Elme Communities (ELME) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Washington Real Estate Investment Trust Q1 2004 conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to the presenters for today's call. Please go ahead. Presenters, please go ahead.

Thank you, and good morning, everyone. After the market closed yesterday, we issued our earnings press release. If there is anyone on the call who would like a copy of the release, please contact me after the call at 301-984-9400, or you may access the document from our website at www.WRIT.com. Our first-quarter supplemental financial information is also available on our website.

Please bear in mind that certain statements made during this call are forward-looking statements within the meaning of 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 rates, leasing activities and other risks associated 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 Sara and me today are Skip McKenzie, Executive Vice President, Will Staid, and Laura Franklin, Senior Vice President of Accounting, Administration and our Corporate Secretary.

This morning after brief comments by me, Sara will provide a review of our financial performance for the first quarter of '04. Skip will discuss our portfolio performance and general market conditions, then we will open the call for questions. Since Skip's remarks will cover general market conditions and our current market performance of each, I will (technical difficulty) what we are hearing as well as seeing in our region to regards to the office sector.

As a direct result of increased federal government issuance of contracts, deposit sector is expanding. Though it is slower than we would like, it is noticeably positive. We are seeing increased activity in showing space to prospects and deals are being inked. The real beneficiary of this early momentum is Northern Virginia, outside the Tysons Corner, down through the Dulles corridor. In my opinion over the near-term, all of Northern Virginia will benefit while the District of Columbia may see an increase in occupancy over the next 12 months due to -- I'm sorry, a decrease in occupancy over the next 12 months to 18 months due to a large volume of construction and limited internal growth. For suburban Maryland, primarily Montgomery County, very modest growth will occur until the health-care related government agencies, such as NIH, return to the market for space and escalate contract issuances. To save time, it would be best for us to respond to your particular questions and concerns about the region and WRIT during the Q&A. Sara?

All per share amounts are on a fully diluted basis. Net income for the first quarter totaled $11.3 million, or 27 cents per share compared to 11.2 million or 28 cents per share in the first quarter of 2003. Funds from operations for the first quarter totaled 21.2 million or 51 cents per share as compared to FFO for the first quarter of last year of 19.3 million or 49 cents per share, representing a 4.1 percent 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 first quarter totaled $15.2 (ph) million compared to 15.6 million for the first quarter last year. First-quarter tenant improvement costs included a $1.1 million payment associated with a large ten-year lease signed in 2003. For the quarter, we distributed $37.25 per share in dividends, resulting in an FFO payout ratio of 74 percent. Our FAD payout ratio was 96 percent. Looking ahead at the remaining three quarters in 2004, we expect our FFO payout ratio to be in the 70 to 73 percent range and our FAD payout ratio to be in the 92 to 94 percent range. A reconciliation of net income to both funds from operations and funds available for distribution can be found in our earnings press release and fourth-quarter supplemental financial report, both of which are available on our website.

In the first quarter, same-store cash NOI for our overall portfolio decreased 1.2 percent compared to cash NOI for the first quarter of 2003. Breaking that down by property type, office same-store cash NOI decreased 2.6 percent. While occupancies have begun to level out, operating expenses were higher due to increased utility expense and other operating expenses. Same-store apartment cash NOI decreased 5.5 percent, largely due to the fact that 25 units at our Ashland property were undergoing renovation in the first quarter of 2004. While occupancy continues to be a challenge in apartments, utility expense in the first quarter also contributed to the drop in same-store NOI. Same-store cash NOIs for the retail portfolio increased 2.9 percent despite a small drop in occupancy due to the renovation for a new grocer (ph) at the Westminster shopping center. The industrial portfolio has the most improvement, with same-store cash NOI increasing 3.2 percent over the first quarter last year. Occupancy increased 360 basis points, although there was a slight rolldown in rent.

The Company continues to take a very conservative approach to reserving for doubtful accounts. At March 31, our allowance for doubtful accounts stood at 12.4 percent of cash basis (ph) receivables and 11.4 percent of straight-line receivables. While our actual bad debt expense for the quarter totaled 0.2 percent of revenues on a cash basis and 0.4 percent of revenues on a GAAP basis. At quarter end, we had 530 million in total debt outstanding with 142 million of secured fixed rate debt, 375 million of unsecured fixed rate notes and $13 million outstanding on our lines of credit. In total, our debt carries the weighted average interest rate of 6.4 percent and a weighted average maturity of 7.6 years. At March 31, our total market capitalization was 1.9 billion, resulting in a debt to total market capitalization ratio of 28 percent. The Company's debt service coverage ratio remains at a strong 3.3 to 1 for the quarter.

Lastly, we remain comfortable with our previously-stated guidance with FFO expected to be between $2.08 and $2.12 per share for the year. This guidance assumes 100 million in acquisitions (ph) for the year, overall occupancy of 91 percent and flat same-store NOI growth. Now I will turn the call over to Skip.

As of March 31, our portfolio totaled 67 properties consisting of 11 retail centers, 29 office buildings, 18 industrial properties and nine multi-family properties. The Washington regional office market showed improvement in the first quarter, particularly Northern Virginia, as the region's economy improves with the long-awaited ramping up of the federal government and government contractors affiliated with Homeland Security and defense industry. The WRIT office portfolio was 81.9 percent occupied this first quarter. During the first quarter, vacancy, including sublet space, in the Northern Virginia office market improved, decreasing from 16.3 percent last quarter to 14.8 percent at March 31 with a positive absorption of 2 million square feet, following 1.2 million square feet of absorption in the fourth quarter of 2003. Despite the two sequential quarters of significant positive absorption, the large amount of available space have rental rates generally flat. Leasing momentum picked up during the first quarter with activity concentrating in large leases with government contractors, primarily in the Reston/Herndon submarkets. Large leases, those in excess of 100,000 square feet, were signed during the quarter, with Northrop Grumman, the PriceWaterhouseCoopers, TKC Communications and Computer Sciences, among others. At quarter end, the vacancies within Northern Virginia submarkets ranged from a low of 9.2 percent in Arlington and 9.6 percent in Alexandria to 24.8 percent in Herndon. Tysons Corner improved from 19.4 percent vacant to 17.9 percent, and vacancy in Reston dropped to 15 percent. Although activity has increased from both large and small users, there is still a significant quantity of vacant space to be absorbed before the market approaches equilibrium and a rental rate growth can be expected. WRIT's Northern Virginia office portfolio consists of 1.8 million square feet and was 86.9 percent leased at quarter end. The downtown Washington D.C. office market continues to be the strongest in our region, although we expect vacancy will increase as the year progresses and new buildings are delivered to market. At quarter end, vacancy was 7.1 percent, down slightly from 7.2 percent at year-end. As of the end of the quarter, there was 5.4 million square feet under construction, 44 percent of which was pre-leased. As these buildings deliver, expect vacancies to increase. The WRIT D.C. office portfolio consists of 459,000 square feet and was 97.2 percent leased at quarter end. In Maryland, overall leasing activity has improved, but still can be described as lackluster. Vacancy in the office market was 12 percent at the end of the first quarter, down from 12.7 percent at year-end. Absorption for the quarter was a positive 483,000 square feet, split evenly between Montgomery County and Prince Georges County. Nearly all of Montgomery County's net absorption was due to the delivery of MedImmune's headquarters in Gaithersburg. The first-quarter Montgomery County vacancy rate decreased from 12.6 to 12.2, but continues to suffer from subdued demand by NIH and its contractors. Rental rates are flat.

WRIT's Maryland office portfolio consists of 1.6 million square feet and was 84.7 percent leased at quarter end. Omitting Maryland Trade Center 1 and 2, the lease rate and the WRIT portfolio in Maryland increases to 89.1 percent. During the first quarter, we leased 201,000 square feet of office space with a 9 percent rolldown in rent by cash basis, roughly flat on a GAAP basis. Tenant improvement costs averaged $9.00 per square foot and leasing commissions averaged $4.00 per square foot. These included 1.1 million for the Xerox renewal on Tysons.

Our office retention rate for the quarter was 31.5 percent based on square footage, significantly lower than usual, due primarily to the expected move out of Lockheed Martin, formerly the OAO space at Maryland Trade Center. Omitting the Maryland Trade Center from this analysis, our retention rate for the office portfolio was 60 percent. Our greatest re-leasing challenge going forward continues to be at Maryland Trade Center 1 and 2, wherein we now have a total of 108,000 square feet vacant plus an additional 101,000 square feet rolling in 2004. Leasing activity at the two buildings has been modest, but hardly robust, and the Northern Virginia or the Northern Prince Georges County market is currently 12.7 percent vacant.

The retail market is in excellent shape in the D.C. region. Retail sales are strong in virtually all categories. Occupancy within our retail centers has remained excellent at 94.4 percent, down slightly from the fourth quarter at 96.1. We continue to make good progress at Westminster, where we have under construction a 30,000 square-foot food line grocery store and we expect occupancy by year-end. This will complete phase two of the renovation of the Westminster shopping center.

During the first quarter, we leased 31,000 square feet of retail space, achieving an 8.5 percent increase in rent on a cash basis and a 14.6 percent increase on a GAAP basis. Tenant improvement leasing costs averaged together $1.27 per square foot. Our retail portfolio retention rate for the first quarter was 93 percent. For the year 2004, we continue to expect to see high occupancies and rising rents.

The apartment market in the D.C. metro area continues to be soft with the exception of condo sales. Rental rates this quarter have generally been flat while occupancies have been down. With significant vacancy and construction activity in many submarkets, rental concessions abound, especially in proximity to new developments. While absorption throughout the region has been good, market conditions, overall, have been stagnant as supply has generally outstripped demand. Thankfully, many new projects have converted to a condominium regime, which has mitigated some of the overbuilding. At this point, the market of most concern is Montgomery County, Maryland, which has been significantly overbuilt from Bethesda through North Rockville, with overall vacancies in excess of 10 percent.

The WRIT multi-family portfolio occupancy was 89.9 percent for the quarter, excluding the units that have been taken off the market at our Ashby property for renovation. In particular, vacancies at our properties in Bethesda, Virginia and Falls Church, Virginia have adversely affected overall occupancy. As job growth improves and the Ashby renovation is finished, we should see gradual improvement in occupancies but minimal rate growth this year.

The Washington/Baltimore metro region industrial market, which was slow in 2002 and 2003, shows signs of recovery in the first quarter. Occupancies have been improving in most sectors and building types, and we have seen positive indications in our western Fairfax properties. We feel most industrial space markets in the region are on the mend and will continue moderate improvement through year-end. The WRIT industrial portfolio overall occupancy improved substantially to 91.5 percent from 88.2 percent in the first quarter of 2003 and from 88.8 percent sequentially. We experienced occupancy gains in our Ammendale properties in Beltsville, Maryland as well as the Earhardt and Sullyfield in Chantilly, Virginia. In the first quarter, we leased 90,000 square feet with an 11 percent decrease in rental rates on a cash basis, and a 7 percent increase on a GAAP basis. Sixty-three cents in TI and leasing costs and an 87 percent retention rate. The decline in rental rate was due to several lease rolldowns, mostly in flex properties.

In summary, conditions in the region are improving. Leasing activity in the office and industrial sectors has increased and recent gains in Northern Virginia are encouraging. Maryland continues to be lackluster and office construction in the district will increase vacancies there over the next 12 months. Rental rates will be flat in 2004, but occupancies will improve. The multi-family sector continues to suffer from a combination of overbuilding and a slow job growth environment. We are expecting conditions to get better, but significant improvement is still on the horizon for multi-family. We remain optimistic but cautious. Now we will open up the call for your questions.

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

A couple of questions. Skip, you talked about you know general occupancy probably picking up throughout the year. On your list of top tenants, you have two significant reductions -- or at least I consider them significant reductions -- from Xerox and SunTrust throughout the year. Do you think your occupancy's going to go up this year?

I think -- office occupancies specifically, Bill, right?

Right.

Right. I think it will be moderately up.

Okay, okay. So essentially flat to modestly up.

That's right.

Okay. And that's the overall portfolio.

(multiple speakers). Portfolio.

You talked about some major leases in kind of Northern Virginia area, 100,000 foot plus range. What about -- I mean, you are historically the smaller tenant, I mean, historically been focused on a smaller office tenant, a smaller industrial tenant. Do you see the smaller tenants coming back to the market? Or is that activity picking up?

Yes, that activity is definitely picking up. We are seeing an increase in that market. However, because of the large amounts of vacancy, it will be (indiscernible) back --

Right.

-- especially in small bites.

Are those rents for the smaller tenants more steady, less steady than maybe the other parts of the market, the bigger tenant?

I would say they are about equal, I would not differentiate them.

Okay. And do the smaller tenants still have upper hand on negotiating TI packages and things like that?

Smaller tenants?

Yes.

I think we have much better leverage with them.

Okay, good.

And Bill, just to point out, I think I mentioned in my comments, the reason our TIs were a little bit higher this past quarter was really the Xerox lease, primarily. That had a big concession package in it only because it was a long-term lease. (multiple speakers). Since it was a ten year lease, it had a big commission as well with it. So that tended to skew our numbers fairly significantly.

Right, okay. In terms of the Maryland Trade Center building, what is the plan for re-leasing that space? I mean, are you breaking up space? I mean, that was a fairly big tenant that came out of there. Are you breaking that up and going -- (multiple speakers)?

Just so you understand that building, Bill, it does have smaller floorplate; it has a 12,000 square foot floorplate. So it does not lend itself well to large tenants.

Right.

So figure you are going to be doing leases, 12,000 square feet and less --

Okay, good.

To start knocking that out.

Okay. So more of the bread and butter stuff for you.

That's right. And so accordingly, it's going to you know -- we are seeing good activity there on the small tenants. I want to note that. But to lease that much space with small tenants is going to take a while. But the activity has been good.

Has the tenant market, Skip, gone to higher quality-buildings so far as the recovery? Or can you tell, or know?

I don't know if I'd make that general statement. However, it affected us on SunTrust. They actually went to a much higher quality building.

You may see some of that downtown, as a lot of these law firms and others are moving into the new larger floor plate buildings. You may see some of the smaller tenants going into what are basically considered Class A buildings as a follow-on leaving behind B and B+ buildings over in the case-B (ph) corridor.

Okay. Sara, on your balance sheet, you have some line of credit debt. Is that going to be fixed shortly? Or is that going to be out there for a while? Or what are you doing with that?

I anticipate it will be out there until we have a few more acquisitions.

Okay. And then fix it out to pile (ph) together.

Yes.

Okay, that's all I have for right now.

Ken Avalis (ph), Raymond James.

Good morning. Paul is here with me. a couple of questions, first if you could in the office sector in particular, are you seeing any relief has to TI and the leasing commission line?

Not really. I think first off, the commission have stated relatively flat with a few exceptions like to the (indiscernible) has not changed much but I think the demand of the moment at least from what I hear downtown with some of the law firms moving into some of these bigger spaces, they are paying -- there is some pretty expensive TI in those buildings. Our property type with the exception that skip just mentioned with 0 and last year with sunrise assisted care the smaller tenants really not have not seen much of an increase.

Let me put one asterisk on that, though. At Maryland trade center, where we have our significant vacancy, the space that was reclaimed from the space that was reclaimed from OAO/Lockheed was not in great condition. In fact, a couple of those floors have been gutted. So I expect that at least a good portion of that at a minimum will be seeing some increased stake (ph) TIs, because we're going to have to rebuild some of those corridors and flat-out build out the entirety of that space. So certainly with respect to that building, we're going to see as we lease that up, a little bit higher-than-normal TIs -- at least on the WRIT's historical TIs.

Ed and Skip, I guess, as it relates to your portfolio downtown, could you just comment again on your rollovers for '04 and '05 and what you expect to happen there?

We are in pretty good shape, Paul, in our portfolio downtown. 1901, as you know, is mostly small tenants, and 1220 -- I mean, we don't have a whole lot rolling over. We have a law firm at 1901 who is rolling out late this year. But we have good activity in that building. That's about an 8,000-square-foot vacancy. So that's 8 percent of that building. But that building in particular is a great location. We just renovated it, and I don't see any real issues or concerns in that. We don't have any other really major tenants rolling there.

At 1220 19th Street, there is virtually nothing in the (multiple speakers) next 18 months rolling. And as you know, at 1776 G Street from our supplemental, what we have rolling there is the IMF in the next really 12 months out. And we think they're probably going to renew for a year, but we don't know. And World Bank is further out than that.

Do you expect pressure over rate?

I think we'll hold rate, to be honest with you.

Okay, turning to the apartments for just a second. How far away are you from seeing some rental rate growth in the market?

A while.

I don't think there is rental rate growth this year, Paul. And if there is, it's modest.

Paul, what Skip was mentioning in northern -- here in Montgomery County between Bethesda and Rockville, there's an extraordinary -- vacancy currently is 10 percent or a little above that. But there is a lot of product under construction which hasn't come to the market yet. So it's going to continue to be weak. D.C. has approximately 4,500 units being delivered over in the East End area during this year. And there's other buildings under construction. Now, a number of those have been converted over to be condoed. But that market is going to -- and it's also causing pressure on rents in D.C. in general.

In Northern Virginia outside the Beltway, you have an awful lot of product out there in vacancies. And I think in the early-stage and probably over the next six to seven months, we will see some lease-up. But I don't think we are going to see any really, truly positive rental rate growth there.

Paul, also what you hear a lot of these people doing, particularly the new developers to a large degree in residential is that they are playing games with concessions. And they -- you might hear rental rates showing some sign of growth, but they're offering like two months free on a 14-month lease or something along those lines. So they're playing a lot of games with free rent, particularly in these new developments.

Some of them are -- like JPI, the merchant builders out there, they -- Skip mentioned, they'll do deals where -- eight months -- they'll do a 12 month lease, but four months will be free rent. What they plan to do (ph) is build those rent rolls up, and then they're selling the project as merchant builders. And it's up to the buyer to (technical difficulty) -- where he wants to go, as far as the way that cash flow and rent roll is structured.

So you'll still have operating expense pressure in '04,so the sort of 5 percent declined in same-store NOI, you don't see that reversing for awhile?

My sense is that stay relatively flat through the year, because I can't see our vacancy rates increasing any. And I don't see our income rental rates going up. So if anything, I think we'll see some modest growth in occupancy.

Okay, and then turning to industrial -- could you just comment on the market rates in the various sub-markets? You know, have you bottomed out there?

Yes, I think they have. Let me just comment -- I think what's probably leading you into that is the fact we had some rent rolldowns. That's really, the factor that hadn't (ph) occurred there is we had a number of what I would call high-rent tenants particularly out in the Chantilly area, and even in Beltsville, Maryland, that had some of the higher leftover rents from when the market was good. And then we pretty aggressively -- as you knew, we had some vacancies -- so we aggressively went after a couple of tenants. So you almost had a doubling factor. You had probably an irregularly high rent expiring in a couple cases. And we went after a couple tenants with some aggressive proposals. And we were more than happy to do that, to sort of cut into our vacancy.

So that is why I think maybe it was a little bit of an exaggerated rolldown in rents on our behalf, because we wanted to really bring our occupancies up. I think that rental rates in general in that area are going to be stable this year. There might be some minor increases, but you still have the issue in northern Virginia -- in particular with the flex properties where they're competing a little bit with office space that's a little soft. So I think we will see a relatively flat, maybe slightly up market.

Okay, one more question. If you could just comment on the acquisition market, and any changes you have seen in sort of -- where you're expecting to go this year?

Let me say we haven't seen a change yet, but I think it's coming, because if you take the ten years (ph) up 78 dips (ph) in the last three to four weeks -- and I guess I tend to break down in two ways -- one, institutional sellers strategically plan to sell their properties. And normally, they will -- the market tells them what the price is regardless of what they may hope for, and they will move ahead and sell very often. The concern I have -- and there are a number of properties that we are looking at right now that are owned by individuals or partnerships and so on which are closely held partnerships. And my concern there is it's going to take them awhile to realize that the cap rates have got to go up. It just does not make any sense when you figure your cost of capital to acquire these assets.

So we're still expecting to do 100 million. We are looking at certainly a substantial volume of dollar amount in properties over that right now. But I'm really concerned as to where it's going to end up just because of what I said. I am concerned at what the sellers are going to be thinking now, because if you take a look at these numbers, if you reflect that 78 basis points increase, and you take a look at what that does and looking on a spread basis, that's going to -- I would think it should, anyway, cause an 8 to 10 percent reduction in the value of these properties. I'm not talking just cap rates. I am talking about dollar amounts here. The cap rate is working off the spread.

So would you expect to apartment market to loosen up first? Or how do you look at that?

I don't know, to answer your question. I can't give you a good answer on that, because this apartment market has been extraordinary. People are paying prices for properties that the fundamentals are so weak -- I just don't understand it. And particularly the high cost per unit they're spending for the properties, and then the huge amount that's under construction.

The concern I have is the properties that we would like to acquire that would have some upside with some current vacancies on, I am just not sure with the market returning whether people are going to be willing to sell those properties right away rather than wait until they can lease it up. And there again, to offset some of the -- what should, at least, be a decline in the price of properties as a result of the increased cost of capital.

Are you still inclined to buy more office this year?

If the opportunity -- well, we're really as I said earlier in the last conference call, we're very focused on trying to buy medical office buildings. But all of a sudden, they have become very expensive, because the word has gotten out on the street and everybody and their brother are trying to buy medical office buildings, and some groups have been formed specifically to do that. So as far as a regular office building is concerned, unless it has something very, very attractive to us, we are going to try to keep our level of ownership in the NOI contribution of that pie chart we put out as not to exceed 78 percent or so.

Arthur Beckhoffer (ph), Independent Investors Forum.

Interesting report. My question is if the market begins to look like it's getting overbought in many of these areas where you're having properties, why do you need to raise more money through stock issues?

I don't understand your question, from the stand of (ph) we think the market is being overbought. We certainly never go into the market for debt or equity in this company unless we are in the banks for a substantial amount of money, at least for 75 to $100 million or more, as we did last December. The banks were in excess of 160 million. And we want to keep a high debt service coverage over the 3-to-1. And so consequently, we are going to continue in the future just as we have in the past. As I said, I don't understand what you mean the markets being overbought.

Well, my question related to -- you've got a shelf registration out there.

Yes.

You recently issued some stock, so you have earnings dilution. So my question is -- it seems like this market is not as a bland as it was a few years ago. So why do you need to buy more stuff?

Let me separate the question. First off, the purpose of having a shelf registration is so that we can move very quickly if we decide to go to market to raise capital, either debt or equity. Secondly, opportunities will come along that we will be looking at and we want to acquire assets. Thirdly -- and that gives us the ability to do it both through our lines of credit and then being able, as I just mentioned, more rapidly go to the market for capital.

Thirdly, as far as the recent raise of equity that we did in December, that was really structured because we are one of only four A-rated publicly held real estate companies that I am aware of. And we're really focused. We've told the whole world we are going to stay focused on keeping a very, very strong balance sheet. And from time to time, though it causes some modest dilution over the short term, we will go to the market and raise equity. And that was what we did in December. As you'll recall, we raised about 160 million, of which 100 million was debt at a 5.18 percent return -- cost, and the equity obviously at the same -- couple days later. But it's really a function of financially managing the Company properly to keep it secured.

Frank Layway (ph), Key McDonald (ph).

I have a question about the GSA. There's been some talk about new requirements for office space. I am just wondering what you think this -- how this could impact maybe your leases and the D.C. market in general?

As far as rent is concerned, we don't really chase a lot of government GSA tenants, though we have them -- and virtually everybody will have them in their portfolio. And recently we had we at 1600 Wilson leased a couple of floors to a GSA agency.

The real positive impact for us is that the GSA expands themselves through taking space as well as issuing contracts to the major contractors. There's a lot of subcontracting that takes place, and that's where we really benefit. They become tenants in our buildings, but they use less space. And they also, because of having to bid to get those subcontracts from the major contractor, rent becomes a factor to them, because unlike the major contractor, they don't have the pass-through provisions. So therefore, smaller tenant users related to subcontracts really will occupy buildings such as ours.

In addition to that, and I -- these are numbers that we hear, for every new job that the government creates internally -- and the government is growing, supposedly it creates something like four private-sector jobs. So that is also beneficial to us, because many of those that are -- really, there again, the type of people who use less space.

Are you concerned at all about maybe an obsolescence of certain GSA buildings in the greater D.C. area that could eventually cause vacancies or turning in the market? Not necessarily of your buildings, but in general?

There will be some. But the obsolescence in the GSA area is in the government-owned properties. And in fact, most of them won't even meet the EPA requirements, or many of them would not. What we are seeing, though, is the government is really taking up more private space. And they're out in the market -- and particularly in northern Virginia, looking for additional space. And here in the district, the question is where Homeland Security is going to end up? They have not really taken and determined where they are going to consolidate their operations. So the positive there is their game plan is to have 179,000 employees. And currently of that 179, there are various agencies being consolidated. And there are something like 110 or 112,000 people somewhere throughout the region. What that will do, though, is possibly create vacancies when this consolidation takes place. That's probably over the next three to four or five years.

(OPERATOR INSTRUCTIONS). Chris Lucas, Ferris, Baker Watts.

Just two quick questions. Can I get the retention number on the industrial for the quarter?

(multiple speakers) Let me get you the exact number, Chris. The retention number was 87 percent.

And then can you comment a little bit -- one of the things that I am hearing as it relates to the condo market is that -- it relates to the amount of investors buying into the condo market, which is essentially creating -- while its changed the competition a little bit, it's still for-rent product ultimately that's out there. What are you hearing about the condo market?

We haven't seen a lot of that.

You have not?

No. We haven't been -- obviously, we are not involved in that business to any great degree. And but I would say I would not be surprised -- particularly downtown, there are some great locations. And I think you probably can get a pretty good buy.

(OPERATOR INSTRUCTIONS) We have no questions in the queue at this time.

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 second quarter conference call on July 22. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.