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Government Properties Income Trust (NYSE:GOV)

Q3 2013 Earnings Conference Call

October 29, 2013 13:00 ET

Executives

Tim Bonang - Vice President, Investor Relations

David Blackman - President and Chief Operating Officer

Mark Kleifges - Treasurer and Chief Financial Officer

Analysts

Vikram Malhotra - Morgan Stanley

Stephen Sihelnik - Bank of America

Young Ku - Wells Fargo

Mitch Germain - JMP Securities

Michael Carroll - RBC Capital Markets

Operator

Good day and welcome to the Government Properties Income Trust Third Quarter and 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 - Vice President, Investor Relations

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, retransmission and transcription 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, October 29, 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 those projected in any forward-looking statements.

Additional information concerning factors that could cause those differences is contained in our filings with the SEC. Investors are cautioned that 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 - President and Chief Operating Officer

Thank you, Tim. For the third quarter of 2013, Government Properties Income Trust is reporting normalized FFO of $27.9 million or $0.51 per share compared to $25.6 million or $0.54 per share for the third quarter of 2012. Our 9% year-over-year increase in normalized FFO is primarily the result of our accretive acquisition activity. The year-over-year reduction in normalized FFO per share is a result of our acquisition closings being behind our expected pace having an underleveraged balance sheet for most of 2013 and a modest decline in same-store results.

Our activity since July 1 includes the acquisition or entering agreements to acquire eight properties for $99.1 million, executing 15 new and renewal leases for approximately 245,000 square feet for a 10.6% roll up in rent and identified three properties containing 356,000 square feet for disposition under our capital recycling program. We also declared a $0.43 per share distribution in October. As of September 30 GOV owned 81 properties containing 10 million square feet in continuing operations. These properties were 94.6% leased, an increase of 50 basis points from the previous quarter for a weighted average remaining lease term of 5.4 years.

In aggregate, our government tenant pay approximately 94% of our rental income and the U.S. Government remains our dominant tenant. In addition, to our strong property statistics, we also exhibit strong credit statistics. Our balance sheet remains conservatively leveraged at 33.8% of total book capitalization. Our total debt-to-adjusted EBITDA was four times. Our fixed charge coverage ratio was 7.7 times and $481 million of our $550 million unsecured revolving credit facility was available to fund acquisitions and other working capital needs.

Our leasing activity has been strong and accretive to the company. For the quarter GOV entered 15 leases for 245,000 square feet for the weighted average lease term of 7.8 years. Our executed leases were 21,000 square feet more than our quarterly lease expirations which combined with our acquisition activity resulted in a 50 basis point increase in portfolio occupancy from the previous quarter to 94.6%. Approximately 220,000 square feet or 90% of our leasing activity was new and renewal leases for four U.S. Government tenants and two State Government tenants that resulted in a 12.6% roll up in rents and leasing capital commitments of $5.5 million or $3.06 per square foot per lease year.

We also executed nine new and renewal leases for non-government tenants for 25,000 square feet that resulted in a 7.2% roll down in rent and capital commitments of $867,000 or $6.01 per square foot per lease year. We remain pleased with the leasing activity for our vacant space across the portfolio. In total we have about 250,000 square feet of perspective leasing activity which includes more than 30,000 square feet of space with executed letters of intent or where active lease negotiations are ongoing. We also executed a 75,000 square foot lease in October for our 125,000 square foot vacant building in Atlanta. The tenant is (Emory) University who is expected to grow into the full building within a relatively short period of time.

Now let’s review our capital recycling activity. As we have discussed on previous earnings calls GOV considers disposing of vacant properties where market conditions make the marketing period required to lease a property unacceptably long and or where the return on invested capital required to lease a property results in an unacceptable return. During the third quarter GOV identified three properties that need one or both of these criteria. The three properties include our two former FBI facilities in Phoenix, Arizona and San Diego California and a property in Falls Church, Virginia leased to the Defense Information Services Agency through July 2014 but is unoccupied.

In aggregate these buildings contain approximately 356,000 square feet and have a net book value of $25.6 million after recording a $10.1 million asset impairment loss. These properties have been listed with brokers are accepted to be sold by mid year 2014 and will take the number of properties sold by GOV in a 12-month period to five. Recall that we sold two properties early in 2013 for $18.5 million resulting in an $8.2 million gain on sale. The pace of our acquisition activity is improving. Since July 1 we acquired two properties containing 357,000 square feet for $30.8 million excluding acquisition cost. These properties are 100% leased for a weighted average remaining lease term of 4.5 years. We acquired an average price per square foot of $86 and a weighted average acquisition cap rate of 9.7%.

In August we acquired a previous disclosed industrial property in Chester, Virginia containing 228,000 square feet for $12.5 million excluding acquisition cost. The purchase price per square foot for this acquisition was $55, the acquisition cap rate was 8.3% and the remaining lease term was 7.2 years. The property is 100% leased to the U.S. Government and occupied by the U.S. Army as a logistic center. Also in August we acquired an office property in Bethesda, Maryland containing 129,000 square feet for $18.3 million excluding acquisition cost.

The purchase price per square foot was $142, the acquisition cap rate was 10.7% and the weighted average remaining lease term is 2.6 years. The property is 100% leased to the U.S. Government and occupied by the National Institutes of Health. The property is located adjacent to NIH’s headquarter campus and believe to be a permanent part of the agency space needs making a lease renewal in 2016 highly profitable. Since July 1 GOV entered into agreements to acquire six properties containing 314,000 square feet for $68.3 million excluding acquisition cost.

These properties are all 100% leased with approximately 60% is space occupied by two State Government agencies, 16% of this space is occupied by the U.S. Government and the balance of this space is occupied by seven non-government tenants. These acquisitions remain subject to the completion of due diligence and other closing conditions so there can be no assurance we will make any of these acquisitions. As a result of feedback from shareholders on September 23 we announced the restructuring of our management agreement with Reit Management & Research or RMR and the company’s plans to recommend the annual election of all trustees at its 2014 Annual Shareholders Meeting.

The changes to the management agreement with RMR will begin in 2014 and include the base management fee being paid on the lower of historical property cost or GOV’s total market capitalization instead of historical property cost. And the requirement of 10% of RMR’s base management fee be paid in GOV shares instead of cash. In addition the incentive management fee paid to RMR will no longer be paid based solely upon growth in FFO per share but instead based upon total shareholder returns in excess of benchmarks established by GOV’s independent trustees and disclosed in GOV’s annual proxy statement.

The incentive management fee will be paid in GOV common shares the best over time. We view these changes as a positive step in further aligning management’s financial incentives with a return to shareholders. Our business strategy of delivering shareholders a safe and predictable dividend from our stable income and our investment thesis of making selective acquisitions of buildings majority lease to government tenants remains unchanged. As a reminder RMR is a full service management company that provides GOV executive leadership, capital markets execution, and other business management services that include asset management leasing, accounting, acquisition underwriting due diligence and execution, legal, Investor Relations, and other related services and exchange for shares in the company and a cash fee which has historically resulted in a lower G&A cost for GOV than the G&A cost of our peer group.

Our independent trustees continue to discuss our corporate governance and we will further update you as these discussions evolve Finally on October 1 the U.S. Government entered a partial shutdown as a result of not passing a 2014 fiscal year budget or a continuing resolution to fund the government’s ongoing operations. While the shutdown is expected to have a modest negative effect on the economy and created tremendous uncertainty for business leaders and consumers. The shutdown did not result in a delay of our rent being paid or change any of our business agreements with the U.S. government to occupy space in our buildings.

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

Mark Kleifges - Treasurer and Chief Financial Officer

Thanks, David. First let’s review our consolidated property level operating results for the 2013 third quarter. Because of our acquisition activity we once again experienced quarter-over-quarter increases in both rental income and property net operating income. At the end of the 2013 third quarter and excluding the three properties held for sale and included in this continued operations we owned 81 properties with 10 million square feet compared to 77 properties with 9.4 million square feet at the end of the 2012 third quarter. For the 2013 third quarter compared to 2012 GOV’s rental income increased $4 million or 7.6% to $56.4 million and property net operating income increased $1.7 million or 5.1% to $34.6 million. At September 30 our properties were 94.6% leased and our consolidated NOI margin for the 2013 third quarter was 61.4%.

Turning to our same-store operating results. At quarter end our 69 same-store properties were 93.7% leased up 80 basis points from the prior year quarter end and up 30 basis points from the end of the second quarter. Our 2013 third quarter same-store rental income increased by $184,000 or approximately one half a percent compared to the 2012 third quarter and our same-store net operating income decreased $686,000 or 2.2% compared to the 2012 third quarter. This quarter’s revenue change was largely due to the rent roll ups resulting from the lease renewals with the Department of Justice and U.S. Customs & Immigration Service at our Mass Avenue Property in Washington DC during the fourth quarter of 2012 offset by lower straight line rents in the 2013 quarter and the favorable impact of an unused tenant improved allowance in the 2012 period.

Same-store operating expenses increased $870,000 or 4.6% quarter-over-quarter with increases in real estate taxes, payroll, utilities and property insurance cost. Despite the uptake in expense growth this quarter on a year-to-date basis same-store operating expenses are up only 1.2%. We currently expect year-over-year same-store expense growth in the fourth quarter to be in the range of 1% to 2%. Our same-store NOI margin in the 2013 third quarter decreased 160 basis points from the prior year quarter to 60.8%.

Turning back to our consolidated results. Adjusted EBITDA in the third quarter of 2013 was $32.1 million compared to $30.1 million in the 2012 third quarter, a quarter-over-quarter increase of 6.5%. Our EBITDA to fixed charges ratio remain very strong at 7.7 times for the quarter and our debt to annualized EBITDA was only 4 times at quarter end. For the current quarter normalized FFO was $27.9 million compared to normalized FFO of $25.6 million for the 2012 third quarter. Third quarter 2013 normalized FFO per share of $0.51 was down $0.03 or approximately 5.5% from the 2012 third quarter. We paid a $0.43 per share dividend during the quarter and our FFO payout ratio was approximately 84%.

During the quarter we spend $4.7 million on tenant improvements and leasing costs. A substantial amount of these costs pertain to leases executed in the 2013 second quarter with the State of Oregon at our property in Salem and with the State of California at our L Street property in Sacramento. We also spend $6.3 million on improvements to our properties this quarter including $3.7 million of cost incurred in connection with the expansion of the parking capacity at our Salem Oregon property and efforts to reposition our 330 Second Avenue Property in Minneapolis.

Turning to our balance sheet and liquidity. At quarter end we had $510 million of debt outstanding including $69 million outstanding on our $550 million revolver. Debt to total book capitalization was 33.8% at quarter end and we have approximately $160 million of debt capacity to fund acquisition growth before leverage would reach 40% of book capitalization. We currently have six properties under contract to purchase for an aggregate purchase price of $68.3 million and our marketing for sale three properties that have a combined net book value of $25.6 million.

In closing GOV’s well capitalized balance sheet positions the company to continue to be a consolidator through accretive acquisitions in the government leased real estate sector. That concludes our prepared remarks. Operator, we will open it up for questions.

Question-And-Answer Session

Operator

(Operator Instructions) And our first question is going to come from Vikram Malhotra with Morgan Stanley. Please go ahead.

Vikram Malhotra - Morgan Stanley

Hi guys, I’m sitting in for Vance. Wanted to just kind of touch a bit more on the expense growth, were there any apart from kind of what you highlighted, were there any kind of one-time expense there and is it likely that over the next few quarters we could see similar kind of bump ups in the expense?

Mark Kleifges

This is Mark. I think if you look the largest components that impacted expenses this quarter, real estate taxes were up about 9.4% and year-to-date on a same-store basis they are up about 7.3%. That’s really just been due to higher assessments at all our properties; the increase this quarter was a little higher because we had to true up some of our accruals this quarter due to the higher assessments coming in higher than we had estimated. The other large, one of the other large drivers was utilities expense which was about little over 3% this quarter and that was driven principally by higher than normal temperatures in the Northeast this quarter as well we experienced some rate increases in a couple of markets this quarter.

And then the last item that impacted expenses in a significant way this quarter was insurance. And while insurance for the year is flat year-over-year in the quarter it was up because in the 2012 quarter we had some credits in there, we received some retroactive premium adjustments last year due to our favorable loss experience and we didn’t receive that same credit this year. Looking forward as I said for the year expenses on a same-store basis are up about 1.2% and we think the fourth quarter on a same-store basis year-over-year be up 1% to 2% so back to the trend that we’ve experienced for the year in total.

Vikram Malhotra - Morgan Stanley

Okay, thanks. And then David just last one you mentioned that as part of the government shutdown there was really no impact in terms of collecting rents. Did you ever see any just maybe push-out of some decision making on new leasing or renewal leasing and has that – is that – are those sort of discussions then process or have they been resolved?

David Blackman

Well the biggest impact I guess could be the fact that for 16 days there was nobody working. So yes there would have been a delay in the process of managing through those decisions but I don’t think it impacted the ultimate decisions, it just simply slowed it down because for 16 days the GSA was furloughed like everybody else.

Vikram Malhotra - Morgan Stanley

Okay, okay, okay. Thank you.

David Blackman

Yep.

Operator

And our next question will come from Jamie Feldman with Bank of America.

Stephen Sihelnik - Bank of America

Hey guys, this is Stephen Sihelnik with Jamie. I had a question sheer mark-to-market for the leases expired till the end of 2014. Could you kind of walk us through that?

Mark Kleifges

Yes we’re – when we look at the next 12 months leases expiring. On a weighted average basis we think they will be flat to up 1% to 1.5%.

Stephen Sihelnik - Bank of America

Okay. Thank you. And I know you guys also talked about your October lease with the Emory University. Do you guys have any other known move-ins coming into the next 12 months or any move-outs in any free rent period that are burning off over the next year. Could you kind of just walk us through that?

David Blackman

Yes we – I mean we tend not to have a lot of free rent in our business. We – as I said we’ve got about 30,000 square feet of LOIs or ongoing lease negotiations. So we would expect that we will bring those to fruition over the next several months. We previously talked about the fact that next quarter but the CDC expects to vacate buildings 10, 11 in Corporate Square in Atlanta, I think that’s a little bit less than 70,000 square feet less than – far less than 1% of rents. And that’s the big component that we would have. I don’t know Mark are there any other..

Mark Kleifges

Well we’ve got the State of California is leaving a building in California.

David Blackman

Right.

Mark Kleifges

Probably another call it 44,000 square feet.

David Blackman

Which we talked about last quarter as well.

Mark Kleifges

Right. So I think there is a few smaller things in there. I’d say overall about 1% of revenues and little over 1% of square footage vacating next quarter.

David Blackman

For 2014 we don’t really have any, any expected non renewals, it’s a relatively light leasing year for us, but based upon our ongoing discussions with tenants we feel pretty good about where we are right now.

Stephen Sihelnik - Bank of America

Got it. So nothing really incremental from last call in terms of..

David Blackman

No, no, no, not at all from last call.

Stephen Sihelnik - Bank of America

Okay, thank you.

Operator

And our next question is going to come from Young Ku with Wells Fargo.

Young Ku - Wells Fargo

Hi, great. Thank you. Just going back to 2014 a little bit, looks like you have 100,000 square feet of move-outs by year end 2013. But 2014 like you said is a pretty light year and don’t expect any major move-out. So just, I know you guys don’t give guidance but just broadly speaking how do you envision 2014 kind of occupancy coming along and you would expect a pretty significant move-up in occupancy?

David Blackman

Well I mean we expect to renew tenants in place, so we really don’t expect to have a decline in occupancy as a result of lease expirations. We don’t have a lot of vacant space in the company but we do have pretty good activity on this space that is vacant and then assuming we continue to buy buildings that are 100% occupied, yes there should be a slight to modest increase in occupancy as we go through 2014.

Young Ku - Wells Fargo

What do you kind of see as your structural vacancy within your portfolio, it’s already kind of 95% leased, how high can that get you think?

David Blackman

Well we had it 100% occupied for one or two quarters which is certainly not something that we expect to happen again. You’re always going to have some structural vacancy with tenants kind of moving in and moving out. I would think if the margin is 95%, 96% is a pretty good place to run because our tenants do need options to expand and again you’re always going to have some level of structural vacancy with tenants moving around and moving in and moving out.

Young Ku - Wells Fargo

Okay. That’s helpful. And just a question on your kind of pending acquisitions, the basis for the Montgomery asset looks a little big high. Just wondering if you can provide a little more details regarding the tenant term and what kind of asset it is?

David Blackman

Sure. We don’t really disclose details on pending acquisitions we wait till they close before we give a lot of details. But I will tell you is it’s a relatively new building, it has some special purpose structure to it that we believe will continue to have the tenant remaining place well beyond it’s lease expiration and it’s also got some security features that would add to the cost. It’s also – it’s a relatively small building too and small buildings tend to have a higher cost per square foot. So that would be the level of detail we can give you at this point.

Young Ku - Wells Fargo

Okay, got it. And just one last following question, can you guys provide the cap rate on the three assets that you are going to sell?

David Blackman

Well I mean there are two of them are vacant and the other one that the lease expires in 2000 – in July of 2014. So I don’t know the cap rate is really relevant on those buildings I mean obviously the..

Young Ku - Wells Fargo

Okay.

David Blackman

The vacant buildings the cap rate is going to be infinite.

Young Ku - Wells Fargo

Got it. Okay. That makes sense. Thank you.

Operator

And our next question will come (indiscernible) with Jefferies. Please go ahead.

Unidentified Analyst

Hi, yes, good afternoon everyone. David just a quick question, you talked a little bit about the restructuring of the management contract with RMR and some of the corporate governance changes that could happen very soon. Just curious based on where things are with common roll up and where things ultimately could end up with that arbitration where the – that could serve as a catalyst for even further corporate governance changes and what could some of those additional changes being?

David Blackman

That’s a good question (Tyle). As I mentioned in my prepared remarks the independent trustees are continuing to look at our corporate governance, but it really is in the hands of the independent trustees. And they are looking at things like expanding the Board, creating maybe a lead independent trustee but none of those – I can assure you will actually happen and I’m sure there were other things that are under consideration as well. I would expect over the next 90 days or so that we’ll have more to talk about but until I have specifics that the independent trustees have approved, that’s really all I can say at this point.

Unidentified Analyst

Okay, that’s helpful. And then just on the acquisition front, could you also talk a little bit about what you’re seeing just in regard to cap rates for assets with the federal versus the state tenants and even from an acquisition perspective where you see more opportunity well is at the federal level or at the state level to do deals?

David Blackman

Yes, it’s a good question. And interestingly there has not been a lot of change really over the last six months. We’re seeing more federal lease building acquisition opportunities than state. The states tend to have a slightly higher cap rate depending upon the age of the building, the location and who the agency occupants are. We’re seeing a lot of federal lease buildings that has a 15 year remaining lease term, the cap rates are in the low 7s and we tend to just pass on this. We also see a handful of kind of zero cash flow opportunities that don’t make sense for us and those are deals where the sellers put a credit tenant financing on place. And so they’ve got fully amortizing debt and really all of the cash flow from the asset goes to pay debt service and those aren’t interesting to us as well. But it’s picking up, we’re having a little bit better luck in terms of finding opportunities that we think fit for the investment thesis of our company at returns that we think are creative to our ability to increase the dividend at some point.

Unidentified Analyst

That’s helpful. Thanks a lot guys.

Operator

And our next question comes from Mitch Germain with JMP Securities.

Mitch Germain - JMP Securities

Good afternoon.

David Blackman

No, I don’t think that our competitors that are active in owning federal government lease space, get a lot, get back, concerned about the federal budget or the Congress’s inability to put a budget in place. I think people are very focused on making sure that they are buying buildings that are leased to agencies that have a higher probability of growth than those that may receive cutbacks and that’s hard to always identify. We spend a fair amount of time with our key leasing broker having those conversations and making sure that we think about agencies appropriately. But that’s the real kind of arc of the acquisitions right now is making sure we’re buying buildings that are leased to the right agencies.

Mitch Germain - JMP Securities

And the cap rate on the - I believe it was the Bethesda asset north of 10%.

David Blackman

Yes.

Mitch Germain - JMP Securities

Is that driven David by the early lease term of the property or was that just sourced off market, any color as to why so high?

David Blackman

It is driven by the lease term. So it’s two things there. One it’s the risk of a shorter remaining lease term and our expectation that there will be some capital in 2016 when we renew them in place. But yes I think it’s definitely high cap rate because we’ve taken some risk but that building is adjacent to NIH’s headquarter campus, we had good conversations with both the agency and the contracting officer prior to concluding our diligence and based on those conversations we felt pretty comfortable that this is permanent space for NIH. And we also believe NIH is one of the right agencies to be doing business with right now.

Mitch Germain - JMP Securities

Thanks. And just want to clarify some of the leasing information you offered up, 75 renewed, another 30 in active negotiation, and then about 1% moving out in the fourth quarter. Is that – that’s the way to characterize it?

David Blackman

1% of revenues about and then the 75,000 square foot lease that was executed in the fourth quarter that will be – show up in fourth quarter numbers.

Mitch Germain - JMP Securities

Also it starts pretty much right away.

David Blackman

Yes.

Mitch Germain - JMP Securities

Thank you guys.

Operator

And our next question will come from Michael Carroll with RBC Capital Markets.

Michael Carroll - RBC Capital Markets

Thanks. What had changed in the acquisition market that got you guys more active, I know it’s been a pretty slow year I guess for the first two quarters, but it picked up meaningfully this quarter?

David Blackman

Yes, part of it Mike is we’ve had a handful of deals that have just taken a long time to get through. And it’s not from an underwriting perspective, it’s from a negotiating with the seller working through the contract and then getting some diligence done. So we’ve had some deals that we’re talking about or we hope to talk about where we’ve been looking at them for quite sometime. They’re just having a hard time in fact it’s taken a long time to get to this point.

Michael Carroll - RBC Capital Markets

Should we expect volumes pickup again in the fourth quarter and into 2014 or are we still kind of going through those slow stages?

David Blackman

Well I think will be reasonably active as we close out the year. It’s hard to tell at this point what 2014 looks like. At this point I don’t expect any real change. So it’s going to depend a lot upon the types of opportunities we see and our ability to simply to work through that from an acceptable yield perspective.

Michael Carroll - RBC Capital Markets

Okay. And then can you give us some additional color what type of assets that you want to sell within your own portfolio and how the three assets that you’re currently marketing fit that well?

David Blackman

Sure. Well Phoenix, Arizona the FBI building I mean that was the property that we’ve spend sometime trying to lease. And it’s – phoenix has not comeback as quickly as some of the other markets around the country and based upon the amount of time we’ve spend trying to lease that space and where we think rental rates are, should we find the appropriate tenant, it just makes that uneconomical for us. So we made the decision with the input of the Board to go ahead and move it off the books. The defense building in Falls Church, Virginia, the submarket of that building is located in has a very high vacancy rate.

And so we anticipate that it will take a while to lease that building, we spend sometime working with GSA to try to backfill it because it’s been empty for a while because the tenant was moved to Fort Meade. And they just don’t have an agency to move into this space. So again that’s a situation where we think it’s going to take a while to lease that building and we think the capital cost is going to be relatively high relative to rents. So I mean so that’s what’s going on in the third quarter. Ideally what we want to do is we want to get to a point where we have enough visibility with the tenants in our building so that we’re identifying problems early enough that we can make a decision to sell if we want, while the tenant still on occupancy or to decide they were going to hold it through the end of term and release it and I think we’re pretty close to being there at this point.

Michael Carroll - RBC Capital Markets

Okay. How much volume should we expect in the dispositions over time?

David Blackman

My gut tells me that this year’s volume is relatively high in terms of number of buildings that we’re going to sell. I think that typically you’re going to see maybe one to three buildings a year. We’re going to I think at some point we may elect to harvest some returns and take some buildings where we’ve renewed leases but we are not there yet.

Michael Carroll - RBC Capital Markets

Okay. And then Mark what makes I guess the company so comfortable running the balance sheet with such a high level of floating rate debt and then under what scenario would you want to fix that out?

Mark Kleifges

We’ve talked about this I guess in the last couple of calls. Obviously we constantly evaluate the markets and what we think interest rates are going. And as I have said in the past we continue to find the short end of the curve very attractive, we don’t think it’s going to move a whole lot in the near term and on the long end we don’t think that’s going to move a whole lot either and I think it’s probably retrace the tenure is probably retraced about 30 basis points, 35 basis points since our last call.

So we’ll continue to monitor the market at some point we may make a decision to fix. We have recently evaluated the cost of either purchasing a cap on the term loan or swapping up the floating rate to fixed and our analysis indicates you on the cap it’s just very expensive insurance that we don’t think will need and on swapping out to fixed rate the negative arbitrage relative to what little risk we see with interest rates, it just doesn’t make sense today. But that could change at any point, it’s an ongoing evaluation, but where we sit today we’re comfortable with floating rate debt.

Michael Carroll - RBC Capital Markets

Okay. Thanks.

Mark Kleifges

Yep.

Operator

And our next question will come from Young Ku with Wells Fargo.

Young Ku - Wells Fargo

Thanks. Just a quick follow-up, in the quarter the acquisition cost was a little bit high at $1.6 million relative to kind of the acquisition volume. Was there something unusual there?

Mark Kleifges

Yes, there was – we had an acquisition in the fourth quarter of last year the Florence Kentucky acquisition that had a provision per contingent additional consideration or purchase price to be paid to the seller of up to $1.8 million. The way the accounting works for that when you acquire the asset and record it on your books so you record an estimate of what you think you will pay out in additional cost and I think we recorded about $270,000 of cost in the fourth quarter of last year which we capitalized. The way the rules work is if you pay something more or less than that, that difference runs through the income statement. So we increased our estimate of what we’ll have to pay in that 900 – call it $970,000 increase in additional consideration ran through this quarter’s income statement and that’s included in acquisition cost.

David Blackman

Yes, so when we bought that building Young our tax consultant convinced us that real estate taxes were going to go up based upon the sale and they didn’t. So we’re going to have lower real estate cost which was a good thing, but it resulted in a higher cost of that acquisition based upon the deal we’re negotiating with the seller.

Young Ku - Wells Fargo

Okay, got it. Thank you.

Operator

And with no further questions I’ll turn the call back over to David Blackman for closing remarks.

David Blackman - President and Chief Operating Officer

Thank you for joining our third quarter conference call. We look forward to seeing some of you at NAREIT in San Francisco in November. Thank you.

Operator

That does conclude our conference for today. Thanks for participation and for using AT&T Teleconference Service. You may now disconnect.

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