Elme Communities (ELME) 2011 Q1 法說會逐字稿

Welcome to the Washington Real Estate Investment Trust first quarter 2011 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 first quarter supplemental financial information is also available on our website. Our conference call today will contain financial measures such as a core 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 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 potential for federal government budget reduction, changes in general and local economic and real estate market conditions, the timing and pricing of lease transactions, the effect of the current credit and financial market conditions, the availability and cost of capital, fluctuations in interest rates, tenant financial conditions, levels of competition, the effect of government regulation, the impact of newly adopted accounting principles, and other risks and uncertainties detailed from time to time in our filings with the SEC including our 2010 Form 10-K. We assume no obligation to update or supplement forward-looking statements that become untrue because of subsequent events.

Participating in today's call with me will be Skip McKenzie, President and Chief Executive Officer; Bill Camp, Executive Vice President and Chief Financial Officer; Laura Franklin, Executive Vice President and Chief Accounting and Administrative Officer; and Mike Paukstitus, Senior Vice President, Real Estate. Now I'd like to turn the call over to Skip.

Thank you, Kelly. Good morning, and thank you for joining the Washington Real Estate Investment Trust first quarter earnings conference call this morning. Market conditions in the Washington DC region continue to improve slowly, but first quarter leasing activity reflected normal seasonal doldrums, with generally flat absorption in region-wide office submarkets. On the leasing front at WRIT, we continue to experience increased space tours across all our sectors, but getting prospects to the lease execution table is still somewhat slow. The investment market, however, is another story. Competition for well located, high quality assets in our region remains fierce, and despite the increased supply of properties to purchase, pressure on cap rates has increased for all but the riskiest assets and submarkets. Fortunately, looking at our acquisitions over the past 12 months versus the assets we sold, we are generally cap rate neutral, and above our blend cost of capital. These traits have significantly improved the age, locations, and overall NOI growth prospects within our portfolio.

In the first quarter, we acquired two high-quality urban office assets,1140 Connecticut Avenue, and 1227 25th Street, for a total of $127 million. These properties, one of which is located in the central business district, and the other of which is in the West End, are extremely well-located, in close proximity to several of our existing properties, and add to our growing presence in the District of Columbia. With the addition of these two properties, over 40% of our office sector NOI comes from our Washington DC properties, and just under 50% of our overall NOI is obtained from properties inside the Capital Beltway. On the disposition front, a few weeks ago we completed the sale of Dulles Station West Phase I, an office property in Herndon, Virginia, for $58.8 million. The rationale for divesting this asset was that the lease-up of this former development project was complete, and the project was stabilized, primarily with 10-year leases, thus providing little further upside until well into the future. The sales frees up capital to deploy on new acquisitions with greater growth potential in the near future. We continue to own the adjacent land parcel, which can accommodate a 340,000 square foot office building, situated next to a future metro stop.

On our last call, we announced we are looking to exit the industrial sector on a wholesale basis, with the specific timing dependent upon the optimal exit opportunity. We are currently in the process of marketing the portfolio to a select group of investors, and have so far been very pleased at the interest this potential transaction has generated. Although we have nothing further to report to you at this time, we do expect to have more clarity on timing and the direction by the second quarter conference call in July. I am happy to announce that WRIT has recently entered into a contract to purchase John Marshall II, a 223,000 square foot office building in Tysons Corner, Virginia, for $73.5 million. This property is 100% leased to Booz Allen Hamilton, and serves as their worldwide headquarters. The Dulles Corridor Metrorail, which is currently under construction, will include four metro stops serving Tysons Corner. One of these four stations, Tysons Central 7, will be located 500 feet from the John Marshall II building upon its anticipated completion in 2013. We expect closing to occur in the next several months, subject to the loan assumption.

I'd like to briefly touch upon our current portfolio results before I turn the call to Bill and Mike, who will discuss our financials and property operations in more detail. This quarter, we saw modest same-store rental rate growth over the fourth quarter in every sector. Leasing volume was up across most sectors this quarter, with minimal tenant improvements in leasing commissions. Multifamily performance continued to lead the portfolio, with solid occupancy levels and strong rents. Medical, Office, and Retail were generally stable, with a modestly down occupancy, but positive rental rate growth. The Office sector is a bit bumpy, but as I stated earlier, we are seeing increased building tours and generally experiencing positive rent spreads.

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

Thanks, Skip. Good morning everyone.

Last night we reported first quarter core FFO of $0.49, $0.01 better than the fourth quarter due to higher overall net operating income. This is in line with our original projections, when we set our core FFO guidance range of $1.96 to $2.08. We are reiterating this range at this time. In terms of the core FAD we reported $0.43 per share. Tenant improvements and capital expenditures were relatively low this quarter, which is in line with our normal quarterly trends. Consistent with prior years, we anticipate increasing CapEx spending in the remainder of 2011.

Looking at our sources and uses of capital in the first quarter, let me start by saying that we did not tap into our ATM program this quarter. In January, we purchased 1140 Connecticut Avenue for $80.25 million, using the proceeds from our Ammendale and Ridges dispositions, as well as a portion of the proceeds from the fourth quarter equity raise, and $13 million from our line of credit. In March, we purchased 1227 25th Street for $47 million, drawing the full amount on our line. At the end of the quarter, our line balance was $160 million. Subsequent to quarter end, we sold Dulles Station Phase 1 for $58.8 million, and currently are holding the proceeds in escrow in accordance with the rules for a potential future 1031 exchange. We recorded a $600 million -- or $600,000 impairment charge in connection with this sale.

Coming up in the second quarter, we plan to finalize our new line of credit, and repay or refinance our $94 million of our [595] unsecured notes coming due on June 15. We will likely put this $94 million balance temporarily on our line of credit, and potentially pay it down with the proceeds from our industrial portfolio sale if the timing allows for it. We are happy to answer any questions about the new line when we get to the Q&A portion of the call.

Finally, bad debt expense for the quarter was approximately $1.1 million, or 1.4% on a cash basis; and $1.3 million or 1.7% on a GAAP basis. This is an increase over last quarter of less than $500,000 on both the cash and the GAAP basis, primarily split between two of our property types. We believe the majority of the increase in bad debt expense to be one-time or recoverable in nature. As we have stated in the past, we believe the trend in bad debt is improving, but in any given quarter we may continue to see spikes as the economy affects tenants at different times. With that, I'll turn the call over to Mike to discuss operations.

Thanks, Bill, and good morning everyone.

Looking at our property portfolio in detail, on a year-over-year basis, same-store NOI increased 1.1%, led by our Multifamily and Retail sectors. From fourth quarter to first quarter, same-store occupancy improved 20 basis points, and rental rate growth was 0.6%. The same-store NOI was down 90 basis points. The main driver for the sequential NOI decline was increased bad debt expense in the Retail and Medical Office sectors. And as Bill mentioned, we believe a portion of this expense is to be either one-time in nature or recoverable in future quarters. Our Multifamily sector continues to lead our portfolio with high occupancy and solid rental rate growth. Same-store NOI growth was 13.7% on a GAAP basis year-over-year. While we are enjoying this very high same-store growth, we are not projecting these levels to be sustainable, as a portion of this increase is represented by occupancy gains, and abatement burn-off. However, at 95.3% occupied, and no new supply the market, we believe this sector will remain strong over the next several quarters, if not years.

In the commercial portfolio this quarter, WRIT executed 416,000 square feet of lease transactions, and nearly flat rental rates. Decline is a modest 0.6% over expiring leases on a GAAP basis, with an average lease term of 4.5 years. Although Medical Office and Retail rental rates increase 13% and 5% respectively, the overall average was brought down by the industrial sector. But it is important to note we are beginning to fill a vacancy in this sector, as occupancy improved 160 basis points in this quarter. Current with our prior statements, the Office sector is flat to modestly positive. Excluding one large renewal lease, leasing spreads are positive this quarter. Same-store NOI was up 0.5% and GAAP rent increases were 0.4% sequentially. Going forward, we are continuing to see signs that the Office sector is experiencing increasingly positive operating trends, which we believe point to a period of recovery to the end of 2011 and into 2012.

In the Medical Office sector, same-store occupancy was down 30 basis points from fourth quarter, due to some small tenant move-outs at various properties. Same-store NOI was down 4.7%. Rental rate growth over the fourth quarter was 1.1%. Our Retail sector same-store occupancy declined 30 basis points from the fourth quarter. Retail NOI was down 3.4% from fourth quarter, mostly due to increased snow removal and bad debt expense. We continue to benefit from cash GAAP rental rate increases at 2.4% and 5.4% respectively. We remain confident that our occupancy will increase throughout the year, with the majority of improvements likely coming late in the third and fourth quarters as retailers began to schedule their 2011 store openings. The industrial sector experienced a positive trend this quarter, with same-store occupancy improving 160 basis points over the fourth quarter. Rental rate growth was 1.4% from fourth quarter, while same-store NOI declined 50 basis points, primarily due to snow removal expenses this quarter. We executed 156,000 square feet of leases, with an average lease term of 4.9 years. Now, I'll turn the call back over to Skip.

Thanks, Mike.

We continue to focus on our repositioning strategy, and believe it is leading to a better, more stable return for our shareholders. As a significant part of that return, we are focused on and proud of our continued 49-year record of consecutive dividend payments at equal or increasing rates. While this [strain leads all week], we just reviewed a research report saying that there are only 11 publicly traded companies that have longer dividend track records. I found that report very impressive. With that, we'll open the call for your questions.

Thank you. We'll now be conducting the question-and-answer session.

(Operator Instructions).

John Guinee, Stifel Nicolaus.

Okay, thank you very much. You guys have been really aggressive in CBD, and essentially what you're doing is you're operating around the fringes for [AB] asset, AB locations, a couple corner buildings, a couple mid-block buildings. Can you walk through what you see in the next 3 to 5 years, and the ability raise rents in that kind of product?

Everything's forward-looking, so it's tough to say 3 to 5 years out. Let me tell you what we've seen in the assets that we just recently purchased this past year. The 1227 25th Street was attractive to that asset for us was, is that it's, number one, it was adjacent to our existing property at 2445 M Street, and was only 72% leased. So we thought there was significant opportunity there just through pure lease-up to lease that property. And we think that section of town really is underappreciated currently. And we think that there's significant ability to raise rents over there over a period of time -- and I'm not just talking about market rents, but certainly that asset had a significant upside in terms of lease-up.

In terms of the other asset we bought in the first quarter,1140 Connecticut Avenue, that asset is more of what we do in terms of it's multi-tenant. It has, I think, almost 30 individuals, probably, that you would consider smaller tenants, and we thought that property was approximately 10% below market in terms of rents in place. And that over a period of time, your good is as a guess as I am what rents in the CBD are going to be, but over the last couple of years, really, rents have been somewhat flat in that type of location, within walking distance of a metro. We feel very optimistic that whatever rental rate increases that are going to occur in Washington, this will be near the top of the market. Did I answer the question more or less?

I'm sorry, Skip. Excellent, yes. Also, any other one-off transactions on the market -- retail portfolio, some of the older buildings in Rockville, some of the apartments?

That we're selling or buying?

Selling. Besides Dulles Station and the big industrial portfolio, are you also selling any of your older, second- and third-tier assets, say some of the Retail assets, et cetera?

The direct answer to your question is, no, we don't have any other properties on the market, nor do I anticipate any further sales between now and the end of the year. I mean our hands are going to be full selling the industrial portfolio. But I do want to make an editorial comment on your comment. I don't believe we have a lot of second- and third-tier assets in the portfolio. Our Retail portfolio is one of our, perhaps, strongest; we have maybe two centers out of our 14 or 15 centers that might be underperforming somewhat, but we believe there is fantastic redevelopment opportunities in those properties. So I don't see it -- to answer your question specifically, since you brought up Retail, I don't even see a Retail property ever on the horizon, at least that I see today. And while there may be a handful of suburban office assets at some point in time that may go, we think we've done a lot of the majority of the pruning that's required. And going forward after this year, there'll be some assets as we continue to go forward that's in the current portfolio, but we like the construction of the portfolio as it exists today.

That's great. Thank you.

Michael Knott, Green Street Advisors.

Hi, guys. Question on DC fundamentals in general, particularly on the Office side. One of your peers this quarter said that they saw a pretty significant short-term slowdown in leasing activity from the budget impasse that was happening for a while. Can you just comment on anything that you saw from that, with respect to either your properties, or your leasing, or maybe just the market in general?

Are you referring to Washington DC specifically, or just the entire metro area?

More of the metro in general .

I think I made the general comment that absorption certainly was sluggish in the first quarter. A lot of that is seasonal. And there was a lot of government leasing that was tapped in the District that put the District positive. But, I would say -- I don't believe that there was a major downturn, because of a lot of the concern over the budget process and what's going on. I do think that there's a lot of uncertainty in the market, and people are afraid to step forward and take space . As I also mentioned in my comments, we've seen, we believe, we've had actually increased building tours on our properties. And it's very difficult to get people to sign a lease right now. And I think that's reflected in some of the market statistics that have shown some negative absorption, but whenever we get clarity on what's going to happen with the budget will be helpful for the market. But we haven't really seen anything necessarily going backwards; it's more -- I would characterize it as more flat-lined than going backwards. A lot of uncertainty.

Do have any view as to how the longer-term fight over the budget, I guess the longer-term budget deficit, how that may impact your region and your portfolio?

I wish I was that smart, to say that I knew what the answer is. I think, our opinion -- in our investor presentation book, which I'm sure you've seen, Michael, we have sort of a famous chart that shows the government spending in Washington over like a 20 year period, and they've never been able to bend it back. So historically, they've never been able to figure out how to do it in, our region specifically. Sometimes it slows down and flattens out from time to time, but over the recent history that we've even been able to track, they have not been able to bend it back in our region. So, the question is, will they be able to do it for the very first time? And, the second part of that question is, we have so many initiatives going on in our region right now that are underway, that for the near-term, it's virtually impossible, between the BRAC relocation -- I'm just going from north to south -- going up in Aberdeen from the Fort Monmouth closure, and all the benefits that's going up there. Then the things that are going on with cyber security at Fort Meade, and the tremendous amount of activity that's going on in Fort Meade. For the intermediate future, all those initiatives, they're not even outfitted yet in many cases. So, you've got all that momentum going on. It's just hard to imagine any time, certainly in the near future, other than the uncertainty that a lot of people have of a material impact occurring.

And then Skip, I would just add, the biotechnologicals. I mean with NIH and everything else that's moving here in suburban Maryland.

Okay, and then I guess that leads into 1 more question I have is -- I think recently there's been kind of this debate, in 2010, all the absorption was government and hardly any was private sector, and we're waiting for the private sector to take the baton. What's your current thinking with respect to what you're seeing from private sector tenants?

Yes, Mike referenced one good area where sort of a little bit of daylight. We have seen more activity in, really, where our corporate headquarters is right here, the North Bethesda area. We've seen some very positive activity from some of the people that are working with NIH and some of the military medicine initiatives, and we've talked about our One Central Plaza project a number of times over the last year. We pretty much leased that project up from a lot of these tenants, so that's one sort of bright light we've seen in an area that was dead for five years prior to that. But region-wide, I'd reiterate what I said earlier -- there's still a lot of uncertainty. We don't see a lot of people going backwards, but while we see some increased tours, still, just getting people to sign a doggone lease; getting tenants, when they renew, to renew for five years instead of three or two -- it's still somewhat challenging.

Thanks, I'll queue back in.

Brendan Maiorana, Wells Fargo.

Thanks, good morning guys. Just wanted to circle back on the acquisition opportunities that are out there, and then just maybe frame that up with how much in 1031 money you guys will have to put into place. First, can you just clarify -- are the transactions for 1227 25th, and then Dulles Station, are those -- or I'm sorry, and then the recent Tysons Corner, are those 2 that you can use for 1031 exchanges to offset the sale at Dulles Station, and then the pending sale for the industrial portfolio? Is there anything else that could be put into the buy category as well?

Okay, so 1227 25th Street, we do have in a reverse 1031. I think that's the proper terminology. And, we would anticipate utilizing the John Marshall II, the Tysons building, in some fashion as well. In terms of Dulles Station, we do have those proceeds in terms of the 1031. We're actually evaluating what the tax bill would be on that; we might even just pay the taxes since they're going to be relatively nominal. We're doing those calculations as we speak. So, as it relates to the larger portfolio, and when the industrial portfolio sells, there are some of those properties -- I don't want to get into the dollars and cents right now -- but there is a portion of that we're hopeful that we'll be able to return via the dividend. So we don't have to basically reinvest the entire amount via 1031. Bill, I don't know if you want to add anything to that?

Yes, let me just talk about that. We're looking at the sale of the industrial in a variety of different ways. As you can imagine, we're probably analyzing every way you can possibly think of. But there is a portion of the assets that you could pool together to say that, that gain, whatever that gain would be, would fit under the existing dividend. We wouldn't need to raise dividend or lower dividend; we'd just, under the existing dividend, we could fit that gain, and that would be a certain amount of the sale proceeds. So that would be free and clear money to us to reinvest whenever we saw fit. We want to be under the time gun of a 1031 . And then the rest of it, we would have to locate assets. And like Skip said, we'd put 1227 25th Street in there and we also will -- John Marshall II would be another candidate.

One thing that I did want to mention, is that it may sound strange to some of you that we have Dulles Station into a 1031, because we did take a $600,000 impairment charge on it. But on a tax basis, we actually had a 1031 going into that project a long time ago, when we bought into that property, into that development; we had a 1031. So our cost basis for tax purpose was lower. So, we do have a tax gain on that property, so with that, it's why we at least protected it temporarily, and we're trying to calculate exactly what kind of tax liability is there. It's probably nominal.

Because it's held in a taxable REIT subsidiary.

That's correct. If in a taxable sub. So does that answer your question, Brendan?

Yes, that's helpful. I'm trying to, maybe, triangulate a couple of things. First, I think, in your guidance you've got an assumption of net $50 million of acquisitions over the dispositions this year. It sounds like, maybe, if you pay the tax bill on Dulles Station, and there is some form or some portion of the industrial portfolio where you can effectively take those gains and put it out on the dividend so you wouldn't have to reinvest. And given that asset pricing has firmed pretty significantly, just wondering if that portion of the guidance, maybe your outlook on that? And then, just on the flip side of that, your view on acquisition opportunities as they're out there today?

Let me take the first part and I'll give Skip the second part on the terms of the view of the acquisition opportunities. In terms of the first part, in terms of the guidance, we did have $0 to $50 million. That was assuming that we would have to redeploy pretty much all of the capital on the sale of the industrial and Dulles Station. And the reason we came up with $0 to $50 million is that, if you know the 1031 rules well enough, if you wanted it for all the taxes relating to those particular assets, you have to invest an amount equal to or greater than the amount that your proceeds are. So, you're never going to get it perfect. So that's where the $0 to $50 million came in. And ultimately, to go forward on that guidance, I don't know what the answer is going to be. But just because of the timing of the industrial sale, and how much we're going to be able to use -- we're working with tax counsel and we're also working with our independent auditors to try to figure out the most efficient way to do this, and to give it the most flexibility.

So, I don't really have an update on that part of the guidance yet. But you're right, you're going down the right path, is that if I can put a portion of it into the dividend and I use a portion of it to maybe pay off debt for a period of time, this particular calendar year may not be in that $0 to $50 million range. But I don't know that yet. I can't update that number yet. Looking at it a little bit longer term, the plan is to continue to grow the Company and reinvest all the assets, and buy more properties. And with that I'm going to turn it over to Skip, to talk about what's going on in the acquisition markets and what opportunities we're seeing.

Without question, it's a competitive market out there. We think we've found good assets, and we're going to continue to find some good assets. Obviously, were not going to be competitive on certain asset classes, like trophy office buildings, like the Market Squares and those types of things in the world that have traded for 5 and sub-5 cap rates. It's not really an arena that we're participating in. We're likely not going to be competitive in the generally stabilized apartment buildings that people have been paying for 5 and sub-5 cap rates, but we think that there's a class of assets that are above that, such as the ones that we've already executed this year -- the 3 that we've already announced. We've also got a fairly significant transaction in due diligence as we speak today.

So, answering your question, whether we're going to get to that $400 million plus or minus, I think, in the guidance neighborhood, or whatever the approximately equal guidance -- I think we'll be around there. We don't have all that in our pocket today, but I think that we already have $127 million plus $73 million is $200 million, and as I mentioned, we have some stuff in study period right now, and we're four months into the year. So, I don't feel that we are out of the game, so to speak.

And then, just a quick follow-up. Can you just frame that up with the Tysons acquisition being a stabilized asset, a single tenant, no rollover for five years; where you're going in and where you see the upside? And then just lastly, is there a little bit of land or additional FAR that you can build on that, and would that be going up or is that a -- you could do that in a separate structure?

That's a great question. I'm glad you asked it. Because that probably isn't a typical acquisition for us, just to buy a building that has a single, large tenant. We actually generally shy away from those things. But let me give you the rationale for our acquisition there. That building, as I stated in my comments, is the corporate headquarters for Booz Allen Hamilton. It is leased through -- I believe it's 2016; the date 2016. We are very bullish on Tysons Corner long-term, when that metro is completed. We are not so bullish in the short-term there.

It is an extremely difficult market with the construction, until that metro is completed in 2013. This acquisition really beautifully got us through that construction period, and was going to deliver an opportunity to increase rates just when all that construction will have been stabilized and through, and the dust will have cleared. In addition to that, as you alluded to, this property being only 500 feet from the metro -- under the new Tysons Corner master plan, this is an area that would provide for possibly a 6.0 FAR, which would allow us to increase the density, I believe it is over 500,000 feet. Now, it would be somewhat difficult to do it as it's currently configured, but on the long range thinking for the site, we could increase the density there significantly. And none of that's baked into this acquisition. It's a good acquisition, just straight up, without any additional density. But in the future, 10 years from now or maybe even less, there's the potential to add additional buildings there for virtually no land cost right now. So, we think this was a fantastic acquisition, and as I said, we're very bullish on Tysons Corner long-term, but it is going to be difficult until this metro's done in 2013.

Sure. Okay, great. Thanks for the color.

Steve Benyik, Jefferies and Company.

Hello, thanks, and good morning guys. I appreciate the color on the Tysons Corner potential development, but can you also just touch base on other potential development possibilities in the portfolio, particularly related to Multifamily, and whether you give any of these potential opportunities a shot of possibly getting started as early as 2012?

I would say that, just to cover the development world, it's generally on the commercial side, not a great market for development -- just going out there and developing a spec office building. It's just, market conditions just generally aren't there. Now, having said that, there are some unique opportunities that we're looking at. They'll be more like build-to-suit type things. There's not a lot. It's very thin. So to say that it's a robust opportunity to develop commercial properties, the answer to that is no. And there probably won't be any commercial development. But [by] us there's not that many other people in the next two years. Now, on the Multifamily side, we are looking at different opportunities in the marketplace, and we're making some traction and headway, and I think that we'll hopefully be announcing something in the not too distant future.

Okay, that's great. And then, I guess, just for Bill, when you look at the debt maturity schedule, in terms of almost $200 million of unsecured coming due over the next two years; and I know in the past you had mentioned the possibility of a larger, unsecured deal -- how are weighing that, relative to what's currently in guidance, and whether that may be also a 2012 event?

That's a great question. I'll be real honest, I don't have anything baked into the model this year in terms of pulling the trigger on a transaction to refinance the debt. I was planning on using the proceeds -- I want to carry some line balance. It's just too attractive money, and quite honestly, we've got a Multifamily portfolio that resets rents every year, so you can kind of match that up. If you're going to match assets and liabilities, you can match that up a little bit. So you can carry a little bit of variable rate debt. I don't know if I really want $200 million plus of variable rate debt going forward, but if we pay off a portion of that with the sale of the industrial portfolio, at least temporarily, until we find more assets to buy, and then pull the trigger on something. It's kind of the plan right now. I'll give you one caveat to that, is that rates are still really attractive, and there may be a point in time where I just don't think it's going to get much better than this. And, we pull the trigger on a deal even though I don't have it in the model. It could happen, but I'm not anticipating it, at least right now.

Okay. And then just finally on the credit line balance, the interest rate on it dropping by 70 basis points in the quarter. Can you just walk through exactly what drove that decline?

Sure, that's easy. The $100 million, remember, is fixed on the swap -- with the swaps -- so that's a fixed rate. So, when I added the $60 million at basically 67 basis points, or whatever I pay on my line, it blends that rate down.

Okay, great. Thanks, guys.

Mitch Germain, JMP Asset Management.

Good morning, gentlemen. Just curious -- and I jumped on late, so I apologize if you mentioned it -- the Dulles Station marketing and sale process. Can I just get some background with regards to the type, the bidding, and pricing relative to your expectations?

We generally don't give too much of the details, other than to say that we were very pleased with the process. We fully marketed that. We hired a broker, Cassidy Turley, they did a full-blown marketing campaign on that. We received a number of offers on it, and went through the typical process, and had a great buyer; and we're very pleased with the execution. But, we went through the standard marketing process on that. It wasn't off-market or anything like that.

Mitch, we've said in the past, that because of the way that thing was leased up with some lease inducements and things like that, the GAAP NOI on that particular property was pretty low, and it was going to be low for 10 plus years. So, we don't really disclose cap rates on sales, because it's really the eye of the beholder of the buyer. So we'll just let them advertise whatever cap rate they want to advertise. But, on a GAAP basis for our books, just about anything we would invest in, even -- we could actually invest in trophy Multifamily and make that transaction accretive. On an earnings basis, not on a cash basis, but on an earnings basis.

And Booz Allen today has, on the John Marshall property, do they have a renewal option?

Good question. The scenario there, was that was built for them 20 years ago. So I believe they're on a 10 year lease with two 5-year fixed options. This was the last fixed option that they recently exercised. So, they exercised an option that began on, I believe, February of '11 for 5 years, and it was fixed under the terms of their original lease, and that's what they're in. So, another reason why we thought it was very attractive.

Great. And then, just your comments on signing tenants, and it has more hesitation today versus previous quarters. Your total lease volume on a square foot basis was up. Is the signing now more forward-looking where we'll see the hesitation or --?

No, I don't think it was a negative change over price. It's sort of uncertainty that we've been going through for 12 months now or more.

Part of that movement was a very advantageous renewal. We had a 50,000 plus square foot renewal that --

One-third of our office leasing activity was a large renewal.

Great. That's very helpful. Thanks, guys.

Thank you.

(Operator Instructions).

Michael Knott, Green Street Advisors.

Hi, guys. I was just curious if you could give us some comparison on the cash cap rate on Tysons versus your sale at Dulles?

That would be a positive.

Positive.

Positive spread.

I don't think we're to give anymore detail than that, Michael, but it's a positive spread. We're really limited on what we can say about on Dulles station, due to the contract.

There was a confidentiality provision by the seller, or excuse me, the buyer was interested in. S, I don't want to say too much, but I would say that we definitely had a -- significant in the eyes of the beholder -- but we had a positive rent spread on that trade.

What do you think replacement cost is for the building that you bought?

It is probably in the neighborhood of $300 a foot, somewhere around there, because it has structured parking. Somewhere in that neighborhood maybe in high $200s. You agree, Mike? Yes, that sort of neighborhood. And as I said, in that particular property, we're going to be getting, in addition to the improvements in place, potentially we could have another 500,000 square feet of FAR at some point in the future.

So you guys paid at or above replacement cost?

We paid right around replacement cost. Right around.

Okay. And I'm sorry, maybe I missed it, but how old is the building?

It was built in the 90s.

Okay, thanks.

Chris Lucas, Robert W. Baird.

Hi, good morning everyone.

Hi, Chris.

Skip, could you just walk us through what the status of the industrial sale is at this point, and what the process is that you're expecting, and maybe the timeframe under which we should be looking for news?

I think I mentioned in my comments that, hopefully, we'll have more clarity at the next conference call. I believe we'll have more clarity. But, we recently just hit the street in the last couple weeks with the preliminary marketing materials. Cassidy Turley received request for the full book, and it is a bible. I mean there's 57 I think different buildings and we have a detailed offering memorandum on each property. So, the offering memo itself, I believe, is like 300-and-something pages long. So, this process is ongoing as we speak. I know Cassidy Turley sent out well over 100 of them. So, the big property bible is just going out as we speak. I believe that we will have -- be in the finals in June; receiving -- negotiating and receiving offers. And, as I said, I believe at the next conference call, we'll have a lot more clarity as to where we are in the process. It's just, we're very early in the game right now, unfortunately.

And are you taking bids from single assets all the way to the whole portfolio? Or parting it up in some ways? Could you just --

I don't know if we're taking single-asset offers, but certainly we're open to some subsets of the whole portfolio. But no, I don't think we're going to be doing -- unless maybe there's a user that wants to buy their own building and are willing to pay a [something], but I don't envision that as a path.

Okay, and then just on the acquisition opportunity, can you just give us a sense as to what you're most interested right now, given the portfolio dynamics, and how you're looking at building this portfolio without the industrial component going forward?

What are we most interested in right now? Obviously, we're most interested in the other four sectors. We'd love to buy more assets like the three we just bought, that we've had -- that we put on the scoreboard so to speak. We'd love to buy a couple more downtown office buildings. Whether we're going to be successful in that is another story. We're very focused on a couple opportunities inside the Beltway -- office opportunities. Not necessarily -- it may not be in the District per se, and we've actually seen some interesting opportunities in the retail arena that we'd, hopefully, be able to put on the scoreboard. I would say there's not a whole lot of medical office buildings for sale right now. So, although we'd like to buy 1, the opportunities just aren't presenting themselves.

Okay. And Bill, just a cleanup question on the ATM -- did you guys tap that all?

No. I said it earlier, but no.

Okay, great. Thank you.

Dave Rodgers, RBC Capital Markets.

Hey, good morning guys. Skip, you'd mentioned looking at maybe some apartment transactions, or hoping to announce anything soon; but maybe stepping aside from that, are you guys looking at partner transactions, structured investments, mezzanine pieces, with regard to deploying your balance sheet in the near-term? And you think there's opportunity to do that for you guys?

Yes, I think we may have mentioned that were looking at those opportunities, particular in the Multifamily arena specifically. Have we've looked at some mezzanine opportunities? Have we looked at some mezzanine opportunities? Yes, we've looked at some, but we've never seen any of them that have been all that attractive to us. Not to say we wouldn't do them, but I would say that, that's a low probability. We are directly and specifically looking at Multifamily partnership opportunities.

And, would you consider the other property types as well? It's just that you're not seeing the opportunities? Is that what we should take from that?

I don't know if it's needed. Is it a possibility, particularly like in medical office buildings or something like that, because of the strategic opportunities some had? Yes, I just think it's less likely. I don't envision it occurring in office buildings for example.

Okay. And you guys talked a lot of on the call about 1031, and trading assets, and clearly that make sense with the industrial portfolio sale. If the acquisition opportunity presents itself, I suppose you'd be okay issuing new capital to go pursue that. And I guess, Bill, to dovetail into your comments about maybe being opportunistic with capital raises given rates, what would your preference today be to add to the balance sheet, given some of your recent announcement about preferred, but also what you're seeing in the underlying market?

My preference, as I've stated for I think the better part of my time at this Company, is that for new acquisitions, if it's not funded over a long period of time -- we've always said that we'd probably fund about a third of any acquisition with some form of disposition proceeds, just over an extended period of time. Obviously, this year it probably will be 1 to 1, or pretty close to 1 to 1. But over a period of time, it'll be something else. So, what makes up the other two-thirds of the acquisition? And it will probably be pretty close, Dave, to the current capital stack. And we're right now about 60% equity and 40% leverage. So, if you think of it that way, you're probably doing a mix of both over a period of time. In today's market, I like the debt market a lot better than the equity market, but that changes every day.

Great, thank you.

Thank you. There are no further questions at this time I would like to turn the floor back to management for closing comments.

Okay. Thank you, everybody, for your interest in the Company. We'll look forward to talk to you in July at the second quarter conference call. Thank you. Have a great weekend.

This concludes today's teleconference.