Elme Communities (ELME) 2004 Q3 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the Washington Real Estate Investment Trust third quarter 2004 earnings conference call. I have a reminder, today’s call is being recorded. Before turning the call over to the companies Chairman, CEO and President Mr. Ed Cronin, Sara Grootwassink the companies CFO will provide some introductory information. Miss Grootwassink, please go ahead.

Thank you and good afternoon 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 after the call at 301-984-9400 or you may access the document at our website at www.writ.com. Our third quarter financial supplemental information is also available on our website. Please bear in mind that certain statements during this call 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 acquisitions, changes in interest rates, weakened activity and other risks associated with the commercial real estate business as detailed in our filings from time to time with the Securities Exchange Commission. Now I would like to turn the call over to Ed Cronin.

Good afternoon. With me today are Skip McKenzie, Executive Vice President of Real Estate and Laura Franklin , Senior Vice President of Accounting and Administration and Corporate Secretary. This afternoon after my brief comments Sara will provide a review of our financial performance for the third quarter ’04. Skip will discuss our portfolio performance, current development activities, and general market conditions affecting our properties. Then we’ll open the call for questions.

On our July conference call, I stated that we believed that WRIT would be at the lower end of its guidance for a year. Indeed first call now has $2.07 per share. After recent reviews of operations we now anticipate FFO for the year to be between $2.05 and $2.07 per share on a fully diluted basis. This year we have been impacted by lower than expected occupancy levels and increased operating costs due to the combination of carrying the vacant space and the general expense increases throughout the portfolio along with the lack of any meaningful contribution from acquisitions during the first nine months of the year. The acquisition arena is still very aggressive to a point where many cases it makes no sense to us. We will continue to focus on improving our internal growth and carefully acquire assets which suit our strategic plan and provide with a positive return on invested capital.

To refresh everyone’s memory our strategy is to reduce WRIT’a exposure to the general office building market by reducing its NOI contributions to our portfolio to a 43% range from what was recently 50-51% and increase our investment in medical office buildings and the other three property types in which we invest. Incidentally, the medical office building group now represents 9% NOI contributions on an annualized basis. As you’ll hear from Skip, we are also planning to sale of an office building in Tyson’s Corner, which is a part of our strategy to reduce portfolio volatility and provide us with an opportunity to continue seeking value added opportunities in the general office market arena. This has been quite a lean summer, and early fall for everyone at WRIT between preparing budgets and meeting 404 requirements and wanting to get it right, we have pushed off our annual retreat with our trustees until mid-November. Consequently, until they sign off on the budget we are not prepared to provide ‘05 guidance. It will be provided after the retreat in mid-November. Now I will turn the call over to Sara and look forward to answering your questions.

Thanks Ed. As of now all per share amounts are on a fully diluted basis. Net Income for the third quarter totaled $10.8 million or 26 cents per share compared to 11 million or 28 cents per share in the third quarter of 2003. Funds from operations for the third quarter totaled $21.3million or 51 cents per share as compared to FFO of the third quarter last year of $20.1million or 51 cents per share representing flat quarter growth. After adjusting for recurring capital expenditures, tentative improvements, leasing commissions, the straight lining of rents and the amortization of lease intangibles, our funds available for distribution for the third quarter totaled $16.9 million compared to $16.1 million for the third quarter last year. For the quarter we distributed dividends of 39 and ¼ cents per share resulting in a FFO payout ratio 77.1 %. Our FAD payout ratio was 97%.

A reconciliation of net income for both funds from operations and funds available for distribution can be found in our earnings press release in the third quarter supplement financial report, both of which are available on our website. In the third quarter since our cash NOI for our overall portfolio increased 0.3% compared to cash NOI for the third quarter of 2003. Breaking that down by property type, office same store cash NOI decreased 1.7%. Decreased occupancy in Maryland plus increased operating expenses primarily utilities and administrative expenses were only partially offset by lower rent abatement. Same store apartment cash NOI decreased 2.3% as rental rate growth was more than offset by administrative expense, which included marketing cost, payroll and the sector allocation of increased accounting expenses.

Same store cash NOI for the retail portfolio increased 4%, despite a price, small drop in occupancy due to the renovation at Westminster Shopping center. The increase was driven by rental rate increases and decreased bad debt expense. The industrial portfolio achieved its third sequential quarter of positive same store NOI growth, with same store at cash NOI increasing 3.1% over the third quarter last year. Occupancy increased 410 basis points with only a slight roll down in rents. Sequentially, we achieved positive results. The same store cash NOI for the overall portfolio increased 0.3% over the second quarter of 2004. Multifamily decreased 2% due largely to increased operating expenses, although those occupancy and rental rates increased over the prior quarter. Sequential same store cashed NOI for the office sector increased 0.2%, retail increased 0.6% and Industrial increased 2.6%.

Overall same store operating expenses increased 3.2 % primarily due to the seasonally higher utility expense and the increase in our accounting expenses that flow through to the properies. At September 30th, our allowance for doubtful accounts stayed at 10% of cash basis receivables and 11.9% of straight line receivables. Our actual bad debt expense for the quarter totaled 0.2% of revenues on a cash basis with 0.7% on a GAAP basis.

At quarter end, we had $557m in total debt outstanding with $150m in secured fixed-rate debt, $375m of unsecured fixed-rate notes, and $31m outstanding in our lines of credit. In total, our debt carries a weighted average interest rate of 6.3%, and the weighted average maturity is 7.1 years. At September 30th, our total market capitalization was $1.8b resulting in a debt-to-total market-capitalization ratio of 31%. The company’s debt service coverage ratio remains at 3.3 to 1 for the third quarter.

As Ed mentioned earlier, we will not meet our previous guidance for the year 2004. We currently expect our FFO for push year to be in the range of $2.05 to $2.07 for the year. Looking at our results for the first nine months of the year compared to our projections, we are actually ahead $0.02 per share on revenues from the existing portfolio. But this has been offset by higher operating expenses of $0.02 per share of which $0.01 is attributable to the portion of 404 accounting fees that have been passed down to the property level. General and administrative costs are $0.02 higher than anticipated due to additional personnel expense and some abandoned acquisition expenses. And finally, the largest driver was that we had expected to earn $0.04 in FFO from 2004 acquisition activity to date and instead have earned only $0.01 per share.

Looking at the fourth quarter, I expect flat same-store NOI growth, some incremental acquisition NOI, and lower G&A expenses. We are in the process of completing budgets for 2005 and will be providing guidance in mid-November after board approval.

Now, I will turn the call over to Skip.

As of September 30th, our portfolio totaled 68 properties consisting of 11 retail centers, 30 office buildings, 18 industrial properties, and 9 multi-family properties. Subsequent to quarter end, we acquired 8301 Arlington Blvd, a 5-storey medical office building consisting of 49,744 rentable square feet for $8m.

Through the third quarter, the Washington metro area office market experienced increased activity primarily due to the new job creation that resulted from higher federal government spending. The leasing activity remained varied among sub-markets. Northern Virginia continued to show strong gains while the Maryland and D.C. markets have demonstrated more moderate growth. Suburban Maryland, in particular, remains flat. Although overall leasing activities on the up swing, most sub-markets continue to have significant quantities of vacant space. Thus resulting in generally flat rental rate growth. The WRIT office portfolio was 89.2% leased in the third quarter.

During the third quarter, vacancy rates, including sublet space, in the Northern Virginia office market improved, decreasing from 12.2% last quarter to 11.4% at September 30th. This sub-market experienced a net absorption of 1.8 million square feet, totaling more than 4 million square feet through September 30th.

Despite the three sequential quarters of significant positive absorption, persistent large amount of available space generally kept rental rates stable at current levels. Leasing momentum continued during the third quarter and available sub-lease space was significantly reduced with strong interest being expressed by medium and large users. Large blocks of space that is greater than 100,000 square feet were taken down by AOL, Systems Planning and Analysis, and Web Methods. It is interesting to note that most robust activity took place outside the Beltway and the DOD and the Homeland Security contractors have been joined by renewed from technology companies.

At quarter end, the vacancies including sublet space within the Northern Virginia sub-markets ranged from 8.8% in Roslyn and 10% in Alexandria to 15% Herndon and 16% in Tyson’s Corner. Although the demand has increased from both large and small users, activity occurs sporadically. And significant amount remaining vacant space, including 3 million square feet in Tyson’s and 3.2 million square feet in Reston/Herndon, continues to have a dampening effect on rental rates. WRIT’s Northern Virginia office portfolio consists of 1.8 million square feet and with 85% leased at quarter end.

The downtown Washington market continues to show strength and to realize positive absorption, primarily driven by job growth in the public sector as well as consulting in business sector services firms. This leasing activity has offset substantial increases to supply and has kept the district’s overall vacancy rate lower than of than the neighboring suburbs. In fact, large blocks of space have become increasingly scarce, thus requiring big users to plan strategically. Vacancy in the two largest D.C. sub-markets is 6.4% in the CBD and 8.7% in East end. In the third quarter, 700,000 square feet was absorbed in D.C. and 6.3 million square feet was under construction.

Because of new supply and competition for the suburbs, overall rental rates remain firm. The WRIT D.C. office portfolio consists of 459,000 square feet and was 97.2% leased at quarter end. In suburban Maryland, overall leasing activity has improved but still remains fairly weak. The suburban Maryland office sub-markets continue to vary significantly in stability and vacancy. For example, during this quarter, Montgomery County, Maryland had 400,000 square feet of positive absorption while Prince George’s County had negative 100,000 square feet of absorption.

Office vacancy overall in Maryland actually increased slightly from 10.9% in the previous quarter to 11.1% in the third quarter. Although overall absorption is up, rental rates are flat or down. There is noticeable improvements in some sub-markets such as downtown Rockville but activity is sporadic. NIH in the sub-contractors remains generally inactive. Individual sub-market vacancies range from 3.6% in Silver Springs to 12.6% in the I-270 corridor of Rockville and Gaithersburg.

During the quarter, WRIT added the 66,000 square-foot Shady Grove medical office to the Maryland portfolio. WRIT’s Maryland office portfolio now consists of approximately 1.7 million square feet and was 87.3% leased at quarter end. Omitting Maryland Trade Center I and II, the leased rate in the Maryland portfolio increases to 93.2%.

During the third quarter, WRIT leased 248,000 square feet of office space with an average rent decrease of 6.2% on a cash basis and flat on a GAAP basis. Tenant and improvement leasing costs average $11.99 per square foot. Our office retention rate for third quarter was 75.4% base on square footage. Our largest vacancies are in Tyson’s Corner where we have 212,000 square feet or 43% of overall office vacancies. And that is available with good activity and Maryland Trade Center where we have 124,000 square feet which is 25% of overall office vacancies available with fair leasing activity. Currently, we are completing negotiations with World Bank to renew and expand as the IMF space at 1776 G Street.

The retail market is in excellent shape in the D.C. region. Retail occupancies throughout the region are strong and occupancy within our retail centers has remained excellent at 94.6% even with the second quarter. At Westminister, we will open Food Lion on November 10th, and during the third quarter, we executed a 55,000 sq. ft. lease with Harris Teeter for Foxchase .

During the third quarter, we leased 192,000 sq. ft. of retail space achieving a 35.1% increase in rents on a cash basis and 41.4% increase on a GAAP basis. Tenant improvements and leasing costs average $1.77 per sq. ft. Our retail portfolio retention rate for the third quarter was 93.1%. For the year 2004 we will continue to see high occupancies and rise in rent when leasing opportunity arises.

The apartment market excluding Condos for sale in the DC Metro area continues to be a tale of two cities. Virginia is improving by the day but Maryland, particularly the I-270 North Bethesda market through Rockville is soft, whereas in Virginia, the renewed economy has created increased occupancy. In Maryland, the apartment development pipeline has grown larger than Northern Virginia’s for the first time in recent history and there are significantly fewer condominium switches. In DC, absorption and conversion to condo regimes have kept the market reasonably healthy. We anticipate continued moderate improvement in the DC and Virginia markets and continued soft conditions in the suburban Maryland market for the fourth quarter.

The WRIT multi family up portfolio occupancy was 91.4% for the quarter and all but one of the units at Ashby are back in the market at this time. The Washington region industrial flex market experienced steady growth in the first half of 2004. Absorption is up, vacancies are down and sub-lease had declined significantly. Northern Virginia in particular is strong and we are seeing both reduced vacancies and increased rents in virtually all sub markets. The Baltimore Washington corridor is not nearly as vibrant but occupancies and rents continue to be stable. We expect to see moderate rental rate growth and reduced vacancies into the fourth quarter.

WRIT’s industrial portfolio continues to improve. Overall occupancy improved slightly to 92.8 from 92.6% in the second quarter. Overall activity and tenant prospect stores have increased. At Northern Virginia Industrial Park where most of our vacancies reside, we have robust activity across the board. During the third quarter, WRIT leased 265,000 sq. ft. On a cash basis, rental rates were flat, on a GAAP basis, rental rates increased 7% . TI and leasing cost were $5.14 and the tenant retention rate was 96.2%.

We have commenced construction on Rosslyn Towers in Rosslyn, Virginia, where we will construct 224 residential units in 59 hundred sq. ft. of retail space, which will be completed during the fourth quarter of 2006. Plans for the approved 75 residential units in 4,500 sq. ft. of retail space on the addition to the 800 block of South Washing Street in Alexandria Virginia are progressing. At our Foxchase Shopping Center as I mentioned earlier, we have executed a lease with Harris Teeter and we anticipate receiving approval from Alexandria city officials by year-end. We have a firm contact to sell 8230 Boone Boulevard in Tyson’s Corner for $10m to a purchaser who intends to convert the property to office condos. The closing is scheduled for November 15.

In summary, conditions in the region are improving. Leasing activity in the office industrial sectors has increased, with Northern Virginia leading the charge. However in suburban Maryland, both office and residential has been slow to lease up for different reasons the former due to NIH and FDA inactivity and the latter due to over supply. Rental rates in general are stable to moderately up depending on the sector and market. The retail world is outstanding throughout the region. Overall we remain optimistic and expect continue improvements in our markets. Now we will open the call for your questions.

Ladies and gentlemen, if you would like ask a question at this time please press star then the number 1 on your telephone keypad. To withdraw your question press star then 2. One moment please for our first response. Our first question comes from Chris Lucas with Robert W. Baird.

Good afternoon Chris.

Good afternoon everyone. Skip can you give me a little bit of color on Foxchase in terms of size and expectations as to when that renovation project would be complete? Hello

Could you just bear with us (inaudible)

Technical difficulty.

Hi, you are back on line Mr. Lucas is still sending his question.

Okay sorry about that. Chris? I’m sorry we had a technical difficulty.

Did you hear the question at all? I just wanted to get a sense as to size of that project in dollars and then also in terms of defining when you thought that, that would be completed?

Chris? The actual dollars on that is relatively nominal because we just negotiated an absolutely deal with Harris Teeter. Basically what we have to do with Foxchase, I know you’ve probable the centers, in L-shaped shopping center, but our requirements are essentially to demolish half of the center and deliver a pad to Harris Teeter, so we’re not actually building them their store so our construction costs are relatively nominal. In addition to that we will be fussing up the other half of the shopping center i.e. re-cladding it so we have to do some site work obviously and there’ll probably be a few minor proffers that we have to do for the sale to get it through but we don’t believe that the investment is going to be more than $2 to $2.5m overall.

Typically what will be happening there is similar to Bradley. The average inline rental what --

I don’t have it right now but it’s in the teens.

It’s in the teens and we’re looking at a mid to the high 20’s market in all those leases that have been renewed on whatever subject to our development process we have a right take the space back or re-negotiated with tenants, the new rents upon completion of the renovation.

Okay. Just switching gears. Sara you mentioned that G&A you expect for fourth quarter to be lower, did you mean lower quarter or year over year?

I expect it to be lower in the fourth quarter than it was in the third quarter by approximately $400,000.

G&A expense is that much lower?

Yes we had a $132,000 abandoned acquisition expense that I don’t expect to repeat. We won’t be accruing for bonus and we had a one time true up of share grant expenses $128,000.

Okay, in term of again going back to earlier in the call at your comment about getting your office exposure down to 43%. I’m assuming that excludes the medical office component?

Yes it does. The game plan is to really leave our self plenty of room to hopefully buy some value added opportunities in the general office space market. We’ve seen a couple out there but the numbers still look goofy, but as far as we’re concern meet some body else’s requirement. Our game plan frankly is to continue in the medical office sector and we’re still looking at properties.

Is there -- what’s the opportunity there in terms of this market? It seems like everything you bought at this point has been you know it’s a fully occupied property. What’s the opportunity there?

Well you know there should be opportunities out there at this point with the markets improving where we can buy properties that have -- rental you know tenants come in hopefully renewal within the next year or two. And obviously those that have vacancy in them. And at the moment we’re not seeing a lot of properties on the market where there is any substantial vacancy to speak of. There has been a couple with the year term roll over that we looked at. But there again we just didn’t step up to the plate with the dollars that someone else was willing to pay.

Okay and then, Skip, on your cost was it related to office UTI and leasing commission cost in just sort of what the markets requesting now. What kind of change have you seen over the last you know 6, 9 months in terms of those cost?

In terms of what the market is demanding or what’s the construction cost?

What the markets is demanding what kind of things are the tenants requesting? You know free-renting along those lines?

You know we have a generally improving market so free rent is not a big factor today. I mean I wouldn’t say that it doesn’t happen on occasion but we have not been seeing a lot of free rent activity. In terms of construction cost that’s always a tough question to answer because it’s all over the board depending on the condition and the space and where you are. You know in DC your tenants seem fairly higher amounts of tenant improvements. I mean a newer class A buildings are very high. In our building we’ve been able to keep it less than $20. In Tyson’s Corner and other sub-urban markets we’ve been able to hold tenant improvement less than $20, between $10 to $20 depending on the condition of the space.

Plus we’re also still seeing that tenants rather go for commissions at a higher level than normal than they still (indiscernible) to the volume of prospective tenants out there is relatively low so that puts pressure on upward commission as far as the progress is concerned.

Okay and then my last question on your roll over both for the remainder this year and then sort of the first part of next year, generally in the office side where does most of that roll over occur? Which markets are you seeing most of that roll over occurring?

Well I don’t know if there is one particular market. I mean we had space rolling in different markets. I think one of the things that we mentioned in the conference call that is think it’s important to take note of in the roll over category is the World Bank space. That has a big impact because it’s big square footage at big rents. So for example the re-negotiation we’re currently having with them encompasses 153,000 square feet. And since that rent is in the $40 per square foot neighborhood you’re talking about over $6m of annual rental income and we are very close to finalizing that deal with them. So I think when you take that into account that’s a big part of our office rolling number in 2005. I don’t want say it’s button down but we’re pretty darn close with us having a signed and executed deal.

Okay thanks a lot guys appreciate it.

Again ladies and gentlemen star one for any questions or comments. Our next response comes from Jessica Tulley with CSFB.

Good afternoon.

Good afternoon Jessica.

Hi I was going to ask for some more color on the World Bank situation. When you were talking about it did you mention there might be an extension with that or even an extension I know --?

Jessica the situation there is at that building in 2005 the World Bank comes up and later in the year the IMF space comes up. The World Bank space is 87, 531 square feet and the IMF space is 59,146 square feet. So there is actually another space that comes up to 153,187. So if we get this deal done, which I fully expect we will, all of that will be incorporated to one lease document. It would be no down time.

Great and when you mentioned the $40 per foot is that the current cash rate or is that the current straight line rate?

That’s the current cash rate.

And then also I wondered if you had any color on the SunTrust and the Xerox leases because I think one of them was going to extend or go on a short term basis for a while and then just wondered if you could give an update on those two?

Okay the Xerox lease is pretty much done at this point. Xerox is -- just to refresh everybody’s memory it was approximately 90,000 square foot at Tyson’s Corner. And they like many of the technology companies down size substantially approximately in half. So we renew them for 45,000 square feet and we’ve pretty much taken that vacancy at this point. So that’s that situation. They are renewed and reduced in terms of square footage.

On Sun Trust we have them in two different locations in terms of the near future expirations. There are approximately 50,000 square feet in Tyson’s Corner and I think we’ve pretty much announced that in the past that that space is vacating in our, what we call Tycon II building, 8245 Boone Boulevard. That space is vacating in November, we have a lot of activity in that building right now. But that spaces is not –it’s not like one continuous space, the way that space kind of grew there, it’s bunch of different suites. So it’s not the type of situation where we’re going to lease it to one 50,000 square foot tenant. It’s going to be a number of tenants.

But they haven’t left the building yet so we can’t lease their space yet. But there is a lot of activity in those buildings right now. The other large Sun Trust expiration coming up which is at the end of the year in December in late December is Sun Trust at 515 King Street. And that lease is 42,572 square feet, we’ve renewed them for 26,960 and they are going to vacate one floor, which is 15,612 square feet. And that lease is done.

And how is things doing in the Maryland trade center area is there anything picking up at all there?

We definitely have some activity there. Wish we had more to be honest with you. But if you listen to my market comments the Prince George’s Canning market is a little soft right now. But we do have prospects we’re -- in fact we’re talking to 2 full floor prospect for one of the buildings. Now we don’t have a handshake we don’t have any thing on them I would caution you on that. But we do have people looking in space there and we have several lines in water with some larger fish as well. But they are you know well down the road. So I guess what I would say we’re cautiously optimistic but you know we’re coming out of a period that was very soft there.

Thank you.

Again ladies and gentlemen star one for any questions or comment.

Are there any more questions?

There are no further questions on the phone lines.

Well good I 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 question you may have. And I suppose we’ll be seeing a number of you out in LA and we can discuss WRIT to a greater degree at that point. Thank you.

This concludes the Washington Real Estate Investment Trust Third Quarter 2004 Earnings Conference Call. Thank you again for participating, you may now disconnect.