Elme Communities (ELME) 2009 Q2 法說會逐字稿

Welcome to Washington Real Estate Investment Trust's second-quarter 2009 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. Ms. Shiflett, please go ahead.

Thank you and good morning, everyone. After the market close 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 second-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. The per-share information being discussed on today's call is reported on a fully diluted share basis.

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 condition, the timing and pricing of lease 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, our 2009 first-quarter 10-Q and our Form 8-K filed on July 10, 2009. We assume no obligation to update or supplement (technical difficulty) statements that become untrue because of subsequent events.

Participating on 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 and thank you for joining Washington Real Estate Investment Trust's conference call today. The metropolitan DC real estate market is proving it is not immune to the economic headwinds facing the US economy. Real estate transactions of all stripes seem to be in suspended animation as business managers and owners continue to offset revenue declines with expense management of the real estate cost centers by delaying, reducing or minimizing real estate leasing decisions.

Real estate investors and property sellers continue to be hampered by a wide bid-ask spread, and retailers struggle to cover overhead with declining sales and an American consumer who now saves rather than spends. As a result, regionwide vacancy rates increased significantly over the first six months of the year as too many submarkets experienced negative net leasing absorption.

On the investment front, in a region that normally averages well in excess of 100 office sales transactions in a year, year to date we have had 10. It just seems like no one is in a hurry to do anything.

Having said that, WRIT managed to achieve several significant strategic and operational achievements in the second quarter. We renewed our largest tenant, the World Bank, through December of 2015 at our office building in 1776 G St. in Washington, DC. We completed the sale of our weakest multi-family asset, the Avondale Apartments, for $19.75 million and recorded a $6.7 million gain on the sale.

Subsequent to quarter end, and yesterday, in fact, we closed on the sale of our Tech 100 Industrial Park for $10.5 million, achieving a gain on sale of $4.2 million and achieving an unlevered internal rate of return of 14% over the 14-year holding period. We substantially completed leasing on our three development projects -- the Bennett Park and Clayborne Apartments and our Dulles Station office development.

We continued to delever our balance sheet by raising $112.4 million of equity in and overnight equity offering in May and repurchased $40.8 million of our convertible notes at a discount to par. Operationally, in the commercial portfolio, we retained 67% of expiring tenants in the second quarter. And at June 30, our commercial portfolio was 92.2% leased and the multi-family was 96.9% leased. And lastly, the Board of Trustees approved our 190th consecutive dividend at equal or increasing rates.

While we are pleased with the performance we have achieved, we recognize that this is an extremely challenging operating environment, and we anticipate it to continue as such for the balance of 2009.

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

Thanks, Skip. Good morning, everyone. For the second quarter, funds from operations were $30 million or $0.53 per share. This compares to FFO over the second quarter of 2008 of $25.9 million or $0.54. Funds available for distribution were $21.8 million or $0.39 per share compared to $18.1 million or $0.38 for the second quarter of 2008.

Comparing to the first quarter of this year, before gains on the repurchase of debt, FFO per share was $0.51 versus $0.53 last quarter. Netted out of these numbers are a $0.02 gain in this quarter and an $0.11 gain last quarter. The primary driver of the $0.02 decrease in FFO before gains on the extinguishment of debt was the effect of the two months of share dilution from our equity issuance at the beginning of May.

From a net operating income and an FFO basis, the second quarter was very similar to the first. The combination of vacancy, bad debt and rent abatements that I mentioned last quarter would hover around 11.5% for the remainder of the year came in a little better than expected at 11.2% this quarter.

In this quarter, we issued 5.25 million common shares at an offering price of $21.40 for proceeds of $112.4 million. As I have discussed on the last few conference calls, we have been opportunistically repurchasing our convertible debt, which has a 2011 put date. In the second quarter, we repurchased approximately $40.8 million of this debt at an average discount price of 91% of par. In conjunction with these repurchases, we reported a gain of approximately $0.02. As of the end of the quarter, we have purchased $105.4 million of the original $260 million, leaving $154.6 million of our convertibles outstanding.

We extended the maturity date of our term loan with Wells Fargo from February 2010 until November of 2011. The interest rate on the term loan increased from LIBOR plus 150 basis points to LIBOR plus 275.

As for dispositions, we completed the sale of the Avondale Apartments, a 237-unit Class B apartment property in Laurel, Maryland. The sale price was $19.75 million, and we achieved a net book gain of approximately $6.7 million. The internal rate of return over our 10 years of ownership was 11%.

As Skip mentioned, we generated $10.5 million from the sale of our Tech 100 Industrial Park yesterday. We achieved a $4.2 million gain on the sale and a 14% internal rate of return over 14 years.

After the quarter closed on July 1, we prepaid the $50 million multifamily loan coming due October 1 of this year. By retiring this debt, we unencumbered five of our Northern Virginia multifamily properties. We funded this prepayment with cash on hand and a $15 million draw on our line of credit. We continue to monitor Freddie Mac and Fannie Mae rates to position ourselves to be able to finance all of our unencumbered multifamily assets quickly, giving us a source of relatively low-cost capital that we believe may generate approximately $175 million.

With the recent draw on our line, our line of credit balance as of the end of the quarter was $15 million, down $33 million from the end of the first quarter. In the second quarter, WRIT paid a dividend of $0.4325 per share, achieving its 190th consecutive quarterly dividend at equal or increasing rates. Last night, we issued a press release announcing our third-quarter 2009 dividend at the same rate, payable on September 30, 2009.

We started repurchasing debt back in December of last year. Since that time, we have taken a number of actions to improve our capital structure and plan for our upcoming 2011 maturities. We have repurchased a total of 105.4 million of our converts for a total repurchase price of $88.8 million. We paid off the $50 million five-property multifamily loan. Additionally, we reduced our line of credit balance by $52 million.

Over the same period, we raised $127 million of equity, raised $37.5 million by leveraging only one apartment building for a 10-year term, sold the Avondale apartment building for $19.75 million and the Tech 100 Industrial Park for $10.5 million. When you do the math, you can see that our sources and uses of external capital align closely at $194.75 million and $190.8 million, respectively.

As we look forward, we have eliminated our 2009 debt maturities. We have moved our $100 million 2010 maturity to November of 2011, and we eliminated $105.4 million of our converts that are puttable in 2011. We believe we have the liquidity from various sources to manage the remaining 2011 maturities, as well as fund accretive acquisitions when opportunities present themselves over the next few years.

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 strong performance this quarter. On a same-store basis, our economic occupancy was 93% compared to 94.5% in the same period one year ago and 93.2% at the end of the first quarter.

Despite rising vacancy and a broad economic downturn in the DC metro area, we have generally held core occupancy between 93% and 94% for the past four quarters. This quarter, WRIT executed over 558,000 square feet of commercial lease transactions with an average cap rental rate increase of 13.8% over expiring leases and an average lease term of 4.4 years. Rental rates in the residential sector increased 1.1% compared to the same period one year ago.

In the office sector, we executed leases for a total of 307,000 square feet and an average rental rate increase of 17.6% on a GAAP basis. The largest contributor to office leasing volume this quarter was a 150,000-square-foot extension signed with World Bank at 1776 G St. commencing in January 2011 for a five-year term.

In the medical office sector, we signed leases for a total of 57,000 square feet at an average rental rate increase of 7.8% on a GAAP basis. Our medical office portfolio continues to be our most occupied sector at 96%. In the retail sector, we executed leases for a total of 21,000 square feet, with a rental rate increase of 4.9% on a GAAP basis. In the industrial sector, we entered into leases for a total of 174,000 square feet, with rental rate decreases of 3% on a GAAP basis.

Our two apartment development projects, Bennett Park and Clayborne, were 96% leased and 93% leased at the end of the second quarter thanks to a busy spring and summer lease-up period. This compares to 79% and 82% at the end of the first quarter. Furthermore, our entire multifamily portfolio was 96.9% leased at the second quarter, with three of the projects 99% leased.

Now we would like to open the call for questions.

(Operator Instructions). Mark Biffert, Oppenheimer.

This is Ian Hunter with Mark Biffert. Just a couple questions about the asset sales and lease renewals. On the Tech 100 disposition, can you give us an idea of what the exit cap rate was?

Sure, I can do that. On the trailing 12 months, it was an 8.5% cap rate. But one of the factors in that property is we had a number of tenants there that were somewhat difficult in terms of rental rate paying. And we knew one of those tenants were leaving. So if you took into account on a forward-looking basis that we were probably going to lose one of those tenants, it was probably closer to a 6%. So if you're looking forward, it was a 6% cap; if you're looking backwards, it was an 8.5%.

Okay. And then what would you say accounted for the occupancy growth in your core multifamily and office sectors? And what are you noting in terms of traffic? Is this being driven by the decline in rents in your submarkets?

Well, on a core -- you asked on a core basis, is that correct?

Yes.

One of the large reasons on a core basis is seasonality. You are in the leasing season. There's a big difference leasing in the second quarter as opposed to the first quarter, generally. And I would say that we were in fact a little more aggressive on our rental rates. But as you could see in the numbers that Bill discussed, or Mike, that we did report year-over-year rental rate increases.

But I would say a combination of two things -- we were a little aggressive in getting occupancy, and also the seasonality effect.

Okay, thanks. And what are your expectations for additional asset sales, excluding the -- or I guess have you earmarked any for sale so far?

Well, I think we have reported that -- we gave an estimate for $50 million to $70 million was our sort of goal for this year we reported earlier. And in this environment, it is tough to give you a definitive answer. I do think that we are on target to be on the lower end of that estimate.

Having said that, if a couple things break the right way, we could blow through it. But I think that we feel pretty good about being on the lower end of that estimate for this year. Having said that, as you know, with the two assets, we are at 30 right now, in round numbers, completed.

And last question is, what percentage of your '10 renewals have you extended or leased, and how much are you currently working to complete?

What percentage of our '10 leasing renewals?

Yes.

Well, World Bank was in that category. I don't have the specific percentage number for you, but let me just talk about a couple of the larger tenants in '10. I'm just looking through a tenant list here. The World Bank is the biggest, which is 150,000 square feet of approximately 774,000 square feet, expiring in 2010. That is the only large one that we have signed at this point. I don't have a percentage number of the number of tenants rolling off the top right here. To answer that question shortly, as a general rule, we don't have a lot of those tenants signed today.

John Guinee, Stifel Nicolaus.

Just a couple of clarifications first. Refresh our memory as to how the income is coming in on an accounting and cash basis for the big IBM lease at Dulles Station?

Well, IBM pays -- we started booking income in the fourth quarter of 2008, and they start paying cash rents January of 2010.

They are handling their own tenant improvements, so it's --

Yes, they are under construction.

In theory, they could take occupancy early, if they finish their construction early. We left that in their hands.

Okay, so that is reflected in your FFO to FAD summary?

Yes.

Okay. Second, was your guidance with or without the $0.14 in noncash gains from the debt extinguishment?

Without.

Okay. Let's see. From a strategy point of view, it's unclear to us as to whether you are going to focus on the corporate unsecured market or the asset-secured mortgage market for the next few years. Do you have any thoughts on whether you will continue to delever enough to get access to the corporate unsecured market, or do you feel comfortable where you are right now, which pretty much limits you in this world to asset-secured financing?

John, I think that is a great question. I think with the balance sheet that we have built here, we have the flexibility to tackle each, quite honestly. We are not up against any of our covenants, so we could issues senior unsecured debt today, in addition to what we have out there.

But generally speaking, we probably would, if I was in your shoes analyzing the Company, I would expect us to continue to slightly delever over time, because we want to be able to be in position to take advantages of acquisitions. And you never know in terms of which way we would go, whether we would do some secured financing or unsecured financing. It really all depends on price for us, because they're both available. So it's just a matter of pricing at the time we would need the capital.

Okay. Dividend policy -- do you feel comfortable just keeping it flat for the next couple of years?

You know, obviously it's a decision the Board makes every quarter. The dividend is important to the Company. It is important to our shareholders. And it is a long track record of the Company. So I think I don't want to sort of say what the Board will do each quarter because it is a decision they're going to take under advisement, given market conditions and what is going on in the portfolio at the time. But I can tell you it is a very important achievement that this Company has achieved over a long period of time.

Great. Okay. And then last question. It appears to us that you are clearly being much more aggressive than you ever have been in the past on selling assets from the bottom of the decks or to the bottom quartile of your portfolio. Would you expect that strategy to continue?

Yes. In fact, I can tell you -- I guess I can announce this -- we do have another property that is firm. Our Brandywine building we are firm on -- I usually don't like to announce those things, but that is a firm contract which we expect to close later this year. Even though a contract is firm, things could happen. But that is another transaction I expect to happen. It is a relatively small one. And we have a few other assets that we're entertaining -- I guess I would put it in the category of unsolicited offers from others on.

So, more aggressive? That is a term of art. But I would say that you can expect us to continue to sell some of the assets that we consider to have less growth going forward than we would like.

Is the Brandywine asset, the little $4 million deal, sort of part of the sale you just announced up in the Baltimore -- Washington industrial market?

No, it's not.

The Brandywine building is in Rockville. It's over on Parklawn Drive. It is a smaller sale, though. Not announcing the exact price, but it is a smaller sale. It is a small -- I guess we actually have it in our office category. So it is probably our smallest, quote/unquote, office building.

Okay, great. Nice job. Thank you.

Mike Knott, Green Street Advisors.

Can you comment on the office re-leasing spreads? I'm curious if you can just sort of break them down for your second quarter between CBD and suburban.

We don't have them broken out like that.

No, we don't have them broken out with that.

The spirit of my question is, I am guessing the transaction you did with World Bank had more positive re-leasing spread than the rest of the transactions. Is that?

Michael, can I answer it this way? Because we've sort of anticipated that question. How about if I give you what the statistics, our office statistics are without World Bank?

Okay.

So that would be everything else, because as you correctly observe, that had a big impact on our spreads. So if we take World Bank out of the office category, our office spreads go down to, on a cash basis, a minus 2.3% roll-down on a cash basis. And on a GAAP basis, they go up 5.1%. So that is everything but World Bank, and that would be 157,000 square feet of leases.

And then to the extent you have --

And most of that would not be -- I mean, there might be some CBD stuff in there. But I think that gives you, I think, the flavor of what you are looking for.

No, that's helpful. I appreciate that. To the extent you have mostly suburban leases in your expiration schedule over the next year and a half or so, is that minus 2% consistent with what you would expect over that time period?

I do think we are upside down a little bit, so to speak. I do think that our sort of office spreads are somewhere between zero and 5% negative, probably, on a mark-to-market basis today. Doesn't mean we might not be able to push some of those tenants harder. But I do agree that on a mark-to-market basis, over the next 12 months, we're looking at somewhere --- today we're looking at something between zero and 5% negative.

On a cash basis.

On a cash basis, right.

On a GAAP basis, it's really dependent on the lease term.

Right, right. And then isn't Lafarge a big part of the '10 expiration schedule? Can you just comment on what that is looking like today?

Yes. Lafarge is I think 85,000 square feet. They are $2.7 million, I think, of NOI. I'm struggling to find that. $2.7 million of annual rent. And we don't have a deal with them, and if you're asking me to handicap that deal, I don't feel good about it.

Okay, that is helpful. Thanks. And then just a question on retail. It looks like your retail rollover in '10 is heavier than normal. How do you feel about that part of your portfolio?

We feel pretty good about it. We have several I would call them medium-size tenants in the retail portfolio. We have a couple banks that have a big number in there, which we are highly confident we're going to roll over. But some of the tenants, just to -- I will give you some of the bigger tenants in '10 in the retail portfolio, to give you a feeling.

We have a Dress Barn that we feel pretty good about renewing. Like I said, we have a couple banks, Wachovia Bank, a PNC Bank. We're pretty damn confident we're going to get those deals. We have a Jo-Ann's Fabric (sic), which is a pretty big tenant that we feel pretty good about.

The one tenant that may or may not -- I won't say I am concerned about -- that is a little more iffy, we have a T.J. Maxx in Chevy Chase, Maryland, that, if there is any exposure, it would be in that lease. But I feel pretty good in general about the retail leasing, despite the very difficult retail environment we're in.

And then my last question, and then I will yield the floor. Bill, you commented about wanting to delever in order to be positioned for acquisition opportunities. And, Skip, you also mentioned the dearth of transaction activity in your markets. What do you expect the timeline to be in terms of when you will have opportunities? And how do you see it sort of playing out big picture?

It is tough to tell. I don't think it is going to be dramatically changed for the balance of this year. We are thinking, if you look at some of the maturities at some of the banks and some of the CMBS loans that are coming due starting in 2010 and beyond, really, I believe, but I don't think there -- while there may be some individual opportunities between now and the end of the year, I don't think it's really going to start picking up until next year. Does that answer your question, Michael?

Yes, that's helpful. Thanks.

Chris Lucas, Robert W. Baird.

Bill, can you just -- you talked a little bit about the options you have on the debt market. If you had to price out either the Fannie loan today versus your unsecured market, could you comment about what your thoughts were on pricing?

Yes, I can. Obviously, with the 10-year treasury moving around 20 basis points a day, it's a little hard to pinpoint. But I will give you some kind of general idea.

The Fannie and Freddie market, as many of you guys probably know, Freddie has come out with a new CME program product that prices a little bit better than just going into their straight portfolio. So there is a spread there of about 30 or 40 basis points. So that's going to kind of give you an idea of what their low -- the lowest rates are. And I'm not sure I like the structure yet. So we will answer it that way.

On the low end, Freddie and Fannie probably today is around 5.50% for 10-year paper, and that has fluctuated in the last two months between 5.25% and probably 5.80% or even 6%. And then if you change structures and go directly into the Freddie portfolio, instead of doing their pooled financing program that they're coming up with, you can add 30 or 40 basis points to those numbers.

On the unsecured side, it really depends on term. I think for five-year paper right now, we would be hovering at 7% or just slightly inside of that. The spreads have tightened dramatically over the last three, four weeks. And most of the investment banks out there probably believe that those spreads are going to continue to tighten, even though the treasury rates will go up. So ultimately, it may kind of hover in at that same level, but that is kind of the price. If you get to 10-year paper, we are probably high 7s to probably 8%, maybe even over 8% right now.

Okay. And then on the -- can you give us a sense as to what the bad debt expense was for the quarter?

Bad debt expense for the quarter dollar-wise, I will get that in a second. But on a percentage-wise, total bad debt is around 2% on a cash basis. It was about $1.4 million, $1.5 million. On a GAAP basis, it's about $1.8 million or 2.3%.

Okay. And then how is that -- have you seen the same trends you had first quarter continuing into the second quarter as it related to your smaller tenants, and retail and industrial being the primary --

Well, retail and industrial are -- you picked the two buttons. Those are the two weak spots. On a cash basis, we continue to see those getting worse. We are hoping that we're kind of getting to the bottom of it, but you never know.

Overall, the other sectors have kind of declined. Office actually declined bad debt in the second quarter versus first on a cash basis, and so did medical office. And apartments kind of remained flat.

So the overall trend, the growth rate of bad debt is slower today. I think at the end of the first quarter, we were at, like, 1.8% or 1.9%. Now we are at 2% on a cash basis. So it slowed down a little bit, but it is still there. It is still meaningful. And it's -- when you look at industrial, if you look at industrial, it's approaching 5% in industrial.

Now, if you remember, as I said in my prepared remarks, Chris, I kind of look -- when I am modeling the Company, I am looking at the combination of vacancy, bad debt and then the free stuff, the giveaways, the abatements. When I look at those three, and I said it last quarter and I will say it again, I think that number overall will continue to hover around 11.5%. It came in at 11.2% this quarter.

Really, what that is is it's just trade-offs. Bad debt guys becomes vacancy, or you get to a bad debt guy and you negotiate some abatements to give him, but it's just trading off the free stuff, is all you're doing. But generally speaking, that has not got -- that is starting to come in a little bit. We are projecting that it just stays flat at 11.5% for the rest of the year.

Okay. And then, Skip, maybe more broadly, what do you think of the local DC economy? And how soon do you feel that we will see some of the positive impacts of the federal government as the primary employer?

As I sort of mentioned in my opening comments, it's somewhat frustrating. Every transaction you try to do, every lease transaction, everything takes forever. Everybody seems to be delaying making any sort of decision to make a financial commitment going forward.

So on one hand, that is somewhat discouraging. On the other hand, I don't feel like we're going backwards in our market. It really does feel like we are just sort of bouncing around whatever bottom we're at right now. It's just tough for me to give you some sort of estimate of when I think we're going to really turn upward.

We really haven't seen sort of empirically a lot of evidence right now of stimulus money in terms of leasing space. Yes, there has been some commitments downtown with some government agencies, but on the order of magnitude, they're probably something between 200,000 and 400,000 feet in a market that's 400 million. So it's 0.1% on the high side.

So we just haven't seen a lot of it yet. And as I also said on my closing comments -- opening -- we are not anticipating a large change in that for the balance of this year. So we are somewhat optimistic that beginning next year we're going to start seeing more fruits of that labor of some of the infrastructure, et cetera, spending hitting the market sooner. But right now, we are sort of bouncing on the bottom.

Okay. And then last question. Just going back to the World Bank lease and actually more specifically on the tenant improvement leasing commission number for the quarter, I'm assuming that most of that was related to that lease. Is that fair? At least the increase, the change quarter to quarter?

On the leasing commission side, yes. On the tenant improvement side, no. The tenant improvements that were in this quarter were really from leases that were signed last year that people just spent their money this year.

So if you look back to leases that we signed last year, the big one is MedImmune. They spent -- in the quarter, they spent roughly $1.5 million. And then there are some other ones from last year that decided to put some money into their buildings this year. So those were all contractually obligated last year. So you don't really have control over the timing of those, so that is where it came in.

The other thing I would add is going quarter to quarter, we had a different -- when you're looking at the supplement and you see that we are at the 853 now for TI, some of that movement up is from the first quarter, simply the mix between industrial and office. If you look at the second quarter versus year to date, you will see that a substantial amount of the office was done this quarter, where last period we had a lot more industrial in the mix, which would have lowered the -- or would have increased it this quarter.

Dave Rodgers, RBC Capital Markets.

Bill, on the multifamily pool of assets, did you say in your comments that you thought that the leverage on those assets could be up to $175 million?

Total -- there is seven unencumbered apartments, including Bennett and Clayborne. And we think if we loaded them all up as maxed out as we could in today's interest rate environment, we could probably pull out $175 million.

What would be the earliest point when you could take the development and put them into that pool?

We can do it today. We probably wouldn't get maximum proceeds. I think I could probably get maximum proceeds if I waited a few more months, just because the way Fannie and Freddie look at it is they look at trailing 12 NOI and then they look at the last three months. So they really wanted to be really stable for at least three months. And quite honestly, they would like to see it stable for 12, but in this environment they understand it's a lease-up situation.

So I could pull the trigger; I feel pretty good that I could probably go out and get $175 million or pretty darn close to that today. If I waited a little bit more, I might get a little bit more. But if interest rates move up, that will wipe out that extra.

Fair enough. Can you guys give any updates on Sunrise and any of the sublease space that had been available there?

Not a whole lot, Dave. We're still working with them. We still feel like there's decent progress. But we are working on a couple of transactions, obviously can't comment specifically on what is going on. But we are moving in the right direction with putting some direct tenants in place and helping them minimize their obligations going forward.

In terms of their status, notwithstanding the market news on Sunrise that come and go, they have been a great tenant. They pay their rent early. If every tenant paid rent on the same schedule that Sunrise did, we would be happy campers. They've been a great tenant. But given the market news, we continue to monitor it closely.

Last question -- on the previous medical office building commitment, I guess [out at Inova], I think it is, do you have any updates on that?

What I could say to you is that obviously we haven't closed on it yet because we haven't made that announcement. But we are trying to work through a few things with the seller. I do anticipate that we will close sometime this year.

(Operator Instructions). Anthony Paolone, JPMorgan Chase & Co.

I just have two small ones here. One, what was lease termination income in the quarter?

It is 272.

Thousand?

Thousand.

Okay, and then just my other question on the term loan. Was there any LIBOR floor added to the mix as part of the extension?

There was, and if I can possibly remember what it was -- I think it was -- it was 150 basis points, I think, is where the floor was set. But, Tony, it doesn't really come into play because we have it swapped out anyway.

Okay, so even with -- so from the LIBOR point of view, there is no change in the rate there, but I guess does the higher spread take effect now?

Yes, yes. We are paying -- we've got an old swap in place that from accounting perspective it was pretty costly to unwind that swap or blend and extend the swap. So what we're doing is we have two swaps in place. We have one that was the existing swap at plus 2.90%.

The new swap is 2.75%.

New -- plus --

2.95%.

2.95% is the existing swap, and then the swap -- we have a second swap that starts when the first swap expires in February next year. And that is at plus 2.10%. So the interest rate will come down 80 basis points or so in February of 2010.

Mike Knott, Green Street Advisors.

I think historically Wash REIT has been precluded from issuing preferred from a structural standpoint. Have you guys talked about trying to get that changed? And how would you think about that?

I'm going to issue preferred as soon as Freddie and Fannie can. No, I'm just kidding. We are precluded. We have gone to vote for -- we have to get majority of all shareholders, not just shareholders that vote. So that is a pretty tough hurdle for us. We have obviously discussed it again and may attempt that at some future time. But right now, we are precluded from issuing preferred. I would love to have that arrow in my quiver, if I could, but at this point we don't have it.

(Operator Instructions). Michael O'Dell, MetLife.

Just a quick clarification on the liquidity. You mentioned that you feel comfortable with your obligations through '11. I'm just trying to understand what your assumptions are there for your bank line renewal in '11, as well as what you plan to do with the term loan you just extended there. And is there any GSE financing incorporated into that analysis or further asset sales?

There's certainly certain -- more asset sales as a source of deleveraging, as I mentioned. But we have basically $400 million left in 2011. $175 million of it comes from -- can come from the apartment financing that we have discussed on the call. And then the remainder of it will be a combination of asset sales. It could be more secured financing. It may be tapping the unsecured market which is available.

And quite honestly, we can do a number of things. But quite honestly, our line is completely untapped. So if the worst case came, I could just throw the balance on the line after the apartments. It's not optimal, but I could do it. And so I feel pretty good that -- we are not worried. We are not in a liquidity crisis situation. We're just kind of managing what our options are and trying to execute on the cheapest cost of financing at the time and the ones that give us the most flexibility.

So have you had discussions with the banks in terms of beyond the extensions, any refinancing of the line, will you have to shrink the capacity there or anything along those lines?

Well, our line expires in -- the biggest line, the $262 million line, expires in 2010, with a one -- our option to extend it for a year to November of '11. And we have had discussions with the majority of at least the major players of our line. And I don't see, other than a pricing reset, which is obviously going to be painful because we're right now at plus 42 basis points. So that will be a little more expensive, probably closer to plus 275 or plus 300 in this market. Who knows what it will be in two years from now.

But in terms of the amount on the line, I feel pretty good that we will be at or around the same amount on that line, $262 million. And the second line that we have that comes due in '11 and we can extend to '12, which is with SunTrust, I feel pretty good that that line will stay in place. Obviously, price is going to be the issue. And we have to work through what the rate is.

So I don't see a cutback too much. There might be some international banks that go away, but quite honestly, there might be some domestic banks that come in that want exposure to DC. So I feel pretty good about the ability to negotiate the line.

Mike Knott.

I was just wondering if you can comment on the expense reduction in the multifamily same-store portfolio and whether you think that is a one-time event?

I think with all expense reduction, if you look across -- you're referring kind of year over year. But if you look from just quarter over quarter, we had pretty good operational expense reduction. And that all is primarily negotiating tax bills and reduced energy costs. Do I think it is a one-time thing? I think it will be reset lower, and you will grow from there.

Obviously, energy costs were much higher last summer than they are today, so those are being reset. But we are seeing energy costs kind of creep up, so I fully expect that this year next time we will have higher costs on energy.

And then in terms of the property taxes, I think the governments around this place and throughout the nation are going to have to find ways to raise more money. So I have a hard time believing that they are just going to keep everybody -- even though the property values will be lower, I have a hard time believing that the tax rates won't go up so they get more dollars.

Thank you. At this time, we have no further questions. I would like to turn the call back over to Skip McKenzie for any closing comments.

Okay. Well, thank you, everybody, for listening to our call this day, and have a good summer. And we will be talking to you in the -- at the end of third quarter. Thank you, everyone.

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