Elme Communities (ELME) 2005 Q4 法說會逐字稿

Welcome to the Washington Real Estate Investment Trust fourth quarter 2005 earnings conference call. As a reminder, today's call is being recorded. Before turning the call over to the Company's Chairman and CEO and President Ed Cronin, Sara Grootwassink, the Company's CFO will provide some introductory information. Ms. Grootwassink, you may 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 at 301-984-9400. Or you may access the documents from our website at www.writ.com.

Our fourth quarter supplemental financial 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, leasing activities and other risks associated with the commercial real estate business and is 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. With Sara and me today are Skip McKenzie, Executive Vice President-real estate, Laura Franklin, Senior Vice President of Accounting Administration and Corporate Secretary, and Chris Mundy, Executive Vice President, Chief Investment Officer, who is on travel but on the phone.

I'm pleased to announce that we ended 2005 on a particularly strong note, experiencing solid leasing performance in all of our commercial properties sectors, especially at Maryland Trade Center where we are now 93% leased. I expect our office sector occupancy levels will continue to improve throughout 2006; and as you'll hear from Skip, our other sectors are performing very nicely.

Please note that we have added a new segment to our financial disclosures by separating our medical office portfolio from the general office sector. In keeping with our strategic plan, the medical office building portfolio has reached 10.1% of NOI contribution to the portfolio and will continue to grow over the foreseeable future.

In December, we announced the acquisition of our Dulles Station development project. This location is terrific since it's one of the last development sites with frontage along the Dulles Access Road. Construction began a little over a week ago. Since this was an acquisition of an existing JV which opted not to proceed, this is benefiting from an executed fixed-price contract for the first building.

Within the last two weeks, we employed Grubb & Ellis on an exclusive basis to market the property. As a pre-emption to potential questions regarding the acquisition pipeline, we expect to execute a couple purchase contracts within the next week. Those property types are medical office buildings and industrial.

We are not at liberty to discuss any details regarding these properties until they come to fruition. But in the spirit of a heads up we want to keep you informed regarding current activity. After you hear from Sara and Skip, we will open up the call the questions. Now I will turn it over to Sara.

Thanks Ed. As a note, all per share amounts are on a fully diluted basis. Net income for the fourth quarter totaled 11.1 million or $0.26 per share compared to 12.4 million or $0.30 per share for the same quarter in 2004, a decrease of $0.04 on a per-share basis, due to the $1 million gain on sales recognized in the fourth quarter of last year.

Net income for the year was 77.6 million or $1.84 per share compared to 45.6 million or $1.09 per share in 2004. The significant increase in net income is due primarily to the $37 million in gains recognized on property we hold. Funds from operations for the fourth quarter totaled 22.8 million or $0.54 per-share, an increase of $0.02 over the same quarter last year. Funds from operations for the year totaled 87.4 million or $2.07 per share compared to 85.6 million or $2.05 per share in 2004.

Our FFO payout ratio has improved throughout the year from 79.6% for the first quarter 2005 to 74.5% in the fourth quarter. A reconciliation in net income for both funds from operation and funds available for distribution can be found in our earnings press release and the fourth quarter supplemental financial report, both of which are available on our website.

Overall, our portfolio is experiencing positive same-store NOI growth led by the retail and medical office portfolio. Same-store cash NOI for our entire portfolio increased 1% over the fourth quarter of 2004. Sequentially, we also experienced positive same-store NOI growth increasing 0.6% in the third quarter in 2005 and for the full year of 2005, we achieved positive same-store cash NOI growth of 0.3%. All sectors were positive with the exception of office.

The medical office portfolio is performing very well. Fourth quarter same store cash NOI increased 6% due to both rental rate growth and increased occupancy. Sequentially medical office same-store cash NOI increased 1.8% and for the year medical office occupancy was 99.3% and NOI increased 5.2%.

In general, our apartment portfolio is performing very well although same store partner cash NOI decreased 1.3% this quarter over the same quarter last year driven by an increase in operating expenses, primarily utility expense. Sequentially same store NOI per apartment decreased 1.8% with a decrease in occupancy from a specific moveout that Skip will discuss later in increased utilities.

For the year, apartment same store NOI increased 2.7% with strong rental rate growth and occupancy of 93.2%. Retail portfolio is very strong. Fourth quarter same-store cash NOI for the retail portfolio increased 3% driven by increases in occupancy and rental rates throughout the portfolio. Sequentially retail same-store cash NOI decreased 0.6%; and for the year, retail same-store cash NOI increased for 4.1% with 97.3% occupancy.

Fourth quarter same store NOI for the industrial portfolio increased 0.5% over the same quarter last year due to an increase in rental rates. Sequentially industrial same store NOIs decreased 0.9% due to an increase in operating expenses. But for the year the industrial portfolio achieved the greatest increase in same store NOI at 6.6% with 93% occupancy.

Finally, the office sector was flat this quarter over the same quarter last year as occupancy gains in Maryland Trade Centers 1 and 2 were offset by increases in operating expenses. Sequentially, same store cash NOI for the office sector increased 2.5% with increased occupancy and higher rental rate.

For the year the portfolio experienced -5.2% same-store cash NOI, all driven by vacancy in the 7900 West Park Building, 515 King Street in Alexandria, and three office buildings in Rockville, Maryland.

At year end we had 714 million in total debt outstanding, with 170 million of secured fixed-rate mortgages, 520 million of unsecured fixed-rate notes and 24 million outstanding on our lines of credit. In October we reopened our 2015 senior unsecured note issuance for an additional 100 million in debt, with an effective interest rate of 5.5%. As a result, our overall weighted average interest rate increased 10 basis points to 5.9% with a weighted average maturity of 7.4 years.

At December 31st, our total market capitalization was 2 billion resulting in a debt to total market cap of 36%. The Company's debt service coverage ratio was 3.21 for the fourth quarter.

In mid-November we issued 2006 earnings guidance of $2.15 to $2.18 in FFO per-share. This guidance assumes $100 million in acquisitions weighted evenly throughout the year. Our projections also assume 94% occupancy throughout the portfolio and whole portfolio NOI increasing 7%.

Earlier this week, we announced our first acquisition of the year -- Hampton Overlook and Hampton South, a 5 billion industrial property located inside the Beltway in Prince George's County, Maryland, for $23.1 million. One of the buildings is recently completed and has not yet been leased. Therefore we announced that our first-year cash yield will be 5.4% after closing cost and capital reserve, increasing to 7% in the second year.

Now I'd like to turn the call over to Skip.

As Sara just mentioned we closed on Hampton Overlook and Hampton South this past Tuesday. These properties are modern tilt-up construction, true industrial warehouses well-located with excellent access to I-95 in Capital Heights, Maryland. Four of the buildings were completed in 1989 with the last building completed in late '05.

The stabilized buildings are 93.3% occupied and we already have good activity on the 63,000 square foot recently completed vacant building. In fact, a letter of intent was received just this morning for 30% of the building well in advance of our projected lease up.

As Ed mentioned our leasing group finished the year very strong. In 2005, we executed 380 commercial leases for over 1.7 million square feet of space with average rental rates on a GAAP basis increasing 8.7%. On a cash basis, rental rates were even with the only roll down from the office sector at a negative 4.4%. On a GAAP basis, rental rate increases were 3.8% in the general office sector, 11.2% in the medical office sector, 28.6% in the retail sector, and 12.2% in the industrial sector. Tenant improvement leasing costs averaged $10 per square foot throughout the portfolio.

In the fourth quarter we leased 391,000 square feet. Rental rates increased on both a cash and GAAP basis at 1% and 12% respectively.

The office sector continues its steady improvement. Rental rates increased 5.9% on a GAAP basis and a negative 6.1% on a cash basis. TIs and leasing commissions averaged $15 per square foot. We are experiencing good activity in virtually all submarkets and we expect to see reduced vacancies in moderate rental rate growth -- market rental rate growth going forward. Our Maryland Trade Center properties are now stabilized at 93% lease with greater diversification in the rent roll and we are seeing increased activity at 7900 Westpark where we are 84% leased.

During this quarter with few lease expirations and low vacancy, there was nominal leasing activity in the medical office portfolio. What activity occurred was excellent. Rental rates increased 14.8% on a GAAP basis and 6.4% on a cash basis. This portfolio was 98.6% leased at the end of December.

The largest rental rate increases in our portfolio were again in the retail sector with cash rents increasing 34% and GAAP rates increasing 51% on a 45,000 square foot lease this quarter. Even more extraordinary these increases were achieved with nominal improvement costs with incurred TI and leasing conditions at a combined $1.44 per square foot. At the end of December we were 98.8% leased across the portfolio.

Our industrial portfolio continues to perform well. During the quarter, we leased 176,000 square feet; rental rates increased 12.4% on a GAAP basis, and 5.4 on a cash basis with only $2.81 per square foot in total TIs and leasing commissions. This portfolio was 93.4% leased at year end. We have good activity in a couple of the larger vacancies in the portfolio and thus expect occupancy to increase in the first half of the year.

Our apartment portfolio occupancy declined this quarter for two specific reasons. At the Ashby we had 28 units vacate at the expiration of leases with a diplomatic entourage affiliated with an embassy in DC. These units will be leased shortly or renovated and based on the strength of the McLean market will lease expeditiously. We also removed 10 units off the market in Munson Hill and 12 units at Bethesda Hill for renovation. These units are experiencing strong pre-leasing interest and the underlying fundamentals in our market are positive.

We expect to renovate approximately 172 units during 2006 which is 8% of our stock and will continue to affect occupancy levels.

On the development side, construction is underway at all four active projects, having recently broken ground at Dulles Station. Roslyn Towers our 224 unit apartment project in Roslyn is living along well. We have topped out the midrise building and recent progress photos are available on our website. We anticipate full project completion in the second quarter of 2007.

At South Washington Street we have finished excavation work and are currently pouring the foundation for the underground garage facility. In spring, we expect completion of this space and project completion is anticipated late in the first quarter of 2007.

The Foxchase Shopping Center redevelopment is well underway. We have delivered to Harris Teeter their pad site and they have started construction of a 55,000 square foot store. While Harris Teeter is underway WRIT will be adding 5,500 square feet of new small shop space as well as renovating the exterior façade of the entire shopping center. We expect the grand opening to be late this year.

At Dulles Station, we have our building permit and have executed a guaranteed maximum contract with construction for the base building. We recently commenced clearing and grading the site and as Ed has mentioned we have engaged Grubb and Ellis as the leasing agents for the project.

In summary, markets in our region are improving and our properties in all sectors are well positioned for leasing. In 2006, leases representing 17.4% of our office revenues expire with a projected modest cash roll down in that space but slightly positive on a GAAP basis. The medical office portfolio has leases representing only 3.5% of the medical office revenues expiring, and we expect renewals and new lease rental rates to be relatively flat on a cash basis and, again, slightly up on a GAAP basis.

The retail portfolio has leases representing 8% of retail revenues expiring; and we expect to continue to increase rents substantially both on a GAAP and cash basis. The industrial portfolio has 17.1% of its lease revenue expiring and we expect the new leases will be signed with modest increases on a cash and GAAP basis.

Overall we are projecting continued decline in portfolio vacancy and expect all market sectors to continue steady improvement in both occupancy and rental rate growth.

We would now now like to open the call for your questions.

(OPERATOR INSTRUCTIONS) David Fick with Stifel Nicolaus.

Congratulations on your progress on the development site. It sounds very very positive. I was wondering if you might have some comments on the Winkler acquisitions in your market? Could you look at that and what were your thoughts about it?

Number one, it makes our Company extremely more valuable in which you guys are showing on the numbers. We bid on both sides of that so we know what the numbers are and what cap rates we are at. And I don't want to guess at what -- since I haven't seen a final price. But having fairly good idea my comment is this Company is way undervalued. Our portfolio generally across the line is superior to what they sold in general in both sides. The apartments and the industrial and the commercial. So that's my look see at it.

Okay we will take another look at cap rates. With that in mind and seeing that very high pricing have you given any further thought to any sizable asset sales this year?

No.

You mentioned in your guidance that you got whole portfolio NOI increasing 7% for '06. What are the components of that?

On the residential and now again this is not same store. It's the entire portfolio. So for residential, we are expecting 2.75% increase in NOI in office 4.58%, in retail 11.1%, and in industrial 13.3%, and actually the office includes medical, back from our budgeting process. Off the number I gave you.

I was a little surprised to see your run rate down a few hundred thousand on G&A in the fourth quarter. What was that about and what is a good run rate going forward?

I think the G&A for Q4 was down, primarily due to incentive compensation and good run rate for '06 is about 2.2 a quarter.

And I guess lastly, Ed, I'd ask you to comment if you could on two things. The first is, your shortfall last year on the dividend was about $2 million. Not a huge number. Just wondering if you could comment on crossover? When you expect to get there? And then lastly, if you could comment on the executive integration process. where you are in terms of Chris Mundy's role?

First Laura, do you have the numbers there?

Really in terms of our payout, we are looking at about our [fad] numbers are about 100% for '06. We are looking at about a breakeven point at the end of '06, David.

On your second question, as far as the integration is concerned, where we are starting out here is Chris will be focusing primarily on our acquisition programs and the development going forward in that particular area. And then, as far as the balance for management we are taking our time with this integration.

Chime in there. It's Chris Mundy, but from my perspective it's been a pretty exciting start and I think two things just to reiterate what Ed said. Our acquisition pipeline is pretty active at this point and, secondly, I think as you mentioned, the Dulles Station development deal is a strategic opportunity for us in the sense that it really provides us with sort of a solid downstream earnings drive or so. It's been a good start. It's been busy.

Jessica Tully with Credit Suisse First Boston.

I wondered if you could talk about the Sun Microsystems lease? I think that expires in 12 months and I wondered what the outlook for that was lease in that building?

Let me talk about that. We are very engaged with Sun Microsystems right now and in fact, we recently received a letter of intent executed with them for approximately 65,000 of 110,000. There is an additional subtenant in there that we already signed a lease with for renewal for a total of 80 of the 110,000 I'm very confident that we have a tenant replacement.

The other 30,000, of course, we have a year before that -- almost a year before that lease expires. We have good activity on that space with in one case an existing tenant and in other cases, other tenants up by the building subtenant.

Then in your office portfolio I think, overall, you are about 89% leased and Maryland Trade Center was 93% leased and I wondered which buildings were subpar? Maryland Trade Center used to be but it's not anymore.

Obviously we talked about 7900 Westpark is one of the big vacancy. Obviously the biggest vacancy. Our building, our headquarters building believe it or not is one of the larger vacancies. That is also 85% leased. It's only 30,000 square feet but this Executive Boulevard market has been a slow market over the last really 18 months to 2 years since NIH really started dialing back their activity. Other building that has higher than normal vacancy is our Lexington building on Parklawn Drive which really is in the same sub market.

It has a lot of NIH -- smaller NIH subcontractors but that building was greatly affected by a 30,000 square foot tenant that moved out on us last year. The other building where vacancy is a little greater than our portfolio is at 515 King Street and that's where we had a top floor tenant of about 15,000 square feet vacate on us last year.

It's actually the SunTrust renewal. They did not elect to renew the top floor of that building. And because of some unique aspects of that it's a little more difficult than the rest of the building to lease. But that's been a great sub market. We expect to have that leased this year but we don't have any particular commitments on it. I'd say that summarizes the big blocks.

Then the residential side I think you mentioned that there would be a -- hopefully a 2.75% increase in NOI; and I think all of the apartments are in same-store so you don't have any -- are there any -- would that be equivalent to same-store reference?

Yes we don't have any new (MULTIPLE SPEAKERS) coming online.

Then the reason for the question was, with the utility costs going up in the fourth quarter, I assume that might have been gas cost and that should hopefully be down in this quarter. But I know you also mentioned that you are going to have a number of units coming out of the portfolio that you are renovating and that is taken into consideration with that 2.75% increase?

Yes.

That's right. Both those have been budgeted, Jessica. As a general rule most of those rents -- at the Ashby, we have a little more aggressive renovations in terms of scope of the renovation but the majority of the units that we are renovating are 60 to 90 day downtime maybe even less than that. Maybe even 45 to 60 days downtime in the renovation program. So it shouldn't be too adverse on our performance. And it's all been budgeted in.

Then I just have one final question and that's on the industrial side. One of your other REITs is purchasing industrial properties and renovating them for office use in the DC area. And I wondered if you felt any of your industrial properties would be attractive for you to do that?

As I said, so far most of ours are really not conducive to the office markets. Maybe some that might be more oriented to the flex rather than pure office. But we haven't really looked at that very hard.

Sree [Nagarajan] with KeyBanc Capital Market.

Most of my questions have been answered. Just one question on, can you give us some insight into office lease expirations? How they are spread across sub markets and across time for '06?

I don't know if we have it in that fashion by submarket.

Well in terms of let's talk about [lease] across time in terms of whether it's spread across the four quarters, would you say roughly?

We will have to get back to you on that. We have the numbers here. We just don't keep score that way. So we can get back to you on that.

I think you talked about large blocks of office buildings being vacant, but again in terms of lease expirations, is it mostly small blocks that are getting vacated in '06 or do you -- .

As Jessica had asked earlier the big bogey for us on the office portfolio is the Sun Microsystems leak which is really 12/31 of '06. That's really our only really big block of office space. We also have the state of Maryland has approximately 30 some odd thousand square feet of 51 Monroe Street and we have had actually preliminary discussions with them. I believe they are about mid year in terms of their expiration, I'll actually tell you in a second. They are -- 8/31 of '06 the state of Maryland's lease comes up and that's I think 35,000 square feet plus or minus. Other than that we don't have any big what I would call larger tenants coming up in the near future.

Skip, do you want to talk about Lockheed at all?

Yes. We footnoted -- if you've seen the supplemental we footnoted Lockheed which is one of our larger tenants at Maryland Trade Center. We've already executed that lease. That was 60 some odd thousand square feet.

So the rest of the lease expirations you would pretty much categorize as small tenant space spread across?

Small and medium tenants.

Scott Sedlack with A. G. Edwards.

Just curious if you could comment on construction costs? I realize you have the guaranteed mix contract on the Dulles Station property. Do you have other such contracts on the apartment retail properties as well that you're developing or redeveloping?

With respect to the Roslyn project that is a cost plus agreement but most of the subcontracting is in at this point. So effectively a guaranteed max contract.

With regard to South Washington Street, we've only contracted for the foundation at this time which is the guaranteed max contract for that portion of the work.

So how would construction costs impact South Washington then?

In terms of -- .

If we were to see further increases?

You are talking about from a return standpoint?

Yes.

Based on our estimates right now we are looking at somewhere between 8 and 9% to return on that (inaudible).

And is that true with most of your other development projects as well?

Pretty much in line, yes.

Should we expect to realize Dulles Station might be more of a one off type of a strategic development project? Should we expect more development from you guys in the future?

I would say that we've always been very selective in our development process. We've been looked at as somehow generally as a value added type company but keep in mind that we've acquired land adjacent to the property we've owned such as in Roslyn and in Montgomery County where we have added two existing properties. We are going to do it -- we are not going to be a developer -- let me put it that way. What we will do, though, is expeditiously develop where we think it's advantageous and this example out here, it was a ready to go site. A joint venture partner with Trammell Crow did not want to go forward and Chris knew the people and brought it to our attention.

And we looked at it very closely and since it is one of the last sites available for development facing out on the Dulles Access Road we thought it was a good opportunity to move forward. And part of that is the fact that there was a fixed place contract for the construction of the first building in place.

Then in terms of the guidance for the of 2.15 to 2.18. Do you consider yourself to be kind of still on target with regards to your acquisitions? I mean, I know you mentioned the pipeline has some properties in it. Are you in line with that or do you consider yourself to be ahead of that in terms of your acquisition volume?

What I said is we've already closed one transaction and we had a couple of contracts that we expect will be signed this week so we will be ahead of the game as far as the guidance we have given, regarding the acquisitions.

(OPERATOR INSTRUCTIONS). Charlie Blase with Ferris Baker Watts.

Most of the questions that I had have been addressed. One of the things is from a clarifying standpoint. When you talk about the 7% of expected NOI growth in '06, does that include the NOI from acquisitions?

It does not include NOI from acquisitions in '06 but it does include those acquisitions from '05. So it is not a same-store basis but it does include '05 acquisitions. Just not '06. Because it's impossible, of course, to plan which.

I understand. I appreciate that.

Also I want to tack on what Sara is saying if you -- in her report as well as you know. When we determine -- when we tell people that our return on expected invested capital is after all closing costs and related charges, including expected near-term CapEx items, and we talk about what we think our first year and second year yields will be. (indiscernible) report but I think it's the only way to take a look at it.

Right; Ed is referring to, say, the press release on Hampton Overlook and Hampton South we announced that we're going to have a 5.4 -- essentially a 5.4 return on the first year but I want everybody to know that that is after all closing costs. Capital reserves, expected leasing commissions and TIs in the first year. (MULTIPLE SPEAKERS) just a cap on the price.

(OPERATOR INSTRUCTIONS) At this time there are no further questions. Ms. Grootwassink, are there any closing remarks?

No I just want to thank everybody -- this is not Sara. I want to thank everybody 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, so please give us a call. Thank you.

Ladies and gentlemen, we do appreciate your joining today for the Washington Real Estate Investment Trust fourth quarter 2005 earnings conference call. This call is now concluded and you may now disconnect.