GOV
#Sure.
Let me make sure I understand the question, <UNK>.
You want us to give some color on our ability to lease assets as leases expire or we have vacant space.
Is that correct.
Sure.
It's a good question and I appreciate the opportunity to provide some color.
I guess there is several different ways to look at that.
I think, one, and let's just talk about GOV particularly, if you look at our occupancy historically over the last three or four years, we've maintained a pretty high occupancy.
This Company's occupancy has never dipped below 90%.
We have bumped around 94% to 96% for the last several years, and we have had ---+ we routinely have 7% to 15% of our revenue expiring in any one year.
So, we wouldn't be able to obviously maintain high occupancy like that if we didn't consistently renew leases or bring new tenants to place.
I think, again, speaking specifically about GOV, we've had some relatively large vacancies across the portfolio that we have re-leased in a relatively short amount of time period.
One example would be our property in Rockville Pike that the FDA moved out of.
That was about 110,000 square feet of vacancy in what is somewhat of a weak market.
And within a year, we were able to backfill 100% of that space with another government tenant and we think we will probably be able to grow that tenant in the building, and they will ultimately end up taking more space than what the FDA occupied.
A second example would be a building we own in Atlanta, Georgia, in Executive Park that the CDC occupies, and they vacated.
And within about 12 months, we were able to backfill that building 100% with Emory University.
The other ---+ in some of these cases, the FDA is an example, we have lost tenants due to them outgrowing our buildings and us not being able to accommodate their growth.
So, that's one of the reasons where we've had some vacancies.
But we routinely across the RMR companies, we are leasing 1 million square feet of space a quarter.
We have very good relationships with brokers across the country.
And I think when you look at senior housing properties, trusts, select income REIT and GOV on a combined basis, all of our companies have done a good job of maintaining high occupancies.
So I don't know.
Did that help answer your question, <UNK>.
Yes, I appreciate that comment.
Sure.
As I said, we have a pretty decent pipeline of potential opportunities today.
It's six or seven potential opportunities; $150 million, $175 million in value; relatively broad range of cap rates, probably from around a 7% to maybe as high as a 9%.
I think today what we are looking to acquire at GOV would be buildings that give us an acquisition yield at 8% or maybe above, where we have ---+ it's a stabilized building that doesn't have any near-term lease expirations, and buildings where there is not a tremendous amount of building capital.
So what we are trying to find are buildings that are accretive, both on an FFO and an AFFO basis.
And we think we can do that, that 8% to 9% range, and provide a good spread over our weighted average cost of capital.
The government lease market tends to be a more narrow leasing market ---+ or, excuse me, not leasing, I'm sorry.
The acquisition market tends to be more narrow than what you would find for Select Income REIT.
Just simply there are less buildings on the market to buy that are majority leased to government tenants.
From a Select perspective, Select has maybe a slightly lower weighted average cost of capital today, has the ability to buy assets on an accretive basis anywhere from maybe 7.5 and above.
But there is a pretty good pipeline of potential opportunities that are suburban office, strategic to tenants, with long weighted average lease durations or industrial buildings.
You sometimes have to look at a number of deals before you find one that is within the pricing range that makes sense for your cost of capital, but they are out there.
And I think our perspective is it's more important to be patient and buy the right buildings than to rush and try to grow the companies.
Let me make sure I understand the question.
As we look out 2 to 3 years, do we think we will continue to be able to grow same-property cash NOI and maintain high occupancy.
It's very difficult to provide great color out two or three years.
I think what I would do is maybe point to the headwinds with the US government that we have been dealing with over the last really three years.
If you go back and look, there have not been approved budgets.
The US government has been doing short lease renewals, and just simply kicking the can down the road.
We are getting to a point where the US government is now more focused on long-dated lease renewals, which we find very positive.
We think we will have approved budgets going forward, which will allow the agencies to create longer-dated housing plans.
And we should be able to grow the weighted average remaining lease term across our portfolio.
We think that's very positive in that the longer our weighted average lease term, the less average lease expirations we will have in any one given quarter, which will allow us to better spread out our leasing capital.
We also think that, as we look at leasing spreads, just like this quarter where we had 4.4% average roll-up in rent, we should be able to continue to have flat to maybe slightly up increases in rent.
It really depends on the economy and whether it continues to remain a more landlord-friendly leasing environment than a tenant-friendly leasing environment.
Yes, <UNK>, let me take a look at the list real quick.
And some of these are a little bit far out.
And maybe the way to look at this is more on what are some of the larger blocks of space.
Because what we have in most of these, we have relatively ---+ we have ---+ a lot of these are ---+ well, all of these are actually less than 1% of rents, so it's a lot of smaller spaces.
Probably our largest space is a 38,000 square foot bay in Buffalo, New York.
And that is a fourth quarter move-out.
So, we have ---+ we've ramped up our leasing efforts on that.
There are a handful of prospective tenants in that market that we are beginning to have dialogue with.
We have hired both government leasing brokers as well as nongovernment leasing brokers to give us the best opportunity to find tenants.
And I think our building is reasonably well-positioned in that market to be successful.
It may take us 12 months to find the right tenant.
It may take us 12 months to find two or three tenants to replace that one tenant.
But we think that we are doing the right things in terms of making the space presentable and providing brokers adequate incentive to show the space, and that that will help us be successful.
So, we are optimistic that we have pretty good prospects to backfill this space.
And I would say that's across all of our potential move-outs across the portfolio.
It's the next 24 months, yes.
Yes, I will give you an example.
We have ---+ if I look at the size of the square footage of our tenants vacating over the next 24 months, we've got a lot of spaces that are 1,600 square feet, less than 1,000 square feet, 3,000 to 4,000 square feet.
Those types of spaces really shouldn't take as long to lease, because you don't have to find large tenants.
Of the 130,000 square feet of space the vacates represent, we have one 38,000 square foot space, a 40,000 square foot space, and a 20,000 square foot space.
So those are the ones that will take a little bit longer to lease.
In some cases we might be able to do it in less than a year.
In others, it may take a little bit longer than that, depending upon the market.
So, what we do on our at-risk category is we include 100% of the revenue for a building if we think they are at risk of downsizing or vacating.
So it's capturing 100% of that, and in many cases, these are potential downsizing risks that probably would be more of a 20% to 25% of the total loss.
And that is assuming we don't roll-up rent.
I think that's a very difficult question to answer, because every lease is a little bit different.
Every market is a little bit different.
For the government leased buildings, there are some buildings where we have a lot more negotiating strength than in others.
Particularly buildings where there are high security parameters or less options for the government to relocate out of our properties.
So, I think you're going to see, across the portfolio, a mix of roll-ups and you're going to see some roll-downs.
I think what we had said over the last ---+ what we've said, that over the next 12 months or so, we would expect our rents to be flat to slightly up.
I think that's consistent with our specific portfolio.
I would say that the market generally has become a little bit more landlord-friendly than tenant-friendly.
But again, I think it depends a lot on markets and you have to look at what the individual market's overall vacancy factor is as you try to make that assessment.
Oh, okay.
Well, as we've talked about on numerous occasions, the US government leases are flat, so we don't have contractual rent bumps.
What we have is the right to grow operating expenses based upon a change in CPI.
And if you think about where CPI has been over the last couple of years, it's been pretty modest.
We have some rent bumps in our state leases and in some of our nongovernment leases, but when you think about the US government representing over 70% of our rental income, and those leases are flat, we are not going to show a lot of internal growth from contractual obligations.
I don't have any expectation that the government is going to start agreeing to contractual increases in their rent.
I think that's the way they've always done it and I think it would be unreasonable for us to project to the market that we would get anything different than that.
Thank you, operator, and thank everyone for joining us on today's call.
I look forward to seeing you as we go to conferences and when we are out in the market.
Thank you.
