Office Properties Income Trust (OPI) 2013 Q3 法說會逐字稿

Good day and welcome to the Government Properties Income Trust third quarter 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, retransmission, and transcription of today's conference call is strictly prohibited without the 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, October 29, 2013. 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. 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.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 not to place undue reliance upon any forward-looking statements. Now I'd like to turn the call over to David Blackman.

Thank you, Tim. For the third quarter of 2013, Government Properties Income Trust is reporting normalized FFO of $27.9 million, or $0.51 per share compared to $25.6 million or $0.54 per share for the third quarter 2012. Our 9% year-over-year increase in normalized FFO is primarily the result of our accretive acquisition activity. The year-over-year reduction in normalized FFO per share is a result of our acquisition closings being behind our expected pace, having an under leveraged balance sheet for most of 2013, and a modest decline in same-store results.

Our activities since July 1st, includes the acquisition or entering agreements to acquire eight properties for $99.1 million, executing 15 new and renewal leases for approximately 245,000 square feet for a 10.6% roll up in rent, and identifying three properties containing 356,000 square feet for disposition under our capital recycling program. We also declared a $0.43 per share distribution in October.

As of September 30, GOV owned 81 properties containing 10 million square feet in continuing operations. These properties were 94.6% leased, an increase of 50 basis points from the previous quarter for a weighted average remaining lease term of 5.4 years. In aggregate, our government tenants pay approximately 94% of our rental income and the US government remains our dominant tenant.

In addition to our strong property statistics, we also exhibit strong credit statistics. Our balance sheet remained conservatively leveraged at 33.8% of total book capitalization. Our total debt to adjusted EBITDA was four times, our fixed charge coverage ratio was 7.7 times and $481 million of our $550 million unsecured revolving credit facility was available to fund acquisitions and other working capital news.

Our leasing activity has been strong and accretive to the Company. For the quarter, GOV entered 15 leases for 245,000 square feet with a weighted average lease term of 7.8 years. Our executed leases were 21,000 square feet more than our quarterly lease explorations, which combined with our acquisition activity, resulted in a 50 basis point increase in portfolio occupancy from the previous quarter, to 94.6%. Approximately 220,000 square feet, or 90%, of our leasing activity was new and renewal leases for four US government tenants and two state government tenants, that resulted in a 12.6% roll up in rents and leasing capital commitments of $5.5 million or $3.06 per square foot per lease year. We also executed nine new and renewal leases for non-government tenants for 25,000 square feet that resulted in a 7.2% roll down in rent and capital commitments of $867,000 or $6.01 per square foot per lease year.

We remain pleased with the leasing activity for our vacant space across the portfolio. In total, we have about 250,000 square feet of perspective leasing activity, which includes more than 30,000 square feet of space with executed letters of intent or where active lease negotiations are ongoing. We also executed a 75,000 square foot lease in October for our 125,000 square foot vacant building in Atlanta. The tenant is Emory University who is expected to grow into the full building within a relatively short period of time.

Now let's review our capital recycling activity. As we have discussed on previous earnings calls, GOV considers disposing of vacant properties where market conditions make the marketing period required to lease a property unacceptably long and/or where the return on invested capital required to lease a property results in an unacceptable return. During the third quarter GOV identified three properties that meet one or both of these criteria. The three properties include our two former FBI facilities in Phoenix, Arizona and San Diego, California, and a property in Falls Church, Virginia leased to the Defense Information Services Agency through July, 2014 but is unoccupied.

In aggregate these buildings contain approximately 356,000 square feet and have a net book value of $25.6 million after recording a $10.1 million asset impairment loss. These properties have been listed with brokers, are expected to be sold by mid-year 2014 and will take the number of properties sold by GOV in a 12 month period to five. Recall that we sold two properties early in 2013 for $18.5 million resulting in an $8.2 million gain on sale.

The pace of our acquisition activity is improving. Since July 1st, we acquired two properties containing 357,000 square feet for $30.8 million, excluding acquisition costs. These properties are 100% leased for a weighted average remaining lease term of 4.5 years, were acquired at an average price per square foot of $86 and a weighted average acquisition cap rate of 9.7%.

In August, we acquired a previous disclosed industrial property in Chester, Virginia containing 228,000 square feet for $12.5 million, excluding acquisition costs. The purchase price per square foot for this acquisition was $55. The acquisition cap rate was 8.3% and remaining lease term was 7.2 years. The property is 100% leased to the US government and occupied by the US Army as a logistics center.

Also in August, we acquired an office property in Bethesda, Maryland containing 129,000 square feet for $18.3 million, excluding acquisition costs. The purchase price per square foot was $142. The acquisition cap rate was 10.7% and the weighted average remaining lease term is 2.6 years. The property is 100% leased to the US government and occupied by the National Institute of Health. The property is located adjacent to NIH's headquarter campus and believed to be a permanent part of the agency space needs making a lease renewal in 2016 highly probable.

Since July 1st, GOV entered agreements to acquire six properties containing 314,000 square feet for $68.3 million, excluding acquisition costs. These properties are all 100% leased with approximately 60% of the space occupied by two state government agencies, 16% of the space is occupied by the US government, and the balance of the space is occupied by seven non-government tenants. These acquisitions remain subject to the completion of due diligence and other closing conditions so there can be no assurance we will make any of these acquisitions.

As a result of feedback from shareholders, on September 23rd we announced the restructuring of our management agreement with REIT Management and Research, or RMR, and the Company's plans to recommend the annual election of all trustees at its 2014 annual shareholders meeting. The changes to the management agreement with RMR will begin in 2014 and include the base management fee being paid on the lower of historical property cost, or GOV's total market capitalization, instead of historical property cost, and the requirement that 10% of RMR base management fee be paid in GOV shares instead of cash.

In addition, the incentive management fee paid to RMR will no longer be paid solely on growth in FFO per share, but instead based upon total shareholder returns in excess of benchmarks established by GOV's independent trustees and disclosed in GOV's annual proxy statement. The incentive management fee will be paid in GOV common shares that vest over time.

We view these changes as a positive step in further aligning Management's financial incentives with the returns of shareholders. Our business strategy of delivering shareholders a safe and predictable dividend from our stable income and our investment thesis of making selective acquisitions of buildings majority leased to government tenants remains unchanged.

As a reminder, RMR is a full service management company that provides GOV executive leadership, capital markets execution, and other business management services that include asset management, leasing, accounting, acquisition underwriting, due diligence and execution, legal, investor relations and other related services in exchange for shares in the Company and a cash fee which has historically resulted in a lower G&A cost for GOV, than the G&A costs of our peer group. Our independent trustees continue to discuss our corporate governance and we will further update you as these discussions evolve.

Finally, on October 1st, the US government entered a partial shutdown as the result of not passing a 2014 Fiscal Year budget or a continuing resolution to fund the government's ongoing operations. While the shutdown is expected to have a modest negative effect on the economy, and created tremendous uncertainty for business leaders and consumers, the shutdown did not result in a delay of our rent being paid or change any of our business agreements with the US government to occupy space in our buildings.

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

Thanks, David. First let's review our consolidated property level operating results for the 2013 third quarter. Because of our acquisition activity, we once again experienced quarter-over-quarter increases in both rental income and property net operating income. At the end of the 2013 third quarter, and excluding the three properties held for sale and included in discontinued operations, we owned 81 properties with 10 million square feet, compared to 77 properties with 9.4 million square feet at the end of the 2012 third quarter.

For the 2013 third quarter compared to 2012, GOV's rental income increased $4 million, or 7.6%, to $56.4 million and property net operating income increased $1.7 million, or 5.1%, to $34.6 million. At September 30th, our properties were 94.6% leased and our consolidated NOI margin for the 2013 third quarter was 61.4%.

Turning to our same-store operating results. At quarter end our 69 same-store properties were 93.7% leased, up 80 basis points from the prior year quarter end, and up 30 basis points from the end of the second quarter. Our 2013 third quarter same-store rental income increased by $184,000, or approximately 0.5%, compared to the 2012 third quarter. And our same-store net operating income decreased $686,000, or 2.2%, compared to the 2012 third quarter.

This quarter's revenue change was largely due to the rent roll ups resulting from the lease renewals with the Department of Justice and US Customs and Immigration Service at our Mass Avenue property in Washington DC during the fourth quarter of 2012, offset by lower straight line rents in the 2013 quarter, and the favorable impact of an unused tenant improvement allowance in the 2012 period.

Same-store operating expenses increased $870,000, or 4.6%, quarter-over-quarter with increases in real estate taxes, payroll, utilities, and property insurance costs. Despite the uptick in expense growth this quarter, on a year-to-date basis, same-store operating expenses are up only 1.2%. We currently expect year-over-year same-store expense growth in the fourth quarter to be in the range of 1% to 2%. Our same-store NOI margin in the 2013 third quarter decreased 160 basis points from the prior year quarter to 60.8%.

Turning back to our consolidated results, adjusted EBITDA in the third quarter of 2013 was $32.1 million, compared to $30.1 million in the 2012 third quarter, a quarter-over-quarter increase of 6.5%. Our EBITDA to fixed charges ratio remain very strong at 7.7 times for the quarter, and our debt to annualized EBITDA was only four times at quarter end. For the current quarter, normalized FFO was $27.9 million compared to normalized FFO of $25.6 million for the 2012 third quarter. Third quarter 2013 normalized FFO per share of $0.51, was down $0.03, or approximately 5.5%, from the 2012 third quarter. We paid a $0.43 per share dividend during the quarter and our FFO payout ratio was approximately 84%.

During the quarter we spent $4.7 million on tenant improvements and leasing costs. A substantial amount of these costs pertain to leases executed in the 2013 second quarter with the State of Oregon at our property in Salem and with the State of California at our L Street property in Sacramento. We also spent $6.3 million on improvements to our properties this quarter, including $3.7 million of costs incurred in connection with the expansion of the parking capacity at our Salem, Oregon property, and efforts to reposition our 330 South 2nd Avenue property in Minneapolis.

Turning to our balance sheet and liquidity, at quarter end, we had $510 million of debt outstanding, including $69 million outstanding on our $550 million revolver. Debt to total book capitalization was 33.8% at quarter end, and we have approximately $160 million of debt capacity to fund acquisition growth before leverage would reach 40% of book capitalization. We currently have six properties under contract to purchase for an aggregate purchase price of $68.3 million and are marketing for sale three properties that have a combined net book value of $25.6 million.

In closing, GOV's well capitalized balance sheet positions the Company to continue to be a consolidator through accretive acquisitions in the government leased real estate sector. That concludes our prepared remarks, Operator, we're ready to open it up for questions.

(Operator Instructions)

Vikram Malhotra, Morgan Stanley.

Hi guys, I'm sitting in for Vance. Wanted to touch a bit more on the expense growth. Was there any part from what you highlighted -- was there any kind of one-time expense there? And is it likely that over the next few quarters we could see similar kind of bump ups in the expense?

This is Mark. I think if you look, the largest components that impacted expenses this quarter, real estate taxes were up about 9.4% and year-to-date on a same-store basis, they're up about 7.3%. And that's really just been due to higher assessments at all our properties. The increase this quarter was a little higher because we had to true up some of our accruals this quarter due to the higher -- assessments coming in higher than we had estimated. One of the other large drivers was utilities expense, which is up about a little over 3% this quarter. And that was driven principally by higher than normal temperatures in the Northeast this quarter as well, as we experienced some rate increases in a couple of markets this quarter. And then the last item that impacted expenses in a significant way this quarter was insurance. And while insurance for the year is flat year-over-year, in the quarter it was up because in the 2012 quarter we had some credits in there. We received some retroactive premium adjustments last year due to our favorable loss experience and we didn't receive those same credits this year.

Looking forward, as I said for the year, expenses on a same-store basis are up about 1.2%. And we think the fourth quarter on a same-store basis year-over-year will be up 1% to 2%. So back to the trend that we've experienced for the year in total.

Okay, thanks. And then David, just last one, you mentioned that as part of the government shutdown there was really no impact in terms of collecting rents. Did you ever see any -- just maybe push out of some decision making on new leasing, or renewal leasing? And has that -- are those sort of discussions still in process or have they been resolved?

Well, the biggest impact I guess would be the fact that for 16 days there was nobody working. So yes there would have been a delay in the process of managing through those decisions, but I don't think it impacted the ultimate decisions. It just simply slowed it down because for 16 days, the GSA was furloughed like everybody else.

Okay, thank you.

Yes.

And our next question will come from Jamie Feldman with Bank of America.

Hi guys, this is Steven Skolnik with Jamie. I had a question on [sheer] mark-to-market for leases expiring through the end of 2014. Could you kind of walk us through that?

When we look at the next 12 months leases expiring, on a weighted average basis we think they will be flat to up 1% to 1.5%.

Okay, thank you. And I know you guys also talked about so your October lease with Emory University. Do you guys have any other known move-ins coming in in the next 12 months or any move-outs? Just any free rent periods burning off over the next year? Could you kind of walk us through that?

We tend not to have a lot of free rent in our business. As I said, we've got about 30,000 square feet of LOIs, or ongoing lease negotiations, so we would expect that we will bring those to fruition over the next several months. We've previously talked about the fact that next quarter the CDC expects to vacate Buildings 10 and 11 in Corporate Square in Atlanta. I think that's a little bit less than 70,000 square feet, less than, far less than 1% of rents. And that's the big component that we would have. I don't know Mark, are there any other?

Well, we've got the -- State of California is leaving the building in California, its probably another call it 44,000 square feet.

Which we talked about last quarter as well.

Right. So I think there's a few smaller things in there, I'd say overall about 1% of revenues and a little over 1% of square footage vacating next quarter.

Yes. For 2014 we don't really have any expected non-renewals. It's a relatively light leasing year for us, but based upon our ongoing discussions with tenants we feel pretty good about where we are right now.

Got it. So nothing really incremental from last call, in terms of that?

No, nothing incremental from last call.

Thank you.

Our next question is going to come from Yun Ku from Wells Fargo.

Great. Thank you. Just going back to 2014 a little bit looks like you have 100,000 square feet of movement by year-end 2013. But 2014, like you said, is a pretty light year and don't expect any major movement. So I know you don't give guidance but just broadly speaking how do you envision 2014 kind of occupancy coming along? Do you expect pretty significant move up in occupancy?

Well, we expect to renew tenants in place. So we really don't expect to have a decline in occupancy as a result of lease expirations. We don't have a lot of vacant space in the Company but we do have pretty good activity on the space that is vacant. And then if assuming we continue to buy buildings at 100% occupied, yes, there should be slight to modest increase in occupancy as we go to 2014.

What do you see as your structure of vacancy within your portfolio? It's already 95% leased. How high can that get, do you think?

Well, we had it 100% occupied for, what, one or two quarters. Which is certainly not something that we expect to happen again. You're always going to have some structural vacancy with tenants moving in and moving out. I would think at the margin it's 95%, 96% is a pretty good place to run. Because our tenants do need options to expand and again, you're always going to have some level of structural vacancy with tenants moving around and moving in and moving out.

Okay, that's helpful. And then just a question on your pending acquisitions. The basis for the Montgomery asset, looked a little bit high. Was wondering if you can provide a little more details regarding the tenant terms and what kind of asset it is?

Sure, well you know we don't really disclose details on pending acquisitions. We wait until they close before we give a lot of details, but what I will tell you is it's a relatively new building, it has some special purpose structure to it that we believe will continue to have the tenant remain in place well beyond its lease expiration, and its also got some security features that would add to the cost. It's also -- it's a relatively small building too. And smaller buildings tend to have a higher cost per square foot. So that would be the level of detail we can give you at this point.

Okay. Got it. And just one last modeling question. Can you guys provide the cap rate on the three assets that you guys are going to sell?

Well, I mean, two of them are vacant and the other one the lease expires in July 2014. So I don't know that cap rate is really relevant on those buildings. I mean obviously, the vacant buildings the cap rate is going to be infinite.

Got it. Okay. That makes sense. Thank you.

And our next question will come from Tayo Okusanya with Jefferies. Please go ahead.

Yes, good afternoon, everyone. David, just a quick question. You talked a little bit about the restructuring of the management contract with RMR and some of the corporate governance changes that could happen very soon. Just curious, based on where things are with commonwealth and where things ultimately could end up with that arbitration, whether that could serve as a catalyst for even further corporate governance changes? And what could some of those additional changes be?

That's a good question, Tayo. As I mentioned in my prepared remarks, the independent trustees are continuing to look at our corporate governance. But it really is in the hands of the independent trustees. And they're looking at things like expanding the Board, creating maybe a lead independent trustee, but none of those, I can assure you, will actually happen and I'm sure there are other things that are under consideration as well. I would expect over the next 90 days or so, that we'll have more to talk about. But until I have specifics that the independent trustees have approved, that's really all I can say at this point.

Okay. That's helpful. And then just on the acquisition front, could you also talk a little bit about what you're seeing just in regards to cap rates for assets with the Federal versus the State tenants? And even from an acquisition perspective, where you're seeing more opportunity whether it's at the Federal level or the State level to do deals?

Yes, it's a good question and interestingly, there's not been a lot of change, really over the last six months. We're seeing more Federal leased building acquisition opportunities than State. The states tend to have a slightly higher cap rate, depending upon the age of the building and the location and who the agency occupants are. We're seeing a lot of Federal lease buildings that have had a 15 year remaining lease term, the cap rates are in the low sevens and we tend to just pass on those. We also see a handful of kind of zero cash flow opportunities that don't make sense for us. And those are deals where the sellers put a credit tenant financing on place, and so they have fully amortizing debt and really all of the cash flow from the asset goes to pay debt service. And those aren't interesting to us as well. But it's picking up, we're having a little bit better luck in terms of finding opportunities that we think fit for the investment thesis of our Company, at returns that we think are accretive to our ability to increase the dividend at some point.

That's helpful. Thanks a lot, guys.

The next question comes from Mitch Germain with JMP Securities.

Good afternoon. Are we seeing some of the more traditional buyers that you compete against slow their efforts down, in the face of some uncertainty around the budget and other issues with the government?

No, I don't think that our competitors that are active in owning Federal Government lease space get a lot -- get that concerned about the Federal budget or the Congress' inability to put a budget in place. I think people are very focused on making sure that they're buying buildings that are leased to agencies that have a higher probability of growth, than those that may receive cutbacks. And that's hard to always identify. We spend a fair amount of time with our key leasing broker, having those conversations and making sure that we think about agencies appropriately. But that's the real kind of art of the acquisitions right now, is making sure we're buying buildings leased to the right agencies.

And the cap rate on the -- I believe it was the Bethesda asset -- north of 10%, is that driven, David by the early lease term of the property? Or was that just sourced off market? Any color as to why it's so high?

It's driven by the lease term, so it's two things there. One, it's the risk of a shorter remaining lease term and our expectation that there will be some capital in 2016 when we renew them in place. But yes, I think it's definitely a high cap rate because we're taking some risk, but that building is adjacent to NIH's headquarter campus. We had good conversations with both the agency and the contracting officer prior to concluding our diligence. And based on those conversations we felt pretty comfortable that this is permanent space for NIH. And we also believe NIH is one of the right agencies to be doing business with right now.

Thanks. And just want to verify some of the leasing information you offered up -- 75 renewed, another 30 in active negotiation. And then about 1% moving out in the fourth quarter, is that the way to characterize it?

Yes, 1% of revenues, about. And then the 75,000 square foot lease that was executed in the fourth quarter that will be -- show up in fourth quarter numbers.

Oh, so it starts pretty much right away?

Yes.

Thank you, guys.

Our next question will come from Michael Carroll with RBC Capital Markets.

Thanks. What had changed in the acquisition market that got you guys more active? I know its been a pretty slow year, I guess, for the first two quarters but it picked up meaningfully this quarter.

Yes, part of it, Mike, is we've had a handful of deals that have just taken a long time to get through. And it's not from an underwriting perspective, it's from negotiating with the seller, working through the contract, and then getting some diligence done. So we've had some deals that we're talking about or we hope to talk about, where we've been looking at them for quite some time and they're having a hard time -- in fact its taken a long time to get to this point.

Should we expect volumes to pick up again in the fourth quarter and into 2014, or are we still kind of going through those slow stages?

Well, I think we'll be reasonably active as we close out the year. It's hard to tell at this point what 2014 looks like. At this point, I don't expect any real change. So it's going to depend a lot upon the types of opportunities we see and our ability to simply to work through that, from an acceptable yield perspective.

Okay. And then can you give us some additional color -- what type of assets that you want to sell within your own portfolio? And how the three assets that you currently marketing fit that bill?

Sure. Phoenix, Arizona -- the FBI building, that was a property that we've spent some time trying to lease. And it's -- Phoenix has not come back as quickly as some of the other markets around the country. And based upon the amount of time we've spent trying to lease that space, and where we think rental rates are, should we find the appropriate tenant, it just makes that uneconomical for us. So we've made the decision with the input of the Board to go ahead and move it off the books.

The Defense building in Falls Church, Virginia, the sub-market that that buildings located in has a very high vacancy rate and so we anticipate that it will take a while to lease that building. We spent some time working with GSA to try to back fill it because its been empty for awhile, because the tenant was moved to Fort Mead. And they just don't have an agency to move into the space. So again that is a situation where we think it's going to take awhile to lease that building. And we think the capital cost is going to be relatively high relative to rents.

So I mean -- that's what's going on in the third quarter. Ideally what we want to do is we want to get to the point where we have enough visibility with the tenants in our buildings so that we're identifying problems early enough that we can make a decision to sell if we want while the tenant is still in occupancy. Or to decide we're going to hold it through the end of term and release it. And I think we're pretty close to being there at this point.

Okay. And how much volume should we expect in the dispositions over time?

My gut tells me that this year's volume is relatively high in terms of number of buildings that we're going to sell. I think that typically, you're going to see maybe one to three buildings a year. We're going to, I think, at some point we may elect to harvest some returns and take some buildings where we've renewed leases but we're not there yet.

Okay. And Mark, what makes the Company so comfortable running the balance sheet with such a high level of floating rate debt? And under what scenario would you want to fix that out?

We've talked about this, I guess, on the last couple of calls. Obviously, we constantly evaluate the markets and where we think interest rates are going. And as I've said in the past, we continue to find the short end of the curve very attractive. We don't think it's going to move a whole lot in the near-term. And on the long end, we don't think that's going to move a whole lot either. I think it's probably retraced -- the 10 year probably retraced about 30-35 basis points since our last call. So we'll continue to monitor the market. At some point we may make a decision to fix.

We have recently evaluated the cost of either purchasing a cap on the term loan or swapping out the floating rate to fixed and our analysis indication on the cap, it's just very expensive insurance that we don't think we'll need. And on swapping out to fixed rate, the negative arbitrage relative to what little risk we see with interest rates -- it just doesn't make sense today. But that could change at any point. It's an ongoing evaluation. But where we sit today, we're comfortable with the floating rate debt.

Okay, thanks.

Yes.

(Operator Instructions)

Our next question will come from Yun Ku with Wells Fargo.

Great, thanks. Just a quick follow-up. In the quarter, the acquisition cost was a little bit high at $1.6 million relative to the acquisition volume. Was there something unusual there?

Yes, there was. We had an acquisition in the fourth quarter of last year, the Lawrence, Kentucky acquisition, that had a provision for contingent additional consideration, or purchase price to be paid to the seller of up to $1.8 million. The way the accounting works for that, when you acquire the asset and record it on your books you record an estimate of what you think you'll pay out in additional costs and I think we recorded about $270,000 of cost in the fourth quarter of last year, which we capitalized. The way the rules work is if you pay something more or less than that, that difference runs through the income statement. So we increased our estimate of what we'll have to pay in that -- I'll call it $970,000 increase in additional consideration ran through this quarter's income statement and it's included in acquisition costs.

Yes, so when we bought that building, Yun, our tax consultant convinced us that real estate taxes were going to go up based upon the sale. And they didn't. So we're going to have lower real estate costs, which are a good thing, but it resulted in a higher cost of that acquisition based upon a deal we negotiated with the seller.

Okay, got it. Thank you.

With no further questions, I'll turn the call back over to David Blackman for closing remarks.

Thank you for joining our third quarter conference call. We look forward to seeing some of you at NEREIT in San Francisco in November. Thank you.

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