Elme Communities (ELME) 2009 Q1 法說會逐字稿

Welcome to the Washington Real Estate Investment Trust first quarter 2009 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 Shiplet, Director of Finance, will provide some introductory information. Ms. Shiplet, 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. At our first 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 certain statements during this call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially. Such risks, uncertainties, and other factors include but are not limited to the effect of the current credit and financial market conditions, the availability and cost of capital, fluctuations in interest rates, tenants' financial conditions, the timing and pricing of leasing transactions, levels of competition, the effect of government regulation, the impact of newly adopted accounting principles, changes in general and local economic and real estate market conditions, and other risks and uncertainties detailed from time to time in our filings with the SEC including our 2008 Form 10-K.

We assume no obligation to update or supplement forward-looking statements that become untrue because of subsequent events.

Participating in today's call with me will be Skip McKenzie, President and Chief Executive Officer; Bill Camp, 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. Thank you for joining Washington Real Estate Investment Trust's conference call today.

The effects of the slowing economy continued to have a dampening effect on real estate conditions not only nationwide but here in the metropolitan DC region as well. While we believe our market is arguably the best commercial real estate market in the country, and I expect it to continue to be so for the foreseeable future, Washington is not immune to the economic malaise affecting our country. Real estate performance region wide has reflected these lackluster conditions.

In virtually all of our submarkets, vacancies have risen and leasing progress has been slow. In general, business managers, retailers, and consumers continue to manage risk conservatively and are reluctant to increase liability such as expansions of their spacings or extensions of real estate leases.

Having said that, we believe the WRIT portfolio has performed admirably while flying through these recessionary headwinds. I attribute this to the infill location of our properties, the portfolio's diversification by property types, and our hands-on approach to management leasing.

Overall occupancies in our core portfolio are generally healthy at 93% for the first quarter. Sequentially same-store NOI grew 1.8% over the fourth quarter of '08, and we retained 76% of our expiring commercial tenants.

On the downside, we continue to experience significantly greater than historical bad debts, particularly in our retail and industrial segments, and occupancy declines in our industrial portfolio were 180 basis points over the fourth quarter.

In the first quarter we were active on the capital markets and financing front, raising $14.8 million of equity in early January through our Bank of New York [save] program and repurchasing $48.6 million of convertible debt at attractive discounts in closing a $37.5 million loan at a very attractive 10-year rate of 5.37% on our Kenmore apartments.

Finally, the Board of Trustees approved our 190th consecutive dividend at equal our increasing rate.

Now I would like to turn the call over to Bill Camp, who will review in greater detail our financial performance, and Mike Paukstitus, who will review our real estate operations. Bill?

Thanks Skip. Good morning everyone.

For the first quarter funds from operations were $34.2 million or $0.65 per diluted share. This compares to FFO for the first quarter of 2008 of $17.8 million or $0.38 per diluted share. Funds available for distribution were $26.7 million or $0.50 per diluted share compared to $13.3 million or $0.29 per diluted share for the first quarter of 2008.

On a sequential quarter basis, FFO per share increased $0.10.

I would like to spend a couple of minutes talking at the quarter -- talking about the quarter's FFO in more detail.

First, first-quarter FFO of $0.65 includes an $0.11 gain related to the re-purchase of convertible debt, which I will explain further in a moment. Excluding the gain, FFO was $0.53 per diluted share. This compares to the fourth quarter 2008 FFO of $0.55 per diluted share, which included a $0.05 gain related to the re-purchase of convertible debt.

So FFO excluding gain on extinguishment of debt in the first quarter was $0.03 ahead of the fourth quarter.

The primary difference between the fourth and first quarter on a pre-gain basis is twofold. First, the impact of owning 2445 M for the full quarter positively impacted this quarter. Second, the fourth quarter included the effect of losing Circuit City. Other than those two items, the first and fourth quarters were very close.

This quarter we continue to strengthen our balance sheet. As discussed on the last quarter's call, we have been opportunistically repurchasing our convertible debt, which has a 2011 put date. In the quarter we repurchased approximately $48.6 million of our 3 7/8 convertible notes at a discount price ranging from 80% to 84% of par. In conjunction with these repurchases, we've reported again of approximately $0.11 per diluted share. We have continued to repurchase these securities in the beginning of the second quarter, and currently $182.8 million of the original $260 million is left outstanding.

In January we issued approximately $14.8 million of equity through our sales agency finance agreement with the Bank of New York at a weighted average price of $26.47. We used the proceeds to reduce our line of credit balances and for other general corporate purposes.

As previously discussed on the fourth quarter earnings call, in February we closed on a 10-year, $37.5 million loan for the Kenmore apartments at a fixed rate of 5.37%. These proceeds were used to reduce our line of credit and to fund additional purchases of our convertible notes.

We are actively working on refinancing our October 1, 2009, $50 million par multifamily loan that is pre-payable on July 1. Typically we can lock the interest rate for about 60 days without a premium. So we believe we are close to coming to terms on this financing.

We are also in final negotiations to extend our 2010 $100 million term loan. Our line of credit balance currently stands at $59 million, down slightly from the beginning of the year.

Looking at the changes in the balance sheet in the quarter, we reduced total debt by $27.5 million while raising only $14.8 million in equity. We are getting close to ramping up our 2009 debt maturity and our $100 million term loan exposure in 2010. We have a $25 million mortgage that actually has an interest reset date in 2010, and we show it as a maturity, that we plan to retire. Our lines, which come due in 2010 and 2011, both can be extended at our option for one year.

For 2011 as I mentioned we are down to $182.8 million on the convertible notes. We also have $150 million of senior notes maturing. We believe we have several options to help fund these future obligations.

In the first quarter, WRIT paid a dividend of $0.4325 per share, achieving its 189th consecutive quarterly dividend at equal or increasing rates. And as Skip mentioned, yesterday we issued a press release announcing our second quarter 2009 dividend at the same rate. It is payable on June 30, 2009.

We are reiterating our FFO per share guidance for 2009 of $1.95 to $2.15. I want to clarify what is in this guidance. Our guidance does not include the gains from the convert repurchase. We continue to assume that we will complete asset dispositions totaling $50 million to $70 million. We continue to assume that we will complete acquisitions totaling $20 million. We believe the combination of vacancy, bad debt reserves, and abatements will remain fairly steady the rest of the year. Currently we are assuming that rate is about 11.4%. We expect rents on renewals and rollovers to be mixed, ending the year flat to slightly down.

Now I will turn the call over to Mike to discuss operations.

Thanks Bill and good morning everyone.

Overall our real estate portfolio showed a stronger-than-expected performance this quarter. On a same-store basis our economic occupancy was 93% compared to 95.4% in the same period one year ago and 93.6% at the end of the fourth quarter.

This quarter, WRIT executed over 235,000 square feet of commercial lease transactions with an average cap rental rate increase of 11.1% over expiring leases with an average lease term of 3.6 years.

Rental rates in the residential sector increased 2.2% compared to the same period one year ago.

In the office sector we executed leases for a total of 63,000 square feet at an average rental rate increase of 13.4% on a GAAP basis.

In the medical office sector we signed leases for a total of 11,000 square feet at an average rental rate increase of 9.8% on a GAAP basis. Our medical office portfolio continues to be the most occupied sector at 97%.

In the retail sector we executed leases for a total of 21,000 square feet with a rental rate increase of minus 5.2% on a GAAP basis. This roll-down was primarily generated from the work-out of a 6,000 square foot tenant which represented 28% of the Q1 retail leasing activity. Additionally the retail lease for this quarter involved nontypical retail leases more similar to industrial transactions in less than prime space.

In the industrial sector we entered into leases for a total of 140,000 square feet with a rental rate increase of 13.4% on a GAAP basis. This is higher than usual leasing velocity thanks to three leases in excess of 15,000 square feet signed at [Pickett], NVIP, and Sully Square.

Our two apartment development projects, Bennett Park and Clayborne were 79% leased and 82% leased at the end of the first quarter. This compares to 79% and 64% at the end of the fourth quarter. We have experienced increased activity at both of these properties over the last month with Bennett Park now at 88% leased and Clayborne now at 89% leased.

Now I would like to open the call for questions.

(Operator Instructions). Mark Biffert, Oppenheimer & Co.

Related to leasing I have a couple of questions just on what you're seeing from the discussions. Last quarter you had mentioned you are negotiating with the World Bank on their renewal next year, and then across your other portfolios you have a sizable renewal -- amount renewing as well. I'm just wondering what you're hearing from tenants and the likelihood that they will renew versus those that have said that they are giving back space.

Good morning Mark. As it relates to World Bank, I'm extremely optimistic that that's going to be signed very soon. I would've liked to have said we would have it signed today, but I can't say that right now. But I'm extremely optimistic on that front.

With respect to the rest of rollover, actually for the balance of 2009, just to clarify, it's actually a very light year. We only have something on the order of about 6.5% of our leases of our economic lease income rolling for the balance of this year. So this year is actually a very light year.

As it relates to 2010, which I think is where you might be seeing a little bit of a blip-up in some of our exposure, one of the tenants is Lafarge out in the Reston corridor and actually in our Herndon project. I don't have any particular intel on that right now. We've just begun the process of trying to discuss with them.

That World Bank lease that I had just mentioned, that actually is the biggest sort of participant in those 2010 rollovers. And those are probably the two ones that stick out more than any other.

Yes. Across the street we have a 40,000 square foot lease at our Atrium office building, and they have renewed.

How long was that for, Mike?

That was for --?

Another five years.

Another five years. So those are the three biggest exposures and with the dramatically biggest impact being the World Bank lease. That's 148,000 square feet, and that's a high-40s dollar rent. So that has a huge impact on that number.

How about the rest of the portfolios? The retail, the industrial portfolios?

We don't have any giant tenants rolling in those areas. I would say just sort of from a macro level, the markets are soft. We've actually been able to have a pretty good retention rate even throughout this. As I reported on my comments, we were 76% for the first quarter. Having said that, it's going to be sort of a bare-knuckle environment for the rest of the year in my view. I think we are going to continue to have retention rates that we've experienced historically, but I would be lying to you if I didn't tell you that the leasing dynamics market wide our relatively soft.

And then last quarter you, Bill, I think mentioned that your occupancies would be in the 90% to 95% range with industrial being at the low end, and it appears that industrial is already down at that low end. I mean, what are your expectations in terms of being able to maintain occupancy at that level through the rest of this year?

Yes, I think we can. We have been hit pretty hard in the industrial sector. Interestingly enough, probably the area that we are being hurt is as much as any is down the 395 corridor where -- which has historically been one of our strongest markets, which is our Northern Virginia Industrial Park. We have two buildings down in the Fullerton area.

And I think I've mentioned on previous conference calls, one of the things that's really impacting us in that market is these aren't historical -- these aren't the traditional large-bay industrial buildings. These are small-bay warehouses, generally 5,000 to 20,000 square feet, and they are mostly consumer-oriented type operators. So we would have small general contractors and there. We actually have a Deere parts distributor in there for example, who is actually doing well. But it's those types of users that are down there, and they are being hit by very much the same forces that are hitting the consumer retailers that have problems today.

Okay. And then -- and Bill, if you can talk a little bit about what you are hearing from the GSEs on their underwriting. Today it seems like coupon rates continue to fall, and I'm just wondering what they are basing that on and given the longer terms that they are also offering people on a fixed basis.

We did the Kenmore loan at -- now it's at 5.37,% 10-year rate -- that was a 10-year deal. I would say today we are probably in that same ballpark, quite honestly. Treasuries have come up but the spreads have gone down a little bit. So we are kind of modeling right now -- I mean anything can change, but right now we are kind of modeling that we would be at the same kind of level, somewhere in that 5.30%, 5.40%, maybe as high as 5.50% range on those apartment loans that would come due.

So I think that GSEs are actively in business. I think they probably make more money on the -- I don't know, but I'm guessing they make probably more money on multifamily than they do on all the housing stuff that's defaulting on them. So they probably need that business. I think they are still active.

The terms quite honestly, the proceeds are locked up. It's typically 65% loan to value or 125% debt service coverage. Depending on where your numbers shake out, one of those two will cap the proceeds on how much you can generate out of the building.

Anthony Paolone, J.P. Morgan.

Just a follow-up on the GSE debt discussion. Do you intend on taking out any excess proceeds from the upcoming maturity in October or even throughout the apartment portfolio, given that attractive financing source near term?

Right now, Tony, I think the plan is to just refinanced the 50. I think that logic would say you want to wait through the summer -- the spring and summer lease-ups in those buildings. It's the active time of the year to lease buildings up, and the more occupancy you have, the higher your proceeds are going to be. It is a little bit of a risk on the interest rate, but I personally don't see -- I don't see the interest rates being able to move too quickly too soon.

So it may be a situation where when we have stabilization of Bennett and Clayborne that we lock in the rest of it. However, let me just say this. We can do the 50 million refinance with two of the five, so we are and encumbering. So for a ratio perspective we are encumbering three assets. That's always a good thing for our -- for ratios.

And quite honestly, adding secured debt, while I am eliminating unsecured debt, puts some strain on ratios that the credit rating agencies look at, and if that gets too out of whack then I am looking at the rating agencies downgrading our debt at some point if I continue on that path -- something that I have to analyze. I'm not saying that I will control what I do.

That's helpful. And then just my other question is, I was wondering if you could provide your thoughts looking out the next 12 to 24 months on the deal environment. You have the potential of some movement with maybe like Archstone assets on the apartment side or just any variety of opportunity funds that bought assets aggressively on the office side. Just what your thoughts are in terms of maybe those things hitting the market or how you see yourselves maybe getting involved?

We monitor the market closely to be quite honest with you. There hasn't been much of that available today. There's limited product available in the market. The transaction activity has been extremely slow. There have been some transactions but a very small quantity of them. We are monitoring the market closely. We don't think just from a temperature and pricing standpoint that super attractive pricing is out there in our market. As you know, everybody seems to think that this is the best market in the country, so there haven't been any screaming buys at this point, but we are monitoring it closely, and to the extent there are those super attractive opportunities, we plan to evaluate them on a case-by-case basis.

Michael Knott, Green Street Advisors.

Did you mention anything about asset sales in your comments?

We did not mention anything specific, but I could give you a general comment. We have announced in the past that we had the Avondale Apartments on the market, and just to give you the latest update on that, we do have a -- that contract is firm with a buyer, and we anticipate actually closing on that next week. So that's sort of the glide path that that's on.

We do have another property on the market today, and that's our Crossroads warehouse. It's a very small transaction so it's not going to move the needle too much -- up in the Baltimore-Washington corridor area. Those are the only two projects that we have actively on the market now.

We have received a number of unsolicited interests on properties which we have -- we are evaluating, but nothing firm on any of those. But we do anticipate closing on the Avondale apartment sale next week.

Do you care to share any details on that?

No, I would rather -- not that it's double top secret, but I never like to talk about a transaction that hasn't occurred yet. And we certainly -- the day that it occurs and the check clears, we will put out a press release.

Bill, you talked about having several options for future unsecured maturities. How does issuing additional equity or potentially cutting the dividend factor into the menu of choices that you talked about?

Well, obviously those are all choices. You evaluate them all equally. I will take the second part of that question first. In terms of the dividend, if we look at our taxable income for this year -- obviously projections, and who knows exactly how things are going to shake out. But if we look at our taxable income this year and we include the gains that I'm taking on converts and the gains that we will -- we anticipate we would take on selling $50 million to $70 million of dispositions, we will have a taxable income pretty much equal to our current dividend. So for this particular year at least, I don't think I have a whole lot of wiggle room.

In terms of equity, obviously we raised a little equity in the first week of the year. I'm not opposed to doing that. We evaluate that versus raising more leverage or selling more assets on -- quite honestly, it's everyday I look at that stuff. So it's a matter of deciding if you need capital and when you need it and what the best option is to get it at that point in time.

Okay. And you guys have about $50 million left under that original program?

No, it's about 90 -- it's about $92 million or $93 million.

Okay. And Mike, could you comment on suburban Maryland office versus Northern Virginia in terms of leasing fundamentals, tenant demand, perhaps inside, outside the Beltway? That would be helpful.

Well again, I think the dynamics of inside/outside are very similar, inside the Beltway obviously being much stronger than outside. You know generally speaking, we see increased vacancies in Virginia outside as opposed to Maryland, which has been a more steady environment. The markets that we're in, I mean, on the office sector generally we're favoring much more favorably than the market in general. The market's vacancies are much higher than the ones we are experiencing.

But we have some -- we are seeing some aggressive deals being done in our one project on Rockville [Pike]. The good news is that we are closing just about everything that's occurring in that marketplace. So we're getting velocity but we're not getting tremendous growth out of that.

And then in Virginia for the most part we are pretty stable. Our two Virginia properties out near Dulles are full, and the one at 1600 Wilson in [Roseland] is the same way, is almost 100% leased. So we are trying to close down Dulles. We've got the 6,000 footer we are close to signing, and some others in the pipeline that could stop that -- or close that gap. And then at Monument, our other project there, the one deal that Skip had mentioned, there is a roll-over in that asset next year that we are working on right now.

This is Skip, Michael. I would say that just region wide I think I mentioned in my comments that leasing velocities are down fairly dramatically. In the recent Delta report I think they reported a negative almost 1,000,000 square feet of net absorption in the first quarter region wide. That's not necessarily good. I mean, the first quarter is usually a slow quarter admittedly, but you would almost have to say region wide almost everywhere just transactional activity -- leasing, sales, what have you -- on all property types is significantly abated.

Then my last question and I will get back in the queue. Skip, how would you evaluate the possibility of in the future investing in the new areas of the DC marketplace, north of Massachusetts, down by the ballpark, etc. ? Just curious of your view on that.

Yes, I think we would certainly approach it opportunistically. I think those are certainly emerging markets and their day will come. They will be dynamic, and particularly by the baseball stadium you could see the vision there, and it could be an exciting place. I think they are going to be evaluated on a case-by-case basis, and certainly today if you were to make a move in one of those two markets, you would want an extraordinarily good deal because you are going to be looking at a lot of downtime in those two particular markets.

But just from a long-term sort of visionary sort of point of view, I think that those are -- will be major parts of the city. I think that over time they will fill in like the rest of the DC, just like the East End did 20 years ago when you might've asked the same question, and they certainly would so far as a long-term strategy will fit in. But today if you were to make the move on either of those sectors, you would want a pretty good discount.

Dave Rodgers, RBC Capital Markets.

First question, on the One Central Plaza move-out, can you give us a little bit of additional detail on that, and particularly with respect to prospects and the incremental impact to second-quarter versus first-quarter FFO, if that is significant?

Dave, that was a vacancy that occurred almost a year ago now. It was the United Communications Group. Over the last year, I will be honest with you, I've been very disappointed in the leasing performance there. It is a market that -- that building historically has been a very tight building, and I would say that we felt pretty optimistic when United Communications moved out that we would lease it up quickly, but we have not done so.

It is a little bit unusual in that it's not contiguous. There is a number -- that tenant grew sporadically throughout that building, so it had some space on four, some space on six -- so it's very heavily broken up. We've actually leased some of it, but we've done a little bit of the sort of the "two steps forward, two steps back" over the intervening 12 months and really net/net/net have made little progress.

We've actually over this time frame have actually hired a third-party broker to assist our leasing team in leasing that space up. So we do have activity on it. I would like to say I'm optimistic about leasing some of it up. But I'm not going to jump for joy and tell you that I'm really pleased with the leasing activity there.

Long-term I think that's going to be a good building in a good market. If you are familiar with its location, is right up the street from NIH, and NIH and Bethesda Naval Hospital, which is across the street from it, they are going to be major beneficiaries of many of the initiatives that are going on, especially with Walter Reed moving to Bethesda Naval, so I think long-term it's going do be fine, but it's a rocky road right not to be quite honest with you, Dave.

Thanks for that color. With respect to distress, we've obviously talked about it and there was an earlier question on distress in the market overall. It hasn't I guess fully emerged as maybe we had all anticipated at this point, likely still on to come, but how do you think, Skip, about positioning the balance sheet and how to take advantage of that when it does come?

Yes. I mean we think we are in a good spot. If the opportunities came we think even today we could make a move. Obviously like everyone everybody else we would like to have less leverage so we could be even more aggressive and make bigger moves on that.

But quite frankly, right now we don't see that opportunity out there. We don't see -- as I just mentioned a caller ago -- that there just are not screaming buys in the marketplace today.

And do I think that they will occur? I don't know. I really don't know whether in the Washington DC region if we are going to see the screaming discounts that many people are forecasting for many markets in the country. Will I think we see -- we'll se better deals? Absolutely. I do think we will see more attractive rates of return on investment, and I think we are poised to do so. But I'm not so sure we're going to be seeing the $0.50 on the dollar type transactions that we saw in the -- the last time we had the meltdown in the early '90s.

Okay. Final question. Bill, I think you mentioned earlier in response to another question your -- or you characterized the discussions with the GSEs. Could you characterize discussions with the other lenders maybe with respect to the term loan for next year or just broader discussion on potentially the unsecured side, whether from institutions or banks, and characterize those two sources of capital in your discussion?

Sure. Well let's start with the term loan, and as I mentioned in my prepared remarks, we are in final discussions on extending the term loans It's an extension. It's not a renewal. It's not -- so it's not like a new loan necessarily. It's kind of a blend and extend type of situation that we are looking at.

It will cost us a little bit more. The loan rate right now is -- we pay a swapped out fixed rate of 4.45% on that term loan. That's a two-year loan that was set in February of '08. Quite honestly, the concept behind this obviously is not done yet. The concept is to take it out to the end of two -- or towards the end of 2011. And the rate -- so I am extending it by about 17 months. And the rate would probably be up 75 basis points or maybe a little higher than that. That's kind of where it's at.

If you ask me where a new term loan terms are, like what the market looks like if I went out for a new two-year term loan today -- and I am kind of guessing a little bit, to be perfectly honest with you, Dave, because I haven't talked to people about it yet. I've talked to a couple of bank but not a lot.

What you're seeing in today's market is you are seeing floors on LIBOR rates somewhere around 150 to 200 basis points. So 1.5% or 2% floors. So -- and if you -- you can get those floors waved obviously if you swap it with whoever you are getting the loan with. You can either get it waived or it becomes a non-factor. The spreads are 275, 300 over for a credit like us. Might be a little lower today than it was a few weeks back when I was talking about it, but that's kind of the number. And I think that's kind of the term loan market right now.

In terms of the other property types, secured financing, a lot of the lenders, insurance companies, there is money to be put out in this market. In fact we had one insurer come to us to ask if they could try and be competitive against Fannie and Freddie because they wanted apartment exposure in this market, and low and behold they couldn't be. But they wanted to be. But they wanted deals in the under-$10-million size, and we don't have very many of those. So I think they were looking for smaller exposure on an individual basis.

It doesn't sound like they want any kind of pooled transactions right now. They just want to be simple and have one asset that they can watch. And I would say they are probably -- if Fannie and Freddie are in the low 5's, I would say they are probably in the high 5's or 6's.

In terms of other property types, it seems or it feels like everyone thinks at least in our area -- I don't know about other parts of the country -- that those rates are 7% to 7.5%. And they've been that way for a while, and if interest rates move up a little bit their spreads come down, and if interest rates move down, their spreads go up. It feels like a floor to me. But that's kind of where we are at.

Does that give you enough color?

Yes. I appreciate the color. Thanks guys.

(Operator Instructions). John Guinee, Stifel Nicolaus.

Nice quarter guys.

Question. You talked about the relative strength of the investment sales market in DC versus the rest of the country, and you also talked about the seemingly availability of debt in DC and then your desire to delever a little more. If you kind of add that altogether it would imply a much more aggressive disposition policy than $50 million or $60 million in 2009.

So my questions are really twofold. Why not more than $50 million or $60 million of assets sold in 2009. And then second, what is the (technical difficulty) or the dispositions (technical difficulty) like one small industrial, an apartment. So what's (inaudible) reason there?

Well, we like -- first of all we like our diversified portfolio. John, I think there is -- but let's go to the meat of your questions, why not more dispositions? And I think as Skip said earlier, he said there was several properties that we have had unsolicited offers on. I think when you go to the broader markets and really show the market that you want to try and sell a building, I think everyone thinks that you are willing to give it away. So --

I think that's a good point, tactically.

I think one right now what we're seeing is these one-off transactions that are unsolicited by us, some of them are attractive, and we're going to look at them. And quite honestly the number could go higher than $50 million to $70 million, which is what I'm advertising. It could go higher, but with the market the way it is and the fact that money is as tight as it is and some guys can get lending and other guys can't and these are one-off buyers sometimes, you just -- it's not -- I'm not ready to say all of a sudden that we are going to push the disposition program. We're looking at a lot of stuff.

I think we agree with you, John. I think it's a valid comment. We are evaluating it. I think as Bill mentioned, that number could be greater than that at the end of the year, but maybe we're being a little conservative on our numbers, but we feel comfortable with the numbers that we put on the table in terms of our projections, and it very well could be a larger number than that when the chips are finally counted at the end of the year.

The other point, John, I think is that even if we would decide that we were going to sell another asset and move down the path, we are kind of at the end of April here. By the time we actually get it all done and said and done, we are going to be very late in the year or it could be certainly late third quarter and if not, fourth quarter. Some of these things may push out, and we haven't given any guidance on disposition next year. They could push out the next year too. So it's kind of a -- I don't know if we are going to hit higher than $70 million this year or not, but I think the thought process is we are continuing to work on a lot of different things and if some of them hit, that number may go up this year or it may kind of wiggle into next year.

Chris Lucas , Robert W. Baird.

Bill, just to kind of follow-up on the train of thought here on the capital side, I guess two quick questions. One is that have you even bothered to look at the unsecured market at this point? And is there any pricing that's being bandied about that you would care to discuss?

I have not quite honestly. I think there's some of our REIT counterparts out there that have tested the waters in that market, and I don't think at this point -- I actually -- Chris, I actually think that at some point in the future that market might become more attractive, but right now the pricing looks pretty expensive.

Okay. And then just in terms of thinking about the debt maturities over the next couple of years, it seems like the general consensus is to try to get as much paid down through sort of the 2012 time frame. So given that as sort of the conventional wisdom, what's the thought process on just extending the line into essentially the end of '11 as opposed to further out?

Well, we have an option at the same terms. Our line is that plus 42 basis points. The rates right now are under 1% for us to borrow.

I guess -- I'm sorry. Let me talk about the term loan is really what I want to talk about.

Oh, the term loan?

Yes.

Well, the thought process -- I will be real candid. The thought process is that term loan is with our lead line of credit bank. It is under the same covenants and various things at that line if we extend the line. The line matures in November of 2011. And if I want to keep that term loan basically -- I have a penalty if I pay it off, so my cheapest source of capital with regard in that term loan right now is just to negotiate an extension rather than pay it off and issue a new term loan. And they are unwilling to move it beyond that maturity date of the line because then they will have exposure to the same set of covenants that they have now, and I think they are not really interested in keeping covenants exactly the same. I don't think any bank is.

Okay. That's helpful. And then just I guess a kind of a technical question, and if Laura is there maybe she can help me with this. I'm just trying to understand the APB 14-1 application, what was the actual adjustment in terms of interest expense for the quarter?

Sure. As you saw in our press release, we mentioned which included the gain on extinguishment, the $0.05 in the first quarter '09 and $0.03 in the first quarter of '08. If you exclude the gain, Chris, it's basically $0.02 in the first quarter of '09 versus $0.03 in -- the same $0.03 obviously in the first quarter of '08.

Okay. I think there is a footnote that references -- and I don't have it in front of me -- about $1.2 million of adjustment for each quarter, and that was the part that I was struggling with.

We basically have -- excluding the gain we have $1.2 million in first quarter '09. About $900,000 of that is the noncash related to -- on the fair value adjustment. The difference for that, you see it added back in our FAD is basically the amortization of the fair value on the mortgages in the first order.

I will probably need a little more help on this so I'll -- if I can get you off-line that would be great.

Sure.

Michael Knott, Green Street Advisors.

I was going to ask for an update on Sunrise.

I guess the way I would answer Sunrise is, as they have advertised in the marketplace they are attempting to sublease a significant portion of the premises. I think I announced the prior call, we are working with them to assist them in subleasing 60,000 square feet is what they have identified as excess space needs. And they've actually got a decent amount of prospects on I would say almost all of that space. And we are actively working with them to facilitate releasing them of some of those lease liabilities.

So that's sort of an ongoing process. Nothing is firm. It's all subject to change, but I feel pretty good about the activity on that space and the ability for us to basically help them sort of deal with their sort of G&A issues on a going-forward basis.

In terms of them as a tenant for us, they've been a phenomenal tenant. They are current on their rent, and we recognize that they have still more things to do in terms of their business plan going forward, but I think they are making some progress.

How is that building received in the marketplace from potential sub tenants?

I think the activity has been very, very good. Let me just make sort of a general market comment. One of the -- sort of the -- you might hear negative comments about Tysons Corner in general today. It's one of the issues that there is a tremendous amount of construction activity going on at Tysons. They have what's called a hot lane project, which is adding lanes to the Beltway, which is a lot of disruption in the vicinity of Tysons corner, as well as the whole metro construction project is now underway.

So sort of a macro level, you are hearing concerns just in the marketplace on the willingness of some new tenants to want to expand in Tysons because of the sort of just big macro level issues that don't relate to our properly necessarily, it relates to the whole market as a whole. Having said that, as I mentioned earlier, these guys have had really good activity in our space. We are probably one of the, if not the, most prominent buildings on the Beltway there, so it has wonderful signage opportunities. Sunrise has a sign the building. The other building across the street, Capital One, has an equally prominent building signage, so they've had good progress there.

I guess the other thing to address is there's -- given our pricing, the price point for that building is substantially below new delivery in the marketplace. So it's a fabulous deal for a tenant to come in there and get that location at that price.

And then on the retail portfolio -- maybe you mentioned this and I missed it -- but can you just talk about your feeling as to the health of your retail portfolio? It looks like occupancy was up a little bit sequentially and you had a roll-down on just a little bit of releasing on a cash basis. Can you talk about your expectation of where -- for the entire retail portfolio -- where market rents are versus your in-place rents?

Yes. I can make a general comment on that, Michael. First of all, the first thing I would like to say just I think you should just ignore the rent roll-down in retail. The activity this quarter was so light -- it was 21,000 feet -- and it had sort of an aberrant tenant in there. It had on the backside of our Montrose Crossing shopping center it had a industrial center on the backside of the center.

And then as Mike mentioned I think in his comments, we had a work-out tenant for another part, so it was really -- it's kind of an aberration. I don't think that negative 5% is indicative of where our leases are relative to market on a macro level. I think we are showing that our rolling leases over the next 12 months are slightly below market so that we are still -- I would say as we release over the next 12 months, we will see modest or moderate rental rate increases on that on those rollovers.

Having said that, I would comment that retail is still a very tough environment for our tenants out there. As we reported, we are still experiencing higher than historical bad debt expense in the retail world, and we are hearing from our tenants that their sales are down fairly significantly.

The good news is that we have primarily supermarket-anchored grocery centers in in-fill locations, and those are doing well. Where we sort of are keeping a close eye on, we do have two power centers and we are keeping our eye on some of the big boxes out there. We don't know of any further problems other than the Circuit City that we had in the fourth quarter. But we are keeping a close eye on those.

But I would say we are reasonably optimistic given the region that we are in that we are going to sort of get through this okay. But we are not going to see sort of those 20% rental rate increases and 98% occupancies that we have enjoyed over the past five years maybe over the next 24 months.

Chris Lucas, Robert W. Baird.

Two quick questions just to follow-up. What was the bad debt expense for the quarter?

The overall number?

Yes.

The cash number was $1.4 million and the GAAP number was $1.76 million.

Okay. And then just following up on that comment, Skip, any prospects on the Circuit City space? I know it's early.

Let me answer this two ways. Do we have prospects on it? Yes Chris. But I wouldn't factor in a permanent tenant in that space. It's a very difficult retailing environment. We will probably get some rental income on that space over the next 12 months with some seasonal tenants where we'll probably do like a Halloween store and we'll probably do like a Christmas tree store, so we will probably actually mitigate the income dislocation from Circuit City. But as a practical matter, the chances of putting in a 23,000 square foot tenant on a permanent basis there over the next 12 months is probably not that good right now. But from an income basis, I think we will cut down some of that with some seasonal tenants.

Thank you ladies and gentlemen. There are no further questions at this time. I will turn the conference back to Management for any closing comments.

Okay. Well, thank you everyone for listening to our conference call today. I hope you are enjoying as good a weather as we have here in Washington. We look forward to discussing with you the results of the second quarter. Have a good day.

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