Six Questions for Doug Donatelli

WASHINGTON, DC-All things considered, First Potomac posted a strong year for 2011 and the fourth quarter. Not only did the company deliver strong funds from operations—a key metric for REITs—but it also exceeded its goal of one million square feet in new leases for the year, CEO Doug Donatelli told listeners in the recent earnings call. Come again? One million square feet of new leases? In a portfolio predominately located in the Washington DC and Mid-Atlantic region—where the watchword for government spending has become “don’t”? Yes. GlobeSt.com’s Erika Morphy spoke with Donatelli about the REIT’s performance and how it plans to ride out the ongoing Congressional logjam.  

 
GlobeSt.com: You are a Washington REIT with Washington tenants—i.e. the government. How is the current political and fiscal environment impacting First Potomac?

Donatelli: Overall the market is slower than it has been than in previous years. And certainly there is a fair amount of concern about direction of DC economy--especially because of the potential cutbacks with federal government spending in the defense industry. All that said, we don’t have an enormous number of government-related leases about which we are worried. Government contractors make up about 15% of our overall leases.
 
GlobeSt.com: Still 15% is nothing to ignore—how are you handling that?

Donatelli: We are comfortable we will retain, for the most part, these leases. We are keeping in close contact with t hem, and are willing to be flexible, such as giving them shorter-term renewal options or working with them to use their space more efficiently.
 
GlobeSt.com: Are you making any new concessions, other than what is common practice in this tenant’s market right now?

Donatelli: I would say the primary thing is that we are offering them shorter-term renewals.  Ordinarily we would hold out for a five-to-seven year renewal for an existing tenant. Now we might offer as short a period as one year in order to keep that tenant.
 
GlobeSt.com: Tell me how you managed to not only retain Lockheed Martin as a tenant but get an expansion out of them? (Editor’s Note: Lockheed Martin inked a three-year lease extension and expansion agreement at 1408 Stephanie Way in the Crossways Commerce Center in Chesapeake, VA, in December 2011, for 43,984 square feet).

Donatelli: That growth, which was slightly over 8,000 square feet, was contract specific. They received a renewal of contract that allowed them to take the additional space.
It’s a good tenant to point out because I believe that is how the market will go for the next few years. Lockheed Martin didn’t speculate on the space—they waited for the contract to get nailed down. They don’t have a handle on what Washington will do any more than the rest of us do.
 
GlobeSt.com: Speaking of Washington, what do you think Congress will do with the budget, as it relates to the area?

Donatelli: I don’t think anyone in Congress knows that right now, much less the industry. Certainly there is a general trend to reducing government spending. That is probably good but no one knows the shape that it will take.  Here is what I think: at end of the day whatever they do will not be tremendously negative for the Washington, DC region.

GlobeSt.com: How are the capital markets treating you these days?

Donatelli: The capital markets for REITs are very much open. There are a variety of sources for debt financing, from banks, insurance companies and CMBS. The equity markets are open as well. That is one thing I don’t worry about too much—financing for public companies is still very much alive.  The challenge is matching that up with opportunities on the acquisition side.