Office Properties Income Trust (OPI) 2011 Q4 法說會逐字稿

Good day, and welcome to the Government Properties Income Trust Fourth Quarter and Year 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. Joining me on today's call is David Blackman, President and Chief Operating Officer and Mark Kleifges, who's Treasurer and Chief Financial Officer.

In (technical difficulty) of today's conference, the presentation by management, followed by a question and answer session. I would note that the recording or any transmission of today's conference call is strictly prohibited without the prior written consent of the company. I would note that there have been widespread phone outages in the Boston area today. So if we get disconnected, we will try to reconnect as soon as possible. And we thank you in advance for your patience.

I would now like to read a 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 (technical difficulty) presently released of expectations as of today, February 22, 2012. The company undertakes no obligation to revise or publicly release any revisions to the forward looking statements made in today's conference call, other than compliance with the Securities and Exchange Commission or SEC regarding this reporting period.

In addition, this call may take on non GAAP numbers, including normalized funds from operations or normalized FFO. The reconciliation of normalized (technical difficulty) of net income and the components that calculate [FFO], CED or equity Ds or available (technical difficulty) operating and financial doc package found on our website at www.govreits.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 filings with the SEC. Investors are cautioned to not place undue reliance on any forward looking statements. And now, I would like to turn the call over to David Blackman.

Thank you, Tim. 2011 was another successful year for Government Properties Income Trust. During 2011, we acquired 16 properties containing 2.1 million square feet for $444 million, sold 6.5 million common shares for $158 million in net proceeds, and increased outstanding debt by $277 million, while maintaining a conservative leverage profile of 33% debt to total booked capitalization. This activity resulted in a 19% increase in normalized FFO per share from the fourth quarter of 2010 to the fourth quarter of 2011, an 18% increase in book equity, a 44% increase in gross real estate value, and the increase in our regular quarterly distribution by $0.01 per share in April. All of the backdrop of volatile equity markets, global sovereign debt concerns, and uncertainties created by our leaders in Washington.

Let me start with our specific results from the fourth quarter of 2011. Since October 1st, we have acquired four buildings for an aggregate purchase price of $115.9 million. And we also amended our unsecured revolving credit facility to increase the size to $550 million, reduce the order pricing to LIBOR plus 185 basis points, and extend the majority base by two years.

In January, we closed a $350 million five year unsecured term loan priced at LIBOR plus 175 basis points, and declared a regular quarterly distribution of $0.42 per share. For the quarter ended December 31, 2011, we are reporting normalized FFO of $26.1 million or $0.56 per share compared to $19.2 million or $0.47 per share for the same period in 2010.

Our administration normalized FFO is primarily the result of the Company's accretive acquisition activity, which was substantially funded during the quarter with borrowings under our $555 million unsecured revolving credit facilities.

As previously stated for the full year, we acquired 16 properties with 2.1 million square feet for an aggregate purchase price of $444 million, excluding acquisition costs. These fixed in properties were acquired at an average cost per square foot of $207, an average [growing] in cap rate of 8.3% or on average, 96% at the time of acquisition and had an average remaining lease term of approximately seven years.

Recall that in 2011, we acquired a property in Manhattan for $114 million that the stores are average cap rate and acquisition price per square foot. Excluding the Manhattan acquisition, the average acquisition price per square foot was $168. And the average acquisition cap rate was 8.7%.

(technical difficulty) portfolio statistics and balance sheet remain exceptionally strong. At year end, our properties were 95% leased with a weighted average remaining lease term of 4.9 years. Approximately 92% of our rental income was paid by the US government, eight state governments, and the United Nations. We have more than $41 million of outstanding debt at quarter end, which represented a conservative 43% of our total booked capitalization and EBITDA covered interest expense (technical difficulty) times.

During the fourth quarter, we entered into 12 leases for 548,000 square feet, for a weighted average lease term of 9.8 years and committed $1.4 million for leasing related costs, which equates to $0.27 per square foot per year.

97% of our fourth quarter leasing activity was the IRS facility in Fresno, California, which resulted in a ten year long term renewal and a 5.5% roll down in rents. The rent roll down for his property was consistent with our expectations and in line with what we had said on previous earning calls.

The ten year (technical difficulty) is strategic for our company as our lease not matures with outside the time period for other IRS leases in the Fresno market, and positions this property to consolidate other IRS functions into our buildings over the next ten years.

Those that are only leasing costs for this removal was a $1.25 million host commission. During 2012, 19.9% of our rents are subject to maturity leases. While we have previously disclosed the lots of certain tenants for 2012, our current expectation is to renew 75% of all 2012 leases and approximately 80% of our maturing leases with government tenants.

While this is slightly below the historical average renewal rate for government tenants, our renewal rate over the past two years has been (technical difficulty) above average. And since our non renewals are with the same tenants we have been discussing for some time now, we've seen nothing to communicate -- indicate a change in historical renewal terms.

At quarter end, approximately 70% of our annualized rents were paid by the US government. Approximately 17.5% were paid by state governments. And approximately 5% were paid by the United Nations. The Commonwealth of Massachusetts remains our largest state tenant at approximately 4.6% of annualized rents.

Since October, we have acquired four properties with 667,000 square feet for an aggregate purchase price of $115.9 million, including the assumption of $49.4 million of mortgage debt and excluding acquisition costs. These four properties were acquired at an average cost per square foot of $174 and a weighted average remaining lease term of 6.7 years or 91% occupied and has a weighted average [tap] rate of 8.5%.

In October we acquired a [3 billion] office portfolio in Indianapolis, Indiana with 434,000 square feet. The property is 94% occupied and (technical difficulty) a lease to the government and occupied by the US Customs 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.

In December, we acquired an office property in Salem, Oregon with 223,000 square feet. The property was 84% occupied and majority leased to the state of Oregon and occupied by the Oregon Department of Human Services, the Oregon Department of Justice, and the Oregon Employment Department. The purchase price was $30.9 million. The going in cap rate was 9.9%. And the average remaining lease term was 6.6 years.

Consistent with 2009 and 2010, the year end acquisition pipeline was weak. Also consistent with 2010, 2011, acquisition momentum has improved during the first quarter, steps that we remain bullish on our growth prospects for 2012 and continue to believe our business strategy of providing a safe and predictable dividend to investors supported by stable revenue and a clear growth through acquisitions remains a viable strategy. 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 of our operating results for the 2011 fourth quarter. (technical difficulty) experience significant quarter over quarter increases, investment income and property net operating income is a result of our 2010 and 2011 acquisition activity. At the end of 2011, we own 71 properties with 9 million square feet, compared to 55 properties with 6.8 million square feet at the end of 2010. For the 2011 fourth quarter, (technical difficulty) income increased $14.8 million or 40% to $51.7 million. And property net operating income increased $9.2 million or 39% to $32.7 million compared to 2010 fourth quarter. At December 31st, our properties were 95% leased, and our consolidated in (technical difficulty) margin percentage for the 2011 fourth quarter was 63.3%.

Turning to our same store operating results, at year end, our 53 same store properties were 95% leased, around 1% from the prior year end. For the 2011 fourth quarter, same store rental income increased $388,000 or 1.1% compared to the 2010 fourth quarter. And net operating income was essentially flat quarter over quarter. For the 2011 fourth quarter, same store operating expenses increased $391,000 or 3% compared to the 2010 fourth quarter, due primarily to higher real estate tax and insurance expense partially offset by lower maintenance expense.

Our same store ROI margin in 2011 fourth quarter was down 70 basis points from a prior year quarter to 63.1%. Including in 2011 same store revenue is $610,000 of non recurring retroactive rent increases. If you exclude this income, rental income decreased to $222,000 or less than 1%, and net operating income would have decreased $612,000 or 2.6% compared to the 2010 fourth quarter.

Turning to our consolidated results for the quarter, EBITDA it the fourth quarter of 2011 was $29.5 million compared to $21.4 million in 2010 fourth quarter, a quarter over quarter increase of 38%. On EBITDA, the fixed charges ratio was very strong at nine times for the quarter and a debt to annualized EBITDA is only 3.7 times at quarter end.

For the current quarter, normalized FFO was $26.1 million or $0.56 per share compared to normalized debt per quarter of $19.2 million or $0.47 per share for the 2010 fourth quarter, an 18% increase in unrealized FFO per share.

During the quarter, we spent $2.5 million on tenant improvements and leasing costs, which includes $2 million of leasing commissions in connection with our Fresno and Indiana Avenue leasing activity, and spent $3.3 million for improvements to our properties.

Turning to our recent financing activities, (technical difficulty) were (technical difficulty) involving credit facility to increase the maximum dollars available over the facility of $500 million to $550 million. It reduced the interest rate on drawings from LIBOR plus 210 basis points and LIBOR plus 150 basis points. It reduced the annual facility here from 45 basis points to 35 basis points, and to expenditure maturity data facility by two years from October 2013 to October 2015 while maintaining our option to further extend the maturity by one year subject to the payment of the three.

On October 12, we closed a new five year, $350 million unsecured term loan. The loan matures in January 2017 and is prepayable without penalty at any time. Interest from the loan is LIBOR plus 175 basis points. We used the net proceeds of the term loan to repay all amounts outstanding under our revolving credit facility.

Due to our balance sheet liquidity at year end, we had $541 billion of debt outstanding. And our debt to total booked capital realization was approximately 33%. And today, we have approximately $24 million of cash on hand, some of which we expect to use for payment of (technical difficulty) dividend late this week, and no amounts outstanding under our $550 million credit facility.

In closing, while the (technical difficulty) conservatively capitalized company with (technical difficulty) and secured cash flow stream, we may expect will allow us to pay a consistent dividend. In addition to our statement base, we remain optimistic about the company's growth outlook for 2012. Operator, we're ready to load it up for questions.

(Operator Instructions)

Our first question is from the line of Dave Rodgers. Please go ahead.

Good afternoon, guys. Just a follow up, David, on your comments regarding acquisitions and the pace of activity improving in the first quarter. (technical difficulty) to happen every year, you know, how comfortable are you that you're going to be able to put the money to work during the first half of the year, this year are fairly typically from what you've seen. And do you see added competition of weight for the assets that you're looking for?

I guess there's a couple of questions there. Competition has not really gotten any more fierce during the fourth quarter or during the first quarter so forth so far this year. In fact, I think we're starting to see at least one fund that has become fully invested, and is not competing with us on some of the GSA acquisition opportunities.

In terms of the pipeline, we have, you know, rebuilt the acquisition pipeline during the first quarter. We have a number of opportunities that we are currently in the midst of underlining and expect to be presenting to investment committee, and submitting LOIs on. And I would fully suspect that we have specific acquisitions to talk about when we have our first quarter earnings call in --

And with regard to your comments about retention of the government tenants, was the comment there regarding specifically the SDI in Phoenix or the others you could talk about? Or was it contained to that particularly lease as just weighing on the renewal rate this year?

When suddenly, the FBI in Phoenix is the largest non renewal. We've also talked about the CDC in Atlanta that gave us a termination notice back in the third quarter. And then, we've also got the DEA in Tucson that outgrew our space in Tucson and will be leaving during this quarter. That was -- I think that's less than 1% of revenue.

It's about 200 basis points.

Yes, yes. The big building, unfortunately, they just needed more space. And we couldn't provide it for them.

Last question for me, Mark, to you, I think you talked about the retroactive rent adjustment. I think you said $610,000 in the quarter. Would that be straight lined going forward or do we see an incremental bump down into the first quarter to a normalized run rate?

Yes, in the first quarter, we'll go back to a normalized run rate. That represented leases that have been in holdover like for 211 months, some of them. So that was a retroactive catch up on the renewals are at higher rates or the way government leases work, get to the back and retroactively borrow that increase in rent, which we did during the fourth quarter. So that's -- the 610 should be for those one-time item and, you know, not including your numbers going forward.

(technical difficulty) really like 90%? Obviously, some of it would carry into the future.

Well, the 610 is for that particular lease. So the recurring increase for those particular leases are an annual basis as $560,000 on an annual basis but the $610,000 is strictly incremental piece though it's the past month.

Okay, thank you.

Yes.

Our next question is from the line of [Chris Caton]. Please go ahead.

Hey, Mark can you talk about the debt strategy for the company? I believe you're still floating on the term loan here. And in the past, we've talked about unsecured offerings. So if you could just shed some light on what you were thinking going forward?

Yes, on the term loan, correct, we have not introduced any type of contract with fixed rate on that. I think a couple reasons, one, our view on where interest rates are bombing in the near term. We don't see a significant uptick in short term rates and secondly we have a lot of flexibility into that term loan in that we can prepay it any time without penalty.

So at any time, when our view on where interest rates are going, changes will have the ability to pay off the term loan and insurance system type of fixed rate financing if we choose to do so.

A follow question on that is where do you see, you know, the unsecured bond markets, or you know, it you were doing an all year offering?

You know, that's a tough question in the sense that [Maryland] has been offered (technical difficulty) offering recently. In the REIT space, at least. And, you know, there's some question of what type of (technical difficulty) premium you would have to pay. But it is our understanding that there is a transaction in the market today for a REIT that is non marketable issue for that -- there are companies. So we're going to be watching that closely to kind of handle, where that goes, and what type of spread they carry over Treasuries. But I will think that, you know, we're storing that 576%, I would hope on ten year. But they're fixing debts at this point.

Thanks. And then, the last question I have, on the tenant improvements, leasing costs, and capital improvements page in the supplemental, you have recognized $2.2 million, $2.3 million of development, redevelopment, and other activity. Is that -- can you shed a little light on how you kind of segment your capital costs, and talk about how those piece of your capital expenditures may train going forward?

Yes, a lot of what -- a lot of the recent -- what we're classifying as development and redevelopment represents (technical difficulty) for either deferred maintenance or replacements, such as rents as HVAC units, but we -- our best buy is part of our diligence on acquisitions and either receive the GAAP reduction in the purchase press, or consider to make those improvements in negotiating a price for the -- pricing for that transactions. That's the majority of what's in that $2.3 million that we expended in the fourth quarter. And (technical difficulty) you know, I would expect that, you know, in 2011, you know, it -- I wouldn't be surprised if that amount, you know, were twice as high next year, but we've got -- unlike burdening through this and recent (technical difficulty), we have a little bit of discretion in terms of when we do some of this work. So some of it, you know, we may push out.

Thank you.

Yes.

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

Yes, good afternoon. Just in regards to 2012, and the lease maturity schedule, particularly about your expectations for (technical difficulty)?

(technical difficulty) have continues to proceed as we would expect at this point. We are having conversations with the agencies with the GSA, primarily through our broker on, you know, the space that each agency needs, the rental rates, and the duration of the maturity, and the capital where it coincide with that. So, you know, I would say things are proceeding, Omotayo. You know, as you know, nothing happens rapidly with the US government. And these are both prospectus level renewals. So they will need to go through both the House and the Senate for approval, before they're done. So like Fresno, we will take this to the goal line as the clock expires so to speak. And so, you know --

Is there any risk of this dragging on for a while, so you don't get the expected rent dumped immediately. And then the second thing is, you know, (technical difficulty) kind of talks about your in place market rents versus the -- I mean, in place rent versus the market rents of the last delta. Are you expecting to capture that large delta on a going forward basis?

There certainly isn't an expectation that we don't get this done on a timely basis, although you have to remember we're in an election year. Congress has been very slow to decision on prospectus level leases over the last 18 months. And that's completely outside our control. So what I wouldn't -- again, I don't expect cannot get this lease -- these leases renewed prior to the majority day. It's certainly feasible since they could drag on. As an example, you know, we had Indiana Avenue in holdover for ten months before we got Congress to sign off on those prospectus level renewals.

As it relates to the increase in rental rates, we certain expect that we're going to have a meaningful increase in rents for that building. I think a lot of what it's going to depend on duration and capital expenditures that we might make on the tenant's behalf. But certainly, feasible to think that we're going to get, you know, $5 to $10 increase in our rents at that property.

And the exact expiration date for the (technical difficulty) run again?

I think they're both -- I think their October and November of this year.

September, October.

September, October of this year.

Great. And then just one other question, thanks for indulging me, I mean, of late, you guys have definitely increased your exposure to state governments, well, a lot of the deals you've done recently. Just curious where that's something strategic that you were doing, or that just happened to be what's kind of coming up in the acquisition pipeline.

It is not strategic Omotayo. It is what has mostly to do with what's been available to a client. And also, we have in many cases let competition for state government leased properties, because a lot of the funds that we can compete with on GSA lease properties don't have the ability to buy buildings leased to (technical difficulty). So we tend to think we're going to get better returns on those properties, but mostly, just what's been available in the market to acquire.

Got it, okay. That's helpful. Thank you.

Yes.

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

Thanks, good afternoon. The question, so how much of what your borrowing costs are at, you know, call it 2% can all in now on a variable rate is impacting what you guys are willing to pay on a GAAP rate basis for the acquisitions that you're looking at?

I would say personally, none of that, Brendan. I mean, when we do our acquisition model, we are still benchmarking against our long term cost of capital. So we're, you know, we're looking at our equity yields. And we're looking at what we think our long term cost of bet is, which I think today, we have in the model, it may be 6.5%. I think -- it might be 6%, but it's somewhere between 6.5% and 6%. And we're assuming 40% debt, 60% equity in our models. So it helps our earnings, yes, but we're certainly not making the acquisition decisions based upon the current loan interest rate environment bonds.

So I mean, I guess I think Mark's response to Chris' question earlier, maybe I just didn't follow it as clearly I could have, but is the intention that you're still planning on fixing your term loan in a long term 10 year piece of debt that, you know, is probably somewhere around 5.5 to 6%, is that what we should expect over the next couple of years, assuming that the debt markets normalize?

I think you should absolutely expect that we will take out the unsecured term loan and your unsecured senior notes at some time. Whether that happens in the next six months or in the next 24 months is to be seen, but I think absolutely we'll take that out at some point in the future.

Are you looking at then your dividend level on a long term cost of capital basis, assuming that you've got this, that your debt goes back to a normalized level on a long term basis then you're setting your dividend relative to that level of cash flow, as opposed to the current level of cash flow, which is arguably inflated, given low interest rate floating rate debt?

We would never increase the dividend such that we couldn't pay it with more normalized interest expense.

Okay, all right, that's helpful. Thank you. And second question, in the portfolio, I guess when I think about it, if I'm running these numbers correctly, if you guys do 75% of your 2012 expirations, you renew, 25% moved out, it's about 400 basis points impact to your overall occupancy, how much -- if you don't lease anything else, that would put you in the low 90s, I think around 91%. How much lease up do you expect to do on the vacant part of the portfolio this year? And where are you guys kind of think you can be at the end of the year from an occupancy standpoint. And then, longer term, where do you think your portfolio should be on a mid cycle basis occupancy wise?

It is very difficult to predict how much of the vacant space we're going to lease up during 2012. It clearly is a huge focus for the company right now, Brendan. Leasing generally is a huge focus of the company right now, given that 2012 is our largest lease maturity year over the next, what, probably three, five years at least. I think that it's highly probable that we will lease up a decent amount of the vacant space that we acquired, whether it be, you know, most of the year, whether it be in Minneapolis or San Diego. All those are focuses for us.

I'm reluctant to tell you a number, because, you know, all of our lease assumptions are speculative. We don't have any one specifically right now that we are in deep negotiations with in a -- prefer a large block of space. So it's going to be incremental.

As it relates to our long term occupancy levels, I think you will continue to see us buy buildings that are highly occupied. And you're not likely to see us buy buildings that are 95% to 100% occupied, when they 80% to 85% occupied.

I also think that you will see long term, we will do better than 75% renewal of our lease maturities as they come up. So my expectation would be that a long term occupancy for this company is about 91%. And it probably is between, you know, 92 and 95%. But I definitely think it's above 91%.

Okay, that's helpful. And then, just last one, the CDC, I know you guys got, you know, notice on the movement for the holdover rent, I think for late last year's expiration. Move out sometime during '12. The expirations that I think there are some -- I forgot if it's 2013, '14 and '15 or '14, '15, and '16. Has there been any indication on those more forward expirations from the CDC? Do you have any sense of their intention?

We don't have anything positive or negative to report necessarily on the upcoming CDC lease maturities. So they're not telegraphing either positive or negatively what their intents are at this point.

Okay, all right. Fair enough, thanks.

We have a question on the line of [Dee Zhang] with Bank of America, Merrill Lynch. Please go ahead.

Hey, (technical difficulty). So just (technical difficulty) discussion, so if you think about the (technical difficulty) you were talking about, what does that mean for same store occupancy, as we go through the quarters of 2012?

We expect same store occupancy's going to decline. I think you will see -- I think it's to some extent our move outs are kind of front end loaded for the year. So my guess is you're -- and I haven't ran a map on this, Jamie, but my guess is same store is going to get to the kind of 92%, 91% of equipment?

Yes, we have about 3% of the 5% occurring in the first quarter. So and those are all behind the same store basically, but off the same store property, so.

I know you're saying you'd lose another 2% throughout the year?

Yes. Well, (technical difficulty) David was talking about revenues in the prior percent. We're talking about occupancy now, the total occupancy is about 5% of revenues equates to about 3.9% of occupancy.

David, is that at 90 basis points?

No.

Okay, and then sorry to rehash it, but in terms of back (technical difficulty) in 2012, you're confident you'll get anything better at this point or like how would you characterize discretions?

I don't -- you know, we're seeing markets firming up all around the country. We certainly have budgeted that we're going to backfill some of this space throughout the year. And I think we've got deepened discussions going on, but you know, it's a process. And it takes time, particularly when you're talking to government tenants. So you know, I think you have to stay tuned and just see how things proceed.

Okay, and then, so when you look past 20 Mass Ave and also you talked about Fresno and then talk about 20 Mass. Ave., where are the next couple big leases that we're focus on on these (technical difficulty) in terms of big expirations coming up?

Yes. Well, you know, the other larger renewal that we have during 2012 is the National Business Center, which is three buildings that we have in [Lakewood], Colorado. Two of those are -- two of those buildings are prospectus level leases. And they've been kind of helped in Congress for some time. And we're waiting for final approval. We have negotiated the business deal. And we're just waiting for Congress to sign off on that. So that's probably the next of the --

Yes, correct. Those are about -- those three buildings serve about 2.4% of the revenue. After that, the next big (technical difficulty) would be the FDA (technical difficulty), which is about 1.6%.

But you know, we've gone to 2013, we normally have one lease that's more than 1% of revenue. So our portfolio gets approved granular. After that, 2014, we have one lease that is more than 1% of revenue. And then, you go all the way out to 2015 before you get something that's, you know, about 4.5% of revenue for the building we own in College Park, Maryland. So, you know, we don't have a little lumpy portfolio, other than Mass. Avenue and the (technical difficulty), which I think is good.

Okay. And then if you could (technical difficulty) what are you thinking, like the current business plan, is that up or down in rent?

We have a quite (technical difficulty) rent, assuming that it gets approved as we expect it gets approved.

Okay. And then, the Rockville?

Rockville, the FDA will be a (technical difficulty), you know, when we backfill the Henry M. Jackson space, we expect that'll be a roll down in rent over what Henry Jackson was paying, but the FDA is -- you have a couple percentage point loss.

Okay. And that was included in expected vacancy, right? Those are expected to be new?

That is correct.

Okay. All right, thank you

Yes.

Our last question is from the line Dan Donlan with Janney Capital. Please go ahead.

Thank you. David, just real quick on the acquisitions you made in the quarter, what are the exact dates of those acquisitions?

Great question. I think the impact in Indianapolis, Indiana was the first week of April.

[Vitac] was on the 14th of October. And Salem was on December 20th.

Okay. And then, how much did -- how much NOI did the Henry M. Jackson space contribute to fourth quarter?

I don't have the NOI, but I can tell you it was (technical difficulty). They moved out October 1 they vacated. And the impact on financial income was $575,000 in the quarter.

Okay. Was anybody else that moved out that, you know, we need to, you know, take away from your number there in the fourth quarter?

Not in Q4, no.

Okay.

That was a majority of the (technical difficulty).

Okay. And then, when does the CDC then -- when do they -- the space that they said they're going to give back, when does that come --

Yes, let me give you the first quarter's, the CDC and (technical difficulty).

Okay.

So that's full impact in the quarter. DEA is expected to gain in February. And the FBI committee on March.

Okay, and how much was the CDC of middle income?

2.5%.

Okay. And then, as you're looking at your acquisition strategy going forward, you know, I guess your -- you said your debt to gross assets is in the low 30s. You know, how high are you willing to take that, I think, you've said 40% was as high as you'd want to go. Is that still how you guys were thinking about your leverage going forward?

I think we definitely believe our long term normalized leverage is between 30% and 40%. Doesn't mean that we wouldn't be willing to take it above 40% for some time period for the acquisition opportunity. We need an expectation and we wrote it back down.

But clearly, long term plan is between 30% and 40%.

Okay. And then, as you guys are building out your pipeline, how do you think about potential equity raises? So once you kind of figure out what you think you can win, is that when you start to potentially think about equity? Or is this something that maybe, you know, comes after that? Or how does -- how are you thinking about using equity?

You know, we have -- come against the luxury of time with acquisitions, because no matter how hard you try, it typically from the time you have an accepted LOI to the time you close is generally going to be 60 to 90 days at the quickest. So, you know, you have time to plan for equities. But, you know, we don't have any plans for equity as we sit here today.

Yes, and we'll have significant capacity with nothing else in the revolver, you know, if we do need to raise equity, you know, we're going to raise it when we think it makes sense to raise it based on both markets.

Okay, you know, that makes sense. All right, that's it for me. Thank you.

Thank you.

And now, I'd like to turn the conference back to our host, David Blackman for closing remarks. Please go ahead.

Thank you, operator. And thank everyone for joining the call. We will talk to you on our next quarter call, unless you have questions earlier. Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T teleconference service. You may now disconnect.