Elme Communities (ELME) 2002 Q1 法說會逐字稿

Thank you and good morning everyone. After the market closed yesterday, our earnings press release was faxed or emailed to each of you. If there is anyone on the call who needs a copy of the release, please contact me after the call at 301-984- 9400, or you can access the document from our website at www.WRIT.com. First quarter supplemental financial information is also available on our website.

First I must remind all of you at the outset that certain statements during the call regarding anticipated operating results and future events are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Although such statements and projections are based upon what we believe to be reasonable assumptions, actual results may differ from those projected. Key factors that could cause actual results to differ materially include changes in the economy, the successful and timely completion of acquisition, changes in interest rates, leasing activities, and other risks associated with the commercial real estate business and as detailed in our filings from time to time with the Securities and Exchange Commission. Now I would like to turn the call over to Ed Cronin.

Good morning, everyone. With me today is Skip McKenzie, Senior Vice President of Real Estate, Sarah [inaudible] Managing Director of Finance and Capital Markets, Laura Franklin, Managing Director, Accounting and Administration, Mike Comer, our Controller, and Hillary Valler, [phonetic] Accounting Manager.

After a brief overview, I will turn the call back to Sarah, who will discuss our financial results. After Sarah finishes, Skip will discuss our markets in more detail, then we will open up the call for questions.

We are pleased to report another strong quarter for the company. Compared to the first quarter of '01, operating earnings per share increased 10.3% with earnings per share having increased 40% due in large part to the gain on the sale of 1501 South Capital Street. Meanwhile, funds from operations increased 6.4% on a per share basis. Funds available for distribution decreased 5.4% on a per share basis due primarily to the timing of nonreturning cap ex items we have included in our FAD [phonetic] calculations. Sarah will discuss these in more detail. The $33.25 per share dividend paid during the first quarter resulted in a 67% FSO payout ratio. Importantly, our cash same story sold to the quarter are very strong, up 4.9% despite weakness in the overall economy.

While occupancies have returned to more normal levels, and I am referring to the norms of the last twenty years in this region, current rental rates have been holding up well both in the region and across all four of our property sectors. We attribute this to our continued focus on driving internal growth through our hands on management style and value added capabilities as well as the favorable demographics of the Greater Washington D.C. region. On a relative basis, Greater Washington remains one of the strongest markets in the country. The federal government's presence in this market has the truly stabilizing effect accounting for one third of the gross regional product.

As we mentioned in our year end conference call, we had two main issues to resolve during '02. The first was the sale of 1501 South Capital Street. We closed on the sale of this property on February 28th resulting in net proceeds of $5.8 million and a gain of 3.8. Though we are seeing some tenants either reducing their space requirements or vacating unexpectedly at lease expiration within a couple of our office buildings, the major negative impact in our portfolio is still the [inaudible] of 7900 West Park Drive located in Tysons Corner, Virginia.

We were able to release 28,000 square feet before [Jetronics] vacated January 1st. Of the remaining 156,000 square feet, we projected that we would release 46,000 square feet by the end of the third quarter and 40,000 square feet by the end of the fourth quarter with the balance in the first and second quarter of '03. Consequently, we budgeted only $0.02 to $0.03 per share for '02 weighted towards the year end. When fully leased, we expect this space will generate $0.11 per share. We have begun seeing more activity for this space. However, no leases have been signed. Skip will discuss 7900 in more detail along with other marketing comments.

We continue to actively pursue acquisitions. While we had originally anticipated being able to close some acquisitions within the first quarter, we remain unchanged from the earnings guidance given during our third and fourth quarter earnings conference call. We continue to estimate funds from operations per share for '02 to be in the $2.03 to $2.05 range.

In addition, our initial estimate of funds from operations for the year '03 is in the $2.13 to $2.15 range. Again, I would like to point out WRIT has no off balance sheet investments or commitments for real estate or technology ventures.

Furthermore, WRIT does not hold any nonproductive land and it is not exposed to any speculative development risks. With that, I'll turn the call over to Sarah to go through the numbers in more detail. Sarah?

Thanks, Ed. I'll start with funds from operations. As you know, all per share amounts are presented in a fully diluted basis. FFO for the first quarter totaled $19.5 million or $0.50 per share as compared to FFO for the first quarter last year of $16.9 million or $0.47 per share, representing a 15% increase in total FFO or 6.4% on a per share basis. Operating earnings for the first quarter totaled $12.6 million or $0.32 per share compared to $10.5 million for the first quarter of 2001 or $0.29 per share, representing a 10.3% increase on a per share basis. After adjusting for both recurring and nonrecurring capital expenditures and straight-lining events, our funds available for distribution for the first quarter totaled $13.5 million or $0.35 per share as compared to $13.3 million or $0.37 a share for the fourth quarter last year, representing a decrease of 5.4% in total funds available for distribution. The decrease is due to some major renovations we have undertaken in several of our properties including a façade renovation at 1900 Pennsylvania Avenue and lobby renovations at 51 Monroe and 7900 West Park Drive. During the fourth quarter, the company distributed $33.25 per share in common dividends, equating to a 67% FFO payout ratio and a 95% FAD payout ratio. Same store cash NOI for the core portfolio increased to 4.9% this quarter over the same quarter last year. Apartment same store cash NOI increased 5.6% this quarter despite a drop in occupancy quarter over quarter from 94.9% to 93.5%. Occupancies dropped in six of our nine apartment buildings although we are starting to see improvement. Rental rates remain strong during the quarter increasing 7.4% on average. Same store office sector cash NOI decreased 0.2% for the quarter due largely to the vacant Jetronics space. Correspondingly, occupancy dropped to 89.3%. Rental rates for the office portfolio increased 7.5% over the same period last year due in part to a rental rate increase achieved in a 91,000 square foot renewal at 7900 West Park. We also achieved significant rental rate increases at 51 Monroe, [Tyson Two], and 6110 Executive Boulevard. Same store retail sector cash NOI increased 19.6% while same store occupancy dropped to 93.3% from 95.9%. Rental rates increased 8.4% over first quarter last year due primarily to two new supermarket leases with existing tenants whose extension options ran out.

As a result, we achieved substantial rental rate increases. Occupancy dropped due to a TGI Friday's lease termination and [inaudible] space being occupied by [Trek Auto]. We did recognize a $4,000 lease termination fee on a TGI Friday's space in the first quarter, $400,000 lease termination fee. Same store industrial cash sector NOI increased 5.8% while occupancy dropped to 97.2% from 98.2% in the first quarter last year. Rental rates increased 5.1% for the quarter while operating expenses decreased 8.7% due primarily to lower utility and [inaudible] expense. At March 31st, our total market capitalization was $1.5 billion with $359 million in debt outstanding. The company's fixed charge coverage ratio was 3.7:1 for the quarter. At March 31st, WRIT's $359 million in debt had a weighted average maturity of 7.3 years and a weighted average fixed interest rate of 7.4%. With no outstandings on our line of credit, we currently have no floating interest rate exposure. Now I'll turn the call over to Skip to speak about our markets in more detail.

Thanks, Sarah. As of March 31st, our portfolio totaled fifty seven properties consisting of ten retail centers, twenty three office properties, fifteen industrial, and nine multi family properties. Our office portfolio was 90.2% occupied at quarter end.

As we mentioned in our previous conference call, we have 156,000 square feet of space in Tysons Corner, which was vacated on January 1 by Jetronics. We have just begun to see some interest in this space in the last four weeks, and we remain optimistic that we will lease up in accordance with earlier projections.

The overall market in Tysons is still in the state of trauma, and it is difficult to forecast consistent demand at the moment. The balance of our office portfolio is reasonably strong with 94.9% occupancy. During the quarter, vacancy overall in the Northern Virginia office market increased slightly from 14.3% at year end to 15.4% with a positive absorption of 200,000 square feet. The vacancy rate including sublease space in Tysons Corner was 21% at quarter end primarily driven by the large amount of space vacated by internet telecom tenants such as MCI WorldCom and Cable and Wireless.

Newly constructed space accounted for only 6% of the 5.1 million square feet of available space. Although leasing exit activity in the market is increasing, we continue to see additions to supply via the continued downsizing and subleasing engaged by tech and telecom tenants.

The Reston Herndon office market in which we only have industrial space was 20% vacant at quarter end. The 25.2% vacancy rate in Herndon was the highest in Northern Virginia. The Arlington and Alexandria office markets are currently the strongest markets in Northern Virginia with 9% and 11% vacancy, respectively. Excluding 7900 West Park Drive, the WRIT Northern Virginia office occupancy is 93.8%.

While we continue to believe that office demand will grow over time with increased spending by the federal government, we have not seen significant market impact to date. Leases have been executed with major federal contractors.

However, they have been more than offset by additions to supply. We anticipate no significant improvements to the Northern Virginia vacancy rates until late 2002 at the earliest but more likely into 2003 and beyond. The downtown Washington, D.C. office market is the strongest in our region ending the quarter at 5.9% vacant. However, vacancy in the CBD has increased to 8.2%, up from 7.6% the quarter before and 4.1% one year ago.

The overall vacancy in the East End and CBD, our major D.C. submarkets combined was 6.4%. Leasing activity continues to be somewhat slow characterized by increased sublease space, more generous concessions, and increased downtime.

Leasing activity by the federal government continued to dominant the large transactions for the quarter although several large law firm leases were executed as well. Our office portfolio in the district is 94.5% occupied. The Maryland office market, primarily Montgomery County, has been slow but stable. Overall vacancy in the market has risen slightly from 9.9% at year end to 10.2% at March 31st, 2002. Maryland continues to attract health related, biotech, and high tech tenants as the ten largest transactions in the first quarter were all concentrated in these sectors.

The market is anticipating a large number of government agencies such as the National Institutes of Health and the Health and Human Services to execute large leases soon, although to date few leases of size have been executed.

Several large health related leases in excess of 50,000 square feet were executed during the first quarter in Montgomery Country. Our office portfolio in suburban Maryland is 96.1% occupied. During the first quarter, we released 145,383 square feet of office space achieving a 4.6% increase in rents on a cash basis. Tenant improvement costs and leasing commissions together averaged $8.72 per square foot.

In summary, our major short and long term market concern outside the Beltway from Tysons Corner to the Reston Dulles corridor, although there appears to be some positive activity taking place particularly in Tysons, it is too early to say that there is a significant improvement in market conditions.

Occupancy within our retain centers has remained steady at 93.4%. Occupancy dropped at our Federal County Square Shopping Center as Trek Auto, who is currently in Chapter 11 bankruptcy, reduced their space from 31,000 to 21,000 square feet. In addition, TGI Friday's terminated its lease in Chevy Chase upon payment of a lease termination fee to WRIT. During the first quarter, we released 13,721 square feet of retail space, achieving an increase of 18.6% rent on a cash basis.

The apartment market in the D.C. metro area continues to experience softening since mid 2001, although it appears that the worst is behind us. The Class A apartments in Northern Virginia were particularly affected by the telecom meltdown and the aftermath of 9/11.

The area unemployment rate was 3.9% in January, up from 2.2% one year earlier but still well below the national average of 5.6%. Twelve month job growth for the area through February was 0.3% versus a minus 1% at the national level. Importantly, regional experts believe that the area is poised for continued job growth as the federal government will likely hire 6,000 new workers in the Washington, D.C. area each year for the next four years.

Even more significant, private contractors that provide goods and services to the federal government are likely to add nearly 40,000 workers each year for the next two years as a result of the expected increase in procurement activities.

Within selected submarkets throughout the region, concessions of one to two months of free rent are being offered generally on selected units. And fees for application, moving and amenities are being reduced or eliminated altogether.

We have offered concessions on selected units within some of our buildings, but generally, we have been able to maintain our rental rates. Our apartment portfolio was 93.5% occupied at quarter end.

However, we have seen increased activity both in traffic and applications received over the last several months. We believe that the market is improving, and we expect increased occupancies with fewer concessions going forward. We estimate the current loss to lease in our portfolio is 4%. The Baltimore Washington metro area industrial market, which slowed in 2001, continues to experience reduced leasing activity. The WRIT portfolio, which was 99% occupied at year end adjusting for South Capital Street, experienced increased vacancies during the first quarter with the occupancy at 94.7% at quarter end. Significant new vacancies include 22,700 square feet at [Tech 100] and 35,000 square feet at Crossroads, both of which are in the Baltimore Washington corridor market, and 33,000 square feet in buildings located in the Chantilly Dulles Airport market. Both of these markets are soft with significant vacancies and reduced tenant demand. Overall, the Washington, D.C. metro area continues to see generally slow leasing activity in all sectors with the exception of apartments which appear to be stabilizing. While some markets are more stable than others, significant areas of weakness are troubling, particularly Northern Virginia office conditions outside the Beltway.

We believe indications are beginning to appear that there is a light at the end of the tunnel. New construction is halted, more leasing tours are occurring, residential concessions are lessening, and increased interest is being shown by federal contractors as well as the government for new space procurement.

We believe we are in the beginning of a slow climb back to more robust markets. Now that you have our quarterly performance numbers and read on current market conditions, we would be happy to answer any questions you may have.

Operator, you want to open up the call for questions?

Sure. At this time, we are ready for questions. If you would like to ask a question, you may do so by pressing star one on your touchtone phone. You will be announced prior to your question. Once again, to ask a question, please press star one.

Once again, if you would like to ask a question, you may do so by pressing star one on your touchtone phone. Our first question comes from Hall Jones [phonetic] from AEW Capital.

Morning, Hall.

Good morning, Ed. How are you?

Good.

Just one quick question regarding the apartments. You mentioned that the market was stabilizing. And granted this is through the time of year when apartment demand picks up anyway through seasonality. How much of the stabilization would you say is just a seasonal, a typical seasonal pickup versus a true recovery in the apartment market in Northern Virginia?

We're still a little early for the recovery of apartments. I'd say that it's more that people are getting confident in potential job growth in the area. And the growth that we're seeing is more of the BBP plus type, the A type properties that still haven't started to pick up yet.

Okay. So it's above and beyond what you would typically expect for a seasonal trend in apartments?

I would say so, yes.

Okay. Alright, thanks.

Go to the next. Operator?

I'm actually waiting for the next person to come up. I'm sorry, I'm not showing that he's in there, ma'am.

Okay.

The next question comes from Harry Wethers [phonetic] from BBNT Capital Management.

Harry, good morning, Harry.

Good morning, Ed. Good morning, everyone. Just a couple of quick questions. I was wondering if you could give just a little bit more color on the type of activity you're seeing at Space Center right now just in terms of the size of the space needs folks are looking for there, type of tenant whether it's government related or otherwise.

And secondly, I was wondering if you could give just a little bit of your assumptions regarding the 2003 guidance particularly with regard to the large building in Tysons.

Okay, well, Skip will take the real estate side, I'll answer the question on the guidance.

Okay. Harry, in terms of the type of tenants, it's kind of interesting that the activity really started up I'd say in the last four weeks or so. And all we can say at this point is there are tours taking place.

In terms of the type of tenant, it's kind of across the board we've seen some financial institutions, we've seen legal profession types, and we've seen a few tech type related tenants, and all sizes, from 5,000 square feet to 100,000 plus square feet to 10,000 to 20,000 size.

So I guess the encouraging thing is we are seeing different types of tenants, and we are seeing different sizes of tenants.

Right.

which has been the problem in the market.

Okay.

Harry, to answer the question [inaudible] relevant to the guidance of $2.13 to $2.15, the way we arrived at it is we went back and tore our budgets apart that we had prepared last October where we thought our projections would take us for not only '02 but '03 particularly with what we're discussing here.

We've adjusted all of that now and as promised in the last call that we would give guidance [inaudible] and functionally, the big impact there is to start with would be 7900 with that 156,000 square feet.

Additionally, as I mentioned and others have mentioned here, a couple of tenants who we had expected particularly in the office buildings to renew, and had given us every evidence of renewal, have not renewed. And then in a couple of cases, they are telling us that they are reducing the amount of space that they are taking. We know that now as we negotiate with these prospects who are coming up for renewal during the summer.

So with those types of adjustments plus we've adjusted downward our actual physical occupancy levels from where we are in October, all brought us back to the range that we gave you in guidance of the 2.13, 2.15. And that's where we feel pretty comfortably, particularly if this market picks up, we'll be at the higher range on that. But it's our best sway that we can make at the moment with current market conditions not improving as rapidly as we would like.

Okay. And with your current assumptions, when are you assuming 7900, that big block of space, when are you assuming that will actually be totally leased up in '03? Early, I mean, mid year, late year?

It's really late in '03.

Late '03.

Into late '03.

Okay.

As Skip mentioned, there are a couple of tenants that are kicking around out there and including one that frankly who's been in who is a very large tenant, but their lease, and these are the problems you run into, some people are now beginning to look around, but their leases don't mature for the next year to eighteen months.

And so, we've got to be very careful about those numbers. And so there is activity, but we've got to, as I say, be very careful about that activity and also how we price it if it's somebody that we really like with good credit who may not be coming in for a year to eighteen months from now.

Right. Okay, thank you.

Jay, good morning.

Good morning, Ed. How are you?

Great.

Could you provide an update on the acquisitions market? I think you've given guidance this year of approximately $100 million?

Yes. We feel pretty comfortable on that though we haven't closed anything in the first quarter, and I'll tell you why. The one large deal as we mentioned I believe in the last conference call, we ran into a serious environmental problem. And so, that one went by the wayside.

But we also had another transaction we're working on ran into a similar problem, so I don't know if people are trying to get rid of those properties in a market where there was a [inaudible] properties being available.

What we're seeing right now interestingly enough is a number of properties, we have a couple under contract right now in due diligence without getting into anymore detail on that, the point being that we're finding that the sellers are acting more slowly in responding to the offers that people are making.

In our case, there are three or four deals that we're looking at, very interested in, and though there are a lot of prospects looking for property, there is still somewhat of a disconnect between what the sellers think they may be able to get, particularly with so much money around, and what is really being offered.

So we're not seeing quick responses to acquisition offerings from the standpoint of the buyer. And so, though we feel that, we feel pretty comfortable where we're going, we just want to take our time, and I believe we'll be able to meet what we're projecting.

So your sense is that cap rates have not changed at this point, have not moved up yet?

No, I don't think, as far as cap rate is concerned, I don't think they've changed at all frankly. And what I believe a lot of people are looking at today who are trying to sell the property, I guess we as buyers have to give consideration to it is if people are talking about over the next couple of years that the securities market is going to return to 7% to 8% return in max, what does that do as far as cap rates when you bring it back to real estate with public companies looking at them.

So that's where I think some of the disconnect is, people who are getting appraisals that were a little bit higher, they're not meeting those objectives now. And so they're having a hard time making decisions on the liquidation of the assets.

So we still look at it on the basis of where we think we will be within the first three years of an acquisition, and we want to be in double digit returns averaging out the acquisitions that we make in any one year.

And Jay, there's till a lot of capital out there chasing quality assets, keeping those cap rates fairly low.

Okay. Thank you very much.

Our next question comes from Chris Lucas [phonetic] from Paris Baker Watts.

Morning, Chris.

Good morning, Ed. Good morning, team. A couple of basic questions here. Going into '02, what was the total expiring leases that you were expecting?

Going into '02?

Yes, starting, going back to the end of the fourth quarter, what was the total volume?

I know what they are now.

We can give you exactly what they are now. We have to dig out the [PLX] to see where we were at the beginning of the year. Where are we now?

You know, you've given us what, where you are now in the supplemental. I'm just trying to figure out how much you've done so far.

Right, so far.

so far?

Right.

And if you take a look at that, so far this year in the office buildings, we have leased 145,383 square feet; in the retail, 13,721 square feet; the industrial center is 32,874 square feet; and that's for a total of 192,000 square feet in round figures.

And I might also mention as you know, we like to shorten our terms up as much as possible for our weighted average. The term of years on those leases that we have either new leases or renewed, is 3.9 years in the office buildings, 6.9 years in retails, and in the industrial centers, it's 3.1.

Now I might also mention since everybody is also concerned about what's going on in the apartment market, we track very closely what our rollover is in our apartments, and for the year, we're running a fairly good norm. Though the vacancy is up, we're running at about a 37% rollover.

And that is pretty much a norm that we have seen with the exception of the '98-'99 period when we were running at 99%, 98% occupied levels. Does that answer your question, Chris?

Well, a better way of asking it then is what has your retention rate been for the commercial group?

For the year, it's 65% or 66%.

Okay.

Uh-huh.

we have a high retention in the other two sectors, and that takes us up into the 74% range, somewhere around there.

Is that in the historical norms?

I would say that it fairly is normal.

Okay. Can you go through the dropoff in the G&A? Sort of year over year, it looked like it dropped off by about 25%.

Laura?

Yes. Chris, hi, this is Laura.

Hi, Laura.

Right.

The decline in G&A for Q1'02 is primarily attributed to the management bonus. And I do recall the decline for 2001 versus 2000 was also attributable to the same.

Okay.

That's the real bad news.

Can you talk about the [Fox Chase] renovation? I see in the note that the theatre lease is going to burn off here at the end of the second quarter. What's the status of that project? And are we going to see, you know, what's the timing on some of the other leases expiring there?

Okay. Skip, why don't you go ahead and take it.

Yes, Chris, that's the, with respect to that particular lease you talked about, that has the option to continue to roll. That property really is not going to see any significant improvement until the supermarket lease expires, which is the [McGruder's] lease there.

So I don't think you're going to see any material increases in that renovation for, I think it's another 3-1/2 years, probably more like four after you go through the construction, et cetera. And until that point, it's going to be rollover, keep the tenants in place, et cetera.

So you'll just extend the theatre lease until you match the lease?

Yes.

Okay.

It always brings me to the point when I take a look at particularly our retail and some of the NAB approaches that analysts are taking. That is a property if we wanted to sell it tomorrow that would probably be about a 4% cap rate mainly because of the huge, huge bump.

Compare it to what we did at Bradley. Bradley had very similar dynamics to what we had at Fox Chase. The average rents at Fox Chase today in line are about $8.00. And at Bradley before we renovated, it was right around $8.00. Today, the in line rents are running on average at $25.00, and Fox Chase has exactly the same demographics.

And so that will give you an idea of, and I know it's very difficult to really look at the innards of a company in that way, but we have with our shopping centers a couple of those opportunities.

Last question relates to the auditor, what's your status with Andersen right now?

We are having discussions with others, and no formal decision is made. But we will let everybody know May 13th exactly what we're doing and with whom.

Okay, that's it. Thank you very much.

Our next question comes from Brian O'Flanagan, [phonetic] Northland Capital.

Morning, Brian.

Good morning, Ed. You talked about your renewal rate I think for the office even was for about 65% for the quarter. What are your expectations for that for the rest of the year? You expect that to fall a little bit?

No. Frankly, it's hard to tell because some of the tenants are shrinking on us. They're not moving, but they're taking less space as I mentioned. We have that at 1220 19th Street where a tenant was going to take the entire amount of space that they've been talking about, and they had their own form of implosion in there and a couple of people left, so they took less space.

We also had another tenant, new Republic, in that same building who has been a tenant there for a long time, had decided that they were going to move to a less expensive space, and they left. And we have another one at 1901 Pennsylvania Avenue, which is Audubon, who has been in the building for a number of years now, probably the last six years, and had been taking extra space as we went along.

And they were talking about taking additional space, all of the sudden out of nowhere, they decided they're going to move on and we don't know where. And so, it's really hard to tell, but I would say at the same time, there are other positive things that are happening.

And based on the experience in this portfolio and other experiences that we've had, I think that 65% to 66% on the office space retention is probably a fairly good number.

Okay. Are you being less aggressive on rents in order to keep occupancy?

We're doing what we have to do to keep the tenants there, particularly in Northern Virginia where you have the most competitive environment that to the extent we have to move our rents downward somewhat, we do it. But for the most part, since most of our tenants are smaller, we've been able to generally hold rental rates.

Your rental increases on expiring and new leases continues to be very strong. What are your expectations for that number as the year goes on?

Well, with respect to the Northern Virginia, I would expect that to moderate to the extent there is space rolling in Northern Virginia. On our other portfolios in Maryland and D.C., I expect to see continued rollover increases.

In the double digit rate? Or do you expect something a little bit [inaudible]?

No, I wouldn't expect it to be double digit.

No, on average, it won't be double digit, but there are a couple below, well below market situations. But I think the numbers that we reported this morning and in the supplemental is pretty much on target on the office side.

Okay, great. Thank you.

Any other questions?

At this time, if you'd like to ask a question once again, please press star one on your touchtone phone. There are no further questions at this time.

Okay. Well, thank you again for joining us today. As always, we greatly appreciate your participation and support. All of us are available to answer any other questions you may have.

Incidentally, we intend to hold our second quarter conference call on July 23rd if you'd like to go ahead and calendar that. Thank you, and give us a holler if you want to talk. Thank you.

The conference is now concluded.

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