Equity Commonwealth (EQC) 2008 Q3 法說會逐字稿

Good day everyone and welcome to the HRPT Properties Trust Third Quarter 2008 Financial Results Conference Call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Director of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

Thank you, Cynthia. Joining me on today's call are Adam Portnoy, Managing Trustee, and John Popoe, 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 HRP's present beliefs and expectations as of today, November 5, 2008.

The Company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call other than through filings with the Securities and Exchange Commission regarding this reporting period.

In addition, this call may contain non-GAAP numbers, including funds from operations or FFO. A reconciliation of FFO and a net income is available in our supplemental package found in the Investor Relations section in the Company's website.

Actual results may differ materially from those projected in forward-looking statements. Additional information concerning factors that could cause those differences is contained in our Form 10-K filed with the SEC and in our Q3 supplemental operating and financial data found on our website at www.hrpreit.com

Investors are cautioned to not place undue reliance upon any forward-looking statements. And with that I would like to turn the call over to Adam Portnoy.

Thank you, Tim. Good morning and thank you for joining us on today's call. For the third quarter of 2008, we are reporting fully diluted FFO of $0.27 per share compared to $0.29 per share in the third quarter of 2007. Although FFO per diluted share declined from last year, we have made great improvements in reducing our capital expenditures.

As a result for the nine months ended September 30, we have generated approximately the same amount of cash from operations as paid in dividends. During the third quarter, we signed leases for about 1 million square feet and 59% were renewals and 41% were new leases.

Leasing activity during the third quarter resulted in a 16% roll up in rents and about $10 per square foot in capital commitments. The average lease term was 5.6 years, and the average capital commitment per lease year was $1.75.

Also I think it is important to note that we have reported roll ups in rents during the last 12 consecutive quarters. Although we are 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 to lease new space. This trend is evidenced by the reported decline in office net absorption and occupancy rates across the country during the last few quarters.

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 September 30 was 90.6%, which represents a 30 basis decrease from last quarter.

Although our total same store NOI declined by 2.9% in the third quarter, this decline is primarily the result of a decline in occupancy in our Boston market and a one time reduction of rental income in our Washington DC market. Excluding the decline in same store NOI in these two markets, our total same store NOI would have been flat this quarter.

The Philadelphia portfolio experienced a 2.8% increase in same store NOI, reflecting an increase in rental and escalation income offset by the decline in occupancy. 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. We continue to believe that we are well positioned in this market with less than 1% of our total square feet rolling to the end of 2009. And in-place rents equal to or below market rents.

Southern California is also a market experiencing weakening fundamentals with negative net absorption and about 1.7 million square feet of new construction completed in the third quarter. Third quarter same store NOI increased by 1.9%, reflecting rent growth offset by a 3.3% decline in occupancy.

Our Austin, Texas portfolio continues to post strong leasing results. But new construction in this market is beginning to impact growth with 800,000 square feet of new construction completed during the third quarter, 1.7 million square feet under construction and 1.3 million square feet of projected deliveries by the middle of 2009.

Same store NOI decreased by 2.3% during the quarter, primarily reflecting increases in utilities and other operating expenses.

Washington DC is still a market experiencing weakening fundamentals with up to 1 million square feet coming online per quarter. Our same store NOI in this market decreased by $1.9 million or 17.1% reflecting a one-time reduction in rental income booked during the third quarter.

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. Land values for all industrial properties on Oahu, not just our properties, continue to go up. Because of these factors, HRP is largely benefiting from this market improvement because we are the largest owner of industrial properties in the state of Hawaii.

During the third quarter we saw rents roll up by over 90% in this market and we anticipate significant roll ups in rents to continue into the future. During the quarter same store NOI declined by 4.3% in this market as a result of $600,000 of non-recurring lease termination revenue that was recognized in the prior year.

Boston same store NOI decreased 12.2% during the quarter, reflecting almost 300,000 square feet of space vacated in two of our south suburban office buildings in early 2008. As of today this is our only major market where we may continue to experience significant lease roll downs to the end of the year.

In our other markets located throughout the country, our same store NOI during the quarter was flat. We have 1.6 million square feet scheduled to expire during the last quarter of 2008, which represents approximately 3% of our total square feet in annualized rents.

The majority of the leases scheduled to expire through the end of 2008 and into 2009 have in-place rents that are below current market rents. However, it is unclear whether we will realize all of this possible rent roll up in the near term because leasing fundamentals are currently weakening across the country.

Even in this difficult market, I think we are achieving some great accomplishments. During the last six quarters, we have seen a consistent improvement in leasing metrics with rental rates rolling up and low CapEx commitments. This is having the desired effect of improving our dividend payout ratio during the first nine months of 2008. However, these improvements are coming at the expense of lower occupancy rates and NOI. In light of the current market environment and our need to maintain occupancy and cash flow in the future, we expect capital expenditures may increase during the fourth quarter and into next year in order to be competitive with leasing.

During the third quarter we purchased an industrial complex with 42 buildings located in Lenexa, Kansas with 1.8 million square feet for about $112 million. We purchased this high quality asset at a going-in cap rate of almost 12%. And the complex was 88% occupied with an average lease term of over four years.

We acquired two other industrial properties during the quarter with about 800,000 square feet for $48 million. These two properties were 100% leased with the weighted average main lease term of four and 20 years, respectively, and initial cap rates between 9% and 11%.

As of today we have also executed purchase agreements for two additional properties, which have approximately 630,000 square feet in aggregate for a total purchase price of $117 million. These agreements were entered into over 60 days ago and the $117 million purchase price will be reduced by about $70 million of mortgage debts to be assumed. Of course, these agreements are subject to closing conditions, and the purchase of these properties may or may not happen in the future.

Before turning the call over to John Popeo, I would like to recap HRP's current balance sheet and liquidity position. We currently have about $2.9 billion of debts outstanding, which represents a conservative 48% of total assets. We have no significant maturities until 2011. We continue to be in compliance with all debt covenants and we currently have ample room under these same covenants.

As of September 30, we had $303 million outstanding on our $750 million unsecured, revolving credit facility. This facility is provided by a diverse group of close to 30 participating banks and matures in August 2010. We currently pay interest at LIBOR plus 55 basis points.

At our sole option we have the right to extend this revolver for one additional year through 2011. As we discussed in May, we agreed to sell 48 of our medical office, clinic and biotech laboratory buildings with 2.2 million square feet for $565 million.

As of September 30, we have closed on the sale of 28 of these buildings for $233 million, and recognized gains of about $98 million. We sold one additional building for $30 million in October and the remaining $302 million is scheduled to close in phases through April 2009.

Of this $302 million of anticipated future sales, $186 million is scheduled to close in 2009, and these sales are subject to a financing contingency from the buyer. We also have one additional property currently under contract to sell for a sale price of around $15 million, which may or may not close in 2009 based on closing conditions.

Assuming all the sales occur as scheduled and we use the proceeds from the sales to repay our revolver, we have the full $750 million available under our revolver in 2009. Unlike some of our competitors, HRP is in an excellent liquidity position and we are well prepared to take advantage of unique opportunities to build long term value for all stakeholders in our company.

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

Thank you, Adam. Looking first to the income statement, rental income increased by 7.5% and total expenses increased by 11.1% during the third quarter of 2008; the year-over-year quarterly increase in rental income, operating expenses and G&A expense reflects properties acquired between July 2007 and September 2008 partially offset by the decline in occupancy and same store NOI.

Appreciation and amortization increased by 8.6% reflecting properties acquired and to a larger extent appreciation and amortization related to building and tenant improvements. Our consolidated NOI margins were 58% for the third quarter of 2008 and 60% for the third quarter of 2007. The decrease reflects the decline in occupancy and increases in operating expenses.

Current quarter EBITDA increased by around 1% from the same period last year primarily reflecting property acquisitions since June 2007 offset by property sales and a decline in occupancy and same store NOI; interest expense increased by 2.8% reflecting property acquisitions.

Net income available for common shareholders for the third quarter of 2008 was $73.1 million compared to $16.8 million for the third quarter of 2007. The increase reflects $58 million of gains on the sale of 23 properties during the third quarter of 2008.

Diluted FFO available for common shareholders was $0.27 per share for the third quarter compared to $0.28 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 and gains recognized in 2007 from the sale of land, partially offset by the reduction in preferred distributions and earnings from properties acquired since June of 2007.

In October 2008, we declared a dividend of $0.21 per share, which represents 77% of our third quarter FFO. During the quarter we spent $20 million on tenant improvements and leasing costs and $2 million, or $0.03 per square foot, for recurring building improvements including lobby and facade renovations, elevator upgrades and other capital projects throughout the portfolio. We paid $4 million on development and redevelopment activities during the third quarter.

Turning to the balance sheet, on September 30, we held $25 million of unrestricted cash, the increase in restricted cash reflects over $65 million of proceeds from asset sales that were deposited with an escrow agent during the second quarter.

The $220 million of assets held for sale includes the net book value of assets under contract totaling $199 million plus the reclassification of rents receivable and other assets related to these properties, totaling $21 million.

Rents receivable includes approximately $145 million of accumulated straight line rent accruals as of September 30. Other assets includes approximately $86 million of capitalized leasing and financing costs.

On September 30, we had $503 million of floating rate debt, $387 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 5.9% at the end of the quarter and the weighted average maturity was 5.7 years.

We have no debt maturing in 2008 or 2009 and only $50 million of the senior notes maturing in 2010. Our senior unsecured notes are rated Baa2 by Moody's and BBB by Standard and Poor's. The book value of our unencumbered property fold totaled about $5.8 billion at the end of the quarter.

Our secured debt represents 6% of total assets and floating rate debt represents 17% of total debt. At the end of the third quarter, our ratio of debt-to-booked capitalization was 50%.

Our EBITDA and fixed charge coverage ratios were 2.7 times and 2.1 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 third quarter, we had $303 million outstanding on our revolving credit facility with $447 million of additional borrowing capacity at a current interest rate of around 3.3%.

In summary, this quarter produced results we expected in light of a difficult market environment. We also think that an improved pay out ratio is an important step for our company. We continue to believe HRP's strong tenant base, limited near term lease expirations, strong balance sheet and current high annual dividend yield make HRP a logical choice for the long term income oriented investors.

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

(Operator Instructions). We will take our first question from Philip Martin with Cantor Fitzgerald. Please go ahead.

Good morning.

Morning, Philip.

Adam, I just wanted to get a better feel for your rent roll in 2009 in terms of the types or type of tenant that is rolling. Are more of these back office tenants? I know a significant portion of your portfolio is medical, government related et cetera. But I guess my question really goes to the retention rate that you expect and are these tenants more susceptible to an economic downturn? Or are they the type of a tenant that could weather a downturn reasonable well?

Given the number, it's a good question, Philip, but given the number of tenants that we have, I think it's safe and I feel comfortable saying generally we feel very good about the renewal prospects for the vast majority of the tenants that are expiring in 2009.

What I think is happening in the market place is -- it is definitely getting more competitive for landlords to keep tenants because it's -- because other landlords and brokers are entering the market and trying to entice people to renew early, two years, over two years at some instances early in terms of renewal activity.

So, generally speaking, I feel good about our portfolio in terms of the credit quality of our tenants. Yes, there's some back office, yes there's some medical back office, there's a lot of GSA, as you point out. But we also have a lot of professional service firms that I think are going to do fine.

The stuff that was going to shake out, that we were worried about and we didn't have a lot of it was earlier in the year. Industries that were related to the mortgage financing business, title companies, mortgage brokers, we never had a lot of that in our portfolio. And the little bit that we did, we've largely dealt with those businesses I'd say in the first half of 2008.

I think we're entering a more competitive market, but I think our -- the credit quality of our tenants is good, and I think the renewal prospects for the vast majority are very good.

What sense -- do you have a sense one way or another whether it -- is it a 50/50 mix between a back office type tenant versus a professional services? Do you have a sense of what percentage of that roll is approximately professional services?

I can't give you an exact number, but it's safe to say -- it depends what you consider back office. A lot of the GSA properties might be considered functions that you would typically consider back office; but being done by the GSA, which I don't see them downsizing in our buildings anytime soon. So I guess commercial, non-GSA back office, this is a ball park, 25% maybe.

Okay. My next question, in terms of the -- given your platform and the skill sets and just your strategy, what types of opportunities are you seeing in this chaotic environment? Are you getting any calls, for example, from banks knowing that you're in a pretty good financial position with no significant debt maturity or debt refinancing risks, and some available cash to utilize strategically? Are any of your bank relationships or lending relationships coming to you with potential opportunities where you might be able to help them out?

That -- a little bit, that's been happening for the last three to six months but I would not say that's a -- that's not happening in large amounts, if that's the question. Yes, there's been a few instances where banks that we have relationships with have approached us and said this is an opportunity, this is an asset that we hold on our books, especially some of the investment banks; this is an asset that we hold on our books, would we be interested in looking at it. We've taken a look at a few things, but typically we haven't been able to get comfortable either with the asset quality, the credit of the tenant or the pricing expectation, to be perfectly frank.

But honestly there haven't been a lot of those types of inbound calls that we have gotten from our banks.

What's your feeling in potential opportunities in '09 and '10? Are you pretty excited about -- certainly a weaker economic environment doesn't excite anybody, but some of the opportunities that can come in that kind of environment. Are you excited about those opportunities? What's your feel there?

Yes, I think there's going to be -- I think you're absolutely right, in 2009 we expect there to be some great opportunities in the market to buy some very high quality assets at very good prices.

And I think in my prepared remarks I made a point of saying we really haven't entered into any agreements to buy anything in over 60 days. And we're currently in a position where management, the Board and the entire company is stepping back for a moment and deciding exactly how we want to use this liquidity.

We are in a very good position. We want to be very careful in what we spend money on and how. And specifically regarding acquisitions, we've seen a few interesting situations to date in the last couple months, but there haven't been a large flow of what I'd describe as distressed sales yet.

And we anticipate that will pick up in 2009, but we haven't seen it yet.

Thank you for the answers.

Yes.

We will take our next question from John Guinee with Stifel Nicolaus. Please go ahead.

Hello, gentlemen, how are you?

Good, how are you?

Good. Couple of things; it really surprised me when you said you would need to increase your CapEx on leasing to be competitive. Can you elaborate on that?

Sure. What's happening, I believe what's happening and I actually -- it is happening, is that you have very -- the limited number of -- it can -- landlords are having to give more concessions to be competitive in the market place. So if you want to lease vacant space or space you know that's going to roll and the tenant might be leaving, if there's a new -- if you're going after a new tenant, it is becoming much more competitive in terms of the dollars you have to spend, in terms of upfront concessions either in free rent or in TI dollars --

Adam, let me interject. The facts of life are, none of your competitors, you're in B and C markets where your competitors are all private guys. None of these competitors have any money. They can't go out and just borrow off their lines like they used to in the old days because the banks have shut them off. If you talked to 20 of your peers, every one of them will say the same thing, which is nobody has any money for CapEx and leasing commissions.

No, that's what was happening -- I saw that last quarter. I'll tell you in the third quarter, there's been a change. And maybe some of our competitors who don't have as diverse a portfolio as we do, don't have the opportunity to look across the country maybe the way we do. But I can tell you in most of our markets we are seeing -- there's a lot of private equity guys -- I know you like to say that we're in B and C markets and you think that nobody else is there, John, but there are a lot of investors in those markets. There's a lot of private investors and not everybody is capital constrained.

And the people for example, give you a good example, Washington DC, there are a lot of buildings that were built that are now sitting vacant. They were put together by, yes, private investors, but what I'd describe as large, well capitalized institutional private investors. And some of those buildings have been sitting vacant for almost two years. They've gotten to the point where they're willing to so do almost anything in terms of concessions to lease up the space.

And we are seeing that, not just in DC, but in other markets across the country. So I don't agree with your characterization that in B and C markets there's nobody to compete with. There's a lot of competition out there and it's definitely becoming a tenant's market.

Okay. Second question, I guess this is for John; it looks like your straight lines have gone from 2 million to 3.2 million to 6.8 million. Why such a big change over quarter-by-quarter?

It partly reflects property acquisitions, John, but in addition if you look back we have some seasonality in the trends in our straight line rents. And that's due to a couple of large tenants that pay rent semi-annually.

And then it looks like you're raising equity at about $6.58 a share?

That's correct, but that was part of an acquisition we made in July.

So you're not raising it in the open market at that number?

No, that's the only equity we have raised I think in quite some time. It was part of that acquisition of Lenexa in Kansas City.

And then finally, how does what's going on with the RMR funds affect HRP?

I don't think there's any relation with what's going on with the RMR funds. They don't invest in the -- the RMR fund, which is an affiliated group of mutual funds are prohibited from investing in any related company. So I don't think there's any affect on HRPT, zero.

And then when are you, last question, when are you subject to additional rating agencies reviews?

We just went through, we do it annually. We went through reviews with both Moody's and S&P in the late summer; we went through our reviews with them.

Great, thanks a lot.

And we'll take our next question from Mark Biffert with Oppenheimer. Please go ahead.

Hi, this is Marisa Clinton calling in for Mark, hi, guys.

Hi.

My question is for Adam. Adam, you briefly touched upon the -- your recent acquisition in Lenexa, Kansas, and I'm trying to find out if you can provide more color on the actual tenant mix within these 42 assets?

Sure, it's a large diverse group of tenants. I'd say one of the largest -- probably largest tenant, Sprint, which is a very large user of space in the Kansas City market. I think they're our largest tenant. But there's also a break of the portfolio, about half of it's what you would call flex or industrial and the other half is office. And the office tenants range from professional service firms to, there's some law firms, accounting firms, the whole gamut. It's a very diverse group of tenants that are in there. But the largest tenant is Sprint that is in that portfolio.

So Sprint Spectrum Realty, what do they do? Is that like regular Sprint?

Yes.

And of the 1.8 million square feet, how much space do they occupy?

Sprint, I don't have the exact number in front of me, but -- I could guess but I don't want to. We can get you that number offline.

And also pertaining to this industrial acquisition, are there any concerns for bankruptcies or terminations?

No, we evaluated this portfolio in this market environment pretty thoroughly and we have a very good handle on -- we feel pretty good about the tenant mix and the viability of them to stay in the buildings. So there's no -- because at the time we bought it we knew if there was going to be upcoming bankruptcies or terminations. And we factored that in.

And then moving on to the leasing environment, you talked about Boston a little bit, you referred to space being vacated, lease roll downs through the end of the year. Then you also cited weakness in the Washington DC market, can you provide any additional color on NOI declines in these markets? And also what are your expectations for seeing these declines stabilize? Are there any leasing expectations or cross savings?

I'm hoping that things stabilize sometime in 2009 in both these markets. Washington DC, it'll be interesting to see what happens over the next year with the new administration, if that creates any sort of expansion of government, usage of space in the market.

In Boston, again, the buildings that we have, we're seeing very little activity to be honest with you, in the south suburban Boston market. These are great assets, they're high quality A suburban buildings, it's just in a tough market area. And across the country, I hate to sound so negative; it's just that we're just not seeing a lot of new leasing activity. Tenants entering markets looking to rent large blocks of space; now there are obviously exceptions to that. I know you didn't ask about it but Philadelphia is a market where --

That was my next question, Philly.

Philly's a market actually where there were some very large tenants in the market. They keep telling us that are moving forward with their lease proposals and their RFPs. And we are among -- with many of these large leases the finalist, the final two or three spaces that they're looking. But we are in unchartered territories and I can't tell you how different the leasing -- leasing decisions take a long time for companies to make.

Maybe after the election people will start -- there'll be some certainty in the world and people might start making decisions again. But I can tell you over the last two months people have been very reluctant to make any decisions or commit to anything. And so in Philadelphia we have a lot of people we're talking to and they tell us that they're going to continue to move forward, but I take everything with a little bit of a grain of salt because a decision could come down from the higher-ups that say we no longer want to take expansion space and we no longer want to move into the Philadelphia market. We're going to stay where we are.

It is a very fluid market.

If there is an extended downturn through 2009 and into 2010, what are your expectations for occupancy on these markets?

I think occupancy -- I think we sort of -- in the specifically three that we talked about; DC, Philly and Boston?

Boston, yes.

It's very hard to predict. But I think we're about where we're going to be in both Philly and Washington DC. There might be some more vacancy in Boston over the next year or two. But again it's conjecture, we might be -- do better at some of the re-leasing than I might be predicting in my head for 2009 in Boston. I think we're pretty stable in our markets in those three markets in terms of where we are with occupancy. We have a lot rolling and the stuff we do have rolling, I feel pretty good about the renewals except maybe in Boston.

And then lastly what drove the decline in NOI in your industrial portfolio during the quarter? I was initially thinking it was Hawaii, but you mentioned strength out of Oahu. Can you elaborate there?

The decline in NOI, same store NOI?

Yes.

John can probably best answer that.

It was mainly attributable to decline in occupancy in Boston. In the Boston market we had around 300,000 square feet go vacant in a Boston suburb in January 2008; and also a decline of around $1.5 million in Washington DC. That decline reflects adjustments booked during the quarter, actually two adjustments. One was to retroactively book the terms of a lease signed this quarter where those terms went affective retroactively to late 2006. The second adjustment in the Washington DC market was to adjust revenue billed to another one of our tenants, but not paid pending resolution of a dispute of CPI clauses in their new leases.

So we still may receive the full amount, but given current market conditions, we wanted to be conservative.

Okay. Great. Thank you.

Marisha, the one -- I do have the answer on that Sprint question. They actually hold 140,000 square feet, about 10% of the portfolio.

Perfect, thank you.

(Operator Instructions) And we will take our next question from Dave Rodgers with RBC Capital Markets. Please go ahead.

Hi, good morning, guys. Follow-up on one of John's questions earlier. You obviously used OP units in the transaction during the quarter that was again negotiated a while ago. What's your view on continuing to use units as a source of equity for those acquisitions you mentioned either late '08 or into 2009?

Dave, first of just to be clear, it was actually just -- it was an issuance of stock, it wasn't OP units. The company doesn't actually have OP units.

Right.

But that's just a technicality. In terms of getting to the meat of your question, which is would we use stock again in acquisitions; it was a very unusual transaction, which led us to use stock, it was very much driven as OP units are typically used for tax reasons and partly is what led us to be able to buy the properties in Lenexa at such a very attractive cap rate.

I do not -- it is not our preferred structure for buying properties. And because it's not OP units, it's stock, we typically have to buy the entity, we can't just buy the asset. And so we would rather -- we typically would not structure a deal that way.

I'm not saying it -- it could happen again, but it's not our bias nor are we actively looking. If we put a bid out, I don't anticipate us making a bid that the percent of the consideration would be in the form of stock. That's not the way we would make a bid.

But that's not to say that in the course of negotiations someone might ask for it and it might make sense. But I don't -- it's not our preferred way of doing things.

Fair enough, and then I of course wanted to ask you about the dividend and related to your comment. Your comments about the direction of the office and industrial environment continues to get worse, CapEx expected to be higher, occupancy will either go up with more CapEx or head down without it. It sounds like.

So given where the starting point is today with the dividend for the third quarter regardless of the year-to-date trend sounds like coverage will become more challenging, but opportunities will emerge. So why not take the opportunity to use the dividend as a source of capital today while the environment is challenging, use it for acquisitions and then in the future be able to grow it.

I think your question is, are we considering lowering the dividend. Is that basically the question, David?

Yes. Given everything you said, why doesn't that make the logical sense for a next step for capital in today's environment?

I guess the simple answer is from a big picture standpoint, we are very much in unchartered territory and historically maintaining our dividend and being focused as primarily and income investment for interested investors in the company, the dividend has always been I think management and the Board has taken a position it's very important.

It is important to maintain it. But you bring up a good point that we are in uncharted territories. And I'm not -- we are in the process, as I've tried to state in the prepared remarks that we are currently evaluating what to do with our liquidity. What is the best course of action going forward? And I think included in those discussions; it would be prudent to think about the dividend. But I think it's also important to point out that we have been good at covering it, historically. And at the same time it's always been very important to us to maintain it.

And I think the Board would next consider the dividend for the fourth quarter payment sometime in either December or January when it would be considered again. But you bring -- obviously with where our stock price is, and the yield being as high as it is now and obviously we make note of that and ask ourselves the question -- the market obviously is telling us something with a 25% dividend yield. In these uncertain times and these unique times, should we be considering the course of action as you've outlined. And I'll tell that I think it's important for the management and the board to consider all options and I think that would be one of them.

But I think you should understand that as we consider it, it's being considered in the context of our pay out ratio's been improving and it's always been very important to the Company to maintain its dividends. So I think that's the best answer I can give on that.

That's fair. With respect to the acquisitions or the opportunities, would your focus continue to be on cash flow acquisitions or could we see you delve into the opportunities of those types of buildings you talked about in DC or other markets that may have been un-leased but may still offer long term potential as either, call it a redevelopment or repositioning?

I think we will primarily be focused on buildings that are producing good income. In these markets we are somewhat -- if we think about acquisitions, we are reverting back to our core investment philosophy, which is trying to buy very high quality asset -- physical assets, very well leased to good credit tenants.

I think that's, as we think about potential acquisitions in these markets, I think that's the type of opportunities that we're more focused on; I think the certainty of cash flow today and the ability to maybe buy certainty of cash at distressed prices is we think more appealing than maybe buying some opportunities that as you pointed out might be un-leased or shows leasing challenges.

Again, I'm trying to maintain flexibility, I can't predict every opportunity we might look at and there could be a compelling reason to do something as you've outlined, but that's not our biased and that's not the way we're thinking about it. We're thinking about it if we make acquisitions going forward, we're focused on high quality assets, well leased to good credit tenants on a long term basis that are going to cash flow.

Thanks, Adam.

Yes.

We will take our next question from Jamie Feldman with UBS. Please go ahead.

Thanks, can you talk a little bit about maybe the potential for additional asset sales similar to the healthcare assets you guys teed up last quarter?

Sure. As we said in the prepared remarks, we do have one other building for $15 million currently under contract. We think it's going to close either in the first or second quarter of 2009. There's not much else that I can say that we are actively thinking about selling only because this is a very difficult -- this is not a seller's market. And we're just not going to be in a position to be generating anything close to I think the true value of the properties if we tried to sell them today.

I'm not saying that we might not sale some one off properties here and there into 2009. It may make sense but, it just doesn't feel like a seller's market to us and that we would be getting -- not only that, we don't need to be doing selling because we have I think ample liquidity unlike many of our competitors to take advantage of the market if we choose to do so. So I think that's our bias, that's the way we're thinking about these positions.

And then can you give a little bit more color on exactly the kind of pricing you're seeing on financing right now if you were to go after some mortgage level debt, what you could get?

On mortgage level debt, it's very much available, as you know we don't have much mortgage level debt. Most of the way we finance is through unsecured debt offerings. But mortgage debt, you're seeing -- I haven't seen a quote recently but call it 250 to 300 over.

That's an average?

That's an average for mortgage. 60%, 65% loan, good asset, good office, 65% loan to value. 10 year, 30 year am -- 30 year amortization on a 10 year loan. Something like that.

Okay. Thank you.

Yes.

At this point I will turn the call over to Adam Portnoy for closing remarks.

Thank you for joining us on our Q3 conference call. And John and Tim both look forward to seeing some of you at the NAREIT conference in San Diego later this month. Thank you.

Ladies and gentlemen, this will conclude today's teleconference. We thank you for your participation and you may disconnect at this time.