Equity Commonwealth (EQC) 2008 Q2 法說會逐字稿

Good day, and welcome, everyone, to the HRPT Properties Trust second quarter 2008 financial results conference call. Today's call is being recorded; and at this time, for opening remarks and introductions, I would like to turn the program over to the Director of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

Thank you, Milicent. Joining me on today's call are Adam Portnoy, Managing Trustee, and John Popeo, Chief Financial Officer. The agenda for today's call includes a presentation by management followed by a question-and-answer session. Before we begin today's call, I would like to read our Safe Harbor Statement. Today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Federal Securities laws. These forward-looking statements are based on HRPT's present beliefs and expectations as of today, August 5th, 2008. The Company undertakes no obligation to revise or publicly release the results of any revisions to the forward-looking statements made in today's conference call other than through filings with the Securities & Exchange Commission regarding this reporting period.

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 & Exchange Commission and in our Q2 Supplemental Operating and Financial Data found on our website at www.hrpreit.com. Investors are cautioned not place new undue reliance on any forward-looking statements. And with that, I would like to turn the call over to Adam Portnoy.

Thank you, Tim. Good afternoon, and thank you for joining us on today's call. For the second quarter of 2008, we are reporting fully diluted FFO of $0.28 per share compared to $0.27 per share in the first quarter of 2008, and $0.29 per share in the second quarter of 2007. It is important to note that our second quarter 2008 FFO per share includes $1.2 million of nonrecurring lease termination fees. Although FFO per diluted share declined from last year, we have made great improvements in reducing our capital expenditures. As a result, for two consecutive quarters, we have generated more cash from operations than paid in dividends. The combination of an improved payout ratio and our efforts to recycle capital into accretive acquisitions are two important steps for our Company which may better position HRP in the marketplace going forward.

During the second quarter of 2008, we signed leases for about 1.7 million square feet, and 78% were renewals and 22% were new leases. Leasing activity during the second quarter resulted in a 9% roll-up in rents and about $8 per square foot in capital commitments. The average lease term was 5.6 years, and the average capital commitment for lease year was $1.40, which is the lowest rate we have reported in the last five quarters. Also, I think it is important to note that we have reported roll-ups in rents during the last 11 consecutive quarters. Although we're pleased with our ability to sign renewals with many of our tenants at attractive terms, the pace of new leasing activity or the leasing of currently vacant space has slowed significantly since the end of 2007. Within most of the markets where we operate, net effective rents are trending downward. This is the result of a slowing economy, which is leading to a reluctance of companies to commit to expansion space or lease new space.

This trend is evidenced by the reported decline in office net absorption and occupancy rates across the country in the first half of 2008. At the same time, development activity has not yet slowed, with many new projects scheduled for completion during the remainder of 2008. As a result of these market dynamics, overall Company occupancy at June 30th was 90.9%, which represents a 180 basis point decrease from the prior year. Despite the difficult market environment, we are doing a good job of outperforming in many of our market areas. Although our total same store NOI declined by 2.7% in the second quarter, this decline is primarily the result of the decline in occupancy in Philadelphia and our Boston markets, which we anticipated and discussed with investors in the past. Excluding the decline in same store NOI in these two markets, our total same store NOI would have been flat this quarter.

Our Austin, Texas, portfolio continues to post strong leasing results, with a 14% increase in same store NOI during the quarter. This is reflecting consistent rent growth on leases signed during the last few quarters and a modest increase in occupancy. Washington, D.C. is still a market experiencing weakening fundamentals with between one and two million square feet coming online per quarter. Our same store NOI in this market increased by 3.6% during the quarter, driven by occupancy gains and rent growth. Southern California is also a market experiencing weakening fundamentals. Second quarter same store NOI was flat, reflecting rent growth offset by the decrease in occupancy of 5.4% in this market. In Oahu, the market for industrial property is still 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 United States. HRP is largely benefiting from this market improvement because we are the largest owner of industrial properties in the state of Hawaii. During the second quarter, we saw rents roll up by almost 150% in this market, and we anticipate significant roll-ups in rents to continue in the future. During the quarter, same store NOI was basically flat in Oahu due to the timing of recent leasing activity. Our Philadelphia portfolio experienced a 7.4% decline in same store NOI, reflecting Comcast vacating around 350,000 square feet on April 1st. As announced previously, we have pre-leased over 50% of the Comcast space and we hope to report additional progress with this re-leasing effort in the future. 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.

The Philadelphia market also appears to be benefiting from companies leaving the New York City market in search of lower rental rates. We continue to believe that we are well-positioned in the Philadelphia 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. Boston same store NOI decreased 19.8% during the quarter, reflecting almost 300,000 square feet of space vacated in two of our South Suburban office buildings. As of today, this is our only major market where we may continue to experience significant lease rolldowns through the end of the year. In our other markets located throughout the country, our portfolio experienced a 2% decline in occupancy, which contributed to a 2% decline in same store NOI during the quarter. We have 2.2 million square feet scheduled to expire during the last two months of 2008, which represents approximately 4% of our total square feet and 5% of our annualized rents. The majority of the leases scheduled to expire through the end of 2008 have in-place rents that are below current market rents, which may lead to some rent roll-ups in the future.

As we discussed last quarter, we recently agreed to sell 48 of our medical office clinic and biotech laboratory buildings for with 2.2 million square feet for $565 million. We closed the sale of five of these buildings for $84 million during the second quarter and recognized gains totaling $40 million. We sold three buildings for $39 million in July, and expect to sell another 20 buildings during the month of August for around $110 million. The remaining $332 million is expected to close in phases during the remainder of 2008 and into 2009. As stated previously, we anticipate using the proceeds from this sale over the long-term to take advantage of current, favorable market conditions. The purchase property is at higher cap rates than the properties being sold. The good example of this is our second quarter purchase of one of the best Class A office buildings located in Milwaukee, Wisconsin, with 374,000 square feet of space for about $53 million.

We purchased this high-quality asset at a cap rate of over 9%; and as a result of recycling capital from the announced sale of properties, this purchase is expected to be accretive to FFO per share in the future. This property is 97% occupied, with an average lease term of over six years. Also, subsequent to the end of the quarter, we purchased a portfolio of well-leased office industrial properties in the Kansas City market with 1.8 million square feet for approximately $112 million. And the initial going in cap rate is close to 11%. We will provide more information on this acquisition when we announce third quarter results. As of today, we have one additional property under contract for sale at a sale prices at around $15 million. Obviously, the closing of this sale is subject to completion of diligence and other contingencies and may or may not occur for a variety of reasons. Looking forward to the remainder of 2008, it appears that leasing fundamentals are weakening. During the first half of the year, we have seen a decline in leasing of vacant space and an increase in early lease renewal activity. We suspect this trend will likely continue through the end of the year. Nevertheless, even in this weakening market environment, I think we are achieving some great milestones.

During the last five quarters, we have seen a consistent improvement in leasing metrics, with rental rates rolling up and low Cap Ex commitments. This is having the desired effect of improving our dividend payout ratio in the first six months of 2008. However, the consequences of these actions are affecting our occupancy, which has declined during the last year, and this has led to a decline in same store NOI. As a result, we expect capital expenditures may increase in the remaining quarters of this year in order to maintain occupancy rates in this market environment. 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 4% and total expenses increased by 7% during the second quarter of 2008. The year over year quarterly increase in rental income operating expenses and G&A expense reflects properties acquired between April 2007 and June 2008, partially offset by the decline in occupancy and same story NOI. Depreciation and amortization increased by 6%, reflecting properties acquired; and to a larger extent, depreciation and amortization related to building and tenant improvements. Our consolidated NOI margins were 59% for the second quarter of 2008 and 60.4% for the second quarter of 2007. Current quarter EBITDA increased by around 1% from the same period last year, primarily reflecting property acquisitions since March 2007, offset by the decline in occupancy in metro Philadelphia and Boston. Interest expense increased by 5.2%, reflecting property acquisitions.

Net income available for common shareholders for the second quarter of 2008 was $55.4 million compared to $16.1 million for the second quarter of 2007. The increase reflects $40 million of gains on the sale of five properties in June. Diluted FFO available for common shareholders was $0.28 per share for the second quarter compared to $0.27 per share last quarter and $0.29 per share for the prior year. The year over year decrease primarily reflects the decline in occupancy and same-store NOI, partially offset by the reduction in preferred distributions and earnings from properties acquired since March of 2007. As Adam mentioned, FFO per share during the second quarter included $1.2 million of nonrecurring lease termination fees, which may result in a decline in FFO per share of around one penny next quarter. Of course, any 2008 estimates are not guaranteed to occur and may be different than expected. In July 2008, we delivered a dividend of $0.21 per share, which represents 74% of our second quarter FFO. Our board considers the dividend level on a quarterly basis, and they are comfortable with this current payout ratio.

During the second quarter, we spent $14 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. Combined CapEx declined by more than 35% from the same quarter last year. We paid $3 million on development and redevelopment activities during the second quarter. Turning to the balance sheet, on June 30th, we held $33 million of unrestricted cash. The increase in restricted cash reflects over $80 million of proceeds from asset sales that were temporarily deposited with an escrow agent during the second quarter. The $312 million of assets held for sale includes the net book value of assets under contract totaling $274 million, plus the reclassification during the second quarter of rents receivable and other assets related to these properties totaling $38 million. Rents receivable includes approximately $139 million of accumulated straight line rent accruals as of June 30th.

The decrease in other assets also reflects a $15 million decrease in purchase deposits related to the property we acquired during the first quarter. Other assets include approximately $87 million of capitalized leasing and financing costs. On June 30th, we had $501 million of floating rate debt, $391 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% at the end of the quarter, and the weighted average maturity was six years. We have no debt maturing in 2008 or 2009, and only $50 million of senior notes maturing in 2010. Our senior unsecured notes are rated BAA2 by Moody's and BBB by Standard & Poors. The book value of our unencumbered property pool totaled about $5.7 billion at the end of the quarter. Our secured debt represents 7% of total assets and floating rate debt represents 17% of total debt. At the end of the second quarter, our ratio of debt to book capitalization was 51%. Our EBITDA and fixed charge coverage ratios from 2.7 times and 2.1 times, respectively. As of the end of the second quarter, we were comfortably within the requirements of our public debt and revolver covenants. As of the end of the second quarter, we had $301 million outstanding on our revolving credit facility, with $449 million of additional borrowing capacity at a current interest rate of around 3%.

In summary, we think this quarter produced good results in light of a difficult market environment. We also think that the combination of an improved payout ratio and our efforts to recycle capital into accretive acquisitions are two important steps for our Company which may better position HRP in the marketplace going forward. We continue to believe HRP's strong tenant base, limited near-term lease expirations, strong balance sheet and current annual dividend yield of almost 12% make HRP a logical choice for long-term income-oriented investors. That concludes our prepared remarks. Operator, we're now ready to take questions.

(OPERATOR INSTRUCTIONS). Our first question comes from Phillip Martin with Cantor Fitzgerald.

Good afternoon, everybody.

Hi, Phillip.

Adam, just -- a bit on the opportunities that you're seeing out there going forward. Can you give us some sense of where relative to replacement value you're seeing transactions valued, and using possibly Kansas City as a good example?

Sure. I think our overall comments on the market is a lot less volume of deals to look at. I think it is safe to say that generally speaking, investors -- again, this is a general statement, maybe not in all cases -- but generally, investors, if they don't have to sell are not selling in this market, given the difficulties in raising debt financing for most buyers. And so that's resulted in -- we're starting to see drop-off in the number of deals that we can look at. But that being said, deals -- there are some deals out there. There are sellers that have, for whatever reasons, needs to sell or create liquidity. And in those situations, there are a lot less buyers available in the marketplace simply because all of the levered buyers have disappeared.

And we're seeing a -- it is because -- we're actually in a very good position because we don't have any finance contingency associated with our acquisitions because we have -- we can use our revolver for the acquisition. And so oftentimes, you know, we are not even the high bidder -- and the properties that we're seeing -- for example, you've mentioned Milwaukee, that was -- that's probably half replacement cost we bought that at. And we weren't even, I think, the highest bidder there. And in most cases, today, the surety of closing is becoming more important than whatever price somebody puts on the table. So, you know, if they think you can close and you might be 5% less than the highest bidder who might have -- or 10% less than the higher bidder that might have a finance contingency -- the seller and the broker are more likely to want to go with you -- or with us -- when you don't have a financing contingency. So it is a pretty good opportunity for us; and as you can tell, our volume this year has been much off what we've done in past years. I think it's safe to say we're being selective in what we're buying and the prices that we're paying and the cap rates that we're achieving, especially on some of these very good assets that we've been able to buy.

I'll also point out that, you know, we're doing this probably -- it is actually working out a little bit better than even we thought. We might we might sell a lot of these buildings -- the medical office buildings to S&H, and that we might be sitting on a lot of cash and there might be some negative arbitrage in the interim until we actually were able to reinvest the proceeds. More by luck than by -- than planning, we've been able to actually offset the sale proceeds with acquisitions on an accretive basis. The timings actually worked out very nicely so far on these deals. So, it feels like a good environment if you have capital like ourselves and you're looking for, you know, deep value. You can buy buildings today -- again, there is not a lot to look at -- probably less than half the volume of transactions to look at. But the purchase price -- or you know, price compared to replacement cost is, you know, at least half, sometimes less.

And is that what you found with Kansas City as well here? How far below replacement value do you think you acquired those buildings?

I don't think it is probably -- it is probably more than half, but it is certainly less than replacement value. Those buildings -- we can get into more detail. They're actually -- most of those buildings are relatively new, built within the last ten years. Some have been built within the last five years. And you know, the average-- they're close to -- they're about 85%, 86% leased. There's a little bit more leasing we could do there. And the average lease term is just about five years. But they're great assets -- some of the best buildings in the market and we got in at a very attractive yield. So I think it is another example where we were able to buy -- that's probably another example of an acquisition -- this one, Kansas City, as you mentioned, Milwaukee, Cleveland earlier this year. These are deals that we're buying at great rates and what I consider deep value, that we would never have been able to buy at these prices a year ago, two years ago, three years ago.

Are there opportunities out there in some of your markets to take over some development -- you know, developers that have had their problems, looking for some help here and finishing a project and opportunities like that?

There are, but we're shying away from them.

Okay.

We've been focusing more on the core product and we've been looking for -- what we've been doing in this environment is looking for better assets that are well-leased, and looking for people that are in search of liquidity; but there are a lot of -- there are opportunities to buy buildings that are just completed that have almost no occupancy. They're beautiful buildings; it is just very difficult to be buying a building like that with the uncertainty about what you're going to do in terms of leasing it up.

Sure. Okay. Okay. Well, I appreciate the answers. Thank you.

You're welcome.

(OPERATOR INSTRUCTIONS). And we'll pause momentarily. Having no further questions on our question roster, I would like to turn the program -- forgive me, we do have a question from John Guinee with Stifel Nicolaus. Please go ahead.

John Guinee here, how are you?

Hi, John.

Few quick questions. First, do you have any raw land on your balance sheet that's entitled and ready to go and could be either be developed upon or sold?

Yes, but it's not very much. We have -- you know, we have -- trying to think the exact number. It is -- you know, developable acres across all of our markets, it is going to sound like a big number. It is close to 300 acres. But these are parcels that are typically next to an existing building; so we bought a building that has a parcel sitting next to it that it is not a vast swath -- swaths of developable land where you could do multiple buildings in one area. These are more one-off areas next to an existing building, but it is close to -- all told, close to 300,000 -- 300 acres. The biggest piece -- we do have some developable land, I'm thinking outside Pittsburgh, at the Sheraton Office Park. There is some developable land out there. John, do you remember how many acres that is?

Pittsburgh -- that's around 150 acres.

Yes, that's the biggest piece. That's 150 acres outside of Pittsburgh. That -- with the one exception of that piece of land which, you know, could support multiple buildings, that's it basically.

Okay. And then on page 11, John Popeo, can you walk through how you calculate the straight line in FAS 141? They seem to have come down significantly since last year.

Sure. Well, first of all, straight line rents, they have a life cycle depending on the length of the leases. So, the fact that straight line rents are going down just -- in many cases is just reflective of leases coming closer to maturity. We also have a couple of large tenants within the portfolio, though, that pay rent twice a year. So that also skews the number a little bit. As far as lease value amortization goes, it is the same -- I guess the same concept but in reverse, where the amortization of lease value amortization is tied directly to lease maturities. So we've -- we have leases that are cycling off and maturing that are reducing the amortization numbers.

So to get -- to go from a GAAP to a cash number this year, I should be -- this quarter -- we should be deducting 3.26 million for FAS 13 and then adding back 2.3 million for FAS 141?

That is correct. But as far as third and fourth quarter go, you should probably add around $1 million to your FAS 13 run rate.

How about FAS 141?

No. That should be a pretty decent run rate.

Okay.

And that was a million per quarter, John?

Yes.

That was. Okay.

And then I read something -- I didn't actually read it. But someone said that S&P or Moody's had changed the rating on some REIT preferred shares. Were you involved in that?

Yes. What S&P did is they blanket all REITs that issue -- that have issued preferreds. They've taken the position that the notching will be two notches below the corporate credit rating. Before, it used to be just one notch. So, for example, HRPT, we're BBB rated by S&P, and we used to our preferreds with BBB minus, so they were investment grade rated. As a result of this change, now the preferred from an S&P standpoint are rated BB plus. So -- but that affects us, it affects the REIT in the market place. This was a broad change they made to all -- to the way they rate preferreds across the board. It's safe to say we've also talked to Moody's. Moody's does not make that -- Moody's does a one notch below your corporate rating, and in our conversations with them, it is our understanding that they don't plan on making the same change that S&P did.

Okay. And then the last question, any projections as to where you'll be on occupancy by the end of the year? You're at 90.9 now. Do you see that staying flat, trending up a bit, trending down a bit?

I see it flat to trending down a little bit.

Okay. So maybe between 90 and 90.5?

Yes, I don't think it is going to drop below 90. I think that's pretty much -- I would think of that as the floor.

Got you. Okay. Thank you.

Yes.

And we take our next question from Dave Rodgers with RBC Capital Markets.

John's question, I guess. On the capital cost, you mentioned capital cost might be up in the second half of the year to support occupancy a little bit better to keep NOI up. But I guess given your comments earlier, how new leasing is really slow, is it really a capital cost issue? Or I guess following up on John's question, is it really just no new leasing activity so the capital costs are not really that important today?

Well, are you asking about Cap Ex and why -- I guess new leasing. Yes, new leasing, you're right, is more expensive than renewals -- and you're right. We haven't had as much new leasing; but remember, what we report as leasing from what we rent in a current quarter, that usually doesn't flow through to the actual CapEx spend where it could be upwards the next two, three, four quarters at times. So often what you see in the leasing reports is what your future CapEx is going to look like. And right now, I think you're right in saying that, you know, CapEx is lower because our leasing costs are lower; but it is not -- and part of that is because we're not doing as much new leasing. It is all renewals. I think I'm answering your question. Is that what you asked?

Yes, I guess a better way to ask it maybe is were you losing a lot of leases because of the capital costs because of your internal decision to avoid putting more capital in, or is it just that the market is that slow? I'm just trying to bifurcate --

Yes, yes. That's a great question. I think it's -- I think it's 20% -- 20% of it is us -- I think the majority of it is the market. 20% to 30% of it is us walking away from some deals. But the majority of it is the market. I mean, yes, we are walking away from some deals because of the change in a little bit of the way we're more focused on making sure we can get the payout ratio more in line. That's definitely been affecting it -- affecting it. But I think a bigger influence has been the market.

And then finally, could you summarize, you talked a lot about investment activity, both acquisitions and dispositions that you expected in the third quarter. Can you just summarize the dollar volumes of each currently that you expect with what's under contract?

What's under contract -- well, in acquisitions, we have nothing. Well, we had the acquisition in Kansas City, which we closed that in July, $112 million. And as of today, there's nothing else under contract for acquisitions. We have -- in addition to what John said that we sold in July as part of the S&H disposition was $39 million; we have another $110 million we plan on selling in August, and then we have an additional property that's separate from the transaction we announced with Senior Housing Properties Trust for sale of another building that's under contract for $15 million. That's it.

That's helpful. Thank you.

Yes.

And our next question comes from (inaudible) with Wells Fargo.

Hi, good afternoon.

Good afternoon.

I've got one question. Sorry, I jumped on this call a bit late. I'm wondering, for full year 2008, do you have any CapEx guidance? I know you talked about lowering that. Do you have any guidance on that?

We don't have any official guidance on it. I said in the prepared remarks that we think that the CapEx run rate would likely increase slightly as you go into the third and fourth quarters than what we've been running at in the first and second quarters.

Okay.

I think it is going to trend upwards. I think at the end of the day, overall, you know, we're still going to have -- 2008 still is going to look like a pretty good year when you do your -- a payout ratio calculation after CapEx. I think it's going to look like a pretty good year compared to years past.

Okay, thank you.

Yes.

And we take our next question from [Shiping Li] with [N.R. Capital Management].

Yes, hi. What's your payout ratio after CapEx for 2008?

Yes, we haven't -- we don't give specific guidance on where it is going to be. And we also -- I mean, the simple way to do it is just take your FFO and subtract cap -- your capital expenditures; and what we've done in the first two quarters has been under 100% payout ratio. We were about 90% -- I think about 90% in the first quarter and about 95%, 96% in the second quarter. Again, extrapolating on what I said, you know, in the third and fourth quarters, it is likely that on an individual quarterly basis, we'll probably go above 100% in the third and fourth quarters. How far above, I'm not sure. Again, overall for the year, you know, in comparison to 2007, 2006, 2005, you know, I can't guarantee -- I don't think it is going to be under 100% for the whole year when you look at the entire year 2008, but it is going to look a lot better than the prior years.

Okay. Do you think that will change or improve in 2009?

That is the goal. That's what we're trying to do. Yes.

Through Cap Ex reduction or through FFO?

It all depends. There's two -- it is so much more of that -- the answer to that question is dependent upon what the economy looks like in 2009. I have some idea of what things look like or what I feel things might look like in the second half of 2008; but you know, if this is a prolonged downturn in the economy, which some economists and (inaudible) think it might be, it is going to be very hard to maintain occupancy -- it is going to be very hard to push rate, maintain occupancy and not spend money on leasing in 2009. So, so much of it depends on what you view of the economy is going to be in 2009. So I just don't know.

Okay. Okay. And your revolver (inaudible) this quarter, is that because you draw the revolver to acquire the assets? And are you going to move some of the credit facility into a long-term mortgage note? I guess another way -- do you think the balance of the revolver will decline next quarter?

The answer is -- Go ahead, John.

Well, I was just going to say, yes, the increase of around $160 million in the revolver balance since the beginning of the year does reflect acquisitions.

And so you're going to refinance that revolver using more long-term mortgage debt?

No. What's happening -- I mean, we're basically recycling capital so we're selling assets and taking the proceeds and reinvesting, which is having -- looking forward, at least, should have a minimal impact on leverage in the balance in the revolver.

Yes. I mean, short term, you sell assets, you pay down the revolver, then you go out and you replace those assets and you draw down on the resolver, and so the revolver goes up. But what John is saying on average, you know, it is probably going to go down next quarter. But it is likely to go back up at some point.

So the covenants of that revolver are similar to the covenants in the unsecured debt?

Yes.

Yes.

They're similar, yes.

There are some specific nuances to the revolver covenants -- they tend to be somewhat more restrictive. But we are comfortably within our covenant requirements.

Can you go through the key covenants?

In summary, they're very similar -- they define things a little bit differently, but they're very similar to the public debt covenants; and again, we're comfortably within all of those covenants.

I see. Okay. And last question, why does the restricted cash balance go up this quarter?

Well, that's because we sold during the quarter around $84 million worth of properties and the proceeds were deposited with an escrow agent on a short-term basis. The proceeds are going to be used to reinvest in new acquisitions.

Okay. Thank you very much.

You're welcome.

And we will take a follow-up question from John Guinee with Stifel.

We're all on the same page because the numbers have been bouncing around. Can you give the summary on a quarter by quarter basis for the $565 million deal with your sister company? It was $85 million in 2Q. What's 3Q, 4Q, 1Q, 2Q?

Well, in the third quarter, our expectation is around $150 million of dispositions including the $110 million that we discussed, and around $40 million that's already been sold. What's scheduled to sell -- and these are just in PNS agreements that were filed -- is another $115 million by the end of the year, and then another $200 million or so in 2009.

First quarter, second quarter or --

Well, it's hard to say right now. But it is a combination right now -- at least as originally laid out, the $217 million or so was scheduled to close in the first and second quarter of 2009.

And John, if you're trying to fade it into a model, just assume 50/50 first and second quarter.

All right. Thank you.

Yes.

And we take our next question from Philip Martin with Cantor Fitzgerald.

Okay. That -- I just had one of my questions answered. And so, with respect to the sales here, any debt on any of this? I just wanted to -- no, there's no debt?

Well, none remaining. I mean, there was some debt --

There was some, okay. That's -- but of the 150ish or so in the first quarter and the 115 in the fourth quarter, that's debt free at this point, so all of the proceeds will be used to take down the line or used to fund incremental investments?

Yes, that's correct.

Okay. And then Adam, maybe -- would you be able to give us a bit of a road map -- you know, the next 12 to 24 months what's going on in Hawaii and, you know, how that may impact the growth story at HRP?

Sure. The rental rates in Hawaii, you know, really have skyrocketed in the last two to three years. When we bought properties there, the existing rental rates were at 3.50 to $4 a foot. We're typically doing renewals anywhere from $8 to $10 a foot now -- or rent resets. I think you're going to see, you know, over the next 18 to 24 months, us continue to try to push rate as much as we can. I will tell you that rates have sort of flattened out in the last three to six months at that higher rate. They aren't increasing anymore. There was sort of a two-year period where every quarter, the rate was going up that we could charge more and more; but they've sort of leveled off between, depending on the area, the $8 to $10 a foot range, depending on the area. And you know, we got about 400,000 square feet scheduled to expire between -- or between now and the end of the year in Hawaii. So, that gives you a good sense of what we might be able to reset there or be able to renew at higher rates there. And again, if you just look at our -- I'm trying to think beyond into 2009 -- the same sort of run rate is what I think you'll see. Somewhere around -- what's the number we show in Oahu?

In 2009, we only have about 300,000 expiring and another 300,000 expiring in 2010. But that doesn't mean that we won't be able to increase the rents more because, as you know, the leases out there have what's called rent reset provisions. And so even though it is not expiring, it gives you the ability to, you know, renegotiate at certain intervals throughout the lease term, and so that's something we will continue to do. I can't give you an exact number. I can just tell you that, you know, we're working very hard and if anyone -- we're pushing rates very hard, especially in places like Hawaii. In fact, you know, we get -- if you want to look -- just Google us and look at some of the articles written about us in Hawaii press. I mean, we've gotten a lot of flak in that market because we're pushing rates so hard and trying to push the rates so hard. In fact, there's been a little bit of backlash from a lot of the tenants. And so rest assured that we're doing everything we can, as much as we can and as fast as we can, to drive increase -- the rates there to push cash flow to HRPT.

How about in terms of other uses for some of the land or parcels that you have there? I know in years past, you've talked about in some cases maybe not renewing some of the leases that were coming up for renewal to use that for other uses, other projects. I know you've done some storage. Are there any other projects like that in the future here over the next 24 months?

No. I think in the next 24 months, what we might be doing is aligning some leases up in certain areas to maybe expire all around the same time. And those expirations could be -- you know, we're not going to start realizing some of the benefits of that for ten years.

Okay. Okay. Okay. Thank you.

Yes.

And our next question comes from Sabina Bhatia with Basso Capital.

Hi there. Can you just give us some color on cap rates you're seeing? I know you said that you might use some of the proceeds from sales in maybe possible acquisitions. Just trying to get some color to what you're seeing in the market, what you have seen in the last six months -- do you see any changes, anything at all, please?

Sure, cap rates generally moving upwards. I think you saw in the three acquisitions we've done this year, two of them are around 9%. One of them is going to be close to 11%. You know, clearly, as I said earlier, there is a lot less product that people are willing to sell; but what people are willing to sell, it is an environment where, you know, I think cap rates in some of our markets have gone up 200, maybe 300% to be honest.

Wow, okay.

So, they've definitely moved. There's no question.

Okay. Thank you.

You're welcome.

And at this time, we have no other questions standing by on our question roster. I would like to turn the program back to Mr. Portnoy for any closing remarks.

Thank you, everyone, for joining us on our Q2 conference call. We look forward to talking to you in the future. Thank you.