Executives
Joel Bonder – EVP, General Counsel and Secretary
Doug Donatelli – Chairman and CEO
Nick Smith – EVP and Chief Investment Officer
Skip Dawson – EVP and COO
Barry Bass – EVP and CFO
Mike Comer – SVP and Chief Accounting Officer
Analysts
Chris Lucas – Robert W. Baird
Chris Haley – Wachovia Securities
Jordan Sadler – KeyBanc Capital Markets
Philip Martin – Cantor Fitzgerald
Carol Kemple – Hilliard Lyons
Andrew Dizio – Janney Montgomery Scott
Bill Crow – Raymond James
David Rodgers – RBC Capital Markets
Sheila McGrath – KBW
First Potomac Realty Trust (FPO) Q3 2008 Earnings Call Transcript October 29, 2008 11:00 AM ET
Joel Bonder
Good morning. Welcome to First Potomac Realty Trust third quarter 2008 conference call. On the call today are Doug Donatelli, Chairman and CEO; Nick Smith, Chief Investment Officer; Barry Bass, Chief Financial Officer; Skip Dawson, Chief Operating Officer; and Mike Comer, Chief Accounting Officer.
After the market closed yesterday, our company issued its earnings press release and we posted supplemental information related to third quarter operating results and portfolio performance on our website.
Many of you have signed up to receive this information automatically by email. If you did not receive it, please contact Tripp Sullivan at 615-254-3376.
During this call, we will discuss our anticipated operating results and future events, including our anticipated earnings, FFO, AFFO, dividends, and our ability to identify additional acquisition and disposition candidates. These forward-looking statements are within the meaning of the Private Securities Litigation Reform Act of 1995. We believe the expectations reflected in these statements are based on reasonable assumptions.
However, the company's actual results or events might differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results or events to differ is contained in our company's 2007 Annual Report on Form 10-K and described from time-to-time in the company's other filings with the SEC. Many of these factors are beyond our ability to control or predict.
Now, I will hand the call over to Chairman and CEO, Doug Donatelli. Doug?
Doug Donatelli
Thanks, Joel. Good morning, everyone, and thank you for joining us. This is a time of obviously great turmoil in the real estate markets and the capital markets, but we think our disciplined investment approach and our foresight has been paying off for First Potomac.
We’ve done a lot this year to shore up our liquidity. Earlier this year, we sold one of our larger properties for $52 million, a property that we had acquired a couple of years earlier for $40 million.
We successfully refinanced about $70 million worth of debt that came due in September; we refinanced that early before the capital markets had their issues.
And finally, we successfully completed a $45 million equity raise, which turns out we’ve been very well fine [ph].
We also worked hard to improve our property operations now that we are heading into some tough times. We worked very hard to improve our tenant retention rate, which is now back up to the 80% range, year-to-date. And it looks like we’ll have a very strong fourth quarter in retention as well.
In the (inaudible) to grab every strong tenant prospect that we saw and (inaudible) into a lease and that’s resulted in about a million square feet of new leases so far this year, improved the quality of tenancy as well, adding Siemens, FedEx, and Citigroup as new tenants, and signing long-term renewals with Iron Mountain, General Dynamics, and many others.
Our markets are holding up well. We think we’ll see this strong momentum continuing into the fourth quarter and beyond as we continue to see strong demand for our properties, especially the low-cost, high-quality, well-located properties that are dominating our portfolio.
So, overall, our balance sheet and our properties are in relatively strong position. This is allowing us to look at some new opportunities. As you know, we’ve made no new acquisitions in the last 18 months until very recently. 18 months ago we looked around, even though we were averaging one acquisition a month, we decided that the average markets made really no sense. So we dropped out of the acquisition market, maintaining our discipline.
Today, the acquisition market makes a lot more sense for us, but we do know that capital is precious, so we want to be disciplined in the way we deploy that capital going forward just as we always have. So, to that end, we are forging an acquisition joint venture with AEW. AEW is a group that we have a relationship with from – even before we went public and we are really looking forward to rekindling our relationship with them so that we can pursue some acquisition.
Our first transaction we expect we expect to be the contribution of our River’s Park property, the acquisition that we made during the third quarter into a new joint venture with AEW. And then beyond that we will be able to leverage our relationship with AEW and our capital in order to grow our portfolio in a sensible but strong way.
So, in summary, while we are perplexed by our stock price, we think that our foresight and our actions have left our balance sheet in a very strong liquidity position so that instead of dealing with problems, we are now in position to begin pursuing some acquisition opportunities.
To discuss those opportunities, I will now turn the call over to Nick Smith, our Chief Investment Officer.
Nick Smith
Thank you, Doug. Over the last year and a half, we’ve been very disciplined and patient in our approach to acquisitions. Opportunities have been scarce as we felt the market was still over-priced and clearly the market has shifted to a buyer’s market recently. With that has brought opportunities.
One of those opportunities was a transaction that we completed in the third quarter with General Growth Properties. We bought Triangle Business Park in Baltimore, Maryland for $4.5 million and River’s Park in Columbia for $42.3 million. This transaction is compelling for three primary reasons. First and foremost, location. The River’s Park property is located just off I-95 and near the National Security Agency and Fort Meade, which is expected to add over 20,000 jobs over the next few years.
Secondly, in our discussions with tenant and brokers during due diligence, we discovered the properties have suffered from inattentive ownership. Giving the properties some attention as well as working the brokerage community should present some immediate leasing opportunities.
And thirdly, the property was priced significantly below replacement cost and recent comparable transactions. Going forward, we are going to remain selective and disciplined. Our basic attitude regarding sellers and opportunities is that any property that’s being marketed right now is a distress sale and we are going to price it accordingly.
We also expect Washington to be one of the strongest markets in the country and maybe the world and we intend to take advantage of the opportunities that an expanding federal presence will present.
I’ll now turn the call over to Skip Dawson, our Chief Operating Officer.
Skip Dawson
Thanks, Nick. Good morning, everyone. We leased a total of 553,000 square feet in the third quarter on 45 transactions. Year-to-date, we’ve leased 2.4 million on a 175 lease transactions. In the new deal category in the third quarter we leased 307,000 square feet. This is the third quarter in a row of leasing 300,000 square feet or greater in the new deal category.
We are also pleased with the types of tenants who are joining us. FedEx at our Diamond Hill Distribution Center in Chesapeake, Virginia, leased 75,000 square feet. General Dynamics extended their commitment to us at Crossways Commerce Center leasing 36,000 square feet. In Cavalier Business Park in Chesapeake, the fourth building, our new one, is now 50% leased. We’ve added two new tenants to that new building. In Richmond, electronic precision technology, a German based company, leased 46,000 square feet at our River’s Bend Business Park.
Year-to-date, we leased 1.0 million square feet in new deals and our GAAP rental rate increase on all new leases in 2008 is 14%. Renewals for the quarter, we leased 247,000 square feet. As Doug mentioned earlier, our retention rate for the year is hovering around 80%. Two very large renewals for the quarter, a 120,000 square feet at our English Muffin Way property, located in Frederick, Maryland, and 69,000 square feet at our Glenn Drive property in Sterling, Virginia.
Iron Mountain was the tenant in both locations and their commitment was for 10 additional years. Our GAAP rental rate increase for all renewal leases in 2008 is 11%.
And just for a quick comparison, 2008 versus 2007, our new leasing is up 56% and our renewal rate is up 36%. Again, that’s 56% on new leasing for the year and 36% on renewals for the year.
It’s also important to take a look at what’s in the pipeline for the upcoming quarters. We have over 450,000 square feet of lease space that is not yet occupied at this time. When that comes online, our occupancy will increase to around 89%.
Let me take a step back for a second. In 2007, we averaged about 200,000 square feet of new leases per quarter. 2008, we are averaging around 330,000 square feet of new leasing per quarter.
We’ve been very disciplined over the last year working on renewals to minimize our exposure for additional expirations over the next two years.
If we take a look at fourth quarter’08, all of ’09, and through 2010, the next nine quarters, we’ll be averaging around 330,000 square feet of expirations per quarter. We are well positioned over the next nine quarters to improve on our overall occupancy.
What a difference a year makes for us. In 2008 new leasing is up, renewals are up. Our go forward lease expirations are down. We’ve added strong tenants to our portfolio – Siemens, FedEx, Citigroup. We expanded relationships with General Dynamics, (inaudible), and the U.S. Coast Guard. We renewed our commitments to Iron Mountain for Alexandria Corporation [ph], Wolseley, and Centera Healthcare.
This is just a partial list of the 175 tenants that made commitments to First Potomac in 2008. They all had different needs, and they all made the same choice. Our team is honored and committed to serve their needs.
I would like to turn the call over to Barry Bass, our Chief Financial Officer.
Barry Bass
Thank you, Skip. The third quarter was very productive for us in terms of improving our overall liquidity and our balance sheet flexibility. In August, we completed the refinancing of our largest debt maturity, which we had set in motion earlier in the year ensuring that we’d have no debt maturing prior to May of 2009 and only about 3% of our debt maturing over the next 24 months.
The equity offering that we completed at the end of September provided us with a significant amount of flexibility to not only weather the current financial turmoil, but also to take advantage of opportunities that we are beginning to see and that we believe we will see more of in the coming months.
The joint venture with AEW that Doug mentioned will also help us to further extend our availability, allowing us to take advantage of more of these opportunities. We’ve never done a significant amount of development, but the development that we have been doing we’ve essentially completed. We will only start new projects as we see demand from tenants and as financial conditions allow.
As for our operations, our NOI for the quarter came in about $150,000 or little less than 1% shy of our internal expectations, primarily as a result of higher utility cost and real estate taxes.
Our FFO was $9.8 million, or $0.39 per share for the quarter. Our AFFO was $5.2 million, or $0.21 a share as we experienced higher leasing cost attributable to the extraordinary amount of leasing that we’ve completed so far in 2008.
We narrowed our FFO guidance range for the year to $1.78 to $1.80, or $0.39 to $0.41 for the fourth quarter, reflecting continued leasing progress as well as the dilution from our recent equity offering.
Our same-property NOI was up 2.2% for the quarter on an accrual basis and 1.5% on a cash basis as revenue gains offset the higher operating expenses that I mentioned earlier.
Our balance sheet is strong. At the end of the quarter, we had $655 million of debt outstanding of which $575 million was fixed rate debt or hedged variable rate debt with a weighted average interest rate of 5.5% and a weighted average maturity of almost five years. Borrowings on our line of credit of about $81 million represent our only unhedged variable rate debt. Our fixed charge coverage ratio for the quarter was 2.2 times.
We are fortunate to have a great group of lenders in our line with KeyBanc, Wells Fargo, Wachovia, PNC, (inaudible), Chevy Chase, and M&T. Our lending group remains very solid and we recently forged a new relationship with U.S. Bank from whom we received a loan for the River's transaction.
With our recently completed equity offering and the joint venture we are forging with AEW, we are extremely well positioned to take advantage of opportunities as they present themselves in the market. We will continue to be disciplined with our capital as we have been for the life of our company, but we do expect to see some very attractive opportunities.
You might have noticed that we added a summary page to our supplemental package that highlights some of the things that we have been discussing on this call, namely, that we have listed exposure to debt maturities over the next two years. As Skip mentioned, we also have very few lease expirations in the coming quarters. We operate in perhaps the strongest market in the nation, which has resulted in the continued lease up of our portfolio. We recognize the magnitude of the issues currently facing the financial and real estate markets and we are realistic about how these forces will impact our business. But our disciplined approach has put us in a position to take advantage of opportunities that we expect to see over the next couple of years. We are well positioned for the long haul and are preparing ourselves for the opportunities that we believe will be available for disciplined, well capitalized companies.
Operator, we’d now like to open it for questions.
Question-and-Answer Session
Operator
Thank you, sir. (Operator instructions) Our first question comes from the line of Chris Lucas with Robert W. Baird. Please go ahead.
Chris Lucas – Robert W. Baird
Hey, good morning, guys.
Barry Bass
Good morning, Chris.
Chris Lucas – Robert W. Baird
Can you – Barry, can you guys provide a little more color on the terms of the JV and terms of the structure and leverage and whether it’s a one-time sort of structure or whether there is some scalability to it?
Barry Bass
A little bit of both, in fact, in terms of the one-time and the scalability. What we are doing is it will be a transaction by transaction venture with AEW, which has advantage in the sense that we are not providing them any exclusivity other than around the properties that we will be buying with them. So, there is no definitive commitment to do all of a certain type of deal with them. The idea is that this transaction is a 75:25 transaction on the Rivers property. We are looking to doing 75:25 or 80:20 transactions on a go forward basis, leverage levels in the 60% range, which is about where you can find capital these days for debt mortgage financing. What else did you need to know on that front?
Chris Lucas – Robert W. Baird
Just on that transaction, are you getting credit at the sort of cost basis that you bought the (inaudible) or there has been some additional adjustment on that or how is that asset gone in?
Barry Bass
It will be at our cost basis.
Chris Lucas – Robert W. Baird
Okay. And then on the – for the quarterly results, just are you seeing any negative trends in your bad debt levels especially in sort of third quarter to second quarter?
Barry Bass
Well, third quarter to second quarter is a little bit of an aberration in the sense that in the second quarter we actually had a pickup because we had a tenant pay a fair amount of their back rent and so into the third quarter we were about half a point in terms of bad debt, which is kind of consistent with historical norms. I mean it definitely went up a little bit from the second quarter.
Doug Donatelli
But, knowing the environment that we are in, it’s something we are keeping a close eye on trying to get ahead as best we’ve possibly can. But we are right now keeping our finger crossed. Things – we’ve worked hard to increase the quality of our tenancy and I think we do benefit from being local and being selective even with some of our smaller tenants. So I think that – maybe before we sign them up, but we are looking at it to see what the effects of the current economic situation is going to be on our tenants across the board. So far we are not seeing anything – tendency [ph] out of the ordinary.
Chris Lucas – Robert W. Baird
So the days receivable has been consistent, nothing that you are seeing is causing a great concern at this point?
Barry Bass
Nothing of great concern. Obviously, as Doug mentioned, there is concern, but we aren’t seeing any significant increases at this point.
Doug Donatelli
Yes, I think we benefit from being in the Washington region. I think that – our regional economy is going to be a lot stronger than most economies across the country and that I am – we are hoping it’s going to help us – then certainly as we go through our list of larger – largest tenants we don’t have any issues right now at all.
Chris Lucas – Robert W. Baird
Okay. And then on the – in the guidance what occupancy level are you assuming for the fourth quarter?
Doug Donatelli
Well, in terms of occupancy, I mean we are kind of – where we are currently, as we show in the supplemental, we do have a lot of tenants moving over the next couple of quarters. A lot of that’s going to happen later in the fourth quarter, but on Page 13 of the supplemental we show that in the fourth quarter we have about 238,000 square feet taking occupancy. As Skip mentioned, we have 450,000 square feet in total that we’ve leased, but has not yet taken occupancy. So I don’t know if that answers your question specifically, but I would push out the occupancy gains that we expect to achieve in the fourth quarter toward the latter part of the fourth quarter. As Skip mentioned, we expect to be at 89% once all the dust settles on the leasing that we’ve done that has not yet taken occupancy.
Chris Lucas – Robert W. Baird
And then just a point of clarification on the lease and occupancy stats that you report, is any sub-let space included in that or is it just the leased and occupied levels from a rent paying – ?
Skip Dawson
Yes, there is no sub-lease space in those numbers.
Chris Lucas – Robert W. Baird
Okay. And then – and Skip, just on the tenant retention for the quarter, it was down sequentially and really Southern Virginia was the big issue there, what – can you provide some detail on what was that about?
Skip Dawson
Sure, sure. What we’ve really have done here is in Southern Virginia we had a Centera Healthcare, which this quarter moved from their previous location into all the Visteon space we received back. So that 60,000 they basically hit that quarter on the number side, however the incremental benefit of (inaudible) moving over has started to do some traction. Again, in Richmond, we had one center, which is one Full Spectrum move out at about 6300 square feet and move down to River’s Bend and occupy 23,000.
Barry Bass
When you take a look at our overall renewals for the quarter, two major ones that occurred, both were outside of the southern region. So you are dealing with a very small denominator. And then when you had some shifting in the tenant base this quarter, it came out to be a lower number.
Chris Lucas – Robert W. Baird
Okay. And then just sort of last question from me is just – you sort of pulled JV playbook, which is something you used back in the late 90s. The other you guys used was OP unit transactions. Any thought to how you would evaluate that kind of deal given where your stock price in the current environment?
Doug Donatelli
Yes, I think that right at the moment, an OP unit deal that would be based on our current stock price wouldn’t make a lot of sense. I think it would be the equivalent of selling stock in this environment, which is not something that we would do, not at our current share price. So – and then it’s something we are contemplating at the moment –
Skip Dawson
Yes, we are pursuing any OP deals right now.
Chris Lucas – Robert W. Baird
Thanks a lot guys.
Doug Donatelli
Thanks, Chris.
Operator
Thank you, sir. Our next question comes from the line of Chris Haley with Wachovia Securities. Please go ahead.
Chris Haley – Wachovia Securities
Good morning.
Doug Donatelli
Good morning, Chris.
Barry Bass
Good morning, Chris.
Chris Haley – Wachovia Securities
You give us a little color on the marginal [ph] leases that were in the third quarter and then dividend capital expenditures, is that a fair run rate (inaudible) ratios looking into 2009 that we should model.
Barry Bass
I didn’t hear you, Chris. On the leases that were done in the third quarter?
Chris Haley – Wachovia Securities
ON the leases that were executed in the third quarter that carried approximately a 20% plus concession ration, the CapEx cost, is that a fair ratio to assume that would carry through in 2009 – probably in 2009, as you see 2009 unfolding?
Barry Bass
I mean – certainly on the renewal side of leasing that we did in the third quarter they were primarily longer term leases. So what dramatically impacted our AFFO, for example in the third quarter were three 10-year leases that – where we had to pay the entire leasing commission all in the third quarter for a 10-year lease. So, that had an impact. That was a total of about $750,000. And then on the new leases –
Skip Dawson
We had a number of leases that were long term in nature. Our comparable in the entire quarter is around five-year mark. Quality tenants that we invested necessary dollars to improve the spaces for those groups to move in.
Chris Haley – Wachovia Securities
And in those the FAD reconciliation, my apologies, if I were to look at occupancy pickup, it will continuously to distinguish between first generation and second generation expenditures?
Barry Bass
I mean we are continuing to distinguish between – when you say in the – I am not sure what the question is. If you are looking at the leasing analysis, schedule –
Chris Haley – Wachovia Securities
Right.
Barry Bass
That includes both first generation and second generation expenditures.
Chris Haley – Wachovia Securities
And in terms of FAD reconciliation or as you guys report, FAD (inaudible) you will continue to delineate into 2009 the difference between those first generation and second generation cost?
Barry Bass
We would expect to, yes.
Chris Haley – Wachovia Securities
Okay. Thank you.
Barry Bass
Alright, thanks.
Operator
Thank you. Our next question comes from the line of Jordan Sadler with KeyBanc Capital Markets. Please go ahead.
Jordan Sadler – KeyBanc Capital Markets
Good morning.
Barry Bass
Jordan.
Jordan Sadler – KeyBanc Capital Markets
Just wanted to reconcile some of this leasing. Real helpful the new disclosure on Page 13, so thank you for that. But I am looking at the 4Q known move-outs and it looks like 104,000 square feet. And so I am curious how is that – what that means or how that translates for the – is 400,000 feet maturing or expiring in the rest of 2008?
Skip Dawson
Sure. The 104,000 is representative of two components, one the move-out associated 09/30, which is around 50,000 square feet and then balance is one transaction, which is a group in Windsor in Manassas. We have a tenant that’s actually vacating the space early in November and we’ve signed a lease for that entire building, which will take occupancy next March. That represents the activity from 09/30 and then go forward with that one lease coming on line in the first quarter of ’09.
Jordan Sadler – KeyBanc Capital Markets
Okay. And the rest of the – so, is it appropriate to take the 400,000 that’s expiring and say 104,000 of that is moving out, so the 300,000 at this point a know renewal?
Skip Dawson
The other 300,000 represents activity between 10/01 and 12/30 and we’ve been working hard to solidify those renewals in the quarter. We have a couple we’ve identified that probably leave us, but the balance look pretty strong, a lot different than we did last year at this time.
Jordan Sadler – KeyBanc Capital Markets
So, ballpark of that 300,000 retention rate – ?
Skip Dawson
Well, I think you could use – based on what we are seeing right now a calculation that’s been consistent throughout the year, of retentions, the 80%-85% range on this particular component. I know we’ve had some activity already in the quarter that will solidify some of our exposure. I will say that it looks quite promising with incremental increase in their occupancy for the fourth quarter with the movement of close to 240,000 square feet coming on line in the quarter that we will be seeing, already identified in the Page 13 supplemental along with what we think will happen in the quarter.
Jordan Sadler – KeyBanc Capital Markets
Okay. And so where does occupancy end up and the year?
Skip Dawson
I think depending on really delivery, we are looking around 87% range, maybe a couple of BPs beyond that, 87.1, 87.2 depending on all deliveries that they occur as projected. And with the current move-out scheduled for the end of the year now what could factor in as some deals that could be signed and take immediate occupancy, which is not on this table, on this chart right now.
Doug Donatelli
A lot of those have to do with completion of the construction. We are doing more build-out for tenants right now than ever done in the history of the company and the – we can't count the spaces occupied until the construction is done and we are doing out best to deliver as much as we possibly can before the end of the year, but it will be done when it’s done.
Jordan Sadler – KeyBanc Capital Markets
I realize you’re probably – you’re talking about occupancy specifically there, so what does that translate into in terms of where you will be leased by the end of the year, you think? And is that an easier way to think about it?
Skip Dawson
Yes, we are still – on target for a 90% leased rate, which has been our goal.
Jordan Sadler – KeyBanc Capital Markets
Okay. The other question I had is just maybe a little bit more clarification on this joint venture. What – is there a going in size or am I to understand it’s an asset-by-asset basis right now, Barry?
Barry Bass
It is an asset-by-asset basis. We are working on a couple of other transactions in addition to the River’s transaction and we will like it to be of some significant size multiple acquisitions over the next few quarters, but really has everything to do with condition of the market and where we think the best opportunities are for us. We could have announced particular size, but just like a lot of joint venture relationships, the – you can talk about a size, $200 million of committed dollars, but they are committed dollars and are committed dollars. It’s all going to be discretionary. But AEW’s discretion is continue to co-invest with us. And we will like see it grow to a pretty significant size relationship with them. I think they wanted to be at significant size as well, but it’s going to be on an asset-by-asset basis.
Jordan Sadler – KeyBanc Capital Markets
Okay, so there is no exclusivity at this point, really, whatsoever, and they are just – you are offering them deals as you see them essentially, is that the right way to think about it?
Barry Bass
No, beyond that. I think that they are – they’ve been active in our market on their own, and I think what – essentially what we are doing is joining forces with them and it’s not just us showing them deals, but working with them on some of the deals that they are seeing as well and teaming up in a way that leverages our local presence, their solid reputation, and their access to capital.
Jordan Sadler – KeyBanc Capital Markets
Okay. What type of return expectations do they have?
Barry Bass
Well, again, that’s going to be on a deal-by-deal basis and it’s fluctuating as the market fluctuates, but we – the kinds of returns that we think we can uncover for our property types and our marketplace are pretty stall [ph] right now.
Jordan Sadler – KeyBanc Capital Markets
Okay. But on River’s, for instance, was there a going in hurdle that you could share?
Barry Bass
I think we’ll talk about details on that when we get it –
Jordan Sadler – KeyBanc Capital Markets
Get it done.
Barry Bass
Completed.
Jordan Sadler – KeyBanc Capital Markets
Okay. I guess that was really – the only other question I had is could you see yourself selling assets directly or joint venturing already owned assets with AEW or would it all purely be sort of new assets – acquisitions assets?
Barry Bass
I think for the near term future it’s going to be acquisition asset only. I think trying to sell assets in this environment even into a joint venture is – this is not the perfect time to do that.
Jordan Sadler – KeyBanc Capital Markets
Okay.
Doug Donatelli
Other than River’s, of course.
Barry Bass
Other than River’s but that’s – that was an acquisition, so a recent acquisition.
Operator
Thank you, sir. Our next question comes from the line of Philip Martin with Cantor Fitzgerald. Please go ahead.
Philip Martin – Cantor Fitzgerald
Good morning everybody.
Doug Donatelli
Good morning.
Philip Martin – Cantor Fitzgerald
I – My first question is on leasing, on the renewal leases. Can you talk a bit about – it sounds the retention rate in the fourth quarter is looking pretty good on that 80% to 85% range. You’ve been at 78% year-to-date, but in the third quarter you were at 55%. What happened there in the third quarter? Can you go into a bit more detail?
Barry Bass
Philip, I will take that, this is Barry. It gets – it really comes down to how we calculate retention. And I think I am guessing, like a lot of things we do, are more conservative some other people out there. So, one of the things that we did when we calculate retention is if someone moves from one location in our portfolio or in a property to another location, that’s considered new leasing in the new space that they take and we are not returning them in the space that they left. So, for example, in Southern Virginia, it’s complicated by that fact as well as the fact that we just had a lower pool of leases that were expiring and subject to renewal in the third quarter. So, I think Skip mentioned specifically for Southern Virginia that Sentara was group that is moving into Visteon’s vacated space of 72,000 square feet, leaving their 60,000 square feet GDIT is then back-selling some of the space that Sentara left, but we’re – I mean it kind of speaks to the way that we’ve managed that property well in terms of moving people around and frankly not all of those guys are paying rent now because we are working on all of those spaces. When the dust settles, with Sentara and GDIT, we’ll have 24,000 square feet left over, and we have an LOI out of that space, so we feel pretty good that Crossways is going to be back to 100% occupied.
So, in terms of the retention, as Skip mentioned, in the fourth quarter we think it will go back to a more normal level. For the year, we expect to be about the 80% range and Southern Virginia was abnormally low this quarter for those reasons. The other one that Skip mentioned was the 6000 square feet in Chesterfield that moved to 24,000 square feet at our River’s Bend property, but we ding [ph] ourselves for the 6000 square feet of non-retention there.
Doug Donatelli
Yes, so, in summary, Phil this is Doug, the – about half of our move-outs in Southern Virginia were really relocations inside of our portfolio. So, we retained those tenants in the portfolio where we called those move-outs.
Philip Martin – Cantor Fitzgerald
But – it’s really then if you – the tenants retained within the portfolio than your – within your kind of 805 to 85%, is that fair say?
Doug Donatelli
Not, probably not – It still would have been less than that for the quarter, but the – it was so off a fairly low denominator and that’s why the overall year-to-date retention didn’t drop that significantly –
Philip Martin – Cantor Fitzgerald
That much.
Doug Donatelli
We are still about 80 [ph].
Philip Martin – Cantor Fitzgerald
Got you. Okay. On the leasing – in terms of the 5.1 increase in rental rate on the renewals in the third quarter, that’s obviously down from the year-to-date 10.9%. Is that largely a function of the longer lease term, I mean you are looking at 94.5 – 94.6 months average lease term here versus 67.2 for the year, is that decline in the rate largely a function of the longer lease term.
Skip Dawson
We had – it’s – the drivers from the two leases that we signed with Iron Mountain plus long-term commitments that represented around 75% of our activity for the quarter on renewals and that really is the – one that’s driving that 5.1% for the quarter.
Philip Martin – Cantor Fitzgerald
Okay. What – if you were to look at a more typical renewal lease in that five to six year lease term, are – would the rental rate increases be similar to your year-to-date average or more similar to that or are you seeing pressure or less negotiating leverage given this environment?
Barry Bass
Well, over the last two years we’ve been averaging around a 10% GAAP increase.
Philip Martin – Cantor Fitzgerald
Exactly.
Barry Bass
And our churn – (inaudible) churn also increase I think ’07 we were around 41 months total and this year we are tracking over five years. Then we really took a step back at the end of last year and wanted to really focus on establishing and maintaining relationships with the tenants in our portfolio and button up a lot of the renewals that we had in the first half of the year. We were very disciplined with working with the tenants. We were – I believe, we were now very forward-looking in taking a position that it was important for us to maintain our capacity of capital, spend the right dollars for the right tenants. And also looking forward, minimizing our exposure. Because I do believe we are very good position right now to work on our expirations, the minimal exposure we have over the next nine quarters. And that just – that discipline that we put in place at the beginning of this year to really hammer in on the expirations are important for us. I do think the environment will be a little bit more challenging with tenancy renewals, but at the same time we recognize the fact that with the capital that’s out there right now and especially in Washington, it’s very expensive to move. And we need to remember that when we are dealing with tenants and working with them and their long-term needs.
Philip Martin – Cantor Fitzgerald
And the discussions you are having right now here in the fourth quarter on the fourth quarter renewals and even the discussions you might be having with respect to first quarter renewals, are the lease terms more similar to what you’ve dealt with in the past in terms of the five- to six-year average and are the rental rate increases more in line with your two-year 10% average?
Barry Bass
I think you’ll see over the next two quarters that the average term may come down a little bit and I say that because in some cases the tenants are looking out now. I am not quite sure what I am going to look like in 12 or 18 months.
Philip Martin – Cantor Fitzgerald
Okay.
Barry Bass
They will commit to stay with you. We’ve seen some of that. There is a price associate with that and we are trying to be disciplined on all aspects of negotiations with existing tenants. I will say that the number of leases and the square feet that is rolling over the next two quarters are very minimal, so it’s – the pool is a lot different than it was this time last year. And I am not mistaken, I need to take a quick look – I believe the next two quarter rolls are just equal to what we leased in the first quarter alone on renewals. So, again it gets back to being disciplined with what we’ve been trying to do over the last year. We minimize our exposure – I like to look one calculation even further is that when you look at our expirations over the next nine quarters, as I mentioned earlier, we are seeing in average about 330,000 square feet. If you just apply a 75% retention rate to that, that’s 84,000 square feet that we could have us as leakage in the portfolio per quarter. Just to be in neutral, we have to lease 84,000 square feet in the quarter along with the 450,000 square feet that’s coming into the system over the next two quarters. Along with an answer here is that I do believe that we’ve done a lot of work and a lot of effort in solidifying the core portfolio so that our exposure is minimal going forward, but our opportunity for occupancy gain is –
Philip Martin – Cantor Fitzgerald
Is going to be there.
Barry Bass
Yes.
Philip Martin – Cantor Fitzgerald
No, I would agree. And then in terms of the rental rate increases again and discussions you are having with existing tenants right now, is it closer to that 10% rental rate renewal growth or is it closer the five? I mean you are going into shorter lease, there is a price to be paid for that by going to a shorter lease.
Barry Bass
Yes, it’s going to be –
Philip Martin – Cantor Fitzgerald
And that price is going to be a probably a higher – get a little more rental rate growth.
Barry Bass
If you tossed out the last two large renewals that is in the third, we’d be in the 10% range.
Philip Martin – Cantor Fitzgerald
Got you. Okay. And Barry, you’ve mentioned kind of broadly very attractive opportunities. Certainly with a smart player like AEW, can you get into a bit more detail on these very attractive opportunities to find them for?
Doug Donatelli
Yes, I think I will let Nick address that one.
Philip Martin – Cantor Fitzgerald
Okay.
Nick Smith
Yes. Our attitude basically right now is if you are a seller in the marketplace you are distressed and we are going to price things accordingly. Larger transactions, it’s hard to find debt for. We think we can find debt in the transactions we look for, which is generally speaking, in the $20 million to $30 million range per transaction. And frankly, we are looking forward to working with AEW. We have somewhere in the neighborhood of $40 million to $100 million of product that we are looking at various different stages and we will see where the market heads.
Philip Martin – Cantor Fitzgerald
Are the majority of these opportunities properties that have vacancy or leasing risk or are they – ?
Nick Smith
The opportunity, frankly, this time around is on the seller side. These are solid properties. They are generally Washington based and we are very bullish about Washington thinking that it’s very hard for the federal government to spend a trillion dollars without creating thousands of jobs.
Philip Martin – Cantor Fitzgerald
Yes.
Nick Smith
The changed administration we think is going to be a net positive and frankly they are terrific properties. They are – the sellers have issues. They are either fund managers who are reallocating, they are other funds that are getting redemptions and are quick sell or other REITs that are essentially trying to get a stronger balance sheet. So, for us to be able to team up with AEW, put in less capital than we would have otherwise – we think at the end of the day we’ll have much larger slice of a very lucrative pie.
Philip Martin – Cantor Fitzgerald
So, it sounds like a lot of these assets are more of a stabilize variety. You are just dealing with a seller that’s looking to, like as you say, reallocate, deal with too much leverage, repossession, et cetera, so –
Nick Smith
Exactly.
Philip Martin – Cantor Fitzgerald
Okay.
Nick Smith
And they are under a lot of pressure from a timing standpoint.
Philip Martin – Cantor Fitzgerald
Okay. So these are from an IRR standpoint, these aren’t necessarily – I am being general about this – but these aren’t 20% IRR opportunities, are could they be?
Nick Smith
They could be.
Philip Martin – Cantor Fitzgerald
Okay, okay. Okay, thank you very much.
Doug Donatelli
Thanks, Philip
Operator
Thank you. Our next question comes from the line of Carol Kemple with Hilliard Lyons. Please go ahead.
Carol Kemple – Hilliard Lyons
Good morning.
Doug Donatelli
Good morning.
Barry Bass
Good morning.
Carol Kemple – Hilliard Lyons
Going forward into 2009, would you expect more of your acquisitions to be for the joint venture of for your core portfolio?
Nick Smith
This is Nick. We would expect the majority of the acquisitions going into 2009 into be in association with the joint venture.
Carol Kemple – Hilliard Lyons
Okay. And have you all thought about your 2009 FFO guidance, any ranges there?
Barry Bass
We thought about it, but we have not provided any guidance as yet. We will provide guidance in January or February.
Carol Kemple – Hilliard Lyons
Okay. And what cap rate did you pay for your recent acquisition.
Nick Smith
This is Nick again. We paid an eight cap going in and stabilization being at 18 to 24 months at north of the nine cap.
Carol Kemple – Hilliard Lyons
Okay. Thank you.
Operator
Thank you, ma’am. Our next question comes from the line of Andrew Dizio with Janney Montgomery Scott. Please go ahead.
Andrew Dizio – Janney Montgomery Scott
Hi, good morning guys, just a few quick questions for your.
Doug Donatelli
Sure.
Andrew Dizio – Janney Montgomery Scott
Taking a look at your first generation leasing cost, we notice those increased by a pretty good amount. Is that a function of more first generation (inaudible) lease or is it higher on the square footage?
Barry Bass
That’s just more space being leased.
Skip Dawson
Yes.
Andrew Dizio – Janney Montgomery Scott
Okay. So, it’s just a function of the square feet. Got you. And you characterized the D.C. market as being a pretty strong market. How do you feel about the Southern Virginia market, Richmond and Norfolk?
Doug Donatelli
This is Doug. I think that the Southern Virginia markets are strong as well. We are really looking at the near term future in Washington as being even more positive. I think that as you look around the country that real estate markets on a macro level and Washington has been come about that as strong as any market in the country. So, I am not going to be – think there are any significant issues with our Southern Virginia properties or Southern Virginia markets, for which we’re continuing to see pretty strong demand. We just happen to be more bullish the Greater Washington area right now.
Barry Bass
And if you look at our supplemental, we did add a little chart that shoes unemployment rates and job growth in each of our markets, and we are fortunate to be operating in markets that all had unemployment well below the national average and continued to have job growth at least through August in each of our markets.
Andrew Dizio – Janney Montgomery Scott
Okay, thank you. Yes, that is a very helpful graphic. And in relation to the JV, do you expect (inaudible) management fees with properties – I guess there is one that you are looking at so far but future properties that are – that go into that?
Barry Bass
Yes, the one that we are looking at right now is the River’s transaction that we completed towards the end of the third quarter. And there are a few others that we are considering.
Andrew Dizio – Janney Montgomery Scott
Okay, thanks. And that’s all from me. Thank you.
Doug Donatelli
Thank you.
Operator
Thank you, sir. Our next question comes from the line of Bill Crow with Raymond James. Please go ahead.
Bill Crow – Raymond James
Good morning. Barry, I start with you. What was capitalized interest in the quarter?
Mike Comer
It was 400,000.
Barry Bass
That was Mike Comer.
Bill Crow – Raymond James
400, okay, great thanks. Doug, two questions. How much of your portfolio in D.C. is related to government tenants?
Doug Donatelli
How much of our portfolio? Overall, we have something just short of 10% of our revenue coming from – directly from the federal government, but if you include government contractors and those who serve government contractors, it’s a pretty hefty chunk.
Bill Crow – Raymond James
Yes.
Doug Donatelli
25%-30% or more. I hadn’t really broken it out how many of our properties are affected. It’s indeed a very large number of our properties that have some federal government or government contracted tenancy.
Bill Crow – Raymond James
Okay, great. And then I don’t know how much you are going to be able to provide here, but can you take us in at all into the board room and just kind of talk about what the discussion towards the dividend is given that the economic outlook is certainly much worse than it was a quarter ago or even a month ago?
Doug Donatelli
Sure. I will give you a little flavor for it. I mean the – obviously the discussions around the dividend are something that we do every quarter looking at it both from a capital standpoint and from a REIT preservation standpoint. For 2008, I will let Barry talk about it for a minute. For 2008 the discussion was fairly simple.
Barry Bass
Yes, I mean for 2008 it’s looking like our taxable income from the gain on sale of Alexandria Corporate Park as well as the gains associated with the repurchase of our exchangeable notes is going to result in taxable income that’s roughly equivalent to the dividends that we’ve declared for 2008. So there wasn’t much of a discussion there. I mean there was still a discussion, obviously, but feeling that we obviously need to distribute at least 90% of that taxable income and didn’t want to pay tax on anything between 90% and 100%. Everyone felt that keep the dividend the same for at least this quarter made a ton of sense.
Bill Crow – Raymond James
Yes, makes sense. ’09?
Barry Bass
And then going forward –
Doug Donatelli
Going forward, we have – it will be a little more complicated in that we’ll have more – assuming that we don’t have the kinds of gains that we experienced in 2008, we will have more maneuverability in terms of at least discussing adjusting dividend downward. A lot of it’s going to depend on one – what’s going to be continuing into the one of the capital markets. So, the – it doesn’t seem like REITs in general got a tremendous amount of credit for dividend that they obtain currently, but we have – it’s sort of – a little bit more of a complicated discussion.
Bill Crow – Raymond James
Yeah, fair enough.
Doug Donatelli
And just – I mean we are always going to keeping an eye on what we think is in the best interest of the company and the company’s stockholders and it will be thoroughly discussed at one of the board level as we get into 2009.
Barry Bass
Yes, and just add to that a little bit – this is Barry – I mean we are – as we look at our ’09 projections internally, which we haven’t put out there as yet, it looks like we are going to be able to cover our current dividend second, third quarter or so of next year based on occupancy gains that we expect to achieve. That assumes leasing slows down I mean one of the things obviously that’s hampering, ironically our AFFO currently is the amount of capital that we are investing in new leases. So, we expect that that would slow down in the next year as the portfolio gets more highly occupied.
Bill Crow – Raymond James
Yes, fair enough. And then Barry, one final question. You still have what $90 million of exchangeable notes, is that – ?
Barry Bass
That’s correct.
Bill Crow – Raymond James
Have you looked at the impact on FFO next year under the change in the accounting regulations?
Barry Bass
We have, and we haven’t put that out there I think in our Q or K. We are going to have to identify what we expect the impact to be, but it’s a pretty – I mean the basic calculation would be about the time we issued those notes. That would have cost us about 6% –
Bill Crow – Raymond James
Yes.
Barry Bass
It’s costing us about 4%, so the difference will be the impact. Now we are trying to assess what – how other people are going to report that delta because –
Mike Comer
This is as relates to (inaudible).
Barry Bass
Yes, obviously a non-cash item.
Bill Crow – Raymond James
Right, right, which ultimately becomes a cash item when they are put back to you in the 2011, right?
Barry Bass
Well, the interest itself is not.
Bill Crow – Raymond James
No, I understand, but you are going to have to re-fi at a higher rate at some point I guess this is the argument, yes, no I understand, we are having the same discussions internally about AFFO, so – alright very good guys, thank you.
Barry Bass
Alright, thanks Bill.
Operator
Thank you, sir. (Operator instructions) Our next question comes from the line of Dave Rodgers with RBC Capital Markets. Please go ahead, sir.
David Rodgers – RBC Capital Markets
Hey, good morning guys. Another component on I guess the dividend question would be the potential deleveraging of the balance sheet or what your thoughts are on that. I thought when we had originally, I guess, visited a year, year and a half ago the idea of a joint venture that was to be offloading assets in this environment. It appears that the joint venture you’ve elected is to increase the size of the company’s balance sheet in a pretty tough credit environment. So could you comment I guess on whether these acquisitions will be leverage neutral, specifically to FPO what your thoughts are on leverage today, how you thought about that going into this venture?
Doug Donatelli
Well our – just the (inaudible) comment I mean offloading assets in this environment doesn’t make a lot of sense, so – even into a joint venture. I think that before we’ve came real [ph] we did sell – we were fortunate enough to be able to successfully one of our larger assets in the early part of 2008 at a very good price. But just like we are treating anybody who is selling assets today as a distressed seller, any other purchaser would treat out sales as a distressed sale as well. So, it doesn’t even make – it doesn’t make sense even to offload some assets into a joint venture right now and we think we can get for our joint venture much better pricing than we are willing to offer on our existing assets.
Doug Donatelli
Yes, I mean, we are obviously going to maintain our discipline as it relates to the allocation of our capital and one thing we love about the – doing things in a joint venture relationship is that we don’t have to allocate a lot of capital to gain access to a lot of attractive opportunities. We were extremely disciplined over the last 18 months, not having bought a single thing during that time and I think that’s going to serve us well in the long term. I think we would be crazy not to look at the current environment and realize that they are going to be some fantastic opportunities and figure out a way to take advantage of them in a disciplined fashion.
Doug Donatelli
And as far as (inaudible) I think the key right now is that maturities and we’ve put ourselves in a really good position from a debt standpoint. We’ve got ahead of debt maturities, push things out to the time where we have very little coming due over the next 24 months. And I think that puts us in a really strong position from a liquidity standpoint.
David Rodgers – RBC Capital Markets
Yes, I mean if we are going to reach crystal ball, it’s probably a little fudgy today and I guess one of things that just concerns me is that if real estate is expected to further de-lever over the next two or three years, and as some of your competitors suggested that lines of credit, other forms of credit become a much smaller component, even with that general threat on the horizon, and just question I guess the vision to lever up today although, again, this could reverse in the six months. But it just seems like a tough environment to make that decision.
Doug Donatelli
Well I mean our – if you look at our – the first transaction we will be doing AEW will be essentially the offloading, if you want to used the term, of our River’s Park asset, which is currently at the end of the third quarter on our books. That will return to us a fair amount of capital, and we can end up doing three or four additional acquisitions just with that capital alone.
Barry Bass
Right, I think we were also forward-thinking in doing our equity offering at the end of September, which did help us to de-lever and gain access to capital and flexibility on the balance sheet. And we paid off our largest maturity. We again realized that there could be trouble in the capital markets and put that into place, set that into motion earlier in the year to make sure that when September rolled around we weren’t caught with our pants down, if you will, on that $72 million maturity. And then as our occupancy increases throughout our portfolio that in and of itself will be a good de-levering event. I mean we are currently at 86% occupancy. That is not, we don’t believe kind of stabilized level or a normalized level in this market and as we’ve mentioned a few times, we have 450,000 square feet of leasing that’s been completed that has not yet taken occupancy. So that as that happens that effectively is a de-levering as well. That gives us even more capacity in our system.
Doug Donatelli
Yes, let me just reiterate – this is Doug again – the things that we’ve done to de-lever in 2008 include the sale of a pretty large property, a $52 million property, which is a big property for us. The sale of our – of the equity that we completed in the third quarter, which raised $45 million in equity for us in a pretty well timed transaction, any time we’ve been buying back our notes at a discount that’s resulted in a deleveraging and we bought 30 million of those – 35 million of those so far. And then when we formed this joint venture, the transfer of the property we acquired in the third quarter will essentially result in a deleveraging as well. Combined now, we’ve effectively not been buying any properties up until very recently and I think we were real proud of the way we (inaudible) de-lever in advance a lot of other people looking around and saying that they need to de-lever today, which is a much more painful situation.
David Rodgers – RBC Capital Markets
And I think with that you have executed well this point in the year and again maybe just worrying too much about the future, but certainly points well taken. Thank you.
Doug Donatelli
Thank you.
Operator
Thank you, sir. Our next question comes from the line of Sheila McGrath with KBW. Please go ahead.
Sheila McGrath – KBW
Oh yes, my questions have been answered. Thank you.
Doug Donatelli
Thank you.
Barry Bass
Thank you, Sheila.
Operator
Thank you, ma’am. Our next question is a follow-up question from the line of Jordan Sadler with KeyBanc Capital Markets. Please go ahead.
Jordan Sadler – KeyBanc Capital Markets
Hi guys, did you say how much cash you would take away from the AEW contribution?
Barry Bass
We have not put that out there, but 65% leverage transaction at 43 million and they are taking a 75% interest.
Jordan Sadler – KeyBanc Capital Markets
Okay. So you will pull out the – 65% of the full 42?
Barry Bass
No, no, we’ve already got –
Jordan Sadler – KeyBanc Capital Markets
Or will it be just the equity portion?
Barry Bass
Only the equity portion.
Jordan Sadler – KeyBanc Capital Markets
Got you. But 8, 9, $10 million, something like that – $9 million, basically.
Barry Bass
We will give full details when and if the transaction is completed.
Jordan Sadler – KeyBanc Capital Markets
Okay. Also there was – on that property there was the lease termination fee. I may have missed this, but did you just line up a tenant for that quickly and sell back some of space that was master leased by the seller?
Barry Bass
No, that was an issues of wanting to get that cash in our hands sooner rather than later.
Jordan Sadler – KeyBanc Capital Markets
Okay. So, what – so it’s vacant space or – ?
Barry Bass
Oh it always has been. I mean, basically that transaction was – GDT was backstopping the rent on a portion of the space.
Jordan Sadler – KeyBanc Capital Markets
Okay.
Barry Bass
And essentially rather than –
Jordan Sadler – KeyBanc Capital Markets
Pay it over the term, okay.
Barry Bass
– monthly, we would like to see that money sooner rather than later.
Jordan Sadler – KeyBanc Capital Markets
Okay. So it’s a reduced amount?
Barry Bass
No, no, the full amount of the rental obligation –
Jordan Sadler – KeyBanc Capital Markets
That they paid upfront?
Barry Bass
Paid upfront.
Jordan Sadler – KeyBanc Capital Markets
Okay. Did you say anything about the opportunistic debt repurchases in the de-levering – capturing the dislocated opportunities there in the debt markets?
Barry Bass
We did not say anything. We’ve thought about it I mean the debt that we have out there that really is repurchaseable at this point would be our exchange – more of our exchangeable notes. We just have to make sure that we have capital flexibility to go out and do that – do more of those purchases. We want to be disciplined about that. So –
Jordan Sadler – KeyBanc Capital Markets
What’s your bias of – toward purchasing those exchangeable notes here today versus repurchase and I think you have about $90 million still outstanding there versus maybe new investments.
Doug Donatelli
Well – this is Doug – I mean it all depends on the price. So –
Barry Bass
Exactly right.
Doug Donatelli
Thank you.
Jordan Sadler – KeyBanc Capital Markets
Given that, maybe you could just – you’ve talked about treating selling as distressed sellers. What to you guys today is a distressed return, so what is your return requirement going into some of these transactions today?
Barry Bass
Much higher than it’s been for a while.
Jordan Sadler – KeyBanc Capital Markets
Higher than even the River’s deal?
Barry Bass
I think the River’s deal is extraordinarily well located real estate that’s been tremendously under-managed, so that – we think it has very good long term prospects and I think the idea that we will be able to joint venture that AEW confirms the price that we paid for is a good market price today. The – we’ve never – I’ve never really been personally comfortable about talking in broad brush terms about cap rates because everything is variable based on the quality of the property, location of the property, but I think the kinds of returns that we think we can pencil out on – acquisition is pretty compelling right now and make tremendous sense. And then you’ve got to balance that against the scarcity of capital today and we don’t want to go – I don’t what the capital markets will look like six months from now and I don’t want to look back and kick ourselves for having being too aggressive in acquisitions in the short term. So it’s a –
Jordan Sadler – KeyBanc Capital Markets
Maybe we can take it from another angle, which is what do you think you weighted average cost of capital is today? Because you have to have that in mind –
Barry Bass
Sure we do. Again, that’s moving target as well. I mean I think if we look at cost of our equity, for example, is off the charts if you looked at it from a – our current share price, I would say – we’ve always said that we’d like to try to get returns on our equity in the 14% to 15% range. I think that that’s the range that investors would be happy with at this point.
Jordan Sadler – KeyBanc Capital Markets
Okay.
Doug Donatelli
I mean and the problem is if you look at the stock price it’s extraordinarily volatile so it would imply huge volatility in our cost of capital and when you got to invest in a property you got to drive a stake in the ground at some point and at some price. So the – we are looking for what we think are the best long-term opportunities for us.
Jordan Sadler – KeyBanc Capital Markets
I mean I totally recognize world is a very volatile place, particularly of late in the last 28 days, but my point is it’s also a very, very different world today than it was in August when you put River’s under contract. And so – or even in September when you did your equity offering. And so I am – guess I am trying to gauge what your thoughts are in terms of putting out and how precious capital has become since that time period, if it has become more precious to you or less or just the world is just – is still just trying to get 14% to 15% ROEs.
Nick Smith
Jordan, this is Nick. I’d like to think that back in August when we were buttoning up the River’s transaction, we were looking forward at where we thought the market would be. I mean, frankly, GDT was under a lot of pressure to sell (inaudible) and I still remain convinced that we priced it accordingly. And going forward, we are going to be even more disciplined.
Jordan Sadler – KeyBanc Capital Markets
Yes. And I am not trying to pick on River’s, Nick –
Nick Smith
One of that [ph] I am just –
Jordan Sadler – KeyBanc Capital Markets
I am just saying the world is different that you – no one knew the world will be this different, but do you guys – and I am not saying if you did that deal over, I am just saying would you look at eight cap deals today when your stock is trading in – pick a REIT, trading in the double digits for quality assets, right, double digit average cap rate.
Barry Bass
No, and the – I think the short answer is that – it makes – if we are going to buy it and acquisition in the short one, it has to be an extraordinarily strong opportunity because of the fact that we can't assume that our stock price is going to bounce back to 16 any time soon and the – our cost of capital, therefore, is high. But we will – we are beginning to see extraordinary opportunities. Prices that you wouldn’t have expected to see on the property level just like you are not – you wouldn’t – I never expected to see our stock price where it currently is. And not just ours but almost any other REITs out there, so – and to act today you need to see something extraordinary and we are beginning to see those kinds of opportunities.
Doug Donatelli
But I would much rather do that in conjunction with a partner than on our own.
Jordan Sadler – KeyBanc Capital Markets
Alright. Thanks for the clarification.
Operator
Thank you, sir. Our next question is a follow-up question from the line of Chris Haley with Wachovia Securities. Please go ahead.
Chris Haley – Wachovia Securities
Thanks. Could you provide a mark-to-market for the portfolio on the Flex product to the warehouse product, could you please?
Barry Bass
In terms of –
Chris Haley – Wachovia Securities
Mark-to-market on rent.
Barry Bass
– leases in place versus kind of the current rental rates?
Chris Haley – Wachovia Securities
Yes.
Barry Bass
But – let me get back to you on that, I mean obviously I would say that it’s in the 8% to 10% range. But let me confirm that and get back to you.
Chris Haley – Wachovia Securities
Also, when you raised the equity – the recent equity, I think the belief was that the use of proceeds were to buy the asset entirely – in its entirely and at the rate of return in the acquisition was greater than the cost of capital on the equity raised and then we learned last night that you have partnered this transaction. Is that sequence correct and what – may be you can offer (inaudible) behind that?
Barry Bass
Sure. I mean we raised I mean it was a little confusing because the amount of money we were raising was about the same as the purchase price of the asset, but we always intended to only use the proceeds – about $14 million of the proceeds to pay for the cash portion of the acquisition. So, we always knew we were getting debt on the property and that we were going to use the $30 million of the offering proceeds to pay down debt, which we did. I mean we had been talking to AEW about joint venturing this asset, but certainly weren’t in a position to talk about it or say that it was going to happen. So – and I think the fact that we are kind of taking essentially $12 million or so of the capital – of our capital off the table as a result of contributing into a joint venture makes sense for us at this point.
Chris Haley – Wachovia Securities
Understand, but today’s investments are better than – potentially better – likely better than investments made six months in terms of rate of return and the decision to do that wholly owned obviously provides a greater return to – on that capital and – than to bring in a partner that would – at cost, seems to give away some of that upside. One way to think about it is to also – it reduces risk, understand, but –
Doug Donatelli
But, Chris, if you think about it the capital we are getting back from AEW we have the ability to reinvest today at better prices. So, I mean if you are saying that the deals that are available today are better than the deal that we got on River’s the idea that we are able to sell – which we could discuss, the idea that we are able to essentially sell a chunk of that to a partner for cost I mean that gives us the ability then to reinvest those proceeds at a better return than we were getting off River’s in the first place.
Chris Haley – Wachovia Securities
Okay. Thank you.
Doug Donatelli
Thanks, Chris.
Operator
Thank you, sir. Our next question is a follow-up question from the line of Philip Martin with Cantor Fitzgerald. Please go ahead.
Philip Martin – Cantor Fitzgerald
Okay. My – most of my questions have just recently been answered, but I guess one last one, Barry, and you may have provided this earlier, but in terms of potential net cash proceeds that the company will be recognizing over the next call it six to nine months from planned asset sales, can you give an estimate of that?
Barry Bass
Yes, I mean Nick did address this one earlier. We are not planning to sell anything in this environment, so the environment would have to stabilize before we decided we were going to be a seller. So I mean we have not forecast any sales over the next –
Philip Martin – Cantor Fitzgerald
Okay. So and the – so the only one we are looking at then is really the AEW sale and the net cash from that –
Barry Bass
Correct.
Philip Martin – Cantor Fitzgerald
– at least in the near term. Okay, just wanted to clarify that.
Operator
Thank you, sir. And Mr. Donatelli, there are no further questions. Please continue with any closing remarks.
Doug Donatelli
Okay. Well thanks again everyone for joining us this morning. I hope you are as pleased that I am with the way we are managing our business during these uncertain times. We had the foresight to strengthen our balance sheet and we think that our properties are performing very well right now. I look forward to reporting further progress next quarter. Thank you.
Operator
Ladies and gentlemen, this concludes the First Potomac Realty Trust third quarter 2008 conference call. You may now disconnect. Thank you for your participation and for using ACT Teleconferencing. You may now disconnect.
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