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Q2 2010 Earnings Call Transcript

Published: 6 Aug 2010

[Operator:]

Good morning, and welcome to the Cogdell Spencer Incorporated Q210 earnings call. All participants will be in a listen-only mode. (Operator instructions). Please note this event is being recorded. I would now like to turn the conference over to Ms. Dana Crothers. Please go ahead.

[Dana Crothers:]

Thank you so much. Welcome to Cogdell Spencer’s second quarter 2010 conference call. The press release and supplemental disclosure package were distributed yesterday afternoon, as well as furnished on Form 8-K to provide access to the widest possible audience. In the supplemental disclosure package, the company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. If you did not receive a copy, these documents are available on the company’s website at www.cogdellspencer.com in the Investor Relations section. Additionally, we are hosting a live web cast of today’s call, which you can access in the same section. At this time, we would like to inform you that certain statements made during this conference call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Cogdell Spencer believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements are detailed in yesterday’s press release and from time to time in the company’s filings with the SEC. The company does not undertake a duty to update any forward-looking statements. With that, we would like to begin the call with Jim Cogdell, our Founder and Chairman of the Board. Jim?

[Jim Cogdell:]

Good morning. Welcome to our second quarter 2010 earnings call. Joining me this morning are Frank Spencer, Chuck Handy, and Scott Ransom. After our review, we will be available to answer your questions. Before we discuss the second quarter results, I want to give a status update of several ongoing projects. Last month, we completed both the HealthPartners Medical & Dental Clinics; Minnesota Clinic; and Sartell, Minnesota, a suburb of St. Cloud, and University Physicians in Grants Ferry, and Flowood, Mississippi, a suburb of Jackson. In July, we broke ground on two new projects at the Northwest region, associated with Good Samaritan Hospital in Washington State. These two projects are scheduled for completion during the second half of 2011. We are very pleased that Medical Pavilion at Howard County our Design-Build project with Johns Hopkins and Columbia, Maryland recently received Silver LEED Accreditation. Take a tour of the facility on www.cogdell.com. I like to turn the call over to Frank Spencer now to give us a detailed review of the quarter.

[Frank Spencer:]

Thanks Jim. Good morning everyone, and thank you for joining us today. Our core business remained stable with continuing improved results, and we are confident in our strategy of building the portfolio through development, recognizing NOI on new facilities immediately upon completion, typically within one year of groundbreaking. Occupancy in the portfolio was 91% for the second quarter, and tenant satisfaction and retention remained high. On our 2010 tenant satisfaction survey, we had a response rate of 83% with an overall score of 3.59 out of 4.0 with four properties receiving a perfect score. We have found profitable and creative investments to deploy capital. To summarize the quarter’s key activity, we completed 31.5 million in new development, broke ground on an additional 42 million in new build to suit projects, and acquired the $16.6 million St. Francis Outpatient Surgery Center in Greenville, South Carolina. That 72,000 square foot facility houses six outpatient operating rooms with both inpatient and outpatient radiology. The property is 100% leased by St. Francis Hospital, a subsidiary of Bon Secours Health System. We developed the property, and have managed it since its opening in 2001. This acquisition was an off-market deal facilitated by our long-term relationship with Bon Secours and will result in outstanding return for our shareholders. The Northwest region projects that Jim mentioned, Bonney Lake OB [ph], and Puyallup OB, are both on balance sheet with substantially beneficial terms. These projects constitute approximately 142,000 square feet of medical space, and the facilities are pre-leased 100% and 73% respectively. Cogdell Spencer ERDMAN is providing all services to complete these projects from ownership and financing, strategy to design, construction and property management. We expect to recognize NOI on these two projects beginning in the second half of 2011. We continue to enjoy access to loans for our projects, both in new development and in refinancing. Our policy of modest leverage and substantial preleasing has paid off for us. Now, I would like to take a moment to address the impairment charge noted in yesterday’s release. This non-cash accounting entry is a write-down on the value of the intangible assets related to our third-party Design-Build business. Despite success with on balance sheet development, fee-based third-party Design-Build business as consistent with the overall construction market has seen a slowdown during the second quarter. Despite that, we have reached the profitability milestones needed to raise our guidance for the year to $0.47 to $0.51 per share and unit. Chuck will discuss the impairment charge in more detail when he gives his review of the financials for the quarter. To wrap up, I would like to give you an update on our ongoing CEO search. We are pleased to report that our search committee headed by board member, Chris Lee, has identified, profiled and screened numerous prospective candidates. At this week’s board meeting, the search committee presented progress to date and recommendations of the top candidates for further screening, background checks, and board interviews. We expect to announce the new CEO before my planned departure date of October 31. With that, I would like to turn things over to Chuck Handy now for an in-depth look at the quarter’s financials. Chuck?

[Chuck Handy:]

Thanks Frank. As noted in our earnings release, FFO modified or FFOM, excluding non-recurring events and impairment charges for the second quarter was $6.5 million or $0.12 per share in unit, which represents 1.6 increase over second quarter 2009 FFOM. Net loss for the second quarter, excluding non-recurring events and impairment charges was approximately $570,000 or $0.01 per share. During the second quarter, we performed an interim review of the carrying value of intangible assets associated with our Design-Build and Development segment. The review was performed as a result of indicators of potential impairment that included a 15% to 20% decrease in the market value cash flow multiples for comparable engineering and construction companies, a decrease in our forecasted cash flow projections for Design-Build and Development activity, and a reduction in workforce that occurred within the business segment during the quarter. As a result, a pre-tax, non-cash impairment charge of $13.8 million, which resulted in an after-tax charge of $10.8 million. This write-down of intangible assets represents approximately 9% of the carrying value of the intangible assets prior to the reduction. Revenue for the first quarter [ph] totaled $37 million. Rental revenue for the quarter totaled $21 million; while revenue related to Design-Build contracts and Development totaled $15.3 million, and that is after eliminations for on balance sheet projects. Property management and leasing fees, as well as expense reimbursements totaled approximately $760,000 for the quarter. Selling, general, and administrative expenses for the second quarter totaled $9.3 million, which included approximately $4.8 million of corporate G&A. Corporate G&A for the second quarter includes a pre-tax accrual of approximately $3.1 million related to retirement compensation expense for Frank Spencer. Excluding this retirement expense, we expect full-year 2010 corporate G&A to be approximately $9 million. At March 31st, approximately 79% of our debt was at fixed rates and our average interest rate on real estate mortgages was approximately 4.9%. Our total debt had a weighted average remaining term of 3.6 years, and we had $55 million outstanding on our $150 million revolving line of credit at quarter-end. For the second quarter, our interest coverage was 2 times and our fixed charge coverage was 1.7 times. On July 21st, we paid a dividend for the second quarter of $0.10 per share to holders of record on June 25th. During the second quarter, we issued approximately 7.1 million shares of common stock, resulting in net proceeds of $47.1 million. The net proceeds were used to reduce borrowings under our revolving line of credit, to fund build to suit development projects, for working capital and other general corporate purposes. At June 30, we had cash balances of $31 million and availability on our revolving line of credit of $87 million for a total available capital of approximately $118 million. In May, we exercised our option to extend for one year the mortgages on Alamance Regional Mebane Outpatient Center located in Mebane, North Carolina. These mortgages now mature in May 2011. In connection with the extension, we repaid $1.3 million of principal, and interest rate terms were unchanged. At June 30, we had approximately 638 leases under consolidated properties with an overall occupancy of 91%, representing an increase in portfolio occupancy of 40 basis points over the first quarter. Our largest tenant accounted for 6.8% of annualized rental revenue. Tenant improvements related to second generation leases totaled approximately $1.1 million across our consolidated portfolio for the quarter. In June, we completed and opened two build to suit projects. The University Physicians – Grants Ferry project located outside of Jackson, Mississippi, is a 50, 575 square foot, multi-specialty facility that houses clinical offices, and imaging services. The facility is 100% occupied and is wholly owned. The project is financed with a $10.4 million construction loan that will convert to a permanent mortgage during the third quarter with a swapped fixed interest rate of 5.95% and a maturity of April 2019. The HealthPartners Medical & Dental Clinics medical office building located outside of St. Cloud, Minnesota, is a 60,108 square foot clinic featuring a state-of-the-art medical record system, digital imaging, and uses a variety of new technology to enhance patient care. The project is 94% occupied and it is wholly-owned. The property is financed with a $14 million construction loan that will convert to a permanent mortgage during the third quarter with a swapped interest rate of 6.8% and a November 2014 maturity. During the second quarter, we began construction on two new projects located in the state of Washington. The first project is a 56,000 square foot medical office building located in Bonney Lake, Washington. The $17.7 million project is a joint venture between Cogdell Spencer ERDMAN, MultiCare Good Samaritan Hospital, and a group of private physicians. Upon completion, the company expects to own approximately 62% of the project. MultiCare Good Samaritan Hospital will serve as the anchor tenant. The medical office building is 100% pre-leased and we expect to complete construction in the third quarter of 2011. We obtained $11.5 million of construction financing for the project with an interest rate of LIBOR plus 3.25%. Monthly payments are interest only during the construction period and the loan will convert to provide for monthly principal and interest payments based on a 25 year amortization. The mortgage will mature in January of 2018. The second project is an 80,000 square foot medical office building located in Puyallup, Washington. The $24.7 million project will be located on the campus of MultiCare Good Samaritan Hospital and the hospital will serve as the anchor tenant. The project is 73% pre-leased and construction is expected to be completed in the third quarter of 2011. At June 30, Cogdell Spencer ERDMAN fully owned the project, but we intend to offer tenant physicians the opportunity to invest in the project. We obtained $16.3 million in construction financing at a fixed interest rate of either 7.1% or 7.5% depending on the property's debt service coverage at completion. Monthly payments are interest only during the construction period and will convert to monthly principal and interest based on a 25 year amortization at the project’s completion. The mortgage will mature in June 2015. In July, we acquired St. Francis Outpatient Center in Greenville, South Carolina for $16.6 million. The property is comprised of approximately 72,000 square feet and houses outpatient operating rooms and inpatient and outpatient radiology and imaging. The property is 100% leased by St. Francis Hospital, a subsidiary of Bon Secours Health System. Cogdell Spencer ERDMAN developed the property and has managed the property since its opening in 2001. During June, the company sold Harbison Medical Office Building, located in Columbia, South Carolina for $2.5 million and recorded a gain on sale of approximately $300,000. A $2.1 million mortgage note payable that encumbered the property was repaid. With respect to our 2010 earnings outlook, we are raising our guidance for the year, and expect that FFOM per share and operating unit for the year will be in the range of $0.47 to $0.51 per share in operating partnership unit, which excludes a $10.8 million after-tax non-cash intangible asset impairment charge, and also excludes the onetime after-tax charge to retirement compensation expense of approximately $2.6 million. Our revised guidance reflects positive leasing and operating outcomes experienced within our core portfolio, as well as new build to suit projects generating returns greater than pro forma. Our revised guidance also reflects the recent acquisition of the St. Francis Outpatient Center in Greenville, South Carolina, which after taking into account transaction and financing costs of roughly $200,000, we expect will be accretive to FFOM by approximately $0.01 for 2010. With that, I would now like to turn the call over to Scott Ransom. Scott?

[Scott Ransom:]

Thanks Chuck, and good morning. New business development is the highest priority of the Design-Build business. While we are pleased with our on balance sheet development projects and contracts that are in early stages, we want to acknowledge the slowdown in the third-party Design-Build business. While this fee-based business is taking longer to return than expected, we continue to see significant planning and predesign feasibility engagement opportunities, and expect the willingness of health care providers to move forward with construction projects to increase over the next 12 months. We continue to recognize better margins in the Design-Build business and remain profitable for the year. I would like to refer you to the statement reporting on page 8 of the supplemental. With the exception of the non-cash impairment, our net operating profit is 1 million based on 24.2 million in revenue for the second quarter. The difference between the 24.2 million noted on page 8, and the 15.2 million reported in consolidated GAAP numbers is the on balance sheet development projects we previously announced. As noted, we remain strong in our on balance sheet projects. As discussed, we have experienced the significant increase growth in the volume of new business opportunities. We are in a highly competitive market environment, yet we’re beginning to see our clients release projects for strategic planning and feasibility. This is especially true for our outpatient and ambulatory facilities in markets where the company has a historically successful date [ph]. With that, I would like to go back to Frank to wrap up and look forward to answering any questions you may have.

[Frank Spencer:]

Thanks Scott. Before we go to questions, I would like to take a moment of personal privilege here. This is likely the last time I will be on an earnings call with you, the analysts who cover us, and the investors who put your trust in us. I want to say thank you to both groups. I have enjoyed working with each of the research teams, and I hope you recognize the candor and sincerity of our interaction. To our investors, this is your company, and I appreciate the confidence you have had in me and in our team. Speaking of our team, I want to thank my colleagues here at Cogdell Spencer ERDMAN. Some you know, but others however, are not out front as much. First, I would like to thank Jim Cogdell, who created the opportunity here. Our asset and property management division led by Rex Noble and Mary Surles, each of whom has been by my side for 15 years. Scott Ransom and the whole Design-Build team, Dev Gregg, our National Head of Development, our regional presidents, who meet the markets every day, our incredible financial team, including Drew Prentice, Chief Accounting Officer, and Jason Bates, our VP of Finance, and without doubt Chuck Handy, our CFO. My successor will have a great team in place, and will be very lucky indeed to come in to such a great job. I have had a wonderful time leading this company, and look forward to seeing many of you in the months to come. Best wishes and many happy returns. With that, operator we will take questions from the queue.

[Operator:]

(Operator instructions) Our first question is from Karin Ford with KeyBanc. Please go ahead.

[Karin Ford:]

Hi, good morning. Just wanted to drill down a little bit on the slowdown in the third party business at ERDMAN, wanted to get a sense for when the timing of that started to happen, which of the two sort of drivers that you mentioned were more important, was it fewer opportunities or more competition, and can you put a little more detail on how much the volume of opportunities dropped?

[Chuck Handy:]

Frank, you want me to take that one?

[Frank Spencer:]

Sure, go ahead.

[Chuck Handy:]

Okay. Hi, Karin.

[Karin Ford:]

Hi.

[Chuck Handy:]

You know, we have been talking about this. I wouldn’t say it was this quarter suddenly started to just freeze and slowdown. I think what we anticipated was, and I referenced to it on the call, was more of a willingness to move forward with projects, where I would categorize it Karin, there is certainly a lot of competition, because reading recent construction start information, the Dodge report, which is probably the most recognized, initially last year forecasted construction starts to be about the same in 2010 as 2009, which were down 40% from 2008 and 2007 numbers. And this is non-residential building and construction dropped another 15% through June compared to June of 2009. So, I think in general it is a hesitancy, especially for the midsized physician groups due to several factors, I would say again the economy, uncertainties there, still uncertainties with healthcare and reimbursements. There is no lack of overall like long-term demand of these facilities, but I would say is one, there is more competition when there is a project, although I think we position ourselves very well to be on a very short rest to win jobs, when we do go after them. Two, there are still uncertainties and it is reflected in, Frank and both Chuck mentioned it, in overall construction numbers. There are down even more than even anticipated as I said by about 15%. So, you know, it is hard to categorize it, but I would say it is just a combination of the economy right now, the overall construction market is down about 50%, from where it kind of peaked in the middle part of 2007. And we just have to be conservative and realistic in projecting when it is going to come back, which we think will be. We thought it would come back stronger in the first half of 2010. It is still more of a holding pattern, where you can get fees that might be $25,000, $50,000 on a $10 million, $20 million project to do feasibility analysis, but that is a long way from actually putting a shovel in the ground.

[Karin Ford:]

And where is the competition primarily coming from, is it other REITs, is it private companies?

[Frank Spencer:]

You know, well, the competition is the general commercial market, the general commercial I would say outside of health care is down even more so than healthcare just because of vacancy rates, as you know, throughout the United States. So, I think what you will find is in every regional market of any size, you would see those that would normally be probably busier doing more non-healthcare projects, but still have some healthcare portfolio. They are trying to come to the table, and in a lot of instances if it is a local market, they are going to try to do whatever they can to get them in the mix or even have them partnered in some instances. So I think everyone is feeling it right now, if you are in the – our actual engineering and construction, there is just more competition than they have had because of the lack of overall number of projects. And everyone is trying to hold on to their good people.

[Chuck Handy:]

And Karin, just to be explicit on your question, no, it is not REITs or developers, we are still winning more than our fair share of on balance sheet investment opportunities, but what we are specifically referring to is third-party design and construction work, and so the typical competitors in that market is either other Design-Build firms or combinations of architectural, engineering and construction firms, who are competing for any business out there. So it is not the REITs or the investors, it is the other contractors and engineers.

[Karin Ford:]

It is helpful. One more question on ERDMAN was the SG&A expense line there that went up even though the revenue for the segment went way down, is that typical?

[Frank Spencer:]

You know, Chuck, you can chime in on this, but we have continued to manage the overall staffing levels, and we had a one-time severance adjustment, not one time, but we had a severance adjustment in June, I think is what you are referring to.

[Karin Ford:]

How much was that?

[Frank Spencer:]

Chuck do you have…

[Chuck Handy:]

It is – we recorded, it was roughly $400,000 that was reported as a charge in the second quarter related to our reduction in force.

[Karin Ford:]

Got it. Well, question, I am sorry, just the cap rate on the acquisition?

[Chuck Handy:]

Yes, it was, just so that again, as much clarity as possible, this was a transaction that had been structured in 2001 as really a financing transaction. And so what we did is we actually took over the loan plus paid a small cash boot, and the cap rate on the 16.6 million was about 8.6%.

[Karin Ford:]

Great. Thank you very much.

[Operator:]

Our next question is from Michael Bilerman with Citi. Please go ahead.

[David Shamis:]

Yes, good morning. David Shamis from Citi as well. Just wanted to drill down a little bit more on to guidance for a second, as we think about the back half of the year, what it would appear though is that the Design-Build business, including the allocated G&A would be running at a slight loss to get to even the high end of numbers. Is that what you are effectively putting into your numbers?

[Frank Spencer:]

Yes.

[David Shamis:]

And how much of a loss is in the back half of the year for the Design-Build business?

[Frank Spencer:]

Well, we’re obviously not giving out internal gadgets, but, you know, we have given you a range and while we expect the business to be overall profitable for the year, the math does suggest that there is a range of potential downside on the Design-Build business. So, I think you are on the right track there.

[David Shamis:]

You are saying it will still be profitable. I mean, is the potential for the – lead the potential money in the back half for the – I mean you are at a positive $6 million for the first half. So, just trying to get a sense of what you are actually putting in?

[Frank Spencer:]

Well, we’re giving a range implicit in the guidance that I think you can tease out of there, but we’re not going to talk about specific budgets.

[David Shamis:]

I don’t know why you put specific numbers, rather than meet surprises for positive and negative. I guess is just a choice. On the tax line, I know in the 5.2 million you have the tax benefit from the write-down. Net of that write-down, it is still about a positive 2.4 million, what exactly occurred in terms of getting the tax credit, and what is driving that?

[Frank Spencer:]

Well, there are benefits, of course, I think you need to look at it on the six month window cumulatively for the year, look at the total tax provision in terms of activity for the full six months. And so as we were – and so we look at the six months as a whole, and I think if you do the math, backing out the impairment charge of course, which is not tax deductible, I mean, there is a tax effect of that, but if you look at our tax provision for the six months compared to the six months results for the design and build segment, after detecting interest expense and depreciation related to that segment, and the interest expense will be the 50 million term loan interest. You will get back to roughly 39% tax rate on the cumulative activity for the six months.

[David Shamis:]

And so that can be positive $600,000 [ph] for the first six months when you back that out?

[Frank Spencer:]

Right.

[David Shamis:]

And then for the back half of the year, I guess, then it should be gaining one time in those numbers to drive that one way or the other.

[Frank Spencer:]

Right, right. I think that is – I think you are correct.

[David Shamis:]

There is nothing in guidance that would be a large one time one way or the other?

[Frank Spencer:]

No.

[David Shamis:]

Okay, and then just a question for Jim, I guess, you had a pretty tumultuous nine months with the company going from the strategic review process, the significant stocks to undertake that process, Frank announcing his retirement, the new CEO search, additional write-downs in the merchant business, and I guess as you sit back, do you begin to question whether the correcting that has to be done, given the size of the company and the impairments that have been taken was to sell the company versus going at it alone?

[Frank Spencer:]

We made a decision, the board made a decision to go ahead and proceed going alone. And we feel the strategy of that is still solid direction, and having been in the construction and development business 40 years, just hitting the first road [ph] riding through storms. So, we feel – the board felt that moving forward as an independent was the choice.

[David Shamis:]

Even with the dramatic cost of staying independent?

[Frank Spencer:]

I would say yes.

[David Shamis:]

Okay, thank you.

[Operator:]

Our next question comes from Dan Donlan with Janney Montgomery Scott. Please go ahead sir.

[Dan Donlan:]

Thank you. Just curious, what is the cap rate on the sale of the (inaudible).

[Frank Spencer:]

There was no implied cap rate.

[Dan Donlan:]

Okay.

[Frank Spencer:]

The product is being repositioned for different use. So it didn’t trade on a income basis.

[Dan Donlan:]

Okay. Can you just, regarding the decision to kind of make this acquisition you went into a little bit, is there any potential for us to see for you guys to do more of this, and I guess, I’m particularly interested in Bon Secours, given that they do have a pretty large presence in the Southeast.

[Frank Spencer:]

I mean, this is an example of how relationships spin out deals. I think we’re still consistent with our view that we are not fundamentally in the acquisition business, because you know, 8.6 [ph] cap rates don’t come along every day. And if you look at things that are broadly marketed, you know, you are certainly well down in the sevens. So, I don’t think it would be appropriate to build in expectations either into your model, or your strategy that there are a lot of these kinds of acquisitions. We think we are smart enough and well-connected enough to take advantage of them when they come along, and so I certainly wouldn’t say we’re not going to do any more acquisitions, but it is not a fundamental part of the strategy. I mean, we are still very much focused on driving capital through our integrated process so that we capture the whole value chain.

[Dan Donlan:]

Understood. And then in your press release, you mentioned a 15% to 20% decrease in the market value of cash flow multiples for comparable engineering and construction companies, could you may be discuss where those multiples there and what you guys are looking at?

[Frank Spencer:]

I mean, the multiples – we have a benchmark list of AEC [ph] companies that we have consistently used in reviewing our intangible assets, and it is a range of AEC companies. So we have consistently applied the grouping, if you will, and so there is a range among those companies, depending upon the profile of the company, the types of projects, and as we have said the 15% to 20% ranges is a low to high range within that group, but I’m not sure – I don’t know if I answered your question or not, but…

[Dan Donlan:]

Well, I was just looking at a multiple of the EBITDA, is it 5 times, 6 times, 7 times, I mean, what is the range we should be thinking about?

[Frank Spencer:]

Well, I think at the low end of the range the multiples are in the 5, 5.5 range, and so I think that is at the bottom end of the peer group, and I think it goes up from there, up into the upper single digits from a multiple standpoint. So, as I said, among the group there is a range, and I think bottom end is about 5.5 or so, and then it goes up from there.

[Dan Donlan:]

And what is the difference between what hit you at the low end versus the high end, is a firm that is more consulting heavy at the higher end, and a firm that is more construction heavy at the bottom end, I am just trying to reconcile where you guys fall.

[Chuck Handy:]

I think it is debt [ph]. I think that certainly plays into it. And also the types of projects that the various firms do, are they longer in duration, longer term projects versus shorter term projects, and so I think it is the makeup of the types of product lines of those companies are performing work for work as well.

[Dan Donlan:]

Okay, and then I guess kind of going back a bit to Karin’s question, couldn’t we continue to get a run rate for G&A, I think in the past you guys discussed it was between 4 million and 4.5 million. Is that going to be down a little bit?

[Frank Spencer:]

I think well, in terms of this quarter, as we said, we had a reduction in force. We also did some other cost cutting and restructuring efforts, and so on a run rate basis going forward, on an annualized run rate basis going forward, we expect to realize roughly $4 million a year in annualized savings.

[Dan Donlan:]

Okay, 4 million a quarter in annualized, okay.

[Frank Spencer:]

4 million a year of annualized savings.

[Dan Donlan:]

Okay. Sorry, and that is not all in obviously tuck in SG&A?

[Frank Spencer:]

That is right. That is across, but I think just in the total cost structure that drives cost [ph] overall savings.

[Dan Donlan:]

And then just one more question I guess off of that is, I think in the past you discussed that you guys pushed down some of the G&A from (inaudible) to the urban subsidiary, what is the good run rate there. Is it $0.5 million a year, $750,000 a year, what is the good range?

[Frank Spencer:]

I think it is probably between in the range of 750 to 1 million a year, somewhere in that range.

[Dan Donlan:]

750 to 1 million a year, or per quarter?

[Frank Spencer:]

Per year.

[Dan Donlan:]

Per year, okay. Thank you. And I guess, just lastly, just want to say Frank just good luck in your future endeavors.

[Frank Spencer:]

Thanks Dan.

[Operator:]

Our next question is a follow up from Karin Ford with KeyBanc. Please go ahead.

[Jordan Sadler:]

Good morning, it is Jordan Sadler here with Karin.

[Frank Spencer:]

Hi Jordan.

[Jordan Sadler:]

Hi, could you give us a little bit more of an update on the search process, I know you said you are – I guess evaluating candidates and screening, but have you started to whittle it down at all, and then has the set of sort of qualities of the right candidate evolved?

[Frank Spencer:]

We need to be somewhat circumspect obviously, because a number of candidates are obviously confidential candidates. But broadly speaking, we have been very pleased with the pool of candidates, and the whittling down process has definitely been going on, which is why we fully expect to have the process completed and a successor named before the end of October, but feel very good about both the pool and the folks who continue to remain interested in the position.

[Jordan Sadler:]

And in terms of like public company experience or industry experience, anything in particular?

[Frank Spencer:]

I think that would be probably getting too close to some confidential information, but I feel confident that those who follow the company will be very excited by the final person we announce. We obviously won’t be announcing anyone, but the new CEO.

[Jordan Sadler:]

It is helpful. Well, we will miss you on these calls. Thanks for all the time.

[Frank Spencer:]

Hi, Jordan, thank you.

[Operator:]

(Operator instructions) At this time, I show no further questions in the queue, and I would like to turn the conference back over to management for any closing remarks.

[Jim Cogdell:]

It is Jim Cogdell. Once again thank you for joining this morning, for your continued interest in our company, Cogdell Spencer. And stay tuned for the updates, as Frank said, on the CEO search, and we look forward to introducing you to our new leadership in the future. And also feel free to give us a call if you have any additional questions you might like to talk about. Thank you very, very much.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.