Equity Commonwealth (EQC) 2005 Q2 法說會逐字稿

Good day everyone and welcome to the HRPT Properties Trusts' 2005 earnings results conference call. At this time for opening remarks and introductions I would like to turn the call over to the Manager of Investors Relations, Timothy Bonang.

Thank you, joining me are Adam Portnoy, Executive Vice President, and John Popeo, Chief Financial Officer. The agenda includes a presentation by management followed by a question and answer session. Before we begin today's call I would like to read the safe harbor statement. Today's call contains forward-looking statements within the meaning of the Privates Securities Litigation Reform Act of 1995 and federal securities laws. These forward-looking statements are based on present beliefs and expectations as of today August 8, 2005. The Company undertakes no obligation to revise or publicly release the results of any revisions to the forward-looking statements made in today's conference call other than through filings with the Securities and Exchange Commission regarding this reporting period. Actual results may differ materially from those projected in the these forward-looking statements. Additional information concerning factors that could cause those differences is contained in our forms 10-K and 10-Q filed with the Securities and Exchange Commission and in our Q2 supplemental operating and financial data found on our website at www.hrpreit.com. Investors are cautioned not to place undue reliance upon any forward-looking statements. And with that I would like to turn the call over to Adam Portnoy.

Thank you Tim. Good morning and welcome to our second quarter 2005 investor conference call. In summary, HRPT experienced a good second quarter on many fronts. First we are reporting FFO of $0.32 per share for the second quarter of 2005, compared to $0.29 per share for the comparable period last year. We not only grew FFO by $0.03 per share but our FFO payout ratio continues to steadily improve. Our payout ratio was 65% for the second quarter compared to 68% last year. This payout ratio improved despite raising our dividend by 5% to $0.84 per year in the third quarter of 2004. I think it is also important to note that we achieved this more than 10% increase in FFO per share despite the added dilution of issuing 22.5 million shares in March, 2005.

In the second quarter we signed 163 leases for 1.3 million square feet. Not only did we experience a 5% positive change or roll up in rents during this quarter, but our up front capital commitments for leases signed in the quarter declined to just under $12 per square foot. These lower up front capital commitments were largely offset by lower than average lease terms. In summary, net effective rents have generally remained flat across our portfolio to slightly positive in certain markets for leases signed during the second quarter. Overall, we continue to maintain one of the highest occupancy rates in the industry.

HRPT's occupancy stood at 94.1% at the end of the quarter compared to 93.5% for the year ago period and 93.7% last quarter. We also continue to do an excellent job of increasing occupancy at our properties on a same store basis. Occupancy of properties we have owned continuously since April 1, 2004, increased 60 basis points to 94.6% leased at the quarter end. As a result of these positive developments, our overall same store NOI increased by 2.5% in the second quarter of 2005. I think these strong results reflect the overall improvements in market conditions across the country. Generally, occupancy rates have been improving since the beginning of the year and during the second quarter there was positive net absorption and excess of new building deliveries within all the major markets that we operated.

As a result, we are optimistic by HRPT's long-term growth prospects, but realize there may be some bumps along the way, in the short-term, as certain markets improve faster than others. Our largest market, Philadelphia, is 93.3% leased at the end of the second quarter. Which is significantly better than the overall occupancy for this market after of of around 86%. Although same store occupancy declined 220 basis points in the second quarter, same store NOI increased by 12.6%. The primary reason for this increase in same store NOI was the recognition of around $3 million of nonrecurring rent recovering income. Excluding this one time recovery, same store NOI for the Philadelphia market would have been - 5.4% and same store NOI for the entire company would have been -1.2%. We continue to believe that we are the best positioned commercial office owner in the Philadelphia market, but there continues to be a general softness in this market with regards to rental rates and it may take up to another year before HRPT starts seeing positive growth in this market.

Washington DC continues to be one of the strongest mark -- office markets in the country as well as one of our best performing portfolios. We are 95.1% leased in this market as of the end of the second quarter, which compares favorably to this market's overall occupancy of around 90%. Same store NOI in this market increased 1.9% in the second quarter. This improvement was the result of an increase in same store occupancy and a roll-up in rents during the last 12 months. We feel very good about our position in the Washington DC market because of our concentration of long-term leases with the U.S. government and medical related tenants.

Our Boston portfolio was 96.8% leased at the end of the second quarter, which was better than this market's overall occupancy of around 87%. Same store NOI decreased 8.5% during the second quarter. Although our same store occupancy continues to increase in this market same store NOI increased because of a roll down in rents. Even though we have been very successful in leasing space and increasing occupancy in the Boston market, the overall market, and spatially the downtown market continues to be challenged. We are fortunate that less than 20% of our square feet in this market is located in the CBD and these properties are largely leased on a long-term basis to medical related tenants.

Our Oahu Hawaii industrial lands continue to perform very well. Our portfolio was 97.4 percent leased at the end of the second quarter and the market occupancy is around 98%. During the second quarter we made some good progress with regards to our business plan of increasing the return on these investments. We signed nine new leases in the second quarter and these leases included a 57% roll-up in rental rates. As a result our same store occupancy increased 70 basis points and our same store NOI increased by 1.6% in Oahu.

Our southern California portfolio continues to be one of our strongest markets. We were 97.5% leased at the end of the second quarter which compares favorably to the overall occupancy for this market of around 91%. Same store NOI increased in this market by 15.9 % during the second quarter. This increase was largely the result of incr -- of, of significant growth and same store occupancy by 480 basis points and 99% leased. We continue to out perform in this market because we have a very secure portfolio that's primarily leased on long-term basis to the U.S. government and medical related tenants.

Our Atlanta portfolio continues to out-perform the market. Our properties were 91.9% leased at the end of the second quarter, which is better than the overall occupancy for this market of around 86%. We do not have any same store operating results for this portfolio because we purchased our properties in this market in mid-year 2004. Our properties in this market continue to be dominated by long-term leases to the U.S. government, which represents 47% of our annualize rents.

Our Austin portfolio continues to improve with significantly more than leasing activity. As of the end of the second quarter, our Austin portfolio was 85.3% leased, which is modestly better than the overall market occupancy of around 84%. For the second quarter in a row, same store NOI results were positive, with 3.9% growth in the second quarter. This improvement was primarily driven by an increase in same store occupancy of 590 basis points offset by roll down in rents.

In summary, if I was to generalize HRPT's portfolio by major market, the strongest markets continue to be southern California, Washington DC, and Oahu, Hawaii. The markets with the greatest growth potential are Austin, Texas, and Atlanta, and the most challenged markets are Philadelphia and Boston. Our other markets were generally flat during the second quarter of 2005, although same store occupancy increased by 20 basis points, same store NOI declined by 2.6% because we experienced some roll down rents in these other markets. As of the end of the second quarter HRPT is still very well positioned in the market place. We continue to have one of the most secure revenue streams in the industry with 64% of our annualized rents coming from government tenants, medical related tenants, long-term lease lands or other investment grade rated tenants. Our largest tenant continues to be the U.S. government, which represents 15.4% of our annualized rents.

We also continue to have one of the longest average remaining lease terms in the industry at 10.3 years based on square feet and 6.8 years based on annualized rents. Even though we have limited lease roll-over during the next few years, we do have some areas of challenge, which you would expect with a portfolio of 415 properties with close to 53 million square feet. For example, during the second quarter, we received notice from the U.S. government that they would not be renewing their lease for us for 119,000 square feet in the Atlanta market, which expires on December 31, 2005. Although we are disappointed by this development our Atlanta portfolio is still very well leased with 78% of our annualized rents expiring in 2008 or thereafter.

Furthermore the average remaining lease term for the U.S. government in our Atlanta market is still a strong eight years. We have begun the process of marketing this space and we are optimistic that we will be able to fill this space in the future. In addition, during the second quarter we were notified by TYCO International, that they would be vacating 344,000 square feet of industrial space in Austin, when their lease expires in 2007. Because we have two years to find a replacement tenant we are in the preliminary stages of planning for departure, but, we have already started some dialogue with potential users of this space.

Before turning this presentation over to John Popeo to run through some of the financials, I want to briefly go over our disposition in acquisition activities. During the second quarter of 2005 we sold three properties for $20.5 million and we closed on three acquisitions for approximately $197 million. In May, we sold three buildings with 237,000 square feet located in our Boston market. The primary reason for the sale was that these were older, class B properties, that were largely Virginia can't and it would have taken a substantial amount of capital to upgrade the building for leasing. We sold the building for close to $87 per square foot, which is a 1.5 times multiple of our original purchase price of around $57 per square foot.

Also in May we closed on the acquisition of a 628,000 square foot building located in Indianapolis for $74.75 million. This building is 95.9% leased for an average of 3.8 years. Although the average remaining lease term is shorter than we have typically seen with our acquisitions we were compensated for this added level of risk with a going in cap rate of 10.9% and a below replacement cost purchase price of $119 per square foot. As a following acquisition we also closed on another 72,000 square foot building in Indianapolis in June for $6.6 million. This building is 100% leased for an average of 5.9 years and the going in cap rate was 9.4%. In June, we closed on the acquisition of 8.2 million square feet of industrial lands in Oahu, Hawaii from the estate of James Campbell, for $115.5 million. The characteristics of these lands are very similar to our existing industrial land holdings in Oahu.

For example, the investment is very secure because the lands are currently 95.4% leased for an average remaining lease term of 15 years. The going in cap rate for this acquisition is approximately 7.6% and our business plan for these lands is the same as their existing lands in Oahu. We plan to increase the return on investment in the future by working with existing tenants to extend the lease terms in exchange for higher contractual lease payments. As a result of this acquisition, HRPT is one of the largest industrial landowners in Hawaii, with close to 18 million square feet or 412 acres. Subsequent to quarter end, we also closed on one additional acquisition for $17 million. As of today, we have four additional properties that under agreement for $109.5 million.

These acquisitions are subject to closing contingencies and may or may not close in the third quarter. If these acquisitions close we will discuss them in more detail as part of our third quarter report to investors. Overall the acquisition market remains very competitive. There continues to be of product coming to market, but pricing remains very competitive with limited opportunities to buy properties at attractive cap rates. As a result, our acquisition activities have slowed compared to the last few years. Nevertheless, we have been successful at buying properties at attractive pricing during 2005 because of our ability to evaluate acquisitions throughout the country.

Finally, the second quarter was busy for us with regards to investor relations activities. Besides some one-on-one meetings with investors throughout the quarter, in April we presented CSFB Real Estate Investor Conference and in June we presented at the NAREIT Institutional Investor Forum. We look forward to meeting with the investor community at future events. I will now turn the presentation over to John Popeo, our Chief Financial Officer, to provide some more details regarding our second quarter results.

Thank you, Adam. Looking first to the income statement, rental income and operating income increased by 25.7% and 22.8%, respectively, during the second quarter of 2005. The year-over-year increase in rental and operating income reflects over $1 billion of properties acquired between April 1, 2004, and June 30, 2005, plus the 2.5% increase in same store NOI. Current quarter EBITDA increased by around 24% over the same quarter last year.

G&A expense increased 27.8% reflecting properties acquired since April of 2004 and to a lesser extent, costs related to Sarbanes-Oxley 404 compliance. G&A expense, in relation to total revenues, was 4.3% in the quarter which is better than the pier group average. Interest expense increased by 37.8%, reflecting the 2004 issuance of $400 million of unsecured senior notes, due in 2016, and $100 million of additional term loan proceeds, received in August, 2004. We funded our 2004 and 2005 property acquisitions primarily with the proceeds of these 2004 financings and proceeds from the issuance of 22.5 million common shares in March of 2005.

Net income available for common shareholders for the second quarter of 2005 was $39.2 million, 66.6% increase from the second quarter of 2004. The increase reflects almost $5 million of gains related to the issuance of shares in June, 2005, by Hospitality Properties Trust and $7.6 million from gains in the sale in May, 2005, of three central properties in our metro Boston market. FFO available for common shareholders for the second quarter of 2005 was 24.5% higher than the prior year amount. On a per share basis, FFO increased by 10.3% from $0.29 per share in the second quarter of 2004 to $0.32 per share in the second quarter of 2005. The increase reflects earning from acquired properties partially offset by the issuance of common shares in March of 2005.

Current quarter FFO includes around $3 million of nonrecurring rent recovery income received from a tenant in our Philadelphia market. Excluding this one time recovery, FFO for the quarter would have been $0.31 per share. In July of 2005 we declared a dividend of $0.21 per share which represents 65% of FFO for the quarter. Our Board considers the dividend level on a quarterly basis and they are comfortable with this current payout ratio. We committed $15 million in tenant improvements and leasing costs to 1.3 million square feet of space leased during the quarter. We spent $28.9 million during the quarter on tenant improvements and leasing costs, which include costs related to deals signed in 2004.

As of June 30, 2005, we had $95 million of total committed but unpaid tenant improvements and leasing costs related to leasing that took place last year and during the first half of 2005. The majority of this amount reflects several large blocks of space that we were able to lease during 2004 for terms that span up to 16 years. We expect to pay $74 million of this amount during the remainder of 2005. During the second quarter we paid almost $2 million or $0.04 per square foot or recurring building improvements including lobby renovations and elevator and other systems upgrades throughout the portfolio.

Turning to the balance sheet, on June 30 we held $18.9 million of unrestricted cash. The book value of our equity and former subsidiaries was $208 million compared to a combined market value of $340 million. The $13 million increase in rents receivable reflects over $12 million of straight line represent accruals during 2005 and the $14 million increase in other assets reflects financing fees related to our January revolver amendment and leasing commissions and prepaid operating expense payments made during 2005. The changes in our revolving credit facility reflects $197 million of property acquired during the second quarter, $100 million repayment of our 6.7% senior notes in February, 2005, and proceeds from the property sales and the issuance of common shares during the first half of 2005.

On June 30, 2005, we had $586 million of floating rate debt, $430 million of mortgage debt and $1.3 billion of fixed rate senior unsecured notes outstanding. The weighted average contractual interest rate on all of our debt was just under 6% at the end of the quarter, and the weighted average maturity was 7.9 years. Our senior unsecured notes are rated BAA 2 by Moody's and triple B by Standard and Poor's. The book value of our unencumbered property pool totaled $4.1 billion at the end of the quarter. A secured debt represents only 8.7% of total assets, and floating rate debt represents 25.4% of total debt. At the end of the second quarter, our ratio of debt to book capitalization was 47.6% and debt to total market capitalization was 43.4%.

EBITDA and fixed charged coverage ratios were 3.2 times and 2.4 times, respectively. As of the end of the second quarter we were comfortably within the requirements of our public debt covenants. We have 8 million Series 8 preferred shares outstanding, with a face value of $200 million and distribution rate of 9 7/8%. These shares are callable in February, 2006, at par. We also have 12 million series B preferred shares outstanding with a face value of $300 million and a distribution rate of 8 3/4%, that are par callable in September 2007. We had 199.8 million actual and weighted average common shares outstanding, for the quarter ended June 30. Subsequent to quarter end, in July of 2005 we repaid 75 million of 8.7% mortgage debt that we assumed with our 2004 acquisition of Hallwood and we repaid an additional $9.9 million of 8.4% mortgage debt in August, 2005.

In July we also acquired a property for $17 million. We funded these debt repayments and acquisitions with cash on hand and by drawing on our revolving credit facility. As of day we have $313 million outstanding on our revolving credit facility with $437 million of additional borrowing capacity. In addition, our unencumbered property pool as increased 4.1 billion to almost 4.3 billion. That includes our prepared remarks. Operator, we are now ready to take questions.

Today's question and answer session will be conducted electronically. At this time if you do have a question you may signal on our touch-tone phone. If you are using a speaker today, please make sure your mute function is turned off to allow your signal to reach our equipment. So, once again, if you do have a question you may signal by pressing star one on your touch-tone phone and we'll pause for a moment to allow everyone a chance to signal. We'll take our first question from Phillip Martin with Stifel Nicolaus.

Good morning gentlemen.

Good morning.

Just a couple questions regarding the 119,000 square feet in Atlanta being vacated by the government. Number one how long were they a tenant with you?

This is an acqu -- they were part of the acquisition we made of Hallwood in mid-year 2004, so they have been a tenant of HRPT's for about a year and to be honest with you I don't know, I mean the U.S. government has been a tenant down there in that property for, you know, in one way or another for ten years or longer. How long have they occupied that specific space, I'll be honest with you, I don't know.

Okay. What's the sense of cost to re-lease that space.

Well, the good news it they were paying about market rates. There's probably, you know, the way it's configured, the good - the good news is that the rest of the U.S. government space that is leased down in Atlanta, we have nothing coming due in 2006, 10,000 square feet coming due in 2007, and 25,000 square feet coming due in 2008, and the average remaining lease term is eight years. The good news is that, generally, the U.S. government is very comfortable with us in Atlanta. That being said, this space happened to be what I would call some smaller one story high office buildings, they were part of an industrial park that we have down in Atlanta, the rest of the space that the U.S. government has is in multi-tenanted, larger office buildings. Each one of these buildings is about 17 or 15,000 square feet. To re- lease this space, somewhere in the magnitude of 10 to $15 of TI.

Okay.

It dep... - you know, it depends, you know, who comes in, and how long a lease term they sign and so on and so forth, but we're targeting 10 to $15.

Okay. They were paying what there, the government was? What was it quarterly or monthly?

I want to say the market rates there are somewhere around probably 18 bucks? I'd say in the high 18's.

Okay. Have you -- and do you have any -- is there anybody that's expressed interest or is it too early?

It's too early.

Okay. How about the same with TYCO, you know, I know that's out to 07, so, is there a potential up-side there, given where rents are, what they're paying, et cetera? And also the potential cost that your -- that you would imagine with that space.

Yeah, the TYCO space, the good news there is they're either, you know, depending on how you look at it, they could be below market rents is what they're paying. So there is some opportunity to -- for increasing the rent, increases in rent. We just received notification about this at the end, you know, at the end of June. And it's two years out, and we have started some dialogue with some, with some groups about either, you know, some existing tenants about expanding into that space, they may want to take it, as well as some, you know, other tenants that might be interested in that space. So it's , it's a little early to say what's going to happen there. The good news is that, you know, the market rates that they are paying are, I'd say, slightly below average in the market.

Okay. And lastly, John, regarding the, just the equity investments, you said -- what was the market value of that on the balance sheet, its 207.7 million, I just -- ?

340 million.

340, okay. Okay, perfect, thank you.

And we'll go next to Jay Leupp, with RBC Capital Markets.

Hi, good morning, here with Brett Johnson. Adam, could you talk a little bit about what the -- what you think sort of the range of weighted average cap rates you could apply to the new asset value calculation of your shares and maybe related to that what your outlook is for asset sales through the back half of the year in a very healthy private market?

Jay, I guess the question is what do we think the net asset value on a per share basis is for our company, and then, and then what do we think about sales or disposition in the second half of 2005. You know, we make it a policy really not to talk too much about NAV here at the Company. It's incredibly subjective and, to be honest, we- you know, to do it correctly we would have to do a bottoms up analysis, property by property and to be honest, we just haven't done that analysis. So we generally don't comment on net asset value on a per share basis.

The answer to your second question regarding, you know, disposition opportunities or potential in the second half of 2005, I would call it opportunistic sales. I mean, we're not going to put a target out interest, some of our competitors put targets of saying, you know, 100 million or 200 million, we're not going to do that. What we're -- we're going to do it opportunistically, it could be be anywhere from zero to I would say 50 million in the second half.

Okay. And then, notwithstanding what you talked about in terms of your vacancy in Atlanta, can you talk more about your expectations for demand in the government sector for space in Philadelphia, Washington DC and some of the other federal government hubs and how you are adjusting your business plan accordingly?

It's a good question. There's been a lot, you know, we've heard grumblings from the government and the GSA about, you know, change, some of their changings, changes in requirements and there's even been some grumblings we've heard about, you know, across the board them trying to want, wanting some reductions in rates. So far none of that is actually hap.. -- none of those, you know, rumblings has actually filtered its way into a negotiation with the GSA to date. So, you know, we're cognizant of these sort of issues out there that people talk about in terms of you know, security requirements for the buildings, you know, in terms of, you know, possible rate reductions, but again it hasn't really been an effect for us. I -- luckily, you know, 80% of our gov/GSA leases are in buildings where they are a single tenant in the building and that works to our advantage.

It becomes more of an issue when the GSA, you know, let's say is a small tenant in a large building, the general trend that you start to see across the country is that the GSA is trying to consolidate their space and they like to be the only tenant in a building. The other thing you will start to notice is in some of the, you know, some of the GSA buildings they, there, there's long-term, they hope to be less in an urban environment and more in a suburban environment with large setbacks from the roadways. Again, luckily, most , a lot -- we have a good proportion of our properties, let's say leased to the FBI or the DEA, that are in suburban markets that are in, you know, single user tenant buildings. So, we're cognizant of it, we are aware of it, it really has not affected any of our lease negotiations to date. The only thing that, you know, again, something that's rumbling on the horizon we haven't really seen yet, is, you know, the Washington DC market is incredibly strong, our market -- our portfolio there is very strong, and net absorption in the market place continues to outpace deliveries, but that market is one of the only markets that's having any sort of significant development activity going on, across the country.

And, you know, generally, I think the statement's safe to say that the rate of growth by the GSA in Washington DC has started to slow. So, you know, we're not, you know, necessarily panicked or very nervous about it, but we're definitely aware of the fact that, you know, long term we're cognizant of the fact that the GSA growth rate in Washington DC may not be as strong as it has been -- as it has been over the last few years. So I mean, you try to manage on a day to day basis and you're aware of what sort of the general trends are, but all I can tell you is on a day-to-day leasing negotiating basis a lot of these things haven't come up yet.

Okay. And then you talked somewhat about borrowing capacity and obviously balance sheet activity in terms of equity issuance, with rates ticking up here in the last couple weeks, how is that factored into your strategy going forward at least through the back half of the year in terms of debt and preferred issuance?

Well, the good news is that I think the Company is extremely well positioned to do either debt equity or do neither, right now. The good news about refinancing our revolver at the beginning of the year is now we have a fairly launch amount of capacity. As of today we have $437 million worth of capacity, and I think I, you know, and just including the acquisitions that I outlined that we have under agreement which may or may not close we have more than enough capacity. So we don't have to do anything. But that being said, you know, we watch the markets, you know, weekly if not daily and if the opportunity presents itself, you know, we, we might do something in the second half of the year, could be debt, could be equity, but again we might not do anything.

If the market is not there and, you know, if it behaves the way it's behaving the last two days maybe we do nothing. But, you know, we, we look at -- we evaluate weekly and the good news is we don't have to do anything. We have more than enough capacity, our leverage ratios are in good position, our coverage ratios are strong, unencumbered asset pool has actually increased with the repayment of some unsecure debts, so we don't -- we don't have to do a thing, but, you know, we might look to do something opportunistically in the second half.

Thank you.

Yep.

Thank you. Just a reminder if you do have a question at this time you may signal by pressing star one. We will go next to John Guinee with Legg Mason.

Hello.

Hey John.

We didn't -- we're having a little trouble here, thank you. Two quick questions. One is, it looks to me from our office's industrial coverage universe, that you are about the only company that's in a -- a net acquirer versus net disposer in 2005. Any comments on why you guys are acquiring and everyone else is -- has a debt net disposition mentality?

I can't comment on why, you know, what everybody else's business strategy is. I can tell you from our strag... -- our business strategy, we're still acquiring buildings, we think, at good cap rates in -- with good strong credit tenants. I think we did -- done a pretty good job of growing FFO per share even with dilution of, you know, even with the dilution of extra share offerings largely as a result of doing acquisitions. And so, I think we have delivered some good healthy growth as a result of those acquisitions. Going forward, you know, again I don't think we're going to be acquiring as much as we acquired in 2003 and 2004, and I -- and again I think we will be doing some disposition activity this year.

We've already done some, there might be some more in 2005. But, you know, generally, I would say that, you know, we think we have been doing a pretty good job of picking some good assets and as a result of that giving shareholders a good return on their investment. So, I can't comment on why other people run their business the way they do, I can only tell you the way we run ours and I think we're doing a pretty good job at it.

Okay. Second question, it looks no -- no matter which way you run your numbers that you're going to be in a dividend coverage shortfall position well into 06. Is that going to affect your dividend policy?

John, as I mentioned in the initial remarks, the Board reviews the dividend coverage and the dividend amount on a quarterly basis. The Board is comfortable with the current dividend level. I think, you know, it, it's no mystery, all the officery seem to be in the same boat, many of them paying out more in dividends then they're generating in cash available for distribution. What's happening at HRPT is, in 2004 we were fortunate to take care of around a million square feet of leasing, particularly in the Philadelphia market and southern California, for long term and of course these were expensive deals because of the term, six -- up to 16 years. What's happening in 2005, though, is the actual payments on these capital improvements for these tenants is coming through.

But if you look at HRP's FFO and you look at the current quarter TI and leasing commission run rate, you layer in what we have in the current quarter for recurring Cap Ex you're most closer to a 100 % dividend payout ratio. And I think, you know, as we continue to make accretive acquisitions as we see Cap Ex stallers moderating in the future, as vacancies decline and as we achieve rent growth throughout the portfolio, we'll see this payout ratio increase and improve.

Good, thank you.

Our next question comes from Scott Sedlak with AG Edwards.

Hi. Adam, could you maybe comment on what the cash returns on your acquisitions were in the second quarter?

We reported, I'm assuming you're talking about the cap rates, they've been about -- for the second quarter total, we listed in a supplemental, it's about -- weighted in -- it's probably somewhere around 8.5, 8.6.

Okay, so a little bit underneath the 8.9, is -- I'm assuming that's the GAAP cap rate that you're reporting there right?

Right.

That's right.

Okay, so about 8.5 then roughly for the cash?

I'd call it 8.6.

Okay. In terms of the occupancy gains that you reported in the quarter, how much of that was attributable to the sales up in Massachusetts?

Very -- very little. They were largely vacant buildings to begin with, they were -- and so most of the occupancy gains, you know, luckily or I'd say, to our benefit, have come through really same store growth and occupancy. We've been doing a pretty good job of leasing, leasing activity across the country, so most of our occupancy gains have come from same store growth.

Okay. And then, in terms of interest income, that was up in the quarter, can you just comment on that maybe John?

Sur3, let's see. In August of 2004 we issued $400 million of 6.25% senior notes that come due in 2016. Basically it's all mainly attributable to the fact that we've acquired around a billion dollars of assets between April 2004 and today.

In terms of interest income?

Oh, I'm sorry, I thought you said interest expense.

No, I'm sorry.

Interest income is, it's really minimal, I think it's less than a million dollars.

But, it looked like it was up from I think the last quarter if I'm not mistaken.

Right, what we have on our revolver, it's variable rate and we lock in to different, we can lock into different periods, seven days and one month and up to three months and occasionally what we do between LIBOR layered maturities is, is invest the money in short term deposits and there just may have been a little more cash deposits invested this quarter than prior quarters.

Okay. Just related to probably the offering. That you had, proceeds from the offering at all or --

I mean it's, it's basically cash flow.

Okay. Lastly, when is, when is AON's lease up in 2006 in Baltimore?

Oh, AON?

Yes.

What month is it up?

Yeah, do you know that offhand?

I don't know it offhand what month it's due.

Okay. Any idea when or what the rent levels are there compared to the market?

In Baltimore we're running right around market rates.

Okay, great, thank you very much.

Yeah.

We will go next to Ken Avalos with Raymond James.

Could you tell me the IRR on the sale of the property of Westwood -- in Westwood, Mass., and the holding period please?

The holding period, we bought -- there was three buildings, they were bought at different times. Honestly I haven't done the , you know, the AOR -- it's somewhere probably in the mid-teens, because they were well occupied buildings for several years. It's got to be around 15%.

Okay. Great, thanks.

And we have a follow up from Phillip Martin with Stifel Nicolaus.

Yes, just a couple other things. Can you give us an update on Hawaii now that you've owned a significant chunk of that portfolio for the last year, year and a half, just has anything changed or is everything pretty much the same and then secondly, the $3 million one time recovery, can you just, briefly describe what that was?

Okay, I'll deal with the Hawaii question and I'll turn it to John to talk about the recovery question. Hawaii is going, is going really, is going very well. We're very pleased with the progress we're making there. As I mentioned on the -- in the prepared remarks, we signed nine new leases just in the second quarter, you know, rent roll-ups were 57%. Demand for space is still very, very high, occupancy rates are 98, 99%, depending on who you talk to in the market. You know, generally, I -- I think the, you know, demographics and long term, you know, we're very bullish on the Hawaiian market just because of the limited amount of, you know, space for industrial buildings, you know, limited amount of flat space that's actually zoned industrial.

The dynamics of some of the space where our -- where our space is actually located, which is, I think, you know, ground zero in terms of industrial location. Some of the stuff we brought back in 2003 which is between the harbor and the airport, it butts up to -- against the CBD. All the, everything, all the trends are going in the right direction for our investments in Hawaii, and we're very bullish. In fact, we'd love to buy more stuff in Hawaii because of our -- because of the way we feel about the market, it's just very difficult to find stuff. There's a very limited supply of new product that comes out to market there. For the second question I'll turn it over to John regarding the nonrecurring.

Yeah, the, the collection of around $3 million of rents in the Philadelphia market was rental income that was previously fully reserved.

Okay. Okay, thank you.

And there appear to be no further questions at this time. I'd like to turn the call back to our speakers for any additional or closing comments.

Okay, thank you for joining us on our Z-conference call. We look forward to meeting with the investor community in the fall as well as having the opportunity to update you on our progress in next quarter's conference call, thank you.

This does conclude today's conference call. Thank you for your participation, you may disconnect at this time.