Elme Communities (ELME) 2008 Q2 法說會逐字稿

Welcome to the Washington Real Estate Investment Trust second quarter 2008 earnings conference call. As a reminder today's call is being recorded.

Before turning the call over to the Company's President and Chief Executive Officer, Skip McKenzie; Kelly [Shiflett], Director of Finance, will provide some introductory information. Please go ahead.

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

Please bare 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 on 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, successful timely completion of acquisitions, changes in 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.

Participating in today's call with me will be Skip McKenzie, President and CEO; Sara Grootwassink, Executive Vice President and Chief Financial Officer; Laura Franklin, Executive Vice President and Chief Accounting and Administrative Officer; and Mike Paukstitus, Senior Vice President Real Estate. Now I'd like to turn the call over to Skip.

Good afternoon and thank you for joining Washington Real Estate Investment Trust conference call today. 2008 has been an extraordinary year for real estate investors. Credit has been tight, equity valuing have been volatile and increased commodity prices have dampened economic activity on many levels. It is truly times like this we appreciate the region we invest in.

Although not immune to the economic challenges facing our nation, Washington remains as a historically has one of the healthiest markets in the country. While our tenants are affect by these economic pressures and I anticipate regional vacancy and tenant delinquencies will rise, I believe these increases will be nominal and our region will significantly outperform in the country in both occupancy and run rate growth for the balance of the year. The unemployment rate in our region is 3.1%. The overall office vacancy rate is 10% on a base of almost 400 million square feet and regionally job growth although slow is actually up over a year ago. These metrics are strong evidence that the diversity of our economy and the stability of our federal government continues to underpin the regional economy and that our region will weather the storm well.

As we move forward this year, our hands-on management focus will continue to be one of our strengths. We will stay close to our tenants and monitor occupancies closely. At quarter end our commercial portfolio was 94% lease and while we may lose occupancy of the balance of the year, particularly in the retail and small industrial sectors, I believe this marginal increase will be offset by our continued ability to increase rents upon roll over in the core portfolio.

On the investment side, we are beginning to see opportunities for acquisition that we have not seen in years. The dislocation in the credit markets have reduced the number of potential buyers and has significantly increased the cost to capital for many of our competitors. We are optimistic that the discipline we have exercised, in conjunction with the market activity and balance sheet management that Sara will describe later, will position WRIT to take advantage of excellent opportunity for investment over the next 18 months. This past quarter we acquired a small medical office building in Sterling, Virginia and as Mike will describe briefly, our pending acquisition of 2445 M Street which is also indicative of this opportunity.

I'd now like the turn the call over to Sara who will discuss our financial performance and our activities in the capital markets.

Good afternoon, everyone.

Funds from operation grew 1.8% to $0.56 per diluted share this quarter over the same period last year. Funds available for distribution were $0.38 per diluted share. Core cash net operating income increased 2.7% and core occupancy increased 30 basis points to 94.8% compared to the same period one year ago.

By sector, our performance is broken down as follows. Multifamily properties core cash NOI for the second quarter increased 2.1% compared to the same period one year ago. Rental rate growth was 1.1%, core occupancy increased 250 base points to 93.3%, primarily due to increased occupancy in our Falls Church and Arlington, Virginia properties. Retail properties core cash NOI for the second quarter increased 3.3% with rental rate growth 3.5%, while core occupancy was flat at 95%. Office property core cash NOI for the second quarter increased 3.6% compared to the same period one year ago. Core occupancy decreased 30 basis points to 94.8%, however core rental rates grew 2.3%. Medical office properties core cash NOI for the second quarter increased 3.5%. Core occupancy increased 140 basis points to 97.6% and core rental rate growth for the sector was 2.2%. Industrial properties core cash NOI for the second quarter decreased 0.3% compared to the same period last year. Core rental rate growth was 3%, while core occupancy decreased 150 basis points to 93.4%.

Overall core occupancy increased 30 basis points quarter-over-quarter to 94.8%, although it has slipped 70 basis points sequentially. The decrease in occupancy that occurred in the office and industrial sectors offset by increase in the residential sector was expect and included in our guidance. In the office sector a 20,000 square foot tenant at 2000M Street vacated at the beginning of the quarter, providing the opportunity to release the space significantly higher rental rate. We've projected eight months of down time in our underwriting assumptions for this lease expiration and we are confident about our release prospects.

As discussed in last quarters call United Communication Group vacated 60,000 square feet of rented space at One Central Plaza. There is interest in this space and we expect it will be leased in smaller segments over the next six to 12 months.

Sequential results were also impacted by percentage rent we received in the first quarter of $329,000 versus no percentage rent this quarter. The disposition of $41 million in property and movement within our capital structure.

We were active in the capital market this quarter taking advantage of specific opportunities to further strengthen our balance sheet. In May, we raised $90.5 million through the issuance of 2.6 million common shares at a price of $34.80 per share. We decided to equity early in the year than anticipated, as our shares were trading well and we were confident we would soon have 2445 M Street under contract, which occurred several weeks later. 2445 M is project to close in the fourth quarter of 2008, due to the length of the loan assumption process.

Also in May, WRIT enter into three mortgage loans with an aggregate principal of approximately $81 million. WRIT used the proceeds to repay borrowings and lines of credit. The mortgage is fixed at a rate of 5.71% through maturity in May 2016.

Consistent with our commitment to maintain a strong balance sheet, we refinanced short-term debt with long term capital and showed multifamily secure debt rather than corporate unsecure debt, due to the significant differential spread for the two different instruments. This quarter WRIT increased its dividend 2.4% to $43.25 per share for its 186th consecutive quarterly dividend at an equal or increasing rate.

We are leaving our full year guidance of $2.11 to $2.21 in FFO per share unchanged. While we've announced higher acquisition volume, it will occur later in the year. Interest expense will be lower than projected, due to the earlier than anticipated equity offering but it will be offset somewhat by the additional dilution. Bad debt expense is running in line with our budget year-to-date, but we expect it will increase. And finally, our target occupancy for both the core properties and the two apartment properties that we just put into service were high hurdles and we expect residential leasing velocity to decelerate in the fourth quarter due to seasonality and reduce options available within the properties. Thus our reforecast indicates we are still in line with previous guidance.

With that I'll turn the call over to Mike to discuss operations.

Thanks, Sara and good afternoon. Leasing activity was solid this quarter. WRIT signed commercial leases for 470,000 square feet with an average rental rate increase of 6.1% on cash basis and 18% on a GAAP basis. Tenant improvement costs were $4.43 per square foot. Residential rent rates increased 1.1% in the second quarter, compared to the same period one year ago. Rental rates for new and renewed leases at each sector ranged from an increase of 3.2% to 10.7% on a cash basis. With $0.26 to $18.26 per square foot in tenant improvement cost.

In the office sector, we executed 28 leases for a total of 168,000 square feet and an average rental rate increase of 4.4% on a cash basis and 14.3% on a GAAP basis. The majority of these leases were executed for less than 10,000 square feet, which is consistent with our small tenant focused strategy.

In medical office sector, we signed leases for a total of 48,000 square feet with an average rental increase of 10.3% on a cash basis and 28.2% on a GAAP basis. Prosperity medical center we executed early renewal for 24,000 square foot tenant at 17.2% cash rental increase and five year renewal term.

In the retail sector, we executed leases for a total 59,000 square feet with a rental rate increase of 10.7% on a cash basis and 28.3% on a GAAP basis. At Concord Center in Springfield, Virginia, we executed the lease of 25,000 square foot tenant for a ten year term with 8.6% cash rental increase and a 35.6% GAAP rental increase on that transaction.

In the industrial sector, we entered into leases for a total 199,000 square feet with an average term of 4.2 years. In Dulles South, we executed a 45,000 square foot lease with a major defense contractor increasing rental rate by 5.5% on a cash basis and 8.5% on a GAAP basis. We also executed a 33,000 square foot lease at 6100 Columbia Park in Landover, Maryland. As you recall we acquired this property at the end of February, when it was 78% leased. It is now 100% leased.

Leasing activity at our apartment developments is on pace. Bennett Park, the 224 unit apartment complex consisting of high mid-rise buildings is completed in December. At quarter end the property was 55% lease and rent is on target for an average projection of $2.60 per square foot. Upon its completion in February of this year, we began leasing units at Clayborne Apartments at Alexandria, Virginia. The property consist of 74 units, with 2,700 square feet of retail space. It is in excellent location and offers luxury amenities. Rents are averaging more than $3 per square foot. And the property was 36% leased at quarter end.

The office market in the Dulles quarter has been soft, but several large prospects are touring projects in the market with serious intention for relocation. In fact earlier this week at 200,000 lease transaction was announced in the marketplace. The superior quality and location of WREIT's180,000 square foot class A project is being viewed very favorably by several tenant prospects. They awarded this building the best Suburban mid-rise office building in northern Virginia. We are cautiously optimistic of leasing a sizeable portion of the building in the near term.

Acquisition and disposition activity was strong this quarter. In May, WRIT acquired Sterling office building; a 36,000 square foot medical office located in Sterling, Virginia for $6.5 million. Demand for the medical office space in the area is driven by its proximity to hospital and hospital center. WRIT expects to achieve first year unleveraged yield of 7.6% and 7.9% on a GAAP basis. In June, WRIT entered a purchase agreement to acquire 2445 M Street. This is a 290,000 square foot suite of office buildings located in Washington, D.C. for approximately $182 million. The property is 100% leased and strategically positioned between Georgetown and the central district in the west end market of Washington, D.C. WRIT anticipates the closing of the acquisition will take place no later than the fourth quarter of 2008.

In June, WRIT completed the sale of (inaudible) Commerce Center in the [Eareheart] building totaling for 336,000 square feet for $41.1 million. The industrial flex property is located in Chantilly, Virginia were acquired in 2001 and 1996 respectively. We achieved a net book gain of $15.3 million on the sale of the property and a combined 13% unleverage return during the ownership period. Proceeds from this sale will be reinvested in the 1031 transaction.

As we indicated on previous quarter we continue to pursue opportunities to change use or increase density, where local government's are considering revision to their county growth plans. Our submission for projects and close proximity to Fort [Belbar], for the Department of Defense [Brakfe] locations are being favorably received by the local planning groups. Additionally our two projects within close proximity to metro sites are being favorably received. We anticipate that the formal reviews will be completed by year end with governmental action soon thereafter.

And now with that I would like to turn this over and open the call for questions.

Thank you. (OPERATOR INSTRUCTIONS). Our first question comes from Dave Rodgers, RBC Capital Markets.

Good morning guys. Skip, first question on the residential that you discussed earlier, how much is the stabilization? If leasing will slow in the second half of the year are we talking about a quarter or a couple of weeks? Can you give color on that please?

As we mentioned maybe in the last call, at the Clayborne, the project really sort of got leasing started two months late. We didn't start the leasing project -- process until February. So that process is probably -- the velocity is on track, but I would say that you could expect maybe us to be two months behind on sort of the reaching our final goal at 95%, approximately. It's tough for me to give you a bullet answer on both projects together, because sort of uncertain how the fourth quarter leasing velocity is going to occur. I think my comment was more focused on the fact that we know, historically, in the fourth quarter there's a seasonality to leasing in the residential world and that in combination with the fact that as these projects get to that 85% and 80% lease sort of situation, there's going to be less options for tenants. So the natural course of sort of the leasing curve will decline probably substantially at the end. I think this will stretch out a couple extra months, would be the short answer to that.

Fair enough. I guess with respect to the 2000 M move out that you mentioned the 25,000 square feet, should we expect a higher TI on the replacement on the nature of the building?

Substantially higher than what?

Running than the current quarter you were close to 26. You've been running lower than that. Should we expect something up in that range or higher?

2000 M is not an MOB, that's a regular office building. It's going to require -- it's a downtown office building, so it will require more TI in general than our standard office project. So you have to figure that one is in excess of $20 TI. I don't know exactly. We don't have a specific tenant in hand for it. We do have good activity for that space. I would expect that TI for that space would be in excess of $25.

My apologies if I forgot that. Can you talk about the magnitude of decline that you expect in occupancy both in the industrial and the retail portfolios that you mentioned Sara?

We are not projecting huge numbers. We are just thinking based on sort of the chatter we are hearing from our tenants and some of the difficulties the smaller retailers are having that we are going to lose 100 to 150 basis points on those. Anybody else have a better idea on that? That is a gut feeling. We don't have a mathematical number that we know because of a specific tenant is leaving. We are basing that on market conditions more than anything.

Right. And we do expect that some of that will be offset by our ability to continue to raise rents upon new leases and renewals. So our leasing statistics in this quarter are strong.

We might have even discussed this at the last call. I just think that retail occupancy in particularly -- occupancies will be going down. But if you look at the rents that we have in place and that are rolling, we are expecting some -- and we've experienced some pretty dramatic rent roll ups particularly in the retail sector. I think there's going to be a lesser degree of roll up on the industrial side, but I'm just looking at our expiring leases over the next balance of the year. We are expecting decent rent roll-ups in industrial as well as not to the degree of retail. The bottom line is there will be some modest vacancy increases in those sectors that will occur, but it will be more than offset by rent roll-ups to the tenants that we renew

Great. Thank you.

Our next question comes from Michael Knott of Green Street Advisors. Please go ahead proceed with your question.

Hi everyone. Skip or Mike can you give more detail or color on the three major office regions in your area? And then also discuss suburban Maryland at what we read and heard the demand is weakening there. Can you talk about how that pertains to your portfolio?

General market conditions?

Yeah.

Sure. The District of Columbia is still a strong market. There is some concern in some of the more development exposed areas particularly down by the baseball stadium and the Navy yard for one and over with the area that is called "No Ma" or northern Massachusetts those two areas had a lot of development occurred. We don't have any projects in those areas. There's also some new development on the east end where there's some vacancy. But other than that and our projects are not necessarily competitive with those. We are still seeing some pretty good demand in Washington, D.C. And the overall vacancies are still in the single digit, significantly below 10%. So the district is still a very strong market.

In northern Virginia, we've talked on many of these calls it seems the Dulles Corridor that uniquely is the softest market in our region. Other than Dulles, the Virginia market is I would put it healthy but not robust. There's not a lot of leasing activity. In fact I just added to our envelope in northern Virginia and Maryland, leasing activity is down fairly significantly over let's say a year ago. However, the overall vacancies again, with the exception of the Dulles Corridor, are fairly -- I won't say healthy, but okay. They are in that 10% to 11% range depending on what submarket you are in. I don't know if that gives you the general big picture.

That is helpful. And Sara, do you happen to have the occupancy figures for your office portfolio between the three regions?

By state sector?

I don't have that available.

We can get that. I don't have that with me today.

We don't have it by state. But our office vacancy right now is about only about 5% overall.

I think the general statement is against all the submarkets we fair very well against the reported vacancy in those markets.

Okay. And then the Time Warner look at your building in Dulles before they signed?

Yeah. They didn't look at our building because it was too big.

The lease requirement was too big.

It was a 200,000 -- 200,000 square foot requirement.

Can you provide any more color on your expectation for signing a lease in the near term?

We feel it's optimistic today as we ever have.

Would that be for maybe a quarter of the building, half the building? Any magnitude there would be helpful.

We have several prospects more than one for space in the building. So it would be a significant portion of the building. Very significant.

Okay. And then any comments on Sunrise? I believe they are having some issues, but we haven't followed that too closely.

Yeah. In fact Mike had lunch with them recently. We stay close to them. They pay their rent on time. They've been a great tenant as far as we are concerned. We watch their filings in the press as much as everybody else. We don't have any new ample information other than what is reported in the public arena. They are fantastic tenant, as far as we are concerned. They pay their rent on time. They've expanded over the years. They are good a tenant as you can have on our level, but other than that, we know about as much of their public filings as you do. We don't get any inside information or anything.

Okay. Thanks. I'll get back in the queue.

Our next question comes from Chris Lucas with Robert W. Baird. Please proceed with your question.

Good afternoon.

Hi Chris.

The first question is can you, Skip, give us an update on search process for Sara's replacement?

Sure. We are active in the process. We hired executive search firm. We interviewed a number of people. We got a couple more we are going through that are to be brought into office. We've got what is fantastic candidates and we are on track for what I think I may have announced on the last call to have somebody identified by September and brought on board before the end of the year.

Okay. Sara, can you walk through some of the sequential variances on some of the larger items from first quarter to second quarter that occurred?

Sure. We talked a little bit about revenue being down a little bit. There was an increase in vacancy in the office sector as well as we did not have percentage rents that we received in the first quarter come in the second quarter. So right there is about $700,000 difference in revenue. We also had the sale of Earheart and that caused revenues to decrease about $210,000. So at that point you are about at $0.02. In addition to that, we had changes in the interest expense that were more expensive than you may have modeled. We turned out a fair portion of our line. We turn out $81 million with a slightly higher interest rate because we felt it was appropriate to go out long term, and we executed three mortgages for a total of $81 million at 5.7% and that was of course significantly higher than our line borrowing cost. In addition to that, we issued equity in May and that was really earlier than we had planned to issue in the year and so we had some longer traunches out on our lines of credit and we had some breakage fees we needed to pay. So interest expense was inflated a little bit from those numbers.

On the -- are there any one time items this quarter either revenue or expense related that we should be taking into account for future earnings?

Lease termination fees.

Actually, lease termination fees are consistent with the first quarter. In the first quarter, we had lease termination fees of $334,000 and the second quarter they were $385,000. So those were pretty consistent. I think it's mostly the three revenue items we talked about a little bit more; vacancy in office, the lack of percentage rents and then the sale of Earheart on the revenue side and then on the expense side, it was really the changes in interest expense.

Okay. And then on the maybe Mike for you, on some of the space that has opened up in the M Street what mark-to-market do you roughly expect in some of those vacancies relative to where they were before?

Yeah. I mean, basically from a percentage -- I don't have a percentage but there's a lower than market we are expecting those to be moving up. The 2,000 M had some opportunity to attract some smaller tenants that we can move right up, and similar to the One Central transaction. That was a 60,000 footer that had an opportunistic rate in there. We'll be smaller tenants into those spaces. By the way that market is very vibrant as well notwithstanding some of the things that are going on in Maryland with a major regional mall across the street and tremendous amount of retail activity around that building.

And Chris, I think that that space in 2000 M Street was somewhere in the mid $35 to $36 if I'm not mistaken when it expired and we are looking at above $40 to release it.

And then just on the TI trends. The MOB TI's were up significantly over previous quarters. Is there something specific going on there, or is that a trend that we should be watching?

In other words, --

Was it leased specific or --

One tenant that threw that off.

I think so.

I would say it wasn't like one single tenant.

We did move a large tenant over to another building.

That's true.

8503 Prosperity which is our highest end project so to speak. That's the property where we get 40 something dollar rent. We did have one fairly, it was a 20,000 square foot tenant that rolled into that property that had a good TI.

Northern Virginia --

Yeah. They were -- there were two that were moderately high let's put it that way.

What were the lease terms on those deals?

One second. Okay. So Woodburn Nuclear Medicine for example, the Woodburn Two, project the new space rates were $36 and $38. Same thing with tenant improvement cost and leasing commissions of around $30.

In the lease length is how long on that deal?

The lease length, I'll do some averaging here, its 120 and 111 months. So about ten years. And then also at 8503 Prosperity, that is our nicest medical office building just to give you another handle. We had a five-year deal with a 24,000 square foot tenant. We had a $42 base rate and we gave TIs and leasing commission so this is both you are including both of $27. So those were the two biggest contributors for the highest TI.

Just taking a step back, going out to the corridor the Dulles Corridor a little bit, what -- how would you characterize the sort of lease term -- the characteristics that you are seeing today versus say a year ago in terms of face rent, free rent, TI packages, fixed bums, how have they changed?

First you have to caveat the whole thing with last year or this year. It's been a very small data set we are comparing. You are comparing two deals last year versus two deals this year. So it's not a great sample set that we are operating off of. But without a doubt, the TIs have gone up fairly significant. Now even last year the TIs were going up. So if you are limiting me to a year, I don't know if it's dramatic as maybe over two years, but I would say everybody out in the corridor is offering a much higher tenant improvement package than anybody at pro forma. Let's put it that way.

So people are probably anywhere from $60 to $80 in tenant improvement on ten-year lease. So that's probably the most dramatic change on a percentage basis. And then -- again we are talking new buildings here. From a rent perspective, where that -- and I don't know if it's a great market comp because it's such a huge number. That Volkswagen deal was like a $37 rent, that was really an outlier. Everybody was really pro forma the $34 to $35 range a year ago that's where I think maybe normal deals would have been done. Today you are several dollars less than that. You are probably maybe $3 less than that in that neighborhood.

Okay. Thanks a lot, guys.

Okay.

(OPERATOR INSTRUCTIONS). Our next question comes from Aaron from Stifel Nicolaus. Please proceed with your question.

Good afternoon. Thank you guys for taking my question. I had a couple of quick one's actually. What is the investment strategy for the remainder of '08 and '09 in terms of acquisition and dispositions? You mentioned the 1031 possibility.

Well, for that specifically, that 1031 is sort of earmarked for the 2445 M Street property. We have to come up with a little bit of cash for that as well. But sort of the 30,000 feet from above strategy to answer your initial question is -- we are as I mentioned in my comments, we are just beginning -- we feel like we are just beginning to come to that point where we are seeing some of these opportunities that we hadn't seen for a bunch of years to be honestly with you, and we are hopeful to do particularly for the balance of the year is potentially -- I can't promise you anything because we don't have anything firm but fill in some of those property types that we have had a difficult time acquiring. I think 2445 M Street is a good example. It's a great downtown office building and I'm hopeful that we might be able to fill in some of the cracks with potentially even a residential or even a potentially retail property. But we've got a bunch of irons in the fire, and nothing is firmed other than 2445 M Street right now.

All right. Have you mentioned the cash yield you expect on that?

I'd prefer not to right now. We haven't closed on the transaction it it wasn't been our practice to report on those things. But I would say that we were very pleased with this particular as it related to what people have quoted on similar transactions. But I'd rather not comment on that until we actually close on that.

All right. How about Dulles phase one? That is moving from capitalization to expensing I believe in the third quarter is that correct?

That's correct in early August.

About how much do you think that will increase expenses?

About $650,000 up for the year for the remainder of the year.

For half for basically half a year for six months?

About five and a half.

Okay. Thank you. And then you mentioned your lease term fees.

Yes.

Okay. And that's it. Thank you very much.

Thank you.

Our next question comes from Bill Crow with Raymond James. Please proceed about your question.

Good afternoon. A couple of questions. You talked about some of the opportunities to maybe take advantage of acquisitions. What about the stress developments that are out there that we are financing may have been pulled away? Are there some opportunities for you in that area?

We are looking at a few things. I always caution everybody not to use the word distress in our market. We are not at the part of the cycle at least here. Just Washington, D.C. You don't see a whole lot of distress. There are some sellers that have the power to sell but rather not sell but usually there is a fairly liquid market. We haven't seen the full out stress yet, but there's definetly opportunities starting to emerge of people that need to sell property sooner as opposed to later, and we are looking at a couple of those opportunities, but we have not seen sort of a wholesale foreclosure situation yet where we are standing on court room steps trying to pick out properties for $50 a foot as we did in the late '80s and early '90s time frame.

I was looking at the development stage where somebody may have a piece of entitled dirt, but all of a sudden they can't financing and they need to flip it.

There are some opportunities out there we are looking at that are that fit that category. Not a tremendous amount right now, but I think the correct terminology to use is we are just beginning to start seeing some of those.

Okay. And then the last time we talked we discussed some of the assets and a lot of those assets are come back on market. Any update on that in your opportunity there maybe?

We are very interested in some of those assets. I'll leave it at that. Some are more problematic than others because in the district there's a tenant rights law and some of these properties have to go through that process and that complicates some of the ones we are interested in, but we are tracking that process fairly closely.

Very good. Thank you for your time.

Thank you.

Our next question comes from Alan from European Investor Incorporated.

Thank you for taking my questions. First, the CIP balance at quarter end, is that all Dulles Phase One.

It's Phase One. It's the land and parking garage for Dulles Phase Two and then very nominal amounts that we spend for our new developments, such as 4651 Kenmore, which is in the very initial stages.

So of the $58 million, that balance is how much of that is Dulles Phase One?

About 43.

Okay. And my last question. What kind of capacity do you think you have to do other external opportunistic acquisitions given the fact you have the 2445 M in the fourth quarter? What capacity do you have right now?

We have a lot of capacity right now. We pretty much cleaned our credit line. We have $15 million?

Right. We are issuing equity last quarter plus the sale of the two buildings. We have a large amount of capacity at this point.

Right. In terms of funding the 2445 M, $180 million but it has $101 million debt in place. We have the $41 million from the sale in escrow in 1031. So we really only need to come up with another $30 million or $40 million for that to finalize that sale. So we've got a fairly substantial balance on our credit line available.

Is the full capacity about $337 million?

Yes.

Okay. Thank you very much for your time.

Sure.

Our next question comes from Wilkes Graham with FBR.

I have just a couple of questions. First I didn't see -- looks like the development page was taken out of the supplemental. Can you talk about or break out the construct in progress in land line? You discussed a little bit but how much of that in the balance sheet is land and how much is construction in progress at Dulles and then other?

We actually did post it subsequent. It was posted today. There's a development.

Okay. I guess I'm looking from the one from yesterday.

But construction in progress has Dulles Phase One and then Phase Two of the garage. Phase One of the garage is actually placed in service already. So that is up and operating property. So Phase Two of the garage is still in construction progress plus the land for Phase Two and then there's other nominal amount.

How much is the pure land that is not tied to asset that is under construction right now?

Somewhere around $60 million. Right? For the Phase Two land.

Phase Two land.

And land is not in the -- Right. So out of the $58 million, you have about $45 million that relates to Phase One.

Okay.

And then for Phase Two, we have about $7 million of the garage that's been allocated to Phase Two. And then we have about another $8 million in there related to Phase Two. And then we have another from our 4661 Kenmore acquisition which is our unit deal, we have about $4.2 million in construction in progress for that deal.

Okay. Thanks for that. The last question was Sara you mentioned that there was a pretty material difference between spreads on multifamily secure debt and corporate debt. Can you give a little more detail on that on where it was in May and if you've seen secure debt spreads, what kind of changes you've seen to the spreads since then.

When we last in our pricing, we lock the spread of 220 basis points over the comparable treasury which was at about 350. So we are our fix rate on our loan was 5.71%. At the same time spreads in the corporate area were at least 300 over the ten year. So it would have been in excess of -- near 7% in the corporate fund market. So there's a fairly big difference at that time. At this point treasury has moved up pretty substantially above 4%. And so the spreads I don't think on multifamily has moved substantially. However, getting a quote on what you see on the screen could be two different things right now because there's a lot of turmoil there. But I would think that you are going to be at 6.5 on a comparable term right now in multifamily and then you are still -- spreads are wide on secure bond. Still cheaper in multifamily.

Thanks.

Sure.

Our next question comes from Michael Knott with Green Street Advisors. Please proceed with your question.

Just a follow-up on that question a little bit. Which properties were financed with the mortgage debt this quarter and which -- what was the loan-to-value on those?

They look at that service coverage more than loan-to-value. 1.2 times debt service coverage. 13801 and Bethesda Hill and Walker House.

Okay. And can you remind me any of your other multifamily property has financing on them?

The Virginia properties that are operating properties not the two development properties, but the Virginia properties have mortgage debt due to expire next year only maturity in 2009 is the mortgage debt on those five Virginia properties but at this point we believe it's a 25% loan-to-value. So we are not certainly not concerned about refinancing that. But we will have a lot of capacity when that matures as well as if it's appropriate, we may look at placing secure debt on the two development properties. But you have to balance that of course with your bond covenant and your lines of credit covenant.

How much capacity could you sort of keep financing on your multifamily portfolio and use that for investment capacity?

Well, our lines are more restrictive than our bonds but we are putting another $100 million of secured debt with the acquisition of 2445 Mand you can probably put another couple hundred million on. The reason that we generally don't initiate secure debt except for now when the spreads are so incredibly different that it makes sense to do so. The reason we don't is we want allow ourselves room to continue to acquire assets. You don't want to fully use that capacity because that eliminates the possibility to acquire assets that have secured debt. So you want to leave room for that.

Okay. And then just conceptually can you compare a little bit the 2445 property with maybe the (inaudible) property that sold? I'm assuming that would be a property that you would look at. I'm curious if you can compare the pricing dynamics of those two different markets to the extent that you looked at that building.

It's apples and oranges. I mean, our assets is a 2445 M Street is a class A asset that is comparable -- I don't know if I would say it's comparable to the two that sold for $800 a foot in downtown recently. But by every measure, it is a class A asset. It's got triple rent in place so you are protected from expenses running away from you. It is every bit as desirable as assets in the district by no means it's comparable to anything in Tyson's corner.

The credit quality of the downtown asset that we are looking at is superior so that Su bur ban asset.

Aren't the cap rates similar to that? You put your money on the --

We haven't advertised the cap rate yet. What -- I don't recall. It was like $300 a foot.

They haven't said, but some of the data sources say low 6.

Sounds about right.

Okay. And then my last question is there any previous lease to speak of or any progress on the Landsdown office yet?

We don't have any -- we have good activity. It's really really hard to get prelease to get it this far in advance because you are talking about much smaller users. So we don't have any but we have pretty good interest on that. That property we actually hired a third party broker to help us with the listing of sort of a medical building specialist who has done a lot of business with. So we actually have a two-man team on that and we have good activity but the short answer is we don't have an actual firm lease yet and as we mentioned, that building won't be ready until the first quarter of '09.

Thank you.

There are no further questions in the queue at this time. I would like to turn the floor over to Mr. Skip McKenzie for closing comments.

Thank you everyone for taking time out on a Friday afternoon and I hope you enjoy the rest of your summer and we'll talk to you in the third quarter.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.