Office Properties Income Trust (OPI) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Government Properties Income Trust Second Quarter 2010 Financial Results Conference Call. Today's conference is being recorded. At this time, for opening remarks, I would like to turn the conference over to the Vice President of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

Thank you. Joining me on today's call are Adam Portnoy, President and Managing Trustee and David Blackman, Chief Financial Officer. The agenda for today's call includes a presentation by management followed by a question-and-answer session. I would note that the recording and retransmission of today's conference call is strictly prohibited without prior written consent of the Company.

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 3, 2010.

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 and Exchange Commission or SEC regarding this recording 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 of the Company's website located at www.govreit.com.

Actual results may differ materially from those projected in any forward-looking statements. Additional information concerning factors that could cause those differences is contained in our second quarter 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 this afternoon. We are pleased to announce another active quarter for Government Properties Income Trust. Since April 1, 2010 we have acquired 11 properties, we've entered into agreements to purchase nine additional properties for an aggregate purchase price of $367 million. We also declared the second quarter distribution on July 1st of $0.41 per share which is a $0.01 per share or a 2.5% increase over our previous distribution rate. For the quarter ended June 30, 2010, we are reporting FFO of $0.45 per share.

We completed our IPO on June 8, 2009 and as a result our weighted average share count for the three-month period ended June 30, 2009 does not allow for a meaningful comparison of per-share data. At June 30, 2010 our portfolio statistics and balance sheet remain strong. As of June 30th, our portfolio was 99.7% leased with a weighted average remaining lease term of approximately five years. Approximately 95% of our rental income was paid by the US Government and five State Governments. As a result of our acquisition activity, the credit facility usage increased during the second quarter but our ratio of total debt to gross real estate assets remain conservative at 15.1%. And EBITDA was also almost nine times greater than interest expense.

During the second quarter, we entered into leases with tenants for an average remaining lease term of four years at about 13,000 square feet and committed $134,000 for tenant improvements and leasing commissions. For the remainder of 2010, less than 2% of our annualized rental income is expiring. Most the remaining lease roll over for 2010 is concentrated at one property leased to the US Department of Energy and located in Germantown, Maryland. This lease renewal was currently out for signature with the GSA. Approximately 82% of our annualized rental income comes from the US Government and approximately 13% of rents come from five State Governments.

The larger State Government in our portfolio is the State of California which represents 5.5% of our rents. As some of you may be aware, the State of California has not yet approved its 2010 2011 budget which began on July 1. As a result, we were recently notified by the State of California that our rent payments after July 1 may be delayed until the budget is enacted later this year. Today, we are unsure if any of our rent payments from the state will in fact will be deferred. Having been in the business with leasing state governments have been for about 15 years, it is our experience that states and especially the State of California sometimes defer rent payments until budgets are passed. Furthermore none of our leases with the State of California allow the state to cancel its lease based on budget appropriations. Accordingly, we do not expect this possible rent deferral by the state of California to have a material impact on our future financial results or liquidity.

During the second quarter of 2010 we acquired or entered into agreements to purchase 18 properties totaling 2.1 million square feet for an aggregate purchase price of $302.5 million. After the quarter ended, we also entered into agreements to acquire two additional properties containing approximately 520,000 square feet for an aggregate purchase price of $64.5 million. In April 2010 we acquired an office property located in Burlington, Vermont with approximately 27,000 square feet. This property is 100% leased to the US Government and is occupied by the Office of Security and Integrity. The purchase price was $9.7 million and the going in cap rate was 8.6%. Also in April 2010 we acquired an office property located in Detroit, Michigan with 56,000 square feet. It is 100% leased to the US Government and is occupied by the US Citizenship and Immigration Services. The purchase price was $21.3 million and the going in cap rate was 8.7%.

In May 2010 we acquired an office property with 125,000 square feet located in Malden, Massachusetts. This property was built for the Commonwealth of Massachusetts in 2008 and serves as the headquarters for the Massachusetts Department of Education. Purchase price is $40.5 million and the going in cap rate was 9.1%. In June 2010 we entered agreements to acquire 15 properties from Commonwealth REIT containing 1.9 million square feet for an aggregate purchase price of $231 million. The going in cap rate was 8.9%. Eight of these properties were acquired in two separate closing in June and July 2010. The June closing included three properties containing 306,000 square feet for an aggregate purchase price of $40.4 million. The July closing included five properties containing 441,000 square feet for an aggregate purchase price of $48.3 million. These eight properties are majority leased to the US Government and are occupied by various federal agencies.

There are still seven additional properties to acquire under the purchase agreements with the Commonwealth REIT. These seven properties containing 1.1 million square feet and have an aggregate purchase price of $142.3 million. These remaining seven acquisitions are expected to be acquired prior to March 31, 2011 and remain subject to various contractual contingencies so we can provide no assurance that we are actually acquiring these properties.

In July 2010 we executed agreements to acquire two additional properties. The first property is an office building located in Trenton, New Jersey across the street from the State Legislature which contains 266,000 square feet. This property is majority leased to the State of New Jersey and to the US Government and is occupied by the New Jersey Treasury Department, US Department of Justice and the Internal Revenue Service. The contracted purchase price is $45 million. This acquisition is subject to diligence and customer closing conditions and as a result there is no assurance that we will actually acquire this property.

The second property placed under agreement in July is an office building located in Eagan, Minnesota containing 252,000 square feet. A condition of acquiring this property is that we enter a lease with the US Government for the Department of Veterans Affairs for the entire property. Upon closing of the acquisition we will still -- we will substantially renovate the property and the US Government will contribute substantial capital towards these tenant improvements. Our contracted purchase price is $19.5 million which excludes any cost associated with renovating the building. As this acquisition is subject to diligence, customer closing conditions and winning a competitive lease with the GSA, there is no assurance we will actually close or acquire this property.

Our acquisition pipeline remains strong. Since the completion of our IPO in June 2009, we've acquired 17 properties and have nine additional properties under agreement for an aggregate purchase price of $530 million. These 26 properties include 3.7 million square feet and are 93% leased with a weighted average remaining lease term of 6.7 years.

We continue to evaluate a number of high quality opportunities for a broad range of properties. These opportunities principally include properties leased to the US Government and the acquisition in cap rates fall within our targeted range of 8% to 10%. We believe the results of our second quarter 2010 activity continue to support our business goal providing a safe dividend to investors supported by our stable rental revenue, coupled with the opportunity to grow through acquisitions, in cap rates above the historical average for Government leased properties. I will now turn the call over to David Blackman, our Chief Financial Officer, to provide more detail on our financial results.

Thank you, Adam. First let's review the results of second quarter operations. Operating activity -- operating income increased 15.4% as a result of total revenue increasing by $6.5 million compared to a $5 million increase in total expenses. We've acquired 12 properties since our IPO through June 30, 2010. As a result, the primary reason for our year-over-year change in rental income and property operating expenses is our acquisition activity. Our non-property level operating expenses of acquisition costs, depreciation expense and G&A account for more than 60% of our increase in total expenses driven heavily by the change in acquisition costs which were $1 million in the second quarter of 2010 compared to no acquisition cost in the second quarter of 2009.

Depreciation expense increased 42% also as a result of acquisitions. Finally, our G&A expense is a comparison of receiving an allocation from Commonwealth REIT in 2009 and the actual cost associated with operating a separate public company in 2010. A comparison of our second quarter 2010 G&A expense to our G&A expense for the first quarter of 2010 shows that the increase in G&A is substantially the result of property acquisitions during the second quarter.

Property net operating income increased by 36% year-over-year and our consolidated operating income margins increased slightly from 66.3% in the second quarter of 2009 to 67.4% in the second quarter of 2010. Same store NOI decreased slightly for both the three and six month periods. This was primarily the result of a decrease in construction management fees received for managing a tenant space upgrade at one of our properties and a reduction in expense reimbursement income due to negative CPI adjustments at certain properties. We also experienced a slight increase in repairs and maintenance expense, insurance costs and cleaning expense offset by savings for utilities and property level G&A.

EBITDA increased in the second quarter of 2010 by 23.4% compared to 2009 primarily as a result of acquisition activity and in spite of our $1 million in acquisition costs and our increase in G&A. Interest expense was $1.7 million in 2010 and decreased by $682,000 compared to 2009. This decrease is the result of Gov's common share offering in January 2010 and having less amounts outstanding on our credit facility. If you recall that we had the full amount of our credit facility outstanding from April 25, 2009 until our IPO closed on June 8, 2009.

Interest expense for 2010 includes $624,000 in amortization of deferred financing fees and net amortization of debt premiums associated with entering and amending our $250 million revolving credit facility and the assumption of two mortgage loans of properties acquired in the first quarter of 2010. Net income for the second quarter of 2010 was $7.7 million compared to $5.9 million for the second quarter of 2009. The increase reflects the net result of a $4.6 million increase in rental income over operating expenses and a $682,000 decrease in interest expense offset by $1 million in acquisition costs, a $1.6 million increase in depreciation and amortization expense, a $750,000 increase in G&A and a $74,000 change in interest and other income and income tax expense.

FFO was $0.45 per share for the quarter -- for the second quarter of 2010 based upon a weighted average common share count of 31.3 million shares and $0.89 per share for the six-month period based upon a weighted average share count of 30.2 million shares. Since we became a public company a year ago this quarter, our weighted average share count for 2009 does not provide a meaningful comparison to 2010 results.

We declared our second quarter dividend on July 1st equal to $0.41 per common share which is a $0.01 increase over our distribution for the first quarter 2010. The dividend will be paid on August 16th to common shareholders of record as of the close of trading on July 16th. During the quarter we spent $109,000 on tenant improvements and leasing costs and $412,000 for building improvements which primarily included life safety enhancement and energy upgrades.

Turning to the balance sheet. During the second quarter we became a net borrower. As a result, we held only $1 million of unrestricted cash and $1 million restricted cash associated with our two properties encumbered by mortgage loans. Deferred financing costs of $5 million of fees and expenses associated with establishing and amending our $250 million revolving credit facility and the assumption of two mortgage loans during the first quarter of 2010, all of which amortize on a straight line basis. Rents receivable includes $2.1 million of accumulated straight-line rent as of quarter end. Other assets of $5.6 million are primarily our $5.1 million investment in Affiliates Insurance Company.

At quarter end we had $82 million outstanding on our revolving credit facility. In order to fund our July acquisitions and deposits for our two potential acquisition opportunities under agreement, we've increased outstandings under our credit facility $132 million since quarter end. Our credit facility bills bears interest that LIBOR plus 2% and matures April 2012. We have a right to extend our credit facility for an additional year to April 2013 and the right to increase the facility to $500 million.

We believe we are compliant with all terms and conditions of our credit facility and are operating well within these established covenants. Gov remains a well capitalized Company without material leased maturities or any debt maturities in 2010. Our properties are more than 99% leased and approximately 95% rental income is paid by the US Government and five State Governments. As a result, our cash flow is stable to pay a consistent dividend. In addition to our stable base, we continue to have strong acquisition momentum. We are both excited and confident about our ability to have success during the remainder of 2010. That concludes our prepared remarks. Operator, we are now ready to take questions.

(Operator Instructions)

Our first question is from Dave Rodgers with RBC Capital Markets.

Good afternoon guys. On the acquisition front, I was wondering if, Adam, you can talk a little bit more about the depth of the pipeline and what you are continuing to see. And then maybe David, update us on the timing of these acquisitions, roughly when you expect them to close that you have already announced and if you had me debt on those assets that would be closing as well.

Okay. To talk about the depth of the pipeline, I would say it is as good as it's ever been. Maybe the best it's been since we've been a public company. Things -- I will tell you as I think about the year, things are pretty good in the first quarter in terms of we were seeing -- especially in the beginning of the year we saw a lot of stuff. Things have sort of slowed down, we weren't seeing very much. I would say in the March, April sort of May timeframe and then things start picking up again just in the last 30 to 60 days.

And I can't tell you exactly what's driving it, I can just tell you that -- I mean I have a theory, my theory is that anyone, investors, possible sellers of Government leased buildings consider the March April May timeframe. The world -- everyone was starting to take -- the eventual wisdom was that things were going to start getting a lot better in the economy. And so people might have been thinking, I'm going to hold on, if I wait six and not 12 months I might get a better price. I'd say the sentiment among the business community especially in the last 30 to 60 days has not -- I think has waned and I think people are now more focused on might we have a double dip and in the economy.

And maybe I think some sellers that were maybe holding off because they were thinking that they could wait until the economy got better and get a better price are now starting to think well maybe this is as good as it's going to be for a while, and so I'm going to jump into the market and I'm going to put my property up for sale. That's the only thing I could think that maybe is driving it but we have definitely seen an uptick in opportunities in the last 30 to 60 days and we are evaluating a number of those opportunities.

And the sentiment impact on pricing of those transactions that have come in the next 30 to 60 days?

I think we are still able to execute between our 8% and 10%. I don't think you are going to see a lot at the 10% but it's certainly in the 8% 9% range I think we can get stuff done.

Okay.

And Dave on the timing, we have until the end of March 2011 to close on the seven remaining properties that we have under agreement from Commonwealth REIT. In all likelihood, we will close on those by -- during the remainder of 2010. I would expect we will do it in two separate closings and again I think the effort would be to try and get that done before the end of the year. The property in New Jersey, we are just beginning our diligence period on that and we have a number of items that we're still working through. One of the things with that property is we are assuming a tax program with the State of New Jersey -- property tax program with State of New Jersey. And it is a little unclear as to whether we can get that done in 30 or 60 days. So that closing could actually be pushed into the fourth quarter.

On the property in Minnesota, the GSA would like to award the lease by the end of September of this year. Assuming we win that lease, I would expect would close probably 30 days after the award. And because we do have some renovation to do at that property. None of these assets that we are acquiring have any debt on them, we are acquiring them all unencumbered of debt.

Thanks for the color. And I guess the last question is a follow up to that point. What is the financing strategy for the second half of 2010 and the first part of 2011 as you look ahead? Clearly you have a lot of different options but I know you would like to keep the properties individually unencumbered. Can you give us some color around that?

Sure. I don't think it's hard to do the math. David says we are about $130 million out in the revolver now in just what we have under contract we would be over our $250 million line of credit. I think the options -- the easiest option is we can obviously expand our credit facilities from $250 million to $500 million. I think we can also raise debt, but keeping in mind that we have always had a focus on keeping the Company's leverage very modest and talking to investors about really not getting much above the mid-30s in terms of leverage. I would also put on the table that we could consider an equity offering as part of the financing a package for these acquisitions as well.

Okay, great. Thank you.

Our next question is from Brendan Maiorana with Wells Fargo. Please go ahead.

Thank you, good afternoon. Just to follow up on that, you have got now with assets that are likely to come in to your portfolio would get your total asset level to around $1 billion, which I think was kind of the number that you guys were looking for to issue unsecured debt. You've got rates that appear pretty attractive and you've got a pretty big pipeline that it sounds like you are pretty confident that you are going to be able to close additional deals. So why would you not go out and issue some unsecured debt at this point?

It is definitely something that is on the table that we would consider. Obviously we would have to get a rating from the rating agency to do something like that. And we are not 100% sure that at a $1 billion we would get that rating, that we get the investment grade rating to do unsecured debt from the rating agency. We think we have a pretty good shot at $1 billion that we might get it but nothing is a sure thing. And so I can tell you it is something we are considering along with our other means of financing.

And also I think we are also certainly very much feel like we are in the position to begin conversations with the rating agencies. And that clearly is something on our agenda currently.

So as you think about the financing of the business long-term and we just kind of think about how to run the model for you guys. Is it that your 30% debt would be -- we should consider that that is likely to be a permanent secure type of debt rather than having a fairly sizable balance on the line over the long-term?

Yes, I think that is probably right. I think it will fluctuate. I don't think you will see us hold a lot out on the line for a long period of time. But I think long-term our goal is to be between 30% and 40%. I don't think we are going to be at 30% and 40% right -- our goal is not to be there right now. Maybe -- as we said we ended the quarter at 15% so I think eventually we get there. When or how big the company is when we get there, but I think it is going to gradually -- it will gradually grow to that point.

But you are right Brendan, I think the way to think about it is that our permanent debt will likely be senior unsecured notes.

Okay great. And then just with cap rates or deal pricing in that 8% to 10% range, how should we think about how you guys are getting across the finish line at that level versus where the rumored pricing was on the large California portfolio? Which I guess didn't quite go across the finish line in terms of the sale but which was calling it kind of 7%. Why are you guys able to transact for deals at 8% to 10%?

I think it's certainty of closure and I think -- again look at where these buildings are being bought. They are class a properties but a lot of them are in suburban markets, second and third tier markets. Obviously if we were transacting in Washington DC, which we would love to do, I think the cap rates would be lower. And I think you made a good point that the California portfolio has not transacted so it will be interesting to see if that happens and at what cap rate it goes across that.

Okay sure. And then just Adam, on the price per square foot on the deals that closed early in the quarter, it seemed like it was pretty high. What in particular was driving those numbers up north of $300 a foot?

Some of it had a lot of specialty build out, especially for the Immigration and Citizenship Bureau. These were some very -- a lot of security requirements that we had to meet in terms of tenant build outs and finishes. They also had to -- most of these buildings are brand-new buildings and they needed to have -- they were lead certified to different levels of lead certification, either gold silver or platinum.

And so between trying to get -- between getting lead certification and then the extra security requirements that Government leased buildings require and that they were in new buildings, the price per square foot was a little -- might seem a little high. But remember these are newer buildings with long-term leases in them. I think the renewal process for a GSA tenant -- when they are starting the leasing of new buildings, when the renewal comes up it is very doubtful I think that they would ever leave the building after all the capital has been invested in it because it meets their special requirements, it meets their specific requirements.

Sure, okay. Thank you. And then just lastly David, if California does differ cash rental payments, how may -- how will that be accounted for?

We will continue to recognize the revenue unless it becomes doubtful that we would collect that rent. But I can't understand -- I can't imagine a scenario where it would become doubtful. So it would continue to show up as rent and we would be booking a rent receivable corresponding on the balance sheet.

Okay, great. Thank you.

(Operator Instructions)

We will go next to Tayo Okusanya with Jefferies & Co.

Good afternoon, gentlemen. Congratulations on a solid quarter.

Thank you.

Couple of quick questions. The post Q2 deals that were done, could you give us a sense of what the cap rates were on those two transactions? The New Jersey transaction and the Minnesota transaction?

Sure. I can't give you real specifics I will tell you they fall within our stated range of 8% to 10%. The reason I don't want to give you a specific number is because we are still doing diligence. And so until we know exactly -- until we confirm the NOI and confirm the actual purchase price, I just want -- I don't want to give a specific GAAP number. But it is between the range that we stated, 8% to 10%.

That is fair. And the supplemental page 16, I may have missed this but the NOI group, the negative 2.3%, could you just walk us through what comprised that? What the change in the rental income was? What the change in the upward expense side was to add up to that negative 2.3%? Same-store (inaudible - multiple speakers).

Sure, we had two components of the change in rental income, Tayo. The primary component was -- we had a tenant, the Treasury Department did an expansion at our property in Kansas City. They did roughly $1 million, actually it was I think it was roughly $5 million in improvements at that property that were for their own benefit. They paid us a fee to manage those tenant improvements for them. And so that is a kind of a one-time fee that we got over a couple of quarters in 2009 that we didn't have in 2010. The other component is, in certain regions across the country you had a negative change in CPI which resulted in a reduction in our tenant reimbursement income at certain properties. So that was a primary change in our same-store NOI.

Okay.

We also had a slight uptick in expenses, I think it was maybe $60,000 increase in expenses. There was no one expense that really jumped out and accounted for that increase. We had a slight increase in earthquake insurance costs for our California properties but we also had some savings in utilities expense. So really the big driver was rental income change in the primary driver there was our construction management fee out in Kansas City.

Okay. That is helpful. And then with Commonwealth, are there any assets within that portfolio that you have the Right of First Refusal on? After buying the current 15?

No, really there is nothing left in Commonwealth today that would be subject to right of first refusal. The way the Right of First Refusal works is if Commonwealth ever decides to sell a building that is more of the majority leased to the Government, Gov would have the Right of First Refusal. Commonwealth doesn't I believe today have a building that is majority leased to the US Government. It could change, it could happen but it doesn't happen today.

Any progress or anything new in regards to Fresno on the re-signing of the lease?

No, it is still ongoing and I think that we are going to be well into 2011 before we have anything really material to discuss. And your early negotiations with the GSA tend to be with people that really don't have authority to make a decision. And so they gather information, they take it to the folks that have authority to make a decision and that is when you really get significant movement in the process. So we're kind of still in that gathering part for the GSA so that they can then go to the folks that have authority to begin to make decisions.

Okay. Sounds good, thank you.

Yes.

We will take our next question from Jamie Feldman, Bank of America.

Thank you. A follow up to Tayo's question on Fresno, any update on what is going on at 20 Mass. Ave. and also the Colorado lease?

At 20 Mass. Ave. we are I think -- I guess it would be fair to say we are making a decision at this point on who we would like to represent us in our renewal negotiations from a brokerage perspective. Once we complete that, we will begin to have meaningful conversations with the tenants. So nothing meaningful to talk about there. We have had some conversations with the National Business Center, with the contracting officer that represents the National Business Center in Lakewood Colorado.

They are beginning to explore options of renewal that would be short-term and long-term. They seem to be struggling a little bit with what their real needs are at the property. They had some thoughts that they may need to expand but they are not sure that given what is going on in the federal government right now that expanding makes sense. That will probably stall negotiations with that tenant until they can really figure out what their needs are.

Okay. Are they fully utilizing the space?

They are fully utilizing the space. We also have expansion capabilities within the park for them with a building that is owned by Commonwealth. So expanding them is not a concern, it is just a matter of them figuring out what they want to do.

Okay. And then back to your comments on California and differed rent payments, can you talk a little bit about -- more about how the process works? Adam, it sounds like you have been through this before.

Yes. Sure, we have gone through this before. Of the last 25 years, 19 of those years the year passes without California approving its budget. And so we have gone through this in the past. It was a little different this year. Most years they don't pass the budget and they still continue to pay you rent because they have the money and it's an obligation of the state. What I think is happening this year, this is my belief, this is my guess as to what is happening. They sent us a very short note saying that we may not be getting our rent on time because the budget hasn't been approved for our leases in California, this was sent by the relevant state body in California. I think that what is happening here is there is a showdown between the Governor and the Legislature.

The Legislature went on recess June 15, the budget wasn't approved, we knew it was going to lapse on July 1. We've known this was going to be -- we had a pretty good feel -- we knew from June 15 that they didn't have a budget so we were all scratching our heads wondering what was going to happen with the most likely outcome that they just continue paying us. I think the Governor has directed the state agencies to send out notices to every vendor of the state as a way to pressure the Legislature to come back and pass a budget. In California you need two thirds of the Legislature to pass a budget. And so like I said it's happened 19 of the last 25 years.

I cannot remember another time in the last 15 years where we have owned buildings out there leased to the Government that they haven't paid us but at the end of the day -- and all they sent us was a notice that they may not, that they may defer it. They are not saying they don't owe it to us, they are not saying they won't pay it, they are just saying they may differ it until the budget gets passed. I think what is happening which makes it different this year is there is a this is a pressure tactic the Governor is using to pressure the Legislature into coming back into session and passing it.

I should point out just for everyone's benefit, we lease to four other states. We also talked about a building in New Jersey that we are about to buy. All the four other states plus the state of New Jersey have all passed their budgets for 2010, 2011. So we don't have any issues in any of the other states where we operate. But this is what we were dealing with California. And again, they don't have a contractual right to cancel the lease, they are not even claiming they do. And in fact I think they have the money, they could pay us the rent. I think this is some politics going on between the Executive Branch and the Legislative Branch in California. That is what I think is happening.

Okay, thank you. And as you think about the buildings that are either under contract or that you may pick up in the future, what kind of lease clauses do those have in terms of potential break clauses depending on the kind of Government and the kind of agency?

All the federal government leases don't have appropriation rights -- appropriation clauses. So it's an obligation of the federal government and that is about 82% of our rent. The states vary. California doesn't have that and I am looking to David, do you remember?

Yes, we have three states. The state of Massachusetts, the state of Maryland -- or excuse me, the state of Minnesota and the state of South Carolina have appropriation language in their leases. But we -- it is not consistent across the country in terms of which dates do and which states don't. Everybody has got a little different policy. But that is clearly a consideration, Jamie as we underwrite acquisitions. As an example, we just bought a building in Malden, Massachusetts that is leased to the Department of Education.

That building has annual appropriation rights. But as we looked at -- as we were analyzing that building, none of us could fathom a situation where the state of Massachusetts wouldn't fund the Department of Education. And since this is the headquarters and this is where the Commissioner of Education has his office and all the administrative offices are for the Department of Education, we felt like that was pretty safe investment for our Company. And so that is the kind of thought process we go through when we consider these acquisitions.

Okay, thank you.

Take our next question from Chris Caton, Morgan Stanley.

Hello guys. Picking up on some of the earlier questions on the per pounds for the deals that were closed earlier this year. What I wanted to ask about specifically was the Safford, Arizona asset. It was listed as built and 92 and it is in the sub as 330 a foot. What drove the high per pound evaluation there?

We are entering into a new lease with the Government -- with the US Government for that property. As part of executing that lease, we are making a number of improvements that will allow us to meet a certain number of lead designation points. And so those tenant improvements added to the expense associated with that acquisition. And it is also a relatively small property and so relative to the income that we are going to generate over the next 10 years it just resulted -- at that cap rate it resulted in a relatively high cost per pound.

Sure. So did the 12.6 purchase price, does that include the capital you expect to spend over the coming period of time or is that going to be incremental and will see that kind of surface going forward?

That includes the tenant improvements.

Got it. And then on kind of the coming additional acquisitions and the lease role it looks like you have about a third of rents rolling in 2011 and 2012, do you have kind of a pro forma expectation for what that will look like say at the end of this year?

Well I think the simple answer Chris is we expect our tenants to renew. And we really don't have indications at this point otherwise. The question is where will those rents be? We clearly remain well below market in Washington DC at 20 Mass. Ave. and that's probably -- that and the Fresno lease with the IRS are probably our two most significant maturities in 2011 in 2012. My guess is that Fresno will be flat and we will have pretty major roll up in Washington DC. And I would expect that we could have roll down in Lakewood, Colorado and we could have a roll down with the FDA in Rockville, Maryland.

Yes and then the incoming acquisitions you have, are those -- do those have some near-term maturities in 2010 2011 2012?

We do have some -- we have some near-term maturities with the Commonwealth acquisitions. When you look at the Commonwealth acquisitions on a pro forma basis with our existing portfolio, it actually -- those lease maturities are less lumpy. So it actually reduces the percentage of revenue that matures in 2012 and 2013. And it increases the percentage out in 2015 and 2016.

Yes I think we saw that this also quarter anyway because it was something like 40% and now it is down to about a third --

That's right and you should -- assuming we close by year end, you should see continued flattening of our leased maturity schedule.

Great, thank you.

Yes.

Ladies and gentlemen this does conclude today's question and answer session. At this time I will turn the conference back to Mr. Adam Portnoy for any additional and closing remarks.

Thank you all for joining us on our second quarter conference call, we look forward to updating you on our Q3 results in early November. Thank you.