Elme Communities (ELME) 2007 Q3 法說會逐字稿

Greetings and welcome to the Washington Real Estate Investment Trust third-quarter earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Sara Grootwassink, Executive Vice President and Chief Financial Officer for Washington Real Estate Investment Trust. Thank you. Ms. Grootwassink, you may begin.

Thank you, and good morning, everyone. After the market closed yesterday, we issued our earnings press release. If there is anyone on the call who would like a copy of the release, please contact me 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 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, 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 Skip McKenzie.

Thank you, Sara. Good morning, everyone, and thanks for joining us. With us today are Laura Franklin, the Executive Vice President of Accounting and Administration and Corporate Secretary, and Mike Paukstitus, Senior Vice President of Real Estate.

We are pleased to announce another quarter of great performance, with 9.3% FFO per share growth over the third quarter of 2006, 6.8% core net operating income growth and an impressive 95.3% core occupancy.

All of our sectors are performing extremely well, as occupancy and rental rates continue to increase in the WRIT portfolio. We continue to improve the quality of our portfolio through strategic acquisitions and disposition of select properties. This quarter, we completed the sale of Maryland Trade Centers I and II for $58 million. WRIT acquired the office properties in 1996 for $28 million and achieved a net book gain on sale of $25 million. Over the 11-year WRIT ownership period, WRIT achieved an unlevered internal rate of return of 16.9%. We will reinvest the proceeds from the sale in a 1031 exchange.

The acquisition of high-quality medical office buildings in the Washington metro region continues to be one of our core strategies. Year to date, nearly half our acquisitions have been medical office properties for a total investment of $119 million. In August, we acquired the 52,000-square-foot CentreMed I and II medical office buildings located in Centreville, Virginia, for $15.3 million. The property is located in Fairfax County off the Route 28 Centreville Road intersection near I-66 in close proximity to Inova Fair Oaks Hospital and Prince William Hospital.

We expect continued rental rate growth from this 100%-leased property as it is well situated at an infill location with strong demographics. We project a [first-year earning] leveraged yield of 7.2% on a cash basis and 7.6% on a GAAP basis.

In September, WRIT acquired land for development located at 4661 Kenmore Avenue, Alexandria, Virginia. The property is adjacent to WRIT's medical office building, the Alexandria Professional Center, and is less than one-half mile from Inova Alexandria Hospital directly off I-395. By right, WRIT may develop 70,000 square feet of office space on the site, but will pursue the potential to develop additional square footage with the modification of zoning.

We believe there is tremendous demand for additional medical office space at this infill location. At this time, our 100%-leased Alexandria Professional Center is the only medical office building proximate to Inova Alexandria Hospital, which is currently undergoing an $84 million expansion.

In early October, we hosted an investor day and property tour. We began the day at our Bennett Park development and toured an additional 22 properties in Virginia and the District of Columbia. If you haven't already, I encourage you to review our tour presentation, which can be found on our website.

I will now turn the call over to Sara, who will discuss our third-quarter results.

Thanks, Skip. As you mentioned, we had great performance this quarter. Our FFO increased 9.3% to $0.59 per fully diluted share. Occupancy increased 110 basis points to 95.3% for the core portfolio and increased 60 basis points to 94.8% for the overall portfolio.

We're particularly pleased with our core net operating income growth, which increased 7.2% on a cash basis compared to the same quarter last year. All sectors of our portfolio contributed to the increase, with office and retail sectors achieving the highest gains.

Our market, the Greater Washington, D.C., region, is strong and stable. We are currently experiencing low vacancies and steady rent growth in all submarkets. Office properties' core cash NOI increased 9.1% from one year ago due to improved occupancy levels. For the fourth consecutive quarter, core occupancy in the office sector increased, reaching 95.5%, resulting in net revenue growth of 7.1%.

Market data shows vacancies in suburban Maryland have increased slightly, although our office properties in this area are performing well and are currently 94% leased. Vacancies in the District have declined and rental rates have increased. Our office properties located in the District reflect this trend, as they are 99% leased, and the average rental rate on leases signed this quarter was $47 per square foot, with only $20 in TI.

Northern Virginia rents have increased mainly in the Rosslyn/Boston corridor and Tysons Corner markets, where many of our Northern Virginia office properties are located. Our properties in the Northern Virginia submarket are 94% leased, and our rental rates on new and renewed leases increased 6% this quarter.

Retail properties' cash NOI increased 7.7% this quarter, with net revenue growth of 6.2%. We're still seeing the results of The Shoppes at Foxchase redevelopment completed in October 2006, which has been extremely accretive. Most rents are in the 30s, but some leases are substantially higher. We also experienced substantial rental rate growth at Bradlee Shopping Center, another very strong shopping center located in Alexandria, Virginia, and Frederick County Square, located in Frederick, Maryland.

Core cash NOI for the industrial sector increased 6.8% quarter over quarter. Net revenue growth was 5.1% as economic occupancy increased 20 basis points to 94.5%. The medical office sector continues to deliver consistent positive results. This quarter, core cash NOI increased 5.6% and net revenue growth was 2.5% as economic occupancy remains constant at 99.4%. Rental rates per square foot average in the mid-30s across the portfolio, with continued high occupancy. We believe there is still room to push rent, particularly in the recent acquired properties.

Multifamily properties' core cash NOI increased 3.7% from the same period last year. Rental rate growth was 5.1%. Economic occupancy declined 120 basis points quarter over quarter to 93.2%, but increased 250 basis points sequentially.

Given the earnings clarity for the remainder of the year, we're increasing our 2007 FFO per share guidance from a range of $2.23 to $2.26 to a new range of $2.28 per share to $2.31 per share.

Looking at WRIT's financial position as it relates to the current capital markets, we are in great shape. WRIT has always maintained a strong balance sheet, which is particularly advantageous at this time. While many REITs currently struggle to access capital, we've maintained a strong capital position. In the last year, we closed two new credit facilities with very attractive borrowing rates, with expansion capacity for up to $600 million.

This summer, we successfully amended the terms of our debt covenants, achieving additional borrowing capacity of $475 million. We reduced outstandings on our lines of credit earlier this year with a $150 million convertible debt offering and a $57 million equity issuance. We recently sold two buildings, and we will reinvest the proceeds in a 1031 exchange, providing $58 million worth of equity. This capacity allows us to continue to find the best investments and quickly close on deals.

I will now turn the call over to Mike, who will provide some insight into leasing activity and give us an update on our development pipeline.

Thanks, Sara. This quarter, we executed 66 leases for a total of 323,000 square feet and an average term of 4.3 years. Average rental rates on new and renewed leases increased 22.6% on a GAAP basis and 11.4% on a cash basis. Average tenant improvements for the commercial portfolio were $6.36 per square foot, and average leasing costs were $2.72 per square foot.

Leasing activity in our office portfolio was strong this quarter. We executed 20 leases for a total of 82,000 square feet and an average term of 4.7 years. Net improvement costs were $17.66 per square foot. Rental rates on new and renewed leases increased 22.7% on a GAAP basis and 13.8% on a cash basis. The largest rental rate increases were at our properties in suburban Maryland and the District of Columbia.

By repositioning assets for redevelopment, we're able to achieve short-term and long-term growth in the core portfolio. In October 2006, we completed a facade renovation at Wayne Plaza in Silver Spring, Maryland, and in May 2002, we completed the redevelopment of 1901 Pennsylvania Avenue in the District.

On a cash basis, rental rates on new and renewed leases increased 34% at Wayne Plaza and increased 16% at 1901 Pennsylvania Avenue. Even five years later, we realize the benefits of redevelopment. We continue to identify opportunities for repositioning assets in order to achieve our internal growth objectives.

The medical office sector experienced healthy rental growth, with the portfolio already 99.4% occupied. We executed 11 leases for 24,000 square feet, with an average term of 7.1 years. Net improvement costs were $18.33 per square foot. Rental rates on new and renewed leases increased 19.8% on a GAAP basis and 7.9% on a cash basis. 2440 M Street in Washington, D.C., achieved the highest increase in the sector, a 16% increase on a cash basis.

As you may recall, rents at this property were significantly below market upon acquisition. We're beginning to realize the value of the acquisition as existing leases expire and we renew at higher rates. Again this quarter, rental rates of new and renewed leases in the retail sector increased significantly. We executed 17 leases for 34,000 square feet at an average term of 5.3 years. Rental rates on new and renewed leases increased 37.2% on a GAAP basis and 19.4% on a cash basis. The increase was primarily due to new and renewed leases at Bradlee Shopping Center, our strongest retail property, where we executed a lease at $62 per square foot. We're also experiencing rental rate growth from redevelopment of Foxchase. There were no improvement costs associated with this leasing activity.

Leasing in the industrial sector was also very strong. We executed 18 leases for a total of 182,000 square feet, with tenant improvement costs of $0.88 per square foot. Rental rates for new and renewed leases increased 5.6% on a cash basis. NVIP, located in the I-95/395 Springfield submarket, was our most active property this quarter, where eight leases were signed, for a total of 76,000 square feet.

Our three development projects are nearly complete. This quarter, WRIT delivered all 46 units at the midrise tower of our Bennett Park residential development in Rosslyn, Virginia. The midrise tower was 70% leased at quarter end, beating our expectations for absorption. We attribute this high demand to the property's prime location near two Metro stops, its upgraded finish and the spectacular views. We anticipate delivery of the remaining 170 units in the high-rise tower by the end of the year, and we are already preleased with 10 units.

Construction is nearing completion at the Clayborne Apartments. The Clayborne is a ground-up development project in Alexandria, Virginia, adjacent to our 800 South Washington retail property. Construction of all 74 units at this Class A apartment building is anticipated to be substantially completed during the fourth quarter this year.

In July, WRIT completed base construction on Dulles Station, a 180,000-square-foot development project, for Class A office and retail space located in Herndon, Virginia. The building, prominently visible from Dulles Toll Road and just over one mile from Dulles International Airport, is part of a mixed-use development which will ultimately include 1095 multifamily units and 56,000 square feet of retail and restaurant space, as well as several hotels.

Delivery of new space is ahead of absorption in the Reston/Herndon/Dulles corridor area. While demand has been off over the last 12 months, on the bright side, there are signs that leasing activity is increasing, the most notable example being the relocation of the Volkswagen headquarters from Detroit area. Additionally, we have issued a number of proposals out to medium-sized tenants, and rental rates in general have held firm in this market.

We continue to actively pursue tenants in Dulles Station, but do not have any leases signed at this time. I want to make a few comments about the returns on this property. When we acquired the development, we assumed the fixed-price contract negotiated mid-2004 based upon construction prices at the time. As a result, we were shielded from rising construction costs, but will benefit from the increased rental rates. Based on comparable transactions in the market, such as Volkswagen, we believe we can achieve the projected 8% to 9% return on this development, despite the delays in leasing. With that being said, Dulles Station is at the center of our attention, and we are aggressively working towards getting it leased.

Thanks, Mike and Sara. I would now like to open the call for questions.

(OPERATOR INSTRUCTIONS). Chris Lucas, Robert W. Baird.

Very nice quarter. Just a couple of quick questions. Skip and Mike, can you just give a sense as to what you are seeing in terms of pricing, asset pricing in the market, in terms of either on a price per square foot change or cap rate change, given the turmoil that has occurred in the credit markets?

It's difficult to say right now, Chris. There's a lot of, if you listen to the investment brokers out there, everybody will talk about the disconnect between the buyers and sellers. It's sort of like a Chinese standoff.

But let me give you at least one data point that we have accurate numbers on, and that's the Maryland Trade Center transaction, which we closed, of course, in September, in late September. That was an asset that you're fairly well aware of. It's a suburban office asset that have some vacancy that you would think would be one of the assets that would be heavily repriced. We sold the asset on our basis on approximately a 6.5% cap rate. And it did have some vacancy you could lease up. But in any event, that was a property that went right in the throes of the credit crunch that lenders got over the goal line. Incidentally, the buyer got 78% financing on that.

So it's tough to say right now. If you talk to the brokers in the market, they will tell you that their number of prospective purchases are down, but there's still quite a few out there that create a competitive environment that allows cap rates to still continue to be very aggressive in this market. So I think the short answer is the jury is still out, and we don't have a final answer on that.

And then I guess could you comment on, maybe give us a little bit better feel for what your use of proceeds will be from the Maryland Trade Center sale, in terms of asset price in the market and things like that?

Sure, I'll give you as much as I can at this point. As you know, the Maryland Trade Center sale was $58 million. We did a reverse 1031 with the CentreMed medical office building, so that leaves about $43 million, in round numbers, and we have a property under contract right now -- we're not firm yet -- that would more than account for that amount of money.

And then my last question, Sara, can you give me what the capitalized interest amount was for the third quarter?

Capitalized interest for the quarter was $1.7 million, and we are projecting that to be slightly lower in the fourth quarter, you know, as we deliver floors and the midrise at Bennett Park -- or I'm sorry, the high-rise.

Ken Avalos, Raymond James.

Nice job this quarter, again. It's been a good year for you. I guess I wanted to follow on Chris' question. I'm just trying to drill down a little bit more, maybe get some anecdotal evidence. I know you haven't seen a lot of transactions go through, but if any of you would give us a little color on the composition of bidders now versus a few quarters ago, their financing positions, etc., etc.

And then I guess I would just like a second question, is, Skip or Mike, or whoever wants to comment, give us some thoughts on how you are viewing the market, what you think -- how things unwind over the next little bit, and give us a flavor for your capital allocation decisions going forward. I know MOB has been a big part. Do you still think that continues to be a disproportionate part, or do you see other sectors presenting some opportunity for you? Thanks.

Sure. With respect to the first question, what I'm hearing in terms of the buyers out in the market, you know, they seem to be less the leverage players and more sort of the pension fund advisors and the sort of value-added funds that have a lot of capital. Having said that, as I mentioned earlier, we had a buyer that somehow got over the goal line with heavy leverage, but I am told that the people that are out there today are the pension fund advisors, from the people who are really collecting the offers. That's what we've seen.

Now, with respect to where we see in terms of our asset allocation, of course, we're heavily focused on medical office buildings. We will continue to be focused on those. But we are looking at everything right now. And the asset that we have under contract right now is not a medical office building. So we're looking at everything. It's tough to say at any one point in time where we're going to go with our capital allocation, but we're looking at everything. We're focused on our region, and as we've said in the past, we have to be focused on where opportunity presents itself and where we see the ability to grow rents. And right now, we see it in medical office buildings. We're looking at other asset types as well, and I would hazard to say that before the end of the year, we may have other asset classes under agreement as well.

That's fair, and that's helpful. If I could put you on the spot, if you thought there was one other sector besides MOB where you are most optimistic about or pessimistic about, I would love to hear that.

With respect to acquisitions or just in terms of rental rates, etc., etc., market conditions?

Yes, just overall.

In terms from the acquisition front, it's still extremely competitive on the residential and retail sectors. Everybody is waiting for a little bit of fallout in the residential market, multifamily market from the issues that we are experiencing in the condo world. To be honest with you, we've taken a look at a number of busted condo deals, and we have not seen incredible amount of value in there. There's still a lot of buyers for well-located properties that have sort of come out of a condo regime into the rental market.

Now, that's not to say out on the fringes of the world there aren't some deals that are probably more aggressively priced, but we're not looking out there. But on the infill location, inside the Beltway, in and around the Beltway in the main thoroughfares around here, busted condo deals have not shown tremendous amount of value. They're still going for very high price per pound. And basically, you're buying a vacant apartment building that you've got to lease up at well into the $300,000s per unit, if not $400,000 per unit neighborhood. So that may change, but I'm not expecting that to change in the next four months.

Retail, that sector is still extremely aggressive. We would love to buy another retail property. We're looking at sites, smaller sites, to potentially either add on to our shopping centers or in close vicinity to our shopping centers. There may be development opportunities. But well-leased grocery-anchored shopping centers, I wouldn't paint a pretty picture for the ability to acquire those over the next few months or so.

And then in the office sector, I think there's a lot of shakeout there. I think that, probably more than any other, is the area where you see a huge disconnect between the buyers and sellers. And I think that's probably the greatest area where there will be a wait-and-see to see if things turn. But right now, there's still a lot of interest on well-located office buildings, particularly in the District and inside the Beltway. And again, while there may be some expansion in cap rates, there's no dramatic expansion in cap rates. I would expect that if you're looking for that, you'd better be looking out on the fringes.

Did I answer all your questions?

Yes, no, that's really helpful. And I guess I would just knock you in and ask one more. Are you actually seeing trades done on those broken condo deals, or is that just --

Yes, no, absolutely. And I will give you some examples of -- we looked at the -- if you are familiar with the Rockville Town Center area, where Federal built the retail and a local developer built 644 -- what were supposed to be condo units in Rockville, we looked at that deal. What happened, they obviously couldn't get the condos leased, so what they did is they piled them all into one building and sold basically three of the towers as a vacant apartment building, and that is in Rockville, Maryland. This is not inside the Beltway. It's not Rosslyn and it's not D.C. It's Rockville, Maryland. And those things sold for well into the $300,000s per unit. There's also one out in the Reston corridor that sold for I think it was $440,000 a unit.

So there are big numbers being sold for broken condo deals. Not to say it won't change, but if you are in or around the Beltway, inside the Beltway, there's no bargains to be had at this point.

(OPERATOR INSTRUCTIONS). Matt Konrad, Friedman Billings.

Great quarter, and just kind of wanted to follow up on more of the macro questions that Chris and Ken asked. With expectations of a potential slowdown in the U.S. economy, what is your outlook for Washington? I know that there is a lot of insulation due to government spending there, but what is your outlook? And following up on Matt, what kind of strategies can you and will you take as far as leasing and acquisition with the potential slowdown?

We're not economists. We can only read what other gurus say. But I would say we're cautiously optimistic. At this point, the numbers in our market are still fairly good. If you look at the overall office occupancies, they're still in general less than 10%. There's still job growth in this region. Our unemployment rate is very low. So the fundamentals here are fairly healthy.

Now, having said that, we continue to be worried about what's happening in the credit markets and what's happening in the subprime lending market and what's happening in the residential housing market and how that will impact the world going forward. And specifically what we're doing in terms of our own portfolio, I think a good example is what we have already begun. Maryland Trade Center historically has been one of our weaker suburban office assets. We made a lot of money on that asset. It was an awesome buy for WRIT 11 years ago, but if you followed our progress over the last three or four years, that's always one of the properties that sort of had a little bit less growth and it has been in the somewhat weaker submarkets.

So we sort of pruned that asset, and we will be, we have redeployed some of that money in higher-growth assets, and we will continue to by virtue of the 1031. I think you will continue to see some of that. We're looking at other assets that we may think may not -- we may need to be a little more defensive in going forward. So I think you'll see us maybe put another asset or two on the market.

In terms of our leasing program, we're just aggressively retaining any tenant we have. We're not doing anything particular in that area, but our occupancies, as you can see, are very high right now. We have really nominal rollover in the next 12 months, looking at my office building rollover schedule. Over the next 12 months, I think we only have 12% of our portfolio rolling. So we're really in a good position with respect to where the economy is going. But like everybody else, it's a wait-and-see.

Great, and just quickly to follow up, do you expect any impact of the layoffs that were announced at AOL? I know they own a lot of their own property, but as far as rippling through that Dulles corridor, do you think that will impact you at all?

I do think it will contribute to the softness that's already out in that market. And if you look at the vacancy in the Reston/Herndon region, the stated vacancy is less than 10%. And as you know and we've discussed many times on our conference calls, there is a lot of construction going on out there. And I certainly don't think that is going to help any.

Much of the AOL requirements are in their own Company-owned facility out in the Loudoun corridor. Back in the late '90s, AOL really took a lot of space in the Tysons area and really throughout Northern Virginia, but as time went on, they tended to consolidate almost all that usage on their campus. And it's a very difficult campus to sublease out to third parties.

So, you know, is it going to have some impact? I think it will. But I don't think it's going to be anything dramatic or anything major that isn't really otherwise being affected by the general sort of malaise of that corridor.

Steve Benyik, Credit Suisse.

Skip, I believe you touched upon some additional zoning that would be associated with the 4661 Kenmore potential MOB development. Can you just talk about it? And I guess also the projected development costs, timing -- any kind of color you can add?

Sure. By right, we can develop 70,000 square feet on that property, and through a special use permit, we can take it up to 105,000. So it's about another 50% in density through a special use permit. Now, as in the city of Alexandria, we have a lot of experience doing development there and going through the development process there with Bradlee, with Clayborne, with South Washington, with Foxchase, and it's an extremely difficult neighborhood, town, municipality to get additional density in. So we're going to attempt to get as much as we can, and it will probably be between 70,000 and 105,000. I couldn't promise you which end of that spectrum it's going to be.

With respect to costs, we're still working through that now. We'll work with a number of contractors and some various building designs. So I'm hesitant to mention any particular numbers out there. We're going to be really spending 2008 going through the process with the city. So the earliest you'd see construction on that is potentially put the shovel in the ground in late 2008. I even think that may be aggressive.

I got it. I guess regarding other redevelopment opportunities, can you just touch on what some potential ones might be down the road, whether it's the industrial at Fort Belvoir or kind of things in the District, anything that kind of -- the timing and scope of those projects?

Yes, we're looking at a number of things such as at 1220 19th Street, we have the ability to add -- it's in the [TDR receiving] zone, and we have the ability to add two or three floors to that building. So that's something we are really sort of beginning right now, so it will be something that will take several years to go through the process.

We're also looking at potentially building a medical office building at 6565 Arlington Boulevard, where the really standard office building we bought in Falls Church, where we have had the ability to build an additional approximately 80,000 square feet of additional [FAR]. We will be going through the process on that this year as well.

What am I forgetting, Mike?

Randolph/Montrose.

Randolph/Montrose Shopping Center, as you know, we really -- it's sort of a two-phase project. We are just -- when we acquired that Montrose Shopping Center, it was only 53% occupied. We have currently got it up to 91%, I believe, occupied today, and we will continue to increase and ramp up occupancy there on intermediate term. On a long-term basis, that will be a much denser, potentially high-rise property of mixed-use variety of retail and residential, probably, and that's going through a master planning process in Montgomery County.

This is Mike, I think that one of the more significant that we will be very active here shortly is the NVIP project down in -- near Fort Belvoir. There's a significant amount of people coming into that marketplace. It's clear that there's not the sufficient office space in the marketplace for that, and there's opportunities to basically use the dynamics of all our product lines in terms of evaluating mixed-use opportunities for any various sources of those.

And then, going into a couple of other things, we are expanding into looking at some of the other what I will call underutilized projects that are near the Metro stations down in Virginia. We have several others of industrial applications that certainly could go residential or mixed-use. And some of our shopping center, we're looking at adjacent land parcels, again, that could expand the density on those sites that, moving into '08, we will have a better handle on what the timelines on those could possibly be.

Great, thank you. Just finally on Dulles Station, in terms of the pattern of the leasing, can you just talk about the type of tenants you're negotiating with, what kind of some of the near-term challenges are? And then finally, I guess, regarding Crimson Partners, they have acquired the 40,000 square feet adjacent to your site and then also a future office development site. Can you talk about the size of that future site and what that might imply for the project itself?

Sure. The first part of your question -- we're not negotiating with anybody right now, unfortunately. We have a number of proposals out to people in the marketplace that are the typical sort of Northern Virginia sort of I would call technology-oriented tenants, as well as sort of DoD-oriented tenants. And we have a number of proposals out, some of them big, some of them small. There are not any of them in the sort of high-probability neighborhood, but we think we have a reasonable shot at one or two of them.

Having said that, part of your question was what are the challenges. The challenge is there's 2 million square feet either on the market or under construction or about to be completed over the next 12 to 18 months in that corridor. So there's going to be a lot of competition for tenants out there. And I'm not going to paint a pretty picture, because activity has not been as good as one would have expected over the last 12 months. So the challenge is will the absorption pick up in that corridor?

With respect to Crimson Partners, the way that the Dulles Station development, and when I'm using that word Dulles Station, I'm using it as the entire mixed-use project, we only have one portion of the totality of what is otherwise known as Dulles Station. Our site is actually called Dulles Station West. And we have is the ability to build 180,000 square feet in Phase I, which as you know we've completed the shell. And we also have the ability to build an additional 340,000 right behind it, for a total of I think 540,000.

Doherty has the exact same mirror-image project on the other side of the entrance road into this project, so he also has an 180,000-square-foot building in the front, which he has under construction today, and he also has a 300 and whatever, 40,000 or 50,000-square-foot piece in the back, identical to ours in the back. So Doherty and we have the exact same development profile, and behind us, [Tansan's] building a number of multifamily units. The original developer, Doherty, sold the condo complex to Korman Communities, which are actually in a rental, really like a corporate sort of rental situation, and there are actually two pads for hotels in the back as well.

Great. Thanks, guys. Great quarter.

Charlie Place, Ferris, Baker.

Real quickly here, on the balance sheet this quarter, you have the restricted cash of $46 million, which I am assuming is that 1031 proceeds.

Yes.

And if the property that you have under contract goes through the normal course, is that a fourth-quarter event or a first-quarter '08? What is your expectation of timing of --

Assuming that the project that we have under contract goes through, which again, we're under due diligence and we're not firm on it yet, but if that goes through, it will be a fourth-quarter.

Lastly, if you could, Sara, go over again your current borrowing capacity and additional funds available from the restructured covenants?

Right. Well, as our lines exist right now, we have $275 million of [available] capacity. Those can be increased up to $600 million if we expand the accordion feature. So we have an additional $225 million available with those. And then overall, with our bond covenant consent that we completed this summer, if there were a significant transaction, we could increase our level of debt $475 million without issuing any equity and be in compliance with our covenant. However, to do something like that, you would also have to meet with the rating agencies, etc., because that would have an effect on your ratings.

Sure. Just to clarify, are your current lines of credit in aggregate $375 million or $275 million?

It's $275 million currently, and then I have the ability to expand up to a total of $600 million.

So it's another $325 million on top of that.

Yes.

[Aaron Hostelson], Stifel Nicolaus.

Nice quarter. Thank you for taking my call. First question for you -- could you guys please discuss a little bit more about your approach to asset recycling, how you determine which assets you would like to sell versus keep? Can you provide some more color on how much and when assets will be recycled? (technical difficulty)

Sure. There's no magic formula for it. Essentially what we do is we look at our portfolio, we look at historical performance and we look at where we think the markets and the assets and how well they are positioned in their submarkets and where we don't think there's the growth that we would anticipate, that we would like for those properties.

And Maryland Trade Center is the perfect example of our sort of thought process. It was a property where, over time, we were able to really make a tremendous amount of money leasing up vacant space and getting that to a fully leased position. As you know, one of the reasons that hurt us is we lost a large tenant there, which was basically a defense contractor that did work at Goddard. And we leased it back up. We got it to 90-some-odd-percent leased.

But to be honest with you, over time, the rental rates out in that greenbelt market just never went anywhere. Ten years ago, the rents were $20 a foot; today, they are approximately $20 a foot. So we saw an asset market where rents were going nowhere. And we felt that we could take that and make a really good deal, make a lot of money for our shareholders, and take that money and reinvest it in assets where we think we're going to have good growth, for example, the CentreMed portfolio for the property that we bought out in Centreville that's just an awesome property in an area with fabulous demographics where we know we are going to be able to push rents going forward.

And I think that's sort of our thought process. We are combing through our portfolio, where we have identified -- I will tell you right now, we've got one that we're preparing to put on the market that we think is a good asset. There's no reason why someone can't do something with it. But we think maybe we can get better rent growth in other areas. So I don't want to talk too much about what assets we're identifying, because we're sort of telegraphing where we're going in terms of our portfolio, but we're looking at assets that we don't think the growth -- where we can get better growth in other areas of the market.

(technical difficulty)

Over the last couple of years, you have acquired $550 million to $600 million and I'm not sure if you've sold anything else besides Maryland Trade Center.

Over what time frame are you looking at?

'06, '07.

You are right, since '06. We sold a number of (technical difficulty) in '06.

At the end of the day, '08, do you expect it to be kind of that same 10-to-1 ratio of acquisitions versus dispositions, or do you expect a different strategy?

10-to-1 (multiple speakers)

10-to-1 acquisitions versus dispositions.

I would say that it would be more acquisitions than dispositions. I've never put a pencil on to the exact sort of ratio of it. We pretty much -- last year, we acquired $300 million. This year, we are at $250 million. Let's just say next -- I don't know how much we're going to acquire in 2008 because it all depends on market conditions. But I would say maybe I would more be like in the 4-to-1 range. But again, I don't know where the acquisition world's going to go.

Michael Knott, Green Street Advisors.

I apologize if I missed this earlier, but could you just talk a little bit about the rent rollup that you achieved in the office segment this quarter? It was higher than you had experienced in recent quarters. Was there something unusual there, or was it --

Well, we had a couple things that happened. One of the properties where we had a big rollup was on our [Gootie] Drive property, and that was a fairly large deal, at least on a relative basis, we did with the FBI that had a fairly high TI component associated with it. And we also did a fairly large lease in 1901 Penn, which, you know, D.C. is just a great market. We just wish we had more rollover there so we could take advantage of it.

We also had a number of leases at Wayne Plaza. Let me just speak to Wayne Plaza. Mike talked about it earlier. Wayne Plaza was a building we built really on the come, so to speak, in Silver Spring. We bought that asset really before the redevelopment occurred in Silver Spring. I think we paid $90 a foot or some crazy number like that. And the building was fully leased, but it was loaded up with really low rents because the market was horrible.

We're seeing -- we're reaping the benefits of buying that asset with really low rents in it. We rolled over two fairly significant leases in there at very high rollups. So those were the biggest impact items that occurred in the portfolio. And then the rest were just sort of singles and doubles. But if you add those, in conjunction with the singles and doubles, you pretty much have what we produced for this quarter.

That's helpful. And based on what you see coming ahead, where would you peg your entire office portfolio in terms of mark-to-market today?

I would say we are just a little bit below market, not dramatically below on a cash basis.

Okay. And then not to go back to Maryland Trade Center too much, but just curious if you wouldn't mind opining on what you think the cap rate delta would be between that asset in PG County versus your other suburban Maryland office assets in terms of, if that was a 6.5 cap, what do you think the right number is today for the rest of your portfolio there?

I think that was a good deal for WRIT. I'm not sure that's a great benchmark item. Certainly our suburban Maryland, specifically, properties are 50 basis points better than that at a minimum. And that is suburban Maryland -- I'm not talking about Virginia, I'm not talking about inside the Beltway Virginia, I'm not talking about D.C. Suburban Maryland, our suburban Maryland office assets are probably the highest cap rate assets we have in the office portfolio. I would say we have 50 basis points better than Maryland Trade Center, because as I've mentioned before, our strategy in selling these assets is we are selling from the bottom of the deck, not from the top of the deck. I'm just guessing. I'm taking an educated guess on that.

(OPERATOR INSTRUCTIONS). Ms. Grootwassink, there are no further questions at this time. I would like to turn floor back to you for closing comments.

Okay, well --

Thank you very much. We enjoyed presenting our awesome quarter to all of you. And if you have further questions, we will be more than happy to answer them. And thank you very much. Have a good day.

This concludes today's teleconference. You may disconnect your line.