Equity Commonwealth (EQC) 2006 Q4 法說會逐字稿

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

Thank you, Patty. 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 he 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 statement are based on HRPT's present beliefs and expectations as of today, February 15th, 2007. 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 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 and Exchange Commission, and in our Q4 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 afternoon, and welcome to everyone that is joining us on today's call. For the fourth quarter, we are reporting FFO of $0.29 per share on a fully diluted basis, compared to $0.30 per share for the same period last year. The primary reason for this $0.01 decline is the loss of income from our investments in former subsidiaries which we sold in March 2006, and higher floating rate debt costs. For the fiscal year ended 2006, FFO was $1.19 per share, compared to $1.26 per share in 2005. This decline in FFO per share was primarily a result of lower lease termination fees and rent recovery income, the loss of income from our former subsidiaries, and the increase in interest expense on our floating rate debt.

Across our markets, real estate fundamentals continue to remain generally positive. Occupancy continues to increase or remain steady, and net effective rents are generally increasing across the country, but the rate of growth in some real estate metrics is starting to slow down. For example, even though net absorption is still in excess of new deliveries on a nationwide basis, total net absorption is decreasing year-over-year, and development activity has picked up in many markets. Leasing activity in our Company continues to remain strong. Leases for 874,000 square feet were signed during the quarter. 48% of the square feet were renewals, and 52% were new leases. During the year, we signed leases for over 6 million square feet. 61% were renewals, and 39% were new leases. Overall Company occupancy at December 31st was 93.1%, which represents a 30 basis point decline between the third and fourth quarters of 2006.

As we've discussed in the past, given our strong occupancy rates, we have begun sacrificing some occupancy in exchange for generating higher net effective rents in some markets. I think our leasing results for the quarter somewhat illustrate this point. Even though occupancy declined by 30 basis points, the terms of executed leases were very good during the quarter, with a 9% roll up in rents and $13 per square foot in capital commitments. These results are even more impressive when you consider we had a higher percentage of new leases during the quarter, which typically have lower net effective rental rates than lease renewals. Overall same store Company NOI was flat during the fourth quarter. Generally, on a same store basis, increasing rental rates have somewhat offset the 101 basis point decline in occupancy.

With regards to our portfolio, all of our major markets are performing well, with Austin, Texas, Oahu, Hawaii, and Southern California performing especially well. In Oahu and Southern California, the strong growth in same store NOI is primarily driven by rent increases. Whereas the 28% increase in same store NOI in Austin represents increases in both occupancy and rental rates. Philadelphia continues to move up and down on a same store basis, depending on different variables. But we continue to believe that we are very well positioned in this market, with only 3.4% of this market's square feet rolling through the end of 2007, and in place rents equal to or below market rents. In addition, the Philadelphia leasing market has shown steady improvement during the last few quarters, especially in the downtown market, where we own a large percentage of assets.

The Washington, D.C. market has really gone through a lot of changes in the last year, and we no longer characterize it as one of our strongest markets. Development activity has been robust in Washington, D.C., with development square feet exceeding net absorption for the last three quarters. As a result, occupancy rates have been declining in this market for the last two quarters, especially in some of the northern Virginia suburban markets. Nevertheless, we remain well positioned in this market, with 95.8% occupancy and in place rents equal to or below market rents. Austin continues to perform better than expected, with market occupancy steadily improving and very limited new development activity. Unfortunately, this is our only major market where we may have some lease roll-downs next year. But it is important to remember that the square feet expiring in 2007 represents less than 0.6% of the Company's entire square feet. As a result, any rent reductions in this market should have minimal impact on our overall financial performance in 2007. In our other markets located throughout the country, our portfolio has generally experienced modest decreases in same store NOI, primarily as a result of lower occupancy.

With regards to 2006 investment activities, we purchased 64 properties with 4.9 million square feet for $457 million. And we sold our interest in our former subsidiaries, as well as five properties, for a total of $329 million. During the year, we recognized total gains from sales of assets of almost $120 million. During the fourth quarter, we acquired 17 properties with 1.8 million square feet for $150 million, and sold one property in San Antonio, Texas, with 33,000 square feet for $4.5 million.

Looking forward to 2007, we are planning on real estate fundamentals to remain stable. We have 4.4 million square feet scheduled to expire this year, which represents less than 8% of our total square feet, and less than 10% of our annualized rents. This lease roll is spread out evenly throughout our portfolio, with no market accounting for a disproportionate amount of lease expirations. In 2007, we will continue to focus on purchasing high quality and well-leased office and industrial properties, located in less high profile markets, as well as look for opportunistic development and redevelopment projects in select markets. We also continue to actively look at selling some of our B and C class properties, located in lower tier markets we are unlikely to grow our portfolio. As of today, we have three portfolios of property, with 4.1 million square feet under agreement to purchase for about $187 million. Of course, these agreements are subject to closing conditions, and the purchase of these properties may or may not happen in the future.

As we end the year, 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 office REIT sector. Furthermore, the diversity of our portfolio holdings and tenant base adds to the security and stability of our cash flows and dividend payments. I'll now turn the call over to John Popeo, our CFO.

Thank you, Adam. Looking first to the income statement, rental income increased by 10.9% and operating income increased by 8% during the fourth quarter of 2006. The year-over-year quarterly increase in rental and operating income reflects increases from properties acquired between October 1st, 2005 and December 31st, 2006. Our consolidated NOI margins were 59.8% for the fourth quarter of 2006, and 60.4% for the fourth quarter of 2005. The decrease primarily reflects increases in escalatable expenses in our metro Washington, D.C. and Oahu markets, and a decline in occupancy in our other markets in 2006. Current quarter EBITDA increased by 1.5% from the same period last year, reflecting properties acquired, offset by the sale of our investments and former subsidiaries in March of 2006. Interest expense increased by 5%, reflecting the 130 basis point increase in weighted average interest rates on our floating rate debt from 4.6% during the three months ended December 31st, 2005, to 5.9% during the three months ended December 31st, 2006.

Net income available for common shareholders for the fourth quarter of 2006 was $23.2 million, compared to $32.2 million for the fourth quarter of 2005. Diluted FFO available for common shareholders was $0.29 per share for the fourth quarter, compared to $0.30 per share for the prior year. For the year-ended December 31st, 2006, diluted FFO was $1.19 per share, compared to $1.26 per share reported for the year ended December 31st, 2005. In December 2006, we declared a dividend of $0.21 per share, which represents 70% of our fourth 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 $27.3 million on tenant improvements and leasing costs, $9.7 million or $0.16 per square foot for recurring building improvements, including lobby renovations and elevator and other systems upgrades throughout the portfolio. We paid $8.5 million on development and redevelopment activities during the fourth quarter.

Turning to the balance sheet, on December 31st, we held $17.8 million of unrestricted cash. The $27.2 million increase in rents receivable reflects straight line rent accruals during 2006. Rents receivable includes approximately $137 million of cumulative straight line rent accruals as of December 31st. Other assets includes approximately $87 million of capitalized leasing and financing costs. On December 31st, 2006, we had $440 million of floating rate debt, $416 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 6.3% at the end of the quarter, and the weighted average maturity was 7.1 years. In October, we raised $368 million by issuing 15.2 million shares of 6.5% series D convertible preferred shares. These shares have a liquidation preference of $25 per share, and each share can be converted into HRPT common shares at any time, at an initial conversion rate which is equivalent to $13 per common share. Unlike convertible debt, these shares cannot be redeemed for cash, and can only be converted into common shares in the future. As a result, this security is recorded as equity on our balance sheet.

Net proceeds from this offering were used repay $310 million outstanding on our revolving credit facility, and to acquire properties during October. 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 about $5.1 billion at the end of the quarter. Our secured debt represents 7.5% of total assets. And floating rate debt represents 18% of total debt. At the end of the fourth quarter, our ratio of debt to market capitalization was 41%. Our EBITDA and fixed charge coverage ratios were 2.9 times and 2.1 times respectively. As of the end of the fourth quarter, we were comfortably within the requirements of our public debt and revolver covenants. As of the end of the year, we had $40 million outstanding on our revolving credit facility, with $710 million of additional borrowing capacity.

In summary, we continue to believe HRPT's strong tenant base, limited near term lease expirations. strong balance sheet, and current annual dividend yield of over 6% make HRPT a logical choice for long-term income-oriented investors. That concludes our prepared remarks. Operator, we are now ready to take questions.

[OPERATOR INSTRUCTIONS]. Scott Sedlak, A.G. Edwards.

I was wondering if you can maybe talk a little bit more about the development and redevelopment opportunities that you foresee in your portfolio.

Sure, Scott. Good afternoon to you. Thanks for the question. It's a great question. As you know and as we talked about in the past couple conference calls, we have some development activities going on in Oahu, Hawaii right now. And in the past, as we've shown people on some of our investor days and tours, that we've done some redevelopments in Austin, as well as in Washington, D.C. So we do have the capacity and capabilities of doing it, and we're starting to do a little bit more of it. As I look out to 2007, 2008, I can tell you we are thinking more about development and redevelopment opportunities. We get asked a lot about are we looking to sell assets in this market. And the answer is yes, we are looking to sell some assets. But I think what we're more interested in, and think where there might be some even greater returns, is looking at doing some redevelopment and development activity. And so I can tell you right now, we've probably got a half a dozen different projects that are in the very, very preliminary stages of looking at, that could be redevelopment projects that you probably wouldn't even see until 2008, until they start coming -- until we start doing some real work on them.

But I can tell you we are looking to do more and more of that stuff. And in the Oahu situation, that self-storage facility, we expect that to come on-line in the second quarter of this year. So -- and again, when development and redevelopment opportunities -- we're looking -- we're pretty selective. And we're being very opportunistic about it. And we're thinking about the two type of -- basically three types of redevelopment that you could think about. It's office redevelopment, it's some sort of office/retail redevelopment, and it could be a mix of some residential in there. And then we're also looking at some self-storage redevelopment. So again, it's about a half a dozen different projects that are in the very preliminary stage that we are looking at.

And when you think of the returns you could generate on those type of projects, how would those compare to the typical acquisition yield that you guys have been able to acquire?

Right. Well that's a great question. When we look at an office asset or any acquisition, I just want to point out, there's the initial cap rate. But obviously, we do a total return analysis on it over a five and ten year basis. Today, we're buying properties which we think over that time period we can get about a 10% return over the life of the asset, or the life -- or the investment horizon, as we look at it. And I think development projects, we're looking to do better than that. The one in Hawaii, I think is maybe a lit bit of an outlier. I think we really are quite hopeful that we're going to see returns in the, hopefully, in the mid teens within the next two, three, maybe four years. Whereas I think some of these other projects, I think we feel pretty good if we were able to get 12%, 13% returns on them. And that's sort of the bogeying we have in our mind. We're not doing development projects to get a 9% return. We're really looking at stuff in the low teens.

And can you -- I can't seem to recall, Austin, is that an industrial development? Or is that office development?

It was a -- it's a research park. It was I guess you could call an office/flex space, is maybe the best way to describe some of the development that we've done down there.

Okay. And then just in terms of the acquisitions that you already have under contract, Adam, what -- can you just go over those again? What type of yields kind of are you expecting on thos? And how much square footage and the number of properties?

Well, it's a total of -- it's three different portfolios. It's about $187 million. The yield we're going to get on them is about -- it's in line with what we were generating for 2006. And the yields that we've been generating in 2006 has been around 9%. A little better than 9% on a GAAP. And generally on a current yield, it's maybe in the high 8s. And that's in line with what we'd be doing with these acquisitions, too. I don't want to go into too much detail about them, because I'm always wary of talking too much about stuff that we just have under contract, because deals do fall out of contract.

Sure. No, that's fair. Okay. And then just lastly, in terms of the lease-up, you mentioned that the Austin space. I'm assuming that the roll-down is related to the Tyco space. Is that correct?

Well, Austin actually -- the results from Austin this quarter were excellent on a same store basis, and on leasing results. I mean, we did very well. But yes, in Austin, you're correct to point out that we do have Tyco, which is about 300,000 square feet expiring in March of this year or next month. We believe that the -- an existing tenant in the same park is going to take some portion of that space. It's not determined yet how much. We know they're not going to take all of it. And the remaining portion, we're going to put out to lease. Now, the stuff that is going to be taken by the existing tenant, I don't know how much. There might be some roll-down. There's not going to be much. With the stuff that we go out to lease with, there's going to be some roll-down there.

Okay. Thank you very much for your comments.

John Guinee, Stifel.

Couple things. First, a little clarification. What do you expect to have happen with your straight lines? You've -- had done a bunch of leasing at strong GAAP roll up numbers, and your straight lines look at like it's about 5.3 million, 5.4 million a quarter. Do you see that settling out above 4? Above 5 million a quarter?

John, I think at this point in time, that probably represents as good a run rate as any, because we'll be taking on new assets and adding to the straight line rent accruals, as well as seeing decreases.

So what's a good number, John?

Well, what we report this year -- this quarter is probably the good number to use going forward.

5.2 million?

Yes.

That sounds good. A combination of FAS 141 and straight line.

Okay. Our FAD number after adding back for noncash financing charges, deducting straight line, base building capital, second generation TIs, leasing commissions, is $0.58 for '06. And it looks like '07 and '08 is going to be $0.60 to $0.65 for funds available for distribution, or AFFO, people have different definitions. Do you see that as a good number, $060, $0.65?

John, you want to answer it?

Sure. Let's see. It all depends, as you well know, John, on where we end up with new and renewed leases, because the bulk of our CapEx -- and that's really what's driving the payout ratio at this point. The bulk of the CapEx is coming from leasing TIs and leasing commissions. But if you just kind of take a pure mathematical point of view, and take the 4.4 million square feet or so that we have expiring in 2007, and say, apply an average CapEx or TI and leasing commission rate for say the past four quarters that we experienced on new leases of roughly $15 a foot, that gets you to roughly $70 million. And then if you assume maybe $0.50 a foot on building square feet, which is roughly 40 million square feet, that gets you another $20 million. So you're up to say around $90 million. We have some carryover costs that will spill into 2007, another $20 million. So roughly around $110 million of CapEx, given the current run rates, gets you somewhere right around where what you just mentioned. Maybe 130% payout ratio. But again, it's really tough to predict with any high degree of certainty at this point, where we're actually going to end up.

Okay. If that dividend, if that short fall is maintained indefinitely, will the Board reconsider the dividend?

John, this is Adam. Thank you for the question. I think the Company is extremely focused on working on reducing that payout ratio. I think right now it's probably about a $35 million short fall, give or take, around there. And given the size of our Company, that is not an overly large shortfall that we can't maintain. At the same time, it's something that we are very focused on for 2007, in 2008. It's part of what I've been talking about with regards to giving up some occupancy for getting higher returns on our capital outlays or getting lower -- higher net effective rents and growing our cash flow. I can -- it's also why we're thinking about some redevelopment activities. It's very much something that we're focused on as a Company. Now, to directly answer your question, I do not believe that the Board at this time is contemplating reducing the dividend. I don't think that's on the table right now. Now, if we were to maintain -- one, I think we could maintain this payout ratio for a long time, without having to worry about the dividend. Second, I think the payout ratio is actually going to decline. It may take us two or three years to get it where we want it to be, but I'm telling you we're focused on getting it down.

Okay. And then the last question, historically you have raised equity at above $13 a share. And you have a good, strong acquisition pipeline. Do you anticipate raising common in the next quarter or two?

Thank you for the question, John. It's -- while I think the last offering we did was over 13. I don't think every time we've done a deal it's been over 13. That being said, we have a lot of capacity right now on our revolver. We have a lot of capacity with regards to our leverage ratio. I would say we're in a very good position and we have a multiple choices with regard to long-term financing. Now, as we grow this business, we will do an equity offering again sometime in the future. I don't know when it's going to be. As we grow and as we expand and as we put money -- capital to work, our plan is -- our mode of operation has always been to try to match fund it with a portion of long-term equity and debt -- and long-term debt. So we will do an equity offering some time in the future. But I'm telling you right now, where we're sitting, we have a lot of options available to us. There is no great need to have to do one. We have a lot of capacity on the revolver. Our leverage ratios are very low. They're probably on the historically lower end of where they've been for the last few years. So we feel pretty good about the balance sheet. Might it make sense to do equity in the next couple quarters? Maybe. But it's not something that we're going to go out and do tomorrow. Let me put it that way.

Okay. And then the last question is, you've got $300 million worth of preferred callable as of September '07. My guess is that you can go out at about 7.25 to 7.5, replace that 8.75 preferred with 7.25 to 7.5. Is that an accurate number, based on where the capital markets are today?

I think where the capital markets are today, we could probably do better than 7.5.

7? 7.25?

I think you could maybe even get -- the markets today are pretty good. Maybe even inside 7.25. Probably for modeling purposes, I would argue 7.25, just to be conservative. But, it depends. In September, who knows what the markets are like. If we were doing it today, we could do better than 7.25. In September, who knows where interest rates are, and what the markets are like. Maybe it could be 7.5. I hope not. But today, we can definitely do it inside 7.25 today.

All right. Hey, thank you very much.

Philip Martin, Cantor Fitzgerald.

A couple things. First, on your acquisitions in 2006, that 8.9% cap rate in the supplemental, is that after a CapEx, or a maintenance level CapEx type number?

No. That is just straight net operating income on a GAAP basis.

Okay.

As of the date of acquisition.

And what does that 8.9 become after you take the properties, and do value additive type things, that initial cap rate would drop to what? I guess I'm trying to figure out what type of repositioning, if any, the assets need in terms of -- ?

Most of the assets we bought in 2006 don't need much repositioning. It depends on how -- CapEx -- maintenance CapEx for a building can range from anything from $0.05 a square -- it could be zero if it's an absolute triple net lease. Up to $0.75, depending -- I don't think any of the buildings we're buying in are $0.75 a year. Any of the buildings we're buying now are probably on the lower end. It's a little bit of a guesstimate, but it's probably more in the $0.30, $0.40 a square foot, maybe even less than that. Definitely in the first couple years of ownership, I don't think there's going to be a lot of CapEx. We don't typically buy buildings that have a lot of near term lease roll. And we typically do a very good job in diligence at reviewing CapEx requirements. In fact, you look at our numbers, what we spend on maintenance CapEx compared to our competitors, were among the highest. And it's not -- I think that's because we really do spend a lot of energy and time maintaining very high quality assets. But we do a pretty good job, I think, in the diligence process too. If we find deferred CapEx that wasn't disclosed, or wasn't put -- wasn't factored into the underwriting, we often get purchase price reductions. And that's just the way we do it. So I don't anticipate -- any acquisition does not normally have much in the way of either TIs or CapEx in the first couple of years.

Okay. Okay. Secondly, the half a dozen or so development, redevelopment opportunities, again, it's more of a 2008 type of situation. But how much of that is occurring on existing land that you already have on your balance sheet?

It's on our existing -- it's with existing properties. It's land, and it is existing property -- structures. Meaning, we've got an office building, let's say in a market, and we're looking at it and it's, let's say, in a very -- it's a suburban market. Or maybe even an office park. Let's say it is in a suburban market that was built 20 or 25 years ago. The asset is doing okay now. There's not a tremendous amount of rent growth. But yet, the area around it may have changed. I mean, there's a lot more high end residential and retail that has grown up around that area over the last 20 years. Those are the types of projects where we step back and say, wait a second. Does it make sense to continue putting money into this project as an office building? Or should we think about taking a part of this project and think about retail? Or does it make sense to think about a part of this project as residential? And some of that we might do completely on our own, or some of that we might do -- we might take in a partner to help us. But that is -- that's sort of the thinking. It's existing land and it's existing properties, where we're currently earning income. These are properties that we're looking at that we're saying, we're earning X, but if we turn this into something else, we might be able to earn Y, which is a much better return.

Okay. And how much land are we talking about in terms of acreage? Can you quantify that?

Well, it's not a lot. I mean, in total developed land for the portfolio, it's probably -- I'm trying to think. It's about 160 acres in total, probably, in the entire portfolio. But again, not all of what I'm talking about is on vacant land.

Okay. Got you. Okay, and of that, what is -- what percent, roughly, is vacant land? Just to get some kind of an idea?

Of what we're thinking about?

Yes.

25%.

Okay.

Again, I want to couch on this. I mean, look, we're looking at a half a dozen projects. None of them are at a stage where I can even tell what you they are, where they are. Because we may not even go forward with them. But we are looking at them. And I'm trying to give the market a sense of look, we're a dynamic -- we're a large, dynamic Company. We're always trying to get the best return on our investments. And when an investment doesn't -- it's earning an okay return, but we think we can earn a better return, we're looking very seriously at it.

Oh, yes, definitely agree. And just looking longer term, that's how I'm trying to look at this, too. Look two to three years out.

That's the right thing. That's right.

The last thing, in terms of trends, in terms of capital commitments, you mentioned on the new leases, seeing more new leases than renewed leases this quarter. Is that a trend that you see continuing through 2007? Where we do see more new leases signed? I know you're playing it a little bit here, where you're playing a little bit hard to get and maybe slowing down the process a little bit. But is that a trend that you see within your portfolio, in terms of continuing in 2007? And then secondly, on the capital commitment side of things, you're at about $13 and change per foot on capital commitments. Is that a little bit better than expected? Or about what you thought it would be? And will that trend what's that trend look like going forward here?

I think that's a little better than we expected. I think we did a pretty good job in the fourth quarter. So that might trend up in more the mid teens, is what I'm thinking. In terms of 2007, look, we're currently planning about -- with the 4.4 million square feet rolling, our plan is 50% of those will be renewal, 50% will be new leases. We had the sort of the same dynamic happen in 2006, where there was about 4 million square feet at the beginning -- or 4.5 million square feet at the beginning of the year. We ended up leasing 6 million square feet in 2006, because we had a lot more renewals come through that were early renewals, renewals from two or three years out. And that's part of the -- that's the part of the equation that's tough to gauge. We might -- we might end up doing more than 4.5 million square feet of leasing in 2007. But that could -- if we end up doing more, it would be because we do more renewals.

Are you turning down requests, or seeing requests with your Boston portfolio, trying to renew early, and maybe take advantage of a situation that might be -- ?

Yes, and it depends on the asset. The stuff in the downtown area, in the Longwood Medical area, the answer is sure. We're trying to drive rate there, and we're trying to get the best deal. That market is performing especially well. Some of the suburban markets, depends where. It depends if it's in south suburban market versus the west suburban market. So it's a sort of mixed answer. Yes in some areas, and no in others.

Okay. Okay. Thank you.

Charles Place, Ferris, Baker Watts.

A lot of the things that I wanted to talk about have been discussed. But one thing that you can address for me, is that you have this sales agreement with Cantor in selling some common stock kind of on an as-needed basis, or as you go basis. What should we look for as far as expectation of how much you anticipate selling on a quarterly basis?

Sure, Charlie. Thank you. Thanks for the question. That's a great question. Maybe some people know or not know, we entered into a sales agreement with Cantor Fitzgerald at the end of the year, where we sell some -- we have the ability to sell common shares on a continuous basis through them. Let me first explain why we entered into it. Basically, it's a way for us to -- we evaluated it over about a year. And it's a way for us to raise a, what I would call a very modest amount of equity, very inexpensively, and at very good prices. The costs to raise that capital is less than -- about, less than 2%, compared to a traditional equity raise. And the way it's executed in the trading market, is we're able to get the prices at a higher weighted average price than, let's say, the average close of the stock on a daily basis. So it's been very -- we've only had it in place now for a month and-a-half. We've sold about $10 million worth of stock in the last six weeks. I do not see this as a major form of capital raising for the Company. I think in a year, the most you might see us do is $100 million. And again, it's very opportunistic. We can turn it on, and turn it off whenever we -- at our choosing. And it's a very good return. It's a very efficient way to raise capital. It's not a way I think will raise large amounts of capital. And so doing it at less than 2% cost is pretty good, and the prices we're able to achieve are higher than the weighted average stock price you'll see the stock close at. So it's a pretty good program. But again, it's not going to be a lot of stock.

How many shares were registered in the December filing?

A total for 20 million. But that's to keep that in place for hopefully years.

Right.

We just didn't want to have to continue to register something every year. We thought we would put a big number out there, so we could keep it out there for a long time.

So you haven't sold a million -- would it be a million shares a quarter or maybe -- ?

That's a good number.

Okay. Thanks. Next, as far as your NOI margin is concerned, and as we look at '07 and you've got a bunch of your markets, D.C., Southern California and Boston, in particular, that have a high percentage of lease turnover coming up here, wow should we be looking at the NOI margin? Do you anticipate occupancy kind of bleeding off a little bit, kind of as it did in '06 with getting better rental rates, but kind of any benefit from that increase offset by the decrease in occupancy? Or are -- I guess a little bit more commentary on the specific markets as far as you see them from a leasing standpoint. You mentioned briefly about D.C. and the negative absorption in that market. How do you -- how are your rental renewals looking in that market, if you can comment a little bit further?

Sure. There's a lot of parts to your question. In Washington, D.C., it depends on the rental renewals. As I mentioned in our prepared remarks, the northern suburban -- the northern Virginia suburban markets are not doing especially well at this moment. The downtown D.C. market is doing very well. And our properties there, we're actually seeing rental growth rates still quite robustly. We have about three medical office buildings there, multi-tenant buildings, and we're getting great rates there. Some of the stuff in the suburbs, I'm a little bit more cautious about. We have some stuff expiring there that I'm a little nervous about maintaining occupancy. The rental -- .

I'm sorry to interrupt you. Real quick, Adam. But as far as your D.C. rental roll in '07, is there a breakdown, just a general breakdown between the suburban versus the downtown D.C.?

The general breakdown is -- well, I guess how much do we have rolling in 2007 and -- .

D.C.? 348,000.

Yes, 300 -- I'd say that's about half. Half is suburbs and half is downtown.

Okay. So I guess getting back to my earlier -- or I guess my general question is, is what are your views on occupancy year-over-year looking forward?

I think flat to slightly down.

Okay. That is pretty much all the questions I have. Thank you very much.

Sri Nagarajan, RBC Capital Markets.

Quick general question. I think you had a couple of comments in there that I wanted to kind of [inaudible]. You said that you were looking for a total return watermark of about 10% on your acquisitions and you were also avoiding high profile markets. In looking at your recent acquisitions, you've made them mostly in the secondary markets. Could you just give us some color on what kind of total returns you're seeing in the major high profile markets, where I am presuming that you are no longer competitive.

Sure. Well, I'll tell you the truth. In places like New York City, we haven't looked at a building in New York City, I've got to be honest with you, in over a year. We just can't compete with what the prices that people are willing to pay in those markets. When you say high profile markets, yes, we've looked in the Boston market. Boston is a good example. I don't -- Sri, I've got to be honest, and I think I'm like a lot of people in this industry. We scratch our heads a lot, looking at what people are paying. I believe some of these prices are beyond -- above replacement cost. And I don't -- there's some fundamental rules we look at when we look in making an acquisition. And we do all sorts of returns analysis. But sort of the fundamental test we do is replacement cost. We say, what's it cost to build this building if someone builds one next to you cheaper and charges less rent. I don't -- there is -- I don't understand what's going on in some of the -- I can't tell if it's being driven by the amount of capital that people have to put to work, and a lot of the private equity money that's being driven into these markets. I can't tell if it's being driven by the greater fool theory, which people say, well, I'll by it for $800 a square foot, which I know is more than it costs to build. And I'm going to sell it for $1,000. I don't understand what's happening in some of these markets, and in some of the more high profile Boston, New York, even Chicago markets. So the -- we can't model the returns to make sense. That's I guess what I'm answering. I can't model the returns.

Sure. Again, [inaudible] in terms of the major markets, I mean you're seeing it across the board in major markets? Or is there any specific market that you think is pretty much a lot of flurry of activity, among your markets, that is?

Among our markets, Boston probably has the greatest premiums being paid for buildings in the major markets we play. That, and Southern California. And I guess -- and to a certain extent the downtown D.C. market, too. [inaudible]

Not to belabor -- I'm sure you've been asked this question before. Why not take advantage and harvest the assets, and dispose of these assets when there is significant demand for these assets here?

Sure. That's a great question. In the Boston market, we don't have what I would call Class A towers downtown, which is I think what you -- I'm going to classify. We have what we call medical office buildings in Longwood Medical area. And the value -- we have just been -- all the rental growth rate you're seeing in the Boston market is coming from there. And I think we've been able to generate fantastic returns just on continuing to manage those properties. They're generating great returns. We don't own anything in let's say the New York City market, which is where I think people are paying the most for assets right now. Chicago, we don't own very much. Southern California, again, there it's a lot of medical and lab space, which we are getting great returns on, in terms of what we've spent for those assets, and what we're able to generate in returns. It's driving a lot of our cash flow growth in the Company. So we don't have what I would characterize -- where we're looking to sell assets is more in the B and C class markets, second and third tier markets, tertiary markets where we don't have a lot of -- we're not going to grow a lot more in those markets.

And there is a bifurcation happening in the marketplace. I think people are willing to pay a very big premium in some of the, what I call, 24 hour cities, gateway cities in America, versus what they're willing to pay in other cities in suburban markets. And so even though we might say, hey, a classic example is our Detroit assets. I've talked about this ad nauseam with people before. But we -- look, would we sell those assets if someone would pay us a good price for them? Yes. Are people willing to pay a lot in Detroit right now? No. They're not willing to pay a lot for assets in Detroit. So it doesn't make sense to off load those assets today. We're still generating a return on them. And they're still somewhat -- they're still the same occupancy as we had when we bought them. So that's sort of our strategy as we look at dispositions.

One final question. Just as a corollary to what you said about Detroit. You repeatedly said, I mean I think at least you [inaudible] about sacrificing occupancy for rent growth. I know that's about 2.1 million square feet in other markets, as you bracketed. And you said the other market expiration is widely distributed. But give us a sense of where you're seeing the rental growth happening, in general. Are you sacrificing occupancy across the board? Obviously, you can't do that in Detroit. But I'm just saying, perhaps a little bit of flavor would help.

Sure. That's a great question. Listen, in some of those other markets, some of the big pieces of it, and this is easy to ascertain by just looking at any of our disclosure about where our assets are located. But for example, on our website. The Denver, Phoenix, Albuquerque, Rochester, Chicago, Atlanta, I don't know if I said Pittsburgh, those are some of the markets that sort of make up that other market. It depends on a market by market basis. For example, Denver and Phoenix, even though there's a lot of building going on, surprisingly there's been a lot of absorption going on at the same time. And those are markets that actually -- they've sort of turned the corner, what I would say, in the last six months. And we've been able to drive a little bit more rates there. So that's an example of where we might sacrifice some occupancy.

Rochester, it's sort of a mixed bag. We have in that market, we have well occupied Class A buildings, with sort of Class A tenants. All -- we have the buildings where all the big six accounting firms and all the brokerage firms want to have their offices because they're the best locations in suburban markets. Can we drive rate there? It's not as easy to drive rate there because there are other options. But nevertheless, we do have the nicest assets. So people want to be in our buildings there, so we can maintain lease rates and maybe grow them a little bit. It really depend on -- that gives you a flavor. Pittsburgh, it's an asset by asset basis there. The stuff that's downtown, and some of the recent acquisitions there, we've be able to fill up vacant space. Some of the vacant -- some of the stuff we bought there we went in with only 75%occupancy and we've been able to get that closer to 90% occupancy. So we're filling vacancy, which is obviously growing cash flow. So it depends on a market by market basis. Look, Austin is a great example of today, where in many of the assets in Austin, we've got great occupancy, we're seeing growth in rental rates. We're holding back a little bit. We're saying, look, to get this building it might be 90% occupied, up to 100%, we're going to hold out a little bit, and we're going to push the rate. Because there's not a lot of development activity, thank God, going on in Austin right now, and yet the economy has come back quite favorably. So we're able to take advantage of that.

Those comments are very helpful. Thank you so much.

Ken Avalos, Raymond James.

I just wanted to get a sense for what you think about the same store performance in '07 and even, if you would, in '08, assuming fundamentals stay flattish or even up a little bit. Because it sounds like you're pretty optimistic about rents in a lot of markets and pushing for occupancy and sort of just getting back to that. But just give me your thoughts on same store performance, if you would. Thanks.

I'm hopeful. Look, I'm not going to give you a specific number, but I'm hopeful it's going to be positive. I was a little disappointed with our results for 2006. And I'm very hopeful that 2007 will be better than 2006. I can't really give you a number where it's going to be, just too specific for me to get into. But look, it's going to be positive, I'm hopeful, and that's what we're shooting for.

Thanks.

[Brian Yelvanten, Collin Yayo Assets].

I think most of the questions that I was going to ask have been answered. But one thing that I did want to touch on, from a balance sheet perspective, you guys seem to have debt outstanding that could easily be refi'd. The bond market's been very kind to you the past few years. I know that earlier we talked about the preferred issue. There's also some floating rate debt. Do you guys intend to be pretty aggressive with taking advantage of low floating rates right now? Or is it just really not a big concern?

Thanks, Brian, for the question. We monitor the capital markets pretty regularly. And the existing floating rate debt we have out there, we have about $400 million, is something that we would consider a refinancing. I have not -- we could think about refinancing with existing floating rate, or we could think about refinancing it with -- given where long-term fixed rates and the spreads that are currently -- bonds are currently trading at. We could also think about refinancing it long-term. The thing we would think very closely about on a floating rate -- any new floating rate issue, is obviously the term, the rate, and the prepayment ability. Those are sort of the three variables that go into it. And we have seen some alternative offers for that. And we just haven't gotten to the point where we've seen anything compelling enough yet to pull the trigger. We might refinance that with additional float with some sort of lower floating rate debt with a lower spread, or we might consider doing it with long-term fixed rate debt. But we could also think about refinancing it with a portion of preferred or some sort of equity instrument, too. But it's something on our radar screen, but it is not at the top of our list of things to do.

Thank you.

That concludes our question-and-answer session. I would like to turn the call back over to our speakers for any additional or closing remarks.

Okay. Thank you for joining us on our fourth quarter conference call. We look forward to updating you on the first quarter results sometime later in May. Thank you.

That does conclude today's conference call. Thank you for your participation. You may now disconnect.