Elme Communities (ELME) 2016 Q4 法說會逐字稿

Welcome to the Washington Real Estate Investment Trust year-end 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 FFO, core FFO, NOI, core [VAD], and adjusted EBITDA, that are non-GAAP measures as defined in Reg G. Please refer to our most recent financial supplements and to our earnings press release, both available on the Investor page of our website and to our periodic reports [furnished] or filed with the SEC, the definitions of federal information regarding our use of these non-GAAP financial measures, and a reconciliation [often] to our GAAP results.

Please also note that some statements during this call are forward-looking statements within the Private Securities Litigation Reform Act. Forward-looking statements and the [any] press release, along with our remarks, are made as of today and we undertake no duty to update them as actual events unfold. Such statements involve known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially. We provide this risks in our SEC filings. Please refer to pages 9 through 24 of our Form 10-K for complete risk factor disclosure.

Participating in today's call with me will be Paul McDermott, President and Chief Executive Officer; Steve Rifee, Executive Vice President and Chief Financial Officer; Tom Bakke, Executive Vice President and Chief Operating Officer; Drew Hammond, Vice President, Chief Accounting Officer, and Controller; and Kelly Shiflett, Vice President, Finance, and Treasurer. Now I'd like to turn the call over to Paul.

Thank you, Tajel; and welcome everyone. Thanks for joining us on our year-end 2016 earnings conference call.

Washington REIT reported 2016 core FFO of $1.76, which is the midpoint of our guidance range and $0.05 higher than our full-year 2015 core FFO of $1.71. Better-than-expected same-store NOI growth was the key performance driver in 2016, as we grew same-store physical occupancy by 220 basis points while simultaneously growing same-store rent by 160 basis points over full year 2015. Let me begin by summarizing our successful execution in 2016 and its expected impact on our future growth.

Overall, 2016 was a transformational year for Washington REIT. We sold our suburban Maryland office portfolio, reallocated capital into value-add metro-centric multifamily, and further reduced our debt, thereby strengthening both the left and right side of our balance sheet. Our capital allocation elevated the quality of our portfolio, reduced the volatility of our cash flow, and improved our net debt to adjusted EBITDA ratio from approximately 7 times at year end 2015 to 6.1 times year end 2016. In aggregate, we believe our execution has improved Washington REIT's long-term risk-adjusted growth profile. It has also better positioned our portfolio to capitalize on growth opportunities in our region, which remain concentrated in urban metro-centric locations with walkable amenities. Finally, with our 2016 execution, we have completed our programmatic asset recycling and established a solid platform for our future growth.

Today, we forecast that our portfolio will grow same-store NOI by 4.75% to 5.25% in 2017. This is our highest forecast for annual same-store NOI growth in five years, or since sequestration impacted the real estate fundamentals in our region. By successfully executing our strategic plan, we have adapted to thrive despite a challenging market, and are poised to further benefit from a regional recovery.

Let me now delve into a more detailed update on our three portfolios and our six key NOI growth drivers. Starting with office, which contributed 48% of our fourth-quarter NOI, we feel optimistic about our portfolio as reflected in our strong 2017 same-store office NOI growth guidance of 7% to 7.5%, primarily driven by a positive leasing execution. We believe demand in our region is accelerating. For example, we currently have over 770,000 square feet of tenants that we are touring or trading proposals with; and another 1.1 million square feet of prospects for our approximately 285,000 square feet of vacant space at year end 2016. For space that is rolling in 2017, our current prospect pool represents approximately three times the amount of space available.

Let us now discuss the Army-Navy building, which is one of our near-term NOI growth drivers in office. We have approximately 50,000 square feet of space to lease up at this boutique trophy asset located in the epicenter of the CBD overlooking a park and flanked by two major metro stops. We continue to make good progress on the renovations, investing approximately $4 million in total, and expect to generate additional stabilized annualized NOI of approximately $2 million above 2016 NOI. Our leasing activity has been strong thus far, especially for small- to mid-sized tenants and continues to validate our pro forma underwriting expectations.

Now, let me address all of our large office lease expirations from 2017 until 2020. I am pleased to report that we have executed a 16-year renewal of one of our 10 largest tenants, Hughes, Hubbard, and Reed. HHR is an A-list law firm at 1775 I Street, whose approximately 53,000 square-foot lease was set to expire in February 2018. We signed an early blend and extend with the tenant at strong GAAP rent. The fact that a highly coveted pennant like HHR chose to stay with us and renovate in place speaks to the strength of the Washington REIT brand and the value we offer CBD tenants in the form of well-located assets with operational expertise at competitive rates.

Furthermore, we are in active negotiations with a significant new tenant to replace Engility's lease that expires in September 2017 at Braddock Metro Center. Following the company's recent sale of its US AIG business, known as the International Resources Group, Engility's Braddock operations will be consolidating with the acquirer's current facility. We have developed a comprehensive repositioning plan for the asset while proactively marketing Engility's space, and have seen excellent activity with future Metro-centric location.

Finally, regarding 2445 M Street, where the advisory board is expected to vacate in mid-2019, our immediate focus is to aggressively pursue the office leasing opportunity while continuing to evaluate long-term value creation options. We have hired an industry-leading architect and leasing team, which are actively marketing the states as we explore renovating and re-tenanting the asset in a value-enhancing matter. Situated at the corner of 25th and M Street, within easy walking and biking distance from Foggy Bottom and Dupont Circle Metro locations, this building enjoys the most desirable location in the West End. It is surrounded by popular restaurants, exciting new retail, and the city's top hotels, including the Ritz-Carlton, Four Seasons, Fairmont, and Park Hyatt.

We are bullish on the West End sub-market, which is historically DC's tightest office market, with an average direct vacancy rate of 7.4% since 2001. The West End enjoys immediate proximity to key demand drivers including foreign delegations, embassies, and three of DC's largest employers and influencers, the World Bank, the International Finance Corporation, and George Washington University and Hospital. We continue to implement a focused tenant retention program that has proven successful with the recent renewal of large tenants such as the World Bank, Booz Allen & Hamilton, Epstein Becker and Green, and now Hughes Hubbard and Reed. With that said, our diversified office portfolio as a whole caters more to small- and mid-size tenants than it does to large tenants. In 2016, our average office deal was approximately 5,600 square feet, which reflects the average deal size for our market, and where the highest level of tenant activity occurs.

Our office NOI remains fairly evenly split between the District and Northern Virginia and we see secular growth drivers for both markets. As mentioned on our last call, in the District we continue to observe that the availability of well-located office space priced at the mid-$40 to mid-$50 gross rent is limited. We continue to see good steady tenant activity in this price range, with both concessions and vacancy rates improving as supply is removed, to be repositioned in the trophy office space priced in the mid to high $70 per foot. All of our district office assets are in excellent locations, with the majority offering rents in this pricing sweet spot.

Washington REIT continues to seek value add opportunities that fit this profile. In Northern Virginia, we continue to see office leasing concentrated in Metro-accessible locations and continue to benefit from the fact that all of our office assets, with the exception of one, are proximate to strong transportation links including Metro. In the aftermath of the election, Northern Virginia is poised to benefit from a potential increase in Federal [dispense]-related spending, which is expected to lead to defense contractor expansion. This tenant constituency has downsized significantly following the onset of sequestration and currently has very little shadow space. Approximately 15% of our overall office portfolio is currently occupied by defense contractors. We expect both our Northern Virginia office and multi-family portfolios to benefit from their anticipated increase in office net absorption in the region.

Moving on to multi-family, which contributed approximately 28% of our fourth-quarter NOI, the trends in net effective renewals and new leases are improving both on a month-over-month and a year-over-year basis. Despite continued record levels of new supply in 2016, we were able to increase both rents and occupancy for approximately half of our same-store multi-family portfolio on a year-over-year basis versus none in 2015 over 2014. Our same-store multi-family rents have slowly but steadily accelerated on a year-over-year basis in every quarter of 2016, from negative-30 basis points in the first quarter to positive-80 basis points in the fourth quarter.

We benefit from having a multi-family portfolio that is predominantly composed of well-located B to B-plus assets, which are relatively less impacted by an increase in supply that is composed of the significantly more expensive class A product. In the Washington Metro region, almost a quarter of households earning greater than $45,000 a year are defined as being housing-burdened, given they spend more than 30% of their income on housing. As per this measure, the proportion of housing-burdened renters in our market is higher than in every major market in the country with the exception of LA, San Jose, and San Diego. We therefore continue to see a flight to value, driven by value-conscious renters seeking affordable, well located products.

We further benefit from having the majority of our portfolio located in sub markets within Northern Virginia that are not directly competing with the largest wave of class A deliveries and specific sub markets in the district, such as the Ballpark in Southeast DC. In our region, class B multi-family assets outperformed the class A, both in terms of net effective rent growth and occupancy in the fourth quarter of 2016. As per RealPage, fourth quarter class C net effective rents grew 100 basis points faster than class A net effective rents, while class B vacancy was 20 basis points lower than class A vacancy. Overall, the outlook for multi-family is steadily improving as absorption remains strong while new supply has declined by 14% in the fourth quarter of 2016 on a year-over-year basis.

Our near-term NOI growth drivers and multi-family are the unit renovation programs at the Wellington and Riverside apartments, where we are renovating units as they turn over. Both assets are located in sub markets with a significantly greater than average affordability gap between class A and B monthly rents. As of December 2016, 219 out of 680 planned units have been renovated at the Wellington; and 100 out of 850 planned units have been renovated at Riverside apartments. We have been able to generate mid to high teens return on our cost on the renovation dollars that have been invested at the two assets to date. We continue to expect to generate incremental annual NOI of approximately $4 million above 2016 NOI following the completion of the entire renovation program. We expect to spend a combined total of approximately $23 million on unit renovations at both assets from the inception of the program through the end of 2018.

Furthermore, we are currently preparing the site at the Wellington for the ground-up development of approximately 400 additional units, which will be known as The Trove. We continue to plan the ground-up development of approximately 550 units on site at Riverside apartments, expected to commence in the second half of 2018.

And finally, on retail, we grew occupancy by 420 basis points on a year-over-year basis in 2016, primarily due to several large leases that commenced during that year. We continue to experience strong rental growth from smaller in-line retailers and have noted a pickup in consumer confidence over the past quarter. At approximately 96% occupied, we're driving additional revenue to specialty leasing and short-term opportunities. Another retail NOI growth driver is 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's most affluent neighborhoods. We expect to spend approximately $5 million and generate incremental stabilized annualized NOI of approximately $500,000 over 2016 NOI.

To conclude, we expect 2017 to be a strong year for our region. Growth continues to be driven by an expanding projects sector, which has created approximately 24,000 national and business services jobs over the past 12 months relative to an average of 10,680 jobs between 2000 and 2015. In 2016, the year-over-year rate of job growth in the Washington Metro region exceeded that of New York, Los Angeles, Chicago, and Boston. Moreover, following the national elections, we are seeing greater levels of activity in the region as associations, corporations, lobbyists, as well as accounting and law firms, ramp up to influence and position for the proposed initiatives of the new administration.

At this time we are more optimistic about the prospect of increased private sector growth than concerned about federal hiring freezes for three reasons. First, federal government leases accounted for less than 1% of our 2016 revenues and our portfolio doesn't directly compete with GSA's stronghold such as NoMa, Southwest, Crystal City, Springfield, or Baileys Crossroads. Second, our region's dependence on the federal government has already shrunk dramatically, from approximately 40% of our gross regional product in 2010 to between 30% and 35% today, and it's heading to 27% by 2021. Today, the government leases just over 10% of space in the core markets where we compete. Finally, our region has already experienced recent years of executive orders focused on reducing the size of the federal footprint, and the GSA is now several years into its right-sizing process.

As for JLL research, GSA's space reduction averaged 15% to 25% per year from 2011 to 2014, while recently completed prospectus-level deals average just over 10% in space reductions. This implies that, while the governments right-sizing profits may not yet be complete, it should provide diminishing rates of return in space compression in the years ahead. The consensus view is for alignment across the House, Senate, and White House to alleviate political gridlock, which in turn should lead to the Congress enacting more legislation. If historical correlations hold, increased legislation should spur greater net absorption within the private sector, and we should begin to see this region's real estate fundamentals return to higher levels of growth.

Now, I would like to turn the call over to Steve to discuss our financial and operating performance in 2016.

Thanks, Paul. Good morning, everyone.

2016 net income of $119.3 million or $1.65 per diluted share, exceeded 2015 net income of $89.7 million or $1.31 per diluted share, largely due to higher gains on asset sales, lower interest expense, and higher income from real estate. We reported core FFO of $1.76 per diluted share for full year 2016, the midpoint of our most recent guidance range. This represents approximately 3% core FFO growth over 2015 core FFO per diluted share of $1.71, while partially absorbing dilution from asset recycling and equity issuance. Core funds available for distribution, or core FAD, was approximately $102 million in 2016, representing an 85% payout ratio, which was in line with our projections. We continue to target an annual core FAD payout ratio in the mid-80%s.

2016 same-store NOI grew 1.2% over the prior year. Same-store rents increased 160 basis points over full year 2015, and same-store physical occupancy improved 220 basis points over the prior year to end 2016 at 94.3% occupied. Starting with office, 2016 same-store NOI grew 1.4% over the prior year, exceeding our most recent guidance of approximately 1%. Same-store office rents grew 180 basis points over full year 2015, primarily due to annual rent increases across our DC office portfolio. Same-store office physical occupancy improved 110 basis points over the prior year to end 2016 at 92.1%.

We leased approximately 600,000 square feet of office space in 2016, driven by approximately 440,000 square feet of office renewals, which brought our 2016 office tenant retention rate to approximately 70%. In the fourth quarter we renewed approximately 65,000 square feet of space and achieved an 8.1% improvement in GAAP and a 1.3% improvement in cash rent spreads. Our approximately 39,000 square feet of new leases were 5.7% higher on a GAAP basis, but negative on a cash basis in the quarter, impacted by one short-term lease were we accepted a face rent reduction in exchange for minimal build-out and zero free rent.

Our same-store Washington DC office portfolio continues to outperform the region, with year-end occupancy approximately 390 basis points above overall DC market occupancy. Our office portfolio is also significantly outperforming in Northern Virginia where our year-end occupancy is approximately 11% higher than market. Our overall office portfolio was 91.1% occupied as of year end 2016.

Moving on to retail, in 2016 our portfolio experienced strong same-store rental growth of 230 basis points over full year 2015. At year-end 2016, same-store physical occupancy was 95.7%, or 420 basis points higher than at year end 2015. Retail same-store NOI was approximately flat for full year 2016, in line with our most recent guidance, while also during the fourth quarter bankruptcy of Offenbachers, a regional retailer occupying approximately 18,000 square feet. We leased approximately 200,000 square feet of retail space in 2016, driven by approximately 170,000 square feet of renewals, which brought our 2016 retail tenant retention rate to approximately 80%. In the fourth quarter, we renewed approximately 66,000 square feet of space and achieved a 10% [GAAP] and a 7.8% cash rent increase on renewals. For 2016, retail new leases were 15.4% higher on a GAAP basis and 3.5% higher on a cash basis.

Moving onto multi-family, our 2016 full-year same-store NOI was 2.7% higher year over year, partly due to the same-store physical occupancy improving 190 basis points and same-store rents increasing by 30 basis points in 2016 over 2015. Excluding the fourth-quarter bankruptcy of a restaurant located within one of our multi-family properties, 2016 same-store multi-family NOI would've grown by 3.3% over 2015. On a per-unit basis, the same-store portfolio ended the fourth quarter 96.3% occupied.

Now turning to 2017, our core FFO guidance is expected to range from $1.74 to $1.82 The year-over-year growth embedded in our current portfolio is skewed by the timing of the 2016 recycling execution. It's a dilution from our 2016 asset recycling that all occurred on January 1, 2016. Then 2017 guidance would represent approximately 7% core FFO growth on a pro forma basis at the midpoint. We're currently not providing guidance relating to acquisitions or dispositions for 2017, but remain a local sharpshooter looking for value-add opportunities, to more update you on future calls to the extent that we can execute on such opportunities.

Our guidance includes the following assumptions. Our same-store NOI growth of 4.75 to 5.25%. Office same-store NOI growth of 7% to 7.5%, retail same-store NOI growth of 3% to 3.5%, and finally, multi-family same-store NOI growth of 2.5% to 3%. We have removed Braddock Metro Center from the same-store portfolio, as we plan to reposition the asset prior to the re-tenanting that Paul commented on earlier. We project office non-same-store NOI to range between $9 million and $10 million, and multi-family non-same-store NOI to range from $13 million to $13.75 million.

Our interest expense is expected to range between $46 million to $47 million; G&A is expected to be between $19 million to $20 million. Moving on to the balance sheet, we exceeded the goals we had set out for 2016 at a faster pace than we have outlined at this time last year. We have reduced our secured debt by $270 million in 2016 and another $50 million since year end, bringing our secured debt to total assets to below 5% from approximately 13% at year end 2015. We have successfully unencumbered our balance sheet, and we created greater flexibility to pursue value-add opportunities. The debt paydown, coupled with the growing EBITDA generated by large leases that commenced in the second half of 2016, have enabled us to lower our net debt to adjusted EBITDA to 6.1 times at year end.

We drew $100 million on our term loan in the fourth quarter of 2016 and drew the remaining $50 million last month to further refinance secured debt. As a reminder, we entered into interest-rate slots for the term loan to achieve a 2.86% all-in fixed-rate commencing at the end of the first quarter of 2017. The term loan's July 2023 maturity fits well on our debt maturity ladder.

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

Thank you.

As Steve said, having repositioned the portfolio, our 2017 core FFO guidance on a pro forma basis represents approximately 7% core FFO growth at the midpoint. We are excited to be commencing 2017 with an overall same-store NOI growth expectation of 4.75% to 5.25%, and office same-store NOI growth expectation of 7% to 7.5%, the strongest in our recent history. Our strategic efforts over the past three years have aligned the portfolio, the balance sheet, and the people needed to capitalize on long-term value creation opportunities in our region.

Today, we are uniquely well-positioned to succeed in a new era of growth and alignment in the Washington Metro region for the following key reasons: first, approximately half of our office and more than 60% of our multi-family NOI is derived from Northern Virginia for increased federal defense spending is expected to be a key growth driver in 2018 and beyond. Second, the other half of our office NOI is derived from the CBD and West End, which are home to tenant constituencies such as accounting firms, associations, and law firms that are expected to expand in an era of far-reaching tax and regulatory reform. Third, our office portfolio doesn't compete in GSA-heavy sub markets and has negligible existing GSA tenant exposure. And finally, with multi-family supply abating and increased consumer confidence supporting our retail in this region, all three of our asset classes are growing simultaneously while we execute a manageable redevelopment and development pipeline and maintain a conservative balance sheet.

Now, I would like to open the call to answer your questions.

(Operator Instructions)

Our first question comes from the line of Dave Rodgers with Robert W. Baird.

Good morning, guys.

Paul, just want to start maybe with Braddock and Engility. This is isn't an asset that you previously identified as one of the big redevelopment drivers. Can you maybe put a little bit of color around potential spend that you're thinking there? The mark to market on Engility's lease, and what you're looking for in terms of downtime?

Yes, Dave, Tom Bakke how you doing?

I'll start off. This is -- we've been working with Engility, as we've discussed on previous calls, for some time. And basically they lost the USAID business and so they consolidated; plus they were purchased by TASC, and so they consolidated that business into another -- that's been consolidated into another company, so they are going to vacate and we have been working on a major repositioning effort on that asset that we've been in the market with. And so, when they vacate, we'll undergo that. But we do have an active prospect we're negotiating with and we might be able to concurrently reposition, re-tenant it together.

Tom, you took it out of the same-store pool. Should we expect a fairly meaningful spend? Or how would you think about the capital going in?

Yes, I think it's going to be a fairly typical repositioning of an empty building, and you'll see lobby amenities, bathrooms, that kind of spend. Our budget isn't finalized there, but the typical spend that you see on those kinds of repositionings are $30 to $40 a foot.

And how does Engility compare to market? In that sub market?

Engility is little bit above market as they vacate, and we're probably going to see a roll-down on a cash basis. But we're probably up on a GAAP basis.

Okay great, thanks for that.

Paul, maybe one for you, just in terms of acquisitions: I realize its not on the guidance; neither are dispositions. Do you have an active pipeline that you're looking at? I know it's going to be opportunistic, but how opportunistic do you anticipate being this year?

Well, Dave, let's step back for second and let's look at what we just came out of in 2016. I think we saw a real mixed bag of risk being brought to the marketplace. I think we went after the assets that we felt that we could create the most value on: i.e., Riverside; and then we transitioned out of product that we felt we were going to be challenged from a capital allocation standpoint to press.

I would say that, if you talk to the top three brokerage firms here in DC, the end of fourth quarter and even as of January when we were pounding the phones, I think the pipeline was fairly light; and I would say that because a lot of people were in wait-and-see mode with the new administration. We're starting to see a thaw on that right now, for -- we're definitely seeing those same three brokerage firms doing a lot of BOVs right now. I think that our observation would be, we're going to continue to go after the three asset classes that we have, but each one of the specific product types have to have value creation potential. We're keeping our eye on a couple of assets in each space, but in that core space, and in particularly downtown, we're continuing to see a lot of foreign capital come into our space.

I think in 2016 we were the second-highest market in the US, with about just a little over $2.5 billion come in. We don't see that changing, and matter of fact, I think in the first quarter you're going to see some big sovereign wealth deals get closed here in town. But they're not really hunting in the same space as we are. So, I think, if you look at Riverside, if you look at the Wellington, if you look at what we're doing in retail, and more particularly, if you look at what we did, what we're doing in Army-Navy and what we did accomplish at 1775, you probably have a good handle, Dave, on what we're looking for this year and hopefully what we can execute on. But right now there's nothing completely in the crosshairs that we would put a stake in the ground on in this call.

Great; maybe last question, just for Steve.

As you look a year from now, Steve, and you look at the capital plans for the year, how do you view the leverage profile the Company may be changing between now and the end of the year? And any meaningful changes that you have planned that we should think about? Thanks.

Thanks, Dave.

Well, we entered the year at right around 6, at a 6.1. If you think back to a year ago, we had hoped to get to the mid 6s, so we're ahead of schedule. I think we said all along that once we got there, we're very comfortable operating in the low- to mid-6 -- between 6 and 6.5. We've taken care of all of our refinancing and debt, have no more debt maturities for the next two years. Leverage is a little bit ahead of schedule. We will be breaking ground on The Trove, so this year we're probably going to spend around $40 million, could be slightly higher than that on development.

The year, that we would hope, is everything if our research still supports it, to have a higher development commitment in terms of spend, would be 2018, because we would think in the second half of 2018 we would also possibly be breaking ground on the Riverside. So we don't have a lot of capital needs because we have done a good job of working ahead of it. That said, we're, we don't need -- we put a guidance together where we forecast that we can be in this range without being a net acquirer or a net seller. The Company remains a local sharpshooter. We're still asset managers, so we're going to continue to pursue those value-add opportunities. And I think we've increased our optionality in terms of all of the different capital that we could use.

There's an asset or two that we think would be candidates for recycling; we think we have access to the capital markets, and we've unencumbered the balance sheet. One of the things that pointed out in our earlier comments is that we now have our secured debt to total assets to below 5% as of earlier this quarter. So we have a lot of flexibility, and I think the Company is well-positioned going forward. And we like the portfolio we have, as we said. Now that the repositioning was done closer to the end of the year on a pro forma basis, that 7% growth year over year, and I think that we now have the flexibility and the team that's got a track record of finding additional value-add opportunities.

Thanks, guys.

(Operator Instructions)

Our next question comes from the line of Chris Lucas with Capital One Securities. Please proceed.

Hey, good morning, everyone.

Just a couple of follow-up questions: where does the Walker house stand on the disposition list? It was for sale and taken off; it's no longer on the held-for-sale list. I'm wondering where you are with that transaction?

Chris, it's Tom.

So Walker house, we still are holding that as potential use of proceeds as a currency; that asset has been performing well. We don't see the long-term growth projections in that sub-market so we certainly still envision selling that. And we probably would do that sometime this year, but again, it's a good use of currency for us.

And this is Steve.

With that said, as we talked about it, while it may be at its maximum value, we decided there's no downside on holding it and trying to match it up, the real estate decision with the capital allocation decision. And so we think it's high on the list of currency if we have an opportunity.

Okay, and then on 2445 M, is the plan there, as it relates to renovating the asset, is that to look for a single tenant? Or are you looking for four tenants? How are you thinking about marketing that?

Well, we're in the market to re-tenant as an office building. As we have said before, we're looking at some alternative uses as well. We've got good interest from the current market for several law firms and some other large tenants. I don't think you're going to see that get re-tenanted by one single tenant; it's just too big. More than likely, if we do release it, it will be one large anchor tenant and then multi-tenant for the rest.

So Tom, are you guys past the point of making decisions as it relates to whether you would convert that asset, or move forward with an office? Or is that conversion still hanging out there as a possibility depending on demand?

No, it's still a possibility. Some of it has to -- relates to whether we can get some help from the city on some incentives to convert, because I think the city is looking at that as a 2018 policy decision, and that would make it a lot more compelling. So I think we're continuing to analyze that, all the while, while we're trying to take it to the market as an office option.

Okay, and then just on the tenant retention for 2017, the office tenant retention, if you exclude, obviously, Engility, what are you guys assuming in your same-store NOI guidance for retention?

I think we've averaged between 60% and 70% historically. And I think that's really what's embedded other than the known rollover now of Engility.

Okay, that's all I have. Thank you.

(Operator Instructions)

There are no further questions at this time. I'll turn the call back over to Mr. McDermott for any closing remarks.

Thank you, everyone. We remain excited about the future of Washington REIT and are confident in our ability to capitalize on an improvement in regional economic conditions. Everyone here at Washington REIT is committed to continue to transform this Company into a best in class operator of real estate in the Washington DC region. Again, I'd like to thank you for your time today, and we look forward to seeing many of you at the upcoming conferences and on our NDRs over the coming months. Thank you.

Thank you ladies and gentlemen; this does conclude the teleconference for today and we thank you for your time and participation. You may disconnect your lines at this time. Have a great rest of the day and have a wonderful weekend.