Elme Communities (ELME) 2009 Q4 法說會逐字稿

Welcome to the Washington Real Estate Investment Trust fourth-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 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 fourth-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 these 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 recent credit and financial market conditions; the availability and cost of capital; fluctuations in interest rates; tenants' financial conditions; 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 third-quarter 10-Q, and our Form 8-K filed on July 10, 2009. 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'd like to turn the call over to Skip.

Good morning and thank you for joining Washington Real Estate Investment Trust's earnings conference call this morning.

But before I start, I would like to publicly apologize to Tiger Woods who unfortunately scheduled his much anticipated press conference at precisely the same time as Washington Real Estate Investment Trust. I know he expected America's viewership but, as we all know, Tiger's popularity is second only to Washington Real Estate Investment Trust. So, Tiger, my apologies for stealing your viewership.

As I peek out between the record-breaking mountains of snow piled in the parking lot here in Rockville, we are reminded every day that the much-anticipated spring thaw is still quite a few months away. However, on the real estate front in the Washington DC region, we believe we are beginning to see signs that the spring thaw in real estate fundamentals has begun in our markets and conditions are beginning to improve.

In the office market in the fourth quarter, regionwide leasing activity increased significantly as absorption totaled over 1.1 million square feet of vacant space, effectively bringing the year's total from a net negative number to a net positive number in one quarter. In the WRIT portfolio, we are seeing more interest in space tours particularly in our Northern Virginia and DC properties. We have good activity on our pending LaFarge vacancy on the Dulles Toll Road and other Virginia vacancies and we are experiencing better activity at our largest vacancy in Maryland at One Central Plaza.

We ended the year a solid 91.5% leased in the office portfolio. Our multi-family portfolio and medical office core portfolios are humming. While rental rate growth has been modest in each, we are seeing strong occupancies and both are leased in the mid-90% range, the steady performance we have come to expect in these sectors.

In retail, we leased our one large vacancy, the Circuit City box in Hagerstown, to hhgregg and are 96% leased at year end. While we're beginning to see improvement in the overall retail environment, credit loss is still well above long-term averages and the return to the good old days is still quite a way in the future.

The industrial portfolio is our weakest performer, ending the year at 85% leased. As in retail, this sector -- we continue to experience credit loss well above the long-term averages.

On the good news side, leasing activity on vacant space is improving, particularly in our Northern Virginia assets, and we are in the process of negotiating renewals with several of our largest tenants, including our largest industrial tenant -- the GSA -- for approximately 130,000 square feet.

On the investment front, we are finally beginning to see increases in investment sales activity. The turtle is poking his head out of the shell, as we say, and we actually have offers out on acquisition candidates. Again, this is just a start and time will tell if there is an increasing and substantial trend back to more normal trading activity.

In short, we believe the indications are that our markets are trending toward recovery to more normal conditions. A recovery, we believe, will not be a rapid one but a long and extended trip back to what we have come to know and expect in the Washington, DC region.

Overall, WRIT finished 2009 strong and I am pleased with the performance of our people and portfolio exhibited under the most challenging economic conditions of our lifetimes. In the face of these extreme financial headwinds experienced by our tenants, customers, and indeed all Americans, over the year, WRIT strengthened our balance sheet.

We maintained our BAA1, BBB+ credit rating, among the highest in our industry. We reduced overall debt; we achieved record revenues; stabilized each of our developments at over 90% leased; maintained core portfolio economic occupancy of 93% for the full year; we achieved 10.2% rental rate increases overall on our commercial portfolio and paid our 48th year of consecutive or increasing dividends. And speaking of dividends, I would like to discuss for a moment our dividend coverage before passing the call to Bill and Mike.

In 2009, FAD, or AFFO if you prefer, covered all but $3 million of our dividends paid this year. Many analysts covering WRIT predicted that shortfall may increase in 2010. We currently believe that 2010 will likely be the low point of our FAD dividend coverage.

In addition, we believe that we will be able to grow FFO and FAD and cash flow in the future with a goal of achieving 80% to 85% of FAD. At this target payout level, our coverage will be at historically high levels.

We currently expect that we will be able to reach this goal over the next few years through a combination of our real estate markets returning to more normal market conditions and routine levels of acquisition opportunities resuming. As I noted earlier, we believe these are beginning to see signs that these normal market conditions are on the horizon.

We are not announcing this as a commitment to our shareholders to get this payout ratio in a particular period of time but, rather, I mean this to be an expression of our goal. Final decision on these dividend matters, of course, are subject to the ongoing discretion of our Board on a quarterly basis.

And finally, last night WRIT announced our Chairman transition plan to be effective at WRIT's 2010 annual meeting this coming May 18. In accordance with WRIT's Board retirement policy, Ed Cronin will retire from the Board and his position as Chairman, and John McDaniel will take that office as Chair effective that date. This plan is the orderly transition to an independent Chairman structure incorporated in the corporate governance guidelines adopted by the Board and announced last fall.

I would personally like to take this moment to acknowledge the profound contributions Ed has made to WRIT. His leadership, vision and business acumen have been an inspiration to the entire executive team at WRIT and his deep knowledge of real estate in our markets has been a linchpin to the success enjoyed by WRIT over his tenure.

On a personal note, Ed has been a mentor, confidant, and friend to me and I will miss his counsel and advice greatly.

Having said that, I have worked closely with John McDaniel over the past 12 years as a trustee. In recent years, he has served as lead independent trustee and member of the compensation, audit and corporate governance committees. As the CEO of MedStar Health, the largest health care organization in the region, John is an expert in medical office real estate and is a major force behind our extremely successful investments in medical office properties, all of which occurred during John's tenure on the Board.

John is a leader of the Washington, DC business community, he displays keen strategic vision and will provide continuing great leadership to our Board and Company in the years to come. Although he has big shoes to fill, I know John is well up to the task.

With that, I will pass the baton on to Bill, who will discuss in greater detail our financial performance, and Mike Paukstitus, who will discuss our real estate operations.

Thanks, Skip. Good morning, everyone.

The earnings press release we issued last night contains details of our FFO performance and other measures. I'd like to take this time to discuss a few one-time items from the fourth quarter, give an update on our capital position and liquidity, and then focus on our assumptions for 2010 guidance.

In the fourth quarter, net operating income came in at 2 -- about $2 million higher than in the third quarter. This is mostly due to recognizing straight line revenue on a lease extension that we did with the World Bank back in May of 2009, which totaled approximately $950,000 in the quarter, and executing a lease termination on OfficeMax for $325,000. The new run rate for World Bank will be about $300,000 per quarter or about $0.02 per share per year.

Additionally, we took a $1.5 million charge for the payoff of our term loan which I will discuss more in a minute.

We had about $450,000 of unrecoverable snow charges in the quarter. If you were to add these all together, the net effects of these items and other more minor one-time items adjust the reported $0.50 quarter to $0.51.

However, some of the reports out this morning quickly pointed out the simple math of annualizing the fourth quarter and getting a result higher than our guidance range. It is important to point out that our fourth quarter tends to be one of our better quarters historically, due primarily to lower expenses.

Our portfolio measure of effective occupancy and our combination -- or the combination of vacancy, bad debt and abatements as a percentage of min rent was 11.8% for the fourth quarter, up from 11% in the third quarter. This is mostly due to increased vacancy in our medical and industrial sectors.

Medical office occupancy decline was essentially due, almost fully due to the addition of the newly purchased Lansdowne Building.

The industrial occupancy is a function of the weakness in that sector. Fortunately, this sector is only 13% of our NOI.

On the capital side, as I said, we repaid the $100 million term loan in December and incurred a charge of $1.5 million which included a $500,000 non-cash charge to account for the acceleration of the amortization of the issuance costs. We used our line of credit to repay this loan to keep variable rate exposure that is offset by existing swaps.

Yes, this transaction used some of our liquidity on a temporary basis. But we reduced our interest rate initially by 233 basis points in the process and as of today our interest rate drops another 85 basis points as our initial swap expires and our forward starting swap begins. We expect to recoup our $1.5 million charge over approximately a six-month period.

As of December 31, we had $128 million outstanding on our line. With the line priced at 42.5 basis points above LIBOR, we believe it is somewhat prudent to use the line for short periods of time. We expect to take an opportunistic approach to refinance this debt longer term at some point this year. Currently the cost of terminating the swap is approximately $2 million.

We also continued to repurchase our 3 7/8% convertible notes, buying $8.1 million at an average discounted price of 96.9% of par, incurring a charge of approximately $100,000. Subsequent to quarter end, we repurchased an additional $1.2 million for a discount of 99.3% of par.

Clearly the opportunity of significantly reducing our 2011 maturities through open market purchases has diminished. At this time, we have $133 million of our converts outstanding, down from the original $260 million. Combining this with our $150 million of unsecured notes due in 2011 leaves us with an opportunity to execute a potential index-sized bond deal in the next 12 to 16 months.

We believe our capital structure and liquidity position remain strong. Being one of the few REITs with a BAA1/BBB+ credit rating that has demonstrated continuous improvement in our covenants throughout 2009, we believe we have options available to raise capital in this market.

Interest rates remain attractive on both an unsecured and a secured basis. Coupling this with our $250 million refiled ATM program, we believe we have ample capacity to fund refinancing and acquisition opportunities as they arise.

Now I would like to provide more detail on our guidance for 2010. As we reported last night, we expect FFO per share to range between $1.86 and $2.00. We provided detail in our press release about some of the major assumptions that are the foundation of this guidance.

Please keep in mind that we don't expect all of the good things and all the bad things to happen all at one time. Just a couple of points I want to reiterate.

Our portfolio proved to be fairly resilient in 2009 with effective occupancy hovering in the 11% to 12% range. As I stated throughout the year, it ended at basically 11.9% -- 11.8% for the fourth quarter. We currently expect this stability to carry through into 2010 such that effective occupancy stays between 11.5% and 12.5%. Every 100 basis point change in effective occupancy equates to approximately $0.05 per share in FFO on a fully annual basis.

Given our generally stable outlook on this number for the year, we believe each sector will remain in a fairly tight range throughout the year. Remember, this effective occupancy number includes all the zero paying activity, vacancy, bad debt and the free stuff.

Moving to the interest expense, we are not including any early refinancing of debt coming due in 2011. As I mentioned earlier, we expect to take an opportunistic approach to accessing the capital to refinance our line and our 2011 maturities. Timing and structure are important to minimize the total cost of refinancing.

As reported in this press release, we are modeling acquisition volume of $50 million to $150 million and disposition volume of $25 million to $75 million. We are continuing our more active plan for asset recycling, and with the acquisition market beginning to show signs of life, we can better match dispositions with acquisitions.

In the quarter we disposed of one asset -- one industrial asset, Crossroads Distribution Center, which sold for $4.4 million and we recorded a book gain of $1.5 million.

Next I would like to address a few routine questions that we have been getting fairly regularly for the past few quarters. Bad debt expense for the quarter was $1.7 million or 2.2% on a GAAP basis and $1.6 million or 2.1% on a cash basis. Retail is currently running the highest while industrial bad debt expense actually declined in the fourth quarter, due to some tenants being reclassified from the bad debt category to the vacancy category.

This is why we talk about effective occupancy, which combines all the non-rent paying categories. At times, it is prudent to kick out the guys that are not cutting checks at the end of the month.

Lease termination fees for the quarter are $657,000, about half of which was associated with the termination of OfficeMax that I mentioned earlier. In the fourth quarter, WRIT paid a dividend of $0.4325 per share, achieving its 192nd consecutive quarterly dividend at equal or increasing rates. Yesterday we issued the press release announcing our first quarter 2010 dividend at the same rate payable March 31, 2010.

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

Thanks, Bill, and good morning to all. This quarter, our real estate portfolio continued to perform well. On the revenue side, we posted core occupancy gains over the third quarter in three of our five sectors -- multi-family, office and retail.

On the expense side, operating expenses were up about $300,000 from the third quarter, largely due to snow removal costs -- net snow removal costs, which, after estimated reimbursements, were $450,000 in the fourth quarter. To date in 2010, costs for projected reimbursements are approximately $1 million. As we indicated in our press release, we billed $0.02 of the guidance to cover this amount.

Our multi-family sector gained 20 basis points in occupancy from the third quarter to the fourth to 94.1% occupied, resulting in a 0.7% increase in net operating income. In the commercial sectors we've had pretty good velocity, but transactions are generally taking longer to complete with higher lease transaction costs.

While we experienced higher Q4 transaction costs, year-over-year average leasing transaction costs have increased only 4.4% from $13.36 to $13.95 per square foot.

In the fourth quarter WRIT executed over 308,000 square feet of commercial lease transactions with an average lease term of 5.4 years.

In the office sector, overall economic occupancy improved 30 basis points compared to the third quarter. As noted in Q3, our entire office portfolio continues to perform well, relative to the submarkets. Generally our vacancy rates are well below the rates of these submarkets.

Looking ahead as we mentioned on previous calls, we know that LaFarge, our 80,000 square feet tenant in Monument II plans to vacate at the end of July this year. We are actively marketing this space. We have good activity and we are hopeful that we will be able to land one or more of our prospects to minimize our downtime exposure at this particular property.

In the medical office sector, we lost 330 basis points in occupancy due to the full-quarter impact of the vacancy at Lansdowne. We signed our first lease on the building during the fourth quarter and we are close to signing our second to bring that to a total of 10,000 square feet. We have another 15,000 square feet of letters of intent proposals out in the market and are pleased with the progress we have made so far.

As for the rest of our medical portfolio, we continue to see run rate increases. We signed two new 10-year leases at 2440 M Street property in the West End that rents about $43 a square foot.

In the retail sector, we executed leases for a total of 95,000 square feet in the fourth quarter, nearly doubling our transaction volume total for the first three quarters of the entire year, mostly due to activity in three of our boxes. Jo-Ann Fabrics at Frederick County Square, which was a 39,000 square-foot renewal; hhgregg in our vacant Circuit City space in Hagerstown, 28,000 square feet; and A.C. Moore at Frederick Crossing, 20,000 square feet.

Of note as well were two notices to extend 2010 expirations -- one for 30,000 square feet at Hagerstown and one for 32,000 square feet at the Chevy Chase Metro Center.

In the industrial sector this quarter, we entered into leases for a total of 45,000 square feet with an average term of 4.9 years. This sector remains difficult as we deal with increasing vacancies and credit problems with tenants.

This quarter we swapped some bad debt for vacancy, clearing our leasing guys to focus on finding new tenants rather than asset managers trying to negotiate partial rent payments that were proving to be elusive. We know the Red Cross is vacating their space at VIP in April.

On a positive note, we are working on several leases with the GSA -- overall, our third-largest tenant in the portfolio. Currently we have a renewal of approximately 130,000 square feet which has been fully negotiated and executed by WRIT and we are waiting for GSA's final execution. Upon execution of this lease, our industrial rollover exposure in 2010 is reduced from 19.1% to 15.5% of annualized rent.

Now as we look into 2010, we see the rents for the various sectors to be essentially flat for residential, retail, and industrial, office increasing 1% to 3% and medical office increasing 3% to 5%.

I would like to turn the call back over to Skip at this point.

Thanks, Mike, and before we open up for questions, I want to emphasize one final point.

What you have heard from Bill and Mike shows what the WRIT franchise is all about. We are a conservatively leveraged company operating real estate assets in what we believe is one of the top performing real estate markets in the nation.

While being in our real estate industry the last two years has been challenging, when you have experienced real estate professionals operating high-quality assets in a top market, the lows are not as low and the recovery comes sooner. We think this is one of the fundamental strengths of the WRIT franchise.

Thanks again, and now we will take your questions.

(Operator Instructions). Chris Lucas from Robert W. Baird.

Good morning, guys. Very good quarter. Just a question on the acquisitions front. I guess the question I had is, where do you see the capital being allocated? What sectors do you find have the most opportunities in this market?

Right now, the most opportunities are in the office sector. That is where we are actually seeing some product being offered for sale and we've got actually a number of offers out on some. I can't say obviously that we are going to get them, but to me that is where we see the most activity and the most opportunity today.

Some of the other sectors, there's just really few offerings or they are -- the conditions that we are seeing on some of the rent rolls are not conducive to what you would like.

Now having said that, on an interesting note, I mean, we have actually seen foreclosures in this market. We have attended a downtown office foreclosure, something that you wouldn't even have expected in a good location. We are keeping our eyes on a pending multi-family foreclosure that is coming, which you wouldn't have expected.

So there are exceptions to what I just mentioned. But certainly if I had to pick one sector where we are seeing the most opportunity, it is in the office sector.

In terms of the process, is this market switch back to a much more fully marketed approach rather than the offmarket transactions we sort of saw last year? To the degree there was any transaction?

We have irons in the fire on both accounts. I certainly think the trend is the direction you are indicating.

I will give you like one sort of current market. There's a really nice Northern Virginia office building on the market that we were a bidder on but there's an avalanche of offers on it. And I think transactions like that will spur more investors to follow that diagram, in other words, to go to the former model of fully marketing properties and putting them on the market. It is just sort of an initial trend right now, but I -- if that's where you were leaning with that question, I agree with that observation.

And then on the dispositions front, what is your expectation in terms of the product type that you guys would be looking to leave?

There will be some office buildings and likely some industrial properties. We are looking at a couple of other things, but those are the likely ones.

Okay. And Bill, on the capital market side, on the refinancing side, is your expectation at this point then to essentially refinance out with the debt -- with debt as opposed to further deleveraging?

Probably it's a little bit of combination mode. I would still like to delever a little bit, but not anything like last year, not even close. But I would like to keep it coming down just a little bit. It might be a part of the asset sales, you know. We may tap the BoNY program at some point. But right now I would say the lion's share of it will be replaced in long-term debt.

And then, on the -- how would you fund the acquisitions to the degree that you are successful there?

That one, I would like to do. Everything is market-dependent at the time we do it, but that one I would like to do more -- probably a little more equity than debt if we had to. I mean, initially we would probably throw them on the line, depending on how big they are.

That's all I had. Thanks a lot.

David Rodgers of RBC Capital Markets.

Good morning. Just wanted to follow up on some of the medical office side of the equation. Mike, I didn't follow your comments, I guess. Did you say you had made some progress at Lansdowne? It just didn't show up in the supplement. So I wanted to track through how your portfolio was performing there.

Yes, what we had indicated, we will have 10,000 -- or we have 10,000 square feet signed and then about another 15,000 square feet in letter of -- combination of letter of intent and [store] prospects. We are -- now that the building is up, now that people can get their hands around it, we are starting to see much more velocity.

That won't show up -- and, Dave, that won't show up in the numbers yet just because those leases aren't -- I mean, there's -- the ones that Mike referred to, the 10,000 square feet are signed, but they are not -- they are not rent paying yet. They are not effective. Got to build out space and things like that.

That buildout is what? Six months or so?

Well, the first couple are relatively small. But it will be something like that. That's a good guesstimate.

Yes, that's a ballpark.

And the retail pickup -- a good job on the hhgregg lease. Was the retail pickup from 3Q to 4Q? Is that sustainable? Is there a lot of temporary tenancy in there or is that going to be a fairly flattish number going forward?

From third quarter to fourth quarter or year-over-year?

Sequential.

There is a variety of things in there, but I mean, a lot of it is just sequential kind of rent growth on existing leases. It is also some signed vacancies. So I think it's kind of sustainable. But I say that and you don't know what bad debt is there and you don't know which bad debt is just going to go away. So there's always some stair steps out there that could happen and we have to be cognizant of that.

Fair enough. You mentioned progress on the LaFarge space. Could you also talk about -- you know, Northrop's in the market, at least appearing to move to DC with its corporate headquarters. Can you make any comments on what you have heard from that process so far?

There's a lot of noise on that. I can't say I know where they are going. I know that the conventional wisdom in the market is that they are going to Northern Virginia, perhaps inside the Beltway, but I haven't heard any what I would call real intelligence on where that's going. But the conventional wisdom is that they are going to Northern Virginia. But you know --.

Of course that's a maybe 300 employee use. I mean, it's not a --

That's more a symbolic gesture than it is (multiple speakers).

As you know they are heavily in the market right now. I mean, they've got a strong presence here.

Yes. If you remember, several years ago back in the '90s, General Dynamics did the same thing. They moved from the Midwest, I think, their headquarters was St. Louis and then moved here. I think they moved a total of 50 employees. So it is a symbolic gesture.

Fair enough. I guess last thing for me is the last question you answered -- acquisitions and dispositions -- are those going to be mutually exclusive this year? Or are you willing to fully fund the acquisitions without dispositions and vice versa, if necessary?

Right. I mean, they are sort of independent of each other if that is where you're going. One is not dependent on the other.

We would like to match timing as best we can especially if we are going to start the disposition process before the acquisition process. But --.

Yes. Actually we got -- we are getting -- we are thinking about some right now. They are not on the market yet, but we are beginning that process, but they are really independent. You know, as Bill said, we would like them to be but certainly the vagaries of the market, and when buyers and sellers moved, I mean, that is just a dream really.

I like to dream.

All right. Well, thank you very much.

(Operator Instructions). Brendan Maiorana of Wells Fargo.

Good morning. This is Young Ku here for Brendan.

My first question is in regards to your retail portfolio. I think you previously said that credit loss was up to around 4%, up from historical of about 1%. How has that trended in Q4 and what is baked into your effective guidance for 2010?

Yes. For the impact on guidance -- I will answer that part first. I don't really look at the impact of retail bad debt. I will say that our retail leasing folks seem to think that there's probably more opportunity with things starting to pick up in the economy a little bit. There's probably more opportunity to convert some of the bad debt into rent paying again, maybe not fully rent paying, but some rent paying, before we can probably fill vacancies. So we are probably going to take that approach.

But it's not -- I really don't look at it that way when I am modeling it. I'm looking at it as a combined bucket of vacancy, bad debt and abatements.

In the quarter for retail, it ended up the fourth quarter on a -- is that GAAP or cash? That's cash. That's GAAP? 4.3%.

Thank you for that. In terms of your acquisitions and dispositions expectation for 2010, how should we think about the cap rates for those two segments? It seems like you guys baked in about $0.03 in expensing of the acquisition costs, but none in terms of accretion. Should we just assume that these are neutral deals in terms of accretion?

Yes. I mean, in the model we are pretty much -- they're probably initially flat to modestly accretive and then the costs bring it negative.

Okay, and the differential between the acquisition and disposition cap rates?

Well, I mean, we don't really project disposition cap rates since these are sensitive to buyers listening. So as a general rule, as I think we have said on many of the conference calls, we are selling properties that we think are the lower-growth properties.

So as a general rule, we are buying properties at lower cap rates than the properties that we are selling, as a general rule. But we don't really want to get into the game of publishing the cap rates or even the neighborhood of the cap rates of the properties that we are thinking about selling.

Okay, thank you for that. And for your industrial portfolio, it looks like your 2010 expirations actually went up around 100 square feet -- 100,000 square feet sequentially. Is that just mostly due to some of the short-term renewals that you guys executed in Q4?

Yes, that's exactly right.

And how do you guys think? What is actually causing them to not sign longer-term deals? Or are they just expecting the market to get a lot worse?

It's the -- I mean, it is the economy. A lot of that sector is driven by the historical service entities and the home building sector, the home service sector. So again, many of them are playing it year by year and we have a lot of smaller tenants in that orientation.

Yes, I mean, and you know, you are somewhat new to tracking WRIT; at least Wells is. We explained on some of the calls the nature of our industrial portfolio. We have generally small-bay industrial properties. We are not the big distribution oriented properties and we have many of the tenants that have really been affected by the downdraft in our economy. We have a lot of home improvement type subcontractors in our properties.

We even have some what I would call B-level actual retail stores. We have furniture companies and people -- carpet and tile type operators. So these are the types of individuals that really have been affected by the economic downturn, especially as the housing industry turned down.

So that's one of the main reasons we've struggled somewhat, because we don't have the traditional big distribution type tenants.

That's helpful. My last question, on the Lansdowne asset, it sounds like you guys are getting good progress. Do you guys still hold the Q4 2010 type of a fully leased expectation?

Yes. I think that was a question we were asked at the last conference call. I would say now that we have one -- another quarter behind us, that is somewhat aggressive.

We would like to be. It is hard for us to say specifically. We have some larger tenants that are looking at space, but given the fact that -- you know, medical office is a lot of smaller tenants. Standing here at the beginning of the first quarter, I think now that would be -- it's going to be difficult for us to get to that number, but I think we are going to be somewhere between 50% leased and that number. I just don't know what it would be.

If we hit a couple of these full floor tenants, we will be there. But I would say it's going to be tough for us to get to 90% by year end, to be honest.

Got it. Thank you.

John Guinee of Stifel Nicolaus.

Thank you. Nice quarter.

I'm just looking back. You know, we have been covering you guys for a long time and we've got your normalized FFO, which excludes non-cash one-time items, 2007 was $2.31; 2008, $2.22; 2009, $2.02. At the midpoint for 2010 your guidance is $1.92 which comes about where we are.

Looking forward, it looks -- I think you were pretty clear, Bill, that you are going to get some of your FFO growth levering up the balance sheet a little bit and the positive spread investment on acquisitions versus the cost of debt. I think you also have a couple hundred basis points of occupancy gains.

The flipside is it looks to us like you've got some rent rolldowns in North Virginia. And clearly, your cost of debt where you've got $500 million with an effective rate of about 4.9% rolling in the next three years will most likely offset the occupancy gains and the levering up.

Is it really clear that you guys can get yourselves into the $2.10 to $2.20 a share in FFO which would allow you to cover the dividend comfortably?

Well, that's a long, long question, but I think the answer is we don't really give predictions into the future, but we certainly, as Skip said in his opening remarks, we have a -- certainly a plan and a goal to get there. And you can do financial modeling all day long and obviously the markets are going to dictate a little bit about what's going to happen in the future.

But it is not, I don't think projections are unreasonable to get to those kinds of levels over a period of time.

Okay. Thank you.

Michael Knott of Green Street Advisors.

It is Lukas Hartwich in for Michael Knott. I was just hoping if you would comment on the tenant mindset of your different property types?

Well, you never know what tenants are thinking so I will caveat that out. I would say -- let me do groupings of them. You know, our industrial and retail tenants are still very wary about the economy.

And as I stated just a few moments ago, our industrial tenant is very much like a retail tenant in many ways. They are very dependent on the purchasing power of the consumer. And the mindset we find from them is they are still very cautious. They are very defensive-oriented, less likely to -- you know, we don't have a whole lot of retailers looking to expand.

We were very fortunate to nail down that hhgregg lease. But you don't see a lot of national retailers expanding and even in Washington, DC in this environment. So you have a very cautious customer really in those areas.

Our office tenants, even though the office -- and the general office sector is somewhat cautious, we are seeing, we are feeling a little more confident now particularly in Northern Virginia and DC, where we are seeing more activity. In Maryland, it seems like -- it almost seems like another world from DC and Virginia. There's a much more cautious tenant base in Maryland than there are in the other two jurisdictions. It is almost like another property sector, believe it or not.

And then lastly our medical office building and our multi-family tenants are pretty solid. It's -- you know, everybody's probably still got a couple of skinned knees from getting through this environment. So I want to say they are ebullient in their terms of their prospects of the world, but they certainly are feeling a lot better now in those two sectors than they had in recent months.

Thanks. I just have one more question. Not to beat a dead horse here, but on the acquisition front, are you guys going to be targeting stabilized acquisitions, unstabilized, and then also what markets do you think the opportunities will show up in?

Well, I mean, we are really targeting both. And let me just give you a little more to work with than just that sort of generic comment. I mean, we have looked at -- we have offers out on quasi -- you know, stabilized properties, properties that are 90%, 85% to 90% leased. I put those generally in the stabilized category.

And as I stated, we have actually attended a couple of foreclosure auctions. We have launched some offers to some lenders that have had properties. We have met with some what I would call distressed owners of real estate, attempting to buy some troubled assets as well.

So we've got initiatives in all of the above and that is something that you have to do in this environment. You can't be myopic and look just in one sector. So I believe that there's opportunity in all of the above.

Even in Washington there are overleveraged borrowers from the '06, '07 period that can have relatively healthy properties that need help.

All right. Thanks, guys. That's it for me.

(Operator Instructions). Chris Lucas of Robert W. Baird.

Just a quick couple of detailed follow-ups. On the OfficeMax lease term, where did that store fall out? What center?

Frederick Crossing. They were -- Chris, they were never -- they never occupied that space.

Yes, let me give you a history of that, maybe give you a little bit of background. The Fredericks (sic) Crossing is a center we bought -- I can't even remember the number, six, seven years ago from Milt Peterson, Peterson Group. And the OfficeMax never moved into that center.

They -- when we purchased the center, it had a subtenant in there. So we had a direct sort of obligation from OfficeMax, but there was actually a -- and I will be nice calling it a B grade furniture retailer. And there were a series of subtenants in that space that were really somewhat problematic because we didn't have control of the space.

There was an opportunity presented over the last six months with OfficeMax to get control of the space. We have been marketing this space on our own. Obviously maybe that will give you some indication of how confident we are at re-leasing that, that we were really to take a lease buyout from OfficeMax.

And I, I won't say I am confident, but I feel pretty good about the prospects of us re-leasing that space pretty quickly. It's a real positive for us. We get control of the space that has been somewhat of an issue in terms -- not necessarily an economic issue, but just in terms of a merchandising issue, to put a better operator in there, at better rents with a better future.

So that's sort of the history of that space.

Then is your plan to try to find a tenant that will take the whole space as opposed to cutting it up and trying to work something else out?

Absolutely.

And then Bill, just on some real granular questions. What was the gross snow removal cost?

In the quarter?

Yes, for fourth quarter.

Gross was --

The gross for Q4?

Q4 or Q -- I will give you 1, too, just so you have it. Q4 was around $900,000. And we are running at about a 50% collection rate. In Q1, it's about $2.1 million, $2.2 million, something like that.

Then, just on the recovery process, is that something that you bill through over a -- what is the timeframe that you are trying to recover that over?

We should get it this quarter.

And how is that? I mean, it seems like a lot of that recovery process is falling on a lot of your retail tenants?

Well, I mean, you know, it all -- it's weighted as our portfolio is weighted. I mean, you know, the retail and industrial properties are triple net properties so subject to how many vacancies are in those properties, you almost get full recovery in those sectors, almost. So again subject to how much vacancy is in them.

And those properties tend to have, as you probably are aware just observing it, some of the highest snow removal costs because they have big parking fields. And then when you get into the multi-family it's a complete loss. Whatever you spend on a multi-family property, there are no pass-throughs.

So we have a little more -- and office buildings are even more complicated because they are subject to an operating base. So we have a kind of a soup of different pass-through accounts. We are not as simple as maybe more property-specific, where they either have all triple nets or they have all operating pass-throughs.

But we have gone through the mathematics, since it was such a big number this most recent year, the double whammy, the 2 point -- what Bill referred to as the $2.1 million -- we've actually gone through and run the -- our August models, etc., and our pass-through models. And we recognize we're estimating a 52% recovery of that first-quarter event.

But yes, it's not as easy to do that diagram for us as it is for others because of the multi-property types.

Thank you. There are no further questions at this time. I would like to hand the floor back over to Skip McKenzie.

Thank you, everyone, for participating in our conference call this afternoon or this morning and we look forward to catching up with you at the end of the first quarter. Bye bye.

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