Elme Communities (ELME) 2006 Q2 法說會逐字稿

Welcome to the Washington Real Estate Investment Trust second quarter 2006 earnings conference call. As a reminder, today's call is being recorded. Before turning the call over to the Company's Chairman and CEO, Ed Cronin, Sara Grootwassink, the Company's CFO, will provide introductory information. Please go ahead.

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

Please bear in mind that certain statements during this call 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 rates, leasing activities, and other risks associated with the commercial real estate business and as detailed our filings from time to time with the Securities and Exchange Commission.

Now, I'd like to turn the call over to Ed Cronin.

Good morning and thank you Sara. With me are in addition to Sara, Skip McKenzie, President and Chief Operating Officer, and Laura Franklin, Senior Vice President of Accounting, Administration and Corporate Secretary. As you'll hear from Sara and Skip, all our sectors are performing very well. We achieved positive same-store cash NOI growth both quarter over quarter and sequentially with increases of 6.5% and 2% respectively. Increased occupancy in the office sector and strong performance in the multifamily sector are the primary drivers and I expect these strong operating results to continue.

By now, many of you know this has been a very active quarter for WRIT. First, I'm pleased to announce Skip McKenzie was appointed to President and Chief Operating Officer effective May 30th. Many of you know Skip and I'm sure you will share our enthusiasm as we chart the course of the future of WRIT as I plan to step down as CEO in May of '07. For those of you who do not know Skip, I will briefly bring you up to speed.

Since joining WRIT in fall of '95, he has been the Chief Real Estate Operating Officer. Prior to joining WRIT, Skip managed debt and equity investments in the Washington region for [the Prudential]. Upon learning he was being transferred to Newark (indiscernible) to take on increased responsibilities, we were able to convince him to join WRIT as Vice President of Real Estate. He has provided solid leadership throughout the organization and definitely knows our marketplace.

During this past quarter, we completed several acquisitions totaling 133.4 million. Subsequent to the quarter end, we acquired the last building in the previously announced Shady Grove Medical Office Portfolio so that through today we have closed on $179 million in assets. In addition, we disclosed in our recent prospectus supplemental a proposed acquisition [to the firm] pending the assumption of two mortgages. This $94 million acquisition consists of two properties, one located in Rockville and the other in [Gaithersburg]. Closing is expected in early August.

In early June, we completed two capital market transactions. For the first time since December 2003, we issued equity. Including the [shoe], we issued 2,745,000 shares at 34.40, a 14% premium over our previous issue price. Following the equity offering, we issued 100 million in 5-year unsecured notes with an effective yield of 5.96%. The proceeds paid down outstandings under our lines of credit which have been funding our recent acquisitions and development activity.

Some of you may ask why we issued equity at this time. Frankly, there are three reasons. First, we do not speculate where reprices will be in the future. Secondly, as our acquisition and development activity has accelerated over the last year, our debt service coverage ratio is declining at faster rate than we prefer. And lastly, though we expect to use moderately increased leverage going forward as part of our growth strategy, we will continue to focus on maintaining comparatively high debt service coverages in the process.

In summary, this has been a solid quarter. We're very pleased with our portfolio performance and enthusiastic about our recent acquisitions as well as those in the pipeline. 2006 is shaping up very well and expected to lead to an even better 2007. After you hear from Sara and Skip, we will open the call for questions. I would now like to the turn the call over to Sara.

Thanks Ed. As a note, all per-share amounts are on a fully diluted basis. Net income for the second quarter totaled $7.7 million or $0.18 per share compared to 10.9 million or $0.26 per share for the same quarter in 2005. The reduction in net income is due to two onetime charges recognized this quarter. Severance payments for a former executive plus the impact of the immediate vesting of shares granted to Ed Cronin required by FAS 123R reduced earnings by approximately $0.05 per share. You may also recall in the second quarter of 2005 we recognized a $0.05 gain on the sale of a property.

Funds from operations for the second quarter totaled $20.7 million or $0.48 per share, a decrease of $0.03 per share over the same quarter last year, due again to the aforementioned $0.05 onetime charges this quarter. Our FFO payout ratio increased to 85%, and our FAD payout ratio increased to 117% due in part to the reduction in FFO. We expect the FAD payout ratio to stabilize below 100% next quarter.

For a reconciliation of net income to both funds from operation and funds available for distribution can be found in our earnings press release and the second quarter supplemental financial report, both of which are available on our website.

Overall, our portfolio is achieving very positive core portfolio NOI growth, led by the apartment, office, and retail sectors. Core portfolio cash NOI for our entire portfolio increased 6.5% over the second quarter of 2005. Sequentially, we also experienced positive core NOI portfolio NOI growth, increasing 2% over the second quarter -- over the second quarter of 2006.

Our apartment portfolio is performing very well with the cash NOI increasing 8.1% this quarter over the same quarter of last year, driven by 6.5% rental rate increases and offset somewhat by increased vacancy. Occupancy declined over the same quarter last year as units have been taken off the market for renovation. Taking those units under renovation out of the numbers, our apartment portfolio occupancy was 91.2% for the quarter. Sequentially, core portfolio cash NOI for apartments increased 9.9% with increases in rental rates and lower utility expense.

The office sector has shown significant improvement as core portfolio cash NOI increased 6.3% this quarter over the same quarter last year, with occupancy gains at Maryland Trade Centers 1 and 2, 1600 Wilson Boulevard and 7900 Westpark Drive. Sequentially, core portfolio cash NOI for the office sector increased 2.1% with increased occupancy and higher rental rates. The medical office portfolio is performing well with second-quarter core portfolio cash NOI increasing 3.7%. Sequentially, medical office core portfolio cash NOI increased 1.8% due to higher rental rates and lower expenses.

The retail portfolio is performing exceptionally well. Second-quarter core portfolio cash NOI increased 10.8% driven by increases in occupancy and rental rates. Sequentially, retail core portfolio cash NOI was flat due to minimal lease rollover this quarter.

Second-quarter core portfolio cash NOI for the industrial portfolio increased 2.2% over the same quarter last year due primarily to rental rate increases throughout the portfolio. Sequentially, industrial core portfolio cash NOI increased 1.3% due to slightly higher vacancy at 6.5%.

With the completion of the debt and equity transactions discussed previously by Ed, our balance sheet is in great shape. Our leverage at quarter end was 33%. Our average debt maturity is 6.8 years with an average interest rate of 5.9%. Total market capitalization at quarter end was 2.4 billion. And for the 36th consecutive year we have increased our dividend, effective in the second quarter. The quarterly dividend has been increased 2.5%, or $0.01 per share to $0.04125 per share -- to -- I'm sorry -- $0.4125 per share.

Finally, you will recall that on our last conference call, we increased our 2006 earnings guidance to a range of $2.17 to $2.20 per share. We are now lowering that guidance $0.06 per share to $2.11 to $2.14, due primarily to the $0.05 in onetime charges is quarter as previously discussed as well as some additional FAS 123R charges expected in the second half of the year. Our portfolio continues to perform well, and our outlook is very positive. Now I will turn the call over to Skip.

As Ed mentioned, our portfolio is performing very well. We executed 107 leases in the second quarter. Rental rates on renewed and re-tenanted spaces in all sectors were up, with average rental rate increases of 11.5% on a GAAP basis. On a cash basis, rental rates increased 2.3% with positive increases in every sector except for office buildings which were down modestly.

Tenant improvement and leasing costs averaged $8.76 per square foot throughout portfolio, which is down from the first quarter. Our retention rate this quarter was outstanding. On an overall basis, our renewal rate for commercial properties averaged 89%.

The office sector continues to improve steadily. Although cash rental rates decreased upon rollover in the portfolio, we're experiencing solid leasing activity throughout and overall occupancy levels are improving. At quarter end, our office portfolio was 93.1% leased. At 7900 Westpark we have a signed letter of intent with Sun Microsystems for 65,000 square feet and are putting the final touches on the new lease document which we expect to execute next week.

As we mentioned in the past, Sun is downsizing from 110,000 square feet which lease does not expire until 12/31/06 this year. In the meantime, we have executed an additional 24,000 square feet in prime leases with those tenants that have been subletting from Sun. Therefore, only 21,000 square feet of the Sun space remains to be leased at year end.

The office renewal rate in this quarter was 87.5%. With only 8% of the office portfolio expiring over the balance of the year and good leasing velocity on available space, we expect to continue to reduce overall vacancy as the year progresses. [TI's] and leasing commissions for the quarter averaged $13 per square foot.

In the medical office building portfolio, with few lease expirations and occupancy at 99%, there was nominal leasing activity. In this portfolio, when we renew or lease vacant space, we generally achieve rates substantially higher than nearby comparable -- general office buildings. Rental rates increased 13.6% on a GAAP basis and 1.3% on a cash basis. Only 2.6% of the medical office portfolio expires during the balance of 2006.

The largest rental rate increases in our portfolio were again in the retail sector, with cash rents increasing 14.6% and GAAP rents increasing 22.8% on the 50,000 sq. ft. lease this quarter. These increases were achieved with nominal TI's and leasing commissions at a combined $3.62 per square foot.

The portfolio overall vacancy increase during the quarter with addition of the 58% leased Montrose Shopping Center acquired May 16. During the next 6 to 8 months we will complete renovations of this property, which will enable us to accelerate the lease up of the vacant space. Along with his evaluated opportunity, we anticipate continued strong performance from this sector for the balance of the year as market conditions are excellent.

Our industrial portfolio continues to perform well. During the quarter, we leased 143,000 sq. ft. Rental rates increased 12% on a GAAP basis and 2.8% on a cash basis with $5.03 in total TI's and leasing commissions. The portfolio was 92.6% leased at quarter end. Overall occupancy was negatively affected by the two recent acquisitions at Hampton Overlook and Hampton South and 9950 Business Parkway, which were acquired with significant vacancies earlier this year. These properties account for one-third of the vacancy and omitting them would increase overall occupancy 180 basis points.

Leasing interest for these spaces as well as several of our larger vacancies in the core portfolio is very active. I expect to achieve solid occupancy gains in the third quarter. Our industrial renewal rate this quarter was 85%.

Our apartment portfolio occupancy declined this quarter due to unit renovations and major common area renovations ongoing at several of our properties. The unit renovations alone added 80 basis points to overall apartment vacancies. We've concentrated on pushing our rental rates and rental rate growth has been strong at 6.5%. As we enter the strong leasing season along with the addition of the renovated units, we expect vacancies to decline in rental rates to continue to increase. During 2006, we anticipate renovating approximately 112 units which is 5% of our multifamily inventory. We're achieving a return on investment in excess of 10% from these renovated units.

On the development side, activity in progress is accelerating in all four active projects. At [Roslyn Towers], after a slow start due to complex garage demolition, life safety renovations and environmental remediation, we're now moving expeditiously. We are revising our completion date to the third quarter of '07 in evaluating potential delay cost estimates to the total project budget.

At South Washington Street, we have completed the underground garage phase of the project and are beginning construction of the above grade portion to include 75 units plus 2500 square feet of retail space. We expect project completion in the second quarter of '07.

The Fox Chase shopping center redevelopment is progressing faster than we have anticipated. We're projecting a November grand opening, but I would not be surprised if we open earlier. Leasing interest has been extremely strong on the remaining in line space. In fact, this quarter we signed three small leases at the center for an average cash rental rate increase of 24%.

At Dulles Station, construction is slightly ahead of schedule and we expect to deliver on schedule. There is strong interest in the property and we have issued several proposals to prospects, but at this time there are no leasing negotiations taking place. In summary, leasing activity in all sectors is strong. Market conditions are excellent and the future looks bright. We would now like to open the call for your questions.

(OPERATOR INSTRUCTIONS). Ken Avalos, Raymond James.

Nice quarter. Skip, we wanted to extend our congratulations to you.

Thank you, Ken.

Just a couple of quick questions. Leasing at the Ashby -- I think last quarter, Skip you mentioned that particular small submarket was a little bit tough. Can you give us an update there?

Yes, it's -- yes, to be honest with you that's probably the one property where we're still struggling a little bit. It is still on the slow side. We're about 90% occupied in that property. That was the one where we had the [Saudi] Embassy additions to the vacancy. And to be honest with you, the lease up has been a little bit on a slow side. That's a market that tends to have slow absorption.

We have the only building in that market, and sometimes people looking for apartments tend to overlook the McLean downtown market, so in general, it's a slower lease up, but a great market. So we expect to make progress over the balance of the year, but it has been slower than we would have anticipated, and it's probably our weakest property right now.

Fair enough. Sara, could you just give us a little bit of guidance on the G&A? I think you said 10, 11 million last quarter. That's obviously --

Correct. Obviously this quarter we had $2.2 million of increase in G&A. And over the next two months, we expect G&A to increase another $800,000 to $900,000 over what we had previously projected, so all in that brings you almost to $14 million.

Thanks. A couple more quick leasing questions. I know you have the lease renewal with Sun at 7900 Westpark -- a downsized renewal, but have they comeback to you recently? I know they sold their headquarters on the West Coast, etc., etc., and the company's doing a lot of cost rationalizations. Have they comeback to you in any -- at all recently or do you worry about that?

You mean to renegotiate the lease or anything?

Yes.

No, no -- it is progressing along. To be honest with you, that probably was part of the reason -- you probably know we talked about this on prior conference calls. It has taken forever to get them to the plate. They actually signed the lease and it's here, but we had a small revision to it in the language that we had to send back to them and that's why we expect to get it back next week. They have actually signed the lease. We just need them to initial a change that we made this past week.

But it has taken longer than we would have liked, I think for many of the reasons that you just outlined.

Thanks. Nice job. That's it for me.

Scott Sedlak, A.G. Edwards.

Sara, you kind of touched upon the FAS 123R charges in terms of the guidance outside of the severance. Can you just elaborate on that a little bit more?

Sure. With Ed having a date certain for his retirement of May of 2007, we're having to accelerate the expensing of share grants that had previously been in place, as well as the one that was made this year. And so rather than -- the intuitive thought process would probably be that would happened when he retires because with FAS 123R you have to speed that up. And so we had to take a large hit in the second quarter, and slightly larger hit than we had expected in the third and fourth quarter.

In addition to that, we have a compensation plan that has been modified in which restricted shares -- a portion of the restricted shares that would be granted potentially at the end of this year have to be expensed within this year whereas in the past, they would be expensed post the grant date.

Okay, so some of that -- how much of that actually occurred in the second and how much will actually occur in the third and fourth?

In the second quarter, you had 800,000, and that was due to Ed. In the second -- in the third and fourth quarter, we have -- we're still estimating of course, so we have a range upwards to -- up to $1 million that would a combination of acceleration of Ed's grants as well as the vesting the grants that would potentially be granted at the end of this year.

That's $1 million in aggregate or per quarter?

In aggregate.

Okay. That's good. And then in terms of -- looks like you guys have some assets held for sale. Can you discuss what your plans are for those assets and the potential timing maybe?

Yes. I can talk about that. Scott, there's only one asset held for sale; it's our Lexington building. I don't know if you have actually seen this one. It's a small office building that is on Parklawn Drive not far from our headquarters here. It's approximately 46,000 square feet in size. And it's a property that we think may have some ability to be a potential condo project for someone else to do. And therefore, we think we can get a really nice sales price for that asset. It's just a small asset.

And is that fully leased or --?

No, it has a lot of vacancy and that was one of our thoughts. Not only does it have a decent amount of vacancy, it has a lot of rollover for the property. It's -- again, there is only 46,000 square feet, but 18,000 square feet of that is expiring in the next twelve months. And in combination with some existing vacancy, which is approximately 21,000 square feet, you almost can deliver a whole building vacant.

And in fact, we've had tenants come to us for renewal and we held off renewing them in consultation with the listing brokers for the property who recommended that we really target potential condo buyers for this. But we're looking at all people -- condo buyers, user type occupants, etc.

Okay. Have you seen any type of slow down though with the condo that might impact that sale?

This is office condos. There really hasn't been a whole lot of office condos in Montgomery County. I think there has been two or three. And this is well-suited -- and is really none in this area, which I will call the southern part of the market. There has been an office condo up in the Gaithersburg area and I believe one other north of us, but really the condo crush that you heard down here has been all residential.

In Northern Virginia though we sold building a year ago which (multiple speakers) and that was -- they sold that thing out in 90 days.

Right. It was [8230 Boone Boulevard]. I think might have been two years ago, I can't remember exactly when they sold it -- it was 11/15 of 2004. We saw it. That was exactly what happened, it was the exact same strategy we have done on that property. We made a huge gain on it that had some rollover, we had some exposure to it, and as Ed had mentioned, the guy practically sold it out before we closed.

Okay. Sara, can you just refresh my memory in terms of your same-store NOI growth expectations for the year? If I was recalling, I thought it was like for 3% growth.

Overall, it's about 3% growth, but what I'd like to do is go back to the budgets and compare what we've done thus far this year, I can talk to you about that off-line.

Appreciate it. And one final question just in terms of capitalized interest, can you comment at all in terms of how much interest you guys might be capitalizing with regards to the development projects?

Well this year, we expect and we budgeted 6.6 million in capitalized interest, so that's what we're expecting for the year. In this quarter it was 1.6 million.

Thank you very much.

Jim Sullivan, Greenstreet Advisers.

Sara, I'm still confused about the share grants and the expensing of the share grants. What changed from the last time you gave guidance?

Two things. One is that there is now a date certain for Ed's retirement, which is May 2007. Prior to that date certain, they were being amortized over the period of the grants which is generally for us five years. And so because there is a date certain, you have to accelerate that so that they are all completely vested by May 2007. There would be -- there were several grants that would hang out pass that date.

Let me -- Jim, this whole 123R really became effective January 1 of this year from a reporting standpoint. And the other was the -- for some reason, the auditors had not focused in the first quarter -- in the second -- in the first quarter that I was definitively retiring as -- from management in June, or rather May. And so as a result of all that, that's why this is occurring now. It would have been earlier obviously if they had realized it.

And we didn't -- we didn't understand either. But going forward, you're going to have not only less than others, this 123R are is going to be something to pay attention to.

Okay. And then switching to the office portfolio, clearly the strength of the markets reflected the occupancy gains you've achieved, but I am a little bit surprised that your rents on new leases are still rolling down on a cash basis. Is it a strategy of yours to gain occupancy by perhaps being aggressive on rents? Or what is -- what do the rent roll downs on a cash basis in the office sector tell me?

Jim, I think it's not inconsistent with what occurred before. The markets are improving, but we haven't seen dramatic rental rate increases the most of our markets. Now, of course, there's exceptions to that like downtown Washington. But where most of our leasing activity has occurred, rental rates have -- market rental rates overall have increased modestly.

And what's occurred is many of our leases that were done let's say five years ago, they've been increasing at 3% per annum for five years and the market rate -- what ends up happening is those rollover rents tend to be higher than where the market rent has slightly grown. It hasn't grown at a rate of 3% for the last five years. So that's why you're seeing a little -- that's my philosophy of why you're seeing a little bit of a rent roll down.

And in the medical office portfolio, the initial yields you reported on the acquisition were quite high, but my sense is that the capital expenditures related to those buildings are significant too. So when I think about yields on an after CapEx basis, are they actually higher or lower in your medical office portfolio than the traditional office portfolio?

I think --

That is a tough question.

We looked at this at the end of last year, and last year actually our medical office portfolio yield was higher than our office portfolio. I think that's because TI's in the office sector last year were significant compared to historical levels. Going forward, I think that there's probably greater potential to raise rents in the medical office portfolio. And since most of these buildings are new, I would not expect a lot of TI.

I am not quite sure I clearly understand your question. We bought a couple of medical office buildings, one recently as a matter of fact at -- what was the yield on -- first-year yields on Alexandria --

-- 7s --

Anyway, somewhere in the 7.5 range. Now the other properties which we recently acquired, particularly the portfolio in Gaithersburg, that was around a 6.5 yield, 6.4 first-year yield increasing with 3% bumps in there. Those are brand new buildings with virtually no CapEx. One we just closed on, and another with a 7.5, [there's] going to be a lot of work we have that built into our numbers.

And one of the other things that we do, we talked about our second-year yields in these medical office buildings, by and large many of them are -- if not most of them are virtually 100% leased. The leases coming up for renewal when we do our cash flow analysis looking out for the future, we estimate that there'll be vacancies coming up at -- we're looking at from our experience, those vacancies don't occur because it always looks like we're getting a roll down in the second-year, frankly, rather than an increase due to the fact that we went from 99 to 100% leased taking it down to a 97 or 98% because of the expected rollover which had taken place.

Also I would add that the INOVA yield, 7.5%, that's an aberration. We're not seeing that in the market today. We really sort of found a hole in the donut there, that was not a widely marketed transaction. And that's really not indicative of the market unfortunately.

Also took us almost a year and a half to get it done.

Okay, and the final question, at what point in the future would you expect your FAD to cover your dividend?

In the third quarter. It would have this quarter except for the G&A charge.

Okay thank you.

Charlie Place, Ferris Baker Watts.

Good morning. A couple quick questions, most of them have been addressed. I want to get back to your acquisition outlook for the rest of this year. You'd indicated or you -- in your press release, the fourth medical building is closed in the third quarter here in July. And then I thought, Ed, that you mentioned another $98 million or $94 million acquisition --

Yes, a $94 million acquisition. There are [conduit] loans on those. And we anticipate with the dates that we know right now, the closing should occur no later than August 17. But when you deal with these conduits and you -- they're very difficult to accelerate.

What are those properties again? What kind of buildings?

They are suburban office buildings, Charlie, up in Rockville, Pike and Gaithersburg up sort of where the Biotech area is on Quince Orchard Road.

Okay. I guess I missed the press release on that if you made one.

Charlie, it was in the prospectus supplemental from our last debt and equity transaction.

Okay.

We have not released anything on that since we haven't closed but its firm.

Okay. And then, for the rest of the year, what are your thoughts? Is there going to be -- is there some other things in the pipeline you think are going to be '06 transactions or --?

We have under -- we're in due diligence now for a 30,000 square foot office building in northern Virginia. That's the only thing that is firm and we've got a lot of offers on a number of other properties.

And indeed on that one --

Did I say a 30,000 feet? I meant $30 million if I said 30,000 feet.

-- on that particular deal evidently there is no debt on that property. And as a result, we'll be able to close that pretty quickly provided you get through due diligence.

Yes. Okay. Great. And then lastly, I just wanted to go back -- I think Skip, you were going through the development timeframe, and I just wanted to make sure I've got this right. When you talk about the Roslyn Towers, you have kind of two separate completions. One is the midrise that you were looking to do -- close at the end -- or complete at the end of the fourth quarter of this year. And then the high-rise which was -- is listed in second quarter '07. Did you say that high-rise is now a third quarter '07 target?

That's right.

And is the midrise still fourth quarter this year?

No that went to the first quarter of next year.

Okay.

I think we revised that in the supplemental.

Okay. Well I am looking at the supplemental and it still has the other dates on it.

First quarter of '07.

And South Washington Street is now second quarter '07?

Second quarter of '07 for South Washington Street.

Okay. But the -- you said Fox Chase is on schedule, maybe a little bit ahead and --

The Harris Teeter store, it's -- we are going to have our shops renovated in accordance with the schedule. And of course Harris Teeter is building their own store, so we're a little bit out of control of their store. So they have their own contractor on that, but everything looks to us like it is going to be slightly earlier than this projected November 1 date.

Okay. Excellent. Those are the questions I had. I appreciate the time. Thank you.

John Guinee, Stifel Nicolaus.

David is on another call. As we all know, merchant builders are extraordinarily active in D.C. right now, but within your various portfolios and submarket concentrations, where do you see very little concentration and where do you see cause for concern?

Very little concentration in what?

Very little competition -- I'm sorry. And then where do you see cause for concern in terms of new product in the pipeline?

Obviously we still have a very aggressive acquisition market down here. And we just have to pick our spots. The -- I would say that the more --

Ed, I am talking within your current portfolio and where you have portfolio concentrations, where do you see a lot of new product which would give you concern, and then where do you think you're very well protected in terms of --

I am sorry, I misunderstood what you said. Essentially, we really don't see a lot of new products coming on or affecting our portfolios. I could break that down into two areas, though, for discussion. One is our Dulles Corner property which is under construction. We're sort of second in line out here with the properties that are under construction. There's one that started several months before us nearby -- these are all good locations and competitive. Ours is second in line and there's another one which is about 190,000 feet or 200,000 feet which is nearby, which is also probably several months behind us.

Then, you have a huge drop-off out there in that Dulles access market. You have Trizec on, and Brandywine who have just started some construction which is going to put -- those are much larger buildings -- are going to put them substantially behind us. So with the activity we've seen so far within that marketplace, we are pretty comfortable with that first building which is 180,000 feet.

I would just add also, if you added those together, that's about 1 million square feet of development out there, and that market even on weak years absorbs 1 million square feet.

The other area I think that we need to be able to keep our eye on is probably the high-rise apartments that we have either under construction as far as Rosslyn is concerned up in that Ballston market. You have a lot of condo taking place between there and Alexandria and throughout Arlington.

And indeed, if this condo market continues to see its wheels come off, even though that market -- those two markets I just mentioned are still reasonably strong by the secular nature of the acquisitions of that property type of decline, the sales are still not as rapid as they were occurring in the past. But they're still experiencing some good sale opportunities there.

Now, on the other hand, these guys are not going to be finished for awhile. So I think that could be a competitive standpoint from the view that these get converted to apartments even though their cost is higher than ours on a per unit basis, we could be impacted.

I would also add, John, that where we have our two largest concentrations of office space, Tyson's Corner and Rockville, there isn't a single building under construction. The whole Rockville market doesn't have any anything under construction, nor does Tyson's Corner.

Our medical buildings we don't have any competition whatsoever in those markets, and nor -- when we looked at our industries portfolio, there is little to no construction taking place around those portfolios. They're pretty rock solid in [their] locations.

The highest concentration of construction we're seeing now is mostly out in northern Virginia in the Westfield submarket as well as off Route 28 North and South, and Route 28 South is really the Westfield market. And we really don't have any office exposure in those markets.

Good, thank you.

(OPERATOR INSTRUCTIONS). Scott Sedlak, A.G. Edwards.

I just wanted to follow up with you. You guys have obviously done a good job in terms of increasing occupancy with -- specifically within the office portfolio. Can you -- what -- can you maybe discuss what you consider to be the stabilized occupancy level of the portfolio as a whole?

You mean just sort of a generic one?

Yes.

I think we've always said that it's really tough in a [small town] and office portfolio to maintain much higher than a 95, 96% occupancy because you always have someone coming and going, downsizing or whatever. That 95, 96 is -- you are humming along when you're occupying at 95 or 96%. So I would guess -- I would say sort of that stabilized range being 94 to 96.

Is that just for the office or is that as a whole?

I thought you were talking about office specifically.

I guess both.

Yes, that's what I would call the general office sector. A retail sector unit -- you could probably stabilize that at 97%. The medical office portfolio is another one you can probably maintain at 97. We have got extraordinary property, so we're operating a little bit higher than that. But I wouldn't advise anybody to take something over 97% on a long-term basis in terms of average occupancy, even though we seem to do that. On industrial, I think it's a little bit lower in terms of a stabilized occupancy -- maybe more like the 93 to 94% range.

Okay, so you maybe have some upside in terms of the office and industrial, and I guess then apartment as well, but maybe a little bit of potentially -- I guess some down on the retail and medical office based on current expectations?

I always said if you're at 99% occupancy, there is really only one way to go. That is the way it is.

Yes, the only other --

(multiple speakers) We got a little room when we got -- what was one of our comments we had mentioned with [Randolph Montrose], we now have some space to lease which we're really positive about because that has been one of the issues. We have been having great rental rate growth in our retail portfolio, we just have not had any space to lease. So we feel real positive. That's one of the reasons we feel very positive about that acquisition.

Okay, and one final question terms of the management team, I think you guys have recently kind of indicated that you might be hiring or need to hire somebody else I guess, Skip, to kind of follow with what your responsibilities currently are. Can you talk about what type of expenses we might be talking about in terms of the G&A?

I don't think it will be anything extraordinary.

It won't be any real dramatic change because we have -- for two reasons. Number one, obviously we need to bring someone in to replace Skip, and with the expenses we have seen with the exception of these extraordinary expenses, it shouldn't any higher than we anticipated the first two quarters of this year. Going out next year, effective end of May of '07, I'll be coming off the payroll, so I would say you're not going to see -- you are only going to see a modest increase over the next several months.

Thank you.

At this time we have no further questions.

Thank you again 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 and we look forward to visiting with you personally when have any opportunity.

Ladies and gentlemen, this concludes today's conference. You may now disconnect.