Elme Communities (ELME) 2010 Q4 法說會逐字稿

Welcome to the Washington Real Estate Investment Trust fourth-quarter 2010 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 and NOI 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 the 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, tenant financial conditions, the timing and pricing of lease transactions, levels of competition, the effects 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 2009 Form 10-K and our third-quarter 2010 10-Q.

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 of Real Estate.

Now I would like to turn the call over to Skip.

Thank you, Kelly. Good morning and thank you for joining the Washington Real Estate Investment Trust earnings conference call this morning. As we wrap up 2010 and look ahead to 2011, the Washington DC real estate market continues to recover, albeit slower than our patience allows. Leasing activity is picking up across most of the property types, concession packages are declining. What we have not seen is a rapid absorption of vacancy by the private sector, but we are making progress regionwide.

In addition to modest improvement in the leasing market, we are seeing healthier investment sales activity. We have been active in the market, having closed on two well-located properties, and a third under contract, with closing to occur within 45 days.

In addition, in the fourth quarter we continued to recycle capital by disposing of four assets which no longer fit into our strategic plan. As we announced in our press release last night, we are projecting continued asset sales in 2011 and are focusing our future investment on well-located assets inside the Beltway near major transportation modes like Metro Stop, in areas with strong employment drivers and in areas with outstanding and improving demographics.

With this in mind, we believe there are excellent opportunities to concentrate our investment capital on high-quality, well-located office, medical office, multifamily and retail properties in the Washington Metro region.

We are exploring the sale of our industrial portfolio, not only as a means to fund future acquisitions, but also with an eye toward streamlining operations and focusing our asset allocation. It is our intent to exit the industrial sector on a wholesale basis over the next year or two, dependent upon the optimal exit opportunity.

Over an extended period of time we expect that approximately one-third of the funding of acquisitions will come from disposition proceeds. Naturally, this process may appear somewhat choppy as over any given shorter period of time we may sell significantly more or less than this amount.

I would now likely like to briefly discuss our current portfolio results before I turn the call to Bill and Mike to discuss our financials and property operations in more detail.

Throughout 2010 certain property sectors performed much better than others, both regionwide and within our portfolio. We believe these differential results validate our property sector diversification strategy, which has been one of the linchpins of our long-term success over the past 50 years.

Apartments continued to perform exceptionally well with high occupancy levels and increasing rents. Medical office is performing well and has been generally steady with growing rents throughout the downturn. Retail is picking up, and we expect good leasing velocity over the next few quarters and continued rental rate increases and higher occupancies.

Office seems to be very choppy, and leasing vacant space remains challenging. The good news is that we seem to be getting better than expected rents versus in-place rents. The challenge remains motivating prospective tenants, particularly those in the private sector, to move expeditiously. The prospects are there, but they are still somewhat cautious about expanding space or jumping into new lease liabilities.

In concert with our efforts to constantly perfect our processes, streamline operations and improve accountability, this past quarter we further restructured our internal leasing department. Beginning in 2011 individual leasing managers report to our asset managers to tie directly individuals responsible for revenue of the properties in a more direct relationship.

In addition, we increased the utilization of external third-party agents across the portfolio for our more challenging vacancies. We are encouraged by the early results of these improvements.

Now I would like the call to turn over to Bill Camp, who will discuss our financial results and capital market activities, and then Mike Paukstitus will discuss our real estate operations.

Thanks, Skip, and good morning everyone. We reported core FFO of $1.96 in 2010, which as we projected last quarter is in the upper end of our original guidance range of $1.86 to $2. These results exclude acquisition costs and losses on the debt extinguishments.

For the fourth quarter core FFO was $0.48, slightly lower than the third quarter due to higher G&A and interest expense. Approximately half of the fourth quarter increase in G&A is attributable to our internal leasing department restructuring that Skip mentioned, and the other half is due to the year-end true-up for incentive compensation.

The higher interest expense is related to the excess proceeds from the bond offering we closed at the end of the third quarter versus the amount of debt we tendered in the quarter. Generally we carried about $200 million in cash in October and about $80 million for the rest of the quarter.

In terms of FAD we reported $15.3 million or $0.24 per share. We also reported core FAD of $22 million or $0.34 per share, which excludes the cash loss on the extinguishment of debt of $0.09 and the acquisition costs of $0.01.

Tenant improvements were higher this quarter at $6.4 million, as projected. And over half of that amount was due to the concession packages given out to new tenants over the past few quarters. We ended the year with $8.7 million in committed tenant improvements, which is in line with how we ended the year last year.

On the capital side in 2010 we raised a total of $171 million through our ATM program through BNY Mellon at a weighted average price of $30.34 per share, and the issuance cost of just 1%. The $51.5 million of proceeds from the fourth-quarter issuance was used for general corporate purposes and to partially fund our Gateway Overlook acquisition in December.

At the end of the quarter our line balance remained $100 million. We are currently working to recast our $262 million line, and expect to have it done by midyear.

As discussed on our last call and detailed in press releases throughout the quarter, we completed two tender offers totaling $179 million, which cost us $0.14 in premiums. I would be happy to answer any questions or provide more details during the Q&A.

Bad debt expense for the quarter was approximately $830,000 or 1.1% on both a cash and a GAAP basis. These results overall are better than the third quarter and are a continuation of the improving trend that we have generally seen since the beginning of 2010. We expect the trend to continue in 2011.

Many of you have called with questions about sources and uses of funds for our recent acquisition, so I thought I would simply state that we came out of the tender offers with about $70 million in cash proceeds remaining from our bond offering. We sold $50 million in assets and we raised $50 million in equity for a total of $170 million. We purchased two assets, Gateway Overlook and 1140 Connecticut Avenue for $168 million. We will continue to find effective ways to balance our funding sources with our uses.

Lastly, we outlined guidance in our press release last night. Core FFO, excluding one-time items and acquisition cost, is expected to fall in the range of $1.96 to $2.08. Generally our guidance will be highly dependent on the potential success and timing of acquisition and disposition activity, particularly the timing of a potential sale of our industrial portfolio.

I am sure some of you will have questions about guidance during the Q&A portion of the call. With that, I will turn the call over to Mike to discuss operations.

Thanks, Bill, and good morning. First, I would like to bring your attention to page 19 of our supplemental information. We have added a physical occupancy metric and provided five quarters of history for comparison purposes. Physical occupancy is solely based on square footage occupied, while economic occupancy is dollar weighted by rents.

Looking at our property portfolio in detail, on a year-over-year basis same-store NOI was off 2.7%. There were two one-time adjustments in Q4 2009 that pushed this number down from minus 0.3%. From third quarter to fourth quarter same-store occupancy was down 30 basis points, same-store NOI was up 110 basis points, and rental rate growth was 0.1%. The main driver for the improvement in NOI was a continuation of reducing costs, primarily utilities and real estate taxes in the office sector.

Similar to prior quarters, our multifamily sector continues to maintain high occupancy and modest rental rate growth. Sequentially from the third quarter occupancy was seasonally down as expected, but we continue to push rents higher. At over 95% occupied, in markets with no new deliveries and minimal vacancies, we are very optimistic that the busy spring and summer leasing season and will produce excellent rental rate growth in the months ahead.

In the commercial portfolio this quarter WRIT executed 382,000 square feet of lease transactions at an average rate increase of 11.5% of our expiring leases on a GAAP basis with an average lease term of 5.8 years.

In the office sector same-store physical occupancy remained steady from the third quarter. Same-store NOI was up 2.9% from the third quarter due to the expense savings primarily related to real estate taxes and utility costs. While cash rents were down as expected, GAAP rent increases of 9.3% exceeded our projections. We are encouraged by the market data indicating that concession packages are diminishing, which is an early sign of market recovery.

In the medical office sector same-store occupancy was up 50 basis points from the third quarter due to the expansion of Children's Hospital at Shady Grove Medical Village and a new healthcare practice at Sterling Medical. Same-store NOI was up 5.3% compared with third quarter. Cash rents were down 3.5%, while GAAP rents grew 5.3% as expected.

While the medical office sector enjoys high occupancy and continues to be very stable, much of the uncertainty of health care reform seems to be having a negative effect on the absorption of vacancy. When vacancy exists it lasts longer than it should, even in this strong sector.

The retail sector same-store occupancy improved by 30 basis points from third quarter. With a new 24,000 square foot tenant at Montgomery Village opening in the fourth-quarter rents more than doubled the prior tenants. This drove average cash rents higher by 26.5% and GAAP rents higher by about 41%. Retail NOI was down 4.2% from the third quarter mostly due to increased expenses, some of which are one-time in nature.

We continue to see increasing activity in our retail vacancy, and feel pretty good about these trends and our ability to lease vacancy and increase rents in 2011. Much of this activity will not really impact numbers until later in 2011.

The industrial sector continues to underperform our expectations. With that said, we were able to sign 153,000 square feet of leases with an average lease term of 4.5 years. We continue to evict nonpaying tenants; as a result occupancy declined an additional 110 basis points from the third quarter.

On a positive note, we are seeing an increase in tours of our properties and expect increasing occupancy trends in the months ahead as the recovery takes hold.

Now I will turn the call back to Skip.

Thanks, Mike. Before we open the line for your questions I would like to note for the record that yesterday our Board approved our 197th consecutive quarterly dividend at equal or increasing rates. We are very proud of that track record and what it says about the WRIT strategy. We can only achieve these results with outstanding real estate professionals in the best real estate market in the world year in and year out.

With that, we will open the call for your questions.

(Operator Instructions). Michael Knott, Green Street Advisors.

Skip, I just want to ask you about the repositioning strategy. A couple of questions. One, how big a shift is this from the path -- that similar path you have been on recently? Is this a big acceleration of that strategy or just maybe more of a modest shift that was already in the works?

Then, two, related to that, how much work might be behind, even after selling the industrial portfolio in terms of product that you would need to recycle out of to really fit with your strategy here?

Good question. As you noted, we have really begun this path in the past. We sold a number of some of these properties already, even in the fourth quarter of this year, as we sold the Ammendale portfolio. So in some respects it is not really new news.

I would say that we are looking at more aggressive opportunities to dispose of these assets perhaps on a larger scale. Again, we are going to look at the best opportunities that are presented to us. But I would say that we are looking at more broader strategies for exiting this sector in a quicker fashion.

I think the other part is just the -- kind of going away from the industrial sector to the other sectors. I think those are more not necessarily a whole submarket or a whole product type sale, it is going to be more one-offs after that.

Like Skip said in his comments, we will generally sell about one-third of what we are buying. So it will be some -- if I had to guess, it would probably be focused in on some of those suburban kind of commodities -- suburban office product. And then there might be some ancillary other buildings, but not many.

So is it fair to maybe conclude that it is similar to the strategy that you have been employing for the past couple of years, with the notable exception of exiting industrial completely as the newest wrinkle to that?

Yes.

That is a good way of putting it.

Then my second question is just relating to the Washington DC office acquisitions. Can you just talk a little bit about your decision to buy those, how you price them? And then obviously the two buildings have slightly different return expectations, maybe just give us a little more color on how you thought about those capital allocation decisions.

The first of those, the building we already closed, 1140 Connecticut Avenue, that is a fantastic acquisition in my opinion. It is a core downtown DC asset, very nearby many of our other assets, so it has great synergies with some of our operating personnel down in those areas.

It is -- we are acquiring it at fairly -- I would say at a fairly aggressive cap rate for us in the low [6s]. But the property has great opportunity for upside. We believe the rents are below-market. And there is also a number of opportunities to improve the space in the building and recondition and rehab some of the area so that we can push rents even beyond where the market rents are today.

It is an improving market with virtually no to little construction in the CBD, and it is two blocks from the Metro. So to us that is a core acquisition that has some really good potential to grow rents over an extended period of time.

Now the second of the two downtown properties that we are buying is really in the West End. It is 1227 25th Street. That property is the one that I noted that we will be closing in about 45 days. We are firm on that contract. That property has a little different spin to it. It is located adjacent to our 2445 M Street property, and it is 72% leased.

So that is one where we can increase occupancy. We feel that there is a really good market for leasing that vacant 28% of the building that is sitting there somewhat stagnant right now. Perhaps we may be even able to see that building with our own tenants that are growing in the adjacent building.

Of course, again, we will have really good operating synergies there. We think we can bring the returns of that building into the 8% range actually in the next couple of years, if we are successful leasing up that vacancy.

By the way, both of these assets are below replacement cost. The second one is significantly below replacement cost. We are only buying it for $360 a foot. So we are really pleased with those acquisitions, and we think they're going to be long-term keepers in the portfolio.

Mitch Germain, JMP Securities.

When looking at your current development -- sorry, acquisition pipeline, what is the mix in terms of assets, and what about size relative to where it was, call it, last conference call?

When you say pipeline, you mean the ones we have just acquired or --?

No, the ones that you are currently underwriting, future acquisitions.

Well, we are looking at a little bit of everything except industrial. I would say certainly in terms -- we don't have anything firm other than the 1227 25th Street, just to be clear that we don't have anything firm. But we are looking at a lot of assets out there.

Primarily, certainly, the asset class that we see the most activity in is the office sector. We have a number of good offers on the office sector portfolio, and I think we will be successful in the next few months in that regard.

The other things we are looking at, we are looking at a couple of retail deals. We may or may not be successful in them. It is an extremely competitive environment for that. We are seeing some medical office buildings out there that I feel fairly optimistic that we will be successful in acquiring.

And less so apartments. Apartment existing product is extremely competitive for the stuff we want to own. You might argue it is sub 5 cap rates in many cases. We are looking at alternative ways of building our apartment portfolio.

Okay, I appreciate it. Then the 1227 deal, how much cost would be required for the asset, is it just TIs?

Yes. Well, just TIs and leasing commissions. The building is in really good shape. It was built the same year as 2445 M Street. It is a really nice freestanding office building, which you don't see a lot of in the DC urban core.

And then when I say freestanding I mean it has windows on all four sides. It is something that is very attractive, because you don't have buildings butting up against two sides, like you oftentimes do with a traditional urban office building.

Great. And where do you stand if -- whatever commentary I would appreciate -- on the industrial exit? Are you just starting to put the books together or (multiple speakers)?

We are well along, but I would still say we are getting ready to throw out the first pitch.

Just one for Bill. What is left on the ATM?

What is left on the ATM?

Yes.

$79 million.

Great, thanks, guys.

Steve Benyik, Jefferies & Co.

I guess regarding guidance, can you describe what property types are the largest drivers of the 150 to 200 basis point occupancy improvement, and which ones are expected to lag? Then, also, on the same-store occupancy side how you think it may shape up for 1Q '11 versus how it will rise for the balance of the year?

From a guidance perspective, the 150 to 200 basis point occupancy pickup is really across many of the sectors. If you look at multifamily just in the quarter we will expect that to go up just because we are in the seasonal part of the downturn, so third quarter to fourth quarter occupancy went down. We expect that to pick back up.

In the office sector we certainly think that we will be successful, particularly in some of our downtown assets -- that we will be successful in gaining occupancy throughout the year, as hopefully the economy continues its kind of roll that it is on right now, and at least turning around.

Retail, we said in our prepared comments that we expect retail to actually have some pretty good activity. That will probably -- while we might sign leases in the first quarter or two, retail generally takes a little longer time to get going and actually hit our numbers -- just moving in, getting the store open, things like that. So I don't expect those numbers -- while, we might have leases in our hands and committed, we probably won't see any impact numbers until third and fourth quarter.

Then MOB has just been kind of steady. I expect that to be modestly the same. It is pretty strong now. And the core portfolio, it is pretty strong. And we do expect to see occupancy pickup in Lansdowne, but it is much slower than we wanted it to be.

Okay, do you guys expect additional debt buybacks or charges in '11? And then also can you provide what the cash mark-to-market assumption is for signed leases in 2011?

Well, we don't -- well, let me start with the first one first. We don't necessarily expect any kind of buybacks. The only thing that is out there that could hit the numbers, which is not in our guidance, is the payoff, the swap that I have on the line of credit. I just don't have that in there because I think I will probably just let that run its course until the November expiration. But anything is fair game on that one. I will report back if and when I do something with that. But other than that I don't expect any kind of extinguishment of debt charges either positive or negative.

On the other side of the fence --

You want me to comment on that?

Yes (multiple speakers).

I'll comment on that. On terms of the mark-to-markets, I think I have a pretty good handle based on what we have been seeing. In the office sector -- and everything I'm going to talk about here is on a cash basis, not GAAP.

So on rolling rent in the office sector I think we are going to be about even, maybe slightly down small single-digits perhaps, but we might end up being even. So on a cash basis maybe minus 2% to 0% to positive 1%, that sort of range. On a GAAP basis it would be positive.

Retail, we are going to -- I am very optimistic we are going to continue to see really good rental rate increases in retail, as we demonstrated this past quarter. I feel really good about what we are seeing there.

Industrial is going to be sloppy, the industrial leasing we do. I think it is going to be better. We are seeing trends that it is going to be better, but I think it is going to be, again, on a cash basis slightly negative. And MOBs will be positive. They will be sort of that steady plus 3% type range, again, on a cash basis, better on a GAAP basis.

So generally I think it is looking pretty good. And one that is still a little sloppy is going to be industrial, and office will be flattish.

Then in residential, obviously, we're looking at a very positive environment.

Yes, residential will be great.

Okay, thanks very much. Just one last one. You had mentioned Lansdowne. I was hoping you can provide an update on that one, as well as the Lafarge space at Monument II?

Yes, on Lansdowne, I think Bill made a comment that we are not that happy with the progress. We have several leases that we are working on right now, but it is much slower than we would like. We are going to grind through that, through the balance of this year. It is going to be hand-to-hand combat.

As I made mention in my comments, even in medical -- in the medical sector -- it is very steady and very solid, but when you have vacancy it is taking longer than we would like. We are getting some feedback that tenants are somewhat reluctant to expand and take on new space, open up a new office in a new jurisdiction until they get some clearance on health care reform.

So even in that sector, which is a strong sector and a good sector, we are finding that just taking down large blocks of vacancy is taking longer than we have been accustomed to in this market.

The other one, Lafarge, we have had really good progress there. We have great activity there. And I might be sticking my neck out a little, but I think we might have leases on that space before the end of the third quarter. We are having really good activity on that property.

Thanks very much.

Erin Aslakson, Stifel Nicolaus.

When all is said and done with the sale of the industrial portfolio and the reinvestment of the proceeds and your future acquisitions, what are you looking at in terms of allocations between the asset classes?

It is tough to answer that directly. Obviously, it is going to depend on the opportunities that are sitting out there. We are certainly going to look at the other four asset classes and buy the best properties we can that is available on the market at that time. But it is hard for me to give you specifics.

What I would say clearly is that the office building sector is probably going to work its way up to 50% of the portfolio over a period of time. It is 40% now, but just by the nature of where we are, it is probably going to be something like that, and will probably be -- the other sectors will probably remain basically equal, 17%, 18% each. And then the office will gravitate towards closer to 50%. But a lot of it is going to depend on the opportunity.

I would assume those office -- incremental office investments would be within the Beltway?

I wouldn't say solely. Certainly that has been our focus, but we are looking at some really good properties that are on or near Metros, for example, that we have looked at some really good investments that have really good growth aspects that are around BRAC sites that may perhaps be outside the Beltway.

So there are some -- I would say it is more limited in that it has to have a little bit of a story, but I think you're right that primarily they would be inside the Beltway, but we are not exclusively looking inside the Beltway.

Certainly the other property types will probably not be inside the Beltway. When you say retail, we bought the one up in Columbia. We bought -- we looked at -- we are looking at other things that are outside the Beltway for retail. Medical offices generally are by hospitals; those hospitals are generally not inside the Beltway.

So some of the other sectors, while office is an easy one to target and say it is going to be inside the Beltway, the other ones are a little more challenging to get more NOI inside the Beltway.

In terms of the actual industrial sale, how would you handicap that in terms of it being a 2011 event versus a '12? And would that be a large all at once probability to that or would this be trickled out over many quarters?

Well, we reserve the right to all the above. We are going to look at the best opportunities, but if you're asking me to handicap it and just make my best guess, again, we don't have any deals as I mentioned earlier. We are not even in the first inning. We are getting ready to throw the first pitch.

But if I were handicapping it, I would say it is probably going to go in one fell swoop based on what we believe is a robust and very active acquisition market, and we think this is something that is highly, highly, highly desirable at this point in time.

And I think that it is going to go in one fell swoop at a really, really, really good number. But if we don't -- if that doesn't materialize, it may go in three chunks, it may go in four chunks, it may go one asset every month for 48 months. I don't think that is going to happen, but that is my reading of the tea leaves.

Then, I guess, the final question is in terms of -- what is the tenant-to-tenant profile and lease expiry on the 1227 asset?

1227 was the biggest -- the most interesting part of that is that 28% of it is vacant. Now in terms of the leased part of the property, it is extremely well-leased. It has got primarily -- the balance of the lease space are two larger tenants. It has got the GSA in there until 2019 for 35,000 feet. And it's got a law firm in there through 2016. And it has got a couple of some minor -- more minor tenants in there.

So other than the vacancy, which we stated we think we are going to be successful leasing, the lease space is in there for the long term. (multiple speakers).

Do you know what the GSA is doing there?

It is Social Security Administration.

Thank you.

Chris Lucas, Robert W. Baird.

So can you give us an update on where things stand with Dulles Station at this point?

In terms of --?

It is listed, so what is the timeframe for either keeping it or moving forward with something there?

That is a good question. I'm a little bit hamstrung about saying too much about it, because we are in the market with it. Let's just say we have had a lot of interest at it. We have had a lot of good offers on it. And we are in the process of negotiation, so that is why I don't want to say too much about it. We are actively negotiating final terms with somebody. So it looks like it is going to be something that is going to happen fairly soon.

Bill, is that something that is in your net number?

Yes, when you look at the guidance of the zero to $50 million net on acquisition positive, yes, that is out there assuming that would be in there on the minus side.

Then just in terms of going back to the restructuring, Skip, is there -- how do I put this delicately -- is there a headcount adjustment that you're going through? Is there a G&A savings on the one hand versus what I would expect would be higher leasing commission dollars on the success side? Is that a way to look at it or how is that going to play out?

Well, I would say we have had a reduction in salary. It won't probably follow through to G&A, because most of that is capitalized in the leasing commissions, right, Laura?

So while certainly from a cash flow basis there will be savings, from a pure G&A perspective it will be de minimis. It hit G&A because we had some severance benefits which hit. But on a going forward basis -- and correct me if you think I am wrong, Laurie -- I don't think you're going to see huge savings on the G&A side -- there will be cash savings.

Correct, you won't see savings. You won't see savings. As well as an execution of strategy there are -- we are looking at probably $0.02 to $0.03 increase in G&A that was in our guidance, and so we are looking at talent and we actually may have some increases.

And to answer your question, I think you were referencing the comment we made where we might have some increased third-party commissions. I would say there is some nominal amount of them. They are very targeted at select buildings where space has been more difficult to lease, where we have had more larger and/or more challenging vacancies. So while I do think there is going to be some incremental commission expense, I don't think it is anything that is of large magnitude.

In fact, if it hits, it is going to be because we got some big deals. So it will be a great counterweight to that. So I don't think it is anything that is material.

That is a very good point. We are targeting that to vacancy primarily.

Then, Bill, I appreciate the detail on the guidance. I guess the one question I have is that it is all laid out on a per-share basis. I guess I am just trying to think through. In terms of how the -- how equity will be utilized in the coming year, should we continue to assume that the ATM program will be a regular and consistent part of the capital strategy or will it be less predictable than it had been in the last year?

I would say your second answer is better. I think it is going to be less predictable, because we have pretty much got the balance sheet where we want it, generally speaking. A lot of the equity we raised over the last year, we bought some buildings -- and we are net positive on acquisitions last year, so we had to pay for those buildings.

I said going into last year that any incremental acquisitions would generally be funded with equity. This year with the variability of a potential sale of industrial, whether or not Dulles Station goes through, we think we are going to be balancing acquisitions and dispositions this year. So I don't think my -- necessarily I will need as much capital.

With that in mind, I have a $90 million -- a little over $90 million left in June that comes due in debt. I've got a $100 million line balance. So there is about $200 million in debt that I am going to have to do something with. Maybe I'll just leave it on the line this year and build it up until next year. We've got another $50 million coming due next year in '12 that I could do another $250 million bond deal at some point in the future. And just replace debt for debt, because I don't really need to delever any more or not much.

So I would say -- a long-winded answer is that I think it would be a little more inconsistent than it was last year. Last year it was pretty much every quarter.

Then I guess with that, the shareholder basis continues to turn over. It is more institutionally held. Are you thinking about taking another run at the charter related to the preferred?

Always thinking about it. I would never say never, but yes, we have actually had discussions about it. You're absolutely right. The shareholder mix is definitely more heavily weighted institutionally. So, yes, it is something we talk about.

You may be hearing more about that, stay tuned.

You could hear more about that, you never know when.

Then the last question, just sort of a detail point. Can you provide us an update on whether it is -- I don't know whether it is under the Sun Micro or Oracle banner, but what the lease status is at 7900 Westpark?

Yes, they are leased through the end of this year. (multiple speakers). They are going to be in place through the end of '11, at least leased. I would say -- handicapping that I would say there is a good chance that they're going to be vacating there. Other than that, it is a lot of uncertainty. So we are -- we would like to keep them, but I think they will probably be downsized into Oracle.

So, just so I am clear, their lease runs through when, I am sorry?

Isn't it 12/31? Let me just verify that, one second. I believe it is December, but let me look that up.

That, Bill, then would be running into the numbers all through the entire year if that is the case?

Say that again, Chris.

Yes, they are paying rent, that's for sure.

Their lease is -- I don't have that. Mike will have that answer in one second. I believe it is 12/31.

12/31, 2011.

Great, thank you, guys, that's it for me.

Brendan Maiorana, Wells Fargo.

This is actually Young Ku here with Brendan. I just had a quick question on the industrial portfolio sale. If you were to sell the whole portfolio, what kind of proceeds do you think you can get from that?

You know what, I am not going to comment on that. I'm sorry -- I will apologize in advance. I just don't like to comment on prospective transactions before they occur. I won't comment on that. (multiple speakers).

We don't want to give the potential buyer what we think it's worth.

Okay, that's fair enough. Just going to your dividend, it looks like you're going to be selling your industrial portfolio, which should be a high-yield type of disposition. And then you're going to --.

I disagree with that part.

Okay. But you will be selling industrials and then buying, say, office and retail over time. And your FAD level is still below your dividend. When do you think the FAD level will be able to get close or exceed the dividend level?

Model-wise I have it -- we will crossover the point in 2012 probably.

Okay, got you. Just in terms of your debt maturities, you have, call it, $400 million of debt maturing over the next three years. Interest rates will probably move up. Have you considered trying to raise more debt today and then trying to extinguish those debt maturities earlier?

Well, since I really liked paying $0.14 of premiums last quarter, I'm going to probably not try and do that again. I will take my risk. None of those maturities -- we have $200 million coming due this year between the line and the rest of the debt that is maturing, and that one I might take out. But going forward I don't want to time it too incorrectly, because it is expensive to do it early.

Let me just make one comment, just to reiterate what -- you alluded to it being a high-yield transaction. That is one thing we don't believe. We think this is going to be -- have an extreme amount of demand for this. And that it is going to actually sell at a very expressive cap rate. That is our belief.

Well, if the industrial fundamentals aren't doing too well, and you guys are trying to sell it, who would be the typical buyer of that asset at such a low cap rate?

There is a tremendous amount of interest. Large super deep-pocket investors, institutional quality, it could be even other REITs, for example, that will be very interested in this. To buy an entire portfolio in Washington DC area and to assemble mass here that you really can't, there will be a tremendous amount of interest in it. And it will be very competitive.

I think in terms of your thoughts on cap rates and things like that, I think you have to think about you are selling -- like we did with some of the other industrial properties that we have sold, when it is under-leased people are paying you a lower cap rate on in-place numbers, because they are assuming that they can lease it up.

So I would assume the same thing would happen here. And you could pick whatever you want to use for a guesstimate of if it was fully stabilized at 92% or 93% occupancy and cap that, and then reduce it by -- and then almost mathematically reduce that cap rate and say, okay, well it is going to be X and then some premium for a portfolio. You can look at it that way.

Okay, thanks for the color. One last question. Do you guys have any exposure to Borders stores by any chance?

Yes -- well, virtually none. We have one Borders in our Hagerstown Shopping Center. It was not on the list of the 200 they are closing. So it at least at first blush is not in there. Even if it were, we are not worried about it. They pay a modest rent on that store. Their annual rent is $250,000 a year. While we probably take a hit for some down time, ultimately we think we probably are below-market on that lease there.

Now the one asterisk I would put on there, we do have a receivable for [our parent job] (multiple speakers). We take a one-time hit of $0.01 from a TI receivable that we inherited when we bought that property. But other than that one-time hit, if they rejected that lease ultimately, that would be all. We would re-lease the space probably at higher rents. We would suffer a little bit of downtime, but we really are -- and as I said, they didn't reject this lease.

That mall is a historical high occupancy mall. We virtually keep that thing full.

Got it, thank you very much.

Anthony Paolone, JPMorgan.

Skip, from everything you mentioned and just also from what we have seen, the apartment business seems to be a lot further along and humming along compared to office being still kind of in the earlier stages here of recovery.

I am just wondering is there a price point or an execution level where you would consider just moving out of that area, even if temporarily, and just bulking up more in office, or it is just not even on the table?

On a wholesale basis, no. We have been asked that question as long as I have been at this Company. It would be very hard to get baked back into that sector. Obviously right now it is one of the biggest growth stories for us. It is the sector that got through the financial crisis with our heads held high. It has really been sort of the backbone of our performance over a long period of time. And it would be very difficult to get back in if we got out of it wholesale.

There is always a premium for these assets. Right now it is the difference between 4% and 6%, but back when cap rates were 8% it was a difference between 6% and 8%. So there is always this crazy cap rate trade. You could argue whether the trade is good or bad right now, but on a wholesale basis we are not looking to get out of that sector.

Might we sell an asset or two around the edges? That's possible. We've got enough things on our plate for sale today that I don't think that something is going to happen imminently, but could we sell one or two assets? Possibly.

You had mentioned just -- I forget the words you used exactly, but just other ways of even bulking up the exposure there. Can you elaborate on that?

Yes, we are looking at some development opportunities, either singularly or with partners.

Okay. I'm sorry, were you adding something?

You want to say something?

The only point I was going to make, and as Bill has talked in the past, is that that line always represents an additional source of financing for us as well. It could be just as easily financed as sold.

Right, got you. Same question. Skip, you mentioned the private sector just not having returned to absorbing space as quickly as you have thought it would, earlier in your comments. Just wondering if you have an opinion or can give us your point of view on how you see the government sector in the region playing out here, especially with the prospect of budget tightening and belt-tightening overall?

That is the $64,000 question in Washington right now.

It might be the $64 billion question.

Yes. Last year the government single-handedly brought the DC leasing statistics into balance. There were some staggering numbers. They were like 60% or 80% of the absorption in the District of Columbia last year, primarily with big large block leasing by the federal government.

So their presence last year was staggering, and single-handedly brought the DC market into balance. So the larger question is what does it mean going forward?

We believe in our -- we are somewhat skeptical, although we are not taking our eye off the ball. If we have health care reform that is going to require a lot of folks. The financial crisis added a lot of folks in some of these different agencies that are here.

We see still a lot of demand from the federal government. We have a famous chart that I am sure you have seen. It is in our roadshow presentation. It shows how much the federal spending has increased in our region over a long, long period of time.

So if it happens, this will be the first time ever that it goes down. So it is something we are keeping an eye on. There is a lot of different opinions on this. Some people think Washington is going to be a beneficiary, while other regions are hacked away at more aggressively. So it is something we watch closely. We haven't seen any signs yet of significant pull back in the government directly.

You couple that with the ongoing movement of people from the -- out of the area and the BRAC relocation stuff, you couple that -- you've got a few years here where we are -- even if they start cutting back, there is at least a couple of years where the employment growth is still going to be there, just because we are bringing people in from other parts of the country.

Got it. Thanks. And the last question, Bill, did you mention -- maybe I missed this -- were there any acquisition costs to be expensed in guidance?

No, I am excluding acquisition costs in guidance.

Should we put anything in for the first quarter on what you know already are or you'll just report it without it, or how should we think about that?

Well, we know 1227 25th Street will have something when it hits. That could (multiple speakers).

But we did not put it in guidance. We will report a core number without acquisition costs.

Okay, thanks.

Just back on that, before we go to the next question. The one thing in this area that is somewhat unique to many others is when you buy and sell properties in this area it really dependent -- those acquisition costs are really dependent on where you are buying those properties.

So I don't want to steer guidance with acquisition cost assumptions and force us into a situation to meet guidance and determine that we don't want to buy buildings in downtown DC because it costs more money. It just -- it is what it is and we will live with it.

Let's go to the next question.

Michael Knott, Green Street Advisors.

Skip, could you talk about the sale of the Ridges in Gaithersburg? I was surprised at the price preferred. I think it was around 265. Could you just comment on how that might hypothetically stack up against the rest of your suburban Maryland portfolio from maybe a value per foot standpoint?

Well, that was a great sale. I will be honest with you on that one, we were extremely lucky on that. That building is in Gaithersburg, Maryland, which is not a particularly strong market. It may be one of the weaker markets in our region. And we were lucky because that building is adjacent to MedImmune's headquarters, and that building was bought by MedImmune. So it was almost a user sale. It wasn't almost, it was a user sale.

And so we got a really good price, because we were sitting next to the right guys in that particular case. So it is hard for me to extrapolate that to other properties because that was an opportunistic sale for us.

Got it, okay. Then a similar question with the industrial building you sold in Beltsville. I guess it was three properties actually. Can you this comment on the quality of those properties compared to the remaining properties that will be up for sale?

I would put it in the middle of the pack. That is our Ammendale business. It is listed formally as three properties, but is actually one park. It is Ammendale I, Ammendale II, and something we called Amvax, which was a former headquarters of American Vaccine, which was also in that park. So that was really one contiguous park, although it technically counted as three properties.

That is sort of middle of the pack. It was very much one of those properties that had a very mixed variety of users. It had flex users. It had some highly built out space. Like the Amvax building, for example, had some very sophisticated vaccine making lab type equipment in it. Then we had raw space that was vacant. So it was very much indicative of some of our properties.

But I would put it in the middle of the pack. We had great interest in it. We got great offers on it. Obviously we reported some really nice returns and gain over a period of time for it, but I wouldn't necessarily call it any better or significantly better or worse than our other industrial properties. It is solidly in the middle of the pack there.

In terms of flex Virginia versus Maryland, obviously most of the balance of the portfolio is largely Virginia. I would think there is probably a premium for Virginia over Maryland. Is that true?

Yes.

Okay.

I agree with that.

Then the other element I would make to that is there is a good concentration around the largest BRAC relocation in the country, which is down in Fort Belvoir in our southern Lorton complexes.

The biggest property in our portfolio we refer to as Northern Virginia Industrial Park, which is just under 800,000 feet, 790,000 or 780,000 something like that. That property is right across from Fort Belvoir. So it is in a great location. We have done very well with it. It is getting knocked around a little bit because of the market today, but it is a very, very attractive asset for someone to own.

Again, just to comment on timing, in September this year those buildings are up. So they are already starting their transition with full moves by September of this year.

Okay, and then last question on lease-up timing on 1227 25th do you think -- what is your expected timeline for leasing that up? And then also, obviously, Vornado and Mitchell have a pretty good leasing platform there. So when you are doing your due diligence how did you think about -- or what gave you confidence that you guys could lease it up and they were unable to?

Well, they don't own the building next door with the seed of tenants. That is number one. Which we do -- we have a building next-door that tenants are exploding. So that is one thing that Mitchell and Vornado didn't have in that building.

But having said that, we were very conservative on our underwriting and we left that down for more than a year. So we were very conservative on our underwriting and we were looking at it more on the long term.

Okay, thank you.

Dave Rodgers, RBC Capital Markets.

With respect to the GSEs and I guess the uncertainty around that, I don't know, but I was thinking do you have any change in either your debt capacity, willingness to take on debt, or changes in your underwriting with respect to your multifamily portfolio, given the uncertainty there and any future changes? Just any color would be great. Thank you.

In terms of the GSEs, obviously there is a lot of discussion in the newspaper about what they may or may not look like in the future. I will tell you right now there is -- away from the GSEs there is plenty of appetite right behind them to provide loans on multifamily properties, whether it is the life companies or anybody else. Especially if you get things under $50 million there is a lot of appetite for individual property financing.

And quite honestly, Fannie and Freddie, they're holding rates a little bit higher than you would expect right now. It is not the huge homerun. In fact, I have seen some loans, some mortgage loans by other companies that I think -- on other commercial properties that would outpace what Fannie and Freddie are giving on residential right now.

So you could assume that if I went down that path that might not be the most viable option. It may be doing something else.

The insurance companies are very eager to get back into that business. They will be very aggressive.

I guess a follow-up to that would be what would be your capacity for additional secured leverage relative to the unsecured side of the business, and if you do [assume] multifamily investments?

We've got room. Our first -- the first bump against the constraint would probably be with the rating agencies a little bit. We've got some room to take it up. We could probably go up on unsecured debt by -- I don't know -- I'm going to venture out and go off the cuff here and say probably $100 million to $200 million we could probably go up. As we grow the properties -- as we grow the portfolio over time, obviously that number goes up. And as we grow NOI that number can go up.

All right, great, thank you.

Bill Crow, Raymond James & Associates.

Good morning, guys. My questions have been answered. Thank you.

(Operator Instructions). There are no further questions. I would like to hand the floor back over to management for any closing comments.

Okay, thank you for listening to the call this morning. I look forward to catching back up at the end of the first quarter. Have a great long weekend everyone.

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