Elme Communities (ELME) 2017 Q1 法說會逐字稿

Welcome to the Washington Real Estate Investment Trust First Quarter 2017 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, good morning, everyone. Please note that our conference call today will contain financial measures, such as FFO, core FFO, NOI, core FAD, and adjusted EBITDA that are non-GAAP measures as defined in Reg G. Please refer to our most recent financial supplement and to our earnings press release both available on Investor page of our website, and to our periodic reports furnished or filed with the SEC for definitions and further information regarding our use of these non-GAAP financial measures and a reconciliation of them 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 in the earnings 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 these risks in our SEC filings. Please refer to Pages 9 through 24 of our Form 10-K for a complete risk factor disclosure. Participating in today's call with me will be Paul McDermott, President and Chief Executive Officer; Steve Riffee, Executive Vice President and Chief Financial Officer; Tom Bakke, Executive Vice President and Chief Operating Officer; Drew Hammond, Vice President, Chief Accounting Officer and Controller; and Kelly Shiflett, Vice President, Finance and Treasurer.

Now I'd like to turn the call over to Paul.

Thank you, Tejal, and good morning, everyone. Thanks for joining us on our first quarter 2017 earnings conference call. Washington REIT delivered a strong start to 2017. We grew core FFO by 4.8% year-over-year to $0.44 per fully diluted share and same-store NOI by 10.4% year-over-year. We increased same-store economic occupancy by 540 basis points year-over-year and ended the first quarter 93.7% occupied.

In addition to achieving our strongest same-store NOI growth in over 15 years, we announced plans to acquire Watergate 600, an iconic D.C. office asset with compelling NAV growth potential, and completed the transaction subsequent to quarter end. Furthermore, we raised our full year core FFO guidance range by $0.02 and provided assumptions for $70 million to $100 million of asset sales.

Finally, we raised approximately $65 million of gross proceeds year-to-date through our ATM program in order to maintain our balance sheet strength. One of the principal highlights of this quarter is our strong same-store NOI growth, which was driven by all 3 portfolios. Office same-store NOI grew 15.6%, retail, 7.9% and multifamily, 4% on a year-over-year basis. All 3 portfolios also delivered sequential same-store NOI growth. Occupancy gains from large leases that commenced in the second half of 2016 were a key driver of the annual growth and reflect Washington REIT's ability to capture the robust job growth generated in our region over the past 12 months. Moreover, we benefited from weather-related OpEx savings and were also able to push rents higher across the portfolios.

Let me now provide you with a detailed update on our 3 asset classes, starting with our office and our acquisition of Watergate 600, a 309,000 square-foot office building on the Potomac riverfront in Washington, D.C. for approximately $135 million or $437 per foot. Located in close proximity to Metro's Foggy Bottom station with instant commuter access to I-66 and Rock Creek Parkway, the 97% leased Watergate 600 is a 12-story office building with some of the best river and monument views in all of Washington, D.C. Similar to our acquisition of 1775 Eye Street, Watergate 600 is consistent with our strategy of acquiring high-quality, urban, metro-centric assets with manageable leasing risk, which provides us the opportunity to create value and grow NAV.

Following our leasing success at 1775 Eye Street and the rest of our downturn office portfolio, we feel confident in our ability to maintain occupancy at Watergate 600. We have over 2 years to lease future vacancy on the top 3 floors, which have unparalleled panoramic views. The building is anchored by the headquarters of the Atlantic Media Company, a nationally renowned media conglomerate, occupying 140,000 square feet. As part of our negotiations with the seller, who also owns Atlantic Media, we achieved an attractive long-term renewal of the Atlantic Media lease, which now extends through October of 2027. We acquired Watergate 600 at a deep discount to replacement cost and an attractive going in yield. We plan to invest approximately $18 million between now and year-end 2018 to renovate the asset, including modernizing and expanding the lobby and rooftop, installing a new state-of-the-art fitness facility and conference center, and completing major systems upgrades. As with most of this team's acquisitions, we sourced Watergate 600 off market by tapping our deep local networks in an ongoing search for urban, metro-centric value add opportunities. One compelling differentiator was our ability to offer operating partnership units as a liquid publicly listed REIT. This enabled the prior owners to solve financial planning complexities and diversify their portfolio, while bringing Washington REIT's expertise to the asset repositioning. It is our belief that the Washington metro region has significant real estate portfolios that are long held by private owners, who may value the OP unit structures efficient and mutually beneficial execution.

Moving on to our broader office portfolio, which contributed approximately 47% of first quarter NOI. We continue to see growth drivers for both our Washington D.C. and Virginia assets. In Washington D.C, all of our assets, except for the Army Navy Building and Watergate 600 have average rents that range between the mid-$40s to mid-$50 per foot full-service, a price segment where availability remains limited. As per JLL research, approximately 2 million square feet of space within this price range has been removed from the downtown core and an additional 1 million square feet is slated to come off-line in 2017. Most of the space is being redeveloped to Class A product, priced above $70 per foot full-service.

As of the first quarter, JLL estimates that the total vacancy within the mid-$40s to mid-$50s price range downtown is 8.3%, which is significantly lower than the Washington D.C. average of 12.5%. Within our downtown portfolio, we continue to see healthy tenant activity in this price range, with concessions decreasing and base rents increasing, especially, for smaller tenants.

Last year, our average office deal size was approximately 5,600 square feet, which is also the average deal size for our market and where the highest level of tenant activity occurs. For larger size deals, such as that with our recently renewed tenant Hughes Hubbard & Reed, there are some instances of redeveloped Class A space lowering rents in order to compete. For large rollovers, our renewals may need to match new deal concession packages, but we expect to achieve market rents, considering there is a long way to drop from above $70 per foot to the mid-$50s full-service. Longer term, as owners of these redeveloped Class A assets, miss their underwriting expectations, they may seek to exit their investments, which could create opportunistic acquisitions for Washington REIT.

Within our Washington, D.C. office portfolio, the Army Navy building and Watergate 600 are both being repositioned, but with a more judicious and tailored scope than the aforementioned more extensive downtown redevelopments. Our strategy is to deliver a Class A amenity package and tenant experience through targeted value-added capital, enabling us to offer rental rates that are lower than the redeveloped A rates. For example, for the small to mid-size user that we are targeting at Army Navy, we are creating a VIP business lounge and conference center on the 12th floor. In addition to differentiated amenities, both assets offer unique attributes, such as Watergate 600's panoramic views of the Potomac and monuments, and Army Navy's park setting in the heart of the CBD.

Furthermore, Army Navy's boutique 13,000 square-foot floor plates provides small and midsized tenants the rare opportunity to establish a prominent presence on a floor rather than being marginalized on the typical Class A floor plate. We are currently 55% leased to Army Navy, are in active negotiations with a full floor user forward lease that would bring the building to approximately 70% leased.

In Virginia, we continue to see office leasing concentrated in Metro accessible locations and benefit from the fact that all of our office assets, apart from one, are proximate to strong transportation links, including metro. Of our 10 office assets in Virginia, 7 are above 94% leased and that gives us greater ability to drive net effective rents higher as evidenced at 1600 Wilson Boulevard and Silverline Center.

At Braddock Metro Center, we are in final negotiations with a significant new tenant to replace Engility's lease that expires in September of 2017, and look forward to providing you with further details on this deal in the coming weeks. We continue to believe that Northern Virginia is poised to benefit from a potential increase in federal defense-related spending, which is expected to lead to defense contractor expansion. We expect both our Northern Virginia office and multifamily portfolios to benefit from the anticipated defense contractor-led growth in the region.

Moving on to multifamily, which contributed approximately 29% of our first quarter NOI, we continue to drive positive rent growth. On a year-over-year basis, rents are growing on both renewals and new leases and for both Class A and B product. We have been able to push rents more aggressively than we could in the first quarter of last year, partly due to higher starting occupancy levels and improving submarket fundamentals. We are helped by the fact that most of our portfolio did not directly compete with the largest way of Class A supply that is hitting specific submarkets within the district, such as the Navy Yard and Waterfront areas of Southeast and Southwest D.C. We are also driving rent growth through our unit renovation programs at The Wellington and Riverside Apartments.

In the first quarter, we renovated 46 units at The Wellington and 88 units at Riverside. In total, we have renovated 265 out of 680 planned units at The Wellington and 188 out of 850 planned units at Riverside. We continue to generate mid-to-high teen return on cost on the renovation dollars that have been invested at these 2 assets to-date.

In addition, we are always looking for ways to generate rent growth including through minor upgrades at other properties. For example, at Yale West, a new Class A asset located in Mount Vernon Square, we have grown net effective rents 4.2% year-over-year, partly by implementing such simple upgrades as replacing carpet with hardwood flooring in units as they turn. This approximately $2,500 investment enables us to raise rents by $50 to $75 per month, depending on the size of the unit and achieve an above 20% return on incremental investment.

On the development front, we plan to break ground in this quarter on The Trove, a 401 unit development on-site at The Wellington. We are also planning ground up development on-site at Riverside Apartments where our team is working with the County to increase density beyond the approximately 550 units we had originally outlined. We look forward to providing you with updated numbers once they are approved.

Moving on to retail, which contributed approximately 24% of our first quarter NOI, our portfolio experienced a strong start to the year that is helping us partially offset the full year impact of tenant bankruptcy-related store closures, including HHGregg. Overall, we believe Washington REIT's retail portfolio is well-positioned in one of the nation's more resilient retail markets. We don't own any malls and 66% of our first quarter NOI was driven by community and neighborhood shopping centers. These are high-performing, well-located centers with an average population density of approximately 156,000, an average annual household income of approximately $122,000 within a three-mile radius. 80% of these centers have a grocery anchor that drives strong levels of traffic. Perhaps, as importantly, many of these centers have been part of their community for decades and have adapted over time to serve their community's evolved needs. Today, they offer an array of food, grocery, medical and personal care services, all of which tend to be relatively less impacted by the growth of e-commerce. Despite the negative headlines, retail in the D.C. Metro area continues to benefit from solid supply/demand fundamentals. As per CoStar data, the average market vacancy rate is 4.1% and supply growth as a percentage of inventory is about half of the metro's historic average. Market rents have increased by approximately 6% over the past 12 months. Retail in our region benefits from high average household income levels that exceed the national average by 61%. Buying power in most of DC proper submarkets has increased by at least 25% since 2000.

Now let me conclude with some observations on the Washington metro region, which continues to generate solid job growth. In the 12 months through February 2017, our region added 62,400 new jobs, which represents a 7% increase over the elevated job growth experienced a year ago and nearly a 42% increase over the region's 20 year average for job growth. Almost 20,000 or more than 30% of the new jobs were in professional and business services, a segment that is growing 180% faster than its 15-year annual average of 10,900 jobs. Washington REIT's portfolio is directly benefiting from regional job growth, which helped us lease Silverline Center, 1775 Eye Street and the office portfolio at large. Office same-store economic occupancy has increased 910 basis points and overall economic occupancy has increased 510 basis points year-over-year as we also continue to successfully lease vacancy at the Army Navy building. Our office portfolio ended the first quarter at 94% leased. We are benefiting from regional job growth because we have strategically recycled assets to recalibrate our portfolio, which today, consist of largely metro-centric assets located in the right submarkets.

Moreover, we feel optimistic about the future because defense contractors and law firms, the 2 major tenant constituencies in the region have already experienced cycles of downsizing and rightsizing, and are now getting closer to optimal levels of space efficiency with very little shadow space.

In addition, job growth has translated into historically high levels of absorption in multifamily where approximately 10,000 Class A units were absorbed in the 12-month period ending March 2017 versus the region's historical average of approximately 6,000 units. While another approximately 13,000 units are scheduled to deliver over the next 12 months, construction starts are down nearly 30% to approximately 7,000 units. Furthermore, as a result of experiencing its supply wave earlier, the Washington Metro region is forecast to see rent growth accelerate at a time when other major markets are experiencing decelerating rent growth.

As mentioned earlier, approximately 29% of Washington REIT's first quarter NOI was driven by multifamily. D.C. multifamily drives a higher percentage of Washington REIT's NOI than that of any of the pure multifamily REITs.

We expect 2017 to be another strong year for Washington REIT. We continue to look for untapped opportunities for growth through our proprietary analysis of submarkets and price segments with strong growth potential. We also continue to prudently allocate capital out of legacy assets as dictated by our strategic planning process.

To that end, we have placed Walker House Apartments in Gaithersburg, Maryland in the market as part of the $70 million to $100 million of dispositions that we expect to complete this year.

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

Thanks, Paul, and good morning, everyone. Net income of $6.6 million or $0.09 per diluted share in the first quarter of 2017 exceeded net income of $2.4 million or $0.03 per diluted share in the first quarter of 2016, primarily due to lower interest expense as well as increased NOI. We reported first quarter core FFO of $0.44 per diluted share versus $0.42 in the same prior period last year, driven by positive same-store NOI growth and interest expense savings, which combined, more than offset the FFO dilution from asset recycling and deleveraging. Core funds available for distribution or core FAD was approximately $26 million in the first quarter. We continue to target a full year core FAD payout ratio in the mid-80s. First quarter same-store NOI grew 10.4% over the prior year, driven by a 540 basis point increase in economic occupancy and a 100 basis point increase in rental rates. As Paul mentioned, all 3 asset classes drove same-store NOI growth, with office delivering the strongest growth rate, followed by retail and then multifamily.

Starting with office, same-store NOI grew 15.6% over first quarter 2016, driven by 910 basis points of economic occupancy gains, approximately half the increase in economic occupancy, was driven by lease commencements at Silverline Center with the other half predominately driven by lease commencements in our Washington, D.C. office portfolio. Office grew rents by 100 basis points year-over-year. Overall office economic occupancy increased 510 basis points and was impacted by vacancy at the Army Navy building, which is being redeveloped. We leased approximately 140,000 square feet of office space in the first quarter with new leases achieving an average rental rate increase of approximately 33% on a GAAP basis and 14% on a cash basis. Renewals were 25% higher on a GAAP basis and flat on a cash basis. Excluding the approximately 50,000 square-foot renewal of Hughes Hubbard & Reed, office renewal rates would have been approximately 20% higher on a GAAP basis and 10% higher on a cash basis.

As a point of reference, office PIs for renewals, excluding this one large lease, would decrease from approximately $93 a foot for 11.8 years of weighted average term to approximately $31 a foot for 8.2 years of weighted average term. As Paul mentioned, we achieved positive GAAP and cash rent spreads, and paid significantly lower concessions for leasing to small and midsized tenants, who represents a majority of our tenant base. We've also been able to push rental rates on renewals within our stabilized office assets in Northern Virginia.

Overall, we achieved an approximately 80% tenant retention rate in office in the first quarter. Our same-store Washington D.C. office portfolio continues to outperform the region with occupancy approximately 8.5% above overall D.C. market occupancy. Our office portfolio is also significantly outperforming in Northern Virginia, where our same-store occupancy is almost 13% higher than the markets.

Moving on to retail. Same-store NOI grew by approximately 8% on a year-over-year basis, primarily driven by higher occupancy, operating expense savings due to decreased snow removal and other tenant-related expenses as well as decreased bad debt expense compared to the first quarter of 2016. Retail economic occupancy grew 240 basis points, while rents grew 60 basis points. We leased approximately 55,000 square feet of retail space, predominantly through renewal leases, which achieved an average rental rate increase of 15.5% on a GAAP basis and 6% on a cash basis. With only approximately 8,000 square feet of new leasing, rent spreads were skewed by 1 lease where we expected a lower face rent in exchange for no build out or free rent.

Finally, multifamily same-store NOI was up 4% over the first quarter of 2016, driven by 130 basis points of rent growth and 90 basis points of economic occupancy gains. On a per unit basis, the same-store portfolio ended the first quarter 94.8% occupied with overall occupancy at 94.6%.

As we began 2017 at a strong level of occupancy, we were able to increase rents at 9 of our 13 same-store multifamily assets. Furthermore, we reduced concessions on a year-over-year basis, primarily due to strengthening submarket fundamentals and also benefited from weather-related operating expense savings.

Now turning to guidance. We are affirming our 2017 core FFO guidance range, which was recently raised by $0.02 at the top and $0.02 at the bottom end, to a range from $1.76 to $1.84 from a previous range of $1.74 to $1.82. At that time, we also provided 2017 acquisition and disposition assumptions, which reflected the acquisition of Watergate 600 and assumed asset dispositions of $70 million to $100 million. We continue to look for further value add opportunities and we'll update you on future calls to the extent that we execute on such opportunities. Our guidance is supported by the following assumptions: overall, same-store NOI growth expectations remain unchanged at 4.75% to 5.25%. We assume office same-store NOI growth is now higher at 7.25% to 7.75% from a previous range of 7% to 7.5%. We have lowered our assumptions for retail same-store NOI growth, which is now expected to range between 2% and 2.5% from a previous range of 3% to 3.5%. Retail remains positive growth, despite absorbing the impact of HHGregg and a small number of other bankruptcies.

Finally, multifamily same-store NOI growth remains projected to grow 2.5% to 3%. Our office non-same-store NOI range remains unchanged between $9 million and $10 million, and multifamily non-same-store NOI also remains unchanged at $13 million to $13.75 million. Our interest expense is expected to range from $47.5 million to $48.5 million, considering the acquisition of Watergate 600 and the anticipated timing of the assumed dispositions. G&A is forecasted to be approximately $21 million to $22 million. Our capital plan for 2017 focuses on maintaining our balance sheet, our strength there and flexibility to realize our development and redevelopment plans and to pursue further value add growth opportunities. Year-to-date, we've opportunistically raised approximately $65 million of gross proceeds through our ATM program at an average price of $31.44. We expect our net debt to adjusted EBITDA to end the year within our target range of 6x to 6.5x.

Moving on to the balance sheet, we reduced our secured debt by $270 million in 2016 and refinanced another $50 million in January by fully drawing the balance of our $150 million term loan, that matures in July 2023 and will swap to an all-in fixed interest rate of 2.86% as of the end of the first quarter. We have brought our secured debt to total assets to approximately 3% from approximately 13% at year-end 2015, thereby, successfully unencumbering our balance sheet and creating greater flexibility to pursue additional value add opportunities.

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

Thank you, Steve. The continued growth we delivered this quarter is the result of many months of well executed capital allocation and value creation. We believe that the company has recycled and redeveloped the right assets in the right submarkets, while deleveraging and optimizing the balance sheet to reduce interest expense and enable value add growth. Looking ahead, we have created multiple additional phases of NOI growth for our shareholders with the lease up of the Army Navy building, unit renovations at The Wellington and Riverside, repositioning of Watergate 600, development of additional FAR at Spring Valley and the development of approximately 1,000 new multifamily units in submarkets with limited supply.

Furthermore, we are well-positioned for the dynamics shaping the future of the Washington Metro region for the following reasons: First, approximately half of our office and 67% of our multifamily NOI is derived from Northern Virginia, where 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 district, which is home to associations, law firms and accounting firms that are expected to expand in an era of proposed 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, multifamily supply is abating and the Washington Metro region is one of the few major markets expected to accelerate rents, going forward.

We expect all 3 of our asset classes to grow same-store NOI this year, 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, please go ahead.

(Operator Instructions) Our first question is from Richard Schiller of Robert W. Baird.

The 10.4% increase in same-store NOI growth overall, I'd say caught us by surprise to the upside -- so congrats there. I think you mentioned in your prepared remarks that half was driven by the leases at Silverline Center. What was the other half attributed to?

This is Steve. So half of it was approximately from the Silverline, the other half was basically our D.C. office portfolio. All of it is additional leasing execution. And one of the things that we wanted to point out, while we got a lot of it done in the second half of 2016 that's actually capturing a lot of new jobs in -- particularly in the Virginia assets.

Okay, got it. And the G&A expense, I think that was raised from the prior guidance. Is a lot of that due to Watergate 600, or is there something else there?

Well, there is various items, and it is a range. When you look at, maybe, what's the largest changes we've taken up are professional fees. So we've been working with advisers transactionally and getting some of our corporate things done. And with our increased expected earnings growth -- and we have raised guidance, some of it is also higher projected instead of comp.

Got it, okay. Thank you. And last from me, how was the activity going on the Army Navy Club redevelopment?

Yes, this is Tom. So we -- I think we mentioned, we've got a deal that's working on a full floor that'll take us to that 70%. We've got tremendous activity. I think for this re-lease -- in this re-lease strategy, we want to make sure putting the right users in there, the right deal structures and economics. And our goal is to have it to fully committed by the end of the year, and that looks like we might be able to beat that.

The next question is from Jed Reagan of Green Street Advisors.

It looks like your cash same-store NOI came in almost on top of GAAP in the first quarter. And just curious if we should think about that relationship as remaining pretty close throughout the rest of the year. Just trying to think about it how your sort of 5 percentage GAAP guidance for the year, kind of translates to cash?

Well, we don't actually give cash guidance. We report cash and GAAP in our supplements as we incur it. In same-store, I don't see that changing for the next quarter. So -- but when you get new lease commencements, sometimes the GAAP will start before the cash kicks in. So to the -- usually in the second half of the year, you'll have some lease commencements that will start initially for GAAP and with cash commencements trailing. We -- we're likely in the non-same-store category to have higher GAAP than cash returns on the acquisition.

Okay, that's helpful. And you mentioned that you're -- you expect the Virginia portfolio to see some benefits from the defense contractors expanding. My guess is given just uncertainty of getting a long-term budget passed, I mean, what -- when do you think that expansion could start taking place and where you'd actually feel some kind of tangible growth on the ground on your kind of the office and multifamily side?

Well, Jed, it's Paul. In terms of activity, I actually think we're seeing activity right now in terms of, we were in Kushman's office last month, and I -- the stat that probably struck me as being the most profound, was prior to the fourth quarter there, their defense contractor tours represented about 6% of their tours. In the first quarter defense contractor tours represented about 50% of their tours. I think we are definitely seeing more traffic in our multifamily assets, and I think there is -- there's a lot more tire kicking with duration than we've seen, probably at other points in the cycle. What I think that does for the region now, and Northern Virginia, in particular, is position us well to kind of accommodate the growth; what we're trying to set Washington REIT up for is not just for 2017, but 2018, '19 and '20. I think, though, that budget, which we do believe will get through. That combined with the increase in job growth that we're projecting over the next -- the same full year period, I mean, we added 62,000 jobs over the last 12 months. But the 15-year average here in D.C. is about 32,000. So you're almost double that. And for the next 4 years, we're projected to add an average of 41,000 jobs a year. We think a lot of those will probably go -- and that's 27% above the 15-year average -- we think a lot of those could be earmarked for Northern Virginia. And so I'd say, we're starting to see it now. I think we've been fairly consistent, Jed, that even -- I think, our first call after the election that it isn't like throwing a light switch -- okay, you've got a new administration coming in. A lot of the appointments, a lot of the confrontation, a lot of the legislation is really still in the infancy, and it's probably because of the stylistic approach of the administration to be maybe a bit more protracted, but we still see it bearing fruit for the region and specifically, our portfolio.

Okay. Appreciate that. And I think as far as sort of the uptick in your contractor activity. Is that more sort of anticipatory on their part at this point or they're thinking, hey, awards could come, let's sort of get out of ahead of those? Would you sort of -- is that fair to characterize it at this point?

That's exactly the feedback that we've gotten from the brokerage community, Jed.

Okay. And what percent of your portfolio is defense oriented, would you say, office side?

15%, 30% specifically, in Virginia. And that's -- a lot of that's because of the Booz Allen. That's the big part of that, Jed, Booz Allen asset.

Okay, got it. And then maybe just last one from me. There's been some reporting recently that First Potomac may be in play, and just curious as to how much of that portfolio you think could fit well into your portfolio, and just maybe in general, if you could talk about your appetite to grow via either an entity level or a larger portfolio transaction?

Okay, well there's a couple there, Jed. So let me start with First Potomac. We have tremendous respect for Bob Milkovich and the team that's there right now. We know they are going through a process, and we wish them the best in terms of a successful outcome for both that team and their shareholders. I think that we are probably looking at focusing on growth in other areas. You mentioned an entity level deal or a some type of portfolio execution. Yes, we have growth aspirations, I think we've been very consistent about that over the last few years. And we are consistently looking for portfolios in all 3 of our asset classes.

The next question is from Chris Lucas of Capital One Securities.

I guess Steve, starting with you, on the HHGregg, I guess I was trying to understand sort of what your thoughts are as to how -- how much exposure you have as it relates to sort of when rent will cease there, and sort of how you're building that into your same-store guidance for the retail?

I think we're assuming -- I'm looking at Tom that they close their stores at the end of April in terms of our forecast, the numbers. So if they stay longer, that's upside to our numbers.

Okay. And then, I guess, just maybe going back to the question about defense contractors and about the Northern Virginia market, there was a large lease reported that was taking out a huge amount of the vacancy along the toll road -- you do have space at Monument, [too]. I was wondering how the activity level is out there and whether that large lease will -- is a consolidation lease or new demand. If you could comment on that?

Chris, it's Tom. So the big lease is at the old Booz Allen building that [cop] sold to Federal Capital Partners, they leased that to Amazon, that's all new growth. And yes, Amazon is very active out in Herndon and out in the 28th quarter -- they're gobbling up a lot of space, and they are in the Monument complex in a different building. We've got some vacancy there. We've got activity. It's a little bit tougher vacancy because it looks into the garage and so we've got to find the right user to go into that space. But I think we're confident we'll get it leased up because the activity has been robust out in that part of the toll road.

Okay, great. And then Paul, more general question. Just in terms of product availability and competition in the marketplace. What are you seeing as it relates to the different product types in terms of availability at this point? And has the competition and pricing changed at all?

Okay. Well, I'll tell you, let me go back 60 days, Chris, and I remember we talked about the availability of product. We really came out of the blocks, like a number of markets, pretty slow. It was probably one of the driest Januaries I had seen certainly in this cycle. That has completely reversed. There is a number of, and I'll start with office -- I mean, I'm just looking downtown here right now, in the last 30 to 45 days, 1101 New York, looking for $1,350 a foot, 1401 New York, 1800 M Street, 1111 19th Street, I mean the list goes on. So they're going to be plenty of opportunities to place capital in the downtown market. I'd say this -- out in the suburbs, as you know, there is this product and there have been some recent closings in the Tysons Corner market with the Rock Point deals. 2 products are coming out in Bethesda. The last piece of the old air [rights] complex, I think it's called Montgomery Towers and then 7101 Wisconsin. So I think if you want to play downtown or the suburbs, you're going to have plenty of opportunities to place capital. I think the lending community has been keeping people honest in terms of asking more questions, particularly, on the credit and duration side. But I think the trend, right now, from a worsening, we think investment activity will clearly be up, and that's -- I think when you have more optionality that's going to put a little bit more pricing pressure and that could have, obviously, a residual impact on cap rates. I think from an investor standpoint, it's all about kind of leasing risk versus yield. We've seen some people kind of underwriting through the vacancies, right now, and I think that can be a little bit dangerous depending on what submarket you're in. But we set a record, obviously, with Waterview being in the low $700s a foot. We look at Arlington Tower right now -- that's probably in the upper $500s a foot. So you're going to have your chances to play along the risk spectrum in office. Multifamily, we haven't probably seen as much product come out. But I think our numbers that we look for and that we maintained, we've seen, I'd say, on the mid-to-high rise concrete, we've probably seen, I think on Grant's numbers is about 7% increase in pricing. I think we're probably looking at about $430 a door. So that's year-over-year, that's a nice little increase. I haven't really seen the desire for Class A multifamily from an investor standpoint to-date. But people are being very cautious, obviously, about the Waterfront markets and the ability to grow rents there. And then retail, Chris, we just haven't really seen the data points that we've seen on a comparative basis with the other products.

The next question is from John Guinee of Stifel.

I'll ask a series of quick questions, which means you can give me quick answers. First [FPOs]-- going through a process. What do you think this is, the third, fourth or fifth time they've gone through a process?

John, I don't really have a response to that. This is the first time we've formally been contacted.

Got you. Second, surprised, maybe comp -- surprised that Amazon would look out the Dulles corridor or take space in the Dulles corridor -- you would think intuitively that they would rather be in the R-B corridor or Tysons Corner. Any thoughts on why they're are focusing on Dulles corridor?

This is sort of just my best sort of insight and that is that they've been focusing out in that dark fiber corridor, and it's more for their data storage needs and services rather than some of the other aspects of their business. And so that's why they're out there. I thought to your point there to come a little bit further east to the -- that the old Booz building was a surprise because they'd been closer to 28 in the past.

Got you. Okay. And then on retail, it looks to me like most of your vacancy is smaller -- smaller spaces, and as you know rental rates are all over the place, so you can't really go talk specific rental rates. But what's your take at back fill vacant retail right now in terms of tenant concessions to get a tenant to move in?

So, yes, we do -- now that we have the 2 HHGregg boxes back, so we do have a couple of larger boxes coming. But to answer your question around small inline shop leasing. The typical TI package is pretty modest for those guys, and I guess a lot of it is underwriting credit, and you may offer anywhere from even low single-digit to $20, $30 a foot for some of these guys. Now you go into the bigger users -- when we did Michaels and some of the others, those guys are going to demand a little more TI out of you. But it's just generally TI and negotiating your starting -- rent start date, John, that's pretty much -- those are the main drivers.

How about back filling an HHGregg box?

So yes, we've got good activity on these boxes, believe it or not, there's some junior box users that are, in fact, they're fairly aggressively opening stores. Most of those are the discount retailers like T.J. Maxx and Marshalls and Saks off 5th, Western Rack, Arlington, all those guys are in a growth mode. So again, those guys are going to drive mostly about getting the shell condition up to a certain standard that fits their acceptance and then you're negotiating, how long it takes you for that deal to start, because they want time to build it out and they're going to try and drag their feet to open it at the best time for their business. And so that's where your main negotiating pain comes in. But you've got to -- depending on the age of the box, you may have to put, $20, $30 a foot into getting that into a shell condition.

Got you. And then last question, Paul. I love your comment in the past on CapEx hogs. And when you look at the Watergate complex, it sort of screams CapEx hogs. So 2 questions. I understand buying 600 Watergate or Watergate 600 in order to generate some quick FFO from a GAAP, the GAAP leases in place. But it seems to me a sort of contrary, to what you usually do in terms of -- to avoid the CapEx hogs. And then the second question is, obviously, Watergate tends to compete as much with the Rosslyn market as it does with the D.C. market because of the view component. Can you talk about, which submarkets Watergate 600 will compete with, and also sort of a counterintuitive acquisition from what you've recently done?

Sure. And I'll ask Tom to probably ham and egg with me on the submarkets. But Watergate 600, the acquisition, John, was kind of what we do in terms of creating NAV value. We think that there is an opportunity to go in there, put more of an institutional flare, in terms of the ownership and management of the property. We think that the asset is -- it does have longer-term potential. For us, we think it's a submarket. The hotel has been repositioned. You have new institutional owner in and around that, and it's not even really, John, as much of a submarket as it is a micro market that we like to focus on. We like what's going on there. I probably wouldn't say that the tenants that are going to go to the Watergate are going to be the same tenant set who -- that want to go to Rosslyn because whether we like it or not, optically, some people just do not want to go across the river. And we think that, that's going to bode well for us. While the price points may be the same, I think, the walkability of what's around the Watergate and quite frankly in the West End and what has taken place around Washington Circle all the way down to the river and even walking into Georgetown. You can't really do that from Rosslyn, or people don't as much as they would if they were in Watergate 600. So we think there is an opportunity for us to create value there. We'd liked the going in cap rate and we know that -- I think we've proven to the marketplace that we have the ability to execute and reposition assets and this is just another data point.

I was just going to add that what we have found is that there are tenants that just don't want -- they want D.C. on their address, and I think that's a big part of the reason they would pick this asset over Rosslyn if there was a view decision.

(Operator Instructions) The next question is from Michael Lewis of SunTrust.

On the retail side, you gave good detail on HHGregg and kind of re-leasing those spaces. You also sort of alluded to other bankruptcies. And I'm wondering if you have -- I presume smaller ones, if you have any others kind of factored into your guidance already? And your risk assessment on the retail side, given what's going on, kind of, I guess more nationally in retail?

Yes Michael, well it's Tom. I think we did have a couple other smaller bankruptcies: Payless. We had 1 Payless, that's 2,500 square feet. We had a Family Christian, smaller user 5,000 square-foot box. And again, all of those are factored into our guidance, and we are confident we'll have those re-leased. They're not an indication, in our mind, of any kind of weakness in our portfolio, just some isolated business failings.

Okay. So these have all happened. You're not forecasting or expecting any additional bankruptcies for the rest of the year?

No, we, in fact, our watch list, believe it or not, has, frankly gotten smaller. And partly because the HHGreggs that have been on for the last several years are now off. And so yes, we feel like our guidance is reflective of a fairly stable and normal business climate.

That's great. I just have one other, maybe I missed it, but it looks like the cost estimate for the Trove went up a little bit from the previous quarter. So I was wondering if there was any material reason why that we should talk about and if it's impacted your projected return at all?

Michael, yes, the Trove -- your observations are correct. If you look at, obviously, all of the activity, the construction activity that's taking place in D.C. right now, I mean we're pretty much in the belly of the beast for the next 12 months. And what that has had, it's had a impact on both labor and materials, so our return on costs have probably moved from the upper 6s to the mid-6s. So yes, there has been an impact and we continue to be optimistic about the submarket, the site, but just given all the activity that's taking place in the region, that's had a spillover effect on the Trove.

There are no further questions in queue at this time. I would like to turn the conference back over to management for closing remarks.

Thank you. Again, I would like to thank everyone for your time today. We look forward to seeing many of you again, and at the upcoming NAREIT Conference in New York in June. Thank you, everyone.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.