Elme Communities (ELME) 2015 Q3 法說會逐字稿

Welcome to Washington Real Estate Investment Trust's third quarter 2015 earnings conference call. As a reminder, today's call is being recorded. Before turning the call over to the Company's President and Chief Executive Officer, Paul McDermott, 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 supplements 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 provide these risks in our SEC filings. Please refer to pages 8 to 22 of our Form 10-K for a complete risk factor 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; Drew Hammond, Vice President, Chief Accounting Officer and Controller; and Kelly Shiflett, Vice President Finance and Treasurer. Now I'd like to turn the call over to Paul.

Thank you Tejal, and good morning everyone. Thanks for joining us on our third-quarter 2015 earnings conference call. We have generated a significant increase in leasing momentum across our portfolio this quarter which delivered Core FFO of $0.45, a $0.03 increase over the second quarter this year and a $0.02 increase over third quarter 2014.

We are especially pleased about the strong uptick in leasing momentum at our three needle movers, Silverline Center, The Maxwell, and 1775 Eye Street in the third quarter which has been our busiest period so far this year. We believe these three assets will contribute $0.20 to $0.23 of NOI upon stabilization and are expected to be important drivers of our NOI growth as we execute the anticipated sale of additional legacy assets.

Let me start with the Silverline Center where we are in active discussions with four large prospects all requiring at least 70,000 square feet of space. While we cannot accommodate all four prospects in this 532,000 square feet Class A office building, the high level of interest and activity we're experiencing have validated our value add repositioning of this asset as well as our differentiated pricing strategy that offers excellent value in Tysons Corner. Silverline Center is 65% leased today and is currently expected to stabilize by the end of 2016 with economics that are in line with pro forma.

The Maxwell, our 163 unit Class A multi family development, is now 84% leased with a weekly leasing run rate and price per foot that have met underwriting expectations. The Maxwell remains on track to stabilize by year end.

Finally, 1775 Eye Street is 89% leased with two leases in final negotiations that will take the asset to 97% leased. This Class A office building in the heart of the CBD is 52% leased when we contracted to acquire it last year. We have had prospective tenants competing for space in this asset which has met our pro forma lease up timing as well as rent expectations. More importantly, 1775 Eye Street demonstrates the new Washington REIT's ability to take calculated risk in specific submarkets and provide a value added execution.

Moving on to our 2015 dispositions. We successfully sold Country Club Towers in the first quarter and have closed on the sale of Munson Hill Towers this week for $57 million. Similar to Country Club Towers, Munson Hill is a multi family asset located in a submarket where we expect slower growth than the rest of our multifamily portfolio. Both of these sales demonstrate our ability to reallocate capital to higher growth assets such as The Wellington whose acquisition is being funded for the most part by asset sales. These include the sale of one parcel of land for $14.5 million that closed this quarter as well as the sale of one retail asset expected to close by year-end. We have one final parcel of land under contract and now expect that sale to close in the second quarter 2016. We are close to selecting a broker to assist us with the evaluation and sale of approximately $250 million of primarily suburban office assets that are well leased, unencumbered by debt or ground leases, and should be well received by the investment community. We expect to have these assets in the market within the next 30 days.

While the sale of these assets represents a programmatic step to elevate the quality of our portfolio, we continue to evaluate the growth potential of all of our assets in an ongoing effort to proactively reallocate capital to higher growth assets with lower risk profiles on an ongoing basis. These include development and redevelopment opportunities embedded in our existing portfolio. While our guidance does not contemplate additional acquisitions this year, we continue to search for off market, value add opportunities similar to The Wellington. While originating these opportunities may appear challenging to the outside, the acquisitions we have deployed recycled capital into thus far demonstrate our strength in identifying and executing deals that create value for our shareholders.

I would now like to discuss our re-tenanting and repositioning plans for 2445 M Street, a 290,000 square foot Class A office building in the West End following The Advisory Board's announced future move to a 500,000 square feet development at Mount Vernon Square. The Advisory Board's lease expires on May 31, 2019, which as of this earnings call, leaves us with three and half years of rental cash flows. We have been planning for this contingency over the past year as it became progressively apparent that The Advisory Board's final space requirement will be greater than 500,000 square feet and more than we could accommodate. The Advisory Board has at its own expense upgraded the asset with a state-of-the-art conference facility as well as a contemporary self-service cafe and fitness center, investing over $15 million to enhance its marketability.

The West End remains well sought after and our building enjoys one of the most desirable locations in the submarket surrounded by numerous restaurants and high-end hotels. We have already received inbound inquiries from tenant representatives and expect to have an anchor tenant signed before The Advisory Board's lease expires. An early recapture of the space prior to lease expiration would be optimal for us. We are currently evaluating the most cost-effective and value-enhancing repositioning of this building and our preliminary analysis indicates that the capital required for this asset will support the Class A rental rates projected in mid 2019.

Now I would like to touch on some of the broader trends we are seeing in the overall DC market. While there was an improvement in office leasing activity across the region in the third quarter, the market remained bifurcated with continued divergence in the performance of quality, urban infill Metro-centric assets versus commodity product. While concessions remain high for both types of products, we are seeing a marginal increase in face rents for quality, amenity rich assets that are close to Metro. Conversely, rental growth and commodity product remains flat. That said, market participants are looking to the fall in government leasing to drive demand for Class B office products. Our office portfolio continues to outperform most submarkets and our strategy remains to compete aggressively for deals in our projects undergoing lease up such as Silverline Center. We continue to focus on tenant retention and the ability to strategically push rents higher when appropriate to do so.

Our retail portfolio continued to experience strong rent growth from new and renewing tenants despite mixed results in the overall regional retail market. Over half of our retail assets are neighborhood, grocery anchored centers which continue to be strong performers. Going forward we expect retailers to continue to benefit from the strong demographics in our region.

Multifamily supply continues to deliver at elevated levels with 13,200 units delivering in the past 12 months. Although record-setting demand has surpassed the recent supply additions, increased competition has led to high concessions which have negatively impacted effective rents. The good news is that construction starts have decreased by nearly 20% over the past year, which bodes well for an improved supply demand balance by the end of 2016. Now I'd like to turn the call over to Steve to discuss our financial and operating performance.

Thanks Paul, and good morning everyone. Third quarter Core FFO of $0.45 per share increased 7.1% compared to the second quarter this year and by 4.6% compared to the third quarter of 2014. Same store cash NOI increased 20 basis points year-over-year as a 1.1% increase in cash rental rates more than offset the negative impact of higher operating expenses including DC real estate taxes. Our 2015 full year, same store NOI guidance has been impacted by a 13% increase in DC real estate taxes. Core funds available for distribution, or FAD, was $0.36 per share. For the full year we expect a core FAD payout ratio in the mid-80% range.

Third quarter office same store cash NOI grew 2.2% year-over-year driven by 1.9% of cash rental rate growth and 10 basis points of physical occupancy gains over the prior year. We benefited from annual rent increases at several of our office properties this quarter and grew office occupancy to 90.8% by quarter end.

Office leasing increased by more than 120% over the second quarter and by almost 250% year-over-year. We leased approximately 285,000 square feet of office space, with 93,000 square feet driven by new leases signed in the quarter. For new leases, we experienced a 32% improvement in GAAP, and a 17% improvement in cash rent spreads. For renewals, quarterly percentages were skewed by one short-term lease where we were able to reduce a significant prior capital commitment for lower short-term rent. Excluding this lease, our office renewal rate was 1.4% higher on a GAAP basis and 4.7% lower on a cash basis and is more indicative of the current market.

Retail experienced strong cash rental growth of 2.5% year-over-year. Retail same store cash NOI declined 3.4% primarily due to a full quarter impact of the tenant moveouts that occurred in the second quarter. We have re-leased these challenging vacancies with rents commencing in mid-2016. As a result of this leasing, retail percent leased was 94% at quarter end with the new leases expected to commence in mid-2016.

Retail leased approximately 128,000 square feet this quarter, with 74,000 square feet driven by new leases signed in the quarter. Retail rental spreads continue to be strong. For new retail leases we experienced a 24% improvement in GAAP and a 15% improvement in cash rent spreads. With renewals seeing a 15% improvement in GAAP and a 10% improvement in cash rent spreads.

Moving onto multifamily. Although our region has experienced another quarter of record setting absorption, it has been challenging to grow both rents and occupancy in certain submarkets. While we increased multifamily same store NOI by 80 basis points over the second quarter, driven by 10 basis points of rental rate increases, we experienced 110 basis points of occupancy declines. We continue to compete to maintain and grow occupancy in the face of record deliveries, which are projected to subside by the end of 2016 and beyond.

Turning to guidance, we tightened our 2015 Core FFO expectations by $0.02 to a range of $1.68 to $1.70 and lowered the midpoint by $0.01 per share to $1.69. The following assumptions underpinned our narrowed guidance range. Overall, same store NOI growth ranges from flat at the bottom end to positive 1% at the top end. The same store office portfolios NOI is expected to grow 1% to 1.5%. Retail ranges from negative 2% to negative 1% and multifamily is expected to be a little over negative 1% at the bottom end to flat at the top. We continue to expect $0.01 per share NOI contribution in 2015 from The Maxwell which remains on track to stabilize by year-end and to contribute approximately $0.04 to $0.05 of NOI per share annually upon stabilization.

We expect Silverline Center to contribute $0.06 to $0.07 of NOI per share in 2015 with the lease up gathering greater momentum into 2016. Of the $0.20 to $0.23 that we expect at Silverline Center, The Maxwell and 1775 Eye Street to contribute to NOI upon stabilization, approximately $0.07 to $0.08 is expected in 2015, leaving the bulk of the NOI upside for 2016 and 2017. We have experienced strong leasing momentum in these three assets since the beginning of the third quarter. By the end of this year Maxwell should stabilize and 1775 Eye Street is expected to be 97% leased. As Paul said, the Silverline Center is in active lease negotiations with several large prospects.

Our interest expense is expected to be approximately $60 million and our G&A guidance range remains unchanged at $19 million to $20 million. And finally, our guidance does not assume any equity issuance. On September 15, we entered into a $150 million 5-1/2 year unsecured term loan with members of our bank group, utilizing terms and definitions through an accordion feature of our recently completed credit facility. This essentially completes the refinancing of the bonds that matured in the second quarter and increases our flexibility to sell assets as the size of the term loan is more optimal than that of a larger bond offering. The term loan fits well on our debt maturity ladder and has been swapped at 2.72% all in fixed as an interest rate. It is prepayable without penalty, further enhancing our flexibility.

We plan to continue to increase flexibility and optionality for the use of proceeds from the expected sale of approximately $250 million of primarily legacy suburban office assets. We have approximately $163 million of secured debt scheduled to mature in 2016 as well as the option next October to prepay approximately $100 million of fixed rate secured debt that is scheduled to mature in 2017.

While we're not ready to provide our 2016 guidance at this point, our options to reallocate capital begin with our ability to strengthen the balance sheet by prepaying the fixed rate secured debt which has a weighted average interest rate of 5.7%, as well as a floating rate mortgage. We will also evaluate value add acquisition opportunities similar to The Wellington as well as a leverage neutral share buyback and debt paydown if that is the most prudent option at that time. And with that, I'll now turn the call back over to Paul.

Thank you, Steve. I like to follow up on our acquisition of The Wellington which closed at the beginning of the third quarter. This off-market acquisition, which was primarily funded by legacy asset and land sales, currently our best source of capital, epitomizes prudent capital allocation for Washington REIT for four reasons.

First, our research identified The Wellington submarket as one with a significantly greater than average gap between Class A versus B rents and strong potential to grow Class B rents. Second, we purchased the asset at approximately 40% discount to replacement cost. Third, we have the opportunity to renovate approximately 680 units and generate mid-teen returns which is higher than our average return on renovations and significantly higher than our cost of capital. And fourth, The Wellington came with additional FAR to develop approximately 360 new units in a submarket with limited supply. While acquisitions like The Wellington are not easy to replicate, these are the type of value add deals you should expect from Washington REIT.

To conclude, the highlight of this quarter is the increase in leasing velocity across the portfolio. From backfilling the majority of our old headquarters space at 6110 Executive Blvd. to the active lease negotiations in progress at Silverline Center and 1775 Eye Street, we remain confident in our ability to deliver future NOI growth. Furthermore, our leasing progress has been instrumental in positioning approximately $250 million of legacy suburban assets for sale. Compared to last year, the investment sales climate for suburban product is notably higher which makes us feel optimistic about the timing of this sale. We look forward to updating you on the progress of this seminal step in transforming Washington REIT from a suburban office investment to an urban infill REIT owning and operating high-quality, transit oriented, and amenity rich assets in the Washington Metropolitan region.

Finally, the key leading indicators for our region continue to bode well for the future, with August posting an annual job growth of 61,100 jobs of which 18,000 were gained in the traditionally office-based using professional and business services sector. To put this in context, in August of last year, the region posted 14,300 jobs with 1,100 jobs lost in professional business services. The region's year-to-date office absorption is a positive 709,000 square feet versus negative 1.8 million square feet in calendar year 2014. In the third quarter and for the first time in five years, northern Virginia, DC, and suburban Maryland have all posted positive absorption. We continue to expect market fundamentals to recover in our nation's capital which has historically performed well and with low volatility through all phases of the cycle. Now I'd like to turn the call back over to the Operator for questions.

(Operator Instructions)

Tony Paolone, JPMorgan.

Thank you. Good morning. Paul, I think you referenced some competition for space this quarter at 1775. I was wondering if you talk about whether you think that is one office, or if you are seeing some further evidence or any evidence of lease economics improving, or CapEx diminishing, or more detail on any inflection you're thinking about there.

Sure Tony. A step back for second. We had a specific asset management strategy for 1775 Eye Street. We tried to first attack the more challenging space simultaneously with undergoing what we thought was a very positive -- rent positive renovation program.

We've saved what I would like to call a filet for the last which is the top floor. We did have two tenants competing. We had one tenant in about a $62 range and another tenant in an upper $50 close to $60 range. Because of the tenant mix and because of the size of the footprint we went with the lower rent because we thought if Washington REIT were going to continue to recycle assets obviously, we wanted to provide a good tenant mix with as importantly a good balance sheet for our perspective tenants.

I think that, Tony, was probably the first time since I've been here that we have had good competition above pro forma competing for vacant space. I would not characterize that as an overarching statement on Washington DC because I think as you know we continue to have the have and have-nots. I think DC is clearly winning the battle versus the suburbs.

Over half of the leases that were done on -- let's call it on the 700,000 square feet this quarter, I think it's 685,000 square feet, over half of those were done in DC. I think that the urban infill, transit oriented deals on our numbers I think 90% of the deals over 20,000 square feet that were done year-to-date have all been within approximate to a Metro. So I still think tenants are favoring transit oriented heavily amenitized assets.

But specific to 1775 Eye Street, that is hopefully we're going to see that more reflective in our portfolio as we go forward. I would say a statement specifically to our office portfolio and this includes suburban and downtown, leasing activity picked up considerably in terms of foot traffic and the amount of looks we're getting around issuing LOIs. That picked up significantly this past quarter.

Okay. Got it. One of the things you mentioned too as it relates to the ABC space to engaging redevelopment plans you had some rents in mind for 2019 that would make that work. Any way to characterize what kind of improvement you'd need to see from current levels to hit that?

Right now I think we're probably -- as we tried to message even on some of our [NDRs], it really depends. We very much broad-based the TI program and actually the base building renovation program, Tony. I think that right now let's call that building an upper $40 to low $50 building today. Let's say $50.

I think if we do the renovation light program we would probably be in the low to mid $50. And again let's talk about a standard 10 year deal. We still are underwriting probably $80 to $100 for a TI package on a 10-year deal with a year of term. If we can get something approaching more of the $60 rent and if the market is there, we're going to be putting obviously more into the base building.

Stepping back for second, I think a lot of people know it, and the people who toured the ABC space, they put in as I messaged on the call, they put in over $15 million of their own money. We've also had some common areas already be done and I think about half of the bathrooms have been done. We're not going to need to -- this will not be a complete base building renovation.

I think if we see the market being there right now, and quite frankly with the amount of activity we already had from tenant reps calling us about what our plans were for that building, we feel pretty good that hopefully we can get to an upper $50 number then. The other nirvana would be a build-to-suit which would be a much more detailed and problematic renovation of the building catering around a tenant. Optimistically that would probably be in a mid to upper $60 number, Tony.

Okay got you. Last question, you talked about putting up some other assets for sale. Beyond that, is there more you want to do with the portfolio? Can we see another round of sales in the second half of 2016 into 2017 or do think putting this package out there gets you to where you want to be?

You are asking us and I think we are accommodating being prudent allocators of capital. I think out -- the area that we really wanted to -- we felt over the last year that we really wanted to position for sale was our suburban Maryland office assets. We of course have other assets that we think are going to hit inflection points over the next 2 to 3 years.

But as far as a big programmatic portfolio sale, I think suburban Maryland is what we have in our sights for closing on the first half of 2016. We have a lot of tax planning to go along with that. And so we're going to be -- the people that have expressed interest already know it's coming and we talked about a structured sale.

I think after we close this asset, I think we'll be back to good blocking and tackling portfolio managing and examining the assets on a one-off basis and continuing to prune. I do think with that said we have some obvious outlier candidates, Tony, on a one-off basis that we would also look to monetize. And I think that some of the people that we've also talked to have said they're willing to look at those one-off's in addition to the $250 million.

We feel good about the climate that we're going into to sell these. But outside of this programmatically in terms of portfolios, no, we don't have anything in the immediate plans for the immediate future.

Great, thank you.

Brendan Maiorana, Wells Fargo.

Thanks, good morning. Steve, if you have the $250 million coming in the door, how much of that you think you need for leverage reduction versus what could be recycled into new investments?

Brendan, the timing of everything for 2016 is why we're not quite ready to give guidance. We've been running sensitivity analysis and I've looked at what if you reinvested the entire $250 million -- where do get towards all of our goals what of your invest half of it? Where do we get towards all of our goals?

I'm especially watching our targeted debt to EBITDA annualized at the end of the fourth quarter of next year. And I think we can achieve that either way, by reinvesting or by paying down debt with about half of it. We continue to do tax planning.

My instincts say that we'll have to reinvest some, but I really like the optionality so that we'll have I think an opportunity to pay down a lot of secured debt that will help us meet our deleveraging targets. At this point on a preliminary basis I think we can get there more than one way.

And remind me, your debt to EBITDA target, will that be like mid-6s by the end of next year? Or is that just sub-7?

It's trying to get under 7. It look under 7 this year, and we're shooting as the next level on an annualized fourth quarter of next year basis, we're targeting 6.5 or under at that time.

Okay. Thinking about near-term sources and uses -- your line balance is $195 million. Is that a little above normalized level that you think about carrying? How should we think about that?

Yes it is. And keep in mind that the way we conducted this year, we tied up The Wellington but had to close in July and we structured a series of reverse 1031 exchange sales that had a different sequence. So the rest of paying for The Wellington is really coming from the sale that closed this week and also we have a sale coming in the fourth quarter so you'll see the line come down for those and I think we're going to try to term out debt and keep the line at a fairly low level, but it will fluctuate based upon the timing of asset sales.

So is $100 million reasonable mid-cycle balance for the line, to think about?

Yes, by the way, the line can't be paid down until the last asset under the 1031 exchange is closed. So the sum of all of that is going to allow us to close -- pay down the line more than one asset when it closes in the fourth quarter.

Okay. And then Paul, if you had your way and the balance sheet were not a consideration, are there investment opportunities that could be there for the full $250 million if that's where the balance sheet were set?

Yes. Candidly, we are still pretty active in the market, Brendan, in terms of looking at opportunities. I still think we are seeing more value creation opportunities in that B multifamily space, and we've identified some candidates.

That and then I think we're going to have an opportunity to potentially reposition some retail assets. Those would probably be our bigger focus. You let me know the day balance sheet is not a consideration and we will work on it.

(Laughter) I was hoping maybe I could separate you guys and put you in the soundproof phone booth while Steve gave his answer and ask you.

No cone of silence here.

Yes, I guess that didn't work. Last question. I appreciate that you got a lot of buyer interest. Volatility in the fixed income market over the summer, spreads have widened out on some things and maybe lenders are a little bit more cautious. Do think that is having -- is or could have an impact in terms of the number of buyers and pricing that you're likely to get for this portfolio?

Let's break it out. Being a former lender, I know that there is a couple of issues at hand. The first thing, let's say I'm starting over and I have Brendan and Paul's hedge fund, and we're going out and we want to target mid-teens in the suburbs.

We need product with good operating history. We have that. We need product that has no big deferred maintenance numbers. We have that. We don't want to buy CapEx [hogs] and I think we've got that.

I think that right now the lending community, you're in the fourth quarter -- that's specifically where we want to close next year, a lot of the lenders and specifically you take out some of the really big boys that try to get all their commitments up and down by the second quarter and have them close throughout the year, we're going to be dealing with new allocations at the beginning of next year, Brendan, and the lenders that we've talk to have definitely gotten a lot more comfortable.

This time last year I think -- quite frankly I think the imaginary wall was at Bethesda. I've definitely seen lenders up at northern Rockville and I see them going up [I-270] if we're talking about suburban Maryland assets. The biggest thing we haven't seen subside is the continual inflow of capital and you notice we have not seen a tremendous amount of trades in the District proper.

We've definitely continued seeing that capital looking for and chasing yield and that circle is growing wider and wider. We feel pretty good about the reception this is going to get. Do I think that is some challenging submarkets out when you look at suburban Maryland in general. But I think the operating history and the care and feeding of these assets that Washington REIT has put in over the years probably puts us in a good position.

Okay great. Thanks.

John Guinee, Stifel.

Great. I have a couple of questions. The first one is a real softball, but you got answer it quickly. If you go through your properties, your office properties on page 27 of the supplement, which ones fit into the category of Metro centric, urban, things where you think there might be a little light at the end of the tunnel? (multiple speakers)

Thanks John. I'm on page 27. 1901 Penn, I like it as it, but also has redeveloped opportunity. 51 Monroe is on a Metro. 515 King, we like that and packaging that up with another asset in terms of recycling. 6110 is probably an asset that we think it could -- somebody else can probably recognize some more upside there than we can.

1220 19th,1600 Wilson we still think have legs underneath them. Silverline, we already talked about. 600 Jefferson would probably be another opportunity for someone else to improve and allocate capital to. Same with Wayne Plaza. Courthouse is what I had already talked about, about packaging with King.

One Central has redevelopment opportunity associated with it. 1776 G actively leasing. West Gude definitely a sales candidate that has opportunity with it. Same with Monument. 2000 M, 2445 we like. Quantico, that's a hard one for me, John. I like that one a lot.

1140 Connecticut, 1227 25th. Again a lot of traction. Same with Braddock. John Marshall, we just re-upped the Booz on it. We like the FFO coming off of that. Fairgate at Ballston probably could have some appeal to the broader market sometime in the future. Army Navy and 1775 Eye we like and we think fits that mold that you're referencing earlier.

Great. Wonderful summary. Thank you. And going to the previous page, if I look at retail, 2017 and 2018 you have for what a retail portfolio is a surprisingly high roll over -- 11% of the square footage in 2017 at $27 average rent. 16% of the portfolio in 2018, $15 average rent. Do those represent risks or opportunities?

John, Tom Bakke. A lot of that is big box retailers, in Hagerstown, Gateway, in some of the other centers. Fixed renewal rates most of them are either in the queue to renew or will be shortly and I think that's going to be pretty standard roll over management.

I think the retail -- we got hit with the challenging vacancies earlier this year and that's what caused us to have a little bit of a slowing of momentum in retail but we've got those leased up now so the portfolio gets back to fairly just plugging along. And moving rents up on the mom and pops and handling the bigger retailers --bigger rollovers.

Okay. And then the last question, it looks like the logjam is opening up on the GSA in all of their agents leasing and that's the good news. The bad news is that when you look at it, it appears to us -- and remember we're looking at the world from 50,000 feet, so we'd appreciate you if you would correct any misconceptions and then talk about the magnitude in terms of square footage and velocity.

It appears to us as GSA is on one hand taking about 10% to 20% or more, less space as they roll out of existing buildings into new buildings. And then the basic base building requirements are between EnergyStar, life safety, terrorism, building access, white boxing down to the shell.

That $75 to $100 of square foot of base building work. And then the TI packages and leasing commissions is another $75 to $100. That's the bad news. The good news is they want to be Metro centric and certain buildings will prevail. But how many square feet are we talking about in the whole GSA relocating tenants and the magnitude and the duration of this fairly significant effort?

John, I don't have a precise rollover number on GSA. I can step back and tell you what our observations are on it. They're definitely starting to thaw. If you look at, let's just say, the universe of 100% of the leases, 25% are moms and pops and onesies and twosies.

Of the 75% remaining, the GSA is probably accounts for 37% of the leases that have gotten done followed by contractors doing 18%, technology doing about 11%, and law firms doing about 10%. Our observations with the GSA on some of the RFPs they put out is definitely champagne taste on a beer budget.

You're right. They do want to be around Metro and they do want all the amenities but a lot of those are not going to come at $35 or $40 rents. We purposely don't chase GSA deals and we don't -- we're not actually trying to put them in any of our space. We don't like them going in neighboring space. As you know they're extremely hard on the building.

I actually think on the base building stuff that the space that they're moving out of, I think the numbers might even be a tad light given the densification that they've put into some of the space, and how hard they are on it. I also think that it impacts the markability of the Class A office space. We don't really see ourselves competing on the Class A and B+ space. We don't see ourselves as much competing with that. We see the GSA, the type of deals that they are trying to go into is that B-, C+ space because they're constrained by a budget.

They are continuing, you're right, they are continuing the compression circuit and I don't see that changing right now. I think they were trying to get down to somewhere between [120] and [150] per employee. I don't know if they have achieved that. But a lot of the stuff that they want to do takes capital, even for them to stay put.

And so that's why I think you've seen a lot of stalling, a lot of kicking the can. You also have to remember we're running into an election year and we don't see a lot of people running on a platform that they're going to expand the government footprint. I don't have a precise answer for you right now on what the residual impact is going to be but they have to go somewhere and yes they want all the bells and whistles, but my question has been and will always be can they afford to pay for it?

That was a great answer anyhow. Take you very much and have a good weekend.

John Bejjani, Green Street Advisors.

Morning guys. I was hoping you could share a little more color on multifamily. From what we've seen most apartment REITs have seen notable improvement in their DC operations this year despite the elevated supply growth. If you could share any additional thoughts on what's been impacting your portfolio's performance relatively speaking that would be helpful.

Hey John. Tom Bakke. I think we've experienced some margin compression here as we have gotten through the back half of the year or gotten into the back half of the year. I think we've seen some -- it's been a little bit of a reaction to the overall competitive landscape and all of the new supply.

We started pushing rents late in the summer which is generally a peak leasing season. And we found with the majority of the renter base, the millennial generation which everyone talks about, and you send out your 60 day notice to renew and what we find is that they'll compete online your renewal all the way down to the day before because it's pretty easy for them to move. And when we were pushing rent we got a lot of pushback on our retention, and I think we had to adjust that strategy and we're entering the fall with a better lease up strategy and occupancy strategy.

We got some of that margin compression on the expense side with taxes moving up in DC and additional marketing and advertising to get -- drive some of the velocity. I think that's what's hurt us a little bit but I think we feel that our strategy is now in place for sustained performance.

Okay great. And I guess one more question. Can you update us on the status of Epstein Becker given the advisory board moveout?

We're in renewal discussions with them. They are competing us against a couple of options. They are like most law firms looking at a change in how they use the space.

On one hand it's easy to move. On the other hand it's cheaper to stay and just a little more painful to re-stack and reconfigure. We're working through a financial structure with them that we hope will keep them but we still have not made a deal yet. They expire at the end of 2016 as you know.

All right, great. Thanks guys, have a good weekend.

Chris Lucas, Capital One Securities.

Good morning guys. A couple of timing oriented questions. Paul, you mentioned the interest at the Silverline and the LOIs that you have out. I was just curious as to what your sense is to the decision timing for each of those roughly. And then what the expectation would be if one of them or more was selected in your building, what the timing would be for actually rent paying at that point?

I will start off and then I will pass it to Bakke to ham and egg it with me. I believe the two of the four principal ones that we're focused on right now are fourth quarter decisions. When I say that I would expect that to be probably executed in the fourth quarter. And those would probably be 3Q or 4Q rent commencements. It just depends on when we get the deal done, Chris.

But again, we are in pretty detailed discussions as we alluded to, more than one. I would hope -- I don't know if we are going to have something to message at NAREIT, but I would hope definitely between NAREIT and the holidays we would have something to signal back to the marketplace.

And then I would probably put on anywhere from 6 to 9 to 12 month depending on which deal it is in terms of rent paying. But certainly would think we would have something to factor into 4Q of 2016.

Chris, just to add one thing. I think that's a nice little stat. Our pipeline of proposals at the end of Q2 in Silverline was about [255]. And our pipeline at the end of Q3 and proposals, it's just proposals not general interest, is [380]. I think that's an indication of the increased momentum we're seeing and increased interest in the asset.

Okay great. On the disposition program, can you walk us through the timing of broker selection process for putting the books together and then an expectation for what you would think would be the reasonable time frame for the disposition program to be -- the pricing to be decided?

Sure Chris. We will probably select a broker within 10 business days of today. We are down to two groups and are having final evaluations and such over that time period. I expect the boat to be in the water over the next 30 days.

And then we will not call for offers probably until after the holidays. We want to give -- listen, these are -- it's a larger portfolio than the community is used to seeing from us. I think there's -- I'm sure there's going to be a lot of questions and with the war room and [such] we're setting up I think that, that will probably take 30 to 45 days. We'll be calling for offers in the first quarter.

I think as I alluded to earlier and I think as Steve has tried to message, we want to do the appropriate tax planning for value creation purposes. And so it could close in the first quarter, but I would not be shocked if we did a structured deal and it ended up being -- ended up closing in the second quarter, but we certainly anticipate that portfolio to close in the first half of 2016.

Okay great. And then to follow-up on that point, Steve, as it relates to the reverse 1031 exchange, once you are done with the -- you have Munson Hill done, you've got one more asset to complete. Is that it for that reverse 1031? Or is there some way to allocate more back to it? I.e., some of proceeds from this potential sale?

There is a little bit of room if something could go that fast based on the timeframe that we are on in terms of when it will really get to market and what exactly is in the portfolio, and how to price. I doubt that anything else could close in the fourth quarter. I believe that before the fourth quarter is over it will be what is already in the market and when that closes we get all the funds back from the intermediary, but they have to hold them, that's why we haven't paid the line down yet until the last deal closes.

Great. Thank you very much.

(Operator Instructions)

Dave Rodgers, Robert W. Baird.

Good morning guys. Two questions around lease economics for the quarter. The first was is open office and retail the economics for leasing overall when taking capital and spread, et cetera all into consideration were pretty low compared to what you'd done historically. And I realize some of that has to do with positioning assets for sale.

The first question is can you give us a sense of what that looks like without the asset repositioning in there? Or I guess another way to say it is if we are looking at Silverline lease up et cetera, are we going to start to see that number come back up or do we continue to see pretty difficult comps in those numbers going forward as you continue to lease up the assets for sale? Some color on current and then future.

Chris, with regard to the Silverline itself -- Dave, I'm sorry. With regard to Silverline itself, it's an asset coming out of redeveloped. A lot of that space will be first-generation nonrecurring CapEx on that particular asset. I don't know if you want to add any other color on what's going on with our portfolio.

Dave are you -- is the question around are we seeing overall lease economics trending in one direction or another in terms of capital and concessions?

Yes, I guess just bifurcating the difference between what's going on in the core portfolio and the portfolio that you're positioning for sale. What's happening with lease economics I guess in the portfolio aside from the positioning that Paul mentioned in the prepared comments about positioning the assets for sale in Maryland.

First of all -- this is Steve. And then I'll let Tom. One of the things I think Paul try to get across is our assets and our suburban assets don't have a lot of deferred maintenance.

They are not -- we haven't had to put a lot of that CapEx into get them ready for sale. I don't think there's anything unusual happening with regard to the fact that we would like to take some assets to the market. If you're getting at that, Dave.

I think really -- Dave, it's Paul, the biggest thing that we had to do was backfill our headquarter space and we did that over the summer. Albeit we were aggressive to try to get that lease done. But that was really a key linchpin for us to move 6110 to put that into that portfolio to move it forward.

In terms of -- I think I tried to message it earlier just in terms of what we're seeing, we are seeing a lot more leasing velocity downtown. Tom I think has been pretty consistent on the calls. We've not seen a lot of changes in terms of the concessions. I think face rents have probably moved up about $1 year-over-year but we haven't really -- the net effect has not -- that has not translated into net effect of growth.

And then in the suburbs right now it's just too broad to make a suburban statement. I think that really has to be a much more granular view on a submarket by submarket basis. We are specifically -- I wouldn't read anything into the leases that were done over the last -- even in 2015 on the suburban portfolio.

Those have really -- we probably tried to put as minimal TI packages as we have. We have met the market in terms of face rents and concessions. But we really wanted was duration, Dave, so we could sell that. Because, I think the logical buyer that is going to come up is probably going to be some type of fund that looking for some type value add to opportunistic yield.

They're going to need duration of cash flow to leverage up off of. That's how we've tried to position the suburban portfolio.

And Dave, I will add additionally that I think the several of the retail deals we did were fairly [expensive] from the capital investment standpoint. These were old lower level spaces, very challenging vacancies that did require some landlord capital. Those may have skewed some numbers a little bit this quarter on the retail side but I don't think that's necessarily a trend.

Okay thanks guys. That's helpful.

There are no further questions of the time. I'd like to turn the floor back to Mr. McDermott for any final remarks

Thank you. Again I would like to thank everyone for your time today. Everyone at Washington REIT is committed to continue to transform this Company into a best in class operator of real estate in the Washington DC region.

We remain confident in our region and enter the fourth quarter with greater visibility on the two high-profile catalysts that will continue to drive our stock performance. These are the continued lease up of our needle movers Silverline, Maxwell, and1775 Eye Street. And the sale of approximate $250 million of legacy office assets.

We look forward to updating everyone further on our progress at NAREIT next month. Thank you everyone.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.