Government Properties Income Trust's CEO Discusses Q4 2012 Results - Earnings Call Transcript

Feb.20.13 | About: Government Properties (GOV)

Government Properties Income Trust (NYSE:GOV)

Q4 2012 Earnings Call

February 20, 2013, 01:00 pm ET

Executives

Tim Bonang - VP, Investor Relations

David Blackman - President & CEO

Mark Kleifges - Treasurer & CFO

Analysts

Mitch Germain - JMP

Mike Carroll - RBC Capital

Tayo Okusanya - Jefferies

Brendan Maiorana - Wells Fargo

Jamie Feldman - Bank of America/Merrill Lynch

Operator

Good day and welcome to the Government Properties Income Trust Fourth Quarter and Year-End 2012 Financial Results Conference Call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

Tim Bonang

Thank you and good afternoon. Joining me on today's call are, David Blackman, President and Chief Operating Officer, and Mark Kleifges, Treasurer and Chief Financial Officer. The agenda for today's call includes a presentation by management followed by a question-and-answer session. I would note that the recording and retransmission of today's conference call is strictly prohibited without the prior written consent of the company.

Before beginning today’s call, I would like to read our Safe Harbor statement. Today’s conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based on GOV’s present beliefs and expectations as of today February 20, 2013. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call other than through filings with the Securities and Exchange Commission or SEC regarding this reporting period.

In addition, this call may contain non-GAAP numbers including normalized funds from operations or normalized FFO. A reconciliation of normalized FFO to net income and the components to calculate AFFO, CAD or FAD are available in our supplemental operating and financial data package found on our website at www.govreit.com. Actual results may differ materially from any projected forward-looking statements. Additional information concerning factors that could cause those differences is contained in our filings with the SEC. Investors are cautioned not to place undue reliance upon any forward-looking statements.

And now I would like to turn the call over to David Blackman.

David Blackman

Thank you, Tim. Government Properties Income Trust had its more challenging year as a public company in 2012 and I am proud of how our team rose to the occasion to execute a solid performance.

We began the year with 19.9% of annualized rents subject to lease expiration and despite the sluggish economy, the federal government exploring ways to reduce its real estate footprint, state municipal governments reducing work forces and the inability of our federal government to approve a budget, find a constructive solution to reducing the federal deficit, deal with the debt ceiling or eliminate sequestration, we entered into new and renewal leases for 1.2 million square feet with a weighted average roll up in rent of 9.3%. We increased the weighted average remaining lease term from 4.9 years to 5.5 years. We continue to diversify the company by acquiring 13 properties containing 1.3 million square feet for $214 million. We maintained a leverage neutral capital structure by raising $167 million in net proceeds due to sales of 7.5 million common shares and we increased our annual distribution rate by $0.04 per share.

Now lets review GOV’s results from the fourth quarter of 2012. For the quarter ended December 31, 2012, we are reporting normalized FFO of $28.1 million or $0.53 per share compared to $26.1 million or $0.56 per share for the same period in 2011. Our decrease in normalized FFO per share is primarily the result of a 250 basis point decline in occupancy, which primarily occurred during the first half of 2012 and our increase in shares outstanding during the fourth quarter.

Since October 1st, we have acquired two properties for an aggregate purchase price of $33 million and an entered into new and renewal leases for 637,000 square feet with a weighted average increase in rent of 16.8%. We also sold 7.5 million common shares in a public offering raising $167 million in net proceeds to reduce outstandings under our unsecured revolving credit facility, and in January we declared a $0.43 per share distribution.

GOV’s portfolio statistics and balance sheet remain exceptionally strong. At year-end, our 84 properties, which contained 10.2 million square feet were 92.5% leased with a weighted average remaining lease term of 5.5 years. The U.S. government remains our largest tenant and combined with leases to 10 state government tenants and the United Nations accounts for 93% of our annualized rents. We had $493 million of debt outstanding at year-end which represented a conservative 32% of our total book capitalization and EBITDA covered interest expense 7.6 times.

Turning to leasing activity. During the fourth quarter GOV executed 13 leases for 637,000 square feet for a weighted average lease term of 4.6 years; very modest 8,000 square feet of negative absorption during the quarter all associated with non-government tenants. Our commitments for leasing capital during the quarter were $3.3 million or $1.15 per square foot per lease year.

607,000 square feet of our leasing activity was with two federal government tenants and one state government tenant. This includes the renewal of the U.S. Citizenship and Immigration Services at 20th Massachusetts Avenue for 214,000 square feet for a four year term, a 38% roll up in rent and a lease commission as our only capital obligation. U.S. USCIS desires for 20th Mass Avenue to become its headquarters and is working with our other tenant at the property, the Department of Justice to occupy 100% of the building. We are also under letter of intent with DOJ for a short-term renewal to accomplish this goal. On average our change in annualized rents for government tenants during the quarter was up 18% and for non-government tenants was down 4.8% for an annualized increase in rents for the quarter of 16.8%.

Prospective leasing activity for our vacant space across the portfolio remained strong. We expect the FBI to vacate our property in June to move to its new 250,000 square foot campus, but otherwise expect continued high tenant retention in 2013. We also are having a dialogue with prospective tenants to fill more than 350,000 square feet of vacant space at our properties including a full building user for our 125,000 square foot building in Atlanta, Georgia.

In addition to our leasing momentum, we are also having success with our capital recycling program. Since October 1st, we have executed an agreement to sell our 31,000 square foot empty building in Tucson and have executed an agreement to sell our 186,000, square foot property in Oklahoma City. First lease from these two sales will be approximately $18.5 million and it will be used to repay outstanding debt or fund future acquisitions.

Turning to acquisitions. For the full year, we acquired 13 properties containing 1.3 million square feet for an aggregate purchase price of $214 million excluding acquisition costs. These 13 properties were acquired at an average cost per square foot of $169 and average going in cap rate of 8.2% were all 100% leased and have an average remaining lease term of 10 years.

Since October 1st, we acquired two properties containing 248,000 square feet for an aggregate purchase price of $33 million excluding acquisition costs. These two properties were acquired at an average cost per square foot of $141, had a weighted average remaining lease term of nine years or 100% leased and had a weighted average cap rate of 9%.

In November, we acquired an office property in Windsor Mill, Maryland containing 80,000 square feet. The property is a 100% leased to two tenants of which 97% is leased to the US government and occupied by the Centers for Medicare and Medicaid. The purchase price was $14.5 million. The going in cap rate was 9.4% and the average remaining lease term was 8.3 years.

In December, we acquired an office property in Florence, Kentucky containing the 168,000 square feet. The property is a 100% leased to the US government and occupied by the internal revenue service. The purchase price was $18.5 million, the going in cap rate was 8.1% and the average remaining lease term was 9.5 years.

Consistent with the last three years, the acquisition pipeline at year end was weak. Also consistent with the last three years, acquisition momentum has improved during the first quarter such that we remain optimistic in our ability to deploy accretive growth capital in 2013 that will support our business strategy of providing a safe and predictable distribution to shareholders from our stable revenue.

I will now turn the call over to Mark Kleifges, our CFO to provide more detail on our financial results.

Mark Kleifges

Thanks David. First, let's review our consolidated property level operating results for the 2012 fourth quarter. Because of our acquisition activity, we once again experienced quarter-over-quarter increases in rental income and property net operating income. At the end of 2012, we owned 84 properties with 10.2 million square feet. This compares to 71 properties with 9 million square feet at the end of 2011.

For the 2012 fourth quarter, GOV’s rental income increased $4.5 million or 9% to $56.3 million and property net operating income increased $2.6 million or 8% to $35.3 million both compared to the 2011 fourth quarter. At December 31, our properties were 92.5% leased and our consolidated NOI margin was 62.7% in the 2012 fourth quarter.

Turning to our same-store operating results; at year end our 67 same-store properties were 91.9% leased which is unchanged from the end of the third quarter but down 3.4% percentage points from the prior year end. For the 2012 fourth quarter, same-store rental income declined $2 million or 4.2% compared to the 2011 fourth quarter and net operating income was $1.6 million or 5.3% lower.

2012 same-store operating expenses declined $406,000 or 2.2% from 2011 quarter and same-store NOI margin was down 70 basis points from the prior year quarter to 62.2%. GOV’s quarter-over-quarter same-store operating results continue to be negatively affected by the expiration of our leases during the first quarter of 2012 with the CDC in Atlanta, the DEA in Tucson and the FBI in Phoenix.

In addition, the 2011 fourth quarter results included $610,000 of non-recurring retroactive rent increases resulting from the renewal of a tenant that had been in hold over. Together, these items accounted for $2.3 million quarter-over-quarter decline in rental income and a $2 million decline in net operating income. Without these items, the same-store revenues and NOI would have increased.

Turning back to our consolidated results, adjusted EBITDA in the fourth quarter of 2012 was $32.4 million compared to $29.5 million in the 2011 fourth quarter, a quarter-over-quarter increase of 10%.

Our EBITDA, the fix charges ratio remains very strong at 7.6 times for the quarter and our debt annualized EBITDA was only 3.8 times at quarter end. For the current quarter, normalized FFO was $28.1 million or $0.53 per share, compared to normalized FFO of $26.1 million or $0.56 per share for the 2011 fourth quarter, a 5% decrease in normalized FFO per share. This decrease was driven largely by the decline in NOI in certain of our same-store properties discussed earlier.

During the quarter, we spent $5.4 million on tenant improvements and leasing costs and $5.2 million for improvements to our properties.

Turning to our financing activities and balance sheets, in October, we sold 7.5 million common shares, raising net proceeds of approximately $167 million that we used to repay amounts outstanding on our $550 million revolving credit facility. At year-end, we had $493 million of debt outstanding, including $50 million outstanding under our revolving credit facility and our debt-to-total book capitalization was approximately 32%.

Our balance sheet is well positioned entering 2013 with approximately $200 million of acquisition capacity before our debt-to-total book capitalization would approach 40%.

In closing, GOV remains a conservatively capitalized company with a secured cash flow stream we expect will allow us to pay a consistent dividend. In addition to our stable base, we remain optimistic about the opportunities for further growth in 2013.

Operator, we are ready to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Mitch Germain of JMP. Please go ahead.

Mitch Germain - JMP

David, can you shed some light as to the seasonality of the investment pipeline in as you mentioned 4Q little slower while other sectors clearly see 4Q seeing deal flow accelerate, so I am just curious as to why that does happen in the fourth quarter?

David Blackman

Yeah, I don’t know that I have a great answer for that Mitch. We have kind of the same pressures that other property sectors would have to get deals closed in the fourth quarter, and generally, we are trying to get deals closed in the fourth quarter. There aren’t as many acquisition opportunities in this sector and for one reason or another that I don’t necessarily have an explanation for, it tends to fall of at year-end and then builds again usually in late January and early February but I can’t give you a specific reason as to why we have that seasonality, it just kind of errors.

Mitch Germain - JMP

And with regards to the pipeline today, as it fits, is it I mean kind of around similar levels that you saw year ago, is it higher, is it lower?

David Blackman

I think our acquisition pipeline is very consistent with how we began 2012, and leave me to believe that we should have acquisition opportunities during the year very consistent with how we performed during 2012.

Mitch Germain - JMP

Are you still seeing competition from PE capital or has some other fund raising there dried up a bit?

David Blackman

We are seeing competition and I would say the biggest change in the acquisition market generally is there is more debt capital available in the market today, and because financial institutions are trying to grow their portfolios it's got more competitive. So the debt capital is less expensive and slightly more aggressive in underwriting parameters.

Mitch Germain - JMP

Got you, and just reminding in the Oklahoma City property, was that part of, I know it was in the IPO, was that part of one of the CommonWealth transactions and [whispering] the decisions?

David Blackman

It was part of our, I guess the acquisitions that we did from CommonWealth in 2010. We are frankly been somewhat optimistic or opportunistic with that asset. There is someone that seems to be very interested in owning that property. They put a very compelling price on the market and we don't have other properties in Oklahoma City across the arm or franchise, so there really aren't a lot of synergies for us from a management perspective, and it’s unclear as to what the IRS and other tenants in that building are going to be long term. So we felt like it was a good opportunity to get that capital back and invest it into another asset.

Operator

And the next question is from the line of Mike Carroll of RBC Capital.

Mike Carroll - RBC Capital

With regard to your capital recycling plan, can you kind of give us a sense of the size and timing of transactions that we should model in?

David Blackman

Sure, we took a very detailed analysis of our entire portfolio at year end. We try to identify properties where we believed we’ve either maximized value or think that we may have potential problems in the future. Things like keeping the tenant is going to require more capital than we may get in rent growth such that that additional capital may not be accretive.

We identified the two properties that we have under agreement for immediate sale. We identified a handful of other properties under our watch list that we will continue to monitor and potentially be opportunistic with throughout the year. At this point, we don't have any other properties that we are actively marketing for sale. But it’s not to say we won't have one or two other properties during the year that we may become more active with.

Mike Carroll - RBC Capital

And then with the higher CapEx that was in the quarter, what was that related or its just improvements in the properties they are trying to create some of the green initiatives to keep the government tenants to stay.

Mark Kleifges

I think the first point I'd make is if you look at our capital spent historically its really bunched in Q3 and Q4. In fact if you look at the past three years over 75% of our BI spent takes place in Q3 and Q4, with the largest piece being in Q4, so that's part of the driver.

The other driver is our leasing activity, as David mentioned in his comments we entered into leases for about 1.2 million square feet of space this year and obviously there's capital commitments that we've made in connection with those new leases. Some of that spend took place in the latter part of 2012 and some of its going to carry over into the first half of ’13.

Mike Carroll - RBC Capital

And then are there any leases right now currently in holdover.

David Blackman

Yeah we have a handful on holdover. Obviously the biggest lease in holdover is the IRS in Oklahoma City. That lease expired at the end of October and because we elected to sell the asset we specifically have not tried to negotiate the renewal.

Mike Carroll - RBC Capital

And then DOJ is still in holdover too.

David Blackman

DOJ is in holdover although we've signed a letter of intent for renewal.

Mark Kleifges

And I think the other one that's been in holdover forever is (Causeway) Street in Boston in Veterans Affairs.

Mike Carroll - RBC Capital

And then for the DOJ was that cash was that lease spread similar to the one you spend in the fourth quarter?

David Blackman

Wasn’t quite as aggressive and we didn’t necessarily feel like we had to get as aggressive with the because we know they are negotiating with USCIS to vacate the property, so that US Citizenship can take the whole building.

Operator

Your next question from the line of Tayo Okusanya of Jefferies. Please go ahead.

Tayo Okusanya - Jefferies

Just a couple of questions. Could we get any update in regards to just what are you seeing out there lease up of the vacated space from 1Q ’12. It’s kind of over a year now, we really haven’t seen any activity and any in that space?

David Blackman

Well, lets see. I guess what we had in the first quarter 2012 was the FBI in Phoenix. That’s a pretty weak market, continues to have above 20% vacancy in the market generally. We had a handful of prospects at the property and for one reason or another, elected to not move forward leasing at that building.

We continue to actively market that property. The other building that we lost a tenant for in the first quarter was Tuscan which we obviously elected to sell and have under our agreement right now to sell. The other vacant building we have is the 125,000 square foot property in Atlanta, Georgia that the CDC exited in the first quarter, and we have pretty active negotiations with a tenant to take a 100% of that space. So I feel pretty good about that.

To talk about other activity for example; we lost a law firm in Capital Place which is a property in Sacramento, California that’s at a corner across from State Capital. They exited in the fourth quarter of 2012 and we are pretty far along with negotiations with the California Department of Finance to take that space.

We also acquired a property in Salem, Oregon during 2012 that had some vacant space that we didn’t have a lot of - we didn’t underwrite that we would ever lease that space because it was interior space and we knew the only way we would lease it is if the government tenant in there expanded. We have active negotiations with them for leasing 36,000 square feet in that building.

So, generally I think the activity across the country picking up and we are optimistic that we are going to have some organic growth during the year from leasing activity.

Tayo Okusanya - Jefferies

That’s helpful and then just mark-to-market in the quarter the 16%. I am assuming a meaningful amount of that has to do with releasing of mass ads. If you were to exclude Mass Ave from that number, what’s kind of like the mark-to-market and everything else?

David Blackman

Well if you look at our government tenants Mass Ave was a 35% plus or minus increase in rent, the US Postal Service was our next, was really our largest lease that was 322,000 square feet and that was down 14.6%. That was the building that we acquired in 2009 at a 12% plus cap rates. So we knew when we bought that building that it was an above market leads, and I think we have been relatively transparent that we expected that rent to roll down with the renewal that we executed there.

The biggest roll down we had with our government tenants was the State of South Carolina Department of Labor Licensing and Regulation. That was almost a 35% roll down in rents, which was actually good news because we expected that tenant to vacant the property.

That was the tenant that we talked about where the State of South Carolina was trying to consolidate agencies into owned real estate. They have given us notice that they are going to vacate, realized that they didn't have adequate acceptable space to move in to and came back us to renew.

So we ended up with the 10 year renewal there, when in fact we thought that space is going vacant. Columbia is a difficult leasing market, so keeping them in the building even with a roll down was very positive.

Tayo Okusanya - Jefferies

Got it, that is helpful. And so just kind of think by your lease expirations in 2013. What kind of mark-to-market we will be associating with that space?

David Blackman

We think that we are up modestly in 2013, and it’s going to be up and down. We obviously expect the Department of Justice to roll up with their renewal at 20th Mass Avenue. We should have a slight roll up in rent with the renewal of the Department of Energy in Richland, Washington. We will probably have a roll down in rents with the State of Maryland renewal and potentially with CDC in Atlanta. So I think net-net we are probably up 1% to 5%.

Tayo Okusanya - Jefferies

And then the rent coverage, I know you guys gave some pretty good explanations about the heavy CapEx spend in the third quarter and fourth quarter and why that creates lack of coverage in those two quarters, but I guess when we kind of think about the dividend and you guys have risen the dividend by a penny to $0.42 a quarter, is the idea really we should be thinking about the payout over on entire year of the coverage covering for the entire year rather than just kind of focusing on the quarter-to-quarter basis if it doesn't cover some particular quarters in 2013?

David Blackman

Before I let Mark answer that question, I want to go back to the leasing question. The one thing that's important to understand about 2013 for us, we only have two tenants in our 2013 lease expirations that represent more than 1% of rents. So it’s a very granular leasing year for us with really other than kind of CDC and Department of Justice, no one renewal really kind of moves the needle much.

Tayo Okusanya - Jefferies

Okay. That's helpful.

Mark Kleifges

In terms of the dividend I think we look at the payout ratio over the long-term, not just looking at one year and then the reason we do that is because leasing activity could be so lumpy and the costs associated with leasing activity so lumpy, so we take a longer term view and wouldn’t have increased the dividend if we weren't comfortable that over the long term that CAD, FAD will cover our dividend. We may as we did in the fourth quarter, we may experience as we burn off the remainder of this leasing commitment costs that we've made in 2013, we may experience a quarter or two we are above that payout ratio, but over the long term we expect the dividend to be covered.

Operator

The next question is from the line of Brendan Maiorana of Wells Fargo. Please go ahead.

Brendan Maiorana - Wells Fargo

Hey Mark, I just want to follow up on that. If I look at your leasing CapEx for the year, it is, I guess its around $15 million between both leasing capital and building improvements which seems like that's probably roughly a reasonable run rate for the year; is that accurate?

Mark Kleifges

A reasonable run rate going forward is that you are asking?

Brendan Maiorana - Wells Fargo

Yeah, $15 million is what you guys did this year I think it was a maybe a little more than $15 million between both leasing capital and maintenance CapEx, is that sort of a good average annual number going forward?

Mark Kleifges

I think on the maintenance or what we call BI, I think that was about $4.2 million, you know, we kind of look at that on a occupied square foot basis, we are at $0.46 a square foot and I think we've always said that long-term we think that's going to be around $0.50 a square foot for this portfolio. On the leasing side, I would argue that our leasing costs are higher. Remember, we came into the year with some close to 20% of our portfolio rolling entered into leases for 1.2 million square feet and made commitments of around $14 million in connection with those leases. So I would say that’s a heavy leasing cost year for us.

David Blackman

Yeah, when we go into 2014, we have less than 4% of revenue subject to lease exploration. So 2012 was a heavy TI year. 2013 will be heavier than normal but not the heaviest and in 2014 it should be pretty modest.

Mark Kleifges

And I want to point out that while the payout ratio was above 100% in the fourth quarter for the year 2012, it was around 92%.

Brendan Maiorana - Wells Fargo

Yeah, David, I mean I agree with you guys in the sense that you sort of look at ‘12 going into the year and it looks like it's a big year heading into channel lot of role but unfortunately there were some tenants that didn’t renew and your total leasing volume, the 1.2 million square feet. It doesn’t strike me as sort of abnormally high number on a 10 million square foot portfolio. It strikes me sort of average. So I mean I was sort of looking at the leasing capital cost as sort of an average number but you think those numbers are, you think that’s high in ‘12 versus the normalized run rate?

David Blackman

Yes we do.

Mark Kleifges

Yeah, I think the cost to some of these leases were higher than what we normally have incurred. Also if you kind of look at things on a per square foot per year basis.

Brendan Maiorana - Wells Fargo

Right.

Mark Kleifges

Lease it, rock and roll, that was fairly expensive lease this year and obviously when you renew something like at (inaudible) with a high rental rate, pretty significant leasing commissions associated with that.

Brendan Maiorana - Wells Fargo

Yeah, it was only like $11 a square foot right, that you guys still think that’s high?

Mark Kleifges

Well it is high historically for us.

David Blackman

It’s high relative to other markets where we own assets. We don’t have many buildings that have $47 rents.

Brendan Maiorana - Wells Fargo

Right.

David Blackman

And lease commissions based upon the rental rate times the number of years at the lease.

Brendan Maiorana - Wells Fargo

Sure, okay what’s your mindset now with where you stand on your term loan and your line of credit that’s out there and your willingness or likelihood of doing a secured offering to take out that part of your capital stack or a portion of that part of your capital stack?

David Blackman

Yeah, I think where we sit today we are still comfortable with the floating rate the amount of floating rate that we have.

Brendan Maiorana - Wells Fargo

Is that a similar, is that a commentary on where the market is and your view of interest rates or is that more of a commentary on you don’t mind having that level of your capital stack as floating rate debt on a longer term basis?

Mark Kleifges

Yeah I think long-term, I wouldn’t be surprised if we always had some floating rate debt as part of our capital stack, you probably wouldn’t represent this larger proportion of our debt part of our capital stack, but given our views of market interest rates, it’s probably higher today than it will be over the long-term for the company.

Brendan Maiorana - Wells Fargo

Yeah, sure and if you guys were to issue unsecured, where do you think you could, where would likely be a 10-year deal forego if it was done today?

Mark Kleifges

It’s tough because we don’t have any bonds to benchmark off but I think it’s going to be, we will probably in that 525 area.

Brendan Maiorana - Wells Fargo

Okay, that’s helpful and then David I apologize if I missed this, but did you say what the rough cap rate for the Oklahoma City disposition outstanding?

David Blackman

We did not, and like with our acquisitions, I think our strategy is to wait until the transaction closes before we talk about specific cap rates.

Brendan Maiorana - Wells Fargo

Yeah, I know that you mentioned you are not planning on selling anything else but something could come up in what portion of your portfolio, if you look at it is something that would be considered non-core?

David Blackman

This is pretty small percentage, I mean you think about it, all of our buildings are substantially leased to government tenants which is our business strategy, where you are going to see some potential dispositions, for example, buildings that we may have vacant at least for non-government tenants are going to be buildings that hit the watch list, buildings that we have vacant that we attempt to lease for sometime and have difficulty leasing, we may consider those as well, and then there is going to be the occasional and I think this is occasional building where we don't like the rent versus capital cost associated with keeping that tenant in the building, I think that is going to be kind of (inaudible).

Brendan Maiorana - Wells Fargo

Right, if you guys, is the tenant that you are speaking with for the former CDC space in Atlanta, a government tenant or is that a private tenant?

David Blackman

It is a non-government tenant.

Brendan Maiorana - Wells Fargo

Would that asset be a candidate for disposition, if you considering the non-government?

David Blackman

It could potentially be a candidate for disposition although we don't have any specific plans at this point to sell. We like that location. We like the tenant that we are talking to, and so we will just have to kind of play that out over time.

Brendan Maiorana - Wells Fargo

And then just last one, the CDC that's got the roll this year I think they are in three different buildings in ’13, do you expect all of them to renew.

David Blackman

You know Brendan as I've said previously the CDC seems to be the most challenged agency that we deal with in making decisions and providing clear direction. We certainly hope to have a [renewal] this year, but given their lack of transparency I challenge committing that they are going to renew in all the buildings.

Brendan Maiorana - Wells Fargo

Just for my recollection, when the group moved out in the beginning of ’12, how much foresight did you guys have ahead of time that they were doing that? Was that a pretty quick turnaround in terms of when you knew they were going to move out and when they ultimately did?

David Blackman

Not only was it quick for us, but the real estate person at the CDC seemed to be a bit stunned that they were leaving that building as well. Coming back to my point that they don't seem to know amongst themselves exactly what their strategy is, what’s their real estate footprint.

Brendan Maiorana - Wells Fargo

And what was the square footage that's rolling in ’13 for CDC?

David Blackman

65,000 square feet.

Brendan Maiorana - Wells Fargo

Oh 65.

Mark Kleifges

CDC its about 202,000 square feet in total.

Brendan Maiorana - Wells Fargo

200 yeah three buildings.

Mark Kleifges

About 1.4% of our revenue.

Operator

The next question is from the line of Jamie Feldman of Bank of America/ Merrill Lynch.

Jamie Feldman - Bank of America/Merrill Lynch

I guess kind of big picture here, when you think about the discussions going out in DC over the sequester and just other potential budget cuts, what do you think it means for your leasing progress and is there some point where everything really gets put on hold here. Can you give us more color on what's your thinking about the rest of the year giving all the discussions going on?

David Blackman

Yeah, that's a hard question to answer Jamie. I would say that the biggest risk that our country has right now is the inability of our politicians to find compromise and make decisions. I think it has huge repercussions for the entire economy, and it has the potential of putting the economy back into a recession.

With that said, we don't feel like we have any near term risk with our portfolio because of the contractual obligations that we have, because of the way that the government’s currently talking about dealing with these cuts is shortening work weeks and managing through retirements, through attrition.

So they are still going to have an obligation to occupy space in our buildings and they are still going to have a need to be in those buildings and serve the public, because in most of our buildings they do have a specific need to serve the public. I don't know that it necessarily affects renewals, because I think our greater challenge is the desire of not only government tenants but non-government tenants to have more people in the same square footage that they occupy today. So I don't think that’s a sequestration issue, I think that’s just a general office real estate challenge. So does it make sense?

Jamie Feldman - Bank of America/Merrill Lynch

Yeah, I am just thinking in terms of if you have leases and process right now, like the DOJ, LOI at 20 Mass Ave leases like that, I mean there is some point where you feel like you can have an agreement going and then it's just going to be complete standstill for a while or based on if there is a sequestration, the different kind of moments along the [task] here?

David Blackman

Yeah, I would say it's no change from what we've been operating under the last two years.

Jamie Feldman - Bank of America/Merrill Lynch

Okay, and then when you think about,

Mark Kleifges

That’s a [10%] improved budget in a few years now. So this issue of getting leases through a committee, we've been living with now, seems like forever. So that’s just going to continue. The leasing process will be elongated because of the government, but eventually you will get to the finish line.

Jamie Feldman - Bank of America/Merrill Lynch

Okay, and then when you think about your federal government leases, what is the utilization in those buildings? Are they pretty full right now or is there some excess capacity?

David Blackman

Tends to be pretty high.

Operator

Thank you. And the next question is a follow up from the line of Mitch Germain of JMP. Please go ahead.

Mitch Germain - JMP

My question was answered. Thanks.

Operator

Okay, thank you. And the next question is from the line of Tayo Okusanya of Jefferies. Please go ahead. Mr. Okusanya your line is open.

David Blackman

Must have answered his question.

Operator

Okay, thank you. And there are no further questions in queue so I will turn it back to Mr. David Blackman for closing remarks.

David Blackman

Thank you, operator and thank you everyone for joining us on our fourth quarter conference call. We will be attending the Wells Fargo Real Estate Conference next week and look forward to seeing some of you at the conference thank you.

Operator

Thank you and that concludes our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.

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Government Properties Income Trust (GOV): Q4 FFO of $0.53 in-line. Revenue of $56.26M misses by $0.08M. (PR)