Office Properties Income Trust (OPI) 2011 Q3 法說會逐字稿

Good day and welcome to the Government Properties Income Trust Third Quarter 2011 Financial Results Conference Call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the vice President of Investor Relations, Mr. Tim Bonang. Please go ahead sir.

Thank you and good afternoon, everyone. Joining on today's call is David Blackman, President and Chief Operating Officer and Mark Kleifges, Treasurer and 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 other securities laws.

These forward-looking statements are based on Gov's present beliefs and expectations as of today, November 1, 2011. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call other than through filings with the Securities and Exchange Commission or SEC regarding this reporting period.

In addition, this call may contain non-GAAP numbers including normalized funds from operations or Normalized FFO. A reconciliation of Normalized FFO to net income and the components to calculate AFFO, CAD, or SAD are available on our supplemental operating and financial data package found on our 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 on our Forms 10Q to be filed with the SEC.

Investors are cautioned that not to place under alliance upon any forward-looking statements. And now, I would like to turn the call over to David Blackman.

Thank you, Tim. Government Properties Income Trust is pleased to announce strong performance and continued growth during the third quarter of 2011. Since July 1st, we have acquired six buildings for aggregate purchase prices of $186.5 million and under agreement to acquire one property for a purchase price of $32 million.

In July, we sold 6.5 million common shares raising net proceeds of approximately $158 million. In October, we declared a regular quarterly distribution of $0.42 per share and amended our unsecured revolving credit facility by increasing the size to $550 million, reducing the all-in pricing to LIBOR plus 185 basis points and extending the maturity date by two years.

For the quarter ended September 30, 2011, we are reporting Normalized FFO of $23 million or $0.51 per share compared to $15.7 million or $0.43 per share in 2010. Our increase in Normalized FFO is primarily the result of the Company's accretive acquisition activity.

Gov's portfolio statistics and balance sheet remain exceptionally strong as evidence by the fact that Moody's Investor Service place GOV Baa3 Investment-Grade corporate rating on positive outlook in September.

In addition, our properties remain greater than 96% leased with a weighted average remaining term of 4.5 years. Approximately 93% of our rental income was paid by the US government, seven state governments, and the United Nations.

We had $328 million of debt outstanding at quarter-end which represented a conservative 27% of our total book capitalization and EBITDA covered interest expense more than eight times.

During this the third quarter we entered into seven leases for 85,000 square feet for a weighted average lease term of 9.6 years and committed $2.9 million for leasing related costs which equates to $3.50 per square foot per year.

We lease approximately 10,000 more than expiring leases during the quarter and nearly 90% of our leasing activity was for government tenants, which resulted in an 11.7% roll-up in rent.

At quarter-end through the remainder of the year, approximately 10% of our annualized rents were subject to expiring leases. With the exception of the Henry M. Jackson Foundation and a building leased to the Centers for Disease Control, which together represent 3% of rents, we expect to renew substantially all of our fourth quarter leases.

At quarter end, 71% of our annualized rents were paid by the US Government, approximately 17% were paid by seven state governments, and 5% were paid by the United Nations. The Commonwealth of Massachusetts remains our largest state tenant at approximately 5% of annual rents.

Since July 1, 2011, we have acquired six properties approximately 1.2 million square feet for aggregate purchase prices of $186.5 million including the assumption of $49.4 million of mortgage debt and excluding acquisition cost.

These six properties were acquired at an average cost-per-square foot of $161, had a weighted average remaining lease term of 7.7 years, are 94% occupied, and had a weighted average remaining cap rate of 6.6%.

In August, we acquired an office building located in Holtsville, New York with 264,000 square feet. The property is 82% and majority leased to the US Government and is occupied by the Internal Revenue Service and the US Citizenship and Immigration Services. The purchase price was $39.3 million. The going-in cap rate was 8.7% and the average remaining lease term was 10.2 years.

In September we acquired an office property located in Sacramento, California with 88,000 square feet. This property is 100% leased to the State of California and occupied by the Employment Development Department. The purchase price for this property was $13.6 million, he going-in cap rate was 9.8%, and the average remaining lease term was 8.3 years.

Also in September we acquired an office property located in Atlanta, Georgia with 376,000 square feet. This property is 97% and majority leased to the State of Georgia and occupied by the Department of Transportation. The purchase price was $48.6 million, the going in cap rate was 9.2%, and the average remaining lease term was 6.8 years.

Finally, in October, we acquired a three building office portfolio in Indianapolis, Indiana with 434,000 square feet. The property is 97% and majority leased to the US Government and occupied by the US Custom and Border Protection Agency. The purchase price was $85 million including the assumption of $49.4 million of mortgage debt. The going-in cap rate was 8%, and the average remaining lease term was 6.7 years.

Since July, we have entered into a purchase agreement to acquire an office property in Salem, Oregon containing 233,000 square feet for a purchase price of $32 million excluding acquisition costs. The property is 84% and majority leased to the state of Oregon and occupied by three critical state agencies.

This acquisition remains subject to completion of due diligence and other closing conditions so we can provide no assurance that we will acquire this property.

Despite volatility in wild financial markets, global sovereign debt concerns, and budget challenges, GOV continues to maintain an exceptional balance and a safe and predictable revenue stream from our high-quality tenants.

The capital markets have made us more cautious in evaluating acquisition opportunities but we remain optimistic that GOV will continue to uncover accretive growth opportunities at attractive investment yields.

I will now turn the call over to Mark Kleifges, our CFO to provide more detail on our financial results.

Thanks, David. First, let's review our consolidated property level operating results for the 2011 third quarter. We once again experienced significant quarter-over-quarter increases in rental income and property net operating income as a result of our 2010 and 2011 acquisition activity.

At the end of the third quarter, we owned 67 properties with 8.3 million square feet compared to 53 properties with 6.5 million square feet at the end of the 2010 third quarter. For the 2011 third quarter, rental income increased $15 million or 49% to $45.7 million and property net operating income increased $9.3 million or 48% to $28.8 million. At September 30th, our properties were 96.1% leased and our consolidated net operating income margin was 62.9% for the 2011 third quarter.

Our same-store results in occupancy for the third quarter were essentially flat. Same-store cash rental income increased $490,000 or 1.8% versus the 2010 quarter due primarily to a $302,000 or 1.2% increase in base rents and a $200,000 increase in construction management fee income due to a large tenant improvement project completed on behalf of a government agency during the third quarter.

The increase in cash rental income was partially offset by unfavorable non-cash straight line rent adjustments and intangible lease value amortization totaling $287,000 resulting in a $269,000 or 1% increase in same-store GAAP rental income for the 2011 third quarter.

Same-store operating expenses increased approximately $136,000 or 1.4% compared to the 2010 quarter due primarily to higher maintenance expense and increase in insurance costs related to our California properties and cost associated with the construction management project completed on behalf of a tenant during the quarter.

As a result of these changes, same-store net operating income increased $134,000 or 75 basis points quarter-over-quarter and our NOI margin percentage declined 10 basis points to 64.7%.

Turning to our consolidated results for the quarter, EBITDA in the third quarter of 2011 was $26.1 million compared to $17.7 million on the 2010 third quarter, a quarter-over-quarter increase of 47%.

Our EBITDA to fixed charges ratio was very strong at 8.3 times for the quarter, and our debt-to-annualized EBITDA was only 3.1 times at quarter-end. For the current quarter, Normalized FFO was $23 million or $0.51 per share compared to Normalized FFO of $15.7 million or $0.43 per share for the 2010 third quarter, a 19% in Normalized FFO per share.

During the quarter, we spend $563,000 on tenant improvements and leasing costs and $1.3 million for improvements to our properties.

Turning to our recent financing activities, on July 25th, we sold 6.5 million common shares at a price of $25.40 per share raising net proceeds of approximately $158 million which we used to repay amounts outstanding under our revolving credit facility.

On October 18th we amended our revolving credit facility to increase the maximum borrowings available under the facility from $500 million to $550 million to reduce the interest rate on drawings from LIBOR plus 210 basis points to LIBOR plus 150 basis points, to reduce the annual facility fee from 45 basis points to 35 basis points, and to extend the maturity date of the facility by two years, from October 2013 to October 2015 while maintaining our option to further extend the maturity by one year subject to payment of a fee.

Turning to our balance sheet and liquidity, at quarter-end, we had $282.5 million outstanding on our credit facility and our debt to total book capitalization was approximately 27%.

As David noted, we closed on the acquisition of the three building portfolio in Indianapolis for a total purchase price of $85 million including the assumption of a $49.4 million mortgage.

Pro forma for this acquisition at September 30th, we had $318 million outstanding on our credit facility with $232 million available for additional borrowings and our debt-to-total book capitalization was approximately 32%.

In closing, GOV remains a conservatively capitalized company with a stable and secure cash flow stream that we expect will allow us to pay a consistent dividend.

In addition to our stable base, we remain optimistic about the Company's growth outlook for the remainder of 2011 and into 2012.

That concludes our prepared remarks, operator. We're ready to take questions.

Thank you. (Operator Instructions). Dave Rodgers, RBC Capital Markets.

Good afternoon, guys. David, maybe you can provide a little more color on the acquisition environment out there. Clearly you're still having success finding properties. Cap rates seem to be slightly higher than you were closing on earlier the year last year. So maybe talk about what you're seeing from the private owner's ability to get financing and their interest in selling assets today.

It's a little bit of a mixed bag right now, Dave. For properties that have leases that are 10 years or greater, we are seeing a lot of core money chase those deals and not only are they folks like us that want to own building leased to government tenants, but they are your typical core investor that just needs to get money out.

There clearly is a more aggressive bend for deals of that type and we're seeing some of those transactions trade at low seven cap rates to maybe even below seven cap rates depending upon where the property's located.

Another example would be the property that we put under agreement in Salem, Oregon. That property was under agreement with another seller, for some reason they weren't able to pull together either their debt or equity financing and the transaction fell through after contract. And so we were able to back in get that property under agreement at what we think is a favorable cap rate.

We've got the headquarters for two state agencies; the Department of Human Services - Child, Family, and Adult Division, and then Department of Justice, Child Support Division. So we think that's going to be a property that's going to remain highly occupied for a long time.

Second question with regard to your government discussions that you're having, some of the delayed decisions; do you have any additional clarity you can provide on some of leases that have been in hold-over status, when you expect to see any clarity as well as any additional leases that may be headed for hold-over status here in the near term.

The one lease that we had in hold-over status, or the leases we had in hold-over status, were in 625 Indiana Avenue. We excecuted those leases during the third quarter and really, that was the primary reason our tenant improvement and leasing commission costs per square foot per year was somewhat higher than what we would normally expect.

We did roughly 74,000 square feet of leasing in that building at 10-year lease durations, but the good news is we did at an average rent of $49 a square foot.

And so when you calculate a lease commission on 74,000 at $49 for a square foot for 10 years, it tends to be above what you would normally pay. I think the lease commission in that case approached $2.90 a square foot.

So at this point, we actually don't have any leases in hold-over. The Fresno lease, which would go into hold-over sometime later this month, we have a lease document in hand. We are negotiating that with both the IRS and the GSA and we're both motivated to try to get this executed before the end of the month when this would go into hold-over.

We're pleased with where we are with the lease right now in terms of both rate and terms, but I really don't want to get into exactly what we're going in terms of rate in terms until we execute the lease.

But there still is difficulty getting large leases through Congress. The IRS Fresno lease, which was approved maybe a month or so through The House, was one of seven leases that got approved and so there still are a number of leases in hold-over in Congress. Fortunately, none of them are ours right now.

Okay, great. Thank you.

Chris Katen, Morgan Stanley.

I wanted to follow up on the fix rate financing. You got the line refinanced and a fair amount drawn on it. What are the plans for doing a fixed rate financing? I think we talked about it last call.

We still have a lot of interest in issuing unsecured notes. As you know, that market's been a little bit choppy here lately. I don't think there's an issuance of an investment grade REIT since around July if my memory is correct.

It probably doesn't make sense for an initial issuer such as Gov to be the REIT to reopen that market so we continue to monitor interest rates at least on the trading level of outstanding REIT debt that's out there is very favorable so we continue to monitor it and hope to get something done in the unsecured markets before the year's out.

Is there anything that you're looking at that would you go a different financing, fixed financing route, if you continue to have to wait?

Not at this time, the only other thing that we are evaluation is a bank term loan, but that would also be floating rate most likely.

Just two quick modeling questions. For G&A and the stock comp that you show in the statement of cash flows, looks like that hits in the summer months. Is that right? If I look back at last year, second and third quarter had stock comp and the first and fourth didn't really have much. The pattern may be repeating again this year, wanted to ask about that.

Are you looking in the non-cash items on the cash flow?

Yes, on the cash flow statement.

That item tracks when the grants are actually made so the grants you see in May, June period relate to trustee grants. The grants you see showing up in the September period or the September quarter relate to grants to management. The expense itself is coming in more or less prorated throughout the year.

The other questions was what is the rate on the assumed financing in Indianapolis?

It is 5.73% so that will be our cash interest on that. We still have to evaluate whether we need to mark that to market for GAAP accounting purposes and we just haven't done that yet.

Understood. Thanks very much.

Mitch Germain, JMP Securities.

Good afternoon. David, last year, this time, you talked about a bit of a seasonal slowdown in investment activity. You talked about some cautiousness in your approach to new investments as you try to consider a capital markets plan. What are you seeing out there in terms of offerings?

In our pipeline, we have almost 1.7 million square feet of stuff that we're evaluating right now at various stages. So that's probably about on par for where we would normally expect to be in terms of the number of deals that we're evaluating.

It typically, the slowdown that we begin to see, or the shift around Thanksgiving is you will have sellers that go from trying to get deals in the market to trying to get stuff closed by year-end.

So we're still seeing a fair number of deals coming to us in the market right now, and I would expect that most of these sellers have the expectation that they are going to try to get closed by year-end. I would expect that activity will begin to wane a bit as we get into the really the bottom half of the fourth quarter.

I'm optimistic with what we have in the pipeline right now. It's a mix of state and federal. There clearly are a couple of deals in there that I think are going to trade at relatively low cap rates and so we're not going to pursue those aggressively, but there's a number of deals in there that I think will trade in that high eight to nine percent cap range that I think allows us to continue to be competitive.

We are cautious about our acquisition activity right now just simply because of what we perceive our current cost to capital to be. I stock price with most other rates dislocated in July. We've had a reasonable recovery, but we're still not trading above where we last issued equity.

And so because of that, we're being more cautious to make sure that we're buying properties that are accretive for our current cost-to-capital even though we don't think this is a long-term weighted average cost-to-capital.

Appreciate the commentary. And just quickly, it seems like you're more willing to acquire vacancy. We'd like some thoughts on that shift. Most of your prior acquisitions tend to have been stable, call it 90% plus occupied, I think you shifted away from that on a couple of the recent deals.

Yes, we did that mostly in Holtsville, New York. That's I think an 82% occupied building. We think there is a reasonable probability that the IRS is going to expand in that building. And so we felt that that was a reasonable risk to take mostly because of the high occupancy that we have across the company generally.

We're still above 96% occupied. I think if we were 90% occupied or looking to potentially go below 90% occupancy I think we would be more cautious is doing that. The other building that we, I think it's the Oregon Building, we have under agreement, I think its 85% occupied. Again, there's a chance -- the space that's vacant in there is probably is most well suited for the State of Oregon to take additional occupancy in.

We think that's a reasonable chance that they do that over the remaining lease term, but in both cases, we're buying these assets based upon in place revenue. We're not attributing any value to potential lease-up and the cap rates that we're reporting are based upon in-place rents, and so I think we're getting recent returns based upon in-place rents and not really subject to leasing-up the property to get a good return.

Thank you very much.

(Operator Instructions). Brendan Maiorana, Wells Fargo.

Thanks. Good afternoon, guys. Question on CDC. Have you guys gotten any more indication from them given that there's a move-out in Q4 that you guys have a lot of roll between 2012 and 2014, what their intentions are about staying or going in your portfolio down in Atlanta?

That's a good question, Brendan. The move out that's going to occur in the fourth quarter with the CDC is at 12 Executive Park. That's an early termination and they have basically looked at the entire portfolio and evaluated whether they needed to reduce their space or whether they would remain to term in the remainder space. So we feel pretty confident that while we're losing them at 12 Executive Park, we're confident that we're going to keep the remainder of the CDC through term.

The CDC is a little bit interesting. They're a little bit like the SEC, they've been running around Atlanta trying to develop new space and I feel a little bit like they're being made an example of.

Because basically what happened is they were told that they needed to reduce lease space and move into government owned space, and they weren't really given an option locally how to do that or which buildings to get out of. These decisions were made in Washington which is a little bit unusually and not something that you see very frequently particularly with that agency.

So the short answer is I think we're pretty good with our remaining space with the CDC at least through the remainder of term.

But through the remainder of term isn't particularly long, right? Because don't you have a lot of expirations with them in '12, '13, and '14? I don't have that roll in front of me, but that was my recollection.

I don't think we have anything in '12. I think we've got about 1.6% in '13.

OK, maybe we can just follow up on the details of that offline, but there wasn't a way to sort of structure the early move out with an extension on the remainder or anything like that?

No. The folks locally frankly didn't want to leave that space because it was probably some of the better space they occupied outside their campus in Atlanta and they were not given any ability to negotiate anything. They were being told what to do.

Okay. Then, David, you talked I think it was Mitch about the outlook for acquisitions and you mentioned you're being more conservative just given where your cost-to-capital is. Have you guys considered if you get a long lease extension for Fresno or maybe some of the other assets that have very long lease terms maybe bringing those to market and disposing of some assets as a way to maybe get some capital and then redeploy that capital at what are more attractive returns in the market?

Yes, I would say we take a ongoing view at potential dispositions across the portfolio. There are a couple of buildings in the portfolio we could consider selling, but by and large, we are in a growth mode. So we're trying to grow our asset base, grow our equity base in the company. Fresno clearly is something that rises to the level of a sale consideration, but we're still early in that process and no decisions have been made one way or another.

Okay. And then, Mark, you mentioned that you feel like the cash flow levels are pretty stable, but if we look at your capital structure and all the amount of credit facility debt that you have out there, it does seem like there's going to be a pretty big headwind in terms of your interest costs as you look to term out that debt and even if the rates become a lot more attractive then where they are today, its still going to be higher than that current level.

Do you still feel pretty confident when you look at the cash flow headwind that you have potentially from higher interest expense plus increase (inaudible) commissions with more roll coming up at 2012 that you'll be able to cover the dividend as you look out next year and beyond.

Yes, and first, when I talk about stability of cash flows, the point I'm trying to emphasize is the stability of our rental cash flow stream, but yes, we do, you're right, there will be dilutive effect from fixed rate financing when and if we do that. in looking out at our potential leasing [TI] Commissions as well as that potential increase in interest costs, we do feel comfortable about our payout ratios in the long run.

Okay. And then, last question on the acquisition in Atlanta, the 1 Georgia Center. You guys put in a 9.2% cap rate. You acquired that from a public peer that discloses their NOI for each building and it seems like the NOI that I'm getting from the disclosure from Cousins is about $300,000 or $400,000 below or probably about 75 basis points below the 9.2% cap rate that you guys put in the supplemental. What's the difference? Are you assuming an increase in NOI as we look out, or what would drive that potential difference?

What we disclose is the in place GAAP rents to calculate NOI. So we've got, I think we had a 6.8 year average remaining lease term in that acquisition and so we straight lined the rents on the all the leases to calculate revenue to compare to expenses. What we report is a GAAP NOI and I'm guessing what they reported was a cash NOI.

Yes, maybe I'll have to follow up because I think they reported a GAAP number too, but the expense numbers are kind of comparable with the current in-place expenses too as you guys calculate it?

When you buy a property, you have to restart GAAP, so it's certainly feasible that they would have a different GAAP number than we would because they GAAP it from the date of ownership or from the date that the tenant lease commenced.

Right. Are you guys including the FAS 141 for any rents that might be above or below market or are you just taking the actually cash rental income straight-lined over the remainder?

We don't include any intangibles.

Right. Okay. All right, thank you.

Jamie Feldman, Bank of America.

Thank you. Back to the dividend question, when you do foresee a scenario that you'll be able to grow the dividend? It sounds like '11 is kind of a flat year and maybe covering? Or are we thinking about that wrong?

Jamie, we've increased the dividend twice since 2009. We did it once earlier this year.

No, I'm saying going forward.

It's certainly feasible that we can continue to grow the dividend. It's something that we think is important to us and our share holders, but I think, didn't we increase the dividend in the second quarter --

April I believe it was.

So it's probably not feasible to think we're going to increase the dividend every six months, but we certainly look to try to do it annually if it makes sense.

All right. And then as you're thinking about the acquisition pipeline or just putting capital to work, how should we think about the road map for raising capital. Just in terms, I know you talked about the unsecured, but how much do you think you can buy additionally before you need to raise more capital and how should we think about equity versus debt?

Well, we will be roughly 35% levered at the end of the quarter based upon existing acquisitions under agreement. We've said we want to try to run the company between 30% to 40% leverage so we've got probably $100 million acquisition opportunities before we would have to consider raising equity.

So really I think we're most focused on is trying to get the right debt solution in place for us. There hasn't been a REIT that is issued in the bond market since July and we just don't think we're the right company to open the bond market since it would be our inaugural issuance.

OK, thanks. And then, as you think about your 2012 expirations, I know you had mentioned Fresno, you're really not ready to talk about the change of rents, based on the conversations you're having today, what do you think your mark-to-market on leases would be if conversations went as they are going now?

Yes, I think we will have a modest roll down in rents for our fourth quarter leasing activity mostly driven by Fresno. I think we've talked about at Fresno we're expecting plus or minus $500,000 annual roll down in cash rent with that lease.

I think in 2012 we should have roll-up in rent mostly driven by what we expect to do at 20 Mass Avenue. We have a lot of wood to chop still with Mass Avenue just in terms of working through which tenant stays where and what the lease term duration is going to be, but [net net] we should have a pretty decent roll-up in rent at that property and given the fact that I think its our number one contributor NOI, it should have a pretty positive effect on leases globally.

So what is the latest state of affairs in terms of negations there? How far are you from getting it done and then what's the latest in terms of the magnitude of the change percentage wise?

Yes, those leases mature I think in the fourth quarter of 2012 and so as you might expect, the Fresno property -- we made our proposal to the US Government 12 months before they actually responded and got approval to it.

And we got a lease document to negotiate basically the month that the lease matures. So I would guess we've still got some time to work through with the government particularly given the continued deficit reduction issues that seems to be getting most of the focus in Congress right now.

You think 20 Mass Avenue will be signed sometime in '13, is that the right way to think about it?

No, I think it'll be signed in '12. There's no reason to think it won't be signed in '12, but I don't think it's going to be signed six months before the lease matures. I think it's going to be signed right at lease maturity. So it'll be signed in the fourth quarter.

All indications are that we're going to get plus or minus $10 square foot roll-up in rent. There's no reason to think, given where market rents are versus where we're achieving rents in that market.

So we continue to remain confident in our ability to keep that building full, our ability to get strong roll-up in rent. I think everything is very positive with that property.

Okay. So you're saying if it's signed in the fourth quarter, it'll also take effect in the fourth quarter, or there's a delay there also.

Once it gets approval through Congress, and you have the lease document, it's signed, it's effective when it's executed. So again, I think it's feasible to think it gets signed prior to -- I think it's feasible that it does not go into hold over, that it gets executed prior to the maturity date.

Okay. And then we've been hearing from brokers, at least in Washington, there's a limit on space-per-user; about 155 square foot per head. First of all, is that correct? And secondly, are you seeing that? How is that impacting your portfolio and what are you seeing from the state level, where else are you seeing those kind of reductions that seem mandatory?

Yes, well our approved prospectives with the Fresno lease did have an occupancy threshold requirement which we believe that lease is compliant with. This is something that's I think a little bit new just because people are starting to focus on it. Government employees tend to get less space per square foot than non-government employees.

I think you typically see about 200 square feet per employee globally and I think it's closer to 150 square feet per employee for government space. So I don't think that this is a big change. I think it's more to make sure that if they ever go back to building new buildings again, that they have appropriate usage when they go into occupy the new space. So I don't think it's going to have any affect for our existing properties.

and so you're not seeing on any renewal discussions the need to downsize?

No. We're not seeing any need to downsize. The only thing we really seen Jamie and this is globally, both federal government and state governments is trying to make sure that the owned real estate is being appropriately utilized, and that's what happened with the CDC. They wanted to make sure that the owned real estate was appropriately utilized before they started spending money to lease space. And that's the same thing we're seeing with some of our state tenants.

All right. Thank you.

Dan Donlan, Janey Capital Markets.

Thank you, and good afternoon. Just real quick, going back to leasing discussions, can you maybe give us a sense of where you think capx is going to turn out for the fourth quarter and then maybe looking at 2012 as well?

I don't know that we can do that because that's basically giving guidances we don't do. What I will tell you, Dan, is we tend to spend more capx dollars in the fourth quarter than any other quarter throughout the year.

I think on building improvements, Dan, we've always kind of thrown out that $0.50 a square foot. If you look at through the first three quarters, I think we're at around $0.19 to $0.20 a square foot. You'll see some pick up in the pace of spend in the fourth quarter, but I still don't think we'll hit $0.50 a square foot this year on building improvements.

And then obviously on the TI leasing side, with Indiana Avenue, there's the possibility of significant commissions in the fourth quarter and Fresno, depending on when that signs, there's a chance commissions there, but that could slip to the first quarter.

Okay. And then just looking at your acquisition prices in the quarter and then into the fourth quarter, it looks like some of the prices came down versus what you originally reported. What went on there?

We do a pretty thorough job of our diligence identifying potential capital opportunities and in most cases I would say we identified capital opportunities that had not been disclosed and we don't typically close over those without an adjustment.

Okay. And then once you factor in the buildings in Indiana and then what you're potentially buying in Oregon, where's that going to bring your NOI as a percentage of state government and then is there some kind of threshold you don't want to go above there?

Yes, we have tried to not allow state governments to get above 20%. And I think we're at 17% right now. So we're starting to approach that threshold. It's never really been a hard fast, but we believe that Government Properties Income Trust should be a predominantly US Government REIT. So we continue to be focused on buying US Government leased buildings.

Haven't done the math on how Oregon will change that. I think the Indianapolis property, [INTEK], will have more revenue than the Oregon property, so my guess is that will actually increase our US Government exposure and decrease the state exposure.

Okay.

I can't tell you exactly how it changes it, but the numbers should align that way.

And then just real quick, what was the exact acquisition date for the Indiana properties in October?

October 14th.

Okay. And then do you anticipate closing on the Oregon deal before year end?

That's certainly feasible. We are in diligence so I think it's feasible that it closes in early December.

Okay. Thank you.

Thank you. I will now turn it back to David Blackman for closing remarks.

Thank you, operator, and thank you for joining us on our third quarter conference call. We will be attending the (inaudible) Conference in Dallas later this month and hope to see many of you there.