Elme Communities
Q2 2016 Earnings Call Transcript

Published: 1 Aug 2016

[Operator:]

Welcome to the Washington Real Estate Investment Trust Second Quarter 2016 Earnings Conference Call. As a reminder, today’s call is being recorded. Before turning the call over to the company’s President and Chief Executive Officer, Paul McDermott, Tejal Engman, the Director of Investor Relations will provide some introductory information. Ms. Engman, please go ahead.

[Tejal Engman:]

Thank you, and good morning, everyone. Please note that our conference call today will contain financial measures such as core FFO and NOI that are non-GAAP measures as defined in Reg G. Please refer to the definitions set out in our most recent financial supplement available at www.washreit.com. Please also note that some statements during the quarter are forward-looking statements within the Private Securities Litigation Reform Act. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially. We provide these risks in our SEC filings. Please refer to Pages 9 to 24 of our Form 10-K for our complete risk factor disclosure. Participating in today’s call with me will be Paul McDermott, President and Chief Executive Officer; Steve Riffee, Executive Vice President and Chief Financial Officer; Tom Bakke, Executive Vice President and Chief Operating Officer; Drew Hammond, Vice President, Chief Accounting Officer and Controller; and Kelly Shiflett, Vice President, Finance and Treasurer. Now, I would like to turn the call over to Paul.

[Paul McDermott:]

Thank you, Tejal, and good morning, everyone. Thanks for joining us our second quarter 2016 earnings conference call. Washington REIT had another strong quarter and raised the mid-point of our full-year, core FFO guidance range, all while executing our asset recycling plans and successfully raising equity capital. I would like to highlight four key achievements this past quarter. First our core FFO of $0.46 grew 9.5% and same-store NOI grew 3.9% over second quarter of 2015. Second we tighten our full-year core of FFO guidance range and raised its mid-point by $0.02, we are also raising full-year office and multifamily same-store NOI guidance. Third, we executed the first of the two sales transaction of our suburban Maryland office portfolio and acquired Riverside Apartments. And finally, we successfully raised equity capital to strengthen our balance sheet and help you deleverage to an expected low 6's net debt to EBITDA by year end. Let me start by detailing the progress, we have made on our full-year, 2016 asset recycling plan. As mentioned, we have completed the sale of the first tranche of a suburban Maryland office portfolio, which comprised to four assets and delivered aggregate sales proceeds of $111.5 million. The remaining suburban Maryland office assets are under contract to be sold in September for $128.5 million. We also completed the acquisition of Riverside Apartments $244.8 million. This apartment community in Alexandria, Virginia consists of 1222 units and potential onsite density to develop 550 additional units. Through our asset recycling, we have strategically allocated capital out of low barrier, suburban office assets into urban infill Metro centric assets in locations with strong demographic and walk able amenities. More over we have allocated capital to value add multifamily assets that meet this criteria. We believe that the allocation provides the best risk-adjusted returns for our portfolio, over the long-term we expect to generate greater levels of NOI and fast growth with more stable cash stable cash flows and decreased risk. At this time, our remaining plan deposition for 2016 is Walker House Apartments in Gaithersburg Maryland, a legacy suburban Multifamily assets that is currently in the market and expected to be close in the fourth quarter of this year. We are also exploring the sale of another legacy suburban office assets. Our 2016 disposition completes our programmatic portfolio repositioning. Going forward we expect to make opportunistic asset recycling decisions driven by regular asset lifecycle management. Moving on to acquisition, while we do not expect to close on additional asset purchase in 2016, we continue to underwrite well located value add, Multifamily opportunities such as Riverside apartments in the Wellington as well as Metro centric office opportunities in the district. We look for deals that leverage our value add capabilities as demonstrated by the post renovation lease up of 1775 I Street and Silverline Center and by the high teams return on cost currently being achieved on unit renovations at the Wellington. Equally important we have several excellent growth opportunities imbedded in our existing portfolio. From these we have identified a number of near and medium term opportunities that we will execute through strategically timed series of projects and expect to generate multiple phases of NOI growth for our shareholders. Let me now detail six current imbedded growth opportunities and their incremental NOI potential. These six opportunities are expected to collectively contribute a range of approximately $27 million to $29 million of additional annualize NOI upon stabilization. This is NOI that is not in place in 2016 and will be accretive as the assets stabilized from the beginning Operator Instructions 2018 and thereafter. The first of these is our renovation of the Army Navy Club Building, a boutique trophy building that overlooks the park at Farragut Square and is adjacent to two major Metro stops in the heart of the CBD in DC. We are improving the value of this extremely well located assets by applying our knowledge of the tenant needs to create attractive and adaptable amenity space. We are also upgrading the building’s lobby and systems and creating access to a renovated penthouse and rooftop. We plan to spend approximately $4 million on the improvement and expect to generate a incremental annualized NOI of approximately $2 million upon stabilization. Next are the unit renovation program at the Wellington and at Riverside apartments. We are creating value by renovating units as they turn over at these assets. Both assets are located in some markets with a significantly greater than average affordability gap between class A and B monthly rent premium. The large rent differential between A&B units enabled a well renovated these assets to achieve a healthy rent premium over un-renovated asset. We have been able to generate a high teams return on cost with the renovation dollars that have been invested. We expect to spend a combined total of approximately $20 million on unit renovations at both assets through the end of 2018 and to generate an incremental annual NOI of $4 million to $5 million following the completion of the entire renovation program. Four is the development opportunity of approximately 400 additional units on available land at the Wellington. This ground up development named the Trove will create a Class A offering at the eastern end of Colombia Pike in South Arlington, a submarket with limited new supply. It will also provide us the opportunity to offer multiple price points within a single apartment community thereby increasing existing tenant retention as well as prospective tenant conversion. We are currently expecting to break ground in the first quarter of 2017. The asset is expected to generate between $8 million and $8.5 million of incremental NOI in its first full-year post stabilization. Fifth is the development of approximately 550 additional units on site at Riverside Apartment which is located near metro and the dynamic Huntington Metro corridor. This submarket is experiencing significant investment led economic growth and improvement. Major employers such as the Patent and Trade Office, The National Science Foundation and MGM National Harbor Resorts are expected to increase the employment base within three miles of the property by approximately 10% over the next 15 month. Multifamily supply demand dynamics are expected to remain stable for the foreseeable future. We expect to break to break ground on this development in the second half of 2018 and the asset is expected to deliver in phases beginning in 2020. It is expected to generate between $12.5 million to $13 million of incremental NOI after it is fully built out and in its first full-year post stabilization. Finally, in retail we plan to create value at Spring Valley Retail Center, recently renamed Spring Valley Village. We will be utilizing additional onsite density to build a two-storey mixed use building to expand this high quality shopping center located in one of Washington DC most affluent neighborhood. We expect to spend approximately $5 million and generate incremental stabilized annualized NOI of $500,000 to $700,000. We are in the early stages of planning other medium to long-term growth opportunities that include a ground up development of additional units at the Ashby located in the affluent neighborhood of McLean as well as potential mixed use redevelopment of the Montrose and Randolph shopping centers which are located in the White Flint growth zone in Montgomery County. All of our additional internal NOI growth opportunities are either proven unit renovation programs or ground up development on sites already owned by Washington REIT where we have a deep knowledge of the submarket and our customers and where we can leverage our existing operating platform. Now, I would like to touch on our portfolio activity and some other broader trends we are seeing in the Washington Metro region. Starting with job growth, our region created an impressive 81,100 jobs, over the last twelve months to June 2016. This growth is more than double the annual average of 37,700 jobs generated between 2011 and 2015 and was 18 consecutive months of solid year over year job growth. Job growth in professional business services, also remains strong, but approximately 19,000 created over the last twelve months, versus an annual average of 8000 between 2011 to 2015. Our recent job growth points to a fundamental recovery that began in 2015 and continue to build momentum this year. Moving to the office market both the District and Northern Virginia experience increase, net absorption and leasing velocity. Quality urban infill Metro centric assets continue to outperform the market and, although concessions remain high across the board. There is some growth in net effective rent to high quality, Metro served downtown assets. Rents for more commoditize products remain flat. Our office portfolio continue to outperform most of our markets on occupancy as our focus remains on tenant retention and the ability to strategically push rents higher where appropriate to do so. As we approached stabilization in the office portfolio, we are now filling vacancies in spaces that have been more difficult to lease and are doing so in a competitive marketplace. In retail demand continues to supply outpace supply and vacancy remains to 200 to 400 basis points below the national average, well net effective rents for neighborhood and community shopping centers continues to rise. Our local economy remains strong with average household income, tracking nearly 60% higher than the U.S. average and regional job growth continuing to fill demand. Finally, our region has dearth of quality retail products and high quality retail space attracts higher rent paying tenants. We see this in current activity at our Bradley and Fox Chase Shopping Centers where we have strong traffic and multiple users looking at our vacancies. In multifamily the class D, markets continue to benefit from economic and demographic trends driving the need for more affordable housing options. In addition, job growth has been strong in the leisure, hospitality and retail sectors, and this is expected to generate further demand for class apartments. According to Delta Research class B, vacancy dropped marginally in the second quarter. That said, historically high levels of class A products will continue to deliver in the next twelve months limiting the rental growth prospects for both Class A and Class B products. We believe our strategy to drive rental growth through renovations that select Class B properties located in sub-markets with a wider then average of affordability gap in Class A and Class B rent will continue to be successful. We expect that unit renovations will enable to profitably engineer long-term rank growth at assets, such as Riverside Apartments, The Wellington, The Ashby, and 3801 Connecticut Avenue. Now, I would like to turn the call over to Steve to discuss our financial and operating performance in the second quarter.

[Stephen Riffee:]

Thanks Paul, good morning everyone. Second quarter net income was $31.8 million or $0.44 per share compared to a net loss of approximately $2.5 million or $0.04 per share in the second quarter of 2015. The difference is primarily due to the recognition of $24.1 million gain on the first sale transaction of the suburban Maryland office portfolio this quarter. Second quarter core FFO per share increased 9.5% to $0.46 compared to $0.42 per share in the second quarter 2015. $0.1 of the increase was due to a differed tax benefit recognize following the sale as Dulles Station land this quarter. Core FFO is growing partly due to same-store NOI growth, which includes renewal growth over bad debt higher reimbursement, and operating expense savings. Core FFO is also growing as a result of the increased contribution from the Maxwell, Silverline Center, The Wellington and Riverside Apartments. In addition, we have decreased interest expense through the pay down of secured debt this quarter, due in part to using proceeds from equity offering. Second quarter same-store NOI increased 3.9% over the prior year. Same-store rents increased 190 basis points year-over-year and same-store typical occupancy was 92.7% at the end of the quarter. Core funds available for distribution or Core FAD was $0.32 per share for the quarter and $0.73 for the first half of 2016 the slight improvement over the $0.71deliverd in the first half of 2015. We continue to project a full-year core FAD payout ratio of 85%. Starting with office, same-store NOI grew 5.7% and rents grew 210 basis points year-over-year due to annual rent increases at several of our properties located in the central business district. Office NOI also benefited from higher reimbursement collections of bad debts and increased parking revenues. Same-store office cash NOI grew 4.7% and rents grew 150 basis points on a year-over-year basis. Same-store and overall office physical occupancy are slightly lower than in the second quarter 2015 due to some expected office tenant move outs that occurred. In comparison with the first quarter of 2016, our same-store physical occupancy grew 30 basis points to 91.8%. With minimal leases growing this quarter and only 2.3% of our office portfolio rolling in the remainder of the year, our leasing volumes this quarter was up. We leased approximately 59,000 square feet of office space with new leases achieving an average rental rate increased of approximately 49.5% on the GAAP basis and 4.7% on a cash basis. Renewals for 14.2% higher on a GAAP basis and 2.9% higher on a cash basis. The same-store office portfolio was approximately 92.5% leased at quarter end. Going forward, our office lease expirations in 2017 are manageable 11.9% of our annualized rent and drop to 8.3% in 2018. Our office portfolio continues to outperform in nearly all sub-markets across to district, Northern Virginia and Maryland Moving onto to retail, our same-store portfolio experienced strong rental growth of 320 basis points. Retail same-store NOI was negative due to an increase in real estate taxes stemming from increases in property assessment values across our retail portfolio. That said year-over-year retail NOI comparisons continue to negatively be impacted by vacancy from tenant move out that occurred in 2015. As a reminder, two large vacancies that were created last year have been released at higher rents that are expected to commence later in 2016. Our same-store retail portfolio was approximately 94% leased as of June 30, 2016 and has stabilized. We leased approximately 15,000 square feet of retail space with negative cash rent spreads, which we believe are not representative of the trends in the rest of our portfolio as they include a storage space lease. Multifamily same-store NOI was up 5.9% year-over-year driven by better operating expense management and the fact that our portfolio has burned off historical rent concessions and abatements. Rents were up 20 basis points on a year-over-year basis. Multifamily same-store physical occupancy on a square footage basis improved by 50 basis points year-over-year and by 30 basis points over first quarter 2016. The same-store portfolio ended the second quarter 94.8% occupied with overall occupancy at approximately 94.4%. Our same-store Multifamily portfolio was approximately 98% leased as of June 30, 2016 and has stabilized. Turning to guidance, we have heightened our 2016 core FFO guidance by $0.04 to range of $1.74 to $1.77 which raises both the bottom end as well as the mid-point of our previous guidance range by $0.04 and $0.02 respectively. Our new mid-point is $0.450 higher than we achieved in 2015, despite partially absorbing dilution from asset recycling and the equity offering. The hauling assumption underpins our tightened and raised guidance range. Overall same-store NOI growth up approximately 1%. Same-store office NOI growth also up approximately 1% and Multifamily growth of between 3% and 3.5%. Within the same-store NOI growth we expect weather related expense comparisons to be more difficult in the second half of the year as we are experiencing record heat in the third quarter today and benefitted from an extremely mild fourth quarter in 2015. That said, we are still raising same-store guidance overall and for office and multifamily. We expect same-store retail NOI to range between negative 1.5% to negative 1% primarily due to increased real estate taxes and the timing of lease commencements. We currently expect a range of $7.1 million to $7.6 million of contribution from Silverline Center, assuming our anchor lease commences as planned in September. We continue to expect $2.5 million to $2.7 million of contribution from the Maxwell. Our interest expense is projected to range between $53 to $54 million and our G&A expense is expected to be approximately $19.5 million excluding severance. The asset recycling that Paul detailed will strengthen the best side of our balance sheet by improving the quality of our portfolio, more specifically by allocating capital out of suburban office and into urban infill, value add multifamily. We expect to improve the stability of our cash flow, reduced our recovering leasing capital requirements and increases our NOI and fast growth trajectories over time. Furthermore a greater level of parity between our asset classes will also better diversify our cash flow and reduce its risk profile. By the end of 2016, we expect the further strength in the right side of our balance sheet by further deleveraging. The completion of our assets sales follow the equity offering and will allow us to pay down debt over the balance of 2016. The debt pay down coupled with the growing EBITDA that we expect to generate from large lease commencing in the second half of this year, should allow us to lower our debt EBITDA to the low 6’s by year-end. We expect to have reduced our secured debt by $266 million in 2016, of which we have already repaid $164 million. Finally, we have entered into a new $150 million, seven year unsecured term loan facility with members of our bank group to further term out debt. The facility has a delayed long-term of up to six months from July 22. We plan to drown the term loan in the fourth quarter, then we will also be able to pay, the $100 million of secured debt without penalty that is otherwise scheduled to mature in 2017. We also have another $50 million of secured debt that we can repay in the first quarter of 2017 that we will refinance by drowning on this term loan. The term loan at July 21, 2023 maturity fits well on our debt maturity ladder. We have entered into a forward swap in the term loan, to achieve a 2.86% all-in fixed interest rate commencing at the end of the first quarter of 2017, once it is fully drown. And with that, I’ll now turn the call back over to Paul.

[Paul McDermott:]

Thank you, Steve, we have successfully executed multiple strategic objectives this quarter. First we have closed on the first tranche of the sale, that will transform our office portfolio, from suburban to predominantly urban product. Second we have reinvested the capital in a lower risk, higher growth, value add, multifamily opportunity embedded with multiply phases of NOI accretion. And finally, we have successfully raised equity capital for the first time since 2009 and expect the further strengthen our balance sheet by year end. Following the sale of our suburban Maryland office assets this year, our portfolio will be predominantly located in the heart of downtown DC and in urban infill centers in Northern Virginia. Our multifamily portfolio is almost entirely located inside the beltway and in well-amenitized, transit-linked neighborhoods. And finally, our retail portfolio is located in strong neighborhood centers across the region and is embedded with excellent long-term re-development opportunities. We have maintained our strategic direction and improve the performance of our portfolio through challenging market conditions. Washington REIT remains [indiscernible] on the Washington Metro region, which is showing strong signs of a recovery led by robust private sector growth. We are much stronger company today and among the best positions to benefit from a continued recovery in the Washington Metro region. With that operator, please open up the call for questions.

[Operator:]

Thank you, at this we will be conducting a question and answer session. [Operator Instructions] our first question comes from line of Blaine Heck [Wells Fargo Securities]. Please proceed with your question.

[Blaine Heck:]

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

[Stephen Riffee:]

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

[Blaine Heck:]

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

[Thomas Bakke:]

Blaine its Tom, as we announced this in previous calls we do see TIs remaining stubbornly high. I think a lot of that is just the fundamental shift in the market in terms of what demanding. And the offset for us has been we are getting generally a little longer times we are getting a little better platform. And those things are offsetting somewhat the higher concessions. I would like to believe that we are going to see that as the market tightens, we are going to see that turnaround but DC has been 8%, 9%, 10% depending on the submarket vacancy. Usually you start to see the free rent get burn off little bit and TIs start to squeeze down, that is not really occurred. And I think a lot of that is just tenants are demanding a high TIs, because they want better space, because they are shrinking their footprint, They are taking less space per worker and so we consequently want better space. I think that's what we are seeing. Additionally, I think just to make sure we are apples-to-apples on our comparisons versus our peer group, I think we include incentives in our numbers and I know that might skew our numbers a little bit on some of the comparisons, but anyway I think overall the answer to your point is that concessions are remaining somewhat stubbornly high.

[Blaine Heck:]

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

[Stephen Riffee:]

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

[Blaine Heck:]

That’s helpful color. thanks guys.

[Operator:]

Our next question comes from the line of John Guinee [Stifel Nicolaus]. Please state your question.

[John Guinee:]

Just kind of continuing on that thought process, Tom, is the market now essentially turnkey TI, turnkey moving costs all paid and that is ending up driving the high concessions? And then can you talk a little bit about where there is actually velocity in activity and which submarkets appear to have very little or no tenant interest? And particularly talk about the stubbornly high vacancy in the Rosslyn Balston Corridor, all without talking of book .

[Thomas Bakke:]

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

[Paul McDermott:]

John, it's Paul. The only other things I would add, I mean, when we look at the second quarter activity, stepping back for a second for the district, let’s call its overall 12% vacancy, suburban markets kind of averaging around 20, so defiantly have and had knots. When we look at Northern Virginia that probably had a pretty tough year last year, I mean looking at the second quarter statistics, there were 41 leases done over 21,000 square feet, which is over double the quarterly average. So it’s defiantly more activity out there, I agree with Tom, the tenant eating contest between RNB and Crystal City will continue until they get the kind of more balance levels. But one thing that is clear, especially in Northern Virginia, if you were within a half mile of a Metro, in the aggregates the buildings in the deal they got. There was 1.8 million square feet of positive absorption and the office front, but you are off Metro over a half mile, there was 1.3 negative absorption on deals and so. I think the trend is pretty clear, downtown, I think we concessions to death on this call, but downtown I think that, we are still comfortable with the activity that we are seeing in the CBD. I mean we talk a little bit about, in our narrative about the work that we are doing on the Army Navy Club and this time last year, when we were first putting the pen to paper thing here is how we wanted to roll out. I think we were in the low to mid 60’s as what we are performing in rent. Right now for the top floor, the Army Navy Club, we have got proposals out low to mid 70. So we are seeing some moment, I think that, that they were trying to follow the appropriate size tenants for the four place but commenting on markets that we like and we don’t like it’s probably too broad, we are still big believers in the CBD. We actively continue to look for value-add opportunities, in and around Metro sides, downtown here, I say probably the CBD in the east end and may be just dipping our toe into the west end. I think the suburban market is really a market-by-market hunt, and we are not really looking there right now.

[John Guinee:]

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

[Paul McDermott:]

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

[John Guinee:]

Okay, thank you.

[Paul McDermott:]

Thank you John. Olympic performance.

[Operator:]

Our next question comes from the line of Michael Lewis [SunTrust Robinson Humphrey]. Please state your question.

[Michael Lewis:]

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

[Stephen Riffee:]

Michael this is Steve. I am trying to remember, go back in my head. So we had the Army Navy and that’s about $4 million that’s imbedded in our capital plan for this year. We have Spring Valley which is about $5 million and that’s also in our plans for this year already so when we talked about our capital plans for the year that’s already covered. We have talked about the renovation programs. We have got two big ones ramping up, that are underway now The Wellington and now the Riverside. We have said over the next three years, we are going to average about $7 million a year totaled somewhere around $20 million between now and the end of 2018. And then, I think the rest of it is our development, which is primarily the 400 or so additional units at the Wellington that we call The Trove. And we are estimating about 550 units at Riverside. If our research supports, delivering at the right times we think we will go in the ground in early 2017 at the Wellington. And if research still supports delivering on Riverside we will probably breakdown in the second half of 2018. And I’m looking for the cost numbers on that. Hold on a second. Somewhere around maybe $250 million to $260 million I mean we are still obviously in drawings and approval from the Riverside that’s out there and this likely to be done more in phases, not all built at exact same time. In terms of capital requirements assuming that we are on the earliest possible timeframe, the years that they would overlap would be 2018 and 2019. And I think you are in the $70 million to $75 million probably peak spend on this two developments. And if say we equitize it at the same capital structure right now. And we are looking somewhere $340 million to $345 million equity per year, when we get out to those year. I think it’s totally manageable. So that’s how we are thinking about the cost.

[Michael Lewis:]

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

[Thomas Bakke:]

Michael its Tom, so once we are completed the final pieces of the Maryland sale including the asset that we are investment finals on right now, we will be in the upper seven, the number that is out there is clearing 200 a foot on the office portfolio. So, we are consistent with that and then on the Riverside acquisition we were in the upper five going in very quickly stabilizing into the [success] (Ph).

[Michael Lewis:]

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

[Paul McDermott:]

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

[Michael Lewis:]

Thanks a lot.

[Operator:]

Our next question comes from Jed Reagan [Green Street Advisors]. Please state your question.

[Jed Reagan:]

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

[Paul McDermott:]

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

[Jed Reagan:]

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

[Paul McDermott:]

South of here.

[Jed Reagan:]

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

[Paul McDermott:]

Absolutely Jed, that's definitely something that we have seen evolve really predominantly over the last quarter. And I would look at it from breaking the investment sales market kind of up in the tranches. Core pricing still is hanging in there. And especially Downtown and DC we are still seeing some good activity. I think asset that just coming out it’s 6010, we think that will do probably do well in the market place, but when you get out into the suburbs, definitely a shift in tone from the lenders that we talk to and then definitely the deals from the opportunities funds that are going into liquidation mode, or recap. We are defiantly seeing more and more continued risk of type measured and I just think that, especially over the last thirty days. I think it got much more pronounced in terms of people are being, or buyers are being more discriminating on the types of risk that they are willing to take, both in terms of duration, price per pound and specifically submarket risk. I’m looking at our pipeline sheet right now, and think two-third of the office is, what we recall value adds last opportunistic, and we think it’s going to be a struggle for probably half of that product to clear the market place. I defiantly think deals even deals that people are showing us Jed, now are like, hey, Washington REIT. would you do preferred equity or would you do a mezz deal means to us there are shortfall taking place in valuations and the capital that is been reevaluated.

[Jed Reagan:]

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

[Paul McDermott:]

Again, we haven’t really, there is so many products out there right now, but on the closing I would say, kind in the suburban markets 5% feels about right. The problem is, none of these deals have closed, They are tied up. I say downtowns on the quality spectrum haven’t really seen a lot of retreading and reprising. We are seen due diligence period getting extended, we are seeing bid dates getting extended. I think it is, in my experience it tend to be a little bit more red flags than not. But I think that's really more on the riskier product with less duration on the cash flow or in submarket that, historically at higher vacancy rates.

[Jed Reagan:]

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

[Paul McDermott:]

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

[Jed Reagan:]

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

[Paul McDermott:]

You know we just did seven years because we didn’t have an enough proceeds after we did the equity offerings. I think under four on unsecured bond deal, I just think you got to have to clear the bond market I think that we have bigger than just minimal index-eligible size deals. I was actually hoping as one of our capital plans going into the year that we would have enough use to proceeds to do that this year because I think it's smart to term out debt. But I thought it was even better for the company to de-lever and once we did that we didn’t need as much debt. So we went the seven year and then swapped it to fix at 286 for, seven years which we thought it was a good source of capital.

[Jed Reagan:]

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

[Paul McDermott:]

I think so, and again we are not focused a lot on that because we have been trying to un-encumber the balance sheet just to make us a stronger unsecured borrower.

[Jed Reagan:]

All right. Thanks a lot guys.

[Paul McDermott:]

Thank you Jed.

[Operator:]

Our next question comes from the line of Dave Rodgers. Please state your question.

[Dave Rodgers:]

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

[Stephen Riffee:]

All right, this is Steve, I'll take a crack at it and Paul can clean it up if there is something I miss. I am not talking on incremental spend, because I think it was additional capital question that I was trying to answer. So it did not include the land. I think we are working at in the case of the development it’s a Wellington probably in the upper 6s initially and then within three year getting over seven. I think in the mid 6s as Riverside and getting over seven around three years also, it's what we are thinking we are building to on those two assets. The going in cap rate I think it was the other question that you asked, that was initially without the juice of the renovation returns. So renovations returns are going to bump us up into the 6s in the whole project grows into the 7s as they build in layers.

[Dave Rodgers:]

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

[Stephen Riffee:]

The development land has been allocated with development, that land and the investment in the building of the existing assets.

[Dave Rodgers:]

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

[Stephen Riffee:]

Well once we drawdown on our term loan for re-financing we are going to have very little outstanding on our line I think we can handle - and these are not major spends per year. I think we can handle the construction financing on our line.

[Dave Rodgers:]

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

[Paul McDermott:]

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

[Dave Rodgers:]

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

[Paul McDermott:]

I think look it's really every acquisition we do and as a backdrop we have tried to prove to folks like you and our investors that every time we do a transaction we go in with a mindset that we are here to create value. Okay. The 55 deals that I have reference that I'm glad that you broke out into the three asset classes. I would say that those were deals that are in our universe. Okay, but we are not concurrently underwriting 55 deals. I would say out of those 55, our interest is peaked on probably about five of them. And what that would mean is that we think that there is an opportunistic buy there that we can create value either through management, repositioning or we think that it's in a submarket where one of these closed end funds that’s monetizing the payback. Their LP is in a rip off position and might be in a submarket where we are going to take some leasing risks. I can't emphasize enough though that if you see us doing office deal it's most likely downtown and it's going to be by metro. We are going to remain remarkably consistent in that and then in the B, we still like I said B+ or un-renovated B multifamily space and then as I said earlier, the neighborhood grocery anchored shopping centers, we will go after those if we see one that's appropriate with our criteria.

[Dave Rodgers:]

All right. Thanks for the color guys.

[Stephen Riffee:]

Thank you.

[Paul McDermott:]

Thank you Dave.

[Operator:]

[Operator Instructions] Our next question comes from the line of Chris Lucas [Capital One Southcoast]. Please state your question.

[Christopher Lucas:]

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

[Thomas Bakke:]

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

[Christopher Lucas:]

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

[Paul McDermott:]

Chris I think The Trove is a go as you know. I think Riverside and Ashby, my hunch would be probably the Riverside would edge it out just knowing, the approval process especially as granular as McLean gets to be. So I would probably stack in that order.

[Christopher Lucas:]

And then, go ahead.

[Paul McDermott:]

We will keep you posted if there are any changes on that though.

[Christopher Lucas:]

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

[Paul McDermott:]

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

[Christopher Lucas:]

Great. Thanks a lot guys. I appreciate it.

[Stephen Riffee:]

Thank you Chris.

[Paul McDermott:]

Thanks Chris.

[Operator:]

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

[Paul McDermott:]

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

[Operator:]

This concludes today’s teleconference. Thank you for your participation. You may disconnect your lines at this time.