Elme Communities (ELME) 2015 Q2 法說會逐字稿

Welcome to the Washington Real Estate Investment Trust second quarter 2015 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, Tejal Engman, Director of Investor Relations, will provide some introductory information. Miss Engman, please go ahead.

Thank you, and good morning everyone.

Please note that 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 available at www.washreit.com.

Please also note that some statements during this call are forward-looking statements within the Private Securities Litigation Reform Act. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially. We define these risks in our SEC filings. Please refer to pages 8 to 22 of our Form 10-K for a complete list fact disclosure.

Participating in today's call with me will be Paul McDermott, President and Chief Executive Officer; Steve Riffee, 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 Kelly Shiflett, Director of Finance. Now I'd like to turn the call over to Paul.

Thank you, Tejal, and good morning everyone. Thanks for joining us on our second quarter 2015 earnings conference call.

We continue to make steady progress on our strategic plan to elevate the quality of our portfolio while driving operational performance. We delivered second quarter core FFO of $0.42, which is a $0.04 increase over the first quarter and a $0.01 increase over second quarter 2014.

Our operational performance in the second quarter has strongly rebounded from the first quarter unimpeded by the adverse weather related expenses we experienced last quarter and boosted by a slight increase in office and multifamily occupancy. Importantly, we continue to expect $0.20 to $0.23 of additional NOI upon stabilization from the three assets in our portfolio with a great lease up potential -- Silverline Center in Tysons, the Maxwell in Arlington and 1775 Eye Street in the Central Business District.

We have seen a marked increase in activity at the Silverline Center where we have proposals out for approximately 240,000 rentable square feet with three projects interested in 50,000 square feet or greater. We have signed ten leases of 75,000 rental square feet since our new marketing campaign last fall and our rents are meeting or exceeding pro forma. The planned addition of a white tablecloth restaurant in the high-end conference facility has further incurred a competitive positioning of this Class A office building which offers HOT lane and Metro access as well as unique Beltway signage opportunity. Silverline Center is currently 61% leased and is projected to continue to lease up over the next 18 months.

The Maxwell, our newly delivered 163 unit multifamily project, continues to show positive leasing philosophy and is currently 64% leased with a weekly leasing run rate and price per square footage that remains in line with our expectations and with stabilization projected to occur by year-end. 1775 Eye Street has seen a steady increase in leasing activity and we are now 80% leased at this asset with either letters of intent or proposals out for the remainder of the building. We expect a lease up of 1775 Eye Street to be completed this year with leases commencing over the next 12 months.

While on leasing, I should mention that [Takenbach] lease for the 112,000 square feet space that is sub leased to the advisory board, due to expire in April, 2017, with that final approval to be extended coterminous with their existing lease that expires in May of 2019. Although our continued dialogue with the advising board indicates that renewing their lease at 2445 M Street remains their most economically viable proposal on the table, if the final space requirement is for 500,000 square feet or more we are unlikely to be able to accommodate them.

I would like to address the acquisition of the Wellington, which is a 711 unit apartment community located at the eastern end of Columbia Pike in South Arlington. The Wellington is a high-quality, well located asset with strong transit links and walkable amenities. It also offers compelling value add potential for a planned unit renovation of over 680 unit and the opportunity to use on-site density to develop approximately 360 additional units.

We began our pursuit of the Wellington over 12 months ago, driven by our disciplined in-house research team, which narrowed our investment target in multifamily to some markets with limited supply delivery and the greatest Class B rental process. It was this granular approach that focused us on the South Arlington Class B multifamily submarket and the Wellington. Our analysis has been firmly validated by Delta Associates recent report stating that the South Arlington Class B multifamily submarket has achieved the highest rental growth rate in the region with 9.8% rental growth in the past 12 months.

Our planned unit renovation of over 680 units further capitalizes on the strong rental growth trends in this submarket. Based on the CapEx incurred and the rental growth achieved by the units that have are ready been renovated, we expect the unit renovation program to generate returns that well exceed our typical target of a 10% average yield on cost. We remain committed to proven capital allocations as evidenced on our last earnings call when we reduced our 2015 acquisition guidance to represent the Wellington, which was the value add acquisition opportunity that was then visible to us.

Furthermore, we guided two lengthy the asset sales as our chief source of capital for acquisitions and the cornerstone of our portfolio repositioning strategy in the currently favorable investment sales climate. After our successful sale of Country Club Towers in the first quarter, we placed four additional legacy assets, including land, on the market. We are on track to meet our 2015 dispositions guidance of $140 million to $150 million and are preparing to accelerate additional legacy asset sales of approximately $250 million over the next 18 months.

Now I would like to review the performance of our portfolio during the second quarter and touch on some of the broader trends we are seeing in the overall leasing market. Some good news came in the office sector where we saw positive absorption in both DC and Northern Virginia. Concurrently, we saw increased activity levels in our portfolio, assessed it for assets in locations proximate to Metro and other transit links. Titans continues to see strong activity with many companies attracted to the amenity rich environment now served with Metro.

That being said, the many large lots of competitive vacancies remain an ongoing challenge in this submarket. Although Northern Virginia had an excellent quarter from a net absorption standpoint, much of the absorption came from three large deals, two of which were building purchases for nontraditional industry segments with patients charged for my 202,000 square foot building in Tysons and German grocer Lidl purchasing a 210,000 square-foot building in Crystal City. This bodes well in terms of taking space off the market but may not be a sustainable trend. As mentioned previously, we see increased activity in our Silverline project and continue to seek the right tenant to anchor this high-profile asset.

Across the other office markets, activity in downtown DC remains reasonably positive in the small to mid-sized range and we have been effective at infield leasing in our small remaining vacancies. Suburban Maryland had another quarter of negative absorption from our execution of aggressive tenant retention strategies has allowed our portfolio to consistently outperform this market over the past several quarters. Retail in the region is benefiting from significant upticks in job growth in the Washington Metro economy over the last few months and the market vacancy rates for neighborhood and community shopping centers in Northern Virginia and suburban Maryland are modestly lower in the second quarter.

Compared to the last quarter, we have demonstrated greater ability to push rents higher on renewals and are successfully leasing up the vacancy created by a few known tenant move-outs in the second quarter. Multifamily supply continues to deliver in record numbers and while demand has kept up with supply, there has been some impact on effective rents. In our projects located in submarkets, such as Mount Vernon and Shaw, where there is significant new supply, we have had to meet the market from an effective retrospective to retain occupancy.

In summary, the overall portfolio has eached consistent level of stabilization, with the exception of our development and redevelopment assets, which represent additional growth opportunities. Our focus on delivering the highest level of customer service with a commitment to tenant retention remains our principal operating strategy going forward.

Now, I'd like to turn the call over to Steve to discuss our financial and operating performance.

Thanks Paul and good morning everyone.

Second quarter core FFO increased 2.4% to $0.42 compared to $0.41 in the second quarter of 2014. Same-store cash NOI increased 1.3% over the prior year. Same-store cash rents increased 120 basis points year-over-year and same-store physical occupancy at the end of the quarter was 92.8%, which is 30 basis points higher than the second quarter of 2014.

Core funds available for distribution, or FAD, was $0.38 per share. For the full-year, we expect a core FAD tail ratio in the high 80% range and project coverage to further improve in 2016.

Office same-store cash NOI grew 2.5% year-over-year, driven by 90 basis points of occupancy gains over the prior year, as well as annual rental rate increases at several of our properties. Office same-store physical occupancy was 91.8% at quarter end. Our same-store Washington DC office portfolio continues to outperform its sub market with a vacancy of approximately 3% compared to the submarket at 11%. Our office portfolio also continues to outperform in suburban Maryland and Northern Virginia where our same-store vacancy rates are nearly 7% and 10% loading vacancies in those markets.

Office leasing for the quarter totaled approximately 129,000 square feet with 58,000 square feet driven by new leases signed in the quarter. For new leases, we have experienced a 14.5% improvement in GAAP and a modest rollup in cash rent spreads, while renewals have seen a 4.9% increase in GAAP and a 5.1% decrease in cash rent spreads.

Retail experienced a robust 2.2% cash rental rate growth year-over-year. Retail same-store cash NOI declined 70 basis points with physical occupancy declining 140 basis points year-over-year primarily driven by expected tenant move-outs. Of the three primary move-outs, we have leased two, and at letter of intent for the third.

Retail leased approximately 130,000 square feet in the quarter with 35,000 square feet driven by new leases. For new retail leases we have extracted an 18.5% improvement in GAAP and a 4.4% improvement in cash rents spreads while renewals have seen a 28% improvement in GAAP and a 14.6% improvement in cash rent spreads. Real same-store physical occupancy was 92.8% at the end of the quarter.

Multifamily same-store cash NOI grew 70 basis points year-over-year, has 90 basis points of occupancy gains over the prior year, offset 2.7% of rental amounts. Multifamily same-store physical occupancy was 94.5% at the end of the quarter.

Turning to guidance. We've tightened our 2015 core FFO by $0.04, to a range of $1.68 to $1.72, which maintains the midpoint of our previous guidance range. The following assumptions underpin our narrowed guidance range.

Overall, same-store NOI growth ranges from negative 0.5% at the bottom end to a positive 2% at the top end with the same-store office portfolio growing 0% to 2%. Retail ranges from negative 1% to positive 1%, the multifamily ranges between 0% to 1%. As a reminder, same-store growth is impacted by the large year-over-year increase in Washington DC real estate packages.

We currently expect $0.01 per share NY contribution in 2015 for the Maxwell which remains on track to stabilize by year-end. While the delayed delivery has extended the timing of Maxwell's expected contribution to NOI, it remains projected to grow to approximately $0.04 to $0.05 per share annually -- upon stabilization.

We continue to expect the Silverline Center to contribute $0.06 to $0.08 of NOI per share in 2015 with the lease up gathering greater momentum into 2016. Our prior acquisition guidance assumed the acquisition of the Wellington. While we continue to thoroughly evaluate and underwrite value-add acquisition opportunities, our current guidance does not contemplate additional acquisitions in 2015.

Our interest expense is projected to range between $60 million to $60.5 million. And our G&A guidance remains unchanged at $19 million to $20 million. Finally, our guidance does not assume any equity issuance.

Our acquisition of the Wellington creates the opportunity to recycle additional vacancy assets with a low tax (inaudible) in a very tax efficient manner utilizing reverse 1031 exchanges. Of the four legacy asset sales, including land that Paul mentioned earlier, two are under contract and the third is an active contract negotiations. Based on our assessment of market conditions, we are planning additional legacy asset sales over the next 18 months with approximately $250 million of dispositions to follow the assets we currently have in the market or under contract.

We will monitor market opportunity and as appropriate would accelerate the $250 million of asset sales which are currently not included in our 2015 guidance of an expected $140 million to $150 million of dispositions. The sale of our interests in one parcel of the aforementioned land is close in value to the land we just acquired with the Wellington. Our capital allocation positions are informed by our in-house research which concluded that the South Arlington submarket was significantly superior in terms of its demographics and rental growth potential than the submarket we only had then.

The land sale under contract allocates our capital to the land associated with the Wellington and thereby to what we believe is a superior development opportunity. In addition, we plan to sell another parcel of land valued at approximately $12 million.

We have repaid our $150 million of 5.35% bonds that matured in May by drawing on our credit facility. Instead of turning that out through an index eligible bond offering as previously discussed, we now plan to turn out $150 million through 2021 with a term loan and then swap that loan for fixed rates. This will sit well in our debt maturity ladder and provides us with greater flexibility to accelerate legacy asset sales if appropriate as compared to issuing a minimum $250 million of investment eligible bonds. The maturity of secured debt in 2016 and 2017 should help provide opportunities to continue to turn out that in those years by accessing the bond market.

We target ending the year at an annualized fourth quarter net debt to adjusted EBITDA ratio of approximately 6.9 times. And are targeting to achieve a 6.5 times net debt to adjusted EBITDA in 2016 as additional interline contributions from the Silverline Center, the Maxwell and 1775 Eye Street are expected to increase EBITDA. We have a new and extended credit facility that increases our line of credit to $600 million while extending maturity, improving financial covenants, lowering pricing and better aligning the terms of the facility with our value added business model.

And with that, I will now turn the call back over to Paul.

Thank you Steve. To conclude, we remain committed to prudent capital allocation as demonstrated by our value-add acquisitions of the Wellington where we expect our unlevered IRR to well exceed our cost of capital. Additionally, we have significantly increased our legacy asset disposition plan in a continued effort to capitalize on the currently salable investment sales environment and help us opportunistically transfer risk while elevating the quality of our portfolio.

We have confidence in the success of Silverline Center, the Maxwell and 1775 Eye Street and continue to expect them to contribute $0.20% to $0.23 of NOI upon stabilization. In addition, we look forward to evaluating further development and redevelopment and renovation opportunity embedded in our existing portfolio.

I would also like to emphasize that we are deeply committed to our Investor Relations outreach which began in mid-May this year and has led to a meaningful dialogue with numerous stakeholders and other rate-dedicated investors. We greatly value investor feedback and look forward to an active schedule of meetings with investors for the remainder of the year.

And finally, our recent spell of job growth of 68,500 jobs between June 2014 and June 2015 compared to our 20 year average of 41,700 jobs. Fairly strong April and May data suggests that the Washington Metro area economy may have turned the corner in the last few months.

Encouragingly, the job growth has been driven by specialized professional, scientific and technical services as well as by healthcare and is reflective of the private sector gradually reducing its dependence on government spending. We look forward to the continued improvement in market fundamentals and believe that improving the quality of our portfolio now will better position us for future real estate cycles.

Now I would like to turn the call back over to the operator to open it up for questions.

Thank you. Ladies and gentlemen, at this time will be conducting a question-and-answer session.

(Operator Instructions)

Dave Rodgers with Robert W. Baird.

Paul wanted to ask you about the $250 million of potential additional asset sales and it sounds like there is some opportunity to move that up. The two questions would be, what are you really looking for to move that forward if you were to do that? And the second thing would be, do you see yourself deleveraging with that additional $250 million or would that be all 1031 as you look at that group of assets?

Okay, thanks Dave. First off, in terms of the $250 million and the composition of it itself -- obviously we are -- I think as we have said on prior calls, we feel that just looking at our NOI, we are overweighted in office and we see opportunities in terms of our suburban office properties that we did not see probably 12 months ago. I can give examples, Dave, of a couple funds that have recently been raised and are actively out pursuing opportunities over the last 12 months, that are specifically targeting -- certain suburban office markets domestically. So I think that we are looking right now, we are having dialogues with a number of different private equity sources that have approached us about opportunistically transferring those assets. In terms of accelerating those assets, I think it's really contingent on the timing and the type of pricing and structure that we can get. We are being very sensitive, since we do have some tax issues with some of those assets, we are trying to integrate that into our strategic exit on those. And then in terms of how the capital is going to be reallocated, we are considering a number of opportunities to realize that capital, and paying down debt could be one, but also we could use other 1031s to go into other investment deals.

Just playing off of that last comment, Paul, in terms of acquisitions, what are you seeing? Are you still finding acquisitions that are attractive? You are just struggling with capital allocation again? Or has a pool of assets that you're looking to acquire maybe send out or maybe just become too aggressive?

I think in terms of prioritization, what we want to do, and I think the signal that we have sent out to our investors and our shareholders is we want to capitalize on this window in terms of selling some legacy assets where we don't see the growth prospects that we see in other opportunities. I can only point to, Dave, an opportunity like the Wellington. It took a long time to put that deal together and we basically had our eyes on that for about 12 months before closing it. I do think the amount of transactions in DC has thinned out, but we still are being paid to be the local sharpshooter. I think we have identified some good opportunities. But again, these opportunities are timing opportunities, and they have to hit our pretty rigid value-add criteria.

My pleasure for you, Paul. In terms of the renovations at the Wellington, can you talk about what the spend might be, the timing and should we see any kind of impact on earnings performance over the next couple of quarters as you move through those on rollovers?

Sure. So we have -- it's a 711 unit property. We have about hundred 680 unit to renovate. And stepping back, the Wellington itself, for us -- One of the criteria that I have talked about, and I think I've talked about it on several calls, was really what attracts us to that and why would we allocate capital there? We love to the growth prospects in that South Arlington specifically, that Class B market. Second is, we think we are operating this property and we acquired it at about a 40% discount to replacement cost. We think that adding probably between 8,000 to 10,000 per door, Dave, is what we are going to be looking at. At a minimum we think we will be juicing rents probably about $100 a door. And we will, as we see that phase-in, that's probably going to be about a 30 month renovation for the entire project. We see that adding approximately about 50 bits as each one of those newly renovated units come online.

Great, thanks for the detail Paul.

Thanks Dave.

Brendan Maiorana with Wells Fargo.

Thanks, good morning. Steve Riffee, just a bunch of questions for you. You mentioned that the EBITDA, end the year at 6.9. Think it could probably be next year at 6.5. Is that contemplated on a leveraged neutral basis or is that assuming that you're going to take some of the proceeds of the $250 million of assets that seems slated for next year and use that to pay down debt?

Brendan, we are not giving full guidance for next year, but there is just an element of the $250 million that we would likely want to reinvest for tax purposes but we keep doing our tax planning and modeling so that we have the greatest flexibility possible to consider delivering it all. So I think just it is really driven primarily by the growth in EBITDA that we are anticipating from our lease up of our value add properties, the Silverline, the Maxwell, even 1775. So it is more driven by growth in EBITDA then change in debt levels.

Sure. So you guys have -- mentioned $0.20 to $0.23 of EBITDA growth from those three assets. And I think this year midpoint of guidance is that they would contribute about $0.09 a share to this year's FFO. Is that -- most of that, is that Silverline? And I know that the lease right there has been pretty steady over the year, although I think you have had tenants move in and out. Is the $0.09 that you are getting, is that earned pretty radically over the year, or is that predominately backend weighted?

So if you take the detailed guidance points that I just updated, I said that we have changed this year's contribution from the Maxwell to $0.01, which we have had very little, all close to zero contribution in the first half of the year on a net basis. So that $0.01 is earned radially over the second half of the year. And then we're at the $0.04 to $0.05 for next year on the Maxwell as we stabilize at the end of the year. The guidance that we are giving on the Silverline is $0.06 to $0.08. So if you took the midpoint, that would be solid. So I would say that's about $0.08. Of the Silverline, we are just under $0.03 in the first half of the year. So you would take that range, minus approximately $0.03, and that would be your expectation for the second half of the year.

And then 1775 Eye, I think it is $0.01, so is that about routable for the year?

The leasing on 1775, the incremental leasing, is getting done in this year but it really starts rent commencement in 2016, so I am not expecting additional NOI from that in this current year, in the guidance that I just gave.

-- So your credit facility balance, it was $185 million in June 30, than the Maxwell closed July 1, so that brings that number up to around $350 million. You've got the asset sales, about $110 million slated for the back half of the year, and then you are going to do the term loan. So how do we think about longer-term how much you would be comfortable running on the credit facility?

The numbers $340 million today, not $350 million. So it's a little bit lower than you thought. I expect to term out $150 million, as you said, so that will bring it down. And then, we do have the asset sales that are already in the guidance, and I think you've got the range well there. And I am leaving some flexibility to increase some of the $250 million of asset sales into this year. So maximum under that math would be -- you might be sitting at $100 million out on the line, and we could drive it down to zero if we accelerate additional asset sales. My general philosophy on line use is try to use no more than half of it in general, or keep it outstanding, and when you get to above half you should be thinking about terming out debt. And at the size that we negotiated for this line, that means we should be thinking about long-term index sales while bond offerings is our more typical way of terming out debt. That's how I'll plan to manage the line.

Great, and just last one, Paul. So I really appreciate all the transparency that you have given over the past several quarters on advisory board. My recollection was that there was, maybe there was a decision between advisory board and Epstein Becker and you couldn't keep both of them. But I think Epstein Becker, their expiration is sometime next year. When do you think you will have a sense of what is likely between either of those two tenants that may remain in the building?

Brendan this is Tom, Paul just looked at me for the answer on that one. (laughter) I think we are parallel passing both of those, and engaged with both, we have heard advisory board is going to make a decision this year. That is certainly going to be a driver on Epstein Becker. Epstein Becker would like to stay, from what we hear, although they are engaged in the marketplace just because that is smart business. We are going to hopefully retain, we would like to retain both but it's more than likely we will retain one of them and we are going to work on that in parallel path.

Okay, all right, thanks for the time.

(Operator Instructions)

John Guinee with Stifel.

Great, thank you. Steve, for the rest of the year, should we just assume that the Wellington is match funded against your credit line? And is that part of a 450 basis point positive spread?

No, I think the timing is we are going out to do the term loan in the third quarter, John. So I expect to be terming that out and swapping it six year, probably five and a half year term loans, then swapping it to fixed in the third quarter. And then I expect us to be closing the asset sales, which sequentially are a part of our capital allocation back towards the Wellington, throughout the year. So I would expect that the third quarter's probably about $0.01 higher than the fourth quarter as we start to turn out debt and close asset sales in terms of the expectation of timing.

Okay, and then which assets did you take the impairment and which asset did you have the gain?

So we had, speaking to the impairment, that related to going under contract after the quarter ended on a piece of ground that was slated for multifamily development in Alexandria that we decided was not in as attractive a submarket for multifamily rental growth as the one that we had an opportunity to get into through the Wellington. So we negotiated a contract, and basically adjusted that land value to what we think we are going to close under that contract. That happens to be almost exactly the amount of money that we believe is allocated towards the ground associated with the Wellington, so from a capital allocation standpoint we took a non-earning asset -- and replaced it with one that we think has greater future NOI potential. We had a small gain on a property up in Maryland, a retail property where the state actually took a piece of ground and reimbursed us for it to expand the local growth. And that created that small gain.

So both of those ramped through NAREE to find FFO because they were actually dirt?

That's correct.

Oh interesting. Thanks a lot guys.

John Bejjani with Green Street Advisors.

Good morning guys. Quick question on just broader DC office -- environment. So improving job growth appears to already be a pretty clear positive for both retail and multifamily. But office absorption seems to not have benefited as much and the leasing costs are still pretty high. It is there any further insight that you can share to provide or what needs to happen for leasing costs to start coming back down to earth?

I'll start, John, and then I will ask Tom to jump in with probably a little bit more real-time color. When we look at the DC right now, and we look at our portfolio, we are happy in terms of the retention specifics we are seeing. I think just looking at the last quarter alone we had about 275,000 square feet of positive absorption, about 65,000 in the East End and about $1.25 in the CBD. The CBD, for the first time in a long time, is below 10% in terms of vacancy, and the East End is -- also coming down. I think we are still seeing the smaller tenants right now that are ruling the day, and those smaller tenants just have optionality. And when I say the smaller tenants I am talking the 6,000 to 10,000 square-foot tenants that dominate the space. And we just don't see that change in the small pockets with primary space and shadow space and sublease space. We -- still see that being an ongoing challenge through the remainder of 2015. Tom, do you have any?

Yes. To add to that, I think there is always a lag effect on job creation and absorption. And I think we are definitely seeing some good job activity. We had good absorption in Northern Virginia, I think as Paul touched on in his opening comments, about some of those were nontraditional users. But absorption is absorption and we will take it. And we're seeing positive indicators. That being said, in Northern Virginia, overall 18%. Maryland, high teens as well, some people say Maryland is at 20%. DC on average, at 10%, which is good. But the suburbs -- they've got a long way to go. But the indicators seem to be gradually improving. And I think that's what everybody seems to be saying out there.

I mean the last point I'd add, John, and it's really just riding on Tom's coattails a little bit. Our observation would be that some of these employment numbers take a while to bake in. If you look at the average rent year-over-year for DC in general, I think we are at $50 or $50.10 last year. I think we are up $0.52 -- on a gross basis. We're moving in the right direction, we're just not moving at the trajectory that we want to, that we would all hope for.

Thanks for the color. Paul, I have just a follow-up on the Wellington acquisition. Can you elaborate on your unlevered IRR commentary? What kind of returns are you guys underwriting and where do see your cost of capital?

We went in just a hair under six. As I said, we expect those to, with the renovations, to stabilize -- in the mid- to upper-sixes as those units, come online. And then if you look at the development component, we are at north of 100 basis points to 150 basis points above that when we bring the development in queue.

Great, thanks.

(Operator Instructions)

Chris Lucas with Capital One Securities.

Good morning everyone. Paul, just a follow-up on the Wellington commentary. What is your thought process as it relates to starting the development planning process?

We are looking at right now, we have spent some capital looking at drawings and we've got the option Chris, as you know, to build 360 units. We want to get underway with the renovation program, but we think end-to-end the development process would probably be 30 months, in 18 to 22 to build and then leasing. We are specifically targeting right now, Chris, a window of delivery, when we don't see competitive supply forces. I think we'd be looking at -- late 2016 or early 2017 breaking ground, and then taking it from there.

Okay, thank you. And then on the -- I guess Steve on the Silverline Center, just trying to understand the guidance contributions. So the first half of the year, let's call it roughly $0.03, how do you get to the $0.08? Are there leases that have been signed that need to commence or how do you get to $0.08, I guess is what I am try to figure out here given that the leasing level has stayed pretty consistent.

It has to do with leases and some contributing before the end of the year. I will let Tom give you a little color on some of the leasing activity that is underway even since quarter end.

Yes, hey Chris. We've got, as you know in your recent visit, we've got good activity and we have about 24,000 feet that we've recently signed and about 15,000 of that is going to probably get going in the third quarter. There is a little bit of slippage potentially on some construction starts, but nonetheless, I think -- And then, we've got some potential for some others to occur later in the year. We've also got our full floor tenant, LCC. They just came in, and we will get a full six months out of them.

I think this partially contributed to the second quarter.

They didn't contribute much in the first quarter or the first two quarters.

Thank you for that. And then, just a final question as relates to the retail portfolio. The shopping center peers tend to run at a 95%, 96% lease rate and you guys have been in this lower 92%, 93% range for a while. What is your expectation for what you think is a stabilized maximum lease rate for that portfolio?

I think we have been up around 95% before. We had some known vacates that hit us in the first half of the year, which two of them are leased and the third is at LOI. -- One was a 25,000 foot vacancy out at Bradley that is leased. With this small portfolio, a 25,000 foot deal is a big mover. And then we had a 30,000 foot space that we're now LOI. So we'll get back up to the mid- 90%, that peer benchmark here in a couple quarters.

Okay, thanks a lot guys.

(Operator Instructions)

John Guinee with Stifel Nicolaus.

Just because the Wellington is 5% of your total capitalization, and you've got big plans for it, just walk through -- I think what you're saying, you pay about $230,000 a unit for it. And at 60% of replacement cost, that implies you're going to build 400,000 square-foot product there. Are you also going to have to decommission all the parking and make the entire project structured parking? What is the grand plan for that location?

I think we paid, just on my math John, I think we are about $214 a door with a $15 million land contribution. And yes, we will be using some of the excess surface parking. It will be a fence with a Texas doughnut, with parking, with sticker over top. It will be, with some additional roadwork being put in. But -- that's the plan right now.

-- And what are you thinking is, you are all in to develop Texas doughnut, four or five over two when you have to create an immense amount of parking for the -- what was previously surface park for the other 700 units.

I think our basis we are in -- I'm just going back to my notes. I think we are in close to upper 200s a door.

Okay great, thank you very much.

Brendan Maiorana.

Hey guys, just a couple follow-ups. So one, Silverline. The lease rate remained at around 60%, but I think you guys had maybe a couple of tenants that moved out and a couple that moved in. If you look at the existing tenant base today, is that stable so really the leasing is just focused on getting tenancy for the remaining roughly 200,000 square feet that is unleased?

Yes, Brandon, that is the right way to look at it. We had a couple of renewals downsize. These are folks that stayed with us during the redevelopment so we got them to stay, a couple of them downsized in the last quarter, but the existing tenant base now is stable, and we are going up from there.

And are the, Tom, the big three tenants that you mentioned that were over 50,000 square feet each. -- Are they all candidates or is it something where you could only accommodate maybe one or two of them, you couldn't do all three?

Yes, I think the hard part is -- what is attractive to the big user is to be for the anchor and to get the sign on the building and you're probably going to do, at most, two of them. You won't do all three just because they won't want to compete for that visibility, or share that visibility, should I say. I'd say two is-- one maybe 60, one 40, that would be a nice mix.

Got you. Okay great, and then last one. Volume mentioned, kind of a dispositions, probably likely oriented towards some of the legacy -- suburban office stuff that is there. That is historically been a higher CapEx product type for Wash REIT. If you are selling stuff, broad brush, what do you think the economic cap rate would be after CapEx cap rate is likely to be on some of the market?

Brendan that's pretty asset specific because we have varying degrees within our suburban per folio. I think as we've talked about it -- if this conversation was taking place 12 months ago, we wouldn't have even been able to really talk about monetizing our suburban office product. I think right now we're looking at probably a low-7, low- to mid-7 cap rate range. That's our observation on some deals that are actually out there right now. -- Even if I look at an asset like our 6110 property, I mean what we had to do is, I think we have been pretty consistent about positioning these assets for sale, and that is buttoning up leases. So something that is not in the numbers that we just disclosed, we just backfilled our -- the old wash REIT space last night, almost all of it with the new tenant. So we have to continue to do those types of leasing pushes as we positions those assets for sale to try to bring that cap rate down to a more palatable number from a dilution base.

And I think that low-seven number, that's probably a nominal cap rate. Is it fair to think that, not getting into the specific assets that may or may not come but, over time that those assets have had maybe 20% of their NOI on an annual basis has been taken away by a CapEx spending?

Not being specific, one of the things I would say -- having just walked several of these assets, I think that Wash REIT, one of the things that it wasn't shy about was spending money on CapEx for its properties. I think most of these assets are in good shape. I think, Brendan, if there is going to be any type of punitive pricing, I think it's probably going to be on a submarket basis, probably more than it is going to be on an asset specific basis.

Got you. Okay, thanks guys.

Thanks.

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Thank you. Again, I would like to thank everyone for your time today. As we announced in the first quarter, Laura Franklin, our Executive Vice President of Accounting and Administration, will be retiring at the end of this year. As this will be her last earnings call with us, I would like to take this opportunity to thank Laura for over two decades of valuable service. Laura has played an integral role in building our solid financial foundation and helping us successfully implement our strategic plan. She is a well-respected leader, whose loyalty and dedication has significantly contributed to the Company's growth and success. On behalf of all of us at Washington REIT, we wish Laura all the best in her future endeavors.

In conclusion, we are excited about the future of Washington REIT and it's ongoing transformation into a best in class operator real estate in Washington DC. We remain committed to executing our strategic plan by making prudent capital allocation decisions and driving operational performance. I look forward to updating you on the progress on our next call. Thank you everyone.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.