Office Properties Income Trust (OPI) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Government Properties Income Trust Third Quarter Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time.

(Operator Instructions)

As a reminder, this conference is being recorded. I would like to now turn the conference over to your host, Mr. Tim Bonang. Please go ahead.

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 I 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, November 2, 2010.

The Company undertakes no obligations 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 or SEC 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 Q3 supplemental operating and financial data package found in the Investor Relations section of the Company's website 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 Q3 Form 10-Q, which will be filed with the SEC and in a 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 good afternoon, everyone, and thank you for joining our call. We are pleased to announce another active quarter for Government Properties Income Trust. Since July 1, 2010 we have acquired 13 properties, and we have entered into agreements to purchase three additional properties for aggregate purchase prices of $271.5 million. In August, we issued 9.2 million common shares in a public offering at $25 per share raising $230 million in gross proceeds.

In September, we obtained investment grade senior unsecured debt ratings of BAA3 and BBB minus from Moody's and S&P. And in October, we replaced our $250 million senior secured revolving credit facility with a $500 million senior unsecured revolving credit facility. And finally, we declared a third quarter distribution of $0.41 per share.

For the quarter ended September 30, 2010 we are reporting FFO of $0.43 per share, compared to $0.48 per share for the same quarter last year. The decrease in our year-over-year FFO per share resulted primarily from timing differences between our August 2010 share issuance and when proceeds from that offering were invested in new acquisitions.

At September 30th, our portfolio statistics and balance sheet remained very strong. Our portfolio is 96% leased, with a weighted average remaining lease term of four and a half years. Approximately 94% of our rental income was paid by the US government and five state governments. We had approximately $99 million of debt outstanding quarter end, which represented a conservative 9.8% of gross real estate assets, and EBITDA covered interest expense by almost eight times.

During the third quarter, we had minimal leasing activity entering into only seven leases for approximately 76,000 square feet. For the remainder of 2010, all though it appears as if approximately 4% of our annualized rental income is scheduled to expire, approximately half of the expiration is for a US government tenant located in Boston that has been a month-to-month tenant for more than two years. We recently commenced negotiations for entering a longer-term lease with this tenant.

The remaining 2010 scheduled expirations principally relate to a property in Washington DC, where lease negotiations that are ongoing and proceeding well.

81% of our annualized rental income comes from the US government and approximately 13% of our rents come from five state governments. Our second largest state government tenant is the State of California which represents 4.3% of our rents. As you may recall, we reported last quarter that the State of California gave us notice that until a budget for the 2010/2011 fiscal year was signed into law, rent payments would likely be delayed. In October of this year, the State of California enacted a budget and began paying us past due rent in full.

Since July 1, 2010 we have acquired 13 properties with 1.6 million square feet for aggregate purchase prices of $204.1 million. As previously reported, in June 2010, we entered into a series of agreements with common wealth REITs to acquire 15 properties with approximately 1.9 million square feet for an aggregate purchase price of $231 million. These properties are majority leased to the US government and occupied by various federal government agencies.

In the third quarter, we completed this acquisition by acquiring 12 properties with approximately 1.6 million square feet for aggregate purchase prices of $190.6 million. The going in cap rate for this portfolio acquisition was 8.9%. In October, we acquired an office property located in Tampa, Florida with approximately 68,000 square feet. This property is 100% leased to the US government and occupied by the Department of Veterans Affairs.

The purchase price was $13.5 million, which includes the assumption of a $9.8 million mortgage loan. The going in cap rate for this acquisition was 9.9%. As of today, we also have three properties under agreement to purchase with 417,000 square feet for aggregate purchase prices of $67.4 million.

These pending acquisitions are subject to diligence and customary closing conditions, and as a result there is no assurance that we will actually acquire these properties. The first property under agreement was previously reported last quarter and is an office property located in Trenton, New Jersey with approximately 267,000 square feet.

This property is 96% leased to 15 tenants, of which 65% is leased to the State of New Jersey and occupied by the New Jersey Department of the Treasury. The US government also leases 10% of this property, which is occupied by the Department of Justice and the Internal Revenue Service. The contract purchase price is $45 million.

The second property under agreement is in office property located in Quincy, Massachusetts with approximately 93,000 square feet. This property is 100% leased to four tenants, of which 90% of the property is leased to the Commonwealth of Massachusetts and occupied by the Registry of Motor Vehicles as its headquarters. The contract purchase price is $14.5 million.

The third property under agreement is an office property located in Fort Myers, Florida with approximately 57,000 square feet. This property is 100% leased to seven tenants, of which the majority is leased to the US government and occupied by the Internal Revenue Service and the US Immigration and Customs Enforcement agency. The contract purchase price is $7.9 million. Our acquisition pipe line remains strong. 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 several state governments, and the acquisition in cap rates fall within our targeted range of 8% to 10%. We remain upbeat about our opportunity to continue to grow the business and believe these results support our business strategy of 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 CFO, to provide more detail on our financial results.

Thank you, Adam. First, let's review the results of third quarter operations. Operating income increased 12.3% as a result of total revenues increasing by $11 million compared to a $10 million increase in total expenses. We have acquired more than $450 million of properties during the past 12 months. 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 55% of our increase in total expenses, driven heavily by the change in acquisition costs which were $207,000 in the third quarter of 2009, compared to $2.7 million in the third quarter of 2010. Depreciation expense increased 78% also as a result of acquisitions. Finally, our G&A expense increased approximately 50% and is substantially attributable to the increase in real estate investments through acquisitions.

Property and net operating income increased 51% year-over-year, and our consolidated net operating income margins decreased slightly from 65.8% in the third quarter of 2009 to 63.3% in the third quarter of 2010. Same store revenue and NOI decreased year-over-year by 2.6% and 6.1% respectively.

The revenue decrease was primarily the result of the elimination of a large nonrecurring construction management fee in 2009 and the reduction in reimbursement income associated with real estate taxes. Same store rent from leases actually rolled up slightly in the year-over-year comparison. NOI experienced a larger decrease than revenue, primarily as a result of operating expense increases for repairs and maintenance and cleaning offset by savings and utilities and insurance costs.

EBITDA in the third quarter of 2010 increased by only 1% compared to 2009, primarily due to the large increase in acquisition costs. Interest expense was $2 million in 2010 and increased by approximately $500,000 compared to 2009. Interest expense includes $635,000 and $562,000 in the amortization of deferred financing fees and debt premiums for 2010 and 2009, respectively. Net income for the third quarter of 2010 with $6.7 million, compared to $6.2 million for the third quarter of 2009.

For the current quarter, FFO was $15.7 million, which based upon a weighted average share count of 36.4 million shares, results in FFO per share of $0.43 compared to FFO of $10.2 million for the third quarter of 2009, which based upon a weighted average share count of 21.5 million shares is FFO per share of $0.48. We experienced mild dilution to FFO during the quarter, due to raising equity ahead of closing our acquisitions.

On October 5th, we declared our third quarter dividend of $0.41 per share, payable on or about November 23 to common shareholders of record as of the close of trading on October 27th. During the quarter, we spent $710,000 on tenant improvements and leasing and $620,000 for building improvements, which primarily included energy upgrades and two roof replacements.

Turning to the balance sheet, at quarter and we held $2.3 million of unrestricted cash and $860,000 of restricted cash associated with our two properties encumbered by mortgage loans. Deferred financing costs of $4.4 million are fees and expenses associated with our $250 million secured revolving credit facility and the assumption of two mortgage loans during the first quarter of 2010.

As part of entering our new $500 million unsecured revolving credit facility last week, we expect to take a $3.8 million non-cash charge during the fourth quarter for unamortized deferred financing fees associated with retiring our $250 million secured credit facility. Rents receivable includes $2.1 million of accumulated straight-line rent at quarter end. Other assets of $19.5 million include $10.1 million of acquisition deposits, $3 million in pre-paid real estate taxes and our $5.2 million investment in Affiliates Insurance Company.

At quarter end, we had $63 million outstanding on our secured revolving credit facility. As discussed earlier, we entered a new $500 million unsecured revolving credit facility in October and increased outstanding is under the new facility to $65 million as part of closing. Our new unsecured revolving credit facility bears interest at LIBOR plus 210 basis points, which is 90 basis points less than the interest on the secured credit facility that was retired.

The new unsecured credit facility matures in October 2013 and subject to the payment of a fee, we have the right to extend the maturity date for an additional year through October 2014. We also have the right to increase the unsecured facility amount to $1 billion. 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 with great access to capital. Our properties are 96% leased and approximately 94% of our 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 and remain optimistic about the Company's outlook as we approach 2011.

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

(Operator Instructions)

Our first question comes from the line of Brendan Maiorana from Wells Fargo. Please, go ahead.

Thanks, good afternoon. David just to start with you, I think you mentioned that the operating expenses were up in the quarter year-over-year and so your margins were compressed a little bit. Is that just a seasonal factor or a factor in this quarter, and what would be the outlook for the margins or the OpEx line going forward?

Sure, Brendan. We have a tendency to accelerate capital expenditures in the -- and repair and maintenance expense in the third quarter -- third and fourth quarters of every year. So my sense is, is that we did have a little bit higher repair and maintenance expense during the third quarter than what we would normally have.

So, I would expect that that component of operating expenses will probably improve in the fourth quarter. And on the revenue side, I think we have pretty much burned off the large construction management fees so I am expecting margins to be relatively flat year-over-year in the fourth quarter.

Okay. And then in terms of unsecured rates, if you look to tap that source of capital what rates do you think you would be able to get if you did an issuance?

Yes, I think if we did an issuance, we are probably issuing around 6% today.

Okay. And then just on the acquisitions you guys have continued to be pretty active and you are cap rates have remained roughly static over the past several quarters and we saw obviously the California -- State of California portfolio sail on a very low cap rate. What do you think is allowing you guys to maintain the cap rates on your acquisitions relative to cap rates that have seemed to progress overall for not only government facilities, but core type of assets?

Sure, Brendan, this is Adam. I think a couple of things are at play here. One, you have to look at where some of our assets are occurring. You have to look at the size of some of our acquisitions. They tend to be more suburban locations. The ones we have been announcing have been basically under $50 million. I think -- so they attract less let's say large institutional money and because of the affiliation with RMR, we have a very large real estate presence around the country with 20 offices and over 600 people looking for those types of opportunities. So, I think that is part of it.

I also think that what is going on with the California portfolio that you referenced, I think that was -- I think that pricing was very aggressive. And I don't think that is necessarily indicative where the entire market is going, but it certainly is a great comp when you think about our stock price. I will admit that. So -- but I think it is largely -- plus we also tend to be the -- one of the few buyers of this asset class.

A lot of buyers -- our buildings are typically very well leased when we buy them. They typically don't have a lot of rent bumps built into it. That is the type of acquisition that can -- you can put debt leverage on it but the banks are still not extending a tremendous amount of leverage so it doesn't create a very high IRR for a levered buyer. And at the same time, most of the people out there today are just happened to be looking.

If they are buying on an IRR basis, they need some lease rule. They need to be able to push rates up over the course of their five to ten-year hold period and typically our buildings don't provide that. Our buildings are much -- we provide a much more stable cash flow stream for investors and there is just not a lot of investors looking for that exact investment profile -- that have that investment profile in mind at the same time.

So I think there is a lot of different dynamics going on, but we seem to be able to continue to buy properties at I think between 8% and 10%. And honestly, given our pipeline, I don't foresee that changing materially over the next couple of quarters.

Thank you for the color, Adam. And just maybe to clarify or to follow up, do you think that there is a certain aspect of the risk of underwriting the properties that you have been successful acquiring that you are better at underwriting that risk or better at understanding that than maybe the competitors are, whether it be for call it higher basis per square foot or just understanding renewal that allowed you to be successful where maybe some others haven't?

Or, do you think it is just that the competition is limited for smaller assets as you say?

What you mentioned definitely plays a part in it. We have been doing this for 15 years so we have a pretty good feel for if we think a tenant is going to renew or not. We have dipped our toe into looking at some state leased assets as well. And I think you will find there is even less competition for that and we have had a lot of experience doing that and the experience there is not too different in terms of lease renewal when you are dealing with most states than when you are dealing with the federal government. What you deal with on the state level is you are just much more focused on what the state agency is doing.

For example, the building we mentioned that we bought in Massachusetts that is -- that we have under agreement, it is the state of Massachusetts, but it is the headquarters building for the Registry of Motor Vehicles. They have a tremendous amount of capital to invest in the building. I think some people might not be as attracted to the building because it is the State of Massachusetts versus a federal lease, but we feel very confident that they are going to be there for quite some time.

One, because it is a headquarters for the registry, we don't think the registry is going anywhere and they have invested a lot of money specifically in IT in that property as well. So I think it is a combination of what you mentioned, but it is also the fact that we have been doing it for a long time and we have a large organization backing the company in terms of RMR and the expertise it brings to bear. So, I think it is a combination of many things.

And, Brendan, we only have probably between a 35% and 50% hit rate on things that we look at, underwrite and where we are actually successful getting under contract. So, part of it is being disciplined and letting stuff go if we don't like the yield where we think it is going to tread.

Sure, okay. Thank you for the color, guys.

(Operator Instructions)

Our next question comes from the line of Tayo Okusanya from Jefferies and Company. Please, go ahead.

Good afternoon, Adam, and David. How are you guys?

Good.

Good.

Good. A couple of questions, the Fresno lease, anything new on that front at this point?

Yes, the negotiations continue to be ongoing, Tayo. And we are pretty encouraged right now with where they are going. I think we have got a reasonable chance of getting a ten-year renewal with the IRS. So we are very encouraged by that.

Okay, in regards to lease rates is it pretty much according to what you were expecting before?

Yes we have always felt that to get a ten-year renewal at that property, we would be willing to accept may be a modest roll down in rent and we continue feel that same way. But I think if there is a roll down it would be pretty minor relative to getting a ten-year lease renewal at that property.

Got it. Okay that is helpful. And then the same store NOI decline on a year-over-year basis -- I think we addressed the expense side of it, but on the revenue side -- because I think we did also have a decline on the revenue side of it. Could you talk a little bit about that, too?

Sure. We -- on our financial statements we show one line of rental income. Included in rental income are some variable revenue sources. For example, parking revenue is variable. We have also got -- we will earn construction management fees for managing tenant improvements at our properties.

And in 2009, we managed a very large capital expenditure for the US Treasury out in Kansas City. And over, I think, three quarters of last year we earned a total of about $1 million in construction management fees. We don't have another project of that size ongoing in 2010.

We still have some construction management but nothing of that size, and that is really the big delta in what we see right now on the revenue side. I think -- my expectation is that that normalizes in the fourth quarter, and so I expect that revenue will be flat to slightly up in the fourth quarter year-over-year on a same store basis.

That is very helpful.

The other thing that we had in the third quarter was we have been successful in appealing real estate taxes. And as a result, our reimbursement revenue for real estate taxes have gone down.

Got it. Okay, that is helpful. And then, anything at this point from your tenant base in regards to the note that came out a couple of months ago with Obama focused on trying to cut real estate expense for the overall US federal government? Has there been any ripple effect as a result of that?

Really, there has been absolutely nothing. I have actually followed up with some of my contacts on the government brokerage side just to understand what is happening. There were two things that were supposed to happen over a 90 day period. The GSA was supposed to make a recommendation to the Office of Management and Budget on where they thought they could find savings, and then the OMB was then supposed to make a recommendation to the President on what they could expect to happen. What I have been told is that it is believed that both of those activities occurred but no one knows any specific results to what happened.

Got it. Okay. That is helpful. And then from an acquisition perspective, anything new out there? I think you guys continue to hit singles and doubles out of the park, but in regards to a fairly large portfolio, similar to California, is there anything kind of like that out there or is there something smaller -- $255 million type portfolio?

Yes, Tayo, this is Adam. Look, there has been large portfolios that have been out there for a long that people know about, there have been some of those Australia LPTs that were set up. But I think it is safe to say that the vast majority of what we have been looking at is as you call it, they are not large portfolios; they are small portfolios or single assets.

I was actually referring to some of those Australian LPTs, and just kind of curious why none of that product seems to have moved, nor do you really hear anything in the market about strong interest in them versus what we saw in California.

What one of the things going on I think with both of those portfolios is they had some relative near term lease maturities. And my understanding is in both cases, they are trying to deal with their lease maturities to really create as much value as they can before they start selling assets. And my guess is what happens when they do become sellers, is they will be more one off sales than they will be on a whole portfolio basis.

Okay. Very helpful. Thank you, guys.

You are welcome.

Our next question comes from the line of Jamie Feldman from Bank of America Michigan. Please, go ahead.

Thank you. So, I know Tayo asked about Fresno, can you give us an update on the Massachusetts Avenue and also on the Colorado asset?

Sure. On 20 Massachusetts Avenue, we hired a broker I guess last month. So we are just kind of beginning that process to have conversations with the GSA for both the tenants in there. My guess is it will be a relatively long process with both of those tenants, but we still feel very positive about the strengths of that building, across the street from Union Station, and just the relative vacancy in the DC market.

So, we are still kind of feeling the rents of $48 to $52 a square foot are probably in the appropriate range versus the $36 that we are currently collecting. And then on Lakewood, we are having conversations about renewal with the Department of Interior for all three of those buildings. And so that is kind of a fluid process in terms of both the rate and duration.

Do you sense any of those -- either one would get done early?

There is probably a better chance that National -- or that the Lakewood gets done earlier than Massachusetts Avenue. Massachusetts Avenue is just such a large property. You are talking about rent roll ups between $3 million and $4 million that is going to get a lot of attention within the GSA so my guess is that takes a much longer time, but frankly it is in our best interest to be patient.

And, can you remind us the two tenants in there and why they would stay or why they wouldn't stay?

It is the Department of Justice and it is US Customs and Immigration Services. And I think, one, it is a great location for them with good access to mass transit. They also have the entire building, so they control the parking structure, they control all access into the building and it is an Energy Star-rated building. It is very well maintained, not a lot of capital needs for them to do that. And the fact of the matter is they really don't have a lot of options in that market right now, there is just not a lot of vacant space in the DC market.

Okay. And along those lines, as you think about your largest tenants, are there any that have been labeled to move on base recently for BRAC realignment?

We don't have anything that has been labeled recently, but we do have a building that is in Falls Church, Virginia occupied by the Defense Information Services that is relocating to Fort Meade, and we have known about that for awhile. They are likely to go to Fort Meade sometime in 2011, but their lease goes through 2014 and they have no termination rights or a downsize option. So, we are currently working with the GSA to see if we can find an acceptable replacement tenant that can take that space and continue in that lease.

And if they can't find one do they have any right to break?

They do not.

They would have to pay you the full termination fee?

Or continue to pay monthly rent.

Okay. And then if you look at the acquisitions you guys did during the quarter, I think if we did our math right the weighted average occupancy is like 85%. Is there -- how should we think about that vacancy? Is there -- are you thinking there is near term upside, or these buildings comfortable at their current occupancy levels?

We don't --

There are a couple that are in the 50s I see.

Yes, the -- in the Commonwealth acquisition, we acquired about 250,000 square feet of vacant space. We did not underwrite that vacant space meaning we did not attribute any revenue to that vacant space, so any leasing that we do there is complete upside on our acquisition yield.

I think it will take time to lease that space, but I am optimistic that given the quality of the buildings, where the buildings are located, the growth we are seeing from the federal government that we are likely to lease that space over the next six months to 18 months.

Okay. And then, do you have any other acquisitions teed up from Commonwealth?

Currently -- Jamie, it is Adam. We -- no, the answer -- to be quick, the answer is no. Commonwealth does not own anything that would be right that would be subject to a first refusal.

Okay. So you are saying there is nothing else. Is there anything else in the Commonwealth portfolio that would even fit?

That's -- no, there is nothing. Commonwealth, I believe, it still owns assets that have government leases, but there is no building Commonwealth owns today that is the majority leased to a government tenant.

Okay. All right. Thank you.

Our next question comes from the line of Chris Caton from Morgan Stanley. Please, go ahead.

[On] earlier discussion about unsecured pricing, I think I heard 6% which may be that is ten-year money. I wonder if you could compare that to secure debt pricing if you looked at that at all?

We really haven't explored new secured debt financing. My guess is that -- obviously it is going to depend a lot on the building that you want to put it on. And what I believe a lot of secured institutional lenders want to do with government leased base is they want to try to match the duration and the amortization as close as possible to the lease.

You might get a ten-year loan, maybe a 20 or 25 amortization if you've got a ten-year lease. So -- one, we are not big fans of secured debt but we really haven't explored that, but I would guess that you might be able to get secured financing inside of 6% maybe it is probably 5.5% in that range.

That is helpful. And then on acquisitions, are you going to stay focused on office? I think you have a few distribution -- or maybe one or two distribution facilities, have you for example considered data centers?

We would be open to looking at data centers, the pricing on a per square foot for a data center we have typically shied away from for that reason, but I think it is safe to say we are primarily focused on office use. But you are right, we have a couple distribution centers and would look at data centers but --. For example, I mentioned it before, Massachusetts -- the building leased to Massachusetts, there is a data center in there, it is just part of the building, it is not only a data center.

And then the last question, I think you provide enough detail in the timing of acquisitions kind of back into a partial period NOI that wouldn't be captured by the income statement. Is that calculated anywhere in here or should we just go ahead and do that by ourselves? Do you know what I am asking?

Yes, it is not really telegraphed in there at all.

Okay. Thank you.

Yes, thank you.

Your next question comes from the line of Dan Donlan from Janney Montgomery Scott. Please, go ahead.

Thank you. Just a question on the potential acquisitions Quincy, Trenton, Tampa and Fort Myers. Could you maybe provide a cap rate range there?

It is within the stated range, 8% to 10%. I can't get too specific other than that. It is within the range of what we have been buying things at and what we have been stating our target cap rates are.

Okay, understood. And then as we look at your portfolio going forward, is there a percentage of NOI that you aren't -- not what to go above or below for state government? I think you said you are about 80% now for federal, 12% or 14% or so for the state. Is there a threshold that you are not willing to go above or below?

I wouldn't say there is any line in the sand but I think that 20% might be a number that we might feel comfortable with, with the state governments but we are not there yet. And I think it is safe to say that the vast majority of what we evaluate is federal government, it just happens to be that the two buildings in the queue right now happen to be state governments. But I think as we go out in the next few quarters and we continue to make some acquisitions, my gut is that you will see more buildings federally leased.

Okay. And then -- I guess the VA has talked about expanding and you guys have talked about in the past developers have had a hard time accessing capital to build new buildings. Is there any way that you guys could maybe step in and fill the void there? Is that of interest to you? I know you haven't talked about developing in the past, but any commentary there would be appreciated.

Sure. The short answer is we are not currently actively looking to finance or work with the GSA on development projects. There was a project that we announced or talked about in our queue or in our press release in Eagan, Minnesota where it was -- it really was a development project but we were going to buy an existing building and work with the GSA and then -- and redevelop the building, put them in a long term lease.

That was a very unique situation. As we announced in our press release, that deal has fallen through because the GSA has made decision that it is -- it withdrew the R&D, it is no longer interested in having a new location. It is going to stay in the location that it has.

So we didn't lose to anybody -- nobody wants to bid because the bid was withdrawn. But that is more of an anomaly. I think today is -- one, is we can continue to buy properties we consider to be above average historical cap rates. And we don't feel we need to or should take the risk of development today because the development returns are actually not that better than what we have been buying at and you take a lot more risk obviously with it. So, I think today we seem to be -- we are very focused on just buying mature buildings.

Okay. Thank you.

Yes.

All right, our next question comes from the line of Dave Rodgers from RBC Capital Markets. Please, go ahead.

Yes, hey, Adam. Maybe you can give us some more color on if you track it, what the office build to suit market looks like for the government with the RFPs that are out there, and maybe how that has been affected by the government's comments about the lease payments et cetera in the recent term.

There is still a fair amount of RFPs out there. Obviously, what we saw in Minneapolis or Eagan outside Minneapolis and what we have anecdotally heard around the country with some other properties, it seems to be that the GSA is pulling back -- or let me put it this way, anything where they think they want -- where they want to build a new location, it used to take a long time. It seems to be taking them a longer time.

Everyone is very skittish about being able to get budget approvals for a new development. And so, there is still build to suit's out there but I would say the forward pipeline in my view, people -- there is still a lot of talk about it, but there are still a lot of people saying maybe it is not going to happen or maybe it is going to take some time for it to happen.

My view is it is slowing and it is going to slow down. My view is that whatever happens in Washington in the next Congress is likely to be a fight over the budget and so there is not a lot of money -- either the executive branch or Congress seems to be willing to devote to RFPs to build new build to suits for the government. In fact, the government is starting to take -- is starting to look at other things.

For example, they are starting -- it used to be that security requirements they had a long list of agencies and types of tenants to have to fill -- or had to be in buildings that met certain security parameters, for example. But now they are starting to say, well yes, if you have an FBI building it should have a certain security parameter. But if you have a back office building that might actually be FBI employees but they are not any agents, there is no investigative work being done, it is all just back office, do they need to have the same security requirements.

And so, we are actually seeing the GSA taking a more detailed look at their own requirements because they are having trouble meeting them. And so, I actually think the winds are actually blowing in our direction and it -- when I say in our direction, in the incumbent landlords. So that is my view and it is partially based on what I have been hearing in the market place from others.

Has the interest rate or cap rate environment changed -- not the ability to but from where you are sourcing assets or the size of the pipeline that you are looking at today versus six months ago?

No, I think the pipeline has stayed relatively consistent. It ebbs and it flows, but I would not characterize the very low interest rate environment has. We have low interest rates now for some time -- a couple of quarters with a low interest rate environment in an environment where I would say banks are more willing to lend let's say for well leased projects than they were let's say a year ago. So, we have been living through this now for about six months and the pipeline continues to be what I would characterize as solid.

Last question on that build to suit. Have you had any success, or have you tried to approach any private developers with land to do build to suit transactions or be that take out partner? You have talked about it in the past I just don't know if you have had any progress or pursued that front.

We have had several developers approach us and talk to us about it. We have yet to come up with -- we have yet to find a developer that we think is enough -- well enough capitalized that we would feel comfortable I guess putting a structure together with them.

They -- most developers as you know are thinly capitalized and you take the risk of building running over budget or taking longer and unfortunately all the structures ultimately that risk would likely fall on our shoulders if it didn't get built on time or ran over budget. And so, because of that extra risk, we are -- we tend to shy away from that type of activity or engaging in those conversations.

We just -- as long as we are able to still buy buildings well leased, even new buildings, some of these are new buildings -- well leased at good solid cap rates. It is our view, why take the development risk, we would probably get the same return and you take just more risk in today's environment. That might not be the same a year from now, it may not be the same four years from now, but today that is our view.

Thank you for the additional color.

Yes.

Okay. There is no further questions in queue. I would like to turn it back over to Adam Portnoy, please go ahead.

Thank you all for joining us on this third quarter conference call. We will be attending Manhattan REIT conference in New York later this month, and we hope to see you all there. Thank you.

That does conclude our conference for today. Thank you for your participation, and for using AT&T Executive Teleconference Service. You may now disconnect.