Elme Communities (ELME) 2007 Q2 法說會逐字稿

Welcome to the Washington Real Estate Investment Trust second-quarter 2007 earnings conference call. As a reminder, today's call is being reported.

Before turning over the call to the Company's chairman, Ed Cronin, [Kelly Shiplet], Senior Manager of Finance will provide some introductory information. Miss Shiplet, please go ahead.

Thank you and 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 our release please contact me at 301-984-9400 or you may access the document from our website at www.WRIT.com.

Our second-quarter supplemental financial information 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 could include changes in the economy; the successful and timely completion of acquisitions; changes of interest rates; leasing activity 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'd like to turn the call over to Ed Cronin.

Thank you, Kelly.

Good morning and welcome along with Kelly and me today are Skip McKenzie, Sara Grootwassink, Laura Franklin and Mike Paukstitus. I will get that name right one of these days.

I would like to publicly congratulate Skip on his appointment to CEO, in addition to his role as President and Chief Operating Officer. Congratulations are also extended to Sara and Laura on their appointments to Executive Vice Presidents. Additionally I offer a hearty welcome aboard to Mike Paukstitus who recently joined WRIT's executive team as Senior Vice President - Real Estate.

Under their leadership I'm very confident that WRIT will continue to produce excellent results. Now let me turn the call over to Skip.

Thanks, Ed. This has been quite a busy and eventful quarter for WRIT. As Ed has mentioned I was appointed to replace the President and CEO effective June 1 with Ed remaining as non-executive chairman.

I would like to take a few moments to thank Ed for his leadership and service for WRIT for the past 13 years. WRIT has grown and prospered during this timeframe growing from 38 to 88 investment properties and from 137 to 300 employees on staff. Company revenues have grown during his tenure from $45 million per annum to over $220 million per annum. In addition the equity cap of the Company has grown from $320 million to $1.6 billion.

Of equal importance is the dramatic improvement in the quality of the investment assets and the infrastructure and systems of the Company which were rebuilt and overhauled to accommodate the continued growth and expansion for the future.

On a personal level Ed has been a mentor to me and the entire executive staff, and his wisdom and leadership has been an inspiration to us all. Thank you, Ed, for all you have done for WRIT.

During this quarter we also welcomed Mike Paukstitus to the WRIT team. I've had the distinct pleasure of knowing Mike professionally for over 20 years -- first as colleagues in the DEC office of Prudential and second as we intersected on various transactions in our regions. Mike brings a welcome transactional development and asset management experience to WRIT, gained both at Prudential and a private development companies.

You'll be hearing from Mike on the call today as he and Sara report on the financial and real estate operations for the second quarter.

As many of you know from last evening's press release, our fundamentals are very strong this quarter. We achieved 15% FFO per share growth and increased core NOI by 3.2% compared to the same period last year. Also this quarter, we achieved the highest overall economic occupancy we've had in five years. Year-to-date we added more than $225 million of acquisitions to our portfolio and raised over $200 million in capital. This quarter we also modified our bond covenants and entered into a new $75 million line of credit.

During the second quarter of 2007, WRIT acquired three properties for $72 million including one Class A general-purpose office property and two medical office properties. On June 1st, WRIT acquired the Woodholme Center and the Woodholme Medical Office Building for a combined price of $49 million. The properties are located off of the Baltimore Beltway in the affluent Pikesville Owens Mill submarket of Baltimore County Maryland.

The Woodholme Center is a four-story Class a office building consisting of 73,000 net rentable square feet and 277 parking spaces. The building is 95% leased.

The Woodholme Medical Office Building is a 97% leased five-story medical office building containing 125,000 net rentable square feet and 567 parking spaces.

Demand for medical space in the area is high, driven by its proximity to Sinai Hospital located five miles to the southeast and Northwest Hospital located three miles southwest. With an unemployment rate of 3.1% well below the national average of 4.5 and affluent demographics, this is a very attractive submarket in our region as we continue to expand our MOB and office platforms.

Also on June 1 WRIT acquired the Ashburn Farm Office Park, a portfolio consisting of three multistory medical office buildings for $23 million. Located in Loudoun County, Virginia, the 100% leased portfolio contains 75,400 net rentable square feet and 250 parking spaces. Consistent with our medical office acquisition strategy, the buildings are located near the Innova Loudoun Hospital, a dominant growing hospital system in a market with very strong demographics.

I will now turn this call over to Sara to report on this quarter's financial results.

Thanks, Skip. We had a great quarter. Funds from operations for the second quarter totaled $25.2 million or $0.55 per share, an increase of $0.07 per share or 15% over the same quarter last year.

The portfolio performed very well with core NOI growth led by the industrial plex and office sectors. Overall cash portfolio -- overall core portfolio cash NOI increased 3.2% over the second quarter of 2006.

The industrial sector had the strongest performance with core portfolio cash NOI increasing 7.2% with rental rate growth of 4.4% and occupancy levels increasing 160 basis points over the same period in the prior year.

The office sector also performed very well with cash NOI increasing 4.6% from the same period one year ago. Core occupancy increased 310 basis points to 95.5% and rental rate growth was 1.6%. The largest increases in occupancy were at 7900 West Park Drive and 6565 Arlington Boulevard, where more than 50,000 square feet of space was leased.

Our medical office core portfolio cash NOI increased 1.5%. Occupancy remained high at 98.3% and rental rate growth of 3.4% was due primarily to annual rent increases.

The multifamily portfolio cash NOI increased 1.1%, primarily due to rental rate growth of 5.8%. Occupancy was stable for the quarter.

Core cash NOI for the retail portfolio decreased 1% from the same period last year with occupancy dipping 300 basis points to 96%. Vacancy associated with the tenant replacement process at the newly redeveloped shops at Foxchase and the lease termination by Storehouse Furniture at 800 South Washington Street were the primary drivers for the decline.

As of quarter end, our debt average debt maturity was 8.9 years with an average interest rate of 5.4%. Total market capitalization at quarter end was $2.8 billion. Our debt to total market cap was 44% and our debt service coverage ratio was 2.5 times.

For our 37th consecutive year, WRIT announced in May an increase in its quarterly dividend to an indicated annual rate of $1.69 per share.

On June 1st, WRIT raised $59 million by issuing 1.6 million common shares at a price of $37 per share. WRIT used the net proceeds from the offering to repay borrowings under its lines of credit.

On June 29th, we renewed our unsecured revolving credit facility with SunTrust Bank. The facility has a committed capacity of $75 million, improved pricing and a four year maturity. This new facility brings our current line capacity to $275 million with the ability to expand both lines up to $600 million.

Also on June 29th, we successfully completed our consent solicitation to amend the terms of our outstanding unsecured notes. WRIT requested the modifications due to the restricted total assets definition. The change to a market-based asset definition will more accurately reflect the value of our assets and greatly improve our financial flexibility. The modification allows WRIT to increase leverage an additional $475 million.

Fees from the consent process resulted in an approximate $850,000 charge to G&A during the quarter or $0.02 per share. The equity issuance, bond covenant modification, and expanded line of credit all provide tremendous strength and flexibility to WRIT's balance sheet.

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

Thanks, Sara.

As Skip mentioned, our fundamentals are very strong. Leasing activity is positive and our three development projects are coming online during the second half of the year.

This quarter we executed 89 leases for a total of 534,000 square feet, 25.3% of which replaced vacancy. Rental rates on new and renewed leases increased 20.8% on a GAAP basis and 10.7% on a cash basis. Average rental growth rate was 5.8% on a cash basis for residential properties.

Tenant improvement costs for the second quarter were $6.67 per square foot on average, raising from a high of $17.80 per square foot for the office portfolio to $2.27 for the retail portfolio. TI in the office sector were higher this quarter than the 2006 average of $11.85, primarily due to a new 10-year lease signed with Children's Hospital at 6565 Arlington Boulevard, and two substantial long-term leases signed at 7900 West Park Drive located in Tysons Corner.

In the second quarter, rental rates in the office sector increased 14.4% on a GAAP basis and 3% on a cash basis, primarily due to the previously mentioned leases at 6565 Arlington Boulevard and 7900 West Park Drive.

At quarter end our office portfolio was 95% leased, the highest level of leasing and office sector since 2001. This is broken down as follows. DC portfolio is sitting at a 99.8% occupancy level, Virginia portfolio at 96% and the Maryland portfolio at 94%. Our medical office core portfolio is 98.3% leased at quarter end. Rental rates on new and renewed leases increased 17.8% on a GAAP basis and 9.1% on a cash basis.

The strategic location of our properties and the lack of competitive alternatives contributed to outstanding results for this quarter. TI costs averaged $6 per square foot on the 15,000 square foot leased.

In our retail portfolio we continue to achieve very strong rental growth and a 79,000 square foot leased this quarter. GAAP rents on new and renewed leases increased 40.6% and cash rents increased 25.7% driven by leases signed at Westminster, Bradley and Wheaton Shopping Centers. Tenant improvement costs for the entire retail portfolio were $2.27 per square foot this quarter.

The Montrose Shopping Center has been a huge success. We acquired the center when it was 58% leased. With the sod renovations completed this year it is now 90.1% leased, with prospects for all other remaining vacancies.

Our industrial sector was very strong this quarter. We leased 323,000 square feet with rental rates increasing 18.3% on a GAAP basis and 11.3% on a cash basis. This portfolio was 94.6% leased at quarter end.

Our portfolio leasing as follows. Our 1.4 million square feet I 95, 395 Virginia properties are 95% leased. Our one million square foot Chantilly flex portfolio is 91.2% leased and our 1.3 million square foot of Maryland industrial property is 97% leased.

Vacancy is concentrated at Sully Square and Sullyfield Commerce Center in Chantilly, Virginia, representing 39% of the overall industrial vacancy. Our other core properties in the Chantilly market are 98% leased.

In the apartment sector with unit and major common area renovations ongoing at several of the properties, occupancy levels were 90.7% in the second quarter. Our strong markets and infield locations have enabled us to achieve rental growth rates of the 5.8% this quarter. We expect that the combination of the delivery of the renovated units and the beginning of the lease season will contribute to improved occupancy and NOI growth in 2007.

During 2007 our business plan includes the renovation of 100 units. We expect to achieve at least 10% return on the invested capital from these units upon return to the market.

At Bennett Park, construction is expected to be substantially complete on the midrise units in the third quarter and on the high-rise in the fourth quarter of 2007. The building is becoming well-known in the marketplace and we already have preleased 16 units or 36% of the midrise tower.

Clayborne Apartments are expected to be substantially complete in the third quarter this year. Located in the heart of Old Town Alexandria, an area with high barriers to entry due to historic preservation and restrictive construction laws, this is the only new apartment product in the Old Town area for many years.

[Show] completion at [Dulles] Station is complete as of last week. At this time we have no signed leases but have several prospects for large blocks of the space. Absorption of the Dulles quarter is slow but we see signs of leasing activities picking up. According to Delta Associates, net absorption totaled 804,000 square feet in northern Virginia during the second quarter versus only 299,000 square feet during the first quarter.

We look forward to continued growth and even stronger fundamentals for the balance of the year.

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

(OPERATOR INSTRUCTIONS) Michael Knott with Green Street.

I'm wondering if you guys can address share buybacks? I know you just issued some equity, but given that your shares traded at discounts (inaudible), just curious how you view share buybacks as a capital allocation tool?

Yes something that we certainly consider and we look at. In the past we haven't really taken a strong position on that. We certainly believe that our stock price right now is significantly below NAV and as you know it is very expensive to raise equity capital in the public market today. I think given that where we were in the past, it was too expensive. Today it is something we will be looking at as we go forward, but as of right now we have no plans in place.

Can you just talk generally about office market conditions in say suburban Maryland and maybe just a little more broadly in northern Virginia?

Yes. The market, the absorption over the first half of the year has been I would say mediocre at best. The vacancies in both submarkets -- being northern Virginia and Maryland -- are fairly good. Generally depending on where you are in the world less than 10%.

So I think although absorption has been probably slower than most people would have anticipated in the past, given the fact that overall vacancies are well within sort of and equilibrium state, we are starting to see we're continuing to see rent growth throughout most of the region. Depending on which submarket you're in.

Also last couple questions, can you update us on the progress of the sale of Maryland Trade Center?

Sure. Yes. You have a second part of that or you want me to --?

I was just going to ask my last few questions and then yield the floor. So Maryland Trade Center update and then can you remind us your current expectations for yields on your development projects?

Sure. Maryland Trade Center progress -- we marketed the property with a brokerage firm. We received a number of good offers on the property. We've selected a prospective purchaser. We are negotiating a contract as we speak. We are literally down to the last couple of comments. We should have an executed contract imminently and the buyer will be going through due diligence period; and I would expect that the property or close probably later in the third quarter. Maybe middle of the third quarter type thing.

The expected development yields for our three development properties, the apartment properties is 6% range on current cost and the Dulles Station if we had a lease in place was in the mid 8s.

(OPERATOR INSTRUCTIONS) Charles Place with Ferris Baker Watts.

One of the things I wanted to get a handle on was the decrease in year-over-year NOI margins. Is that tied to just your higher utility costs or and real estate taxes or is there anything we can look at that explains the year-over-year declines there?

Part of it is real estate taxes and utilities are both (inaudible) factors in our operating expense line item. And to an extent in some of our properties they are reimbursed and in others they are not.

Looking forward for the rest of '07 when these apartment developments come online, would it be correct in assuming that because you are during the full operating cost of these properties and you don't have necessarily the revenue -- rental revenue -- of a fully leased property that that margin will continue to be pressured in the short term?

Well, certainly in apartments on an overall basis that's true because we will be absorbing costs of getting those properties online. And then of course the rental revenue will come as those apartments are actually leased. But from a core perspective they won't hit our core operating numbers until a year after they are put in service.

Right. Okay, but I guess on the aggregate that may be the case?

Yes.

Can you -- you kind of hit it fairly quickly. Can you circle back and talk about the retail occupancy? How much -- obviously there was some negative absorption there. How much vacancy is now there? Again it's still a very highly occupied property segment but still -- ?

I can give some color on that. As of June 30th our retail vacancy was about 3%, and as you know just from our past quarters we were running 98, 99%. We had virtually no vacancy.

I think we had mentioned either last call, or at least several calls, we were anticipating and we had budgeted a higher vacancy for this year because in essence, we knew that would be turning over a number of the spaces particularly the Foxchase Shopping Center. At Foxchase, as you know, we put the Harris Teeter in last year and what we did during that renovation is, we pretty much held onto a number of tenants on a month-to-month basis just to keep cash flow during that renovation knowing that upon completion of the renovation we were going to upgrade the tenant mix and have a little bit higher vacancy there.

So it was totally anticipated and it was in fact -- it is in fact in our budget for this year. So that is one big reason and another reason our vacancy ticked up just this year is when we brought the Montrose Shopping Center onboard as we mentioned it was 58% leased. Right now it's at 90% leased which is really ahead of where we thought we would be, but all of the vacancy in our portfolio was as a general rule anticipated, with the exception maybe of the Storehouse vacancy in South Washington Street.

But as you know that is a very strong market. I anticipate that will have that leased up. In fact we have activity on it. It is just a matter -- you know how long it takes to get retail leases up.

But I don't figure there is any indication at all on that there's something bad going on in retail market. In fact I think it is positive as we continue to drive rents.

Right. That was the other thing that was obviously pretty eye-opening was the level of rental rate growth. Was that just a function of real strong demand for the location? How do you explain a 40% growth in rental rate?

We have really been driving rents. Part of it is like I said Foxchase was hugely successful. We turned over -- in retail, of course, when you have longer -- you tend to have longer-term leases so you have -- tend to have older rents with the ability to turn them up higher. I'm just taking a quick look at some of our leases to see where we've had some of our biggest tops. (multiple speakers)

Westminster -- there was another example of as you know maybe it was a little bit of an older renovation. But I guess it was maybe three years or four years ago we put a new supermarket in there and some of those older leases turned over. It wasn't a whole lot but when you have a fairly small denominator in terms of rollover every lease makes a big impact. But we had some older leases. I think you're seeing the benefit of -- in two particular cases -- some renovated property.

I mean it's -- to be honest we have great properties in very strong locations and we've really been focused on driving rental rates maybe a little bit at the expense of occupancy. But it's -- we are very, very pleased with that sector.

Just a couple more questions here. On the G&A cost side, you had talked about last quarter that there were going to be some onetime charges associated with Mr. Cronin's retirement. Can you add color specifically to how much of that G&A cost was related to that?

Sure. I would say that roughly $900,000 of that Q&A charge is non-recurring in terms of compensation and then another $850,000 is non-recurring and that was related to the bond consent fees that we paid. So both of those are non-recurring.

And about another $0.5 million related to our systems migration. (multiple speakers) had about $0.05 for the quarter. That is non-recurring going forward so we've got a run rate of about $3.4 million for Q3 and Q4.

The Bennett Park you know you noticed, obviously, that your estimated cost had gone up pretty significantly over the previous quarter. What is behind the -- that?

There was a couple of things. I think we bumped our estimates (technical difficulties). One of the things that occurred that probably we should have updated before is we had, as we become a little more educated on how from an accounting perspective these are going to be brought online we had almost $2.4 million of NOI -- offsetting development NOI in the project. So in essence we had, right from day one, we were reducing our development costs for $2.4 million and as we find out we probably should have made this maybe the last quarter that we are not going to have $2 million of development period NOIs and offsets.

So $2.4 million of that is really an accounting adjustment.

We also added the -- as we went down the final stretches of selecting lobby finishes and stuff we really felt that this is probably going to be the nicest project in Arlington; and we added almost another $2 million of upgrading finishes to the elevator cab, the common area of the lobby, to some of the social rooms and all those types of areas.

So that was another add that we made probably in the last six months.

And there was a little bit of -- there were still some delay claims that we are still wrestling with.

Have you exercised the [green shoe] from the -- is there a green shoe with the share offering?

There is one or was one. It is probably expired. But you know with our share price performance it did not get exercised.

So what is your share count outstanding at this time?

At this moment? It is -- I'm sorry. Give me one second. I've got it in another place. $46.7 million.

Last question. Skip, I would be remiss if I didn't ask you just to kind of comment on borrowing -- excuse me the CAP rate environment. Certainly that's a concern out in the marketplace. How have you when you are looking at acquisitions and, especially when you are talking about are talking to banks for helping to finance transactions, what are you hearing out there? Is your expected cost increasing on the debt side? Is pricing softening in any of the property segments? What is your view on that?

Just to reflect back on just the recent acquisitions as you know I think we report on Woodholme. We thought we got a really good deal with the 7% round numbers going in return and the Ashburn Properties were in the high 6's. I believe it was 6.6 or 6.7. So that sort of some real-time data for you.

In terms of things that we are looking at right now, I think we are still in that range. I would characterize CAP rates as sort of flat. We have not seen them rise. Everybody keeps saying the mantra that you hear is that CAP rates have to go up, CAP rates have to go up.

We say that as well, but we have not seen that evidence yet. I mean I think when we talk to the investment brokers who are the recipients of the offers that they're marketing, they will tell you that they are seeing less offers but they are still seeing fairly robust interest from all kinds of buyers.

So it is still -- this is still one of the top two or three markets in the country. There is still a lot of interest from a variety of different buyers. So we have not seen a major softening of CAP rates breaks yet.

So it's a lot of digging. We are out there digging for assets and it is not easy, but we do have things in the pipeline; and we are confident that we are going to continue to find not only acquisitions that are accretive but ones that we can grow over time.

Thanks. I will let someone else get in here. Thank you very much.

Chris Lucas with Robert Baird.

Good morning, everyone. Very nice quarter. Just a couple of follow-up questions. On the Maryland Trade Center sale, what do you anticipate the proceeds to be used for?

What we want to do is we want to do a 1031. So we actually have a prospect in our sights right now and then we have -- we are hopeful we will find other properties. We have got irons in the fire but our intention is to buy other assets.

Are you asking me specific sectors or --?

No. I guess I'm looking at the balance between debt repayment, a 1031 transaction or potentially share buyback.

Our intention right now is to do the 1031.

On the share buyback question, Skip, what -- is their authorization to do so or does that need a board approval?

Yes. That would need board approval which we don't have right now.

So you currently aren't able to do that.

Not without further board approval.

Then, Sara, just to kind of go through the G&A numbers again. If I take the $900,000 in the comp, and $850,000 on the consent and the $500,000 on the system integration, I get to essentially a lower run rate than what I thought I heard which is somewhere close to $3.1 million and $3.4 million.

Is there something else that should be positively adding to G&A expenses for the second half of the year?

Yes. Basically we are anticipating increased incentive compensation.

Very good. Then in terms of the Bennett Park transaction, Skip, can you -- I guess I don't fully understand the NOI comment you made. Is that NOI that was being generated that you're offsetting the cost against? And what is that NOI coming from?

We were just anticipating that as we were still in the development period we'd have around $2.4 million of NOI before we actually brought the property into a stabilized basis, which was there from day one. So in essence our budget from day one was $2.4 million more. It's just that we felt we would have offsetting the overall cost which we shouldn't have been carrying.

So that is an accounting treatment issue. That is not a change in the fundamental thought process about how it -- okay.

Exactly. I probably didn't artfully describe that, but you are exactly right.

Then in terms of -- again the investment market that is out there, I think to follow up the question that Charlie had asked, in terms of the quality of buyers, the funds [flower] and the competition that you are seeing and the things that you are looking at and the things you made the disposing of, has there been a material change in the marketplace at this point?

I would say no. As I mentioned before I think maybe there's lesser buyers out there, but they're still enough to generate significant competition. Let me also just mention the one that we are selling, Maryland Trade center. We had a whole number of offers on that property. So there was no shortage of buyers for the asset.

I think that maybe we had less buyers than we might had a year ago but we had plenty to generate three very competitive offers on the property to make sure that we got what we believe was a very attractive price. I think that is sort of what we are facing as we go forth in the marketplace.

Of course, depending on what type asset you are buying, you see different buyers. And then we see different competitors when we are looking at industrial properties than we see when we are looking at MOBs than we see if we are looking at downtown office buildings.

So there's a variety of different people but everybody and his brother is competing in Washington because everybody wants to be here. I think that's the bottom line.

Then to that end, I guess, relative to sort of the beginning of the year guidance and on acquisitions I think you've blown through that number through the first half of the year. Do you have a sense as to what acquisitions should be for the second half of the year?

You know we gave guidance. We updated our guidance last quarter to $250 million for the year and of course we've done $226 million. So it's likely that we would exceed that $250 million, but we haven't updated guidance.

Then just the last question, just on the debt capacity, Sara. You had mentioned with the consents that you now have it sounds like a significant amount of capacity, relative to the covenants. How does that fit within the ratings scheme, do you think?

Well, obviously, we can't increase leverage $475 million without affecting our ratings and we have no plans to do so right now. But it does give us more flexibility even within our current ratings, as well as if in the future we decide it is appropriate to expand from there, we have that availability.

Do you have a sense as to what, then, the acquisition capacity is given the current structure for future acquisitions?

I will say that we intend to borrow and not have to issue equity for quite some time. I think that we have several hundred million dollars worth of capacity. But it is tough to say because the rating agencies look at more than one criteria.

My last question is, given that you are sorted heading down the homestretch on your three primary development projects, what do you anticipate your development team to be working on, say, six months to a year from now? Do you have things lined up or is it -- what do you sense that opportunity to be?

We have got a number of things in the works. Right now even just on our existing portfolio that they are looking at, they are more on the front end of those other projects than on the back end.

Let me just give you some examples. I think we might have mentioned we have excess capacity at 6565 Arlington, where we could build a building. We are looking. Those guys are actively working with design teams and zoning people on what the next phase is going to be there. We have got -- Randolph Montrose is part of a -- we are engaged in the master planning process of Montgomery County and in the (inaudible) sector. Those guys are working with architects and the county there. So we've got property in Alexandria that has excess capacity. They are working with architects there as well.

At 8301 Arlington has additional FAR so these guys -- if you went down to our development group, they are all wondering how they going to get their work done. It's not a matter of having work to do, it's -- as you know the development is a long process. It takes 18 months to build a building, it takes a year to design a building, it takes another year to get it approved. So they are working on the front end of something and the back end of others. But believe me, they are very busy.

Very much appreciate it. Thank you.

Ken Avalos with Raymond James.

Most of my questions were answered, but I just wanted to sort of beat a dead horse a little bit with asset pricing and the stock pricing. Ask Skip -- you yourself have said that stock price is obviously well disconnected from the NAV. We feel the same way. CAP rates haven't moved, but I think you said you think they're going higher.

So what are some of the issues that the board and the management team sort of beat around as they discuss the outlook strategy and the best long-term plans of the Company in demonstrating shareholder value and the underlying asset value?

I don't want to get into -- telegraph what we are doing to the market, but I think that as a general rule we are all very disappointed with the stock price. We think that the NAV of the Company is significant -- significantly greater than what is being reflected by the public markets and we are discussing different things.

But we are extremely disappointed and that discussion is ongoing.

Thanks, Skip. Nice quarter, guys.

John Stewart with Credit Suisse.

Skip, it sounds like you've got at least one specific deal in mind for the 1031 and the Maryland Trade Center. Can you just give us a sense for the magnitude?

I had rather not because nothing is firm. We've definitely got one iron in the fire. It is not enough to cover the entire purchase, but I don't really like to talk about anything that is prospective and we don't have a firm contract on.

But I would say we are in due diligence on one asset. Nothing is firm. We are digging around the bushes making sure everything is what it should be, but we will need additional acquisitions to cover the full sale price of Maryland Trade Center when that sale occurs.

But we have time and we feel that we've got other prospects to cover it.

That's helpful. Thank you. In your opening remarks I think you've indicated that you have had some prospects for Dulles Station. Can you kind of give us a bit better sense there? Then you also indicated that the yield if you had a lease would be in mid 8's.

What is your revised forecast considering the downtime seems like it is going to be a bit longer than anticipated?

Yes the mid 8's was the stabilized yield so that would be upon lease up. What was the first part of that question? (multiple speakers)

Prospects.

Okay, prospects. Yes, we have several offers out to real tenants. Of course, as you know and as we have sort of lamented in a way, there's other competitive buildings out there. But I can tell you in one particular case we are finalists for a fairly significant tenant to his out there. It doesn't mean we have it, but we do have irons in the fire, so to speak.

But it is a very competitive market. In terms of returns I still think we are confident that, from a rental rate and a return perspective on a stabilized basis, we are going to achieve that 8% rate whether we lose a little bit may be is a possibility. But we haven't really seen the rental rates decline for the Class A buildings. So that is somewhat encouraging.

On the other hand I think the lease-up will probably the longer. So our stabilized yields will probably be about where we thought it was, but it may take us a little bit longer to get there.

How far the way towards stabilization would this one tenant that you are a finalist for take you?

Yes (multiple speakers) it is a little bit flexible but it's hopefully as much as 50% of the building. We also have another offer to a tenant that is even greater than that, but it's a little more speculative.

Then, a quick question for Sara, just on the mark-to-market calculation. I guess the -- following up on an earlier question, the rent spread seemed pretty high relative to what I would have expected. Can you just confirm, is this the 20.7% across the board? Is that beginning cash over ending cash? What is the calculation?

That is -- the 20.7, that is a GAAP rate.

Okay. What would the cash have been?

10.7.

Michael Knott with Green Street Advisers.

I was wondering if you can just go through an update (inaudible) on what you think the embedded rate growth is for each property type given in place rents and current assessment of market?

Sure.

This is on what is expiring over the next 12 months. Not the entire portfolio.

Right. Is that the correct genesis of your question, Michael, like over the next 12 months how -- where we stand relative to market?

Just if you could hypothetically release your entire portfolio today, by property sector what do you think?

You know what? I couldn't answer that question because I don't -- we don't analyze it, but what we do do is we look out over 12 months and we have a pretty -- I can give you a pretty good snapshot of that. But we don't go through and announce as marking our entire portfolio to market rent. So I -- I don't want to shoot that out at you because I just don't have that data.

But, Michael, we do have a lease expiration schedule on page 21 of the supplemental and you can look at those average rental rates and compare them to the rents that we achieved. That will give you some ballpark.

Okay and then can you just talk about your assessment of the performance of the assets you acquired, say, over the last 12 to 15 months?

Yes, no -- I mean they've been great. They have been more or less what we've anticipated. I think as Mike had mentioned earlier the one notable dramatic improvement was Montrose that we acquired 58% vacant. We are at 90% already. It was much faster than we anticipated. The other properties that had fairly significant vacancies that we acquired last year, those industrial properties in the Hamptons and also at 9950 Business Parkway where as a general rule we were ahead of projections on those and the stabilized assets have performed well.

The other properties had a little less flexibility since they were leased, but we have been very pleased with the performance of all of our recent acquisitions.

(OPERATOR INSTRUCTIONS). John Guinee with Stifel.

Ed, have you ever had any share buybacks during your tenure at Wash WRIT?

No.

Any reason to change that?

Actually in the history of the Company there has [never] been a share buyback.

Any reason to change that strategy and philosophy?

As Skip mentioned, I think it's something that needs continued discussion. My sense has always -- this is a personal viewpoint and I'm not speaking for the board when I say this either, but I do think there's some sensitivity to that at the board level.

Frankly it is so expensive to raise equity capital in real estate it is so capital-intense -- unlike so many other industries and the lack of ability to retain earnings, you know I can get into an argument on both sides of that whether you buy back or not.

And there is no question right now where we are today and we are not by ourselves in this as far as the industry is concerned. REIT prices across the board I think are as reported substantially in NAVs across the country. And so you can make the academic approach to this and go either way.

But in answer to your question we haven't really discussed it and there -- but I think we need to do the numbers and Skip and I have talked about this. And we have told the board that we are going to come back with some ideas in that regard.

Ed, how long will you continue to office at headquarters and how long we you continue to be on the call and actively involved?

No. 1, I own a lot of stock in this Company so I think I will stay actively involved as to what is going on as one might expect. The other is there are -- in answer to your question I have been reelected to the board for three years. So unless I get hit by a beer wagon I intend to stay on the board. So I don't know whether that answers your question or not.

From the standpoint of real estate itself, Skip and I have been around each other for not only the 12 years that he has been here, but prior to -- in his prior life at PRU in my old private company we worked very closely with him and so I think we do kick around a lot of ideas with each other. I'm not going to be proactively involved in the operation of the Company.

Sara, Skip, it looks like you ran a $0.58 first quarter and a $0.59 or $0.60 second quarter excluding onetime items. If you do the math to hit the midpoint of your guidance, you are only going to hit $0.55 or $0.60 quarters for the third and fourth quarter. Given the strength of the fundamentals it seems much more likely that you would be closer to a $0.59 or a $0.60 run than a $0.55 or $0.60 per-share run.

Can you comment on that?

John, we chose not to increase guidance at this time and I think that your numbers might be a bit aggressive. But there were in essence to at least $2 million in non-recurring charges in the quarter.

Last question or second to last question. You increased the dividend 2.4% $0.01 a share on top of a current 5 1 dividend yield. It is about a 7.5 total return dividend plus dividend growth. Clearly you could have increased your dividend more. Ed, what was the thought process there?

We just felt we would continue at the same level we had in the past. We didn't get into a lot of numbers in determining whether we would increase the dividend any greater than we have on a per year basis.

Thanks a lot.

One other comment, yes, Skip.

I think we have been trying to keep our Fed, keeping to drive that down and we are very conscious of (multiple speakers) Fed payout.

Steve (inaudible) with Credit Suisse.

I was just wondering what property types looked most attractive against going forward in terms of how the NOI contribution mix might change over the next three to five years if at all?

Are you talking about in terms of acquisition prospects?

Yes. In terms of acquisition prospects or just kind of portfolio recycling.

It is hard to say. I mean as we have sort of stated over and over we try to remain very opportunistic. As you know we have been very active in the MOV sector. I think we will continue to be very active in that sector. Having said that, I mean, we are looking at office buildings and what I would say is, it's still very hard to find retail and very hard to find multifamily. So those are ones that you really make -- there's just not a lot of liquidity in our market for those property types.

It is hard for me to telegraph what opportunity will be around tomorrow because we are looking at a lot of different things.

On the development pipeline, correct me if I'm wrong, but I thought that I heard you say that that the Bennett Park midrise apartments were 36% preleased?

That's right.

When will that commence?

Well actually August 1st we are supposed to start delivering units to the -- how many units? 18 units?

16.

16 units. You know that midrise building is only 46 units. So -- but we are -- those 16 people are taking delivery in a couple of weeks here.

I guess finally on the acquisitions during the quarter it looked like they were relatively well leased. Can you kind of just discuss your plans for how you can obtain additional upside and maybe if there's kind of how the mark-to-market or how the expirations will occur with those assets?

Yes. Sure. Those, as you correctly identified, those are very strong MOB assets and they have nominal vacancy. Woodholme has, I believe, 5% vacancy in one of the buildings and the other one was even higher occupied. In terms of Woodholme, we see that -- we see rental rate growth because it is such a strong market, but obviously there's not a whole lot of occupancy growth. So we expect to see sort of steady return growth on that asset. And the same thing for Ashburn.

They are both -- I wouldn't say they are dramatically leased below market but because of the strength of those markets and those assets, we see those as being sort of steady core assets, where we can continue to drive rents. And we have been able to do that in our MOB portfolio because of the strength of locations. So that's how I characterize. You are not going to see a big giant pop out of those if that is what you're asking.

And then (inaudible) what was the size of it and the amount of space that was associated with it?

I'm sorry I missed that.

On the lease termination fee. What was the size of the magnitude of the fee and the amount of space that was associated with it?

I don't remember their being (multiple speakers) -- .

It was very small. Can I get back to you on that one?

It was nominal.

It was insignificant.

There are no further questions at this time.

Okay. Skip.

Well, thank you, everyone, for listening to our call. We appreciate the interest in the Company and look forward to talking to you in three months.

Ladies and gentlemen, this concludes today's conference. You may now (technical difficulty)