Elme Communities (ELME) 2011 Q3 法說會逐字稿

Welcome to the Washington Real Estate Investment Trust third quarter 2011 earnings conference call. Before turning the call over to the Company's President and Chief Financial Officer, Skip McKenzie, Kelly Shiflett, Director of Finance, will provide some introductory information. Ms. Shiflet, 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 third quarter supplemental financial information is also available on our website.

Our conference call today will contain financial measures such as core FFO and NOI that are non-GAAP measures, and in accordance with Reg G, we have provided a reconciliation to these measure in our supplemental. The per share information being discussed on today's call is being reported on a fully diluted share basis. Please bear in mind that certain statements are Forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Such statements involve known and unknown risks, uncertainties an other factors that may cause actual results to differ materially. We provide a detailed discussion of these risks from time- to-time in our filings with the SEC. Please refer to pages 7-14 of our form 10-K for our complete risk factor disclosure.

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

Thanks, Kelly. Good morning and thanks for joining the Washington Real Estate Investment Trust third quarter earnings conference call this morning. This quarter and subsequent to quarter

we took huge strides in accomplishing a significant piece of our long-term strategic plan with the sale of the vast majority of our highly volatile industrial investment portfolio and redeployed the majority of the proceeds and the strategically located office and retail assets. All these transactions were previously announced. Yet, I want to walk through the individual importance of each transaction.

We acquired the 345,000 square foot Braddock Metro Center office asset adjacent to the metro in Oldtown Alexandria, for $101 million. This building fits our stated strategy of being in a grate inside the beltway submarket with great employment drivers sitting next to the Braddock metro stop. While we underwrote vacancy, we believe the location will drive leasing velocity.

Next, we acquired the 223,000 square feet John Marshall two-building in Tyson's Corner. In the near term throughout the entire period of the massive construction going on in Tysons, we will have a fully-leased building, Booz Allen Hamilton as its corporate headquarters. Once the construction of the metro is complete, we will own a A class office asset with the future potential to increase density significantly within 500 yards of the entrance to one of the four metro stops in Tysons in what's expected to be a very vibrant market in the metropolitan area.

And lastly, we acquired the only village center 199,000 square foot grocery-anchored shopping center in Olney, Maryland in the heart of Montgomery County. Consistent with our strategy, we continue to like grocery-anchored centers in areas with great demographics and this is one of them.

Overall, by the end of the year we project that we will have sold $409 million of assets once the industrial sales is complete and will have purchased $360 million of income producing assets. Bill will discuss the impact to our numbers, but clearly now we expect to be net sellers of property for the year. Currently, we do not have any pending transactions in the pipeline, although we continue to evaluate opportunities and we expect to put out a number of offers between now and the end of the year. We are currently formulating our plan for the next days of our long-term strategic plan, specifically 2012 and beyond, and we will provide more guidance about that at a future date.

Switching to operations which I will let Mike discuss in more detail later in the call, the market continues to demonstrate weak leasing demand region-wide as a result of the economic uncertainty stemming from the impasse over the federal budget. Tenants continue to tread water by delaying business decisions as they evaluate the future of job growth, both locally and nationwide. The good news is our leasing volume remains consistent with past quarters and leasing spreads overall have been positive. We have good prospects in some of our larger vacancies which I expect progress on by year end or early 2012. These market conditions reinforced our are decision our position to reposition the portfolio.

While real estate fundamentals in Washington remain choppy, we will continue to build a portfolio that will remain more stable in this environment with better prospects for future growth as the economic climate improves. We do believe it is coming clear that the market conditions will likely remain flat and significant positive momentum will remain challenging until post 2012 presidential election when we expect to begin to see more clarity in terms of government direction and how this will affect the US economy. Now I'd like to turn the call over to Bill Camp who will discuss our financial results and capital market activities, and then Mike Paukstitus who will discuss our real estate operations.

Thanks Kip, good morning everyone. Today I would like focus on the third quarter results, as well as discuss guidance to the rest of the year. Last night we reported third quarter FFO per share of $0.48 which was impacted by the timing differences related to our strategic sale of the industrial portfolio verses our acquisitions. In terms of core fad, we recorded $0.38 per share which included the anticipated higher expenses related to tenant improvements and leasing commissions..

As stated last quarter, we expect higher-tenant improvements and leasing commission costs in the third and fourth quarter due to leases negotiated in prior quarters. The repositioning of the portfolio that Skip discussed is a major focus of ours. The activity we are in the process of completing has shifted the complexion of the NOI coming from our assets inside and outside the beltway adding stability to our cash flow. This quarter's transaction activity increased the amount of NOI coming from inside the beltway by 400 basis points to 52.1%.

We believe the next shift in the portfolio will begin to minimize our exposure to suburban Maryland office as we continue to acquire in areas that better fit our stated strategy. Operationally, we continue to experience positive same-store growth, NOI growth, on a year-over-year basis. Year-to-date and third quarter, same story, NOI growth is .6% on a GAAP basis.

These results are driven largely by rental rate increases and expense reduction, partially offset by loss of occupancy. In terms of capital raising activity, we announced last quarter we replaced and expanded our Wells Fargo credit facility, improving our liquidity position by increasing our total line capacity to $475 million with the ability to expand it another $200 million within an accordion option. At the end of the quarter, we carried a balance of $193 million. We used a portion of the proceeds from our industrial dispositions to repay approximately $52 million on our line in the quarter.

Our next anticipated capital moves are repaying our $52 million unsecured bonds that come due in May of 2012, and refinancing our $75 million SunTrust credit facility which comes due June in 2012. For those who track the finer details, we repaid the remaining $2.7 million of our 3 7/8 convertible notes in September, we also prepaid a $9.1 million 6.98%mortgage note on Shady Grove Medical Village II without penalty. We will continue to repay our secured debt as the maturities approach in order to make room for any assumptions of debt that we may see through our acquisition activity.

Subsequent to quarter end, in order to pave the way for a smooth sale on the last piece of our industrial portfolio, we repaid two mortgage notes associated with Dulles Business Park. The two loans totaled $17 1/2 million at interest rates at 7.09% and 5.94%.

We'll recognize a repayment penalty of approximately $1 million in the fourth quarter, the majority of which will be reimbursed by the purchaser. Now I would like to discuss our guidance adjustments for 2011. Last night we announced that we expect to end the year within a range of $1.96 to $1.99 for core FFO. There are a few primary we are narrowing the range. Originally we assumed that we would be a net acquirer of property over and above our $409 million of anticipated dispositions.

We expected the acquisitions would occur evenly throughout the year. Now it is likely we will be a net seller of property, missing our original guidance assumptions of 0 to $50 million of net acquisitions, and we will miss it by approximately $110 million. Our acquisition volume net of assumed mortgages fell short of our disposition proceeds. The acquisitions we did make were more heavily weighed toward the end of the year compared to the original guidance.

The overall impact of this on an annual basis is approximately $0.06, which partially offset by delay in the timing of our industrial sale verses our original projections. This equates to about a $0.04 benefit. Lastly, our current occupancy levels are below our original expectations. We are upon average for the full year about 100 basis points below our projections. Recall, every 100-basis point move in occupancy results in approximately $0.04 on a full-year basis. However, due to the timing of lease commencements, we are not anticipating a material improvement until the first quarter of next year.

We believe the dilutive effect of the strategic portfolio repositioning is more temporary in nature as we continue to evaluate acquisition opportunities and are confident we will land additional acquisitions in the future. As Skip mentioned, the leasing environment is challenging and while real estate fundamentals and retail and multifamily appears strong in our area, medical office and office fundamentals are more difficult. We believe clarity from our government will alleviate much of the leasing gridlocks as virtually 100% of the market is waiting around for what may be a 2% to 7% federal budget cut before they make any decisions.

We are preparing for these decisions to drag out until after the elections, but we hope it is sooner. With that, I'll turn the call over to Mike to discuss operations.

Thanks, Bill and good morning everyone. At quarter end same-store occupancy finished above the 9% level for the first time in quite a while. This was primarily due to the sale of the portfolio and redeploying the capital. into better occupied assets. Our leasing activity was steady compared to past quarters and we expect a modest uptick in leasing activity going forward, particularly in the office sector.

Translating this activity into our same-store NOI performance as Bill mentioned, same-store NOI growth continues on a positive trajectory on an annual basis. However, compared to last quarter, same-store NOI was down 2.6% driven by higher utility expenses and lower occupancy offset by higher-end levels, and I will reiterate what Skip mentioned earlier. It's talked out there in the market if you're a leasing agent. Market data, absorption numbers and nasty rental levels continue to point to a very challenging environment.

Overall, rents increased 2.6% so reinstated rents on a cash basis and 11.7% on a GAAP basis. These increases were primarily offset by slightly lowered occupancy in the quarter. Rents in multifamily continue to lead the way with 4.3% increase of rental rate growth across the portfolio. Retail continues to experience solid rent growth increases on new leases.

Office is deathly more mixed, but consistent with our prior statements that it would increase on a GAAP basis but be modestly negative on a cash basis. The most challenging rent spreads were in medical offices, usually one of our more steady sectors. In this sector we are see some tenants push back on our market-high rents in the sector in certain buildings. In the quarter we still able to garner positive 9% rent growth on a GAAP basis, but negative 3% on a cash basis in the medical portfolio. We thought it would be beneficial to spend a few moments talking about the market conditions in each sector, rather then digging through the numbers in more detail.

The apartment market continues to perform well. Our occupancy was off slightly compared to last quarter, as we continue to push rents. As we said earlier this year, the ability to capture double-digit NOI growth of doubt-digit rent growth was short-lived. We have entered a much more normal market where we expect rents to grow in the 3% to 5% range. Occupancy will remain in the mid 90% areas. We continue to see little or no supply coming online in the next year or more. These dynamics bode well for improving overall profitability in this sector.

Our retail portfolio is performing as predicted. We have made good leasing progress over the past couple of quarters, signing 60,000 square feet of leases for previously vacant space. Some of these stores opened at the end of the quarter. We now expect our remaining quarters to open sometime in the first or fourth quarter next year. This should set us on a course of higher occupancy going forward as most of the larger spaces are now leased.

The overall retail environment is probably best described as choppy. We have had good activity from the national retailers on some of our larger vacancies, but the weak economic conditions and lack of consumer competence continues to effect the mom and pop stores adversely. The office sector is one that can be best described in one word. Indecision. Tenants are skeptical to make any long-term commitments given the economic backdrop in the federal budget fiasco. Most third-party market studies are showing essentially no or minimal new net absorption. Therefore, reasons becomes a shellgate as are working to steal tenants from other landlords resulting in increased leasing concessions

We believe we are holding our own in this environment. We flat to modestly increasing rental income, offset by modest occupancy losses. Medical office too suffers from indecision. Doctors continue to struggle to put any type of long-term business plans together that supports expanse in light of the uncertain impact of Healthcare reform reimbursement.

So when you get a vacancy in one of your buildings, you need to plan for it to be down for a longer period of time. With that said our same-store portfolio occupancy remains in the 91% to 92% range and we are beginning to see little more activity on our vacant spaces. Now I'll turn the call back over to Skip.

Thanks, Mike. I would like to make one final comment before we open the call for questions. Last night we announced our 200th consecutive quarterly dividend. This is a proud milestone for our Company and our board., and we believe it shows our continued dedication with shareholders during the difficult economic time.

The performance of our property portfolio, though choppy, over the past couple quarters has allowed us to keep our dividend a priority. Many public companies can't say the same. We would like to thank our investors for their continued support. With, that I would now like to open the call for your questions.

Thank you. (Operator Instructions). Our first question is coming from Michael Knott of Green Street Advisors.

Hey, guys, good morning. Bill, hopefully even though you're in DC. and not St. Louis, hopefully you root for the Cardinals tonight

I got the Cardinals shirt on today, how about that.

He's rocking red, in an obnoxious way I might add.

Go Cards. I'm fascinating about your comment about lessening or exiting suburban Maryland office over time. It looks like it is about 13% of your portfolio. I'm curious how you're thinking about that, and in particular, that seems like it might lessen at the margin at your ability to continue paying your dividends. Just curious how you thought about that? I'm sorry, pay your dividends at the current level. It seems like if you

recycle into lower cap rate type assets, that might make it a little tougher at the margin. Yes, made the comment. We are not selling out of it. There are certain assets there that will be primarily effected, but we have great assets in Maryland. So by no means consider the entire Maryland office portfolio. You're right, as a percentage of our GAAP NOI it's a little over 12% of our NOI. You know, given it's nature as it effects everything, I don't believe at all it's going to have an impact on our ability to pay our dividend.

I do agree with the premise to the extent that there's a trade out there on a one-for-one basis that we'll be trading into assets with a little bit lower cap rates, but I do not think it is of a magnitude that's going to impact our dividend.

What's driving that decision, obviously just a preference for the District or the Virginia office over suburban Maryland, or is this that you might not rotate into other office but into other property types?

I think it just really fits what we said about our strategic plan. Some of the Maryland assets may not be on a metro or near, for example, a BRAC relocation, some of them, not all of them, and those are the assets that we're targeting. You can pretty much go through our property list yourself and identify the properties that don't fit with what we stated to be our strategic plan this year.

Okay, that's fair enough. I think Mike touched on this in his comments, that the environment is conducive to high CapEx on the office side right now. Just curious if you can touch on sort of your outlook for that? Is it going to be as-is in this current marketplace through the election or is there any glimmer of hope that things might get a little better?

Well, two things. First of all, one facet of that is to the cash CILC which is timing. Michael, as we're getting to the end of the year, we just know there's a lot of construction projects that were slower that will catch up with us in the fourth quarter that we'll be paying.

However, on the second front, we're focused with the new acquisitions, obviously coming more inside the beltway and coming more into DCthose naturally are generating some higher TI requirements as opposed to, for example, things we've had in the suburbs. So downtown we're much more involved with a little bit higher concession packages. The offset of that obviously is much more higher rents for those products.

I would add, hey, Michael, I would add on that is that when you look compare quarter-over-quarter and you look back at supplementals from first, second, third quarter, those are all going to be weighed down by the fact that there's very little TIs in the industrial world and now we don't have an industrial portfolio any more. So everyone should expect that going forward just the math is going to be that they look higher just because we don't own a portion of the portfolio that we're always bringing the average down.

Okay, thanks.

Thank you. Our next question is coming from John Guinee of Stifel Nicolaus.

Okay, drill down a little bit on what you think is going to happen in some of your, I would call your focused markets, for example, Tysons Corner? You are clearly making the decision to get near the metro locations. What's going to take that particular submarket to really turnaround?

The other is what you have done, which I would not disagree with, is kind of by the B product A location in the traditional CBD? Can you kind drill down on those particular submarkets?

Sure. I will at least give you my overview, there's certainly many opinions on these markets. In Tysons specifically we are a huge bull on Tysons long-term. We believe that Tysons is going to be a fantastic market over the long-term.

However, I would admit over the next few years while this metro project and the HOT lanes which is another transportation initiative, high occupnacy transit lanes are being constructed, it's a very difficult area just to navigate through with an automobile. So we are not so bullish in terms of leasing traffic over the next several years until this metro project, and that's why we made note of the fact with respect to the new acquisition that it's leased throughout 2016 throughout this construction process.

Now, having said that and acknowledged the difficult leasing conditions, we are seeing some pretty good activity at our 7900 Westpark property right now. So that's flying a little bit in the face of that, but I think if I were to give you sort of the overall my prospective on it, leasing in the Tyson's area for the next couple of years will be difficult, but I think long-term with three metro stations being there it is going to be a great long-term market and we're looking for other opportunities there currently. In downtown DC. you know, it has always been historically a fantastic market, and I will admit that this year it has been off of our traditionally high expectations in DC. There is positive absorption in the market.

I think Delta reported 500,000 square feet year-to-date, something like that, which is still lower than what we are used to having. It is not like the good old days, but we still believe if you're near a metro in DC that long-term it is going to be a great location. I think as we stated in our overall comments, that up until the election you are going see a lot of blocking and tackling, a lot of tenants looking to get shorter-term lease extensions rather than sign on for the long-term. I think it's going to be somewhat of a flat year or so in the District.

John, I would embellish one other item. The recent acquisitions in the CBD and those D class puts us in a very unique situation. They are very close to each other, it allows us to do a lot of repositioning of tenants within a combination of buildings now with the exception of one. The last piece of the puzzle the game plan down there now is working very heavily to distinguish ourselves through renovation programs and other things going on that will hopefully distinguish ourselves a lot differently from our competition.

Great, thank you.

Thank you. Our next question is coming from Dave Rogers of RBC Capital.

Question for Skip. Skip, with the reduction in the acquisition guidance I guess for the year, at least the tone, 30, 60 days ago even most recently, I think you were fairly bullish on the opportunity to close transactions with irons in the fire by the end of the year. Have those flipped? Are those gone? Can you give us some more color on the acquisition market and what you have been looking at?

No, at that time I was refer to the three properties that closed that quarter. So that is what I was acknowledging at that time. I mean, before the last call, we had all of the three transactions that closed either previously announced or were in the pipeline. So with respect to slip I sort of knew in the back of my mind that these were projects that were going to close. Right now, I'll be quite honest, we do not have anything under contract and we are not in due diligence on anything right now.

However, I would say as I mentioned in my comments, we are looking at a number of things, and I am hopeful that we will be successful in lining something up in the next 70 days, whatever is left throughout end of there this year, but we certainly do not having in under our belt at this minute. Now I will make an overall comment, that I do think that although there is a number of things out there that the offerings have dialed back a little bit. I'd say there is a little bit less opportunity than there was at the end of the prior quarter.

Okay, thanks for that color. Then on the apartments, I think throughout the year obviously the growth where you expected slowed there a little bit, some was the effective burn off of concessions and free rents, but others, are you seeing a meaningful tone difference there, move out rising on rental rates pushes? Little more color on apartments would be helpful.

No, we think the apartment market is great. That quarter when we had 13.7%, we cautioned everybody that this is not only not sustainable, you probably won't see it again because it while it was occupancy put down. When you are operating around the 95% or 96% level where we have been hovering, you are going to see ups and downs in occupancy. You can't maintain it, especially if you're pushing rents. We are very comfortable where we are. We don't think the markets are going backwards or anything of that nature. This is the natural sign curve around, a normal good market condition in terms of occupancy. If you started to see our rents going down, then you should raise and eyebrow. I feel very comfortable about where we are. I think it is again the natural progression. I am guessing now because obviously we have much of the quarter left to go that there will be an uptick in occupancy at the end of the third quarter multifamily as again we hover around that 95% level fourth quarter.

Dave, I think one of the things in the quarterly if you look at the multifamily stats, you are going see some pretty good expense growth in the quarter.

Keep in mind July and August, those are all it's a utility game in multifamily, and I don't know if it was the hottest summer on record but it was certainly close. That and because of our success, our real estate taxes were higher. So in the quarter we got hit by both of those. Obviously, utilities will probably back off in the fourth quarter like we you fully expect. If you take that and normalize the utility and the real estate taxes, we would be the same-store NOI growth number would have been more normal instead of 1%.

Okay, thank you.

Thank you. Our next question is coming from Brendan Maiorana of Wells Fargo.

Thanks. Good morning, guys.

Good morning, Brendan.

I think Billl mentioned that you expected Q1 2012 occupancy will get better and I am just trying to reconcile that comment with the outlook that things are going to be kind of in a holding pattern until opposed to post-election which would suggest Q4 2012 or early 2013. Can you help me reconcile those two?

I would agree macro-market conditions are going to be flat. The worldwide Washington, DCbuildings will be relatively flat. I think Bill is just referencing some in particular, we have known retail leases that are signed in-house that are taking occupancy over a period time that are fairly substantial, and we are anticipating some of these can leases that we have discussions with in the office sector to hit over the month or so, but I would certainly agree that from a market macro level that there is going to be minimal positive news on a market-wide basis. I think he's referring, Bill, you can correct me, to the very specific things that we have going on.

Yeas, and Mike mentioned in his comments that we over the last couple of quarters we have signed basically 60,000 feet of vacancy in our retail space, so that's the big one. I may be crazy, but I do think our multifamily will pick up in the fourth quarter in terms of occupancy. So that will push overall numbers up a little bit, is the guess. And when you look at with the exception of the one vacancy that we know is coming on December 31st in the office sector at Tysons at 7900, with the exception of that, we actually think probably think there's some pick-up on some of the leases we're looking at signing in the office sector, that there should be a pick-up in office, but probably office will be flat or modestly down if I had to guess going into the first quarter just because of that one vacancy.

I'll also note that next year when we would consider a very low rollover year for us. There's only 11% of the portfolio on rentable square feet and annualized rent basis turning over.

The other significant aspect of it is over a lot of lease transaction, which will tend to be smaller. I can't make express sure of any one particular lease.

The average lease coming up next year on average, if you just do the math, I think it's something like 4400 feet.

Is that -- do you view that as a competitive advantage relative to your roll and your retention ratio, or is that something is that is challenging because there's probably a lot of 4400 square feet suites that are available.

A lot of things. Where we are seeing a lot indecisiveness as it relates to the budget and relates to elections and things like that clearly are on larger tenants. Tenants want to take much larger, bigger blocks of space, and we have had a couple in the pipeline we thought we were gonna complete, then went into a hold mode. Many of these smaller tenants that are in the rollover stage, they are basically steady the ship as is so to speak. We feel a high confidence level that we will continue to renew them.

Okay, that's helpful. Then, Mike, the retail leasing. What was in particular that drove that CapEx level that was up so significantly in the quarter and relative to kind of the lease rate that you guys got there? It seemed like a high CapEx.

I think we mentioned it last quarter, Brendan. We did two leases with ULTA,which is the cosmetic, one of the better retailers in the industry, and you can see that is one of the reasons our rent spreads popped up high, but those two leases which were for fairly large boxes, one in Hagerstown and one in Frederick had a decency I component on them, but it's the type of tenant sort of must-haves in world of retail and maybe one of the best retailers currently out there, so we were extremely pleased to do those leases and that's primarily where the TIs, the excess TIs went.

Okay, like I understand excess TIs and that can make sense, but your sense is getting ULTA in there is a benefit for the overall center because the TI dollars relative to the rent was about 30% of your overall rent, which is typically for your retail portfolio, you guys run kind of mid to upper single digits on that metric.

Those are large, extremely good credit high producing retailers.

Okay.

With appropriately higher rents.

Then Braddock Place I think there's a large GSA expiration at the end of next year is that underwritten I think you might have mentioned in that kind of vacancy that I think Skip you might have mentioned in your prior remarks?

Yes, we underwrote that in our analysis and that vacancy doesn't come until November of next year.

What do you guys think the prospects are like for a lease up of that space?

I think they are excellent to be honest with you. I would not be a bit surprised if we actually kept GSA in there of all things, but we don't have anything in place.

There are two elements. Element number one obviously is directly across the street from the metro which is harder and harder to find in the D.C. metro region. The second thing, it's within miles one of the major BRAC locations. Up to 9,000 people will be moving into that so an area about 5 miles away which creates another major employment source for that property.

So you think they may stay. What is the level of discussion that you're having with them which is about a year out from their expiration?

Very high.

The specific tenant will not stay. They may put another GSA user in there. The tenant is one actually going down to Quantico, One of the reasons we are bullish about our Quantico tenant was because we knew these tenants were going down there, but it would be replacement perhaps -- this is completely speculative. We don't have a lease signed or RFP or anything like that in hand, but we feel pretty good about it with a different GSA user, due to the rent levels and metro locations that we can offer, these would be competition.

Okay, great. Thank you.

Thank you. Our next question is coming from Steve Benyik of Jeffries & Companies.

Hey, good morning, guys.

Good morning.

I just wanted to try to make sure that I understood the revised guidance range and what is really driving that. I think, Bill you mentioned a negative $0.6 impact from just the aggregate sales in excess of the acquisitions, but then that's $0.4 net sort of reverse impact related to the industrial sale occurring a bit later in the year, so that a $0.02 negative impact just from the capital recycling front? Is that a good way to look at it?

That's a good way to look at it. Keep in mind, the $0.04 of the industrial timing, that includes everything like difference in interest expense and everything else just because we didn't get the proceeds to pay off line balance and various other- - That is a full-loaded, impacts various parts of the income statement, so you just cannot look at it as it is just an in and out thing.

Okay. So if we look at the $0.02 net impact there and look at the guidance midpoint coming down $0.04 1/2 what is the balance of the difference there? Because it looks like from an economic occupant prospective it, looks like you're not that far below of the low end sort of the 150 to 200 basis points improvement that you originally had built into the 2011 guidance. I am just trying to understand where the other $0.02 1/2 are coming from.

We are down on average about 100 basis points on occupancy, which is about $0.04, so your $0.02 from transaction activity and $0.04 on occupancy, roughly. There is some rounding going on here. So you're really talking about $0.06 on a big picture basis of where we originally projected, and quite honestly when you look at it, I would say we were fairly aggressive on our original assumptions by going up 150 to 200 base basis points in occupancy. That wasn't like ti was gonna happen January 1st, it was gonna happen over the year. When you average, that if you wanted to average it like we were going to end up somewhere around there at the end of the year, well we are down from there, that's where it is.

So what's the current expectation for year-end economic occupancy with the guidance now?

We think that it's going to be about a 100 below where we originally said.

Okay. And then just thinking about sort of allocating capital to acquisition. Is the goal, I know it's not completely in your control, but is the goal that over the next two, three quarters you have $100 million plus of net positive acquisitions, or is it like a timing issue in terms of reallocating this capital or is it sort of the new leverage level and the new way you guys are going to be operating?

I mean I would not put a specific number on over the next couple quarters. We expect to do this specific number. Obviously, we are very focused on acquiring the right kind of assets and if they are there, if it's $200 million, it's $200 million, if it's $50 million, it's $50 million. I won't put a circle around a number for the next couple of quarters because we have not done so.

Okay, then just lastly. When you look at the higher CapEx cost to release some of the space through the backhalf of 2011 and early 2012 and you look at where dividendcoverage is today What is the view on the dividend and when you think you might get it close to coverage? Could that potentially be a year-end 2012 thing or something beyond that?

I would say, Steve, I would go out and say we believe we will cover dividend when our occupancy gets back to normal levels it, and we are not necessarily forecasting when that will happen but that is what we have been saying forever basically to all of our investors and all of our analysts. We are hopeful it happens sooner rather than later, but every time we talk about occupancy it seems like it is not going exactly the same way we want it to. We're working on it. If you look at the acquisitions versus the dispositions we did this year, we are basically 50 basis points dilutive on those trades, so that obviously put a little pressure on it, but at the same time we are buying assets that have better gross. So we think we still be able to conitnue to grow into the existing dividend.

Great, thanks, guys.

Thank you. Our next question is coming from Mitch Germain of JMP Securities.

God afternoon, guys. Bill, just a quick question on the accounting for the debt prepayment charge. That's not going to be recognized at all? It's wiped out against the --

Bill It will be recognized.

We will actually have a fourth quarter charge for early extinguishment of debt of about $1 million, and then the reimbursement I mentioned in my comments will come through in a slightly higher purchase price. It is two different parts of the world in terms of accounting.

Great. And then just a little more detail on your capital plan. You said you're paying off the $ 50 million in notes. Just walk me through kind of the ins and out on how you are approaching the balance sheet next year.

That's a great question. I haven't given any guidance for next year so I'm not really prepared to talk about how I'm going do that.

Okay.

Suffice it to say, I am going to collect hopefully when the last transaction in industrial sale happens, that's around a $68 million transaction and I'm at $193 million on the line right now, so you're basically looking at probably paying down the line to getting down to the $130 million range, something like that. So I'll have plenty of capacity to initially, no matter what I want to do longer term, I will just, you know, if it comes up and I'm not prepared to access the markets to refinance it, I will just pay it off with the line for temporarily.

Great. And then, Skip, just looking at the macro environment and fundamentals and everything going on with the government, the pause. How are you approaching underwriting today? Have you downwardly adjusted kind of how you are approaching rent growth and vacancy moving forward?

Yes, we usually add a little more into lease-up times essentially. We are a little more conservative on rental rates for particularly vacant space, generally how we approach it.

Is your competition doing that as well?

I can't comment on what everybody else is doing. We seem to be finding assets so we must be competitive out there, but yes, it is hard for me to comment on exactly what everybody else is doing.

Thanks, guys.

Thank you. Our next is coming from Bill Crow of Raymond James.

Good morning, guys. I wanted to take one more shot at the multifamily from the quarter and not from NOI prospective but really from a move out perspective Rents were up 4%. Is there that much consumer sensitivity verses move outs or where are these tenants going? Is there any return to homeownership? Is there any sort of extras from the greater DCarea? What are you seeing from that prospective?

I think two elements are still occurring that we are seeing. One is job change, relocation out of the area. And some is job loss, frankly. It is sort of the consistent aspects of what we are seeing on a turnover, but adding to that, we are refilling the space. We are maintaining very high occupancy levels and once that space goes, we are filling it.

Hey, Bill

On historical turnover is around 50% multifamily.

Right.

I don't think we are anywhere out of the ordinary there, so it is just some of this is a little bit, in terms of the occupancy levels, some of it is just a little bit of timing. We have a tremendous amount of our leases that come due in the third quarter and when you have got 50% turnover, you are going to have some units that are going to be vacant for a few weeks until you get them filled and they may crossover the quarter, that's just the way it is.

I think the element to always remember about our residential portfolio is that it is primarily inside the beltway, it is primarily extremely located, while some of it is in the B class, it's got that excellent location.

Do you think your experience in the quarter was kind of inline with the market and what are you seeing from a traffic prospective?

Yes, I don't think it's off of the market at all and we have not really seen a decline in traffic of any significance.

I do no thing we have seen a downdraft in how much we are pushing rents either. If you look at the actual numbers, if you look at just rent growth and occupancy loss in the quarter, the changes in occupancy and the changes in rent, we more than offset our dip in occupancy by rental rate growth. I feel pretty good about it.

Very good. All right. That's it for me. Thank you, guys.

Thank you. Our next question is coming from Chris Lucas of Robert W Baird.

Good morning, guys.

Chris.

Just a follow-up question on the traffic issue. Skip, on the office side, over the last four months I would like to include October, if I could, what are you seeing in terms of traffic through your vacant or space available broadly? What sort of trends? Is it stabilized? Was it slowing? Was it picking up as we get into this quarter .

I would say it picked up a little bit after the summer and it sort of flat lined a little bit. It depends by submarket, so it is tough to make a macro-macro comment on this, but I would say it did pick up after the summer, that's one of the problems with the third quarter, there is a seasonality effect in the office leasing pretty much July and August seem to be a relatively slow months from a pure traffic prospective and that is what you're talking about. But I would say while it has come up from a pure seasonal prospective, it is still lower than what we normally enjoy in Washington, DC

Okay. Then as you look out as into next year's expiration, given the market, the lease roll, the length of term, what sort of a mark to the market should we be thinking about for the 2012 expirations?

For office?

Yes, just the office.

I would say that we're somewhere in that, and I am speaking on a cash basis and I am speaking from the rent that is in place now at the end of a lease visa-vie, the new ingoing cash rents, I am not speaking GAAP. I would say that we are at a single digit negative, somewhere like a minus 5% on a cash basis and it would be up on a GAAP basis.

And then on can the --

Lower performance has been better than that, but I think we will be single digit negative on a cash basis.

Okay. And then on the sort of the acquisition timing issue. I know you mentioned that the choices out there weren't sort of diminished as we got towards the end of the year. What do you think is driving that? Has there been any pushback on pricing and therefore sellers are sort of less willing to move forward? Is there a dynamic that has changed since the summer since when you actually announced the sales transaction? Is there anything going on there that we should be thinking about?

I think there's a little bit of confusion out there to be honest with you. We have seen some acquisitions that we were very interested in that, I am talking about recently, that we were blown way by some of the offers knocked out of the game on, well beyond where I thought the world was. Then there have been some opportunities out there where the sellers have not achieved the number and they have pulled properties off the market, so there's been a little bit of both. I sort of feel and again, we are waiting for the empirical evidence to point to it that there is a little bit of price discovery going on in the fourth quarter and while some assets are getting some crazy numbers at really good locations, I think there is a little bit of sloppiness out there because I have seen both. I have seen deals pulled off of the market because the sellers didn't get the number they want, and I have seen numbers that really exceeded what my wildest dreams.

So on maybe it is too granular, but is the volume of deals that are getting pulled, is that is that larger than what was happening say the first half of the year?

I will say there's been a handful of them. We usually do not see very many at all.

Bill, just a last question just on the dividend issue. You commented about the need to get back to historical occupancy I guess could you be maybe a little more specific about that delta is today, whether it is an economic delta or just an overall?

I would put it in a 300 to 400 basis point improvement category.

Okay, thanks a lot guys.

Thank you. (Operator Instructions). Our next question is coming from Michael Knott of Green Street Advisers.

Guys, David Anderson has one question.

Good morning, guys. I wanted to king of get your thoughts on some of the underwriting you did this quarter, specifically the Olney Center. I think in the positive you out lined in the press release, strong demographics TJ Max credit possibly some of the downside risk there is the supermarket, maybe the fact that there are several other supermarkets in that area. Do you see kind of when you underwrite that 6, 7 yield, is that as good as it is going to get? Or what generally on an IRR basis are you looking at when you underwrite some of these retail deals that you have done recently?

Okay, let me talk generically about - - let me take this piece-by-piece. You raised the comment about the supermarket in that particular center just to go back to remind everybody, was a shopper's food warehouse that is 54,000 feet and the lease expires in 2013 at the end of 2013 specifically. Whether they are the survivor in that market, the store does well by the way, it is a well-performing store, there is a lot of competition. Our analysis of that, if the store stays, we are happy with that and they have an option to stay. As you know, in these situations, relatively low rent. If they leave, we are very confident and base where that is we would probably split that space and increase the rents dramatically with two other users, and perhaps not a supermarket, but based on the strength of the market and the location that if that supermarket pulls out, we are very confident in our ability to release that actually have a rent pop, perhaps a little bit of down time, but we will dramatically increase rent. So that is how we analyze that exposure. Now, on an ongoing basis, we do not particularly spend a lot of time on IRRs because we really focus on rent inplace rent and rent growth moving out of that and that asset showed very steady rent growth over a period of time based on the rents in place and the demand for space in that market. So in the absence of the supermarket leaving, we will see good, steady growth going forward from there.

If the supermarket leaves, we will have one year where there is a dip, then a sort of dramatic pop after that, but we are very confident that returns will be significantly above the cost of capital for that asset.

Thank you, guys.

Thank you. At this time, I'd like to hand the floor over back to Mr. Mc Kenzie for final and closing comments

Ok, no further comments. Thank you, everybody, and we look forward to updating you at the end of the fourth quarter. Thank you, everybody, have a good weekend.

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