Elme Communities
Q3 2014 Earnings Call Transcript

Published: 24 Oct 2014

[Operator:]

Welcome to the Washington Real Estate Investment Trust Third Quarter 2014 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, Kelly Shiflett, Director of Finance, will provide some introductory information. Ms. Shiflett, please go ahead.

[Kelly Shiflett:]

Thank you, and good morning, everyone. After the market closed yesterday, we issued our earnings press release. If there is anyone on the call who would like a copy of the release, please contact me at 301-984-9400 or you may access the document from our website at www.writ.com. 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 found in our most recent financial supplement. The per share information being discussed on today’s call is reported on a fully diluted share basis. Please bear in mind that certain statements during this call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially. We provide a detailed discussion of these risks from time to time in our filings with the SEC. Please refer to pages 8 to 15 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; Bill Camp, Executive Vice President and Chief Financial Officer; Tom Bakke, Executive Vice President and Chief Operating Officer; and Laura Franklin, Executive Vice President and Chief Accounting and Administrative Officer. Now, I'd like to turn the call over to Paul.

[Paul McDermott:]

Thank you, Kelly, and good morning, everyone. Thanks for joining us on our third quarter 2014 earnings call. As I have discussed on past calls, we are continuing to position our company to be a best-in-class operator of Washington D.C. real estate. To that end, improving the quality of this portfolio is paramount. Our acquisitions this year underscore this objective as they each contribute to the overall portfolio improvement. Year-to-date, we were at the mid-point of our guidance range on acquisitions, with approximately $300 million closed so far this year. Each of these acquired assets are located in the district. The newest being Spring Valley Center acquired on October 1. This $40.5 million retail asset located in the affluent Northwest Washington D.C. neighborhood is anchored by Crate & Barrel. The off-market acquisition of Spring Valley represents another strong value-add opportunity for us. We expect to quickly lease-up the center’s only vacancy and over the coming years to be adding additional shop space. We have good prospects on the vacancy and we are in discussions with local constituents regarding the center’s future expansion plan. Looking forward, our acquisition pipeline remains solid and we are actively analyzing several potential opportunities. Three of the four acquisitions this year were off-market and finding opportunities like these requires a focused and disciplined origination process. We will update the market at the appropriate time with respect to any additional development on this front. Washington REIT achieved its second straight quarter of strong same store NOI growth. Our Core FFO and FAD numbers increased to $0.43 and $0.30 respectively. This performance is driven by substantial occupancy gains over the past several quarters and new operational protocols that have been put in place at the company. Same store NOI growth was a solid 7.1% this quarter, led by the office sector coming in at 9.2% growth and the retail coming in at 8.1% growth. Occupancy continues to tick up in all three property types with overall same store occupancy reaching 93.2%. Bill will go through these numbers in more detail in a moment. Each of our three property types is posting better than expected performance this quarter. I addressed the office and retail metrics above. Our residential portfolio is also outperforming expectations despite the pending supply challenge. In our opinion, this impact is more muted than the pundits’ negative view of multi-family in Washington D.C. The absorption pace of 16 units per project per month for residential developments in initial lease up remains steady, despite the number of projects in initial lease up increasing 25% over the past 12 months. In the quarter, our residential portfolio held steady with same store NOI declining only 0.10%, thereby exceeding our expectations. Overall occupancy for our residential portfolio improved to 94.3%, which is 220 basis points better than the start of this year. The positive impact of these occupancy gains in the portfolio are being partially offset by slightly lower rents on average at our property. On the development and redevelopment front, our two ongoing projects are progressing according to plan. The Maxwell our 163 unit residential development in the Boston submarket of Arlington, Virginia is nearing completion. We expect this project to begin leasing units in the fourth quarter. The marketing center is in place and fully staffed, and we are actively talking to prospects about preleasing units. The redevelopment of our largest office asset at 7900 Westpark in Tysons Corner is well underway with the new facade being completed, thereby transforming the building’s appearance. This activity is capturing a lot of attention from commuters on the Beltway. The interior improvements are progressing and we are seeing the heightened level of interest from perspective tenants and hope to have our first lease signed soon. Before I turn the call over to Bill to discuss the financials, I want to focus on the operational improvements we have made at the company over the past several months. We are nearing the completion of our reorganization to a portfolio management model, whereby separate portfolio managers oversee each of the three property sectors. Each portfolio manager is responsible for the operating performance of their respective portfolio, and all three reports directly to our Chief Operating Officer. This structure was implemented to ensure accountability at all levels for the financial performance of each Washington REIT assets. Also included in this organizational structure was the streamlining of our internal and external real estate services. I have been very consistent about our need to realign the resources of this firm to accelerate our transformation into a best-in-class operator of real estate. To that end, we have hired a new asset manager in-charge of our Virginia office portfolio, as well as established a real estate services division. This was accomplished through a combination of internal promotions and the realignment of certain departments to support and provide the highest level of service to our internal customers. We have also directed greater focus towards third-party vendors in leasing, architecture, and other services to add depths to our internal bench, while appropriately managing costs. These are all part of further transforming Washington REIT into an institutional owner and best-in-class operator of real estate in the public markets. Finally, we've recently announced our plans to relocate our corporate headquarters from Rockville, Maryland to Washington, DC. Our new headquarters will be located in the Central Business District at 1775 Eye Street Northwest, which we acquired earlier this year. Following the move, which will commence in the fourth quarter and is expected to be completed in January of 2015, we will continue to maintain a presence at our current office located at 6110 Executive Boulevard in Rockville. This decision is a natural extension of our strategy to focus on owning high-quality, well-located urban and metro-centric assets as part of our overarching objective to enhance our portfolio and drive shareholder value. We are very excited to be moving to this dynamic downtown location. Now, I will turn the call over to Bill, to discuss our operating and financial performance.

[William Camp:]

Thanks, Paul. Good morning, everyone. As Paul mentioned, our core FFO for the quarter was $0.43. This is an improvement over last quarter, driven largely by the progress in leasing in all three portfolios. On a physical and economic basis, overall portfolio occupancy increased 60 and 110 basis points respectively compared to last quarter and 200 and 130 basis points compared to last year. Looking at the same-store pool, physical and economic occupancy has improved 340 and 390 basis points respectively over the past year. We believe, the continued occupancy gain should generate positive same-store NOI growth well into next year. For this quarter, these occupancy gains have translated into 7.1% same-store NOI growth year-over-year and 1.9% just since last quarter. The office division led the way with 9.2% same-store NOI growth. Corresponding same-store occupancy improved 520 basis points to 91.8% from a year ago. This is the highest same-store occupancy in the office sector over the past five years. Just since last quarter, same-store office occupancy improved a 120 basis points. We currently expect these occupancy trends to drive year-end same-store NOI growth above our original estimate of 2% to 4%. Office leasing activity totaled 82,000 square feet for the quarter with GAAP and cash rent increasing on average 23 and 6% respectively. Tenant improvements, leasing commissions, and other incentives were in line with the averages from past quarters. The retail division delivered another strong performance this quarter with same-store NOI climbing 8.1% and physical and economic occupancy increasing 300 and 340 basis points respectively. As the retail portfolio occupancy reaches levels in the mid-90s area, we believe we are reaching stabilized occupancy levels, which support the rental rate increases we are seeing on new and renewal leases. Total leasing volume in the retail division this quarter was 181,000 square feet of which 171,000 square feet were renewal deals. On average, GAAP and cash rents increased 9% and 4% respectively. Tenant improvements, leasing commissions, and other incentives averaged only $2.79 per square foot, largely driven by a number of as is renewal deals. We originally projected the year's retail same-store NOI growth to range between 0% and 1%. We now expect the retail same-store NOI growth to range between 4% and 6%. On the residential side, we originally forecasted residential same-store NOI growth to range between negative 3% and 0%, and we expect it to fall within that range. In the third quarter, residential same-store NOI was essentially flat, compared to last year's numbers. Occupancy continues to improve with same-store physical occupancy increasing 20 basis points in the quarter. The overall occupancy improved 60 basis points in the quarter, indicating solid leasing activity at Yale West and Paramount. Core FAD for the quarter was $0.30, an improvement over last quarter due in part to lower tenant improvements in the third quarter. We continue to expect leasing capital, including tenant improvements, leasing commissions, and incentives combined with recurring capital improvements to total $45 million this year. Year-to-date, that figure was $31 million. On the capital front, we currently have $50 million outstanding on our line of credit. The balance at the end of the quarter was $5 million. The additional borrowing was used to pay for the acquisition of Spring Valley center. Turning to guidance, we narrowed our guidance range from a range of $1.56 to $1.64 to a new range of $1.60 to $1.63. This shift is supported by better than expected same-store NOI growth that we have experienced over the past two quarters. We believe, our current projections put us on a path to deliver Core FFO towards the upper half of our original range. Now, I will turn the call back over to Paul.

[Paul McDermott:]

Thank you, Bill. Last quarter, we discussed our progress in improving our portfolio, processes, and our people. We are making significant changes at this company, yet there are still opportunities for improvement. You should expect continued swift execution of our strategic plan. These changes have been positive for this organization instilling a sense of accountability, but more importantly, creating a platform to deliver on our commitment of creating value for all of our shareholders. We believe, our performance over the past two quarters demonstrates our continued focus and execution on our stated objectives. We are experiencing strong occupancy gain, which are translating into solid, same-store NOI growth. Much of our progress has been in positioning our assets and executing on leasing up vacant space. As the portfolio continues to gain occupancy, we hope to be in a stronger position to deliver continued same-store NOI growth into the future. Washington REIT will continue to appropriately balance mitigating risk, executing leasing plans, and surface additional opportunities to improve the quality of our portfolio. All of these will be achieved with solid execution of our business plan. Going forward, we will build on this quarter's momentum and continued to drive shareholder value by striving to become a best-in-class acquirer, owner, and operator of real estate in the Washington DC region. Now, we would like to open the call to answer your questions.

[Operator:]

(Operator Instructions) Thank you. Our first question comes from the line of John Guinee with Stifel. Please proceed with your question.

[John Guinee:]

Oh, great. Thank you very much. Nicely done, nice quarter. Right now dialing in your recent retail deal, you’re right about 40% levered based on total enterprise value. Assuming you don't go to the equity markets and you don’t dispose of assets what’s the capital plan from here? What options are you looking at and what should we expect in the next 30 to 60 days?

[Paul McDermott:]

John, I think what we’re looking at for the next 60 to 90 days is the same options that we talked about in the past, which are combination of asset sales, combination of looking at options in the marketplace. But quite honestly, the question that's always there is – for us is what is the cost of that capital at any point in time and what’s the cost of the acquisition that we might be making in the future. And we have to balance those out as we've talked about in the past, we've talked about different pools of assets that are eligible for disposition at some point in the future, some have different cap rates than others. So you assess which ones you want to sell at the appropriate time.

[John Guinee:]

If you want to lever up as much as First Potomac, you could acquire another $600 million or $700 million of assets just off of your line, how far are you willing to go on a leverage basis?

[William Camp:]

On the leverage basis, I think, we’re constantly watching the ratios that are most important to our ratings. Other companies don’t have public rating. So we have to play at a little bit different way when we’re looking at leverage being in the BBB BAA2 type rating. You’re managing several ratios and you’re constantly watching them.

[John Guinee:]

And then, Paul, your retail deal looks like about $540 a square foot, but retail can always be complicated. Is that a good price per pound or full price per pound as you look at the replacement costs for that kind of product in that kind of location?

[Paul McDermott:]

Well, first off, John, I think if you know the area, I think that’s an irreplaceable location. This is the first time I would like to point out, I believe, this is the first time this asset’s ever traded since it was developed. So we consider it a coveted retail asset. The dirt loan right now, I don't think we could rebuild it. I also don’t think the neighborhood would let that property get constructed the way it is today. I also – I think we mentioned in our commentary that this is a value-add play for us. We do see two benefits with this asset. Number one, we bought it with some vacancy, and we’re talking to several tenants that are competing for that last piece of vacancy right now. And then secondly, there is some additional FAR, which we have the opportunity by right to tap into. And I can assure that we are – we did acquire that asset to create value. And then finally, one of the things that we didn’t really highlight, but that our portfolio manager is keenly aware of is that we have below market rents in that center, and we are looking forward to capitalizing on those when those leases turn.

[John Guinee:]

Thank you very – concise explanation. By the way, did you quote a cap rate on that asset either in place or stabilized?

[William Camp:]

We did not, John.

[John Guinee:]

You could if you want to?

[Paul McDermott:]

Let's go back to talking about First Potomac's leverage levels.

[John Guinee:]

Have a nice weekend.

[Paul McDermott:]

Thank you, John. See you at NAREIT.

[John Guinee:]

Okay.

[Operator:]

Our next question comes from the line of Dave Rodgers with Robert W. Baird. Please proceed with your question.

[Dave Rodgers:]

Hey, good morning. Paul wanted to talk quickly about the office side, and you guys are obviously benefiting nicely in same-store growth from leases that have been achieved previously. I think the leasing activity relative to what's available, slowed a little bit obviously in 2014, and there are certainly some market conditions that that would justify that. But, I guess, my question really comes down to you on the office side, do you think that kind of the transition at the corporate levels has kind of impeded leasing as you transition from one team to the next in 2014. And I guess the second part if not, I guess, as you look at the specific assets out there, what’s going to move that needle for you from this point forward given the strong performance you had over the last year?

[Paul McDermott:]

I would actually say, let me go back to the first thing on personnel, I would actually say the - we take a completely different view, Dave. I think the transition in personnel has actually accelerated our leasing. Our Delta – we’re shrinking our Delta towards full stabilization. I think across the board, if you look and I think you specifically referenced the office portfolio, our office portfolio if you take out 7900 Westpark, which is undergoing a complete renovation right now, our office portfolio is just over 90%, pretty much in every one of our submarkets. I think with the exception of one, both in DC, Maryland, Virginia, we're outperforming market statistics. I think the move to go to third-party leasing has really had a pronounced effect on our occupancy levels, and I think, we’re going to continue to benefit from that. I also think in terms of the personnel transition that you highlighted earlier, we are going to continue to try to put people in place, put the best team on the field to create the most value for our shareholders, and that’s what I think we’re doing in the office portfolio. In terms of how are we going to create value going forward, the big needle for us – big needle mover for us going into 2015 outside of market improvements and kind of picking up on our leasing velocity is 7900 Westpark. We hope to have that skin completely wrapped by the end of the first quarter. We're already starting to get some nice traffic in there. We are on, I'd say, probably three major tenants shortlisted right now, and we're competing for what I would consider at pro forma or better deal. The second thing is, we kind of have an implied rule around here, do not let tenants out of your buildings. And we have a very heightened focus on retention. Right now, it’s very expensive when tenants leave the building considering where some of the back filling rents are right now, Dave. So I can assure you, we have 100% focus, and that is Tom Bakke's charge and every leasing agent that works for his charge is, maintain the tenants that we have and try to build upon that.

[Dave Rodgers:]

Thanks for that Paul. And then maybe switching to residential, it looks like market rates were down, I think, at least, in the supplement. And I think market rates have been under pressure obviously in DC for quite some time, and you’ve been able to offset that with some of the rehabs that you’ve done in just leasing up some specific state. But I guess, talk a little bit more about your ability to kind of buck that trend if you will with additional rehabs, are those returns still holding or we through that process and you’re going to be a little bit more at will of the market.

[Paul McDermott:]

Well, let’s Dave– yes, Dave, let’s step back for a second and take a look at the markets themselves, Class A rents and Class B rents are up, overall, I mean, albeit minute; Class A rents are, I think are up about 1%, Class B rents are up a little bit below that. If we look around at the markets in general and then I will progress into our assets, the markets in general, I think, Northern Virginia is lagging a little bit in terms of performance. Tysons' rents are growing now. Maryland, what we’re seeing out there is performing well kind of in the low rise and high rise. DC rent is outpacing the suburbs. What we’re looking at in our portfolio is, yes, I think the bulk of the rehabs have probably taken place. We do think there is a little juice left in there, but assets that we’re looking at currently right now in the marketplace, we’re still seeing some rehab opportunities in terms of kind of a discount-to-replacement costs. I think, our return on costs historically have averaged somewhere between 800 and 1,200 basis points. When we go after this, that’s going to continue, Dave, to be our sweet-spot. You’re not going to see us chasing brand new Class A product that we don’t think we can tangibly move rents. I think the other charges for our multi-family group is better retention of the tenants that we have, that’s above 50%, minimize the concession, and then finalizing out those renovations in our current portfolio.

[Dave Rodgers:]

Last question, two parts, the CFO transition, any progress and update on timing and the processes going on there and then all the changes with the transition at the corporate level, any impact that we should be thinking about from G&A guidance in 2015?

[Paul McDermott:]

I’ll start with the CFO transition. We engaged Russell Reynolds in September. They have put together a very qualified list. We have been actively screening candidates and will continue to do so, over the next 30 days. I think that we are comfortable in saying that we will probably have a candidate on board sometime in the fourth quarter – candidate identified sometime in the fourth quarter. And then we will progress from there. In terms of any G&A, we will be alluding to that both in our financial statements and the severance will be included in the 8-K.

[Dave Rodgers:]

Okay. Thanks for all the detail, Paul.

[Paul McDermott:]

You got it, Dave.

[Operator:]

Our next question comes from the line of Brendan Maiorana with Wells Fargo. Please proceed with your question.

[Brendan Maiorana:]

Thanks. Bill, I wanted to revisit the balance sheet. Page 12 of the supplemental of the covenants that are there, I think – so mentioned that you felt like there was going to be continued NOI growth, but I wasn’t sure if you meant that on a prospective basis kind of sequentially from what you put up in Q3 or on sort of a year-over-year basis as we think about the next few quarters. So I wondered about that and then how that kind of relates to how your covenants get calculated, because the one I’m sort of looking at and most interested in is percent of total liabilities to gross asset value, it’s 52% now as it gets calculated. I think when you layer in the retail deal that number was up to 53% and the covenant is less than 60%. So I just – I wonder how much wiggle room you think you have with respect to that covenant. And if you do in asset recycling strategy, sell assets and buy assets that are match funded, it seems like that covenant, the way it gets calculated, that probably even if its match funded would continue to go up as leverage gets calculated. So how much room do you kind of think you have on that one?

[William Camp:]

You actually have a lot more room than you think, but let’s go to the calculation for a second, because it does erode a little bit on depending on the cap rates of acquisitions, because you’re taking your – to get to your total gross asset value you’re using a 7.5% cap on your EBITDA. So when you’re doing that you’re getting – every time you buy a building at a fixed cap and you cap that, you immediately capping at 7.5%, and kind of nicks you a little bit. But just to give you some background, that number, you can run that number north of 55% without any problem for an extended period of time. Just to give you an example when I joined the firm years ago, that number was hovering around 59.5% and we managed through that without too much problem. So because you’re adding the EBITDA, you’re adding your – you’re moving things around, I’m not worried about that one. The one – more to your question though Brendan, I would say, the one that I watch more closely is the one that is not necessarily a covenant. It’s more, things that the rating agencies watch, which is like net debt to EBITDA, those numbers are – those numbers with the sale and the way we calculate that is a rolling historical four quarters so you’re hindsight looking. So if you think about January or kind of the first quarter this year and second quarter this year, where we had sold off medical office and hadn’t had a full course of replacement EBITDA, you cap those when you start capping those quarters into that calculation, that obviously hurts that calculation. And it won’t be start improving really until we get past and we don’t have to include for instance second quarter of 2014 in the calculation. So it’s going to take us couple of more quarters to keep that one kind of start moving that one back down.

[Brendan Maiorana:]

Okay. That’s helpful. And then, just that kind of embedded in the long question that I asked was – so from a prospective standpoint you mentioned that occupancy levels are high on the same store basis, although overall, they’re a little bit lower, because you’ve acquired some vacancy. I think you’ve got some maturities, later this year, early next year. How do you think about NOI growth kind of from current levels not on a year basis but just prospectively from where you were in Q3? Do you feel like that can continue to be positive, given that occupancies moved up to pretty elevated levels?

[William Camp:]

Certainly the growth rate will probably slow, but it won’t – you’re going to have the benefit of all the growth we had this year. You’ll have a full impact of that next year. So on a quarterly run rate basis you’re going to continue to – you should continue to see some pretty good growth until the comps get harder, which would be kind of second and third quarter next year. So fourth quarter and first quarter should still remain pretty strong, but you’re right, I mean, as you lease up your space it becomes more challenging to move those internal growth numbers. Now, where you’re going to see the pick-up as Paul mentioned, is the lease up of 7900, the lease up of 1775 Eye Street, those are the big spots. And there are some other little holes, but quite honestly there’s not a lot.

[Brendan Maiorana:]

Yes, and just on 7900, Westpark, my recollection was that you guys, I thought had a little bit of role that was coming up in that building, but I think the occupancy or at least the lease during it went from 55% to 58%. So I wasn’t sure if that was something that was expected to hit Q4 or maybe you just thought that there was some leasing.

[William Camp:]

There is a lot of moving parts to that building. So for me to be able to kind of pinpoint at the end of the quarter where that occupancy is going to be it’s pretty tough to do. There’s – we have people moving around in that building for swing space and all kinds of different things going on. We did have as advertised I think last quarter and probably multiple quarters ago is we had level three move out and September 30. So that was the last of the downdraft due to the construction.

[Brendan Maiorana:]

Okay. And then just last one Paul, any update on your big three tenants that you could speak about or is it too pretty mature at this point?

[Paul McDermott:]

I’m happy to talk about on, Brendan. First off, I think in terms of let’s start with the closest torpedo to the boat would have been World Bank. We have obtained a commitment from the World Bank for an extension. We are in the process of documenting that right now, so I can’t really go into the final terms and conditions. But I think as we reported out at the last call we felt good about that and I think everything that we have tried to commit to you is coming to fruition with that particular tenant. Second and the big three would be Booz Allen and Hamilton, John Marshall and Tysons. We are in in-depth discussions with them. And have been probably for the last four to six months. We hope to have some resolution to that. Probably I would hope in the next quarter, I can say that we are making substantial progress. And again, we feel good about it, but until that that extension is committed we’re going to keep – continue to aggressively negotiate to our best ability. Finally, the advisory board always comes up on these calls. I need to remind everybody of two things. Number one, that expiration is in 2019, and number two, that our good friend Mr. Richie always like to talk about the new car smell and getting people that new car smell, that’s how you get tenants. That new car smell today is costing about $20 to $25 a square foot more than they currently pay. We are talking to them at the highest levels in terms of discussions and I think we do have some time to continue to negotiate that lease. But again, we’re in pretty detailed discussions with them and we are trying to address all space and operational needs in 2014, 2015 and 2016 and that’s about as far as we can comment.

[Brendan Maiorana:]

Great. Thanks for the color.

[Paul McDermott:]

Sure.

[Operator:]

(Operator Instructions) Our next question comes from the line of John Bejjani with Green Street. Please proceed with your questions.

[John Bejjani:]

Good morning guys. I guess, first question on sort of the operating side, Paul, the portfolio manager model you discussed, is that any different from what was starting to be put in the place at Wall Street before you joined?

[Paul McDermott:]

I think it’s – it might have some of the same elements, but I think, it’s number one, it’s about the portfolio managers. And number two, it’s about how far down you drive accountability. I can assure you from the building engineer to the leasing agent, to the property manager to the asset manager on up to the portfolio manager to the Chief Operating Officer. There are accountabilities now in place throughout the organization that weren’t there before.

[John Bejjani:]

Okay. And for my clarification what’s the split for leasing right now between sort of internal leasing and third-party for you guys.

[Paul McDermott:]

We’re 100% third-party.

[John Bejjani:]

100% third-party? Okay. And sort of building on prior questions on capital allocation, you’ve spoken previously about your desire to sell some of your lower geographic quality properties, when do you see yourselves looking to do that and how do you think about use of proceeds?

[Paul McDermott:]

Well, I think we are continually evaluating. We do every quarter, John. We look at what are performers and which ones are the sub-performers. For us let me start with the use of proceeds, I mean the use of proceeds is going to be to grow the company and grow the respective portfolios. But right now in terms of what we’re looking at selling. I would say, we have some assets that we have earmarked that probably don’t have the same income growth potential on a relative basis to some other assets in our portfolio. I think I said on prior calls, John. I don’t know if you’re on them but these assets, you can’t just take these assets, decide you want to sell and take them to the market next week. There are assets that we need to either do some minor cosmetic renovations or that we need to button up some leasing, but there will be assets that will be sold in 2015 and those will be kind of what we deem to be the low growth providers going forward.

[John Bejjani:]

Great. That’s helpful. And last question, on the CFO search, can you give us some idea what kind of candidates are – what kind of candidates you’re looking for? Are these like former REIT CFOs, private market execs or what are you looking for in a candidate?

[Paul McDermott:]

I can say that and just talking about the clarification that you just highlighted, we have gotten skill-sets from across the board. It’s been a very broad menu. We’re obviously – the new candidate will have substantial capital markets experience. They may or may not be a former CFO. I'm a big believer in grabbing kind of the hungry Lieutenant as opposed to the comfortable colonel. And I would say that, we’re – the biggest thing for us is a chemistry fit within the new culture that we’re building here, that’s going to be critical and it’s not just to me, it’s to the other senior executives at this organization that we feel that we’re going to bring in a Chief Financial Officer that is compatible to what we’re trying to do in terms of growing the company and the balance sheet going forward.

[John Bejjani:]

All right. Great. Thanks.

[Paul McDermott:]

Thank you, John.

[Operator:]

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

[Christopher Lucas:]

Good morning, everyone. Paul, just to kind of follow-up on the personnel questions, you've mentioned that you had put somebody in-charge of the Virginia office portfolio. Is there a corresponding person for the DC/Maryland side, or is that a position to be filled? And will those people then be reporting to somebody above them other than Tom, or how is that organizational structure going to look?

[Paul McDermott:]

Chris, someone had vacated the spot, so we put somebody new in charge of the Virginia portfolio. And, again, we were looking for skill sets that someone that we thought could drive value. We think we have the person on board. We are comfortable with the people that are currently managing both the District and the Maryland portfolio. So, I think, everybody that we bring on has augmented the skill sets that are currently in place and have been very complementary to what we're trying to achieve in terms of overall portfolio performance.

[Christopher Lucas:]

Okay. Thank you. On the – you talked about how you don't let tenants out of your building. What sort of tenant retention have you guys been running at and what are you trying to target? I know it's, obviously, it can be very different quarter-to-quarter, but what's your sort of internal view on that?

[Paul McDermott:]

Well, I think what I said is that our goal is do not let tenants out of our building. Tenants, I think, we have lost – we have either lost to people moving out of a neighborhood or quite frankly, which is common place in a very competitive marketplace, we have some of our competitors that are basically buying deals. And we cannot – we obviously don’t control our tenant's balance sheet. Our retention, I think, our recent retention rate in last quarter was 71%. That sounds a little high. I think, historically, we’ve been on or about 60% in office and retail. I have to get back you to with those exact numbers.

[Christopher Lucas:]

Okay. And then, Bill just…

[Paul McDermott:]

But that’s excluding 7900 Westpark.

[Christopher Lucas:]

Sure. Bill, just trying to understand, on the sort of updated guidance for the retail same-store NOI, was there something specific that didn't occur or what sort of drove the significant jump in guided as same-store NOI there?

[William Camp:]

Well, certainly, we were able to hold the occupancy. We had initially thought that some of the kind of junior box renewals that we posted over the year were candidates for probably replacements and downtime when we originally put out our original estimates, Chris.

[Christopher Lucas:]

Okay. And then just the last question, Paul, just going back to sort of the organizational changes, if we think about G&A run rate going forward and operating margins going forward, should we be expecting much in the way of change, is there going to be much in the way of a delta from either of those two, based on just how you've organizationally changed the company?

[Paul McDermott:]

No, I'm not expecting a lot. I mean, I think, what we’re doing is a couple of things. Number one, I think that when people have vacated the positions, the people that we’re bringing in are probably at or about the same level in terms of compensation, in terms of the packages that we are trying to offer. I think, what we’re trying to do is really get a broader skill set in here and I think we’ve effectively done that when we had to replace people, but we haven’t seen any really demonstrable increase in G&A and I don’t expect that going forward.

[Christopher Lucas:]

Okay. Great, thanks. I appreciate it.

[Operator:]

Our next question is a follow-up question from John Guinee with Stifel. Please proceed with your question.

[John Guinee:]

Question was answered. Thank you very much.

[Operator:]

Our next question is also a follow-up question from Brendan Maiorana with Wells Fargo. Please proceed with your question.

[Brendan Maiorana:]

Hey guys, couple of clean of cleanups. Bill, G&A that is assumed in Q4, I think traditionally you guys expense your health tip and annual comp in there so what is G&A expected to be in Q4?

[William Camp:]

We’re going to fix that one kind of unique thing with our plans last year. So it’s not a big spike in a quarter like it was last year. So that – what we saw as one-time thing we kind of took care of it in the plan language so that won’t reoccur. So I don’t think you’re going to see any kind of really abnormal things in G&A except for you may see some expenses related to the move. Those types of things and severance, those types of things we don’t count in the core calculation, Brendan. But you will see it in actual income statement line item.

[Brendan Maiorana:]

Okay, so I mean just your underlying FFO guidance is a – there is nothing sort of that anomalous about Q4 guidance relative to kind of next year?

[William Camp:]

No.

[Brendan Maiorana:]

Okay. And then, Paul, you mentioned at Spring Valley, the potential to develop a little bit more there or maybe add some density. How meaningful could that be?

[Paul McDermott:]

I think probably, by right it could be significantly meaningful. I think that Brendan, especially, given its proximity to a very powerful residential base, I think our goal is right now that’s to be determined, but I think it could have a – it would have a nice pop, a couple hundred basis points in terms of the value that we can create over time.

[Brendan Maiorana:]

Okay. Just out of curiosity, can you park a lot of additional density there? I know I thought it was a little tight on parking but maybe my recollection is off?

[Paul McDermott:]

I think your observation – it is tight on parking. I think that entire area even including the adjoining retail centers, I mean, they’re all parking constrained. That is a direct function again of the surrounding residential neighborhood and American University.

[Brendan Maiorana:]

Right, okay. All right, great. Thanks guys.

[Paul McDermott:]

Thank you, Brendan.

[Operator:]

Our next question is from Anthony Paolone with JP Morgan. Please proceed with your question.

[Anthony Paolone:]

Yes, thanks. I understand the considerations of cost to capital and where the money comes from for deals. But I’m just curious, are you seeing enough deal flow that you like in terms of being able to find transactions? I know, you're going to hit the $300 million. It seems like this year, but just wondering about the size of that pot of stuff that you would actually like to transact in?

[Paul McDermott:]

Well, Tony, I think what we’re looking at right now is and I will go back to probably my first call a year ago. I think it’s the obligation of our origination team both – or excuse me, in retail office and multi-family to find deals that create value. And if you look at the deals that we’ve transacted this year, 75% have been off-market. We have a good pipeline in retail, multi-family and office. I think we’ll continue to do that. I think in terms of the broader metrics, I will be very honest I expected to see more product to come to the market after Labor Day this year. And I think if you talk to kind of like the big three brokerage firms, they did also. I think looking at some of the values right now, especially on the private equity side. I think a lot of people are – there is about to be a pretty significant metric announced in terms of breaking the $1000 a foot barrier in DC. I do think that that’s probably going to drive more products to the market in 1Q and 2Q. But clearly, we were expecting some assets to come to the market this year. I think told you each one of our portfolio managers has a desired hit-list and some of those assets that we thought we could dislodge in 3Q and 4Q, people just decided to wait. There was a little hesitancy there. But in terms of the things that we’re pursing of market, we at least expect to hit the metric that we’re at this year, we at least to expect to hit that next year.

[Anthony Paolone:]

Okay, great. Thank you.

[Paul McDermott:]

Thank you, Tony.

[Operator:]

We have no further questions at this time. I would now like to turn the floor back over to Mr. McDermott for final remarks.

[Paul McDermott:]

On behalf of our board and our employees, I would like to thank you for your time today. I want to assure you that everyone at Washington REIT is working hard to continue to transform this company into a best-in-class operator of commercial real estate in the Washington DC region. We remain focused on urban infill properties with good access to public transportation and in areas with superior demographics to elevate our portfolio profile. Our results in the third quarter demonstrate our progress on executing this plan and implementing our initiatives to deliver on our principle commitments. Those commitments are to strengthen and grow our portfolio, and more importantly, deliver consistent long-term returns to our shareholders. I want to thank you again for your time and we look forward to updating you on our continued progress in February and we hope to see many of you in two weeks at the NAREIT conference. Thank you.

[Operator:]

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