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Edited Transcript of SIR earnings conference call or presentation 6-Aug-12 5:00pm GMT

Q2 2012 Select Income REIT Earnings Conference Call

NEWTON Jan 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Select Income Reit earnings conference call or presentation Monday, August 6, 2012 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Tim Bonang

Select Income REIT - VP of IR

* David Blackman

Select Income REIT - President

* John Popeo

Select Income REIT - CFO

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Conference Call Participants

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* Chris Caton

Morgan Stanley - Analyst

* Jamie Feldman

BofA Merrill Lynch - Analyst

* Brendan Maiorana

Wells Fargo Securities, LLC - Analyst

* Rob Salisbury

V3 Capital Management, LP - Analyst

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Presentation

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Operator [1]

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Good day and welcome to the Select Income REIT second quarter 2012 financial results conference call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Vice President of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

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Tim Bonang, Select Income REIT - VP of IR [2]

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Thank you and good afternoon. Joining us on today's call are David Blackman, President and Chief Operating Officer; and John Popeo, Treasurer and Chief Financial Officer. The agenda for today's call includes a presentation by management followed by a question-and-answer session. I would note that the recording and retransmission of today's conference call is strictly prohibited without prior consent of the Company.

Before we get into today's call, I would like to read our Safe Harbor statement. This conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based on SIR's present beliefs and expectations as of today, August 6, 2012. The Company undertakes no obligation to revise or publicly release the results of any revisions to the forward-looking statements made on today's conference call, other than through filings with the Securities and Exchange Commission, or SEC, regarding this reporting period.

In addition, this call may contain non-GAAP numbers, including funds from operations, or FFO. A reconciliation of FFO to net income and the components to calculate cash available for distribution, or CAD, are available in our supplemental operating and financial data package found on our website at www.SIRREIT.com. Actual results may differ materially from those projected in any forward-looking statements. Additional information concerning factors that could cause those differences is contained in our filings with the SEC. Investors are cautioned not to place undue reliance upon any forward-looking statements.

And now I would like to turn the call over to David Blackman.

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David Blackman, Select Income REIT - President [3]

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Thank you, Tim. For the second quarter of 2012, Select Income REIT is reporting organized FFO of $19 million or $0.61 per share based on a weighted average share count 31.2 million shares compared to normalized FFO of $20.5 million for the second year of 2011. We had no outstanding shares during the second quarter of 2011.

For the first six months ended June 30, 2012, we are reporting normalized FFO of $39.5 million compared to normalized FFO for the same period of 2011 of $40.7 million. Our modest decline in normalized FFO from 2011 to 2012 is principally due to interest expense as we had no outstanding debt during the first half of 2011.

This is SIR's first full quarter as a public company, having completed our initial public offering on March 12, 2012. Since April 1, we have acquired or entered agreements to acquire nine properties containing 2.5 million square feet for $260.7 million, including the assumption of $26 million of mortgage debt but excluding acquisition costs. In addition, in July we closed a $350 million unsecured term loan and declared our first distribution of $0.49 per share. Note this distribution includes the 20-day (technical difficulty) a public company during the first quarter and is $0.09 per share higher than the regular quarterly distribution we disclosed in our IPO prospectus.

As of June 30, 2012 SIR owned 253 properties containing almost 22 million square feet. Our properties were 95.6% leased for a weighted average remaining lease term of 11.8 years. Our 17.8 million square feet of properties on the island of Oahu, Hawaii continues to dominate our portfolio, representing 66.4% of our rental income.

In addition to the high occupancy of our properties, the Company maintains a conservative financial profile. As of June 30, 2012, debt leverage made up only 31.1% of our total book capitalization and EBITDA covered interest expense 12.7 times. As of today, our unsecured revolving credit facility has $12 million outstanding and $488 million is available to support our acquisition activity and other working capital needs.

While our leasing activity was relatively modest during the quarter, we did have almost 50,000 square feet of positive net absorption, entering 14 new and renewal leases for 185,000 square feet with a weighted average lease term of 10.3 years and a 52% rollup in rent. We also answered rent resets in Hawaii for approximately 30,000 square feet during the quarter for a 34% rollup in rents, resulting in aggregate weighted average rollup in rent from our new and renewal leasing activity and our rent reset activity of approximately 50%.

Leasing capital was a modest $608,000 or $0.32 per square foot per lease year, and 100% of our leasing activity was in Hawaii. Our acquisition opportunities have been robust. Since April 1, SIR acquired five properties containing 958,000 square feet for an aggregate purchase price of $151 million excluding acquisition costs. The average price per square foot for these acquisitions was $158. The average acquisition cap rate was 9%, and the weighted average remaining lease term was 11.3 years at the time of acquisition.

In June, we acquired through a sale-leaseback transaction a 406,000 square feet office building located in Provo, Utah. The building is 100% leased to Novell for 12.5 years, and the purchase price was $85.5 million, or an acquisition cap rate of 9.1%. Also in June, we acquired an office property relocated in Englewood, Colorado, containing 140,000 square feet. The building is 100% leased to Sprint for a remaining lease term of 6.2 years. The purchase price was $18.9 million and the acquisition cap rate was 9%.

In July, we acquired two office properties located in Windsor, Connecticut, containing 268,000 square feet. These buildings are 100% leased to Valassis Communications for 11.2 years, and the purchase price was $27.2 million, for an acquisition cap rate of 8.9%.

Also in July, we acquired an office property located in Topeka, Kansas containing 144,000 square feet. The property is 100% leased for 11.3 years to Colgate-Palmolive and serves as a corporate headquarters for Hill's Pet Nutrition. The purchase price was $19.4 million and the acquisition cap rate was 8.6%. Since April 1, we also entered agreements to acquire four properties containing 1.6 million square feet for an aggregate purchase price of $109.7 million, including the assumption of $26 million of mortgage debt and excluding acquisition costs. These properties are 100% leased for a weighted average remaining lease term of 15.5 years. The purchase of these properties is subject to our satisfactory completion of due diligence and other closing conditions, so we can provide no assurance these acquisitions will actually close.

In May, we entered an agreement to acquire a 100% net leased single-tenant office building located in Chelmsford, Massachusetts with 111,000 square feet. The contract price was $12.2 million, including the assumption of $7.5 million in mortgage debt. Also in May, we entered an agreement to acquire two 100% net leased single-tenant office buildings located in Carlsbad, California, with a combined 95,000 square feet. The contract price is $24.7 million, including the assumption of $18.5 million of mortgage debt.

Finally, in July we entered an agreement to acquire through a sale-leaseback transaction a 100% net leased single-tenant industrial building located in Huntsville, Alabama, containing 1.4 million square feet. The contract price is $72.8 million.

We are pleased with our acquisition momentum and remain bullish on our ability to acquire properties at cap rates accretive to our long-term weighted average cost of capital. We're also pleased with our leasing and rent recent activity in Hawaii and believe that our business strategy of providing a safe and predictable distribution to investors supported by a secure income stream is compelling.

I will now turn the call over to John Popeo, our Chief Financial Officer, to provide more detail guarding our second-quarter results.

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John Popeo, Select Income REIT - CFO [4]

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Thank you, David. Looking first at income statement, rental income increased by $642,000 and tenant reimbursement income increased by $49,000. The increase in net income primarily reflects the acquisition of two properties during June 2012, partially offset by the effects of retroactive rent resets recorded in the prior year and a modest decline in occupancy in Hawaii. The increase in tenant reimbursement income also reflects acquisitions.

Total operating expenses increased by $386,000 during the second quarter of 2012, reflecting modest increases related to property acquisitions plus increases in operating expenses, including nonrecoverable payroll and management fees. Net operating income increased by 1.4% and current quarter EBITDA increased by about 1% compared to last year.

Interest expense reflect amounts outstanding on our $500 million revolving credit facility for the full quarter. Net income for the second quarter of 2012 was $15.3 million compared to $17.7 million for the second quarter of 2011. The decrease reflects interest expense and acquisition costs incurred during the current period, a modest decline in occupancy and retroactive rent resets recognized in the prior year, offset by property acquisitions.

During the quarter, we entered into new leases and lease renewals for 185,000 square feet at a weighted average lease term of 10.3 years and weighted average rental rate increases of approximately 52%. Aggregate leasing capital for new leases and lease renewals were $0.32 per square foot per lease year. All leasing activity during the quarter occurred in Hawaii and we have no lease expirations at our mainland office and industrial properties until 2015.

During the quarter, we executed two rent resets for 30,000 square feet, resulting in a 34% increase in rent. We also have 15 leases scheduled to reset during the remainder of 2012, representing $2.8 million of annual rents. Rent resets scheduled for the second quarter were delayed pending the results of a couple of arbitration hearings. We continue to expect rents to increase when these leases reset later in 2012.

For the remainder of 2012, we have 843,000 square feet of lease expirations in Hawaii, and we expect to renew substantially all of these expiring leases at aggregate rents higher than current in-place rents. Normalized FFO was $0.61 per share for the second quarter of 2012. We declared a second quarterly common dividend in early July for $0.49 per share, including $0.09 for the 20-day period from our IPO in early March to the end of the first quarter.

Turning to the balance sheet, on June 30 we held $10 million of unrestricted cash. Deferred financing costs of $3.8 million includes fees and expenses associated with entering our $500 million revolving credit facility. Rents receivable of $34.4 million includes approximately $32 million of accumulated straight-line rent accruals as of quarter end. Other assets includes deposits on pending acquisitions and our $5.3 million investment in Affiliates Insurance Company during the quarter.

Accounts payable and accrued expenses includes $12.1 million of environmental reserves at properties located in Hawaii. As of the end of the second quarter, we had $321 million outstanding on our revolving credit facility, reflecting additional drawing since our IPO used to fund the acquisition of two properties David discussed earlier. During July, we closed on a five-year $350 million term loan the current interest rate of LIBOR plus 155 basis points. We used the net proceeds of the term loan to repay all amounts outstanding on our revolving credit facility and deposited excess proceeds in interest-bearing cash accounts for pending acquisitions and general business purposes. As of today, we have $12 million drawn on our revolving credit facility and $488 million of borrowing capacity.

Overall, we are pleased with our quarterly results and believe we are well positioned for future growth.

That concludes our prepared remarks. Operator, we are now ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator instructions) Chris Caton, Morgan Stanley.

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Chris Caton, Morgan Stanley - Analyst [2]

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John, could you expand a little bit more on leverage? What's the leverage target for the Company, and how do you expect the cap structure to evolve over the next year?

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John Popeo, Select Income REIT - CFO [3]

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Sure, again -- let's see, we ended the quarter at 31.1% debt to book capital. David mentioned that a handful of pending acquisitions, and we both mentioned the fact that we have some significant capacity on our revolving credit facility. So, even if we close on all of our pending acquisitions, that will still leave us with around $400 million of capacity on the revolving credit facility. And, of course, is taking into account the fact that we closed a $350 million term loan after the quarter ended.

So again, assuming we close on everything we discussed today, that brings debt to total book capital up to something closer to around 40%, which we are comfortable with today. And again, we have plenty of capacity on our revolving credit facility to handle this and other acquisitions and opportunities.

We did indicate in our S-11 our targeted limited for leverage was probably somewhere around 50%. And also, I think we've mentioned on prior calls, because we have not been in existence for more than a year, we are not shelf eligible yet. So if we did decide to go to the equity markets, you all know well in advance because there will have to be a required S-11 refiling with the SEC, and in theory they have a full month to review it.

So as of this point in time, given what we have under contract today and what we discussed on the call today, we think we have plenty of capacity to deal with it.

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Chris Caton, Morgan Stanley - Analyst [4]

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That's helpful, thanks. And then, David, you were talking about the rent negotiations in Hawaii. Can you remind us, when we look to next year, where I think you have even more rents up for renewal, does that occur ratably? Excuse me; I said renewal, but I meant negotiation. Does that occur ratably through the year, or is it front-end weighted or back-end weighted?

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David Blackman, Select Income REIT - President [5]

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Yes, I think it's generally ratably throughout the year in 2013. Substantially all of our rent resets in 2013 are in the former Damon estate, which tends to be the area where we have achieved some of the better resets across the portfolio. A lot of what is going on right now are the -- waiting for the results of the latest arbitration hearing, which in most cases will allow us to advance our discussions with existing tenants on resets.

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Chris Caton, Morgan Stanley - Analyst [6]

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Thanks, and how our market conditions doing there in terms of vacancies and rents? Can anything change between now and next year from a market fundamentals perspective to influence outcome of those, either the arbitration or the results you expect to get next year?

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David Blackman, Select Income REIT - President [7]

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Yes, market conditions in Hawaii continue to improve. The second quarter -- I guess second-quarter statistics came out from Collier's today for the industrial market in Oahu. The second quarter experienced 190,000 square feet of positive absorption. The overall vacancy rate in the Oahu is 4.2%, and it's trending downward. So right now, if you look generally across the portfolio, rents are trending up, occupancy is trending up, and we feel pretty positive about where we sit right now. In fact, if you look at the Collier's statistics -- which aren't perfect because they tend to follow space leases versus land leases, the vacancy in the airport, Makua [Kuna] part of Oahu is under 2%. So I think we are well positioned for rent resets next year.

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Chris Caton, Morgan Stanley - Analyst [8]

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Great, thanks very much.

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Operator [9]

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Jamie Feldman.

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Jamie Feldman, BofA Merrill Lynch - Analyst [10]

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John, I was hoping you could talk a little bit more about the year-over-year change in same-store NOI. I know you had mentioned there was some non-reimbursable operating expenses. Just what's going on there, and then how should we think about modeling going forward?

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John Popeo, Select Income REIT - CFO [11]

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Sure. You are correct; there are a few nonrecurring items that actually occurred in the prior year. So I think as far as modeling going forward, current year or current quarter amounts are probably more relevant and probably good figures to follow. But let me shed a little more light on the quarter. And it's probably worth just breaking the discussion down between Hawaii and mainland because they do pretty much operate a little different.

In Hawaii, same-store NOI declined by 2%, around $285,000. But as I mentioned earlier, the decline reflects resets settled during the second quarter of 2011 and the related rent increases booked in the second quarter of 2011, which were in excess of amounts that we accrued back then. So (multiple speakers) 2012; I've -- no, no. This is 2011. Do you understand that, Jamie? We had a few pending resets in 2011 that we ended up finally settling on in the second quarter of 2011. So the prior year includes -- doesn't include stabilized rent; it includes the retroactive adjustment.

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Jamie Feldman, BofA Merrill Lynch - Analyst [12]

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So basically it increased your 2011 second-quarter revenue number?

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John Popeo, Select Income REIT - CFO [13]

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That's correct. The prior-year number is basically inflated by retroactive adjustments that were booked. And the reality is, you just don't know where things are going to play out with your reset negotiations. And it just so happened that you are also making estimated accruals along the way as to where you think conservatively you are going to end up. It just happened to be a pleasant surprise for the Company. We ended up being rather successful in the reset negotiations and ended up booking additional revenue, more revenue than we had expected we would receive from those resets.

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Jamie Feldman, BofA Merrill Lynch - Analyst [14]

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Okay. I guess my greater concern on the expense side, because it seemed like you had a big spike year-over-year that would -- otherwise, you would have had better same-store growth.

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John Popeo, Select Income REIT - CFO [15]

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Sure. Let me continue here. The increases in expenses actually include -- this quarter actually includes around $50,000 of additional environmental remediation accruals -- not costs incurred, but accruals. And as you may recall, at the end of 2011 we did a full-blown environmental re-survey and we used a consultant that basically confirmed the amount that we had accrued on the balance sheet of around $12.1 million, give or take a few thousand dollars. This is just a carryover of that analysis, and we are just adding $50,000, to be conservative.

In addition, we do have some increases in non-escalatable payroll and management fees. For the most part, payroll and management fees are not escalatable to tenants in Hawaii. That's just the nature of the leases out there. That's not a big number, but all things considered, as I continue here, you will see this is basically what's accounting for the approximately $225,000 increase in expenses.

Another relevant factor here, though, is increases in property taxes and maintenance expenses related to some of our vacant parcels in Hawaii. You have to remember that the portfolios aren't fully occupied. It's around 4.5% to 5% vacancy out there, and there are costs that are allocated to those parcels. And the expenses at times can be a lumpy here. So that's another factor in the increases in operating expenses out there.

So if I have to sum up Hawaii, excluding the prior year retro rent reset, same-store NOI in Hawaii would have been more like positive 2%, Jamie. On the mainland, same-store NOI declined by 1.7%, or $123,000. The prior-year mainland revenues also included a retroactive adjustment; it was an escalation income adjustment in the second quarter of 2011 related to properties that we acquired late in 2011 and one property that was acquired in early 2012, and it was just at the period where we were just getting our arms around the inner workings of these properties. So we made some minor adjustments to the escalation revenue amounts, which, again, increased the prior-year number. Mainland operating expenses also increased, and that was by around $115,000. And this increase includes payroll and management fee increases as well as landscaping and other escalatable expenses. So for the most part, what we did see for increases in mainland operating expenses are pretty much recoverable. The only thing that's skewing the correlation between escalatable operating expenses and escalation income on the mainland is the prior year nonrecurring item that I just mentioned.

So to summarize, mainland results -- excluding the prior year of retro escalation buildings, mainland's same-store NOI would have been flat. I hope that's helpful. It's more detail than you probably were looking for.

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Jamie Feldman, BofA Merrill Lynch - Analyst [16]

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Yes, it's very helpful. But I guess I'm confused, because you are basically saying that this year's number is constant, but your prior-year's number is higher, so it makes the revenue increase better, but the reality is that's what you should have been getting a year ago, anyway. And then on the expense side, you are saying the payroll and management fee -- is that like in reimbursement to RMR? Because they're the same assets you guys had before, right? I don't know how that number went up.

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John Popeo, Select Income REIT - CFO [17]

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I'll take it in two pieces. The revenue -- maybe I wasn't clear enough. I guess what I'm saying for revenue is -- first of all, under normal circumstances, you would have seen an increase in same-store revenue this quarter, had we been able to settle on the rent resets -- that was scheduled for the second quarter 2012. But because a few of those resets are held up an arbitration, it's sort of holding up the whole group. There's about 15 rent resets that are backlogged that we had originally expected that would be done in the second quarter of 2012. So the second quarter of 2012 is basically a flat quarter because we didn't recognize rent reset revenue.

The prior year, though -- it's sort of an apples-to-apples comparison except for the fact that the prior year includes a nonrecurring spike in rents related to 2010 and early 2011 resets that were settled in the second quarter of 2011, requiring us to do a retroactive catch-up billing in the second quarter of 2011. And I hope that makes the revenue side a little clearer.

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Jamie Feldman, BofA Merrill Lynch - Analyst [18]

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Yes, okay, now I get it.

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John Popeo, Select Income REIT - CFO [19]

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As far as expenses go, it's probably worth just -- again, just explaining in a little more detail how tenant reimbursement income correlates to operating expenses. And if you look at the results this quarter, we ended up with tenant reimbursement income on a combined basis -- this is just total portfolio -- of $4.2 million, and then you have operating expenses of around $5.7 million. So you have a difference of around $1.5 million per quarter of nonrecoverable expenses. And that hasn't changed. That's how the financials have played out in the S-11, and I think I actually mentioned this last quarter.

The leases in Hawaii generally are pure triple net tenant-managed properties. We basically lease them the land and they do everything from maintenance, soup to nuts maintenance. And we, of course, provide oversight for the entire portfolio and deal with tenant relations and all that. That takes a staff out on the island, and in addition, those properties out in Hawaii, our [dubs] earn a management fee on them. But, again, the typical land lease in Hawaii does not allow for the recovery of that expense.

So what I'm trying to explain here is the difference between tenant reimbursement income that we report and operating expenses. The difference is what's not recoverable, and the majority of that nonrecoverable expense is coming from salaries and management fees in Hawaii. But also, as I mentioned before, we have a fair amount of vacant land out in Hawaii that we are very hopeful we will have re-leased by the end of the year. But, nonetheless, there's a carrying cost associated with that, including real estate taxes and various maintenance and upkeep expenses to make those parcels marketable. And then, of course, every once in a while, we will get a hit for environmental remediation costs, maybe a bad debt expense here and there.

So that's just the nature of, I guess --

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Jamie Feldman, BofA Merrill Lynch - Analyst [20]

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Did you actually add employees in Hawaii? (multiple speakers) that went up from before?

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John Popeo, Select Income REIT - CFO [21]

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Well, no. We're only talking around -- about a $225,000 increase, and if you back out approximately $50,000 of remediation accruals, down below $200,000 -- down below $200,000, then the remaining difference is really three factors. It's expenses related to vacant land, increases in real estate taxes; the unpredictable, I guess, rate of expenditure at vacant land for things like landscaping, for repaving, for road maintenance, things like that helped skew the number a little bit. And then a minor factor is really salaries and management fees. But salaries -- I'm not saying we added staff, I'm just saying every year, people get at least a cost-of-living increase, and management fees are based on revenues and revenues collected, and revenues collected could be higher one quarter than the other just based on the volume of collections and also the burn off of straight-line rent.

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Jamie Feldman, BofA Merrill Lynch - Analyst [22]

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And then just on Hawaii occupancy, I think you had said you expect most of the space coming due to re-lease. What is your outlook for renewal and maybe even vacancy increase in that? I know you lost 10 basis points year-over-year.

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David Blackman, Select Income REIT - President [23]

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Yes, I don't think we are budgeting any real change in occupancy at this point for 2013. The leasing momentum in Hawaii has really picked up. We've got a lot of prospective leasing in both Campbell and in the former Damon estate for properties that were vacant when we bought them into serve. So I'm pretty upbeat right now on the potential growth in occupancy as a result of leasing. But as it stands right now, we are not really -- we are budgeting any change in occupancy for 2013.

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Jamie Feldman, BofA Merrill Lynch - Analyst [24]

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Okay, thank you.

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Operator [25]

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(Operator instructions) Brendan Maiorana.

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Brendan Maiorana, Wells Fargo Securities, LLC - Analyst [26]

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Hey, John, sorry to dive into this topic again, but the 15 backlog leases that are in arbitration or negotiation, that will be additive to your run rate -- how much did that add when they ultimately get settled? Do you have a sense of it?

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David Blackman, Select Income REIT - President [27]

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Brendan, it's too early to really say. Right now, we are waiting on the results of an arbitration case. And in all likelihood, once we have the arbitration findings, we can use that to further negotiations with existing tenants. But we don't have that rent number from the arbitration panel. So we expect it to be positive. We expect it to -- rents to continue to reset in that 50% up range. But we don't have the results of the arbitration panel. They are not due in until September 7.

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Brendan Maiorana, Wells Fargo Securities, LLC - Analyst [28]

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David, do you know how much in terms of square footage those leases represent?

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David Blackman, Select Income REIT - President [29]

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Well, it represents $2.8 million of rents, which I think is probably the more important number.

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Brendan Maiorana, Wells Fargo Securities, LLC - Analyst [30]

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Oh, $2.8 million, okay, I'm sorry; if you mentioned that, I (inaudible). And so is that -- was there a retroactive catch-up that happened in Q1? Because sequentially your revenue number went down from Q1 to Q2. So was there something anomalous that happened in Q1 that didn't happen in Q2?

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John Popeo, Select Income REIT - CFO [31]

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Yes, Brendan, this is John. I don't know if you recall during the first quarter call, but we have an annual -- we have a tenant that pays annual percentage rate in January of each year. So the first quarter of 2012 included over $1 million of rents that are received every January. And that's why you notice the slight decline of around, I guess, $300,000-$350,000 of rent between Q1 2012 and Q2 2012.

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Brendan Maiorana, Wells Fargo Securities, LLC - Analyst [32]

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Okay, got it, thank you. And then, either John or David, if you are running at your acquisition pace, and you guys -- if you close on everything in Q2 -- or in Q3, excuse me -- that you have closed already or the stuff under agreement, that would be $156 million and we're only halfway through the quarter. It looks like you've got about 200 -- outside of those deals, there's an additional roughly $250 million of acquisition capacity you could do before you get up to 50% leverage target. Do you think the environment is, in the next four months to five months of the year, do you think it's such that you're going to hit that mark and the acquisition pace is going to keep up as it has?

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David Blackman, Select Income REIT - President [33]

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Brendan, we have a pretty strong acquisition pipeline. So I think the pace can continue -- it can continue. I think it depends on how we want to manage the balance sheet and whether or not we think it makes sense to add additional equity to the Company. But the acquisition pipeline is strong. There are a number of good opportunities that have very attractive potential yields. It's good real estate and they are strong tenants. So it's a good market out there.

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Brendan Maiorana, Wells Fargo Securities, LLC - Analyst [34]

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John, if you did equity, let's say you got to that 50% threshold and you did equity, is it fair to assume that it would be common, or would you think about doing preferred?

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John Popeo, Select Income REIT - CFO [35]

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I think we would consider both markets at this point. The preferred market may be more expensive than we are comfortable with. But again, we can't do anything without filing an S-11 and having it reviewed by the SEC. So you will definitely know about it once we get to that conclusion.

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Brendan Maiorana, Wells Fargo Securities, LLC - Analyst [36]

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And then this last one -- the deal in Huntsville, it looked like it was $56 a square foot for an industrial building there. Without knowing anything about the building, it strikes me as a little bit high on a price-per-pound basis. Is there something unusual about that transaction that might cause the pricing to be a little bit higher than we would otherwise expect in Huntsville?

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David Blackman, Select Income REIT - President [37]

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Well, we've got an incredibly long-term lease with a company that we have done business before with, and the -- actually, for a building that is leased in the SIR portfolio. So I think it's a 20-year type sale-leaseback transaction. So we're able to structure a lease that we are very comfortable with, with a company where we know the parent very well, and we thought the pricing on a per-pound basis was reasonable. So we feel pretty good about the opportunity.

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Brendan Maiorana, Wells Fargo Securities, LLC - Analyst [38]

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Is it fair to assume that the cap rates are in that 8.5% to 9% range, which it seems like you guys have been striking deals at?

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David Blackman, Select Income REIT - President [39]

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Yes, it's certainly not below that. And again, we don't report on cap rates until we close on the opportunities or -- [for reporting]. So it really doesn't make sense for me to comment, other than to say it's certainly not below that range.

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Brendan Maiorana, Wells Fargo Securities, LLC - Analyst [40]

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Sure, okay, all right, thank you.

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Operator [41]

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Rob Salisbury.

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Rob Salisbury, V3 Capital Management, LP - Analyst [42]

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I just had a quick question on run rate earnings. So I guess you have announced a number of accretive acquisitions over the past five months, and clearly a lot of that accretion has not fully benefited the reported numbers just yet. So I just wanted to see if my math is right here, but based on everything that has been announced thus far, it looks like you could be generating earnings well over $0.70 a quarter at some point by the end of this year. I guess first of all, am I in the right ballpark on that math?

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John Popeo, Select Income REIT - CFO [43]

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You are in the ballpark, assuming no unforeseen circumstances at these properties.

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Rob Salisbury, V3 Capital Management, LP - Analyst [44]

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Okay, great, so I guess, then that would, obviously, compare to the $0.61 normalized that was reported this quarter?

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John Popeo, Select Income REIT - CFO [45]

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You know what? I need to clarify here. That is basically just saying you layer in your properties. That's assuming that you fund these acquisitions by drawing on the revolving credit facility, which has an interest rate of around 1.8%. So again, it's also assuming status quo as far as our capital stack goes.

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Rob Salisbury, V3 Capital Management, LP - Analyst [46]

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Sure, yes. But I guess any way you slice it, it seems like there's a fair amount of opportunity to hike the dividend based on where we're at right now. And I guess, this sort of gets to my main question, which was -- could you just remind us when the next opportunity is to revisit the dividend level, then maybe what we could consider as a good kind of fair target for an FFO payout ratio for SIR?

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David Blackman, Select Income REIT - President [47]

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We will reevaluate the dividend at every Board meeting. So I think we have another Board meeting scheduled in September, and we we'll review it then. The dividend is very well covered (technical difficulty). We do have a goal to continue to grow the dividend for this Company, and there clearly is room. We just haven't got clear guidance from the Board yet as to when the right time and what the amount is to do something.

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Rob Salisbury, V3 Capital Management, LP - Analyst [48]

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Okay, great, a lot of headway, other way. I guess my last question was just on the pipeline, just kind of curious. But it seems like what you are describing in some of the Q&A earlier is the deal pipeline, without getting into the specifics on the cap rates, clearly going to add a pretty good amount of accretion relative to the financing costs as we move through the year. Is that just, kind of high-level, a fair way to think about things?

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David Blackman, Select Income REIT - President [49]

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Yes, I would agree with that assessment.

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Rob Salisbury, V3 Capital Management, LP - Analyst [50]

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Okay, great, thank you very much.

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Operator [51]

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And at this time there are no further questions. I like to turn the call over to David Blackman.

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David Blackman, Select Income REIT - President [52]

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Thank you for joining our second-quarter earnings call. We look forward to seeing many of you at the Bank of America Merrill Lynch conference in September. That concludes the call.

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Operator [53]

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Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.