Elme Communities (ELME) 2014 Q4 法說會逐字稿

Hello, and welcome to the Washington Real Estate Investment Trust Fourth 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 (202) 774-3200, or you may access the document from our website at www.washreit.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 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; Laura Franklin, Executive Vice President and Chief Accounting and Administrative Officer; and Steve Riffee, Executive Vice President and CFO-elect. Now I would like to turn the call over to Paul.

Thank you, Kelly, and good morning everyone. Thanks for joining us on our fourth quarter 2014 earnings conference call.

2014 has been an excellent year for Washington REIT as we continue to successfully execute our strategy to transition and upgrade our portfolio. This was reflected in our results.

We delivered core FFO that was on the higher end of our original guidance range. A key driver of this was the strong individual performance of our properties, as nearly every asset in our portfolio is outperforming their respective submarket metrics.

Furthermore, the occupancy gains we achieved, combined with tenant retention in each asset class throughout the year, drove same-store NOI growth above the high end of our guidance range. We significantly reduced our near-term leasing risk by renewing two of our largest tenants, the World Bank and Booz Allen Hamilton.

Our development and redevelopment projects are nearing completion on budget and continue to transform the quality of the portfolio. Finally, the acquisitions made during the year represent the new Washington REIT and we will continue to improve the quality of the portfolio.

Before going into more detail on the operational performance, I want to comment on the organizational change that we completed this past year. Many of these changes directly impacted our performance on the operational side.

As most of you know, we brought on Tom Bakke as Chief Operating Officer in the second quarter. Tom has been busy restructuring several areas of the firm.

First, the outsourcing of most of our commercial leasing activity to third-party representatives has made an immediate impact, improving same-store portfolio occupancy by approximately 400 basis points this year. Second, implementing a portfolio management model where seasoned asset managers and portfolio managers oversee each asset with accountability for managing NOI growth and maximizing value for every asset in the portfolio. Third, creating a real estate services group to improve customer service and better coordinate our tenant experience within our portfolio from lease signing through move-in, and then throughout their lease term in a Washington REIT asset.

Lastly, we recently relocated the Corporate headquarters to 1775 Eye Street NW in the Central Business District of Washington, D.C. We feel that it is appropriate that Washington REIT is headquartered downtown in the District, and we are excited to be here. The open plan design was utilized to enhance collaboration and communication while bringing a new level of energy and focus to our team.

We are also excited about how our new space has enabled us to more fully integrate into the D.C. real estate community. I invite each of you to stop in to visit when you come to town.

Given all that has been achieved over the last year, we are in a position to continue to make significant strides to grow Washington REIT. While the market for acquisitions remains challenging, I have stated on previous calls that we must continue to find the right deals, keeping in mind the competitive landscape.

We have reformulated our approach to acquisitions and are actively engaged in discussions with owners of D.C. properties to formulate and structure off-market transactions. This is a process that takes time to build, but in the end helps us create future value for our shareholders.

Going into more detail about operations, I would like to highlight two significant lease transactions that occurred in the quarter. We were able to successfully renegotiate renewal leases for both the World Bank and Booz Allen Hamilton. These two transactions represent a major portion of the 575,000 square feet of office leases renewed in the quarter.

The World Bank transaction extended 210,000 square feet through 2020. Booz Allen extended 223,000 square feet for 10 years through 2026.

These two transactions successfully reduced the leasing risk the Firm faced heading into the end of 2015 and into 2016. With these two leases came higher leasing commissions in the quarter, which brought our core FAD per share down to $0.20 from $0.30 last quarter.

The other highlight that I would like to discus is our same-store performance. Same-store NOI increased 8% for the fourth quarter, and 5.3% for the full year, above our expectations as leasing vacancy throughout the year took hold.

These results were driven by two primary factors. First, the retail division continued to perform well, posting 7.8% same-store growth for 2014. A significant portion of this growth was a result of lower bad debt throughout the year as the improving economy put more businesses in a position to not only pay rent, but also supported our enhanced collection efforts of delinquent rent balances that had built up during the financial crisis.

Second, Maryland suburban office same-store NOI growth outpaced everything in our portfolio, recording at 8.7% growth in 2014. A tremendous amount of hard work went into capturing new tenants and retaining existing tenants in this portfolio at a time when market conditions remained extremely challenging.

Our team's ability to find creative ways to structure deals and attract tenants have been keys to our success. We still have more work to do and will continue to assess our assets on an ongoing basis to maximize value.

As I have described, we have made significant strides in the past year to position the Company for the future. Our development and redevelopment projects are nearing completion and continue to transform the quality of the portfolio, and the acquisitions made during the year represent the new Washington REIT, one that is focused on high-quality urban in-fill locations. All of this has been made in an effort to reach the ultimate goal of becoming a best-in-class owner and operator of real estate in the Washington, D.C. region.

I would like to turn the call over to Bill, who will discuss our financial and operating performance for the quarter and year.

Thanks, Paul; good morning, everyone. Core FFO for the quarter was $0.43, consistent with the third quarter, bringing our full-year performance to $1.63, which is at the high end of the guidance range for the year. The primary driver of the results is the increase in occupancy across the portfolio that drove same-store NOI growth above our initial expectations.

In terms of same-store occupancy pickups during the year, the office portfolio increased 550 basis points ending the year at 92.1%. The retail portfolio gained 320 basis points, ending at 94.5%. And the multifamily portfolio increased 180 basis points, ending the year at 93.9%.

The resulting improvement in same-store NOI growth beat our original expectations, coming in at 5.3% growth for 2014. In the fourth quarter alone, same-store NOI increased 8%. As Paul mentioned, the main drivers of this growth in the quarter were the retail portfolio and the suburban Maryland office portfolio.

As we look at the NOI growth, an important observation is that sequentially from last quarter, the same-store NOI increased 1.2%. On the leasing front, as Paul mentioned, we completed our two most significant office renewal leases for the World Bank at 1776 G street in D.C., and for Booz Allen's headquarters at John Marshall II in Tysons. Overall we signed 575,000 square feet of office renewal leases in the quarter at a GAAP rent spread of positive 3.9%; cash rents trended down 5.6%, both of which were consistent with our expectations and recent history.

On the new lease front, we signed 92,000 square feet of space with GAAP rents [26%] above the prior in-place rents, and cash rent 8.8% above in-place rents. For the retail portfolio, we signed a total of 56,000 square feet of new and renewal leases with GAAP rents increasing, on average, approximately 20%.

The multifamily portfolio continues to experience 1% to 2% rental rate declines. However, the multifamily portfolio occupancy pickup drove 4.5% same-store NOI growth in the quarter.

Turning to the costs associated with this leasing activity, core FAD was $0.20 for the fourth quarter driven by the leasing commissions on the two large early renewal deals being paid at the end of the year. During the quarter, we paid approximately $15 million in tenant improvements and lease commissions.

On the development front, we have commenced leasing The Maxwell. This 163-unit multifamily development came in on budget, and is in the final stages of delivery with the first few tenants having taken occupancy. We continue to expect this building to stabilize in the next 12 months.

Our redevelopment of 7900 Westpark, which we have rebranded as Silverline Center in Tysons, is progressing nicely and on budget. We expect to complete renovations at the end of the quarter and have signed our first lease to the tower.

This was an expansion of an existing tenant who stuck with us through the construction. We are in full marketing mode on the building and expect to announce additional leasing progress in the coming months.

Moving to the balance sheet, we raised $36.5 million of equity through our ATM at an average share price of $27.93. The proceeds were for general corporate purposes to help manage debt ratios, and to fund equity for a portion of the development projects.

Coming up next on the balance sheet is the May 1 maturity of our $150 million 5.35% note, which is currently prepayable without penalty. I am sure Steve will be busy identifying refinancing alternatives in his first few weeks at the helm.

The 2015 core FFO per share guidance of $1.66 to $1.74 was detailed in our press release last night. The following assumptions go into this guidance range.

Overall same-store NOI growth of 0% to 2%, with the office portfolio same-store growing 1% to 2%, retail portfolio growing 1% to 3%, and multifamily portfolio ranging between 0% and 1%. We expect approximately $0.02 to $0.03 per share NOI contribution from The Maxwell this year that should grow to approximately $0.05 per share annually upon stabilization. We expect lease-up of the redevelopment of Silverline Center to be back-end loaded and extend into 2016, with the asset contributing $0.06 to $0.08 per share of NOI contribution this year.

Interest expense is expected to be $61 million to $62 million. G&A, excluding acquisition costs, severance, and the move-related costs, is expected to range between $19 million and $20 million. We have modeled approximately $350 million to $450 million in acquisitions, with funding coming from dispositions, debt, and equity, with a focus on maintaining a capital structure approximating 40% debt and 60% equity.

We expect the timing of these acquisitions to be towards the second half of the year. Dispositions are expected to fund approximately 25% to 30% of the acquisition buys.

While we are pleased with the progress we made in 2014, we still have work to do in 2015 and we are up for the challenge. We ended the fourth quarter with core FFO at $0.43 per share.

During 2015, we will absorb significant increases in D.C. real estate taxes, and expect to experience lower one-time collections of bad debt in retail. With those headwinds, we are projecting to end the year with a fourth quarter core FFO per share run rate stronger than we began the year.

Now I would like to turn the call back over to Paul.

Thank you, Bill. As investors and supporters of the Company, you know that we are positioning the Company with the goal of being a best-in-class operator of Washington, D.C. real estate. I would like to spend a few minutes highlighting the changes that were instrumental in getting us to where we are today. These enhancements have transformed the Company and position us well for the future.

Let me start with our Board. We added two new Board members over the past 12 months: Ben Butcher, the CEO of STAG Industrial; and most recently, Tom Nolan, Chairman and Chief Executive Officer of Spirit Realty Capital Inc. These two individuals have significant experience in the REIT industry, and bring complementary skill sets to our board of trustees, thereby providing additional support and focus on the long-term strategy of the Company.

Next, regarding the Management team, we hired Tom Bakke, a former EOP and Blackstone executive, as our Chief Operating Officer. Tom has been instrumental in restructuring the operations of the organization into what we term as a portfolio management model, where capital allocation is paramount.

Next, we are in the process of transitioning to a new CFO and I would like to introduce Steve Riffee, who most of you already know. Steve joined us this week from Corporate Office Properties to become our new CFO. Additionally, we hired a new Director of Acquisitions and appointed a new Head of Real Estate Services. These changes have been instrumental in positioning this Company for future growth and success.

Going forward, you should expect continued swift execution of our strategic plan. We have instilled 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.

Much of our progress has been in positioning our assets and executing on leasing up vacant space. The strong occupancy gains we achieved have translated into solid same-store NOI growth. As the portfolio continues to gain occupancy, we hope to be in a stronger position to deliver continued same-store NOI performance to build upon for the future.

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

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

Thank you. At this time we will be conducting a question-and-answer session.

(Operator Instructions)

Blaine Heck, Wells Fargo.

I will start with one for Paul. So it looks like at this point shares are trading at a discount to NAV on most estimates, and I'm guessing that's true with your internal estimate, and guidance implies that there will be equity issuance to fund acquisitions. Can you just talk about the opportunities you are seeing on the market that make you comfortable issuing shares at or around current levels given that cap rates are typically low in the market? And I guess, how do you balance the desire to grow the Company versus kind of NAV dilution through issuing the equity?

Let's start with the acquisition opportunities that we're seeing. I think a lot of people are looking at some recent trades, probably particularly the price per pound of over 1,000 a foot for the last two big trades in D.C. and extraordinarily low cap rates.

We're not playing in that space. That's not our desire to be an elephant hunter and go for those types of cap rates. We are looking to, and I think we've been fairly consistent about it, we are looking to probably go beyond core, into the value added space.

I think some of the opportunities that we've looked at last year and even one that we executed on, we were comfortable taking on leasing risk in very specific submarkets where we thought we could accommodate that risk and get the space leased up and create value. We're going to continue to pursue those.

I think also if you look last year, a lot of those, probably the comps that you're referring to were fully marketed deals. We are, again, still in 2015; our formula hasn't changed. We are trying to structure transactions with owners that there's something in it for them and something in it for us, and trying to prevent those deals from going to the marketplace.

I think the core market space is particularly flooded with domestic pension capital and sovereign wealth fund money. And again, I think a widely-marketed core deal, we're probably not going to be competitive on that.

As far as going to the market, we are comfortable going to the market to accommodate the growth of the Company. I think it's going to depend where the share prices are trading on the exact time we go to the market, but I think that if we can demonstrate value that we're creating through our acquisitions process, I think the market will accommodate us.

Great. And just following up on that, would you consider prefunding the acquisitions with a larger issuance, or do you think you're more likely to issue on the ATM as the acquisitions occur?

I think that's on a case-by-case basis. I hate to pedal that answer at you, but I think that if we have a line of sight on a transaction, and that's speaking with a high degree of confidence on our execution on a deal, I think we might go to the market, but it really, again, has to depend where we're trading at.

Okay. And just one more on, I guess, the flip side. Given that you have 25% to 30% of the acquisitions slated to be funded with dispositions, which I think equates to around $90 million to $135 million, do you have any specific assets that are targeted for disposition, and do you have anything on the market right now?

Yes, we do have an asset on the market right now. It is under contract. We have a few more assets slated throughout the year, but again, the asset that's on the market right now is the reverse 1031 assets, and as far as the other assets that we will take to the market, we have three food groups to chew on, and I think when we feel like we've got those in the best position to maximize value for our shareholders, we'll execute on the sale.

We've got some leasing to continue to button up. Market conditions are a little bit more ripe in one asset class versus the others, but we're going to take that all into consideration. But yes, we're comfortable we're going to be able to monetize a piece of the portfolio to pay for some of our acquisition activity.

Okay, great. That's helpful. Thanks.

John Bejjani, Green Street Advisors.

Welcome aboard, Steve. A follow-up on the prior question. So on dispositions, why not look to sell more this year? Is it just the assets aren't quite ready and you want to get them there, or would you expect -- not to give 2016 guidance, but would you expect a similar mix of acquisitions and dispositions going forward?

I'll take the first part of that, John. I think when you're looking at dispositions versus going to the market, it's all about a cost to capital.

We've said in past meetings and calls that we want to continue to grow the Company, and that when you look at how to pay for acquisition, you're assessing have you maximized value on properties versus where your common shares trade versus where your debt is. So it's kind of a look-and-see as the opportunities come to you on how you want to pay for them.

Sure. I guess related to that, how -- well, I guess on another route, so what do you guys think of comments made on recent earnings calls by Steve Ross and Sam Zell that now is the time to be raising cash?

That's their comment. I mean, look, let me go back to -- we didn't finish off your last question, then we'll go to this one. The mix that we had last year, we did one resi, two office, and one retail.

I think that's a nice balance for us going forward, but quite frankly, I don't think we're going to have the luxury of choosing where to create value across the boards. We are trying to grow all three food groups simultaneously. But just given the stock of availability, I think we probably -- and I can comment on our current pipeline and on past pipelines throughout 2014, we probably saw more office and retail -- excuse me, office and multifamily opportunities than we did retail. But we're going to continue to equally pursue all three with vigor.

Okay, a couple of questions on operations. You guys had previously indicated that office same-store NOI growth would be lower in 2015 than in 2014, but the magnitude of slow-down you had in guidance is a little greater than I would have expected. Can you shed any light on the moving pieces there?

John, the biggest moving piece is the increase in taxes in D.C. Taxes, real estate taxes in D.C. are up approximately 26% year-over-year, and when you combine that increase in with the fact that we have more downtown assets, it's a pretty steady headwind.

The other thing that's affecting our same-store for next year versus this year is the fact that in this year's same-store numbers, in 2014 same-store numbers, we had pretty good collections on bad debt that we collected and, guess what, you don't get any extra. You just get rent from this point forward. You don't get any of the backlog of rent going forward.

So that is not going to be sustainable going forward. So that brings the numbers down a little bit, too.

That's helpful, thanks. And just one last one. Can you share the rental rate growth assumptions for your multifamily guidance for 2015?

I don't know if I have them handy. I might have to call you back.

All right, great. Thanks, guys.

(Operator Instructions)

John Guinee, Stifel.

First, Steve, welcome aboard. You did a great job at Corporate office and I'm sure you'll do a great job at Wash REIT. Second, Bill, we'll miss you. Let us know where you land. Third, a couple of curiosity questions. You can argue sort of the accretion, dilution, cost of capital until you're blue in the face, and those two guys that think that it's a good time to be a net seller versus a buyer, they don't know much. So the question is how far -- if you have to go out the quality curve or the risk curve, Paul, to get the kind of yields that will pass your investment committee test?

Well, as Chairman of the Investment Committee, I would say that we have a pretty high bar on our sales, John. Let's go back and talk about, and kind of reinforce, what we're chasing. We're not going to be the guys showing up for PNC Place spending [$1,075] a foot, going in at forecast and diluting.

What we're looking to do is get into opportunities where we can create value. Everybody keeps telling us that we can't do off-market deals, but our last three deals were off-market. So I think that our formula is working.

As far as the types of risks we're willing to take right now, we're not doing -- and you and I have talked about development as a measure. It's okay to create value and take development risks if you think the demand is there for a completely spec. I think our ability to get in with our infrastructure, our ability to get in, reposition assets, do value add, and buy leasing risk, I think we've been successful at that, and I think we will continue to be successful at that.

And I think that the band, in terms of -- I think you were referring to probably the geographic band rather than the quality band, because our goal is to, from a physical asset standpoint, our goal is to increase the physical quality. So I think we still believe that we like urban-centric metro-served locations, but I think probably we're a little bit more forgiving when we're chasing some of the retail opportunities that we're looking at, in terms of the footprint, we're not going to be able to accommodate that.

And then in terms of residential, while a lot of people are still very nervous on what the residential outlook looks like, we still see a lot of value to be created in existing stock in multifamily units, and I'm not talking about stock within our portfolio, I'm talking about other B assets that can probably be B-plus or A.

We look back on 2014, and quite frankly, the B rents outflanked the A rents. I think it was a 1.6% growth rate in B rents and a 1% growth in A rents. I think we've proven that that's a viable execution for us and we're going to continue to pursue that.

Okay, and then second, can you just give us a little help? Maxwell, looks like you are in that for about $300,000 a unit, which seems low to me, maybe it's not, first correct me if I'm wrong on that.

Were you putting in a low land cost, or is development cost at market about $300,000 a unit? And then second, what was the yield on the $40 million retail deal?

Let me start with the retail deal. The going in yield was about, just over -- I think we were about a [5.5%] going in.

The retail deal, the key to the retail deal, John, is there is a lot of unused FAR on that transaction, and we plan on capitalizing on that. We're working with the neighborhood association, actually, right now. We've got plans and drawings we're putting together, but we're going to be adding additional density, I would say probably at least up to 15,000 square feet.

So again, while that looked like a core acquisition, we felt like there was an opportunity to create value there through that, adding that additional density. And that will probably stabilize in the upper [6%s]. And in terms of the multifamily --

John, your calculation's pretty close, we're at about $306,000 a unit on that building. So I was just trying to find the land, what piece of that is land, but the land there, if I remember right, was fairly low. So I don't know what other details I can give you right now, but that's --

Well, actually, that brings up a good question. How much developable land on an acre or square foot FAR basis do you actually have on your balance sheet right now?

The only land that we have, not counting additional FAR at some properties, just raw land, the only rent land we have is Dulles Station. And we're looking at different options with that, but chances are it's not going to be us developing. Oh, and we also have the Gateway land down in Alexandria for residential.

(Multiple speakers) We're just reevaluating that one on an ongoing basis.

Perfect. All right, thank you.

Dave Rodgers, Robert W. Baird.

Maybe, Paul or Tom, question for you. Could you talk a little bit more about office leasing activity as you see it in Maryland, Virginia, and in the District itself? Improvements, degradation, and then maybe kind of offer a little bit more color around, I would say, normal economics, given that a lot of the economics in the fourth quarter related to the two big renewals.

Yes, Dave, this is Tom. So I think the conditions are not much different than they were last quarter. That being said, the suburbs are probably lagging, the CBD is steady. Especially steady in the small- to mid-sized segment.

We're seeing good activity on our building here at 1775 in that category, but concessions remain high, they're elevated. I think you have seen effective rents basically -- even though face rates are moving up in the trophy assets, the concession packages are equally high, so your effectives are sort of flat. And then I think in the B-plus, A-minus segment where we compete a lot, we've seen our ability to drive some rent growth in renewals to be pretty effective, but new deals are still high concession packages, and we're modeling those on the remainder of the lease-up here at 1775.

Going out into Maryland, I think I heard for the first time Maryland's suburban vacancy overall is better than Northern Virginia's overall, which I guess is a big win for Maryland but doesn't say much about Virginia. The activity is, as you go further and further out, gets more and more anemic.

I think Bethesda is doing well, North Rockville, close in that area, we see some modest activity, but again it's all small- and mid-size, and not a lot of big drivers in Maryland and, consequently, the rental economics are not really moving at all. They're not moving south, but they're not really moving anywhere of any significance.

Going over to Virginia, so Virginia is a story of many pockets. You go to Crystal, you go to Skyline and Springfield and Rosslyn, you've got elevated vacancy levels. And you're still struggling with what's going to be the tenant base that occupies those submarkets because it's historically been contractor based.

So they're in for a long slog, I think. But you look at some of the other submarkets we're in, Herndon. Herndon, believe it or not performing pretty well, especially if you're on the toll road. We've had good activity out there, we've leased up a couple floors in the last six months at our Monument II project.

Moving into Tysons, we're seeing good activity in Tysons. There's some new demand from Cap One and some new demand from some other sort of quasi-contractor tech users that are, in fact, coming out of some of these submarkets that are becoming less relevant, like Fairview Park, Merrifield -- well, certain parts of Merrifield, I guess, and Springfield, as I mentioned earlier. And so we've got good activity on our Silverline Center, which is the new title for 7900, and got a handful of users over [$50,000].

A little bit of musical chairs, but the musical chairs are from less desirable submarkets to more desirable. And that's metro-served, and that's sort of where the new core amenity packages are lining up.

For Silverline Center, how are the economics looking on those leases relative to, maybe, what the underwriting was, and that may have predated both you and Paul, but how do those economics compare with what we're anticipating going into that redevelopment?

We're right now seeing our economics to be in equal or better than pro forma. We like our positioning with that asset. You've got the high end of the market is up in the upper [40s], low [50s] for Lerner's new building, and Macerich is Tysons Tower, and then you've got the commodity stuff on the outskirts that is in the high [20s], low [30s], and we're priced in the middle there in the -- anywhere from the mid to high [30s] into the low [40s], and our first deal was -- that we did was right in that sweet spot.

And so I think it validated our pricing. And people are willing to pay if you've got the right kind of product and the right kind of amenity package. So we feel pretty good about our ability to perform on that asset.

Great, thanks. Last question from me, maybe for Bill or for Steve, the 40% leverage target, that's not dissimilar from what you've held in the past. Is that still going to be measured against an undepreciated book value, or are we going to move more toward maybe a gross asset value or cash flow-based value for that leverage?

It's more on a gross asset value. When you look at it on kind of an NAV base, but, Steve, you might want to chime in.

We're certainly going to keep the balance sheet stronger as we go forward to support growth, as Paul said. That creates value. We're going to clearly look at what the bank said, which is gross asset value, but I think we'll be driven by in the unsecured rating agencies and bond markets.

And we'll keep an eye on all the key metrics like debt to EBITDA, we'll keep an eye on debt to undepreciated book. And we'll certainly be mindful of what the banks require as well.

Great. Steve, welcome. Bill, good luck.

(Operator Instructions)

Chris Lucas, Capital One Securities.

Just a couple of detail questions, if I could. Bill, what's the capacity left on the ATM under its current configuration?

We can issue another $210 million, roughly.

Okay, and then on The Maxwell, were you capitalizing all of the expenses related to that all the way through fourth quarter, and has that transitioned at this point, or are you still capitalizing on all the expenses?

So your answer to your question is yes, at the end of the year, we were capitalizing all the way through, and now it's all in service, I think. It's all in service.

Okay, and then just sort of an update on the leasing there, what sort of success have you had in terms of units leased at this point?

This is Tom again. We've had, really, for this time of the year to come into a lease-up mode, which is not the ideal time, we've had surprising success. And in fact, we did 10 leases last week, and that kind of pace is, I think, surprising even us, and we've been able to hit our rent metrics as well. So we project this to stabilize by the end of the year, and that's right on target with how we've modeled it.

Okay, and then last question for me. On just the disposition mix, Paul, I think you said at least in our last conversation you've really been focused on the things that don't fit your criteria in terms of long term. Is that still sort of the pool that you're looking at, or are there assets that maybe have termed out in terms of what you think value creation is that may be not in that exterior outer (inaudible) geographic area?

I think, look, we examine the portfolio every 90 days. We have our own. That's part of, even part of when John asked about our investment committee and how far we're willing to go out.

We look at that market by market, asset by asset. And I think right now, like we have experienced success with the assets that we're currently marketing. Quite frankly, I look at our performance, Chris, in our submarkets, and I think with the exception of one, we're kind of outperforming in all of our submarkets right now. I think our long-term goal is to continue to try to raise the bar on the quality of our portfolio and the consistency of it, and lower the volatility.

So it is going to take the right combination to do that, but our portfolio management, the portfolio managers meet every 30 days. We set the bar pretty high at the beginning of every year in terms of what we want out of performance, and we're balancing that with mitigating future leasing risk, but when we do think assets are in a position to be monetized, you can expect us to take them to the market.

Great, thanks. That's all I have.

Thank you. We have reached the end of our question-and-answer session. I would like to turn the call back over to Mr. McDermott for final remarks.

Thank you. Since this is Bill's last call with Washington REIT, I want to take this opportunity to thank him for his valuable service over the last six years. Bill has played a key role in building our solid financial foundation and helping us successfully implement our transformational strategy.

In addition, and as mentioned in yesterday's press release, Laura Franklin, our Executive Vice President of Accounting and Administration, has announced her retirement. She will continue in her current role through July 31, 2015, and will remain with us through the year to ensure a smooth transition. Laura is an effective and dedicated leader, and her over two decades of loyalty and hard work have significantly contributed to the Company's growth and success.

On behalf of all of us at Washington REIT, we wish both Bill and Laura all the best in their future endeavors. Thank you again, everyone. We look forward to updating you on our continued progress in April. Have a good weekend.

Thank you. That 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.