Elme Communities (ELME) 2014 Q3 法說會逐字稿

Welcome to the Washington Real Estate Investment Trust third-quarter 2014 earnings conference call. As a reminder, today's call is being recorded. Before turning over the call 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 our 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 and 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 our complete risk factor disclosure.

Participating in today's call with me will be Paul McDermott, President and Chief Executive Officer; Bill Camp, Executive Vice President and Chief Financial Officer; Tom Bakke, Executive Vice President and Chief Operating Officer; and Laura Franklin, Executive Vice President and Chief Accounting and Administrative Officer.

Now, I'd like to turn the call over to Paul.

Thank you, Kelly, and good morning, everyone. Thanks for joining us on our third-quarter 2014 earnings call. As I have discussed on past calls, we are continuing to position our Company to be a best-in-class operator of Washington, DC real estate. To that end, improving the quality of this portfolio is paramount. Our acquisitions this year underscore this objective, as they each contribute to the overall portfolio improvement.

Year-to-date, we are at the midpoint of our guidance range on acquisitions, with approximately $300 million closed so far this year. Each of these acquired assets are located in the District, the newest being Spring Valley Center, acquired on October 1. This $40.5 million retail asset, located in the affluent northwest Washington, DC neighborhood, is anchored by Crate & Barrel.

The off-market acquisition of Spring Valley represents another strong value-add opportunity for us. We expect to quickly lease up the center's only vacancy and, over the coming years, to be adding additional shop space. We have good prospects on the vacancy, and we are in discussions with local constituents regarding the center's future expansion plans.

Looking forward, our acquisition pipeline remains solid and we're actively analyzing several potential opportunities. Three of the four acquisitions this year were off-market. And finding opportunities like these requires a focused and disciplined origination process. We will update the market at the appropriate time with respect to any additional developments on this front.

Washington REIT achieved its second straight quarter of strong same-store NOI growth. Our core FFO and FAD numbers increased to $0.43 and $0.30 respectively. This performance is driven by substantial occupancy gains over the past several quarters and new operational protocols that have been put in place at the Company.

Same-store NOI growth was a solid 7.1% this quarter led by the office sector, coming in at 9.2% growth, and the retail, coming in at 8.1% growth. Occupancy continues to tick up in all three property types with overall same-store occupancy reaching 93.2%. Bill will go through these numbers in more detail in a moment. Each of our three property types is posting better than expected performance this quarter. I addressed the office and retail metrics above.

Our residential portfolio is also outperforming expectations despite the pending supply challenge. In our opinion, this impact is more muted than the pundit's negative view of multi- family in Washington, DC. The absorption pace of 16 units per project per month for residential developments in initial lease-up remained steady, despite the number of projects in initial lease-up increasing 25% over the past 12 months.

In the quarter, our residential portfolio held steady with same-store NOI declining only 0.1%, thereby exceeding our expectations. Overall occupancy for our residential portfolio improved to 94.3%, which is 220 basis points better than the start of this year. The positive impact of these occupancy gains in the portfolio are being partially offset by slightly lower rents, on average, at our properties.

On the development and redevelopment front, our two ongoing projects are progressing according to plan. The Maxwell, our 163-unit residential development in the Ballston sub-market of Arlington, Virginia, is nearing completion. We expect this project to begin leasing units in the fourth quarter. The marketing center is in place and fully staffed and we are actively talking to prospects about pre-leasing units.

The redevelopment of our largest office asset, at 7900 Westpark in Tysons Corner, is well underway with the new facade being completed, thereby transforming the building's appearance. This activity is capturing a lot of attention from commuters on the Beltway. The interior improvements are progressing and we are seeing the heightened level of interest from prospective tenants and hope to have our first lease signed soon.

Before I turn the call over to Bill to discuss the financials, I want to focus on the operational improvements we have made at the Company over the past several months. We are nearing the completion of our reorganization to a portfolio management model whereby separate portfolio managers oversee each of the three property sectors. Each portfolio manager is responsible for the operating performance of their respective portfolio and all three report directly to our Chief Operating Officer. This structure was implemented to ensure accountability at all levels for the financial performance of each Washington REIT asset.

Also included in the organizational structure was the streamlining of our internal and external real estate services. I have been very consistent about our need to realign the resources of this Firm to accelerate our transformation into a best-in-class operator of real estate. To that end, we have hired a new asset manager in charge of our Virginia office portfolio as well as established a real estate services division. This was accomplished through a combination of internal promotions and the realignment of certain departments to support and provide the highest level of service to our internal customers.

We have also directed greater focus toward third-party vendors in leasing, architecture and other services to add depth to our internal bench while appropriately managing costs. These are all part of further transforming Washington REIT into an institutional owner and best-in-class operator of real estate in the public markets.

Finally, we recently announced our plans to relocate our corporate headquarters from Rockville, Maryland to Washington, DC. Our new headquarters will be located in the central business district at 1775 Eye Street Northwest, which we acquired earlier this year.

Following the move, which will commence in the fourth quarter and is expected to be completed in January of 2015, we will continue to maintain a presence at our current office located at 6110 Executive Boulevard in Rockville. This decision is a natural extension of our strategy to focus on owning high-quality, well-located, urban, and metro-centric assets as part of our overarching objective to enhance our portfolio and drive shareholder value. We're very excited to be moving to this dynamic, downtown location.

Now, I will turn the call over to Bill to discuss our operating and financial performance.

Thanks, Paul. Good morning, everyone. As Paul mentioned, our core FFO for the quarter was $0.43. This is an improvement over last quarter, driven largely by the progress in leasing in all three portfolios. On a physical and economic basis, overall portfolio occupancy increased 60 and 110 basis points respectively compared to last quarter and 200 and 130 basis points compared to last year.

Looking at the same-store pool, physical and economic occupancy has improved 340 and 390 basis points respectively over the past year. We believe the continued occupancy gains should generate positive same-store NOI growth well into next year.

For this quarter, these occupancy gains have translated into 7.1% same-store NOI growth, year over year, and 1.9% just since last quarter. The office division led the way with 9.2% same-store NOI growth. Corresponding same-store occupancy improved 520 basis points to 91.8% from a year ago. This is the highest same-store occupancy in the office sector over the past five years.

Just since last quarter, same-store office occupancy improved 120 basis points. We currently expect these occupancy trends to drive year-end same-store NOI growth above our original estimate of 2% to 4%.

Office leasing activity totaled 82,000 square feet for the quarter with GAAP and cash rent increasing, on average, 23% and 6% respectively. Tenant improvements, leasing commissions and other incentives were in line with the averages from past quarters.

The retail division delivered another strong performance this quarter with same-store NOI climbing 8.1% and physical and economic occupancy increasing 300 and 340 basis points respectively. As the retail portfolio occupancy reaches levels in the mid 90%s area, we believe we are reaching stabilized occupancy levels, which support the rental rate increases we are seeing on new and renewal leases. Total leasing volume in the retail division this quarter was 181,000 square feet of which 171,000 square feet were renewal deals.

On average, GAAP and cash rents increased 9% and 4% respectively. Tenant improvements, leasing commissions and other incentives averaged only $2.79 per square foot, largely driven by a number of as-is renewal deals. We originally projected the year's retail same-store NOI growth to range between 0% and 1%. We now expect the retail same-store NOI growth to range between 4% and 6%.

On the residential side, we originally forecasted residential same-store NOI growth to range between negative 3% and 0%, and we expect it to fall within that range. In the third quarter, residential same-store NOI was essentially flat compared to last year's numbers. Occupancy continues to improve with same-store physical occupancy increasing 20 basis points in the quarter. The overall occupancy improved 60 basis points in the quarter, indicating solid leasing activity at Yale West and Paramount.

Core FAD for the quarter was $0.30, an improvement over last quarter due in part to lower tenant improvements in the third quarter. We continue to expect leasing capital, including tenant improvements, leasing commissions and incentives, combined with recurring capital improvements, to total $45 million this year. Year-to-date, that figure was $31 million.

On the capital front, we currently have $50 million outstanding on our lines of credit. The balance at the end of the quarter was $5 million. The additional borrowing was used to pay for the acquisition of Spring Valley Center.

Turning to guidance, we narrowed our guidance range from a range of $1.56 to $1.64 to a new range of $1.60 to $1.63. The shift is supported by better-than-expected same-store NOI growth that we have experience over the past two quarters. We believe our current projections put us on a path to deliver core FFO towards the upper half of our original range.

Now, I will turn the call back over to Paul.

Thank you, Bill. Last quarter we discussed our progress in improving our portfolio, processes and our people. We are making significant changes at this Company, yet there are still opportunities for improvement. You should expect continued, swift execution of our strategic plan. These changes have been positive for this organization, instilling a sense of accountability, but more importantly, creating a platform to deliver on our commitment of creating value for all of our shareholders.

We believe our performance over the past two quarters demonstrates our continued focus and execution on our stated objectives. We are experiencing strong occupancy gains, which are translating into solid same-store NOI growth. Much of our progress has been in positioning our assets and executing on leasing up vacant space. As the portfolio continues to gain occupancy, we hope to be in a stronger position to deliver continued same-store NOI growth into the future.

Washington REIT will continue to appropriately balance mitigating risk, executing leasing plans, and surface additional opportunities to improve the quality of our portfolio. All of these will be achieved with solid execution of our business plans.

Going forward, we will build on this quarter's momentum and continue to drive shareholder value by striving to become a best-in-class acquirer, owner and operator of real estate in the Washington, DC region.

Now, we would like to open the call to answer your questions.

Thank you.

(Operator Instructions)

John Guinee with Stifel

Great, thank you very much. Nicely done, nice quarter. Right now, dialing in your recent retail deal, you are right about 40% levered based on total enterprise value. Assuming you don't go to the equity markets and you don't dispose of assets, what's the capital plan from here? What options are you looking at, and what should we expect in the next 30 to 60 days?

John, I think what we're looking at for the next 60, 90 days is the same options that we've talked about in the past, which are a combination of asset sales, a combination of looking at options in the marketplace. Quite honestly, the question that is always there for us is, what is the cost of that capital at any point in time? And what's the cost of the acquisition that we might be making in the future? We have to balance those out. As we've talked about in the past, we've talked about different pools of assets that are eligible for disposition at some point in the future. Some have different cap rates than others, so you assess which ones you want to sell at the appropriate time.

If you wanted to lever up as much as First Potomac, you could acquire another $600 million or $700 million of assets just off your line. How far are you willing to go on a leverage basis?

On the leverage basis I think we're constantly watching the ratios that are most important to our ratings. Other companies don't have public ratings, so we have to play it a little bit different way when we're looking at leverage. Being in the BBB- and a BAA2-type rating here, you are managing several ratios and you are constantly watching them.

Then, Paul, your retail deal looks like about $540 a square foot, but retail can always be complicated. Is that a good price per pound or a full price per pound as you look at the replacement cost for that kind of product in that kind of location?

First off, John, I think if you know the area, I think that that's an irreplaceable location. This is the first time, I'd like to point out, I believe this is the first time this asset's ever traded since it was developed, so we consider it a coveted retail asset. The dirt alone, right now, I don't think we could rebuild it. I also don't think the neighborhood would let the property get constructed the way it is today.

Also, I think we mentioned in our commentary, that this is a value-add play for us. We do see two benefits with this asset. Number one, we bought it with some vacancy and we are talking to several tenants that are competing for that last piece of vacancy right now. Then secondly, there is some additional FAR, which we have the opportunity by right to tap into. I can assure you that we are, we did acquire that asset to create value. Finally, one of the things that we didn't really highlight, but that our portfolio manager is keenly aware of, is that we have below-market rents in that center and we're looking forward to capitalizing on those when those leases turn.

Thank you, very concise explanation. By the way, did you quote a cap rate on that asset, either in place or stabilized?

We did not, John.

You could if you want to. (laughter)

Let's go back to talking about First Potomac's leverage level. (laughter)

Have a nice weekend

Thank you John. See you at NAREIT.

Dave Rodgers with Robert W. Baird

Good morning. Paul, wanted to talk today about the office side. You guys are obviously benefiting nicely in same-store growth from leases that have been achieved previously. I think the leasing activity relative to what's available slowed a little bit in 2014, and there's certainly some market conditions that would justify that. My question really comes down to, on the office side, do you think that the transition at the corporate level has impeded leasing as you transition from one team to the next in 2014?

The second part, if not, as you look at specific assets out there, what's going to move that needle for you from this point forward, given the strong performance you had over the last year?

I would actually say, let me go back to the first thing on personnel. I would take a completely different view, Dave. I think the transition in personnel is actually accelerated our leasing. Our delta, we're shrinking our delta towards full stabilization. I think across the boards, if you look and I think you specifically referenced the office portfolio. Our office portfolio, if you take out 7900 Westpark, which is undergoing a complete renovation right now, our office portfolio is just over 90%.

Pretty much in every one of our sub markets, I think with the exception of one, both in DC, Maryland and Virginia, we are outperforming market statistics. I think the move to go to third-party leasing has really had a pronounced effect on our occupancy levels. I think we're going to continue to benefit from that. I also think in terms of the personal transition that you highlighted earlier, we are going to continue to try to put people in place. Put the best team on the field to create the most value for our shareholders. That's what I think we're doing in the office portfolio.

In terms of how are we going to create value going forward? The big needle mover for us going into 2015, outside of market improvements and picking up on our leasing velocity, is 7900 Westpark. We hope to have that skin completely wrapped by the end of the first quarter. We are already starting to get some nice traffic in there. We are on, I'd say, probably three major tenant's short lists right now, and we are competing for, what I would consider, at pro forma or better deals.

The second thing is, and we have an implied rule around here, do not let tenants out of your buildings. We have a very heightened focus on retention right now. It's very expensive when tenants leave the building, considering where some of the back-filling rents are right now, Dave. I can assure you we have 100% focus, and that is Tom Bakke's charge. And every leasing agent that works for us, charge is maintain the tenants that we have and try to build upon that.

Thanks for that, Paul. Maybe switching to residential, looks like market rates were down, at least in the supplement. I think market rates have been under pressure, obviously, in DC for quite some time. You've been able to offset that with some of the rehabs that you have done and just leasing up some specific space. Talk a little bit more about your ability to buck that trend, if you will? With additional rehabs are those returns still holding? Are we through that process and you're going to be a little bit more at will of the market?

Dave, let's step back for a second and take a look at the markets themselves. Class A rent and class B rents are up overall, albeit minute. Class A rents are, I think, up about 1%. Class B rents are up a little bit below that. If we look around at the markets in general, and then I'll progress into our assets. The markets, in general, I think NOVA's, Northern Virginia is lagging a little bit in terms of performance. Tysons' rents are growing though. Maryland, what we're seeing out there is performing well in the low rise and high-rise. DC rent is outpacing the suburbs.

What we are looking at in our portfolio is, yes, I think the bulk of the rehabs have probably taken place. We do think there's a little juice left in there, but assets that we're looking at currently, right now in the marketplace, we're still seeing some rehab opportunity in terms of a discount-to-replacement cost. I think our return on costs, historically, have averaged somewhere between 800 and 1,200 basis points, when we go after this. That's going to continue, Dave, to be our sweet spot. You're not going to see us chasing brand-new class A product that we don't think we can tangibly move rents. I think the other charges for our multi-family group is better retention of the tenants that we have, that's above 50%, minimizing concessions and then finalizing out those renovations in our current portfolio.

Last question, two parts. The CFO transition, any progress and update on timing and the process that's going on there? Then all the changes with the transition at the Corporate level, any impact that we should be thinking about for G&A guidance in 2015?

I will start with the CFO transition. We engaged Russell Reynolds in September. They have put together a very qualified list. We have been actively screening candidates and will continue to do so over the next 30 days. I think that we are comfortable in saying that we will probably have a candidate identified sometime in the fourth quarter. Then, we will progress from there.

In terms of any G&A, we will be alluding to that both in our financial statements and the severance will be included in the 8-K.

Okay. Thanks for all the detail, Paul.

You got it, Dave.

Brendan Maiorana with Wells Fargo.

Thanks. Bill, wanted to read into the balance sheet, page 12 of the supplemental, the covenants that are there. You mentioned that you felt like there was going to be continued NOI growth, but I wasn't sure if you meant that on a perspective basis, sequentially from what you put up in Q3 or on a year-over-year basis as we think about the next few quarters? So I wondered about that. Then, how that relates to how your covenants get calculated?

Because the one I am looking at and most interested in is the percent of total liabilities to gross asset value, it's at 52% now as it gets calculated. When you layer in the retail deal, that number goes up to 53% and the covenant is less than 60%. So, I wonder how much wiggle room you think you have with respect to that covenant? And if you do an asset recycling strategy, sell assets and by assets that are match funded, it seems like that covenant, the way it gets calculated, that probably even if it's match funded would continue to go up as leverage its calculated. How much when do you think you have on that one?

We actually have a lot more room than you think. Let's go to the calculation for a second, because it does erode a little bit, depending on the cap rates of acquisitions. Because you are taking your -- to get to your total gross asset value, you're using a 7.5% cap on your EBITDA. So when you are doing that, you are getting -- every time you buy a building in the 6% cap and you immediately cap it at 7.5% it kind of nicks you a little bit. Just to give you some background, that number -- you can run that number north of 55% without any problem for an extended period of time. Just to give you an example, when I joined the Firm years ago, that number was hovering around 59.5% and we managed through that without too much problem. Because you were adding the EBITDA, you are moving things around, I'm not worried about that one.

The one, more to your question, though, Brendan, I would say the one that I watch more closely is one that is not necessarily a covenant. It's more things that the rating agencies watch, which is net debt to EBITDA. Those numbers, with the sale and the way we calculate that, is a rolling, historical four quarter, so you are hindsight looking. If you think about the first quarter this year and second quarter this year, where we had sold off medical office and hadn't had a full quarter's of replacement EBITDA. You cap those -- when you start capping those quarters into that calculation, that obviously hurts that calculation. It won't start improving, really, until we get past it and we don't have to include first and second quarter of 2014 in the calculation. So it is going to take us a couple more quarters to keep that one, start moving at one back down.

Okay. That's helpful. Then, embedded in the long question that I asked was, from a prospective standpoint, you mentioned that occupancy levels are high on the same-store basis, although overall they are a little bit lower because you've acquired some vacancy. I think you got some maturities later this year and early next year. How do you think about NOI growth from current levels, not on year-over-year basis, but just prospectively from where you were in Q3? Do you feel like that can continue to be positive given that occupancy has moved up to pretty elevated levels?

Certainly, the growth rate will probably slow but it won't -- you're going to have the benefit of all the growth we had this year. You'll have a full impact of that next year, so on a quarterly run-rate basis you're going to continue to -- you should continue to see some pretty good growth until the comps get harder, which would be around the second and third quarter next year. Fourth quarter and first quarter should still remain pretty strong. But you're right, as you lease-up your space, it becomes more challenging to move those internal growth numbers. Now, where you're going to see the pick up, as Paul mentioned, is the lease-up of 7900, the lease up of 1775 Eye Street. Those are the big spots. There's some other little holes, but quite honestly, there's not a lot.

On 7900 Westpark, my recollection was that you guys, I thought, had a little bit of roll that was coming up in that building, but I think the occupancy, or at least the lease rate went from 55% to 58%. I wasn't sure if that was something that was expected to hit in Q4 or maybe you just offset that with some leasing?

There's a lot of moving parts to that building. For me to be able to pinpoint, at the end of the quarter, where that occupancy is going to be is pretty tough to do. We have people moving around in that building for swing space and all kinds of different things going on. We did have, as advertised I think last quarter and probably multiple quarters ago, is we had Level 3 move out at September 30. That was the last of the downdraft due to the construction.

Okay. Last one, Paul, any update on your big three tenants that you could speak about or is it too premature at this point?

Happy to talk about them, Brendan. First off, I think in terms of -- let's start with the closest torpedo to the boat, would have been World Bank. We have obtained a commitment from the World Bank for an extension. We are in the process of documenting that, right now, so I can't really go into the final terms and conditions. As we reported out at the last call, we felt good about that and I think everything that we have tried to commit to you is coming to fruition with that particular tenant.

Second in the big three, would be Booz Allen and Hamilton at John Marshall and Tysons. We are in-depth discussions with them, and have been probably for the last 4 to 6 months. We hope to have some resolution to that, probably I would hope, in the next quarter. I can say that we are making substantial progress. Again, we feel good about it. But until that extension is committed, we're going to continue to aggressively negotiate to our best ability.

Finally, the Advisory Board always comes up on these calls. I need to remind everybody of two things. Number one, that expiration is in 2019. Number two, that our good friend Mr. Ritchie always likes to talk about the new car smell and getting people that new car smell. That's how you get tenants. That new car smell today is costing about $20 to $25 a square foot more than they currently pay. We are talking to them at the highest levels in terms of discussions. I think we do have some time to continue to negotiate that lease. Again, we're in pretty detailed discussions with them, and we are trying to address all space and operational needs in 2014, 2015 and 2016. That's about as far as we can comment.

Great. Thanks for the color.

Sure.

(Operator Instructions)

John Bejjani with Green Street

Morning, guys. First question on the operating side. Paul, the portfolio manager model you discussed, is that any different from what was starting to be put into place at Wash REIT before you joined?

It might have some of the same elements, but I think it's, number one, it's about the portfolio managers. Number two, it's about how far down you drive accountability. I can assure you from the building engineer to the leasing agent to the property manager to the asset manager on up to the portfolio manager to the Chief Operating Officer there our accountabilities now in place throughout the organization that weren't there before.

Okay. For my clarification, what's the split for leasing right now between internal leasing and third-party for you guys?

We are 100% third-party.

100% third-party? Okay. Building off prior questions on capital allocation. You've spoken previously about your desire to sell some of your lower geographic-quality properties. When do you see yourselves looking to do that. How do you think about the use of proceeds?

Well, I think we are continually evaluating. We do every quarter, John. We look at what are the performers and which ones are the sub performers. For us, let me start with the use of proceeds. The use of proceeds is going to be the to grow the Company and grow the respective portfolios. Right now, in terms of what we're looking at selling, I would say we have some assets that we have ear marked that probably don't have the same income growth potential, on a relative basis, as some other assets in our portfolio.

I think I've said on prior calls, John, I don't know if you were on them, but that these assets, you can't just take these assets, decide you want to sell and take them to the market next week. There are assets that we need to either do some minor cosmetic renovations or that we need to button-up some leasing, but there will be assets that will be sold in 2015. Those will be what we deem to be the low-growth providers going forward.

Great, that's helpful. Last question, on the CFO search, can you give us an idea what kind of candidates you are looking for? Are these former REIT CFOs, pilot market execs, or what you looking for in a candidate?

I can say that, just talking about the classifications that you just highlighted, we have gotten skill sets from across the board. It's been a very broad menu. We are, obviously, -- the new candidate will have substantial capital markets experience. They may or may not be a former CFO. I'm a big believer in grabbing the hungry lieutenant as opposed to the comfortable colonel. I would say that the biggest thing for us is a chemistry fit within the new culture that we are building here. That's going to be critical, and it's not just to me, it's to the other senior executives at this organization. That we feel that we're going to bring in a Chief Financial Officer that is compatible to what we're trying to do in terms of growing the Company and the balance sheet going forward.

Alright. Great. Thanks.

Thank you John.

Chris Lucas with Capital One

Good morning, everyone. Paul, just to follow up on the personnel questions. You've mentioned that you had put somebody in charge of the Virginia office portfolio. Is there a corresponding person for the DC/Maryland side, or is that a position to be filled? Will those people then be reporting to somebody above them, other than Tom? How is that organizational structure going to look?

Chris, someone had vacated the spot, so we put somebody new in charge of the Virginia portfolio. Again, we were looking for skill sets that someone that we thought could drive value. We think we have the person on board. We are comfortable with the people that are currently managing both the District and the Maryland portfolios. I think everybody that we bring on has augmented the skill sets that are currently in place and have been very complementary to what we are trying to achieve in terms of overall portfolio performance.

Okay. Thank you. On the -- you talked about how you don't let tenants out of your building. What sort of tenant retention have you guys been running at and what are you trying to target? I know it's, obviously, it can be very different quarter to quarter, but what's your internal view on that?

I think what I said is that, our goal is to not let tenants out of our building. Tenants, I think when we have lost, we have either lost to people moving out of a neighborhood, or quite frankly, which is commonplace in a very competitive marketplace, we have some of our competitors that are basically buying deals. We cannot -- we, obviously, don't control our tenant's balance sheets. I think our recent retention rate in the last quarter was 71%. That sounds a little high. I think, historically, we've been on or about 60% in office and retail. I'd have to get back you with those exact numbers.

Okay.

By the way, that's excluding 7900 Westpark.

Sure. Bill, just trying to understand, on the updated guidance for the retail same-store NOI, was there something specific that didn't occur or what drove the significant jump in guided as same-store NOI there?

Certainly, we were able to hold occupancy. We had initially thought that some of the junior-box renewals that we posted over the year were candidates for probably replacements and downtime, when we originally put out our original estimates, Chris.

Okay. Then, just the last question, Paul, going back to the organizational changes. If we think about G&A run rate going forward and operating margins going forward, should we be expecting much in the way of change? Is there going to be much in the way of a delta from either of those two, based on just how you've organizationally changed the Company?

No, I'm not expecting a lot. I think what we're doing is a couple things. Number one, I think that when people have vacated the positions, the people that we're bringing in our probably at or about the same level in terms of compensation in terms of the packages that we are trying to offer. I think what we're trying to do is really get a broader skill set in here. I think we've of effectively done that when we've had to replace people, but we haven't seen any really demonstrable increase in G&A and I don't expect that going forward.

Okay. Great. Thanks. I appreciate it.

John Guinee with Stifel

Question was answered. Thank you very much.

Brendan Maiorana with Wells Fargo

Hey, guys, couple of cleanups. Bill, G&A that is assumed in Q4, I think traditionally you guys expense your health dip and annual comp in there, so what is G&A expected to be in Q4?

We fixed that one unique thing with our plans last year, so it's not a big spike in the quarter like it was last year. What we saw as a one-time thing, we took care of it in the plan language, so that won't re-occur. I don't think you're going to see any really abnormal things in G&A, except for you may see some expenses related to the move and severance. Those types of things we don't count in the core calculation, Brendan, but you will see it in the actual income statement line item.

Okay. I mean your underlying FFO guidance, there's nothing that anomalous about Q4 guidance relative to next year?

No.

Okay. Then, Paul, you mentioned at Spring Valley the potential to develop a little bit more there, or maybe add some density. How meaningful could that be?

I think probably by right it could be significantly meaningful. I think that, Brendan, especially given its proximity to a very powerful residential base, I think our goal is, right now that is to be determined. I think it could have a nice pop, a couple hundred basis points in terms of the value that we could create over time.

Okay. Just out of curiosity, can you park a lot of additional density there? I know you thought it was a little tight on parking, but maybe my recollection was off?

I think your observation, it is tight on parking. I think that entire area, even including the adjoining retail centers, they are all parking constrained. That is a direct function, again, of the surrounding residential neighborhood and American University.

Right. Okay. Great. Thanks guys.

Thank you Brendan.

Anthony Paolone with JPMorgan

Yes, thanks. I understand the considerations of costs to capital and where the money comes from for deals, but just curious are you seeing enough deal flow that you like in terms of being able to find transactions? I noticed you're going to hit the $300 million, it seems like this year, but just wondering about the size of that pot of stuff that you'd actually like to transact in?

Tony, I think what we're looking at right now, and I will go back to probably my first call a year ago. I think it's the obligation of our origination team in retail, office, and multi family to find deals that create value. If you look at our deals that we have transacted this year, 75% have been off market. We have a good pipeline in retail, multi family, and office. I think we'll continue to do that. I think in terms of the broader metrics. I'll be very honest, I expected to see more product to come to the market after Labor Day this year. If you talk to like the big three brokerage firms, they did also.

I think looking at some of the values right now, especially on the private-equity side, I think a lot of people are -- there is about to be a pretty significant metric announced in terms of breaking the $1,000 a foot barrier in DC. I do think that that's probably going to drive more product to the market in 1Q and 2Q, but clearly we were expecting some assets to come to the market this year. I think I told you, each one of our portfolio managers has a desired hit list in some of those assets that we thought we could dislodge in 3Q and 4Q. People just decided to wait. There was a little hesitancy there. In terms of the things that we are pursuing off market, we at least expect to hit the metric that we're at this year. We at least expect to hit that next year.

Okay. Great. Thank you.

Thank you, Tony.

We have no further questions at this time. I would now like to turn the floor back over to Mr. McDermott for final remarks.

On behalf of our Board and our employees, I would like to thank you for your time today. I want to assure you that everyone at Washington REIT is working hard to continue to transform this Company into a best-in-class operator of commercial real estate in the Washington DC region. We remain focused on urban infill properties with good access to public transportation and in areas with superior demographics to elevate our portfolio profile. Our results in the third quarter demonstrate our progress on executing this plan and implementing our initiatives to deliver on our principal commitments. Those commitments are to strengthen and grow our portfolio, and more importantly, deliver consistent long-term returns to our shareholders.

I want to thank you again for your time, and we look forward to updating you on our continued progress in February. We hope to see many of you in two weeks at the NAREIT conference. Thank you.

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