Elme Communities (ELME) 2007 Q1 法說會逐字稿

Welcome to the Washington Real Estate Investment Trust first-quarter 2007 earnings conference call. As a reminder, today's call is being recorded. Before turning over the call to the Company's Chairman, CEO, Ed Cronin, Sara Grootwassink, the Company's CFO, will provide some introductory information. Ms. Grootwassink, please go ahead.

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 document from our website at www.WRIT.com. Our first-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. Thanks, Sara. With Sara and me today are Skip McKenzie, President and Chief Operating Officer, and Laura Franklin, Senior Vice President of Accounting, Administration and Corporate Secretary.

As many of you now know from last evening's press release, we have put up very positive numbers for this period. Sara and Skip will provide you details regarding both financial and real estate operations for this quarter and our expectations for the balance of the year.

In addition to generally solid NOI performance numbers, we acquired three properties at a cost of $155 million. These acquisitions include 205,000 square foot of office space, 157,000 square feet of industrial flex and 110,000 square feet of medical office space. These acquisition fit in nicely with our strategic plan being located in the strong submarkets are between 96 and 100% leased and have first-year projected cash yields between 6 and 7%.

After you hear from Sara and Skip, we will open the call for questions. Now I will turn it over to Sara.

Thanks, Ed. Funds from operations for the first quarter totaled $26.2 million or $0.58 per share, an increase of $0.04 per share or 7.4% over the same quarter last year. The portfolio achieved positive core NOI growth this quarter led by medical office, general-purpose office and retail sectors. Overall core portfolio cash NOI increased 2.9% over the first quarter of 2006.

Our medical office portfolio led our performance this quarter with corporate core portfolio cash NOI increasing 5.6 over the same quarter last year. Occupancy remained high at 98.8% with no change from the prior year. The office sector improved this quarter with cash NOI increasing 4.6 over the same quarter last year. The gains are primarily due to increased occupancy, which is 320 basis points higher than the same period one year ago. The largest increases in occupancy were at 6110 Executive Boulevard and 7900 West Park drive where more than 33,000 square feet of vacant space was leased.

The retail portfolio also continued to perform well with cash NOI increasing 3.4%, mainly due to rental rate increases associated with the completion of The Shoppes at Foxchase, a redevelopment project completed in the fourth quarter of 2006. Our apartment portfolio of cash NOI increased 1.2%, holding steady from last quarter's strong performance when cash NOI increased 11.9%. Rental rate growth was 5.1%, and occupancy levels dipped slightly to 90.6 from 90.8 in the same quarter last year.

The industrial sector was mostly static this quarter as core portfolio cash NOI modestly declined 0.6% with no change in occupancy levels and rental rate growth of 3.2% over the same period the prior year.

For the quarter our FAD Payout Ratio was 94%. In January we completed a $135 million convertible debt issue with a subsequent overallotment exercise by the underwriters for an additional $15 million. The transaction mirrored closely our convertible debt issuance at September of last year with a 3 7/8 coupon and a 21% conversion premium. Proceeds were used to fund operations, including several acquisitions.

As a result of the projected interest savings from the January convertible debt issue, combined with the accelerated acquisition pace, we are increasing our 2007 FFO per share guidance from $2.17 -- from a range of $2.17 to $2.20 up to a range of $2.23 to $2.26 per share. As of quarter-end, our average debt maturity is 7.8 years with an average interest rate of 5.4%. Total market capitalization at quarter end was $2.9 billion, our debt to total market cap was 41.3%, and our debt service coverage was 2.6 times.

Now I will turn the call over to Skip.

Thanks, Sara. As Ed mentioned, our performance portfolio-wide was very strong, and we continue the momentum we achieved last year. We executed 84 leases in the first quarter for a total of 365,000 square feet, 42% of which replaced vacancy.

Overall throughout the portfolio average rental rates increased on a GAAP basis but were relatively flat on a cash basis. Tenant improvement costs for the first quarter ranged from a high of $11.61 on average for the office portfolio to $1.55 per square foot on average in the industrial portfolio on the low side.

In the first quarter, cash rental rates on 185,000 square feet of new and renewed leases in the office sector decreased 4.3%, primarily due to rolldown of above market rental rates in the suburban Maryland portfolio and one large lease in Tysons Corner. At quarter end our office portfolio was leased as follows. In the Washington D.C. portfolio, 99.8%; the Virginia portfolio, 93.2% and the Maryland portfolio was 93.4%. With only 8% of our office leases expiring for the remainder of 2007, we expect to continue to increase occupancy levels and market rates increasing moderately. Our medical office portfolio was 98.6% occupied and had minimal lease rollovers, thus performance in this sector was strong. Rental rates increased 10.5% on a GAAP basis and 28% on a cash basis in the first quarter. The strategic location of our properties and the lack of competitive alternatives contributed to outstanding results for the quarter. TI costs average only $1.80 per square foot on the 21,400 square foot lease.

In our retail portfolio, we continue to achieve very strong rental rate growth in the 74,000 square feet lease this quarter. Cash rents increased 9.2%, and GAAP rates increased 18%, driven by new leases signed at The Shoppes at Foxchase, a pad renewal at Frederick, and a 26% rental rate increase for Rite Aid in Westminster.

During the quarter we also leased 32,700 square feet of vacancy at the Montrose Center, bringing the center occupancy up to 85%. As this property acquired last fall at 58% occupancy, our leasing case is well ahead of pro forma, and best of all, we have leased the most difficult space first, allowing us to push rents hard for the remaining 15% of vacancy in the tight Rockville market. Retail tenant improvement costs this quarter were $1.55 per square foot.

Our industrial sector continues to perform well. During the quarter we leased 85,000 square feet and achieved strong rental rate growth. On a GAAP basis, rental rates increased 18.6% and 5.2% on a cash basis. This portfolio was 93.7% leased at quarter-end. Industrial leasing is broken down as follows. Our 1.4 million square foot I-95, 395 Virginia properties are 94.3% leased. Our 1 million square feet -- little more than 1 million square feet Chantilly flex portfolio is 91.8% leased, and our 1.3 million square feet of a Maryland industrial property is 94.5% leased.

Our biggest challenge going forward is two difficult spaces at Sullyfield Commerce Center in Chantilly totaling 54,000 square feet, which is 23% of the overall industrial vacancy.

In the apartment sector, with unit and major common area renovations ongoing at several of our properties, occupancy levels were 90.6% in the first quarter. These renovations added 70 basis points to overall portfolio vacancies. During the first quarter, we had 66 units down at one point or another, primarily due to delays on units expected to deliver in the fourth quarter. Despite a drop in sequential occupancy, our strong markets and infill locations have enabled us to achieve rental rate growth of 5.1%. We expect that the combination of the delivery of the renovated units and the beginning of the leasing season will contribute to improved occupancy and NOI growth as we go forward in 2007.

During 2007 our business plan includes the renovation of 120 units. We expect to achieve at least a 10% return on the invested capital from these units upon return to the market. At Bennett Park construction is moving expeditiously, and we expect to deliver our first units in the third quarter of this year. We are projecting to lease 35% of the property by year-end. Although we have not begun to fully market to individuals at this time, we have already had preliminary interest and exchanged letters of intent from block leases with corporate users.

At South Washington Street, we expect completion in the third quarter of this year. The Old Town market is strong, and we anticipate expeditious lease-up as there is no competitive new product in Old Town proper.

At Dulles Station shelf completion is scheduled for completion in the early third quarter. To date we have issued proposals to a number of prospects. At this time we have no leases signed. Over the last 12 months, absorption in the Dulles quarter has been weak, but we believe the quality of our profit in conjunction with the access road visibility, proximity to the airport and the future Metro site is attractive to potential tenants.

On February 8, WRIT acquired a portfolio of five single-story flex buildings, consisting of 157,000 square feet within the 270 Technology Park in Frederick, Maryland for $26.5 million. We have had our eyes on this asset for a number of years. Long-term we love the dynamics of this growing market, and we feel the first year return of 6.8% is outstanding given the quality of the rent role, the visibility from I-270 and the proximity to area amenities.

On March 1 we acquired the 100% leased Monument II, a Class A 205,000 square foot eight-story office building with an attached five-story parking garage located along the Dulles Toll Road in Herndon, Virginia for $78.2 million. Monument II was completed in 2000 as part of the Monument at Worldgate complex, a mixed-use development consisting of Class A office, retail, restaurants, hotels, health clubs and residential buildings. This 100% leased building has an A+ rent role, highlighted by large leases with Lafarge and General Dynamics.

On March 9 WRIT acquired 2440 M Street, a Class A medical office building consisting of 110,000 square feet with the three level parking garage in Northwest Washington for $50 million. 2440 M is well positioned in the district's West End business district, just three blocks from GW University Hospital and a mile and a half from Georgetown University Hospital. The first year return is 6% with substantial in place below-market rents and minimal competitive product.

In summary, market conditions overall are very good, and we expect to see continued reduction and vacancies and modest rental rate growth as 2007 progresses.

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

(OPERATOR INSTRUCTIONS). John Guinee, Stifel Nicolaus.

You know, we work very hard on that pronunciation. (multiple speakers)

I did not want to follow that up.

Well, very nice quarter. It sort of begs the question, is -- your NOI is going up. Your mark-to-market looks good. Your interest rates are going down. You are stating $0.11 alone on your convertible notes versus, say, a 6% fixed-rate debt.

John, you are combining the two issues. Correct?

I'm basically saying instead of reissuing debt at 6%, you are able to do it at 3 7/8. You are paying off $60 million pretty soon at 6.7%. It seems to us like $0.58 a quarter should be a floor. The quick math is that if you can produce 226 for the rest of the year minus 58 this quarter, it is a $0.56 run-rate, it sure seems to us like like $0.58 to $0.60 ought to be a run-rate.

John, my interest savings that we have calculated is a little bit lower than yours. I changed guidance based only on the $150 million convert that was in January. The previous one was already in the guidance. So that number is lower than the one you have.

The other thing that you have to keep in mind is that we do have a larger G&A expense in the second quarter -- we are anticipating a larger one -- due to whatever the board determines is appropriate when the management transition occurs.

Third, you will note in our press release that we have a property held for sale, and it is actually two. It is Maryland Trade Centers I and II. And we actually expect to have $0.034 in lost NOI on that sale for the year. So that is bringing your FFO down.

Well, two questions. The Maryland Trade Center, you will sell it, but you will also pay off 6.7% in debt.

Wait, where are you getting that?

You will pay -- I think your maturity schedule has $60 million being repaid this year.

John, that is in 2008.

Sorry. And then what is up with G&A?

On the G&A, the reason that will be up is we are in the process of determining what the compensation will be going forward with some grants and options with the change in senior management.

So what is a good G&A run-rate going forward?

We increased G&A, and again it is only an estimate -- we don't know -- an additional $1.5 million in the second quarter. And then I think a run-rate following that is $3 million per quarter.

So the run-rate, what you're saying is you should be $4.5 million in the second quarter and then what thereafter? Are you saying you are taking your annualized G&A to what?

We're taking our annualized G&A, in general, if you pull out the second quarter to $12 million. But the second quarter we anticipate will be anywhere between 4.5 and $5.5 million, and it is unknown as of yet.

Okay. But you think on an annualized basis, your new run-rate will be $3 million a quarter?

Yes.

Okay. Well, nice quarter. Thank you.

And we expect to try to keep it up.

I know you will. I know that it is going to be more than 58 run-rate. (multiple speakers). We have great faith in Skip here, come on.

Okay. And I might mention, because I'm sure the question will come up, we still have a very interesting pipeline for the year without getting into any detail.

John Stewart, Credit Suisse.

Ed, just a follow that up or I guess maybe Sara to clarify with you, you referenced the acquisition pace in raising guidance, but did not appear to comment on the pipeline for the rest of the year. Should we assume that all this baked into the upwardly revised guidance is the $155 million that is closed to date?

No, we actually have additional acquisitions in our pipeline in the guidance.

And what is it, what is the magnitude?

It is an additional -- you know, it is an additional roughly 90 to $100 million spaced throughout the year.

Ratably?

Yes.

At quarter-end.

Well, it is end of second quarter, end of third quarter.

Got it. And, Sara, did I hear you right, did you say that you expect $0.03 to $0.04 of dilution from asset sales?

No, that is not necessarily dilution. That is the NOI that we projected to earn on Maryland Trade Center that we do not think that we will earn based on selling that asset.

Okay. So what are the expected proceeds? What is baked into your guidance in terms of (multiple speakers)

(multiple speakers). We have it on the street, and we don't want to get into that.

Okay. Skip, you kind of referenced Dulles Station in your remarks. Can you give us any update in terms of the prospects there?

As I mentioned, the Dulles corridor market has been remarkably soft I have mentioned. Historically it is a very strong market, and it is one of the leaders in absorption in Virginia. There has been -- it has been very active in the Reston particular submarket of that submarket. But outside of Reston, activity has been sparse.

So, in our particular case, for our property, we're really one of the two leading buildings out there in terms of delivery schedule, and we have seen some activity, but we have not hooked anything yet to come to the short on that.

So what is your forecast in terms of leasing that out?

Well, in our current projections, we have one floor leased at the end of the year in the fourth quarter, so I think we have 500,000 square feet of NOI baked into these years' projections.

And how do you feel about that today?

Well, we don't have a lease for it. I would like to say that we will, but we don't have one in place. I think we have a shot at it, but nothing is firm.

But we still have it in our numbers, and I think getting back to John's earlier question, that is why we need to be careful in making projections here. So the combination of potential acquisitions for the rest of the year, which obviously is uncertain, the combination of the lease-up at Dulles Station which is not certain, and so we have baked that all into the numbers from the standpoint of where we are giving guidance at the moment.

Chris Lucas, Robert W. Baird.

Very nice quarter. Just to follow-up on the guidance and really related to the shift in the development schedule that was put in the materials for this quarter, what was the impact to guidance in sort of moving up the delivery of Dulles Station in delaying the deliveries on the two apartment development projects?

Really there is no material impact to that. I think we maybe erred on the side of caution with Rosslyn project. I mean we were scheduled to deliver that right on the border of that quarter, and maybe we erred on the side of caution. I think there's still a good chance that we will be ahead of what we published in the supplemental. It is just that there is a lot of moving parts trying to finalize that project. So I don't think that really there is any material difference in what we have projected for the income for this year. I mean we are projected to be upside down on an NOI basis at Bennett Park, because the leasing, the income from the leasing on the units which we projected is not enough to overcome the expenses incumbent upon ramping that property up. (multiple speakers) in 2007, this year specifically. And, as I mentioned earlier to John on Dulles Station, we had projected $500,000 of NOI. To me, that is going to have the most impact, much greater than any impact the apartments would have if we don't achieve the $500,000 on the Dulles Station project.

And that is worth a $0.01 in round figures.

Yes, a little more.

Sara, on the interest expense related to Dulles Station, when do you take that off of capitalized interest? Assuming you have no tenants this year, are you still capitalizing interest even though the building is essentially done? What is the process there?

We continue capitalizing from one additional -- for one additional year from the day of delivery.

Okay. And what is the --?

If there is (multiple speakers) no tenant in place.

But we are expensing the interest on the land for the Phase II.

And the operations on the building, right.

Operations and the other development parcels?

Yes, correct.

But restate that again because there are others on the call so that it is clear.

Basically we're currently expensing the land on the second phase Dulles Station, and later in the year when we have to have basically operating personnel at the property, we begin expensing them, even though you don't have a lease in place. Because you have to have those stats ready, and we continue to capitalize until we basically have that tenant space built out. So you just do different prorations.

Okay. What was the capitalized interest for the quarter?

You know, I don't have that number with me.

Okay, I will follow-up with you. On Bennett Park, has the leasing office opened, and if not, when is that expected to open?

It is literally opening as we speak.

Fantastic.

I don't think it is quite manned yet, but it should be manned in the next week or so. The office is there. We are outfitting the improvements within the office, so it should be open within the next couple of weeks. We have leasing signup, websites open, etc.

Okay. I will get back in the queue. Thank you.

(OPERATOR INSTRUCTIONS). Charles Place, Ferris, Baker, Watts.

A lot of the questions I had have been addressed already. I guess if you could maybe talk a little bit more about the assets held for sale, and I know you don't want to go into specifics of price and things of that nature, but is there a relative time schedule? I mean where are you in the process of marketing that property?

Sure. I can talk about that. It is you know Maryland Trade Center I and II are approximately 350,000 square feet, two towers in Greenbelt, Maryland. We are literally just getting to the market with that. I believe we have hired -- we have engaged a broker. They have probably put out an investment teaser to best the buying public. We are finalizing the detailed investment memorandum that will go with it, and that should go out shortly.

So we're really in the very infant stages of marketing that property. I would anticipate that it would probably actually close maybe the middle of the summer-type thing after it is marketed and negotiation and etc., etc.

Great. Thank you very much.

Chris Lucas, Robert W. Baird.

Just a quick question. Where do you all fit on your balance sheet in terms of acquisition capacity at this point? And then after I guess MTC I and II are sold -- I don't remember -- are there any encumbrances on that and sort of will all proceeds be available for reinvestment?

It is free and clear.

Free and clear.

Free and clear, although it likely will go into a 1031. So it will be reinvested in another property. In terms of our availability, we have $91 million outstanding on our line of credit, and we have a capacity of $270 million.

Okay. That is very helpful. Thank you.

Chris?

Yes.

The capitalized interest number is 1.26 million.

John Guinee, Stifel Nicolaus.

You ought to change your name here, John. Go ahead.

The talk on the street is $60 million for Maryland Trade Center I or II. Is that achievable?

I think it is certainly achievable, but I would let the market determine what the price is going to be.

No one has made an offer.

We have not put a number on the property in terms of an offering price.

Guys, well (multiple speakers). Okay. Thanks.

(multiple speakers) -- sounds low to me as a seller.

There are no further questions at this time.

Okay. Well, thanks, everybody. We appreciate your 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. Again, thank you very much for attending.

Thank you for participating in today's teleconference. You may now disconnect.