Office Properties Income Trust (OPI) 2009 Q2 法說會逐字稿

Good day, and welcome to the Government Properties Income Trust Second Quarter 2009 Financial Results Conference Call. Today's call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the conference over to Mr. Tim Bonang. Please, go ahead, sir.

Thank you, Michael. Joining me on today's call are Adam Portnoy, President and Managing Trustee and David Blackman, Treasurer and 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 GOV's present beliefs and expectations as of today, August 10, 2009.

The Company undertakes no obligation to revise or publicly release the result of any revisions 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 to net income as well as components to calculate AFFO, CAD or FAD are available in our Q2 supplemental operating and financial data package found in the investor relations section o the Company's website located at www.govreit.com.

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-Q which will be filed with the SEC, and in our supplemental operating and financial data package found on our website. Investors are cautioned not to place undue reliance upon any forward-looking statements.

And with that, I would like to turn the call over to Adam Portnoy.

Thank you, Tim, and thank you, everyone, for joining us on this call, our first call this morning. For the second quarter of 2009 we are reporting FFO of $0.78 per share, based on a weighted average share count of 12.4 million shares. We had no shares outstanding during the second quarter of 2008. On June 8, 2009 we completed our initial public offering of 10 million common shares. On June 30th, our underwriters exercised the overallotment option and sold and additional 1.5 million common shares.

As a result, today we have 21.45 million common shares outstanding. If you apply the 21.45 million common shares, the FFO for the second quarters of 2009 and 2008, our FFO per share would have been $0.45 in 2009 and $0.55 in 2008. The primary reason FFO per share declined is the increase in interest expense related to our $250 million secured revolving credit facility, which was fully drawn for about six weeks during the second quarter of 2009.

Since this is our first conference call, we thought it may be appropriate to spend a little bit of time providing an overview of GOV before we get into some greater detail regarding results for the second quarter. GOV is a real estate investment trust, or REIT, that primarily owns properties, the majority leased to government tenants. We were organized by HRPT Properties Trust or HRP as a 100% subsidiary in February 2009. At the time of our organization we issued 9.95 million common shares to HRP.

In April of 2009 we assumed ownership of 29 properties located in 14 states and the District of Columbia, containing approximately 3.3 million square feet. The US government and four state governments are primarily -- are our primary tenants, representing 96% of our rental income. Also, in April 2009, we entered a $250 million secured revolving facility with a group of banks. This credit facility is secured by all 29 of our properties. Upon closing of the credit facility, we drew the full $250 million and distributed 100% of the proceeds to HRP. In early June 2009 we completed our IPO, and used the net proceeds to repay about $216 million outstanding under our credit facility.

While we are now a separate publicly owned company and we are no longer a subsidiary of HRP it continues to own approximately 46.4% of our outstanding common shares. The majority of our properties are commercial office buildings located in suburban areas and central business districts of major metropolitan markets.

We believe the Company has four key strengths to position us for growth; first is the strong credit characteristics of our properties; second, our conservative capital structure; third, our favorable lease renewal experience and our limited lease maturity schedule in the next 24 months; and fourth, our experienced management team.

The strong credit characteristics of our properties include our tenant profile, our geographic diversity and our tenant diversity. The US government is responsible for approximately 90% of our rental income and the states of California, Maryland, Minnesota and South Carolina represent approximately 6% of our rental income.

Even through many states are suffering from reduced revenues, it is unlikely that GOV will experience any material tenant defaults. And while government tenants are responsible for 96% of our rental income, our government tenants are comprised of 15 different federal agencies and seven different state agencies, and our properties are diversified across 14 states and the District of Columbia. Our only real geographic concentration is in the Washington DC metro market, accounting for approximately 35% of our rental income.

Our second key strength is our conservative capital structure. Our only debt obligation is our $250 million secured revolving credit facility. As of June 30th, we had only 44 million outstanding under our credit facility and our leverage is less than 9% of the gross book value of our real estate. As a result of our low leverage and our substantially undrawn credit facility, we are well positioned to acquire new properties, majority leased to government tenants and grow our company.

Our third key strength is our limited lease maturity schedule of the next 24 months and our historical favorable lease renewal experience. Many of our properties have been owned by HRP for up to 12 years. During that 12 year period, leases representing approximately two thirds of the square feet at our properties have matured and 100% of that space was released to a government tenant. This exceeds national averages and it is consistent with government agencies desire to avoid costs and disruptions that may result from relocating operations. In addition to our favorable lease renewal experience, we have limited near term lease maturities. Our first lease maturity -- our first material lease maturity is in the fourth quarter of 2011.

Finally, we believe being managed by REIT management and researcher RMR is a key strength of our company. RMR is a real estate management company founded in 1986 to manage public investments in real estate. As of June 30th, RMR managed one of the largest publicly owned real estate portfolios in North America. RMR has approximately 570 employees and its headquarters and regional offices located throughout the country.

In addition to managing GOV and HRP, RMR also manages Hospitality Properties Trust, a publicly traded REIT that owns hotels and travel centers, and Senior Housing Properties Trust, a publicly traded REIT that primarily owns healthcare properties. The public companies managed by RMR and its affiliates had a combined total gross assets of approximately $16.3 billion as of June 30th.

RMR handles all the day to day operations of GOV, including property acquisitions, asset management, property management, leasing, financial reporting, corporate finance and investor relations. We believe that being managed by RMR provides us with the depth and quality of management and experience which may be unequaled in the real estate industry. We also believe RMR provides management services to GOV at costs that are much lower than what we would have to pay for similar services, and compared very favorably to costs of most other internally managed office REITs of comparable size.

Turning back to the second quarter results. During the second quarter, we renewed one non-government lease for about 4,000 square feet and committed to spend approximately $8,000 in tenant improvements for that tenant. We have no lease maturities for the remainder of 2009 and we are in the process of finalizing the renewal of our one lease maturity in 2010.

We did not declare a dividend for the second quarter of 2009. Because we were a public company for only 22 days of the second quarter, we have elected to include that 22 day period with our third quarter dividend. As we stated in our IPO prospectus, we intend to pay a dividend of $0.40 per share, per quarter or $1.60 per share annually.

As of today, we have an executed agreement to buy one property, which is a logistics and distribution center with approximately 322,000 square feet for a purchase price of $18.2 million. This property is fully leased to the US Postal Service through 2013, and is one of only 14 critical use regional processing centers across the country. This particular facility processes all non-letter packages that travel into and out of New England. Although the postal service is struggling, its non-letter package business is competitive with private parcel delivery businesses, and is a profit center for the US Postal Service.

Our lease terms are triple net and our acquisition cap rate is expected to be approximately 11% on a cash basis. Of course, this agreement is subject to closing conditions and there is no guarantee that the purchase of this property will occur.

In addition to the US Postal Service property, we have numerous other acquisition opportunities in our pipeline. As of today, our total pipeline of acquisition opportunities approaches 2 million square feet of space and acquisition cap rates range from the low eights to the high nines. Many of our current opportunities are for relatively new properties with ten to 20 years in remaining lease term, and substantially all are with the federal government.

Our preference is to pursue opportunities for all cash purchases where we have a competitive advantage. However, we have also considered acquisitions where we may assume debt on favorable terms.

Although we have only been a separate public company for about two months, I think we are off to a great start in identifying potential acquisition opportunities. We currently have approximately $45 million outstanding on our $250 million secured revolving credit facility, which provides us with about $205 million to support our acquisition pipeline and other working capital needs. Overall, we are well positioned to take advantage of what we believe to be a once in a generation acquisition market for government lease properties.

I'll now turn the call over to David Blackman, our Chief Financial Officer, to provide more detail regarding our second quarter.

Thank you, Adam. Looking first at the income statement, rental income increased by 2.9% and total expenses increased by 7% during the second quarter of 2009, resulting in a 2.4% decline in operating income. The year-over-year quarterly increase in rental income primarily resulted from a slight increase in rent as a result of lease renewal activity in the second half of 2008, and the reimbursement of operating expense increases.

We experienced modest increases in operating expenses as a result of utility rate increases and property tax increases. The increase in G&A expense is the result of receiving an allocation of G&A from HRP for three quarters of the period, plus the increased expense associated with paying annual trustee fees and full legal accounting and internal audit fees for quarterly financial reporting services.

As a result, our G&A expense for the second quarter of 2009 is slightly higher than our expected run rate, assuming no acquisitions. Out largest increase in expenses was for depreciation and amortization expense, which was the result of capitalized building improvements at some of our properties during the past 12 month period.

Our consolidated net operating income margins were 66% for the second quarter of 2009 and 67% for the second quarter of 2008. The decrease reflects the increase in operating expenses at a slightly higher rate than rental income as previously described. Current quarter EBITDA increased by 1% compared to last year, primarily reflecting the increase in depreciation and amortization expense.

Interest expense increased by a substantial percentage, reflecting the amortized costs associated with entering our $250 million secured revolving credit facility in April, and the fact that the facility was fully outstanding for 46 days during the quarter. The credit facility was substantially repaid with proceeds from our IPO in June, thereby substantially reducing ongoing interest expense.

Net income for the second quarter of 2009 was $5.9 million, compared to $8.3 million for the second quarter of 2008. The decrease reflects a slight net increase of $187,000 of operating expenses over rental income and a $2.3 million increase in interest expense. FFO was $0.78 per share for the second quarter of 2009 and $2.53 for the first six months of 2009.

If our IPO had closed on April 1, 2009 instead of June 8, 2009 our weighted average share count would have been 21.45 million common shares and FFO would have been $0.45 and $1.01 for the second quarter and first six months of 2009 respectively. As Adam mentioned, we did not declare a second quarter dividend as we were a separate public company for only 22 days of the second quarter.

We expect to declare a third quarter dividend that will include this 22 day period. At our anticipated dividend rate of $0.40 per share per quarter, this 22 day period in the second period results in about $0.09 per share of common dividend.

During the quarter, we spent $233,000 on tenant improvements and leasing costs, and $133,000 for recurring building improvements across 11 of our properties for upkeep items like paint, carpet, bathroom renovations, sidewalk replacements and elevator modernizations.

Turning to the balance sheet, on June 30th we held 450 -- [$451 million] of unrestricted cash. Deferred financing costs of $6.9 million are fees and expenses associated with entering our $250 million secured revolving credit facility that amortizes on a straight line basis through the second quarter of 2012. Due from affiliates in the amount of $943,000 are amounts due from HRP, as a result of prorating net working capital for our properties at the closing of our IPO. This amount was primarily interest expense not yet billed that has since been paid.

Rent's receivable including approximately $2.4 million of accumulated straight line rent accruals as of quarter end. Other assets of $1.6 million includes $1 million in an escrow deposition for our pending property acquisition. As of the end of the second quarter, we had $43.9 million outstanding on our secured revolving credit facility. As of today, we have $44.9 million outstanding on our secured revolving credit facility with $205.1 million of borrowing capacity.

The facility matures in April 2012, and we have the right to extend the facility for an additional one year period to April 2013. The current interest rate on our facility is based upon a spread above a LIBOR floor of 2% and results in an all in rate of 5% based upon our current corporate leverage.

Overall, we are pleased with our quarter results and believe we are well positioned to take advantage of a once in a generation acquisition environment for government leased properties. We have no debt maturities until April 2012, and no material lease maturities until the fourth quarter of 2011. Even though we have been public for any two months, we have a robust acquisition pipeline which we expect to drive our daily activity for some time to come.

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

Thank you very much.

(Operator Instructions)

And we'll take your first question from Brendan Maiorana with Wells Fargo Securities.

Yes, good morning, guys. This is actually Young Ku here for Brendan. I believe you guys commented on your finalizing 2010 lease, could you speak a little bit more in terms of your rent growth expectations for that lease?

Sure, Brendan. This is Adam. Before I answer that question, I just want to correct one thing David said in his prepared remarks just to make sure it's clear to everybody, we have about $451,000 of cash available today, not $451 million. David got a little overzealous in his prepared remarks. I didn't want people thinking we're sitting on $0.5 billion of cash, it's about $451,000 of cash.

To answer your question regarding 2010, that lease looks to be probably about flat to where we are today. There might be a slight roll up, but generally flat.

And would you say that's pretty much in line with your mark to market?

Yes.

And it's one lease and it's a small amount but the gap rents roll down about 2%, what was the cash rent spread on that?

The cash rent spreads, well I'm not sure I understand it would probably --

You talking about the lease that we actually signed in the second quarter -- 4,000 square feet?

That's right. Yes.

Okay, all right. Probably double that -- 4%.

Got it, great. Thank you. And in terms of your IRS lease facility in Fresno, have you guys been getting an indication on the renewal of that lease yet?

Nothing to really speak of definitively. We're pretty much in the same place we said for some time now, which is that we have a high degree of confidence that they will renew, but we haven't renewed with them yet. I mean, they're giving us all the body signals -- body language signals that they are going to renew.

You know, if they weren't going to renew with us they'd be out with an RFP looking for alternative space or they'd be trying to develop space; both those things aren't happening, so that gives us a high degree of comfort that they will likely -- or, they will likely renew with us because they're not trying to secure an alternative location.

Okay, got it. And it sounds like you guys have about $18 million acquisition in the pipeline, could you restate that? Was that an industrial facility then?

It's a warehouse and logistics center, its where the US Postal Service handles all packages -- non-letter packages going into and out of New England. So, a lot of the overnight mail or just package delivery will go through this facility. And in my prepared remarks, I made a point of letting people understand that this is the -- this is -- this facility works with the postal service on one of their businesses which we think is still profitable, or as they state it is still profitable.

As many people recognize, the postal service has been in the news recently and they've been struggling with the amount of losses they've been having. And this is part of their business which we think is still -- is okay. But again, we're still in diligence and we haven't had a direct interview with the tenant yet, and we haven't completed our building and diligence either -- the structure diligence and everything else.

So I can't guarantee this buildings going to close, but I wanted to give people a flavor for what we're looking at. And again, this building is a little bit out -- if I had to pick our first acquisition opportunity, it probably would not have been this one, but again, I wanted to point out to people there's 11% cap rate on this building, it's got a shorter term lease on it, only got four years left on the lease.

You know a little bit of that built in -- a little bit of that renewal risk is built into the cap rate. But again, we're going to do a lot of diligence to try to make what we think is a reasonable judgment call as to whether or not we think there's a good possibility of them renewing if we buy the building. So, that's what we have under contract.

I made a point of also pointing out that we have another half dozen buildings -- not half dozen, a dozen buildings we are looking at which are in different stages of being looked at. Meaning we've maybe made a bid on these buildings, we're underwriting now, we're in discussions, but we're just not at the point we have it under contract. And most of the buildings we're looking at don't fit the criteria of what -- of this US Postal Service. Most of the buildings we're looking at have a longer term lease with it -- associated with it and most of them are with a federal government agency.

Most people may not know this, but the US Postal Service is not actually -- it's not part of the -- it's not administered through the GSA, leasing is not administered through the GSA, its actually a separate company, but its 100% owned by the government, if its 100% share holders the government, so it's actually run a little bit differently, even though it is a government entity.

And the seller of this asset?

It's an institutional owner.

Got it. Okay. And -- have your expectations for acquisitions for about $200 million, is that still about true for the back half of 2009?

You know it's certainly feasible. It could be more, could be less, I mean I -- it's certainly feasible. We're looking at a lot of stuff. We've only been a public separate company for about two months now. I think we're doing a great job in terms of lining up a pipeline and I do expect more things to get under contract throughout the year, to put an absolute number on it, its very difficult, as you can imagine, but $200 million is feasible.

Got it. Great. Thank you.

And we will go next to Jamie Feldman of Bank of America, Merrill Lynch.

Great, thank you very much. Can you talk a little bit about HRP's plans or potential plans for when the lock up expires, and when the actual date is on those shares?

Well HRP can probably -- will probably be able to talk a little more clearly about that tomorrow when HRP releases its earnings, but HRP's made no indication to-date that it has any intention to sell those shares. Certainly, I think the best gauge from GOV's perspective of what HRP is going to do is to look at HRP's cash needs, and I think that will become a lot clearer tomorrow when it releases its financial results.

But, to give you some sense of what HRP has done in the past is you probably remember, Jamie, HRP used their own shares of S&H or Senior Housing Properties Trust and used to own shares of a company called Hospitality Properties Trust, and it sold those interests down over a long period of time. And the way it sold those shares was it didn't dump them on the market, what it did is whenever an investee company did an offering -- a secondary offering, it would sell into that offering.

So for example, years ago when HRP used to own shares of S&H and HPT, when S&H would let's say do a secondary equity offering and it may have raised 5 million shares primary, they might sell another 1 million or 2 million shares secondary and those would be shares that HRP sold. That's historically how HRP has divested of its -- of ownerships in its affiliated REITs, and I think its safe to assume that that would be likely how we would do it going forward. I think it's unlikely that HRP would just dump these on the market.

Jamie, the lock up was 180 days from the date of the closing of the IPO.

Then as you think about the lease expiration starting to ramp up in 2011, 2012, what's typical with your government tenant basis when you actually start to [inherit] those?

Up to two years out. Unfortunately, they really wont -- I mean, we start talking to them about two years out and try to position us well for the renewal. I mean -- but serious, you won't get a renewal done until about a year out at the earliest is when you actually get a renewal signed. Sometimes it's months before the REIT. Sometimes it's months and sometimes you get right up to the expiration date and they aren't planning on leaving, but you don't have a renewal signed.

It's just the way -- unfortunately the government can move very slowly, and so it's important that you -- you're consistently on top of it, you make frequent contact, both with the tenant which is the agency that's there as well as, and this is very important, maintaining a good relationship and dialogue with the contracting officer at the general services administration. That's something we try to do years in advance.

I think we -- we put a serious effort about two years out, is when we start focusing on it internally. We start to -- having internal meeting about okay, have you talked to the GSA contracting officer? What have they said? What are they leaning towards doing? The truth is though they're not going to -- they will not make a decision two years out. The best case is a year out and that's the best case.

And in all likelihood, Jamie, if a GSA tenant is going to leave, you're going to know about that more quickly than if they're going to stay because they're going to do an RFP and look for other space and that's just public process.

How far ahead (inaudible)?

That can be years in advance; usually three, four years in advance. If they're going to -- if they're going to build something, it can be five years in advance. If they're going to just look for alternative spaces it could be earliest two years.

Right.

I mean more likely two to three years. But certainly they're not going to do that one year. They're going to be -- if you get within one year of the lease, A anything's possible, but it's highly unlikely that they're planning on leaving if you're within one year of the lease and they haven't put out an RFP.

And then I think you mentioned a 2 million square foot potential acquisition pipeline, what is that in dollar terms?

At least $1 billion -- at least $1 billion.

Yes.

Yes. That's stuff we're looking at.

Just stuff you're looking at?

That's right.

That's stuff we've made bids on or have under active review. Things we -- there are lots of properties out there that we bid on and we're maybe going back and forth with the seller on, but we just haven't reached agreement and we may never reach agreement.

All right thank you.

Yes.

(Operator Instructions)

We'll take our next question from David Shapiro with BGB Securities.

Morning, gentlemen.

Morning.

Just a follow up question regards to the US Postal Service facility, what sort of makes this facility unique? Or, what gives you confidence that they couldn't just go to some other warehouse or some other distribution facility after the lease term is up for a reduced rent and sign a longer term lease with someone else? Where's the inherent protection --

Sure.

-- on the location or something of that nature on this facility?

Sure, David, that -- it's a good question and it's exactly what we're doing now is we're in diligence. Again, this is not something we have -- we're in the diligence phase, as we go through the diligence if we come to the conclusion that we think it's a high likelihood that they will not renew, we likely won't complete the transaction.

But what we -- we're focused on the exact thing that you've identified. What we've identified and what we saw about it which made us initially got -- what allowed us to get it under contract, or enticed us to put it under contract was there are only 14 centers around the United States that the US Postal Service uses for its non-letter packages, and this is the one that is dedicated for New England -- all of New England.

And so, we also know a little bit about the postal service and given our relationship with different -- given our relationship with different government entities, or relationships, we were able to initially have some conversations with some high up -- with some people -- senior level people at the post office, and just ask them general questions about, well what parts of the business are you planning on shutting down? Or, what parts of the business are more likely to survive?

And the general feedback we got is generally speaking, the non-letter package delivery business is a part of their business that is actually profitable; they're actually able to compete well with the private sector on. It's the letter side of their business -- really what's hurting them the most is the amount of junk mail that people send is down about 50% compared to where it was two years ago. And so, that's hurt revenues at the postal service dramatically.

That's -- they haven't seen the same drop off in terms of packages. And so, this facility focuses on packages and it's focused on all package going into and out of New England. Now, that's what got us initially interested in it. And again, the cap rate -- we think it's a fair cap rate -- 11% given this four years left on the lease. And so again, what you point out is exactly what we're very focused on as we now diligence this property.

It's up -- it will probably go under -- if it goes under final contract or goes hard on the contract its probably got another three weeks left on it before we're going to go hard, so we're literally right in the middle of sort of making those determinations and thinking through whether or not it makes sense to proceed. But initially, from the desk review -- and yes we did visit the property, but from the desk and from the one visit to the property and some contacts with the postal service, that's what got us intrigued by the property.

I think a lot of people are turned off by the property because it just said postal service, four years left on the lease, and everybody reads the newspaper and hears how the postal service is suffering. We did a little bit of homework and we think that there's a potential here that this facility will -- that they will stay in this facility, and that this is a facility that's currently meeting a need of the post office that is profitable.

But, the questions you are asking are the right questions. As we go through our diligence, we're going to have to gather more facts and more interviews with the tenant and more conversations with industry players and we'll make a determination. And we're hope -- determination will be made on is, do we think it's more likely than not that they're going to renew? And if we come to that -- if we come to that conclusion, we'll likely close. If we get to the conclusion that it's 50/50 or less then we may not close.

David, there is some specialty fit out in that property associated with sorting the mail and just logistics inside that is relatively expensive that the postal service paid for, and they would have to spend new dollars if they wanted to not have any downtime and move into a new property. So, we do have that advantage. It would likely be more expensive for them to leave than to stay.

Okay, that's helpful, gentlemen. And in regards to sort of the acquisition strategy where you got the $200 million on the revolver left, I guess it's a secured revolver, is it secured by the specific collateral?

In other words, where you could acquire additional -- let's say you wanted to do $300 million in acquisitions, you could put additional properties into the bucket under separate secured property level lines? Or, how are we looking at that? Because just to do $200 million in acquisitions probably wouldn't get you to your sort of typical leverage target as a REIT.

Yes, the -- David, the security is secured by all of our 29 properties, so anything we acquire with the facility we would acquire unencumbered. We would have the ability to put debt on those assets, post acquisition, if we so desired. So we do have the ability -- if we use the full amount of our facility, our leverage would go to about 34%. If we wanted to refinance the facility by using secure debt on the assets, you could take leverage higher than that.

Okay, that's helpful. And then in regards to sort of the low eights to high nines cap rate range that you throughout and what you're looking at, as you look across your current portfolio, are you looking to acquire sort of assets as similar -- I mean would we be talking about assets like your DC property or more -- assets more like your Fresno property that are not in sort of high sort of high cost, high value markets sort of --? Or, are you looking really across the range?

Looking across the range, but I think more often not the acquisition opportunities they don't look like -- they don't look -- again, they don't look a lot like the postal service building that we do have under contract and because that's at 11% cap rate, most of the buildings we're looking at are in that 8% to 9% cap rate.

And I would say generally speaking, this is -- of course there's exceptions, but generally speaking they're newer buildings built within the last five years, maybe earlier, and they generally have much longer lease terms in place -- ten plus years of firm term on the leases. They're generally where I would describe in suburban markets around the country. We haven't been very -- we haven't found a lot in the DC market that we've been focused on; it's been more markets.

I wouldn't say they're as maybe -- they're maybe not a Fresno market, but they're -- they might be a -- it might be a larger MSA than Fresno, but it's certainly in the suburbs of that MSA, and so they're newer buildings with longer lease terms. A lot of them have very specialized build-out that we've been looking at; a lot of homeland security, a lot of -- some FBI buildings, a lot of immigration buildings -- immigration services buildings that have specialty build-outs associated with them, and so they're rather unique in that sense but they're new.

I mean, that gives you a flavor of what we've been looking at but those -- that's a very general broad brush stroke I'm describing it.

Is there nothing like your 20 Mass Ave. property for instance available like in the really large markets for anything close to a mid eight type cap rate? Are they just not available?

I mean, we have not really seen anything in the Washington DC market that's come up for sale.

Okay.

There may be some type in a Denver type market, but really nothing that would be considered CBD, but the headquarters of the federal government.

Thank you.

You're welcome.

And we will go next to Patrick Brennan with RBO Company and Asset Management.

I just had a couple bigger picture questions. Given sort of the management fees that RMR collects, can you just talk a little bit about what assurances GOV shareholders have that -- the acquisition opportunities, you get the most competitive cap rate rather than the properties coming in and RMR collecting a management fee on the actual acquisition property. At least from the outside, it would seem to be sort of an apparent conflict of interest. So if you could maybe address that, and then I had one follow up question.

Sure, first of all, RMR does not receive any acquisition fees per se, or disposition fees or leasing fees. Just to be very clear, RMR received a property business management fee based basically on 50 basis points of gross assets annually. That's generally speaking our fee. There's no acquisition fee of any sort.

To get you comfortable that we're not just going to go out and buy assets just to grow our fee, I think the best example is to look at our track record with our other companies and we've been managing publicly traded REITs since 1986. And I think that if you look at our REITS across the board, I mean there are certain REITs that we manage that we have been criticized, specifically I can speak of in the health care arena.

We've been criticized back two, three years ago. There was a two year period where we didn't buy anything and it wasn't because we didn't have access to capital, we were sitting that company -- we had a company, a $2 billion REIT, that was sitting on 20% leverage. And we didn't buy anything because we were very disciplined and we thought the market and the healthcare space had just gotten overheated. So, I think that if you look at our track record, that's one way to get comfortable.

The second way to get comfortable is that if we're going to -- if we just went out and bought properties to grow the management fee we wouldn't be in business very long because we'd end up way overpaying for properties and, ultimately, our REITs would suffer dramatically for it. And if we had done that and if we make a business of doing that, we're going to -- we're not going to be in business very long. It's a very short sighted way for us to run the business.

And finally, we do receive an incentive fee based on growth and FFO per share, so we also are incentivized to grow the FFO per share. I think those are some of the reasons -- some of the -- some of the ways to reassure yourself that we're not just going to go out there and random -- just buy any old property.

If we wanted to do that I could have had $200 million under contract for this call. I could have announced $250 million of acquisitions today; that would have been easy. I've lost -- we've lost acquisitions over $200,000 in the last couple months. And we didn't push the price; we let them go because we were uncomfortable.

I mean, if you're worried about us growing the assets, take heart in the fact that we have -- we haven't bought anything and I got one property under contract. If I wanted to -- or if we wanted to, I could have $250 million spent today, already. But, we're being disciplined in our approach and we've been disciplined in all of our businesses, and we're going to continue to be disciplined.

Okay, and then could you just talk a little bit more about the government tenant properties that remain at HRP? And I think you had sort of said in the prospectus that a lot of those properties -- you chose the ones that were majority government tenants for the IPO. But just in terms of the government properties that remain with HRP, is there any type of schedule for when those might ultimately be sold? And I believe you have the right of first refusal on those properties, and so how would you sort of evaluate those relative to the rest of your pipeline of opportunities?

Sure, again it's a right of first refusal, so HRP has to decide it wants to sell them. And then obviously, it's a painful transaction because as you can imagine its riddled with conflicts because the two companies are related parties, they're affiliated companies. So, it's not something that we look forward to doing just because it's a difficult transaction to consummate, and it's a difficult transaction to explain.

I mean, ultimately, whatever price is struck between the two companies, as much as we can remove ourselves from it and just let independent trustees do the negotiating we'll be criticized for it. So even -- no matter what we do we'll be criticized for it because someone will claim that one side of the party got too good a deal. And so, it's not a transaction that I think we particularly are anxious to consummate today at GOV, and based on the public statements that HRP has made, I think it's fair to say that it's not something that HRP is looking to divest anytime soon.

Now, that's not to say that a year from now or sometime in the future, HRP might decide it wants to divest those assets. And ultimately, it probably does make sense for all of the assets that HRP has leased to the government are in this entity rather than splitting it up.

But I don't see it happening on the short term, I see it happening eventually. But part of the reasons that I think you might not see it happen so quickly is just because it's a difficult transaction to consummate. I mean, it's a -- it would require a lot of independent third parties to be involved to justify the price both that GOV was paying and that HRP was receiving, and so it's just not an easy transaction.

Okay, that's helpful. And then just real quick with the -- can you just clarify again at the time of the IPO, the current properties that GOV has, there was an independent appraisal for those properties prior to the IPO?

No, I mean we brought the assets from HRP over at their costs and that's the basis under which we carry it on our financial statements today. We did, as part of the -- putting the credit facility in place, the lenders had the properties appraised and they did appraise for more than what our undepreciated book value is on our financial statements.

Okay. And can you clarify it, the exact amount? Was it $550 million?

We can't -- the appraisal is --. It was subject to a confident -- it's not owned by us, it's owned by the banks.

Okay.

Do we know what it is? Yes. But, we're not allowed to tell anybody what it's at.

Thank you very much.

Yes.

And we will go next to [Ben Rosenswidge] of Privet Fund Management.

This is actually Ryan Levinson here with Ben. Thanks for taking my question. I was just wondering if you could give us a little bit of color on the buildings that have lease expirations in the next couple of years. The same way that you gave the color about your comfort with the post office facility, just wondering if you could tell us a little bit about maybe some tenant improvement that went into the building or market level rents or something like that that gives you comfort that those leases will be renewed.

Sure. I mean, really there's nothing to speak of until 2011 when you're dealing with Fresno. There, I think, we talked a little bit about it. We have a tenant that's been in the building for over 20 years. We don't believe they're going to leave because they haven't started a process to look for everywhere else, and they're giving us all the signals that they're happy with the site and that they plan on staying.

They themselves recently just spent some additional capital with the building on some upgrades -- so the GSA spent some money there just in the last couple moths. And so, it gives us comfort that they're going to stay given the fact they're spending money when the lease is coming up in two years.

In terms of the leases in 2012, those buildings -- a big portion of those leases is the 20 Mass Ave. buildings -- 20 Mass Avenue in Washington DC; it's the Department of Justice and the Immigration and Customs Enforcement. It's our view that those leases today are about $10 under market, based on where market is today.

Now, we probably won't start -- as we said before, renewal discussions with those two agencies and the GSA on those leases until at earliest next year we can have serious discussions about it, and probably it's going to be a year prior to them actually expiring. But the feeling there is that the space is well utilized, both the Department of Justice and Immigration and Customs Enforcement are happy with the space. That's a building that was a major renovation, basically a gut rehab that was done about ten years ago on those buildings.

So they look like they're very well received, well appointed buildings that we think even if this tenant left -- we've heard anecdotal comments from the GSA that even if these agencies were to leave they like the building and that they're likely to put another agency in if for some reason these agencies wanted to leave.

You get further out than 2012, it starts getting very theoretical because the -- it's just so much time between now and then. We do have some FBI buildings, I think the first one comes up 2013, in either -- and I can't remember, it's either Phoenix or San Diego, and the FBI has been making noises that they want a -- they want to build a newer facility that meets their newer security requirements and they want a bigger facility.

Both these buildings in San Diego and Phoenix were built for the -- custom built for the FBI to meet their specifications in the mid 1980s. One of them was done in the mid-1990s, also was built for the FBI to their specifications.

Then these are building that even if they were to -- they've gone out in the market, we know the FBI has gone out in the market in the GSA to try and find someone to build them a building in both these markets. We know they haven't been able to -- they haven't been successful given the amount of money that they've been allocated to Congress to pay on a new lease, on any developer willing to develop the buildings for them in those markets.

That's not to say that things won't change in the next few years, but my best guess today, four years out, is that we will likely renew those tenants for some shorter period of time, they probably will sign some -- it wouldn't be farfetched to see them sign a five year renewal and then maybe we'd have to think about whether or not we're still going to have them as a tenant, that's nine, ten years from now is where I think things may shake out.

But focusing just on the shorter term stuff, the -- I just wanted to clarify, you said that the -- on the Fresno building that the tenant and the GSA just spent money on the buildings.

Yes, that's correct.

Yes, the --

(inaudible)

The Fresno property is one of two properties we own that portfolio is on a modified net lease basis. So, they're basically responsible for all expenses with the property with the exception of property taxes and structural maintenance. And they have spend a substantial amount of money on that building over the last five to seven years.

Things that they've done recently would include upgraded all the bathrooms throughout the facility. They've replaced one of their backup generators and are in the process of replacing a second backup generator which they would amortize over a five year period. So, we feel pretty good that they're doing all the right things and sending all the right messages that they intend to renew at that space.

Okay. And then looking at the other buildings the DOJ and the immigration buildings, I would imagine that those have some pretty stringent security requirements. First I guess, is that -- is that accurate? But second, is there anything competitive in the marketplace where they could technically move out of the property into a -- there's another fungible building in the same market?

Well --

The Mass Avenue property was substantially renovated in 2002. The GSA has 100% of that building to include the parking garage. So, they have complete control over egress and ingress into the property which is critical for them. There clearly is space coming online in the DC market, but we've got firm term leases until 2012 so they cant necessarily walk out of the building today, and its probably some of the nicest tenant [up fit] of any of the properties that we have in our portfolio.

So given its location, which is across the street from the train station, and given its accessibility to other government agencies, we're pretty confident that even if the Department of Justice and Immigration Custom Enforcements was to leave, we would have another tenant in there because the GSA does control 100% of the building and that's incredibly important to them in that market.

Okay, understood. Thank you very much.

Yes.

And we will go next to [Bob Warner] of [Spot Trading].

Hi, thanks for taking my question. My question's actually already been asked.

Okay, thank you.

Thank you.

And we will now take a follow up from David Shapiro of BGB Securities.

Hello. Regarding sort of where the market is viewing your shares versus sort of where you think you can acquire let's say similar type quality properties, what do you think the reason is there's a big disparity I guess between the implied valuation of your shares and what's available in the market?

I mean, it almost seems like you can't even replicate some of the assets in your portfolio, I mean they're not even coming available for sale at some of the -- even in the eights or low nines. Like a 20 Mass Ave or anything in a San Diego MSA and yet the market sort of says you're worth a lot less than a 8.5% or 9% cap rate. So, what's your feeling on that disparity there?

I don't know if definitively what's causing it, but I think a lot of investors and this came -- this was pretty evident as we went through our IPO process. Almost look at GOV like a bond and they see very little growth in the existing portfolio. It's incredibly secure, which I think most people would agree with, and the rents are incredibly secure, and the cash flow is incredibly secure, and so the dividend is very secure. But, there's not a lot of growth to be had in FFO or FAD based on the internal -- based on the existing portfolio.

And so, I think a lot of the investors looked at it like a -- I mean, I -- it was not -- there was more than one time I heard an investor during a meeting, as part of the IPO said your average lease term is about five years and you're 90% to the US government, why don't I just look at this next to a five year treasury and that's -- and post op and that's it?

And I think until we can demonstrate to the market that we have a real growth strategy here and that we can really grow FFO and then with this REIT growing FFO really comes from acquisitions; it's the only way we're going to be able to do it. Until we can prove that to the market, and I think we're off to a great start, but we're certainly not there yet, until we can prove it, I think the market might continue to look at it more like a bond rather than a stock that has some growth in it in the earnings. Look -- I don't really know, but that's a -- that's sort of a guess as to what I think is going on.

I mean, are there any particular assets that you would say are FFO drivers in the portfolio in and of themselves that are either well located or really command a strong position?

Well, you know our lease maturity schedule is kind of the good news, bad news. We don't have any material lease maturities for a while, which means we don't have the ability to roll rents up because of those maturities. So if we looked at our rent today, we're kind of at market. But we've got properties like 20 Mass Avenue, which in 2012 we should have the ability to have a substantial roll up in rents.

Okay, thank you.

You're welcome.

And that does conclude today's question and answer session. I would now like to turn the conference back to Adam Portnoy for any further statements and closing remarks.

Thank you all for joining us on our second quarter and first ever conference call. We look forward to updating you on our progress next quarter. Thank you.

And that does conclude today's Government Properties Income Trust Second Quarter 2009 Financial Results Conference, we thank you for your participation.