Elme Communities (ELME) 2006 Q3 法說會逐字稿

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

Thank you and good afternoon 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 third quarter supplemental financial information is also available on our website.

Please bear in mind that certain statements during the 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 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 afternoon. With me today are also 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 this has been a terrific quarter. Every sector in our portfolio is performing well. Portfolio-wise we achieved 4.2% same-store cash NOI growth. Strong performance from the multifamily and office sectors were the primary drivers, and we expect these strong operating results to continue.

In particular, it should be noted we're finally achieving positive cash rental rate growth on new leases signed in the office portfolio. During the third quarter we acquired several properties at a total cost of $146.5 million. These acquisitions include the last building in the previously announced Shady Grove Medical Office portfolio, a 140,000 square foot office building in Falls Church, Virginia, and five office and two medical office properties located in Rockville and Gaithersburg, Maryland. Including these acquisitions, WRIT this year has invested $303 million through the end of the third quarter.

In September, we issued $110 million in convertible debt at an attractive rate of 3 7/8% priced off our then all-time high share price. In summary, this has been a very solid quarter. The portfolio is performing well, and we are enthusiastic about these recent acquisitions. 2006 continues to shape up well, and I expect it will continue and lead to an even better 2007.

Now I would like to turn the call over to Sara.

Thanks, Ed. And to note, all per share amounts are on a fully diluted basis. Net income for the third quarter totaled $10.2 million, or $0.23 per-share compared to $13.5 million, or $0.32 per-share for the same quarter in 2005. Excluding the gain on the sale of real estate of $3 million in the third quarter of 2005, net income for that quarter would have been $10.4 million or $0.25 per-share.

Funds from operations for the third quarter totaled $24.4 million, or $0.54 per-share, an increase of $0.01 per-share over the same quarter last year. Our FFO payout ratio decreased to 76%, and our FAD payout ratio was 100%. We expect the FAD payout ratio to stabilize to below 100% next quarter.

The portfolio is achieving very positive core NOI growth, led by the apartment, office and retail sectors. Overall core portfolio cash NOI increased 4.2% over the third quarter of 2005. Sequentially we experienced slightly negative core portfolio cash NOI growth, decreasing 1.2% over the second quarter of 2006, due primarily to increases in operational expenses in the office and the apartment sectors.

Our apartment portfolio is performing very well, with cash NOI increasing 11% this quarter over the same quarter last year, driven by 6.6% rental rate increases. Occupancy declined slightly over the same quarter last year, from 94.9% to 94.4%, as units have been taken off the market for renovation. If you were to take those units under renovation out of the numbers, our apartment portfolio occupancy was 95% for the quarter.

The office sector continues to improve. Its core portfolio cash NOI increased 4.6% this quarter over the same quarter last year, with strong occupancy gains from 88.7% to 93.1%. The largest increases in occupancy were at Maryland Trade Centers I and II, 1600 Wilson Boulevard, and 51 Monroe.

The medical office portfolio is performing well with third quarter core portfolio cash NOI increasing 4.1%.

The retail portfolio also continued to perform well. Third quarter core portfolio cash NOI increased 2.3% driven by increases in both occupancy and rental rates.

Finally, third quarter corporate core portfolio cash NOI for the industrial portfolio increased 0.8% over the same quarter last year, due primarily to rental rate increases throughout the portfolio.

As Ed mentioned, in early September we completed a $100 million convertible debt offering with an over-allotment exercised by the underwriters for an additional $10 million. We were very pleased with the execution, issuing at a 3 7/8 coupon with a 22% conversion premium priced off what had been our all-time high price of $40.80. Proceeds were used to pay down our line of credit, which has funded earlier acquisitions and development. With the completion of this convertible debt offering our balance sheet is in great shape. Our overall average debt maturity is 8.4 years, with an average interest rate of 5.6%. Total market capitalization at quarter end was $2.8 billion.

Now I would like to turn the call over to Skip.

As Ed and Sara mentioned, our portfolio is performing very well. We executed 91 leases in the third quarter. Rental rates on renewed and retenanted space in all sectors were up, with average rental rate increases of 15.4% on a GAAP basis. On a cash basis, rental rates increased 4.3%, with positive increases in every sector, including for the first time in 12 quarters, the office sector. Tenant improvement leasing costs overall averaged $11.30 per square foot throughout the portfolio. On a component basis, TIs ranged from $20 plus per square foot in the office and medical portfolio to $2.11 average in the industrial portfolio. With a positive cash rollover increase we experienced this quarter within our office portfolio, we may have reached an important inflection point. Cash rental rates on new and renewed leases increased 1.8% and GAAP rental rate increased 14.4%. Leasing activity is strong and overall occupancy levels are improving.

At quarter end our office portfolio was 93.3% leased. The lease renewal with Sun Microsystem for 65,000 square feet at 7900 West Park has been signed, and will be effective at year-end. Sun is downsizing from 110,000 square feet. In the meantime, we have executed an additional 24,000 square feet of prime leases with those tenants who have been subletting from Sun. Therefore, only 21,000 square feet of the Sun space ultimately remains to be leased at year-end.

With only minimal rollover exposure in the fourth quarter and only 9% of our office leases expiring in 2007, we expect to continue to reduce overall vacancy in the portfolio over the near-term. In general, leasing conditions throughout the region are excellent in our office markets.

In the medical office portfolio with occupancy at 99% and minimal lease rollovers, we leased 47,000 square feet during the quarter. The strategic location of our properties, combined with excellent market conditions, contributed to outstanding results this quarter. Rental rates increased 25% on a GAAP basis and 8.9% on a cash basis. Less than 1% of the Medical Office portfolio expires during the balance of 2006.

We continue to have rental rate growth in our retail portfolio, with cash rents increasing 6.4% and GAAP rents increasing 10% on a 35,000 square feet lease this quarter. Overall the retail portfolio vacancy increased with the addition of the 42% vacant Montrose Shopping Center we acquired this past May. We signed our first significant lease at Montrose this quarter, rents in excess of pro forma and ahead of schedule. There is very active interest for the vacant space and we expect to accelerate its lease up. We have projected higher tenant improvement costs in the Montrose lease up compared to our existing retail portfolio, due to the poor condition of this space. One area of weakness in the retail sector that we will be watching closely is the home furnishings sector. Currently we have 167,000 square feet of space that is leased to furniture retailers. This year we have already had a 38,000 square foot furniture outlet vacate in our industrial portfolio and Storehouse, a national 9,000 square foot tenant at South Washington Street, is in Chapter 7 liquidation.

Our industrial portfolio continues to perform well. During the quarter we leased 301,000 square feet. Rental rates increased 13.2% on a GAAP basis and 5.5% on a cash basis. This portfolio was 92.1% leased at quarter end. Overall occupancy was negatively affected by the two recent acquisitions at the Hampton Industrial Park and 9950 Business Parkway, which were acquired with significant vacancies earlier this year. These properties account for 22% of the overall vacancies, and omitting them would increase our overall occupancy 180 basis points. Additional vacancy was incurred due to the bankruptcy of a furniture retail I mentioned earlier. Leasing activity overall has been very good and we expect to improve occupancy over the several quarters.

Despite ongoing unit and major common area renovations ongoing at several of our apartment properties, our portfolio occupancy was 94.4%. The unit renovations alone added 60 basis points to overall apartment vacancies. We have concentrated on pushing our market rents higher, resulting in rental rate growth of 6.6%. We expect continued rent growth due to the combination of excellent market conditions and the return to market of our renovated units. We plan to renovate 64 units in the fourth quarter of 2006 and 168 units in 2007. We're achieving a return on investment in excess of 10% from these renovated units.

On the development side, construction activity is robust at all four active projects. At Rosslyn Towers the construction is moving expeditiously, and we have revised our total project budget to $76.6 million to account for the delay claims previously reported. At South Washington Street the project is almost under roof, and we expect completion late in the second quarter of 2007.

This past Tuesday we had a phenomenal community turnout at the grand opening of the 55,000 square foot Harris Teeter grocery store at the Foxchase Shopping Center. Leasing interest has been extremely strong for the remaining in line space, and we anticipate continued rental rate improvements as we recapture and relet existing space to better quality tenants at significantly higher rates as we move into 2007.

At Dulles Station construction is slightly ahead of schedule. To date we have issued several proposals to prospects, but at this time no firm negotiations are taking place. The Dulles Corridor has approximately 1.2 million square feet of competitive properties under construction, but we feel the quality of our property, in conjunction with its visibility and proximity to the airport, will position the building well for prospective tenants.

In summary, occupancies in our portfolio are improving, as are the market in general. And we expect continued operational improvement for the balance of the year and into 2007.

We would like to now open the call for your questions.

(OPERATOR INSTRUCTIONS). John Guinee.

Congratulations. A quick question. When you did your convertible what do you think that brings to the bottom line in accretion versus your normal cost of debt? And then what sort of breakpoint did you look at where you thought it would be a good piece of paper to have on your balance sheet if your share price appreciated marginally, but there was a breakeven at which such level it wouldn't make as much sense?

Right. We believe that in 2007 it will be almost $0.04 accretive. It is about $0.013 for 2006. In 2007 we think it is about almost $0.04 accretive. We looked at a chart and we modeled out our share price from 5% to 13% annually and looked out over five years. And we get to the point where -- when our share price gets to actually $76 is when -- and a dilution of an additional 700,000 shares -- is when we believe it becomes no longer accretive.

Michael Knott.

Can you just talk a little bit on your expected timetable for leasing up the development pipeline?

Skip, go ahead.

I guess you want me to go through all the projects in general?

Yes, that would be helpful.

Of course, Foxchase opened -- we will start with the easy one. Foxchase is pretty much 100% leased throughout the development. It was part of the balancing act. There is two small development nubs, about 5,000 square feet, that were just basically freshly opened this week that we will lease over the next six months. We have lease proposals on both of those vacancies. And again, it is just nominal amounts. So Foxchase is pretty much leased up. On Dulles Station, as I have mentioned, the office building out on the toll road, 180,000 square feet, we have a number of proposals out. We don't have anything firm on any of them. I can almost say your guess is good as mine. We're thinking that we would like to open up with -- somewhere around June or July with at least some of the building leased, but we don't have anything firm on that. The apartment projects, which both open up more or less close together, the first building in Rosslyn we're expecting to start leasing up somewhere around -- we will hopefully start putting tenants in around May of next year. And then leasing, we're hopeful that we are going to maintain a pace of 20 to 25 units per month. And with respect to South Washington Street, we expect to open up there. Again, we might have not have a pace of 20 units per month. It's a much smaller project, but you like to think that you're going to be 15 units or so per month, because it is a very tight market in Alexandria. That project should open up around June of next year, and hopefully again, 15 units per month.

Let me tack on to the Dulles Station project Skip mentioned, which will be able to hopefully have tenants available for next June or July. The tenants that we are seeing so far, and that Skip mentioned where we have some proposals out, are ranging between -- as individual tenants between 40,000 and 100,000 square feet users. Obviously other people are competing for them. I wanted to mention that because to give you an idea of the size interest as far as the tenants are concerned for this space.

On the Dulles Station is the current status sort of what you expected, or is it a little behind what you expected with respect to leasing?

It would be hard pressed to think you would have any leases this far in advance. You would always would love -- I always would love to have leasing well in advance, but not too many projects out there have leased six months or seven months ahead of schedule. I guess we're more or less on pace. Of course, we would love to have a little more activity out there, but we're still very confident. There is activity out there. It is a very strong market. Historically it has absorbed over 1 million square feet a year. It is probably the most desirable market. I think another point that I guess in one regard is painful on one side, but positive on the other. I don't know how familiar you are with the ongoing development with the rail out the Dulles Corridor. One of the concerns that a lot of people have in this market is that that rail is being constructed in Tysons, that a lot of the tenants in Tysons are going to really not be very happy with the disruption and the road traffic out in Tysons area, and will start looking further west. And that has been the traditional migration. On one hand, there may be over the next several years some softness in Tysons as many of the tenants relocate from an area of really very high disturbance, as that Dulles rail comes down Route 7 in particular at grade. It is not below grade out in the Route 7 area. It is expected to be very disruptive to the tenants who office out there in terms of their commuting patterns. And there's a lot of people that think that many of those tenants will relocate out to the Dulles Corridor, which has been the historical migration. That is sort of a positive impact that I think many of the projects on the toll road will enjoy. To the contrary of that is particularly the projects out on Route 7 in the Tysons area there may be some negative impact on those projects.

Then on the retail releasing, do you feel like those releasing spreads are narrowing a little bit -- that your in-place lease rates are getting closer to market?

That is tough to say, because retail is so all over the board. We will say we had some -- seen a little softness in the market. We have referenced some of these issues with the home furnishings sector. We have seen a number of issues with furniture retailers. I don't think overall that retail rents are going down. I think certain sectors are showing signs of some softness. I think that we still feel that we have some real positive potential upside in our portfolio, particularly in Foxchase. Because really many of those tenants we have kept in place to keep cash flow through the renovation. And as we relet those spaces, we're going to get some pretty nice rent pops, particularly in that property. We also have some opportunity possibly with some -- it is a negative on these furniture retailers, but also oftentimes particularly in retail, and I'm thinking of one particular spot in our portfolio where we have a furniture retailer, where we would love to get that space back because we can really pop rent. I think there's a little bit of positives and negative throughout, but I think overall I wouldn't say that there is a narrowing going on.

My last question, I will get back in the queue. But can you just comment on how you think your office in-place lease rates now compares to the market? And then also are you seeing any slowdown in market rent growth in northern Virginia due to the new supply coming online there?

I would say overall we're pretty close to a round market at our existing rates as they relate to the rents that are rolling over the next 12 months. There is probably a little bit of positive bias on a cash basis. On a GAAP basis it would be much more significant. But it is pretty close to market at our existing office rents.

Regarding the market conditions in northern Virginia, I think right now our 7900 Westpark project stands -- have a pretty good prospect of pushing rental rates, because there is really no construction going on in that particular -- there is really no construction going on all in Tysons. Probably a lot has to do with what my comments mentioned earlier. So there is a near-term sort of shortage of space as that market reduces there, particularly in large blocks of space in Tysons.

Out in the toll road there has actually been pretty good activity, particularly in the B Building. And the overall vacancies are pretty much under 10%. We expect them to spike when projects deliver, but right now the markets are fairly good.

Scott Sedlak.

Skip, I just wanted to ask your question in terms of the development pipeline. It looks like the Rosslyn project was delayed a quarter. What does that delay mean? You talked about the $13 million extra in terms of the delay claims. What do those delays and those extra costs mean for the return on those projects?

Well in short they reduced the returns.

I know, but what are we looking at in general now on the returns on the Rosslyn project, the South Washington project and (multiple speakers).

Mid to high 6's, depending on where we come out in rents.

Mid to high 6's?

Yes.

And where do you think -- not that you're going to sell it -- but where do you think you could sell that asset at?

Oh boy, it is tough to say. The numbers we are seeing out there are insane. In fact, I was just reading something that -- a piece that was done on the Class A multifamily where most of the properties were selling at -- they're getting good cap rates in the 5's -- many were in the 4's. So it is hard for me to say, because this is going to be one of the nicest properties in Northern Virginia. In fact, maybe the nicest properties in Rosslyn, and on a fully leased basis it is somewhere around a five cap.

As I recall, was the initial yield expectations on that project closer to like 7 or 8?

Yes. 8 plus.

8 plus?

8 to 8.5.

And that is just all kind of the delays that have been ongoing with the structure of the building and such?

Yes. It is an extremely complicated development. Delay claims, there has been a number of scope increases we had to incur on that project due to these structural modifications. We had three separate environmental contaminations on the site that we had to deal with. Dealing with all these issues from increased interest expense, and we have almost had $2 million worth of added interest costs on the project, just in carrying costs through the additional development time. It was a number of things.

Let me add to that also from the standpoint of where the problem really began is the fact that the as-builts that came with the property when we acquired it -- the property was built something like twenty years before we acquired it. It is two office buildings. The office buildings sector and they way it lays out with the parking garage was where we had the problem -- is the building wasn't built in accordance with the as-built plans. And obviously we didn't know that until we got into the ground.

What about South Washington, where does that yield stand on that project now?

That has been, and always has in the 6's. That is because that is --.

The mid 6's?

Yes. That was a smaller project. It has always been a high-cost project. That is pretty much on schedule, but it is where it was.

Any change to the Dulles project? It looks like -- I know it was only about $1 million, but -- (multiple speakers).

We knew right from the beginning on that project we were redesigning the parking garage. We had a fixed-price contract for the office building, which was fine. There's no significant problem. There has been some minor things with site work, but nothing that isn't within the scope of our contingencies on the actual building itself. But right -- and I think we mentioned on some of the conference calls, we knew right from the beginning that we had it to redesign the parking garage for a cosmetic standpoint and for circulation standpoint. When the original garage was developed it only had one egress point. That is probably most significant thing. Also, it is just a large garage. We felt like we needed to make a number of cosmetic improvements to it. In essence, we finally went through the redesign process of the garage. We knew it was going to be more -- it is actually less than we were somewhat anticipating. The overall cost of the garage is going to be something like $1.5 million increase. Part of that is attributable to Phase II. It is about $1 million increase as it relates to this phase, and that is the $1 million increase that you're saying. It all relates to the parking garage.

What was the $5.8 million referenced in the footnotes then with regards to the structured parking?

I think that is -- I will have to look at that. I think that relates to Phase II. Let me find the footnote so I know exactly what you're talking about. I think you're talking --.

The $5.8 million in the footnote is costs that we expect to spend on the garage, but would be attributed to the Phase II development.

What is going on there, just so you understand, it is a huge parking structure. And because of the ramping system that you have to build, we have to build a significantly bigger garage than we need. We're actually building a portion of this garage which is going to relate to Phase II. When we actually build Phase II, half of the required space are all going to be prebuilt. What that footnotes relates to is that $5.8 million is being attributable -- we are allocating that cost to Phase II of the project. Does that answer your question?

Charles Place.

Real quickly a couple of things here. Looking at the NOI by property type, it looks like on the medical office side is the NOI for your acquired properties is significantly less than your core portfolio. Is there a logical explanation or any explanation for that?

That was primarily due to Dr. Young's portfolio that we acquired earlier this year that we acquired at a lower going in yield than the rest of our portfolios.

Will some of that kind of pull down the margin for the medical kind of going forward, or is that something you can address or make up heading into '07?

I think we will be able to increase rents as the leases roll, but that portfolio --.

Essentially that portfolio is fully leased. There again it is the location. The location of those properties can't be replaced. Really the last pieces of property that could even be built on up there, and they surround the hospital. I would have to say if you really tried to model that, that portion of the portfolio will see somewhere around 3% growth over the next -- each year over the next couple of years purely because there's not a lot of roll over there.

But it is important to know I think that those are surrounding a very strong profitable hospital, and we now control the four nicest office buildings around that hospital. I think over time as the hospital grows, we will be able to push rents more, and that was the whole point of this strategy.

Also, I can't recall if you guys provide any kind of broad range of expectation for property acquisitions. When you're looking out -- or looking at your property acquisition pipeline, and you have done $300 plus million so far this year, is that a run rate that you feel is -- you're comfortable with looking at '07, or should we lower our acquisition expectations? How should we look at that?

Any way you want. Let me say historically we have always sort of bogeyed in for acquisitions somewhere in the -- just putting in $100 million in there. And then some years we have exceeded it, and other years we were less. I think going forward the size of the Company, for the lack of a better word, the price percent on the property, and so on, if that doesn't change -- and we're in the process of putting our projections together right now, so we don't have a firm answer, but it will be in excess of what our $100 million a year projections were in the past. But I think when we give you our 2007 guidance we will be able to give you very specific numbers at that point.

But far as you're looking at the pipeline right now, are you seeing some good opportunities or is the pricing in the market right now make you a little bit less enthusiastic about --.

I haven't been enthusiastic about the pricing in the market for the last two years. But as far as -- we are seeing a lot of volume, to answer your question -- a lot of very attractive situations coming across. We have made several offers here recently, frankly. And it was really interesting -- and we did not get -- we're not successful in those particular deals. The cap rates are still very low in certain properties. We're still looking at some stuff in the 5.5 range, which we don't want to go to.

And what property type is the 5.5?

Office buildings.

And lower 5 for residential.

Right. Even below 5, depending where the residential is located.

You haven't really seen any kind of, I guess for want of a better word, softness in the cap rate environment for property tax you're looking at in the DC market?

None whatsoever. I will give you a good example. Some of the industrials that we have been looking at, they have been -- some of them have gone as low as 6.25 and 6.5. It depends on what they are. They are very attractive situations, but over the near-term there wasn't much roll over so you weren't looking at an opportunity there, and there wasn't any vacancy. There is no sense going to that type of product, there is enough around not to have to go to those cap rate levels.

One last question. I guess I was anticipating a larger charge in the third quarter here as it related to be accelerating of vested options for Ed, like we saw -- maybe not to the degree we saw in the second quarter. Is that -- are those pretty much -- is that issue addressed? Looking at your G&A number of $2.2 million, is that -- kind of are we back to kind of a steady-state number there?

The vast majority of the acceleration for Ed took place in the second quarter. There was an additional $100,000 this quarter. We expect another $50,000 next quarter. But the other thing -- we will have a true up in terms of our year-end compensation expense, bonuses for both the officers and the other levels within the organization. So I expect fourth quarter will be a little bit higher than this quarter. But then I think going forward I think you can get to a run rate close to $3 million.

Ken Avalos.

Nice job. My question is just about the office sector in general and your markets and risk. Really what -- I know metrics have all been trending in the right direction extremely well for you. But sort of -- we hear talk that government procurement spending is either going to be flattish for the first time in a long time. Clearly the single-family housing market is cratering in Northern Virginia. GDP going down. What are you guys look at that gives you comfort that sort of leasing trends are going to remain strong over the next 12 to 18 months? And I will just let you talk about that a little bit, if you could.

Well, let's just talk on the supply-side. Right now our markets are really fairly tight overall. We don't even need to talk about downtown Washington. They've got vacancy rates in the 5% range. If you go into our suburban markets, with the exception of the toll road that we you talked about -- now the Route 28 area, the Westfield area in Northern Virginia -- there isn't a whole lot of construction going on in any of our markets.

In Montgomery County, the Maryland side of the river, there's very little new construction going on. What is going on is fairly spread out throughout the regions. There is virtually nothing going on office-wise in Prince George's County. I think there is nothing going on. I think there's something going on -- a little bit going on in College Park. But from the supply-side of the equation, again with the exception of some of those areas I mentioned in Northern Virginia, the markets are really in balance, and the overall vacancies are fairly tight.

We are all sort of waiting to see from a government spending standpoint where the world is going, but we sort of learned throughout the years that it has never rolled back all that much in this region. And the thing that has always killed us here in this market has been really that out of whack supply equation. We just don't see it right now.

That is really helpful. Thanks, Skip. It is fair to say that in terms of activity velocity you really haven't seen a change at the margin from your submarkets?

No, (multiple speakers) in fact, we have pretty good activity. We have talked a little bit about again we would like to see more activity out on the toll road only because -- not that the really hasn't activity, it is just that we're a little bit worried about that supply out there.

But really Montgomery County -- you see our numbers how we have reduced vacancy recently. It has been good. It has been very good. Some of the areas -- we have talked a number of times about this street right here, Executive Boulevard. This street is starting to firm up pretty well. I bet you I have talked about the last four conference calls how we were a little disappointed with this North Bethesda market where we actually have a lot of property. That is starting to come around, and we're starting to see below single digit type vacancy numbers here. So we're fairly encouraged.

That's great. Thanks. Sara, just a bookkeeping question. I know that you said the margin, the NOI margin, got compressed a little bit in the office and apartment. Is that a fair runrate for that margin or is that seasonality or --?

That is seasonality. That is air-conditioning (technical difficulty).

Michael Knott.

Just going back to the development schedule, can you just summarize the exchange you had with Scott a few moments ago? The Rosslyn Towers, the expected yield is now in the mid to high 6's, and South Washington is in the high 6's?

Right. Mid to high.

Mid 6's.

And that was always projected at that level. Skip pointed out that it is not only a smaller project, we are also building a garage onto the smaller project there. And it is an infill location, but a very, very high-end property.

Right. And that garage is going to serve the retail component of that project.

The Dulles Station, is the yield probably also around 7 or sub 7?

If we lease it as we projected, it will be in the 8's, mid 8's.

One last question on this page. The couple of properties you had to acquire to have the land you needed, are those included in the costs -- the total cash costs on there?

Yes.

Which project are you referring to?

Rosslyn, where we assembled South Washington.

Yes. All the assembled lands in that is in the denominator.

Scott Sedlak.

Sara, I just wanted to ask you real quick in terms of the balance sheet capacity, obviously you guys have been very active in capital markets. How much balance sheet capacity do you believe you have right now?

From a debt standpoint --. We're looking at the fact that I think that we can stay within our debt service coverage range of 2.75 to 3. It depends on where we want to keep that debt service coverage. But I believe that we could put on another $200 million or $300 million worth of debt before we start dropping down into a range that we're not comfortable with.

And you guys are at 2.9 right now?

Yes.

Approximately, yes.

Okay.

It should improve a little bit in the fourth quarter because you'll have more -- you only had one month of the convertible debt deal in the last quarter.

Skip, just on the CapEx side, a little higher sequentially in year-over-year. Was there any one or two leases that impacted those numbers, or is it just trading CapEx for rent?

Hold on a second. Let me take a look at this real quick. I can't think of anything horrible. We had a couple of big office leases that occurred.

Did the Sun Micro lease factor into that one?

Yes, it had some decent TIs in there. And I guess on a risk basis that there probably was a $20 something TI number for 65,000 square feet. Yes, probably. I would say we did have a few fairly large deals this quarter. There was nothing that was off the wall expensive. We had a couple of medical office deals that were fairly expensive in there as well, but those deals tend to be a little bit higher in general.

Is the retail -- is that Montrose in there or what is impacting that -- was it --?

Now, Montrose we only did one lease and I don't think that was done that quarter. I'm trying to think what was high. Give me one second. And I will -- let me just look at a these couple of transactions here.

It was only 35,000 square feet in retail.

Let me look at some of these and see if I can see anything right off the top of my head that screams out at me.

I can get you off-line if that is easier.

No, it will take me one second. I'm just kind of flipping through. Actually, you know what, you are right. The deal we did at Montrose was in this quarter and it was almost one-third of the leasing activity. And it was -- as I had mentioned in my comments, at Montrose -- we mentioned I think when we first announced the acquisition, the center is in horrible shape. And that is one of the value-added opportunities we see.

The actual tenant spaces themselves are an absolute disaster. And they're all going to probably take $20 a foot at least just to build the vanilla shell, and then add on top of that any TI. We did an 11,000 square foot lease at Montrose we actually recorded in the third quarter. It was almost one-third of our leasing on a square footage basis. And that was a pretty high TI. I would anticipate all of the leasing from a TI perspective that we do at Montrose will be at $20 plus in TI's, which for WRIT is actually a high TI number for our retail portfolio.

But keep in mind, as far as --.

All projected.

As far as our projections when we acquired the assets, from a value-added standpoint we had those in our numbers.

Sir, there are no further questions at this time.

Thank you and if anybody has any further questions, just give us a call. All of us are available. We will be here, even though it is Friday afternoon, for another 22 minutes or more. But give us a call, and appreciate your listening. Thank you.

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