Elme Communities (ELME) 2017 Q3 法說會逐字稿

Welcome to the Washington Real Estate Trust Third 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, Vice President of Investor Relations will provide some introductory information. Mr. 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 FAD 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 report 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 made in 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 and uncertainties and other factors that may cause actual results to differ materially. We refer to certain of 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 third quarter 2017 earnings conference call. Washington REIT grew third quarter core FFO by 2.2% year-over-year and to $0.46 per fully diluted share and grew third quarter same-store NOI by 2.6% year-over-year.

Year-to-date, we have grown same-store NOI by 7.2% over the same period in 2016, driven by 11.2% office, 4.3% retail and 3.1% multifamily growth.

In the third quarter, we drove 170 basis points of average occupancy gains over the prior year and ended the quarter at 93.8% occupied.

Subsequent to quarter-end, we closed on the sale of Walker House Apartments in Gaithersburg, Maryland for $32.2 million and signed a letter of intent to sell Braddock Metro Center at Alexandria, Virginia. In addition, we won approvals to develop 767 new units at Riverside Apartments, representing an approximate 40% increase over the 550 units we underwrote when we acquired the asset last year. Assuming the sale of Braddock Metro Center this year, we expect to exceed the top end of our previous 2017 disposition range, which was $100 million.

The sales of Walker House and Braddock Metro Center are the principal sources of capital for our recently completed acquisition of Watergate 600, a Potomac River front office asset in Washington, D.C.

In aggregate, we are allocating capital out of 2 suburban assets into an iconic urban metro-centric office building where we created value within the structure of the deal and are realizing upside from the outset.

As a result, we're growing NOI and FFO while also significantly improving asset quality.

Moreover, we have maximized asset value at Braddock Metro Center by signing a 131,000 square foot lease with the USDA last quarter.

Monetizing the asset now enables us to reallocate leasing capital from a GSA deal into revenue-enhancing capital at Watergate 600.

Furthermore, the sale of Braddock reduces our exposure to large tenants, thus supporting our goal to focus on the portfolio on small to midsized tenants. Following this sale, our office portfolio will continue to focus on private sector tenants and maintain negligible GSA exposure, which remains a key differentiator for Washington REIT.

Moving on to business fundamentals. Our overall office portfolio is well occupied at 93.2% and continues to experience solid leasing momentum on its remaining vacancies. In addition to the approximately 56,000 square feet of leases that we signed in the third quarter, we have another 102,000 square feet under LOI or in lease negotiations.

We currently have over 495,000 square feet of tenants that we are touring or training proposals with and another 633,000 square feet of prospects. This is 4.5x of the total square footage of our current vacancies or impending role over the next 12 months. Our positive leasing momentum is partly driven by the redevelopment projects we are showcasing at unique assets, such as The Army Navy Building and Watergate 600. We are approximately 83% leased at The Army Navy Building through yesterday and have several prospects chasing the remaining vacancy with nonprofits, trade associations, government affairs and law firms, creating a competitive environment that enables us to push rents, while offering lower tenant incentives relative to the competing Class A office product in D.C.

On Watergate 600, we are seeing good interest from consulting firms and media companies for the Blank Rome space and are actively negotiating with several amenity providers for the ground-level. Our office portfolio also benefits from being strategically positioned to capitalize on the growing demand from small and midsized as well as value-conscious office tenants.

According to CBRE data, the 6 sectors that have net absorbed space in Washington, D.C, year-to-date, have leased a medium square footage of approximately 6,000 square feet with full-service rents of approximately $50 a foot. This is the typical profile of office demand growth in Washington, D.C.

Importantly, it is also the profile of the target tenants for our D.C, same-store office portfolio, where the average deal size year-to-date, is approximately 7,000 square feet and the average rent is approximately $51 per foot full-service.

On the supply front, according to JLL data, more than 2 million square feet of existing D.C. office product priced in the mid-40s to mid-50s per foot full-service has been converted into commodity Class A product, priced at or above $70 per foot with further 1.6 million square feet to be converted this year.

Value office product is currently outperforming the market on occupancy, rent growth and concessions, yet there is concern that the oversupply of Class A space can put downward pressure on rent for the market at large. While that is logical, the reality is that developers consider the effect that cutting rents will have on their promoted interest as well as on the existing competitive [product] that they also own, making them reluctant to cut rents to levels [that compete with value] space.

When we have seen aggressive deal structures with lower net effect of rents, the decrease in face rent has been nominal, but tenant incentives have increased significantly to $12 to $14 per foot per year of term for long-term leases. We have not seen these aggressive deals offered to tenants below 10,000 square feet as that would reprice the building for nominal occupancy gains. At the value-end end of the small tenant spectrum, a typical user would need a 30% to 40% face rent drop to even consider this space.

To conclude on D.C. office, we continue to aggressively market multiple redevelopment scenarios at 2445 M Street, which we are repositioning as the new hub of the West End in the heart of the thriving M Street retail corridor, which connects the CBD and Georgetown and is home to some of D.C.'s finest hotels such as the Fairmont, Park Hyatt and Ritz-Carlton, as well as the newly opened Nobu Restaurant, which is directly across the street from the asset. We have seen activity from law firms and consulting firms with one major law firm recently shortlisting 2445 as the only redevelopment asset on their final list.

While we are confident in our ability to execute a redevelopment strategy, we will continue to pursue all options to maximize value for our shareholders. We are increasing our retail same-store NOI growth assumptions for the second time this year and have seen excellent activity on our new development at Spring Valley Village.

We are finalizing commitments with 2 highly regarded local retailers for the ground floor and are seeing demand from a variety of personal and business service users for the second floor.

As announced last quarter, we are negotiating an LOI for HHGregg vacancy at Frederick Crossing. But given interest from a second retailer for a portion of the 23,500 square feet of vacancy, we are simultaneously exploring options to divide the space, and thereby, further optimize rents while reducing risk. There has also been a notable pickup in activity on the HHGregg vacancy at Hagerstown, which is seeing strong interest from discount department store users. We expect both vacancies to be re-leased in 2018.

Approximately 89% of our third quarter retail NOI was driven by community and neighborhood shopping centers as well as Class A power centers and approximately 81% of our third quarter retail NOI was driven by centers that had grocery anchor or shadow grocery anchor, which drive strong levels of traffic and provides a stabilizing effect on the center.

Finally, on multifamily, where we are also raising our same-store NOI growth assumptions for the second time this year. Our unit renovation strategy continues to work well across our Class B portfolio and it's contributing to our outperformance relative to market fundamentals. According to Delta Associates data, the average gap between rents at our B assets and the Class A rents within the same submarket is north of $500 per unit relative to a $300 to $350 market-wide A versus B gap.

In the third quarter, we have grown average rents in our B portfolio by approximately 200 basis points year-over-year, comparing favorably to the region's Class B rental growth of 100 basis points as reported by Delta.

Furthermore, our understanding of the upgrades and finishes that tenants are willing to pay a premium for is also driving unit renovation programs at some of our Class A multifamily assets.

As a result, in the third quarter, we have grown Class A average rents by 230 basis points year-over-year relative to the region's Class A rental growth of 20 basis points, as reported by Delta. We are excited about the near and long-term growth prospects of our multifamily portfolio, where a combination of proprietary submarket research and strong operational and development expertise enables us to grow rents at existing assets and to develop a value Class A offering in submarkets with limited new supply.

Our expanded team has over 40 years of combined experience in developing multifamily product in our region. They had exceeded our initial underwriting of developing 360 new units at The Wellington and 550 new units at Riverside apartments to 401 units and 767 units respectively. We have been able to increase density because our development saw a real need for greater housing in and around high-growth job centers and transportation nodes.

Following the sale of Walker House, we have 4,268 multifamily units in our portfolio and a development pipeline of another 1,168 units, representing approximately 27% organic growth. Approximately 74% of our units are located in Northern Virginia, a share that will reach approximately 80% when we deliver our development projects, both of which are also located in Northern Virginia.

We're bullish on the growth prospects for Northern Virginia, which continues to create significantly more office-using jobs in D.C. and Maryland. For the 12 months to August 2017, approximately 67% of job growth in Northern Virginia was comprised of the office using professional and business services and financial activity sectors, compared with 3.7% in suburban Maryland and approximately 17% in Washington, D.C.

Moreover, the fiscal year 2018 defense authorization bill, which proposes an increased spending levels has received bipartisan support, and if passed, may drive greater economic growth in Northern Virginia. This bodes well for our portfolio, which derived approximately 72% of multifamily, 43% of office and 30% of retail NOI from assets located in Northern Virginia.

Our region added 44,500 jobs in the 12 months ended September 2017, representing growth that is 35% higher than the region's 15-year average job growth between 2001 and 2016.

Importantly, professional and business service jobs accounted for 37.3% of new jobs, significantly above their 23% share of the overall employment base. According to research from the Fuller Institute, the Washington region's current economic growth trajectory has 2017 gross regional product at double the rate it did in 2016. The Washington Leading Index, which is designed to forecast the performance of the metro area economy 6 to 8 months in advance, has now registered solid gains each month since January 2017, and this continued strength points to sustained economic growth into 2018.

We expect a favorable, regional, macroeconomic environment to provide additional support to the internal growth momentum that we have already created. 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 morning, everyone. Net income of $2.8 million or $0.04 per diluted share in the third quarter of 2017 was below net income of $79.7 million or $1.07 per diluted share in the third quarter of 2016, which had included the recognition of a $77.6 million gain from the second sale transaction of the suburban Maryland office portfolio.

We reported third quarter core FFO of $0.46 per diluted share versus $0.45 in the same prior year period, driven by revenue-led year-over-year same-store NOI growth of 2.6%. Year-to-date, we have grown same-store NOI by 7.2% due to a combination of higher revenues and lower expenses compared to the first 9 months of 2016.

We have achieved this NOI growth while improving the quality of our portfolio by recycling out of commodity suburban assets and into quality metro-centric assets, such as Riverside Apartments and Watergate 600, that are performing well for us.

Third quarter core funds available for distribution or core FAD was approximately $32.2 million, putting us on track to achieve a full year core FAD payout ratio in the low 80s, which is favorable to our previously forecasted mid-80s core FAD payout ratio.

Our third quarter year-over-year same-store NOI growth of [2.6%] was primarily driven by same-store average occupancy gains in office as well as higher rental growth in multifamily. On a sequential basis, multifamily and retail grew same-store revenues in the third quarter, while office revenues were lower, primarily due to lower reimbursements and lower lease termination fees than the second quarter.

As expected, same-store expenses were sequentially higher across all 3 asset classes due to normal seasonality, including higher utility costs and repair and maintenance project expenses that typically occur in the second half of the year.

Starting with office, same-store NOI grew 3.8% over third quarter 2016, driven by 480 basis points of average occupancy gains. Approximately 50% of our year-over-year occupancy growth was driven by Silverline Center and the rest, spread across the portfolio with new lease commencements at 1775 Eye Street, 2000 M Street, 1776 G Street, as well as the early renewal and expansion of a tech tenant at 1600 Wilson Boulevard.

On a sequential basis, office ending occupancy grew by 40 basis points despite unknown tenant move out, which has already been partially re-leased. We drove strong office rental growth across both new and renewal leases this quarter, as we leased a majority of space to small and midsized users, which represent our core office tenant base. We signed approximately 45,000 square feet of new office leases in the third quarter of 2017 with a greater-than-usual proportion in our Class A office properties, such as Army Navy Building, where rents are in the mid- to upper $60 per foot.

We committed $9.30 per foot per year of term in tenant improvements, which compares favorably to the $12 to $14 per foot per year of term, offered by comparable Class A office products in Washington, D.C. We achieved rent roll-ups of 19.7% on a GAAP basis and 6.3% on a cash basis. For new leases below 10,000 square feet, we achieved even larger rent increases of 26% on a GAAP basis and 17.3% on a cash basis. In addition, we signed approximately 10,500 square feet of office renewal leases in the third quarter of 2017 and achieved rent roll-ups of 19.1% on a GAAP basis and 16.2% on a cash basis. All of the office leases renewed were below 10,000 square feet in size.

Excluding the office asset we expect to sell, the prospects for rent roll-ups for our office portfolio look encouraging over the next 12 months, as 87% of the leases expiring are leased to tenants below 10,000 square feet. As a result, the overall mark-to-market for the next 12 months of lease expirations in our office portfolio could be positive on a cash basis and continue to strengthen on a GAAP basis.

Notably, these positive re-leasing spreads are on leases that typically have 2.5% to 3% annual rent escalators and that are long term in nature.

Moving on to retail. Third quarter same-store NOI grew by approximately 0.7% on a year-over-year basis as rental growth and lease termination fee income offset 70 basis points of year-over-year average occupancy declines.

Sequentially, average occupancy rose 100 basis points with all of these commencements at Gateway Overlook as well as specialty leasing, offsetting the impact of the HHGregg move outs. We are capitalizing on retailers' use of pop-ups as a tool to test a [shopping center] location, and there are some indications that some of these may lead to long-term leases. Our retail portfolio was 94% leased at quarter-end, with good activity on vacancies and the opportunity to grow occupancy in 2018.

We leased approximately 48,000 square feet of retail space and drove 16% GAAP and 10.6% cash roll-ups on new leases. Renewals were up 2.7% on a GAAP basis and were slightly higher on a cash basis. We paid no tenant incentives on renewals and standard incentives on new leases.

Finally, multifamily. Same-store NOI was up 2.6% over third quarter 2016, driven by 200 basis points of rent growth. This was higher than we previously expected and contributed to our raising full year same-store NOI growth assumptions for multifamily. Same-store renewal leases grew 383 basis points and the same-store new leases grew 171 basis points. On a per unit basis, the same-store portfolio ended the third quarter 94.8% occupied with overall occupancy at 94.7%.

In the third quarter, we renovated 39 units at The Wellington and 71 units at Riverside. As a result, at quarter-end, we had 328 units left to renovate at The Wellington and 504 units left to renovate at Riverside. We continue to generate a mid- to high-teen return on cost on the renovation dollars that have been invested at these 2 assets to date and expect these programs to continue through 2018 and into early 2019.

Now turning to guidance. With only 1 quarter remaining, we are maintaining the midpoint of our 2017 core FFO guidance and tightening the guidance range to $1.81 to $1.83 from a previous range of $1.80 to $1.84 per diluted share. We do not assume further acquisitions in 2017.

As Paul mentioned, assuming the sale of Braddock Metro Center closes before year-end, we expect to exceed the top-end of our previously assumed 2017 disposition range, which was $100 million. Our guidance is supported by the following assumptions: overall, same-store NOI growth expectations are raised to a range of 6% to 6.25% from a previous range of 5.75% to 6.25%. We assume office same-store NOI growth will be approximately 9% from a previous range of 9% to 9.5%, considering slightly higher expenses in the third and fourth quarters.

We are raising our retail same-store NOI growth assumptions for the second quarter in a row, and now expect growth to range between 2.75% to 3.25% from a previous range of 2.5% to 3%.

Our stronger retail growth outlook is, despite absorbing the impact of the previously disclosed HHGregg and Offenbachers bankruptcies, and it reflects our stable tenant watch list as well as our region's resilient retail fundamentals. We're also raising multifamily same-store NOI growth assumptions for a second consecutive quarter to approximately 3.75% from a previous range of 3.5%. In multifamily, unit renovation led revenue growth and rental growth as several of our Class B as well as certain Class A properties is contributing to our outperformance.

Office, non-same-store NOI is expected to range between $18.5 million to $19 million. Multifamily non-same-store NOI is expected to range between $13 million to $13.25 million. Interest expense is expected to range from $47.25 million to $47.5 million, considering the anticipated timing of the assumed dispositions and G&A remains projected to range from $22 million to $22.5 million. Our capital plan for 2017 focuses on maintaining our balance sheet strength and flexibility to realize our development and redevelopment plans and to pursue further value-add growth opportunities.

In the third quarter, we have opportunistically raised approximately $50 million of gross proceeds through our ATM program, an average price of $32.89, which should position us to take advantage of the value creation opportunities we are pursuing. Assuming we close on our dispositions by year-end, we expect our net debt-to-adjusted EBITDA to end the year below 6x, which is better than our target range of 6 to 6.5x. And with that, I will now turn the call back over to Paul.

Thank you, Steve. Our strong operational performance this quarter and year-to-date, has significantly outperformed our region on occupancy and rent growth. We are using proprietary research to strategically allocate capital to the value creation opportunities that offer us the best risk-adjusted growth in our region, while exiting assets and submarkets with lower growth and higher risk profiles.

Looking back, our successful capital allocation to the redevelopment of Silverline Center as well as the acquisitions of the Wellington, Riverside and Watergate 600, in conjunction with our sale of commodity suburban assets has contributed significantly to the growth we are experiencing today.

We are confident in our ability to continue to generate high risk-adjusted returns as we steadily harvest multiple NOI growth drivers, including the redeveloped Army Navy Building and the to be redeveloped Watergate 600, the unit renovation programs within multifamily and the new development at Spring Valley and the ground-up multifamily developments at The Wellington and Riverside.

We expect these embedded growth drivers to enhance our NOI as they continue to deliver over the next 5 years. Moreover, we continue to pursue external value creation opportunities, particularly in multifamily, an asset class that offers up -- offers us optimal risk-adjusted returns. In addition to realizing the benefits of our research-driven capital allocation, we believe there is more potential upside than downside to market fundamentals if federal legislative activity picks up.

The Senate and the House have both passed a budget resolution, clearing the path for the tax reform legislation that the Congressional Republicans are working on drafting, and subsequently, passing. As a result, activity in our region may gear up around tax reform. There has, historically, been a strong correlation between the volume of legislation passed by Congress and net real estate absorption in our regional economy.

Just in the last week, there's renewed optimism for increased legislative momentum that would improve our region's fundamentals and further augment our growth. Now I would like to open the call to answer your questions. Operator, please go ahead.

(Operator Instructions) Our first question comes from the line of Dave Rodgers from Robert W. Baird.

Just wanted to quickly ask about, maybe, 2 specific spaces or assets in the portfolio. One, on Watergate. Paul, you did give us 3 different categories at the beginning of your prepared comments in terms of kind of where leasing stands and the entire portfolio, where's Watergate in that mix? And what's the feedback been?

Dave, it's Tom. Let me try to address that. Watergate is positioned as really sort of a unique iconic asset that sort of almost stands on its own as 1 of only 3 buildings on the water in this part of the city. And we are currently finishing up a lobby -- complete lobby renovation that should be done early in '18 and a new amenity package, new roof terrace and the activity levels have been tremendous there. I think, media companies, we probably had five or six $50,000 or larger users express interest in that. You remember that Blank Rome was in there through '18 and then we've got some additional coverage. So we've got time but we'd like to, obviously, get it leased up sooner, and we feel confident about it.

And for those people that are in place now, we are at 98% lease today. And as Tom said, we have time to address the future leasing.

Great. Maybe second [space], with regard to the advisory board company. I heard some market chatter just about more activity there. I don't suppose you're ready to announce anything, but are you seeing more increased interest in that space as you're getting closer and can you talk any more about that?

Yes, so as Paul said, our strategy at 2445 has been to sort of go to the market with 2 options to basically, see where the demand is playing out. This is sort of another unique type of asset, West End, sort of all by itself in between Georgetown and the CBD. And the M Street corridor over there is really very dynamic and only getting more attractive. So the users that have shown interest have been primarily law firms and consulting firms, a couple of significant users. And they look at this as a unique place to locate for their business because getting in and out of the city from the West End is probably the most efficient and enjoyable commute in the city. And so we've had the interest from users looking at both a high-end renovations approach and willing to pay up for that, and also some looking for sort of a more basic upgrade that would be priced closer to a -- an A- price point.

Great, and maybe last. Just Steve, going back to the capital side of the equation, or Paul, you can chime in, too. But it looks like asset sales, looks like they'll slightly exceed acquisitions for the year unless something else comes up. And then you got the ATM that you've issued, which looks like it's largely matching your development spend, suggesting you are spending a lot of equity, obviously, in the development pipeline. Should we expect to see you continue to deleverage, even though you're below your target already? Is that just kind of a good goal at this point, given where the stock is? And should we expect to see more of that?

Well, Dave, we've -- we're way ahead of our development spend. So I think, we've -- what we've tried to do is even strengthen the balance sheet a little bit further, because we are continuing to pursue additional value creation opportunities. So we're going to -- assuming everything closes by the end of year, we're going to end below 6x. We've said we are comfortable operating at a net debt-to-adjusted EBITDA of 6x to 6.5x. So I think we've created capacity to do the kind of things that we're trying to do and stay ahead of it, not create overhangs. We're not giving guidance for next year. But I mean, I would -- the one thing I would say is our development spend for next year is probably just under $60 million, so I think we stay well ahead of that.

Our next question comes from the line of Jed Reagan from Green Street Advisors.

You talked about a pretty healthy office leasing pipeline. Would you say that's indicative of market-wide changes and fundamentals or tenant activity picking up recently or is that more specific to your portfolio?

It's Tom, again, Jed. I think -- I'd love to just say, it's just our portfolio and nobody else has seen any activity. But -- I think we've seen some significant law firms in the market and that's, obviously, the bread and butter of D.C. And some of those are really large, so that's adding to those numbers. 250,000, 300,000 foot prospects, so that adds a little bit to the number. But we are seeing some good activity because I think the Watergate 600 and 2445 are really interesting assets that do attract a unique look on the market because for -- they haven't been available for a long time. So these assets are getting a lot of looks.

Any changes that you're seeing in terms of asking rents, face rents or concessions?

Yes, I think the comment there is that the B space, we're seeing concessions continue to move our way, whereas, A, they're moving the other way. I think, A is, I've seen some comps recently where all-in TI and free rent. Now granted, the terms are stretching out. You're seeing 15-year terms. But I've seen TI and free rent starting to move up into the $220 to $250 per foot range. Now I'll give you an example on a B deal we just did, which we normally are doing less than $10,000 deals, that's our, sort of our bread and butter. We had a floor come available at 1140 Connecticut, a solid B building, and we had an opportunity to do a full floor deal on that space, which we made and we made that deal around $50 but our TI number was only $85. So there is -- that's an example of the difference between A and B.

That $220 you mentioned, that would be on a 10-year deal or a 15-year deal?

That's probably going to get out to 15 years.

Wow. Just -- there was -- a follow-up on the question about the capital plan, I know it's still early to -- for '18, but how are you thinking about dispositions for next year and are there more non-core sales that you could be seeing up?

Jed, this is Steve. We're not ready to give guidance yet, but we're always doing portfolio asset management, so that is always one of the options that we look at in terms of source of capital. We look forward to updating everybody on that as we get a little bit closer to giving guidance for next year.

Okay, and related to that, any color you can offer on Braddock pricing?

Well, we're trying not to do that because we're not done with the deal at this point in time. All we've said is that total proceeds for the year are going to be greater than what we had guided the last time. And again, when this is a little further along, we'll provide more updates.

Okay. Fair enough. And then, maybe last one for Paul, perhaps. Any changes you're seeing in the pricing environment or investor demand for product across the D.C. Metro and maybe how's the opportunity set looking for acquisitions for you guys?

Sure. So let's go back a year, Jed, and this time last year, things had pretty much come to a halt with election coming up. We definitely -- in the first quarter, we saw a lot of capital coming in to D.C. I think part of it was a reallocation, partly defensive playing. I think right now, if you were to kind of talk to the investment sales community, I think it's pretty flat out there. I think people are -- we're actually seeing some retrading over the last 2 weeks based on interest rates. But I'll start with the core, Jed. I'd say probably 2/3 of the capital that we're seeing chasing core product here in D.C. is foreign capital. There's been a significant interest, and to me, that's kind of the Safe Haven strategy to park it. The most amount of capital that we're seeing kind of into D.C. across the asset classes is value-add/core plus capital. [And I also think that], that's where it's getting a little slippery. We're looking at -- just in talking to the brokerage community, we're definitely seeing people kind of back into underwriting with some pretty aggressive rental increase assumptions to hit those value-add yields. And then, the other piece of the capital structure is they're planning on leverage and that's kind of the moving target right now, with what's been going on in the bond market. But certainly haven't seen any slowdown in capital coming in, but I think the deal volume is flattening out as we approach year-end, Jed.

Okay. That's helpful. You mentioned, the retrading. Anything material there in terms of some of the recent deals being retraded, in terms of changing prices?

I think it's really just been -- like I said, I think it's really just been financing-related and these guys are in and out of the swap market. So I -- that's just a recent phenomenon that we're just hearing as you approach year-end, most of these people have spec-ed up, they've done due diligence, most of these financing commitments probably were floating until they -- obviously, until they went hard and we're just seeing some people nibble around the edges for trying to grab a little bit more yield, so.

(Operator Instructions) Our next question comes from the line of Bill Crow with Raymond James.

Two quick questions for you. First of all, I guess retail is not completely dead if you've got multiple tenants chasing your space. Can you just kind of talk about what category those retailers are in? Where are you seeing the most interest?

Bill, this is Tom. So the -- you're speaking of HHGregg spaces. And I think, yes, we -- discount operators, fairly active and you're hearing that pretty much everywhere. Grocers, believe it or not, in the -- these are in power centers and grocers are now moving into certain power centers we did an ALDI up at Gateway. And we're talking to ALDI and -- and LIDL has sort of a slowed down their expansion plans, but ALDI is still very aggressive. And there are some other new entrants or into this market in the grocery sector looking for positions. And then, the other types of users are sort of home goods and then sort of Quasi entertainment venue. Those are the primary users that we're seeing, looking into these boxes.

All right. That's helpful. Second question. It seems to be on the top of everybody's minds, but this Amazon second headquarter search and D.C. seems to be on the short list. Thoughts on where that might be within the market?

Well, Bill, we had multiple bids coming from both D.C., Maryland and Virginia, and probably on our estimation, could be, like, mid-teens of the 238 submissions that went into Amazon.

Paul, just I'm asking you to handicap where you think the best, most practical location would be within the market?

I think just what -- on our observation, Northern Virginia probably makes a lot of sense. They have a presence out there. We like the [state-sponsored site], the CIT of to Toll Road, good access to transportation, good infrastructure, Silverline coming out there, retail, it would be heavily retail-amenitized and a good educated workforce out there.

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

Paul, I hope you're long, that's too close to home. The 2 questions I have, one, -- and I apologize, I missed the front end of the call. But Steve, just on the $5 million impairment that you guys took, can you maybe provide a little color on that?

Well, when you calculate an impairment, it's not just a straight up sales price versus the book value of land and buildings. So what our estimated impairment is, assume projections of right off, of straight line rents and primarily and unamortized TIs.

Okay, great. And then also sounds like, Paul, the market seems to continue to sort of lack opportunities that fit your criteria. Are there redevelopment opportunities within the portfolio that you're looking at right now, that might be something that you start to see up going into next year, particularly, given the strength of the balance sheet at this point.

Sure, Chris. Well, we have -- I mean, we're in the works on 7 NOI drivers right now. And I think everybody's aware of them, but if they're not, finishing out Spring Valley, completing the renovation on the Watergate, completing the leasing and we finished out the renovation on Army Navy. The unit renovations at both Wellington and Riverside, and then the ground-up development on both Wellington and Riverside, and now we have additional units to address at Riverside, approximately [227] more of them we initially underwrote. I think we have some more development opportunities at, at least, one of our residential assets and then we are looking at additional FAR potential redevelopment on probably a retail center or 2. We also still, Chris, we are still seeing acquisition opportunities that we think have redevelopment potential. I think a lot of the value-add capital that I alluded to earlier, that's in D.C., is not really looking to unplug existing NOI, they're looking to kind of do it on top of in-place NOI. So I think our ability to -- and these are deals that we've been tracking, Chris, for probably 18 to 24 months. I do think we're going to continue to see a pretty -- Washington REIT will continue to have a healthy pipeline going into '18.

Okay, and then last question, I don't know if you guys touched on this. The cap rate for Walker House, roughly?

Upper 5, which exceeded our expectations for Gaithersburg, Maryland.

Our next question is coming from the line of Michael Lewis from SunTrust.

I just had one question. Paul, as I listen to you talk about this correlation between office absorption and bills passed. I've seen those specifics, too, and I've actually even written things to that effect but I'm not sure I fully understand why that is? Maybe it's still obvious that (inaudible) take space as an -- on an as needed basis? But I asked this question because when I think about tax reform, I can't really think of anything even more so than health care maybe that impact every single company and every single incidence. And so depending on why that correlation is, maybe this becomes kind of even stronger demand driver than normal? I'm just curious what your thoughts are on that?

Sure, Michael. I'll kick off and then if anybody else wants to jump in. So when we look at the legislative process, and by the way, we're coming off the worst legislative Congress in 71 years, which has had a nice drag on office fundamentals in D.C., but when we look at what it takes to get a bill passed and new legislation right now, yes, it touches lobbyist, yes, it touches all law firm, a lot of professional and business service space, tax reform, accounting firms, special interest associations. We are already seeing people start to mount up. I mean, I think right now, if you were to ask some of the larger tenant reps in the area, they're probably seeing a slight pickup in activity that will be associated with tax reform and you will see some of these firms that are in existing spaces asking about " shadow space or swing space" within their own buildings right now. So we think it just takes more bodies, and given the dynamic political environment we're in right now, it was very polarizing, we see more special interest groups coming in, just more people showing up that want a seat at the table and those people need office space. So I would've like to have said that this was going to have a fundamental impact earlier, but I do think that, that's upside for this region and for Washington REIT's portfolio.

And Michael, maybe just to add, Paul talked about tax firms -- law firms and accounting firms, a lot of the national tax practices of some of these big firms are based here. And we hear they're gearing up because they are going to be in lot of consulting and trying to roll this out nationally and a lot of their expertise is ramping up here in D.C.

Well, originally Trump wanted to put those guys out of business, I think, but that's probably not going to happen.

Our next question comes from the line of Blaine Heck with Wells Fargo.

Paul and Tom, just on the Blank Rome lease, when I look at your largest tenants page, it looks like the lease term was expended and there was new disclosure regarding an agreement with Atlantic Media to take that for another 8 months or so, is that right? And can you give a little color on what's actually going on there?

So the actual lease expiration is the end of '18. For most of the space they've -- we have from the sale of the building, a master lease to back stop it to the end of '19, on a blended basis, because there's a couple of spaces that we'll get back a little bit earlier. We just added that much to the lease maturity schedule.

Okay. So I guess this is there a chance that the Atlantic Media kind of backs up, turns into a longer lease or you guys are still looking for another tenant to take that space for a longer term?

No, we want to backfill that. In fact, it's mutually beneficial for us to get it re-leased earlier, and then let the previous owner of the past re-lease.

Okay, helpful. And then Steve, can you just give a little bit more color on the flip in same-store NOI and the office portfolio on a year-over-year basis and from Q2 to Q3? I mean, I guess, as you said, most of the occupancy difference year-over-year is due to Silverline, so it would seem NOI would still be much higher this year than last. And then, just looking at the third quarter versus the second, can you give any detail around the amount of term fees last quarter and maybe the effect of the decrease in reimbursements?

Sure. So let's just put this in overall perspective. We've raised our guidance twice this year on same-store. And so we've raised an overall same-store guidance again this quarter. So it's always taking into consideration the prior year quarterly comps. So if anything, things have gotten slightly better, okay? Than as opposed to worse. We've said all along that the first half of the year, we've had a bigger year-over-year occupancy gains and that the comps, in terms of occupancy are more normalized in the last 2 quarters of the year. In terms of -- we did have, in the second quarter, significantly more term fees and expense reimbursements relative to the third quarter. So that was -- they, basically, hit in one quarter more than -- more so than the other. And then -- so this has all been in the guidance all year. And if anything, we just took it up a little bit higher, Blaine. The last comp for the fourth quarter, if you think about it, we've got a seasonal winter that we are assuming is a little bit more normal. We had, basically, the mildest December in fourth quarter a year ago, so we're back to seasonal expenses, et cetera. So I don't think there's a -- there's no major deterioration from what we've been guiding all year, I think, we're slightly ahead of schedule.

Okay. I was just looking at the -- I mean, the occupancy is still up, 480 basis points year-over-year, so thought that might have translated into something similar to what we saw in the first and second quarter, but fair enough.

There are no other -- further questions in queue. I'd like to hand the call back over to management for closing comments.

Thank you, again, everyone. I would like to thank everyone for your time today, and we look forward to spending more time with many of you at NAREIT, in Dallas next month. Good afternoon.

This does conclude today's teleconference. Thank you again. I would like to thank everyone for your time in today and looking forward to spending time with many of you. You may disconnect your lines at this time, and have a wonderful day.