Elme Communities
Q3 2009 Earnings Call Transcript

Published: 23 Oct 2009

[Operator:]

Welcome to the Washington Real Estate Investment Trust third quarter 2009 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, please go ahead.

[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 third quarter supplemental financial information is also available on our website. Our conference call today will contain financial measures such as FFO, NOI and EBITDA that are non-GAAP measures, and then in accordance with Reg G, we have provided reconciliation to those measures in the supplemental. The per share information being discussed on today’s call, is reported on the fully diluted share basis. Please bear on mind, that certain statements during this call are forward-looking statements [technical difficulties] unknown risks, uncertainties and other factors that may cause actual results to differ materially. Such risks, uncertainties and other factors include, but are not limited to the effects of the current credit and financial market conditions, the availability and cost of capital, fluctuations in interest rates, tenant’s financial conditions, the timing and pricing of leasing transactions, levels of competition, the effects of government regulations, the impact of newly adopted accounting principles, changes in general and local economic and real estate market conditions and other risks and uncertainties detailed from time-to-time in our filings with the SEC, including our 2008 Form 10-K, our 2009 second quarter 10-Q and our Form 8-K filed on July 10, 2009. We assume no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. Participating on 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 Administration Officer; and Mike Paukstitus, Senior Vice President, Real Estate. Now, I’d like to turn the call over to Skip.

[Skip McKenzie:]

Good morning and thank you for joining Washington Real Estate Investment Trust conference today. For the Washington metropolitan region market conditions have not improved significantly since we reported to you last quarter. Vacancy levels across all sectors continue to run higher than average, leasing velocity is weak and rental rates of generally decreased as tenants continue to manage cost by downsizing their space needs or delaying plans to grow. Property investment transactions are down dramatically and for those that do trade there’s a wide divergence of investor interest based on risk class. High quality well located assets with minimal downside are attracting numerous offers and attractive prices while higher risk assets with roll over exposure and weaker sub markets are getting few or no offers. For WRIT we continue to focus on strengthening our balance sheet and improving the quality of property portfolio. We completed the sales of two of our weaker assets; the Tech 100 Industrial Park in Elkridge, Maryland for $10.54 million and the Brandywine Center, Rockville or smallest office property for $3.3 million. WRIT recognized unleveraged internal rate of returns of 14% and 13% over the respect of holding periods. We acquired Lansdowne Medical Office Building, a newly-constructed medical office property well located across the street from Inova Loudoun Hospital in Leesburg, Virginia. We paid $19.9 million and expect to achieve stabilized yield between 8%, 8.5% upon Lesa. We made great progress this quarter mitigating our exposure to Sunrise assisted living by executed direct leases for 74,000 square feet with three tenants to takeover a portion of Sunrise’s space at 7900 Westpark. Mike will discuss further the details regarding Sunrise later in the call. We continue to reduce our outstanding debt by raising nearly $40 million of equity through our sales agency financing agreement and repurchasing $12.2 million of our convertible notes at discounts to par and prepaying of $50 million apartment mortgage. Operationally in the commercial portfolio we retained 70% of our expiring tenants this quarter and our overall portfolio was 93% occupied. Lastly, we paid our 191 consecutive dividends at equal and increasing rates. While we believe that the operating environment in our region continues to be challenging we are beginning to see signs of stabilization in the broader economy. We are cautiously optimistic that recovery in our real estate markets will begin in earnest in 2010. Now I’d like to turn the call over to Bill Camp who will review in greater detail our financial performance, then Mike who will review our real estate operations.

[Bill Camp:]

Thanks Skip. Good morning everyone. For the third quarter funds from operation were $28 million or $0.48. This compares FFO in the third quarter of 2008 of $26.1 million or $0.53. Funds available for distribution were $24.5 million or $0.42 compared to $22.6 million or $0.45 for the third quarter of 2008. As you can see per share results are lower primarily due to the impact of raising equity throughout the year. Comparing to the second quarter of this year, the forward gains on the repurchase of debt, FFO was $0.48 versus $0.51 last quarter. The $0.03 differential was driven by lower NOI, higher G&A and share dilution offset by lower interest expense. Since many of you focused on the G&A and you report this morning. I thought I would highlight the G&A includes approximately 450,000 of expenses due to the acquisition of lands down that are now required to be written-off in the quarter you acquire the building. Without that item G&A would have been below the $3.4 million run rate that I gave last quarter. I previously projected that the combination of vacancy, bad debt and rental abatements would hover around 11.5% for the remainder of the year. However it actually improved from 11.2% last quarter to 11% this quarter. This quarter we issued approximately 1.4 million common shares through our sales agency finance agreement with BNY Mellon. The proceeds were $39.6 million with an average offering price of 27/70. We also continue to repurchase our convertible debt in the third quarter we repurchased approximately $12.2 million at an average price of 95.6% of par. Subsequent to the quarter end we repurchased an additional $6.6 million of our converts at an average price of 96.8% of par, bringing total repurchases to $124 million of the original $260 million outstanding. As I discussed on our second quarter conference call, we prepaid the $50 million five property multifamily loan coming due October 1 of this year. As you will recall, this repayment unencumbered five of our Northern Virginia multifamily properties. We continue to believe we could generate approximately $175 million by levering up our unencumbered multifamily pool. As Skip mentioned, we completed two dispositions this quarter, one industrial property and one office property. We sold Tech 100 and the Brandywine Center for our total of $13.8 million recording a net book gain of $5.1 million. On the acquisition front we closed on the anticipated purchase of lands down medical office building in Leesburg, Virginia for $19.9 million. We funded the acquisition with cash on hand and our line of credit. We subsequently issued the $40 million of equity and repaid a portion of the balance on the line. Our line of credit balance as of the end of the quarter was $6 million is down $9 million from the end of the second quarter. In the third quarter WRIT paid a dividend $0.43 in a quarter per share achieving its 191 consecutive quarterly dividend at equal or increasing rates. Yesterday we issued a press release announcing fourth quarter 2009 dividend at the same rate payable December 31 of this year. Before I turn the call over to Mike I thought quickly run through sources and uses of capital since we started repurchasing debt last December. On the uses side of the equation all of our activity to date was completed to strength in our balance sheet, minimize refinancing risk in 2011 and prepare for future acquisitions as transaction volumes increase. We repurchased a total of $124 million converts for a total repurchase price of $107 million, paid off the $50 million five property multifamily loan, we reduced our line of credit balance by $61 million and we purchased a medical office property for 20 million. Looking at the sources side the capital over the same period we raised $167 million of equity, raise $37.5 with a ten year mortgage on the Kenmore Apartments and sold three properties for a total of $33.6 million. When you do the math you can see the sources and uses of external capital are line at roughly $238 million. Finally we are narrowing our FFO per share guidance for 2009 to $1.97 to $2.02 not including the $0.12 gain from the buyback of converts. Now I will turn the call over to Mike to discuss operations.

[Mike Paukstitus:]

Thanks Bill. Good morning to all. Overall our real estate portfolio is holding up well against market conditions are facing. On a same store basis our economic occupancy was 92.8% compared to 93.7% in the same period one year ago and 93.4% in the second quarter of 2009. On an overall portfolio basis this quarter our economic occupancy was 93%, 190 basis point improvement over last year’s third quarter and the10 basis point improvement over last quarter. This quarter WRIT executed over 325,000 square feet of commercial lease transactions with an average gap rental rate increase of 8.1% over expiring leases and an average lease term of 3.4 years. Rental rates in the residential sector decreased 0.4% compared to the same period one year ago. On a cash basis we are seeing commercial rents decline a modest 2% under expiring leases. While residential rents have been primarily flat over the past year we have been making significant progress with occupancy. On a GAAP basis year-over-year economic occupancy has mildly increased 10 basis points in the same store property that is increased from 85.6% to 93.9% over the past year in the entire portfolio due to increased absorption in Bennett Park and Northern Virginia and the Clayborne in Alexandria Virginia. Sequentially from Q2 same store economic occupancy increased by 200 basis points and the overall residential portfolio has increased 330 basis points. At the end of Q3 the average fiscal par occupancy of the residential portfolio was 96.1% before the order in properties with occupancies greater than 97%. Our entire office portfolio is holding up well relative to the sub markets that we operate in. Generally our vacancy rates are substantially below the rates in the sub market. In the office sector we executed leases for a total 182,000 square feet and an average rental rate increase of 7.3% on GAAP basis while cash rents declined nearly 3%. Overall office occupancy improved 210 basis points this quarter compared to the same period one year ago. In the medical office sector we signed leases for a total of 37,000 square feet average run rate increase of 18.8% on GAAP basis and 5.1% increase on a cash basis. At lands down our new medical office acquisition we’re seeing increased leasing interest. We’re currently preliminary lease negotiations with four tenants totaling approximately 13,000 to 15,000 square feet with another 5,000 to 6,000 square feet of active prospects out in the market. In the retail sector we executed leases for 12,000 square feet a rental rate decrease of 8.6% on GAAP basis and 15.8% on cash basis. Despite the low leasing volume this quarter we are making very good progress in finalizing renewals the some of larger tenants. In the industrial sector we enter into lease for a total of 95,000 square feet of the rental rate increase of 2.7% on GAAP basis and 2% decrease on a cash basis. The industrial sector continues to be challenging as we deal very tough market and credit issues with tenants. A bright spot in this sector Federal Government as we move to complete of 130,000 square foot renewal along with several small GSA have renewal transactions. As Skip mentioned earlier this quarter we successfully executed three prime leases for 74,000 square feet at the Sunrise a certain leaving space it 7900 Westpark in the Tysons Corner submarket in Northern Virginia. This reduces their space by 39%, restructured lease transaction to be revenue neutral to us. As you will note from their recent 8-K filed by Sunrise they its extended their bank line till December 2010 and they announced a large proposed asset sale. We are pleased with the progress that they’re making at Sunrise and we will continue to monitor the situation going forward. Now we would like to open the call to questions.

[Operator:]

(Operator Instructions) Your first question comes from Mark Biffert - Oppenheimer & Co.

[Mark Biffert:]

Skip, I was wondering if you could comment on the general traffic patterns you’re seeing in the properties in terms of the office retail industrial and just go through some of the larger vacancies that you have in terms of timing when you expect to see more people come in and also I noticed that the University or George Washington University fell off your top list of tenants? Can you just explain that?

[Skip McKenzie:]

Go to the first part first. I would say sort of region wide that as I mentioned in my opening comments, leasing velocity is down fairly dramatically, depending which submarket you want to address, I would say you could look at almost negative absorption, certainly year-to-date on an aggregate basis throughout the region with Maryland being the weakest of the submarkets. As it relates specifically to our portfolio, we have a fairly large vacancy at our One Central Plaza building, which is right around the corner from our headquarters here and that particular asset, I’ll be quite honest with you and all of Montgomery County traffic has been soft. Over Northern Virginia, the biggest vacancy we have had over there has been Dulles Station, which as you know we leased to IBM and the other vacancy in that building, which is small, we’ve made pretty good progress leasing up. So other than that we don’t have any huge vacancies in our office portfolio in the suburbs. Downtown, we have almost a four floor at 2000 M Street which to be quite honestly that we’ve been disappointed in the activity on that space. We anticipated that would be leased by this time, when we did our budgets a year ago and to be quite honest with you. The activity there has been disappointing. The other four floor vacancy we have in the district, we have very good activity on, and I would expect a transaction fairly imminently on that. Let me talk about the retail portfolio, because that I would say is believe it or not, one of the signs of fairly good progress. At some of the larger boxes that we have, not that we have very many, but we have a former Circuit City box out in the Hagerstown property, and it appears that we’re very close to a transaction there and I would anticipate making an announcement in the fourth quarter for progress on that specific vacancy, that’s really the only large retail vacancy that we have. As far as sort of the middle size vacancies in the retail portfolio, I would say we’ve had very good progress this quarter. We don’t have signed leases yet, but I think that when we get to the fourth quarter, we’re going to show some really good activity leasing up some vacancy in our retail portfolio and as Mike sort of touched on, the one that’s probably the most disappointing from an aggregate perspective is industrial. I mean we and I think the market in general is struggling in that sector, particularly our properties are concentrated on smaller tenants, many of them are focused on the home building industry, they’re smaller general contractors, some of them are consumer even oriented, kind of B grade retailers like furniture showrooms and things of that nature and that market is getting crushed. I mean, the activity to lease up vacant space is minimal and we’re really struggling with some of our credit issues in that sector. So I mean I think that sort of end capitalized. You also asked at the end of about George Washington University, they’re a tenant in a number of properties. Their biggest concentration, they have a big lease at 1776 G Street, which there’s been no change on. They have a significant presence right here in our headquarters though, in 6110 Executive and they did have a downsizing. Mike, do you know how many square feet they downsized? I don’t have that number right off the top of my head, but they’re still in this building, but they downsized a portion of their space there, that’s why they fell off the list.

[Mark Biffert:]

Are they subleasing that space, is that…?

[Skip McKenzie:]

No, that was not space leased to research triangle.

[Mike Paukstitus:]

It was 6,000 feet.

[Skip McKenzie:]

Yes, it was 6,000 feet and we actually did a direct lease on that space. So we’re actually in pretty good shape in the building, but that’s why they fell off the list.

[Mark Biffert:]

Regarding the Lansdowne asset, how long do you think it will take to stabilize that asset?

[Skip McKenzie:]

I’ll be honest with you, I mean long term that’s going to be a fantastic asset. We’re very positive about it. I’m positive about the rental rates that we’re looking that in that asset, but like everything else, I mean even medical users are sort of managing their costs. So I expect that it’s going to take a good year to get that thing to 90% to 95% leased.

[Mark Biffert:]

Then jumping to your debt issuance potential, you talked about this $175 million that you could do on the five multifamily properties that you paid off. What’s unexpected timing on that? I mean would you wait until you had a transaction in hand before you would go out and do that kind of deal or given how low spreads are right now that you would want to go do that right now even though it puts dilutions on your balance sheet, just to have the cash available to you?

[Bill Camp:]

That’s a good question Mark. I think we’re looking at it all the time, I mean...

[Skip McKenzie:]

Popular discussion subject.

[Bill Camp:]

Yes, it’s a very popular discussion. I don’t think anything’s imminent, but I think we’re looking at it. We’d like to line it up a little closer with a use of capital. It seems to me that there’s a lot of different sources of capital out there right now and in the spirit of continuing to slowly deleverage the firm just going out and raising $175 million on the debt side of the equation doesn’t necessarily delever anything. Yes, it’s cheap capital, but it’s not necessarily the way we’re going to go forward at this point in time. I think if we had a big use that we could combine a little debt and equity that might be a better way to approach things. The other side of the debt side is that the fact that the unsecured market is opened up pretty attractively. When you look at all your ratios and all the things that you have to watch out for when you issue debt. There’s some rationale to actually looking at replacing unsecured with more unsecured rather than going out and leveraging up all your apartments. You can always lever up apartments any time and it’s always cheap money.

[Bill Camp:]

Your next question comes from John Guinee - Stifel Nicolaus.

[John Guinee:]

It looks to us like you’re doing a great job of cleaning up the balance sheet. You’re clearly selling assets from the bottom of the deck and doing what you said you were going to do over the last year. It looks like you’ve been very disciplined on the acquisition side. I guess the only sort of concern we would have is it feels to us as if you are heading for an FFO run rate sub $0.50 a quarter for 2010? So if I kind of just do the back of the envelope math and you’ve got a $2 FFO and your gap between FFO and FAD has been running $0.50 to $0.60 a year for the last few years, it gets you down to well below $1.73 on the annualized dividend and you guys comment on the ability to kind of get back to sort of ‘07 numbers, where you were running more in the high 50s on a run rate for FFO and were able to cover the dividend?.

[Skip McKenzie:]

I think that’s a valid comment John. I mean certainly something we watch and certainly something we discuss with the Board in terms of the dividend policy. In the absence of more vibrant acquisition market, it’s something that is going to be an issue we’re looking at going forward. I mean certainly over the next 12 months, we’re not looking at dramatic increases in operating fundamentals sort of at the ground floor level here. It’s our belief, we’re starting to see some of the cracks in the armor of some of the developers in the marketplace and we do believe that there’s going to be sort of a more opportunistic opportunities from an acquisition standpoint that we believe is going to help bridge that gap, but it is something we watch very closely. We recognize that it is very tight going forward from a strictly operational basis, but we do believe that there’s going to be opportunity for us to grow the portfolio over the next 12 to 24 months.

[John Guinee:]

Just sort of back of the envelope, if you look going forward probably your cost to debt will probably in the mid six’s to 7% and your FFO yield have $2 FFO on 27 stock price in the low seven. So your blended cost of capital is probably 7%. So I’m assuming that you can buy creatively off the current cost of capital is that a fair statement?

[Skip McKenzie:]

We agree with that generally.

[Bill Camp:]

The one thing that caution is John, as I mentioned it’s really few opportunities right now. They’re coming, but if you just look at the snapshot over the last couple quarters it’s been thin, but anyway thanks for your comments.

[Operator:]

Your next question comes from Anthony Paolone - JP Morgan.

[Anthony Paolone:]

I was curious along some of the same lines as previous questions. We have heard on a separate apartment call about apartment cap rates being in the five’s. I know there’s not a lot you have to do on the acquisition side now that you mentioned that you think in the next 12 to 24 months, there may few things to do. So just curious how you think about capital allocation over your property types over the next few years and whether you contemplate either selling something or going further into another area?

[Skip McKenzie:]

I think we’ve mentioned, we keep our sort of options open in terms of our allocation. I mean we try to be opportunistic and not really restrict ourselves to one asset class as opposed to any other. So we’ve been very active for example in medical office buildings, but that’s because we believe that’s where the opportunity was. So we really don’t restrict ourselves to one asset class as opposed to the other. You made a comment on multifamily being in the 5% range. I mean there’s sort of a rumor of one sort of trophy property trading in that range. I don’t believe that’s sort of the standard in this market. Although I would concur with the general observation that multifamily properties in general in our market trade below at cap rates lower than pretty much all the other asset classes and given where the financing from the GSE’s are, they’re probably going to continue to be there in sort of a low cap rate environment, maybe not with a five handle in front of it, but certainly lower than the more commercial oriented properties. If that scenario continues, I do agree in general that there will probably be less opportunity for us to acquire multifamily properties. On the flip side, I think some of the more commercial oriented properties of all of the other sectors, office buildings, even medical office buildings to a degree, and perhaps industrial, I don’t think industrial retail properties in the last few months. I think there will be opportunities, but I do concur with the observation that residential properties unless there’s some unique busted condo deal that’s heavily vacant that you’re not going to steal any properties in the current environment.

[Anthony Paolone:]

Another question on the apartment side actually. Bill, can you try to gather, I think you mentioned occupancy slipping year-over-year and it seemed like maybe rents did as well, but yet your revenue number was up, like just out of the properties?

[Bill Camp:]

The biggest change in that, because you don’t straight line you apartments, the biggest change there is probably abidance were enough. If you think that year ago, we’re given a way one to two months free on a lot of different apartments, that kind of activity is burned off, particularly in the lease up for the New Year. As really what you saw abidance in Clayborne and Bennett Park. So while your occupancy could be down a little bit and your rental rate growth could be actually down a little bit, all of a sudden you’re getting revenue on things that were abated before.

[Anthony Paolone:]

Then last question the office portfolio, can you give us an update on the, LaFarge leaves that I think comes due next year?

[Skip McKenzie:]

I can’t remember exactly, how he calculated the last call. I believe we said we weren’t feeling real good about it. LaFarge is leaving. LaFarge, I think they made a formal announcement, certainly we’ve heard that they are going to another building in the marketplace. They’re downsizing. It was sort of a situation, where they were downsizing almost 20,000 square feet and they didn’t want to live through a reconfiguration process and what I believe was a tremendous offer, an aggressive offer from another developer. So they’re vacating. The expiration date of that lease is 7/31, is that right Mike, 7/31 of 2010. So we have a good start on it. We’ve actually hired in that particular case just because of the challenging nature of the overall marked we hired a third party broker to assist our team in leasing that property. We don’t feel that bad about it as a general rule. It’s probably some of the best space in the market. We have very prominent signage on the Dulles Toll Road, it’s a fantastic building and we have some head time to lease it up. I don’t feel that bad about it. We acknowledge that there’s going to be a rent roll down. LaFarge was paying a very stiff number, they’re paying something like $38, and we believe the market is more in the low 30s for that space maybe mid to low 30s. So that will be a factor, but we feel optimistic, we’ll lease it up effectively given that we have till next July 31.

[Bill Camp:]

I would add to that Skip, I mean we’re physically touring the space right now. We have active players that are touring that space.

[Anthony Paolone:]

What do you think it will cost to recant something like that?

[Bill Camp:]

Lafarge has phenomenal space. It was like their sort of east coast, I think it was their U.S. headquarters. So it has great finishes in it. A lot of that’s going to be for nursing, the user. Some users may want to come in there, almost take it as this with paint and carpet, reality is, some tenants don’t care how nice it is they might gut it. It could literally be anything from $5 to $50 when you have a scenario like that. It’s just very hard. It’s not like when you have a shell pretty much a guy has to build it out. Pretty much he has build the office place, when you have a space like this, it’s a little bit of crap shoot figuring out what the TI costs are going to be.

[Operator:]

Your next question comes from Michael Knott - Green Street Advisors.

[Michael Knott:]

I was just going to ask whether the slow leasing velocity that you noted and the amount of leasing velocity in your supplemental was that a surprise or disappointment to you.

[Skip McKenzie:]

Just the market leasing velocity in general?

[Michael Knott:]

Yes, both and specifically your portfolio.

[Skip McKenzie:]

Certainly, we would have wished that there was a little more robust leasing activity market wide. I mean, I talked to a lot of sort of come patriots, fellow owners in the market. I think everybody as a general rule is sort of disappointed that in a way I don’t know surprise is the operative word that maybe the federal stimulus initiatives don’t have more effect in 2010, but reality these things don’t happen overnight. It generally takes a couple years for things to get going. So I don’t know if I’d say I was surprised. I guess, I was hopeful that maybe there will be a little more activity, but I wouldn’t use the word surprised.

[Michael Knott:]

Then with respect to your 2010 rollover schedule for your various sectors, can you just talk about your level of concern over the amount of wood that is chopped there, are you worried about it, do you feel pretty good about it.

[Skip McKenzie:]

Well I worry about everything in general. As a general rule, if you look at our rollover schedule, the general numbers don’t bother me. If you look at just sort of the on a rental rate basis, I’m just kind of looking back at page 21 of the supplemental. In general, overall we’re rolling 14% of our overall portfolio, that’s not a number that makes me blink. I mean as you generally know, we have generally shorter leases. If you took it on a pure mathematical basis, if your average lease term was five years, you’d almost have 20% rolling every year. So we’re showing a 14% rolling, though I wish it was less, of course I wish it was less. The only area I would said that, I joint guess, I worry about everything, but the only area that maybe has some concern is the industrial portfolio. We have 15% of our industrial portfolio rolling next year. Again, it’s not a huge number. This quarter, we saw the average lease term was three years. So it’s not in order number, but I wish we had zero rolling, because that sector is generally a nightmare right now as we have reported. The good news is, the industrial sector is only 13% of our overall NOI, so 15% of 13% it’s only a little over 1%. So I’m not going to have major heartburn over it, but that sector is a problem. It’s going to be difficult making headwind on leases and I wouldn’t be surprised, of that 15% in the industrial sector, that lower than average retention rate only because of the nature of the world we’re in today.

[Michael Knott:]

Speaking of the shorter lease terms, I think the office number this quarter was one of the lowest I’ve seen out of your quarterly data in prior years. Can you just comment on the specifics maybe why that was so much shorter than usual?

[Skip McKenzie:]

I don’t know if Mike has any specific comments on it. I’ll tell you, be honest, just sort from a 30,000 feet looking down everybody wants to do shorter leases. Just about any tenant coming up for a lease, they want to do a one year extension, they want to do a two year extension; they want to go month-to-month everybody, the first thing out of their mouth, so you start with trying to get people to sign a five year lease. I don’t know Mike, do you know anything specific?

[Mike Paukstitus:]

Yes I’m looking real quickly in, so where we had a lot of the activities were just like the 51 Monroe, 20,000 square feet of activity in there, those are traditionally the kinds of tenants that are coming in for lower things. We didn’t really have any big leases roll.

[Skip McKenzie:]

Right, that’s one of the factors. Like last quarter, we had World Bank, which was a big lease, then tenants don’t have big terms. When you do a lot of small leases, they tend to be shorter terms, but my overall comment is sort of the operative one. I mean, it’s unbelievable no one wants to commit to anything. Everybody wants to wait till tomorrow that before they make a long term commitment, because everybody is still managing risk as a general rule. Even in Washington.

[Michael Knott:]

You would expect a number like that to be more common over the next several quarters than maybe the four, five, sixes that we’ve seen in the past.

[Skip McKenzie:]

I think as Mike, Mike raised a good point too. It all depends whether we have a big tenant coming up also. As you know, we generally have smaller tenants, smaller tenants with smaller terms. Since we didn’t have any big tenants this quarter, it tended to be a small number. I don’t have the quarter numbers in front of me from last quarter, but I bet you last quarter was on the high side, because of the World Bank. If I quite frankly, I’m looking now that a big chunk of that was in Westpark, those three new leases that we brought into the fold, skewed the numbers, because they only go out just a little bit beyond the duration of the sunrise lease.

[Mike Paukstitus:]

There’s a heavy weighting in there for those transactions.

[Michael Knott:]

Then Bill or Mike do you happen to have the occupancy numbers for your office portfolio across your three regions?

[Mike Paukstitus:]

Broken out by region? I think we do have that. Let me flip a page.

[Skip McKenzie:]

You can read it Mike. Go ahead Mike.

[Mike Paukstitus:]

Yes, as I look at where we stand on the office sector we’re 3.8% DC, 6.1% Virginia, about 11.6% Maryland for a blend of about 7.8%.

[Michael Knott:]

Is that the vacancy rates?

[Mike Paukstitus:]

Vacancy rate is 9.30%.

[Michael Knott:]

I’m sorry, Mike, can you repeat the Maryland number?

[Mike Paukstitus:]

Maryland is running at 11.6%.

[Michael Knott:]

11.6%.

[Mike Paukstitus:]

11.6%. I think we made the point earlier, generally especially in the office portfolio we’re typically running substantially below the sectors.

[Bill Camp:]

If you look at the sub market data out there from the various providers you probably see that we stack up pretty well Michael. We’re probably beating most of the sub markets by a fair amount, especially in the office side.

[Mike Paukstitus:]

Yes, as I’m looking at trends, I mean generally we trended positive on a sequential basis overall portfolio while obviously the market sectors went the other way sequentially.

[Michael Knott:]

Yes, I’m just glancing at the Transwestern third quarter end market report. They have the Montgomery County overall vacancy rates as suburban Maryland, where most of our properties are a 12.5%, so that’s sort of the market wide vacancy. Northern Virginia suburbs 11.8%, so I mean that sort of the world that we’re living in right now.

[Operator:]

Your next question comes from Chris Lucas - Robert W. Baird.

[Chris Lucas:]

Let’s go back to the debt markets, what kind of quotes would you think you would be getting right now on your unsecured debt for long term say 10 year debt?

[Bill Camp:]

10 year, you’re probably somewhere in the plus 350 to plus 400, probably closer to plus 350 right now, especially with the treasury up a little bit despite narrow.

[Chris Lucas:]

So around seven, roughly?

[Bill Camp:]

Yes, or just inside.

[Chris Lucas:]

Then just on the guidance your range is typically pretty wide given we’re headed into the last quarter here for the year. What are the factors that are get you to the high end or the low end at this point, anything that stands out?

[Bill Camp:]

The factors on the low side are the ones that are the unknowns unlike some tenant blows out, we have a straight line write off, like we had with Circuit City last year.

[Skip McKenzie:]

The big snow event at the end of the year, that’s a factor.

[Bill Camp:]

Yes, there’s all kinds of strange little things, some other something that we just don’t expect. On the high side, we would have to find somebody that goes, basically and takes space basically apartments because those are immediate impact things. So we fill up some apartments that are empty and that’s…

[Skip McKenzie:]

Given some of them are 100%.

[Bill Camp:]

I mean, if you look at the mid point of that range, that implies $0.47, $0.48 type quarter, I think that’s where most of you guys have your numbers.

[Chris Lucas:]

You mentioned the kind of write-off issues were the direct leases done with the Sunrise space actually hitting in the third or fourth quarter and is there some write-off of some straight line numbers?

[Skip McKenzie:]

There is no write off of straight line associated with sunrise.

[Chris Lucas:]

There is none.

[Skip McKenzie:]

No. So it’s the general. Chris, it just comes down to the general writ-off of straight line based on our collect ability assumptions on the Sunrise lease. So, we continue to say they pay rent on time, they pay early actually. So we don’t think that at this point in time that there’s any write-off necessary for that particular space.

[Bill Camp:]

The way that was handled it was pretty much a revenue neutral transaction to the income statement.

[Chris Lucas:]

Then in terms of just on that debt expense for the quarter, could you give us that specific number?

[Bill Camp:]

Yes, bad debt for the current quarter on a cash basis was about $1.6 million, 2.1%, on a GAAP basis it was 2.3%, $1.8 million.

[Chris Lucas:]

These issues are still coming from the small tenant base I’m assuming or is there anything that stands out?

[Bill Camp:]

There’s any, I can’t think of any one, huge one, that’s taken up those types of things. I’m looking, if you start looking at the difference sectors, obviously retail and industrial are the ones that are still kind of creeping up on us. If you look at medical office apartments and office generally they bounce around quarter-over-quarter, but they’re generally kind of coming inline with the previous quarter all the time. Retail and industrial, they still seem to want to grow a little bit.

[Chris Lucas:]

Then residential is superb.

[Skip McKenzie:]

Yes, residential is essentially nonexistent.

[Chris Lucas:]

Then my last question is on the prepayment of the apartment mortgage loan, was there any additional expenses associate with prepaying it earlier?

[Skip McKenzie:]

No, that was within the 90 days. Usually those loans give you 90 days to prepay. So we did it on the first day we could without any type of penalty.

[Operator:]

Your next question comes from Dave Rodgers - RBC Capital Markets.

[Dave Rodgers:]

Really only one question left for me that was asset sales going forward. You picked off some of the lower quality properties in portfolio that just weren’t good performers. Going into 2010, could we see more source of capital coming from that source, are you marketing anything today?

[Skip McKenzie:]

We do have one small warehouse under contract with a buyer right now. It’s actually a use for a small warehouse, relatively inconsequential sale. We haven’t sort of game planned out all of 2010 dispositions yet. I would anticipate there will be something, I just don’t know right now, but yes, we’re thinking that there will be some sales next year.

[Bill Camp:]

On that note though Dave, I think we had a $50 million to $70 million projection at the beginning of the year. We’re probably going to be light of that $50 million lower end of the target at the year ends.

[Operator:]

Your final question comes from John Guinee - Stifel Nicolaus.

[John Guinee:]

I was just look for HPL lease, is that in monument to the building you bought in 2007?

[Bill Camp:]

It is. Yes.

[John Guinee:]

Refresh me on the pricing of that deal at the time of acquisition.

[Bill Camp:]

It was like $78 million, something in that ballpark plus or minus.

[John Guinee:]

What kind of gap in cash, cap rates?

[Bill Camp:]

It was like mid six cap rate.

[Operator:]

(Operator Instructions) Thank you. There are no further questions at this time. I would like to turn the floor back over to Mr. McKenzie for closing remarks.

[Skip McKenzie:]

Thank you everybody for listening to the company’s conference call. Have a great weekend. I look forward to you listening in for the fourth quarter.

[Operator:]

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.