Executives
Wayne Pham – VP of Finance
Ray Marino – President and COO
Carl Berg – Chairman and CEO
Analysts
Erin Aslakson – Stifel Nicolaus
David Cock [ph] – Teachers and Turn [ph]
Anthony Paolone – JP Morgan
Mission West Properties, Inc. (MSW) Q3 2008 Earnings Call Transcript October 16, 2008 11:00 AM ET
Operator
Ladies and gentlemen, and welcome to Mission West Properties third quarter 2008 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator instructions) I’d now like to turn the conference over to your host, Mr. Wayne Pham, VP of Finance. Sir, you may begin.
Wayne Pham
Thank you. Good morning, everyone. Welcome to the Mission West Properties Q3 2008 conference call. Let me begin with the earnings results for the third quarter. Funds from operations or FFO for the third quarter 2008 was approximately $14.2 million or $0.13 per share, as compared to $61 million or $0.58 per share for the comparable period in 2007. FFO per share decreased 77.6% primarily due to higher lease termination fees in 2007.
Net termination fee relating to lease termination for the third quarter of 2007 accounted for approximately $46.3 million, or $0.44 per share. FFO for the quarter ended June 30th, 2008 was approximately $0.12 per share. For the nine months ended September 30th, 2008, FFO decreased to approximately $42.5 million or $0.40 per share, and FFO of approximately $100.9 million or $0.96 per share for the same period in 2007, primarily due to higher lease termination fees and security deposit forfeiture.
Termination fee income relating to lease termination accounted for approximately $1.9 million or $0.02 per share for the nine months ended September 3rd, 2008.
Write-off of and above market lease and intangible asset against income relating to one lease termination accounted for approximately $3.6 million or $0.03 per share for the nine months ended September 30th, 2007.
Net income available to common stockholders for the third quarter was approximately $1.6 million. This resulted in diluted earnings per share of $0.08, compared to $0.60 for the comparable period in 2007, a per share decrease of 87%.
Net examination fee income relating to lease termination accounted for approximately $0.47 per share for the three months ended September 30th, 2007.
Diluted earnings per share for the quarter ended June 30, 2008 was $0.07. For the nine months ended September 3rd, 2008, net income available to common stockholders per diluted share was $0.25, down from $0.87 one year ago, a per share decrease of approximately 71%. Approximately $0.02 and $0.52 per share was due to termination fees and security deposit forfeiture relating to lease terminations for the nine months ended September 30th, 2008 and 2007, respectively.
Write off of (inaudible) and intangible assets against income relating to lease termination accounted for approximately $0.04 for the nine months ended September 30th, 2007.
Rental revenue for the third quarter of 2008 was approximately $20.3 million, compared to $19 million for the same period in 2007, an increase of approximately 6.6%. The increase was due to a straight line vital adjustment in 2007 for a lease termination. For the nine months ended September 3rd, 2008, rental revenues increased to approximately $58.6 million from $57.3 million in 2007.
The occupancy rate for leased properties at quarter end was 66.7%, which increased by 6.5%, compared to the same period a year ago, and increased 2.8% compared to last quarter.
Tenant reimbursement increased 33.4% in the third quarter of 2008, compared to the same period a year ago due to 2007 common area and maintenance billings. For the nine months ended September 30th, 2008, tenant reimbursement increased 20.1%, compared to the same period in 2007.
Operating expenses, including real estate taxes for the third quarter decreased 6.2%, compared to the same period in 2007, primarily due to higher commission expense written off in 2007 that did not recur in 2008. For the nine months ended September 3rd, 2008, operating expenses increased by 6.1%, compared to the same period in 2007 due to higher repairs and maintenance expense, higher utility usage, and lower commission expense.
Same-store NOI on a cash basis for the third quarter of 2008 decreased 11.6%, compared to the same period in 2007, mainly driven by lower rental revenue and higher operating expenses.
On the financing front, we obtained a $150 million fixed rate loan from the Hartford Company. The loan bears the fixed interest rate of 6.21%, and matures October 1st, 2018. Further loan fees and costs were approximately $1 million, which will be amortized over the life of the loan. The proceeds were used primarily to save the Prudential loan and short-term debt.
Now, I will turn it over to Ray Marino who will discuss recent activities and the current R&D market in the Silicon Valley, Ray.
Ray Marino
Thank you, Wayne. Good morning, everyone. Preliminary data from CPS CORFAC International indicates that the third quarter vacancy rate for R&D space in Silicon Valley was at 16.3% or approximately 27.5 million square feet. R&D sublease space represents 16.9% of the total vacant R&D space, or roughly 4.64 million square feet. The office vacancy was at 21.4%, or approximately 8.3 million square feet. Office sublease space represents 9.1% of that number for approximately 157,000 square feet.
For the third quarter, CPS CORFAC International reported positive net absorption of 541,000 square feet in the R&D section. And the Silicon Valley office sector experienced negative net absorption of approximately 214,000 square feet.
Based on preliminary data from the State of California's Employment Development Department Web site, Santa Clara County's unemployment rate dropped from a high of 8.9% in March 2003 to 6.5% in August 2008. And during the same time period, the total labor force has increased from 861,000 to 879,000 workers. The unemployment rate increased from 5% in August 2007 to 6.5% in August 2008, which equates to a total of 57,000 people available for employment.
Merger announcements and other corporate cost containment measures will potentially result in further corporate restructurings that may lead to additional headcount reductions and an increase in the level of unemployment in Silicon Valley.
Silicon Valley in the San Francisco Bay area, in general, continues to attract venture capital investment in hardware, software, telecommunications, green technologies, and bioscience companies. Our tenant receivables, there’s nothing to report of any significant delinquencies.
On the new and renewal leasing front, during the third quarter, Mission West completed three new leases and two renewals. The new leases were for a total of 175,000 square feet, with a weighted average lease term of 58 months, and a weighted average triple net lease rate of $1.63 per square foot per month or $19.56 per year, with no TI or – with no TI cost and $653,000 in commissions. Renewal leases were for a total of 131,000 square feet, with a weighted average lease term of 43 months, and a weighted average triple net lease rate of $1.42 per square foot per month or $17.04 per year. And there were no commissions or TI cost related to those renewals. Our total for 2008 is now in excess of 959,000 square feet for both new and renewal leases.
Carl?
Carl Berg
Good morning. I thought today I’d take a few minutes to update everybody on where Mission West really stands and what’s really going on. I think ever since this past – excuse me, ever since this past summer when we were looking at maybe selling the REIT, we’ve not gone to the trouble to tell everybody where Mission West really stands. And so, I thought I’d take some time this morning to do it.
Even though our vacancy is 33%, which is something that we’re not very happy about, Mission West today is probably one of the best REITs in the United States. And I’ll give you some of the facts to back that up.
Our vacancy picture is not a true picture of what’s really going on. Of that vacancy, 4% is CNM [ph], which we’re getting paid on until 2011 in cash flow. Another 10% is McCandless Properties, which finally got approved by the city. And basically, I’ll go into that in more detail. But that’s another 10% of our vacancy. You take away that 14%, and we’re right there with the rest of the Silicon Valley average rental vacancy.
We probably have the highest quality of tenants in Silicon Valley. We have one of the strongest balance sheets in the industry, even in these tough times. We have one of the lowest debts that grosses at ratios in the agreed industry at 29.07%. We have one of the top ten coverage ratios of EBITDA to interest per PERD at 5.78 times interest. We have one of the lowest G&A percentages in the REIT world at 2.05%. We do all of our leasing, our tax returns, and SEC filings in-house, and still have that low G&A. We have no debt pay-offs due until 2018. And our weighted average interest rate is 5.74%.
81.25% of our ownership is in OP units, by far the largest amount of OP ownership in the REIT industry. Effective the end of this year, OP units will be included in equity, and all of the income from both the OP – attributable to the OP units and the shareholders will be shown. This will enhance our marketability.
But the biggest thing that I want to talk about is during the last four quarters in Silicon Valley R&D markets. There’s been a negative absorption in the entire market of 142,306 square feet. In that same four quarters, Mission West has had a positive absorption of 581,411 square feet.
As Ray just stated, during the first three quarters of 2008, we’ve leased 959,000 square feet, 713,000 of that is new leases. And we’ve renewed leases for 245,000. We’re now back to the point where we used to be when we renewed approximately 80% of our leases that are expiring.
During the remainder of 2008, we expect 52,000 square feet of leases to be vacated. During 2009, we expect 208,000 square feet to be vacated.
For 2009, we expect our FFO to be a minimum of $0.55. For 2008, we expect FFO to be $0.55 to $0.60.
TBI, that we have a joint venture with, has an offer to purchase two of the properties in Morgan Hill. It’s expected to close by around the end of October. But in today’s world, you never know if anything’s going to close, but we believe this transaction probably will close. If that occurs, Mission West will have net cash of approximately $15 million. And this we cannot exchange as property, but this is a partnership interest.
So basically, the net result of this is some of you know that I previously said the reason our dividend is where it is today is because we had a carry over of roughly $0.20 of dividend from previous years that we needed to pay for the terms of the REIT rules. We expect to have, if this transaction closes, then Morgan Hill will have about $0.15 to $0.20 to carry over to the next year. And when you consider this with the $0.80 of cash flow we receive on the Siena [ph] buildings through the fourth quarter of 2011, basically, this means that we’re barely paying out what we to as the minimum and with our dividend at $0.80. We intend to continue based on what we know today.
We expect our $0.80 per year dividend to continue for the year 20– we will believe we will have an opportunity to build approximately 150,000 to 200,000 square feet of new buildings for existing tenants, primarily in the (inaudible) business during the year 2009. We believe we’re in a very good position to look at any distressed properties in top areas that become available in 2009.
On the 24 acres that we have an offer on for $76 million on McCandless Drive, the buyer has been working day and night with the city to get everything done to close the deal. It’s very difficult to know if they really will close the deal in this type of environment. But they have every intention to close it. And they have told us they will close it. If they do close, this will close the last week of December 2008 or maybe moved into the first few days of 2009. The tenant is certainly looking like they believe – I mean the buyer is looking like they believe they will close it. They’ve been working night and day with the city and City Council to get everything approved. And they claim they have the financing to do it. Time will tell.
With that, I’ll open it up to questions. But I think that it was – that we needed to take the few minutes and talk about everything that’s going good at Mission West. We think there’s an awful lot of things going good. And we think even with this unusually high vacancy, which is not a real, true picture, we’re one of the strongest REITs in the United States. And with that, I’ll open it to questions.
Question-and-Answer Session
Operator
Thank you, sir. (Operator instructions) Our first question comes from Erin Aslakson from Stifel Nicolaus.
Erin Aslakson – Stifel Nicolaus
Hi, good morning. How are you, guys?
Carl Berg
Hi.
Erin Aslakson – Stifel Nicolaus
Hey, thank you for taking my questions. First quick question was about the FFO guidance. Did I hear that you mentioned $0.55 per share for ’09 as well?
Carl Berg
Yes.
Erin Aslakson – Stifel Nicolaus
$0.55 to $0.60 range for ’08.
Carl Berg
$0.75 to $0.56.
Erin Aslakson – Stifel Nicolaus
Oh $0.55 to $0.56. Thank you, good correction.
Carl Berg
And we believe that’s the very minimum in 2009. That’s not assuming any new leases. It’s not assuming much of anything. And so that 2009 will be better net, unless the economy grabs us down, and we’re unable to lease much of anything.
Erin Aslakson – Stifel Nicolaus
And no term fees and things like that?
Carl Berg
No.
Erin Aslakson – Stifel Nicolaus
Okay. Okay, great. Thank you. And your other major lease expirations, you guys are expecting only 52,000 additional.
Carl Berg
In the year 2008 and (inaudible), 208,000 in 2009.
Erin Aslakson – Stifel Nicolaus
Okay. Do you expect to be able to make up those or see those in new leases or–?
Carl Berg
Yes. We don’t that’ll be a problem. We definitely think we will exceed the 209,000 that we’re losing in 2009.
Erin Aslakson – Stifel Nicolaus
Excellent. That’s good news. It looks like that the terms of the new Hartford loan were fairly good there. Was there a – what’s the difference between the borrowing bases of the two loans.
Carl Berg
Basically, it was very similar to what we had in the projection. We did change a few things around because there were a couple of properties that we want to get out of the loan base. And we had a couple of properties that were vacant that we substituted with properties that were leased.
Basically, Ray worked about two months getting that done, and did one [expletive] of a job to get it closed because about two or three days after that, Hartford ended up having to borrow $2.5 billion from Elliot, so.
Erin Aslakson – Stifel Nicolaus
Oh gees.
Carl Berg
Yes. We’re very lucky that we got that done as Ray did one [expletive] of a job. He spent nearly two months doing nothing, but working on that lease, putting that loan.
Erin Aslakson – Stifel Nicolaus
Oh that’s horrendous. And is the new one secured – or the previous was secured by 28 properties. But it looks like the new one is secured by 20.
Carl Berg
Yes. I don’t know if that’s correct or not. I don’t have that handy. Is that correct, Wayne?
Wayne Pham
(inaudible).
Carl Berg
Yes. I think that’s more or less correct because we gave them some different kind of properties because we wanted to release the comparable properties that were in the package.
Erin Aslakson – Stifel Nicolaus
Yes. The free unless you could sell or do whatever you wanted with it.
Carl Berg
Right.
Erin Aslakson – Stifel Nicolaus
Okay. And then the covenants are approximately the same or–?
Carl Berg
Yes. There weren’t any unusual things in there. There’s no wide – I mean liability to the REIT except for environmental and fraud.
Erin Aslakson – Stifel Nicolaus
Okay. Okay, great. And your expectations for Silicon Valley leasing, is DC (inaudible) available to the companies that are in the area or is that also being affected by the credit crunch?
Carl Berg
Well, I think it is going to be affected. In some ways, my understanding is the (inaudible) had a – called all of their – all of their people who are running investments for them. And instead, you better find a way to get breakeven. But we’re not giving you anymore money.
Erin Aslakson – Stifel Nicolaus
Okay.
Carl Berg
I don’t know is that’s a trend in the industry. But I think everybody is definitely getting tighter. But I think there will be. There’s a lot of new opportunities out there and a lot of things going on. And then the solar companies, which we have a very good position in, most of those all raised anywhere from $150 million to $200 million before the market went sour.
Erin Aslakson – Stifel Nicolaus
Any idea what the burn rate on that would be. Is that a year’s worth of money or is that–?
Carl Berg
No, really, money to fund another new expansion of their production line. So it’s not – their burn rate isn’t that high because they don’t have a lot of people. So most of that money is going to go expanding production line, and that’s why we believe we’ll get at least 200,000 in 2009 from solar companies.
Erin Aslakson – Stifel Nicolaus
Oh okay. That really is (inaudible). And then, did I hear you mention that you’re expected to pay out the $0.80 dividend through ’09?
Carl Berg
Yes.
Erin Aslakson – Stifel Nicolaus
I didn’t hear that last bit. Okay. Thank you very much.
Carl Berg
Thank you.
Operator
(Operator instructions) Next question comes from David Cock [ph] from Teachers and Turn [ph].
David Cock – Teachers and Turn
Carl, thanks for the additional detail in (inaudible). Can you give us an idea of what, at this point, the final sticky points are if it’s not financing, if it’s not the city?
Carl Berg
Basically, the City Council is set to approve this on the 15th of November based on what’s going on now, their whole plan. And then there’s 30 days if somebody can appeal it. So the earliest they can close would be December 15. And that’s – we’re that close to the end of the year will probably cushion over to the first of 2009, the first few days of 2009. So it’s really, the real bottom line, I think it’s – the only that’s going to hold this up is financing.
Now, these guys, they told me last week they paid out $500,000 to get a commitment. And they’re supposed to send that to me in the next few days. I haven’t received this yet. But if they’re financing is closed, these guys are serious about doing it. They’ve been working with the city almost daily for the last two and a half months to get this deal done. And I keep telling them I don’t believe they’re real. And they keep saying they’re going to close the deal. So we’ll see what happens.
I don’t think, in this market, anybody knows what’s going on until it happens, until it’s you – and things can change so much.
David Cock – Teachers and Turn
And would you be willing to provide any source of financing if your buyer kind of blinks and asks you to do so in the margins.
Carl Berg
I don’t think so because basically, I think they’re getting – they’re getting – they worked out some kind of financing deal with (inaudible), and then there’s the city. And I think they’ve got a lot of financing things going on so I don’t think we want to get in the middle of that one.
David Cock – Teachers and Turn
Okay. Okay. And can you talk about what happened in the leasing environment in the last 60 or 45 days, anything –?
Carl Berg
I mean this last quarter, there was more absorption in Silicon Valley that there has been at any other time in the last four quarters.
David Cock – Teachers and Turn
So you’ve done some deals done since quarter end?
Carl Berg
I don’t think any of that means anything. We’ve seen calls drop up substantially. Wouldn’t you say, Ray?
Ray Marino
Yes. Almost 40% of that cost of absorption of deals we did.
Carl Berg
Yes. So I mean, you really look at it – if you look at it last year when – are the last four quarters, there’s been negative absorption in Silicon Valley for all – if you add up all four quarters, about 142,000 square feet. We had positive absorption of 581,000. So that sounds in effect that there must have been negative absorption for Silicon Valley other than us of 600,000 – almost 700,000.
So we’ve gotten – we’ve really gotten our share of the deals. And I think we’re going to continue. Ray and I are both working extremely aggressively on these deals. And we’re not – we’re getting top dollar also because we happen to have the kind of space that people want today.
David Cock – Teachers and Turn
So have you gotten some additional deals done?
Carl Berg
Well, we have a couple that we’re working on. I’m working on for 80,000 square feet. And Ray is working on one or two, I think in the 50,000 to 80,000. Now, who knows if those will materialize. I mean there’s – one of them that we got today, they need a lot of power, and the power company’s telling us they can’t the power until for a year. And so either we’ve got to find another place for those guys or we may loose them. But we’ll working at it, and see if we can find a way to make it happen.
David Cock – Teachers and Turn
Okay. Very good. Thanks, guys.
Carl Berg
Thanks, David.
Operator
Our next question comes from Anthony Paolone from J.P. Morgan.
Anthony Paolone – JP Morgan
Thanks. Good morning. Carl, the potential sale in Morgan Hill, is that your joint venture interest or does that have anything to do with, I think, some of the land that you talked about in the past that you might do, I guess, a senior housing project on?
Carl Berg
No. That’s a joint venture with PDI.
Anthony Paolone – JP Morgan
Okay.
Carl Berg
And basically, they’ve come up with someone who wants to buy two of the buildings they’ve been working on for about two months. I think about 90% of all the contingencies were removed. It’s not a financing issue from what we’ve been told. They have to – the thing that – latest time we talked to them, I tried to get them this morning to get an update and couldn’t find them. But the major hang up with the technical one because they’re going to assume the loans in both cases on these buildings. And one of the lenders hadn’t approved the assumption. But otherwise, every indication is that they will close the end of October.
Anthony Paolone – JP Morgan
Okay. And then, do you have an update on the other project, the senior housing that you talked about?
Carl Berg
Yes. Right now, the senior housing thing is basically out of the picture. I’m going to continue to work with Morgan Hill to see if we can resolve it because what happened, Morgan Hill has this growth program that you can only build 250 houses a year.
Under the terms of what we were doing and what is – one City Council member, the Planning Department, so this is perfectly okay. We, basically, found a technical way to avoid that program on our senior housing. The City Council voted to not depose that loophole after we basically have gotten their approval that they would do it.
Now, we still maybe able to work something out because two of the Council people out of five and one was leaning the other way, both told the Council that they felt they had totally misled us. And that they would like to see some exemption made for our project. So I don’t know whether we’re going to get it done or not, but we’re working on it.
Anthony Paolone – JP Morgan
Okay. In terms of 2009 with expirations, what’s the scheduled expirations that’s kind of tied in with 209,000 square feet that you think would be vacated? What is that out of the total?
Carl Berg
Okay. Hang on just one second, let me see if I can find that.
Ray Marino
Six hundred thousand square feet.
Carl Berg
It’s about 600,000 square feet total. And most of the ones that will expire, and we know they’re going to move because they’ve already told us they’re – basically, most of those will occur – hang on just a second. Most of those will occur in the first quarter. And we probably liken them – we’ve got one with ISYS for 19,600. We have a tenant that we’re working on. How’s that standing, Ray? What’s the status there? Do you think that deal’s going to happen?
Ray Marino
Yes. I think it will.
Carl Berg
We’ll probably have that one relieved before it expires. We have another one that Juniper – it’s a sublease that Juniper had at 46,000 coming up in the first quarter. And that one, we believe we’ve got a lot of stuff working on that so there’s a good chance we’ll get that one done. And then we have Nortel in the second quarter of 34,000. And that one, we believe they’re going to move. One party tells us they are, the next one tells they aren’t.
And other than that, we’ve got a couple in the fourth quarter. We know that ASM, we’re taking a termination of that lease that we’ll announce in the next quarter. So fundamentally, it’s about – I say 46,000 in the first quarter, another 40,000 or 50,000 in the third quarter, and then another 35,000 in the fourth quarter.
Anthony Paolone – JP Morgan
Okay. And on the – it sounds like your key – your release in key tenants in about two-thirds of the expirations–
Carl Berg
I think we’ll cover it all because these were basically properties that are fairly easy to lease and where there isn’t a lot of vacancy.
Anthony Paolone – JP Morgan
Okay. And that covers the 200,000 – inclusive of the 200,000 you talked about?
Carl Berg
You mean the other 200,000 that I said we might have (inaudible) on?
Anthony Paolone – JP Morgan
No, no, the 209,000, 208,000 or 209,000 that you mentioned.
Carl Berg
We believe that we’ll get those leased without too much problems within three to four months after they’re vacant, if not before.
Anthony Paolone – JP Morgan
Okay. And you think new rents next year on this leasing would be above or below expiring levels?
Carl Berg
I think in most cases – just let me see what our average is for the year. I think we’ll be equal or higher based on the average. It’s only an average to those expiring leases. They’re only $0.83.
Anthony Paolone – JP Morgan
Okay.
Carl Berg
And 2010, our expiring leases are only $1.30 – I mean 132,000. And again–
Wayne Pham
$1.32.
Carl Berg
$1.32, excuse me. And we only have 570,000 coming up in 2010. So we’ve got a good opportunity between 2009 and 2010 if the economy isn’t a total disaster in Silicon Valley. We have a good opportunity to really get our vacancy back under control.
Anthony Paolone – JP Morgan
Okay. On the solar development structure, you’ve got a 150,000 to 200,000 square feet of potential stars and deals there. What would the returns look like? And what would cost per square foot run for that product?
Carl Berg
Well, we would probably put in – assuming there we believe that they’re capable of operating; we would probably put in about $50 per square foot for them. And I would give her – our leases would be somewhere in the $1.25 to $1.35 range.
Anthony Paolone – JP Morgan
So these are existing shells or –?
Carl Berg
No. Most of those – I mean if we do those, they would have a build assist. And it would be really a basic shell, and then we would probably put in the basic electrical and the basic air-conditioning for them.
Anthony Paolone – JP Morgan
And so what would all that cost?
Carl Berg
Well, in today’s market, I would say the shells would be about $50. We do about $50 of PI. And then, our land value would probably – depending on where we put them. If we didn’t have to buy land, if we could either put them in Morgan Hill or we could put them on some piece of land we own. Then basically, our land cost would probably in the range of – if you figured 30% coverage in the range of $40 to $50 too.
So I think our – those are not real fancy buildings. They’re going to be more of a manufacturing type building. I think $150 were put. But I think most things that you feel today are going to be 175,000 to 225,000.
Anthony Paolone – JP Morgan
Okay. So it sounds like on those numbers and the rents, it would be a little over 10% return. Does that sound about right?
Carl Berg
Yes. I think that that would be the minimum.
Anthony Paolone – JP Morgan
Okay. In terms of properties that you might be looking at out there for sale, how do you think about your hurdle rate or cap rate, or what kind of return you would want to put money to work out fine at this point?
Carl Berg
I think the key thing is we want to look for good locations. Fundamentally, in the past, we said – when the market wasn’t as volatile, it seemed like in the past we’d go ten years without having a downturn. So you could go into some of the less better – I mean some of the minimal areas. Anymore, I don’t think we want to do that.
So like for example, Fremont, we had an opportunity to buy 200,000 square feet and pre-marked to $60 to put a couple of weeks ago. And Ray and I turned it down once before. At $60, we went out and said, “Well we got to – we’re supposed to take another look.” We went out and took a look at it and said, “Gee, this is a [expletive] of a deal. It’s $60. But we’ve got buildings in three months that have been vacant for five years. There were vacant buildings all over the place.
And we just said, even at $60 it doesn’t make any sense because if somehow we manage to get it leased, we’ll have another slowdown, and the market will be [expletive] before we get it leased again. So we just couldn’t do it. So I think our key thing is we’re going to stay away from the marginal areas. And if we can’t get something at the price we want, and I think in today’s market that’s going to be a 10% return. Maybe if it’s a really great property, we might do something a little less. But I think that the interest rates really are – we’ve got to be at around 10% return minimum.
Anthony Paolone – JP Morgan
Is that going in cash on cash or overtime?
Carl Berg
I think pretty much cash on cash. I mean if it’s partly vacant or something, then we’ve got to look at what the rents are and do it on that basis. But I don’t think we’ll buy a lot of vacant property unless it’s a [expletive] of a deal.
Anthony Paolone – JP Morgan
Okay. And then, you mentioned something about a change in the way you show the OP units at the end of the year. I just didn’t quite understand what that was. Is it just the presentation or there’s something I should in there.
Carl Berg
Oh basically, the SEC, right, Ray?
Ray Marino
Well FASBI.
Carl Berg
FASBI is changing as of December 15th. So longer will be breakout OP units. They will be shown as equity. And so, instead of our income being shown on all of the reporting and the couple of million dollars, we’ll be reporting the whole thing, including the 80% of OP units.
Ray Marino
Basically, minority of it gets reclassified as (inaudible) that’s as we rule. You’re lending out for December 15th, 2008.
Anthony Paolone – JP Morgan
Okay. Understood, and then just a last question on your guidance, is the McCandless sale in there? Or is it having an impact on you guys for this year?
Carl Berg
The McCandless sale is not in there.
Anthony Paolone – JP Morgan
Okay. Great. Thank you.
Carl Berg
Thank you very much, Tony.
Operator
(Operator instructions) I’m showing no questions at this time, sir.
Carl Berg
Thanks all of you very much for attending our conference call. Please take a hard look at Mission West. We think we’re the strongest REIT out there today. Thank you.
Operator
This does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may all disconnect, and have a wonderful day.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!