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Washington Real Estate Investment Trust (NYSE:WRE)

Q1 2011 Earnings Call

April 29, 2011 11:00 am ET

Executives

Kelly Shiflett – Director of Finance

Skip McKenzie – President and CEO

Bill Camp – EVP and CFO

Mike Paukstitus – SVP, Real Estate

Analysts

John Guinee – Stifel Nicolaus

Michael Knott – Green Street Advisors

Brendan Maiorana – Wells Fargo

Steve Benyik – Jefferies & Company

Mitchell Germain – JMP Asset Management

Chris Lucas – Robert W. Baird

Dave Rodgers – RBC Capital Markets

Operator

Welcome to the Washington Real Estate Investment Trust first quarter 2011 earnings conference call. As a reminder, today’s call is being recorded. Before turning over the call to the company’s President and Chief Executive Officer, Skip McKenzie, Kelly Shiflett, Director of Finance will provide some introductory information. Ms. Shiflett, please go ahead.

Kelly Shiflett

Thank you and good morning everyone. After the market closed yesterday, we issued our earnings press release. If there is anyone on the call who would like a copy of the release, please contact me at 301-984-9400, or you may access the document from our Website at www.writ.com.

Our first quarter supplemental financial information is also available on our Website. Our conference call today will contain financial measures such as Core FFO and NOI that are non-GAAP measures and in accordance with Reg G, we have provided a reconciliation to those measures in the supplementals. The per share information being discussed on today's call is reported on a fully diluted share basis. Please bear in mind that certain statements during this call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Such statements involve known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially. Such risks, uncertainties and other factors include, but are not limited to, the potential for federal government budget reductions, changes in general and local economic and real estate market conditions, the timing and pricing of lease transactions, the effect of the current credit and financial market conditions, the availability and cost of capital, fluctuations in interest rates, tenants' financial conditions, levels of competition, the effect of government regulation, the impact of newly adopted accounting principles, and other risks and uncertainties detailed from time to time in our filings with the SEC, including our 2010 Form 10-K.

We assume no obligation to update or supplement forward-looking statements that become untrue because of subsequent events.

Participating in today’s call with me will be Skip McKenzie, President and Chief Executive Officer; Bill Camp, Executive Vice President and Chief Financial Officer; Laura Franklin, Executive Vice President and Chief Accounting and Administrative Officer; and Mike Paukstitus, Senior Vice President of Real Estate.

Now, I would like to turn the call over to Skip.

Skip McKenzie

Thank you, Kelly. Good morning and thank you for joining Washington Real Estate Investment Trust first quarter earnings conference call this morning. Market conditions in the Washington DC region continued to improve slowly, but first quarter leasing activity reflected normal seasonal doldrums with generally flat absorption in region-wide office submarkets.

On the leasing front at WRIT, we continue to experience increased space tours across all our sectors, but getting prospects to the lease execution table is still somewhat slow. The investment market, however, is another story. Competition for well-located high-quality assets in our region remains fierce and despite the increased supply of properties to purchase, pressure on cap rates has increased for all but the riskiest assets in submarkets. Fortunately, looking at our acquisitions over the past 12 months versus the assets we sold, we are generally cap rate neutral and above our blending across the capital. These trades have significantly improved the age, locations and overall NOI growth prospects within our portfolio.

In the first quarter, we acquired two high-quality urban office asset, the 1140 Connecticut Avenue and 1227 25th Street for a total of $127 million. These properties, one of which is located in the Central Business District and the other which is in the West End are extremely well located in close proximity to several of our existing properties and add to our growing presence in the District of Columbia. With the addition of these two properties, over 40% of our office sector NOI comes from our Washington DC properties and just under 50% of our overall NOI is obtained from properties inside the capital belt.

On the disposition front, a few weeks ago, we completed the sale of Dulles Station West Phase I, an office property in Herndon, Virginia for $58.8 million. The rationale for divesting this asset was that the lease-up of this former development project was complete and the project was stabilized primarily with 10-year leases, thus providing little further upside until well into the future, the sales freeze [ph] of capital to deploy on new acquisitions with greater growth potential in the near future.

We continue to own the adjacent land parcel, which can accommodate a 340,000 square foot office building situated next to a future metro stop. On our last call, we announced we are looking to exit the industrial sector on a wholesale basis with the specific timing dependent upon the optimal exit opportunity. We are currently in the process of marketing the portfolio to a select group of investors and have so far have been very pleased at the interest this potential transaction has generated.

Although we have nothing further to report to you at this time, we do expect to have more clarity on timing and the direction by the second quarter conference call in July. I am happy to announce that WRIT has recently entered into a contact to purchase John Marshall II, a 223,000 square foot office building in Tysons Corner, Virginia, for $73.5 million. The property is 100% leased to Booz Allen Hamilton and serves as their worldwide headquarters. The Dulles Corridor Metrorail, which is currently under construction, will include four metro stops serving Tysons Corner. One of these four stations, Tysons Central 7, will be located 500 feet from the John Marshall II building upon its anticipated completion in 2013. We expect closing to occur in the next several months subject to the loan assumption.

I would like to briefly touch upon our current portfolio results before I turn the call to Bill and Mike who will discuss our financials and property operations in more detail. This quarter, we saw modest same-store rental rate growth over the fourth quarter in every sector. Leasing volume was up across most sectors this quarter with minimal tenant improvements and leasing commissions. Multi-family performance continued to lead the portfolio with solid occupancy levels and strong rents.

Medical office and retail were generally stable with modestly down occupancy, but positive rental rate growth. The office sector is a bit bumpy, but as I stated earlier, we are seeing increased building tours and generally experiencing positive rent spreads.

Now, I would like to turn the call over to Bill Camp who will discuss financial results and capital market activities, and then, Mike Paukstitus who will discuss our real estate operations.

Bill Camp

Thanks, Skip. Good morning, everyone. Last night, we reported first quarter Core FFO of $0.49, $0.01 better than the fourth quarter due to higher overall net operating income. This is in line with our original projections when we set out our Core FFO guidance range of $1.96 to $2.08. We are reiterating this range at this time. In terms of the Core FAD, we reported $0.43 per share, having an improvement in capital expenditures were relatively low this quarter, which is in line with our normal quarterly trends. Consistent with prior years, we anticipate increase in CapEx spending in the remainder of 2011.

Looking at our sources and uses of capital in the first quarter, let me start by saying that we did not tap into our ATM program this quarter. In January, we purchased the 1140 Connecticut Avenue for $80.25 million, using the proceeds from our Ammendale and Ridges dispositions as well as a portion of the proceeds from the fourth quarter equity raise and $13 million from our line of credit.

In March, we purchased 1227 25th Street for $47 million, drawing the full amount on our line. At the end of the quarter, our line balance was $160 million. Subsequent to quarter-end, we sold Dulles Station Phase I for $58.8 million and currently are holding the proceeds and escrow in accordance with the rules for a potential future 1031 Exchange. We recorded a $600,000 impairment charge in connection with this sale.

Coming up in the second quarter, we plan to finalize our new line of credit and repay or refinance our $94 million of our 5.95% [ph] unsecured notes coming due on June 15th. We will likely put this $94 million balance temporarily on our line of credit, potentially pay us down with the proceeds from our industrial portfolio sale as the timing allows for it.

We are happy to answer any questions about the new line when we get to the Q&A portion of the call. Finally, bad debt expense for the quarter was approximately $1.1 million or 1.4% on a cash basis and $1.3 million or 1.7% on a GAAP basis. This is an increase over last quarter of less than $500,000 on both cash and GAAP basis, primarily split between two of our property types. We believe the majority of the increase in bad debt expense to be one-time recoverable in nature.

As we have stated in the past, we believe the trend in bad debt is improving, but in any given quarter, we may continue to see strikes as the economy affects tenants at different times.

With that, I will turn the call over to Mike to discuss operations.

Mike Paukstitus

Thanks Bill and good morning everyone. Looking at our property portfolio in detail on a year-over-year basis, same-store NOI increased 1.1%, led by our multi-family and retail sectors. From fourth quarter to first quarter, same-store occupancy improved 20 basis points and rental rate growth was 0.6%. The same-store NOI was down 90 basis points.

The main driver for the sequential NOI decline was increased bad debt expense in the retail and medical office sectors. And as Bill mentioned, we believe a portion of this expense to be either one-time in nature or recoverable in future quarters. Our multi-family sector continues to lead our portfolio with high occupancy and solid rental rate growth. Same-store NOI growth was 13.7% on a GAAP basis year-over-year.

While we are enjoying this very high same-store growth, we are now projecting these levels to be sustainable, as a portion of this increase is represented by occupancy gains and abatement burn-out. However, at 95.3% occupied and no new supply in the market, we believe this sector will remain strong over the next several quarters if not years.

In the commercial portfolio this quarter, WRIT executed 416,000 square feet of lease transactions and nearly flat rental rates, decline to modest 0.6% over expiring leases on a GAAP basis, with an average lease term of 4.5 years. Although medical office and retail rental rates increased 13% and 5% respectively, the overall average was brought down by the industrial sector, but it is important to note, we are beginning to fill vacancy in this sector, as occupancy improved 160 basis points in this quarter. Current with our prior statements, the office sector is flat to modestly positive. Excluding one large renewal lease, leasing spreads were positive this quarter. Same-store NOI was up 0.5% and GAAP rent increases were 0.4% sequentially.

Going forward, we are continuing to see signs as the office sector is experiencing increasingly positive operating trends, which we believe point to a period of recovery through the end of 2011 and into 2012. In the medical office sector, same-store occupancy was down 30 basis points from the fourth quarter due to some small tenant move-outs at various properties. Same-store NOI was down 4.7%, rental rate growth over the fourth quarter was 1.1%.

Our retail sector same-store occupancy declined 30 basis points from fourth quarter. Retail NOI was down 3.7% from fourth quarter mostly due to increased snow removal and bad debt expense. We continue to benefit from cash grab rental rate increases at 2.4% and 5.4% respectively. We remain confident that our occupancy will improve throughout the year, but the majority of the improvements likely coming late in the third and fourth quarters, as retailers begin to schedule the 2011 store openings.

The industrial sector experienced some positive trends this quarter, with same-store occupancy improving 160 basis points over the fourth quarter. Rental rate growth was 1.4% from fourth quarter, while same-store NOI declined 50 basis points primarily due to snow removal expenses this quarter. We executed 156,000 square feet of leases, with an average lease term of 4.9 years.

Now, I will turn the call back over to Skip.

Skip McKenzie

Thanks Mike. We continue to focus on our repositioning strategy and believe it is leading to a better, more stable returns for our shareholders. As a significant part of that return, we are focused on and proud of our continued 49-year record of consecutive dividend payments at equal or increasing rates. While the string leads all REITs, we just reviewed a research report saying that there are only 11 publicly traded companies that have longer dividend track records. I have found that report very impressive.

With that, we will open the call for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Thank you. Our first question this morning is from the line of John Guinee of Stifel Nicolaus. Please state your question.

John Guinee – Stifel Nicolaus

Got you. Okay, thank you very much. You guys have been really aggressive in the CBD and essentially what you are doing is you are operating around the fringes for AB assets, AB locations, couple of corner buildings, couple of mid-block buildings, can you kind of walk through what you see in the next three to five years in the ability to raise rents in that kind of product?

Skip McKenzie

Everything is forward-looking. So, it’s tough to say three to five years out. Let me tell you what we have seen in the assets that we just recently purchased this past year. The 1227 25th Street, what was attractive to that asset for us is that, number one, it was adjacent to our existing property at 2445 M Street, and it was only 70%, I think 72% leased. So, we thought there was significant opportunity there just through pure lease-up to least that property, and we think that section of town really is underappreciated currently, and we think that there are significant ability to raise rents over that period, I am just not talking about market rents, but certainly that asset had a significant upside in terms of lease-up.

In terms of the other asset we bought in the first quarter, 1140 Connecticut Avenue, that asset is more of what we do in terms of its multi-tenant has I think almost 30 individuals probably what you would consider smaller tenants, and we thought that, that property was approximately 10% below market in terms of rents in place. And that over a period of time, you are good as guess as I am what rents in the CBD are going to be, but over the last couple of years, really rents have been somewhat flat in that type of location within walking distance of a metro. We feel very optimistic that whatever rental rate increases, they are going to occur in Washington, this will be near the top of the market. Did I answer the question more or less?

John Guinee – Stifel Nicolaus

I am sorry. Skip, excellent, yes. Also, any other one-off transactions on the market, retail portfolio, some of the older buildings in Rockville, some of the apartments?

Skip McKenzie

That we are selling or buying?

John Guinee – Stifel Nicolaus

Selling. Besides Dulles Station and the big industrial portfolio, are you also selling any of your older second and third tier assets, say some of the retail assets etcetera?

Skip McKenzie

The direct answer to your question, no, we don’t have any other properties on the market, nor do I anticipate any further sales between now and the end of the year. I mean, our hands are going to be full selling the industrial portfolio, but I do want to make an editorial comment on your comment. I don’t believe we have a lot of second and third tier assets in the portfolio. Our retail portfolio was one of our, perhaps strongest. We have maybe two centers that are under – out of our 14 or 15 centers that might be underperforming somewhat, but we believe there is fantastic redevelopment opportunities in those properties.

So, I don’t see it, to answer your question specifically since you brought up retail, I don’t even see a retail property ever on the horizon at least that I see today, and while there may be a handful of suburban office assets at some point in time that may go, we think we have done a lot of the majority of the pruning that’s required and gong forward after this year, there will be some assets as we continue to go forward in the current portfolio, but we like the construction of the portfolio as it exists today.

John Guinee – Stifel Nicolaus

Great, thank you.

Operator

Thank you. Our next question is from the line of Michael Knott, with Green Street Advisors. Please state your question.

Michael Knott – Green Street Advisors

Hi guys. Question on just DC fundamentals and general, in particular I guess the office side. One of your peers this quarter said that they saw a pretty significant short-term slowdown in leasing activities from the budget in path that was happening there for a while. Can you just comment on anything that you saw from that with respect to either your properties or your leasing, or maybe just the market in general?

Skip McKenzie

Are you referring to a specific sub like Washington DC specifically or just entire metro area?

Michael Knott – Green Street Advisors

More of the metro in general.

Skip McKenzie

Yes, I think I made the general comment that absorption certainly was sluggish in the first quarter. A lot of that is seasonal and there was a lot of government leasing that put the district positive. But I would say that I don’t believe that there was a major downturn because of lot of the concern over the budget process and what’s going on. I do think that there is a lot of uncertainty in the market, people are afraid to step forward and take space. As I also mentioned in my comments, we have seen, we believe we have had actually increased building tours in our properties, and it’s very difficult to get people to kind of lease right now. And I think that’s reflected in some of the market statistics that have shown some negative absorption, but whenever we get clarity on what’s going to happen with the budget will be helpful for the market, but we haven’t really seen anything necessarily going backwards. It’s more, I would characterize I guess more flat line than going backwards, lot of uncertainty.

Michael Knott – Green Street Advisors

Do you have any view as to how the longer-term fight over the budget, I guess the longer-term budget, how that may impact your region and your portfolio?

Skip McKenzie

I wish I was that smart to say that I knew what the answer is. I think our opinion, in our investor presentation book, which I am sure you have seen Michael, we have sort of a famous chart that shows the government spending in Washington over like a 20-year period, and they have never been able to bend it back. So, historically, they have never been able to figure out how to do it in our region specifically. Sometimes, it slows down and flattens out sometimes a time, but over the recent history that we have even been able to track, they have not been able to bend it back in our region.

So, the question is will they be able to do it for the very first time? And the second part of that question is we have so many initiatives going on in our region right now that are underway that for the near term, it’s virtually impossible between the BRAC relocation, I am just going from north to south, going up in Aberdeen from the Fort Monmouth closure and all the benefits that’s going on up there, and the things that are going on with cyber security in Fort Meade and the tremendous amount of activity that’s going on in Fort Meade, for the intermediate future, all of those initiatives, they are literally – they are not even outfitted yet in many cases. So, you have got all that momentum going on. It’s just hard to imagine any time certainly in the near future other than the uncertainty that a lot of people have of a material impact occurring.

Mike Paukstitus

And then, Skip, I would just add the biotechnologicals, but then I should, everything else that’s moving here in suburban Maryland [ph].

Michael Knott – Green Street Advisors

Yes. And then, I guess that leads into one more question I have is, I think recently there has been kind of the 2010, all of the absorption with government and hardly any was private sector and waiting for kind of a – private sector to take the baton, what’s your current thinking with respect to what you are seeing from private sector tenants?

Skip McKenzie

Yes. Mike referenced one good area where a little bit of daylight, we have seen more activity in like, really where our corporate headquarters is right here, this sort of North Bethesda area. We have seen some very positive activity from some of the people that are working with NIH and some of the military medicine initiatives, and we talked about one Central Plaza project a number of times over the last year. We pretty much leased that project up from a lot of these tenants. So, that’s one sort of bright light we have seen in an area that was dead for five years prior to that. But region-wide, I mean, I would reiterate what I said earlier, there is still lot of uncertainty. We don’t see a lot of people going backwards, but while we see some increase towards, there is still just getting people to sign on lease, getting tenants when they renew for five years instead of three or two, it’s still somewhat challenging.

Michael Knott – Green Street Advisors

Thanks, I will queue back in.

Operator

Thank you. The next question is coming from the line of Brendan Maiorana with Wells Fargo. Please state your question.

Brendan Maiorana – Wells Fargo

Thanks, good morning guys. Just wanted to back on the acquisition opportunities that are out there and then just maybe frame that up with how much in kind of 1031 money you guys will have to put into place first? Can you just clarify, are the transactions for 1227 35th and Dulles Station, and then the recent Tysons Corner, are those kind of two that you can use for 1031 Exchanges to offset the sale at Dulles Station and then the pending sale for the industrial portfolio, is there anything else that, that could be put into the buy category as well?

Skip McKenzie

Okay. So, 1227 25th Street, we do have reverse 1031, I think that’s the proper terminology, and we would anticipate utilizing the John Marshall II, the Tysons building in some fashion as well. In terms of Dulles Station, we do have those proceeds in the terms of the 1031. We are actually evaluating whether we would want to just – we are evaluating what the tax bill would be on that, we might even just pay the taxes since they could be relatively nominal. We are doing those calculations as we speak.

So, as it relates to the larger portfolio and when the industrial portfolio sells, there are some of those properties, I don’t want to get into the dollars and cents right now, but there is a portion of that we are hopeful that we will be able to return via the dividend, so we don’t have to basically reinvest the entire amount via 1031. Bill, I don’t know if you want to add anything to that?

Bill Camp

Yes, let me add, let me just kind of talk about that. We are looking at the sale of the industrial in a variety of different ways, as you can imagine, we are probably analyzing it every way you can possibly think of. But there is a portion of the assets that you could pool together to say that, that gain, whatever that gain would be would fit under the existing dividend, we wouldn’t need to raise dividend or lower dividend. We are just under the existing dividend, we could fit that gain and that would be a certain amount of the sale proceeds. So, that would be free and clear money to us. To reinvest whenever we stop there, we wouldn’t be under the time gun of a 1031, and then the rest of it, we would have to locate assets. Unlike Skip said, we put 1227 25th Street in there and we also will, John Marshall II would be another candidate.

One thing that I did want to mention is that it may sound to strange to some of you that we have Dulles Station into a 1031 because we did take $600,000 impairment charge on it. But on a tax basis, we actually had a 1031 going into that project a long time ago, when we bought into that property into that development, we had a 1031. So, our cost basis for tax purpose was lower. So, we do have a tax gain on that property, so with that is why we at least protected it temporarily and we are trying to calculate exactly what kind of tax liability is there, it’s probably nominal.

Kelly Shiflett

Because it’s held in a taxable REIT subsidiary.

Bill Camp

That’s correct, yes, in a taxable sub. Does that answer your question, Brendan?

Brendan Maiorana – Wells Fargo

Yes, that’s helpful. I guess I am trying maybe triangulate a couple of things. First, I think in your guidance, you have got an assumption of kind of net $50 million of acquisition over the dispositions this year. It sounds like maybe if you pay the tax bill on Dulles Station and there is some form of or some portion of the industrial portfolio where you are going to effectively take those gains and put it out on the dividends so you wouldn’t have to reinvest, given that asset pricing as firm pretty significantly, just wondering if that portion of the guidance maybe your outlook on that, and then just on the flip side of that, your view on kind of acquisition opportunities as there are out there today?

Bill Camp

Let me take the first part, and I will give Skip the second part in terms of the view of the acquisition opportunities. In terms of the first part, in terms of guidance, we did have zero to have $50 million. That was assuming that we would have to redeploy pretty much all the capital on the sale of the industrial and Dulles Station. And the reason we came up with zero to $50 million is that if you know the 1031 rules well enough, if you want to duck all, if you want to defer all of the taxes relating to those particular assets, you have to invest an amount equal to a greater than the amount that your proceeds are.

So, you are never going to get it perfect, so that’s kind of where the zero to $50 million came in. And ultimately, kind of to go forward on that guidance, I don’t know what the answer is going to be just because of the timing of the industrial sale and how much we are going to be able to use, we are working with tax counsel, and we are also working with our independent auditors to try and figure out the most efficient way to do this, and to give us the most flexibility.

So, I don’t really have an update on that part of the guidance yet, but you are right, you are going down the right path is that if I can put a portion of it into the dividend and I use a portion of it to maybe pay off debt for a period of time, this particular calendar year may not be in that zero to $50 million range. But I don’t know that yet, I can’t update that number yet.

Looking at it a little bit longer term, the plan is to continue to grow the company and reinvest all of the assets and buy more properties. And with that, I am going to turn it over to Skip to talk about what’s going on in the acquisition markets and what opportunities we are seeing.

Skip McKenzie

Without question, it’s a competitive market out there. We think we have found good assets and we are going to continue to find some good assets. Obviously we are not going to be competitive on certain asset classes like trophy office buildings, like the market squares and those types of things in the world that have traded for five and sub-five cap rates. It’s not really in an arena that we are participating in. We are likely not going to be competitive and be sort of just generally stabilize the apartment buildings that people have been paying for five and sub-five cap rates.

But we think that they are just a class of assets that are above that, such as the ones that we have already executed this year, the three that we have already announced and we have also got a fairly significant transaction and due diligence as we speak today. So, answering your question whether we are going to get to that 400 plus or minus million, I think in the guidance neighborhood or whatever approximately equal guidance, I think we will be around there. We don’t have all that in our pocket today, but I think that we already have $127 million, plus $73 million is $200 million, and as I mentioned, we have some stuff in study period right now and we are four months into the year. So, I don’t feel that we are out of the game so to speak.

Brendan Maiorana – Wells Fargo

And then just a quick follow-up, I mean, can you just kind of frame that up with the Tysons acquisition being a stabilized asset, a single tenant in a rollover for five years, where you are going in and sort of where you see the upside, and then just lastly, is there a little bit of land or additional FAR that you can build on that, and would that be going up or is that, you could do that in a separate structure?

Skip McKenzie

That’s a great question, I am glad you asked that. That probably isn’t a typical acquisition for us, just to buy a building that has a single large tenant and actually generally shy away from those things. But let me give you the rationale for our acquisition there. That building as I stated in my comments is the corporate headquarters for Booz Allen Hamilton. It is leased through, we believe, is 2016. We are very bullish on Tysons Corner long term when that metro is completed. We are not so bullish in the short term, it is an extremely difficult market with a construction until that metro is completed in 2013. This acquisition really sort of beautifully got us through that construction period and was going to deliver an opportunity to increase rates just when all of that construction have been stabilized and through and the dust was cleared.

In addition to that, as you alluded to, this property being only 500 feet from the metro under the Tysons Corner master plan, this is an area that would provide for possibly a 6.0 [ph] FAR, which would allow us to increase the density. I believe it’s over 500,000 feet. Now, somewhat difficult to do as it’s currently configured, but on the long range thinking for this site, we could increase the density there significantly, and none of that’s baked into this acquisition. It’s a good acquisition to straight up without any additional density, but in the future, 10 years from now or maybe even less, there is the potential to add additional buildings there for virtually no land cost right now.

So, we think this was a fantastic acquisition and as I said, we are very bullish on Tysons Corner long term, but it is going to be difficult until this metro is done in 2013.

Brendan Maiorana – Wells Fargo

Sure, okay. Great, thanks for the color.

Operator

Thank you. Our next question is from the line of Steve Benyik of Jefferies & Company. Please state your question.

Steve Benyik – Jefferies & Company

Thanks and good morning guys. I guess I appreciate the color on the Tysons Corner potential development, but can you also just touch base on other potential development possibilities in the portfolio, particularly related to multi-family and whether you give any of these potential opportunities a shot of possibly getting started as early as 2012?

Skip McKenzie

I would say that just to cover the development world, generally, on the commercial side, not a great market for development, just going out there and developing a spec office building. Market conditions just generally aren’t there. Having said that, there are some unique opportunities that we are looking that, more like build to suit I think. There’s not lot, it’s very thin. So, to say that it’s a robust opportunity to develop commercial properties, the answer to that is no, and there probably won’t be any commercial development, but not many other people in the next two years.

Now, on the multi-family side, we are looking at different opportunities in the marketplace, and we are making some traction and headway, and I think that we will hopefully be announcing something in the not-too-distant future.

Steve Benyik – Jefferies & Company

Okay, that’s great. And then, I guess just for Bill, when you look at the debt maturity schedule in terms of almost $200 million of unsecured coming due over the next few years, and I know in the past, you had mentioned the possibility of a larger unsecured deal. How are you weighing at I guess relative to what’s currently in guidance and whether that may be also a 2012 event?

Bill Camp

It’s a great question. I don’t have anything baked into the model this year in terms of pulling the trigger on a transaction on to refinance that debt. It was planning on using the proceeds. I want to carry some line balance, it’s just too attractive money and quite honestly, we have got a multi-family portfolio that resets rents every year, so you can kind of match that up if you are going to match assets and liabilities, you are going to match that up a little bit.

So, you can carry a little bit of variable rate debt. I don’t know if I really want 200 plus million dollars of variable rate debt going forward, but if we pay off, a portion of that with the sale of the industrial portfolio at least temporarily until we find more assets to buy, and then kind of pull the trigger on something. It’s kind of the plan right now. I will give you one caveat to that, is that rates are still really attractive, and there may be a point in time where I just don’t think it’s going to get much better than this. And we pull the trigger on the deal even though I don’t have it in the model. And that’s just, it could happen, but I am not anticipating it at least right now.

Steve Benyik – Jefferies & Company

Okay, And then just finally on the credit line balance, the interest rate on it dropping by 70 basis points in the quarter. Could you just walk through exactly what drove that decline?

Skip McKenzie

Yes, sure. That’s easy. The $100 million remember is fixed on the swap, with the swap. So, that’s a fixed rate. So, when I added the $60 million, that’s basically 67 basis points or whatever I pay on my line. It blends that rate down.

Steve Benyik – Jefferies & Company

Okay, great. Thanks guys.

Operator

Thank you. Our next question is from Mitchell Germain with JMP Asset Management. Please state your question.

Mitchell Germain – JMP Asset Management

Good morning gentlemen. Just curious, I jumped on late, so I apologize if you mentioned it. The Dulles station marketing and sale process, can I just get some background with regards to the type, the bidding and pricing relative to your expectations?

Skip McKenzie

We generally don’t give too much of the details other than to say that we were very pleased with the process. We fully marketed that we hired a broker, Cassidy Turley, they did a full-blown marketing campaign on that. We received a number of offers on it, and went into sort of the typical process, and had a great buyer. And we are very pleased with the execution.

But we went through the standard marketing process on that. It wasn’t off market or anything like that.

Bill Camp

Mitch, we have said in the past that because of the way that thing was leased with some lease inducement and things like that, the GAAP NOI on that particular property was pretty low and it was going to be low for 10 plus years. So, we don’t really disclose cap rates on sales, because it’s really the eye of the bid holder and the buyer. So, we will just let them advertise whatever cap rate they want to advertise. But on a GAAP basis, our books just about anything we would invest in. Even we could actually invest in trophy multi-family and make that transaction accretive on an earnings basis, not on a cash basis, but on an earnings basis.

Mitchell Germain – JMP Asset Management

And Booz Allen today have on the John Marshall property, today have a renewal option?

Skip McKenzie

Good question. With the scenario there that was built for them 20 years ago. So, I believe there are 10-year lease with two five-year fixed options. This was the last fixed option that they recently exercised. So, they exercise an option that began on, I believe, February of ’11 for five years, and it was fixed under the terms of the original lease and that’s what they are in. So, another reason why we thought it was very attractive.

Mitchell Germain – JMP Asset Management

Great. And then, just your comments on signing tenants in a bit, had more hesitation today versus previous quarters, your total of these volume on a square foot basis was up, does that – is the signing now more forward-looking where we will see the hesitation or –?

Skip McKenzie

I mean, I don’t think that it was a negative change over price. It’s just sort of uncertainty we have been going through for 12 months now or more.

Bill Camp

Part of that movement was a very advantageous renewal. We had a 50,000 plus square foot renewal –

Skip McKenzie

One-third of our office leasing activity was a large renewal.

Mitchell Germain – JMP Asset Management

Great. That’s very helpful. Thanks guys.

Operator

(Operator Instructions) Our next question is coming from Michael Knott of Green Street Advisors. Please state your question.

Michael Knott – Green Street Advisors

Hi, guys. I was just curious if you could give us some comparison on the cash cap rate on Tysons versus your sale at Dulles?

Skip McKenzie

That would be a positive spread.

Bill Camp

Yes, I don’t think we are going to give any more detail on that, Michael, but it’s positive spread. We are really limited on what we can say about on Dulles Station due to the contract.

Skip McKenzie

There was a confidentiality provision, but it’s the buyer who was interested in. So, don’t want to say too much, but I would say that we definitely have a significant eyes of the beholder, but we had a positive rent spread on that trade.

Michael Knott – Green Street Advisors

What do you think the replacement cost is for the building that you bought?

Skip McKenzie

It is probably in the neighborhood of $300 a foot, somewhere around that, because it had structured parking. Somewhere in that neighborhood, maybe high 200s [ph]. That sort of neighborhood. And as I said, in that particular property, we are going to be getting in addition to the improvements in place, potentially we could have another 500,000 square feet of FAR at some point in the future.

Michael Knott – Green Street Advisors

So, you guys paid at or above replacement costs?

Skip McKenzie

We played right around replacement costs, right around.

Michael Knott – Green Street Advisors

Okay. And I am sorry, maybe I missed it, but how old is the building?

Skip McKenzie

It was built in the ‘90s.

Michael Knott – Green Street Advisors

Okay. Thanks.

Operator

Our next question is from the line of Chris Lucas of Robert W. Baird. Please state your question.

Chris Lucas – Robert W. Baird

Hi, good morning everyone.

Skip McKenzie

Hi Chris.

Chris Lucas – Robert W. Baird

Skip, could you just walk us through sort of what the sort of status of the industrial is at this point and what the process is that you are expecting, and maybe the timeframe under which we should be looking for news?

Skip McKenzie

Yes, I think I mentioned in my comments, hopefully we will have more clarity at the next conference call. I believe we will have more clarity, but we recently just hit the street in the last couple of weeks with the preliminary marketing materials. Cassidy Turley received requests for the full book and it is a Bible. It is 50, I think seven different buildings, and we have a detailed offering memorandum on each property. So, the offering memo itself, I believe is like 300 and something pages long. So, this process is ongoing as we speak. I know Cassidy Turley sent out well over a 100 of them, so that the big property Bible is just going out as we speak. I believe that we will have the final in June receiving, negotiating and receiving offers. And as I said, I believe at the next conference call, we will have a lot more clarity as to where we are in the process. It’s just we are very early in the game right now unfortunately.

Chris Lucas – Robert W. Baird

And are you taking bids from single assets all the way to the whole portfolio or carving it up in some ways or you just –?

Skip McKenzie

I don’t know if we are taking single asset offers, but certainly we are open to at some subsets of the whole portfolio, but now, I don’t think we are going to be doing one, unless maybe there is a user that wants to buy their own building and they are willing to pay us, but I don’t envision that as a past.

Chris Lucas – Robert W. Baird

Okay. And then just on the acquisition opportunity, can you just give us a sense as to sort of what you are most interested in right now given sort of the portfolio dynamics and how you are looking at building this portfolio without the industrial component going forward?

Skip McKenzie

What are we most interested in right now? Well, obviously we are most interested in the other four sectors. We would love to buy more assets like the three we just bought that we put on the scoreboard so to speak. We love to buy another couple of more downtown office buildings. Whether we are going to be successful, that is another story. We are very focused on a couple of opportunities inside the Beltway Office opportunities, not necessarily it may not be in the districts per se, and we have actually seen some interesting opportunities in the retail arena that we would hopefully be able to put on the scoreboard.

I would say that there is not a whole lot of medical office buildings for sale right now. So, although we would like to buy one, the opportunities just aren’t presenting themselves.

Chris Lucas – Robert W. Baird

Okay. And Bill, just a cleanup question on the ATM, did you guys tap that at all?

Bill Camp

No, I said earlier, but no.

Chris Lucas – Robert W. Baird

Okay. Great, thank you.

Operator

Thank you. Our next question is from the line of Dave Rodgers of RBC Capital Markets. Please state your question.

Dave Rodgers – RBC Capital Markets

Hi, good morning guys. Skip, you had mentioned looking at maybe some apartment transactions, you are hoping to announce anything soon, but maybe stepping aside from that, are you guys looking at partnered transactions, structured investments, mezzanine pieces with regard to deploying your balance sheet in the near term, and do you think there is opportunity to do that for you guys?

Skip McKenzie

Yes. I think we may have mentioned that we are looking at those opportunities particularly in the multi-family arena specifically. Have we looked at some mezzanine opportunities, yes, we have looked at some. But we have never seen any of that have been all that attractive to us. Not to say we would do them, but I would say that that’s a low probability, but we are directly and specifically looking at multi-family partnership opportunities.

Dave Rodgers – RBC Capital Markets

And would you consider the other property types as well, you are just not seeing the opportunities, is that what we should take from it?

Skip McKenzie

I don’t know if it’s needed. I mean, is it a possibility particularly like in medical office buildings or something like that because of the strategic opportunity some had. Yes, I just think it’s less likely. But I don’t vision it occurring office buildings, for example.

Dave Rodgers – RBC Capital Markets

Okay. And you guys talked a lot on the call about 1031 and trading assets and clearly that makes sense with the industrial portfolio sale. If the acquisition opportunity presents itself, I suppose you would be okay issuing new capital to go pursue that and I guess, Bill did dovetail into your comments about maybe being opportunistic with capital raises given rates. What would your preference today be to add to the balance sheet given some of your recent announcements about preferred, but also what you are seeing in the underlying market?

Skip McKenzie

My preference as I have stated for I think the better part of my time at this company is that for new acquisitions, if it’s not funded, over a long period of time, we have always said that we probably fund about a third of any acquisition with some form of disposition proceeds, just over expanded period of time, obviously this year, probably it will be one to one, or pretty close to one to one. But over a period of time, it will be something else. So, what makes up the other two-thirds of the acquisitions, and it will probably be pretty close, Dave, to the current capital stack, and we are right now about 60% equity and 40% leverage. So, if you think of it that way, you are probably doing a mix of both over a period of time.

In today’s market, I would like the debt market lot better than the equity market, but that changes every day.

Dave Rodgers – RBC Capital Markets

Great, thank you.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back to management for closing comments.

Skip McKenzie

Okay. Thank you everybody for your interest in the company. We will look forward to talk to you in July at the second quarter conference call. Thank you. Have a great weekend.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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