Elme Communities (ELME) 2016 Q3 法說會逐字稿

Please stand by for realtime transcript. Welcome to the Washington real estate investment trust second-quarter 2016 earnings conference call.

(Operator Instructions)

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 information. Ms. Engman please go ahead.

Thank you, and good afternoon everyone.

Please note that our conference call today will contain financial measures, such as FFO core FFO, NOI and core FAD that are non-GAAP measures as defined in reg G. Please refer to our must recent financial supplements and to our earnings press release, both available on our Investor page on our website, and to our periodic reports filed with the us SEC, for definitions of revenue information regarding our use of these non-GAAP financial measures and a reconciliation of them to our GAAP results. Please note that some statements during the call are forward-looking statements within the Private Securities Litigation Reform Act. Forward-looking statements and the earnings, release along with our remarks are made as of today, and we undertake no duty to update actual events unfold. Such statements involve known and unknown risk uncertainties and other factors that may cause actual results to differ materially.

We provide these risks in our SEC filings, please refer to pages nine through 24 of our form 10-K for our complete risk factor disclosure. Participating in today's call with me will be, Paul McDermott, President and Chief Executive Officer, 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, and good afternoon everyone. Thanks for joining us on our third quarter 2016 earnings conference call.

Washington REIT delivered core FFO of $0.45 per diluted share and raised elements of our full-year guidance primarily due to a strong operational performance that exceeded expectations. In addition, we achieved major capital recycling goals by quarter end, enabling us to improve our asset mix, further pay down debt and thereby strengthen both the left and right side of our balance sheet. Overall there are four key achievements I would like to highlight this quarter.

First, we improved overall portfolio physical occupancy sequentially by 210 basis points to 93.2% at quarter end. Which is the highest rate achieved in over five years. Second, we raise the bottom end of our 2016 core FFO range, as well as our projections for retail, same-store NOI growth, and for Silverline Center expected NOI contribution in 2016.

Third, we completed the sale of the suburban Maryland office portfolio by successfully executing the final sale transaction, which was structured in a reverse 1031 exchange in conjunction with the acquisition of Riverside Apartments and Alexandria, Virginia. And finally, we further deleveraged to end the quarter at approximately six times net debt to adjusted EBITDA, creating additional flexibility on our balance sheet to continue to execute value add opportunities in 2017.

Let me start by placing our year to date 2016 capital allocation in the context of our broader strategic plan, to elevate the quality of our portfolio and strengthen our balance sheet. Since we put the plan in motion, in late 2013, Washington REIT has sold approximately $900 million of mostly legacy suburban office and suburban medical office assets. Over the same period, we have reinvested approximately $750 million into higher quality urban infill transit linked assets, of which the majority are multifamily properties.

We have also refinanced and paid down debt to achieve and sustain a net debt to EBITDA ratio in the low to mid sixes. We believe our capital allocation has created value for shareholders and enabled Washington REIT to outperform during a period of challenging real estate fundamentals in our region. We expect to continue to realize the values created by our execution.

More specifically, our allocation out of legacy suburban office and into value add multifamily is expected to reduce our recurring releasing capital costs, improve our leased economics, and the stability of our cash flows and increase our NOI and FAD growth trajectories over time. As a measure of the improvement in the quality of our portfolio, resulting from our capital allocation, our year to date average office cash rents per foot, have increased from approximately $32 in the first 9 months of 2013 when the portfolio transformation began to approximately $41 year to date.

Since 2013, we have also notably improved our retail portfolio by purchasing Spring Valley Village in DC, selling a legacy asset, and upgrading tenant quality across the portfolio. As a result, average retail cash rents have increased from approximately $17 in the first nine months of 2013 to approximately $29 year to date.

To conclude on capital allocation, we continue to underwrite well-located value add multifamily opportunities, such as Riverside Apartments and The Wellington, as well as Metro centric office opportunities in the district. But do not expect to close on additional asset acquisitions in 2016. Our remaining planned disposition is Walker House Apartments in Gaithersburg Maryland, a Legacy Suburban multifamily assets that is now expected to close in 2017, with timing impacted by local government and tenant review period as mandated by Montgomery County law.

Now, I would like to provide you with a detailed update on our existing portfolio, it's competitive positioning in the Washington Metro area, as well as an update on all 6 of the key embedded NOI growth drivers we outlined on the last call.

Starting with office, our now predominantly urban infill and Metro Centric portfolio contributed approximately 49% of our third quarter NOI that drops to approximately 46% on a pro forma basis. Currently, our assets in the district contributor approximately 52% of our office NOI, while those in northern Virginia contribute approximately 48%. A positive move in office is that our portfolio is benefiting from specific trends that are impacting leasing within the region.

In the district, we have observed that availability of will located office space priced at mid-$40 to mid-$50 gross rents is limited. In this price range, we see good steady tenant activity with vacancy rates improving as supply is removed to be repositioned into trophy office space priced in the mid to high 70s per foot. All of our district office assets are in excellent locations with the majority offering rents in this pricing sweet spot.

Our average gross rents for office yields in the district is in the high 40s per foot and we are beginning to see net effective rents rise for this product segment. Furthermore, the brokerage community forecast that rents in this price range will rise faster than it will four trophy product due to the reduced supply coupled with steady demand. That said, we are also making good progress on our renovation of the Army Navy building, which is a unique boutique trophy asset that overlooks Farragut Square Park and is adjacent to 2 Metro stops in the heart of the CBD in the district.

Our renovation plan for the building is focused on delivering a high-end amenity package with aesthetic upgrades to lobbies and common areas. The repositioning caters primarily to small to midsize tenants that want image and prestige at a reasonable price. We have are ready signed one new lease and expanded an existing tenant to a slightly larger space at rents in the upper 60s.

Thereby validating our pro forma underwriting expectations of mid $60 gross rents. We have made encouraging progress, even though our renovations are ongoing and expect to generate additional stabilized annualized NOI of approximately $2 million above 2016 NOI. I would like to highlight that the difference between our renovation of the Army Navy building and the previously referenced conversions of the office assets to trophy is that we are investing approximately $4 million of repositioning capital and applying our knowledge of tenant needs to generate the highest possible return on cost.

This asset has an appealing historic facade and presence that we will not alter. As a result, we are able to position this asset in the upper 60s gross rent per foot, whereas the more extensive repositioning is planned in the district required gross rents to be in the mid to high 70s to justify the capital investment.

We believe our market knowledge and extensive research has enabled the scope and underwriting of our asset repositioning to hit the sub market sweet spot, as we experienced last year with the successful lease up of 1775 I Street in the CBD in DC and Silverline Center in Tyson, Virginia. Shifting to northern Virginia office, the continuing trend is that leasing remains heavily concentrated along transportation spine and at Metro accessible locations.

All of our office assets with the exception of one are proximate to strong transportation links including Metro. Moreover, the majority of our northern Virginia office buildings are above 93% leased, and as they stabilize, our ability to drive net effective rents higher is increasing. Most notably at 1600 Wilson, located in the challenging Rosalyn sub market.

Our office portfolio as a whole, caters more to small and midsized tenants than it does to large tenants. Year to date, our average office deal is approximately 5200 square feet. Last year our average office deal was approximately 5900 square feet and almost 80% of our deals were 6000 square feet or below.

Our numbers reflect the average deal size for our market. And we are at the highest level of tenant activity occurs. The smaller [for place] of our building naturally sets up well for small and midsize tenants. We're also strategically focused on creating a strong value proposition for the tenant demographics through our spec suite program that provides prebuilt space and reduces the time it takes tenants from lease signing to being up and running.

We have found that tenants are willing to pay for speed to occupancy and for the additional value created by having connected telecom infrastructure and office equipment. We have been especially successful at implementing innovative short-term leasing solutions to optimize our vacancy and reduce downtime in-between longer-term leases.

Of course, we also have large tenants in our office portfolio and a focus tenant retention program that is proven successful with the renewals of large tenants such as World Bank, Booz Allen Hamilton in the fourth quarter of 2014, and Epstein Becker & Green in the first quarter of 2016.

The two large tenants we lost expanded so significantly that we were unable to accommodate their new footprint. Our strategy is to opportunistically mitigate single tenant risk as demonstrated by the breaking up of single tenant space at Army Navy and to multiple spec suites. Meanwhile, we are working diligently on our future largely lease expirations and look forward to updating you on our progress.

Moving onto multifamily, our portfolio consists of 4480 unit across the Washington Metro region and contributed approximately 28% of our third quarter NOI. Northern Virginia contributes approximately 72% of multifamily NOI, with the district contributing approximately 20% and Maryland approximately 8%. With the exception of one asset, all of our multi-asset our located inside the Capital Beltway in urban infill locations with strong transportation and amenity links.

Currently, approximately 20% of our multifamily portfolio is Class A, which grows to approximately 30% upon the addition of approximately 1000 new Class A units at the Wellington and Riverside. The remaining 80% is well located Class B to B-plus assets, which include properties that are being renovated.

In our region, Class B multifamily has outperformed Class A on vacancy rates over the past year and continues to grow rents driven by value conscious renters seeking affordable well located product. The new supply wave has been a Class A units whereas the largest and fastest-growing renter cohort earns between $50,000 and $75,000 annually, which in our market translates into solid demand for be a B-plus multifamily product.

We have therefore seen a flight to value, which has resulted in an increase in Class B occupancy and rents over the year. According to our analysis of third quarter 2016 CoStar data on the Washington apartment market, overall Class A vacancies stood at 8.5% while Class B vacancies stood at 4.4%.

On our last call, we discussed an ongoing embedded multifamily NOI growth driver in the unit renovation program at the Wellington and at Riverside Apartments. Where we are renovating units as they turnover at these assets. Both assets are located in sub markets were 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 unrenovated asset. Thus far 164 units out of 680 eligible units have been renovated at the Wellington, and 29 out of 850 eligible units have been renovated at Riverside Apartments. We have been able to rent generate a mid to high teens return on cost on the renovation dollars that have been invested at these two assets to date.

We expect to spend a combined total of approximately $22 million on unit renovations at both assets through the end of 2018 and to generate incremental annual NOI of approximately $4 million above 2016 NOI following the completion of the entire renovation program. Furthermore, we remain on track to commence the ground-up development of approximately 400 additional units on available land at the Wellington in the first quarter of 2017, and approximately 550 additional units on site at Riverside Apartments in the second half of 2018. As we are stated in the past, continued positive market conditions will be validated prior to the commencement of either project.

And finally on retail, our portfolio is largely compromised of neighborhood grocery-anchored shopping centers and contributed approximately 23% of our third quarter NOI. Our assets are predominantly located in Maryland and Virginia with two properties in the district. Our retail portfolio and occupancy has increased 350 basis points sequentially due to lease commencements at two large vacancies.

We continue to experience strong rental growth from in-line retailers reflecting positively on the strength of our portfolio. As mentioned on the last call, we plan to create additional value for the development of a two-story mixed use building on site at Spring Valley Village. We will be utilizing additional on-site density to expand this high quality shopping center located in one of Washington DC most affluent neighborhoods. We expect to spend approximately $6 million and generate incremental stabilized annualized NOI of approximately $500,000 for the 2016 NOI.

To conclude, I would like to address job growth in the Washington Metro region, which created an impressive 76,100 jobs over the 12 months to September 2016 this growth has more than double the annual average of approximately 32,000 jobs generated between 2000 and 2015. Job growth in professional and business services also remained very strong with approximately 26,000 jobs created over the past 12 months versus an annual average of 10,680 jobs between 2000 and 2015.

At 34% of total job growth, professional and business services job growth is higher today than at any point in the cycle. Which reflects the high-quality jobs being produced by our regional economy. Our regions job growth plans to a fundamental recovery that began in 2015 and continues to build momentum this year.

Job growth has kept demand and multifamily and retail strong and we expect it to also stimulate office demand as we continue to grow professional and business service jobs at the current pace. Now, I would like to turn the call over to Steve to discuss our financial and operating performance in the third quarter.

Thanks, Paul. And good afternoon, everyone.

Third quarter net income was $79.7 million, or $1.07 per diluted share. Compared to net income of $600,000, or $0.01 per diluted share in the third quarter of 2015. The difference is primarily due to the recognition of a $77.6 million gain on the second sales transaction of the suburban Maryland office portfolio this quarter.

Third quarter 2016 core FFO of $0.45 per diluted share was unchanged over the prior-year and included positive same-store NOI growth and interest expense savings. As well as non-same-store NOI contribution from Silverline center, Riverside and the Wellington. All of which helped offset the FFO dilution from asset sales and additional shares issued this year.

Third quarter same-store NOI increased 1.9% over the prior year. Same-store rents increased 150 basis points over third quarter 2015 and same-store physical occupancy improved 130 basis points to 94.2% at the end of the quarter.

Core funds available for distribution, or core FAD, was approximately $27 million for the quarter and $78 million for the first 9 months of 2016, representing an 81.1% and 82.6% payout ratio respectively. We continue to project a full-year core FAD count ratio in the mid-80s.

Starting with office, same-store NOI grew 1% over the third quarter 2015. Annual rent increases across the portfolio led to 170 basis points of year-over-year rental growth and lease commencements, particularly at 1775 I Street, contributed to higher occupancy gains over the corresponding prior-year period.

Same-store office physical occupancy increased 60 basis points sequentially and 150 basis points over third quarter 2015 to end the quarter at 92.3% primarily due to the aforementioned lease commencement at 1775 I Street and also at 1600 Wilson Boulevard and Fairgate. Overall office physical occupancy increased by 300 basis points sequentially to 90.5% primarily due to the commencement of our anchor tenant lease as Silverline Center.

We leased approximately 212,000 square feet of office space this quarter with new leases achieving an average rental rate increase of approximately 12% on a GAAP basis and 4.5% on a cash basis. Renewals were almost 18% higher on a GAAP basis and 11% higher on a cash basis.

We believe these rent spreads reflect the market trends which Paul mentioned, and are positive for many of our office assets, enabling us to increase net effective risk particularly on renewals. With the exception of periodic large lease rollovers that are susceptible to greater market competition we believe the rental spreads this quarter achieved by leasing mostly to small and midsize tenants, represent the primary strength of our office portfolio.

Our same-store Washington DC office portfolio continues to outperform the region with occupancy approximately 400 basis points above overall DC market occupancy. Our office portfolio is also significantly outperforming in Northern Virginia, where our same-store occupancy is a most 15% higher than the markets.

Moving onto retail, the highlight this quarter was a 350 basis point sequential increase in same-store physical occupancy to 95.6%. As our two large vacancies were both occupied by a prominent national retailer. Our same-store portfolio grew 3.5% over the prior-year.

Primarily driven by 200 basis points of rate growth, as well as other revenue including increased reimbursement, and higher than expected collections on previously reserved bad debt. We leased approximately 76,000 square feet of retail space predominantly through renewal leases, which achieved an average rental rate increase of approximately 10% on a GAAP basis and 5% on a cash basis.

Lastly, multifamily same-store NOI was up 1.7% over third quarter 2015, driven by 50 basis points of rent growth as well as occupancy gains. Multifamily same-store physical occupancy on a unit basis improved 290 basis points over third quarter 2015 and by a130 basis points over second quarter 2016. On a per-unit basis, the same store portfolio ended the third quarter 96.4% occupied with overall occupancy at approximately 94.5%.

Moving onto the balance sheet, we exceeded our goals for 2016. And have done so at a faster pace than we outlined at the beginning of this year. The completion of the suburban Maryland office portfolio sale in the third quarter enabled us to further pay down debt. We have reduced our secured debt by $266 million with a $102 million 5.6% interest rate loan prepaid without penalty in early October.

Today, our secured debt to total assets is approximately 5%, down significantly from approximately 13% at year-end 2015. We have successfully unencumbered our balance sheet and created greater flexibility to pursue value at opportunities.

The debt paydown coupled with the growing EBITDA generated by large leases that commenced this quarter have enabled us to lower our net debt to EBITDA to 6 times at quarter end. Also, we have opportunistically raised approximately $30 million of gross proceeds through our ATM program at an average price of $33.32. To further strengthen our balance sheet and successfully pre-fund value at opportunities in 2017 when we have planned development spend.

In the fourth quarter, we plan to draw $100 million on our term loan, which ultimately refinances $100 million of the secured debt prepayment. In the first quarter of 2017 we expect to draw the remaining $50 million of the term loan to further refinance secured debt. As reminder, we've entered into interest-rate swaps for 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. The term loan July 2023 maturity fits well on our debt maturity ladder.

Now turning to guidance, we have raise the bottom end and thereby tightened our 2016 core FFO guidance range by $0.01. Our new midpoint is $1.76, which is $0.05 higher than we achieved in 2015, while still partially absorbing dilution from asset recycling and the issuance of equity through our second quarter equity offering and our ATM program. The following underpins our tightened and raised guidance range. Overall, same-store NOI growth of approximately 1% and same-store office NOI growth also of approximately 1%.

As we mentioned on our last earnings call, we expect comparisons to be more difficult for the fourth quarter of this year as we benefited from mild weather, as well as higher lease termination fees in the fourth quarter of 2015. That said, we expect office same-store NOI growth to be positive in 2017 and we will provide more details when we give 2017 guidance on the next call.

We expect same-store multifamily NOI growth of approximately 3% and we now expect same-store NOI -- same-store retail NOI to be approximately flat from our previous range of negative 1.5% to negative 1%. This increase in the projected retail NOI is primarily due to better results in the third quarter driven by higher-than-expected reimbursement revenue and higher collections of previously reserved bad debts.

We continue to expect weather-related comparisons to last year to be difficult for retail in the fourth quarter. But the large leases that have commenced this year are expected to provide positive NOI growth in 2017. And again, we will give further details when we provide guidance for 2017 on our next call.

We have raised our expected NOI contribution from Silverline Center to $7.6 million to $7.8 million and we continue to expect $2.5 million to $2.7 million contribution for the Maxwell. Our interest expense is projected to range between $53 million and $53.5 million and our G&A expense between $19 million and $19.5 million including salaries.

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

Thank you, Steve.

With the sale of the suburban Maryland office portfolio now complete, we believe Washington REIT is a new unique pure play on the Washington Metro region. We have a predominantly urban centric well located portfolio that creates a compelling value proposition for office multifamily and retail tenants in our region.

Addressing those segments of the market that have steady demand and limited supply. Importantly, we have a strong balance sheet with solid leverage ratios that will enable us to generate multiple phases of NOI growth through a strategically timed series of 6 relatively low risk growth projects. The renovation programs at Army Navy, the Wellington, and Riverside are beginning to validate our expected returns through ongoing lease up.

The ground up development at Spring Valley, the Wellington, and Riverside our differentiated in that we are adding density on-site already controlled by Washington REIT. And where have a deep knowledge of the sub market and our customers, and where we can leverage our existing operating platform.

Our continued goal is to raise our long-term risk-adjusted growth profile by taking targeted calculated debts in a market where we have the knowledge and expertise to make the best long-term capital allocation decision for our shareholders. Furthermore, we believe the relative defensiveness and lower volatility of our region our sub markets and our assets combined with the solid job growth our region continues to generate makes us stronger and better positioned for the future.

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

Dave Rodgers with Robert W. Baird.

Hi guys, good afternoon. Wanted to maybe talk a little bit more about the acquisition market Paul, and your comments you talked about this mid-market B in the $40 to $50 gross range in the opportunities you have there, but maybe talk a little bit more about the portfolio opportunities that maybe you haven't explored yet in your own portfolio and then maybe more even specifically what you can buy today. Is that product available priced right, et cetera?

I'll talk about let's talk about what's on the market right now. There have been a couple trades in DC like, One Thomas Circle, I would consider that more A minus to B plus type product. And Dave, I'd say you have to really believe in the sub market and your ability to create value. That has been our mantra.

Downtown, we clearly haven't seen the volume of the Metro-centric walkable retail amenity type trades that we normally look for. I think, the suburbs are littered with commodity suburban office product that I would call bordering, not obsolete, but bordering on major CapEx and major renovation potential and just not sure you are going to be compensated with the current market rents to do that.

On the multifamily side, I think it continues to be competitive. I think Class A high-rise at least on our numbers I think last year's numbers I think were probably around 390 a door. The number I'm hearing year to date is probably in the 410 to 415 range. So let's call it 5% increase in that product and then probably a 3% increase in the B product in terms of sales.

I think we've had I want to say about $2 billion of Class A product clear and so clearly there is still an appetite there. But we just haven't -- I would say in terms of what we look for, in terms of the value creation potential, multifamily we look at renovation potential with additional FAR. We haven't seen a lot of those deals trade. I think there are folks that are looking for a core product right now. And that's being priced accordingly.

In terms of back to downtown and the office, I would like to say that -- we talk to the broker community pretty frequently. Obviously weekly. A lot of people threatening to come to the market with product, but we haven't really seen that materialize and if we have seen it materialize Dave, it appears seems to be more risk off because to either come in with debt its got near-term lease expirations or probably some unrealistic pricing. And so for that type of product quite frankly we are seeing that bid/ask spread widening. Not contracting.

That's good color Paul, and thanks for that. It doesn't some like we will expect to your name in the headlines anytime soon with acquisitions, but if I'm wrong, correct me. And maybe a second question just on some of the renovations. I think it maybe I took this comment wrong, you said something about proving out the returns on the renovations for apartments before may be moving forward with a lot of density or most of the density efforts.

But what are those return hurdles? Are you really achieving those and maybe run through some of the math that gets you comfortable with moving forward with the new construction project.

I will ask Bakke, to ham and egg this with me, but when we underwrote these, and I think when we've been out on our numerous NDRs we're pretty transparent on what we were looking for and we were looking for to mid-teens returns on those renovations. We are seeing those right now on the units that we have renovated. I think your question Dave, on needing the renovations to prove out to move forward with development I would like to separate those two concepts. We specifically targeted the Arlington and Alexandria sub markets just because of the lack of new supply that we saw coming on line. The renovations are geared specifically towards the affordability gaps between Class A and Class B and the development potential is really on pending supply.

Right now, and I'll specifically focus on the Wellington, since that was our 2015 purchase which we said we wanted to go on the ground on 1Q 2017. We haven't seen anything that has dissuade us from proceeding with that project. And then Riverside, I think that will be in early 2018 so let's call that 18 months out. I think we'd like to go back, validate our market assumptions but at this time, we don't see a surge in supply or anything that would say, okay, these are the rents we underwrote. But I think we tried to build in the flexibility on the start on that.

The good news is both of those, we already control the projects, we already have existing income coming off of those, so those are really probably tweaking what we underwrote, Dave.

Okay great, thanks Paul.

Thank you, Dave.

Blaine Heck with Wells Fargo Securities.

Thanks, good afternoon. Paul or Tom, can you just comment on what you think the magnitude of net effective rent growth that could be seen in DC office and in particular the kind of sweet spot that you guys talked about over the next 12 months?

Hi Blaine, it is Tom. I think you've got to keep in mind that the effective rent growth we're seeing is in the B segment. And -- which is a big part of our portfolio in the CBD and in the small to midsize tenant where you get an asset leased up, and you've got some pricing power, as tenants renew and expand. And we've seen low single-digit cash and upper single-digit double-digit gap on some of those recently.

We think that that is going to continue but if you just talk about broad rent growth for the market, I think in general with all the new A supply coming into the market and this is B that's been renovated into A, that's going to put pressure on rents and I think they're going to be flat generally in the market overall so it's really asset by asset and deal by deal for us. So I think it's just we've been fortunate to have a good solid B portfolio with small floorplates that cater well to the kind of tenant demand we are seeing in the market.

Blaine the only thing I would qualify that with this just that sweet spot that we talked about, that price range of let's call it mid-50s down to like upper 40s, 48. That market, the vacancy in that market is about 8% and we see continued, that type of product continually being removed from the supply, and to Tom's point, that's why I think that's in any segment of the office market that's where we are probably seeing the more landlord pricing power.

So you think in that segment you can probably see better than the flat overall expectation.

Yes, Blaine.

Okay. Helpful. And then I think, last quarter you guys mentioned that you were evaluating bring some more office assets to the market. And ties in with Dave's question., but can you give any update on that process and the amount of interest you are getting there? And maybe handicap the chances of additional sales getting done in the near to midterm?

I think the only asset right now that we -- let me start with the office. The office segment I think us closing out our sale of suburban Maryland, that was really the transformational transaction in the portfolio. I think if I recall, my words were more that we would go back to a traditional portfolio management model and evaluate opportunities on a one-off basis. There are definitely some office assets probably in the next two to three years once we have pegged down some leasing or we [fit in] some CapEx like we do every, annually every year, they could hit an inflection point and could be a sales candidate. Right now the main sales candidate is the Walker House and that is something that we will execute upon in the first half of 2017.

Okay. That's good color. And then Paul can you just give us an update on what is going on at 2445 M Street? The Advisory Board is leaving. Have you continue to see interest from prospective tenants there? And what the possibility of getting that backfilled?

Blaine, Paul was looking at me. Looks like he wants me to answer.

I tried to be all-inclusive.

He is a sharer from way back. So that's an asset. We love the asset and the location, the unique location, the West End. We do have good activity on it from several large users. We are exploring a couple of options with that.

One is an office redevelopment, and the other is in fact a multifamily conversion. Which we think it has some challenges, but if that was possible that could be a unique opportunity for us. So we are looking at a couple of options. We like both of them and we will try to see which one is going to deliver the most value for us.

Interesting, okay, thanks guys.

Thanks, Blaine.

John Guinee with Stifel Nicolaus.

You may have early answer this or it may have been in your prepared remarks so if you have, don't answer it again and tell me to shut up.

First, what is the expected proceeds on Walker House, and then two, if you assume that you are not going to access the ATM at this kind of price, you assume Walker House closes, you assume you want to keep your dollars for near-term development and redevelopment, how much dry powder do have to acquire in 2017 before you bounce up against Board-provided debt limitations? Is it $50 million or $500 million? I just don't know.

John, will take the first part of that question and before get started I want to thank you for spelling your name out on the list. We enjoyed it.

I'm not going to comment on the proceeds for Walker House because you never know who is on the other side of this call. And we don't want to telegraph our expected proceeds number and I'm sure you will understand that. I will turn it over to Steve to maybe talk about the capital that we are looking at for 2017.

Sure and we are not going to give our 2017 guidance right now either, John. But we've said all along that we want to operate between -- in the low sixes. Low 6 debt to EBITDA ratio. We got to 6 right now. We are comfortable we are going to be where we want to be in that range at the end of the year. We think that -- and we haven't given all of our source and use layout because we are still planning it for 2017. And we will update that.

But when we look at development based on my early estimates I think we have taken care of through this quarters ATM. Probably what will be the equity requirement for next year's development spend. I think we have -- any time we decide to purchase something we will look at a capital allocation decision. It will be what kind of asset and how does it improve both the left side of the balance sheet, the NAV of the Company and what kind of returns are we going to get on it and what is the best capital to match up with it. One of the things that we worked hard to do over the last couple of years is continue to increase the flexibility and the optionality we have to make capital allocation decisions by un-encumbering the balance sheet, by deleveraging, and by recycling.

Quite frankly, it will depend on all of our options when we get there, it will be looked at at a value-added opportunity. We could have our currency, we could have another asset that it is worth trading out of so we will make that call when we get a little bit further down the line with our 2017 guidance.

Okay and just to clarify, can you give us third and fourth quarter GAAP cash Silverline and Maxwell House? What we are trying to do is just figure out when those assets stabilize. Have they already stabilized or do they stabilize mid-next year? I can't get the numbers straight.

We do not have that with us and we have not separately disclosed the individual asset numbers. The Maxwell is stabilized.

We have tried to provide some understanding through the guidance that we gave in terms of the relative impact of Silverline. So we increased its contribution for this year. And if you look at the midpoint of our guidance on the last call for the Silverline Center to the midpoint of our guidance this call on Silverline Center, that implies a $350,000 additional contribution. That comes partially because our anchor tenant, we were able to get them in at one point in August instead of September. And also we had another lease commence in the building.

So they stabilized -- Silverline stabilized in August or September?

There is still lease up to go. Our anchor tenant moves in in August. But there is still some space, Tom, do you want to comment?

John, we're 93% leased at Silverline which for the suburbs is reasonably stable I guess. There's still a little more to lease. We've got a little bit of roll over.

Got you. That's been very helpful. Thank you.

Thank you, John.

Jed Reagan with Green Street Advisors.

Hey good afternoon, guys. It sounds like the [trove] is going to break ground in the first quarter. Just want to confirm that's correct and I think you've previously pointed to a mid to high 6% cash on cost yield at that project. Does that sound in the range?

Yes. Jed, right now we are planning, we're targeting first quarter groundbreaking. The first deliveries of those units we'll deliver in the second quarter of 2019. Construction should be complete in the second quarter of 2020 was stabilization in the fourth quarter of 2020. And we are looking at those were initial yields you are correct on and then stabilizing in the low 7s. And growing from there.

That's helpful. You guys mentioned you modestly reduce the multifamily same-store NOI guidance. Is that indicative of any softening you're seeing or is that just noise for that small amount of change?

That was just third quarter expenses being a little bit higher so we went to the bottom end of our range. And a lot of that is what we were trying to message on the last call, that we were having a hot summer so utilities a little bit of real estate factors but we had a little hotter third quarter. I think it is temporary noise.

Global warming in effect. And I think I heard you say, the bid/ask spread for the tougher suburban product is widening at this point Are you seeing any of that type of stuff transacting, can buyers get financing for it? Would you say you're seeing more folks now chasing those kind of deals as the cap rate spreads widen?

I think Jed, number one I'm glad you highlighted it. The capital markets has a lot to do with it. We have definitely seen first off, I think it is, you look at the time of the year and a lot of these lenders have blown through their quotas and they were pretty -- both multifamily and office lenders in this region were pretty aggressive in the first and second quarters of this year. That's why I'm glad we hit the window that we did.

I would also say that, in talking to the folks that we talked to, and these are more the regional players, local operators that use third-party capital. They're getting a higher equity percentage demand from the lenders. Getting a lot more creative, doing mezz slices or preferred equity slices to try to round out the capital stack.

I think it's really been how much risk to people want to take here. I think people are doing a little more wait-and-see because that type of commodity product is so plentiful right now in this region. Jed. I think you have your choice and people think that there could be some further price dislocation, especially if there is some type of rate movement in December. And that is just my personal observation, Jed.

Appreciate it, thanks guys.

(Operator Instructions)

Chris Lucas with Capital One Securities.

Yes, good afternoon, everyone. Just a couple of quick follow-ups and one more general question. As it relates to Silverline, Tom, just what are your thoughts about additional leasing activity there? You mentioned they certainly outperforming the market. Is the momentum still with that asset at this point?

I think so, Chris. We've got good activity. We are achieving rents that frankly are at or above our expectations. We do have 35,000 feet or so to lease right now, granted, it is as you know when you get least up above 90% you are left with, generally, the less desirable space but we do have activity on it.

We've got some roll over coming in 2017 of which we should have some rent roll up there. So I think it is still performing well in the market in spite of other competitive products.

And then just curious about the 2445 perspective. What sort of a timeframe under which you have to make a decision about whether or not you go forward on just redeveloping the office space and releasing or conversion? I know the lease does expire for while but how much time do have to walk through the exercise of figuring out which is the right way to go?

I think we need to get -- we are in the market with the office leasing plan, we are working on several different design options. We need to be in the market with something more specific I think. Probably within the next couple of months.

The other option, we want to try to get that figured out here in the next few months as well. So that we are full speed ahead with the option we are going to pursue in the next year.

Okay. And then last question, just in terms of general activity, given we are heading into the election, what has sort of historical impact been on particularly office leasing activity going into an election and then coming out? When should we expect or should we expect any sort of slowdown and buildup of activity?

I think what we've seen and this is not surprising, we have seen the election create quite a bit of uncertainty especially for large users, government users, defense contractors, and that is probably going to take even some time after the election for that to settle down. That being said the election will pose some interesting dynamics depending on who gets elected. Paul's got some interesting ideas on that that you may want to share.

Or I will have some idea about that, Chris. We get asked and you've been kind enough to go on the road with us as well as other folks. Everybody asks us to really wax philosophic on the GSA. JLL put out a nice piece today. Scott Homa did.

When we step back and look at where we have come from, what the Budget Control Act or sequestration did to us. It reduce the GSA footprint by over 26,000 jobs or 7%. So since that has burned off let's call it late 2014. The GSA has added about 8,800 jobs. What we are seeing now relative to the election, is there's as much delaying on decision-making as there is downsizing. And I think just look at the FBI's decision to kick the can again till March and that clearly will be under a new administration.

Are there GSA folks downsizing? Yes, FEMA just downsized in upper 60,000 square feet in Southwest, Justice just contracted about 40,000. We look at the strongholds for the GSA. That is NoMa, Southwest, Springfield, and probably Crystal City. Those are going to be a little bit more higher impact areas.

Our observations would be on the election, Clinton has run on a platform to reduce the contractor workforce by about 500,000 jobs and make those jobs GSA jobs. And then Trump has done the exact opposite. He wants to freeze the GSA footprint, shift the federal resources to the private sector and I think if Trump gets elected, you'll see an acceleration in that GSA compression and a shift to the private sector whereas if Clinton gets elected, we think the GSA would hold steady and I daresay could potentially expand. It would be a question of timing and where those all go.

You have to remember under a backdrop and I know Washington REIT felt in its portfolio here, these contractors really already went through some critical pretty radical shrinking from 2011 to 2014. And haven't really caught back up to the expansion that we were used to seeing. And then we all have -- we all wrestled with GSA contractors. The dreaded buyout provision that is tethered to every lease. But I definitely think you'll see a general shifting of federal versus non-federal resources being messaged pretty clearly in the next 60 to 90 days, Chris.

Thank you very much appreciate the time.

Sure, thank you Chris.

Bill Crow with Raymond James.

Good afternoon, guys. Paul, now that you have been in the lead chair for awhile, I want to go back to a topic that has come up before and gauge to your reaction to it. Commitment to the retail sector is the third leg of the stool. I bring that up because before, you've talked about how difficult it is to expand your footprint in that sector. We know the cap rates are low. I guess when we transition our thought process from a depressed fundamental environment for office and multi family into a recovery mode, will retail act more as an anchor compared to a stabilizing factor it is today? How do you think about that when doing longer-term planning for the Company.

Great question, Bill Let me step back for a second and let's talk about retail.

I think this quarter in retail our retention rate was 98%, and year to date I think we are about 80%. Retail has performed well, probably the best, not only in Washington REIT's portfolio but probably the best and most consistent in terms of asset performance in this region. We always look at opportunities built to scale to retail. Again, you've been kind enough to go out on the road with us.

I look at our retail portfolio and a lot of embedded growth. I see an ability to add additional FAR. I look at something like Chevy Chase Metro I look at Montrose and Randolph, I look at what the Purple Line could do to Takoma Center. I think that those are drivers that we're not actively out messaging right now and when we look at the long-term vision of the Company we look at that as additional upside to the potential drivers that we've are ready outlined.

We're always going to evaluate every asset class and we are always going to do what is best for the shareholders but right now what I would hate to do is sit here and tell you that we are going to monetize one asset or another and leave potential FAR, potential density, potential upside for our shareholders on the table.

That's very helpful, thanks guys, appreciate it.

Now I'd like to turn the call back to Mr. McDermott for final remarks.

Thank you. Again I would like to thank everyone for your time today and we look forward to spending, seeing many of you in Arizona next month. Hope you have a good weekend, and we thank you all for your time.

This concludes the third quarter earnings call for Washington REIT. Thank you for your participation. You may disconnect your lines at this time.