Equity Commonwealth (EQC) 2007 Q3 法說會逐字稿

Good day, and welcome to the HRPT Properties Trust third quarter 2007 financial results conference call. This call is being recorded. At this time for opening remarks and introductions, I'd like to turn the call over to the Manager of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

Thank you, Clarissa. 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'd 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, November 6, 2007. The Company undertakes no obligation to revise or publicly release the results of any revisions of the forward-looking statements made in today's conference call, other than through filings with the Securities and Exchange Commission regarding this reporting period. In addition this call may contain non-GAAP numbers including funds from operations or FFO. A reconciliation of FFO to net income is available in our supplemental package found in the Investor Relations section of the company's website. 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 Q3 supplemental operating and financial data found on our website at www.hrpreit.com. Investors are cautioned to not to place undue reliance upon any forward-looking statements. And with that I'd like to turn the call over to Adam Portnoy.

Thank you, Tim, and good afternoon and welcome to everyone that is joining us on today's call. For the third 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 modest decline in FFO was higher financing costs. Also, I'd like to point out that this third quarter FFO includes about $2.4 million or about $0.01 per share of gains on sale of land adjacent to existing properties. From an operations perspective, we continue to see improvements with regards to increasing net effective rents within our portfolio. For example, although we experienced about a 1% decline in same-store occupancy in the third quarter, rents on leases signed during the quarter increased by 9% and CapEx, which included tenant improvements, leasing commissions and recurring building maintenance, have decreased almost 20% between the third quarter 2006 and 2007. These operating results are partially a reflection of the initiatives we've been speaking about for some time where we are more focused on increasing cash flow at the expense of some occupancy.

With regards to what we are seeing across our markets, leasing metrics have largely been flat to slightly negative compared to last quarter. For example, overall office occupancy rates on a nationwide basis have been flat for the last couple of quarters and nationwide office net absorption is definitely slowing. In addition, overall development activities started to increase across the country, especially in Washington D.C. and Southern California.

With regards to our specific portfolio, we appear to be outperforming the market on many fronts. We signed leases for about 1.5 million square feet during the quarter and 83% were renewals and 17% were new leases. Leasing activity during the third quarter resulted in a 9% roll up in rents and about $12 per square foot in capital commitments. The average lease term was 7.7 years and the average capital commitment per lease year was $1.54. Both of these key metrics are improvements from the prior year. Although we are very pleased with our ability to sign early renewals with many of our tenants at attractive terms, the pace of new leasing activity or the leasing of currently vacant space has slowed considerably in the third quarter. As a result, overall company occupancy at September 30 was 92.8% which represents a 10 basis point decrease from the second quarter of 2007. Within our portfolio, all of our major markets are performing well, with Austin, Texas, Southern California, and Oahu, Hawaii performing especially well.

During the third quarter, same-store NOI in Austin, Texas, increased 11.3%, despite a drop in occupancy by over 4%. Our Austin, Texas portfolio continues to post strong leasing results with strongly consistent rent growth on leases signed during the past few quarters. As I mentioned last quarter, 300,000 square feet leased to Tyco expired this past April. Over 100,000 square feet of this space was relet shortly after the Tyco lease expired and demand for space in this region continues to support prospects for continued gains.

Southern California saw an increase in same-store NOI of 4.2% and again despite a decrease in occupancy by 4.1%. Our Southern California portfolio is largely benefiting from increases in rental rates across the region. However, one of our concerns with this market is the increase in development activity during the last few quarters. In addition, in the future, we may be indirectly affected by softening in this market because of the decline in mortgage brokerage business.

In Oahu, the market for industrial properties is strongest in the the country, with gross industrial rents approaching $40 per square foot in certain areas. As a result, the Oahu industrial real estate market is experiencing one of the most dramatic increases in rates among all real estate segments across the entire United States. HRPT is largely benefiting from this market improvement because we are the largest owner of industrial properties in the State of Hawaii. Unfortunately during the third quarter we had no leasing activity in this market but we anticipate significant roll ups and rents in the future. During the third quarter, same-store NOI decreased by 1.4%, however this was largely the result of some retroactive rent increases recognized during the third quarter of 2006.

Although Washington D.C. is currently going through a lot of changes, it has performed well for us in the third quarter. Even though our occupancy declined by 5.1% year-over-year, our same-store NOI was basically flat during the third quarter. One of our concerns with this market is the large amount of development activity, with between 1 million and 2 million square feet coming on line per quarter.

Our Philadelphia portfolio is also performing well. Somewhat surprisingly 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. As announced during last quarter's call, we have pre-leased about 50% of the space Comcast will vacate in March 2008 and we hope to report additional progress with this releasing effort by the time Comcast vacates their space. We continue to believe we are very well positioned in this market with less than 1% of our total square feet rolling through the end of 2008 and in place rents equal to or below market rents.

Austin continues to perform better than expected, with stable to improving market occupancy and limited new development activity, especially in the downtown markets. This improvement is being largely driven by strong economic activity throughout this region. Unfortunately, development activity may increase in 2008 and 2009, and this is our only major market where we may have some significant lease rolldowns and occupancy declines during the remainder of this year.

In the rest of 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. During the remainder of this year, we have 1.7 million square feet scheduled to expire, which represents approximately 3% of our total square feet and annualized rents. Excluding Boston and the rest of our other markets, the remaining leases scheduled to expire through the end of the year have in place rents that are below current market rents which may lead to some additional roll up in rents in the the future.

With regards to third quarter investment activities, we purchased six office properties located in suburban Boston, Atlanta, and central Connecticut with a total of 272,000 square feet for a combined $35 million in the third quarter. We also purchased one hotel property for $13 million during the quarter. As we discussed last quarter, we purchased this hotel because it sits adjacent to several properties in a business park in Atlanta that HRPT currently owns. We are in the planning and approval stages regarding a potential large redevelopment project involving several properties at this location. Until we begin the redevelopment of this site, this hotel will continue operations under a short-term lease agreement with a hotel operating company. The weighted average going in cap rate for all of the acquisitions during the third quarter was 8.6% and the buildings were 100% leased for 4.9 years on average. As of today, we also have an executed purchase agreement for two additional office properties with a total of approximately 262,000 square feet for a total purchase price of about $23 million. Of course, this agreement is subject to closing conditions and the purchase of these properties may or may not happen in the future.

I also want to mention that subsequent to the end of the quarter, we purchased a portfolio of six triple net leased retail properties with 552,000 square feet of space for $73.8 million. These properties are long term leased to Carmike Cinemas for nine years, generate about a 9% yield on investment and require no capital expenditures by HRPT over the life of the lease. Although the focus of HRPT will continue to be an owner of office properties, we may continue to make investments in similar types of properties in the future. We are attracted to this property type because it provides high yields, stable secure cash flows, and minimal ongoing CapEx requirements.

Looking forward, the overall growth in the office leasing market across the country has started to generally slow, with more markets experiencing a flattening rather than an increase in net effective rents. We believe this is largely a result of a slowdown in the growth in the U.S. economy as well as increasing development activity in some markets. Nevertheless, we're looking at our portfolio dynamics. HRPT is very well positioned for any slowdown in the office sector or economy. We currently enjoy among the highest occupancy rate, longest average remaining lease term and highest credit quality tenants and the office REIT sector. In addition, the diversity of our portfolio holdings and the tenant base adds to the security and the stability of our cash flows and our dividend payments. With that I'd like to now turn the call over to John Popeo, our CFO.

Thank you, Adam. Looking first to the income statement, rental income increased by 4% and operating income increased by 1% during the third quarter of 2007. The year-over-year quarterly increase in rental and operating income reflects increases from properties acquired between July 1, 2006 and September 30, 2007, partially offset by the modest decline in same-store NOI and depreciation and amortization related to building improvements and leasing costs incurred during the same period.

Our consolidated NOI margins were 60.8% for the third quarter of 2007 and 60.4% for the third quarter of 2006. Current quarter EBITDA increased by 4.2% from the same period last year, primarily reflecting property acquisitions since June 2006. Interest expense increased by 2.1%, reflecting property acquisitions and a modest increase in weighted average interest rates on our floating rate debt, offset by the repayment of debt with proceeds from our preferred share offerings in October 2006. Net income available for common shareholders for the third quarter of 2007 was $17 million compared to $23 million for the third quarter of 2006. The decrease reflects depreciation and amortization related to building improvements and leasing costs incurred since June 2006 and the modest decline in same-store NOI partially offset by earnings from properties acquired during the same period and $2.4 million of gains on the sale of land during the current quarter.

Diluted FFO available for common shareholders was $0.29 per share for the third quarter compared to $0.30 per share for the prior year. The decrease primarily reflects the slightly dilutive impact of our Series D convertible preferred shares issued in October of 2006 and the small decline in same-store NOI, partially offset by earnings from properties acquired since June 2006 and gains on land sales. The FFO run rate for the company excluding gains on land sales is around $0.28 per share. In October 2007, we declared a dividend of $0.21 per share, which represents 70.8% of our third 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 $17 million on tenant improvements and leasing costs and $3 million or $0.05 per square foot for recurring building improvements, including lobby and facade renovations, elevator upgrades and other capital projects throughout the portfolio. We paid $6 million on development and redevelopment activities during the third quarter.

Turning to the balance sheet, on September 30, we held $26 million of unrestricted cash. The $19 million increase in rents receivable reflects straight line rent accruals during 2007. Rents receivable includes approximately $152 million of accumulated straight line rent accruals as of September 30. Other assets includes approximately $96 million of capitalized leasing and financing costs. We issued $250 million of unsecured senior notes in September with a maturity of January 2018 and a fixed interest rate of 6.65%. We used the proceeds of this offering to reduce amounts outstanding on our revolving credit facility. We prepaid at par $15.9 million of 7% mortgage debt during the third quarter.

During the first nine months of 2007, we sold 2.3 million common shares through a controlled equity offering program raising net proceeds of $28.2 million at a weighted average share price of around $12 per share. In October, we issued 12.8 million common shares for $10.07 per share, raising net proceeds of around $123 million. We plan to use the proceeds of this offering to partially redeem 5 million of our 12 million outstanding Series B preferred shares in November for $125 million. The 5 million preferred shares being redeemed in November carry a coupon rate of 8.75%, almost 50 basis points more than the dividend yield on the common shares issued in October. The October common equity offering strengthens our balance sheet and positions HRPT for continued growth.

On September 30, 2007, we had $238 million of floating rate debt, $397 million of mortgage debt, and $2.1 billion of fixed rate senior unsecured notes outstanding. The weighted average contractual interest rate on all of our debt was 6.4% at the end of the quarter and the weighted average maturity was 7.3 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 about $5.4 billion at the end of the quarter. Secured debt represents 7% of total assets and floating rate debt represents 9% of total debt. At the end of the third quarter our ratio of debt to market capitalization was 48%. Our EBITDA and fixed charge coverage ratios were 2.7 times and 2 times respectively. As of the end of the third quarter, we were comfortably within the requirements of our public debt and revolver covenants. As of the end of the quarter, we had $38 million outstanding on our revolving credit facility with $712 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 about 9% 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) Our first question from Jamie Feldman with UBS.

Thank you. Can you talk a little bit more about what sectors you think are slowing down the most in terms of leasing activity?

When you say sectors, you mean industry? Because I can tell you that we're not seeing a slowdown in the government. We're not seeing a slowdown in medical. It's basically been our multi-tenanted general office buildings across -- we haven't seen a slowdown really in industrial to tell you the truth either and that may largely be a factor of the type of industrial property we have, which is very concentrated in Hawaii. It's really been the multi-tenant, suburban and some CBD office buildings and it's across-the-board. It's not specifically any one sector. What we're finding is a couple months, a couple quarters ago people were talking about expansion space. They were coming back to us wanting to do renewals and expansions. Now, you're not finding that same sentiment out there. It's definitely, we're not a free for all or anything like that, but things have definitely flattened across-the-board, generally, in terms of the leasing environment. There are pockets that are definitely doing well. We have some medical office buildings that we continue to roll up rents 5 to 10% every year, doesn't matter which way the economy is going. But generally speaking in some of our multi-tenant office buildings, it's just gotten a lot, it's gotten more difficult to lease space, especially some of our vacant space. We've been very good over the last couple of years at the renewing space and that's very important for an office REIT such as HRPT to make sure we maintain our occupancy and with good credit tenants. But the limited amount of vacancy we do have -- there's nothing wrong with the location or the buildings. What we're experiencing is just taking a little bit longer to fill some of that vacant space and get some of those new leasing done that it did let's say six or nine months ago.

And when you talk to your potential tenants on making the leasing decisions, are they concerned about like -- are they seeing a slowdown in their own businesses or are they more concerned about the the general economic environment and what they're reading in the paper and more hesitant?

It depends. I have anecdotal experience, now, dealing with, we leased a couple of, Caterpillar, for example. I'm not saying that the they've been very -- they on their own conference call said they saw a slowing down in their own business. So in select areas, it's been a specifically to that business, but I'd say more of it is a lot of decision makers are taking a wait and see approach. People are apprehensive about spending capital or committing to expansion. It's just a sense of uncertainty about where the economy is going and the ability to raise capital I'd say to grow their business. So that's generally what we've been seeing.

Okay, and then in terms of cap rates how much would you say they've moved for your office portfolio and your industrial portfolio?

It depends. Generally speaking, 50 basis points. Some cases, maybe 100 basis points. In some cases I'd say they really haven't moved that much, but generally speaking, a safe guess is about 50 basis points.

So in markets where maybe they've increased the most, does that make you want to ramp up your acquisition to get to a higher yield you're looking for?

Yes. In some of those markets where we're seeing movement in cap rates up like that, you're absolutely right. That's where we were thinking about doing acquisitions and growing. That's correct.

And then finally, so it sounds like we're kind of at the peak of the cycle or has it already hit the peak of the cycle for the office sector in your portfolio. So is it safe to assume we probably will not see same-store turn positive during this cycle?

That's more likely than not, yes. That's probably a safe assumption. Things can change quickly in this market and I really think the top of the office sector was fourth quarter 2006 -- if you want to know my belief where the top was. And the end of 2006 was when we really had all cylinders firing in the office sector, and then I think it's been a slowly declining market for the last three quarters. That's been my view of what's going on.

Okay, all right, great. Thank you very much.

Thanks.

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

Hi. John Guinee here.

Hi, John.

A few quick questions. Do you know what the cash increase or decrease was? You gave us 9% on GAAP.

Yes, about 5% on cash.

Okay. Was the low FAD -- or TI leasing commission numbers driven by a high portion of industrial leasing or is that a trend you think you can continue?

I think it's primarily driven, to answer your question, it's primarily driven because most of our leasing was done for renewals over 80%, and as you are very aware, renewals don't require the amount of CapEx that new leasing does. Our typical mix historically has been more like 60/40, 50 to 60% renewals, 40 to 50% new leasing. It's been, it was a big shift this quarter in the sense that most of what we did this quarter was renewals and that's why the TIs had come down. In terms of leasing we've committed to -- and the the next part of your question is in terms of maybe dollars we're actually spending on TI and LCs -- now remember when we spend dollars in a quarter, that's some leasing that we might have done last quarter or two quarters or three quarters ago. And so I guess the the answer to your question, the lower TI and LC at this level we're seeing this quarter, sustainable going forward? I don't know. I think this might be a little abnormally low in terms of the amount of TI and LC. That being said, I believe we have definitely, if you look trending what's happened over the last four to six quarters, I believe we're generally going in the right direction. I guess what I'm saying is I'm not sure we'll be at the same number in the fourth quarter or the first quarter next year but we are definitely going in the right direction in a sense they are generally, we're spending less money on TI and LC. And that's partly as a result of what we've talked about now for close to a year where we're very much focused on that aspect of the metric in our company and we're very much focused on making sure we can maximize cash flow when we do leasing.

Okay, I think I heard John say that you'd have [180 million] of 8.75 preferred outstanding at the end of this quarter? What's your plan on eliminating that entire $300 million series?

Yes, it's a good question, John. I'll be honest, I don't have an answer because I don't honestly know what we're going to do with the remaining 180 million. It depends on what the market looks like. The good news is we don't have to refinance it now. If I could, if we could refinance it all at preferreds, with a 7 on front, in the low 7's let's say, I think we would take a serious look at that. That's what we probably could have raised preferreds at six months ago. The preferred market has changed dramatically for investment grade rated preferreds in the last three to six months. And we may not, we might be able to get something done with an 8 in front of it, but it's the low to mid 8's which doesn't really save us much money. So we're not real anxious to do something like that. So in my perfect world, I take it out with more preferreds but I want the preferreds to be in the low 7's. And I might be dreaming is what I'm saying so I may never be able to do that. But with that being the the case, we might look to take it out maybe a portion with some preferred at the higher coupons that are available today and maybe the remainder with some debt. Something along those lines.

Okay, and then the last question is per our numbers, your FFO per share 2005 of $1.26 and 2006 $1.19 and 2007 looks like about $1.14 and 2008 I think per John Popeo at $0.20, $0.28 a quarter is about $1.12. Is there any ability for this to go the other direction?

Yes. Yes, there is. We've been trying -- as you remember, when we were running at $1.26, we were also probably running around close to 160% payout ratio in terms of FAD, and so those two metrics you should not think of them as mutually exclusive, so there's a little bit of a push and a pull. We could spend a lot more money in leasing and maybe upfront for TI's and LC's and probably be able to grow our FFO faster. We've taken the approach over the last couple of years or let's say 18 months we've been a little bit more focused on keeping our CapEx spending to a minimum. That's had an effect of reducing our growth in let's say rents because obviously one of the gives and takes in calculating net effective rents is -- well, how much TI, but how much offsetting increasing in rents do you get the charge through as well? I guess what I'm trying to say is yes, going forward, I think we're getting a lot, I think we're starting to stabilize in terms of what we can do on the CapEx front and I think especially in this market where things are changing and it's not 2005, it's not 2006 when the office market was very hot. Things are definitely slowing. I think we're going to have start being a little bit more aggressive with our leasing, maybe with some of our TI's as we go into 2008 to maintain occupancy at our buildings. And as a result of that, I think you got to see some FFO growth. I also think some of what we're doing in terms of redevelopment activities both in Hawaii and what we've talked about Atlanta and to a limited extent in terms of some of the triple net lease retail which we're starting to dip our toe into this quarter, I think all of that combined should help drive FFO in the future. That being said, John, I think you're very aware of this. We're not, HRPT has never been managed nor do we try to manage it to be a high growth engine. It's very much focused on income. It's very much focused on the security of our dividends. It's very much focused on the security of our cash flow. That's been historically the way we've run the business, but we do look to have some growth in FFO and we hope that going forward we'll be able to achieve that.

Okay, and last question, within your operating expenses, how much is ground lease payments? You're the ground lessee in Hawaii, aren't you?

Yes, I don't think any of our expenses I'm trying to think do we have any property where we are leasing land?

Nothing to speak of, John.

Very, I mean --

That's fee simple ownership in Hawaii.

Okay, thank you.

Our next question comes from Philip Martin with Cantor Fitzgerald.

All right, thank you. Good afternoon, everybody.

Hi, Philip.

Well, a number of my questions were just answered through John there and I would echo the the FFO growth. I think a lot of us know that this isn't necessarily managed to be a growth vehicle, I mean, a significant growth vehicle. It's dividend security, dividend yields, stable cash flow growth. But to see some growth in the other direction here would be nice, and again, it sounds like we're hearing some pretty good things. I think on the leasing cost side though, it sounds like it's taking a little bit longer for some pretty common sense reasons. But is it fair to say that you're still maintaining a fair amount of negotiating leverage?

It depends, Phillip, on the property. In Hawaii, yes. Southern California, it's been good the last couple of quarters. There's a lot of apprehension on what's going to happen in Southern California with what's happening with the mortgage/brokerage business. Washington D.C. and our downtown properties are doing very well. You look at all of the medical office properties we own, probably as a segment we maintain a lot of leverage still in a lot of those properties. Is it fair to say we still have leverage? Yes. In certain pockets, the medical office, the Hawaii land leases definitely, but things have definitely, there's no question things are softer now than they were six months ago.

And I guess that leads to my next question then. In terms of rent growth and maybe spending some more on leasing and TI dollars, leasing costs and TI dollars, etc, I mean, you have a tenant base that again is government, medical, a lot of back office type tenants that typically want good, clean, efficient space. They aren't looking for tremendous or significant buildouts. And I guess my question is do you think if you spend money on TIs that you have a tenant base that will pay you for that?

The answer is yes. I mean, Philip, I guess I don't 100% agree with your characterization of our properties. Yes, we have some properties that a good chunk of properties that you're right, are large lease or back office use, but we also have a lot of properties -- let's say Philadelphia is a great example where we could loosen the purse strings on TIs and maybe fill those buildings a lot faster.

Okay.

Places like Southern California where we don't have much in the way of vacancy is another area where maybe we could be loosening the purse strings. Austin is another example where I know that there's some places that we could loosen the purse strings on TI and maybe fill the buildings a little faster. It's like anyone managing an office REIT, you have this tug and pull going on between -- you want to grow the rents, you want to keep the buildings full, but as an office REIT, we're the type of vehicle we have to spend a lot of money to keep the tenants in place. And so you want to -- you got to keep somewhat of a balance and I think we're feeling a lot better about our TIs and LC spending levels. As we go forward, I think we'll be able to take advantage of maybe spending a little bit more. And I think in a market that is softening, I think you have to be prepared that we may have to spend a little more on those TIs to maintain occupancy. Because the market is going to get more competitive, in my view, in 2008 and into 2009 on the office side, generally, I think that's going to happen.

And again, you have a lot of tenants, they aren't necessarily wanting to move. So okay, well it looks like there's light at the end of the tunnel here anyway in terms of FFO growth potential.

Yes.

Well, that's what we're working towards, Philip. We're working towards that.

Now, on the development front, can you give us a little more detail or give us an update as to where things stand on the development front? And I apologize, I came in about four or five minutes into the call, so I may have missed something at the very front end, but I know that's an area that might present some opportunities for you over the next couple of years here and be more of a contributor certainly than it ever has been to your FFO growth.

Yes, Philip, it's a great question. And we didn't talk much about it on the prepared remarks. Not much different to report than what we said last quarter. The Atlanta project that we spoke about last quarter is continuing to move forward. That's a project that probably will not break ground until early 2009, I mean, given the scale and the complexity of it. We're feeling good that we're going, we're getting all of the right signals from all of the different groups that need to approve the project and we plan on getting approval. And we have a lot of interest in different parties that want to lease space in this new development. So everything is pointing positively but again, that's something that we're going to build probably in 2009. We're not going to see the results until 2010 and that's just the nature of development projects. Hawaii is the same type of thing where I think it's maybe even looking out a couple years even further out than 2009 to 2010 wherein even earlier stages of looking at pretty big development projects out there. But there it requires we have to wait until we have enough of the parcels, sort of the leases have expired or rolled or we have to move maybe some tenants. To make things happen out in Hawaii, I believe in the next 10 years a lot will happen, but it's going to take a few years to get everything lined up for us to be able to take advantage of some of the bigger redevelopment projects out there. That also said, now, that being said there's smaller things we're looking at around the the country, but again, nothing major to report since last quart ever. I don't think you're going to start seeing real benefits of redevelopment starting to hit our FFO til 2010. I think it's going to take us 2008 to 2009 to get approvals and into 2009 really to construct it, to build it.

Well, and so do you think by the end of '08 you'd be able to have a little bit of a pipeline that you're talking about where it might be even something that's large enough to include let's say a supplemental?

Yes, I think by the end of '08 that's probably -- you're probably right. That will probably be the point where we hope and I think we're planning that -- we'll see how things go but yes, that's not a bad estimate to say the end of '08 where we might have enough of a pipeline that we'll start breaking it out for people and start highlighting it more.

And for visibility, etc. Okay, fair enough. Thanks for the answers.

Thanks.

(OPERATOR INSTRUCTIONS) We'll take our next question from George [Orbach] with Merrill Lynch.

Hi, good afternoon.

Hi, George.

Just to follow-up on John's questions on the preferreds, when you announced the offering in October, [Freshly] suggested you would use the line to take out the rest of the preferreds.

Yes. Well, maybe that was a mischaracterization. That wasn't our intention in the press release.

I think it was pretty clearly stated that our intention was to partially redeem Series B.

Okay because it says to redeem all or a portion of.

A portion -- depending on how much equity we raised.

Okay. Also, it seems as if you issued equity at 11.5% implied yield, why not sell assets at a presumably more attractive yield than to use those proceeds to repay the preferreds?

Well we have sold assets, and let me back had up and tell you a little bit about the equity offering and why we thought about it. We haven't done an equity deal in two years. Over a two year period we raised -- we acquired about $1 billion worth of property. We financed about that $1 billion -- about $300 million of that, of those acquisitions were financed through the sale of assets, and we also raised about $500 million of debt and about $200 million of preferred. That pretty much breaks out the acquisition, the last $1 billion of acquisitions. $120 million to $125 million equity offering is a modest amount of equity for $1 billion of acquisitions, and at the same time, given the size of the company is basically FFO neutral. It doesn't, it doesn't even round, I mean, $0.001 is maybe what it is dilutive per year. And so especially given the use of the proceeds which are basically redeeming 8.75% preferreds, your yield on the common at the time was about 8.3 to 8.35. So all of those factors taken into consideration was what we looked at when we thought about doing the equity offering. So you say why didn't we sell assets? Well, the answer is we have sold assets and it's a mixture of selling assets and raising equity as well as financing with other sources. So I think $1 billion of acquisitions financed with $100 million of equity is pretty conservative use of equity.

Okay, great. Thank you.

You're welcome.

Next we'll go to Charles Place with Ferris, Baker Watts.

Good afternoon.

Hi, Charlie.

John, is there going to be any charge in the fourth quarter for the redemption of the preferred?

Yes. Yes, there will.

And any, can you frame the amount?

Well, it's probably going to be around $5 million or $6 million. Something like that.

Okay. And just to circle back on an earlier question. Adam, were you, did you confirm an earlier question that said that you really didn't expect same-store performance to turn positive in the near future here and that over the next several quarters as you kind of deal with a relatively soft leasing environment?

Look, I think it's more likely that's the case than not. Let me explain to you, I can make it positive, but if I want to lease -- it's a balance, and managing the business, it's a balance. If we spend a lot more on TIs and LCs and push up the payout ratio, the FAD or AFFL payout ratio, I believe we'll drive FFO as well as increase same-store. I think we're going to probably have to spend a little bit more TIs and LCs in 2008 because of the markets softening, just to remain competitive, because it's going to be a competitive market. As a result of that, you might see same-store NOI go positive. I don't have exact visibility on whether or not it's going to be 1% negative or 1% or 2% positive in the next quarter or the next few quarters. It depends on what happens in the marketplace and how aggressive we want to become in terms of maintaining occupancy and leasing space. So I guess more likely than not, it's probably going to be flat to negative but depends on what the we end up doing and what the market looks like. I don't want you to think there's no way it's going to be positive. It's a very, there's a scenario in my head where I can outline how we get the positive same-store NOI.

You did have some building sales here in the third quarter. Did you not?

They were not building sales. They were land sales.

Land sales. Is there other opportunities for additional land sales here over the next 12 months or other kind of one off properties that maybe are a little far afield from what you're looking at?

Land sales, I don't think think will be many more land sales and so think for, the inclusion in the FFO Calculation is probably just a one quarter anomaly that you'll see in this quarter. But yes, we are actively looking at other disposition opportunities, none of them have progressed to the point where there were some disclosing specifics about at this point.

Can you talk a little bit further, Adam, about and I missed -- you kind of caught me off guard, I don't think I had my pen humming along as much as I would have liked to when you talked about the Carmike Cinemas acquisition. What did you say the yield is?

About 9%.

And obviously, this would be entering into a kind of different asset class and you had gave commentary that you thought that might be, I mean was it just movie theatres that are appealing to you or are we going to see you pulling down portfolios of Burger Kings and things like that?

Well, that's a good question. I don't think you're going to see us pulling down too many portfolios of Burger Kings but I think you might see us in some instances do some other sort of special purpose, triple net lease retail-type properties like movie theatres. I don't think restaurants is something that we're particularly focused on. And the reasons, I can go on and on why I don't think restaurants are a great investment, but movie theatres are definitely an area where we could see some expansion in. This was really an opportunistic acquisition. We were able to buy out the leasehold. We bought this for about 20 to 25% below what we believed was replacement cost and it has very good coverage. It has provisions in the lease that allow for capturing of some of the upside in the growth revenues in the lease and it provides us with basically something that doesn't require us to spend a lot of CapEx dollars on. These are all true triple net lease. So I think you'll see us do some more opportunistic acquisitions, maybe movie theatres, maybe some other specialty retail type projects like this. But that said, I think it's really going to be an opportunistic one off basis at this stage, I think we're still very much focused on office and industrial. I think you'll notice the other acquisitions we made in the year, in the quarter and also we have under contract as of today are also office related properties. So we haven't lost sight of making acquisitions in the office space or industrial space. I think we're just trying to expand a little bit being opportunistic for something that we think can generate some very good cash flow for the company. And as you were talking about everyone has been asking to try to grow FFO. This is one way that might help us grow FFO.

Excellent. All right, Adam. I appreciate it. That's all I have.

Thanks.

This concludes the question and answer session. At this time, I would like to turn the call over to Mr. Portnoy for any closing remarks.

Yes, thank you. John and Tim will be attending the NAR Convention in Las Vegas next week and I know we've been looking forward to meeting with some of you then. Until then, thank you for joining us on the call.

This does conclude today's conference. We appreciate your participation. You may now disconnect.