Equity Commonwealth (EQC) 2007 Q4 法說會逐字稿

Good day, everyone, and welcome to the HRPT Properties Trust fourth quarter 2007 financial results conference call. Today's 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, Darryl. Joining me on today's call is 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, February 14th, 2008. 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 and the net income is available in our supplemental package found in the investor relations section of the Company's web site. 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 web site, at www.hrpreit.com. Investors are cautioned not to place undue reliance on any forward-looking statements. And now I would 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 fourth quarter we are reporting FFO of $0.27 per share, on a fully diluted basis compared to $0.29 per share for the same period last year. The primary reasons for the decline in FFO was higher financing costs, and a decline in same store NOI. Obviously, we are not pleased with these results. As I have mentioned in the past, over the couple of years, we have been focused on controlling our capital expenditures and we have been very successful at reducing our capital costs since 2005. For example, when looking at CapEx, based on a per share basis, it has decreased by 32% in the last two years from about $0.65 per share in 2005, and about $0.44 per share in 2007. Unfortunately, our focus on increasing cash flow and reducing CapEx combined with a slowing economy in the second half of 2007 has been at the expense of growth in FFO per share.

HRPT has never claimed to be a growth stock and we have always maintained that we are a REIT in the very traditional sense of the word, which means we are an income stock, that is primarily focused on delivering reliable and consistent dividends to shareholders. With this in mind, it's important for investors to understand that maintaining our dividend is very important to us, and we currently see the dividend rate as secure and reliable for the foreseeable future. Nevertheless, we recognize that FFO per share has declined over the last two years, and I can tell you that the focus of our company has changed as a result.

As we enter 2008, we are committed to first stabilizing FFO per share and hopefully modestly growing FFO per share in the future. That said, 2008 FFO per share is expected to remain flat with our current fourth-quarter results. However, there may be a temporary one-quarter decline in FFO by at least $0.01 a share in the second quarter of 2008. This temporary decline relates to the loss of rent in Philadelphia resulting from Comcast vacating in April 2008, and getting the space ready for new occupancy later in the year. Of course, these 2008 estimates I just went over are not guaranteed to occur and may be different for a variety of different reasons, such as changes in the economy, new acquisitions, dispositions and et cetera.

With regards to what we are seeing across our markets, leasing metrics are largely flat to slightly negative compared to last quarter. This is a result of a slowing economy in the fourth quarter, which is leading to a reluctance by companies to commit to expansion space or lease new space. As a result, overall office occupancy rates on a nationwide basis are beginning to decline, and nationwide office net absorption continues to slow. In addition, overall development activity continues to increase.

With regards to our specific portfolio, we continue to outperform the market on many fronts. We signed leases for about 1.2 million square feet during the quarter and 67% were renewals and 33% were new leases. Leasing activity during the fourth quarter resulted in a 5% roll up in rents and about $9 per square foot in capital commitments. The average lease term was 5.6 years and the average capital commitment per lease year was $1.67. Both of these key metrics are improvements from the prior year.

Although we are 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 during the second half of 2007. Overall company occupancy at December 31st was 92.9%, which represents a 20 basis point decrease from the prior year. Within our portfolio, all of our major markets continue to perform fairly well.

In Oahu, the market for industrial property is the strongest in the country, with gross industrial rents approaching $40 per square foot in certain areas. As a result, the Oahu industrial real estate market continues to experience one of the most dramatic increases in rates among all real estate segments in 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. During the fourth quarter, we saw rents roll up by 40% in this market and we anticipate significant roll ups in rents to continue in the future. During the quarter, same store NOI increased by around 1% in Oahu, reflecting rent growth on recent renewals.

Boston continues to perform better than expected with stable market occupancy and limited new development activity, especially in the downtown market. Boston same store NOI increased 3.6% during the quarter, reflecting rent growth on recent renewals, mainly in the Longwood Medical area. Unfortunately, this is our only major market where we'll have some lease roll downs and occupancy declines in early 2008. For example, in January of 2008, just over 200,000 square feet of space in one of our suburban office buildings in Boston was vacated, and we have no firm commitment to re-lease this space at this time.

Southern California saw an increase in same store NOI of almost 1%, despite a decrease in occupancy by 3.9%. Our Southern California portfolio is largely benefiting from increases in rental rates in the region. Our only concern with this market is the increase in development activity during the last few quarters. In addition, in 2008, we will likely be indirectly affected by a softening in this market because of the decline in mortgage brokerage business.

Our Philadelphia portfolio experienced a 5.4% decline in same store NOI, reflecting increases in operating expenses and a decline in expense recovery income. Otherwise, the Philadelphia leasing market has shown steady improvement during the past year, especially in the downtown market, where we own a large percentage of assets. As announced previously, we have pre-leased over 50% of the space Comcast will vacate in 2008, and we hope to report additional progress with this releasing effort by the time Comcast vacates their space in April. We continue to believe that 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.

Washington, D.C., is still in a period of change. One of our concerns with this market is the large amount of development activity, with between one and two million square feet coming online per quarter. Same store NOI decreased by 5.9% during the quarter, driven by the decline in occupancy of 4.5% year-over-year. The decline in occupancy primarily relates to the 131,000 square foot expiration in early 2007 in Gaithersburg, Maryland.

Our Austin, Texas, portfolio continues to post strong leasing results, with consistent rent growth on leases signed during the past few quarters. Even though this market is generally performing well, we experienced a decline in occupancy in same store NOI during the quarter because of the expiration of over 200,000 square feet of space in one of our industrial parks earlier this year.

In our other markets located throughout the country, our portfolio has generally experienced stable occupancy and modest NOI growth during the quarter. We have 5.2 million square feet scheduled to expire during 2008, which represents approximately 9% of our total square feet, and 10% of our annualized rents. Excluding Boston, the majority of leases are scheduled to expire through the end of 2008 at in-place rents that are below current market rents, which may lead to some roll ups in the future, but these roll ups are expected to be offset by occupancy declines in Boston and Philadelphia. We are expecting occupancy to decline during the first quarter of 2008 in our metro Boston market by around 8% because of the 200,000 square foot vacancy that I discussed earlier. In addition we are expecting Philadelphia occupancy to decline by around 4% when Comcast vacates their space in the second quarter.

With regards to investing activities in the fourth quarter, we purchased a portfolio of six triple net lease 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 lease.

Although the focus of HRPT will continue to be an owner of office properties, we may continue to make investments in similar times of properties in the future. We are attracted to this property type because it provides high yields, stable and secure cash flows and minimal ongoing CapEx requirements. Also during the quarter, we sold one building in Petersburg, Alaska, for 24,000 square feet for about $700,000.

Generally, the current tightening in the credit markets is starting to affect pricing for commercial office buildings around the country. HRPT is one of the few commercial office REITs with access to capital, and we plan to take advantage of the situation in 2008, to acquire Class A assets at very attractive valuations. A good example of this opportunity is that subsequent to the end of the quarter, we purchased one of the best class A office towers located in Cleveland, Ohio, with 877,000 square feet of space, for about $124 million. Although we will disclose more details regarding this acquisition, when we announce first quarter 2008 results, I will mention that we purchased this high quality asset at a cap rate of over 9% and this purchase is expected to be accretive to FFO per share in the future. In addition, in an effort to increase FFO per share in the future, we are also currently exploring various other opportunities to sell or redevelop properties across our portfolio in 2008; however, I have nothing to -- nothing specific to report to you as of today on this front.

Looking forward, the overall growth in the office leasing market across the country continues to slow with more markets experiencing a flattening or a decrease in net effective rents rather than an increase. We believe this is largely a result of a slowdown in the economy, as well as increasing development activity in some markets.

Even though it appears the economy is slowing and office fundamentals are weakening in 2008, HRPT is still very well positioned today. We currently enjoy among the highest occupancy rate, longest average remaining lease term and highest credit quality tenants in the entire office REIT sector; as a result, our cash flow and dividend payments are secure, and our stock represents a great defensive income-oriented investment in today's environment.

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

Thank you, Adam.

Looking first to the income statement, rental income increased by 4% and operating expenses increased by 3% during the fourth quarter of 2007. The year-over-year quarterly increase in rental income and operating expenses reflects properties acquired between October 2006, and December 2007, partially offset by the modest decline in same store NOI. Depreciation and amortization increased by 17%, reflecting properties acquired and to a larger extent, depreciation and amortization related to building and tenant improvements.

General and administrative expense increased by 26%, reflecting reimbursements of professional [fee] and state taxes received during operator year, totaling around $1.3 million. Our consolidated NOI margins were 60.2% for the fourth quarter of 2007, and 59.8% for the fourth quarter of 2006. Current quarter EBITDA increased by 3.6% from the same period last year, primarily reflecting property acquisitions since September 2006.

Interest expense increased by 13.6%, reflecting property acquisitions and a modest increase in weighted average interest rates on refinancings that took place June and September 2007. Net income available for common shareholders for the fourth quarter of 2007 was $8.9 million, compared to $23.2 million for the fourth quarter of 2006. The decrease reflects depreciation and amortization related to building improvements and leasing costs incurred since September 2006, the excess redemption price paid over the carrying value of $125 million of series B preferred shares redeemed in November 2007, the decrease in gains on property sales, G&A reimbursements during the prior year and the modest decline in same store NOI, partially offset by earnings from properties acquired during the same period.

Diluted FFO available for common shareholders was $0.27 per share for the fourth quarter compared to $0.29 per share last quarter and for the prior year. The year-over-year decrease primarily reflects the decline in same store NOI, G&A reimbursements received in the prior year and higher financing costs, partially offset by earnings from properties acquired since September 2006. The decline in FFO from last quarter primarily reflects land sale gains recognized during the third quarter.

As mentioned before, we believe FFO per share will stabilize in 2008 and likely remain flat with fourth-quarter 2007 results. However, FFO per share in the second quarter of 2008 may temporarily decline by at least $0.01 per share as we transition the space leased to Comcast in Philadelphia. Of course, the 2008 estimates are not guaranteed to occur and may be lower than expected because of various factors such as a slowdown in the economy, a decrease in occupancy, decline in rental rates, and increased costs.

In January 2008, we declared a dividend of $0.21 per share, which represents 77.7% of our fourth quarter FFO. Our Board considers the dividend level on a quarterly basis and as Adam mentioned before, they are comfortable with this current payout ratio.

During the quarter we spent $24 million on tenant improvements and leasing costs and $6 million or $0.09 per square foot for recurring building improvements, including lobby and facade renovations, elevator upgrades and other capital projects throughout the portfolio. We paid $7 million on development and redevelopment activities during the fourth quarter.

Turning to the balance sheet. On December 31st, we held $20 million of unrestricted cash. $25 million increase in rents receivable reflects straight line rent accruals during 2007. Rents receivable includes approximately $160 million of accumulated straight line rent accruals as of December 31st. Other assets includes approximately $94 million of capitalized leasing and financing costs.

During 2007, we sold $2.5 million common shares through a controlled equity offering program, raising net proceeds of $29.9 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 used the proceeds of this offering to partially redeem five million of our 12 million outstanding series B preferred shares in November for $125 million. The five million preferred shares redeemed in November carried 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 December 31st, we had $340 million of floating rate debt, $394 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 6.9 years. We prepaid $29 million of 8.5% mortgage debt in January 2008.

Our senior unsecured notes are rated B AA2 by Moody's and BBB by Standard and Poors. The book value of our unencumbered property pool totaled about $5.5 billion at the end of the quarter. Our secured debt represents 7% of total assets and floating rate debt represents 12% of total debt. At the end of the fourth quarter, our ratio of debt to book capitalization was 49%. Our EBITDA and fixed charge coverage ratios were 2.7 times and 2 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 quarter we had $140 million outstanding on our revolving credit facility, with $610 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 10% make HRPT a logical choice for long-term income-oriented investors.

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

Thank you.

(OPERATOR INSTRUCTIONS) And we'll take our first question from John Guinee with Stifel Nicolaus. Please go ahead.

How are you guys?

Good, John. How are you?

Happy Valentine's Day.

Same to you, John.

All right. Question. You know, on the Comcast space, what sort of net rents are obtainable on that space, and what do you have to put in, in terms of TIs and commissions to fill it back up?

Well, it's a gross --the market is a gross lease market. The market's today about $27, $28, and we would expect to get market rates. And to tell you the truth, Comcast was in there, I think at about $26. So it actually is a little bit of a roll up. In terms of TIs, you have got to keep in mind that Philadelphia, the downtown market is typically a very long-term lease. We are signing leases there, it would be 10 or 15 years. So that -- keeping that in mind, it is, you know, over $50 a foot. I mean, it could be $60, $70, a foot.

What is the operating expense on those buildings?

Surprising-- call it $9, $9 or $10.

So that's a $17 or $18 net market?

Yes.

Wow. Okay.

You think that's good or bad?

Oh, I think that's a lot higher than I would have thought. You know, the facts of life are, that what you guys do, and I think everybody on the call knows it, is you go buy high cap rate assets in third tier markets, which cost you a fortune to re-tenant, and probably depreciate in value. So, you know, you don't make that business up in volume. How do you increase FFO with that acquisition strategy?

Well, first of all, I don't agree that they depreciate in value, our assets. In fact, I think one of the reasons that our CapEx is so high, and I challenge you to compare us to companies I know you cover, Highwoods and Mack-Cali and Brandywine and I challenge you to look at our CapEx spend versus theirs and I can guarantee you -- and I know these companies well. If you look at our companies and you look at -- you look at us and you look at them, I guarantee you, we are keeping our buildings up better than they are. It's just a fact that we are spending more money, and that's not because our buildings are older or not as good as those buildings; it's because we are willing to actually spend the capital.

So I take -- I take issue with the fact you think our buildings are depreciating in value. They are not. In fact, if anything, I think we do a better job of maintaining the value and in fact, I think we increase the value in our buildings.

The question as to how do we grow the FFO? Obviously, our cost of funding was much higher than I think we maybe had anticipated in 2006, and definitely into 2007, and that had an effect on basically how much accretion we were able to pull out of our acquisitions.

I will also make note that we had not made nearly the amount of acquisitions in the last couple of years that we have made in years past. I know you know that back in 2003, 2004, we were running at close to $1 billion in a couple of those years. We are well below that. I think this year we will probably be below it as well.

Now, what's going on in our markets, you know, every market is a little different in what's happening but I think we have bottomed out with our FFO and I think we are doing -- we are making the changes and doing what we have to do at the Company to grow FFO.

You know, we really focused, and this is important for everyone on the call to realize, the last couple of years, we really focused on trying to get our capital spending in line. You know, two years ago, in 2005, our shortfall for dividend coverage was about $70 million in 2005. This year, in 2007, it's still -- we still have a shortfall, but it's half. It's $35 million on a $6 billion portfolio. You take that small shortfall, combined with the fact that -- with the capital we are spending on the buildings I believe is increasing the value of the buildings, and not just maintaining, but increasing the value of the buildings, and I think that over time, we are going to be able to increase FFO.

I really think that what we were doing in the past was very much focused on getting the capital in line. I think we have largely done that. We may have a little bit more work to do. We are definitely going in the right direction. And now as we go into 2008, we are focused more on trying to grow the FFO. I do believe that we have bottomed out. We might have more of a dip in the second quarter because of what's going on in Philadelphia. But I think that you are going to start seeing an increase.

Now, if the economy continues to go south -- and nobody and vacancy rates increase and deliveries in market of new construction continues, we are going to be in the same boat as everybody else and it is going to be a very tough 2008. I can tell you, it looks like the first half of 2008 at the very least is going to be very tough. I don't know what the second half is going to look like yet.

Well, haven't you been trying to grow FFO for the last four years?

Sure, we have been trying to grow FFO, but I have been more focused at the same -- and I have said it many times. We have been more focused on getting our payout ratio in line, and that was at the expense of some FFO growth.

Now, you have to ask yourself, what's more important? They are both important, but do we make sure we cover our dividend or do we have growth in FFO? You want to have both. We were focused over the last couple years making sure we covered the dividend. Now we have gotten a lot -- we have gotten much better at doing that. We are going to be more focused on FFO growth.

It would have been easy for us to grow FFO, it just would have been a sacrifice -- we would have had to spend more dollars on TI. We have seen a slow decline in occupancy. That is not because we can't lease space. That is because I am not willing to lease space where I have to spend a lot of TI dollars to get the space filled. I am willing to hold out a little longer and make sure we get the highest net effective rents. We could have grown FFO this year if we just decided that we didn't care what the CapEx -- capital expenditures would have been. But that is not the way we ran the business. I think it's important that we did do what we did over the last couple of years. And I think we are now at a point we can focus more on perhaps the top line, which is occupancy, and I think as a result of that, you will see more FFO growth.

Well, it appears to us, if we look at some of our peers that what they have done over the last few years is they -- particularly 2006, and 2007 is they've really taken advantage of the very high degree of liquidity and they off-loaded a lot of vacancy and they took advantage of aggressive buyers and they got -- sold some good income streams. Have you thought about sort of righting this ship by increasing the disposition program at all?

John, hindsight is 20/20. I can tell you as we think about 2008, I thought I was pretty clear in my prepared remarks. We are definitely looking at all sorts of scenarios. It is not lost on us that at the expense of getting capital in line, that we have a had of decline in FFO. We don't find the decline in FFO of the last couple years acceptable. We are looking at everything -- it's not only internal operations, how to fill the buildings and get more cash flow out of them. It's also looking at things like dispositions and redevelopment opportunities. And I can tell you that is something we are taking a very hard look at. We are looking at it -- you know, we could look at it. We may do a very big disposition this year; we may not. We may do some very big redevelopment projects; we may not. I can guarantee you that the only way we will do any of those things is it has to be -- it has to be accretive to FFO. It has to be meaningfully accretive to FFO. I can tell you that we are looking at it but I cannot guarantee, nor will I commit the Company that we will be doing anything throughout the rest of the year other than I will tell you we are looking at it.

So you will commit to look but not commit to do anything?

That's absolutely right. I'm not going to commit to do anything. I will commit to you that we are going to take a hard look at it and I am going to commit to you that I'm going to do everything we can to grow FFO.

Which is different than the last three or four years?

John, we have always tried to grow FFO. What is different now is it's not -- I'm not as focused on keeping capital in check. That's the difference.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) We'll take our next question with Charles Place with Ferris, Baker Watts, Inc. Please go ahead.

Hey, guys.

Hi, Charlie.

Adam, can you, in light of your comments regarding your acquisition volumes of a couple of years ago, relative to the last couple of years where it's been below those elevated levels, do you have a sense or are you willing to put kind of a bracket on what your expectations for 2008 is, in light of this Cleveland acquisition you've made in the first quarter?

You know, Charlie, I can't put a number on it. I really can't. We are seeing a lot of really interesting deals come at us. Deals that we never would have been able to buy at the prices today that we could have bought, let's say, two years ago, meaning at much better prices. And -- and we're taking a hard look at them. I don't know how much the acquisition volume is going to be this year. I can tell you that the number of properties that we're looking at is smaller than we have in the past, even though we didn't acquire as much in 2007 and 2006 as we may have in the past. We certainly looked at a lot. We're not looking at as much this year as we have in the past, simply because there's not as much volume to look at or as many things to look at in the marketplace.

I'm not trying to be elusive. I keep telling you that we are going to be very opportunistic. It's going to have to make a lot of sense for to us acquire it and I think the Cleveland building is a perfect example of that. Great cap rate. It is literally the nicest office building in Cleveland. And some of the best tenants in the market in that building long-term leased. There's opportunities like that that we're -- two years ago that building would have sold in the sevens and now that building is settled in the nines. So we're going to look at stuff like that, but I think we are going to see some great opportunities. Will we make some more acquisitions? Probably. But I just don't have a sense it is going to be a -- is the whole year going to be $200 million, or is the whole year going to be $500 million? I just don't know.

Okay. I mean, when you are looking at these opportunities, and maybe Cleveland is a good example. I mean, you think the cap rate was so high because the amount of bidders out there were -- were so -- so fewer, if that's -- I'm probably not saying that right, fewer or, you know, lack of a liquid credit market has limited the number of buyers or do you think it's just Cleveland upper Midwest economy that kind of has brought pricing down in that -- those areas?

Maybe a little bit of both. I mean, I will tell you the number of buyers is much smaller than it was a year ago. I mean, it's -- it's a much smaller universe of people looking at acquisitions and it just makes sense that the market is where you are going to see the biggest change first is going to be in some of the second and third tier markets. It is going to take longer for pricing to adjust in places like New York City or maybe L.A. or downtown Chicago. But certainly in a place like Cleveland, it's changed much faster.

What -- in -- thank you, Adam. John, just some quick questions. You had gone real quickly through your balance sheet and on the asset side, I just wanted to clarify. Of your rents receivable at the year end it was approximately $198 million; I think you said $160 million of that was straight line rents. Is that accurate?

That's accurate.

And of the 124 roughly of other assets net, you said I think that 94 was capitalized leasing or financing cost what--

That's correct. It's a combination of the two, Charlie.

So the other $30 million, would those be viewed as tangible assets?

Yes, the lion's share of the remaining -- the balance is deposits related to the property that we just acquired in Cleveland.

Okay. I think that's -- that was pretty much -- pretty much it that I had. If I have any other questions, I will circle back. Thanks.

And we'll take our next question with Jamie Feldman with UBS. Please go ahead.

Great. Thank you very much. I was just hoping you guys could talk a little bit about what your view is on when you would think about reducing the dividend. Kind of at what payout ratio you really do start to get uncomfortable, assuming you can't grow FFO and things don't get a lot better from here.

It would have to be well over -- well above where it is today. I mean, this year payout ratio, depending on how you calculate it, it's probably about 125%. That's down from about 170% two years ago. I can tell you if it was running at 170 for two or three years, we would probably have to seriously look at cutting the dividend. I can't put an exact number on it, but that gives you a sense of sort of the parameters.

So you still think you have some breathing room?

I think we do.

Okay. And then in terms of the capital market, I mean, assuming you do continue to acquire here, what do you think is your best source of capital and what kind of pricing are you seeing?

Well, I don't think -- with the pricing of our stock price where it is today, I don't think it would be common stock. You know, the debt capital markets have certainly come under a lot of strain. Today -- it depends on the type of debt financing that we would look at, the term and the type, secured and unsecured, how many years. But, I mean --I think a round number to use, if you want to stick it on a model might be 7% for the debt, as a round number. I mean, it could be less than that. It could be more than that, but it sort of depends on what type of financing.

Okay. And then in terms of spread over across the capital what is the minimum you would look at right now?

I think the minimum -- well, generally speaking, the minimum would probably be 100 basis points minimum, but I don't think we would do a deal today at just 100 basis points over. It would have to be more unless it had some unique quality to the acquisition, which allowed it, that we thought we were going to get a lot of growth out of it, let's say, over a period of time. Then we might be more willing to buy something closer to our cost of capital. That's -- you know, for example, a great example, that's why we bought things there, you know, a mid 7% cap rate. That was probably below our all-in cost of capital at the time, but we were able to grow it over three or four year period to -- we are approaching 9% yield on investment on those properties and so we were able to -- we were willing to do that because we knew we could grow it some. I don't like to say it as a hard and fast rule to how we look at acquisitions, but just run of the mill office building, that may not have a lot of growth, it might be long-term lease or with a good quality credit tenant, it would have to be a minimum 100 basis points over. I think it would have to be more.

Thank you.

Yes.

And we'll take our next question with George Auerbach with Merrill Lynch.

Hi. Good afternoon. When you are underwriting acquisitions in today's market, what type of unlevered IRRs are you looking for?

In today's market?

Yes.

Low. Over a ten-year period, we're probably looking at somewhere between -- it depends on the asset, but somewhere -- call it 12% to 15%.

And that's unlevered?

That's unlevered over a ten year period.

Okay. And looking across your portfolio, I wonder if you could give some color on your average mark-to-market, and contractual rent bumps on in-place leases.

Sure. Mark-to-market, if you look at our portfolio, across the board -- even with Boston in it, if you look at our entire market, mark all the leases to market we're about 5% below market in place. So there's an opportunity to roll up. And so in places like Hawaii is a perfect example. I mean there, we are going to see roll ups of at least 40%, 50%, probably more over the next year.

In places like Philadelphia, believe it or not, it's going to be some roll up in rents. Southern California, Austin, some of our other markets. Really the only place that we have any sort of roll down risk is in Boston, and it's not just roll down risk, it's -- you know, it's vacancy risk. As I mentioned in the prepared remarks we have 200,000 square feet of the 400,000 that's expiring this year, 200 has already expired in January, and honestly we don't have a new tenant lined up for that space. Now, I will say for I think over a year, every quarterly call, I've mentioned to people that Boston is going to be a problem in 2008, and I think this was the problem I was talking about. We have a building, seven South 495 market and it's just -- that market is just struggling. We have a very nice building. A Class A asset, it is just -- it's just tough to find a tenant, a big tenant that has a space requirement of that size. We are probably going to have to multi tenant it to fill it up.

And in terms of the contractual rent bumps?

As far as contractual rent bumps, we recognized around $24 million of straight line rent accruals this year. That number will probably taper down to zero in about five years. So you will gain around $23, $24 million over a five-year period.

What is that in terms of percentage on the in-place leases? Is there any sort of CPI rent bump?

Maybe around 4%.

So more than CPI, yes.

Okay. That's helpful. Thank you.

Yes.

And we'll take our next question with Frank [Graywith] with Reef.

Hey, guys. That mark-to-market was that GAAP or cash?

It's GAAP.

Have you issued any stock year-to-date?

In 2008?

Yes.

No.

And where -- at what point do you begin thinking of buying back your stock?

Well, you know, in this market environment, I don't think it makes any sense to be talking about a stock buyback, when the credit markets are where they are. I think it's prudent for any company, not just ours to think about retaining cash in this market. I just -- I think a stock buyback today is stupid. I mean, to be perfectly honest.

Do you think buying back your stock is -- I guess you -- you view acquiring assets more attractive than your current stock? I mean, if you are thinking about buying assets, you might as well buy your stock. It's the same tradeoff. You just have to pick one over the other.

The assets have a lot more growth in it long term. And, you know, if I -- if I had the equal return, either do a stock buyback or buy an asset, I think I would pick buying an asset, because I think everybody knows, anyone who has ever looked at a study on a stock buy back, has it actually done anything other than boost the stock price for a very short period of time. It never does anything long term. Whereas buying an asset can increase the value of your company over a long-term period. So I mean, to get to the heart of your question, I just don't plan on us doing a stock buyback any time soon. That's just reality. I think -- again, I just think -- I think for any company today, with the way the markets are, you know, all you have to do is read the paper and see how difficult it is to get capital. You know, people should be using their capital very, very wisely and very conservatively in this type of market environment. That's why I was asked before, how many acquisitions would we do? We may not do any more than what I just said in Cleveland; that might be it for the year. Or we might do more, depending on the type of opportunities we see. But I can tell you in this environment, the cost of that capital is very high.

Will you need any of your assets to be slower growth assets than your overall -- I assume your company is a weighted average of all of your assets and so some of your assets are slower growth than your overall company, so why not sell the slower growth assets and buy back your stock and get the average [write up]?

Well, I don't know if you've read the paper or have any experience in buying or selling properties, but today is not the -- people do not pay great premiums for properties today. The dearth of buyers out there is quite prevalent. You know, to sell properties today, we are looking at it and there might be an opportunity to do it and do it at a very -- on an accretive basis, but I'm not sure we would use that to do a stock buyback. If we sold properties, we would probably more likely reduce debt, to be honest with you. That's what we would probably use the proceeds for. Thank you. Yes.

And we'll take our next question with Kevin Martinez with J.P. Morgan. Please go ahead.

Thank you. Along those lines of acquisitions, stock buybacks and debt, can you talk a little bit about your capital structure in terms of use of secured, unsecured, preferreds and also how you view your debt ratings going forward?

Okay. Well, first of all, we are investment grade rated. We have been investment grade rated since 1994. Historically, we have run leverage at this company of right around 44%, 45%. Today debt to total book capital is right around 49%. Our goal is to kind of maintain leverage right around 50%. Sometimes we go up to 55, sometimes we go back down to 45, but it all depends on market conditions, what we can do in the markets as far as debt or equity.

Okay. And do you see in this environment, it sounds like from what Adam just said, you would not anticipate leveraging up any further?

Well, we might --

In terms of if you sold an asset, you would pay down debt.

Most likely, that's what we would do with a for sale asset, we would probably pay down debt. That's right. Look in the interim, might we lever up a little bit more? Yes. But we are not going to put a lot more leverage on the balance sheet.

Would it be fair to say you wouldn't put your ratings at risk for a downgrade?

I think that's a fair statement, yes.

Great. Thank you very much.

Yes.

And we'll take a follow-up with John Guinee with Stifel.

John?

He dropped off. We have no further questions in the queue. I would like to turn the conference back over to management for any additional or closing remarks.

No, I think that's it. Thank you for joining us on our fourth-quarter conference call. We look forward to speaking with you all in our first-quarter conference call in May.

Once again, ladies and gentlemen, this will conclude today's conference. We thank you for your participation. You may now disconnect.