Office Properties Income Trust (OPI) 2012 Q1 法說會逐字稿

Good day and welcome to the Government Properties Income Trust first quarter 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 are 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 or 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 with a 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, May 1, 2012. 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 of 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. The reconciliation of Normalized FFO and net income and the components to calculate AFFO, CAD or FAD, 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 in our filings with the SEC. Investors are cautioned to not place undue reliance upon any forward-looking statements. Also, I'd like to note that we found in error and our supplemental after it was posted to the website this morning. The changes made to page 17, total CapEx expenditures, changed as of 12-31-11, from $7 million to $5.8 million. The updated supplemental was posted at 10.30 a.m. EST. We're sorry for any inconvenience this may have caused. Now I'd like to turn the call over to David Blackman.

Thank you, Tim. The first quarter of 2012, Government Properties Income Trust, is reporting Normalized funds from operations of $25.2 million, or $0.54 per share, compared to $19.5 million, or $0.48 per share, for the first quarter 2011. Our12.5% growth in Normalized FFO per share is driven substantially buy our accretive acquisition activity. Since January 1, 2012, we've entered into agreements to acquire five properties for an aggregate purchase price of $61.5 million. We also closed a $350 million, five-year unsecured term loan and in April, declared a distribution of $0.42 per share. As of March 31, 2012, GOV owns 71 properties containing almost 9 million square feet. Our properties were 92% leased for a weighted average remaining lease term of 4.9 years.

The US government remains our largest tenant, and combined with eight state government tenants, and the United Nations, account for a little more than 92% of our aggregate annual rental income. In addition to our strong property statistics, our balance sheet remains conservatively leveraged at 33.4% debt-to-total-booked capitalization and EBITDA covered interest expense [7.3] times. At quarter end, our $550 million unsecured revolving credit facility was unutilized allowing 100% of the facility to be available to support the Company's acquisition activity and other working capital needs. Leasing activity was relatively light during the quarter, having entered into only seven leases for 38,000 square feet. The weighted average lease term for the seven leases was 4.4 years, and committed leasing capital was $296,000, or $1.77 per-square-foot per year.

29,000 square feet of our leasing activity was a four-year renewal with the Bureau of Land Management in Albuquerque, New Mexico, for essentially no change in rent, and $1.71 per-square-foot for lease year in committed leasing capital. The rest of our first quarter leasing activity was with non-government tenants. Perspective leasing activity for our vacant space across the portfolio has become more robust. In addition, we renewal conversations with our tenants are positive and plentiful. As a result, we remain optimistic that current dynamics with our tenants will result in a substantially high renewal-rate, and our properties for the remainder of the year.

Turning to acquisitions. Since January 1, we've entered into agreements to acquire five properties with 255,000 square feet for an aggregate contract price of $61.5 million, including the assumption of $19.2 million of mortgage debt, and excluding acquisition costs. These pending acquisitions are subject to a GOV's satisfactory completion of due-diligence in other customary closing conditions, and as such, we can provide no assurance these five properties will be acquired. In March, we entered into an agreement to acquire two office properties in Everett, Washington, containing 112,000 square feet. These properties are 100% leased to the state of Washington and occupied by seven divisions of the Department of Social and Health Services. The contract price is $20.9 million.

Also in March, we entered into an agreement to acquire an office property in Stockton, California, with 22,000 square feet. The property is 100% leased to the US government and occupied by the Department of Immigration and Custom Enforcement. The contract price is $8.2 million. In April, we entered into an agreement to acquire an office property in Albany, New York, containing 64,000 square feet. This property is 100% leased to the state of New York and occupied by the Department of Agriculture. The contract price is $8.5 million.

Finally, in April, we entered into an agreement to acquire an office property in Madison, Wisconsin, with 57,000 square feet. This property is 100% leased to the state of Wisconsin and occupied by the Department of Administration as a Data Center. The contract price is $23.9 million, including the assumption of a $19.2 million mortgage loan. We are encouraged by our acquisition momentum and remain bullish on our growth prospects for 2012. We also continue to believe our business strategy of providing a safe and predictable dividend to investors supported by stable revenue and accretive growth for acquisitions remains a viable strategy. I would now like to turn the call over to Mark Kleifges, our CFO, to provide more details on financial results.

Thanks, David. First, let's review our consolidated property level operating results for the 2012 first quarter. Because of our acquisition activity, we once again experienced significant quarter over quarter increases in rental income and property net operating income. At the end of the 2012 first quarter, we owned 71 properties, with almost 9 million square feet, compared to 58 properties with approximately 7.1 million square feet, at the end of the 2011 first quarter. For the 2012 first quarter, GOV's rental income increased $11.2 million, or 29%, to $50.5 million, and property net operating income increased $7.9 million, or 32%, to $32.2 million, compared to the 2011 first quarter. At March 31, our properties were 91.9% leased in our consolidated NOI margin percentage for the 2012 first quarter was 63.9%.

Turning to our same-store operating results, at quarter end, our 55 same-store properties were 91% leased, down 5.1 percentage points from the prior-year quarter end. This decline was due primarily to the previously disclosed expiration of our lease with the Henry M. Jackson foundation at our Rockville, Maryland property in September 2011, and the also previously disclosed first quarter 2012 expiration of our leases with the CDC in Atlanta, DEA in Tucson, and the FBI in Phoenix. Due primarily to these lease expirations, our 2012 first quarter same-store rental income decreased approximately $1 million, or 2.7%, compared to the 2011 first quarter. Despite the decline in rental income, same-store net operating income was essentially flat quarter over quarter, due in large part to the favorable impact mild winter weather had on property level operating expenses. For the 2012 first quarter, our same-store property operating expenses decreased approximately $1.1 million, or 7.6%, compared to the 2011 first quarter, due primarily to the lower utility and snow-removal cost incurred at many of our properties in the 2012 first quarter. Our same-store NOI margin in the 2012 first quarter increased 190 basis points from the prior-year quarter to 63.9%.

Turning to our consolidated results for the quarter, EBITDA in the first quarter of 2012 was $29.2 million, compared to $22.1 million in the 2011 first quarter, a quarter over quarter increase of 32%. Our EBITDA-to-fixed charges ratio remained very strong at 7.3 times for the quarter, and our debt-to-annualized EBITDA was only 3.8 times at quarter end. For the current quarter, Normalized FFO was $25.2 million, or $0.54 per share, compared to Normalized FFO of $19.5 million, or $0.48 per share, for the 2011 first quarter, a12.5% increase in Normalized FFO per share. During the quarter, we spent $426,000 on tenant improvements and leasing costs, and $599,000 on improvements to our properties.

Turning to our first-quarter financing activities, and January, we closed on a new five-year, $350 million unsecured term loan. The loan matures in January, 2017 and is pre-payable without penalty at any time. Interest on the loan is at LIBOR, plus 175 basis points. We used the net proceeds of the term loan to repay all amounts outstanding under our revolving credit facility and to fund general business activities. Turning to our balance sheet and liquidity, at quarter-end we had $445 million of debt outstanding, and our debt-to-total booked capitalization was approximately 33%. As of today, we have approximately $20 million of cash on hand, and no outstanding borrowings under our $550 million credit facility. In closing, we remain 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 2012. Operator, those are our prepared remarks. We are ready to open it up for questions.

(Operator Instructions).

Our first question comes from line of Omotayo Okusanya from Jefferies. Please go ahead.

Yes, good afternoon, everyone. Just a couple of questions, David, first of all, the recent acquisitions have been focused more at the state level than the federal government level; just wondering whether you could comment on that? Trend-wise, what you can see on both sides of the equation?

You know, I think we've hit a spot where there has been more state-leased acquisition opportunities. As I looked at our pipeline of deals that are being underwritten right now, we are probably significantly more weighted at GSA opportunities than we are at state opportunities. So, I would expect that we probably acquire more GSA deals as the year goes on which should balance out that acquisition activity.

Great, that's helpful. Then I may have missed this earlier, but did you talk a little bit about pricing of the recent deals and what cap rates are at this point?

Yes, we typically don't announce cap rates until after the transaction is closed. All I can say is that the cap rates are well within our targeted range of 8% to 9%. In fact, I think we probably have some that are above that 9% range.

Okay, that's helpful. Then the space you are getting back from some of the recent lease expiration, can you talk about prospects for those spaces?

Sure. We've got about 150,000 square feet of activity on various vacant space across the portfolio. That includes space that we acquired vacant, as well as some of the space that has gone vacant since we've owned the buildings. We've got a good prospect in Phoenix on the old FBI space. We have good prospects in Columbia, South Carolina, on some space that has become vacant through consolidation at the state level. So, we're pretty encouraged that we are going to have leasing activity that will add to, or occupy, some of our vacant space.

Great. And the last question, I'm sorry, one of the assets that you are buying, I think I believe I heard you say that one of the assets has a data center in it or is data center-related?

Yes, the state of Wisconsin has a backup data center that's a relatively new building that we have under agreement to acquire. It is on the outskirts of Madison. It is a very high-quality building. It is a long-term lease. A building that we think they will always need.

Interesting. All right. Thank you.

Yes.

If there are any additional questions at this time -- (Operator Instructions). And we do have a question from the line of Brendan Maiorana from Wells Fargo. Please go ahead.

Thanks, good afternoon guys. Question for you first with respect to the outlook for retention and leasing for the remainder of the year. If we go back to last quarter's call, I think you guys mentioned that you expected to retain roughly 75% of your 2012 expirations, which were about a 1.5 million square feet at 12/31. If we look at the move-outs this quarter, that basically would imply that out of 25% of that 1.5 million square feet was basically what appeared to move out in the first quarter.

Do you have other known pending move outs, and do you expect that occupancy will trend higher, or do think it is going to trend lower as a go throughout the year?

Brendan, we have a handful, very small amount of tenants that we think could potentially not renew between now and the end of the year. My guess is that, based upon our acquisition activity and our leasing prospects, that we'll probably actually grow occupancy as a result of leasing in acquisitions, versus have occupancy decline. But, there's probably maybe 120, 150 basis points of potential move-outs left in the remainder of the year in the existing portfolio.

Okay, but it sounds like you think you are -- well, I guess, and you said you had 150,000 square feet of pretty solid prospects for the vacancy in the portfolio, right?

That's right. You know, most of the -- substantially all of the tenants that we think are going to not remain are non-Government tenants that occupy buildings in our Government-leased -- occupied space in our Government-leased buildings.

Do you think that backfill prospects for those properties are reasonable, longer term? I guess what I'm trying to drive at, is do you sort of think this low 90%s occupancy for your portfolio is a long-term reasonable average, and this 92%, maybe 93% range, is that fair for your portfolio, and maybe the past couple of years just being significantly higher than that was more true as opposed to having low-lease expirations as the Company came public in the '09?

I honestly believe that our occupancy this year will hit a [low] point. And that it is going to be more normalized; should be in the mid-nineties.

Okay. So, next year, if I look out, I think you have close to a million square feet; I think maybe it is 960 expiring, are there any big move outs that you know of or any big leases that we should watch for with next year's expirations?

The only tenant that we have concern about, and we've talked about this before, is the FBI in San Diego. Which I believe is a 2014 lease maturity, but they have an early-termination right and they are, I believe, building a new building like the FBI in Phoenix. So I would expect that is a potential risk at some point in 2013, but nothing else in the portfolio gives us concern at this point.

Okay. That's helpful. Then David, I think we were e-mailing about the building in Fresno, the traded -- the IRS building that traded there. You guys got your lease done at the end of last year. You've got a term that's longer than that other IRS building, which I think their term is 2018. Have you guys thought about trying to monetize the facility in Fresno in any way, either by putting some form of mortgage debt on it, or perhaps contemplating a sale or JV or something in that magnitude?

We've certainly thought about the possibility of monetizing that asset. You know, it's really a tough call. Honestly, we were able to achieve a 10-year firm term leads, so it is now the longest lease maturity that the IRS has in that market. And we believe that we have the ability, because of our outsized parking and our suburban location, the ability to be the consolidator for the IRS in that market.

So I'm more inclined to think that is a good long-term hold for this Company, versus one where we think there may be concern in 10 years that the IRS no longer needs that much space. So I think you are more likely to see the IRS come out of other buildings and move into our building than you would be to have our building get down-sized.

Can you refresh my memory, how much space does the IRS have in Fresno overall?

This is a little bit of a guess, but I'm thinking they have an additional 250,000 to 500,000 square feet in Fresno. It is a big market for them.

Okay, great. And then, just last one. Are there any updates, in terms of balance sheet plants, with respect to putting more permanent, fixed-rate debt in place, in lieu of the term loan if you guys thought to pay that off?

Brendan, as you know, we can we repay the term loan at any point without penalty. So really, when and if we financed that with, say 10-year senior notes, will depend on our view of where interest rates are going, short-term rates in particular, and, as of right now, we are comfortable playing the short-term floating rate market. We don't see a big move in interest rates in the near term.

Okay. All right, thank you.

Yes.

We do have a question from the line of Dan Donlan from Janney Capital.

Thank you. David, just hoping you could maybe give us some commentary on how, if any, the GSA has changed in their behavior or their attitude in the last couple months. I know they've been under some scrutiny for different stuff out in Las Vegas, but just curious if there's been any change in tone there in the last couple months or so?

There really hasn't been for us. Our contacts at the GSA are not the high-level folks that have been displaced as a result of the Western Conference. So there's really been no change in our interaction with the GSA. The OMB has been very careful in their review of all prospectuses for the last probably 18 months to maybe 2 years, and there hasn't really been any change in that.

Things continue to be slow through the process. So really, there has been -- there's been a lot of press about the disarray of GSA, but there's really been no change in the day-to-day operations and people that we speak to.

Okay, that's very helpful. Then also, as you guys look to release some of the vacant spaces, I'm not sure if you have any buildings that are completely vacant, but would you be looking, if you do have a building that's vacant, would you be looking to potentially sell that to a user. Or if you're able to lease it up to a certain degree with private companies, would you then look to monetize that asset or how do you look upon your vacancy in certain assets?

For the vacancy, we do have a couple of buildings that are vacant. We have three empty buildings at this point. We would consider selling those buildings. We also would consider selling them on a lease basis if we lease them up to a non-Government tenant. What we want to do is generate revenue from those assets. So our first choice is to lease it, and if we are not successful leasing it to a Government tenant, we clearly would consider monetizing that asset on sale.

Okay. Then just lastly on the acquisition pace, just curious how sellers have reacted in the last couple months. Have they started to get more aggressive, in terms of divesting of assets? Have they pulled back, or what's your take there?

I think generally, I guess across the office sector, core properties continue to get very aggressive pricing, particularly in Gateway markets. As I look at GSA acquisition opportunities, if there is a lease in place that's 10 years or greater, you tend to get the lowest cap rate or the highest value for that type of asset. If it is seven years or less, it tends to be more moderate cap rate, as well do state lease transactions tend to be more moderate.

I wouldn't say that I've seen cap rate compression over the last 90 days. But you do see very aggressive cap rates for some of the core properties across the country, particularly if it is in a Gateway market and a long-term lease.

Could you maybe expand upon that further? How aggressive are the cap rates on the 10-year deals, versus the 7-year lease terms that are out there?

Yes, I would say for state lease stuff, probably high low nines. For GSA, 15-year remaining lease terms, probably seven. Maybe slightly below seven.

Okay, great. That's it for me. I appreciate it.

Yes.

At this time, there are no further questions in queue. I would like to turn the conference back over to David Blackman. Please go ahead.

Thank you for joining us on our first-quarter conference call. Mark and I will be in attendance at the Institutional NAREIT Conference in June, and hope to see many of you there. Thank you.

And ladies and gentlemen, that does conclude your conference for today.