Elme Communities (ELME) 2008 Q3 法說會逐字稿

Welcome to the Washington Real Estate Investment Trust third quarter 2008 earnings conference call. As a reminder, today's call is being recorded. Before turning over the call to the Company's President and Chief Executive Officer, Skip McKenzie, [Kelly Shiflett], Director of Finance will provide some introductory information.

Ms. Shiflett, please go ahead.

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.

Our conference call today will contain financial measures such as FFO, NOI, and EBITDA that are non-GAAP measures and in accordance with Reg G, we have provided a reconciliation to those measures in the supplemental. Please bear in mind that during this call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Although such statements and projections are based upon what we believe to be reasonable assumptions, actual results may differ from those projected. Key factors that could cause actual results to differ materially include changes in the economy, the successful and timely completion of acquisitions, changes in interest rates, leasing activities and other risks associated with the commercial real estate business and as detailed 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 would like to turn the call over to Skip.

Good morning and thank you for joining Washington Real Estate Investment Trust conference call today. The third quarter was one of notable accomplishments for Washington Real Estate Investment Trust. On the capital market side, we continued to strengthen our balance sheet by adding over $100 million in common equity.

In real estate we acquired a 374 unit infill apartment building in Washington DC, and ended the quarter with our overall commercial portfolio at 94% leased, and our multifamily portfolio, excluding developments, are 96% leased. We made significant leasing progress on our development assets, highlighted by a 123,000 square foot lease with IBM and, corporately, we concluded our Chief Financial Officer search. That is the good news.

The bad news is their our customers, our tenants continue to face significant economic challenges financing their businesses and selling their goods and services. Although Washington DC and its environs are typically less negatively affected by economic downturns, clearly there are increasing signs of financial distress throughout our region.

In general, delinquencies are increasing, vacancies persist longer, and the number of tenants expanding their business by taking additional space are diminished or nonexistent. While we are buckling our chin straps in preparation for the months ahead, I am cautiously optimistic that the presence of the federal government and our region's resilience will provide sound footing in these perilous times.

While the past is not necessarily prologue, I'd like to offer some brief statistics from the last economic downturn.

From 2001 to 2003, the national economy lost 1.8 million jobs. Of the nine other largest metro areas, eight posted job losses and five lost more than 100,000 jobs. In contrast our region added 66,000 jobs over that time frame. When the jobless rate peaked at 6%, our region peaked at 3.9%. In adverse economic climates we believe there is no better region to be based than here in the nation's capital.

In the office sector of our region, overall marketwide office vacancies have increased since the second quarter with Northern Virginia at 11.9%, suburban Maryland at 11.5%, and DC at 6.6%. Vacancy rates in the Baltimore/Washington Industrial Corridor are at 11.9% and the industrial vacancy rate in suburban DC is 8.9%. Throughout the region, leasing velocity in all commercial sectors is down significantly.

In the risk portfolio, our commercial assets were well leased at the end of the third quarter. Our commercial property sectors were leased as follows. The office at 93.2; industrial at 91.3; retail at 97.2; and the medical office building sector at 96.5.

On the multifamily side, Washington Metro continues to be one of the better performing markets in the nation as we continue to add jobs. And the downturn in the [four] purchase housing markets for condos and single-family homes has contributed to generally healthy occupancies, although, like the promotional commercial sectors, leasing activity is down.

On the acquisitions and investments front, Cap rates have risen and the pool of perspective purchases for any given transaction is down dramatically. Our strategy is to deploy our capital cautiously and to improve our portfolio in sectors of property types where we have had difficulty finding attractively priced assets over the past five years. A good example is The Kenmore, a 374 unit apartment acquisition in DC that might recover shortly.

Lastly I would be remiss in not totally welcoming Bill Camp as the new Chief Financial Officer at Washington Real Estate Investment Trust investment trust when Sara steps down in 2009. Bill is a veteran of our industry and brings a wealth of great experience to WRIT, and we are truly excited to add him to our team. As we have previously announced Sara will stay onboard through February of 2009 to ensure a smooth transition with Bill, who will be here in Rockville in early November.

Now I would like to turn the call over to Sara to discuss our financial performance and capital markets activities and then to Mike, who will discuss the estate activities. Sara.

Thanks, Skip, and good morning, everyone.

Funds from operations for the quarter were $27.4 million or $0.55 per diluted share. This compares to FFO for the same period one year ago of $27.7 million or $0.59 per diluted share.

FFO decreased on a per-share basis primarily due to dilution associated with the finding of our balance sheet through equity issuances. Funds available for distribution were $0.45 per diluted share in the quarter, resulting in a [FAD] payout ratio of 95.5%.

Given the current economic conditions, the portfolio performed well during the third quarter. Core cash net operating income increased by 0.3% with revenue growth of 2.5%. Core occupancy for the portfolio decreased 170 basis points to 93.7% compared to the same period one year ago.

By sector, our performance is broken down as follows. Office properties core cash NOI for the third quarter increased 2.4% compared to the same period one year ago. Our core occupancy decreased 230 basis points to 92.5%; core net revenue growth was 3.5%, due primarily to rental rate increases and, to a lesser extent, lease termination fees.

Medical office properties, core cash NOI for the third quarter increased 1.9%. Core economic occupancy decreased 300 basis points, due to several small moveouts throughout the portfolio, but remains high at 96.6%. Core net revenue growth for the sector was 3.6% due to annual rent increases.

Multifamily properties core cash NOI for the third quarter increased 1.2% compared to the same period one year ago. Net revenue growth was 1.6% due to rental rate increases throughout the portfolio, while core economic occupancy increased 130 basis points to 94.7%.

Retail properties core cash NOI for the third quarter decreased 1.1%. While rental rate increases were strong they were offset by a 60 basis point decline in core occupancy to 94.3% and an increase in bad debt expense. Industrial properties core cash NOI for the third quarter decreased to 4.8% compared to the same period one year ago. The decline in occupancy was offset by rental rate increases. However, bad debt expense increased in this sector as well.

From a capital markets perspective, we believe we are in great shape. The actions we took this quarter have positioned us very well for the year ahead. Since September, we have raised more than $100 million in equity [and] an average share price is $35.46 and fully repaid all borrowings on our lines of credit. In addition, we have no near-term maturities for the remainder of 2008.

In 2009 our only debt maturity is the $50 million residential property mortgage due in October 2009. During the quarter, WRIT entered into a sales agency financing agreement with Bank of New York noncapital markets. Under the agreement we may sell such shares according to limits set by WRIT for 1% sales commission.

As of September 30, 2008, we had issued an aggregate of 1.1 million shares at a weighted average share price of $36.15 for $41 million in gross proceeds. We believe the program works very well to raise incremental equity capital at a controlled price with virtually no disruption in our share price during the period that the shares were sold.

With continued uncertainty in the capital markets, we seized the opportunity to raise additional equity and further strengthen our balance sheets at the end of the quarter. On October 1st, 2008, WRIT completed a $60.4 million equity offering of 1.725 million common shares at a price of $35 per share. We believe we are now in a position to easily fund our capital requirements over the next year.

With further clarity for the remainder of the year, we have decreased our 2008 FFO guidance from a range of $2.11 to $2.21 to a range of $2.07 to $2.12 per share. The decrease was primarily due to dilution associated with additional equity offerings and the delayed timing of acquisitions, as well as somewhat lower-than-expected NOIs due to current economic conditions.

The fourth quarter will include a full quarter of revenue recognition for the Dulles Station leases that Mike will speak about in a moment, but it should be noted that tenant improvement costs have been deemed a lease incentive for our accounting purposes. The incentives will be deducted from revenue on a straight line basis and reduce NOI, rather than being depreciated over the life of the lease.

With that, I will now turn the call over over to Mike to discuss operations.

Thanks, Sara. WRIT made significant strides on the leasing front this quarter. WRIT executed two major leases at our Dulles Station West Office development and in addition signed commercial leases with the main portfolio totaling 460,000 square feet.

The average rental rate increase on leases signed this quarter, excluding the signed at Dulles Station, was 8.6% on a cash basis and 20.9% on a GAAP basis. Tenant improvement costs were $9.41 per square foot. Residential rental rates increased 1.3% in the third quarter, compared to the same period one year ago.

Rental rates for new and renewed leases in each sector ranged from an increase of 1.9% to 26.2% on a cash basis, with $1.20 to $21.72 per square foot in tenant improvement costs in our nondevelopment portfolios.

In the office sector, excluding our Dulles Station West development project, we executed leases for a total of 122,000 square feet at an average rental rate increase of 1.9% on a cash basis, and 16.1% on a GAAP basis. Consistent with our small tenant focus to mitigate risk, 25 of the 31 leases were for 500,000 square feet or less.

By region, our office portfolios leased as follows. In the District of Columbia 95.1%; in Maryland 90.4%; and in northern Virginia 95.7%. In total, our office portfolio is 93.2% leased.

In the medical office sector, we signed leases for a total of 61,000 square feet at an average rental increase of 5.4% on a cash basis and 13.2% on a GAAP basis. Our medical office portfolio is 96.5% leased.

In the retail sector, we executed leases for a total of 78,000 square feet with a rental rate increase of 26.2% on a cash basis, and 32% on a GAAP basis. Our retail portfolio is 97.2% leased. And we achieved 84.7% retention rate in the quarter.

In the industrial sector we entered into leases for a total of 197,000 square feet, with rental rate increases of 11.2% on a cash basis and 28.7% on a GAAP basis. The industrial portfolio is 91.3% leased in total by region -- and by region it is leased as follows. In the I-395 Corridor south of Washington, DC, 91%; in Chantilly, Virginia, 94.7%; and in Maryland, 90.1%.

This quarter, we are pleased to announce that we executed two leases totaling 154,000 square feet at Dulles Station West Phase 1 -- our 180,000 square foot Class A office development located in Herndon, Virginia. IBM will occupy 123,000 square feet and National Student Clearinghouse will occupy 31,000 square feet, resulting in an 86% leased rate.

We believe both tenants bring forward excellent brand-name recognition to the site. We are optimistic that the remaining space will be leased by early 2009.

For the fully leased building we are projecting rents to average in the low 30s per square foot and TIs to be in the 60 to 70s on a per square foot basis.

Leasing activity [at our] apartment developments is going well. Bennett Park, a 224 unit apartment complex consisting of high-rise and midrise buildings, was completed in December. As of quarter end the property was 71% leased and rents are approximately $2.50 per square foot.

Clayborne Apartments, consisting of 74 units with 2700 square feet of retail space in Oldtown Alexandria, VA was 55% leased at quarter end. Rents are averaging $3.00 per square foot.

Year-to-date WRIT has acquired $76 million of assets. During the quarter WRIT acquired The Kenmore, a 374 unit, 270,000 square foot apartment building located in Washington, DC, for $58.3 million. The property is a great addition to our multi-family portfolio.

The Kenmore is located on Connecticut Avenue approximate to the intersection of Connecticut Avenue and Military Road, 1/2 mile south of Chevy Chase Circle between Friendship Heights and Chevy Chase neighborhoods. It was acquired for $155,750 per unit, less than half of the estimated replacement cost.

WRIT expects to achieve first year unleveraged [yield], a 6.2% on a cash and GAAP basis. Upon acquisition, the property was 96% leased.

Now as we indicated in previous quarters, we continue to pursue opportunities to change use or increase density where local governments are considering revisions to their area master plans. We have progressed very favorably to the initial public hearing process and will now be progressing into more formal governmental action by the local planning boards and local elected bodies.

We'll continue to advance our project through this process for the balance of the year and into 2009 where we expect formal votes to adopt the proposed modifications to these respective master plans.

Now with that, I would like to open the call for questions.

(Operator Instructions). [Bill Crowe].

Good morning. Could we talk about distress from a couple of different perspectives?

First of all, the tenants' angle. You noted an increase in bad debt that was specific to the industrial and flex portfolio. Could you talk specifically about that occasion and what, as you look at your tenant profile, do you see an increase in risk to the health of your tenants and if so to what extent?

Yes, we are definitely seeing an increase in bad debt expense and just to give you some big round numbers, I mean, as a general rule over the last -- let's say five years, our bad debt -- the metric that we follow is bad debt expense as a percentage of net potential revenue. And historically we have been in that sort of neighborhood of .5 to 2.(inaudible)%.

And we are almost approaching double that year-to-date in 2008. And to a large degree, the worst sector is the industrial sector. As -- I believe I've mentioned that on prior conference calls where I protected that. And in fact we are experiencing that today.

But year-to-date in 2008, we are somewhere in the neighborhood of 3% of our industrial portfolio is suffering bad debt expense today. And with lesser degrees in the retail sector, closer to 2% and then more moderate, more typical ranges being experienced in the other three sectors, but those being up modestly.

Skip, if you go back to pass downturns and this may be unique, a unique downturn -- we will see -- but how bad can it get, do you think?

Your guess is as good is mine is how bad it can get. As I stated in my comments, there's no better place to be than Washington, DC. And we feel confident that, certainly with respect to our property types, there the majority infill with very solid tenants and small tenants that there are going to be some scrapes and bruises over the next year.

But certainly we are going to pull through and we are going to do better than any other market in the country, but we are in extraordinary times. So I would be hesitant to make any sort of projection of where we are going to be 12 months from now just because I don't know.

But our tenants are performing well. We are 93% occupied in most sectors or above, and we are staying extremely close to our tenants. We are asset managing our properties very closely. Our asset managers are meeting with tenants regularly. We regularly meet on these issues, so we are staying as close to the issues as we can. We think we have a good handle on it, but there's no question that the world we are living in today is quite a bit different than it was certainly 12 months ago.

Yes. No. Fair enough. The other area of distress, of course, is on the refi side. Are you starting to see more properties become available or starting to field calls from folks that maybe can't get refis or the cost of the refi, the debt is so high they can't hold the property?

There hasn't been a dramatic amount of that here in Washington as of yet. I think that will occur over time, but, no, there hasn't been a significant amount -- obviously Monument is a group that's been spoken about much in print and otherwise with their relation to Lehman Brothers.

But as a general rule there hasn't been -- there certainly hasn't been a large foreclosure market in this market year-to-date. And there have been limited instances of people who have reached out. But, no, there hasn't been a dramatic ramp-up in that activity yet, but I would anticipate it will come eventually.

Yes. Thanks. Appreciate it.

John Guinee with Stifel Nicolaus.

Firstly, just a couple of clarifications. Sara, lease term fees in the second quarter -- or third quarter and then also what's the put date on your exchangeable notes?

The exchangeable notes were five years out. So five years from each of the maturities, which would have been November and January, November of '05, I believe, and January of '06. Then, in terms of lease termination fees, they were $387,000 this quarter.

Any chance that was -- November -- (multiple speakers)

It was -- you know it was (inaudible) '06 and '07, I apologize.

Yes, okay, great. Then the second issue I'd guess, Skip, core occupancy is going to be key for the next couple of years. And a lot of that is driven just by a quality of the vacant space and the ability to lease that. Do you have any significant amounts of space that are just functionally challenged and we just don't expect to lease in the next two or three years?

I would say no. We have nothing in that category that you say is functionally challenged. I think I've mentioned on past conference calls, and I mentioned today, I mean it is tough to lease anything that is currently vacant. Because as I noted no one is expanding. No one is growing their business today.

Everybody -- the analogy I give is a basketball one. I said everybody is playing the four corners right now. I mean no one wants to expand their business.

So anything that is vacant is a challenge, but I -- to answer your question specifically, no. We don't have any what I would call obsolete or space that is extremely difficult to lease in our portfolio.

One of the things we've done as you know, John, is we've sold -- in the past, we've sold some of our tougher properties like Maryland Trade Center and our Sullyfield Commerce Center. So I think we are in pretty good shape just from a portfolio perspective, but vacant space anywhere is difficult space today.

Would it be appropriate to assume maybe a 2 or 3% occupancy rolldown in the next 12 months overall?

There's going to be some occupancy rolldown. I don't have a specific number for you, unfortunately.

The good news for us -- let me just give you some numbers. I mean, if you -- and refer back to our supplemental -- and 2008 for the balance of this year, we only have, and I'm talking on aggregate here in our commercial portfolio, we only have 1.5% of our portfolio rolling. And next year we only have 10%. And this is by annualized rent.

So the good news is we don't have a huge exposure of rollover. And I guess one of the positive aspects of a weird market like this is, believe it or not retention rates sometimes go up because tenants don't move. They tend to stay where they are as they sort of delay making decisions to grow.

So on one hand you've got that force working for you. On the other hand, there is going to be some increase in delinquencies. And there's no question about it that in our retail industry portfolio particularly we are going to see, probably in the neighborhood that you suggested, an increase of 200 basis points.

And again, your guess is as good as mine. I don't have any firm numbers on that, but I would say those sectors in particular are ones where you might see that sort of neighborhood. I don't think you're going to see that. I mean if you want to drill down a little bit tighter, we are not going to see that sort of loss in our medical office building portfolio.

You might see some in the office portfolio. I don't believe so, and I don't think we are going to experience that in the residential portfolio, the multifamily portfolio. So I think you really need to drill down a little bit closer and by sector.

Right. One quick question. Sara, are the exchangeable notes -- do they total about 260 or are they 310?

They are $260 million.

All right. Thanks a lot. Nice job. Thank you.

Mark Biffert with Oppenheimer Funds.

First question, when you are looking at the tenants that are leaving some of your facilities, what is their form of business or what did they do? Are you seeing a trend in certain sectors? And then also on the leasing side, are you seeing any specific demand from certain sectors versus others?

Let me answer the second question first. On the leasing side, leasing activity is down dramatically. You don't see any great demand from any one sector anywhere. As I said everybody is playing the four corners. They are in any one sector where anybody is seen a lot of growth right now.

In terms of when you commented tenants leaving the properties, we are not losing a lot of tenants to other properties. Certainly, all of the tenants that are being impacted by the current economic downturn are hurting; and some of those tenants we're certainly seeing lost via bankruptcy and others, such as in our Small Bay Industrial, we are seeing a lot of the people that are related to the construction industry and the home improvement industry. All of the marble counter top guys and we even -- one of our leasing, retail leasing guy was telling me, I was talking to some of the car repair guys that were commenting that their business is off 30%.

So we are seen a lot of the consumer-related activity tenants of ours having tough times. And those are the folks that -- in that retail/industrial sector that are grinding the hardest today.

So, in your conversations with tenants that have upcoming expirations, what are they saying in terms of their ability to renew? And do you have any expectation of additional people leaving in the next six to 12 months?

I think the next six and 12 months is going to be difficult. And I think our approach is to maintain occupancy. And I wouldn't anticipate significant rental rate increases, and I'm certainly not anticipating dramatic losses in our occupancy as well.

I mean, I think we are going to -- as I mentioned to John that I think certain sectors we might lose a couple hundred basis points, but I think you have to look at it on a sector by sector basis.

But we are all forecasting here. My crystal ball is somewhat a little foggy this morning.

And then lastly, when you look at The Kenmore that you bought, I noticed that you put -- I don't know if that's a small redevelopment in your development pipeline. Is that a kitchen and bath remodel?

And then I'm just wondering if you get the rents in this environment to justify that?

(multiple speakers)

That was Alexandria Professional Center. That's the (multiple speakers) that we bought next to the Alexandria Professional Center and we are starting the development process to build a medical office building there. That's different. (multiple speakers)

Okay. Sorry about that. I just saw The Kenmore name.

Unfortunately they both have the exact same name which is I guess something which we should note somehow, but yes. The medical office site in Alexandria is on Kenmore Avenue, believe it or not. And that's not to be confused with The Kenmore apartments which are on Connecticut Avenue in DC. So that is confusing.

All right. Thank you.

Chris Lucas with Robert W. Baird.

Good morning. Just a couple of follow-up questions, particularly on Dulles Station. Mike, it sounded like you are optimistic about getting the last piece of that leased. Do you have a tenant in hand or deep negotiations at this point?

Yes, we have active prospects we are looking at right now. We are down to the last 20,000 feet. So our marketing strategy before was after the much larger tenants.

Now we can focus 100% of our time and [rifle shot] into the smaller groups. So, yes, we've got active prospects in hand right now and it is just finishing off the second floor.

Also you had mentioned that TIs were $60 to $70 a foot. If I look at the current expected cost on the building relative to the amount spent already, it works out to about an extra $90 a foot.

Can you help me walk through that sort of that variance between the $60 to $70 and the TI expectation and the $90 that is expected in the total cost?

We are coming into sort of the mid 300s on a total aggregate basis on that building. Obviously our TIs are much more than we had anticipated as everybody has anticipated in that marketplace.

I guess I'm just trying to understand, the $60 to $70 is what you have indicated and then, there's then the -- basically it is a $90 foot per square foot variance between the cost that's spent through the third quarter and the final estimated cost.

Is there some other cost we should be thinking about or is that (multiple speakers) TIs?

I mean, leasing commissions too. We've got long-term leases and leasing commissions are high for the marketplace, given the economic conditions right now.

But overall an increase in $90 seems high to me.

$90 a foot.

Yes. That doesn't seem right to me and I don't have an answer for you, but --.

It comes in that 45 and you are looking at cash I think the expected number is around $60 plus million. So or that's the math I come up with. Anyway --.

The original, well, let me just back off for a second. The original expected investment in the project I think was $52 million. When it was fully built out with [tenant] improvements, leasing commissions, blah, blah, blah, blah. Everything added in the original expectation was $52 million. Now we're more in the $60 million and that's almost totally attributable to the increased TIs and leasing commissions.

[That's better] -- $60 a foot.

Yes. So the $90 just doesn't seem right.

I'm just basing it off of what you are (multiple speakers).

Right. The $44 investment to date is not a fully completed building. That's, I mean there are no TIs in it. There's.

Virtually no leasing commissions.

Yes, no leasing commissions, etc.

Yes. That was pretty much just the shell as we had finished.

Right. So the TI leasing commission package is $90 a foot?

Yes.

Okay. In terms of the bad debt reserve expense issue, can you give us a sense as to what it was in the dollar amount basis in the second quarter and what it is in the third quarter?

I can give you what we are expecting. In the second quarter, we were at $385,000 and in the third quarter we were at about $387,000. But (multiple speakers) plus another (multiple speakers). Yes actually our third quarter total bad debt was about $1 million and it is about 300 and some higher than the third quarter (multiple speakers) exactly. And then we are forecasting about the same level for Q3, maintaining that level about $1 million for Q4. Great. Yes.

So essentially a sequential change -- no sequential change from third quarter to fourth quarter?

Based on our current forecast, that's correct.

Okay. How does the process work in terms of how -- when you determine when the bad debt expenses need to be taken?

Basically, what we do is for tenants that are aged over 90 days, we are reserved for those as well as tenants that we are in [legal for]. Based on their asset management chain, we sit down and we go through that with the asset management group to get a feel for the estimated collectibility with those tenants. And so that feeds into our reserve percentages.

Okay. Then just, Skip, a broader question. How has your thought process changed since, say, June, in terms of how you are thinking about acquisitions in terms of the required return necessary to make it worthwhile in today's environment?

You are much more cautious. I can say in one word. The activity out there is so dramatically down, and I guess it was down in June, we are being a lot pickier, a lot choosier. Obviously we haven't done a lot since then. We are trying to see where the bottom is. So I would say we are being, the word I would -- the operative word is cautious.

Any sense, any thoughts on Cap rate or growing in yield changes or what you're expected -- sort of three-year return expectation would be on a return on invested capital? How that might have changed?

Yes. I think Cap rates have changed 100 basis points, for example, and I think it is still a property by property specific analysis. I don't think that downtown office buildings are the same as suburban office buildings, which I don't know if anybody is looking at, which are the same as apartment buildings. There's still a lot of variability in it in terms of risk reward relationship.

Great. Thanks a lot.

Michael Knott with Green Street Advisors.

Just a follow-up on that question. If you had to redo The Kenmore acquisition today, the apartment -- I think just to be clear -- how much more leverage do you feel like you would have today even versus just a short time ago, just given what's happened in the capital market?

What you mean by leverage?

In terms of your ability to negotiate a lower price.

I'm not sure the price for something like that has changed dramatically and the reason I say that is that that -- that was a 5% acquisition a year ago. We acquired it at a 6.3% return. So that was a fairly significant price movement. And when you look at the -- you are bumping against replacement cost. That was acquired at 50% of replacement cost.

So anybody can go back and do all kinds of theoretical guessing, but I'm not sure that that price has changed significantly since we acquired that at all. If at all. For an asset like that specifically.

Okay. Then with the call it $350 million of capital you have available, what is your time frame in terms of how long you expect that to need to last? Are you expecting this credit environment to persist for a couple more years? How are you thinking about how long you need to keep that capital?

Again, I would just reiterate, we are being extremely cautious. I mean, we're going to keep a very close eye on the credit markets and the world around us and where that availability is going. So yes, we are going to be very cautious deploying our capital.

If we don't see the world loosening up, because we're obviously not going to go out and buy a $360 million asset in the next six months unless the world changes dramatically. We are being very cautious.

So I wish I could tell you I knew the answer as to when the credit markets would open up, but I haven't found anybody yet that knows the answer to that. A lot of smarter people than me can't answer that question.

Then either Skip or Mike or Sara, can you talk about the lease-up of the two multi-family developments and what your timeframe is now?

In terms of -- as far as what? The lease up is going well. We think that there will be maybe not leased up that the into the year, but certainly into the first quarter of 2009. We are pleased with what's going on there. Is there something else you're looking for or --?

No, I was just curious if you thought the time line had extended?

Yes, I mean I do think it has extended a little bit, mainly because the fourth quarter tends to be a slower quarter and the world is strange right now, but I don't think it's traumatically extended. I think we're probably looking at getting to 90 -- whatever -- 3, 4, 5% leased in the first quarter of '09. Some time.

Okay and then just a question on the office CapEx this quarter. TIs seem to be higher. Is that because the lease term was a little longer?

Yes if you look at our lease term, it is up dramatically. Our office lease term is 7.1 years, I believe.

Historically we almost don't usually average five years with our small tenant focus. Our lease term this quarter is dramatically longer than it is typically for WRIT. It's 7. -- over seven years which is long for us. We did a bunch of fairly long leases.

That doesn't reflect an increasing trend in TIs in your submarkets?

Well I do think TIs are up. I think you've got two forces working there. I think that the significant impact to that is the extent of lease term. I mean, typically, we are doing leases that are 40 months to 60 months in that range.

This year, we are doing a seven-year lease. And I also do believe that, due to the competitive environment we're in, that TIs have gone up a little debt. A good example, not that it is in that formula, those metrics we just discussed, but Dulles Station and the more competitive markets yet tenants are demanding higher TIs. There is no question about that.

Okay. Thank you.

[Dave Rogers]. RBC Capital Markets.

At this point, I guess, given your view on the investment opportunities and the equity funding you've done to date, you've done a good job delevering. As you look at 2009, when do you think some of those opportunities start opening up? And it sounds like your view may have changed.

So would you anticipate pursuing those opportunities to leverage neutral from here or still taking leverage up a bit for the right opportunity?

Yes, I mean, I don't think our view has changed really. We are being cautious, but if we see the right opportunities for the properties that we think are attractively priced in sectors that we haven't been able to buy, I mean, we are going to move on them.

It's just that, to be quite honest with you, there hasn't been a whole lot of that out there today. I think it will happen. I think there will be great opportunities for us in '09. I don't know when. I will be the first one to admit I just don't know when they are going to manifest themselves, but they are not manifested themselves -- they are not manifest today.

I mean, yes, there are opportunities out there, but there isn't that dramatic bargain that everybody seems to be looking for today. There are -- I think things are getting more attractively priced. And we are going to be looking closely at a number of different opportunities, but when the world changes dramatically, your guess is as good as mine.

Maybe a question for Sara. Sara, can you explain -- I think you went through the Dulles Station leasing treatment impact to NOI. Can you explain what that impact might be on a sequential quarter basis from third quarter to fourth quarter?

On an annual basis it is going to be about $1 million a year reduction to NOI.

Okay. And a follow-up to that. I guess, seeing the guidance with the high end of [$2.12], given where you ended up in the third quarter, not that your comments suggest that you are headed to the high end, but it did surprise me to see the number up there.

I guess what opportunistically gets you up that high in the range given where we are in the year?

I think that depends on acquisition activities throughout the rest of the year and the timing of that.

Then, finally, Sara, I know that you are not in the market for a large piece of the debt, but can you just give us an update on your discussion would lenders? Maybe how those have changed over the past month or two months, what their tone is today overall?

There's not a lot of debt available. At this point, a few banks might be willing to give you some on-balance sheet lending, the ones that you have very long-term relationships with.

But in general, the only commercial real estate debt is -- secure debt -- is going to come from insurance companies at this point. And of course they are taking advantage of that position and requiring very low loan to values. And on occasion you recourse which is something that's new in the marketplace. So there's not a lot of debt available.

Fannie and Freddie, on the other hand, seem to be operating business as usual and the benefit to that for us is that the only debt maturity we have in '09 is a multifamily secured loan. It is secured by five apartment buildings in Virginia; and those are about 25 -- it's about 25% loan to value. So that should be able to be refinanced very easily next year if we choose to do that with Fannie or Freddie.

But -- and then in terms of unsecured debt, the spreads are just dramatically wide. And of course there's been no corporate bond issuance in the resector for quite some time. And I don't anticipate that there will be any time soon.

Thanks for the update.

(Operator Instructions). John Guinee from Stifel Nicolaus.

Just a quick follow-up. I know a lot of your peers in the office space are buying back their exchangeable notes at $0.65, $0.70 on the $1.00, and a yield to maturity or yield to put somewhere in the mid to high teens.

Are you exploring that at all? And is the pricing the same for [wash rents] exchangeable notes?

The pricing is not the same. Our notes are trading at about $0.79 to $0.80 on the $1.00 with an 11% yield to put. So we are not contemplating that at this time. I think we had rather leave the extremely attractively priced debt out there at this time.

Great. Then I had a quick question about M Street. Are you guys still planning to close that in the fourth quarter. correct?

We are subject to a contract that's out there. The seller had certain rights. Can't talk about specifics of the contract because it's -- we are subject to a confidentiality provision. But, yes, we are governed by the contract with the seller and as you know Broadway has a lot of -- doing a lot of maneuvering out there and we are waiting to close on the asset.

But is that one of the deals that you thought might get pushed out?

Yes. Yes. It has been pushed out. They had a right under the contract to extend closing and that's what has occurred.

Beyond fourth quarter or still in the fourth quarter?

In fourth quarter.

Okay. Thank you.

Chris Lucas with Robert W. Baird.

Sara, just a follow-up on the refinance of the multifamily assets. What is the thought process at this point in terms of just generally how much leverage -- secured leverage capacity you might be able to pull out of the apartment portfolio, given the liquidity that still remains in that property?

Well, Chris, we could, of course -- there are a lot of things that we could do. We could leave those five properties in a pool. We could add the two apartment properties that should be stabilized at that point.

But I think you have to look at a couple of different things. With the M Street acquisition, we are increasing our -- were that to occur, that we are increasing our $100 million -- our secured debt by another $100 million with that transaction; and you have to keep an eye on your level of secured debt when thinking about your credit rating.

So it is a balance. I think we have to see where our secured debt to total asset ratio comes out at that time and evaluate whether or not we want to increase the leverage on those five properties, add two more properties, increase the leverage there or potentially pull out a couple of properties and only refinance.

We could just refinance the [50] million on one or two apartment houses and increase our unencumbered pool of assets. So I think a lot depends on what our acquisition activity is between now and then and what the unsecured bond markets look like and what the secured debt markets look like.

They are significantly underlevered though. That's sort of what Sara was alluding to. I believe at one point we figured, what, 25% leverage on those assets?

Yes.

So, not knowing how people are going to look it is in October as crazy as the world is, but we believe there is a lot of leverage available there and Sara is right. Maybe we would only pull a couple of those assets out and take out the same amount of money on lesser assets, and pool. So it's hard to say what we are going to do today.

I understand. Just wanted to understand the flexibility. Thank you very much.

Flexibility.

There are no further questions at this time. I will turn the conference back to management for closing comments.

Thank you for your interest in the Company today. Hope everybody has a good weekend. We look forward to talking to you in the fourth quarter and everybody have a good end and hold on tight.

Thank you. This concludes today's conference. Thank you all for participating. All parties may disconnect now.