Elme Communities (ELME) 2003 Q3 法說會逐字稿

Welcome, ladies and gentlemen, to the Washington Real Estate Investment Trust third-quarter 2003 earnings conference call. As a reminder, today's call is being recorded. Before turning over the call to the company's Chairman, CEO, and President, Ed Cronin, Sara Grootwassink, the company's CFO, will provide some introductory information. Ms. Grootwassink, please go ahead.

Thank you, and good morning, everyone. After the market closed yesterday, our earnings press release was faxed or e-mailed to each of you. 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 web site at www.WRIT.com. Third-quarter supplemental financial information is also available on our web site.

First, I must remind all of you at the outset 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 assumptions, actual results may differ from those projected. Key factors that could cause actual results to differ materially include changes in the economy; the successful and timely completion of acquisitions; changes in interest rate; leasing activities; and other risks associated with the commercial real estate business and as 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 Sara and I today are Skip McKenzie, Executive Vice President for Real Estate, and Laura Franklin, our Senior Vice President of Accounting, Administration and Corporate Secretary.

Since our last conference call, economic conditions in Greater Washington/Baltimore region had begun to improve. The region has seen positive job growth. It also appears that a number of federal government agencies are increasing their contract issuance. GSA has accelerated its leasing activity on behalf of several federal agencies, having signed or are currently negotiating leases for space in private sector properties.

From past experience, this is a good sign for a continued economic recovery in the D.C. metropolitan area. However, caution needs to be maintained. Recently released economic data reflects extraordinarily high unexpected growth rates, but at the same time, negative job growth on a national level.

Of particular concern for all of us in the real estate business here and on a national basis should be the flat job growth numbers and potential reduced productivity, leading to long low term -- let me turn that around -- leading low long-term domestic development. The Washington/Baltimore metropolitan region is somewhat insulated from this concern, due to the federal government presence, but not like it has been in the past.

Our plan this morning is that Sara will review our financial performance for the third quarter and provide guidance for the remainder of '03. Then Skip will discuss our portfolio performance and general market conditions. After Skip, I will review our recent acquisition activity, current strategy and provide guidance for '04.

Now I turn the call over to Sara.

Thanks, Ed. I will start with net income. As you know, all per-share amounts are presented on a fully diluted basis.

Net income for the third quarter totaled $11 million, or 28 cents per share, compared to 11.6 million, or 30 cents per share in the third quarter of 2002, driven primarily by an increase in depreciation.

Funds from operations for the third quarter totaled 20 million, or 51 cents a share, compared to FFO for the third quarter of last year of 18.9 million, or 48 cents per share, representing a 6.25 percent increase on a per-share basis.

After adjusting for recurring capital expenditures, tenant improvements, leasing commissions and the straight lining of rent, our funds available for distribution for the third quarter totaled $16 million, compared to 15.6 (ph) million for the third quarter last year. A reconciliation of net incomes, both funds from operation and funds available for distribution, can be found in our third quarter supplemental financial report available on our web site, as well as in our earnings press release.

We distributed a dividend of 37 and a quarter cents for the third quarter, resulting in a 73 percent FFO payout ratio, and a 92 percent FAD ratio. Our FFO payout ratio improved from 74.5 percent, while our FAD ratio remained level from the second quarter.

Same-store cash NOI for the core portfolio was essentially flat, increasing 0.2 percent this quarter over the same quarter last year as we experienced a modest drop in same-store occupancy for multifamily office and industrial properties offset by an increase in retail properties.

Breaking our same-store NOI results down by property sector, same-store office cash NOI increased 1.1 percent for the third quarter, due largely to the Sunrise Assisted Living lease, annual rent increases, and $304,000 in lease termination fees. Same-store occupancy dropped 90 basis points, primarily coming from our properties in Tysons Corner and more recent weakness in the Maryland office portfolio.

Same-store industrial cash NOI increased 1.4 percent over the third quarter of 2002 with a drop in occupancy from 93 percent to 88.5 percent. However, on a sequential basis, industrial occupancy improved 190 basis points from 86.4 percent in the second quarter.

Apartment same-store cash NOI decreased 3.5 percent in the third quarter, primarily due to a drop in occupancy from 94.6 percent in the third quarter of 2002 to 91.9 percent this quarter. Keep in mind that these results include 42 of the 50 former HUD units, plus four additional units at our Ashby property taken off the market for renovation. The 46 units account for approximately 260 basis points in economic occupancy.

Six of the first eight renovated apartments have been leased, with a 23 percent increase in rent over the current market rate, and a 100 percent increase in rent from the former HUD rental rate.

Our retail portfolio continues to hold up well, with same-store cash NOI increasing 0.3 percent compared to the third quarter 2002 as the result of occupancy increasing 90 basis points to 95.8 percent, offset temporarily by a slight increase in operating expenses.

The company continues to take a conservative approach to reserves for a doubtful account. At September 30, our allowance for doubtful accounts stood at 14 percent of cash-basis receivables and 10 percent of straight-line receivables. Our actual bad debt expense for the quarter totaled only 0.5 percent of revenues on a cash basis, and 0.7 percent of revenues on a GAAP basis. And, at this time, there are no delinquencies of a significant amount.

At September 30, our total market capitalization was 1.6 billion, with 500 million in debt, resulting in a debt to total market capitalization ratio of 30 percent. The company's debt service coverage ratio was 3.6 to 1 for the quarter.

The 500 million in debt outstanding at quarter-end is comprised of 275 million in long-term bonds, 93 million in secure debt, and 133 million in short-term unsecured facilities. The debt carries an average interest rate of 5.6 percent, and a weighted average maturity of 8.7 years.

During the quarter, we repaid from our line of credit 50 million in unsecured notes that matured August 13. These notes have an interest rate of 7-1/8 percent. The addition we funded (ph) was short-term debt, the $85 million acquisition of 1776 G Street. Subsequent (ph) (indiscernible) at quarter-end with our acquisition of Prosperity Medical Center, (technical difficulty) $50 million in secure debt and funded 28 million in short-term unsecured debt.

Looking at the fourth quarter, we expect to achieve FFO per share of 51 to 52 cents, resulting in FFO for the year in the range of 201 to 202 per share. This guidance assumes no change in occupancy, flat NOI growth, and no additional acquisitions. Ed will provide guidance for the year 2004 following Skip's discussion of the market.

Now, I will turn the call over to Skip.

As of September 30, our portfolio totaled 61 properties, consisting of 11 retail centers, 25 office buildings, 16 industrial properties and nine multifamily properties. Prosperity Medical Center, a three-building medical park, was acquired subsequent to quarter-end. Our office portfolio was 87.6 percent occupied in the third quarter, 180 basis points lower than the second quarter of 2003, or approximately 64,400 square feet of additional vacancy. This additional vacancy is attributed primarily to properties located in northern Virginia and north Bethesda.

Overall, our office markets have been improving, with leasing activity up, but there are differences in performance across the submarkets. Northern Virginia and the District expressed positive net absorption for the third quarter, but suburban Maryland experienced negative absorption.

During the third quarter, vacancy, including sublet space in northern Virginia office market, improved slightly, decreasing from 16.7 percent last quarter to 16.5 percent at September 30, with a positive absorption of 115,000 square feet. Although rental rates have generally stabilized, the large amount of available space continues to keep any rental growth prospects in check. At quarter-end, the vacancies within northern Virginia submarkets ranged from a low of 10.9 percent in Alexandria and Arlington to 20 percent in Tysons Corner and 31.2 percent in Herndon.

Leasing activity is increasing significantly, and was led by defense agencies and federal contractors, which dominated the largest leases completed in the third quarter. Tysons Corner and Reston/Herndon enjoyed the largest drops in vacancy, with Tysons stopping from 22.3 to 20 percent, and Reston/Herndon dropping from 27.6 to 23.2 percent.

Large leases signed during the quarter included a federal agency for 434,000 square feet; missile defense for 115,000 (ph) square feet; Lockheed for 54,000; and Northup Grumman, among others -- a groundswell of the much anticipated ramp-up of the intelligence and DOD contractors many expected.

Although activity is picking up, there is still much vacant space to be absorbed before the market reaches equilibrium. The WRIT northern Virginia office portfolio consists of 1,559,000 square feet and is 83.4 percent occupied.

The downtown Washington, D.C. office market continues to be the strongest in our region, although vacancy is increasing as new buildings are delivered to market. At quarter-end, vacancy increased to 6.6 percent from 6 percent at the end of the second quarter due primarily to the delivery of 650,000 square feet of available space from the 1.4 million square feet delivered during the quarter. Although two large leases were signed in this quarter, leasing activity in the market was dominated by renewals of small- and midsize tenants and lateral moves. Net absorption in the third quarter in DC was 197,000 square feet overall and 855,000 square feet year-to-date.

Over the next six months, seven buildings totaling 2.5 million square feet are expected to be completed, which are currently 50 percent pre-leased. These deliveries will add further pressure to the market vacancy rate, and provide downward pressure on rental rates. The good news is there were no groundbreakings during the third quarter.

With the exception of 1776 G Street, the WRIT D.C. office portfolio -- excuse me -- with the acquisition of 1776 G Street, the WRIT DC office portfolio now consists of 459,000 square feet, and was 89.7 percent leased at quarter-end.

In Maryland, leasing activity was very slow. Overall vacancy in the market rose from 11.5 percent at the end of the second quarter to 12.5 percent at the end of the third quarter. The majority of leasing transactions that did occur were under 5,000 square feet.

Compounding the selectivity was several large blocks of space returned to market through downsizing or relocating tenants. Montgomery County had a vacancy rate of 12.1 percent from 9.5 percent the prior quarter, and experienced negative net absorption of 205,000 square feet, while Prince George's County had a vacancy of 13.6 percent, up from 10.8 percent, and experience negative net absorption of 400,000 square feet. Montgomery County, in particular, is suffering from the lack of further demand by NIH or its subcontractors. The WRIT Maryland office portfolio consists of 1,618,000 square feet, and was 89.8 percent leased at quarter-end.

During the third quarter, WRIT re-leased 161,239 square feet of office space, achieving a 2.2 percent increase in rents on a GAAP basis, but a decrease of 4 percent on a cash basis. Tenant improvement costs and leasing commissions averaged $15 per foot. Our office retention rate improved in the third quarter to 70 percent.

Occupancy within our retail centers has remained strong at 95.8 percent, and 97.2 percent leased. We have no unleased or uncommitted blocks of significant size in the portfolio. Our end-fill (ph) locations remained strong, and retailers anticipate a strong holiday season.

During the third quarter, we re-leased 62,500 square feet of retail space, achieving a 2.5 percent increase in rents on a cash basis. Tenant improvement and leasing costs averaged 4 dollars per square foot. Our retail portfolio retention rate for the third quarter was 82 percent. We expect rental rate growth in both the fourth quarter and in 2004 to continue.

The apartment market in the D.C. Metro area continues to the relatively soft. However, we continue to see moderate improvements in most submarkets. Challenges remain in specific markets, particularly those absorbing large amounts of units and lease-up, such as Rockville, the east end of DC, and the western suburbs of Fairfax and Loudoun County in Virginia. Rents in the region are generally flat to slightly up, and concessions continue in Class A product and lease-up.

Construction activity in the District, particularly in the east end, has put some downward pressure on occupancy and rents in the District, and will continue to do so in the near future. We are cautiously optimistic that the market is improving in most submarkets, and we expect to see slow rent growth in 2004. We anticipate occupancies between 92 and 95 percent over the next 12 months.

Overall, in the WRIT multifamily portfolio, rental rates have been flat to slightly up. Occupancy year-over-year would have been flat, excluding the 46 units that have been taken off of the market at our Ashby property for renovation, as Sara had indicated. As the economy improves in the D.C. region and job growth continues to escalate, we should see improvements in this sector.

The Washington/Baltimore metro -- metropolitan region industrial market, which was slow in 2002 and the first half of this year, continues to be soft, but leasing velocity is starting to improve. Certain submarkets continue to be slower than others, however, particularly flex space in western Fairfax County. The more industrial-oriented product has performed moderately well and should remain steady in the near future.

The WRIT industrial portfolio overall occupancy was generally flat in the third quarter, with significant occupancy gains in our Ammendale properties in Beltsville, Maryland, offset by vacancy increases at Northern Virginia Industrial Park and Fullerton. We are experiencing increased activity portfolio-wide, and expect moderate improvement by year-end.

In the third quarter, we leased 188,789 square feet, achieving a 2.5 percent rental rate increase on a cash basis, with $3.70 in TI and leasing cost. Our industrial portfolio retention rate for the third quarter was 80 percent.

In summary, although conditions in the region appear to be improving, we do not expect to see monumental strides made in the last quarter of the year. Leasing activity, in general, is improving, and recent grains (ph) in northern Virginia are encouraging, but we have a long way to go. Construction activity in the District in the office sector is of some concern, but occupancy rates are high and should continue to remain so despite increasing vacancies. Multifamily is improving, but patience is warranted, as much new product will take time to become fully absorbed.

Now I will turn the call back over to Ed.

Our acquisition strategy, as always, is focused on finding solid real estate opportunities and A locations within our core submarkets. We seek properties in these locations which we can improve through better management, value-added opportunities, and repositioning of the property to enhance both the near- and long-term cash flow and the underlying value.

Our two recent acquisitions -- 1776 G Street NW in D.C., and Prosperity Medical Center in Fairfax -- may appear to be somewhat of a departure. But in keeping with our premise of increased earnings leading to increased dividends every year, these properties represent solid opportunities due to both the strength of their locations and limited competition. They will always be winners with very little downside risk.

Earlier, Sara provided you with fourth quarter guidance. For the year '04, we anticipate FFO to range between $2.08 and $2.12 per share. This guidance assumes 100 million in acquisitions for the year, overall occupancy of 91 percent, and flat same-store NOI growth, driven primarily by a continuation of soft market conditions within the office sector.

With that, we will now open up the call to your questions.

(OPERATOR INSTRUCTIONS) Bill Camp, A.G. Edwards.

I've got a couple of questions for you. First, if we can, just kind of walk through the top tenant lease? We have talked about Lockheed in the past. Is there an update on Lockheed that you could give us in terms of them exiting space or renewing space or what are they going to do?

We do have an answer. Skip, why don't you --

Bill, just as a summary on the -- which was -- we used to call it the OAO space, and then Lockheed acquired them. When we started their exiting of the property, they were 109,000 square feet, approximately. And we brought that down to about 85,000 square feet of uncommitted space that will roll in both December and January coming up. I guess that's the best way of summarizing it.

Okay, and how much -- just out of curiosity, maybe you can't give this to me -- how much dollars are we talking about in that space that's exiting, and what's the prospects for back-filling that space?

Can I give you an estimate?

Sure.

They're paying somewhere in the neighborhood of 80 -- or $21.

Okay.

So that's somewhere in the neighborhood of $1.8 million in rent.

Okay. And what's the plan of attack?

With the market?

Yeah.

The market is probably a dollar less than that a foot. Those are ballpark numbers.

Okay. And how long have you budgeted for that space to be empty?

In next year's budget -- for the 2004 budget -- we assumed a lease-up of that space of 4,000 square feet a month -- ratably over the year.

Okay. And I am assuming, looking at the top tenants -- I am assuming that, since you're within a year, you're talking to Xerox. What's -- any update on that?

Let me just say no comment. We are talking to them. And I feel positive about it. But we have no commitments either way. But I felt positive about it.

Okay. Last question that I have is -- is kind of on -- if you look at your lease expiration schedule, just kind of going on the average rental rates in place (technical difficulty) it looks like your industrial $10.39 should, based on your average that you put in this year, should roll down. Can you give me an idea if that's the case --? (multiple speakers)

Yes, I can. Yes, Bill. And for the final quarter of this year, which is what you're referring to, where we have the $10.39 -- about half of that space is at or below -- slightly below market, and about half of it is probably above market.

Okay. Then my -- just one follow-up question for Ed on the guidance for next year, 208 to 212. It assumes $100 million in acquisitions. Do you have an idea where that money is going to be spent in terms of office, apartments -- you know, your four property categories?

Well, our target, I would say -- trying to respond on a priority basis, would be to acquire more medical office buildings. And subsequent to that, would be some industrial, distribution types in some areas we have our eyes on right now. And -- so those would be our two primary targets.

But as in the past, if there's something from an opportunistic standpoint, we will certainly move towards that property.

We are still seeing apartments being presented, but the cap rates are so low on them, at 7 and below -- we just can't make any sense out of those numbers, not only on a current basis, but be able to grow those properties over the next 3 to 4 years.

Okay. Thank you.

Christopher Lucas, Ferris Baker Watts.

Just a couple of questions. On the Ashby, what's the timing on those assets -- or those units coming back online?

Okay, I will answer that one. Right now, there's approximately 50 units off the market. And as we mentioned, there was 46 that we'd referenced in the topics gold (ph), and there was an additional four that happened subsequent to the end of the third quarter.

So out of the total of 50, we have delivered 19, seven of which are leased today. And then by the end of the year, we will be delivering the balance in four phases.

Okay? Does that answer sufficiently?

Yes. In terms of the -- just sort of your overall value-added pipeline, can you walk through kind of the timing on each of the various projects and where they stand?

Well, one of my (ph) -- Skip just mentioned the apartments. And I think the interesting aspect of those units coming back online is the rents that we are getting. And Skip, what are their ratios over the market rents? (multiple speakers)

Go ahead, Sara.

(indiscernible) the current market rents, the rents that we had brought those units up to were achieving a 23 to 25 percent increase over current market rents. And over the HUD rates, it is 100 percent increase.

In addition to that, please know (ph) we're looking at beginning to build the high-rise apartments in Roslyn. And we're looking very hard at that right now. We are doing our surveys, trying to see what the lease-up absorption and current rents are in that market there. Our site has probably the sightlines over Washington of anything under construction in the region today. And so that is something that we're hoping to start this fall. The other part of that, obviously, is that we are negotiating construction prices right now with the contractors, and each of those -- if they come in where we want them, we will start construction sometime this fall.

And other items, such as the shopping centers -- we have Fox Chase, that -- we have a major lease there that will not be coming due until -- at the end of '04, Skip, is that -- ?

Yes, we are negotiating with replacement tenants (ph) today.

And we're currently -- Skip just mentioned, in discussion now with replacement tenants. And we would start construction on a portion of the site we're going to scrape over there sometime in early '05.

The other is South Washington Street. We are going through the development process and getting towards the end of our entitlements, and that will be the development of a -- some more apartments on the parking facility behind the retail on South Washington Street. And I anticipate that we would be looking at an '05 start date there.

Westminster -- as you're well aware, we have a lease-up in Westminster with --

Food Lion.

Food Lion -- and we are in the process of completing details there, and we will be start construction, Skip -- when we --?

Well, actually, we've had the fence up now, and the demolition will be in the next couple of weeks. And we will roll right into construction of the Food Lion. So I would anticipate that would be finished by -- towards the end of '04.

So basically that is -- you know, with the exception of Walker House, where we are in the process of completing those 16 units, which are -- which are completed, and we're just beginning lease-up in that market there, and very, again, attractive increases over market rents that we are seeing in the high-rise.

Okay. And just sort of my last question is -- you've had significant increase in your line of credit. And what is your capital needs going forward? And how do you anticipate paying for them at this point?

Well, at the moment, what we are planning to do is to replace the short-term debt with long-term unsecured debt. And it will occur sometime before the end of the year. And going forward, we'll use our lines of credit as in the past. And from time to time, as everyone knows, we are intent and determined that we will retain, at a minimum, our 3-to-1 debt service coverage, which means from time to time, we'll also go forward with an equity raise transaction. So -- and in a nutshell, that is essentially how we will finance where we are today and going forward.

What is your sort of range in terms of what the thinking is on the unsecured debt cost at this point?

Right now?

Yes.

We would estimate that our cost would probably be -- we look at the 10 years most people do on the guide, and I think it closed yesterday at about a 435 level. And -- Sara, what would you think that number would be?

It would be anywhere between I would say 535 -- around 535, 540.

That's based on recent -- we get daily quotes from everybody as to what they think with our rating at A-minus and B-double-A-1 that the 10-year could be sold at.

So essentially -- and I think this also, Chris, would speak to our acquisition program for next year. We really are trying to stay focused on not going below a 200 basis point spread over the cost of capital. So when you model our acquisitions, we're estimating, for lack of a better number to work off and what we are seeing today on the kinds of quality and locations we look for -- somewhere around an 8 percent cap rate with a 6 percent long-term cost of debt related to that 8 percent to get -- for a 200 basis point spread. And there again, would be investing 100 million hopefully on a ratable basis over the year.

I guess -- and this is actually my last question, which is -- what are you seeing in terms of market opportunity as far as acquisitions are concerned? Is the market still as tight as it has been? And certainly, medical office is something that's very difficult to get hands on.

There is no question it's difficult, but we are beginning to see some. The market -- we are seeing properties. In fact, I would say the volume has declined a little bit, though we're seeing some escalation on the apartment side. And I believe that is because many of the owners of apartments are getting concerned that interest rates may be moving upwards -- thus, obviously, potentially increasing the cap rates on apartments. So we're starting to see more of those come out of the woodwork here recently.

Other property types -- we just -- we're doing a lot of cold calling, dealing with the brokers, and so on. So across the board, we don't see a lot. There's not much being offered in downtown Washington in the way of office buildings. Hopefully, what we will see is interest rates escalate a little bit as more properties come into the market, as people get concerned that their cap rates may be increasing. So we just -- in answer to your question, it's not a deep market for opportunities.

(OPERATOR INSTRUCTIONS). Ken Weinberg, Legg Mason.

A quick question on the 1776 G Street acquisition. You have a sense -- I know the IMF is a tenant there, and they're building their own building down the street. Do you have a sense of their demand for that space when their lease comes due? And I guess when does their lease come due?

We do have a -- you know, in our due diligence, we always interview everybody. First off, their answer is they don't know whether they are going to take that -- leave that space or not at the moment. So we have modeled it in our acquisition that they are going out. I know we have a -- I think it's a six months lease-up time for that space at a rate higher than they are paying. So in answer to your question, we are not expecting to stay.

I can tell you from experience, though, when World Bank and IMF and Inter- American Development Fund -- every time I've ever seen them build a building, next thing you know is they're taking more space outside the building when they anticipate they will not be taking that space. But as I said before, we have them going out.

Okay. And I guess the World Bank was the other big tenant there. What does their lease maturation schedule look like there?

Well, they have three years to go on three floors. And, frankly, we have -- as you know, vacancy in that building when we acquired it was in place. And World Bank, along with others, are very interested in the space. There again, World Bank is a growing weed; it never seems to decline. They slow down their leasing sometime, but I feel pretty comfortable how fast we'll lease up that building.

Okay. Where do you see rents at, on average, for the building?

On that building? We're looking at $39 to $40. And that -- I might mention, also, with minimal buildout. It's the nature of these users -- they have been in and out of this building since it was construction, and I made the construction loan on this years ago, so I've been around this building forever, it seems. And -- World Bank's space is the original space they went into. And they've been in and out of other space on other floors in the building. And when they come back in and out, they just -- it's nothing more than -- much than painting and replacing of some carpet. They take the space as is.

Okay. And then with Prosperity, I guess the intention there was to -- you own two other buildings right by the hospital -- I guess just to gain concentration there? Can you talk a little bit about strategically how that fit into the portfolio?

Well, strategically it fits. In fact, we want to reduce some of the exposure we have in your general commercial office buildings. Second -- historically, medical office buildings have been very, very good producers over the years. In this particular case, the Fairfax Inova Hospital is the number one admitting hospital in the entire metropolitan mid-Atlantic region, frankly.

And in addition to that, a lot of other things -- without getting into the details of going along regarding the expansion of the hospital -- there is virtually no land to build other office -- medical office buildings -- though some buildings could be converted, which is very expensive and hard to do.

The other is the fact that the experience comes into play here as well. Most of these leases are 10 years and -- with options to renew. But experience has been in medical buildings that doctors, through expansion, contraction, and retirements, tend to try to terminate their leases earlier. And some percentage will do that here. And the result is that you're able to, even though it's not reflected in the current rent roll, really improve your position over the years.

Last, but not least on it, these buildings will be closed at a location -- stay at levels of minimum 96, 97 percent to 100 percent leased. And so the nature of the product is such that you're constantly getting a pretty solid bottom line performance from it. Being that the properties is also brand new, our cap-ex items expectations over the next couple of years are pretty negligible.

So, all in all, it is a good, long, in some ways a defensive move, not knowing what the world is going to give us over the next couple of years. And the other is it's a well sought after property in a location that cannot be replaced.

Okay. Thanks, guys.

Paul Puryear, Raymond James.

Should we just conclude from your comments that industrial and retail space is trading above replacement cost, is --?

I would say, that in both cases, that's true.

Industrial -- we just saw some things here recently -- the trade at industrial distribution type of product we buy, which you could probably re-do for $65 at max in a high -- or an expensive land situation in close-in Washington -- trading at $100-plus. And of course, you know, in the neighborhood (ph) retail, the prices that people are paying are well above replacement cost.

Federal just bought a small shopping center way out Silver Spring for well over $200 a foot, which was a small giant anchored center, which you could build for a lot less than that.

That's the Plaza del Mercado (ph), I think.

So what kind of yields -- what kind of cap rates are these properties offered at?

Well, what we are seeing, and they're down in that 7 percent range and less. And some of the competitors for this type of product -- also who are driving prices, we have a lot of local real-estate investment types around here with very deep pockets. And they are going in acquiring these assets at 7 percent levels, putting maximum financing in at 5-3/4 percent to 6 max level, and driving prices up at the same time in the region. I don't think you'll be seeing us, unless there's some extraordinary reason, buying any retail over the near-term. I can tell you that.

Right. Okay. Another question -- I think, Skip, you said that on the leases and office, that the TIs and commissions are about $15 a foot?

Over the past quarter, yes.

And what's the average term of those leases?

Okay. Just for the third quarter -- 3.7 years.

3.7 years --

That was for the third quarter.

But the offices -- (inaudible)

$4 a foot -- per year? Is that -- the right conclusion?

There was a large lease at Maryland Trade Center -- a renewal. So Skip has the numbers on it.

I mean, if you're asking going forward at $4 a foot a year is an accurate number, I would say no to that.

Yes. Where would you put that number?

I would say -- let's say, for example, if we did a five-year lease. I think it's accurate to say $15 a foot on a going-year basis on a five-year deal. So, that is $3 dollars (multiple speakers) I mean, I don't think your far off -- and that's a new space. Where it's -- you start muddying the waters, now we're start -- do you blend renewals, which certainly are not $15 deals -- you know, renewals are, you know, usually single digits to $10.

Yes.

I mean, that is a hard one to answer, Paul, because I mean it's all over the board, depending on the needs of the tenants, the building, and the space, etc.

But I think on a new deal, it's accurate to say $3 per year on a new deal. On a renewal deal, it depends on the needs of the tenant. But usually, single digits per foot.

So less than $2, sort of --?

Probably.

Yes. Okay. Thanks.

Ladies and gentlemen, there are no further questions at this time. Do you have any closing comments?

Thank you again for joining us today. 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 fourth quarter conference call on February 20th. Thank you, and give us a call if you have any further questions.

Thank you very much, ladies and gentlemen. That does conclude this morning's teleconference. Thank you very much for your participation, and you may have a wonderful day.