Elme Communities (ELME) 2016 Q2 法說會逐字稿

Welcome to the Washington Real Estate Investment Trust second quarter 2016 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 supplement 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 filings. Please refer to pages 9 through 24 of our Form 10-K for our complete risk factors disclosure.

Participating on 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 would like to turn the call over to Paul.

Thank you, Tejal. Good morning, everyone. Thanks for joining us on our second quarter 2016 earnings conference call. Washington REIT had another strong quarter and raised the midpoint of our full year core FFO guidance range, all while executing our asset recycling plans and successfully raising equity capital.

I would like to highlight four key achievements this past quarter. First, our core FFO of $0.46 grew 9.5% and same-store NOI grew 3.9% over second quarter 2015. Second, we tightened our full year core FFO guidance range and raised its midpoint by $0.02, while also raising full year office and multifamily same-store NOI guidance.

Third, we executed the first of the two sales transactions of our suburban Maryland office portfolio and acquired Riverside Apartments. And finally, we successfully raised equity capital to strengthen our balance sheet and help us deleverage to an expected low 6's net debt to EBITDA by yearend.

Let me start by detailing the progress we have made on our full year 2016 asset recycling plan. As mentioned, we have completed the sale of the first tronch of a suburban Maryland office portfolio which comprised of four assets and delivered aggregate sales proceeds of $111.5 million. The remaining two suburban office assets are under contract to be sold in September for $128.5 million. We also completed the acquisition of Riverside Apartments for $244.8 million. This apartment community in Alexandria, Virginia consists of 1,222 units and potential onsite density to develop 550 additional units.

Through our asset recycling, we have strategically allocated capital out of low barrier, suburban office assets into urban infill, Metro centric assets in locations with strong demographics and walkable amenities. Moreover, we have allocated capital to value add multifamily assets that meet these criteria. We believe that the allocation provides the best risk adjusted returns for our portfolio.

Over the long term, we expect to generate greater levels of NOI and FAD growth with more stable cash flows and decreased risk. At this time, our remaining planned disposition for 2016 is Walker House Apartments in Gaithersburg, Maryland, a legacy suburban, multifamily asset that is currently in the market and expected to close in the fourth quarter of this year. We are also exploring the sale of another legacy suburban office asset. Our 2016 dispositions complete our programmatic portfolio repositioning. Going forward, we expect to make opportunistic asset recycling decisions driven by regular asset lifecycle management.

Moving onto acquisitions, while we do not expect to close on additional asset purchases in 2016, we continue to underwrite well located, valued add multifamily opportunities such as Riverside Apartments and The Wellington as well as Metro centric office opportunities in the District. We look for deals that leverage our value add capabilities as demonstrated by the post renovation lease up of 1775 I Street and Silverline Center and by the high teens return on costs currently being achieved on unit renovations at The Wellington.

Equally important, we have several excellent growth opportunities imbedded in our existing portfolio. From these, we have identified a number of near and medium term opportunities that we will execute through a strategically timed series of projects and expect to generate multiple phases of NOI growth for our shareholders.

Let me now detail six current imbedded growth opportunities and their incremental NOI potential. These six opportunities are expected to collectively contribute a range of approximately $27 million to $29 million of additional annualized NOI upon stabilization. This is NOI that is not in place in 2016 and will be accretive as the assets stabilize from the beginning of 2018 and thereafter.

The first of these is our renovation of the Army Navy Club building, a boutique trophy building that overlooks the park at Barrington Square and is adjacent to two major Metro stops in the heart of the CBD in D.C. We are improving the value of this extremely well located asset by applying our knowledge of the tenant it needs to create attractive and adaptable amenity space. We are also upgrading the building's lobby and systems and creating access to a renovated penthouse and rooftop. We plan to spend approximately $4 million on the improvements and expect to generate an incremental annualized NOI of approximately $2 million upon stabilization.

Next are the unit renovation programs at The Wellington and at Riverside Apartments. We are creating value by renovating units as they turnover at these assets. Both assets are located in submarkets with a significantly greater than average affordability gap between Class A and B monthly rent premiums. The large rent differential between A and B units enables a well renovated B asset to achieve a healthy rent premium over an un-renovated asset.

We have been able to generate a high teens return on costs with the renovation dollars that have been invested. We expect to spend a combined total of approximately $20 million on unit renovations at both assets through the end of 2018 and to generate an incremental annual NOI of $4 million to $5 million following the completion of the entire renovation program.

Fourth is the development opportunity of approximately 400 additional units on available land at The Wellington. This ground-up development named The Trove, will create a Class A offering at the eastern end of Columbia Pike in South Arlington, a submarket with limited new supply. It will also provide us the opportunity to offer multiple price points within a single apartment community, thereby increasing existing tenant retention as well as prospective tenant conversion.

We are currently expecting to break ground in the first quarter of 2017. The asset is expected to generate between $8 million and $8.5 million of incremental NOI in its first full year post stabilization.

Fifth is a development opportunity of approximately 550 additional units on site at Riverside Apartments which is located near Metro in the dynamic Huntington Metro Corridor. This submarket is experiencing significant investment-led economic growth and improvement. Major employers such as The Patent & Trade Office, the National Science Foundation, and MGM National Harbor Resorts, are expected to increase the employment base within three miles of the property by approximately 10% over the next 15 months.

Multifamily supply/demand dynamics are expected to remain favorable for the foreseeable future. We expect to break ground on this development in the second half of 2018 and the asset is expected to deliver in phases beginning in 2020. It is expected to generate between $12.5 to $13 million of incremental NOI after it is fully built out and in its first full year post stabilization.

Finally, in retail we plan to create value at Spring Valley Retail Center, recently renamed Spring Valley Village. We will be utilizing additional onsite density to build a two-story mixed use building to expand this high quality shopping center located in one of Washington, D.C.s most affluent neighborhoods. We expect to spend approximately $5 million and generate incremental stabilized annualized NOI of $500,000 to $700,000.

We are in the early stages of planning other medium to long term growth opportunities that include a ground-up development of additional units at the Ashby located in the affluent neighborhood of McLean, as well as potential mixed use redevelopment of the Montrose and Randolph Shopping Centers which are located in the White Flint growth zone in Montgomery County.

All of our additional internal NOI growth opportunities are either proven unit renovation programs or ground-up development on sites already owned by Washington REIT where we have a deep knowledge of the submarket and our customers and where we can leverage our existing operating platform.

Now I would like to touch on our portfolio activity and some of the broader trends we are seeing in the Washington and Metro region. Starting with job growth, our region created an impressive 81,100 jobs over the last 12 months to June, 2016. This growth is more than double the annual average of 37,700 jobs generated between 2011 and 2015 and marks 18 consecutive months of solid year over year job growth. Job growth in professional and business services also remained strong with approximately 19,000 jobs created over the last 12 months versus an annual average of 8,000 between 2011 to 2015. Our region's job growth points to a fundamental recovery that began in 2015 and continues to build momentum this year.

Moving to the office market, both the District and Northern Virginia experienced increased net absorption and leasing velocity. Quality urban infill Metro centric assets continue to outperform the market. And although concessions remain high across the board, there is some growth in net effective rent to high quality Metro-served downtown assets. Rent for more commoditized products remains flat. Our office portfolio continues to outperform most submarkets on occupancy as our focus remains on tenant retention and the ability to strategically push rents higher where appropriate to do so.

As we approach stabilization in the office portfolio, we are now filling vacancies in spaces that have been more difficult to lease and are doing so in a competitive marketplace.

In retail, demand continues to outpace supply and vacancy remains 200 to 400 basis points below the national average while net effective rents for neighborhood and community shopping centers continues to rise. The local economy remains strong with average household income tracking nearly 60% higher than the US average and regional job growth continuing to fuel demand.

Finally, our region has a dearth of quality retail products and high quality retail space attracts higher rent paying tenants. We see this in current activity at our Bradley and Fox Chase Shopping Centers where we have strong traffic and multiple users looking at our vacancies.

In multifamily, the Class B market continues to benefit from economic and demographic trends driving the need for more affordable housing options. In addition, job growth has been strong in the leisure, hospitality and retail sectors, and this is expected to generate further demand for Class B apartments. According to Delta Research, Class B vacancies dropped marginally in the second quarter. That said, historically high levels of Class A products will continue to deliver over the next 12 months limiting the rental growth prospects for both Class A and Class B products.

We believe our strategy to drive rental growth through unit renovations at select Class B properties located in submarkets with a wider than average affordability gap between Class A and Class B rents, will continue to be successful. We expect that unit renovations will enable us to profitably engineer long term rent growth at assets such as Riverside Apartments, The Wellington, The Ashby, and 3801 Connecticut Avenue.

Now, I would like to turn the call over to Steve to discuss our financial and operating performance in the second quarter.

Thanks, Paul. Good morning, everyone.

Second-quarter net income was $31.8 million, or $0.44 per share compared to a net loss of approximately $2.5 million or $0.04 per share in the second quarter of 2016. The difference is primarily due to the recognition of a $24.1 million gain on the first sale transaction of the suburban Maryland office portfolio this quarter.

Second quarter core FFO per share increased 9.5% to $0.46 compared to $0.42 per share in the second quarter of 2015. $0.01 of the increase was due to a deferred tax benefit recognized following the sale of the (inaudible) Station land this quarter. Core FFO is growing partly due to same-store NOI growth which includes rental growth, lower bad debt, higher reimbursements and operating expense savings. Core FFO is also growing as a result of increased contribution from The Maxwell, Silverline Center, The Wellington, and Riverside Apartments.

In addition, we have decreased interest expense through the pay down of secured debt this quarter due in part to using proceeds from our equity offering.

Second quarter same-store NOI increased 3.9% over the prior year. Same-store rents increased 190 basis points year over year and same-store physical occupancy was 92.7% at the end of the quarter.

Core funds available for distribution or core FAD was $0.32 per share for the quarter and $0.73 for the first half of 2016, a slight improvement over the $0.71 delivered in the first half of 2015. We continue to project a full-year core FAD payout ratio of 85%.

Starting with office, same-store NOI grew 5.7% and rents grew 210 basis points year-over-year due to annual rent increases at several of our properties located in the central business district. Office NOI also benefited from higher reimbursements, collections of bad debts, and increased parking revenues.

Same-store office cash NOI grew 4.7% and rents grew 150 basis points on a year over year basis. Same-store and overall office physical occupancy are slightly lower than in the second quarter of 2015 due to some expected office tenant move outs that occurred. In comparison with the first quarter of 2016, our same-store physical occupancy grew 30 basis points to 91.8%.

With minimal leases rolling this quarter, and only 2.3% of our office portfolio rolling in the remainder of the year, our leasing volumes this quarter was up. We leased approximately 59,000 square feet of office space with new leases achieving an average rental rate increase of approximately 14.5% on a GAAP basis, and 4.7% on a cash basis. Renewals were 14.2% higher on a GAAP basis and 2.9% higher on a cash basis. The same-store office portfolio was approximately 92.5% leased at quarter end. Going forward, our office lease expirations in 2017 are a manageable 11.9% of our annualized rent and drop to 8.3% in 2018.

Our office portfolio continues to outperform in nearly all submarkets across the District, Northern Virginia and Maryland.

Moving onto to retail, our same-store portfolio experienced strong rental growth of 320 basis points. Retail same-store NOI was negative due to an increase in real estate taxes stemming from increases in property assessment values across our retail portfolio. That said, year over year retail NOI comparisons continue to negatively be impacted by vacancy from tenant move outs that occurred in 2015. As a reminder, two large vacancies that were created last year have been released at higher rents that are expected to commence later in 2016. Our same-store retail portfolio was approximately 94% leased as of June 30, 2016 and has stabilized.

We leased approximately 15,000 square feet of retail space, with negative cash rent spreads which we believe are not representative to trends in the rest of our portfolio, as they include a storage space lease.

Multifamily same-store NOI was up 5.9% year over year, driven by better operating expense management and the fact that our portfolio has burned off historical rent concessions and abatements.

Rents were up 20 basis points on a year-over-year basis. Multifamily same-store physical occupancy on a square footage basis improved by 50 basis points year over year, and by 30 basis points over first quarter 2016. The same-store portfolio into the second quarter, 94.8% occupied with overall occupancy at approximately 94.4%. Our same-store multifamily portfolio was approximately 98% leased as of June 30, 2016 and is stabilized.

Turning to guidance, we have tightened our 2016 core FFO guidance by $0.04 to a range of $1.74 to $1.77. Which raises both the bottom end as well as the midpoint of our previous guidance range by $0.04 [brief audio interruption] third quarter to date and benefitted from an extremely mild fourth quarter in 2015. That said, we are still raising same-store guidance overall and for office and multifamily.

We expect same-store retail NOI to range between negative 1.5% to negative 1%, primarily due to increased real estate taxes and the timing of lease commencements. We currently expect a range of $7.1 million to $7.6 million of contribution from Silverline Center, assuming our anchor lease commences as planned in September.

We continue to expect $2.5 million to $2.7 million of contribution from The Maxwell. Our interest expense is projected to range between $53 million to $54 million and our G&A expense is expected to be approximately $19.5 million excluding severance.

The asset recycling that Paul detailed will strengthen the left side of our balance sheet by improving the quality of our portfolio. More specifically, by allocating capital out of suburban office and into urban infill, value add multifamily, we expect to improve the stability of our cash flows, reduce our recurring leasing capital requirements, and increase our NOI and FAD growth trajectories over time. Furthermore, a greater level of parity between our asset classes will also better diversify our cash flow and reduce its risk profile.

By the end of 2016, we expect to further strengthen the right side of our balance sheet by further deleveraging. The completion of our asset sales follow the equity offering and will allow us to pay down debt over the balance of 2016. The debt pay downs, coupled with the growing EBITDA that we expect to generate from large lease commencing in the second half of this year, should allow us to lower our debt to EBITDA to the low 6s by yearend. We expect to have reduced our secured debt by $266 million in 2016 of which we have already repaid $164 million.

Finally, we have entered into a new $150 million 7-year unsecured term loan facility with members of our bank group to further term out debt. The facility has a delayed draw term of up to six months from July 22nd. We plan to draw the term loan in the fourth quarter when we will also be able to pay the $100 million of secured debt without penalty that is otherwise scheduled to mature in 2017. We also have another $50 million of secured debt that we can repay in the first quarter of 2017 that we will refinance by drawing on this term loan. The term loan's July 21, 2023 maturity fits well on our debt maturity ladder. We have entered into a forward swap in the term loan to achieve a 2.86% all-in fixed interest rate commencing at the end of the first quarter of 2017 once it is fully drawn.

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

Thank you, Steve. We have successfully executed multiple strategic objectives this quarter. First, we have closed on the first tronch of a sale that will transform our office portfolio from suburban to predominantly urban product. Second, we have reinvested the capital in a lower risk, higher growth, value add multifamily opportunity imbedded with multiple phases of NOI accretion. And finally, we have successfully raised equity capital for the first time since 2009 and expect to further strengthen our balance sheet by yearend.

Following the sale of our suburban Maryland office assets this year, our portfolio will be predominantly located in the heart of downtown D.C. and in urban infill centers in Northern Virginia. Our multifamily portfolio is almost entirely located inside the beltway and in well-amenitized, transit-linked neighborhoods. And finally, our retail portfolio is located in strong neighborhood centers across the region and is imbedded with excellent long term redevelopment opportunities.

We have maintained our strategic direction and improved the performance of our portfolio through challenging market conditions. Washington REIT remains the pure play on the Washington Metro region which is showing signs, strong signs of a recovery led by a robust, private sector growth. We are a much stronger company today and among the best positioned to benefit from a continued recovery in the Washington Metro region.

With that, Operator, please open up the call for questions.

(Operator Instructions). Blaine Heck.

Thanks. Steve, on the total same-store NOI guidance, you guys have been -- well thus far this year we've seen same-store NOI of 2.5% and now 3.9%, so I think guidance implies a material drop to averaging around negative 1% for the rest of the year. So first of all, is that in the right ballpark? And if so, it seems like the drop is more than weather related. So is there something else that might be a headwind in the second half I'm not thinking of?

Blaine, this is Steve. I think as we pointed out, clearly we've raised the guidance overall for the year. The comps are tougher in the second half of the year and it is we had the mildest fourth quarter in years last year so we're expecting a normal winter and normal utility and weather related costs in the fourth quarter in our current guidance and we basically had none last year. And we've also recognized that we're having record heat so far in the third quarter so we're projecting higher utility costs in the third quarter. That said, that's going to effect the office and the retail portions of our portfolio more. We're still expecting same store growth in multifamily in both the third and the fourth quarter.

Okay, that's helpful. Then Tom or Paul, concessions in the market remain substantially higher than any other market, so can you just give a little bit more color on market fundamentals and whether there's anything out there that you see that gives you hope that leasing costs might decrease in the future?

Blaine, it's Tom. As we've messaged in previous calls, we do see TIs remaining stubbornly high. I think a lot of that is just a fundamental shift in the market in terms of what tenants are demanding. And the offset for us has been we're getting generally a little longer terms, we're getting a little better rent bumps, and those things are offsetting somewhat the higher concessions. I'd like to believe that we're going to see that, as the market tightens we're going to see that turnaround. But D.C. now has been 8%, 9%, 10%, depending on the submarket, vacancy. And usually you start to see the free rent burn off a little bit and TIs start to squeeze down. That has not really occurred and I think a lot of that is just tenants are demanding high TIs because they want better space because they're shrinking their footprint, they're taking less space per worker, and so we consequently, want better space. I think that's what we're seeing.

Additionally, I think just to make sure we're apples to apples on our comparisons versus our peer group, I think we include incentives in our numbers and I know that might skew our numbers a little bit on some of the comparisons. But anyway, I think overall the answer to your point is that concessions are remaining somewhat stubbornly high.

Yeah, just to follow up on that, I would have thought that concessions just as a percentage of rent would be higher for suburban office properties than CBD and therefore we'd see that ratio kind of migrate down for you guys now that you've gotten rid of some of the suburban properties. So I'm curious if that is actually the case or is it actually the opposite in D.C. where concessions kind of as a percentage of rent are higher in the CBD?

Again, I think the suburban concessions are high in a lot of the new leasing. Especially we saw that at Silverline on our lease up there, some of the other spaces. But the CBD, frankly this is a market phenomenon where the concessions are staying high across the board. A lot of that's driven by the new product that has to offer significantly high TI and free rent packages to attract tenants.

John Guinee.

Great. John Guinee here. Thank you very much. Just kind of continuing on that thought process, Tom, is the market now essentially turnkey TI, turnkey moving costs all paid and that is ending up driving the high concessions? And then can you talk a little bit about where there is actually velocity in activity, which submarkets? And which submarkets appear to have very little or no tenant interest? And particularly talk about the stubbornly high vacancy in the [Rosslyn Balston] Corridor.

Yeah, that's -- I think I'm going to make some comments, I think Paul wants to make a few as well. First of all, one of the changes in the market that has been, again, sticking, and especially in the CBD, is where tenants asking for a certain percentage of the free rent to be able to be converted to TIs or moving expenses or soft costs, things like that, that imply they want a turnkey solution for the buildout. And essentially they move out one day and move into the other place and come out of pocket with very little. So I think that sort of validates your point there on the turnkey. We're not providing a turnkey solution per se, but that's how they're getting to it. I think going to activity levels, we continue to see really good activity in the small to mid-size segment, I think that's where our portfolio competes very well, even in the B product. As long as you're near Metro. Metro is still the key. We're seeing good activity. And not only is it downtown is it important to be close to Metro, but especially in the suburbs, if you're not near Metro, I think Paul has some stats that he wants to refer to on the amount of absorption near Metro, but I think metro is the key. And that's where the activity is. Now going to RB and then specifically into Rosslyn, look, I think Crystal City is making very aggressive deals. They've been able to attract tenants out of those markets. And I think that has continued to impact those markets. If you take 1812 out of the mix in Roslyn, it's not quite as bad as it looks. They're doing some deals at the Twin Towers and some other places, so you're seeing decent activity in Roslyn start to pick up. So on balance, I think it's just a little bit of a cannibalization of one market to another.

Yeah, John, it's Paul. The only other things I'd add, I mean when we look at the second quarter activity, stepping back for a second for the District, let's call it overall 12% vacancy, suburban markets kind of averaging around 20. So definitely a have and have nots. When we look at Northern Virginia that probably had a pretty tough year last year, I mean I'm looking at the second quarter statistics, there were 41 leases done over 21,000 square feet which is over double the quarterly average. So there's definitely some activity out there. I agree with Tom, the tenant eating contest between RNB and Crystal City will continue until they get to kind of more balanced levels.

But the one thing that is clear, especially in Northern Virginia, if you were within a half mile of a metro stop, in the aggregate the buildings in the deals they got done, there was 1.8 million square feet of positive absorption on the office front. But if you were off metro over a half mile, there was 1.3 negative absorption on deals. And so I think the trend is pretty clear.

Downtown, I think we've beaten concessions to death on this call, but downtown I think that we are still comfortable with the activity that we're seeing in the CBD. We talked a little bit about in our narrative about the work that we're doing on the Army Navy Club and this time last year when we were first putting the pen to paper, saying here's how we want it to roll out, I think we were in the low to mid 60s is what we were pro forming on rent. Right now for the top floor at the Army Navy Club, we've got proposals out in low to mid 70s. So we are seeing some movement. I think that we're trying to follow the appropriate size tenants for the floor plates, but commenting on markets that we like and we don't like is probably too broad. I mean we're still big believers in the CBD. We actively continue to look for value add opportunities in and around Metro sties downtown here. I'd say probably the CBD in the east end and maybe just dipping our toe into the west end. I think the suburban market is really a market by market hunt and we're not really looking there right now.

Okay, and then just refresh our memory, the advisory board was going to move to a big build to suit. Did that ever get financed and did that build to suit ever break ground?

So they are moving -- they got their equity deal put together. I don't know all the terms of the financing, John, but we are still planning on having them relocate from the property June 1st of 2019.

Michael Lewis.

Thanks. I missed some of the cost numbers on the six imbedded value add projects that you have. So what's the total incremental cost to generate that $27 million to $29 million of incremental NOI?

Michael, this is Steve. So we're -- I'm trying to remember, go back in my head. So we had the Army Navy and that's about $4 million that's imbedded in our capital plan for this year. We have the Spring Valley which is about $5 million, that's also in our plans for this year already. So when we talk about our capital plans for the year, that's already covered. We talked about the renovation programs. We've got two big ones ramping up that are underway now, The Wellington and now The Riverside. We've said over the next 3 years we're going to average about $7 million a year, total somewhere around $20 million between now and the end of 2018. And then I think the rest of it is our development which is primarily the 400 or so additional units at The Wellington that we call The Trove. And we're estimating about 550 units at The Riverside. If our research supports delivering at the right times, we think we'll go in the ground in early 2017 at The Wellington and if research still supports delivering on Riverside, we'll probably break ground the second half of 2018.

And I'm looking for the cost numbers on that, hold on a second. Yeah, so it's somewhere around maybe $250 million, $260 million. I mean we're still obviously in drawings and approval for the Riverside that's out there and it's likely to be done more in phases, not all built at the exact same time. In terms of capital requirements, assuming that we are on the earliest possible timeframe, the years that they would overlap would be 2018 and 2019. And I think you're in the $70 million to $75 million probably peak spend on those two developments. And if say we equitize it at the same capital structure we're at now, you're looking somewhere between $40 million, $45 million of equity per year when you get out to those years. I think that's totally manageable, so that's how we're thinking about the costs.

Okay, it's over a period of time but it's about $300 million to generate almost $30 million of NOI, so not a bad deal there. My second question, I don't know much you can share if anything, but I was wondering if you could talk about cap rates on those Maryland office sales, either during the quarter or what the overall cap rate will be when you sell these last two. However much you're able to share on pricing there. And then maybe also the cap rate on the apartments you bought during the quarter.

Michael, it's Paul. So once we're completed, the final pieces of the Maryland sale, including the asset that we're investment finals on right now, we'll be in the upper 7s. The number that is out there is clearing 200 a foot on the office portfolio, so we're consistent with that. And then on the Riverside acquisition, we were in the upper 5s going in, very quickly stabilizing into the 6s.

And then just one last one, this is kind of a follow up on the guidance (inaudible) what it implies for the second half of the year. It sounds like expenses are going to have a material impact. So you've been putting up positive rent spreads for I think several quarters. There hasn't been much market rent growth. In the second half, are we getting close to where those rent spreads are maybe under pressure, especially on a cash basis where you haven't had market rent growth while you've had bumps in the portfolio. Is that fair?

We're not projecting major changes in rents as part of our forecast for the rest of the year, Michael. It's really, it's just the comps. I mean we had such a mild fourth quarter last year, we had basically none of our normal related expenses. And this is a much hotter July than we had a year ago so we're already recognizing increased utility costs. I think that's more of it. And that's on the same-store. But we're still projecting good multifamily growth in the third and fourth quarter. They're not quite as affected by those types of costs. I think the real change for us is we've executed on a lot of transactions that are improving the company during the non-same-store, so you'll see impact of the acquisition that kicked in, the dilution of the sales, the equity offering, the refinancings helping the other way. And I think all of that settles out through the balance of the year.

Jed Reagan.

Good morning guys. How is the reception you're receiving for the two assets you're now looking to sell for the balance of the year? And do you have a rough estimate of the potential proceeds from those sales?

Well, Jed, we don't really comment on proceeds numbers when deals are out on the marketplace. What I will tell you is the multifamily assets we've seen, we've gotten good interest in it. I think that's a continuing trend in this region. Multifamily product continues to do well here from a per door number. And then the other opportunity is a small office asset and we have not made a decision right now on whether that's going to be sold or not. We are just kind of exploring our optionality on that.

Any color on the location of that building or anything else you can share on that?

South of here.

Okay. Are you seeing any changes in the pricing environment for some of these type of assets, particularly the noncore office type assets?

Absolutely, Jed. That's definitely something that we have seen evolve really predominantly over the last quarter. And I would look at it, if I'm breaking the investment sales market kind of up into tronches, core pricing still is hanging in there. And especially downtown and D.C. we're still seeing some good activity. I think the asset that's just coming out of 601 Penn, we think that will probably do well in the marketplace.

But when you get out into the suburbs, definitely a shift in tone from the lenders that we talk to and then definitely the deals from the Opportunity Funds that are going into kind of liquidation mode or recaps. We are definitely seeing more and more continued risk-off type measures. And I think especially over the last 30 days I think it's gotten more pronounced in terms of people are being, or buyers are being more discriminating on the types of risk that they're willing to take, both in terms of duration, price per pound, and specifically submarket risk.

I'm looking at our pipeline sheet right now and I'd say two-thirds of the office is what we would call value add/opportunistic. And we think it's going to be a struggle for probably half of that product to clear the marketplace. I definitely think deals, even deals that people are showing us, Jed, now are like, hey, Washington REIT, would you do preferred equity or would you do a mezz deal means to us there's just, there are shortfalls taking place in valuations and the capital stack is being reevaluated.

That's interesting. If you had to sort of peg a number on the correction or move you see in some of those values or cap rates, could you hazard a guess on the change in the last quarter?

Again, we haven't really -- there's so much product out there right now, but on the closings I would say kind of in the suburban markets, 5% feels about right. The problem is, none of these deals have closed, they're tied up. I'd say downtown on the quality spectrum, haven't really seen a lot of re-trading and repricing. We are seeing due diligence periods getting extended, we're seeing bid dates getting extended. I think that those, in my experience, those tend to be a little bit more red flags than not. But I think that's really more on the riskier product with less duration on cash flows or in submarkets that historically have higher vacancy rates.

Thank you for that color. You mentioned you're focusing your deal underwriting efforts on office and multifamily primarily. Just curious why retail isn't on the radar screen as much.

Love retail, we'll take it any way we can get it. I'm looking at my pipeline sheet right now, Tom. Excuse me, Jed. And we are tracking right now 32 office deals, 16 multifamily deals, and 6 retail deals. We just find that good retail doesn't really sell as much or doesn't transact as much in this region. I think a lot of people try to do the same thing that we do and that's look at improving the credit quality of your tenants and then we are looking at well positioned retail, potential redevelopment opportunities. But clearly if I were to look back in the three years that I've been here, I'd say retail hasn't even amounted to 10% to 15% of our pipeline.

Okay, that's helpful. And just last one maybe for Steve, what kind of rates do you guys think you could issue on 10-year unsecured debt today? And how about 10-year mortgage debt?

We just did seven years, because we didn't have enough proceeds after we did the equity offering. But I think under 4 on an unsecured bond deal. I just think you've got to have, to clear the bond market I think you've got to have bigger than just minimal index eligible size deals. I was actually hoping as one of our capital plans going into the year that we would have enough use of proceeds to do that this year because I think it's smart to term out debt. But I thought it was even better for the company to de-lever. And once we did that, we didn't need as much debt. So we went the 7-year and then swapped it to fixed at 2.86% for 7 years which we thought was a good source of capital.

And on the mortgage side, would you be kind of in that similar range as the bonds?

I think so. And again, we're not focused a lot on that because we've been trying to unencumber the balance sheet just to make us a stronger, unsecured borrower.

Dave Rodgers.

Good morning. Steve and Paul, maybe a question for you. Following up on the additions at both Riverside and Wellington, I think you said $250 million, $260 million of spend. I think that's about 8.25 yield, and so I guess I'm wondering if that's the number that you're communicating and if that's assuming no land. So I assume that's incremental spend. Maybe an all in yield on that? And the second part of that question would be, you quoted a high 5s on Riverside, did that include the land with the new development? I guess I'm just trying to think on an apples to apples basis if the development relative to acquisition is the same parcel.

All right, this is Steve. I'll take a crack at it and Paul can clean it up if there's something I miss. I was talking incremental spend because I think it was an additional capital question that I was trying to answer. So it did not include the land. I think we're looking at, in the case of the development at The Wellington, probably in the upper 6s initially and then within three years getting over 7. I think in the mid 6s at Riverside and getting over 7 around three years also is what we're thinking we're building to on those two assets.

The going in cap rate I think was the other question that you asked and that did not -- that was initially without the juice of the renovation returns. So renovation returns are going to bump us up into the 6s and the whole project grows into the 7s as they build in in layers.

And that gets most of, Steve. I guess the last part of that I would just again, which was the high 5 cap rate, does that include -- was that a fully baked land number or did you kind of break out the development land in that calculation?

The development land has been allocated to development. That is the land and the investment in the building of the existing asset.

Okay, great, that's helpful. Then maybe last, in terms of funding the bigger project, clearly the line can handle most of it. Do you have any plans for a construction loan as you move into 2017 for The Trove or even moving into 2018 which I know is a little further out there?

Well once we draw down on our term loan for refinancing, we're going to have very little outstanding on our line. I think we can handle -- and these aren't major spends per year. I think we can handle the construction financing on our line.

Okay, that's helpful. And I guess maybe, Paul, I'll ask you a thought around the incremental dispositions for the second half of the year. I think when you did equity you had kind of pulled back on the potential larger apartment sale in suburban and then obviously this quarter that came back and there's some additional assets that you're looking to sell. Is that just that you feel more opportunistic about sales or are you seeing more and more opportunities to invest and should we see any acquisitions kind of late this year or early next year as a bigger component of the spend?

I think, Dave, what you're referring to was last quarter there was an asset, a suburban office asset that was out there in discovery pricing. And basically we just looked down the road, the asset is performing well, and we decided that it remained consistent with what we're trying to achieve in the office space in our portfolio. I think that the apartment asset that's on the market right now is very consistent with us trying to turn over certain assets in our portfolio that we think have reached an inflection point. And then the other office assets that we're toying with bringing to the market in the fall, we'll make that decision once we have a little bit more price discovery on it. But we've made no resolutions in either direction at this time, Dave.

Okay, lastly, I guess the confidence in that acquisition pipeline that you're underwriting the deals, the 32, 16 and 6 in office, multifamily and retail. Do you feel better, neutral or worse about kind of the ability to go out and buy those accretively, long term accretively relative to the cost of capital today?

Well I think -- look, it's really every acquisition we do, and as a backdrop we've tried to prove to folks like you and our investors that every time we do a transaction, we go in with the mindset that we're here to create value. Okay? The 55 deals that I referenced, that I'm glad that you broke out into the three asset classes, I would say that those are deals that are in our universe, but we're not currently underwriting 55 deals. I'd say out of those 55, we're probably -- our interest is peaked on probably about 5 of them. And what that would mean is that we think there's an opportunistic buy there, that we can create value either through management, repositioning, or we think that it's in a submarket where it's one of these closed end funds that's monetizing the payback, their LP is in a rip off position, it might be in a submarket where we're willing to take some leasing risk. I can't emphasize enough though that if you see us do an office deal, it's most likely downtown and it's going to be by a Metro. We're going to remain remarkably consistent in that. And then in the B, we still like that B+ or unrenovated B multifamily space. And then as I said earlier, (inaudible) anchor shopping centers, we will go after those if we see one that's appropriate for our criteria.

(Operator Instructions). Chris Lucas.

I guess we're in the afternoon now. Good afternoon, guys. On the -- just a couple of detail questions. On the development projects at Riverside and Ashby, where are you in the regulatory process for approvals? I know you recently just got the approvals from Arlington County for The Trove. Where do those other two projects stand?

This is Tom, Chris. So on Riverside we have had preliminary meetings subsequent to the county's -- that's in the county of Fairfax even though the city is Alexandria, sort of that quasi area out there. And the county wants further densification. I think we're aligned with that. Our plans have been well received and I think we're progressing through the early phases of that approval process. Ashby, on the other hand, just got approval for an increased FAR on that site and so are -- we had done some preliminary work on that over the last few years, we weren't sure when the county was going to pay attention to that specific opportunity for us, but it just happened in the last month and so we are quickly working on design and on development plans at the Ashby.

So as we think about it, is the timing The Trove, the Ashby, then Riverside in terms of the development process? In terms of sort of which ones would sort of start first?

Chris, I think The Trove is a go as you know. I think Riverside and Ashby, my hunch would be probably that Riverside would edge it out just knowing the approval process especially as granular as McLean gets to be. So I would probably stack it in that order. We'll keep you posted if there are any changes on that though.

Then the last question for me so we can wrap this up is just on the timing for the anchor lease as the Silverline Center and then the two Michael's leases. When do those hit GAAP rent?

So Michael's at Bradley is hopefully hitting any day now. We're in final C of O. Cap One at Silverline, that is projected for September and then the other Michael's lease at Chevy Chase Metro is projected also in September.

Great. Thanks a lot, guys. Appreciate it.

I'm showing no further questions at this time. Now I would like to turn the call back over to Mr. McDermott for final remarks.

Thank you. Again, I would like to thank everyone for your time today and we hope that you enjoy the remainder of your summer. We look forward to seeing many of you on our upcoming non-deal roadshows in the very near future. Thank you, everyone.