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First Potomac Realty Trust (NYSE:FPO)

Q1 2009 Earnings Call

April 29, 2009 10.00 AM ET

Executives

Joel Bonder - General Counsel

Doug Donatelli - Chairman and Chief Executive Officer

Skip Dawson - Executive Vice President and Chief Operating Officer

Barry H. Bass - Executive Vice President and Chief Financial Officer

Michael H. Comer - Senior Vice President and Chief Accounting Officer

Analysts

Jordan Sadler - KeyBanc Capital Markets Inc.

Sheila McGrath - Keefe, Bruyette & Woods

Christopher Lucas - Robert W. Baird

William Crow - Raymond James

Carol Kemple - Hilliard Lyons

Brendan Maiorana - Wachovia Securities LLC

David B. Rodgers - RBC Capital Markets

Stephanie Krewson - Janney Montgomery Scott LLC

Operator

Good day and welcome to the First Potomac Realty Trust First Quarter Conference Call. Today's call is being recorded. And at this time, I would like to turn the call over to Mr. Joel Bonder, the company's General Counsel.

Joel Bonder

Good morning. Welcome to First Potomac Realty Trust first quarter 2009 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 it's earnings press release and we posted supplemental information relating to first 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 Brad Cohen of ICR at 203-682-8211.

During this call, we will discuss our anticipated operating results and future events, including our anticipated earnings, FFO, AFFO, dividend 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 2008 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'll turn the call over to our Chairman and CEO, Doug Donatelli. Doug?

Doug Donatelli

Thanks Joel. Good morning everyone and thank you for joining us. To start this morning. I'll review the highlights of our first quarter 2009 and then I'll discuss our markets and overall outlook. Skip will then talk about leasing and Barry will add some color on our financials.

During the first quarter, we continued to build on the positive momentum that we delivered in 2008 in our two most critical areas, our operations and our capital position. In terms of operations, our Same-Property NOI increased 4.7% year-over-year, as we begin to realize the benefits of our successful leasing efforts last year.

In particular, our Same-Property NOI in our southern and northern Virginia markets was up 13% and 8% respectively due to increased occupancy and increased rental rates. Our Maryland region was softer as economic issues drove demand lower, with the downsizing of some of our tenants.

Continuing to grow on our occupancy level is a top priority for us and in this challenging economy we're keenly focused on tenant retention.

In the first quarter, our tenant retention rate was 80% and for the remainder of the year we have just over 10% of our portfolio coming up for renewal. Signing these renewals has been and will continue to be a priority for us and I'm pleased with our results so far.

During the first quarter, we executed 660,000 square feet of leases, possessing of 150,000 square feet of new leases and 510,000 square feet of renewal leases. As we look ahead to the remainder of the year we have some large leases rolling in the third and fourth quarters.

We're intensely focused on these expirations and are to continue to maximize our retention rates. We expect rents relatively flat, which is a win in this economic environment. While I'm pleased with what we're doing, we do recognize the headwinds that we, our tenants and almost all businesses are facing due to this challenging economy.

However, there are few factors that differentiate First Potomac and provide us with stability and give us confidence in these challenging times.

Importantly, First Potomac is well positioned with our concentration in the Greater Washington D.C. region. While our markets have been challenged along with the rest of country, we believe that the potential government expansion associated with the stimulus measures will have a positive impact on our core territory. Almost 20% of our revenue comes from government related tenants; either the federal government itself or through government contractors.

Prior recessionary cycles and employment (ph) in the region has typically outperformed national averages and to-date in this recession job loss in the Metro DC area has been less than in the rest of the country.

Federal Government expects to spend close to a trillion dollars over the next three years and historically the DC region has captured a disproportionate share of government spending.

History is an indication, the region share the current trend stimulus will knock about $50 billion. But whatever the exact amount, there is little doubt that there will be job growth in this region and we expect to start seeing the benefits of this job growth soon.

Since new supply is essentially non-existent, we're in an ideal position to capture some of this anticipated growth in demand. You might not see the impact right away, but it certainly has positive implications for our territory as it helps to maintain a more stable economic environment in the area.

Additionally, our assets provide us with relative stability. Flexible industrial and office parks are traditionally one of the first real estate classes to recover. Our experience, well located properties like ours outperformed during down cycles.

Our properties are high quality, well located and lower cost than multi-storey office properties. That makes all property type attracted to a wide variety of tenants and its particularly compelling and resilient in this economic environment. We're also an extremely disciplined management team. It gets sight of our long-term strategy to grow our asset base and add value to our portfolio.

For the past couple of years, we've demonstrated our ability to analyze and step away from a frothy market, significantly slowed our acquisition pace as the economics became less attractive. And last year we de-levered through a sizeable asset sale and an equity raise.

While we're continuing to view the market with caution, we're starting to see opportunities that might make sense. While we remain patient with our capital allocation but are positioning ourselves to capitalize on future opportunities.

With respect to our balance sheet, we're in a relatively solid and improving position. During 2008, we reduced our debt by about $50 million and in the first quarter we reduced our debt further by retiring $17 million of our exchangeable senior notes at a weighted average discount of 31%.

We don't have any meaningful debt maturities until 2011 and we're already exploring our options there and making progress on refinancing bad debt. We announced last night that First Potomac Board has decided to adopt a dividend policy that enhances our financial flexibility and has therefore modified our annualized dividend from $1.36 a share to $0.80 a share. This modification resulted in additional cash flow for the company of approximately $4 million a quarter.

We believe this reduction is a prudent thing to do and the right move for creating long term value that helps to ensure that we have the necessary financial flexibility to mitigate risk and to fund growth. This decision was made in the best interest of our shareholders in mind. We're confident that conserving this capital and enhancing our future financial liquidity is the right thing to do.

In summary, I'm confident with First Potomac strategic direction. The DC region in general, remains one of the top markets in the country for commercial real estate in terms of size, liquidity and stability. We're very well positioned within this market and have taken the right steps to pursue opportunistic growth.

We have a high quality balance sheet, a disciplined investment strategy and the right team to execute our business plan. We remain focused on generating improved cash flow. We're a more aggressive and successful leasing efforts which improve occupancy and cash flow, to prudently deploying our capital. We'll continue to take steps to enhance shareholder value.

I'll now turn the call over to Skip Dawson, our Chief Operating Officer, for some color on our operations. Skip?

Skip Dawson

Thanks Doug. Good morning everyone. During the first quarter we continued to build on strong leasing momentum that we begun in 2008, which was a record leasing year for First Potomac.

Our aggressive approach to early leasing helped drive Same-Property NOI growth as these new leases come on line. In 2009, this focus continues. In light of the ongoing challenging economic environment in terms of leasing we had been concentrating on two areas, executing renewals, to improve our retention rate and filling old vacancies.

During the first quarter we made progress against both of these goals and completed 657,000 square feet of leases. During the first quarter, we completed 144,000 square feet of new leases on 15 transactions. Currently 98,000 square feet of these spaces have been vacant for more than a year.

The balance of new leasing for the quarter, 46,000 square feet, experienced a roll down on 2% on the cash basis and 5% on a GAAP basis. In terms of renewal activity, we renewed 513,000 square feet of space in the quarter on 34 transactions. It was a solid 80% retention rate as a result of our aggressive approach during the year to reach out to tenants and for actively work on leasing solutions.

We used the sacrifice rate to get these renewals executed; as the average base rental renewals increased 1% on a cash basis and 15% on the GAAP basis. We also renewed our largest expiration in our one joint venture asset, RiversPark in Columbia, Maryland.

We will continue to focus on maintaining a strong retention rate throughout 2009 as this is the most cost effective leasing we can do from a capital and overall cash flow perspective.

We have taken care of our largest exposures in 2009 and 2010. Because of this, we do anticipate that our renewal rate was slow slightly and as the year progresses since we approved in some renewals on future expirations. I am pleased that we have done a good job in savaging a solid base line with our recent leasing and renewal efforts.

We have rough nearly 10% of our annualized base spread expiring this year and 12% in 2010. We have reduced our exposure for the next few years. Long-term, 48% of our base spread will not roll until 2013 and beyond. This is up dramatically from a year ago. Hence we have successfully extended and we worked many of this closely in expiration only reducing risks. And we'll continue to work diligently to address our expirations.

Now, let me briefly catch on the status of tenant build-outs we have underway. As of 3/31, we have approximately 240,000 square feet in tenant build-out scheduled to be delivered by our construction team in the second quarter. Of this amount, roughly 190,000 square feet is on existing end service space and are down to about 50,000 square feet, since space being redeveloped.

These deliveries represent annualized revenue of close to $3 million including estimated expense recoveries. This should help cushion the portfolio against issues that could arise during the second half of this year. Including in this redevelopment is exciting renovation at our Interstate Plaza property in Alexandria, Virginia.

We are completing re-positioning the property from a single tenant industrial user to a multi-tenant building with a new lobby. The capital cost delivered these improvements, including tenant driven cost are higher than we have historically incurred. Right now average new leasing capital costs per square foot to $26 this quarter.

But what we anticipate an attractive initial return on this investment of 10% to 12%. At the office project, our capital expenditures for new leases are in line with our 2008 average of $16 per square foot.

On regional perspective we are seeing signs of improvement in our Northern and Southern Virginia markets. Northern and Southern Virginia represents 34% and 45% respectively of our portfolio by square footage. Our traffic edge still remains low relative to historic levels. There has been some improvement with an increase in tours and showing.

The Maryland market has remained challenged. I feel what Doug said about our region. We're very well positioned within the D.C. market and are confident we're in the right southern markets. Our markets have stability provided by the Federal Government and it will get stronger as the result of the stimulus spending occurs.

With this, I'd like to turn over the call to Barry Bass, our Chief Financial Officer. Barry?

Barry H. Bass

Thanks Skip. Good morning. Our FFO for the quarter ended March 31st was $14.8 million compared to $11.8 million in the first quarter of 2008.

Our results included $0.15 per share of gains realized from repurchasing $17 million of our exchangeable notes at an average 31% discount. Excluding these gains, our FFO was $0.38 per share, equal to our FFO per share net of gains in the first quarter of 2008. Our AFFO for the quarter was $0.26 per share compared to $0.31 last year.

As a result of the leasing we've been completing, our Same-Property portfolio generated NOI growth of 4.7% on a GAAP basis and 6% on a cash basis. Based on the timing of when signed leases will go into effect, we expect our NOI growth to moderate as the year progresses.

As Skip indicated, the leasing market is challenging but we're encouraged by our ability to reduce downtime by focusing on renewals as evidenced by our 80% retention rate in the first quarter.

The renewal of the advanced biotechnologies lease at RiversPark II, a property we own in joint venture with ATW, let to the un-consolidation of that asset this quarter.

Bad debt expense came in at $500,000, up from $100,000 a year ago but in line with our expectations. As we've indicated previously, we expect to see pressure on this line item during 2009 as the economic downturn continues.

Its important note to keep in mind that we have over 800 tenants with no single tenant other than the U.S. Government accounting for more than 3% of our revenue. We're diversified from both an industry exposure and tenant concentration perspective.

Offsetting the challenging operating environment is the health of our balance sheet. In the quarter, our fixed charge coverage improved to 2.3 times, up from under two times a year ago. We continue to reduce our absolute level of debt and we intend to drive that level down further in an effort to be positioned for opportunities.

We continue to manage our financial resources with an eye towards the long-term. We're well positioned with minimum near term debt maturities which gives us the ability to proactively plan for the maturities that we have coming up in 2011, which is exactly what we're doing. And our decision to reset our dividend for 2009 gives us additional flexibility.

We have reiterated our FFO guidance for 2009 of $1.55 to $1.80 per share. As a reminder, the guidance includes an approximately $0.05 per share reduction from the implementation of APB 14-1, the FASB pronouncement that requires us to fair value the interest on our exchangeable notes.

Also, our initial guidance included $0.13 of gain from debt buyback which is actually $0.15 year-to-date. At this time, we do not anticipate additional debt extinguishment gains during the balance of the year and as a reminder, we anticipate Same-Property NOI to be flat to up 5% in 2009 based on the revenue we're realizing from our 2008 leasing which will be we offset somewhat by higher bad debt and slower leasing velocity in 2009.

I'll now turn the call back over to Doug for some closing remarks.

Doug Donatelli

Thanks Barry. As we discussed this morning, our portfolio is performing well in these tough times. We have the stability offered by government and government related tenants that also have a diffusion of risk offered by the diversity of our tenant base.

While the outlook is challenging, we believe our markets, our portfolio and our asset class position us to outperform in this environment. We made prudent decisions as far as capital and have a well positioned balance sheet that will enable us to pursue opportunities should they arrive.

Our operations are strong and we have a committed teams that's focused on execution and taking advantage of one of the strongest markets in the country. Thank you for your time and we'll now take some questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). And our first question is coming from the line of Jordan Sadler with KeyBanc Capital Markets. Please go ahead.

Jordan Sadler - KeyBanc Capital Markets Inc.

Thanks. Good morning guys. Hey, Barry could you just clarify for me, you discussed it quickly on the guidance there. You said you previously had $0.13 of gains in there and now you've got $0.15 year-to-date. Were there any changes in any of the underlying assumptions there? It sounds like the same-store align numbers and the bad debt numbers were holding steady relative to last time. Any offset or you're just kind of holding the range?

Barry Bass

We're holding the range. I mean, it's only been two months since we issued the last guidance. We basically thought for $0.02. It wasn't worth changing the range and all the other underlying assumptions do remain the same.

Jordan Sadler - KeyBanc Capital Markets Inc.

They do, okay. And then, I guess this one comes back to Skip. Skip, you talked about the leasing cost as you relate it to the new leases. But I was just looking at the renewal costs associated with renewals and CapEx looks like it's up pretty significantly versus 2008 levels. I'm not sure I heard you comment about that. Could you maybe put some color around that. Looks like $1.35 per square foot per year versus $0.60 last year.

Skip Dawson

Sure, I'll be happy to. We had a number of big leases that were executed down south; that had already predetermined TI's (ph) in the renewals along with... in our southern region we have a third party leasing which it kind of extends on both sides of the transactions. I do you see that coming back in line, as we get through the year back to a $3 run rate per square foot.

Jordan Sadler - KeyBanc Capital Markets Inc.

Okay. When you say that predetermined TI in the renewals that was in the prior lease or...

Skip Dawson

That's correct. If they exercise renewals and they were... we're going to receive some of the TI dollars in the transaction. We had that in one of our leases and then we had a one transaction which also down south and has an extension along with that and that had additional TI dollars with the extension and also with renewal.

Jordan Sadler - KeyBanc Capital Markets Inc.

Is that pretty unique within your portfolio or was it in...

Skip Dawson

Yes. It was a lease that we inherited. So we just had to work through that. And I don't see that continuing in '09. Actually I do see that numbers as far as renewal side coming back in line.

Jordan Sadler - KeyBanc Capital Markets Inc.

Okay. And as it relates to retention on the remaining role for the rest of the year, what are the sort of the expectations there. We stay in this 80% range?

Skip Dawson

I think we talked... the beginning of guidance we used the 70% range as far as when we felt retention would be in 2009 for us. But we did pull forward in 2010 expiration which got it to higher than projected retention which we're happy to take. But we anticipate probably as we move through the year, would be in the 70%, 75% range. That could move up depending on how far we reach in 2010 and beyond.

Jordan Sadler - KeyBanc Capital Markets Inc.

Okay. And where do you think after all is said and done occupancy. However you want to describe either on a lease basis or on an occupied basis shakes out by the end of this year?

Skip Dawson

Jordon. Just in terms of our guidance, our guidance assumes 85% to 87% average occupancy for the year. So I think that gives you a pretty good indication of where we think we will be for the balance of the year.

Jordan Sadler - KeyBanc Capital Markets Inc.

So basically, hold steady throughout the year with the expectation.

Skip Dawson

I think that's a fair conclusion to make, yes.

Jordan Sadler - KeyBanc Capital Markets Inc.

Okay. And then lastly Barry, well I have you just the new dividend. How does that compare to your taxable net income expectation for this year... excluded the gains?

Barry Bass

Yes, I mean, we gave ourselves a little bit of cushion in terms of taxable income. But the real goal there, the Board was striving to make us a more of a self funding operation from a cash flow perspective. So, striking the balance between a little bit more than our the bottom-line of our taxable income and less than the cash flow that we're generating.

Jordan Sadler - KeyBanc Capital Markets Inc.

In other words, if you wanted to trim it back incrementally, there would be another, call it, $0.10 or so or whatever the number would be versus taxable net income?

Barry Bass

Well, we don't intend to do that. I think that we're trying to leave ourselves cushion so that we don't find out at the end of the year that our taxable income is higher than projected and have ourselves in a situation we have not paid out enough. So I think that we think that there will be an adequate decrease in the dividend... at the right level (ph).

Jordan Sadler - KeyBanc Capital Markets Inc.

Okay.

Operator

Thank you, sir. And our next question comes from the line of Sheila McGrath with KBW. Please go ahead.

Sheila McGrath - Keefe, Bruyette & Woods

Good morning. Barry, I was just wondering if you could walk us through the 2011 maturities and there is a line of credit in the exchangeable notes. And is the balance secured property mortgages?

Barry Bass

No, we have $100 million of term loans; two separate term loans with KeyBanc and one participating bank in each of those loans. So the good news is that on almost all of our 2011 maturities there's someone to talk to at the other end of the phone and we are having conversations without possible refinancing alternatives for our 2011 maturities. I mean, sufficed to say that we are working on a variety of plans that would allow us to refinance all of our 2011 maturities. Not going to speak about any of the specifics in terms of what those transactions look like. We'll make those details available as they become available.

But given that our first 2011 maturity is 24 months away. We feel like we have a little bit of time to work with. No guns to our head but we are absolutely addressing them currently.

Sheila McGrath - Keefe, Bruyette & Woods

Okay. And when you look at the line of credit, would you envision a similar size of $125 million?

Barry Bass

I would.

Sheila McGrath - Keefe, Bruyette & Woods

Okay, okay. And then my next question is on Same-Store NOI. That was the strongest that you've had in many quarters, and I'm just wondering, when we look for the balance of the year, you did guide for us to expect it to moderate. But how should we think about occupancy levels for the balance of the year and where these things spreads?

Barry Bass

Yes, I think we addressed that a little bit on the call. We were talking that 85% to 87% is our guidance for occupancy levels. So we're currently about 86%. So holding the line in terms of occupancy in terms of lease spreads, as Skip mentioned on the call, holding those relatively flat is also what we're expecting which is a win in this market. So, basically holding the line on both occupancy and rate throughout the balance of the year.

Sheila McGrath - Keefe, Bruyette & Woods

Okay. And last question. Can you just remind us again the changing of reporting of the JV. You said that because the lease that tenant renewed, now you're going to report that differently?

Barry Bass

Yes. I wasn't going to get into all the details until someone asked. But now that you've asked, basically we had guaranteed... when we contributed that asset into the joint venture with AEW, we provided a guarantee, back slot (ph) guarantee for certain leases and lease renewal possibilities.

There were two separate joint ventures. The one guarantee that we had within the RiversPark II property was the renewal of the Advanced Biotechnologies lease. Advanced Biotechnologies did, in fact, renew their lease. So our guarantee went away. With our guarantee going away, that transaction now qualifies for a proper sale accountings so that we can unconsolidated that asset, if that makes sense.

Sheila McGrath - Keefe, Bruyette & Woods

Okay. Okay, thanks a lot.

Operator

Thank you ma'am. And our next question comes from the line of Chris Lucas with Robert W Baird. Please go ahead.

Christopher Lucas - Robert W. Baird

Good morning guys.

Unidentified Company Speaker

Good morning, Chris.

Christopher Lucas

Barry, let me just start with some housekeeping items just so if they are not at your (inaudible) somebody can track them down. Bad debt expense for the last quarter was what? And then were there any lease term fees for this quarter?

Michael Comer

Lease fees... this is Mike. Lease fees for the quarter were just under 100,000. So pretty small.

Christopher Lucas

Okay.

Michael Comer

And...

Barry Bass

For Q4. For Q4 he is asking, right.

Michael Comer

On the bad debt for Q4

Barry Bass

I know for Q1 of 2008. They were roughly a hundred. So I just want to make sure that we're getting you the right number.

Christopher Lucas

All right. And then on the... what impacted the GGP bankruptcy filing you have on your lease guarantees with the assets (ph) you bought from them?

Barry Bass

That's a good question. At this point the general growth entities that guarantees the leases that RiversPark has not filed for; bankruptcy protection that would be vast commercial properties. So, we lately are continuing to be on the hook for their lease obligations at RiversPark too.

Christopher Lucas

What's the amount of the exposure, just in terms of... what do you have sort of in your thought process for guidance. Is there anything there?

Barry Bass

The exposure is about a million dollars left on that exposure. We won't reserve against that unless and until that entity files. So our policy on bad debt really is a tenant specific policy and in fact actually... Mike's looking at me, we actually don't recognize revenue on that space. That is a reduction in our basis so there is no impact for on our revenue line item.

Christopher Lucas

Perfect. And then...

Michael Comer

(inaudible) although, we won't recognize that as an expense.

Unidentified Company Speaker

Correct.

Christopher Lucas

So there would be a negative impact?

Unidentified Company Speaker

It would be a negative impact. It's not a bad debt impact. It would be our having to pay AEW under the joint venture for any amounts that GGP does not come up with.

Christopher Lucas

Okay. And then Skip, can you just sort of maybe give us some context on the leasing environment. What sort of traffic you're seeing? What some of the tenant types are. And then also if maybe you could just bifurcate between small tenant universe and the moderate or larger tenants in terms of activity.

Skip Dawson

Sure. I'll start with Virginia. In Southern Virginia we're seeing increased traffic in more of an office flex. Our product type is a block of (ph) warehouse. There is not that many users out there looking at this time.

In Northern Virginia, it's the same way we're seeing good traffic in our office related product. And the small tenant base traffic, we're starting to see that which is an encouraging sign. In Maryland, traffics increased just a tad but not as what we hoped for. And we're still keeping an eye on that. And as far as comparable between small tenants and big tenants, we're getting... fewer showings are going to be tenants specifically looking for contract related work which is positive. We're seeing some traffic where they are keeping their existing landlords in check by looking in the market. That's kind of hard to quantify based on what you feel is going to move in your portfolio and what's not and then we see some traffic that indicates official demand coming into Northern Virginia and Southern Virginia.

Christopher Lucas

Okay. And then do you have the bad debt number?

Skip Dawson

Yes, the bad debt for the fourth quarter was 300,000.

Christopher Lucas

Okay. That's all I have for now. Thanks.

Operator

Thank you, sir. And our next question comes from the line of Bill Crow with Raymond James. Please go ahead.

William Crow - Raymond James

Good morning guys. Most of my questions have been asked. This is a question more about Semantex (ph). Barry, you indicated that you did not expect anymore gains from debt repurchases over the balance of the year. Should we read that as there are no gains in your guidance but your appetite for repurchasing the exchangeable notes remains and you are going to opportunistic or you're just going to conserve cash at this point, not look to buyback any debt?

Barry Bass

More of the former.

William Crow - Raymond James

Okay. Perfect. That's it from me.

Unidentified Company Speaker

Okay. Thanks Bill.

Operator

Thank you, sir. And our next question comes from the line of Carol Kemple with Hilliard Lyons. Please go ahead.

Carol Kemple - Hilliard Lyons

Good morning.

Unidentified Company Speaker

Good morning.

Unidentified Company Speaker

Good morning.

Carol Kemple - Hilliard Lyons

When your credit line matures in 2011, do you all have an extension option on that?

Unidentified Company Speaker

That incorporates the extension. Technically it matures in 2010. We have a one year extension option that takes it to April 2011.

Carol Kemple - Hilliard Lyons

Okay. And on acquisitions, I know previously you've talked about any that you would do probably be in the JV format. Is that still your thought process?

Unidentified Company Speaker

That's still the thought process, yes.

Carol Kemple - Hilliard Lyons

Okay. Thank you.

Operator

Thank you, ma'am. And our next question comes from the line of Brendan Maiorana with Wachovia. Please go ahead.

Brendan Maiorana - Wachovia Securities LLC

Good morning. Thank you. Skip, I just wanted to start with you. I think I missed what was driving the significant increase on the new leasing column. Can just review that for me?

Skip Dawson

Sure. On the new leasing side, a major component of that was the transaction that happened in Interstate Plaza. We're taking that asset from a single tenant... natural usage of mortgage tenant on property. We're spending close to about $2.5 million and then a complete retrofit of that particular property, the deal that we signed for 34,000 square feet at higher than normal TIs along with some capital cost separation of that particular property. That by itself really pushed that number north and we anticipate as we move through the year that number will come back to what we experienced in 2008.

Brendan Maiorana - Wachovia Securities LLC

So given the vacancy that you've got and the plans that you've got to ramp up over time, are there instances where we would expect to see this type of activity again where we would have above average TI costs for newly leased space to try to get your occupancy levels back up to where you're comfortable on a normalized basis?

Skip Dawson

Well, I think we actually we had one quarter with over $20 in the leasing TIs and then falling quarter we were back to $6. So, it's an unusual case. If there's an opportunity for us in our portfolio to change the use of space to migrate it up from industrial to an office environment, we'll do that. And that's a good return on money. But if you're looking across portfolio, look what we have clearly in our vacancy by getting back to a run rate that we experienced since 2008 and I think we'll end up in 2009. That helps I think?

Brendan Maiorana - Wachovia Securities LLC

So if I kind of stripped out that large deal and move back to kind of the $16 square foot for new leasing. That's still putting your concession ratio as a percent of rent at around a third which is kind of around where you were, I guess, last year at least for the latter three quarters of the year and where you are, I guess, now on a normalized basis for Q1. Is that just where the market is now for new deals?

Skip Dawson

What we've done in the last couple of quarters should really work on space that from a dollar return standpoint is higher. Well we do have vacancies that are industrial based and High Bay, which took lots for space when we lease those naturally those costs would be much, much less per square foot in that new lease category.

So I think what you're seeing here is us really working through some of the vacancies that we've had opportunity to. Some of the rents that we see that our increasing above what we've had in the past and it's just a function of the fact that over the last three quarters we've been working on vacancies that we can add some opportunity to.

Unidentified Company Speaker

And also it's important to note that that these are in some cases individual deals with very strong tenants where we feel very comfortable earning that sort of money and where we're getting good returns. And in addition, as we are changing the use of some of the properties and it's almost like a redevelopment and there is substantial residual value associated with some of that cost. We're calling it TI for reporting purposes even though some of it is an improvement to building itself.

Brendan Maiorana - Wachovia Securities LLC

I appreciate that. I mean I know you guys are conservative in terms of your accounting policies under your TI executive space. So just kind of follow-up. If I think about the $3 million of additional NOI that you've got in queue (ph) from leases that you've done to-date and I look at your concession ratios over the past couple of quarters and kind of low to mid 20s ratio. Should I assume that the cost build estimates is out to be about a 20%, 20%-25% of that NOI.

Skip Dawson

A lot of those costs are already reflected in the numbers that you have been seeing.

Brendan Maiorana - Wachovia Securities LLC

Okay.

Skip Dawson

As we sign the leases, we will account for that in terms of the costs of those leases that we're reporting on whatever page that is of the supplemental. That's a more leading indicator. The numbers that you're seeing... so, for example, this transaction Interstate Plaza is part of the square footage that's leased but has not yet taken occupancy. But the build out number has already been reflected on page 20 of the supplemental.

Brendan Maiorana - Wachovia Securities LLC

Yes. But the costs have not been incurred. Is that right?

Skip Dawson

The costs have not yet... we have not spent that money yet. That is correct.

Brendan Maiorana - Wachovia Securities LLC

Right. Okay. Thanks. And then just Barry, when understanding your commentary about your maturities in 2011, your commented I'm not sure if I'm reading these correctly but if you are thinking about refinancing possibilities for all of these maturities, am I reading that correctly and that you're comfortable with the aggregate level of GAAP that you're now carrying relative to the asset base that you got or... and this is more of a sources and use of exercise or are you thinking about over the long-term that there maybe some need to reduce overall debt level or change your capital structuring in some way?

Barry Bass

I think there is a difference between desire and need. I think that we will not necessarily need to migrate our levels of debt down but there is a desire in our part to migrate them down to give us more financial flexibility.

Brendan Maiorana - Wachovia Securities LLC

And what would be the... if you're looking at it today or after sales the primary tool that you would use it to generate that strategy to lower that?

Barry Bass

To lower the amounts of debt?

Brendan Maiorana - Wachovia Securities LLC

Yes. I mean, would asset sales rather than an equity raise be your preferable mode over time?

Barry Bass

I mean, we're looking it all of our capital alternatives. And we're considering some specific asset sales if we are able to continue to buyback our exchangeable notes, that does brought it down the level of debt.

Now I think we were fortunate or cushioned to a certain extent with the amount of de-levering that we did before a lot of companies, other companies were forced to de-lever and that booked roughly $50 million of debt and paid it down last year to go through the substantial property sale that we had in the early part of last year and the equity raise that we did in late September so that... we kind of got ahead of it a bit. So, we're forced to do anything today that could having dilutives like a lot of other companies are facing now. So,

Brendan Maiorana - Wachovia Securities LLC

I mean, Barry, just a second, try to pin you down in terms of your want if you're looking at a target level and I understand this is long-term so you don't kind of enforce the pricing today. Where would that level be there if it's on LTV ratio or a debt-to-EBITDA level or how should we be thinking about it.

Barry Bass

Yes, I mean I think debt yields in 12% to 14% range are probably the right place to be.

Brendan Maiorana - Wachovia Securities LLC

Okay.

Barry Bass

Flip that and get your debt-to-EBITDA, I suppose.

Brendan Maiorana - Wachovia Securities LLC

Great. Okay. All right. Thank you.

Barry Bass

Okay.

Operator

Thank you, sir. And our next question comes from the line of Dave Rodgers with RBC Capital Markets. Please go ahead.

David Rodgers - RBC Capital Markets

Hey, good morning guys. I know, while I discuss decision, I think I thought the dividend reduction and the flight of flexibility that it'll give you. With respect to better positioning of liquidity in the balance sheet, should we take from that that you're more of these distressed opportunities that we've talking about. That's the first question.

And the second I guess is how do you comfortable underwriting the fundamentals in this environment as we think remain challenging (inaudible) than yourself?

Unidentified Company Speaker

We are starting to see some acquisition opportunities. It's still extremely and very, very slow market there. So underwriting is a challenge. But I think we've been conservative historically. We underwrite by looking at acquisitions from a number of different angels and we'll continue to do that. I think looking at replacing cost and some other basic real estate fundamentals will be key for us.

But it also helps tremendously to specialize in a particular copper type, in a particular market and we'll have tremendous knowledge of the greater Washington region and have a lot more confidence in this region that I think would have in other markets across the countries.

So we feel confident in our ability to look at acquisition possibilities and take a quick educated call.

David Rodgers - RBC Capital Markets

And, Skip, with respect to the larger leases, I think you had said you're maturing later this year. I know there is probably limited amount of detail you can provide. But is there anything you can detail about that phase or those phases and any color that you can add to those discussions at this point?

Skip Dawson

We have ongoing discussions with the tenants and do for exploration in 2009 and we've been working diligently with other groups. If you see some of that in the first quarter with our high renewal numbers, and given the guidance that we gave anywhere between 85% and 87% occupied. I think that's still a target that we're going to hit.

And we'll just continue to work on a renewal side. So, provide more color in the next call as we get through the year, but right now, I'm still pleased with what we're hearing about renewals.

David Rodgers - RBC Capital Markets

Thank you.

Operator

Thank you, sir. And our next question comes from the line of Stephanie Krewson with Janney Montgomery Scott. Please go ahead.

Stephanie Krewson - Janney Montgomery Scott LLC

Hey, there. Good morning. In Maryland, your Same-Store NOI weakness, could you give some additional information on what sub-markets were driving that weakness, of course relative to other markets.

Unidentified Company Speaker

There are two markets right now that we're seeing some challenges and that's Owing Mills and Westminister. Our properties up there, we've got...

Unidentified Company Speaker

And those are Baltimore carrier markets.

Stephanie Krewson - Janney Montgomery Scott LLC

That's what I was thinking. Okay.

Unidentified Company Speaker

And part of that is due to us reserving from bad debt exposure that we see in those two. That just kind of like drove those numbers down in that region for the first quarter.

Stephanie Krewson - Janney Montgomery Scott LLC

Great. Thank you.

Operator

Thank you. (Operator Instructions). And our next question is a follow-up from the line of Chris Lucas with Robert W. Baird. Please go head.

Christopher Lucas

Hey, Barry. Just a quick question. On the exchangeable notes, what's the authorization to repurchase at this point? I think your closer to knocking out on that?

Barry Bass

We had total authorization to spend $60 million. So we still have a little bit of a cushion there.

Christopher Lucas

And is that authorization... that hasn't changed?

Barry Bass

That has not changed.

Christopher Lucas

Okay. Do you anticipate going back to the board at any time to get more authorization?

Barry Bass

We need to line up some replacement financing for those exchangeable notes before we aggressively try to go out and repurchase any more of those.

Christopher Lucas

And then just thinking about on the dividend cut, what's your thought about sort of the cash savings roughly that you think you'll be generating over the next two years?

Barry Bass

Cash savings relative to the former dividend?

Christopher Lucas

No, just relative to the cash flow you think you'll be generating. What cash flow do you think you'd be retaining, roughly?

Barry Bass

Well, I mean we will be distributing less than our AFFO, but realize that between AFFO and FAD, if you will, our principle payments and our first generation costs and redevelopment expenses. So we would be roughly cash flow neutral.

Christopher Lucas

Okay. That's helpful. Thank you.

Operator

Thank you, sir. And our next question is a follow-up from the line of Jordan Sadler with KeyBanc Capital Markets. Please go ahead.

Jordan Sadler - KeyBanc Capital Markets Inc.

Hey, guys, just following up on the capital question. What is the availability under the revolver today?

Barry Bass

$125 million. I mean that's our total availability. We have $85 million drawn. So that would... availability of $40 million.

Jordan Sadler - KeyBanc Capital Markets Inc.

Okay. And that's covered by the borrowing base, you could fully draw.

Barry Bass

Correct.

Jordan Sadler - KeyBanc Capital Markets Inc.

And the other question was I think you guys put into place a continuous equity offering program and I was curious to know plans related to that or if you guys had -- doesn't seem like you've done any issuance yet, but maybe post quarter end?

Barry Bass

We haven't done any issuances at this point. I mean when we originally put that in a place, the notion wise, which I like a lot, is that we found an acquisition opportunity and we were doing joint venture, provides an ideal amount of capital to provide our co-investment capital. So that was the initial concept that we put it into place.

Jordan Sadler - KeyBanc Capital Markets Inc.

But you wouldn't use it to opportunistically de-lever for anything like that or to raise funds to opportunistically repurchase your --

Barry Bass

We're always looking at all our capital funds.

Jordan Sadler - KeyBanc Capital Markets Inc.

Tangibles or anything like... but in terms of this equity, you're not -- you would only use the equity I should understand, you would only use continuous equity offering programs, particularly if you had an acquisition opportunity?

Barry Bass

I think that's not what I said, Jordan.

Unidentified Company Speaker

Yeah, and I think to say only is overstating it a bit. But we're looking at all sorts of different alternatives.

Jordan Sadler - KeyBanc Capital Markets Inc.

Okay. I'm just trying to understand. Do you think that there is additional need for equity in the capital structure and that's why you put the continuous equity offering program in place or is it purely --

Unidentified Company Speaker

It is one tool better.

Unidentified Company Speaker

Jordan, that's certainly a tool that we haven't yet exposed.

Barry Bass

But the concept was the continuous equity was and I think primarily continues to be to give us a way to match fund acquisitions essentially if we need to contribute something into a joint venture.

Jordan Sadler - KeyBanc Capital Markets Inc.

Okay. All right. Thanks guys.

Barry Bass

Thank you.

Operator

Thank you, sir. And ladies and gentlemen, that does conclude our question and answer session. I would like to turn the call back over to management for any closing remarks.

Doug Donatelli

Okay. Well thank you everybody for participating this morning and we look forward to reporting to you after our second quarter.

Operator

Ladies and gentlemen, this concludes the First Potomac Realty Trust first quarter conference call. You may now disconnect. And we thank you for using AT&T conferencing.

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Source: First Potomac Realty Trust Q1 2009 Earnings Call Transcript
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