Equity Commonwealth (EQC) 2006 Q2 法說會逐字稿

Good day, and welcome to the HRPT Properties Trust second quarter 2006 financial results conference call. This call is being recorded. At this time for opening remarks and introductions I would like the turn the call over to the Manager of Investor Relations, Mr. [Jim] Bonang. Please go ahead, sir.

Thank you, [Robbie]. Joining me on today's call are Adam Portnoy, Managing Trustee, 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 federal securities laws. These forward-looking statements are based on HRPT's present beliefs and expectations as of today, August 7, 2006. 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 & Exchange Commission regarding this reporting period.

Actual results may differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause those differences is contained in our form 10-K filed with the Securities & 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 on any forward-looking statements.

Now I would like the turn the call over to dam Portnoy.

Thank you, Tim, and good afternoon to everyone joining us for our call. For the second quarter we're reporting FFO $0.30 per share compared to $0.32 per share for the same period last year. However, the comparison between quarters may be misleading because FFO in the second quarter of 2005 included about $0.01 per share of extra cash flow from our equity investments in our former subsidiaries, S&H and HPT. We sold these investments in March of this year for gains of approximately $116 million.

In addition, in the second quarter of 2005, we had $2.8 million, or $0.01 per share of nonrecurring rent recovery income we received from a tenant in our Philadelphia market. We discussed this item in detail during last year's second quarter conference call. Excluding both these items, FFO per share was flat year-over-year.

Across our major markets, real estate fundamentals remain strong, but the rate of growth seems to be slowing. Occupancy is increasing and net absorption of office space is still positive and exceeds new deliveries but total absorption in 2006 is less than in 2005 and development activity is increasing. In addition, the recent slowdown in job creation across the U.S. is starting to create some uncertainty about the future demand for office space in some of our markets. Nevertheless, we have been experiencing strong leasing fundamentals across our portfolio.

During the second quarter we signed leases for almost 2 million square feet for an average of eight years, and the terms of these leases continue to be very positive. Leases signed during the quarter yielded a 5% roll-up in rents and up front leasing costs were very low, $13.23 per square foot, and $1.65 per square foot per year. Leasing activity continued to be higher than average during the quarter, because of a large amount of renewals, which represented about 68% of the square feet leased during the quarter. Most notably, we signed two large lease renewals in New Mexico and Colorado, each of which was for over 275,000 square feet and had terms of eight and sixteen years.

Sequentially it may appear our leasing costs have increased between the first and second quarters, but the slight increase in the second quarter is the result of more leasing activity away from Oahu, Hawaii. As we have discussed in the past, given the strength of our holdings in Hawaii, the leases signed there are typically longer, involve higher roll ups in rents and include less up-front leasing costs. Excluding leasing activity in Oahu, our leasing costs are roughly flat between the first and second quarters.

Overall occupancy increased 20 basis points from the first quarter to 93.6% at the end of the second quarter. This increase in occupancy was the result of signing leases for more square feet than expired as well as purchasing properties with high occupancy rates during the period. We also continue to maintain above average occupancy rates in all of our major markets.

Overall same store NOI declined 2.9% during the second quarter. However, this metric has also been affected by the previously mentioned nonrecurring rent recovery income that was received in Philadelphia during the second quarter of 2005. Excluding this item, same store NOI was flat year-over-year. Generally on a same-store basis, overall higher rental rates were equally offset by a 20 basis-point decrease in same store occupancy since April 1, 2005.

When looking at our portfolio, our properties in Oahu, Hawaii, and southern California continue to perform very well with increases in net effective rents driving growth in same store NOI. Austin has also started to generate significant increases in same-store NOI but largely as a result of increased occupancy. Philadelphia continues to move sideways, but as we have stated in the past, we are very well-positioned in this market with very manageable lease roll over during the next few years and in-place rents equal to or below market rates.

Boston and Atlanta continue to be our most challenged markets but the Company somewhat insulated from any decrease in NOI from lower occupancy or rent roll downs in these markets because of our large size and diversity of properties. For example, only 0.6% of the Company's total leased square feet is scheduled to expire in these markets during the second half of 2006.

The biggest change we have recently seen in any of our markets is in Washington, D.C. For the last few years, this market has been one of our best performing but during the last few quarters, things appear to be slowing down, and in general, market occupancy rates have started to flatten or even decline slightly with slowing absorption in increasing development activity. We believe this has let the flat same-store NOI during the quarter and the future performance of this market is uncertain.

One of the benefits of having a large nationwide portfolio is we are somewhat insulated from downturns in individual markets. For example, while both Boston and Atlanta are currently struggling, Oahu and southern California are experiencing strong growth. Furthermore, whereas Washington, D.C. may be slowing, Austin has started to improve significantly.

With regards to investment activities during the quarter, we acquired five properties with 1.2 million square feet for approximately $105 million. These properties included one industrial building located in Virginia, and eleven office buildings located in Georgia, South Carolina, Indiana and Ohio. The average purchase price was $87.20 per square feet, and the average going-in cap rate was 9.4%. These properties are 95.6% leased for an average of 4.8 years.

The largest of these acquisitions was the $51 million purchase of an eight-building business park with 538,000 square feet located in suburban Columbia, South Carolina. This property is widely viewed as the most desirable cush an office park in the market and we purchased this property for going end cap rate of 9.3%. The property is currently 93.3% leased and the largest tenant consists of the state government of South Carolina which has multiple long-term leases at the property.

Subsequent to the end of the quarter, we sold 4 buildings with about 60,000 square feet, located in Atlanta for $9.2 million. We will discuss this in greater detail during next quarter's call. As of today, we have no properties under agreement to purchase and one property with 30,000 square feet under agreement to sell for $4.5 million. Of course, this agreement is subject to closing conditions and the sale of this property may or may not happen during the third or fourth quarters.

In addition, we have recently started a $17 million development project on Oahu, Hawaii, which we are confident will generate returns or current returns of over 12% within three years. As we have stated before, over the next five to ten years, we expect we may greatly increase our return on investment in Hawaii by redeveloping portions of our land holdings in this market. Although our pace of acquisitions appears to be slowing, we continue to focus on purchasing high quality and well-leased office and industrial properties located in less high profile markets, as well as looking for opportunistic development and redevelopment opportunities on occasion in select markets.

We also continue to actively look at selling B&C class properties located in second and third tier market areas. As we end this quarter, HRPT continues to be very well-positioned with among the highest occupancy rate, longest average remaining lease term, and highest credit quality tenants in the entire office REIT industry. In addition, we continue to believe that our large, diversified property holdings and tenant base adds to the security and stability of our cash flows and dividend payments.

I will now turn the call over to John Popeo, our CFO.

Thank you, Adam.

Looking first to the income statement, rental income increased by 13.9% and operating income increased by 5.6% during the second quarter of 2006. Year-over-year quarterly increase in rental and operating income reflects increases from properties acquired between April 1, 2005, and June 30, 2006, partially offset by $2.8 million of nonrecurring rent recovery income received in the second quarter of 2005 from a tenant in our Philadelphia market.

Our consolidated NOI margins were 61.6% for the second quarter of 2006, and 63.3% for the second quarter of 2005. The decrease primarily reflects non-recurring rent recovery income received in 2005 and increases in escalatable expenses in 2006. Current quarter EBITDA increased by around 1% over the same period last year, reflecting property acquisitions offset by nonrecurring rent recovery income received in the prior year and the elimination of EBITDA received from investments in our former subsidiaries that were sold in March of 2006.

Interest expense increased by 20.5%, reflecting the increase in average debt outstanding, which was used primarily to finance acquisitions in 2006 and 2005 and the 180-basis point increase in weighted average interest rates on our floating rate debt from 3.8% during the three months ended June 30, 2005, to 5.6% during the three months ended June 30, 2006.

Net income available for common shareholders for the second quarter of 2006 was $22.3 million, compared to $39.2 million for the second quarter of 2005. FFO available for common shareholders was $0.30 per share for the second quarter compared to $0.32 per share for the prior year, and $0.31 per share for the first quarter of 2006. As Adam mentioned, the decline in FFO per share primarily reflects the sale of our investments and shares of our former subsidiaries in March of 2006 and nonrecurring rent recovery income received during the prior year. This quarter's results represents a good run rate for the Company excluding any future acquisitions.

In July of 2006, we declared a dividend of $0.21 per share which represents 70% of our second quarter FFO. Our board considers the dividend level on a quarterly basis, and they are comfortable with this current payout ratio. During the quarter, we spent $24.3 million on tenant improvements and leasing costs and $6.3 million or $0.11 per square foot or recurring building improvements including lobby renovations and elevator and other systems upgrades throughout the portfolio. We paid $4.8 million on development and redevelopment activities during the second quarter.

Turning to the balance sheet on June 30th, we held $35.1 million of unrestricted cash. The $13.9 million increase in rents receivable reflects about $10 million of straight line rent accruals and increases in expense recovery billings during 2006. Rents receivable includes approximately $122 million of cumulative straight-line rent accruals as of June 30th. Other assets include approximately $83 million of capitalized leasing and financing costs.

On June 30, 2006, we had $680 million of floating rate debt, $392 million of mortgage debt, and $1.55 billion of fixed rate senior unsecured notes outstanding. The weighted average contractual interest rate on all of our debt was 6.2% at the end of the quarter and the weighted average maturity was 7.1 years. Our senior unsecured notes are rated BAA2 by Moody's and BBB by Standard & Poor's. The book value of our unencumbered property pool totaled almost $4.9 billion at the end of the quarter. Our secured debt represents 7% of total assets and floating rate debt represents 26% of total debt.

At the end of the second quarter, our ratio was debt to booked capitalization was 49.5%, and debt to market capitalization was 47.5%. Our EBITDA and fixed charge coverage ratios were 2.7 times and 2.2 times respectively. As of the end of the second quarter, we were comfortably within the requirements of our public debt and revolver covenants. As of today we have $230 million outstanding on our revolving credit facility, with $520 million of additional borrowing capacity.

In summary, FFO decreased during the quarter because of the sale of our investments and shares of former subsidiaries in March and nonrecurring rent recovery income received in the prior year. Up-front leasing costs remain low at around $13 per square foot. We signed almost 2 million square feet of leases at higher net effective rents. Our Oahu land holdings continued to perform very well, and we have started the process of redeveloping some of these lands for greater returns. We completed $105 million dollars of acquisitions during the quarter. We ended the quarter with plenty of capacity under our revolver, and we are well-positioned with regards to leverage and coverage ratios.

Overall, we continue to believe HRPT's strong tenant base, limited near-term lease expirations, strong balance sheet and current annual dividend yield of around 7% make HRPT a logical choice for long-term investors. That concludes our prepared remarks. Operator, we are now ready to take questions.

[OPERATOR INSTRUCTIONS]. We'll take our first question from Scott Sedlak with AG Edwards. Please go ahead.

Hi, guys. Adam, can you give us a little bit more detail on the development project in Hawaii?

Sure. It is about 120,000 square feet, six-story structure. It is probably going -- the current thinking is it is going to be largely a self-storage facility that is currently being contemplated that either we will probably third-party manage it, but it is possibly that RMR's management will be managing it, and it is something that we think we'll be able to exceed well in excess of 12% current returns on. If some of the lands we talked about in Hawaii in the past, we have about -- about 19 million square feet out there, about 96% leased.

The dynamics out there are so very, very strong on many different fronts with regards to real estate. On the industrial side alone, there is less than 1% vacancy in the market. We started looking at self-storage as an offshoot to the industrial holdings we have out there about a year ago, because we had a very small self-storage facility that was on one of our lands, and it was a very old facility, and was constantly 100% occupied, and so we did a little bit of work out there and found that compared to the mainland, that the Hawaiian market is severely underserved with self-storage and looked at the rates and the occupancy rates for self-storage facilities out there, the dynamics are incredibly, incredibly strong.

When you look at what's going on out there in terms of how fast the economy is growing, how little land there is available, and how many renters and second homeowners there are, how many students and military personnel are moving in and out of the market, the dynamics are extremely strong, and, again, I think it is going to be -- I say it is excess of 12, but our mid-run rate is higher than 12, meaning, if it is only 12, I am going to be disappointed with this investment.

So you guys are going to own this property, then?

HRPT will own it. It is on lands we currently already had.

But the rest of the holdings out there are just industrial lands. You don't own buildings, correct?

We own a few buildings, I would say maybe half a dozen, most of them very small, some of them almost like very small, very small buildings.

Can you comment, does RMR have any operating experience in the self-storage area?

RMR has limited self-storage experience in that area, but we do have experience in retail, in apartments, in hotels. Yes, self-storage would be new to us, but again, we haven't determined whether or not RMR will absolutely be the manager, we could obviously use a third-party manager. We just started the development project out there. It is probably going to be another six to nine months until it is completed.

Okay. But you would not foresee going outside of the office or industrial areas such as self-storage or retail outside of Hawaii?

No. That's correct.

Okay. In terms of the market rents, I notice obviously they rolled up. Can you give us an idea in terms of what the cash rents were?

They were about flat.

Were you willing -- I know you guys talked maximizing cash flow in the past: were you willing to trade higher capital expenditure, capital commitments for the rents in the quarter, or can you elaborate a little more?

We continue to deploy that strategy, especially in certain markets like southern California and Austin these days, we're starting to do things like that as well, very much so, and then in select other markets as well. What this quarter had a lot of and as you're probably familiar with is, we had a lot of renewal activity, and these renewals not just from people that were rolling in the quarter, but also people that were rolling over the next six months and then some also rolling let's say early 2007, so there was a lot of renewal activity. This is sort of mirroring what we saw in the first quarter of this year, and we've been, as you know, with renewals you obviously have a lot less in up-front costs associated with them, and the good news is the renewal, the average remaining renewal term has been very long.

In terms of the mark-to-market of the overall portfolio where would you peg that at now?

I think overall I don't think it has changed much in the last couple quarters. We're probably still about within -- we're probably 5% above market across the entire portfolio, but there is concentrations, meaning places like I think Boston and maybe even Atlanta a little bit is where there is really the concentration of that. There is areas in the market like southern California and even Philadelphia to a certain extent we're under market in those markets, so there is some roll-up opportunity, and in Austin probably right around market if not below market now with all the leasing activity we've done there. Overall, probably 5% above but largely being driven by what's happening sort of in Boston and Atlanta.

Thank you very much.

Yep.

Thank you. We'll go ahead and take our next question from Phillip Martin with Cantor Fitzgerald.

Good afternoon, everybody. Just on that last question about below market rents, really you don't have a whole lot coming up here in the second half of '06 in Atlanta and Boston, so really, when you look over the next twelve months, in terms of what's expiring, is it fair to say that you're 5% above market or are you more or less flat?

That's a good way of thinking about, it Phil. For the next -- if anything, for the next six months we're flat or even below market to tell you the truth.

Okay. Okay. By the time a big chunk of that Boston and Atlanta comes due we can hope that they will come back.

That's right. Markets could -- dynamics could have changed by then, that's correct.

I just wanted to clarify that for my model. In terms of -- in higher development, absorption is down. We're seeing that in DC, not surprisingly given how strong DC has been over the last couple of years relative to other markets. Are you seeing a similar situation in southern California and some southern California markets?

You know, there is a lot of development activity in southern California, but it is still less than the absorption, so it is still a healthy dynamic and rents, what we're seeing in our especially our Los Angeles properties, rents are still moving up. We're still increasing net effect in our southern California portfolio. Now, our southern California portfolio is a little bit weighted towards medical and government, and so the medical stuff is especially well-located that we have down there, and so we might -- we may not be the best proxy for the whole market in southern California. I think we have a very strong portfolio there to begin with.

Okay. I have seen it happen.

It would not see the same dynamic in as in Washington, D.C. We have a larger portfolio in Washington, D.C.

Okay. Got you. On the development side, are there potential opportunities for you in DC or some of these other markets outside of Hawaii on the development front?

No. It is a good question. The market that I think -- yes, and the market I will tell that you we looked at lately is Austin, and there might be some development opportunities in Austin. That market is really experiencing some great dynamics right now, and that's another market we've looked at. Now, we're not even at the stage where we're close to committing to anything. It is a market we definitely looked at outside of Hawaii as a market we might do some development activity in.

Okay. Okay. Fair enough. Last question, regarding the redevelopment/development in Hawaii, what's the total estimated value of that transaction?

Total is $17 million commitment, not commitment. That's what we budget it is going to cost us.

Okay. Timing, you said, is 9 to 12 -- nine months to develop this.

Yeah.

And lease it up?

You have to lease up. Within three -- let's say it is online by second quarter next year. Our lease-up is we're modeling three years. It could be faster. Our base case is saying three years to lease it up to stabilized occupancy, and then I think we're going to -- again,if we only get 12% on a current return on, this I will be disappointed. I think we're going to do better.

Lastly, with the $13.23 per foot costs to lease up space $13.23 right within the range of where you think costs will remain?

Yeah. I think it is a -- this quarter was a pretty good proxy. John mentioned it in his prepared remarks. This is a pretty good run rate quarter.

Okay. Okay. Good deal. Thank you very much.

Thank you. [OPERATOR INSTRUCTIONS] We'll take our next question from Sri Nagarajan of RBC Capital Markets.

I think in your prepared remarks you talked about the purchase of an industrial building in Virginia. Can you briefly remind us of your industrial strategy and strength and I know you have a lot of industry land in Hawaii, but other than that in the United States.

Thanks for the question, Sri. Right now it is right around 15, 16% of our entire portfolio is industrial. Most of that as you've pointed out is in Hawaii. We do own between trying to get the exact number, about $250 million worth of properties on the mainland, which are industrial properties. Our strategy, we will continue to, I guess, selectively buy some industrial properties when it makes sense, but I really don't think that you're going to see HRPT become more -- I think 25% of total -- I would be surprised if it grows beyond 20% of total NOI for the Company.

I think we will continue to make some additional industrial acquisitions, but around 20% of the portfolio is about maximum. If it got above 25, I don't think there is an intention to try to get -- I don't think we want to get it above 25. Let me put it that way. I think we're a long ways from there. I don't think you're going to -- 10% of the acquisitions that we might look at would be industrial buildings. It gives you a sense of how we're approaching it.

With respect to this particular acquisition you made, can you tell us some background or rationale here? Was it just an opportunistic acquisition at a camp rate here or some color on that?

Trex, I don't know if you're familiar with Trex. It is a publicly trading company that makes building materials. It is part of -- this building and a building across the street is their corporate headquarters. They use it for manufacturing, warehousing. It is key to their entire operations. We have a long-term lease. It is a public company. It is a decent credit. It was an opportunistic buy for us.

One last question on my side. I think also in your prepared remarks you talked about disposing of B&C properties in lesser markets. Do you have any strategy in terms of dispositioning, especially in terms of exiting some markets altogether or again will this be more opportunistic looking forward and how should we think about it in '06 and '07?

'06 and '07, right now I would say it is fairly opportunistic. We have thought about certain markets on and off about maybe completely exiting, but we're not prepared to really say what specific number is of dispositions. It really is opportunistic. There are a couple markets that we have current -- they're not one of our major markets. They would be one of our smaller markets where we have a small amount of holdings and we don't see much in the way of growth opportunities in that market that we've contemplated exiting, but what we're making a point of doing is whenever we have something under agreement we then announce it to you guys and make sure you know about, it but until we have something under agreement, the way to think about it is it is opportunistic.

Right, so just speaking in terms of the future outlooks, we can't expect HRPT to be down to a specific number of markets, say ten markets or so.

No. I think HRPT's strategy is remaining as it has been for many years, to be fairly diversified geographically. We will have some concentrations in some markets, and we will -- a lot of the markets that we might be in if you look on our website, a lot of those buildings might be GSA leased buildings or medical office buildings because those are the types of buildings we would look to buy one-offs anywhere in the country. So I think the strategy remains very much as it has been for the last couple years.

Thanks, Adam.

Thanks.

Thank you. We'll take our next question from Chris Pike with Merrill Lynch.

Hey, folks, how are you doing? Sri took my question in terms of a hot topic, in terms of what you're going to be selling, it doesn't seem like you're going to put a number to that. I am just curious, on the development, redevelopment in Hawaii, I know it is a very small portion, but how different was it to get the development zone for storage, let's say versus typical industrial facility? Was there any noticeable differences with respect to zoning and variance and things of that nature?

No, there wasn't. For this particular site, and I forget the exact classification that they used out there, it is something like industrial two -- they have their own zoning designation. The zoning designation they have, self storage fit within it.

Okay. I guess once again just unrelated to you guys, just for my own clarity here, what is the market comp set look like out and around where you guys are going to be putting this up? Is it a bunch of local mom and pops, just a dearth of providers? What does it look like out there?

A lot of mom and pop's. Not very many of them at all. The market is incredibly underserved. A few of the things that you guys will probably ask your co-workers to work on the self storage space about this, but we spent a year looking at this pretty closely. Some of the things you look at is what percentage of the households around the area rent versus own, and you always are looking for a market that has a lot of transient people moving in and out of it. A lot of second homeowners, and Hawaii had every metric that anybody that would ever look at building a self storage facility, every metric Hawaii was on the top of.

For example, in the mainland about two-thirds of all the homes are owned, about one third of the people rent their homes. In Hawaii it is the exact opposite. Two-thirds of the homes are rented. One third are actually owned. You have a huge population of students moving in and out of the market, and a very large population of military people moving in and out of the market that require self storage, and then second homeowners, which require self storage as they move in and out of the market.

We did lots of our own internal research looking at all the other self-storage facilities. We found which meant calling them up and going and visiting every one of them. They were all running first of all -- half of them were fully occupied. You couldn't get a site. They didn't have anything to release you. The other that did, it was an old facility. It was a small -- they my have one or two blocks of space they might have available. This was the dynamics, one from a macro standpoint were incredibly strong, and also also the statistic, the amount of storage space that available per square foot per capita roughly half what it is in the mainland is what it is in Hawaii as what it is in the mainland.

You do this macro overview look, and we did looks like are from a macro perspective. Let's go put our feet on the ground and ask everybody and make sure we're not missing something, and we did. We met and visited and called every other self-storage facility in the state and found out what they had, and the dynamics were very strong, so that's what led us to take up this opportunity, and again, we feel very bullish about you know how we=ary, everyone on this call knows how warily we approach development activity. It is only when it is going to be a -- it is going to be 200% home run in our mind where as maybe some of our competitors would take a 100% home run in order for us to embark on it. We feel pretty confident this is going to be good.

Again, this echoes I think we've been talking to the market about this, about how we want to develop some of these properties and we're going to develop them, and I think over time we're going to increase the return on this. We already increased the return on our investment. I haven't run the numbers this quarter, but I am sure it is -- we started in these investments at 7.5 cap. We're probably 8.5 cap now on current cash flow. You can probably figure it out looking at our supplemental. We're probably about there already. Just raising the rents, when we start developing some of these properties, and it is not going to be all of them. In my mind it is 25, 30% of them over the next five, ten, fifteen years even. I think we're going to get a really, really great return on this portfolio.

Is this just something -- is this just going to be isolated to Hawaii or are you warming up to the -- once you start to see the dynamics of storage in general if you can find a market in the U.S. or find a building in the U.S., is this something that RMR is actively looking at to enter as another after-class, if you will, in the mainland or is this going to just be isolated to Hawaii?

I think it is a good chance it will just be isolated to Hawaii because we've done all of this work and we now think we know a little bit about what's going on in the self-storage industry and the dynamics. We have looked at selectively in our existing mainland portfolio where we might have vacant land associated with one of our buildings, but to date we haven't found the site on the mainland that would be -- that's suitable for building something like this, so I guess what I am saying is I think it is just going to be in Hawaii, but if we see an opportunity that looks very strong, we would do it here in the mainland as well. You know, that's also just sort of echoing not just self storage by development. There is opportunities that I think as the portfolio has gotten larger and larger, and as it has -- as we've grown as the time has passed, the Company has been in the office sector now for over ten years. Some of the spots that we've owned office buildings across the portfolio in some other markets. The highest and best use may not necessarily be office.

That's something that we've been focusing a little bit more on over the last, I don't know, twelve to eighteen months, and I expect we'll probably continue to do those types of things going forward, meaning perhaps we have a site in one of our markets that is an office building and we have a lot of lull there and it is fifteen years old and happens to be in a site that has seen a lot of, let's say, residential development and retail development around it. We could contemplate a retail site development on something like that. That's something that I think HRPT given the size of the portfolio we will do.

Now, I don't think it is going to be a huge part of our business at all, but I do think it is going to start becoming a smaller, but noticeable part of what we do going forward. Again, it is just sort of trying to be optimistic. Our goal as always, we always yearly, if not quarterly on a yearly basis we look at our entire portfolio and we go through every property, and we say what's -- not only what's the budget but is the best and highest use for this property and should it remain an office building. That's a question we've been asking ourselves for the last couple years, and we're starting to in certain markets we're start to go think maybe a couple more -- there might be a couple other opportunities out there to do many other interesting things where we think the dynamics are very strong, let's say, to do something.

I think rather than think about this as are we going to self storage growth spurt, this might be an indication of HRPT trying to just be a little bit more opportunistic in some of its holdings across the portfolio. Maybe its self storage, maybe it is a retail site.

Thanks a lot, guys.

Thanks. Thank you. We'll go next to Charles Place with Ferris, Baker Watts.

Good morning or good afternoon.

Hi, Charles.

A lot of the stuff I was interested in has been discussed, but I want to also just inquire about your G&A expense level around $8.5 million this quarter. Is that a good number to use going forward?

Yes, it is, Charles.

And see if there is other questions. I guess, can you -- comment a little bit more about the some of the more challenging markets out there. When I look at the data on Philadelphia recognizing that was -- was it 2.8 million nonrecurring rent recovery.

That's correct. That's what the number was in the second quarter of 2005.

Right. I guess just a little bit more commentary about the Philadelphia and Atlanta markets, kind of as you see them over the next 12 to 24 months from a leasing standpoint would be helpful.

Sure. Philadelphia I think again I am not too worried about Philadelphia. I think we don't have a lot of rolling and what we do have rolling I feel pretty confident we'll be able to release and probably close to again most of the portfolio there is at market, and I think or below market, and I think largely be flat is what I am hoping for and what I think is going to happen.

Atlanta is going to be a more difficult market. I don't think -- I think you will see some lease roll downs in Atlanta over the next twelve months, and the good news there is Philadelphia is our largest market. It is sort of going sideways. Atlanta is our smallest market. It is having some difficulty and struggling and again the whole portfolio is not in trouble. It is just that some small portions of it and unfortunately is happens to be some of the stuff that is rolling in the next twelve to really 24 months in Atlanta, which isn't a lot, but what is rolling is currently above market.

Great. Thank you.

Thank you. Next we'll take a follow-up from Scott Sedlak with AG Edwards.

Adam, just a follow-up on Philadelphia. You obviously lost some occupancy in the quarter, and it looks like Tower's parent the top tenant list. Have they vacated completely in Philadelphia?

No. Thanks for the question, Scott, and thanks for the I am always impressed by your insightfulness into specifics in our buildings. Tower's parent is still a large tenant in our building. We signed a large lease with them about a year ago. This was a scheduled roll down as part of the lease we signed with them. You are correct in noticing that they have rolled off our top 10. They are still a large tenant in Center Square, the same building they were in. They've just rolled down their space. I think it is about 150,000 square feet.

Okay. And finally, I know, John, you touched upon the balance sheet capacity in your prepared comments. Any idea what level you could take your leverage ratios up to before jeopardizing your credit ratio or credit rating.

We've been right around 50% for a few quarters. I think we have plenty of capacity. We'd be comfortable anywhere from 53, 54% all the way down down to 45%. That seems to be the range we've been running in for the past two, three years. HRP's business plan as far as managing its balance sheet is unchanged. We've been in contact with the rating agencies. We have some meetings scheduled, and our approach to managing the balance sheet will continue as it has in the past, so we have around $500 million of capacity on the line.

Could we use the entire balance, maybe. Maybe we could. The other thing worth noting, though, is that we have around $4.9 billion of unencumbered assets which has to be one of the most valuable or the largest unencumbered property pools in the BBB office resector.

Okay. Appreciated the comments.

Thank you. We'll go next to John Guinee with Stifel Nicolaus.

Gentlemen, thank you. A couple things. First, how much raw land do you have or how much developable FAR do you have on the balance sheet?

I am trying to get the act acreage. It is mostly -- I can tell you where it is located. The biggest pieces we have some land in Pittsburgh and we got developable land in Austin. I just don't remember the exact acres, John, do you have that number? Just under 200 acres.

Okay. Great. Second question, you're running at about 4 to 500 million in net acquisitions a year. Then you've got 300 million in preferred. You most likely want to pay off next September. You've got a a need of 700 or $800 million. How does that -- how does going back to the common stock or preferred markets play into your thinking right now?

Well, the good news is we don't have to raise anything right now. We have a lot of capacity on the revolver. There is no need to raise any capital today. As I mentioned in the prepared remarks, we have nothing under agreement to make any additional acquisitions as of right now. There is no need to do anything.

In terms of common equity, the way we approach financing is dash the way we've traditionally run this business is we use our revolver to short-term finance acquisitions and look to what is the best source of funding or for long-term funding. Honestly today I think all three markets are available to us.

Again, we don't need to raise any money, but I think the markets would be available to us at the raised debt to raise preferred, to raise common, so it is hard to answer that question when we don't need to do anything today, but I think in the future as we let's say get a higher balance on our revolver, we probably look to do something -- when and if we get a higher balance on our revolver which would primarily come from acquisitions, we'd look to do a long-term financing, and we just look to do what was the best in the marketplace and what was the best thing for the Company and shareholders long-term. That would be our approach.

Okay. Last question, John, is it safe to say that you expect to run this business on about a $0.30 per share FFO run rate and maybe a $0.15 AFD or AFFO run rate over the next half dozen quarters?

Listen, we can comment on the next quarter, mainly because there is nothing in our development pipeline right now. After that, it is all going to depend on what hits the acquisitions pipeline, and the number of other variables including how we continue to make out on rent growth and same-store NOI growth.

Yeah. I think, John, I think probably for the next quarter, as John mentioned in his prepared remarks, there is a pretty good run rate and between saying that and saying we have nothing in the pipeline to acquire are for the next quarter it is going to be around that, but going beyond that, is very difficult for us to predict.

Thank you. Thank you. Next we'll take a follow-up from Phillip Martin with Cantor Fitzgerald.

Thanks again. John just asked the question I was going to ask, but just to take it one step further, on the vacant land, you've got the 200 acres. What's the acreage in Hawaii? I know it is probably a very low number, but do you have that number?

We own about 200 acres in Hawaii. The difference there is it is 96, 97% occupied.

Occupied.

Right. You know, the way we got our hands on this property was we had a tenant that basically on this site they actually defaulted on their rent payment and we threw them out, and then we had two options.

We could lease it to somebody else, but before we decided to do that, we decided to look at this development opportunity. It is an location. The other thing you look at when you look at self storage is you ask the guys in the business for a long time they will always tell you that it is your location and how close you are to a highway where you can get your signage up. This is right next to the highway, we'll have a huge sign right next to the highway going from the airport into downtown for this storage facility, so we think we have a great -- it is a great location for us.

On the mainland, what type of acreage do you have, what kind of acreage do you have that could be developed here on the mainland?

Again, it is mostly -- the biggest portions of vacant land or developable land we got is some in the Pittsburgh area and some in the Austin area, and I mentioned before Austin is another market given what's going on we thought about stuff there.

Okay. Perfect. Thank you very much.

We will go to Scott O'Shea with Deutsche Bank.

Thank you. Did I hear this correctly the going-in yield on the South Carolina park is 9-3, is that correct?

That's correct.

Are these -- can you tell me where these leases are versus market?

They're all right around market. The South Carolina market hasn't seen a lot of fluctuations in the last five to ten years. It is a second or third tier market. It is not a huge market. It is largely driven by the state capitol, the state government there, and that's one of the largest drivers in the economy.

Okay. Do these properties require a lot of catch-up CapEx or would you say they've been well maintained?

They've been very well maintained actually. The strategy here has been a little bit -- is that acquisition was sort of like what we did earlier this year in upstate New York. It is similar to what we did in Indianapolis. It is similar to what we've done maybe in some of our Chicago acquisitions. It is what we try to buy in the suburban Chicago acquisitions I should point out. We try to buy what we consider to be among the best properties in, let's say, a second or third tier market. This property in South Carolina, not only does it have the state government, which is the largest tenant which has lots of many long-term leases at the park, it also is sort of the -- it is the sort of number one business park in the suburban market, meaning every major financial institution, the Merrill Lynches, the Citigroups, all the brokerage firms will have an office at this park. All the accounting firms or many of the accounting firms will have an office there.

It is the place that if you're not going to be downtown this is the office park that most professional service, financial service firms would want to be, and that's the way -- that's the type of property it is, I guess, when you think about it, and that's why we were attracted to it. There is also not a lot of development activity going on in Columbia, so there is not a lot of new product coming online, which is good.

Okay. That's very helpful. My last question has to do with the self storage facility. Have you brought in a consultant or an experienced design construction firm to help you with the work there?

Yes, absolutely. We're working with a firm that's built many self-storage facilities both an architect as well as an engineering firm that's built many self-storage facilities here on the mainland.

Great. That's it for me. Thank you.

Thank you. It appears that's all the questions we have at this time. I would like the turn the program over to Adam Portnoy for any additional or closing remarks.

Thank you for joining us on our second quarter conference call. We look forward to speaking to at our investor events in on our third quarter conference call. Thank you.

That does conclude today's conference. You may disconnect your line at any time.