Elme Communities (ELME) 2012 Q4 法說會逐字稿

Greetings and welcome to the Washington Real Estate Investment Trust fourth quarter 2012 earnings conference call. As a reminder, today's call is being recorded. Before turning the call over to the Company's President and Chief Executive Officer Skip McKenzie, Kelly Shiflett, director of finance, will provide some introductory information.

Ms. Shiflett, 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 our release, please contact me at 301-984-9400, or you may access the document from our website at www.writ.com. Our conference call today will contain financial measures such as core FFO and NOI that are non-GAAP measures as defined in Reg G. Please refer to the definitions found in our most recent financial supplements. The per-share information being discussed on today's call is reported on a fully diluted share basis.

Please bear in mind that certain statements during the call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially. We provide a detailed discussion of these risks from time to time in our filings with the SEC. Please refer to pages 8 to 15 of our Form 10-K for complete risk factor disclosure. Participating in today's call with me will be Skip McKenzie, President and Chief Executive Officer; Bill Camp, Executive Vice President and Chief Financial Officer; and Laura Franklin, Executive Vice President and Chief Accounting and Administrative Officer.

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

Thanks, Kelly, and thank you everyone for joining us on our call today.

Many of you participated on our Strategy and Guidance call two weeks ago, so first I'd like to highlight some of the announcements we made on that call and then get into our fourth quarter performance. We are continuing our simplification of risk diversified strategy to focus on office, multi-family and retail assets committing to a live, work and shop in Washington DC focus for future investment. Beginning in 2007 through 2011, we sold a number of one-off assets that we deemed to be non core in transactions totaling over $270 million.

These non core assets included suburban office and industrial properties that we believe had low growth prospects in the years ahead. This activity culminated in late 2011 when we sold our underperforming industrial portfolio for $350 million as part of a renewed strategic plan to focus on in-fill urban and metro centric assets in the office and multi-family sectors and well-located retail and Medical Office assets. The industrial sale was a huge success in our view as we recognized an almost $100 million gain and reinvested the proceeds into higher quality assets that met the criteria of our new plan.

Now to continue this process to strengthen our portfolio and grow in the Washington DC market, we are exploring the 2013 disposition of our 1.3 million square foot Medical Office division. We believe that simplifying our business model into three core sectors will enhance our focus on property types with proven long term growth potential in our market with the added bonus that we expect to capture significant embedded values for the potential sale. We believe this transaction will provide WRIT the most efficient source of capital to fund the continued improvement and upgrade of our portfolio as we target growing toward $5 billion in assets over the next several years. We are working with a team of Cassidy Turley and JPMorgan as we begin to market the Medical Office division for sale.

Some of you have asked how we decided to sell Medical Office instead of other sectors. Let me respond by saying that our ownership position for office is about 1% of the DC office market overall. Our position in multi-family is less than 0.05%, and retail is under 2% of the total market. We view the growth opportunities in these three sectors as vast and expansive.

On the other hand, looking at Medical Office, we're working in a market of non-hospital owned industrial grade space of about 7 million square feet, of which we own 1.3 million square feet. Without expanding our Medical Office footprint into other geographic areas, we anticipate it will be hard to grow this portfolio as compared to the other divisions. Consistent with our strategy of investing in office, retail, multi-family, this year we will upgrade and improve our existing stock of well-located properties including significant lobby and common area renovations at several office properties and multi-family unit remodels.

We are also evaluating the future redevelopment of several of our retail assets. We will continue to pursue the one-off sales of non strategic assets as time goes on, subject to market conditions and property leasing expectations, and we have our anticipated pending sale of the 80,000 square foot Atrium building in Rockville, Maryland, which we expect to close in the first quarter.

Organizationally, we have made structural improvements to increase our focus and ultimately foster greater sector growth. This past November, we implemented a realignment of our asset management organization, creating new heads of each of our property types to oversee all aspects of leasing, asset management, acquisition, disposition and development opportunities in the respective specialties.

For our retail division, we hired Paul Weinschenk, formerly a vice president for the Peterson Company, one of DC's premier retail ownership and development groups. Paul currently serves as ICSC state director for Maryland, Northern Virginia and the District of Columbia. For our multi-family division, we are very close to announcing a new division head soon. For our office division, we moved Tom Regnell from Senior Vice President and head of All Acquisitions to senior Vice President and head of the Office Division. This alignment will bring more senior level decision making into the day to day operations in the organization, add focus to our ability to find acquisition and development opportunities, and add senior level management depth to the organization.

Regarding the CEO succession planning, the board has formed a search committee and will soon be engaging an executive search firm to begin in the process of finding my replacement. Lastly, regarding our fourth quarter results, our portfolio delivered steady financial performance in a still sluggish market environment. While short term market conditions are inordinately impacted by legislative gridlock at the federal level and the threat of sequestration, we continue to believe in our region as a very strong long-term real estate market. Despite the recent market shortcomings, the region added over 37,000 new jobs in the last 12 months, and the unemployment rate of 5.2% is still the lowest rate among the nation's largest metro areas and compares favorably to the national rate of 7.6%.

In 2012, we sold an outer perimeter office property and Medical Office property for a total of $23 million, and we acquired in-fill office property very close to metro in the Boston sub market of Arlington, Virginia. We posted same store rental rate growth of 1.5% on the year and executed nearly 1 million square feet of commercial leases.

Now I'll turn it over to Bill Camp who will discuss fourth quarter performance and portfolio details.

Thanks, Skip. Good morning -- good afternoon, everyone.

First I'd like to discuss our overall fourth quarter and year-end performance, and then I'll get into some of the portfolio details. Fourth quarter core FFO was $0.47 per share and core FAD was $0.37 per share. Full year 2012 core FFO was $1.90 and core FAD was $1.50. Overall core FFO and core FAD were extremely steady over the course of a very choppy 2012, only fluctuating $0.01 or $0.02 in any given quarter, with core FFO generally meeting our original expectations of falling in between the $1.87 to $1.97 range that we set forth at the beginning of 2012.

For the fourth quarter, same store NOI increased 1.2% compared to the fourth quarter of 2011 despite our lower occupancy. Comparing to the third quarter, same store NOI increased 2.1%. The quarterly improvements were driven by lower operating expenses in the quarter, which we continue to manage aggressively. The two best performing sectors continue to be retail and multi-family, while office and Medical Office trended negative year-over-year. These sectors posted improvement over the third quarter performance.

Rental rates on a GAAP basis continued to post significant increases. In the fourth quarter, rents on the new leases surpassed rents on expiring leases by 9.5% led by the office sector, which increased 11.8%. The primary drivers behind the increase in office were new signings at our recently purchased building in Boston at increases of 28%; a few deals at 2000 M Street, up 20%; multiple deals at 1600 Wilson in Roslyn, up 34%; and a couple of deals at 1901 Pennsylvania Avenue, up 25%.

When we look at leases recently signed that are not yet generating revenue, we anticipate embedded growth in the next few quarters, which is already reflected in our 2013 guidance. We currently have approximately 193,000 square feet of leases signed where the tenants have not taken possession of the space. Partially offsetting this number are some tenants known to be moving out in the first half of the year, as well as the full quarter impact of those tenants that moved out during the fourth quarter. The net effect of all of this additional leasing should improve occupancy by about 125 basis points across all the commercial divisions.

Moving on to some financing details, since the beginning of the quarter, we have repaid approximately $90 million of mortgage debt using excess proceeds from our September bond deal and our line of credit, which currently has a balance of $20 million. Through this repayment, we picked up basically 150 basis points. The debt maturity schedule going forward only includes one additional maturity in 2013, a $60 million unsecured note maturing in March. Our plan is to refinance this with the line of credit and carry it until we permanently finance our line balance. Looking forward, we only have $100 million of debt coming due in 2014.

As a reminder, our 2013 core FFO guidance is a range of $1.82 to $1.90 per share. I'm happy to answer any specific questions about our guidance assumption during the Q&A portion of the call.

Now I'll turn the call back over to Skip.

Thanks, Bill.

WRIT was founded in 1960, 53 years ago. Since that time, we've been through government expansions, an oil crisis, sky-high interest rates, recessions, an S&L and banking crisis, massive over-building, a telecom boom and bust, a deficit that turned into a surplus, an Internet craze that changed how we communicate, and the Great Recession that rivaled the Great Depression. We have been through all of that, and we are still here today. Through it all, WRIT has been led by a strong management team that constantly seeks to position the firm for future growth, enabling it to build shareholder value for many years to come.

Right now, we are furthering our strategy of positioning our assets to drive future growth. That repositioning leads us back to the market's basic food groups, office, residential and retail. They are the three prongs of mixed use server projects. They are the three largest markets in Washington DC and the three largest asset classes followed by all of you. All of us continue to believe Washington DC has always been and will always continue to be one of the best real estate markets in the world for building long-term shareholder value.

We will now open up the line for your questions.

We will now be conducting a question-and-answer session.

(Operator Instructions)

Blaine Heck, Wells Fargo.

Given your comments on the last call that you guys are looking to target acquisitions that will upgrade your portfolio, which will likely trade at relatively lower cap rates, would be it safe to assume that you're probably not going to do much on the acquisition side until you guys have the proceeds from the MOB sale in pocket, or could we see anything earlier?

Blaine, it's possible that we could front load a couple of them, but I would agree to you we're not going to get over our skis in having a huge acquisition pipeline prior to the transaction. But keep in mind, I mean, we have done reverse 1031 transactions, and we would like to do some in this repositioning as well. So it's a possibility. I can't say that we have anything definitive in our hands right now, but it is a possibility that we could have some acquisitions prior to that.

Okay. And then how much investment capacity would you guys say you have on the balance sheet today?

Investment capacity, like what could we do without selling anything?

Right.

I don't have any problem going up -- the line is basically $20 million. So if we wanted to just punt off the line to buy $200 million to $250 million worth of property, I have no problem doing that.

Okay. It looks as though you're expiring rent per square foot on a relatively low across the board for 2013. Can you guys comment at all on your expectations for releasing spreads by sector for the year?

Sure. I agree with you. This year coming up in particular is a fairly low year, particularly in the office sector, which is a good thing since the office sector is a fairly weak market right now. So, if you looked at our supplemental, for example, our office market, we only have about 9% of our annual rent expiring this year, which is about as low as it's been in a long time, and the average rent is about $31 on those expiring leases. We continue to think that on a rollover basis in the office market, the one with the most exposure, we're probably on a cash basis now minus single digits negative rollover, so let's say minus 3% to 7% on a cash basis but positive on a GAAP basis.

Our Medical Office division has about 13% rolling this year, which I'd put that in the average category, and we're probably in the high negative on a cash basis rollovers with closer to flat, maybe modestly up on a GAAP basis. Retail is a little bit of the wild card because we still think we have a very strong market. We have some big leases at very low rents, but they're a little bit of a head fake because they have option -- fixed options in there. So it's -- I'm a little bit hesitant to give you a number on retail, but to the extent we have retail rolling that isn't encumbered by a fixed rate option that's going to be exercised, we expect to continue to see maybe as much as double-digit rent increase.

Okay, that's great. Thanks.

Dave Rodgers, Robert W. Baird.

Real quick, the two big tenants that roll in 2013 and '14 that you have listed are Sunrise and General Dynamics. Can you I guess refresh us on what the plans for those tenants are if you know and where they are and what your plans are for those buildings that they are leaving?

Sure. Okay. Let's talk about Sunrise first. Sunrise is in our 7900 West Park building. They, subsequent to quarter end, it's not reflected in our numbers, but executed a short term extension, so they will be in the property for a short term extension. So they're not -- we don't expect them to leave, and whether they stay over the longer term, I'm not sure. As you know, they were recently acquired, and I think they're going through a lot of decision making internally, and we don't know what their long term strategic plan is. I think they're going to stay, but certainly I can't say there, and the fact that they did a short term extension is I guess both a commitment to the property but yet not a full-time commitment.

General Dynamics is in our -- one of our -- at one of their locations is in our Monument II property out in Herndon. I can't say I know what they're going to do there. Given everything that's going on in the defense industry, I'd be less positive about that. I think they're under-utilizing that space. It's a great building and, in fact, we're marketing it with some of the vacancy we have in that building. I like to think that we have a really good shot of leasing that space prior to when it comes up, but if I had to game plan it, I would put it below 50% for them to stay, although they haven't given us notice that they're absolutely not going to renew. And then the other General Dynamics space we have is down in Quantico, and I think that they're happy down there. I don't really have any specific information on that.

Okay. And with regard to your comments about development and redevelopment capital spending for the year, I guess outside of leasing commitments, have you put any numbers to that, and what was in the guidance?

In terms of the capital commitments? We don't give -- Dave, we haven't given guidance on how much money we're spending on the capital side, but generally speaking, this year, the capital was -- let me look and just kind of see where we were. We have basically the development, JV development type stuff, that will start and the [Glee] Road project is $50 million the other one $95 million total. Some of that's equity that's already been put into those projects, so the spend rate on those projects is something much less. I'm going to say it's around -- I can't remember, around $30 million this year, something like that. And then in terms of the internal projects to the existing buildings, I'm going to have to come back to you. I don't have that at my fingertips, but suffice it to say we spent around $20 million or $25 million last year.

Okay. That's helpful. And I guess lastly on the potential sale of Medical Office, is there any identified G&A that would go specifically with that portfolio if and when it goes?

Well, it's hard to say exactly, Dave. A lot of the G&A with that division, the vast majority of it, are property level people that are in the asset. So a lot of them would go with the building engineers, et cetera, et cetera. There is some G&A at the corporate level, but --

It's not significant and maybe somewhat from the asset management, but with the growth they anticipated in the other sectors, we're looking to retain talent for utilization there.

Right. Because I should note, Dave, we're doing -- basically we have to do 1031s with pretty much the entire proceed balance. So the individuals here at corporate would probably just be working on the assets that we'll be acquiring.

Okay, great. Thanks for the color.

Thank you.

(Operator Instructions)

Michael Knott, Green Street Advisors.

John [Bejanni] here. I believe you mentioned on the guidance call that you want to redeploy maybe 50% of the proceeds to downtown DC office if and when you sell MOB, and I think you've also said that you don't think valuations for DC office float with your view on fundamentals. So if and when the time comes if valuations are still not to your liking, what do you see yourself doing then?

Okay. Let me just clarify your opening premise. We said we thought that's where the opportunity would be. I didn't necessarily say we're definitely going to do 50% down on office buildings. It's just by the nature of the size of the assets and the amount of capital we have to spend, that's likely to be where the opportunities will be.

It's all going to be dependent on the opportunity set. It's hard for me to say what 2013 is going to bring. There's a lot of property that's going to be coming on the market. I do think there's going to be attractive opportunities downtown. I can't say I know specifically, but we're not going to overpay for something that we wouldn't ordinarily value as a good investment.

Okay, great. And I guess just on the topic of sequestration, so the deadline is coming up in a couple weeks. Any thoughts on how this plays out and potential impact on your portfolio?

Who knows? I mean, the people that go behind closed doors in Congress, they don't even know the answer to that question. I personally think that the can is going to get kicked down the road further. I think it will be somewhat harmful to the leasing markets honestly. I mean, this non-resolution of this issue, even if it's -- any resolution would be better than what we have right now. It's extremely difficult to get tenants to make decisions.

If you look at the most recent Delta, I'll give you an example, the most recent Delta report that was published at year-end, Delta's depending on who you talk to, one of the more widely followed market reports for the area, they cited in that report that this was the first time since 1970 that the Washington metro area had negative absorption. That's a pretty outstanding comment, that it's the first time in whatever that is, 43 years, that the DC area has had negative absorption. So what we're going through is not good. It's not good from a long term basis. So I'm hopeful that a decision will be made, but honestly, I mean we don't know the answer to that, and we're as discouraged as anybody by it.

One thing that we have seen is, just as an example of that, is we've seen certain office tenants come and say we need to expand, but we only need to expand or we only need to take new space if we get a contract from the government. So they're waiting. They're waiting on whether or not -- they can't sign documents until they know whether they have a contract, and quite honestly over the last two years, any time anyone has ever said that, it's never come to fruition.

Okay. Thanks, guys.

Thank you. We have reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Okay. Thank you, everyone. Appreciate your interest in the Company and look forward to talking to you in April

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.