Elme Communities
Q2 2011 Earnings Call Transcript

Published: 29 Jul 2011

[Operator:]

Welcome to the Washington Real Estate Investment Trust Second Quarter 2011 earnings conference call. As a reminder, today’s call is being recorded. Before turning over the call to the company’s President and Chief Executive Officer, Skip McKenzie, Kelly Shiflett, Director of Finance will provide some introductory information. Ms. Shiflett, you may begin.

[Kelly Shiflett:]

Thank you and good morning everyone. After the market closed yesterday, we issued our earnings press release. If there is anyone on the call who would like a copy of the release, please contact me at 301-984-9400, or you may access the document from our website at www.writ.com. Our second quarter supplemental financial information is also available on our website. Our conference call today will contain financial measures such as Core FFO and NOI that are non-GAAP measures and in accordance with Reg G; we have provided reconciliation to those measures in the supplementals. The per share information being discussed on today's call is reported on a fully diluted share basis. Please bear in mind that certain statements during this call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially. We provide a detailed discussion of these risks from time to time in our filings with the SEC, please refer to pages 7 to 14 of our Form 10-K for our complete risk factor disclosure. Participating in today’s call with me will be Skip McKenzie, President and Chief Executive Officer; Bill Camp, Executive Vice President and Chief Financial Officer; Laura Franklin, Executive Vice President and Chief Accounting and Administrative Officer; and Mike Paukstitus, Senior Vice President of Real Estate. Now, I would like to turn the call over to Skip.

[Skip McKenzie:]

Thanks Kelly. Good morning and thank you for joining Washington Real Estate Investment Trust second quarter earnings conference call this morning. Our portfolio continued to show its resilience delivering positive same-store NOI growth, positive rental rate growth in all sectors but industrial generally steady occupancy. We believe these results combine with our continued focus on our strategic initiatives, our recycling assets to improve asset and cash flow quality enabled us to deliver better long-term risk adjusted returns to our investors. This is impressive, considering we live in a city of indecision and political posturing. Our federal government is doing what it does best, political grid lock. This obviously has created a very skittish real estate market where tenants remain apprehensive to pull the trigger on new leases. We remain optimistic about the Washington D.C. region and we are confident we will make good progress on our strategy going forward. We announced this last month that we entered into a 90/10 joint venture agreement with Crimson Partners to develop a 150-unit apartment community in the Boston neighborhood or Arlington, Virginia. The joint venture purchased the proposed development site at the corner of North Glebe Road and North Carlin Springs Road for $11.8 million in June. Construction is projected to begin in the second quarter of 2012 with completion expected 15 to 18 months thereafter. We are excited to partner with Crimson on this great site and grow our multifamily portfolio in an environment where it has been nearly impossible to purchase stabilized apartments assets accretively. As we announced last quarter, we are currently in a contract to purchase John Marshall II, a 223,000 square foot office building on the metro in Tysons Corner, Virginia for $73.5 million. This property is 100% leased to Booz Allen Hamilton and serves as their worldwide headquarters. We expect closing to occur by the end of the third quarter subject to the loan assumption. Yesterday, we went firm on a contract to purchase a $58 million grocery-anchored shopping centre at a prime location in our region. This will be an outstanding addition to our retail portfolio and we expect to close on it in the third quarter. Deal flow in the investment market is very good and at this time our pipeline is full. I am optimistic we will have further good news to report on this in the forthcoming quarter. Please stay tuned. On the disposition front, we continue to move forward with the sale of our industrial portfolio. The portfolio is under a letter of intent with a potential buyer who is currently conducting due diligence and we hope to make a formal announcement on this transaction very soon. On the capital side, we successfully replaced and expanded our line of credit to $400 for three years, which Bill will discuss in detail in a few minutes. We have ample capacity between our lines of credit and potential future disposition proceeds to take advantage of the many acquisition opportunities we are seeing in the market. Now I would like to turn the call over to Bill, who will discuss our financial results and capital markets activities and then, Mike will discuss our real estate operations.

[Bill Camp:]

Thanks, Skip. Good morning, everyone. I’m going to keep this rather short today. Last night, we reported second quarter Core FFO of $0.51 on par with last year and $0.02 better than the first quarter primarily due to higher overall net operating income. Two quarters into 2011, we are at $1 per share in Core FFO, which puts us on track to end the year within our original Core FFO guidance range of $1.96 to $2.08. In terms of the Core FAD, we reported $0.44 per share, up $0.01 from the first quarter. Tenant improvements and capital expenditures again were relatively low this quarter. As we said last quarter, we expect higher CapEx and tenant improvement spending in the second half of 2011. Included in this quarter’s results was a $641,000 or about $0.01 a share write-off for Borders as it announced its liquidation plans. We also incurred a $1.2 million or about $0.02 a share income tax charge related to our Dulles Station sale and other activities within our taxable REIT subsidiary. These $0.03 of one time charges were partially offset by a $0.01 of recoveries of prior quarter bad debt. On the capital side, we successfully replaced and expanded our Wells Fargo credit facility from $262 million to $400 million plus a $200 million accordion for a three-year term plus a one-year extension. Pricings was LIBOR plus, a spread of 122.5 basis points at our current rating of Baa1, BBB+. Combining both of our lines gives us $475 million total capacity on which we currently have $245 million outstanding. This is an increase of $85 million over the first quarter primarily due to the payoff of $94 million of our 5.95% on secured notes on June 15th using available cash from the proceeds at the Dulles Station sale and the draw the in line. With the potential industrial sale moving down a logical path, we anticipate being able to pay off a portion of the line balance using proceeds from the sale. In terms of guidance for the rest of the year, we are not changing the range. While the current Core FFO run rate of $0.51 for the next two quarters would put us at the midpoint of our $1.96 to $2.08 range, our final results will largely be dependent upon the sale of our industrial portfolio and our ability to redeploy the capital quickly. Remember the annual NOI, this portfolio is approximately $25 million, so depending on the timing of the sale, it could have an impact on our numbers. With that, I will turn the call over to Mike to discuss operations.

[Mike Paukstitus:]

Thanks Bill and good morning everyone. This quarter, our same-store property net operating income increased over both first quarter 2011 as well as second quarter 2010. There are a few one-time items to note. As Bill mentioned, Borders Books announced plans to liquidate the remaining stores, one of which is in our Centre at Hagerstown Shopping Center. Our one set write-off includes a straight line balance and a construction note balance. Partially offsetting this write-off is a recovery of a bad debt estimate in the medical office sector. Annual rent for Borders at this location is approximately $260,000. We feel confident that they continue to re-lease at or above the current rent as we move forward in marketing this space. Now looking at the individual sectors, our multifamily portfolio continues to outperform, same-store NOI growth was 6.2% on a GAAP basis year-over-year and occupancy improved as well. We continue to feel optimistic about this sector, given our high occupancy combined with a lack of new supply coming online in the near future. In the commercial portfolio this quarter, we had executed 414,000 square feet of lease transactions at rental rate increases of 11% over expiring leases on a GAAP basis with an average lease term of 6.1 years and an average TI package of $13 per square foot. The 11% rent increase was driven by double digit percentage increases in the office and medical sectors and offset by roll downs in the industrial sector. We are well over half through taking care of our 2011 lease expirations and the lease expiration exposure in 2012 is only 11.5% of annualized rent. The office sector continues to show flat to modestly positive growth. Although rent spreads this quarter were over 12% on a GAAP basis and same-store NOI was up 1.5% from first quarter, filling vacancy in a lackluster market remains our biggest challenge. Leasing volume was the highest we have seen in the past five quarters, but it’s hard to tell if this is a trend that we can expect to continue. We’ve hired third party leasing brokers to help with some of our larger more challenging spaces. We hope to see some significant increases in occupancy in the coming quarters. In the medical office sector, same-store NOI was up 8.1% from the first quarter due to a few bad debt recoveries, which I discussed earlier. Same-store occupancy was down 180 basis points sequentially due to move outs at a handful of properties. We do not believe any single theme was a consistent reason for these move outs. Our retail sector same-store NOI increased 20 basis points from the quarter, without the Borders write-off that number would be 7.6%. Leasing volume was down this quarter, but we continue to record cash and GAAP rental rate increases for the leases we did sign. Occupancy this quarter was then changed from the first quarter at 92%. We continue to be optimistic about improving vacancy later in the third and fourth quarters, as retailers begin to reschedule their openings to coincide with the holidays. We’ve had some nice recent leasing activity with the signing of 38,000 square feet previously leased vacant space that have not yet hit our operating results, which could equate to 170 basis point pickup in occupancy assuming no one moves out. We expect strong leasing momentum between now and the end of the year. Finally, our industrial sector was a mixed bag of operating trends this quarter. Rental rate growth was minus 0.8% for the first quarter, while same-store NOI was up about 4.5% primarily due to operating expense savings. We executed 97,000 square feet of leases with an average term of four years. I will end by highlighting some of the capital improvement projects we have been working on in our downtown office buildings as part of our ongoing effort to improve the quality of our portfolio. At 2000 M Street, we have done common area and bathroom renovations; we are in the process of lobby and a major HVAC upgrade to monitorize the building systems. At 1220 19th Street, we are working on renovations of the lobby, common areas and bathrooms. Lastly, at our recently acquired 1140 Connecticut Avenue, we are working on upgrades to common areas and bathrooms. Now I’ll turn the call back over to Skip.

[Skip McKenzie:]

Thanks Mike. Before we open up the call for questions, I want to reiterate that our portfolio continues to show its resilience in these uncertain economic times. Our property fundamentals are steady and we are actively upgrading the quality of our portfolio and improving the stability of our cash flow. This strategy has enabled us to pay our 198th consecutive dividend and declare our 199th dividend at the same or increasing rates. We are proud of this accomplishment and hopefully this shows our commitment to our investors. With that, I’d like to open up the call to your questions. Operator Thank you sir. (Operator Instructions). Our next question is from Mitch Germain with JMP Asset Management. Please state your question.

[Mitchell Germain:]

Good morning guys.

[Skip McKenzie:]

Good morning.

[Mitchell Germain:]

Can I get some additional details on your recent shopping center that is under contract?

[Skip McKenzie:]

I’m sorry to say, no.

[Mitchell Germain:]

Was it really a large deal?

[Skip McKenzie:]

I really don’t want to comment on pending transactions. We did go firm on the contact, so obviously a very high probability of closing, but until we actually close on it, I would rather refrain from making specific comments about, other than that we believe it’s an excellent acquisition, but you will know soon.

[Mitchell Germain:]

And what about details, just on your deal pipeline in general with regards to types of assets that you are seeing. Are they along the lines of strategy inside the Beltway upgrading the portfolios and so on and so forth?

[Skip McKenzie:]

Yes and yes. We are, other than the shopping center that you had mentioned that it under contract, we have at least one other property in due diligence and several others that we are looking at and they absolutely fit our strategy of inside the Beltway upgrade the quality of the portfolio. I really don’t want to say too much more than that, certainly once we go firm on these, we will have much more detailed information, but I do want to reiterate we have a full deal pipeline right now. The wheels are turning here, everybody is working hard and there are excellent opportunities, and we are really excited about what we have coming down the pipeline.

[Mitchell Germain:]

And should we expect any additional property sales outside of the industrial portfolio?

[Skip McKenzie:]

No, not between now and the end of the year.

[Mitchell Germain:]

Great, thanks a lot guys.

[Operator:]

Our next question comes from Michael Knott with Green Street Advisors. Please state your question.

[Michael Knott:]

Skip, I was trying real hard to think another question that Jim Kramer might want to use on his show, but all I could come up with was to ask you what do you think your tenants mindset is today in light of, sort of all the problems there in DC and also the economic weakness that we are seeing?

[Skip McKenzie:]

Yes, it's all about delaying making decisions. I mean, it is extremely hard to get anybody to make decisions. I mean, you could walk in space and space could be crowded and you can't get the tenants to make a decision to expand their space. No one wants to act right now and it's reflected in the market, you could just about read any analyst, any market analyst report, Delta Associates, any of the major brokerage firms. They are all generally reporting flat to negative absorption throughout the market. I think it is just reflective of the tenants are like everybody else, they just don't know which way the world is going and they don't want to make a decision. It's not necessarily that they are going backwards or things are crashing, but right now it's an extremely frustrating environment to get anybody to act.

[Michael Knott:]

Is that decision paralysis increased of late? I mean it had waned at some point right, and now it's kind of back, is that what you are saying?

[Skip McKenzie:]

It's been fairly steady over the last quarter and I think all the news that you've heard recently has done nothing but more than support what had been a trend that was in place.

[Michael Knott:]

Okay, Mike can you just repeat that retail same-store number excluding borders. I thought I heard 7.6%, is that right?

[Mike Paukstitus:]

That's correct.

[Michael Knott:]

Okay, and then Skip, I don’t know if you want to give any more color, you said many acquisition opportunities you are seeing, do you feel like there is just more on the market and that is giving you just more opportunities by itself or do you feel like pricing is better or how does your sort of underwriting take into account all the uncertainty on the leasing side that you are seeing today?

[Skip McKenzie:]

Yeah. Certainly to answer the first of your question, there is a lot of product on the market. The sellers are taking advantage of which is a very active amount of capital that's available that we be put in place. So, there is a lot of things to pick and choose through and that's really sort of the art and the science, you have to pick and choose the right bets and we were concentrating on properties where we think that there is stability in that submarket and that we think that there is good growth going forward, because obviously you're not going to be buying anything today at double digit cap rates. So, we are really focusing on properties that are in submarkets that we think are stable and they have a good trajectory going forward.

[Michael Knott:]

Okay and then, can you just remind us in terms of that how you guys look at maybe expected returns relative to your cost of capital, do you do IRRs or do you think about just sort of stabilize the yield or?

[Skip McKenzie:]

We generally don't do IRRs, we are a typical IRR, we cap a tenure, you assume a terminal cap rate etc, but we look at a tenure cash flow and we want to see the annual yield going through our cost of capital somewhere in the first five years.

[Michael Knott:]

Thank you.

[Operator:]

Our next question comes from Brendan Maiorana with Wells Fargo. Please state your question.

[Brendan Maiorana:]

Thanks, good morning. Skip or I guess it is for Skip. Just big picture number, if you look at the industrial sale, the NOI that's coming out from that sale or that’s likely to go out from that sale and then you are looking at all of the new investment opportunity just on incoming versus outgoing cap rate basis, do you think that you are neutral on an NOI basis, positive on an NOI basis or negative on an NOI basis?

[Skip McKenzie:]

I would say just slightly negative, not as negative as many people have predicted at different times, but we are upgrading the quality of our portfolio and obviously we haven't identified everything to replace this income, although we're pretty close, to be quite honest with you, when you consider all the things we have in the pipeline, I would say that at an aggregate basis, it will be somewhat negative.

[Brendan Maiorana:]

Okay that's very helpful. And given the process that you've gone through and the response that you've gotten with the industrial sale, I think you guys have done a very good job operating the portfolio over the past few years and the industrial fail accelerates that, but you do have I think a little bit left of some of the lower quality suburban office stuff that’s left in the portfolio. Does kind of the process make you think maybe it's a good opportune time as you looking to put a portfolio of some of the other non-core officer stuff out on the market?

[Skip McKenzie:]

Well, let me just at least make one general comment. I mean if you look in our supplemental, only 20% of our entire portfolio are suburban office buildings, that's all that they are. And by suburban, I mean office buildings outside the Beltway and that is outlined in our supplemental. So, there is not a tremendous amount and not all of those are what I would call commodity. I mean we have some excellent buildings right around our metros like 51 Monroe Street, our biggest building 7900 West Park Drive is right in the heart of Tyson's Corner, so a good many of those are in my opinion keepers. Having said that, yes there are a handful of them in that 20% that we will probably be looking at in 2012 and going forward, but I just want to reiterate. We only have 20% of our NOI in what I would call suburban office buildings and two of the biggest ones are absolutely keepers and 7900, 51 Monroe Street and One Central Plaza would be another one, which is right across the White Flint Metro and there are several others. So, I'm just caution to be a little bit careful about throwing the baby out with the bathwater type analysis.

[Brendan Maiorana:]

Oh, yeah, understood. I mean, the 20% numbers understood and I mean the industrial is only 11% of dealt portfolio, but I guess a question was more, does it make more sense in the current environment to put a portfolio out there given that maybe there are some buyers that would like to get into the market and would like scale and there is a portfolio premium versus doing one-off deals, which is largely what you've done with some of the commodity suburban office stuff that has been sold over the past few years?

[Skip McKenzie:]

Perhaps, I'm not so sure if that applies to what, you are suggesting commodity suburban office buildings, but perhaps, I think it needs a little more analysis to determine whether you would put a larger portfolio or one-off and whether there is a benefit in that. So, I'm just a little hesitant to give you a shotgun answer.

[Brendan Maiorana:]

Sure no, understood. And then, maybe for Mike, I think you mentioned that you expect office occupancy to improve in the balance of the year. I think you've got the, there is the Oracle move out; I think that's at the end of this year. So, does that include kind of the Oracle move out and what's your expectation for maybe at least up on the office portfolio as you look at the back half of the year?

[Mike Paukstitus:]

Well, I mean I think the encouraging thing that we are seeing now is albeit slow reaction time in terms of making decisions, we are seeing velocity. That one that you mentioned at Oracle is 7900, Metro is coming. So there is a lot of interest in that and we are getting increased interest in that traffic. So, a lot of it is, we are getting traffic in the market place, they are just not coming to the table to sort of sign up, so that's encouraging to us. The frustrating part is sort of bringing them to signature.

[Skip McKenzie:]

But I would also add to that, I mean that happens on 1231. I don't think net of that, we are above that. In another words, I don't know if we are plus 65,000 of incremental leasing at this point.

[Brendan Maiorana:]

Right okay. So for the year, I mean, the NOI numbers could move up, but then you got that move out at the end of the year.

[Skin McKenzie:]

At 1231, yeah.

[Brendan Maiorana:]

Okay and then –

[Mike Paukstitus:]

So, Brendan that will impact more first quarter than anything else.

[Brendan Maiorana:]

Sure yes. And then, just last one from me. The apartment deal with Crimson that returned the 7% to 8%. Can you just help us understand the structure of that? Is WRIT a getting a preferred return at the 7% to 8% and then Crimson get the split above that level or is this year's return going to go up as NOI goes up above the 7% to 8%?

[Skin McKenzie:]

I mean I don't want to get into the specifics, you know, there is all sorts of confidentiality agreements with the venture partner, but I would say that yes we have some preferred returns in for REIT and it is tough to give you a bulls eye on a development project, it's not even going to stabilize until 2014, but we made assumptions for where rents would be etc, etc and we believe that the property would be in the 7% to 8% range if things proceed as we belong. And then obviously, as things get better or worse, there is some promotes that would be available to the developer that would occur if we start hitting typical waterfall type promote structures, I mean, I don’t want to give you the exact numbers, I don’t think that’s right.

[Brendan Maiorana:]

Yeah, I know I understand, do you guys have an option to buy out the partner?

[Skip McKenzie:]

Yeah, this is a buy-sell provision agreement, which would expect at some point to be triggered.

[Brendan Maiorana:]

Sure, okay all right, thank you.

[Operator:]

Our next question comes from Steve Benyik with Jefferies. Please state your question.

[Steve Benyik:]

Alright, thanks very much, good morning guys.

[Skip McKenzie:]

Good morning.

[Steve Benyik:]

I guess first on just the guidance maybe for Bill, I know you had mentioned the 196 to 208 remained intact to sort of carry forward to Q11 core FFO of $0.51 you can get to sort of the midpoint, but I was just hoping you could provide a little more color in terms of what the guidance assumptions were at the beginning of the year, where you think you maybe trending ahead of schedule. So, for example your same-store occupancy I believe the guidance was for 150 to 200 basis point improvement from 88.6. It looks like you are a little bit behind schedule there. So, sort of how that plays out relative to say you guys are positive $80 million net acquisitions today, potentially going positive 140, sort of how that all plays into the overall guidance numbers?

[Bill Camp:]

Yeah, I can try. I will tell you to start, I mean, your report last night kind of highlighted the occupancy thing and I think you are right in saying that my expectations now are that occupancy will probably be a little bit behind where we projected. The tough part on the occupancy as I said last quarter and I will reiterate it this quarter is, a lot of the occupancy pickups that we kind of expected throughout the year are going to happen later in the primarily in the retail sector. I think the biggest difference in terms of timing of acquisitions, dispositions in terms of what we modeled originally and it was in the original guidance, as we kind of thought the industrial sale would have happened by now. We are a little bit behind schedule, but like a month and a half or something, it is not a huge amount, and that and then the timing of acquisitions throughout the year. If we basically went out initially in the model and said that acquisitions, the total volume of acquisitions would be split equally on four quarters and obviously last quarter, if you count the stuff, the 1140 and 1227 25th Street as first quarter acquisitions, then we really didn’t have any in the second quarter. So, we are behind on acquisitions a little bit, so there are nuances there. In terms of operations though, aside from the occupancy shift, the rent bumps we are getting on renewals and things and some of our, I think expenses are probably not growing quite as fast as we initially thought, especially property taxes are staying low at least again this year. So, we are seeing some pickup from the original guidance model in the expense side of the equation and in the revenue side of the equation in terms of kind of just top line revenue away from the fact that we have some offsetting occupancy delays.

[Steve Benyik:]

Okay, great. I guess for Mike, you mentioned some of the vacancies in the office portfolio that you are struggling with a bit, hiring some third-party brokers to help with that. Maybe you can just walk us through where some of those larger vacancies are concentrated? Whether any of that overlaps of where the capital improvements are going on over the course of the next 12 months and then sort of what incremental redevelopment spend you would expect to flow through numbers based on those expected capital improvements?

[Mike Paukstitus:]

Yeah, I mean, downtown we have been focusing very heavily down there; that is one of the areas that we have a third-party assignment 2000M. And where we quite frankly have implemented a significant amount of our retrofits down there. We think that asset could be better positioned, and we are hoping to get more velocity out of that. And then, in the suburbs, there are some suburban locations where we have had larger pockets that have filled up, that affected it. We have got a building out in the suburbs that we are getting a space back that is pretty large and needs to be retrofitted. So, on the retrofits front, we are expecting all that cosmetic work in some of the HVAC work we finished this year. Does that answer your question?

[Steve Benyik:]

Yeah, that's right. And then just finally on John Marshall II, I mean it seemed like conference call that was expected to have closed over the course of the next few months. Is there any further color you can provide us to what's going on there? Are there any issues at the loan assumption or something else that's delaying that a bit?

[Skip McKenzie:]

Yes, the loan assumption. I mean that the process.

[Mike Paukstitus:]

CMBS loan.

[Skip McKenzie:]

Yes, it is a CMBS loan, the process of assuming one of those things is basically you put your name in the queue and you hope the cement mixer actually spits out your name at some point in the future and it just takes, it's an unpredictable amount of time of how long it takes.

[Steve Benyik:]

Okay, thanks so much guys.

[Skip McKenzie:]

There is no more issues with it, but it just takes forever.

[Steve Benyik:]

Great, thank you.

[Operator:]

Thank you. Our next question comes from Dave Rodgers with RBC Capital Markets. Please state your question.

[Dave Rodgers:]

Well, hey good morning guys. With regard to your comments earlier, I think Skip you made this and maybe you or Mike can give some color on it, but you are talking about just leasing decision paralysis. When you do look at your traffic trends and what you've seen, can you break those down between perhaps inside or outside the Beltway or perhaps between D.C., Northern Virginia and suburban Maryland and any type of property bifurcation color that you might be able to provide, if any?

[Skip McKenzie:]

Well, I would say it is affecting all submarkets first of all, I mean I don't think that the decision paralysis is exiting any of the markets, it pretty much overlays everything. Now, some places are worse than others. We've actually seen some good leasing activity in Maryland of all places. At our One Central Plaza, Jefferson Plaza ironically, I mean, we have seen good leasing activity there. I would say that the district has been disappointing. We're used to that being so robust, so not that it's bad, but Mike alluded to the fact that we're putting some improvement to 2000 M Street for example. The vacancies aren't gigantic but, downtown when you're talking about $45 rents, vacancies magnify it in terms of its economic impact, because the rents are so high. So, I would say that we've been disappointed as much in the downtown market, not so much because the vacancies are huge, but the economic impact is magnified because the dollars are more. Yeah, I would say that it affects all submarkets, certainly affecting Northern Virginia, out on the Dulles Toll Road, we're still trying to work and filling a little large vacancy, we made a decent amount of progress, but getting those last few spaces leased has been difficult.

[Mike Paukstitus:]

And I would add as well the sectors. I mean we did indicate to you that in retail, we finally wrapped some deals up that we think we are going to be able to report to you next quarter, but we fully expected those things to be completed and just got log jammed with major national tenants and the comprehensive (Inaudible) negotiations.

[Dave Rodgers:]

Okay, and then maybe just a question for Bill. Did you provide or can you provide the GAAP and cash NOI cap rates for the Dulles Road Station sale?

[Bill Camp:]

We typically don't give cap rates on exit. I think the last quarter I talked about the trade that we’re making between selling Dulles Station and buying John Marshall and buying Downtown are essentially cap rate neutral, they are a little off, but on a blended basis, I would say they are probably cap rate neutral. So, I think we moved, what did we move, 8 to 9 miles inside in on the Toll Road and bought in Tysons and then we bought Downtown and we did it basically cap rate neutral.

[Dave Rodgers:]

On a GAAP basis?

[Bill Camp:]

On a GAAP basis. On a cash basis, I would have to think about that. Well, on a GAAP basis there was a pick up. I take that back. On a GAAP basis, there was a pretty big pickup. On a cash basis, it was probably about neutral.

[Dave Rodgers:]

Okay, great. Thank you.

[Operator:]

Thank you. (Operator Instructions). Our next question comes from Michael Knott with Green Street Advisors. Please state your question.

[Michael Knott:]

Hey guys, on the 7% to 8% expected stabilized yield on the multifamily development? That sounds pretty attractive and I'm just wondering if maybe because there is a little delay before the start of construction etc, that maybe if you are trending rents to get to that number or is that on today's number is that what you are saying?

[Mike Paukstitus:]

Those weren't today's rent.

[Skip McKenzie:]

Those were un-trended rents. We gave a pretty big spread on that Michael and there is a reason for it and it really comes down to whether or not you are paying a promoter on that on exit. If we do a buy-sell option and we buy out the partner, if you have to pay him a nice number, you are probably on the lower end of the range, and if you don’t, if they stay a partner, we are probably on un-trended rents towards the higher end of that range, so that’s why the big range.

[Michael Knott:]

Okay, so just to make sure I heard that right, the 7-day low end includes essentially no promote and un-trended rents?

[Skip McKenzie:]

That’s right. Yeah.

[Michael Knott:]

Okay and then just a question, I’m curious if you guys looked at the (Inaudible) Northern Virginia deal where Lehman actually is going to deal with on Monday, was that on the market?

[Skip McKenzie:]

That’s a large venture. We heard about it, it wasn’t something that we pursued, to answer it shortly.

[Michael Knott:]

Okay. That’s it, thanks.

[Operator:]

Our next question comes from Chris Lucas with Robert W. Baird. Please state your question.

[Chris Lucas:]

Good morning guys. Skip, I guess one quick question, just in terms of the product that you are looking at, if you could maybe characterize sort of the buckets that it is in and maybe a census to the kinds of assets you are looking at?

[Skip McKenzie:]

We are looking at some office buildings; we are looking at some retail properties. We are looking at further multifamily in terms of development that’s sort of the general buckets.

[Bill Camp:]

Yeah. The bucket that’s probably absent is medical office credits; I mean that thing is, it’s just so thin.

[Skip McKenzie:]

Yeah. There’s nothing out there.

[Bill Camp:]

It is just so thin.

[Chris Lucas:]

Okay, and so on the apartment side the developments are the only thing that are appealing right now given the pricing?

[Skip McKenzie:]

That’s right. We are not even underwriting a forecast.

[Bill Camp:]

I think some of the big boy apartment guys have said the same thing.

[Chris Lucas:]

Okay. And then just in terms of, I don’t know what color you can provide, but I guess just in terms of thinking about the financing for the potential buyer for the industrial portfolio, any sense as to how levered that thing would come out at?

[Skip McKenzie:]

I would rather not say. Yes, we have a sense.

[Mike Paukstitus:]

We have a sense of what he has indicated to us and I wouldn’t say it, because I don’t even know it first of all, in the way of validating it, but we are understanding is that they are not having any problems financing it.

[Chris Lucas:]

Okay, great. Thank you.

[Operator:]

Ladies and Gentlemen. There are no further questions at this time. I will turn the conference back over to management for closing remarks.

[Skip McKenzie:]

Okay. Thank you everybody. I look forward to catching up with you with more results at the end of the third quarter in October. Have a good weekend.

[Operator:]

Thank you. This concludes today’s conference. All parties may now disconnect. Have a great day.