Feb 19, 2010
Executives
Skip McKenzie – President & CEO William Camp – EVP & CFO Laura Franklin – EVP & Chief Accounting & Administration Officer Mike Paukstitus – SVP, Real Estate Kelly Shiflett – Director of Finance
Analysts
Christopher Lucas - Robert W. Baird David Rodgers - RBC Capital Markets Brendan Maiorana - Wells Fargo Securities John Guinee - Stifel Nicolaus Michael Knott - Green Street Advisors
Operator
Welcome to the Washington Real Estate Investment Trust fourth quarter 2009 earnings conference call. 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 fourth quarter supplemental financial information is also available on our website.
Our conference call today will contain financial measures such as FFO, NOI and EBITDA that are non-GAAP measures, and in accordance with Reg G, we have provided a reconciliation to these measures in the supplemental. The per share information being discussed on today’s call, is reported on the fully diluted share basis.
Please bear on 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 effects of the recent credit and financial market conditions, the availability and cost of capital, fluctuations in interest rates, tenants’ financial conditions, the timing and pricing of lease transactions, levels of competition, the effect of government regulations, the impact of newly adopted accounting principles, changes in general and local economic and real estate market conditions, and other risks and uncertainties detailed from time-to-time in our filings with the SEC, including our 2008 Form 10-K, our 2009 third quarter 10-Q and our Form 8-K filed on July 10, 2009. 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; William Camp, Executive Vice President and Chief Financial Officer; Laura Franklin, Executive Vice President and Chief Accounting and Administration Officer; and Mike Paukstitus, Senior Vice President, Real Estate. Now, I’d like to turn the call over to Skip.
Skip McKenzie
Good morning and thank you for joining Washington Real Estate Investment Trust earnings conference call this morning. But before I start I’d like to publically apologize to Tiger Woods who unfortunately scheduled his much-anticipated press conference at precisely the same time as Washington Real Estate Investment Trust.
I know he expected a [inaudible] viewership, but as we all know Tiger’s popularity is second to only of Washington Real Estate Investment Trust. So Tiger, my apologies for stealing your viewership.
As I peak out between the record breaking mountains of snow piled in the parking lot here in Rockville, we’re reminded every day that the much anticipated spring thaw is still quite a few months away. However on the real estate front, in the Washington, DC region, we believe we are beginning to see signs of the spring thaw in real estate fundamentals has begun in our markets and conditions are beginning to improve.
In the office market in the fourth quarter region wide leasing activity increased significantly as absorption totaled over 1.1 million square feet of vacant space effectively bringing the year’s total from a net negative number to a net positive number in one quarter. In the WRIT portfolio we’re seeing more interest in space tours particularly in our Northern Virginia and DC properties.
We have good activity on our pending [inaudible] vacancy on the Dulles Toll Road, and other Virginia vacancies and we are experiencing better activity at our largest vacancy in Maryland, at One Central Plaza. We ended the year with solid 91.5% leased in the office portfolio.
Our multifamily portfolio and medical office core portfolios are humming. While rental rate growth is modest in each we are seeing strong occupancies and both are leased in the mid 90% range, the steady performance we have come to expect in these sectors.
And in retail we leased our one large vacancy, the Circuit City [box] in Hagerstown, to hhgregg and are 96% leased at year-end. While we are beginning to see improvement in the overall retail environment credit loss is still well above long-term averages and the return to the good old days is still quite a way in the future.
The industrial portfolio is our weakest performer ending the year at 85% leased. As in retail this sector we continue to experience credit loss well above the long-term averages.
On the good news side, leasing activity on vacant space is improving, particularly in our Northern Virginia assets and we are in the process of negotiating renewals with several of our largest tenants, including our largest industrial tenant the GSA for approximately 130,000 square feet. On the investment front, we’re finally beginning to see increases in investment sales activity.
The turtle is poking his head out of his shell as we say. And we actually have offers out on acquisition candidates.
Again it is just a start and time will tell if it is an increasing and substantial trend back to more normal trading activity. In short we believe the indications are that are markets are trending toward recovery to more normal conditions.
Our recovery we believe will not be a rapid one but a long and extended trip back to what we’ve come to know and expect in the Washington, DC region. Overall WRIT finished 2009 strong and I’m pleased with the performance of our people and portfolio exhibited under the most challenging economic conditions of our lifetimes.
In the face of these extreme financial headwinds experienced bar [10], customers and indeed all Americans over the year WRIT strengthened our balance sheet. We maintained our Baa1 BBB+ credit rating among the highest in our industry.
We reduced overall debt, we achieved record revenues. Stabilized each of our developments at over 90% leased.
Maintained core portfolio economic occupancy of 93% for the full year. We achieved 10.2% rental rate increases overall in our commercial portfolio and paid our 48th year of consecutive or increasing dividends.
And speaking of dividends, I’d like to discuss for a moment our dividend coverage before passing the call to William and Mike. In 2009 FAD, or AFFO if you prefer, covered all by $3 million of our dividends paid this year.
Many analysts covering WRIT predicted that shortfall may increase in 2010. We currently believe that 2010 will likely be the low point of our FAD dividend coverage.
In addition we believe that we will be able to grow FFO and FAD and cash flow in the future with a goal of achieving 80% to 85% of FAD. At this target payout level our coverage will be at historically high levels.
We currently expect that we will be able to reach this goal over the next few years through a combination of our real estate market’s returning to more normal market conditions, and routine levels of acquisition opportunities resuming. As I noted earlier we believe these are beginning to see signs of these normal market conditions are on the horizon.
We’re not announcing this as a commitment to our shareholders to get this payout ratio in a particular period of time, but rather I mean this to be an expression of our goal. Final decision on these dividend matters of course are subject to the ongoing discretion of our Board on a quarterly basis.
And finally last night WRIT announced our Chairman transition plan to be effective at WRIT’s 2010 Annual Meeting this coming May 18. In accordance with WRIT’s Board retirement policy Ed Cronin will retire from the Board his position as Chairman and John McDaniel will take that office as Chair effective that date.
This plan is the orderly transition to an independent Chairman structure incorporated in the corporate governance guidelines adopted by the Board and announced last fall. I would personally like to take this moment to acknowledge the profound contribution Ed has made to WRIT.
His leadership, vision, and business acumen have been an inspiration to the entire Executive team at WRIT and his deep knowledge of real estate and our markets has been a linchpin to the success enjoyed by WRIT over his tenure. On a personal note, Ed has been a mentor, confident, and friend to me and I’ll miss his counsel and advice greatly.
Having said that, I’ve worked closely with John McDaniel over the past 12 years as a Trustee. In recent years he has served as lead independent trustee and member of the compensation, audit, and corporate governance committees.
As the CEO of MedStar Health, the largest health care organization in the region, John is an expert medical office real estate and is the major force behind our extremely successful investments in medical office properties. All of which occurred during John’s tenure on the Board.
John is a leader of the Washington, DC business community, he displays keen strategic vision and will provide continuing great leadership to our Board in the years to come. Although he has big shoes to fill, I know John is well up to the task.
With that I’ll pass the baton on to William who will discuss in greater detail our financial performance and Mike Paukstitus who will discuss our real estate operations.
William Camp
Thanks Skip, good morning everyone. The earnings press release we issued last night contains details of our FFO performance and other measures.
I’d like to take this time to discuss a few one-time items from the fourth quarter, give an update on our capital position and liquidity, and then focus on our assumptions for 2010 guidance. In the fourth quarter net operating income came in at about $2 million higher than in the third quarter.
This is mostly due to recognizing straight-line revenue on a lease extension that we did with the World Bank back in May of 2009, which totaled approximately $950,000 in the quarter and executing a lease termination on Office Max for $325,000. The new run rate for World Bank will be about $300,000 per quarter or about $0.02 per share per year.
Additionally we took a $1.5 million charge for the payoff of our term loan which I will discuss more in a minute. We had about $450,000 of unrecoverable snow charges in the quarter.
If you were to add these all together the net effects of these items and other more minor one-time items adjust the reported $0.50 quarter to $0.51. However some of the reports out this morning quickly pointed out the simply math of annualizing the fourth quarter and getting a result higher than our guidance range.
It is important to point out that our fourth quarter tends to be one of our better quarters historically due primarily to lower expenses. Our portfolio measure of effective occupancy or the combination of vacancy, bad debt, and abatements as a percentage of min rent, was 11.8% for the fourth quarter, up from 11% in the third quarter.
This mostly due to increased vacancy in our medical and industrial sectors. Medical office occupancy decline was essentially due, almost fully due, to the addition of the newly purchased Lansdowne building.
The industrial occupancy is a function of the weakness in that sector. Fortunately this sector is only 13% of our NOI.
On the capital side, as I said, we repaid the $100 million term loan in December and incurred a charge of $1.5 million which included a $500,000 noncash charge to account for the acceleration of the amortization of the issuance costs. We used our line of credit to repay this loan to keep variable rate exposure that is offset by existing swaps.
Yes, this transaction used some of our liquidity on a temporary basis but we reduced our interest rate initially by 233 basis points in the process and as of today, our interest rate drops another 85 basis points as our initial swap expires and our forward starting swap begins. We expect to recoup our $1.5 million charge over approximately a six-month period.
As of December 31 we had $128 million outstanding on our line. With the line priced at 42.5 basis points above LIBOR we believe it is somewhat prudent to use the line for short periods of time.
We expect to take an opportunistic approach to refinance this debt longer-term at some point this year. Currently the cost of terminating the swap is approximately $2 million.
We also continue to repurchase our 3 7/8 convertible notes buying 8.1 million at an average discounted price of 96.9% of par incurring a charge of approximately $100,000. Subsequent to quarter end we repurchased an additional 1.2 million for a discount of 99.3% of par.
Clearly the opportunity of significantly reducing our 2011 maturities through open market purchases has diminished. At this time we have 133 million of our converts outstanding, down from the original 260 million.
Combining this with our $150 million of unsecured notes due in 2011 leaves us with an opportunity to execute a potential index size bond deal in the next 12 to 16 months. We believe our capital structure and liquidity position remain strong, being one of the few REITs with a Baa1 BBB+ credit rating that has demonstrated continuous improvement in our covenants throughout 2009, we believe we have options available to raise capital in this market.
Interest rates remain attractive on both an unsecured and a secured basis. Coupling this with our $250 million re-filed ATM program, we believe we have ample capacity to fund refinancing and acquisition opportunities as they arise.
Now I would like to provide more detail on our guidance for 2010, as we reported last night we expect FFO per share to range between $1.86 and $2.00. We provided detail in our press release about some of the major assumptions that are the foundation of this guidance.
Please keep in mind that we don’t expect all of the good things and all the bad things to happen all at one time. Just a couple of points I want to reiterate, our portfolio proved to be fairly resilient in 2009 with effective occupancy hovering in the 11% to 12% range, as I stated throughout the year, it ended basically at 11.8% for the fourth quarter.
We currently expect this stability to carry through into 2010 such that effective occupancy stays between 11.5% and 12.5%. Every 100 basis point change in effective occupancy equates to approximately $0.05 per share and FFO on a fully annual basis.
Given our generally stable outlook on this number for the year we believe each sector will remain in a fairly tight range throughout the year. Remember this effective occupancy number includes all the zero paying activity, vacancy, bad debt, and the free stuff.
Moving to the interest expense, we are not including any early refinancing of debt coming due in 2011. As I mentioned earlier we expect to take an opportunistic approach to accessing the capital to refinance our line and our 2011 maturities.
Timing and structure are important to minimize the total cost of refinancing. As reported in this press release we are modeling acquisition volume of $50 to $150 million and disposition volume at $25 to $75 million.
We are continuing our more active plan for active recycling and with the acquisition market beginning to show signs of life, we can better match dispositions with acquisitions. In the quarter we disposed of one industrial asset, Crossroads Distribution Center which sold for $4.4 million and we recorded a book gain of $1.5 million.
Next I’d like to address a few routine questions that we’ve been getting fairly regularly for the past few quarters. Bad debt expense for the quarter was $1.7 million or 2.2% on a GAAP basis, and $1.6 million or 2.1% on a cash basis.
Retail is currently running the highest while industrial bad debt expense actually declined in the fourth quarter due to some tenants being reclassified from the bad debt category to the vacancy category. This is why we talk about effective occupancy which combines all the non-rent paying categories.
At times it is prudent to kick out the guys that are not cutting checks at the end of the month. Lease termination fees for the quarter are $657,000, about half of which was associated with the termination of Office Max that I mentioned earlier.
In the fourth quarter WRIT paid a dividend of $0.4325 per share achieving for its 192nd consecutive quarterly dividend at equal or increasing rates. Yesterday we issued the press release announcing our first quarter 2010 dividend at the same rate payable March 31, 2010.
Now I will turn the call over to Mike to discuss operations.
Mike Paukstitus
Thanks William, and good morning to all. This quarter our real estate portfolio continued to perform well.
On the revenue side we posted core occupancy gains over the third quarter in three of our five sectors; multifamily, office, and retail. On the expense side operating expenses were up about $300,000 from the third quarter largely due to net snow removal costs which after estimated reimbursements were $450,000 in the fourth quarter.
To date in 2010 costs or projected reimbursements are approximately $1 million. As we indicated in our press release we [billed] $0.02 of the guidance to cover this amount.
Our multifamily sector gained 20 basis points in occupancy for the [third] quarter to 94.1% occupied resulting in a 0.7% increase in net operating income. The commercial sectors, we’ve had pretty good velocity but transactions are generally taking longer to complete with higher lease transaction costs.
While we experienced higher Q4 transaction costs, year over year average leasing transaction costs have increased only 4.4%, $13.36 to $13.95 a square foot. In fourth quarter WRIT executed over 308,000 square feet of commercial lease transactions, at an average term of 5.4 years.
In the office sector overall economic occupancy improved 30 basis points compared to the third quarter. As noted in Q3 our entire office portfolio continues to perform well relative to the submarkets.
Generally our vacancy rates are well below the rates of these submarkets. Looking ahead as we mentioned on previous calls, we know that Lafarge, our 80,000 square foot tenant in Monument Two, plans to vacate at the end of July this year.
We are actively marketing the space, we have good activity and we’re hopeful that we’ll be able to land one our more of our prospects to minimize our downtime exposure at this particular property. In medical office sector, we lost 330 basis points in occupancy due to the full quarter impact of the vacancy at Lansdowne.
We signed our first lease in the building during the fourth quarter and we are close to signing our second bringing that to a total of 10,000 square feet. We have another 15,000 square feet of [inaudible] out in the market and are pleased with the progress we’ve made so far.
As for the rest of our medical portfolio, we continue to see run rate increases. We signed two new 10-year leases at 2440 M Street property, at rents about $43.00 a square foot.
In the retail sector we executed leases for a total of 95,000 square feet in the fourth quarter, nearly doubling our transaction volume total for the first three quarters of the entire year, mostly due to activity in three of our boxes; Joanne Fabrics at Frederick County Square, which is a 39,000 square foot renewal, hhgregg in our vacant Circuit City at Centre at Hagerstown, 28,000 square feet and EC Moore at Frederick Crossing, 20,000 square feet. Of note as well were two notices to extend 2010 expirations, one for 30,000 square feet at Hagerstown and one for 32,000 square feet at the Chevy Chase Metro Center.
In the industrial sector we entered into leases for a total of 45,000 square feet with an average term of 4.9 years. This sector remains difficult as we deal with increasing vacancies and credit problems with tenants.
This quarter we swapped some bad debt for vacancy clearing our leasing values [inaudible] finding new tenants rather than asset managers trying to negotiate partial rent payments that were proving to be elusive. We know the Red Cross is vacating their space at VIP in April.
On a positive note we are working on several leases with the GSA, overall our third largest tenant in the portfolio. Currently we have a renewal of approximately 130,000 square feet which has been fully negotiated and executed by WRIT and we are waiting for GSA’s final execution.
Upon execution of this lease our industrial rollover exposure in 2010 is reduced from 19.1% to 15.5% of annualized rent. Now as we look into 2010 we see the rents for the [various] sector be essentially flat for residential, retail, and industrial, office increasing 1% to 3% and medical office increasing 3% to 5%.
I’d like to turn the call back over to Skip.
Skip McKenzie
Thanks Mike, before we open up for questions, I want to emphasize one final point, we’ve heard from William and Mike shows what the WRIT franchise is all about. We’re conservatively leveraged company operating real estate assets, in what we believe is one of the top performing real estate markets in the nation.
While being in our real estate industry the last two years has been challenging when you have experienced real estate professionals operating high quality assets in a top market, the lows are not as low and the recovery comes sooner. We think this is one of the fundamental strengths of the WRIT franchise.
Thanks again and now we’ll take your questions.
Operator
(Operator Instructions) Your first question comes from the line of Christopher Lucas - Robert W. Baird
Christopher Lucas - Robert W. Baird
Very good quarter, just a question on the acquisitions front, I guess the question I had is where do you see the capital being allocated, what sectors do you find have the most opportunities in this market.
Skip McKenzie
Right now the most opportunities are in the office sector. That’s where we’re actually seeing some product being offered for sale and we’ve got actually a number of offers out on some I can’t say obviously that we’re going to get them, but to me that’s where we see the most activity and the most opportunity today.
Some of the other sectors, there’s just really few offerings or the conditions that we’re seeing on some of the rent rolls are not conducive to what you’d like. Now having said that on an interesting note we’ve actually seen foreclosures in this market.
We’ve attended a downtown office foreclosure, something you wouldn’t have even have expected in a good location. We are keeping our eyes on attending multifamily foreclosure that’s coming which you wouldn’t have expected.
So there are exceptions to what I just mentioned, but certainly if I had to pick one sector where we’re seeing the most opportunities, its in the office sector.
Christopher Lucas - Robert W. Baird
In terms of the process is this market switched back to a much more fully marketed approach rather than the off market transactions we sort of saw last year, to the degree there was any transactions.
Skip McKenzie
We have irons in the fire on both accounts. I certainly think the trend is the direction you’re indicating, I’ll give you one sort of current market, there’s a really nice Northern Virginia office building on the market that we were a bidder on and there’s an avalanche of offers on it.
And I think transactions like that will spur more investors to follow that diagram. In other words to go to the former model of fully marketing properties and putting them on the market.
Its just sort of an initial trend right now but if that’s where you were leaning with that question, I agree with that observation.
Christopher Lucas - Robert W. Baird
And then on the dispositions front what’s your expectation in terms of the product type that you would be looking to lease.
Skip McKenzie
There’ll be some office holdings and likely some industrial properties. We’re looking at a couple of other things but those are the likely ones.
Christopher Lucas - Robert W. Baird
And on the capital market side on the refinancing side, is your expectation at this point then to essentially refinance out what the debt with debt, as opposed to for the deleveraging.
William Camp
Probably it’s a little bit of combination of both. I’d still like to delever a little bit but not anything like last year, not even close.
But I would like to keep it coming down just a little bit. It might be a part of the asset sales, we may tap the [inaudible] program at some point, but right now I would say the lion share of it will be replaced in long-term debt.
Christopher Lucas - Robert W. Baird
And then how would you fund the acquisitions to the degree that you are successful there.
William Camp
That one I would like to do, everything, the market is dependent at the time we do it, but that one I would like to do more probably a little more equity than debt if we had to. Initially we’d probably throw them on the line depending how big they are.
Operator
Your next question comes from the line of David Rodgers - RBC Capital Markets
David Rodgers - RBC Capital Markets
Just wanted to follow-up on some of the medical office side of the equation, I didn’t follow your comments I guess, did you say you’d made some progress at Lansdowne, just didn’t show up in the supplement, but I want to track through how your portfolio is performing there.
Mike Paukstitus
What we had indicated we have 10,000 square feet signed and then about another 15,000 in combination of letter of intent and prospects. Now the building is up, now people can get their hands around it, we’re starting to see much more velocity.
William Camp
That won’t show up in the numbers yet just because those leases are having, the ones that Mike referred to 10,000 feet are signed but they’re not renting at, they’re not effective. Got to build out space and things like that.
David Rodgers - RBC Capital Markets
That build out, that’s six months or so.
Skip McKenzie
The first couple are relatively small, that’ll be something like that. That’s a good guesstimate.
David Rodgers - RBC Capital Markets
And the retail pick up, good job on the hhgregg lease, was the retail pick up from 3Q to 4Q is that sustainable, is there a lot of temporary tenancy in there or is that going to be a fairly flattish number going forward.
William Camp
From third quarter to fourth quarter or year over year.
David Rodgers - RBC Capital Markets
Sequential.
William Camp
There is a variety of things in there, but a lot of it is just sequential kind of rent growth on existing leases. Its also, its some signed vacancy so I think its kind of sustainable.
But I say that and you don’t know what, bad debt is there. And you don't know which bad debt is just going to go away.
So there’s always some stair steps out there that could happen and we have to be cognizant of that.
David Rodgers - RBC Capital Markets
You mentioned progress on the Lafarge space could you also talk about, with [inaudible] in the market at least appearing to move to DC with its corporate headquarters, can you make any comments on what you’ve heard from that process so far.
Skip McKenzie
There’s a lot of noise on that. I can’t say I know where they’re going.
I know that the conventional wisdom in the market is that they’re going to Northern Virginia, perhaps inside the Beltway, but I haven’t heard any what I would call real intelligence on where that’s going but the conventional wisdom is that they’re going to Northern Virginia.
Mike Paukstitus
Of course that may be 300 employee—
Skip McKenzie
Its more a symbolic gesture than it is—
Mike Paukstitus
As you know they’re heavily in the market right now, they have a strong presence here.
Skip McKenzie
If you remember several years ago back in the 90’s General Dynamics did the same thing, they moved from the Midwest, I think they’re headquarters in St. Louis, and then moved here.
I think they moved a total of 50 employees, so it is a symbolic gesture.
David Rodgers - RBC Capital Markets
The last question you answered about acquisitions and dispositions are those going to be mutually exclusive this year or are you willing to fully fund the acquisitions without dispositions and vice verse if necessary.
Skip McKenzie
Right they’re sort of independent of each other, if that’s where you’re going. One is not dependent on the other.
William Camp
We would like to match timing as best we can especially if we’re going to start the disposition process before the acquisition process.
Skip McKenzie
Actually we’re thinking about some right now. They’re not on the market yet but we’re beginning that process but they’re really independent.
As William said we’d like them to be but certainly the vagaries of the market, when buyers and sellers move, that’s just a dream really.
William Camp
I like to dream.
Operator
Your next question comes from the line of Brendan Maiorana - Wells Fargo Securities
Brendan Maiorana - Wells Fargo Securities
My first question is in regards to your retail portfolio I think you had previously said that credit loss was up to around 4% up from historical of about 1%, how has that trended in Q4 and what’s baked into your effective guidance for 2010.
William Camp
For the impact on guidance I’ll answer that part first, I don’t really look at the impact of retail bad debt. I will say that our retail leasing folks seem to think that there’s probably more opportunity with things starting to pick up in the economy a little bit, there’s probably more opportunity to convert some of the bad debt into rent paying again.
Maybe not fully rent paying but some rent paying before we can probably fill vacancies, so we’re probably going to take that approach. But its not, I really don’t look at it that way when I’m modeling it.
I’m looking at it as a combined bucket of vacancy, bad debt, and abatement. In the quarter for retail it ended up the fourth quarter on a, net cash, 4.3%.
Brendan Maiorana - Wells Fargo Securities
And in terms of your acquisitions and dispositions expectation for 2010, how should we think about the cap rates for those two segments. It seems like you baked in about $0.03 in expensing of acquisition costs but none in terms of accretion, should we just assume that these are mutual deals in terms of accretion.
William Camp
In the model we’re pretty much, they’re probably initially flat to modestly accretive, and then the costs bring it negative.
Brendan Maiorana - Wells Fargo Securities
And the differential between the acquisition and disposition cap rates.
Skip McKenzie
We don’t really project disposition cap rates since those are sensitive to buyers listening, so as a general rule as I think we’ve said on many of the conference calls, we’re selling properties that we think are the lower growth properties, so it’s the general rule, we’re buying properties that lower cap rates than the properties that we’re selling as a general rule. We don’t really want to get into the game of publishing the cap rates or even the neighborhood of the cap rates of the properties that we’re thinking about selling.
Brendan Maiorana - Wells Fargo Securities
And for your industrial portfolio it looks like you 2010 expirations actually went up around 100,000 square foot sequentially, is that just mostly due to some of the short-term renewals that you executed in Q4.
William Camp
Yes, that’s exactly right.
Brendan Maiorana - Wells Fargo Securities
And how do you think, what’s actually causing them to not sign longer-term deals or are they just expecting the market to get a lot worse.
Mike Paukstitus
It is the economy, a lot of that sector is driven by the historical service entities and the whole building sector, the home service sector, so again many of them are playing it year by year. And we have a lot of smaller tenants in that orientation.
Skip McKenzie
And you’re somewhat new to tracking WRIT as well, we explain on some of the calls the nature of our industrial portfolio, we have generally small bay industrial properties. We’re not a big distribution oriented property and we have many of the tenants that have really been effected by the downdraft in our economy.
We have a lot of home improvement type subcontractors in our properties. We even have somewhat I would call B level actual retail stores.
We have furniture companies, and people, carpet and tile type operators, so these are the types of individuals that really have been effected by the economic downturn especially at the housing industry turndown. So that’s one of the main reasons we’ve struggled somewhat because we don’t have the traditional big distribution type tenants.
Brendan Maiorana - Wells Fargo Securities
On the Lansdowne asset, it sounds like you are getting good progress, do you still hold the Q4 2010 type of fully leased expectation.
Skip McKenzie
I think that was a question we were asked at the last conference call, I would say now that we have another quarter behind us, that’s somewhat aggressive. We’d like to be, its hard for us to say specifically, we have some larger tenants that are looking at space but given the fact that medical office is a lot of smaller tenants.
Standing here at the beginning of the first quarter I think now that would be, its going to be difficult for us to get to that number but I’d say we’re going to be somewhere between 50% leased and that number. I just know what it would be.
If we hit a couple of these full core tenants we’ll be there, but I would say its going to be tough for us to get to 90 by year end, to be honest.
Operator
Your next question comes from the line of John Guinee - Stifel Nicolaus
John Guinee - Stifel Nicolaus
Nice quarter, I’m just looking back, we’ve been covering you for a long time, and we’ve got your normalized FFO which excludes noncash one-time items 2007 was 231, 2008 222, 2009 $2.02 at the mid point for 2010 you’re guiding was $1.92 which comes about where we are. Looking forward it looks, I think you were pretty clear that you’re going to get some of your FFO growth levering up the balance sheet a little bit and the positive spread investment on acquisitions versus the cost of that.
I think you also have a couple hundred basis points of occupancy gains, the flipside is it looks to us like you’ve got some rent roll downs in Northern Virginia, and clearly your cost of debt where you’ve got $00 million was an effective rate of about 4.9% rolling in the next three years will most likely offset the occupancy gains and the levering up. Is it really clear that you can get yourself into the 210 to 220 a share in FFO which would allow you to cover the dividend comfortably.
William Camp
That’s a long question but I think the answer is you know I don’t really give predictions into the future but we certainly as Skip said in his opening remarks we have certainly a plan and a goal to get there and you can do financial modeling all day long and obviously the markets are going to dictate a little bit about what’s going to happen in the future. But it is not I don't think projections are unreasonable to get to those kinds of levels over a period of time.
Operator
Your next question comes from the line of Michael Knott - Green Street Advisors
Michael Knott - Green Street Advisors
I was just hoping if you could comment on the tenant mindset at your different properties.
Skip McKenzie
Well you never know what tenants are thinking so I’ll caveat that out. I would say, let me do groupings of them, our industrial and retail tenants are still very wary about the economy and as I stated just a few moments ago our industrial tenant is very much like a retail tenant in many ways.
They’re very dependent on the purchasing power of the consumer. And the mindset we find from them is they’re still very cautious.
They’re very defensive oriented, less likely to, we don’t have a whole lot of retailers looking to expand. We were very fortunate to nail down that hhgregg lease but you don’t see a lot of national retailers expanding and even in Washington, DC in this environment.
So you have a very cautious customer really in those areas. Our office tenants even though the general office sector is somewhat cautious, we’re seeing, we’re feeling a little more confidence now particularly in Northern Virginia and DC where we’re seeing more activity.
In Maryland, it seems like almost seems like another world from DC and Virginia. There’s a much more cautious tenant base in Maryland then there are in the other two jurisdictions, its almost like another property sector believe it or not.
And then lastly our medical office building and our multifamily tenants are pretty solid. Every body is probably still got a couple of skinned knees from getting through this environment so I want to say they’re [ubilent] in their terms of their prospects of the world but they certainly are feeling a lot better now in those two sectors than they had in recent months.
Michael Knott - Green Street Advisors
Not to beat a dead horse here but on the acquisition front I guess when you’re targeting stabilized acquisitions, unstabilized and then also what markets do you think the opportunities will show up in.
Skip McKenzie
We’re really targeting both and let me just give you a little more to work with then just that sort of generic comment. We’ve looked, we have offers out on stabilized properties, properties that are 85% to 90% leased, but those generally in the stabilized category and as I’ve stated we’ve actually attended a couple of foreclosure auctions.
We’ve launched some offers to some lenders that have properties. We’ve met with somewhat I would call distressed owners of real estate attempting to buy some troubled assets as well.
So we’ve got initiatives in all the above and that’s something you have to do in this environment, you can’t be sort of myopic and look just at one sector. So I believe that there’s opportunity in all of the above.
Even Washington there are over-leveraged borrowers from the 2006, 2007 period that can have relatively healthy properties that need help.
Operator
Your final question is a follow-up from the line of Christopher Lucas - Robert W. Baird
Christopher Lucas - Robert W. Baird
Just a couple of detail follow-ups, on the Office Max lease term where did that store fall out, what center.
Mike Paukstitus
Frederick Crossing. They never occupied that space.
Skip McKenzie
Let me give you the history of that, and give you a little bit of background, the Frederick Crossing is the center we bought six seven years ago from Milt Peterson, Peterson Group, and the Office Max never moved into that center. They, we purchased the center, it had a subtenant in there so we had to direct sort of obligation from Office Max but there’s was actually, and I’ll be nice calling it sort of a B grade furniture retailer.
And there were a series of subtenants in that space that were really somewhat problematic because we didn’t have control of the space. There was an opportunity presented over the last six months with Office Max to get control of the space.
We’ve been marketing the space on our own. Obviously maybe that will give you some indication of how confident we are at releasing that, that we were willing to take a lease buyout from Office Max.
And I won’t say I’m confident but I feel pretty good about the prospects of us releasing that space pretty quickly. It’s a real positive for us.
We get control of the space that’s been somewhat of an issue and they’re not necessary an economic issue, but just in terms of a merchandising issue, to put a better operator in there, at better rent, with a better future. So that’s sort of the history of that space.
Christopher Lucas - Robert W. Baird
And is your plan to try to find a tenant that will take the whole space as opposed to cutting it up and trying to work something else out.
Skip McKenzie
Absolutely.
Christopher Lucas - Robert W. Baird
And then just on some real granular questions, what was the gross snow removal cost for fourth quarter.
William Camp
The gross for Q4 was around $900,000 and we’re running at about a 50% collection rate. In Q1 its about $2.1, $2.2 million, something like that.
Christopher Lucas - Robert W. Baird
And then just on the recovery process, is that something that you built through over, what’s the timeframe that you’re trying to recover that over.
William Camp
We should get it this quarter.
Christopher Lucas - Robert W. Baird
And how is that, it seems like a lot of that recovery process is falling on a lot of your retail tenants.
Skip McKenzie
Well its weighted as our portfolio is weighted. The retail and industrial properties are triple [net] properties so its subject to how much vacancy are in those properties.
You almost get full recovery in those sectors, almost, so again subject to how much vacancy is in there. And those properties tend to have as you probably are aware just observing it, some of the highest snow removal costs because they have big parking fields.
And then when you get into the multifamily it’s a complete loss. Whatever you spend in a multifamily property there are no pass through.
So we have a little more, and office buildings are even more complicated because they’re subject to an operating base. So we have a kind of a soup of different pass through accounts.
We’re not as simple as maybe more a property specific where they either have all triple [nets] or they have all operating pass throughs. But we have gone through the mathematics since it was such a big number, this most recent year, the double whammy, what William referred to as the $2.1 million, we’ve actually gone through and run the, our [Argus] models etc., and our pass through models and we recognize we’re estimating a 52% recovery of that first quarter event.
But yes, its not as easy to do that diagram for us as it is for others because of the multi property types.
Operator
There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.
Skip McKenzie
Thank you everyone for participating in our conference call this morning and we look forward to catching up with you at the end of the first quarter.