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Washington Real Estate Investment Trust (NYSE:WRE)

Q1 2008 Earnings Call

April 29, 2008 11:00 am

Executives

Kelly Shiplet – Senior Manager of Finance

Skip McKenzie – President & Chief Executive Officer

Sara Grootwassink – Executive Vice President & Chief Financial Officer

Laura Franklin – Executive Vice President and Chief Accounting & Administrative Officer

Mike Paukstitus – Senior Vice President Real Estate

Analysts

Chris Lucas – Robert W. Baird & Co.

Michael Knott – Green Street Advisors

David Rodgers – RBC Capital Markets

John Guinee – Stifel Nicolaus & Company Inc.

Paul Puryear – Raymond James Financial Inc.

Operator

Greetings and welcome to the Washington Real Estate Investment Trust first quarter 2008 earnings conference call. (Operator Instructions) It is now my pleasure to introduce your host, Ms. Kelly Shiplet. Thank you Ms. Shiplet, you may begin.

Kelly Shiplet

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.

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. Other such statements and projections are based upon what we believe to believe reasonable assumptions. Actual results may differ from those projected.

Key factors that could cause actual results to differ materially include changes in the economy, the successful and timely completion of acquisitions, changes in interest rates, leasing activities and other risks associated with the commercial real estate business and as detailed in our filings from time to time with the Securities and Exchange Commission.

Participating in today’s call with me will be Skip McKenzie, President and CEO, Sara Grootwassink, Executive Vice President and Chief Financial Officer, Laura Franklin, Executive Vice President and Chief Accounting and Administrative Officer, and Mike Paukstitus, Senior Vice President Real Estate. Now I’d like to turn this call over to Skip.

Skip McKenzie

Thank you Kelly. Good morning and thank you for joining the Washington REITs conference call today. Much has changed in New York’s economy in the real estate markets even since our last conference call. The economy continues to weaken as evidenced by the loss of 80,000 jobs reported in March and the national unemployment rate which increased to 5.1%, a nearly three year high.

Although Washington is not immune from this nationwide slowdown, our region continues to remain very resilient and consistently outperforms the nation in almost all major metrics. The Washington area’s unemployment is 3.5%, the lowest in the nation. It is actually below the national average, the average rate experienced in the ‘90s which was 3.9% in our region. It has only increased slightly from 3.4% one year ago.

Payroll growth in our region over the last 12 months increased 27,600 jobs which is approximately one half the long-term average of 53,000 per ana. This slowdown is material and has had a significant impact on the leasing absorption in our markets. Our region typically absorbs 8 million square feet of office space per year or 2 million square feet per quarter. For the first quarter of 2008 the net absorption was approximately 1 million square feet or one half the long-term average.

While occupancies are generally healthy when vacancy does occur the lease up times have significantly increased. Overall vacancy in a region is up from a year ago but I encourage you not to paint the region with a broad brush. While there are pockets of vacancy, most of the submarkets where we invest are solid. The District of Columbia remains one of the best performing markets in the country. Rents are up and vacancies are actually down in this market.

While there is some concern about the impact of the 8.7 million square feet under construction in the District, we expect single digit vacancy rates to continue over the next 12 months. The District is joined by most inside the beltway submarkets which employ strong occupancies and arduous development prophecies.

Market divisions in Lafarge submarkets specific to WRIT, the Dulles Corridor, remain weak and will continue to be the most challenging market to navigate through this year. WRITs only notable exposure to these markets to their Dulles Station Development as Mike will discuss shortly.

The dysfunction in the credit markets continues to impact acquisition activity. Yield flow is down dramatically as sellers are generally reluctant to mark their assets to market and buyers are either struggling to find financing or are waiting for the better deal on the horizon. Having said that, the DC region continues to be recognized as one of the top investment markets in the world and ready capital continues to be aggressively deployed for select assets and high barrier to entry submarkets such as downtown office, grocery anchor retail and infill high-rise multifamily.

Over the past 47 years, WRIT has weathered many numerous challenging real estate cycles. Our diversified portfolio, infill property location and hands on management focus continue to provide superior results. Our first quarter performance exemplifies our ability to concede even in a challenging environment. I’ll now turn our call over to Sara to discuss this quarter’s performance.

Sara Grootwassink

Thanks Skip and good morning everyone. Adjusted funds from operations grew 2% to 59 cents per diluted share for the quarter excluding the impact of the 18 cent per diluted share non-recurring charge related to extinguishment and debt. Including the charge, funds from operations was 41 cents per diluted share.

Cash basis core net operating income increased to 5.8% and core occupancy increased 160 basis points to 95.2% compared to the same period one year ago. I would like to highlight that for the third consecutive quarter, core occupancy is about 95%. Rent increases on lease rollovers were 7.1% on a cash basis and 16.4% on a GAAP basis. Rental rate growth for the core portfolio was 2.9%.

By sector our performance is broken down as follows. Industrial properties cash core NOI increased 6% compared to the same period one year ago. The increase is primarily due to rental rate growth of 3.1%. Multifamily properties core cash NOI for the first quarter increased 5.4% compared to the same period one year ago. Rental rate growth is 2.5% while economic occupancy increased 210 basis points to 92.7%.

Office properties core cash NOI for the first quarter increased 6.6% compared to the same period one year ago. Economic occupancy increased 290 basis points to 95.4% primarily due to leasing at 7900 Westpark Drive and the West Gude Office Building. Rental rate growth for the office sector was 2.5%.

Retail properties core cash NOI for the first quarter increased 6.9% compared to the same period one year ago. Economic occupancy increased 90 basis points to 90.2% due to occupancy gains at Montrose Shopping Center. Medical office properties core cash NOI for the first quarter increased 1.5%. Rental rate growth was 3.4% and economic occupancy remains high for the medical office sector at 98.4%.

During the quarter we refinanced our only debt maturity in 2008. We completed an extinguishment of debt on a $60 million 10-year Mandatory Par Put Remarketed Securities that came due for remarketing in February. The MOPPRS were issued in 1998 with an option to the underwriters to remarket the bonds in 2008 with a 10-year treasury rate for 5.2 cents plus the current market spread.

We evaluated remarketing as well as long-term debt alternatives. Both would have resulted in unattractively priced capital. Therefore the MOPPRS were refinanced with a $100 million two-year term loan which was swapped at a fixed rate of 4.45%. The remaining proceeds were used to refinance a portion of line outstanding. This refinancing pays an estimated $5.6 million over the two-year period – the first two-year period compared to the estimated remarketing coupon and will allow time for the credit markets to settle out before issuing long-term debt.

Consistent with our earnings guidance, the extinguishment resulted in an $8.4 million net charge or 18 cents per fully diluted share. The net loss is calculated as net present value of the difference between fixed 10-year treasury rates that we would’ve achieved at the time of issuance versus the current treasury rates.

We have also exercised a portion of the accordion feature on one of our unsecured revolving credit facilities. Our total borrowing capacity was increased to $337 million with no increase in spread. The abilities to continue to borrow at LIBOR plus 42.5 basis point puts us in a strong position as we evaluate future investment opportunities.

We are contemplating other methods of financing due to the continued volatility in the credit markets. We will continue our strategy of maintaining a conservative balance sheet with the lowest possible cost of capital. With that I will turn the call over to Mike to discuss operations.

Mike Paukstitus

Thanks Sara. Good morning. Leasing activity this quarter was on target. We have less than 1 million square feet or about 10% of our total portfolio expiring over the remaining of the year. We’ve already renewed or have prospects to lease much of this expiring space. This quarter we signed 61 leases at an average term of 4.75 years for a total of 270,000 square feet.

Tenant improvements average $5.65 per square foot. We renewed 61,000 square foot of expiring space at 1776 G Street with the World Bank. The lease is for a five year term. It’s on an as is basis with a 12% increase in cash rents.

In February we converted the garage lease at 2000 M Street to a management contract resulting in an expected increase in annual parking revenue at that property of 24%. At our industrial property, Belval Marrow Point [ph] we renewed 29,000 square feet for the US Federal Air Marshals for a five year term.

Leasing activity at our development properties is moving along. Upon its completion in February we began leasing units of the Claiborne Apartments in Old Town Alexandria, Virginia. The property consists of 74 units with 2,700 square feet of retail space and has been well-received in the marketplace. Rents are averaging more than $3 per square foot and the property was leased 15% at quarter end.

Bennett Park our apartment development in Arlington, Virginia was completed in December. As of quarter end we have at least 88 of the 224 units in high mid rise buildings. Rents are averaging $2.61 per square foot. As reflected in our 2008 guidance, we do not have any leases signed at Dulles Station in our 180,000 square foot office development in Herndon, Virginia.

The market in the Dulles Quarter continues to be soft. However we are cautiously optimistic that the property will be leased soon. Dulles Station which NAIOP awarded the best suburban mid-rise office building in Northern Virginia continues to stand out among the competition due to a superb visibility along the Dulles Toll Road, its mixed use environment and WRITs sponsorship known for our local presence and expertise in the DC metropolitan region.

As we indicated last quarter we continue to evaluate our portfolio for opportunities to change or increase density for local government circuit city revisions to the county growth plan. WRIT now filed two formal requests for projects in close proximity to Port Belvoir just south of the capital beltway with a department offense, this projected begin relocations of the government facilities in December of 2011.

Additionally we are very active in two other governmental jurisdictions considering revisions to their master plans due to close proximity to existing or proposed metro sites. This quarter we entered into an agreement to acquire Landsdowne Medical Office building, a five-story, 85,300 square foot medical office development for $19.5 million. The project is located at the intersection of Riverside Parkway and Landsdowne Boulevard in Loudoun County, Virginia directly across from the Inova Loudoun Hospital. The site is currently under construction.

Loudoun County is both one of the affluent and rapidly growing counties in the country. WRIT will purchase the property upon it’s completion which is estimated being the first quarter of 2009.

Also this quarter we acquired 6,100 Columbia Park Road a 150,000 square foot industrial warehouse in Landover, Maryland for $11.2 million. The property is located just inside the capital beltway adjacent to Route 50 between Interstates 95 and 495 and the Baltimore/Washington Parkway. With lease stabilization we expect the second year cash return to be 8.2%.

With immediate access to major roadways in this region the location is excellent for small industrial. We will continue to look for industrial opportunities in this marketplace. With that I would like to turn the call back to Sara.

Sara Grootwassink

Thanks Mike. In conclusion, guidance for 2008 FFO for diluted share remains unchanged at $2.11 to $2.21 and $2.29 to $2.39 excluding non-recurring items. We would now like to open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Chris Lucas with Robert W. Baird. Please proceed with your question.

Chris Lucas – Robert W. Baird & Co.

Good morning everyone.

Sara Grootwassink

Hi Chris.

Chris Lucas – Robert W. Baird & Co.

Just a couple of questions to follow up on the leasing thing up front. In terms of what you have remaining for the remainder of the year, the remaining significant leases that you’re concerned about – and I know you do not – United Communications is set to expire in May – is there anything else beyond that that is disconcerting at this point?

Skip McKenzie

Of significant size?

Chris Lucas – Robert W. Baird & Co.

Yes, of significant size.

Skip McKenzie

And just so that everybody knows the page you’re on there, Chris in reference United Communications group lease which is at 1 Central Plaza in North Bethesda, that’s approximately 60,000 – I think it’s 62,000 feet. At the present moment we’re actually, we’re talking about one user for approximately 9,000 square feet of that space. So the balance at this point is uncommitted.

Other than that that’s really the only large office user that we’re sort of looking at in terms of exposure right now. As Mike had mentioned in his comments, the World Bank with 60,000 square feet and we early renewed them.

Chris Lucas – Robert W. Baird & Co.

So the remainder of the year really is more small tenant aspirations.

Skip McKenzie

Largely. Largely.

Chris Lucas – Robert W. Baird & Co.

Okay. And then just in terms of – there was a comment related to the retail same store NOI, the cash and GAAP variance and there was a comment about an increase in bad debt reserves. Is there any more color you can shed on that?

Sara Grootwassink

Well it’s generally consistent with our reserves policy.

Chris Lucas – Robert W. Baird & Co.

Okay, so nothing specific. It’s more of a function of your general policy.

Kelly Shiplet

That’s exactly right based on historical reserve ratios.

Chris Lucas – Robert W. Baird & Co.

Okay. And then just are you guys seeing any pressure on the expense side either from local property tax issues or utility issues going forward for the remainder of the year?

Skip McKenzie

Well there has been significant increases in property taxes and utilities. I mean we’ve already experienced that. I mean Arlington has announced for example that their increasing their tax rate among others. We’re hopeful that with declining property valuations that there’d be some progress made on some of the tax issues but at this moment, no, we have not seen any relief of those particular matters.

Chris Lucas – Robert W. Baird & Co.

Okay. And then I guess Skip, just more generally about the current conditions in the market as it relates to opportunities. Can you provide any more color in terms of the kind of deal flow that you’re looking at and kind of what in terms of property type and what you’re sense is about where cap rates are.

Skip McKenzie

Acquisition opportunities specifically.

Chris Lucas – Robert W. Baird & Co.

Yes.

Skip McKenzie

Well that’s the $100,000 question, where cap rates are today. With the – the first observation I’d make is that acquisition activity and just properties on the market is dramatically down. I mean it’s – you could ask any of the – talk to many of the prominent brokers in the market and they’ll tell you anywhere 40 to 80% reduction in activity.

Now where cap rates are, a lot of it depends on the property type. I mean we’re still seeing very aggressive cap rates on downtown office buildings, some of the more prominent downtown buildings. We made a pretty hard run at some retail properties and we’re disappointed to find the cap rates were still sub-6% range. I do think sort of as you move out into the suburbs and sort of the more commodity type properties you probably have seen cap rates from 50 to 100 basis points.

But to be quite honest with you, the data set out there is not extensive. So it’s tough to put a bull’s-eye on it.

Chris Lucas – Robert W. Baird & Co.

Is there any more flow of data – or flow of deals at this point just in terms of product being offered?

Skip McKenzie

No. I would say it’s very thin. I would quantify it as a very thin deal flow. There are deals out there but it’s relatively thin.

Chris Lucas – Robert W. Baird & Co.

Okay. And then I guess just the last question has to do with sort of the interest expense for the quarter. Sara, I guess your floating rate number remains relatively high compared to where expectations I guess would have been given the drop in LIBOR. Can you give us a sense as to what that number should be or when we should expect some improvement in that floating rate number?

Sara Grootwassink

Sure we – earlier in the year the yield curve on one, three and six months LIBOR was inverted pretty steeply and so we went out with longer LIBOR contracts early in the year. And so unfortunately we have not participated in the last couple months decrease in LIBOR. Most of the contracts are expiring in June and July and so we’ll be able to pick up a little bit of savings there when we roll those over assuming rates are below where they were in January.

Chris Lucas – Robert W. Baird & Co.

Okay. Great, thank you.

Operator

Thank you. Our next question comes from the line of Michael Knott with Green Street Advisors. Please proceed with the question.

Michael Knott – Green Street Advisors

Hey guys. Question on your office expiration schedule. It looks pretty heavy in 2009, 2010. Can you just talk about the composition of that roll-over and any large tenants in those two years?

Skip McKenzie

Wow, 2009. I couldn’t tell you right off the top of my head. Mike would you know?

Mike Paukstitus

The 2010 would be Lafarge.

Skip McKenzie

Yes, 2010’s Lafarge which is the large 10 out in the Dulles Corridor. I’m trying to think right now. Ponduit [ph] is 2009. I can’t think of any major tenants off the top of my head. GSA I believe has a lease out in our Picket Street property for 120,000 feet. That’s – who knows where that would be. It’s currently leased by the FBI for storage. Sort of looking through some papers right now as we are thinking through this.

Michael Knott - Green Street Advisors

Okay. And then can you give a little more color on – Mike, on your comment about the optimism for Dulles Station? Is there more activity recently? I know you had been doing lots of tours, et cetera. Has there been a change in your outlook for the leasing of that building?

Mike Paukstitus

I think that we feel the project has been positioned very well, so the tours that were moving through the marketplace, we certainly see everything that’s coming through. We have narrowed down several that were very placed on the short list. And we see some activity that – we see some decisions being made pretty imminently on those transactions.

Michael Knott - Green Street Advisors

Okay. And then on your multi-family developments, are the current percentage lease statistics, are those behind your pro formas? Or are they basically on schedule? Or how would you describe that?

Skip McKenzie

Let’s say Clayborne is just a little bit behind schedule, because it came online a little bit later, but Bennett Park is pretty much on or about – pretty close to schedule. And we have had really good leasing activity at Clayborne. We are expecting to catch up. So we expect both of them to be more or less on sort of glide slope here soon.

Mike Paukstitus

Especially as we move on to peak season now too.

Michael Knott - Green Street Advisors

Right. And then my last question, can you just talk a little bit about your strategy for acquisitions and dispositions? I think the guidance had previously assumed some capital recycling in the second and third quarters to fund some of that.

Skip McKenzie

That’s right. Let me just give you just a quick snapshot on sort of the dispositions. We do have some properties on the market for sale. They are actually in a due diligence period with a good prospective purchaser. And we expect that property to close some time in the second quarter later on the [inaudible]. There was two properties to close in the later part of the second quarter.

With regards to acquisitions, I mean I think we just reiterate our previously disclosed guides of 100 to 120 million. I mean, obviously, we have got a lot of work to do to get that done. But certainly to the extent we need to replace the disposition income, we intend to do so.

Michael Knott - Green Street Advisors

Okay. Thanks.

Operator

Thank you. Our next question comes from the line of David Rodgers with RBC Capital Mortgage. Please proceed with the question.

David Rodgers – RBC Capital Markets

Good morning.

Skip McKenzie

Good morning, Dave.

David Rodgers – RBC Capital Markets

On the leasing activity in the multi-family, have you had to increase concessions or incentives at all over the last couple of months?

Skip McKenzie

We have had a short burst in there, right Mike, where we – for about a month where leasing activity seemed a little dormant. And we –

Mike Paukstitus

In the new development.

Skip McKenzie

Right.

Mike Paukstitus

But I would say, too, that there are several pockets in the marketplace where we have experienced a lot more supply that has moved into the marketplace. And we have aggressively moved forward to meet the competition in those sectors.

Skip McKenzie

The good news is that rental rates have generally been holding out with multi-family.

David Rodgers – RBC Capital Markets

Oh, okay. Good. And along the same lines for Sara, maybe, because of the later completion of Clayborne, have you pushed some of the dilution that would have expected in the first quarter from that completion into the second quarter? Or is it still pretty much in line with your expectations?

Sara Grootwassink

In terms of revenue or in terms of expends?

David Rodgers – RBC Capital Markets

Well, I guess it’s a combination of the both from the rate of completion – you obviously would have been capitalizing up until the completion, and then after the completion expensing.

Sara Grootwassink

Right.

David Rodgers – RBC Capital Markets

So, I guess, if you are a little bit behind on leasing, and you have finished a little bit later, I guess a combination of the both.

Sara Grootwassink

Well, in terms of Bennett Park, that came – that was all online at the beginning of the quarter. And so we would have been expensing throughout the entire quarter.

David Rodgers – RBC Capital Markets

Right.

Sara Grootwassink

Clayborne came online, I believe, on February 11th. And so that has about six weeks of interest expense that would have been capitalizing – would capitalized prior to the middle of February. So within the quarter, there was about $800,000 in interest expense that would have been capitalized in a previous quarter.

David Rodgers – RBC Capital Markets

Okay. Thank you. That’s helpful. In terms of in office – well, I guess across the commercial portfolio – are delinquencies anywhere concerning you at this point? I know there was a bunch of bad debt reserve in retail, but anywhere overall are you looking at delinquencies? Or is your watch list growing?

Skip McKenzie

I mean our bad debt expense has grown up – grown above our sort of historical standard. I mean, typically, we were in that sort of .7 to .8%. We are up around 1 now, so we have seen just sort of on a macro level. I mean I can’t identify any specific major tenants. Say again?

Mike Paukstitus

[Inaudible] Realty.

Skip McKenzie

Yes.

Mike Paukstitus

We have one tenant that we were in a condition of sort of a write-off. But that has been resolved where cash will be coming back to reversal on that as well. So that is –

Female Speaker

That already occurred in Q1.

Mike Paukstitus

Okay. That did. All right. Good.

Skip McKenzie

But I think as a general rule, yes. We have seen slightly increased delinquencies, and particularly as it relates to the retail sector. I mean we have – there has been workouts that we have – that has occurred. And as a general rule, we have incurred higher bad debt expense.

David Rodgers – RBC Capital Markets

Sure. On the Lansdowne acquisition, the – is that pre-leased? Or will you be able to do pre-leasing on that asset?

Skip McKenzie

Yes. I mean basically what that – just to make sure everybody understands that we are on the same page. I mean basically on the Lansdowne acquisition, we are the – we are working with a developer who is basically responsible for completing the base shell. And we are assuming all of the leasing risk. So we have actually engaged a third party for a medical leasing broker to assist our in-house team in a marketing process.

And we are basically aggressively out there today trying to pre-lease as much of the building as possible. Now keep in mind – I mean medical office building, a little more difficult to get a huge pre-leasing commitment, because there is just not that many big tenants for medical office buildings. But we feel confident that we will have some pre-leasing on that when we actually close on the property, which we expect to be in early 2009. Does that give you the right color?

David Rodgers – RBC Capital Markets

Yes. That is helpful. And then one last question for me. Skip, do you feel good enough, or do you think their fundamentals are at least healthy enough to begin thinking about any redevelopment opportunities in 2008? Or is that something that you are going to put on the back burner until – evaluate it later?

Skip McKenzie

Well, I mean there is no – there is not going to be any material impact in 2008 from further redevelopment. We are concentrating on leasing out the development project that we have on our plate now; now having said that, there is a lot of work going on in the entitlement process, and some fairly significant redevelopment projects. Mike had mentioned a number of them as they relate to the BRAC initiatives down in Fort Belvoir area.

We also have one spitting distance of our corporate office here, Randolph, Montrose. But those are not going to happen in 2008. Really, they are not going to happen in 2009. So they are fairly longer-term initiatives.

David Rodgers – RBC Capital Markets

Okay. Great. Thank you.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of John Guinee with Stifel Nicolaus. Please proceed with your question.

John Guinee – Stifel Nicolaus & Company Inc.

Oh, John Guinee here. Thank you. Sorry. Either Skip or Sara, I guess. You have been running the business at 58 to 59 cents a quarter through 2007, and then this quarter after taking into account the cash charge on the debt. At the same time, occupancy is up 150 [inaudible]. Same-store numbers look good. Mark-to-market looks good. Your debt cost is coming down.

It sure feels as if you are already running the business at a little bit more than 58 or 59 cents with all of those positives, yet your guidance still implies a 58 to 59 cent run rate in the rest of 2008. Any sense for what’s dragging things down? Is it capitalizing versus expensing Dulles Station? Is it a higher OpEx number? Is it other things that we can’t readily identify?

Skip McKenzie

I would say it’s capitalized interest pretty much 100% of it. Not only do you have the Dulles factor, which is going to kick in, I believe, August 1 – correct me if I am wrong – but also, just flying against the – and I know you are backtracking to 2007. I mean the capitalized interest in 2007 was significantly different than what we are recognizing today in the first quarter of 2008 and as we move forward.

So I don't know if Sara has any more amplification to that, but essentially we are flying with a little bit of headwind with the capitalized interest. And I actually think it’s pretty amazing that we have been able to maintain 59 as we have sort of taken this interest expense down.

Sara Grootwassink

Right.

Skip McKenzie

Do you have anything to add to that, Sara?

Sara Grootwassink

I think that we were conservative in how we modeled the UCGs, what happens in that phase. We modeled no revenues for Dulles Station. So it – I would say this is a very good quarter as you look out through the rest of the year from the standpoint of, as Skip mentioned, interest expense is ramping up. He has got a vacancy coming small – relatively small overall, but a vacancy coming up with the UCG. And it’s a somewhat uncertain economy. And I just don’t think it’s prudent to raise guidance at this point.

John Guinee – Stifel Nicolaus & Company Inc.

Okay. Second question. On Page 5 it looks like your real estate expenses are running sort of in the 31 to 1.5% range. And they bumped up to 33 this quarter. Is that a good run rate? Also, are OpEx numbers increasing greater than gross rents are increasing?

Sara Grootwassink

There is some seasonality to operating expense. But I think that that’s a fairly good run rate.

Skip McKenzie

Yes. I mean Sara makes a good point, certainly with respect to the residential portfolio, you could go into [inaudible] season starts, and you start experiencing higher expenses, mitigated by the lack of snow removal, which would be only in the fourth quarter, in general. So I think it is a fairly good run rate. I can’t think of anything large and material.

John Guinee – Stifel Nicolaus & Company Inc.

Well, yes, that is – the first quarter ’07 was about 31.2. And this quarter, first quarter ’08, is about 33%. Last question, if dividend increased time, when do you usually do that?

Skip McKenzie

We usually do it in our next –

Sara Grootwassink

Yes. Historically, it’s been in the second quarter.

Skip McKenzie

Yes. Second quarter.

John Guinee – Stifel Nicolaus & Company Inc.

Okay. And actually last question, I know you just did a big ground lease deal in the CBD. How many assets do you have with ground leases? And do you bifurcate that anywhere in your SEC disclosures?

Skip McKenzie

Technically, we have several of them. But we own the [inaudible] and the ground lease. But there is only one property, the one you mentioned, where we just own the ground lease.

John Guinee – Stifel Nicolaus & Company Inc.

Great. Okay. Hey, thanks a lot.

Operator

Thank you. Our next question comes from the line of Paul Puryear with Raymond James. Please proceed with your question.

Paul Puryear – Raymond James Financial Inc.

Hey. Good morning, everyone.

Skip McKenzie

Hi, Paul.

Sara Grootwassink

Hi, Paul.

Paul Puryear – Raymond James Financial Inc.

We feel like we are losing a little NAV in our calculation here. So I think we have – maybe we have identified it. Sara, could you tell us, a year ago you had about 150 million in CIP; now you are down to almost 50, so 100 million is gone out of that line item.

Sara Grootwassink

Yes. We took out both Bennett Park and Clayborne.

Paul Puryear – Raymond James Financial Inc.

How much income are you getting on that?

Sara Grootwassink

Little, as they are just leasing up now, so very little.

Paul Puryear – Raymond James Financial Inc.

So what is little? A million? 2 million?

Sara Grootwassink

I can get you that number after the call. But if you think about how many units we have leased and the average rental rate, you come up with a number.

Skip McKenzie

I would almost think you could just assume, on average for the year, 50% occupied. Because essentially in round numbers, we are leasing them for pretty close to 0 in January to 95% at year end.

Sara Grootwassink

Right.

Skip McKenzie

So it’s almost like you could come pretty close to assuming a 50% revenue for that property for this year, in round numbers.

Paul Puryear – Raymond James Financial Inc.

Yes. But what are the pro forma yields for that hundred million?

Skip McKenzie

Well, what you – it’s sort of a mixture of different assets. The hundred million, I don’t think they just relate to those apartment buildings.

Sara Grootwassink

Yes.

Skip McKenzie

If it was just the apartment buildings, it would be in that 6% range.

Paul Puryear – Raymond James Financial Inc.

Okay. One more sort of minor detail here. What’s the minority interest on your balance sheet?

Skip McKenzie

Which property does it relate to or - ?

Paul Puryear – Raymond James Financial Inc.

Is it a property?

Skip McKenzie

Yes. There is –

Sara Grootwassink

No.

Skip McKenzie

Northern Virginia Industrial Park is a very small minority interest. And then the other one is Alexandria, is that correct?

Sara Grootwassink

Right. Kenmore [inaudible].

Skip McKenzie

Yes. Last year, Paul, I don’t know if you – I guess this was middle of the year, we bought that land parcel. It was a small acquisition. It was a land parcel across from Inova Alexandria Hospital. It was like 3 – I think 3.7 million. So there is a minority interest in that. And then we had a very small minority interest in Northern Virginia Industrial Park, which has been around for 10 years or more.

Sara Grootwassink

Right.

Skip McKenzie

So that is it. Those two properties.

Paul Puryear – Raymond James Financial Inc.

Yes. Okay. Thank you.

Operator

Thank you. There are no further questions at this time. So let’s turn the call back over to management for closing comments.

Skip McKenzie

Okay. Well, thank you, everyone, for your interest in this company and have a good week. And we look forward to talking to you in another 90 days.

Operator

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

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Source: Washington Real Estate Investment Trust Q1 2008 Earnings Call Transcript
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