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Washington Real Estate Investment Trust (NYSE:WRE)

Q2 2012 Earnings Call

July 27, 2012 11:00 am ET

Executives

Kelly Shiflett – Director of Finance

George F. McKenzie – President and Chief Executive Officer

William T. Camp – Executive Vice President and Chief Financial Officer

Michael S. Paukstitus – Senior Vice President of Real Estate

Analysts

Blaine Heck - Wells Fargo Advisors LLC

John Guinee – Stifel Nicolaus & Company Inc.

Anthony Paolone – JPMorgan Securities LLC

Operator

Welcome to the Washington Real Estate Investment Trust Second Quarter 2012 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 second quarter supplementary 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 reconciliation to those measures in the supplemental. 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.

We provide a detailed discussion of these risks from time to time in our filings with the SEC. Please refer to pages 8 through 15 of our Form 10-K for our complete risk factor disclosures.

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, Real Estate.

Now, I’d like to turn the call over to Skip.

George F. McKenzie

Thanks Kelly, first and foremost as we announced last night, we set a new quarterly dividend rate of $0.30 per share on annual run rate of $1.20. This was a very difficult decision made by our board after extensive deliberation and analysis. We estimate that this new rate will provide an additional investment capital of approximately $35 million per year, which we plan to use to invest in new acquisitions, development and re-development projects or debt reductions. Ultimately, given our long term commitment to fiscal discipline of financial strength, we felt that it was in our shareholders best interest to retain this capital in order to enhance our ability to grow earnings as well as take advantage of opportunistic investments that we expect will emerge in the years ahead.

The world we are facing today presents a future with many uncertainties and we want to make sure we are optimally positioned to take advantage of these opportunities as we continue to execute our strategic plan.

In other news this quarter, we acquired Fairgate at Ballston, a strategically located office building in Arlington, Virginia. We focused on taking measures to strengthen our balance sheet and we made progress leasing some of our most challenging spaces, particularly in the District of Columbia. In the Washington metro real estate market, office fundamentals are soft and we expect them to remain so through the November election.

Second quarter net absorption region wide was positive, but not enough to offset the negative absorption caused in the first quarter by BRAC relocations, primarily in Northern Virginia. In general, office markets continue to be adversely affected by business owners and managers, who push off decision-making due to continued talk of the so-called fiscal cliff, sequestration and other macro economic trends. Bottom line, this result is a little motivation to execute leases or expend business.

Despite this gridlock, our own portfolio performed reasonably well with same-store occupancy improving sequentially. As we mentioned last quarter, we’ve had good activity in our downtown vacancies in particular, including 56,000 square feet of new leasing, which would positively affect our numbers by early 2013.

On the good news side, overall, our multifamily, retail and medical office sectors are performing well. In multifamily, occupancy remains in the mid-90s with modest rental rate growth. Retail occupancy is up from the first quarter with strong NOI growth and good potential for continued increases for the rest of the year. The medical office sector faltered a bit this quarter with some occupancy loss and higher expenses weighing on the NOI growth.

On the acquisition front, we acquired Fairgate at Ballston, a value add 147,000 square foot office building in Arlington, Virginia for $52.25 million in an all cash transaction. This property is excellently located just a few blocks from the Ballston Metro stop and it’s 82% leased. We’ve had early strong interest in the vacant space and are pleased to add to our investments in this historically strong submarket.

As an update to our disposition plan, we currently have a 33,000 square foot medical office building in Bel Air, Maryland under firm contract, we expect the closing in December, as well as two Maryland office properties actively being marketed that we expect to close by year end.

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

William T. Camp

Thanks, Skip. Good morning, everyone. Last night, we reported second quarter core FFO of $0.48 per share, $0.01 better than the first quarter. NOI improved slightly from first quarter led by the retails sector. Core FAD was $0.39, a $0.02 improvement from the first quarter.

Overall, the second quarter performance met our expectations and we remain comfortable with our original earnings guidance of $1.87 to $1.97.

In terms of the balance sheet, we had a busy quarter. We repaid $50 million of a 5.05% unsecured bonds using capacity underline. We amended and extended both of our lines of credit, extending their maturities to 2015 and 2016, and increasing the total capacity to $500 million.

The new rate on the $400 million Wells Fargo facility is LIBOR plus the 107.5 basis points, previously 122.5 basis points. The $75 million SunTrust facility was increased to $100 million and is also priced at the same rate. Finally, we entered into a new aftermarket equity sale agreement with BNY Mellon Capital Markets.

The total issuing capacity under this agreement is $250 million and it has term of 36 months. We have not issued any shares under our aftermarket equity agreements, since the fourth quarter of 2010. Our line balance is $221 million. We plan to repay a small mortgage next week, which will bring the line balance up to approximately $242 million.

We will likely look to refinance is balance in the capital markets before the end of the year. To ensure that we have ample liquidity to fund acquisition opportunities as they arise.

Now I’m going to turn the call to Mike to discuss operations.

Michael S. Paukstitus

Thanks Bill and good morning everyone. Our overall portfolio occupancy is 89.3%. Total commercial leasing volume was nearly 250,000 square feet, slightly up from our first quarter levels, but still lower than historical averages. Over half of that activity was for vacant space. We were successful in signing leases for a significant amount of downtown office vacancy, and many of our larger vacancies within our retail sector.

The office sector same store NOI was flat from first quarter to second quarter with a slight drop in occupancy all set by positive rental rate growth. As Gibb mentioned, we leased several previously vacant spaces in some of our downtown office buildings, where we have made significant common area improvements. Most of these new tenants have not yet moved in. So we expect our third and fourth quarter results to reflect this activity.

In our multifamily portfolio, rental rate growth was 4.1% over second quarter 2011, as revenue growth was 3%, but expense growth was 4.9% due to higher tax assessments at our Virginia properties.

Occupancy hovered near 95%, we continue to believe occupancy will generally remain steady throughout remaining of the year. We continue to see mid to high single digit asking price increases on renewal notices which will lead to continued solid performance in this sector.

We continue our unit renovation program at four of our 11 apartment properties and we are happy to report that so far we have upgraded 77 units for an average return on cost of 19%. We believable we will complete renovating a total of approximately 170 units by the end of the year.

Keep in mind of all, returns were strong for these renovations, our revenue growth slow to the additional downtime necessary to turn the units around.

The office sector remains challenged, although we are seeing strong activity in our downtown vacancies, where we signed 56,000 square feet of new leases in the quarter, which will add over $2 million of annualized rent. Keep in mind, this progress will be partially offset, by the anticipated move out of the GSA from Braddock Metro Center later this year. While occupancy fell to 86%, leasing activities in the quarter and the future pipeline of transactions, currently points to better occupancy level of the coming quarters, more than offsetting some of our future known move outs.

In our retail portfolio, we signed nearly 100,000 square feet of leases and about half of that were leases absorbing vacancy. Occupancy improved 40 basis points compared to last quarter. We expect occupancy to fluctuate up and down the next couple of quarters, as we have some potential move outs as we prepare for these new tenants to move in.

We reported 15.7% same-store NOI growth of the sector, now please remember a portion of this growth was due to the prior year write-off of orders, so pressing the NOI in the second quarter of 2011. We did not experience any significant write-offs in this quarter, which is the first quarter in a while that we’ve been able to make this statement. Hopefully this is the beginning of a new trend of lower bad debt in the retail sector.

Finally, our medical office sector, occupancy declined 80 basis points from first quarter and NOI growth was negative due mostly to move outs and decreased expense reimbursements. We are bullish on this sector long term, but we know in the short term there will be some headwinds due to the uncertainties surrounding healthcare reform and general competition from a fundamentally weak August market.

Going forward, we are continuing our focus on upgrading our properties to make them as attractive as possible to both attract new potential new tenants and retain existing tenants. We’ve already had success doing at various multifamily and office properties and we’ll continue to look for ways to maintain and grow occupancy.

We believe our diversified strategy of owning and managing properties at four different sectors is helping us reduce operational volatility and maintain a balanced portfolio.

Now, I’ll turn the call back over to Skip.

George F. McKenzie

Thanks, Mike. Before I turn the call over for your questions, I’d like to make one final comment. Almost two years ago, we embarked on a strategic plan to grow our company and create a better, stronger REIT for the future, meeting better earnings, better properties and a better balance sheet. We didn’t expect that we’d ultimate to conclude to reduce our dividend, but finally came to the conclusion it was necessary to support the execution of our plan.

Our strategic plan pushes us towards making continued investments in our property sectors, focusing on higher quality properties inside the Beltway and near demand drivers such as Metro Station, BRAC consolidations and major hospitals. With the issue of the dividend level now behind us, we expect to aggressively move forward and develop an even better REIT.

Now, we’d like to open up the call for your questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator Instructions) Our first question is coming from the line of Blaine Heck with Wells Fargo. Please state your question.

Blaine Heck – Wells Fargo Advisors LLC

Hi, guys. So first of all, looking at the balance sheet, you guys mentioned that the line of credit is going to be – has been up to $240 million. So I kind of wanted to get a sense of kind of where you comfort threshold is, where the balance, and what options are you guys looking at, at this point to [refine and add to that]?

George F. McKenzie

Yeah, I think the comforts level is always a moving target. I mean if you tell me where interest rates are going in the future and I'll be able to give you a little better answer, but right now we’re comfortable where the line is, we’re comfortable next week after we pay off a $20 million loan. Certainly, the discussions with ratings agencies and various other entities suggest that once you get past half way in your line availability that you are going to start thinking about it. So, obviously we’re starting to think about it and that’s why I said in comments that by the end of the year, we’ll kind of look for something. Right now, obviously the debt market is extremely attractive in the unsecured market. The bank market is still very attractive the preferred market is very attractive. So there is plenty options out there. And we will access those options as we move forward with some kind of financing.

Blaine Heck – Wells Fargo Advisors LLC

Okay. And what sort of rates do you guys think you could get on each of those at this point?

Unidentified Company Representative

In no particular order preferreds are probably somewhere around 5.75% to 5.78% and at least according to investment bankers that I have talked to. The ten year unsecured paper market is probably we’re somewhere around 225 to 250 over. So that would put you in the high 3’s to 4%, somewhere in that range. And if you go to like the bank market, the bank market actually might beat the ten year, but you’re going to be shorter in duration. You’re probably at five or seven year piece of paper which doesn’t interest me quite as much, but it’s definitely a lower interest rate.

The last one out there is potentially looking at a 30 year bond issue. The baby bonds and the $1000 denoms, and those things trade inside of preferred. So that’s another option.

Blaine Heck – Wells Fargo Advisors LLC

Okay. And then moving on to acquisition market, I wanted to get a sense of kind of what the environment is looking like at this point and kind of whether the divided cut that you guys took might free you guys up to pursue some more value add opportunities and then you may have (inaudible)?

William T. Camp

The answer to the first part of your question, I mean there is still plenty of activity out there. Although, I would admit that it’s down a little bit, but we’ve evaluated and underwritten quite of few opportunities just in the last several weeks. So there is plenty of really good opportunities out there. We're seeing still really high pricing for very high-quality properties. There was just an announcement the other day for our property in Coralville that was purchased by J.P. Morgan for over $500 a foot. Coralville is the – in Old Town Alexandria by the Coralville Metro Station. So there is still very aggressive pricing for quality properties with regards to your second question, I'm certainly having the dividend cut may give us a lot more flexibility to attack value add properties, and not it was an obstacle in the past, but certainly give us a lot more latitude and it gives us more capital the cheapest form of capital which is your own.

Blaine Heck – Wells Fargo Advisors LLC

And on the Fairgate acquisition, did you guys give a cap rate for that?

William T. Camp

No, we did not and that's not consistent with our past practice, where we generally do but in this particular transaction the seller made a personal – made a request that we are abiding by.

Blaine Heck – Wells Fargo Advisors LLC

Okay, and then last one for me as you guys are redeveloping the apartments, are you taking those out of your same-store numbers?

George F. McKenzie

What was that?

Blaine Heck – Wells Fargo Advisors LLC

As you re-developing the apartments, is that being taken out of same-store?

William T. Camp

Yeah, there will be no. There is not a significant number, there is like several down at any given property at any time.

George F. McKenzie

And it always really takes like about 10 days to turn those things. But that’s 10 days, about 10 days longer than it takes us to just paint and foot corporate in. So…

Blaine Heck – Wells Fargo Advisors LLC

You’re right.

George F. McKenzie

We loose 10 days in a month of occupancy, basically, when we turn those units, and it might be as much as two weeks. So…

William T. Camp

It is all depended upon retention.

Blaine Heck – Wells Fargo Advisors LLC

Okay.

William T. Camp

We can only do on (inaudible).

Blaine Heck – Wells Fargo Advisors LLC

Great. Okay, great. Thanks.

Operator

Our next question is coming from the line of John Guinee with Stifel Nicolaus. Please state your question.

John Guinee – Stifel Nicolaus & Company Inc.

Hi, sad day, but I guess it necessary day. Question and I miss this skip. Did you go in any debt on the [fair day] deal, kind of talk about the ingress, egress parking ratio what differentiate that from other buildings in that particular submarket.

Unidentified Company Representative

I can I did not, yeah, you deal the issues that really make it a very attractive acquisition to us. It’s right on Gieber out, it’s right off Gieber of 66 comes in sort of excellent vehicular access. It has a drop off area in front of the properties which is incredibly unique for properties in the submarket. And if it doesn’t have the highest talking ratio in the submarket, it’s one of the top three and it has a very high parking ratio and all of which made this what we thought very unique asset in a market that we love long term.

John Guinee – Stifel Nicolaus & Company Inc.

Great, thank you. And then one other question, you had mention again the assets you have on the market right now. How much color did you give on those?

Unidentified Company Representative

Okay, there is three that we have on the market. I will give you little more background. We have a small medical building up in Bel Air, Maryland which is under a firm contract. It’s a 33,000 square foot building that’s leased, that we have a firm deposit on. And the reason it’s going to hang out there a little bit is because it has a mortgage that pays off in December. So no one wants to pay the prepayment penalty. So that’s going to be hanging out there under a firm contract through December, but that’s a lease property with a good buyer. So that’s going to happen.

The other two properties we have, the Atrium Building, which is right here on Executive Boulevard that we can see outside of our conference room that we are very close to a deal on. That’s relatively small office building that has the NIH in it among other tenants. And then the other building we have on the market, which is little bit earlier on, that we were collecting bids on 1700 Research Boulevard, which is up in the 270 Corridor and we’re actually in the process of collecting the offers and evaluating and assessing a buyer.

John Guinee – Stifel Nicolaus & Company Inc.

Got you. Okay thank you very much.

Operator

Our next question is coming from the line of Michael Knott with Green Street Advisors, please state your question.

Unidentified Analyst

Good morning, guys. It’s David Anderson. So just in light of the dividend cost I’d just want to get a sense of how that changes your disposition strategy for some of those assets. And out of these, first on the two that you’re looking at. But do you sense – is the feeling now that you can maybe be a little bit more aggressive getting rid of some of those, I guess Cap rate cash flowing assets? Now that…

Unidentified Company Representative

A short answer to that is, it doesn’t impact our program at all. I mean we are evaluating the properties that we want to sell, we want to pick the optimal time on a return basis to sell those assets. And that was before we cut the dividend and after we cut that. So I would say it has literally no impact.

Unidentified Analyst

Can you remind me in terms of the magnitude of the portfolio percentage that you are looking, ultimately market?

George F. McKenzie

Yeah, I mean, we’ve never really given an exact number but just to give you some sort of general parameters around it. I mean pretty much the assets that we’re looking at are all the suburban office buildings mostly, pretty much all. And pretty much in the Maryland suburbs. And only 11% of our NOI is Maryland office buildings and we’re not selling all of them. So some single-digit percent of our NOI, I don’t have the exact number but maybe half of our Maryland portfolio type of thing, 5% to 6% or 7% something like that, but that’s I am just giving you a round numbers, I don’t have the exact number. But that don’t give you the general idea of what we’re looking at, pair down.

Unidentified Analyst

Thank you. Just one other follow-up question. Do you have – for medical office, just give in light of the healthcare ruling, do you have any sense of how that will impact demand there particularly from major tenants of yours like INOVA. Is that a consolidation play or they looking to be in aggregate or practices? How does that play out?

George F. McKenzie

I mean INOVA has been a significant aggregator for years in our region, for number of years, I shouldn’t say three years, last few years. And is that major, is one of our top 10 tenants and we continue to see them active on that front. On a going forward basis, I mean hopefully in recent past there’s been a little bit of a slowdown in that activity, but I would expect that to ultimately continue in the months and years ahead. But more importantly, in terms of how it’s affecting our operations. Without question, we’ve seen a slowdown in leasing vacant space in the medical field. Not so much, people are still getting sick, doctors are still in business, and it’s not bad, but when you have vacancy in medical mow, it tends to last longer, because we don’t see a lot of folks expanding like they had in the past. I think people are still in medical systems, individual doctors, all of the above are still want to see the smoke clearing on this to see how the chips are falling. So we still anticipate slowly seeing in particular for vacant space. Not horrible, but slow.

Unidentified Analyst

Great, great. And just one final quick question. The GSA lease as you said is expiring and can you monitor size of that?

Unidentified Company Representative

Sure. Yeah, it’s – and I’ll give you some color on that. We and we pretty much, we brought the product Metro building last year, we knew at that time, it had 63,000 square foot lease. With the division of the GSA that was relocating down to Quantico, they were – actually they were relocating at the time we are buying the building. So we are well aware that we factored into our numbers and it’s that unit and to be honest with you, there is some jogging going around, is anything it may not be as big of reduction as we thought, I can’t say for certain because there are some negotiations that may or may not happen, but we are actually optimistic that it may not be a significant as we want to stop, but we long since advertised and factored in a $60,000 move.

Unidentified Company Representative

For 60,000 square feet.

Unidentified Company Representative

Excuse me sorry, reduction on that; on that property.

Unidentified Analyst

Thanks, thank you guys.

Operator

(Operator Instructions) Our next question is coming from the line of Mitch Germain with JMP Securities. Please state your question.

Mitchell Germain – JMP Securities

Good morning. Have you seen any change in asset values in the DC market?

Unidentified Company Representative

I would, and the answer I give to you on that is yes. I think that and it all depends, I can’t give a generic answer across all property types, but certainly with respect to suburban office assets, you’ve seen a diminution of value, and I’ll point this some comps even – I think this week or maybe last week, it is a really nice building the (inaudible) bought out in the Chantilly area, and you know it’s a classical building it’s not near metros, a little bit out no mans land except for it’s near CIA facility, I think they got a cap on there, well you know a year ago, we sold Dulles Station for 6.2 cap, I think those buildings were built at the same time, so you could see that cap rates out there, as you move out, have definitely moved up, but I would say that as represented by the comp, I mentioned earlier, if you have really very good, very well leased property in DC or at major Metro Station and then the Metro area has referenced by that call our deal. So for former, I think $20 a foot. I mean there is still aggressive pricing for that. There are still aggressive pricing for good multi-family properties. I think if anybody weren’t even push a good shopping center on the market, you get good pricing for that. So, you have to pick and choose, but for the better quality properties, there is still pretty good strike price.

Mitchell Germain – JMP Securities

To your pervious comments about calling some of the suburban, Maryland has changed your time on that at all?

George F. McKenzie

Just we have to manage it, we have to manage it. We have to be very mindful of the leasing. What our expectations are for leasing and how we package that for sale? And that’s why we did just without throwing the whole list on the market immediately.

Mitchell Germain – JMP Securities

Great. And you guys mentioned some downtown office leasing. I might have missed, who signed the leases? Maybe just some background as to who is in the market today and what sort of, whether it would be private or government agencies that you’re talking to?

George F. McKenzie

Yeah, I mean we saw in about 55,000 square feet for vacant space in the district just over the last quarter. And it lit me of the typical DC tenants. So, whether it one giant 55,000 square foot tenants, there is some 15s and 19s and sizes like that. And there were trade associations, your typical kind of DC tenant base. So, there wasn’t any…

Michael S. Paukstitus

I think the key is they were private versus public.

George F. McKenzie

Yeah.

Michael S. Paukstitus

They weren’t government deals.

George F. McKenzie

I would also note for you, I mean even though we had a great quarter in leasing DC. We’re really proud of it and it’s going to be very positive going forward. But in my initial comments, there would be activity in the district as a whole isn’t that great. I mean we where aggressively going after these deals. We made some significant CapEx to these properties, we made them more attractive. We had some promotional leasing commissions that we paid and that was reflective in some of the higher costs. You saw on putting these tenants in place. So we went out and got them. The market Downtown is okay, but it’s not I would put it as a super charge market by any means.

Mitchell Germain – JMP Securities

I know you are seeing outside of those, one time expenses or concessions or that you had to pay for this leasing, this past quarter are you seeing a negative trend in concessions across the market?

George F. McKenzie

I think certainly in markets, the softer markets, you’re going to see higher concessions. I mean, if you are in a suburban office, building with the big vacancy, pretty much anywhere in this metropolitan area, you better be ready to go after it.

Mitchell Germain – JMP Securities

Thanks everyone.

Operator

Our next question is coming from the line of Anthony Paolone with JPMorgan Chase. Please state your question.

Anthony Paolone – JPMorgan Securities LLC

Okay, thanks. Good morning. I think first for Bill. Some of these leases that you said, it sounds like you’ve got gone, but just haven’t commenced and so forth. Can you maybe just walk us through kind of the in and out of NOI over the next few quarters, and when those come in that sort of thing?

William T. Camp

Yeah, I probably can do.

Anthony Paolone – JPMorgan Securities LLC

At least the big ones?

William T. Camp

Generally speaking, I mean this isn’t going to be any exact science, of course, but kind of projections in the office sector, specifically Tony. We think NOI is probably going to creep up, probably $150,000 to $200,000 next quarter probably creeps up maybe close to $400,000 in the fourth quarter, I mean net-net, obviously, net as a things that were gone, we think are moving out. So I mean a lot of it’s timing in the TI packages and things, but net-net like Skip said in the downtown, or Mike said in his prepared comments, and basically $2 million totaled of new revenue on things that were zeros for a pretty long time. So it is positive, but there are some steps moving out to some – I think net-net right now, right this minute we’re basically $750 to $1 million up.

Anthony Paolone – JPMorgan Securities LLC

Okay.

George F. McKenzie

In the other step, it’s positive generally speaking, but it’s – the other ones are pretty small moving around. Medical is actually a little bit down, because we’re loosing, I think everyone on this call knows we’re loosing children’s hospital in 19,000 feet and for medical – for a portfolio of a 1.3 million feet moves in a 19,000 foot that pays a pretty good rent, and you’ll see it in the numbers next quarter.

Anthony Paolone – JPMorgan Securities LLC

Okay. And then just my very [important] question you and others have been, I’ll point to the rational being a key item that hopefully stops the log and block and sort of leasing so forth. Is there any outcome to the election that you think is better or worse for leasing?

Unidentified Company Representative

Honestly, I’m not smart enough to know that. I mean it really – I mean the outcome would be if we get the legislative body on the same page to make decisions. And I’m not sure how that happens, but that’s the key critical variable. We can’t continue and we can’t go forward with these continuing resolutions, because the contractors, the tenants they need to know what the answer is and the analogy I’ve given, We’ve got like a 100% of the market waiting for whatever the 20% cost, whatever they are, but we need some resolution and I know – honestly I don’t know the political calculus its going to be required again to that point. Honestly, I’m not sure anybody knows that, but we are hopeful that cooler heads will prevail and people will get together and realize that this not the way to run a country and will make decisions and then our tenants can make decision. And it’s a hope and that’s all it is.

Anthony Paolone – JPMorgan Securities LLC

Okay. Thank you.

Operator

Our next question is coming from the line of Mike Roarke with McAdams Wright & Regan. Please state your question.

Mike Roarke - McAdams Wright & Regan

Hi, good afternoon. I want to just go back to the dividend, that payment has been made or had been made through all sorts of political, economic and interest rate environment so I want to just try and get a sense on whether or not, there is a shift in your thinking about the stamina of the DC metro area, and is this time different or will that be too far of a read into the dividend decision.

George F. McKenzie

Well, the short answer is we don't know exactly what the future is, I don’t think anybody knows. I mean, there are so many macroeconomic variables out there whether it’s, the Europe crisis and what’s going to, how that’s going to trickle through the world economy, whether it’s sequestration, whether it actually occurs in D.C., I mean whether it’s, we can’t get a budget for however long.

Our view is that, if something bad happens, we want to be the strong guy on the sidelines here, ready to jump on opportunity. And we think that this positions us to do that. If it’s back to the business as usual and things are great and fantastic, well, that’s great too, because then we’re raising that dividend again in a much better rate. So we just think it’s in keeping with, one of the other hallmarks of the company other than the dividend this physical responsibility in financial strength and overpaying your dividend for an extended period of time is not representative of someone with physical responsibility and financial strength. And I think that was underpinning everything that we’re under the Board’s decision. We want to be the strongest guy out there, take advantage of disruption that would occurs. We want to be able to withstand with the future brings, no matter what it is? And we think that this is a good step in getting to where we need to be.

Mike Roarke - McAdams Wright & Regan

Okay. And as a follow-up to that, it looks now that the new payment is well covered by the funds available for distribution, so borrowing a string severe negative developments is it safe to think that if you’re not going to need to cut the dividends further in order to accomplish your strategic objectives going forward?

Unidentified Company Representative

You are right. We believe is write the taxable income, so pretty much nothing else deductible income goes up we’re going to have to raise dividend to cover taxable income, but we feel very confident and obviously, we don’t know what the future brings. We’re very confident that we’re in a very, very safe dividend level and the bias would certainly be towards dividend increases on a going forward and we believe it’s extremely safe, at underline that word.

Mike Roarke - McAdams Wright & Regan

Thank you.

Operator

(Operator Instruction) It appears there are no further questions. I’ll now turn the floor back over to management for closing remarks.

William T. Camp

And well thank you everyone. Thank you for listening to our second call, we look forward to catching back with you the third quarter. Have a great week end.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time and we thank you for your participation.

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