Elme Communities (ELME) 2005 Q3 法說會逐字稿

Welcome to the Washington Real Estate Investment Trust third-quarter 2005 earnings conference call. As a reminder, today's call is being recorded. Before turning the call over to the Company's Chairman, CEO and President, Ed Cronin, Sara Grootwassink, the Company's CFO, will provide some introductory information. Ms. Grootwassink, you may please begin.

Thank you and good morning, everyone. After the market closed yesterday, we issued our earnings press release. If there is anyone on the call who would like a copy of the release, please contact me after the call at 301-984-9400, or you may access the document from our Web site at www.WRIT.com. Our third-quarter supplemental financial information is also available on our Web site.

Please bear in mind that certain statements during this call are forward-looking statements within 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, leasing activities and other risks associated with commercial real estate business and is detailed in our filings from time to time with the Securities and Exchange Commission. Now I'd like to turn the call over to Ed Cronin.

Good morning. With Sara and me today are Skip McKenzie, Executive Vice President of Real Estate, Chris Mundy, Executive Vice President and Chief Investment Officer and Laura Franklin, Senior Vice President of Accounting, Administration and Corporate Secretary.

I'm happy to report that we have achieved many accomplishments since our last conference call. During the third quarter, we met several goals which were included in our '05 strategic plan. Notably on the personnel side, Chris Mundy has joined us as Executive Vice President and Chief Investment Officer. Prior to WRIT, Chris spent 13 years with Equity Office Properties. Most recently, he was Executive vice President of strategic planning and operations. He joined EOP in '91 after four years with Trammell Crow Company. Now that the senior management team of the Company has been rounded out, we can move forward with our announced succession plan as well as look forward to an even greater level of long-term performance.

Another important addition to our management team is David DiNardo. He joined us in July as Managing Director of Leasing. I've known Dave for many years and for ten of those, he worked for me at the Smitty Company. Most recently, Dave served as Senior Vice President and member of the executive committee of Grubb & Ellis Co. in their Office Services group. His contagious enthusiasm for and strong background in leasing is already apparent.

Turning to leasing performance, we are pleased to report that during the third quarter and into the early stage of the fourth quarter, we are experiencing solid performance in both the industrial and office sectors.

Before turning the call over to Sara and Skip, who will provide the details regarding financial and operational performance, I want you to know that we feel very comfortable that we have turned the corner in regard to leasing, particularly in the office sector, which has been our sea anchor. That, along with the addition of the highly qualified talent at the top adds new energy and enhances rich long-term growth expectations. Now I'll turn the call over to Sara.

Thanks, Ed. As we note, all per-share amounts are on a fully diluted basis. Net income for the third quarter totaled 13.5 million or $0.32 a share compared to $10.8 million for the same quarter in 2004, an increase of $0.06 per share, due in large part to the $3 million gain on the sale of one industrial property.

Funds from Operations for the third totaled $22.4 million or $0.53 per share, an increase of $0.02 over the same quarter last year. WRIT paid a quarterly dividend of $0.4025 per share, resulting in an FFO payout ratio for the quarter of 76%. Our FAS payout ratio for the quarter was 97%, significantly improved from 109% in the second quarter. A reconciliation of net income to both Funds from Operations and Funds Available for Distribution can be found in our earnings per earnings press release and the third-quarter supplemental report, both of which are available on our Web site.

Same-store cash NOI for our entire portfolio increased 0.7% compared to cash NOI for the third quarter of 2004. Third-quarter same-store cash NOI for the office sector decreased 4.6%, as economic occupancy in Maryland and Tyson's Corner was lower this quarter than the same quarter last year. All lease termination fees were also lower this quarter. Same-store apartment cash NOI increased 3.7%, driven by rental rate increases and a 350 basis point increase in occupancy. These increases were partially offset by increased operating expenses, primarily utility expense.

Third quarter same-store cash NOI for the retail portfolio increased 9.8%, driven by occupancy gains at Westminster Shopping Center, Chevy Chase Metro Center and 800 South Washington Street.

The industrial portfolio continues to perform well with same-store cash NOI increasing 6.2% over the third quarter last year. Same-store occupancy remains flat while rental rates increased 3.3%.

Sequentially, we also experienced positive same-store NOI growth. Same-store cash NOI for the overall portfolio increased 0.6% from the second quarter of 2005. Same-store NOI for multifamily decreased 2.8% while occupancy increased 120 basis points and rental rates increased 1.7%. Utility and administrative expenses more than offset the increases in revenue. Utility expenses are expected to moderate some in the fourth quarter. Same-store cash NOI for the office sector has decreased 1.1% due to increased operating expenses offsetting the improvement in occupancy. Retail same-store cash NOI increased 5.1% and industrial same-store cash NOI increased 3.1%.

At quarter end, we had 684 million in total debt outstanding with 170 million of secured fixed-rate mortgages, 420 million of unsecured fixed-rate notes and 93.5 million outstanding on our lines of credit. We paid off two mortgages during the quarter, Woodburn with an $18 million mortgage at 7.7% and Avondale with a $7 million mortgage at 7.9%. As a result, our overall weighted average interest rate decreased to 5.8%.

Subsequent to quarter end, we issued 100 million in corporate debt by reopening the May 2006 team issue for an all-in cost of 5.5%. Proceeds were used to pay down our lines of credit and the remaining $6 million will be used to fund development.

At September 30th, our total market capitalization was $2 billion, resulting in a debt to total market capitalization ratio of 34%. The Company's debt service coverage ratio was 3-to-1 for the third quarter. Please note that we will be issuing our 2006 earnings guidance in mid-November following our annual Board of Trustees retreat. Now I'd like to turn the call over to Skip.

Thanks, Sara. During the quarter, we completed one acquisition and one disposition. On July 29, WRIT purchased Albemarle Point Business Park in Chantilly, Virginia for $67 million. Albemarle consists of 89,000 square feet of office space and 207,000 square feet of single-story flex space for a total of 296,000 square feet. The buildings were built between 2001 and 2005, are 97% occupied and cater largely to a tenant base which supports the nearby national reconnaissance office and the Dulles International Airport. The property was purchased at initial yield of 7.3% on a cash basis and it capitalizes on the management leasing synergies with WRIT existing 839,000 square feet of industrial flex portfolio in this submarket.

On September 8th, WRIT sold the vacant 69,000 square foot industrial property at 3900 Penbelt Place, formerly called the Pepsi-Cola Distribution Center, to the Thomas Sommerville Co., for use as a corporate facility for $6 million. Penbelt was acquired by WRIT in 1987 to $2.5 million and was 100% leased to beverage distributors until Pepsi vacated in April of this year. WRIT recognized the $3 million gain on the sale and plans to reinvest the proceeds through a 1031 transaction.

As Ed mentioned, we've had a great quarter in terms of leasing. In the office portfolio, we leased 156,000 square feet. Rental rates decreased 8.8% on a cash basis and were flat on a GAAP basis as expected. TI's and leasing commissions were $21.57 per square foot. The good news is that Maryland Trade Center I and II have just about reached stabilization as each are now 85% leased and soon will be 93% overall once pending deals closed.

7900 West Park is still short of goal, although we leased 24,000 square feet of vacant space during the quarter, and continue to have significant prospects for the majority of the 80,000 square feet available. Currently 7900 West Park is 84.5% leased.

Retail leasing conditions are outstanding at our infill locations throughout the region. During the third quarter, we signed 17 leases totaling 52,000 square feet. Rental rates increased 20% on a GAAP basis and 12.7% on a cash basis. TI's and leasing commissions were $5.31 per square foot. Additional square footage was added at our Hagerstown and Westminster Shopping Centers as pad-type tenants opened for business during the quarter. At the end of September, we were 99.7% leased across the portfolio.

Our industrial portfolio is also in great shape. During the quarter, we leased 234,000 square feet. Rental rates increased 24.9% on a GAAP basis and 12% on a cash basis, with only $1.43 per square foot in TI's and leasing commissions. The sector is now 93% leased.

Our apartment portfolio is also performing very well. Occupancy increased 350 basis points over the same quarter last year with rental rates growth of 4% and occupancy at 92.5%.

On a development side, construction is underway at all three active projects. Rosslyn Towers, our 224-unit apartment project in Rosslyn, Virginia, has experienced a slower than expected initial phase due to complications in demolishing a section of the existing garage structure at 1600 Wilson Boulevard. We anticipate completion in the second quarter of 2007.

At South Washington Street, we expect to finish excavation at the end of November. We anticipate pouring foundations in December and completion during the first quarter of 2007.

The Foxy Shopping Center redevelopment is well underway. We expect to deliver to Harris Teeter their pad for construction next month. While Harris Teeter is building its store, WRIT will be adding 5,000 square feet of new space as well as recladding and updating the balance of the existing stores and site. We expect the grand opening to be late '06.

In the meantime, the re-leases have been executed. They are Rite Aid for $25 per square foot for ten years with 3% annual rent increases. ABC Virginia State Liqueurs at $31 plus 3% bumps for ten years, and another in-line tenant at $37 for ten years. Prior to renovation, in-line rents were in the $8 per square foot range.

In summary, markets in our region are stabilized and our properties in all sectors are well positioned for the upcoming lease rollover. We expect to see reduced vacancies across the portfolio and moderate increases in market rents as we move forward into 2006. We would now like to open the call for your questions.

(Operator Instructions). Scott Sedlack, A.G. Edwards.

Skip, can you maybe comment on what type of NOI that Pepsi building was generating before its vacancy in the second quarter?

Yes, I can. Over the last three years, the NOI from the Pepsi building generated about $345,000.

Over the last three years?

Over the last three years.

Okay.

It basically was -- they signed the lease at $5 triple net when we did the lease five years ago, and I think it had 3% annual increases in it.

Okay. There have been a number of recent sales comps. I understand some might be outside of your area. Would you guys care to maybe comment on whether or not you bid on any of these properties, and if so, why were you unsuccessful in acquiring them?

First off, are you referring to some specific properties? I don't understand the question.

Well, I know some of your publicly traded peers have acquired some. There was one in Frederick, a couple I believe outside in Manassas as well.

Well I'm not sure what property you are referring to in Frederick. I've seen a couple of things up there and it's not to -- I don't recall looking at anything. It might have been office -- there's some things that we've looked out in Frederick and it's almost, on our thinking, is on the wrong side of 270 and 85, so we haven't gone into those.

And as far as Manassas is concerned, we really don't care for that market as an office market. It has some industrial down there that's not bad but it's a market that doesn't have any drawl. Now for retail, it's very heavily residentially occupied; in that region down there is some service type offices and industrial that's related to the area. As I say, it's very heavily populated. Our preference down there would be retail more than anything else. And we have looked at some in-line retail neighborhood type and some people have just outbid business.

And the answer to, as far as we're concerned on the acquisition side, as I've said in the past, we're not going to change these cap rates down on a lot of these properties, particularly where we don't see really any near-term upside potential. And the other side, as you know, we like to acquire assets where we think there's additional opportunities for us to create added value.

Okay. What's the status of the Winkler portfolio?

Currently, in fact, I'm going to be out looking at the apartments tomorrow. The current status is that both the apartment portfolio portion and the office sector are both on the market, being marketed separately by two separate firms. And the expectation is that they want initial bids in within the next three weeks or so. As I say, tomorrow, I'm going on an inspection on the apartments and we're going to take a run in both sectors.

And would you be able to --

And a lot of other people are.

Would you be able to effectively compete versus private buyers on that portfolio?

I don't know. We'll find out. We'll try. The portfolio is worthwhile going after and competing effectively as far as we are concerned, and that is in particular as far as the apartments.

Would Wash REIT be able to undertake something like that themselves or would you have to bring in a partner to the mix?

If we get to that point, we'll decide. We have no problem if we decide to go with a partner. We have a number of people calling us regularly who want to partner up with us. So I'm not concerned about that at the moment.

Okay. And then finally, how do you foresee the increases in the utility expenses impacting your portfolio, specifically I guess by property sector?

Well, as you know, Scott, on the industrial and retail sectors, we pretty much have direct pass-through of those expenses so those aren't too much of a problem. The biggest sector where it hits us directly is in the residential because we have absolutely no pass-through. It pretty much goes right to the bottom line.

We are looking into, for 2006, looking at some programs where we might be able to pass through the electrical on our residential properties. We are evaluating that right now to mitigate some of that impact.

On our office portfolios, as you know, which was pretty much throughout the market, we have some pass-through ability, because everybody is subject to a stop. And the only properties we have in our office portfolio that has direct electrical pass-through is our medical buildings, which to a large degree are plus electric. So we do have some exposure there. So --

Would that impact, on the residential side, would that impact your ability to raise rents?

The fact that we're going to try to pass through electric?

Yes.

I don't believe so. Of course, everybody looks at things on how much is out of their pocket each month. But as a general rule and particularly the new properties are all, the tenants pay (ph), they are on electric. So if anything, I think that would mitigate the problem we might have passing through electric to our tenants because it is quite market-driven that the tenants pay electric.

Chris Lucas, Robert W. Baird.

Just a couple of quick questions. One follow-up on costs, just generally. Insurance costs, have you guys had any feedback yet from your broker regarding property insurance costs changes going forward?

Chris, we just renewed September 1st for two years and I don't have that specific number in here with me right now. But we were lower -- we had a lower float and we also have no terrorism exclusion. So regardless of what happens with TRIA, we are fine.

Okay. So you got in before the slew of hurricanes?

Yes, we did.

Okay.

And I think it's (indiscernible) of 175,000 less than last year or something like that.

Yes, yes.

I think it's 110,000 less than last year, Chris, going forward for the next two years.

Okay. And then on the Rosslyn project, can you give me a little more detail on -- I understand you are saying the project delivery is going to be delayed. Is that the entire project or just a portion of the project?

As you know, it's actually two projects or two buildings. There's a mid-rise building and a high-rise building. The delay is specifically related to the high-rise building. The mid-rise building still should be more or less on schedule. We are pretty much up to the third level and pouring concrete on the mid-rise. But the problem exists -- it's that the high-rise building is built directly over a portion of the existing garage for 1600 Wilson Boulevard. So while the mid-rise building was able to proceed expeditiously because it was on an unencumbered site, the high-rise building was delayed because we had a number of issues just demolishing the garage as it relates to permits with Arlington County.

And Chris, to go a little further on that, what happened was we were relying on the plans and specs that we received when we acquired the property. It turns out that the building was not built as far as the physical structure portion of it in line with what those plans and specs stated, so consequently, we had to go back and reengineer before we could go in and start separating the garage.

Okay. And then in terms of -- I noticed sequentially, there was about a 2.4% increase in the estimated cost for the project from the previous quarter. Is that just carrying costs on the delay? Is that related to material cost increases? What's the --?

All of the above. All of the above. It relates to time delays; it relates to interest expense; it relates to increase in concrete costs, pretty much a little bit of everything.

Okay. And then is the project under a guaranteed delivery cost contract?

It's a cost plus agreement.

Okay. What are the pluses?

We have agreed to a fee with the general contractor for a specific fee.

Okay. But are your construction material costs locked in then, or is there still risk to those continuing to rise?

We have locked in I think 80% of the cost.

We still have some to go, Chris. And the bottom line, where we are, when we initially got into this project, we anticipated we were going to have and (ph) all cost, approximately be turning on invested capital in that particular project somewhere in the range of 9 and 9.25%. Based on where we are right now, it looks like it's going to be closer to 8%.

Okay. On an (multiple speakers) -- on an initial stabilized basis.

That's pretty skewed now.

Okay, great. Thank you very much. That's all I have.

(Operator Instructions). Ken Avalos, Raymond James.

I just had a quick question. Could you guys give a little commentary on the Albemarle acquisition, sort of the seller or the motivation and specifically how you sourced it?

Source, number one, was, as most of these things today are done, came out through a broker's package. As you know, we have been talking about being able to come in under the radar so to speak and do deals direct. We've had a lot of those conversations and I have to tell you just virtually every one of them in the last few years have gone to market and we've had to go back and renegotiate. So people who say that, I'm sure there's some, but I haven't seen any.

Secondly, motivation there is a merchant builder type with apartment who -- they acquired this ground several years ago and went through the development process and once they stabilized it, they put it on the market as most merchant developers do, so that's basically the background.

And I just wanted to clarify one thing. The Fox Chase rents that you quoted, those were all net rents, right?

That's right. They are all triple net rents.

I'd like to mention for those who have been following us for some time that Fox Chase really has a lot of the same synergies that we had when we did Bradley. Those were basically dollar in line rents once we got it all done. We are averaging well above 35 to $40 there.

David Fick, Legg Mason.

What is a good run rate on CapEx now?

For which --?

For reoccurring CapEx?

Yes.

I think we're going to be roughly the same as we were in this last quarter. I think 2 million to 2.2 million is a good quarterly number.

Okay. Your occupancy gains this quarter, that was primarily driven in northern Virginia?

A lot of it was at Maryland Trade Center.

Oh, right, Okay. You guys don't really have much BRAC exposure, but can you comment on that generally as to how it affects you?

The only direct BRAC exposure we have, there's a DOD tenant at 1600 Wilson Boulevard that leases a tenant, or that leases one floor, excuse me. They were directly listed on the BRAC list. That's the only direct one.

And just to tell you how crazy that whole BRAC thing is, that tenant has been looking to expand in the building. They haven't done anything yet but they've made inquiries about expanding. That's the only direct exposure we have. And as you know, the only office building we have in the Arlington area is 1600 Wilson.

Our buildings in Alexandria, where there is also a lot of BRAC impact are in old town and really are a totally different tenant base. They are lawyers and accountants that want to be near the courthouse and just old town in general. So we really have minimal direct exposure to BRAC.

That was really my question, though, was more the indirect exposure. In Alexandria, you've got people who need to be their partly because they need to be near the courts but also I would guess that some of them are there to sort of serve DOD type service businesses or directly.

Not in our buildings, not in the Alexandria buildings.

Actually, a lot of them there, David, in that whole area today, certain things aren't going to change. Those are serving Marine Corps headquarters, which is being all redone now; it's a multimillion dollar project under construction. You have others like Fort Myers is not going anywhere. There's no change, and actually they are going to be receiving people. But it's only minimal impact as far as the private sectors and their relationship with those two organizations.

The only other thing that's going on we will be thinking in another four or five years is the Pentagon will be rotating in and out of those buildings because I think there's five more or six more years to go on the reconstruction of the Pentagon.

(Operator Instructions). Scott Sedlack, A.G. Edwards.

Hi, Skip, I just wanted to ask you another question in terms of your tenant roster. In terms of Lockheed and Sun Micro, any update that you can provide on those two leases?

Nothing has moved specifically forward. We are talking to Sun Mirco now; it's still a little bit early. But we are hopeful we are going to retain them. Lockheed, I think you probably know, does work at the NASA Goddard Space Flight Center and they've pretty much always signed short-term contracts. We are very confident we are going to retain them but we haven't really moved forward in any what I would call serious negotiations with Lockheed yet.

Okay. And then finally is there any trends that we can draw from your third-quarter rents that you were able to achieve?

Are you referring to any particular sector?

Well, in particular, I guess the office. That's been the weakest sector for you guys.

As we sort of generically mentioned, we think that going forward we are going to see some moderate market rental increases. I mean we don't think there's any radical bumps in market rents coming forward over the next few years. But I think we could expect more of the same in terms of rental rate growth. We are not expecting any radical spikes upward or downward.

Okay. And how much of your portfolio has annual rent bumps?

In the office portfolio specifically?

Yes.

Well virtually all our office leases have 3% rent bumps. I mean there's some exceptions to that rule but as a general rule, we get 3% rent bumps in all of our office leases.

There are no further questions at this time.

All right.

Okay. If there are no more questions, I want to thank everybody for joining us today. As in the past, we greatly appreciate your participation and support. All of us are available to answer any other questions you may have and we look forward to hearing from you and obviously seeing you next week in Chicago, and we thank you.

This concludes the Washington Real Estate Investment Trust third-quarter 2005 earnings conference call. You may now disconnect.