Elme Communities
Q3 2008 Earnings Call Transcript

Published: 25 Oct 2008

[Operator:]

Welcome to the Washington Real Estate Investment Trust third quarter 2008 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 Shiplet, Director of Finance will provide some introductory information.

[Kelly Shiplet:]

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 in accordance with Reg G we have provided a reconciliation to those measures in the supplemental. 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. Although such statements and projections are based upon what we believe to be reasonable assumptions, actual results may differ from those projections. Key factors that could cause actual results to differ materially include changes in the economy, the successful and timely completion of acquisitions, changes in interest rates, leasing activities and other risks associated with the commercial real estate business and as detailed in our filings from time to time with the Securities and Exchange Commission. Participating in today’s call with me will be Skip McKenzie, President and CEO, Sara Grootwassink, Executive Vice President and Chief Financial Officer, Laura Franklin, Executive Vice President and Chief Accounting and Administrative Officer and Mike Paukstitus, Senior Vice President – Real Estate. Now I’d like to turn the call over to Skip.

[George F. McKenzie:]

Good morning and thank you for joining Washington Real Estate Investment Trust conference call today. The third quarter was one of notable accomplishments for Washington Real Estate Investment Trust. On the capital market side we continue to strengthen our balance sheet by adding over $100 million in common equity. In real estate we acquired a 374-unit in-fill apartment building in Washington D.C. and ended the quarter with our overall commercial portfolio at 97% leased and our multi-family portfolio excluding development are at 96% leased. We made significant leasing progress on our development assets highlighted by 123,000 square foot lease with IBM and corporately we concluded our Chief Financial Officer search. That’s the good news. The bad news is that our customers, our tenants continue to face significant economic challenges, financing their businesses and selling their goods and services. Although Washington D.C. and its environs are typically less negatively affected by economic downturns, clearly there are increasing signs of financial distress throughout our region. In general, delinquencies are increasing, vacancies persist longer and the number of tenants expanding their business by taking additional space are diminished or non-existent. While we are buckling our chin straps in preparation for the month ahead I am cautiously optimistic that the presence of the Federal government and our region’s resilience will provide sound footing in these powerless times. While the past is not necessarily prologue I’d like to offer some brief statistics from the last economic downturn. From 2001 to 2003 the national economy lost 1.8 million jobs. Of the nine other largest metro areas, eight posted job losses and five lost more than 100,000 jobs. In contrast, our region added 66,000 jobs over that time frame. When the jobless rate peaked at 6% our region peaked at 3.9%. In adverse economic climates we believe there is no better region to be based than here in the nation’s capital. In the office sector in our region, overall market wide office vacancies have increased since the second quarter with Northern Virginia at 11.9%, suburban Maryland at 11.5% and D.C. at 6.6%. Vacancy rates in the Baltimore-Washington and industrial corridor are at 11.9% and the industrial vacancy rate in suburban D.C. is 8.9%. Throughout the region, leasing velocity in all commercial sectors is down significantly. In the WRIT portfolio our commercial assets were well leased at the end of the third quarter. Our commercial property sectors were leased as follows

[Sara L. Grootwassink:]

Good morning everyone. Funds from operations for the quarter were $27.4 million or $0.55 per diluted share. This compares to FFO for the same period one year ago of $27.7 million or $0.59 per diluted share. FFO decreased on a per share basis primarily due to dilution associated with the funding of our balance sheet through equity issuances. Funds available for distribution were $0.45 per diluted share in the quarter, resulting in a FAD payout ratio of 95.5%. Given the current economic conditions the portfolio performed well during the third quarter. Core cash net operating income increased by 0.3% with revenue growth of 2.5%. Core occupancy for the portfolio decreased 170 basis points to 93.7% compared to the same period one year ago. By sector our performance is broken down as follows. Office properties’ core cash NOI for the third quarter increased 2.4% compared to the same period one year ago while core occupancy decreased 230 basis points to 92.5%. Core net revenue growth was 3.5% due primarily to rental rate increases and to a lesser extent lease termination fees. Medical office properties’ core cash NOI for the third quarter increased 1.9%. Core economic occupancy decreased 300 basis points due to several small move-outs throughout the portfolio but remains high at 96.6%. Core net revenue growth for the sector was 3.6% due to annual rent increases. Multi-family properties’ core cash NOI for the third quarter increased 1.2% compared to the same period one year ago. Net revenue growth was 1.6% due to rental rate increases throughout the portfolio while core economic occupancy increased 130 basis points to 94.7%. Retail properties’ core cash NOI for the third quarter decreased 1.1%. While rental rate increases were strong they were offset by a 60 basis point decline in core occupancy to 94.3% and an increase in bad debt expense. Industrial properties’ core cash NOI for the third quarter decreased 4.8% compared to the same period one year ago. The decline in occupancy was offset by rental rate increases. However, bad debt expense increased in this sector as well. From a capital market perspective we believe we are in great shape. The actions we took this quarter have positioned us very well for the year ahead. Since September we have raised more than $100 million in equity in an average share price of $35.46 and fully repaid all borrowings on our lines of credit. In addition, we have no near term maturities for the remainder of 2008. In 2009, our only debt maturity is a $50 million residential property mortgage due in October of 2009. During the quarter we had entered into a sales agency financing agreement with Bank of New York Mellon Capital Markets. Under the agreement we may sell shares according to when it’s set by WRIT for a 1% sales commission. As of September 30, 2008 we had issued an aggregate of 1.1 million shares at a weighted average share price of $36.15 for $41 million in gross proceeds. We believe the program worked very well to raise incremental equity capital at a controlled price with virtually no disruption in our share price during the period in which the shares were sold. With continued uncertainty in the capital markets we seized the opportunity to raise additional equity and further strengthen our balance sheet at the end of the quarter. On October 1, 2008 WRIT completed a $60.4 million equity offering of 1.725 million common shares at a price of $35 per share. We believe we are now in a position to easily fund our capital requirements over the next year. In further clarity for the remainder of the year we have decreased our 2008 FFO guidance from a range of $2.11 to $2.21 to a range of $2.07 to $2.12 per share. The decrease is primarily due to dilution associated with additional equity offerings and the delayed timing of acquisitions as well as somewhat lower than expected NOI due to current economic conditions. The fourth quarter will include a full quarter of revenue recognition for the Dulles Station leases that Mike will speak about in a moment but it should be noted that tenant improvement costs have been deemed a lease incentive for accounting purposes. The incentives will be deducted from revenue on a straight line basis and reduce NOI rather than being depreciated over the life of the lease. With that I will now turn the call over to Mike to discuss operations

[Michael S. Paukstitus:]

WRIT made significant strides on the leasing front this quarter. WRIT executed two major leases of our Dulles Station West office development and in addition signed commercial leases in the main portfolio totaling 460,000 square feet. The average rental rate increase on leases signed this quarter, including those signed at Dulles Station, was 8.6% on a cash basis and 20.9% on a GAAP basis. Tenant improvement costs were $9.41 per square foot. Residential rental rates increased 1.3% in the third quarter compared to the same period one year ago. Rental rates for new and renewed leases in each sector ranged from an increase of 1.9% to 26.2% on a cash basis but a $1.20 to $21.72 per square foot in tenant improvement costs in our non-development portfolios. The office sector, excluding our Dulles Station West development project, we executed leases for a total of 122,000 square feet and an average rental rate increase of 1.9% on a cash basis and 16.1% on a GAAP basis. Consistent with our small tenant focus to mitigate risk, 25 of the 31 leases were for 5,000 square feet or less. By region, our office portfolio is leased as follows

[Operator:]

(Operator Instructions) Your first question comes from William Crow – Raymond James.

[William Crow:]

Can we talk about the distress from a couple different perspectives? First of all the tenants angle. You noted an increase in bad debt. I think that was specific to the investor and flex portfolio. Can you talk specifically about that occasion and what is, as you look at your tenant profile, you see an increasing risk for the health of your tenants and if so to what extent?

[George F. McKenzie:]

Yes, we are definitely seeing an increase in bad debt expense and just to give you some kind of big round numbers, as a general rule over the last let’s say five years, the metric that we follow is bad debt expense as a percentage of net potential revenue and historically we’ve been in that sort of neighborhood of 0.5% to 0.7% and we’re almost approaching double that year-to-date in 2008. And to a large degree, the worst sector is the industrial sector. I believe I’ve mentioned that on prior conference calls where I’ve projected that and in fact we are experiencing that today. Year-to-date in 2008 we’re somewhere in the neighborhood of 3% of our industrial portfolio is suffering bad debt expense today and with lesser degrees in the retail sector, closer to 2% and then more moderate, more typical ranges being experienced in the other three sectors but those being up modestly.

[William Crow:]

Skip, if you go back to past downturns and this may be a unique downtown, we’ll see, but how bad can it get do you think?

[George F. McKenzie:]

Well, your guess is as good as mine as how bad it can get. As I stated in my comments, there’s no better place to be than Washington D.C. and we feel confident that certainly with respect to our property types, the majority in-fill with very solid tenants and small tenants that there are going to be some scrapes and bruises over the next year but certainly we’re going to pull through and we’re going to do better than any other market in the country. But we’re in extraordinary times so I’d be hesitant to make any sort of projection of where we’re going to be 12 months from now just because I don’t know. Our tenants are performing well; we’re 93% occupied in most sectors or above and we’re staying extremely close to our tenants. We’re asset managing our properties very closely. Our asset managers are meeting with tenants regularly. We regularly meet on these issues so we’re staying as close to the issues as we can. We think we have a good handle on it but there’s no question that the world we’re living in today is quite a bit different than it was certainly 12 months ago.

[William Crow:]

The other area of distress of course is on the refi side. Are you starting to see more properties become available or starting to field calls from folks that maybe can’t get refis or the cost of the refi, the debt is so high that they can’t hold the property?

[George F. McKenzie:]

There hasn’t been a dramatic amount of that here in Washington as of yet. I believe that will occur over time but no there hasn’t been a significant amount. Obviously, Monument is a group that’s been spoken about much in print and otherwise with their relation to Lehman Brothers but as a general rule, there certainly hasn’t been a large foreclosure market in this market year-to-date and there have been limited instances of people who have reached out. But no there hasn’t been a dramatic ramp up in that activity yet but I would anticipate it’ll come eventually.

[Operator:]

Your next question comes from John Guinee – Stifel Nicolaus & Company, Inc.

[John Guinee:]

First, just a couple clarifications. Sara, lease term fees in the second quarter or third quarter and then also, what’s the put date on your exchangeable notes?

[Sara L. Grootwassink:]

Well the exchangeable note’s for five years out so five years from the age of the maturity which would have been November and January. November of ’05 and I believe in January of ’06. And then in terms of lease termination fees, they were $387,000 this quarter.

[John Guinee:]

Any chance that was November of –

[Sara L. Grootwassink:]

You know what, it was ’06 and ’07 I called it.

[John Guinee:]

The second issue I guess, Skip, core occupancy is going to be key to the next couple years and a lot of that is driven just by the quality of the vacant space and the ability to lease that. Has any significant amount of space are just functionally challenged and we just don’t expect to lease in the next two or three years?

[George F. McKenzie:]

Well I would say no; we have nothing in that category that you say is functionally challenged. I think I’ve mentioned on past conference calls, I mentioned today it’s tough to lease anything that’s currently vacant because as I noted, no one’s expanding and no one’s growing their business today. The analogy I give is a basketball one. I said everybody’s playing the four corners right now. No one wants to expand their business. So anything that’s vacant is a challenge but to answer your question specifically, no we don’t have any what I would call obsolete or space that’s extremely difficult to lease in our portfolio. One of the things we’ve done as you know, John, in the past we’ve sold some of our tougher properties like Maryland Trade Center and our Sullyfield Commerce Center so I think we’re in pretty good shape just from a portfolio perspective but vacant space anywhere is difficult space today.

[John Guinee:]

Would it be appropriate to assume maybe a 2% or 3% occupancy rolldown in the next 12 months overall?

[George F. McKenzie:]

There’s going to be some occupancy rolldown. I don’t have a specific number for you unfortunately. The good news for us, let me just give you some numbers and refer back to our supplemental, in 2008 for the balance of this year we don’t have, and I’m talking on aggregate here on our commercial portfolio, we only have 1.5% of our portfolio rolling and next year we only have 10%. And this is by annualized rent so the good news is we don’t have a huge exposure of rollover and I guess one of the positive aspects of a weird market like this is, believe it or not retention rates sometimes go up because tenants don’t move. They tend to stay where they are as they sort of delay making decisions to grow so on one hand you’ve got that force working for you; on the other hand there’s going to be some increase in delinquencies and there’s no question about it that on a retail and industrial portfolio particularly we’re going to see probably in the neighborhood that you suggested, increase of 200 basis points. And again your guess is as good as mine. I don’t have any firm numbers on that but I would say those sectors in particular are ones where you might see that sort of neighborhood. I don’t think you’re going to see that. If you want to drill down a little bit tighter we’re not going to see that sort of loss in our medical office building portfolio. You might see some in the office portfolio; I don’t believe so and I don’t think we’re going to experience that in the residential portfolio, multi-family portfolio. So I think you really need to drill down a little bit closer and by sector.

[John Guinee:]

One quick question. Hey, Sara, are the exchangeable notes, do they total about 260 or are they 310?

[Sara L. Grootwassink:]

No, they’re 260 month.

[Operator:]

Your next question comes from Mark Biffert – Oppenheimer & Co.

[Mark Biffert:]

First question, when you’re looking at the tenants that are leaving some of your facilities, what is their form of business or what do they do and are you seeing a trend in certain sectors? And then also on the leasing side, are you seeing any specific demand from certain sectors versus others?

[George F. McKenzie:]

Well let me answer the second question first. On the leasing side, leasing activity is down dramatically; you don’t see any great demand from any one sector anywhere. As I said, everybody’s playing the four corners. There isn’t any one sector where anybody’s seeing a lot of growth right now. In terms of when you comment that a tenant is leaving the property, we’re not losing a lot of tenants to other properties. Certainly, all of the tenants that are being impacted by the current economic downturn are hurting and some of those tenants we’re certainly seeing loss via bankruptcy and others such as in our small bay industrial we’re seeing a lot of the people that are related to the construction industry and the home improvement industry, all the marble countertop guys. And we even, one of our retail leasing guy was telling me how he was talking to some of the car repair guys who were commenting that their business is off 30%. So we’re seeing a lot of the consumer related activity tenants of ours having tough times and those are the folks that, in that retail and industrial sector that are grinding the hardest today.

[Mark Biffert:]

So in your conversation with tenants that have upcoming expirations, what are they saying in terms of their ability to renew and do you have any expectation of additional people leaving in the next six to 12 months?

[George F. McKenzie:]

I think the next six and 12 months is going to be difficult and I think our approach is to maintain occupancy and I wouldn’t anticipate significant rental rate increases and I’m certainly not anticipating dramatic losses in our occupancy as well. I think we’re going, as I mentioned to John, that I think that certain sectors we might loss a couple hundred basis points but I think you’ve got to look at it on a sector by sector basis. But we’re all forecasting here. My crystal ball is somewhat a little foggy this morning.

[Mark Biffert:]

Lastly, when you look at The Kenmore that you guys bought, I noticed that you guys put, I don’t know if that’s a small redevelopment in your development pipeline. Is that a kitchen and bath remodel and then I’m just wondering if the rent in this environment can justify that?

[Sara L. Grootwassink:]

That’s Alexandria Professional Center.

[Michael S. Paukstitus:]

Different Kenmore.

[Sara L. Grootwassink:]

That’s the [inaudible] that we bought and then to the Alexandria Professional Center and we’re starting the development process in building a medical office building there. That’s –

[Mark Biffert:]

Sorry about that. Just saw the Kenmore name.

[George F. McKenzie:]

Unfortunately, they both have the exact same name which is I guess something which should note somehow but yes, the medical office site in Alexandria is on Kenmore Avenue, believe it or not and that’s not to be confused with The Kenmore apartments which are on Connecticut Avenue in D.C. That is confusing.

[Operator:]

Your next question comes from Christopher Lucas – Robert W. Baird & Co., Inc.

[Christopher Lucas:]

Just a couple of followup questions particularly on Dulles Station. Mike, it sounded like you are optimistic about getting the last pieces at there leased. Do you have a tenant in hand or are in deep negotiations at this point?

[Michael S. Paukstitus:]

Yes, we have actual prospects we’re looking at right now. We’re down to the last 20,000 feet so our marketing strategy before was after the much larger tenant. Now we can focus 100% of our time and rifle shot into the smaller groups. So yes we’ve got active prospects in hand right now and it’s just finishing off the second floor.

[Christopher Lucas:]

Also, you had mentioned that TIs were $60 to $70 a foot but how do you look at the current expected cost on the building relative to the amount spent already? It works to about an extra $90 a foot. Can you sort of help me walk through that variance between the $60 to $70 and the TI expectation and the $90 that’s expected in the total cost?

[Michael S. Paukstitus:]

Well, we’re coming in the mid-300s on a total aggregate basis on that building. We’re obviously our TIs are much more than we had anticipated as everybody’s anticipated that marketplace.

[Christopher Lucas:]

So I guess I’m just trying to understand, the $60 to $70 is what you’ve indicated and then there’s basically it’s a $90 per square foot variance between the cost expense for the third quarter and the final estimated cost. Is there some other cost we should be thinking about or is that with TI?

[Michael S. Paukstitus:]

Well leasing commissions too. We’ve got long term leases and leasing commissions are high for the marketplace given the economic conditions right now.

[George F. McKenzie:]

The overall increase in $90 seems high to me.

[Michael S. Paukstitus:]

$90 a foot?

[George F. McKenzie:]

Yes, that doesn’t seem right to me and I don’t have an answer for you but –

[Christopher Lucas:]

It comes in at $45 and you’re looking at I think the expected number is around $60 plus million so that’s the amount that I come up with. Anyway –

[George F. McKenzie:]

The original, well let me just back off for a second. The original expected investment in the project I think was $52 million. When it was fully built out with 10 improvements, leasing commissions, blah blah blah blah, everything added in, the original expectation was $52 million. Now we’re more in the $60 million and that’s almost totally attributable to the increased TIs and leasing commissions.

[Michael S. Paukstitus:]

That’s about $80 a foot.

[George F. McKenzie:]

Yes, so the $90 just doesn’t seem right.

[Christopher Lucas:]

Well, I’m just basing it off of your –

[George F. McKenzie:]

Right. The $44 investment to date is not a fully completed building. There’s no TIs in it, no leasing commissions, etc.

[Michael S. Paukstitus:]

It’s pretty much just a shell as we had finished.

[Christopher Lucas:]

Right so the TI leasing commission package is $90 a foot?

[George F. McKenzie:]

Yes.

[Christopher Lucas:]

In terms of the bad debt reserve expense issue, can you just give us a sense of what it was in a dollar amount basis in the second quarter and what it is in the third quarter.

[Sara L. Grootwassink:]

I can give you what we’re expecting. In the second quarter we were at $385,000 and in the third quarter we were at $387,000.

[Kelly Shiplet:]

Actually our third quarter total bad debt was about $1 million and it’s about $300,000 some higher than the third quarter. Then we’re forecasting about the same level for Q3, maintaining that level of about $1 million for Q4.

[Christopher Lucas:]

So essentially no sequential change from third quarter to fourth quarter.

[Kelly Shiplet:]

Based on our current forecast, that is correct.

[Christopher Lucas:]

How does the process work in terms of when you determine when the bad debt expenses need to be taken?

[Kelly Shiplet:]

Well basically what we do is for tenants that are aged over 90 days we reserve for those as well as tenants we are in legal for. Basically our asset management team we sit down and we go through that with the asset management group to get a feel for the estimated collectability on those tenants. So, that feeds in to our reserve percentages.

[Christopher Lucas:]

Then just a broader question, how’s your thought process changed since say June in terms of how you’re thinking about acquisitions in terms of the required return necessary to make it wor$th while in today’s environment.

[George F. McKenzie:]

We are much more cautious, I can tell you in one word. The activity out there is so dramatically down and I guess it was down in June. We’re being a lot picker, a lot choosier, obviously we haven’t done a lot since then. We’re trying to see where the bottom is. I would say the operative word is cautious.

[Christopher Lucas:]

Any thoughts on cap rate or growing in yield changes or what your expected sort of three year return expectation would be on a return on invested capital, how that might have changed?

[George F. McKenzie:]

I think cap rates have changed a 100 basis points for example. I think it’s still a property-by-property specific analysis. I don’t think that downtown offices buildings are the same as suburban office buildings which I don’t know if anybody’s looking at, which are the same as apartment buildings, there is still a lot of variability in it in terms of risk reward relationship.

[Operator:]

Our next question comes from Michael Knott – Green Street Advisors.

[Michael Knott:]

Just a follow up on that question, if you had to redo the Kenmore acquisition today, the apartments just to be clear, how much more leverage do you feel like you would have today versus just a short time ago just given what’s happened in the capital markets?

[George F. McKenzie:]

What do you mean by leverage?

[Michael Knott:]

In terms of your ability to negotiate a lower price?

[George F. McKenzie:]

I’m not sure the price for something like that has changed dramatically. The reason I say that is because that was a 5% acquisition a year ago. We acquired with a 6.3% return so that was a fairly significant price movement. You’re bumping against replacement the cost, that was required at 50% of replacement cost. Anybody can go back and do all kinds of theoretical guessing but I’m not sure that price has changed significantly since we acquired that at all, if at all.

[Michael Knott:]

Then with the call it $350 million of capital you have available, what’s your time frame in terms of how long you expect the need to last? Are you expecting the credit environment to persist for a couple of more years? How are you thinking about how long you need to keep that capital?

[George F. McKenzie:]

Again, I would just reiterate that we’re being extremely cautious. We’re going to keep a very close eye on the credit markets and the world around us and where that availability is going. So, yes we’re going to be very cautious deploying our capital if we don’t see the world losing up because we’re obviously not going to go out and buy a $360 million asset in the next six months unless the world changes dramatically. We’re being very cautious. I wish I could tell you I knew the answers to when the credit markets would open up but I haven’t found anybody yet that knows the answer to that. A lot smarter people than me can’t answer that question.

[Michael Knott:]

Then either Skip, Mike or Sara, can you talk about the lease up of the two multifamily developments and what your time frame is now?

[George F. McKenzie:]

As far as what? The lease up is going well. We think that they’ll be maybe not leased up at the end of the year but certainly in to the first quarter of 2009. We’re pleased with what’s going on there. Is there something else you’re looking for?

[Michael Knott:]

No I was just curious about the time line that extended?

[George F. McKenzie:]

I do think it’s extended a little bit mainly because the fourth quarter tends to be a slower quarter and the world is strange right now but I don’t think it’s dramatically extended. I think we’re probably looking at getting to 90% whatever, 93%, 94% leased in the first quarter of 09 sometime.

[Michael Knott:]

Then just a question on the office cap ex this quarter TIs, that seemed to be higher. Is that because the lease term was a little longer?

[George F. McKenzie:]

Yes. If you look at our lease term it’s up dramatically. Our office lease term is 7.1 years I believe and historically we only usually average five years with our small tenant focus. Our lease term this quarter is dramatically longer than it is typically for REIT. It’s over seven years which is long for us. We did a bunch of fairly long leases.

[Michael Knott:]

That doesn’t reflect an increasing trend in TIs in your sub markets?

[George F. McKenzie:]

Well, I do think TIs are up. I think you’ve got two forces working there. I think that the significant impact to that is the extended lease term. I mean typically we’re doing leases that are 40 months to 60 months in that range, this year we’re doing a seven year lease. And, I also do believe that due to the competitive environment that we are in that TIs have gone up a little bit. A good example not that it’s in that formula, those metrics we just discussed but Dulles Station. The more competitive markets tenants are demanding higher TIs there is no question about that.

[Operator:]

Our next question comes from David Rodgers – RBC Capital Markets.

[David Rodgers:]

At this point I guess given your view on the investment opportunities and the equity funding you’ve done to date you’ve done a good job delevering. As you look at 2009, when do you think some of those opportunities start opening up? It sounds like your view may have changed so would you anticipate pursuing those opportunities leverage neutral from here or still taking leverage up a little bit for the right opportunity?

[George F. McKenzie:]

I don’t think our view has changed really. We’re being cautious but if we see the right opportunity for the properties that we think are attractively priced in sectors we haven’t been able to buy, we’re going to move on them. It’s just that to be quite honest with you there hasn’t been a whole lot of that out there today. I think it will happen, I think there will be great opportunities for us in ’09 but I don’t know that. I’d be the first on to admit I just don’t know when they’re going to manifest themselves but they’re not manifest today. Yes, there’s opportunities out there but there isn’t that dramatic bargain that everybody seems to be looking for today. I think things are getting more attractively priced and we’re going to be looking closely at a number of different opportunities but when the world changes dramatically, your guess is as good as mine.

[David Rodgers:]

A question for Sara, Sara can you explain, I think you went through the Dulles Station leasing treatment in fact to NOI, can you explain what that impact might be on a sequential quarter base from third quarter to fourth quarter?

[Sara L. Grootwassink:]

Well, on an annual basis it’s going to be about $1 million a year reduction to NOI.

[David Rodgers:]

A follow up to that, I guess seeing the guidance with the high end of 212 given where you ended up in the third quarter, not that your comments suggest that you’re headed to the high end but it did surprise me to see the number up there, I guess what opportunistically get’s you up that high in the range given where we are in the year?

[Sara L. Grootwassink:]

I think that depends on acquisition activities throughout the rest of the year and the timing of that.

[David Rodgers:]

Then finally Sara, I know that you’re not in the market for large pieces of debt but could you kind of just give us an update on your discussions with lenders, maybe how those have changed over the past month or two months? What their tone is today overall?

[Sara L. Grootwassink:]

Well, there’s not a lot of debt available. At this point a few banks might be willing to give you some on balance sheet lendings, the ones that you have very long term relationships with but in general, the only commercial real estate secured debt is going to come from insurance companies at this point. Of course, they’re taking advantage of that position and requiring very low loan-to-values and on occasion recourse which is something that’s new in the market place. So, there’s not a lot of debt available. Fannie and Freddie on the other hand seem to be operating business as usual and the benefit of that to us is that the only debt maturity we have in ’09 is a multifamily secured loan. It’s secured by five apartment buildings in Virginia and those are about 25% loan-to-value. That should be able to be refinanced very easily next year if we choose to do that with Fannie or Freddie. Then in terms of unsecured debt, I mean the spreads are just dramatically widened and of course there’s been no corporate bond issuances in the REIT sector in quite some time and I don’t anticipate that there will be any time soon.

[Operator:]

Our next question comes from John Guinee – Stifel Nicolaus & Company, Inc.

[John Guinee:]

Just a quick follow up, I know a lot of your peers in the office space are buying back their exchangeable notes at $0.65, $0.70 on the dollar and a yield to maturity or a yield to put somewhere in the mid to high teens. Are you exploring that at all and is the pricing the same [inaudible] with exchangeable notes?

[Sara L. Grootwassink:]

The pricing is not the same. Our notes are trading at about $0.79 to $0.80 on the dollar with and 11% yield to put and so we are not contemplating that at this time. I think we’d rather leave the extremely attractively priced debt out there at this time.

[John Guinee:]

Then I had a quick question about M Street, are you guys still planning to close that in the fourth quarter, correct?

[George F. McKenzie:]

We’re subject to a contract that’s out there. The seller has certain rights, I can’t talk about the specifics of the contract because we’re subject to a confidentiality provision but yes, we’re governed by the contract with the seller. And, as you know, Broadway is doing a lot of maneuvering out there and we’re waiting to close on the asset.

[John Guinee:]

But is that one of the deals that you thought might get pushed out?

[George F. McKenzie:]

Yes. It has been pushed out. They had a right under the contract to extend closing and that’s what has occurred.

[John Guinee:]

Beyond fourth quarter or still in fourth quarter?

[George F. McKenzie:]

In the fourth quarter.

[Operator:]

Our next question comes from Christopher Lucas – Robert W. Baird & Co., Inc.

[Christopher Lucas:]

Just a follow up, on the refinance of the multifamily assets, what’s the thought process at this point in terms of just generally how much secured leverage capacity you might be able to pull out of the apartment portfolio given the liquidity that still remains in that property type?

[Sara L. Grootwassink:]

There are a lot of things that we could do. We could leave those five properties in a pool. We could add the two apartment properties that should be stabilized at that point. But, I think that you have to look at a couple of different things. With that [inaudible] to acquisition, we’re increasing our secured debt by another $100 with that transaction and you have to keep an eye on your level of secured debt when thinking about your credit rating. So, it’s a balance. I think we have to see where our secured debt to total asset ratio comes out at that time and evaluate whether or not we want to increase the leverage on those five properties, add some more properties, increase the leverage there or potentially pull out couple of properties and only – we could just refinance the $50 million on one or two apartment assets and increase our unencumbered pool of assets. I think a lot depends on what our acquisition activity is between now and then and what the unsecured bond markets look like and what the secured debt markets look like.

[George F. McKenzie:]

They are significantly under levered though. That’s sort of what Sara was alluding too. I believe at one point we figured what 25% leverage on those assets.

[Sara L. Grootwassink:]

Yes.

[George F. McKenzie:]

So, not knowing how people are going to look at this in October as crazy as the world is but we believe there is a lot of leverage available there and Sara is right, maybe we would only pull a couple of those assets out and take out the same amount of money on lesser assets in the pool. So, it’s hard to say what we’re going to do today.

[Operator:]

There are no further questions. At this time I will turn the conference back to management for closing comments.

[George F. McKenzie:]

Thank you for your interest in the company today. I hope everybody has a good weekend. We look forward to talking to you in the fourth quarter. Have a good weekend and hold on tight.

[Operator:]

This concludes today’s conference. Thank you all for participating.