Office Properties Income Trust (OPI) 2012 Q4 法說會逐字稿

Good day, and welcome to the Government Properties Income Trust fourth-quarter and year-end 2012 financial results conference call. This call is being recorded. At this time for opening remarks and introductions I'd 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 and retransmission of today's conference call is strictly prohibited without the prior written consent of the Company.

Before beginning 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, February 20, 2013.

The Company undertakes no obligation to revise or publicly release the results of any revisions of 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 FAD are available in our supplemental operating and financial data package found on our website at www.govriet.com.

Actual results may differ materially from any projected forward-looking statements. Additional information concerning factors that could cause those differences is contained in our filings with the SEC. Investors are cautioned not to place undue reliance upon any forward-looking statements. And now I'd like to turn the call over to David Blackman.

Thank you, Tim. Government Properties Income Trust had its most challenging year as a public company in 2012 and I'm proud how our team rose to the occasion to execute a solid performance. We began the year with 19.9% of annualized rent subject to lease expiration.

And despite the sluggish economy, the federal government exploring ways to reduce its real estate footprint, state municipal governments reducing work forces and the inability of our federal government to approve a budget, find a constructive solution to reducing the federal deficit, deal with the debt ceiling or eliminate sequestration we entered into new and renewal leases for 1.2 million square feet with a weighted average roll up in rent of 9.3%.

We increased the weighted average remaining lease term from 4.9 years to 5.5 years. We continue to diversify the Company by acquiring 13 properties containing 1.3 million square feet for $214 million. We maintained a leverage neutral capital structure by raising $167 million in net proceeds through the sale of 7.5 million common shares. And we increased our annual distribution rate by $0.04 per share.

Now let's review GOV's results from the fourth quarter of 2012. For the quarter ended December 31, 2012 we are reporting Normalized FFO of $28.1 million or $0.53 per share compared to $26.1 million or $0.56 per share for the same period in 2011. Our decrease in normalized FFO per share is primarily the result of a 250 basis point decline in occupancy which primarily occurred during the first half of 2012 and our increase in shares outstanding during the fourth quarter.

Since October 1 we have acquired two properties for an aggregate purchase price of $33 million and entered into new and renewal leases for 637,000 square feet with a weighted average increase in rent of 16.8%. We also sold 7.5 million common shares in a public offering raising $167 million in net proceeds to reduce outstandings under our unsecured revolving credit facility. And in January we declared a $0.43 per share distribution.

GOV's portfolio statistics and balance sheet remain exceptionally strong. At year end our 84 properties, which contain 10.2 million square feet, were 92.5% leased with a weighted average remaining lease term of 5.5 years. The US government remains our largest tenant and, combined with leases to 10 state government tenants and the United Nations, accounts for 93% of our annualized rent.

We had $493 million of debt outstanding at year end which represented a conservative 32% of our total book capitalization and EBITDA covered interest expense 7.6 times.

Turning to leasing activity -- during the fourth quarter GOV executed 13 leases for 637,000 square feet for a weighted average lease term of 4.6 years. We had a modest 8,000 square feet of negative absorption during the quarter all associated with non-government tenants. Our commitments for leasing capital during the quarter were $3.3 million or $1.15 per square foot per lease year.

607,000 square feet of our leasing activity was with two federal government tenants and one state government tenant. This includes the renewal of the US Citizenship & Immigration Services at 20 Massachusetts Avenue for 214,000 square feet for a four-year term, a 38% roll up in rent and a lease commission as our only capital obligation.

USCIS desires for 20 Mass. Ave. to become its headquarters and is working with our other tenant at the property, the Department of Justice, to occupy 100% of the building. We are also under letter of intent with DOJ for a short-term renewal to accomplish this goal. On average our change in annualized rents for government tenants during the quarter was up 18% and for nongovernment tenants was down 4.8% for an annualized increase in rents for the quarter of 16.8%.

Prospective leasing activity for our vacant space across the portfolio remains strong. We expect the FBI to vacate our property in June to move to its new 250,000 square-foot campus but otherwise expect continued high tenant retention in 2013. We also are having a dialogue with prospective tenants to fill more than 350,000 square feet of vacant space at our properties including a full building user for our 125,000 square-foot building in Atlanta, Georgia.

In addition to our leasing momentum, we are also having success with our capital recycling program. Since October 1 we have executed an agreement to sell our 31,000 square-foot empty building in Tucson and have executed an agreement to sell our 186,000 square-foot property in Oklahoma City. Proceeds from these two sales will be approximately $18.5 million and will be used to repay outstanding debt or fund future acquisitions.

Turning to acquisitions -- for the full year we acquired 13 properties containing 1.3 million square feet for an aggregate purchase price of $214 million excluding acquisition costs. These 13 properties were acquired at an average cost per square foot of $169, an average going in cap rate of 8.2% were all 100% leased and had an average remaining lease term of 10 years.

Since October 1 we acquired two properties containing 248,000 square feet for an aggregate purchase price of $33 million excluding acquisition costs. These two properties were acquired at an average cost per square foot of $141, had a weighted average remaining lease term of nine years, are 100% leased and had a weighted average cap rate of 9%.

In November we acquired an office property in Windsor Mill, Maryland containing 80,000 square feet. The property is 100% leased to two tenants of which 97% is leased to the US government and occupied by the Centers for Medicare and Medicaid. The purchase price was $14.5 million, the going in cap rate was 9.4% and the average remaining lease term was 8.3 years.

In December we acquired an office property in Florence, Kentucky containing 168,000 square feet. The property is 100% leased to the US government and occupied by the Internal Revenue Service. The purchase price was $18.5 million, the going in cap rate was 8.1% and the average remaining lease term was 9.5 years.

Consistent with the last three years the acquisition pipeline at year-end was weak. Also consistent with the last three years acquisition momentum has improved during the first quarter such that we remain optimistic in our ability to deploy accretive growth capital in 2013 that will support our business strategy in providing a safe and predictable distribution to shareholders from our stable revenue.

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 2012 fourth quarter. Because of our acquisition activity we once again experienced quarter-over-quarter increases in rental income and property net operating income. At the end of 2012 we owned 84 properties with 10.2 million square feet, this compares to 71 properties with 9 million square feet at the end of 2011.

For the 2012 fourth quarter GOV's rental income increased $4.5 million or 9% to $56.3 million and property net operating income increased $2.6 million or 8% to $35.3 million, both compared to the 2011 fourth quarter. At December 31 our properties were 92.5% leased and our consolidated NOI margin was 62.7% in the 2012 fourth quarter.

Turning to our same-store operating results, at year-end our 67 same store properties were 91.9% leased, which is unchanged from the end of the third quarter but down 3.4 percentage points from the prior year end. For the 2012 fourth quarter same-store rental income declined $2 million or 4.2% compared to the 2011 fourth quarter. And net operating income was $1.6 million or 5.3% lower.

2012 same-store operating expenses declined $406,000 or 2.2% from the 2011 quarter and same-store NOI margin was down 70 basis points from the prior year quarter to 62.2%. GOV's quarter-over-quarter same-store operating results continued to be negatively affected by the expiration of our leases during the first quarter of 2012 with the CDC in Atlanta, the DEA in Tucson and the FBI in Phoenix.

In addition, the 2011 fourth-quarter results included $610,000 of nonrecurring retroactive rent increases resulting from the renewal of a tenant that had been in holdover. Together these items accounted for a $2.3 million quarter-over-quarter decline in rental income and a $2 million decline in net operating income. Without these items same-store revenues and NOI would have increased.

Turning back to our consolidated results, adjusted EBITDA in the fourth quarter of 2012 was $32.4 million compared to $29.5 million in the 2011 fourth quarter, a quarter-over-quarter increase of 10%. Our EBITDA to fixed charges ratio remains very strong at 7.6 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 $28.1 million or $0.53 per share compared to Normalized FFO of $26.1 million or $0.56 per share for the 2011 fourth quarter, a 5% decrease in Normalized FFO per share. This decrease was driven largely by the decline in NOI at certain of our same-store properties discussed earlier. During the quarter we spent $5.4 million on tenant improvements and leasing costs and $5.2 million for improvements to our properties.

Turning to our financing activities and balance sheet -- in October we sold 7.5 million common shares raising net proceeds of approximately $167 million that we used to repay amounts outstanding on our $550 million revolving credit facility. At year-end we had $493 million of debt outstanding including $50 million outstanding under our revolving credit facility. And our debt to total book capitalization was approximately 32%.

Our balance sheet is well-positioned to entering 2013 with approximately $200 million of acquisition capacity before our debt to total book capitalization would approach 40%.

In closing, GOV remains a conservatively capitalized company with a 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 opportunities for further growth in 2013. Operator, we are ready to open it up for questions.

(Operator Instructions). Mitch Germain, JMP.

David, can you shed some light as to the seasonality of the investment pipeline? And as you mentioned, 4Q a little slower while other sectors clearly see 4Q as seeing deal flow accelerate. So I'm just curious as to why that does happen in the fourth quarter.

Yes, I don't know that I have a great answer for that, Mitch. I mean we have kind of the same pressures that other property sectors would have to get deals closed in the fourth quarter. And generally we are trying to get deals closed in the fourth quarter.

There aren't as many acquisition opportunities in this sector. And for one reason or another that I don't necessarily have an explanation for it tends to fall off at year-end and then builds again usually in late January and early February. But I can't give you a specific reason as to why we have that seasonality, it just kind of is.

And with regards to the pipeline today as it sits, is it -- I mean kind of around similar levels as you saw a year ago? Is it higher? Is it lower?

I think our acquisition pipeline is very consistent with how we began 2012 and leads me to believe that we should have acquisition opportunities during the year very consistent with how we performed during 2012.

Are you still seeing competition from [PE Capital] or has some of the fund raising there dried up a bit?

We are seeing competition. And I would say the biggest change in the acquisition market generally is there is more debt capital available in the market today. And because financial institutions are trying to grow their portfolios it has gotten more competitive. So the debt capital is less expensive and slightly more aggressive in underwriting parameters.

Got you. And just remind me in the Oklahoma City property, was that part of -- I know it wasn't the IPO, but was that part of one of the Commonwealth transactions? And what is spurring the decision to sell?

It was part of our -- I guess the acquisitions that we did from Commonwealth in 2010. We are frankly being somewhat optimistic or opportunistic with that asset. There is someone that seems to be very interested in owning that property. They put a very compelling price on the market and we don't have other properties in Oklahoma City across the RMR franchise.

So there really aren't a lot of synergies for us from a management perspective. And it's unclear as to what the IRS and other tenants in that building are going to be long-term. So we felt like it was a good opportunity to get that capital back and invest it into another asset.

Thank you.

Mitch (sic) Carroll, RBC Capital.

With regard to your capital recycling plan, can you kind of give us a sense of the size and timing of transactions that we should model in?

Sure. We took a very detailed analysis of our entire portfolio at year-end. We tried to identify properties where we believed we've either maximized value or think that we may have potential problems in the future. Things like keeping the tenant is going to require more capital than we may get in rent growth such that that additional capital may not be accretive.

We identified the two properties that we have under agreement for immediate sale, we identified a handful of other properties under a watch list that we will continue to monitor and potentially be opportunistic with throughout the year.

At this point we don't have any other properties that we are actively marketing for sale. But it's not to say we won't have one or two other properties during the year that we may become more active with.

And then with the higher CapEx that was in the quarter, was that due -- what was that related to? Was it just improvements in the properties? Is it trying to create some of the green initiatives to keep the government tenants to stay?

This is Mark, Mike. I think the first point I'd make is if you look at our capital spend historically it is really bunched in Q3 and Q4. In fact I think if you look at the past three years over 75% of our BI spend takes place in Q3 and Q4 with the largest piece being in Q4, so that is part of the driver.

The other driver is our leasing activity. As David mentioned in his comments, we entered into leases for about 1.2 million square feet of space this year and obviously there is capital commitments that we have made in connection with those new leases. Some of that spend took place in the latter part of 2012 and some of it is going to carry over into the first half of 2013.

And then are there any leases right now currently in holdover?

Yes, we have a handful in holdover. I mean obviously the biggest lease in holdover is the IRS in Oklahoma City, that lease expired in -- at the end of October. And because we elected to sell the asset we've specifically not tried to negotiate a renewal.

And the DOJ is still on holdover too?

DOJ is in holdover although we've signed a letter of intent for renewal.

Yes, and then I think the other one that has been in holdover forever is Causeway Street in Boston, the Veterans Affairs.

Yes.

And then for the DOJ was that cash -- or was that lease spread similar to the one you signed in the fourth quarter?

Wasn't quite as aggressive and we didn't necessarily feel like we had to get as aggressive with that because we know they are negotiating with USCIS to vacate the property so that US Citizenship can take the whole building.

Okay. Thanks, guys.

Tayo Okusanya, Jefferies.

Just a couple of questions. Could we get any update in regards to just what you are seeing out there in lease up of the vacated space from 1Q 2012? It is kind of over a year now and we haven't had any activity in any of that space.

Well, I guess what we had in the first quarter of 2012 was the FBI in Phoenix. That is a pretty weak market, continues to have above 20% vacancy in the market generally. We had a handful of prospects at the property and for one reason or another have elected to not move forward with leasing at that building. We continue to actively market that property.

The other building that we lost a tenant for in the first quarter was Tucson, which we've obviously elected to sell and have under agreement right now to sell.

The other vacant building we have is the 125,000 square-foot property in Atlanta, Georgia that the CDC exited in the first quarter. And we have pretty active negotiations with a tenant to take 100% of that space. So I feel pretty good about that.

To talk about other activity, for example, we lost a law firm in Capitol Place, which is a property in Sacramento, California that is catty corner across from (technical difficulty) state capitol. They exited in the fourth quarter of 2012 and we are pretty far along with negotiations with the California Department of Finance to take that space.

We also acquired a property in Salem, Oregon during 2012 that had some vacant space that we didn't have a lot of -- we didn't underwrite that we would ever lease that space because it was interior space and we knew the only way we would lease it is if the government tenant in there expanded.

We have active negotiations with them for leasing 36,000 square feet in that building. So generally I think the activity across the country is picking up. And we are optimistic that we are going to have some organic growth during the year from leasing activity.

That's helpful. And then just mark to market on the quarter, the 16%, I'm assuming a meaningful amount of that has to do with re-leasing of Mass. Ave. If you were to exclude Mass. Ave. from that number what is kind of like the mark to market on everything else?

Well, if you look at our government tenants, Mass. Ave. was a 35% plus or minus increase in rent. The US Postal Service was our next -- was really our largest lease, that was 322,000 square feet and that was down 14.6%. That was a building that we acquired in 2009 at a 12% plus cap rate, so we knew when we bought that building that it was an above market lease. And I think we have been relatively transparent that we expected that rent to roll down with the renewal that we executed there.

The biggest roll down we had with our government tenants was the state of South Carolina Department of Labor, Licensing and Regulation, that was almost a 35% roll down in rent, which was actually good news because we expected that tenant to vacate the property.

That was a tenant that we talked about where the state of South Carolina was trying to consolidate agencies into owned real estate, they had given us notice that they were going to vacate, realized that they didn't have adequate acceptable space moving into and came back to us to renew.

So we ended up with a 10-year renewal there, when in fact we thought that space was going vacant. Columbia is a difficult leasing market, so keeping them in the building even with a roll down was very positive.

Got it, that's helpful. And so when I just kind of think about your lease expirations in 2013 what kind of mark to market should we be associating with that space?

We think that we are up modestly in 2013. And it is going to be up and down. We obviously expect the Department of Justice to roll up with their renewal at 20 Mass. Ave. We should have a slight rollup in rent with the renewal of the Department of Energy in Richland, Washington. We will probably have a roll down in rent with the state of Maryland renewal and potentially with CDC in Atlanta. So I think net-net we are probably up 1% to 5%.

Got it, okay. And then the rent coverage -- I know you guys gave some pretty good explanations about the heavy CapEx spend in third quarter and fourth quarter and why that creates lack of coverage in those two quarters.

But I guess when we kind of think about the dividend and you guys raising the dividend by $0.01 to $0.43 a quarter, is the idea really we should be thinking about the pay out over an entire year of the coverage covering for the entire year rather than just kind of focusing on a quarter-to-quarter basis if it doesn't cover in some particular quarter as in 2013?

Before I let Mark answer that question I want to go back to the leasing question. The one thing that is important to understand about 2013 for us, we only have two tenants in our 2013 lease expirations that represent more than 1% of rents. So it is a very granular leasing year for us with really other than kind of CDC and Department of Justice, no one renewal really kind of moves the needle much.

Okay, that's helpful.

Tayo, in terms of the dividend I think we look at the payout ratio over the long term, not just looking at one year. And the reason we do that is because leasing activity can be so lumpy and the cost associated with leasing activity so lumpy.

So we take a longer-term view and wouldn't have increased the dividend if we weren't comfortable that over the long-term that CAD/FAD will cover our dividend. We may -- as we did in the fourth quarter, we may experience as we burn off the remainder of these leasing commitment costs that we've made in 2013, we may experience a quarter or two where we're above that payout ratio. But over the long-term we expect the dividend to be covered.

Okay, that is helpful. Thank you very much.

Brendan Maiorana, Wells Fargo.

So, Mark, I just want to follow up on that. If I look at your leasing CapEx for the year it is -- I guess it's around $15 million between both leasing capital and building improvements, which seems like that is probably roughly a reasonable run rate for the year. Is that accurate?

A reasonable run rate going forward, is that what you're asking?

Yes, $15 million I think what you guys did this year, I think it was maybe a little more than $15 million between both leasing capital and maintenance CapEx, is that sort of a good average annual number going forward?

I think on the maintenance or what we call BI I think that was about $4.2 million. We kind of look at that on an occupied square-foot basis. We were at $0.46 a square-foot and I think we have always said that long-term we think that is going to be around $0.50 a square-foot for this portfolio.

On the leasing side I would argue that our leasing costs are higher. Remember, we came into the year with close to 20% of our portfolio rolling, entered into leases for 1.2 million square feet and made commitments of around $14 million in connection with those leases. So I would say that is a heavy leasing cost year for us.

When we go into 2014 we have less than 4% of revenue subject to lease expirations. So 2012 was a heavy TI year, 2013 will be heavier than normal but not the heaviest. And then 2014 should be pretty modest.

And to point out that while the payout ratio was above 100% in the fourth quarter, for the year 2012 it was around 92%.

Yes, I guess I mean, David, or -- I mean I agree with you guys in the sense that you sort of look at 2012 going into the year and it looks like it's a big year heading into it -- because you had a lot of roll. But unfortunately I mean there were some tenants that didn't renew.

And your total leasing volume, the 1.2 million square feet doesn't strike me as an abnormally high number on a 10 million square-foot portfolio. It strikes me as sort of average. So I mean I sort of was looking at leasing capital costs as sort of an average number. But you think those numbers are -- you think that is high in 2012 versus a normalized run rate?

Yes, we do.

Yes and I think the costs of some of these leases were higher than what we normally have incurred, also if you kind of look at things on a per square foot per year basis.

Right.

We did the lease at Ruffin Road, that was a fairly expensive lease this year. And obviously when you renew something like at Mass. Ave. with a high rental rate, pretty significant leasing commissions associated with that.

Yes. I mean it was only like $11 a square-foot, right, is that -- you guys still think that is high?

It is high historically for us.

It's high relative to other markets where we own assets. We don't have many buildings that have $47 rents.

Right.

And lease commissions based up on the rental rate times the number of years of the lease.

Sure, okay. What is your mindset now with where you stand on your term loan and your line of credit that is out there and your willingness or likelihood of doing a secured offering to take out that part of your capital stack or a portion of that part of your capital stack?

Yes, I think where we sit today we are still comfortable with the floating rate -- the amount of floating-rate debt that we have.

Is that a -- so, Mark, is that a commentary on where the market is and your view of interest rates? Or is that more of a commentary on you don't mind having that level of your capital stack as floating rate debt on a longer-term basis?

Yes, I think long-term I wouldn't be surprised if we always had some floating-rate debt as part of our capital stack. It probably wouldn't represent this large a proportion of our -- of the debt part of our capital stack. But given our views of market interest rates, it is probably higher today than it will be over the long-term for the Company.

Yes, sure. And if you guys were to issue unsecured, where do you think you could -- where would likely be a 10-year deal for GOV if it was done today?

You know, it's tough because we don't have any bonds to benchmark off of, but I think it is going to be -- would probably be in that [525] area.

Okay, that's helpful. And then, David, I apologize if I missed this, but did you say what the rough cap rate was for the Oklahoma City disposition that is pending?

We did not. And like with our acquisitions I think our strategy is to wait until the transaction closes before we talk about specific cap rates.

Yes, and I know that you mentioned you are not planning on selling anything else but something could come up. I mean what portion of your portfolio, if you look at it, is something that would be considered non-core?

It is a pretty small percentage. I mean you think about it, all of our buildings are substantially leased to government tenants which is our business strategy. Where you are going to see some potential dispositions, for example, buildings that we may have vacant at least to nongovernment tenants are going to be buildings that hit the watch list.

Buildings that we have vacant that we attempt to lease for some time and have difficulty leasing, we may consider those as well. And then there is going to be the occasional -- and I think this is occasional building where we don't like the rent versus capital costs associated with keeping that tenant in the building. But I think that is going to be kind of few and far between.

Right. If you guys -- is the tenant that you are speaking with for the former CDC space in Atlanta a government tenant or is that a private tenant?

It is a nongovernment tenant.

Would that asset be a candidate for disposition if -- considering it would be nongovernment?

It could potentially be a candidate for disposition, although we don't have any specific plans at this point to sell it. We like -- we like that location, we like the tenant that we are talking to. And so, we will just have to kind of play that out over time.

Okay. And then just last one, the CDC that has got the roll this year, I think it is -- I think they're in three different buildings in 2013. Do you expect all of them to renew?

You know, Brendan, as I have said previously, the CDC seems to be the most challenged agency that we deal with in making decisions and providing clear direction. We certainly hope to have [a renewal in] all the buildings this year, but given their lack of transparency I'm -- I challenge committing that they are going to renew in all the buildings.

Okay, just for my recollection, when the group moved out in the beginning of 2012 how much foresight did you guys have ahead of time that they were doing that? Was that a pretty quick turnaround in terms of when you knew they were going to move out and when they ultimately did?

Not only was it quick for us, but the real estate person at the CDC seemed to be a bit stunned that they were leaving that building as well.

Right. Okay, and the --.

Kind of goes back to my point that they don't seem to know amongst themselves exactly what their strategy is with their real estate footprint.

And what was the square footage that's rolling in 2013 for CDC?

65,000 square feet.

Oh, it's just 65,000 --.

Oh, CDC --.

CDC, it's about 202,000 square feet in total.

(Multiple speakers) yes, three buildings.

About 1.4% of our revenue.

Got it, okay. Thanks a lot, guys.

Jamie Feldman, Bank of America-Merrill Lynch.

I guess kind of big picture here, when you think about the discussions going on in DC over the sequester and just other potential budget cuts what do you think it means for your leasing progress and is there some point where everything really gets put on hold here? Just kind of can you give us more color on what you are thinking about the rest of the year given all the discussions going on?

Yes, that is a hard question to answer, Jamie. I would say that the biggest risk that our country has right now is the inability of our politicians to find compromise and make decisions. I think it has huge repercussions for the entire economy. And could -- has the potential of putting the economy back into a recession.

With that said we don't feel like we have any near-term risk with our portfolio because of the contractual obligations that we have, because of the way that the government is currently talking about dealing with these cuts is shortening workweeks and managing through retirement -- through attrition.

So they are still going to have an obligation to occupy space in our buildings and are still going to have a need to be in those buildings and serve the public because in most of our buildings they do have a specific need to serve the public.

I don't know that it necessarily affects renewals because of that. I think our greater challenge is kind of the desire of not only government tenants but nongovernment tenants to have more people in the same square footage that they occupy today. So I don't think that's a sequestration issue, I think that is just the general real estate -- office real estate challenge. Does that make sense?

Yes, I guess I'm just thinking in terms of if you have leases in process right now, like the DOJ, LOI at 20 Mass. Ave., leases like that, I mean is there some point where you feel like you can have an agreement going and then it is just going to be a complete standstill for a while? Or based on if there is a sequester or the different kind of moments along the path here?

Yes, I would say it is no change from what we have been operating under the last two years.

Yes.

Okay. And then when you think about --.

Congress hasn't approved a budget for a few years now. So this issue of getting leases through committee we have been living with now seems like forever. So that is just going to continue. It is going to be a -- the leasing process will be elongated because of the government. But eventually you will get to the finish line.

Okay. And then when you think about your federal government leases what is the utilization in those buildings? Are they pretty full right now or -- there is some excess capacity?

It tends to be pretty high.

Okay. All right, thank you.

Mitch Germain, JMP.

Our question was answered, thanks.

Tayo Okusanya, Jefferies. Mr. Okusanya, your line is open.

Must have answered his question.

Okay, thank you. And there are no further questions in queue, so I will turn it back to Mr. David Blackman for closing remarks.

Thank you, Operator. And thank, everyone, for joining us on our fourth-quarter conference call. We will be attending the Wells Fargo real estate conference next week and look forward to seeing some of you at the conference. Thank you.

Thank you. And that concludes our conference for today. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.