vacancy that we are under negotiation for now, abut another 15,000 square feet. So we need to complete the construction of the supermarket, and we need to re-lease the 15,000 square foot block that we're negotiating with a couple of tenants.

Okay. And then you know one other project in Alexandria that I thought was --

Are you talking about [inaudible].

Yes.

That is the shopping center we have which we are going to redo. We have a [McGruder] store down there, that's leased. McGruder until June '04.

Yes, late '04.

Okay. We are still a year away.

So we are a year and a half away. That is because the analysts have used, you know, the cap rates that they typically see for shopping centers. It is that center that we are [scrapping] up properties for a well-known chain in there as far as the growth is concerned, and the average inline rent there is about $8 now or $9, and this as well the similar attributes that we had at Bradley and we anticipate will be in the $25 inline store range and that's 2-2.5 years old.

Great thank you.

Your next question comes from Bryan Flanagan (ph.) of Northland Capital (ph.).

Hi Bryan (ph.)

Hi Ed. This is a follow-up question on this discussion of yields relative to the cost of debt. Based on that discussion it seem like you are working at a cap rate say in the 7-8% range on your current acquisition pipeline?

Yes. Yes, I agree with you, and based on our acquiring capability that gives us very attractive spreads initially and then build into these properties are leased parts for the longer-term leases. So, we know we are about there, and in each case we think the rents are somewhat under market. So in fact -- and also they have some basic [incentive] which gives us upside potential. So, we feel pretty good about these. We did very selectively, you all know that what we are doing is just not chasing the stuff and though we have looked a lot.

Great. Thanks Ed.

Thanks Ed. At this time, there are no further questions. Are there any closing remarks? I apologize we do have a follow up -- I am sorry the question has been withdrawn.

Well I would like to thank everybody for joining us today, and as always, we greatly appreciate your participation and support. All of us are available to answer any other questions you may have. As a reminder, we intend to hold our third quarter conference call on November 4. With that I thank you, and if anybody like to give us a call, please do. Thank you.

This concludes today's conference call. You may now disconnect.