Elme Communities (ELME) 2014 Q1 法說會逐字稿

Welcome to the Washington Real Estate Investment Trust first-quarter 2014 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, Paul McDermott; Kelly Shiflett, Director of Finance, will provide some introductory information. Ms. Shiflett, 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 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 supplement. 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 this 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 the pages 8 to 15 of our Form 10-K for our complete risk factor disclosure.

Participating in today's call with me will be with will be Paul McDermott, 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 would like to turn the call over to Paul.

Thank you, Kelly, and good morning, everyone, and thanks for joining us on our first-quarter 2014 earnings call. I would like to start by discussing the significant progress we have made in executing the strategy we outlined last quarter. As stated on our February call, we have aggressively begun deploying the medical office portfolio sales proceeds to strengthen each of our three core business lines -- office, retail and residential. For office and residential, we are focused on urban infill properties with good access to public transportation, particularly in metro-serve locations. For retail, we are focused on strong neighborhood centers with exceptional demographic areas in and around the Washington, DC area.

The two significant acquisitions we made during the quarter clearly demonstrate our commitment to pursuing our asset quality improvement strategy as we transition a portion of the Washington REIT portfolio from the 20-year-old suburban medical office assets we sold into high quality Class A residential and office assets located in downtown DC. The first was Yale West Apartments, a newly constructed, 90% leased, Class A residential building in the thriving Mount Vernon triangle area of Washington, DC, just two blocks from the Convention Center and Metro and the East End sub-market. The second was the off-market acquisition of the Army Navy Club building, a 100% leased Class A office asset located on Farragut Square, just two blocks from the White House and one block from the Metro.

The purchase of these exceptional assets strengthened our residential and office portfolios and, importantly, the initial returns on both of these properties are above the projections we provided in our guidance last quarter. The Yale West and Army Navy Club purchases are just the first steps. As we continue to execute our strategy, we fully expect to replace and grow the income generated by our medical office portfolio. We are also committed to maximizing the value of all of our assets and dispose of those assets that may reach an inflection point in their growth trajectory. All disposition candidates will be sold on an opportunistic basis where we've been ensured maximum pricing and could subsequently reinvest the proceeds into other assets with greater growth profiles.

As part of our overall corporate strategic plan, we are also stream lining and strengthening the functional areas of Washington REIT. One key area was our need for an experienced Chief Operating Officer who has both private and public company experience owning and operating commercial real estate. To that end, and as we announced earlier this month, we are extremely pleased to have Tom Bakke joining us this week as our new Chief Operating Officer.

Tom is a veteran of the real estate industry, with over 25 years of experience, including more than 20 years with Equity Office Properties, a national commercial real estate owner and subsidiary of the Black Stone Group. Tom served in various senior leadership positions including Market Managing Director, Senior Vice President of National Leasing and Senior Vice President of Field Operations. Importantly, he has an exceptional background in operations, with in-depth experience in each of our core business lines. As COO, Tom will oversee the firm's three portfolios and will be responsible for all real estate operations, including asset management, marketing, leasing, property management, and development. We are excited to have someone of Tom's caliber join the Company and we look forward to benefiting from his leadership and industry insights.

Before I turn the call over to Bill Camp, I would like to briefly touch on the current state of the Washington, DC commercial real estate market. Office leasing conditions throughout the metropolitan region were challenging in the first quarter and we saw a slight uptick in vacancy results. As a result, effective rents have been slow to gain any momentum but did show a modest increase during the first quarter. The bifurcation of urban infill and suburban assets continues as tenants trade up in quality and location. In fact, one bright spot in the office leasing environment is the resilience of Class A urban assets and well-located Class B assets. Evidence of this can be seen by consistent leasing in select sub-markets of Northern Virginia and the District of Columbia. This was the case with the downtown portfolio, where we are 97% leased in these assets. This gives validation to our shift in strategy as we are benefiting from the performance of those properties and infill locations.

Retail continues to perform steadily, benefiting from strong demographics in the region. Grocers, national retailers, restaurants and household good stores continue to expand within the area as vacancy rates are slowly coming down from their recession peak. In addition to improving occupancy levels, effective rents in the metro region have been consistently increasing each quarter since their low point in 2010.

The residential market continues to be impacted by new development, particularly in Northern Virginia and the District of Columbia. In the wake of this supply and the severe weather, we are pleased to get through a challenging first quarter with a slight uptick in occupancy, with rents and concessions generally holding steady. In addition, the bad weather we experienced during the quarter exacerbated supply concerns by hindering significant leasing activity. Fortunately, and allowing for somewhat of a soft landing, absorption for the new development has been exceptionally strong in the metropolitan area and over the last 12 months has exceeded the long-term average by over 50%.

Undoubtedly, near-term new supply continues to be an issue for all owners of residential assets in this region. However, we remain optimistic on the long-term fundamentals of the market and are pleased to see increasing traffic at all of our properties as spring time seems to finally be here. Now I would like to turn the call over to Bill to discuss our operating and financial performance.

Thanks, Paul. Good morning, everyone. We generated core FFO for the first quarter of $0.36 per a share, a penny off our original budget projection, primarily due to the prolonged adverse winter weather. We originally budgeted the first quarter at $0.37 per share. Our results were $0.06 lower than the fourth quarter.

This is the first quarter where all but $0.01 of the MOV sale impact was reflected in the quarter and the acquisitions we made in the quarter only minimally offset the impact of this result. As a reminder, the lost NOI after debt service from the MOV sale is approximately $0.11 per share, per quarter and as Paul mentioned, we are making strives to replace that NOI with each acquisition. Including the acquisition of the Paramount, the full impact of the two acquisitions this quarter and the interest savings from the debt repayment, we have replaced approximately $0.05 of the $0.11.

Core FAD for the quarter was $0.28 per share, an improvement of $0.05 over the fourth quarter due to lower tenant improvements, leasing commissions and recurring capital expenditures. Part of this improvement was just timing differences in the payment of tenant improvements and leasing commissions. We expect these expenditures to increase over the next several quarters such that the total TIs and leasing commissions in the year are expected to reach our budgeted amount of $40 million.

Same-store NOI declined by 0.4%, or $16,000, year over year as office and retail results positively impacted the challenges faced in the residential division. Overall, same-store results were impacted by $0.02 of non-reimbursable weather-related expenses. The inclement weather resulted in operating expenses increasing by over 10% versus the fourth quarter. Without the effects of the weather, same-store NOI would have been right in the middle of the 1% to 3% range we gave for guidance last quarter.

In the office division, same-store NOI increased 0.3% year over year. Same-store occupancy improved 140 basis points over the past year and 30 basis points from last quarter, as the heavy leasing volume in 2013 is taking full effect. From a lease perspective, the same-store pool remains approximately 92% leased. Overall occupancy declined to 83.7% for the quarter, as the renovation of 7900 West Park, which began last quarter, is now in full swing and is progressing on schedule and on budget. At West Park, we recently began removing the facade of the tower building, which has been going better than expected.

Regionally, our Washington DC office portfolio is holding steady, with physical occupancy above 93% as the lease percentage reached 97%. We expect continued improvement in the second quarter as tenants that are under lease but not occupied continue to move into their new space. Commercial office leasing for the quarter totaled approximately 103,000 square feet, down from previous quarters as many of our big vacancies were leased in 2013. Consistent with previous quarters, we are continuing to see double-digit GAAP rent increases over expiring leases and flat to modestly negative cash spreads on new and renewal leases. During the quarter we also received one-time related termination fees that contributed just less than $0.01 to earnings.

In the retail division, same-store NOI increased 1.2% year over year and occupancy improved 120 basis points. Compared to the fourth quarter, same-store occupancy improved 230 basis points. This significant increase in occupancy is due to few major tenants who took occupancy during the quarter. Included in this list is the new fresh market grocer which opened this year at Bradley Shopping Center in Alexandria, Virginia. We continue to believe that we will see improvement in NOI and occupancy over the next quarter.

Leasing in our retail portfolio totaled approximately 57,000 square feet. Overall leasing volume was lower this quarter due, in part, to the fairly light lease expiration schedule in 2014. New leasing volume closely tracked the average of the prior four quarters. Retail GAAP rent increases over expiring leases are consistently in the double digits, with cash spreads typically flat to slightly positive for new and renewable leases.

The residential division same-store NOI decreased 4.3% year over year, as expense growth offset any movement in revenue. Similar to office, this large increase in operating expense can be, in part, attributed to the higher-than-expected utilities and snow expense. In the residential sector, there are no recoveries for these types of expenses. Due to the hard work of our residential team, occupancy was essentially flat compared to the fourth quarter during the period when there were fewer people looking to move as the weather kept people inside. Our residential development project, the Maxwell, continues to be on schedule and on budget. We are preparing to hire our team to work at the asset and expect to begin pre-leasing units this summer, with the first units ready for occupancy in the fall.

Moving to the balance sheet, we successfully acquired $152 million of assets this quarter, with the acquisition of Yale West Apartments and the Army Navy Club office building. Along with these two acquisitions came the assumption of $101 million of debt. The interest cost on this debt essentially balances the interest savings on the repayment of the $100 million, 5.25% unsecured note in January. In terms of the guidance for the year, we are still comfortable with our core FFO guidance range of $1.56 to $1.64 and we are confident that we will be able to deliver on our acquisition goals throughout the remainder of the year. Now I will return the call to Paul.

I would like to conclude by reemphasizing a number of the key initiatives Washington REIT has implemented over the past several months to transition and strengthen this portfolio. First, Washington REIT identified and executed on the sale of the medical office portfolio, realizing tremendous gains, simplifying the business and positioning the firm for enhanced and more stable growth. Second, the company embarked on the firm's largest renovation project, undertaking the reskin interior modification of our largest asset, 7900 West Park Drive office building.

Third, we successfully acquired two stabilized residential assets, important milestones that mark the start to improving the quality of the portfolio and reinvesting the medical office sale proceed. Fourth, we further upgraded the portfolio with the off-market purchase of the downtown Class A Army Navy office building. And finally, this Company conducted a comprehensive review of the entire portfolio, which included a rigorous bottom-up analysis of all portfolio assets, markets, and regional economic conditions. This enabled us to develop a new strategy that further refines our path to building shareholder value, a path which we believe will not only close the gap to NAV but also grow NAV.

Our reported results this quarter reflect the sale of the MOB, the significant reduced occupancy at 7900 West Park and the weather-related costs of a very challenging winter. Going forward, we see upside. The additional NOI from acquisitions, the tenant move-ins and rent commencements from in the over 1.7 million square feet of leasing we did last year and our ability to source additional off-market transactions should begin to push results higher in the future. Now, we would like to open up the call to answer your questions.

(Operator Instructions)

Our first question today comes from the line of Dave Rodgers with Baird. Go ahead with your question, please.

Can you talk a little more, Paul, maybe about the acquisition pipeline that you are seeing? Obviously, the key question with the MOV proceeds, you made good progress in the first quarter, but particularly in urban infill office. Is that pipeline meeting your expectations?

And a second part would be on the multi-family side. Is the weakness in fundamentals pushing more your way?

Sure. Let's start with the office portfolio. In terms of the pipeline, it is, I think as you know, extremely competitive out there. I believe I said on one of our prior calls, Dave, that we would have to go out and basically attack the market and be very aggressive in our pursuit of off-market acquisitions. I believe we are doing that.

If you look at the number of trades that have taken place probably over the last 60 to 90 days, it has been very minimal. It is one of the most depleted pipelines I have seen in my career, which is fairly ironic when you couple the leasing fundamentals that are taking place out there right now.

It's just a fact that there are a number of transactions that are being chased by much more capital than the market can bare. I think what we have to do, and what we're trying to do to be effective, is each one of our three portfolio managers has a target list of assets. Whether those assets are on the market or they're not and their respective owners.

Number two, we are trying to affect the relationships that we have through most of the senior management team here at the organization through their longevity in the marketplace.

And number three, and quite frankly, it's about execution. I think if you talk to the owners and the debt holders of the Army Navy Club, they were pleased with our execution. I think that that -- we hope to replicate that and hope to have something to report about that in the next quarter.

In terms of multi-family assets, we are very aware of the ongoing supply pipeline. We also think that that is going to present us off-market opportunities. We don't believe that all of these construction starts will actually happen.

We've actually been talking to some people that I believe are getting cold feet and that were probably in the marketplace for the short- to moderate-term holds and they are already talking about monetizing their investments.

So I believe that we're going to see plenty of opportunities over the next two years, even with the 17,000-plus units that are expected to deliver over the next 12 months. We're confident that we're going to able to pick up some assets and augment our portfolio.

Maybe a follow-up to that. You talked about growing any -- I think, in bringing Tom on board, you talked about his skill set with development and expertise there.

Can you talk about your view? Is now the right time, or is Wash REIT positioned to do development? Are you comfortable doing that similar to either major redevelopments like 7900 West Park or the apartment JV?

I'd answer that in two ways. Number one, we're always going to examine an opportunity to increase shareholder value, and it's obviously on a risk-adjusted basis.

I happen to think we have -- 7900 is a good indicator. I happen to think that we have some nice redevelopment opportunities already embedded in our portfolio, so first and foremost, Dave, we're going to look at those.

We continue to get approached by partners on all three asset classes, and the most guidance I can give you is, we're going to examine each one of those opportunities on a case-by-case basis.

Great. Last one, just a clarification from Bill. Bill, on the weather, was it a $0.01 negative impact of revenues and $0.02 negative to expenses, or did I not interpret that correctly?

It's $0.02 overall, Dave. In terms of separation between revenue and expenses, I would say it's probably closer to $0.03 in expenses and $0.01 in revenue.

Okay. Great. Thank you.

Sure.

Our next question comes from the line of Brendan Maiorana with Wells Fargo.

Can -- I don't know, either Bill or Paul, can you give an update of where you stand with the 1031 proceeds and timing and maybe what's out there on the pipeline as it relates to placing that 1031money?

Okay. In terms of the 1031, just as a refresher, because it is somewhat complicated so I'll go through it again.

We had two buckets of 1031 money from the January sale. One was roughly $80 million and one was roughly $115 million. The first one was essentially done with Paramount and Yale West.

And then the second one, obviously, we started taking things away with Army Navy Club. It leaves us about, call it $85 million to $90 million left in that pot. Let me put it this way. We are very confident that we will be able to take care of that hopefully sooner rather than later, but certainly by the July 20 date.

Okay. So what's the -- I think on the balance sheet, there's $107 million of restricted cash. I presume a portion of that is related to the last tranche of that 1031 money, but what is the remainder?

So basically when we -- this is Laura Franklin. When we completed the first part, after the purchase of West and Paramount, there's about $6 million left that we are going to absorb in our dividend distribution this year.

So it's a little more than what I was talking about, Dave.

Okay. And, Bill, you mentioned affirmed guidance, the $1.56 to $1.64.

It seemed like, or at least my impression of the ramp expected in earnings, was partially driven by deploying a lot of the cash from the MOV into acquisitions. While you've started the year off nicely with acquisitions, the $150 million has been encumbered by $100 million of debt, which doesn't drive as much to the bottom line. I'm wondering, are there -- having that financing there, which doesn't give you as much impact on the bottom line and having the weather in Q1 impact you, what are kind of the offsets that keep you comfortable with that range, given you have got some headwinds?

That's a great question. I would say, Brendan, that first and foremost, the quarter is obviously impacted by a couple of pennies of weather, which hopefully we don't have a couple of pennies of weather in this quarter.

Secondly, I think the acquisitions as you pointed out did come with some debt, which obviously offsets the positive impact of those acquisitions. You should assume that going forward, at least in the next round of acquisitions, if we think we know what those are, probably come with no debt, so that's part of it.

The other part is that just the occupancy gains that we expect in the -- primarily in the office and the retail area, are just the separation between the lease percentage and the occupied percentage. If that ramps up and closes, I think that will add some dollars to the bottom line. So I think we're pretty comfortable that we will get back on track.

The one thing that I will note is that generally the -- and this is just observation. The consensus numbers on a per-quarter, we don't give per-quarter guidance, but the slope of those numbers quarter by quarter was somewhat flatter than I would have probably done in our model. Certainly it was flatter than what is in our model.

Right. Okay. So is -- you mentioned that you expect occupancy to move higher in Q2. Given those comments, do you think it trends higher in the back half of the year as well?

We are certainly expecting it to. That gets a little grayer as you go forward. It's hard to say, but we are expecting some.

Okay. And it looked like -- if I did the math correctly, your same-store number in the quarter -- if you were $0.02 in the quarter that's, call it $1.2 million or $1.3 million relate to weather. That's about 3% to the same-store impact, if I did that math correctly.

Are you also affirming your overall same-store guidance, which I think was plus 1% to plus 3%, if I remember correctly?

Yes. What I said in the prepared remarks, Brendan, was that if you took the snow away, we would have been right in the middle of that range. Quite honestly, each of the sectors would have been right pretty much in the middle, with the exception of retail being above the high end of the range for the quarter. Office and residential would have been pretty much right in the middle of each of the ranges.

For those who might not remember what those ranges were, let me refresh everybody's memory. In office, we expect kind of 2% to 4% same-store on -- obviously excluding West Park. Multi-family, we were minus 3% to zero and retail, we were zero to 1%.

Okay. And you are keeping those ranges, even you have the negative impact in the first quarter.

Yes. For right now, we want to sort through second quarter. I think we are going to be in those ranges going forward. And I think we can capture the gap that we kind of put ourselves in a hole in the first quarter. I think we can capture that back.

Okay. Great. Thanks.

Our next question comes from the line of Michael Knott with Green Street Advisors. Go ahead with your question, please.

Thank you. Question -- I'm not sure if you covered this in your prepared remarks, but can you talk about what was behind the sequential uplift in the retail occupancy?

Yes. Retail was -- Michael, retail was primarily a couple of big occupancy, people taking occupancy that leases were signed quite a while ago. The biggest one being Fresh Market at Alexandria in our Bradley shopping center. That was roughly 25,000 feet.

We had another one up in Westminster, I believe, that just started and so there was a couple of them. It wasn't major, but they definitely moved the numbers. I mean, when you look at them on an individual basis, they moved the numbers quite a bit.

Okay. And then two questions that are probably a little bit intertwined.

Can you talk about any update on your status with World Bank? And then more broadly, when we look at your rollover schedule for next year, for 2015, this year seems like it's smaller than it was. And then you look at 2015 and it's still a decent size number.

I know that World Bank may be part of that. Can you talk about both of those items?

Sure, Michael. Let's start specifically with the World Bank.

We've been engaged with the World Bank probably over the last 90 to 120 days. We have received a proposal from them. I can't get into a number of details, but it would involve a lease extension.

What we are doing right now is assessing what is the best -- what creates the maximum value for our shareholders, be it a lease extension, a redevelopment or sale of the assets. We have not come to a conclusion on that, but please rest assured that we are in deep discussions with the World Bank and as a minimum we will probably see some type of extension of that lease. But, again, we're going to look for an opportunity to create maximum value.

And then weaving that in, can you remind us what they are of your 2015 role and then any other big ones in that group that you're thinking about or worried about or working on?

I think the biggest one you should focus on is probably Booz out at John Marshall. We have issued a proposal to them for renewal and we are expecting a counter offer sometime this quarter. And we will move that along appropriately.

But that's -- as far as the most significant tenant needle mover, that would be it, Michael.

Yes. There's other ones that are out there, but that's by far -- the World Bank is by far the biggest one and the Booz comes in right on the heels of that in 2016.

Okay. And then a question on new leasing. As your office occupancy starts to hopefully rebound further over the next couple of years, obviously leasing costs will be a big deal.

Just looking at the lease economics on new leases on page 22, just to walk through, it seems like the last couple quarters you have been signing, not big spaces but for office, $30 gross rents, about $10 a foot per year in TIs and leasing commissions, and then, I guess operating expenses would be on top of that.

Can you talk about the net effect of rents on new leases? It sounds like it could be kind of single-digit type net effect of rents, given the weakness in the market. Can you talk about your prospects for how that's trending?

Yes. I think -- Michael, I would say -- you observation is right. Gross leasing is kind of mid-$30s.

I think concessions will start coming down as occupancy starts increasing. Downtown, we're 97% leased, so we're in a position where we can start pushing the concessions down. That's a good part.

And some of the suburban office buildings, quite honestly, are in somewhat similar shape. We are working to fill up Monument. We are -- obviously, the big hole that we have is going to be refilling 7900. And that one, we're putting improvements into the buildings.

We think we can push kind of gross rents there. We think concession packages won't be really any different. So we will get a rental increase with pretty much the same kind of concession package.

So we feel like on the office side, things are going to get better as we continue to improve the occupancy.

Okay. And on the specific leases the last couple quarters, can you remind us -- I'm not sure what the mixes is, but what the rough operating expense load would be on these?

It's all over the board in terms of suburban and downtown. I'll get back to you on that.

Okay. And then, can you just remind us on -- since you mentioned 7900, what your projected incremental return on capital is and what the time frame is for finding tenants and finishing that?

The way we kind of put 7900 on the drawing board in terms of returns, it's in that 8% to 10% range. Basically, where that goes is from taking kind of $20 -- high-$20 rents in that building up into the high-$30s to low-$40s, is kind of where we're projecting.

That would be still $10 below, or more below the higher-end rents in Tysons. We feel pretty good about those numbers. That's where the return threshold is.

Okay. And then one last one for me and then I'll yield the floor.

Paul, you've been there, I don't know, maybe five months or so now, I guess? Or six months? But just curious where you would say we're at in terms of getting Wash REIT to where you want. I would guess we are still very early innings here in terms of doing what you want to do.

Do you think by the end of the year we will be in a better position and you will be further along in term of getting accomplished what you want?

Another good question, Michael.

Let's start with when I came here, what was what I considered mission one. Mission one was getting the MOV proceeds back working for the shareholders.

And then, I think I talked about on the first call that my objective would be the three Ps; the people, the processes and the portfolio. We had a very good off-site at the end of January with our Board of Directors. I'm very pleased to say, and we met with our board again this week, that they are extremely supportive of our efforts to enhance all three of those aspects of Wash REIT.

I think we are demonstrating that right now and I think we are trying to demonstrate that we are improving the quality of the portfolio through our recent acquisitions. I can't give a better example of a augmentation to the depth of events than bringing Tom Bakke on board.

And I can assure you that the processes are all part of that also and that we have done substantial work and are implementing substantial new processes, particularly on the front end of our business, kind of transitioning the firm from what I would consider more of a skinner to more of a hunter and respectfully going after more off-market transactions, trying to front-end load this thing, match fund capital. Those type of processes are going in place.

How far am I along? We're still kind of in the first quarter. We've got a lot of work to do. I believe that it will be a different company 12 months from now. But time will tell, Michael.

Okay. Thanks a lot.

(Operator Instructions)

Our next question comes from the line of John Guinee with Stifel. Go ahead with your question, please.

John Guinee here.

Okay, actually, let me talk a little bit more and put some numbers around what Michael Knott, my good friend Michael Knott, said.

If I look at your FFO for 2010, 2011, 2012, it was in the $1.90 to $2 range, sort of trending down. And then if we look at 2013 and 2014 and consider those justifiably transition years, it appears to me from the ramp-up numbers and the guidance that you gave, Bill, that to the end of the year this year, beginning of 2015 ought to be a $0.43, $0.44 FFO, which sort of implies 2015 is $1.76. So we have sort of lost $0.20 over the last four or five years.

And then what we've got is, obviously, 7900, and that is a defensive must do. Nobody would ever lease that building in its previous configuration. And you have clearly purchased $200 million worth of very core-oriented assets, which we wouldn't disagree with, but just point out that they are very core-oriented assets.

And then going back to the FFO number, if you stabilize a better portfolio at $1.76, you have got a run rate of $40 million of TIs, a run rate of $5 million at base building. That translates to about $1 to $1.10 of FAD against the $1.20 dividend.

So as I think of this Company, I think of an improved portfolio. I think of an FFO in the $1.75, $1.76 range for 2015. I look at a situation where we are covering the dividend.

And I guess is the best case that we're just sort of waiting for the investment community to fall back in love with DC? Or how should we look at where we go from 2015 and 2016 once we have reinvested the MOV dollars and stabilized the portfolio at the $1.75 FFO, $1 to $1.10 FAD?

Good question, John.

I think your math is -- I would concur with your math. I'm not giving guidance for 2015. I'll state that out there. But your math towards the end of the year on a quarterly run rate is a pretty good logical conclusion.

I think that the $40 million NOI, if you remember from last quarter of CapEx and TIs and leasing commissions, if you remember from last quarter, we think that's elevated probably for this year only. It's not -- because we did so much raw leasing last year, and as you know, some of those were fairly expensive transactions to fill some pretty big holes in our portfolio. That those won't be necessarily a recurring instance, so your gap between FFO and FAD will narrow over the coming years.

I don't necessarily think that, while your math is pretty good for this year in terms of the FAD number and where we think the dividend is where FAD will end up, I think what we will see going forward is that dividend being covered and hopefully we can begin to grow it.

Keep in mind, as you gain occupancy, you also gain the ability to narrow -- as I said earlier, you narrow your TIs and leasing commissions. You have more leverage and you also start moving rents up.

Okay. So what ends up happening is, we've got clearly a much better portfolio in 2015 than 2011 or 2012. We're still in the situation where your better office product, no one is raising rents in DC, even on the good stuff, in the next few years. Apartments is candidly the same situation.

Nobody is raising rents anywhere in the apartment world in DC for the next couple years. And you've still got about 1 million, 1.2 million square feet of pretty tough product up in the lower 270 corridor and suburban Maryland.

What else do you have planned on the disposition side of the equation or the value asset side of the equation to try to offset those harsh realities?

Well, John, it's Paul. I don't know if I concur with your observation that you're not going to be able to move effective rents in Washington, DC, over the next couple of years. If I even look at the first quarter right now, we saw asking rents were up 2%. We think that there isn't really a supply problem.

Three buildings delivered in Washington, DC in the first quarter. They were 92% preleased. I guess I just don't share your sentiment on the next three years in downtown DC.

I acknowledge that the suburbs will be challenging. We are looking -- I think as I stated in my narrative, we are looking at opportunistically selling assets in some of our non-core suburban markets, but I also don't think those assets are positioned for sale right now. There is some modest leasing taking place in some of the markets that we want to exit from and we are going to continue to try to get these assets back to increased stabilized position and then probably take them to the market over the next 12 to 24 months, maybe even 36 months.

Okay. Fine answer. Just one last question.

The Booz Allen space, the John Marshall building, refresh my memory, which Metro stop are you in Tysons and how far walking is it to the entrance to the Metro stop?

It's 500 feet, John, I think is the number, to that stop and it is the third stop. I think it's Metro West. It's on Route 7. It's the first stop on Route 7. It's the east side of Route 7 in Tyson.

So it goes McLean and then it goes the mall stop where Maysearch is and we are. And then it goes to the Route 7 Metro West and then the last one is Springhill.

Perfect. Okay. Thank you.

Sure.

There are no other questions in the queue, so I would like to turn the call back over to Mr. McDermott for a final remark.

Thank you. I would like to thank everyone for your time today, and we appreciate your interest in Washington REIT.

I would also like to remind everyone on this call today that Washington, DC, still remains one of the world's top real estate markets and we are confident that this region will support our desired growth over the coming years.

The new steps we are implementing are strengthening our portfolio and further positioning us to capitalize on the improving regional economic conditions and we look forward to updating you on our progress on our next call. Thank you, everyone.

Thank you. This will conclude today's teleconference. You may disconnect your lines at this time. We thank you for your participation. Have a great day.