Equity Commonwealth (EQC) 2004 Q4 法說會逐字稿

Good day and welcome to the HRPT Properties Trust fourth-quarter and year-end 2004 earnings results conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to the Manager of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

Good morning, everyone, and welcome to HRPT Properties Trust's fourth-quarter and year-end 2004 investor conference call. My name is Tim Bonang and I'm the Manager of Investor Relations for HRP. Joining me on today's call are Adam Portnoy, Executive Vice President, and John Popeo, Chief Financial Officer. The agenda for today's call includes a presentation by management, followed by a question-and-answer session.

Before we begin today's call, I would like to read our Safe Harbor statement. Today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the federal Securities laws. These forward-looking statements are based on HRP's present beliefs and expectations as of today, February 15, 2005. The Company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call other than through filings with the Securities and Exchange Commission regarding this reporting process. Examples of forward-looking statements include the Company's expectations that tenant improvements and leasing cost spending will moderate in 2006 and 2007, annualized rent calculations and the Company's intentions to prepay debt, including the methods for funding that prepayment.

Actual results may differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause those differences is contained -- (technical difficulty) -- 10-K and 10-Q filed with the Securities and Exchange Commission and in our Q4 supplemental operating and financial data found on our Web site at www.HRPreit.com.

In addition, today's discussion will include references to Funds From Operations, or FFO, and earnings before interest, taxes, depreciation and amortization, or EBITDA. HRP considers both to be appropriate measures of our performance. FFO and EBITDA are non-GAAP financial measures and are intended to serve as complements to comparable financial measures calculated and presented in accordance with accounting principles generally accepted in the United States. Neither FFO nor EBITDA represent cash generated by operating activities in accordance with GAAP and should not be considered an alternative to net income or cash flow from operating activities as a measure of financial performance or liquidity. A description of how we calculate FFO and EBITDA and a reconciliation of FFO and EBITDA to the most directly comparable GAAP measures are available in HRP's Q4 supplemental operating and financial report filed on the Company's Web site. Investors are cautioned not to place undue reliance upon any forward-looking statements.

Now, I would like to turn the call over to Adam Portnoy.

Thank you, Tim. Good morning and welcome to our fourth-quarter and year-end 2004 investor conference call.

Before I begin, I would like to point out that Tim's role as Manager of Investor Relations is a new position that we've recently created at the Company in order to better organize our investor relations efforts. In addition to this conference call, we've prepared a comprehensive, supplemental operating and financial report for the fourth quarter. This report was released this morning and, as Tim mentioned, is currently available for download at our Web site. We hope that Tim's position in this conference call and the supplemental report will help investors better understand HRP.

Since this is our first conference call, we thought it may be appropriate to spend some time going through a brief history and overview of HRP before we get into the specifics of the quarter and year-end results. HRP was founded in 1986 as a New York Stock Exchange-listed real estate investment trust that primarily invested in healthcare properties. In 1994, HRP became one of the first REITs to be rated investor grade by both Moody's and S&P.

In the mid-1990s, we made a strategic decision to move away from nursing homes and other healthcare facilities and began investing in office properties. We began this transition by buying medical office buildings and buildings leased to the U.S. government. We also sold many healthcare properties in the mid to late 1990s.

In 1995, our subsidiary, which invested in hotel properties, completed an IPO as a separate New York Stock Exchange-listed REIT called Hospitality Properties trust, or HPT. HRP still retained about 4 million shares of Hospitality Properties Trust, or about 6 percent of its total shares. In 1999, we completed our transition from a healthcare REIT into an office REIT when we spun out our last remaining healthcare facilities into a separate publicly traded REIT called Senior Housing Properties Trust, or SNH. Today, HRP retains 8.7 million shares of senior housing, or about 12.6 percent of its total shares.

Although many investors remember that HRP was founded as a healthcare REIT or that it started HPT, our combined equity investments in these former subsidiaries only represents 4.3 percent of our total assets as of year-end 2004. Today, HRP is primarily an office REIT. As of year-end, we owned 375 properties with 44.2 million square feet, located in 30 states and Washington D.C. Overall, we consider ourselves to be an owner and long-term investor in core properties. Our acquisition strategy is driven more by increasing diversity then selling properties for short-term gains. We do not get involved in many value-add or turnaround properties and we generally do not undertake speculative development projects but we will sometimes undertake a build-to-suit project for an existing tenant. We also currently do not have any investments in joint ventures or off-balance-sheet entities.

The vast majority of our properties consist of commercial office buildings located in central business districts in suburban areas of major metropolitan markets. As of year-end, 40 percent of our annualized rents came from properties located in central business districts and 60 percent came from properties located in suburban markets. Although we have a broad presence in 30 states and Washington D.C., we do have concentrations in 7 primary markets, which represented a combined 63 percent of our fourth-quarter NOI. These 7 markets, listed in order of NOI contribution for the fourth quarter, are the metro Philadelphia market, the metro Washington D.C. market, the Metro Boston market, the island of Oahu, Hawaii, Southern California, which represents L.A., Orange and San Diego counties, the Metro Atlanta market and the Metro Austin market.

In addition to owning office buildings, 14.4 percent of our annual rents as of year-end came from industrial properties. The largest portion of these industrial properties, about 10 million square feet, of developed commercial and industrial lands in Oahu, Hawaii, which represented 6 percent of our annualized revenues at year-end.

Our overall business strategy is to devote equal attention to the security and growth of our business. An important element of the security part of our business model is to focus on buildings leased to the U.S. government and medical-related tenants. HRP's largest tenant is the U.S. government. As of year-end, the U.S. government and various other government agencies were responsible for about $115 million, or 17 percent, of our annualized rents. Medical-related office tenants represented about $124 million or 18 percent of our annualized rents. Government and medical-related office tenants add to the security of our cash flows and dividends because these tenants are less affected by the business cycle, they are often willing to sign long-term leases, and they regularly renew.

Another component supporting the security of our business is our large landholdings in Hawaii, which were 99.4 percent leased for an average remaining lease term of 21 years at the end of 2004. As of year end, 65 percent of HRP's annualized rents come from either the U.S. government, various other government agencies, medical-related tenants, long-term lease lands located in Hawaii, or other investment-grade-rated tenants.

The growth part of our business is focused on multi-tenant, commercial office buildings with strong appreciation potential. Many of the tenants in these properties are high-quality professional service firms, such as law firms and consulting firms. We also consider our minority holdings in HPT and SNH to be part of our growth portfolio. As of year-end, the combined market value of our holdings in HPT and SNH exceeded their combined book value by more than $140 million.

Before turning my attention to fourth-quarter and year-end results, I would like to briefly describe HRP's management. As some of you may already know, HRP has been externally managed by REIT management and research, or RMR, since its founding in 1986. In addition to managing HRP, RMR is also the external manager of our 2 former subsidiary REITs, Hospitality Properties Trust and Senior Housing Properties Trust. RMR is a large, diversified, nationwide real estate company which was founded in 1986 to manage public investments in real estate. As of year-end, RMR over a combined $9.3 billion worth of public real estate assets located in 42 states and Washington D.C. RMR currently has about 400 employees and offices located throughout the U.S. RMR handles all the day-to-day operations of HRP, including property acquisition, Asset Management, property management, leasing, financial reporting, corporate finance and investor relations. HRP has no employees, and although the executive officers, including myself and John Popeo, devote a majority of our time to HRP, we are employees of RMR.

We believe that HRP benefits from its relationship with RMR because it gets to draw upon the resources of a large real estate-focused organization. During the time RMR has managed HRP, shareholders have received average total annual returns of 12.8 percent. HRP also benefits because RMR services are relatively inexpensive. RMR's fees for its services result in lower G&A for HRP measured both as a percentage of assets and as a percentage of revenue, as compared to most other internally managed office REITs.

I would now like to focus on some of the specifics regarding the fourth-quarter and year-end results. In summary, 2004 was a solid year for HRP. The fourth-quarter 2004 FFO per share was 32 cents compared to fourth-quarter 2003 FFO per share of 31 cents. This 3 percent increase in FFO per share occurred despite the odd dilution of a 34.5 million share offering in the first quarter of 2004. Furthermore, throughout the year, we have been steadily increasing FFO per share. Fourth-quarter FFO per share was more than 10 percent greater than first-quarter FFO per share of 29 cents.

In January, February and December, 2004, we sold 4.1 million shares of our holdings in Senior Housing for net cash proceeds of $73.3 million. We also recognized book gains of $21.6 million from the sale of these shares. I'd like to point out that these gains have been excluded from our FFO calculation. As a result of these stock sales and further dilution from SNH equity offerings during the year, our percentage ownership in SNH declined from 21.9 percent to 12.6 percent between year-end 2003 and 2004.

In July, we increased our dividend by 5 percent, or 1 cent per quarter, from 20 cents to 21 cents. HRP's dividend rate had been 20 cents per quarter since July, 2000, when the slowdown in the office sector first began to take hold. Even with this dividend increase in the third quarter, we have decreased our FFO payout ratio from 71.5 percent in the first quarter to 66.5 percent in the fourth quarter. We delivered total shareholders returns of 37.7 percent for the year ended 2004.

We also experienced significant growth in our investment portfolio throughout the year. We made over $800 million worth of investments in 2004. As a result, our total gross property investments increased by 22.5 percent, from about $3.9 billion at the end of 2003 to over $4.8 billion as of year end, 2004. The largest acquisition we made in 2004 was the $430 million purchase of Hallwood Realty Partners in July. Hallwood included 113 buildings with close to 5.2 million square feet located in 7 market areas. The Hallwood acquisition expanded our investment portfolio and led our expansion into Atlanta, a new major market for HRP. Hallwood also expanded our presence in some of our existing markets, including the metro Washington D.C. and Southern California -- (technical difficulty). The Hallwood properties were 86 percent leased for an average of 4.7 years at the time of our acquisition. The going-in tap rate for the Hallwood acquisition was 10 percent.

The remaining acquisitions in 2004 primarily included buildings located in our existing markets, including Boston and Washington D.C. Overall, properties we acquired in 2004 were 90.1 percent leased for an average of 5.5 years at the time of our acquisition. The -- (technical difficulty) -- cap rate we paid for all acquisitions in 2004 was 10.1 percent.

As a result of our acquisitions over the last year, we've decreased our concentrations in certain markets. Over the last 18 months, we've added 2 new major markets to HRP. In addition to adding the metro Atlanta market as a result of the Hallwood acquisition, we added the Oahu, Hawaii market as a result of our acquisition of the Damon Estate lands in December, 2003.

As of year-end 2004, the metro Philadelphia market was our largest market. But our concentration in Philadelphia has declined significantly during the past 2 years. Based on NOI contribution, the Philadelphia market has declined from 23.9 percent to 14.8 percent of total NOI between fourth quarter 2003 and 2004.

During the fourth quarter, we signed leases for 1.4 million square feet, including 563,000 square feet of new leases and lease renewals for 869,000 square feet. Some of the more significant leases we signed in the quarter include a 15-year lease renewal and expansion with Scripps Research Institute in San Diego, California for 164,000 square feet, a 12-year lease renewal with Manufacturers and Traders Trust Company in Baltimore, Maryland for 285,000 square feet, and a 4-year lease renewal with America West airlines in Tempe, Arizona for 101,000 square feet.

During the full year of 2004, we leased about 4.5 million square feet. About 38 percent of this square footage was for new leases and 62 percent were lease renewals. Throughout the year, we have experienced an improving leasing market. Rental rates increased 1 percent for leases executed in the fourth quarter compared to prior rents for the same space. This is significantly better than the -16 percent roll down of rental rates we experienced in the fourth quarter of 2003.

Tenants continue to manage significant upfront capital commitments, but overall, TI and leasing commitments seem to be declining over the last couple of quarters. Leasing costs were just under $31 per square foot for leases executed in the fourth quarter. This compares to just over $23 per square foot in the third quarter. However, this 33 percent rolling quarterly increase is inflated by a one-time leasing cost associated with the 15-year lease signed with Scripps during the fourth quarter. The Scripps lease includes $176 per square foot in upfront TI costs for 165,000 square feet. The primary purpose of this TI is to contribute towards the buildout of medical labs space in our Torrey Pines office complex in San Diego. If you exclude the Scripps lease, the remaining average upfront leasing costs during the fourth quarter were less than $10 per square foot.

We've also been able to partially offset higher upfront leasing costs by executing long-term leases. The average term for leases executed in the fourth quarter were 8.9 years. The average term for all leases executed during the year was 8.7 years. Overall, we believe that HRP continues to have among the longest average remaining lease terms of any comparable REIT. As of year end, the average remaining lease term was 9.5 years based on square feet and 7 years based on annualized rents. Close to 79 percent of our leases expire in 2008 or thereafter, based on square feet, and close to -- (technical difficulty) -- in 2008 or beyond based on annualized rents.

In 2005 we only have -- (technical difficulty) -- square feet of scheduled lease expirations which represents about 6.8 percent of our total square feet and 9 percent of our annualized rents. Our 2005 lease expirations are spread out throughout our portfolio with no significant concentration of lease expirations in any particular market.

I think our overall greatest achievement as a Company over the last 3 years as been our ability to maintain total occupancy at over 91 percent since -- (technical difficulty) -- 2002. As of year-end, total Company occupancy was 93 percent. This is virtually unchanged from third-quarter occupancy, which was 93.1 percent and only 50 basis points less than our total occupancy at year end, 2003. The primary reasons occupancy levels have remained solid throughout 2004 are a strong leasing performance and acquisition activities. On a same-store basis, occupancy levels of properties we have owned continuously for the last 2 years have only declined by 50 basis points and were 90.3 percent leased at year-end.

Occupancy increased in all of our major markets during 2004 with the exception of the metro Philadelphia market. Even though our Philadelphia portfolio experienced a 400 basis point decline in occupancy to 91.6 percent at year-end, we signed the leases for close to 1 million square feet in this market. This leasing activity significantly addressed the rent (indiscernible) issue we had in Philadelphia at the beginning of the year. At the beginning of 2004, there was a large cloud of uncertainty hanging over the entire downtown Philadelphia market because 38 of the largest leases in the market were scheduled to expire in 2006. Today, all 38 of these tenants have signed new leases and with the exception of 1 tenant, all have decided to stay downtown.

We were able to retain Towers Perrin and FMC, which were 2 of the largest tenants expiring in 2006, as well as sign up Sunoco as a new tenant in the Mellon Bank Center. As had been widely reported, we have lost Comcast as a major tenant in 2008 as a result of the new office tower being built by Liberty Property Trust. Even with the loss of the Comcast lease for 357,000 square feet, HRP is still the best-positioned property owner in the downtown Philly market. As of year-end, all of our downtown properties were almost 93 percent leased and with the exception of Comcast in 2008, we do not have any major lease expirations until 2011. Said another way, even if we do not lease any more space downtown and Comcast leaves in 2008, we will still be 88 percent leased through 2011. This compares to a current overall market vacancy rate of 17 percent in downtown Philadelphia and close to a 45 percent vacancy rate in the A-1 market, which represents most of the Class A office towers in Philadelphia.

Our second-largest market, the metro Washington D.C. area, continues to be the strongest overall market in the country with less than 3 percent office vacancy inside the district. About 50 percent of our portfolio in this market is leased to the U.S. government or medical-related tenants. As of year end, our Washington D.C. market was 94.6 percent leased.

Our Boston portfolio improved in 2004 and performed better than might have been expected, given some of the supply and demand dynamics happening in this market place. Even with the market experiencing over 20 percent vacancy rates, we increased occupancy in our portfolio by over 3 percent to 92.4 percent at year end. We signed leases for 333,000 square feet in Boston during 2004 and 68 percent of the square footage was for leases with new tenants. The driving force for us in this market continues to be our medical office buildings, which are about 50 percent of the Boston portfolio. During the year we signed major new leases or renewals with the Dana Farber Cancer Institute, Jocelyn Diabetes Center and Beth Israel Hospital.

Oahu, Hawaii continues to be the Company's strongest market. The Oahu industrial market is currently the tightest in the country with close to 1 percent vacancy rates. At year end, the commercial and industrial lands we owned were 99.4 percent leased and we had close to 0 lease expirations over the next 3 years. We continue to make strides in our business plans for these lands by working with existing tenants to increase their renter rates in return for extending their lease terms. During 2004, we signed leases with 5 tenants and we are currently in negotiations with several others.

Like the Washington D.C. market, Southern California is also one of the strongest markets in the country. Our Southern California market is anchored by the 331,000 square foot Cedar Sinai Medical Center office towers in Los Angeles, and by 269,000 square feet of medical lab space in San Diego. Our Southern California market was 97 percent leased at year-end.

Our newest market, the metro Atlanta market, was 92.6 percent leased at year-end. Since entering this market as part of the Hallwood acquisition, we've made 2 follow-on acquisitions of commercial office buildings. The going-in cap rate for these buildings was better than 11 percent and they were between 97 and 99 percent leased for an average of between 4 and 6 years at the time of our acquisition. Our largest tenant in this market is the U.S. government Centers for Disease Control, which represented 46 percent of annualized rents from Atlanta at the end of the year.

The metro Austin market continues to be our most challenged market. Nevertheless, we're starting to see the beginnings of improvement in leasing activity. Occupancy has improved by close to 300 basis points to over 80 percent at year end. As the overall technology industry continues to improve, we expect the Austin market to perform better. This is especially true, given the market enjoys a strong barrier to entry for new construction.

At the same time -- (technical difficulty) -- grow away from the Austin market during 2004. The discount (ph) market contributed less than 5 percent of fourth-quarter NOI compared to over 7 percent of NOI in the fourth quarter, 2003.

I will now turn the presentation over to John Popeo, our Chief Financial Officer, to provide some more details regarding our fourth-quarter and year-end results.

Thank you, Adam.

First, I'd like to update everyone on the status of our Sarbanes-Oxley 404 compliance. We are substantially complete with our own assessments of internal control over financial reporting and our auditors are now in the process of completing their independent testing and evaluation. We expect their work to be completed by the required 10-K filing date of March 16, 2005.

We owned 375 properties as of December 31, 2004. We owned 224 of these properties continuously since October 1, 2003, which I will refer to during my presentation as our same-store properties for the quarters ended December 31, 2004 and 2003.

FFO for the quarter was $66 million, up from $44.7 million for the quarter ended December 31, 2003 and down from $57.6 million last quarter. To clarify, when we refer to FFO, we mean FFO available for common shareholders after preferred distribution. The year-over-year quarterly increase in FFO reflects over $1.3 billion of acquisitions since October 1, 2003, offset by the decline in same-store NOI and the reduction in FFO from our investments in our former subsidiaries caused by the sale of some of our senior housing common shares during 2004. The decrease in FFO between the third and fourth quarter reflects higher lease termination and settlement fees recognized during the third quarter, partially offset by the increase in NOI from property acquisitions.

The $40.9 million increase in full-year FFO was also attributable to property acquisitions over the past 2 years, offset by same-store NOI declines. Although FFO actually increased year-over-year, FFO per share declined from $1.28 to $1.22, reflecting the issuance of common equity in January, 2004. We paid $145.4 million in dividends during 2004, or 68 percent of FFO.

Same-store NOI for the fourth quarter of 2004 decreased by 2.9 percent from the prior year, reflecting a decrease in rental income of $1.4 million and, to a lesser extent, increases in operating expenses. This same-store NOI decrease is mainly attributable to tenant vacancies and the roll down in rents in Philadelphia and Austin. The 20.5 percent decrease in Philadelphia NOI reflects an approximately 9 percent rent roll down during the year and 261,000 square feet of vacancies during October, 2004. D.C. NOI decreased by less than 1 percent. The 17 percent increase in same-store NOI in Boston reflects the increase in occupancy and expense reimbursements in 2004 and the bad debt expense recognized in the fourth quarter of 2003. The 1.8 percent increase in same-store NOI in Southern California reflects lease termination fees collected during the fourth quarter of 2004 from a tenant who occupied part of the space taken by Scripps that Adam discussed earlier. The 19.6 percent decrease in Austin NOI reflects lease termination fees recognized during the fourth quarter of 2003 and the 24 percent roll down in Austin rents over the past year. The 1.8 percent increase in same-store NOI in our other markets reflects the new 256,000 square foot lease in Wilmington, Delaware. Annual same-store revenue and NOI at the 211 properties we owned continuously since January 1, 2003 decreased by 3.5 percent due to occupancy declines and rent roll-downs throughout our portfolio.

We committed to $126 million in tenant improvements and leasing costs to 4.5 million square feet of space leased during 2004, which is higher than prior years. During the fourth quarter alone, we paid 24 -- (technical difficulty) -- of tenant improvements and leasing costs, compared to $10.7 million paid during the same quarter last year and $12.3 million paid last quarter.

The increase in leasing costs is the reflection of several large blocks of space that we were able to lease during 2004 to strong-credit tenant for terms that span between 7 and 16 years. If you exclude our 10 largest deals covering 1.7 million square feet, average committed tenant improvements and leasing costs would have only been $12.86 per square foot. As of today, we would expect the level of tenant improvements and leasing cost spending to moderate in 2006 and 2007 as the economy strengthens. In addition, the amount of square feet expiring in the next couple of years falls to below 3 million square feet per year.

Again, we acquired over $800 million of property during the year. We paid for these acquisitions with net proceeds from the following capital finance activities during 2004 -- in January, we issued 34.5 million common shares in an underwritten public offering and raised $323 million of net proceeds; in February, we redeemed $143 million of 8.5 percent senior notes due in November of 2013 and we entered into a new 5-year $250 million unsecured term loan with interest at LIBOR plus 80 basis points; in August, we increased the term loan by $100 million and we extended the maturity by 6 months to August, 2009.

We prepaid all but $106 million of the mortgage debt we assumed when we acquired Hallwood in July of 2004. 77 million of this debt is prepayable in July of 2005 without penalty and the balance is prepayable in January 2008 without penalty. We currently intend to prepay the $77 million prior to year-end, 2005. We also have $100 million of senior notes that are payable in full 8 days from now on February 23. We plan on funding these repayments with cash on hand and by drawing on our revolver. We assumed $5.6 million of additional mortgage debt with one of the properties we acquired during the fourth quarter of 2004.

In August, we issued $400 million of 6.25 percent unsecured senior notes in an underwritten public offering -- (technical difficulty) -- net proceeds of $392.2 million. In January, 2005, we amended our existing $560 million unsecured revolving credit facility to increase the maximum borrowing amount to $750 million and extend the maturity date to April, 2009. The amended facility gives us an option to extend the maturity by 1 additional year. The annual interest payable under the facility was also reduced from LIBOR plus 80 basis points to LIBOR plus 65 basis points.

At December 31, 2004, we had $525 million of floating-rate debt, $440 million of mortgage debt and $1.4 billion of fixed-rate senior unsecured notes outstanding. The book value of our unencumbered assets pool totaled $3.8 billion at the end of the year. Our senior unsecured notes are rated B-AA2 by Moody's and triple-B by Standard & Poor's and, as Adam mentioned, we've been investment-grade-rated since 1994. Our secured debt represents only 9 percent of total assets and floating-rate debt represents 22.3 percent of total debt. Total debt represents 45.5 percent of total market cap at the end of the year. The weighted average contractual interest rate on all of our debt was 5.7 percent at the end of the year, and the weighted average maturity was 7.9 years.

On December 31, 2004, our EBITDA and fixed-charge coverage ratios were 3.0 times and 2.2 times respectively. The difference between the 2 ratios reflects $500 million of perpetual preferred shares.

The increase in rental income, operating expenses, depreciation and amortization, general and administrative and interest expense during the fourth quarter, compared to last year, was mainly the result of the $1.3 billion of property acquisitions and the decline in same-store NOI that I discussed earlier. The increase in G&A expense also includes expenses associated with the new Sarbanes-Oxley 404 compliance work undertaken - (technical difficulty) -- year-end.

The decrease in equity and earnings -- (technical difficulty) -- reflects our portion of gains recognized by HPT in the fourth quarter of 2003 and the reduction in the number of shares of SNH we owned during 2004. We recognize gains of $21.6 million from our sale of SNH shares to 2004. Also under the equity method of accounting, we recognized non-cash gains on the issuance of shares by HPT and SNH during 2004.

We redeemed $155 million of 7 8/8 percent and 8 3/8 percent senior notes in February and June of 2003 and $143 million of 8.5 percent senior notes in February of 2004. We recognized losses on the early extinguishment of this debt of $3.2 million in 2003 and $2.9 million in 2004.

The increase in land, building, acquired real estate leases and acquired real estate lease obligations during 2004 reflects the allocation of over $800 million of acquired properties and amounts paid in 2004 for building and tenant improvements. The $52 million decrease in equity investments in former subsidiaries reflects the cost basis of the shares we sold of SNH during 2004. The $11.6 million increase in restricted cash includes new mortgage escrows that we seemed with our acquisition of Hallwood in July. The $29.5 million increase in rents receivable reflects increases in straight line rents, and the $19.2 million increase in other assets includes $24.9 million of gross leasing commissions and related capitalized costs paid in 2004.

That concludes our prepared remarks. Operator, we are now ready to take questions.

Thank you. The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). Philip Martin with Stifel, Nicolaus Investments.

Good morning, gentlemen. I'm enjoying earnings season, I guess. A couple of things, just to jump around -- again, very good prepared remarks here; I'm glad to hear you are doing a conference call.

In terms of leasing costs, I know, Adam, you had mentioned 31 a foot in the fourth quarter. That included Scripps, and if you took out scripts, it was $10. Can you repeat what the fourth quarter '03 was again? I don't think you made mention of that, but I was interested to know what fourth quarter '03 was.

Fourth quarter '03 was just over $26 a square foot.

Okay, then 23 in the third quarter, okay. Again, going back to that fourth quarter '03, was there anything happening in that quarter that was a little bit different, or was that just -- you know like you had Scripps here in the fourth quarter -- anything unusual happening, or was that just obviously the economy, you know, we were still finding the bottom, etc.?

Yes, I think it is more that we were still finding the bottom throughout 2003 and even through the first half of 2004. As I said in the prepared remarks, you know, we're starting to climb out of the bottom and I think we're starting to see that in some of the capital commitments. Also, you know, I think even we have been a little surprised by the lease roll-down over the last couple of quarters. It's been flat for the third quarter and was 1 percent up in the fourth quarter. I'm hopeful it's going to continue in that direction, but I'm not saying we are completely out of the woods yet. We seem to be going in the right direction.

It's kind of bumping along the bottom, so to speak. Again, to that, well, let me jump around here. The average lease term executed in 8.7 for the year, 8.9 for the fourth quarter. For the lease term across the portfolio, what was that number again? I think you said 7 years?

9.5 years on square feet, and 7 years on annualized rents.

I would point out, we believe the more relevant number may be square feet because, you know, we have a lot of leases now that are triple net (inaudible) with our Oahu lands in Hawaii. That annualized revenue number gets a little distorted, so I think -- (technical difficulty) -- in some ways might be more relevant. It's 9.5 years on square feet and 7 years on annualized rent.

Okay, perfect. What percentage of the portfolio is triple net?

A little better -- roughly 10 percent.

10 percent, okay. Jumping back to the leases and the renewals, etc., again up 1 percent in the fourth quarter. What was that in the fourth quarter '03? I know it's probably in some of your data but --.

-16 percent.

Okay, perfect, so quite an improvement there. Okay. Now, you've got the lease expirations. We've got that. The G&A run-rate, John, are we at a pretty good run-rate here in the fourth quarter?

Yes, I think we are, although we are feeling a little bit of the -- (technical difficulty) -- 404 work and another layer of fees from our auditor, Ernst & Young.

Okay. I know G&A has been a moving target for everybody, so you're kind of 85, 90 percent there. Maybe it trends up a little bit as a percentage of revenue, a percentage of assets, that sort of thing?

Yes.

Okay, okay. I think that was it. Other than that, leasing activity in general appears -- it's obviously a bit more robust, picking up. Are you seeing any difference in the demand from your tenants in terms of space needs? Is the space requirement declining versus -- over the last several years? What, if anything, is different? I know I should mention that -- (technical difficulty) -- surprised you a little bit that activity was possibly as good as it was, but what, if anything else, surprised you?

Well, as you would probably expect, I would say most of our new leases we signed for some of our major tenants in 2004, I would say most of them ended up in square footage reductions.

In terms of what we're starting to see now in the beginnings of 2005 and even the end of 2004, the good news is, in some of our markets like Philadelphia and in Boston and Southern California, we're starting to see people ask for expansion space -- limited. I'm not saying it's robust and everyone is doing it but we're starting to see it, and that is something we hadn't seen a year ago.

Okay, so some of the hotter markets, or you know the healthcare/medical primarily -- government is probably -- is the government asking for more space, or expansion space? When you look across here, in terms of tenants, what type of tenants are -- (multiple speakers)?

Yes, we are seeing Washington D.C.; we're definitely seeing that from the U.S. government. You know, our different markets, they are driven by different things. Here in Boston, you know, as I mentioned, the Boston market is not the best market in the country but our portfolio seems to be doing very well because we happen to have about 50 percent of it in medical, and medical happens to be expanding in this market. As I said, Washington D.C., the U.S. government is expanding. In Southern California, close to 40, 45 percent of our portfolio is lab space or medical-related. Again, there, we are seeing an expansion as well. Philadelphia -- you know, our portfolio again as the market -- it's performing tremendously better than the rest of the market is down there, and we have some tenants that are actually asking for some expansion space. So it's not across the board; it's in sort of isolated pockets within our markets.

Okay, my thesis is playing out anyway, so thank you for helping me achieve that. Well, and the last question I have -- (technical difficulty) -- 8 million square feet that is up for -- that's expiring in '05 here. What percentage of that -- do you have a figure as to what percentage of that is committed? Do you think that's going to stay, commit, etc.? Do you have any feel for -- I'm sure you're probably talking to some of the tenants at this point about renewing.

Yes. Let me put it this way -- every tenant that represents that 2.8 million square feet has already been contacted. Some of them we have negotiations going underway, some of them we already signed renewals, and some of them we -- (technical difficulty) -- they are not going to renew. I just don't have the figure in front of me as to what percentage of that 2.8 is already renewed.

Okay. Can you give us a sense for what percentages of tenants have just come back and said "We're not renewing"? What are the reasons for that?

Well, it's a small -- it's less than 50 percent that aren't renewing; I can tell you that much safely. Reasons they are doing it is it's downsizing. You know, there has been corporate mergers and M&A activity and they are shutting down different offices. For example, a good example is the primary reason the Philadelphia market declined in 2004 was we lost a large lease from Wachovia. That's not because Wachovia was necessarily downsizing; it's because they had merged with -- this was an old First Union office. It was being consolidated into another office, so the space came back to us.

Okay, okay. Perfect. The last thing, Comcast -- now I know that's out to 2008, but any thoughts on that yet or -- again, that's a ways off at this point but --?

It's ways off and I tried to address in the markets that even if -- you know,(indiscernible) the macro story is even if we don't do anything else in Philadelphia, we don't lease another square foot of space in the downtown, we will be 88 percent leased through 2011. That being said, you know, the good news about -- if you could put a positive spin on Comcast leaving, they are leaving some of the nicest office space -- the East Tower of our City Center office complex down there, and it's the top 5 floors, which is some of the better office space that could be more desirable. I can tell you that we are in discussions with people about expanding into that and about some new tenant taking it but obviously, those are very early discussions at this point.

Okay. What's the total square footage there?

357,000.

Last question -- pipeline acquisitions? Certainly, you had a good year in terms of acquisitions and the average cap rate, the going-in cap rate, but what's that pipeline and ca-rate environment look like right now?

You know, the cap-rate environment, as everyone is reporting, is getting much -- it's getting tighter and tighter. We had a very good -- the last couple of years, we've had a good run. We had a very robust acquisition group. You know, we wrote up -- in the 365 days of 2004, we reviewed over 500 properties, wrote up over 250 of them, and I think we placed bids on something like 200. So we were placing bids 1 to 2 times a week in 2004, one-off transactions and that is how we were able to generally get the good cap rates that we were able to get in some of the markets.

In terms of 2005, I think it's even getting tighter than it was in 2004. We don't give specific guidance as to what we're going to be doing in acquisitions, but I think it's fair to say it will be less than what we did in 2004 and I think, generally, the market is -- it's more and more difficult to make acquisitions at attractive prices in today's environment.

Scott Sedlak with A.G. Edwards.

Good morning. Can I just as you when exactly that Comcast lease expires?

Sure. They expire in 2008.

Do you guys have the exact month or --?

I believe it's March of 2008.

The current debt levels are a little bit above where they've historical been and you guys addressed with regards to the unsecured notes that expire later this month. With that in mind, what's your kind of overall capital strategy going to be this year, do you think?

You know, it's a good question. We've been wrestling with that a lot internally. You know, historically, we run the Company somewhere between 40 and 45 percent debt to total market cap, and you know, right now, we are about 45 percent debt-to-total market cap. I would say, historically, we also had a smaller revolver -- we use our revolver basically to make acquisitions and then we typically refinance it with -- would refinance it via debt or equity issuances after that.

Today, as I mentioned just a couple of minutes ago, the acquisition activity I don't think is going to be as robust as it was in 2004 or 2003. At the same time, we have a much larger revolver of $750 million. So in terms of capital-raising activities this year, it will probably be some sort of activity at some point throughout the year, but in terms of whether that's going to be -- in what form, I can't tell you right now. But I can also point out to you that we've also been in discussions with the rating agencies. They are very comfortable with us at our debt levels today, so there is no immediate pressure basically for us to do anything, but we are obviously thinking about it.

Should we expect to see any additional sales of SNH shares or HPT shares in 2005 to fund acquisitions? Where would that exactly rank in terms of your activity?

Yes, sure. I think you'll see us sell shares in SNH and HPT. It won't be a steady sale; it will be a little more choppy. I think you'll see us sell shares when SNH or HPT does an equity offering themselves. We will then do a tag-on, a secondary, at that point. So I'm not saying every time HPT or SNH does do an equity offering we will sell shares, but I think the look towards those periods as to when we would look to sell shares in SNH and HPT. So that being said, it depends on what SNH and HPT does.

Sure. What are the costs associated with doing and offering in conjunction with one of those two? Is there any cost to -- (technical difficulty)?

Just the underwriting.

Just the standard underwriting.

You guys already kind of addressed acquisitions and the environment and cap rate environment. Any particular market where you guys are targeting, or just in general?

In general, you know, we are looking a lot -- right now, in our major markets, we are actively looking in Oahu, Hawaii; we look in Southern California; we look in Washington, D.C. You probably won't see us make many more investments in Philadelphia, or perhaps even Austin. Boston is sort of a mix 50-50. We make further investments in this market only because, you know, it's a tough market but it's home for us, we know it very well and we think we can make some selective acquisitions in this market maybe a little differently.

You know, generally speaking, markets that we like are largely driven -- it's not a rocket science; it's largely driven by demographics. It's looking at where people are and where jobs are being created. That happens to be the Southeast and Southwestern parts of the United States. So Atlanta, which is a market we recently entered, we've made a couple of more acquisitions. Atlanta is a market we think has some pretty good demographic trends; we think it also has some pretty good job growth trends. But it has been a little bit overbuilt in the last few years. Nevertheless, we think there are some opportunities to make acquisitions in that market.

So, new markets for us? You know, we look a lot in Florida. We haven't been very successful at making any acquisitions there. New markets could also be some places in the Southwest. Again, it's elective markets, places like Denver or Phoenix which they -- (technical difficulty) -- the overall dynamics and everything may not be great in that market, but I think you can selectively make some good acquisitions with high-quality properties, with good credit-quality tenants on a long-term basis, where you can make some good acquisitions in those markets. So that sort of gives you a general feel.

Last question -- can you just address -- you guys commented on the -- I'm assuming those are the GAAP rents. What are the cash rents and -- (technical difficulty) -- change in the quarter as well? You referred to the 1 percent --.

Right. All of our reporting is done on a GAAP basis, but I will tell you that the majority of the leases have steps in them, so the cash rents would of course be lower than the going-in GAAP rents. On average, the GAAP rents that we achieved for the quarter average right around $20 a square foot. Cash rents would be slightly lower than that.

Brett Johnson (ph) with RBC Capital Markets.

Good morning. (technical difficulty). Actually most of my questions have already been answered. Just a couple of quick questions on Atlanta. How is the integration of the Hallwood Properties portfolio and their properties in Atlanta going?

I think the integration is going very well. You know, we -- as I said, that market is anchored by the U.S. government Centers for Disease Control. They represent 46 percent of the total rents received there. The guys that we have down there working that portfolio have -- they have been working with these properties for over 20 years; they have an excellent relationship with the CDC in that market, and so I would characterize it as the integration is going very well.

I know you guys have a fair bit of I guess -- what was it -- maybe 15 percent rolling in 2005 in Atlanta?

Yes.

What do you expect the lease roll-down to look like in that market? How are the leasing efforts going so far this year?

The leasing effort in that market has mostly been smaller leases, 5 to 10,000 square feet. There hasn't been -- there has been some lease roll down; I would not characterize it as significant. The biggest piece of that lease roll that you are seeing in 2005 in Atlanta is a large piece to the CDC which is rolling at the end of 2005. We are obviously in discussions with CDC regarding renewing that lease.

You answered all of my other questions with your extensive supplemental, so thanks very much.

Due to time constraints, that does conclude our Q&A session for today. I'd like to turn the conference back over to Mr. Adam Portnoy for any additional or closing remarks.

Thanks for joining us on our Q4 conference call and we look forward to updating you on our progress next quarter. Thank you.

That does conclude today's teleconference. We thank you for your participation.