Elme Communities (ELME) 2015 Q4 法說會逐字稿

Welcome to the Washington Real Estate Investment Trust fourth-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. Ms. 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 the 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 filing. Please refer to pages 9 to 24 for 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; Steve Riffee, Executive Vice President and Chief Financial Officer; Tom Bakke, Executive Vice President and Chief Operations Officer; Drew Hammond, Vice President and Chief Accounting Officer and Controller; and Kelly Shiflett, Vice President of Finance and Treasurer.

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

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

We are pleased to report that the strong leasing momentum we experienced in the third quarter further accelerated into year end. We achieved a record high level of new-office square footage leased in the fourth quarter. Our core FFO for the quarter was $0.46, a one cent increase over the third-quarter 2015, a $0.03 increase over fourth-quarter 2014 and our highest quarterly core FFO performance during the year.

Strong leasing at two of our primary needle movers, Silverline Center in Tysons, Virginia and 1775 Eye St. in the central business district in DC drove the office new-leasing number. At Silverline Center we signed a Fortune 100 Financial Services company for a 137,000 square foot anchor lease. One of the three most significant lease transactions that closed in the Tysons submarket in 2015.

Overall it was a very successful year for our newly developed and repositioned Silverline Center. Prior to our $35 million capital investment this 532,000 square foot Class B asset had been underperforming in a very competitive market. The investment helps elevate the assets to a Class A positioning which enabled us to compete effectively for top-tier tenants and enjoy tremendous leasing success during the year.

We delivered the renovated asset in the second quarter of 2015 and implemented a reenergized marketing and leasing campaign taking the building from 61% to above 93% lease or committed in a span of six months. As further evidence of the success of our investment, the building received two NAIOP Awards of excellence for building renovations and building common areas and signed one of the region's best restaurateurs, Action Food Hospitality, for a top-tier white tablecloth restaurant. We expect Silverline Center to continue to perform well in spite of the challenging Tysons submarkets and stabilize by the end of 2016 with economics that are in line with pro forma. Furthermore, our anchor tenant and amenities in place we expect to drive strong rents in the rest of the building and on upcoming renewals.

Moving on to 1775 Eye St., we completed the lease-up of the building with two leases totaling 28,000 square feet with reputable national associations. As you may recall, we contracted to acquire this 11 story office building at 52% leased in 2014, saw it through an extensive modernization of its entryway, lobby, and common areas and brought it to 98% leased by year-end 2015 with deal terms that were in line or better than underwritten.

Finally, our third needle mover, The Maxwell, a 163 unit Class A multifamily development is 95% leased and stabilized as we enter 2016.

We believe our leasing success evidences our ability to create value for redevelopment, acquisition, and ground-up development. Our primary goal is to generate compelling value-add returns for our shareholders.

The redevelopment of Silverline Center, for example, has increased cash and gap rents at that asset by 16% and 30% respectively and incremental leasing from here is expected to achieve even higher rent spreads which have been demonstrated with increases of 26% and 47% for the small-to-midsize deals. A modernization and lease-up of 1775 Eye St. has generated $20 million of incremental value since we acquired it in May of 2014. A ground-up development of The Maxwell has stabilized and is expected to contribute additional FFO in 2016. This is a Class A asset positioned close Metro in a dynamic urban neighborhood that will further benefit from the continued revitalization of the submarkets.

As a reminder, we began 2015 with the goal of leasing up Silverline Center, The Maxwell, and 1775 Eye St., and creating $0.20 to $0.23 of additional NOI, of which we now have lease commitments for $0.22 and further upside from existing leases at Silverline Center that are currently at below-market rents and are expected to renew at higher rental rates when they roll.

We are currently working on several other value creation opportunities that will deliver incremental NOI growth upon stabilization in 2018 and beyond. These include the Army Navy Club Building which presents us with a unique opportunity to upgrade a historic boutique property to compete as a trophy asset in an improving market with the goal of generating double-digit incremental returns upon lease-up. Other incremental NOI drivers include the additional development potential at Spring Valley Retail Center and at The Ashby as well as the revenue generating [unit] renovation program and the lease-up of an additional 400 multifamily units that will be developed on-site at The Wellington.

Before I move on to the execution of an important strategic milestone for Washington REIT the upcoming sale of a select portfolio of our suburban office assets, I would like to briefly comment upon our sale of Montgomery Village Center, a 197,000 square foot Class B Community Shopping Center in Montgomery Village, Maryland for $27.8 million that closed in December. This successful sale transaction finalized our reverse 1031 related to The Wellington and marked the sale of yet another legacy asset that had reached an inflection point and lacked the continued income growth potential that we seek.

Turning to the suburban asset sales, we are currently in the market with a portfolio of well leased suburban office buildings that are unencumbered by debt or ground leases and that have strong amenity and transportation links. The Offer of Memorandum has been released and we are encouraged by the high number of confidentiality agreements that we have received so far. Tours are currently ongoing and the next few weeks will be critical to the sales process. We hope to continue the investment sales momentum we experienced in the fourth quarter last year into 2016 and will provide further updates as we progress through the year.

Following the planned dispositions, our office portfolio will be predominantly located in urban metro-centric locations with walkable amenities. Downtown DC is expected to drive approximately 60% of office NOI. Urban centers in Virginia are expected to drive the remaining 40% of office NOI with Tysons driving 11% of the total NOI. Of our remaining 19 office buildings located in the district in Northern Virginia, approximately 90% of our office square footage will be located in close proximity to a Metro station.

Our over overall portfolio NOI composition is also expected to shift with an intentionally reduced dependency on office relative to multifamily and retail. Our longer-term objective remains to achieve greater parity between our three asset classes.

Turning to acquisitions, we continue to underwrite off market, value-add acquisition opportunity that may potentially redeploy [proceeds] from the legacy suburban office asset sales. Since these assets generally have a low tax basis we plan to utilize a 1031 tax exchange for approximately 50% of the proceeds and use the remaining proceeds to delever and continue to make balance sheets stronger. While originating acquisition opportunities may appear challenging to the outside, the acquisitions that we have [recycled] capital [with you] thus far demonstrate our strength in identifying and executing deals that create value for our shareholders.

Now I would like to touch on some of the broader market trends we are seeing in the overall DC market. Starting with office, although concessions remain elevated and the trajectory for net effective rents remains flat, the strong improvement in leasing activity indicates that the Washington Metro region is on a path to recovery. According to CBRE the DC office market absorbed 576,000 square feet of office space in 2015 compared with 678,000 square feet of contraction in 2014.

Growth leasing activity in the District for deals over 10,000 square feet reached 9.5 million square feet, our highest yearly leasing volume since 2011 and 29% above the District's ten year average. The Northern Virginia office market had a solid fourth quarter with leasing velocity and net absorption reaching five-year high. For the full year the Northern Virginia office market achieved 260,000 square feet of positive net absorption versus 694,000 square feet of contraction in 2014. Even suburban Maryland absorbed a total of 297,000 square feet in sharp contrast with the 896,000 square feet of contraction in the market experienced in 2014.

A key driver behind the recovery and office leasing is job growth. The 61,800 net jobs added during the 12-month period ending November 2015 represents the largest gain our region has experienced in a decade. Furthermore, 42% of 2015 job growth was driven by office space using professional and business services compared with only 15% in 2014. The [ultimate] Economist's five-year forecast points to 54,500 net new jobs per year which represents a higher level of growth than the region has experienced since the middle of the last decade. Encouragingly, job growth is being driven by the private sector with Washington DC ranked among the top employment centers for professionals with science, technology, engineering and mathematics degrees.

Our region's business community and leaders are steadily diversifying away from Federal contracting as the principal source of growth. That said, both Federal procurement and employment appear to have stabilized and the heavy Federal presence in the region will continue to provide economic stability and protect our region from the worst effects of any national or global economic downturns.

Our office portfolio continues to outperform most submarkets from an occupancy standpoint as our focus remains on tenant retention and the ability to strategically push rent higher where appropriate to do so. Our retail portfolio continued to experience strong rent growth from renewing tenants despite mixed results in the overall regional retail market. Over half of our retail assets are in neighborhood grocery-anchored retail centers which are likely to continue to be solid performers. The year-over year-occupancy rate at our grocery-anchored centers improved by 130 basis points from 96% at the beginning of the year to 97.3% occupied in the fourth quarter of 2015.

We outperformed grocery-anchored shopping centers in the metro area where Delta Associates reports that the occupancy improved by 110 basis points to 95.6% occupancy at year end. Delta Office points to rental rates at grocery-anchored centers increasing 2.9% in 2015 after rising 2.3% in 2014. Going forward we expect retailers to continue to benefit from the strong demographics in our region where the average household income is 61% higher than the US average.

Multifamily supply continues to deliver at elevated levels with 12,300 Class A units delivered in 2015. Although record setting absorption of 13,400 units has surpassed the recent supply additions, increased competition has led to higher concessions which has negatively impacted effective rents. We also projected deliveries in 2016 to reach 14,000 units with a decrease in deliveries in Maryland and Northern Virginia where the bulk of Washington REIT's multifamily assets are located.

Our own research projects that region-wide absorption will be in line with deliveries in 2016. Large increases in the inventory within the District, particularly in the Navy Yard and Southwest Waterfront submarkets will create a temporary supply overhang in those submarkets. The vast majority of our multifamily portfolio, however, does not compete directly with those submarkets and targets the value-conscious renter who still seeks well located quality products.

Encouragingly the outlook for 2017 is improving given the moderate levels of construction starts this year and Delta expects demand to exceed the number of units delivered in the region in 2017.

Now I would like to turn the call over to Steve to discuss our financial and operating performance in the fourth quarter and guidance for 2016.

Thanks, Paul. Good morning everyone.

Fourth-quarter core FFO of $0.46 per share brought our full-year performance to $1.71 per share which exceeded the top end of our most recent guidance range for the year. The primary driver of the out performance was the strong office portfolio. Where full-year same-store cash NOI grew 5.1% year over year largely due to rental growth of 2.2%.

We had a strong fourth quarter overall benefiting from lower utility and snow-removal costs due to milder weather and was seasonally expected. Overall full-year 2015 same-store cash NOI grew 2.5% year over year or 2.1% excluding term fees and our full-year core [pad tale] ratio was 86%. Fourth-quarter same-office same-store cash NOI grew 9.2% year over year or 6.7% excluding term fees as we continue to benefit from annual rent increases at several of our office properties and from lower operating expenses due to utility and snow-removal cost savings, termination fees and higher levels of recoveries in the quarter. We leased approximately 872,000 square feet of office space in 2015 including 220,000 square feet of new-office leases signed in the fourth quarter which was a record high for Washington REIT.

For new leases, we had a 21% improvement in GAAP and an 8.5% improvement in cash-rent spreads. Our rents on renewals were 3.9% higher on a GAAP basis and 8.1% lower on a cash basis. Same-store office physical occupancy was 90.5% and our same-store office portfolio was 93% leased at year end.

For the full-year 2015, our retail portfolio experienced strong cash rental growth, 2.4% year over year. Retail same-store cash NOI declined 40 basis points year over year primarily due to the negative impact of two quarters of vacancy and the tenant move-outs that occurred in the second quarter. Although we ended the year 91.5% occupied we are 95% leased and the large leases that were executed in the third quarter that will commence in the second half of 2016.

Retail renewal leases of approximately 33,000 square feet experienced strong rental spreads especially for smaller inline retailers, resulting in an 18% improvement in GAAP and a 4.2% improvement in cash (inaudible). Approximately 15,000 square feet of retail renewals or for a short-term extension excluding which the weighted average retail renewal term would have been 7.8 years.

Moving on to multifamily, our full-year same-store NOI declined 1.5% year over year and the 1.8% year-over-year rent decline reflected rent pressure experienced in certain submarkets such as the Rosslyn-Ballston corridor and Crystal City Pentagon City where supplies sharply increased. As Paul said, we are expecting our multifamily portfolio performance to improve steadily this year due to an increase in occupancy as a result of record-high absorption. Our multifamily portfolio has grown same-store physical occupancies by 70 basis points in the face of record-high levels of deliveries.

Some of our submarkets are now seeing improved rental growth prospects and our portfolio has burned off historical concessions and abatements. In 2015 we successfully positioned the portfolio to perform despite headwinds in the Washington Metro region.

Now turning to 2016 our core FFO-per-share guidance range is $1.70 to $1.77 because the midpoint is higher than we achieved in 2015 while also absorbing dilution from deleveraging and asset recycling. Our 2016 core-FFO guidance is unpinned by the following assumptions: flat overall same-store NOI growth with flat office same-store NOI as we will need to address some releasing from certain projected tenant non-renewals during the year. We have good activity on these spaces and based on our current discussions the prospects to backfill these vacancies we are confident they will be released.

We expect flat to negative 0.5% retail same-store NOI because the long-term leases we signed with a strong national retailer for two challenging spaces do not commence until the second half of 2016. Although that revenue isn't projected to commence until later in the year the retail portfolio is 95% leased.

We continue to maintain our office and retail occupancy levels at or above the competitive submarket. We expect multifamily same-store growth to range from 1% to 2% due to the aforementioned strong absorption from improving job growth as well as concessions and abatements burning off in our portfolio. We expect approximately $0.04 per share of NOI contributions from The Maxwell and $0.11 per share of NOI contributions from Silverline Center for the year, some of which will be backend loaded as the anchor lease [fund] at Silverline is not expected to commence until September 2016.

Our interest expense is expected to be $56 million to $57 million. G&A excluding any severance costs is expected to be approximately $20 million. We project a poor fed coverage of 85% and once again our guidance does not assume any equity issuance. We expect our 2016 core FFO-per-share trajectory to pick up at the beginning of the second quarter. While we are not providing quarterly guidance, we would like to point out that we expect our core FFO in the first quarter of 2016 to be lower than the fourth quarter of 2015 considering several factors.

First, our region experienced significantly milder than expected weather in the fourth quarter of 2015. We have already incurred heavy snow removal and utility costs in 2016 due to a major blizzard and seasonably colder temperatures. We currently expect snow removal and utility cost to be approximately $0.025 higher than fourth-quarter levels. Also during the first quarter we will experience full-quarter impact of the asset sales that closed in the fourth quarter lowering our core FFO by $0.01 per share for the quarter.

Finally, we expect termination fees and reimbursement to return to lower levels and contribute $0.015 per share less than in the fourth quarter of 2015. Again, looking at our full-year guidance we expect our core FFO run-rate to pick up beginning in the second quarter of 2016 with rent commitments of leases signed in the retail portfolio 1775 Eye St. and Silverline Center all contributing to 2016 core FFO growth as we proceed through the year.

Our capital plan for 2016 is to strengthen both sides of the balance sheet. As Paul said we plan to sell our portfolio of suburban assets and allocate approximately half of that capital to more strategic assets and use the balance of the proceeds to pay down secured debt, thereby deleveraging and position us with a stronger balance sheet for the future. We have approximately $163 million of fixed-rate secured debt scheduled to mature this year as well as the option this October to prepay without penalty approximately $100 million of fixed-rate secured debt that is scheduled to mature in 2017. We plan to strengthen the balance sheet by paying down the fixed-rate secured debt, which has a weighted average interest rate of 5.7% as well as one floating rate mortgage. We plan to turn out more debt in the second half of the year and improve our annualized net debt to adjusted EBITDA ratio by year-end 2016.

With that I will now turn the call back over to Paul.

Thank you, Steve.

I would like to briefly summarize the steps we have taken to transform Washington REIT into a best-in-class owner and operator of real estate in the Washington Metro region. First, we have been net sellers of assets over the past three years, selling our lowest performing assets into a strong investment sales climate. We will continue to be net sellers in 2016 and use proceeds to strengthen both the left and right side of our balance sheet.

Second, the acquisitions we have made have been in the heart of downtown DC for office and in urban demographic growth centers in DC and Virginia for multifamily and retail.

Third, our asset recycling to date has significantly de-risked the portfolio and the sale of the suburban office assets currently in the market will be among the final steps towards transforming Washington REIT from a suburban office investment to an urban infill REIT owning and operating high-quality, transit-oriented and amenity-risk assets in the Washington Metro region.

Fourth, we have created value through excellent leasing execution from the renewal of the World Bank and Booz Allen leases to the lease-up of Silverline Center, 1775 Eye St., and The Maxwell.

Finally, and most importantly, despite being net sellers, we have improved our asset quality and strengthened our core-[tenant] coverage. We expect to grow core FFO this year while also strengthening the balance sheet. Washington REIT is a much stronger Company today and is among the best positioned to benefit from a continued recovery in the Washington Metro region.

We will now be conducting a question-and-answer session.

(Operator Instructions)

Michael Lewis, SunTrust.

Hey, thanks. I think I may know the answer to this, but I was wondering if you could give any more detail on the suburban office portfolio that's for sale? And maybe one way to do that is to talk about what's included in your guidance, whether you can talk about volume, cap rate, timing, any of those things.

Good morning, Michael. This is Steve.

We are not going to give specifics (inaudible). We had signaled before, just so that everyone understood, that we planned to be fast sellers coming into the year, but now that we have an actual specific package in the market we are not going to talk about the cap rates right now and we are not going to talk about the proceeds.

I will say, just to help from a timing standpoint, it has to be negotiated, and we are days away from the next step in the process. But we are assuming that we would like to try to take this down in a couple tranches in the second and third quarter of the year from a timing standpoint.

Okay. And so, this is impacting guidance then. It has all kind of been there, even though we can't see it?

That's correct, and I look forward to being able to give more color as the deals are executed through the year, but we certainly have plans.

Okay. And then my second question -- I wanted to ask about development and redevelopment opportunities in your portfolio. Maxwell and Silverline are basically done. Is it safe to assume you're not close to starting the new units on The Wellington? And then, as you swap out -- try to improve the grocery anchors -- does some of that retail require -- or would benefit from redevelopment as well?

Hey, Michael. Tom Bakke.

The main, initial sort of repositioning that we've got on the table of the Army Navy Club, which I think is a unique opportunity to reposition that asset with about $4 million or so into upgrading lobbies, amenity center, some systems, and I think we can generate some nice mid-teens returns on that investment.

We've also got some additional units that we can develop at the Ashby -- one of our multi-family projects out at McLean. That is converting some commercial space into multi-family units. We have got to get that through some zoning, but that's something we're working on.

And then we've got the development right at The Wellington, which we are also in the planning stages on. That's potentially 400 units that we hope to be able to get under way probably in 2017.

Also, I forgot to mention Spring Valley. We do have a small retail expansion in that center. I think we've talked about it on previous calls. That's something we are trying to get through zoning approval right now.

Great. Thank you.

Brendan Maiorana, Wells Fargo.

Thanks. Good morning, guys. Probably Tom or Paul -- really great execution getting resale done with your anchor at Silverline. It did seem like the TIs were high relative to the term and the rate.

Is a lot of the TI spend there, do you feel, transferable beyond the initial term, which I think was a five-year deal. I don't have the specifics in front of me. And how should we think about economics of lease-up going forward with that asset?

It's Tom, Brendan.

First of all, I think the TI numbers also include some other downtown deals here at 1775, and those are, of course, higher numbers just in general. But that deal that we did at Silverline was pretty much a market deal, even though you might assume that we had to compete at a higher level.

I think this was definitely the case where the asset helped sell itself, and the user really bought into that. So, those concessions were all in line with market, which is essentially -- it was a 5.5 year deal, and that essentially was about $6 a foot a year for TIs, and pretty round about a month a year, and pretty much in line with market.

I think another part of the story though is that this location is right across the street from their main campus. And we have initial indications that they are already out of space in their main campus, and are likely to stay for longer term in certain locations, and we think this location makes the most sense for them. We will certainly see how it plays out, but the space is going to be built out pretty generically, and we like our chances on keeping them one way or the other.

Okay. That's helpful.

And then probably for Steve Riffee, your FFO guidance at the mid-point is up a few pennies -- 2016 versus 2015 -- there is lots of moving parts in there. I heard your commentary directly in terms of 85% pay-out ratio on FAD suggests that your FAD outlook is flat year over year. I would think its position of the suburban office asset would improve the FAD-to-FFO ratio?

So, one, is that correct? And if it is, is it more of a timing issue for 2016 where you've got to spend some dollars on some of this leasing that you've done, and that maybe normalizes as you go out to 2017? Or do you not really get much of an improvement in the FAD relative to FFO from disposition of the suburban assets?

Several parts there -- these are not assets that require a lot of capital. That's one of the reasons we think that they are attractive to a buyer and very financable, in addition to the stable rent roll that has been there.

I think, quite frankly, the core FAD ratio is very much affected by timing, because we're selling assets. We are recycling into higher quality assets, so there is some dilution relative to that. And also just keep in mind that we have executed all the leasing that we talked about for the Silverline Center, for The Maxwell, for 1775, for the two big retail leases, and those commence towards the back half of the year.

So, we don't have the full benefit of all of that NOI and EBITDA and FAD for the full year. So, some of this is just moving parts and timing. We have a longer-term goal of getting even lower than 85%. But considering that we are doing all that execution, that's what we are targeting for this year.

Okay. Great.

And then just last one -- I think you mentioned there were a couple of office expirations this year that -- you have good activity on that going. I think you have the law firm and Army Navy Club; are there any other more meaningful ones that we should be paying attention to?

The main one we have some good news on, Epstein Becker: 55,000 feet or thereabouts at 1227. They have recently committed to renew with us, and we are in the final stages of getting that renewal completed. That's the big one on the horizon this year for us.

Okay. Great. Thanks, guys.

John Guinee, Stifel.

Great. Wonderful job, guys. Congratulations.

Kind of a big-picture question, and this is a question that everyone -- 80% of the REITs out there have to deal with, but you guys are probably on the forefront. DC, as you know, has institutional capital that's very, very aggressive in how they value and underwrite assets, maybe more than they should, while the REIT's cost of capital in general is going up versus down.

Where are you in the whole thought of joint venture capital versus common equity? You've resisted it in the past. Is there a level at which it becomes ideal or more attractive?

John, hi, it's Paul.

So, first thing we're going to do is have visibility on our -- what we are selling right now and, in turn, recycle that capital. I would probably submit to you that I think we've been pretty consistent in terms of what we are looking for, and I'm not sure that what we're looking for necessarily completely aligns with the institutional capital.

My observation would be, and what Washington REIT has tried to demonstrate to you and others, and more specifically our investors, is that we can do value-add deals and create value. I'm not seeing that institutional capital that you are referring to taking a lot of risk right now.

You pay us to be level sharpshooters. I think that that is what we are trying to execute on.

But I would probably consider that capital more core capital; and, yes, I think that is very tough to compete with right now. We are just not really looking for those types of transactions.

What we are looking for -- and I thought where you were going with this is kind of, out of the proceeds out of the suburban market sale, what would we consider? You know, we are trying to, as I tried to message in the commentary, we are trying to gain more parity among the asset classes, which means we are really de-risking our office portfolio. But if you were to see us buy an office building, it would probably be within walking proximity of a Metro, have a strong credit tenancy, and you would see us buying that and dip down to replacement costs so we can try to capture some of that value that we discussed.

We still like multi-family. We have not seen as much institutional interest in the multi-family, probably in the last 1.5 quarters. But we are going to continue to target those affordability gaps, John, because we are seeing that in certain submarkets in northern Virginia, and specifically I think once we get through a digestive phase in the central part of DC. We are still seeing anywhere from $400 to $700 there, and we still want strong transportation links and walkable amenities.

And then in retail, I think our bread and butter, and what got us to the dance has been grocery-anchored community centers. Going back to Michael's point though, I think that there's probably more redevelopment opportunities within our current portfolio, so that we wouldn't have to compete with that institutional capital. That's probably right in front of us, and we would probably try to capitalize on that.

But I don't think you would see us, John, ever going after a PNC Place or some of these other assets that are out -- or partial interests that are out there on the market right now. We have been approached -- in the spirit of transparency, we have been approached by sovereign wealth funds to do programmatic joint ventures to kind of expand our footprint. But at this time right now, I think we've got enough to keep us busy with what we have to execute in 2016 and going into 2017.

Okay. And then a two-part follow-up question: Given that you are going to get into basically a ground-up 400-unit development apartment on an existing property, are you thinking more about being in the development business, ramping up your development effort overall? It does seem that the market can absorb about 10,000 apartment units a year.

And then part B of that question for Steve Riffee: Should we look at 2016 as $0.42, $0.46, $0.47, $0.48? Does that make sense?

I will take the first part of that, and then I will pass it off to my partner in crime, John.

With Wellington right now -- the second phase. The first thing that is key on the agenda is executing on the unit renovations that we have started, and we are in the first phase of that. It is going as planned. We are actually slightly ahead of schedule, and we are getting probably a little bit more lift in terms of rental attribution than we initially anticipated.

We are in design development right now, and in the approval phase on the new apartment to be named, and we think that those 400 units, we're going to have nice separation between the renovated unit price point and the new unit price point. So, we feel fairly comfortable about that. But the timing on that, we feel, are probably the back half of this year or early next year. That is a little bit of a ways away.

Great. Thank you.

John, just regarding timing -- first of all, we really try not to give quarterly guidance, but we have given a lot of direction to the first quarter already. I would just say this: There are a lot of moving parts. I think it is not as back ended as you seem to indicate.

I think the second quarter is when we indicated that things start to ramp up. So, there's a lot of things that help it just naturally. Our seasonal expenses are lower in the second quarter.

And a lot of the secured debt that we are going to pay down -- half of it is going to be in the first quarter. And we can reach the next half of the [$160 million] at sometime in the second quarter.

Plus, we've talked about trying to start the recycling process beginning in the second quarter. So, I really don't want to give every quarter's numbers, because there are moving parts, but I think you have pushed more to later in the year than I would.

Thank you.

David Rodgers, Robert W. Baird.

Good morning, guys. I hope you're doing well. Thanks for the details. I got on late, so if you have answered some of this, I apologize.

I guess the first question, and I know you didn't really want to give a cap rate on the sale of the portfolio that's out on the market, so maybe I'll ask it in a different way. Two questions, I guess. What is the yield difference between what you're going to sell and what you're going to buy on a 1031 this year, and what do you think your unlevered IRR difference is in that same trade?

Well, Dave, if I go through that, that's probably going to -- you're going to be able to back into a calculation, so we are not going to comment on that right now.

Let's step back a second and talk about what we're selling and talk about what's going on in the marketplace, because that's, quite frankly, as an investor, that is what I would be asking, and kind of what we're seeing in the CMBS markets and the credit volatility -- what impact that's going to have on our execution over the next six months. Putting on my former Chief Credit Officer hat, just evaluating the opportunity that we have out there right now, I'm looking at the asset operating history.

These are assets that are between 85% and 95% occupied. So, we think it's going to have interest from the light company communities, and being a former light company lender also, I would like to circle my numbers early in the year.

I think when you look at the assets that are out there, the 1.2 million square feet that is out there, you are really not going to find a lot of CapEx aug or a lot of deferred maintenance. I think Washington REIT -- and credit to everyone that has operated these assets as far back as the 1970s and 1960s, these have been well-maintained assets.

I think what's going to be critical is the buyer profile that is out there right now, Dave, in terms of sponsorship and their capitalization. I think that's where you're going to see spread differential.

The regional nature of this portfolio -- I think more lenders and more of the equity people are going to focus on the tenant mix and the diversification. And I feel like we've got every end of the spectrum there, from federal government to state government to technology. I think we've got that covered.

But I think the most important thing that the people that are chasing the yield and that are going to lever it up, and if you step back for a second and look at this portfolio, and let's say you throw 60% to 65% debt, which I think is achievable based on the stability of the cash flow, I think you are looking at low teens right now for a new buyer on this. That's predicated on that people do as good a job operating it, quite frankly, as we have.

If you look out over 10 years on this portfolio, I think it is either 9% or 10% of the cash flow rolls annually. That's a pretty damn good number, and that is very underwritable.

So, I think our big thing on yields, going back to that is, and it is really the onus is on our investment sales team, as well as us, as we share the property, is to differentiate this product from the commodity product that you are going to see coming to the market that's two blocks off Dulles toll road, 60% occupied, and probably had some near-term rollover. We have to reinforce the operational execution, the stability of the cash flows.

But whatever we do, our goal is to maximize proceeds with the buyer that's going to offer us the greatest certainty of execution. That's what we are expecting, and I know that is what our investors and our Board is expecting.

That's helpful. And then maybe one follow-up on residential again -- if you answered this, I apologize. But with regard to the challenges, I guess, and some of the things were resolved in apartments, obviously, it's been a challenging market. Do you sense that getting better? Do you feel that you are on the upswing, and how much of any of the economics that we see is kind of self-induced by some of the improvements you have tried to make?

I think that is a very submarket-specific question. The markets, and I think we have talked about this before. We are value chasers, and when we go after those affordability gaps -- I can pick a market, some micro markets in the Alexandria market or some in central DC that we like that we see big affordability gaps. I think that DC did well last year.

I think this year, for us, the thing that we are keeping our eye on with our DC assets is really going to be -- is there going to be any cannibalization because of all the product that's delivering in Southwest Waterfront and the Navy Yards? Are people going to say -- okay, that is a really big discount, and I'm willing to make the leap?

I think it is about, for us, and as we continue to examine our portfolio -- our portfolio manager is really looking at price points and amenities. And I think you kind of have two types of renters there. I don't see the renter that, at 3801 Connecticut or one of the other assets jumping down to the Navy Yard to save $300. We just think those are two different types of renters.

I do like where certain parts of northern Virginia are going, in terms of delivery. And then the suburban markets -- we just haven't really seen the infill of products that we think is going to hurt our cash flows.

Great. Thanks for all the detail, Paul.

Sure, Dave.

Thank you.

(Operator Instructions)

John Bejjani, Green Street Advisors.

Morning, guys. I think you sort of touched on this, but I was wondering if you could speak to the pricing environment? There's been discussions in Manhattan and so forth as to whether riskier assets are going to get repriced on the market moving forward. Are you seeing any change in the pricing environment in the DC Metro across the risk spectrum?

I would say, John, that that is very asset specific. I think that we are seeing a lot of joint ventures being shopped right now, and you know who they are.

We are seeing a lot of partial interest or 50% or less being out there and people trying to basically take some cash off the table. Haven't seen a lot of re-trades on pricing on core assets.

I would say that more of the re-trading or repricing have been two-fold. Number one, some of the private equity recalculating how much duration risk that they want to take, and let's say you have a near-term rollover, you're probably repricing leases that are 18 months or out. We have definitely seen that.

And then we've seen lenders probably the farther out you go in the suburbs outside of the beltway, I think that if you don't have your forward pinned down, or your spread pinned down, I think there could be some volatility there. There could probably be, in terms of distribution of private equity, more holdbacks, more reserve requirements, just gnawing at the edges there from the lending side.

On the equity side, quite frankly, when we look at our pipeline and we try to track every deal in the region, I would say 80% of the product that we're seeing right now is not what I would call core products. I would say it ranges from core plus, all the way out to opportunistic, and I think that's a bit more of an open playing field, John.

Okay. That's fair. That's helpful.

And then I guess just one question on the office portfolio: I don't know if you've mentioned this, but which property was it where you experienced that large lease term end in 4Q?

That is 1901 Pennsylvania Avenue. We had a 7,000-foot tenant that we did an early termination on and banked that money.

All right. Great. That's it for me. Thanks, guys.

Thank you, John.

Chris Lucas, Capital One Securities.

Yes. Good morning, everyone. Paul, just maybe a quick question on the portfolio you have out in the market: Any sense as to what your thoughts are on just the timing of wrapping that up?

I think, as Steve tried to message, I think we are looking at the second and third quarter, Chris. And we have -- I think if you step back for a second and look at the buyer profiles, I think the people that want to get capital out are going to try to accelerate that.

We're pretty much running the whole spectrum in terms of buyer profiles from local operators, regional operators, capital sources, funds that can take the whole thing down. I think the people that are trying to get large slugs out, and that are aligning with lenders are trying to do that on the front end, as opposed to the back end. But the execution itself, and I think what we have messaged in our guidance, is 2 and 3Q executions.

Correct.

Okay. And when you get this done, how far through the portfolio repositioning do you think you are?

I think we are back to the normal portfolio pruning that any good manager would go through, in terms of allocating capital. Is there still one office building that I could point to right now that I would like to monetize? Yes. Is there another apartment building out there that we think is probably better for us to allocate capital to another multi-family site? Yes. But in terms of larger, programmatic portfolio sales, I think this is the bellwether execution for us.

Okay. And then the last question for me is: When you're done with this portfolio and you put the leverage -- pay down some of the leverage -- is that where you want to be from a balance sheet perspective on leverage once you're done with this?

Chris, just to think about leverage long term, we had targeted to get all the execution of sales in 2015 back under 7. So, we were like 6.8, trailing 12 months, I think, debt to EBITDA at that point. The next target level we have is the mid-6s.

What I've said longer -- and we have a lot of moving parts. What I have said about longer term is I think we would like to operate in the low 6s from a debt to EBITDA standpoint. So, we are going to do it one goal at a time, as we execute.

Great. Thank you very much.

Thank you. We have reached the end of our question-and-answer session. I would like to turn the floor back over to Mr. McDermott for any further or closing comments.

Thank you.

Again, I would like to thank everyone for your time today. We look forward to updating you on the progress of the sale of our suburban office assets in the coming months.

We are grateful for the opportunity to have met so many of you in 2015 when our investor relations outreach efforts enabled us to meet more investors than in any other year in the Company's history. We look forward to seeing many of you again soon, and thank you, everyone.

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.