Elme Communities
Q3 2013 Earnings Call Transcript

Published: 24 Oct 2013

[Operator:]

Welcome to the Washington Real Estate Investment Trust’s Third Quarter 2013 Earnings Conference Call. As a reminder, today’s call is being recorded. Before turning the call over to the company’s new 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 on 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, WRIT’s new President and Chief Executive Officer, Bill Camp, Executive Vice President and Chief Financial Officer and Laura Franklin, Executive Vice President and Chief Accounting and Administrative Officer. Now I would like to turn the call over to Paul.

[Paul McDermott:]

Thanks, Kelly. And thank you everyone for joining us on our call today. As I enter into my 17th day on the job, I’m going to make some brief introductory comments about general market conditions, bring you up-to-date on the medical sale, and highlight our recent multifamily acquisition. After that, I will turn the call over to Bill Camp to discuss our financial performance, and outline our operational performance for the quarter. The stability of the Washington DC economy was apparent during the third quarter as job growth and low unemployment continues despite political gridlock. The majority of this job creation however, can be attributed to non-office occupying sectors such as leisure and hospitality, retail trade, and education and health. With little organic growth from traditional officer users, and an emphasis being placed on space utilization, the office market remains very challenging as absorption is well below historical levels. Our office portfolio continues to demonstrate improvement on the leasing front. We attribute much of our recent success to our aggressive capital improvement programs in many of our buildings. During the third quarter, we signed nearly 150,000 square feet of new leases, and an additional 140,000 square feet of renewal leases. Since the beginning of the year, we’ve signed over 300,000 square feet of new leases, representing the most new office leasing we have done in any year since the financial crisis began in 2008. Our multifamily portfolio occupancy increased 100 basis points as compared to the second quarter. Much of this can be attributed to the seasonally strong leasing in the summer month. While we are seeing the beginning signs of slowing rank growth in the market due to the new supply coming online, our portfolio is still experiencing rental growth of 2.6% year-over-year. Much of the rank growth in our portfolio can be attributed to our ongoing unit renovation program where we continue to experience 8% to 12% return on cost per unit. Subsequent to quarter end, we expanded our multifamily portfolio by acquiring the paramount, a 135 unit apartment building located in the crystal city submarket or Arlington, Virginia, This acquisition is our first multifamily acquisition in five years, and reflects WRIT’s continued commitment to purchasing well located assets in urban metro-centric locations with strong access to transportation, and exceptional demographics. Even with the near term supply changes, we continue to see the multifamily market as one of our core long term investments in Washington DC. The retail market continues to show improvement due to the solid demographics of the region. We find 50,000 square feet of new leases and over 110,000 square feet of renewal leases. Rank growth in this sector remains strong with new and renewal leases increasing an average of 10% on a cash basis for the third quarter. On September 27, 2013, we entered into four separate contracts with a single buyer to sell our medical office portfolio and two office assets comprising a total of approximately 1.5 million square feet. The combined sales price is 500,750,000 or approximately $329 per square foot. The portfolio consists of 17 medical office properties, and two suburban office buildings. 6565 Arlington Boulevard and Woodholme Center as well as a land parcel located in Alexandria, Virginia. The projected closing date for the first two transactions, is November 12, 2013, and the outside closing date for the second two transactions, is January 31, 2014. Since announcing the sale of the medical office portfolio, we have been actively tracking, and pursuing acquisition opportunities that meet our investment criteria, specifically, office, multifamily, and retail properties, located in dense infill locations, with access to transportation nodes and in some markets, with strong demographics. Now, I’ll turn it over to Bill Camp who will discuss third quarter performance and details regarding the medical office portfolio sale.

[Bill Camp:]

Thanks, Paul. Good morning everyone. Today, I like to discuss the overall third quarter performance, detail on medical office portfolio sale and discuss our expected fourth quarter Core FFO. Core FFO for the third quarter was $0.46 per share, down a penny from the second quarter primarily due to the decline in the medical office division performance along with a decline in one of the suburban office buildings that’s included in the portfolio sale. Core fed [ph] for the quarter was $0.34 per share in line with second quarter results. To highlight the quarter, same-store NOI improved 1.5% year-over-year on a GAAP basis. We realized positive same-store growth in all three of our property sectors. Overall, commercial leasing volume in the portfolio increased for the fifth quarter in a row with approximately 480,000 square feet of new and renewal leases signed during the third quarter. Year-to-date, we have signed approximately 430,000 square feet of new leases. This is the highest new – highest level of new leasing volume in any year since 2008. For the third quarter in a row, we achieved positive net leasing absorption with new commercial leases signed out-pacing tenant move-outs by 118,000 feet. Coupled with greater leasing volume, we continue to see consistent GAAP [ph] rent increases and longer term leases. While the region’s real estate markets remain challenged, we believe the long term leases are an indication that tenant confidence may be improving. Same-store occupancy was flat quarter-over-quarter as we experience continued improvement in our office portfolio occupancy of 30 basis points and seasonal improvement of 100 basis points in multifamily. The retail portfolio experienced occupancy declines driven by a previously announced move-out of giant grocery at our Braving [ph] Shopping Center, and a 22,000 square foot tenant at our West Manchester Shopping Center. However, old vacancies have been released in their entirety at substantial cash rent increases. As you may recall, we released the Braving Shopping Center space in the first quarter to fresh market prior to Giant vacating, which was a great accomplishment for the center and the retail team. As Paul mentioned, leasing volume across all our sectors were strong, office retail and multifamily continued to experience solid leasing activity and the momentum seems to be carrying forward into the beginning of this quarter. Now, I’d like to discuss the medical office portfolio sale. As Paul previously mentioned, we have entered into four separate agreements. Ending the successful close in the sale, we will have changed our asset allocation in terms of GAAP NOI for office, retail and multifamily to approximately 56%, 25% and 19% respectively. We will also have increase our asset allocation in terms of GAAP NOI coming from assets located inside the beltway by approximately 600 basis points from 53% to 59%. Please note that these allocations do not include our recent multifamily acquisition which will further increase our waiting in the multifamily division and further increase the NOI coming from assets inside the beltway. We anticipate our asset mix will change in the coming quarters, as we reinvest the medical office sale proceeds across the three primary business lines, office, retail and multifamily. We structured the sale into four separate transactions to provide as much flexibility as possible for the reinvestment. The first two transactions totaling approximately $307 million, are anticipated to close on November 12. We expect that we will be able to absorb the taxable gains generated by these two sales into our existing 2013 dividend distribution, thus eliminating the need to structure these transactions to meet the 10-31 requirements. After the repayment of existing mortgage debt associated with a few of the assets in the portfolio, we expect gross proceeds of this first tranche to be approximately $280 million. Given that these proceeds will be free and clear of any restrictions, we anticipate using the proceeds to pay off our line of credit balances, and most likely repay $100 million, five and a quarter notes that come due on January 15th. The last two transactions were structured to be potential 10-31 exchange transactions totaling approximately $194 million with an outside closing date of January 31st. Structuring this part of the deal into a $79 million sale in a $115 million sale provides us as much tax planning flexibility as possible. You may recall, we did a similar structure for the industrial portfolio sale in 2011. I will be happy to answer any additional questions about the transactions during the Q&A session of the call. Let’s move to projected fourth quarter numbers. Given the timing of the transactions we just outlined, and the other activities on going in the firm, I want to walk through the update fourth quarter in 2013 guidance that we outlined in our press release. Recall from last quarter, we estimated the full impact of the MOB sale, to be roughly $0.04 per month until we reinvest the sale proceeds. The full effect of this would not begin until the second quarter of 2014. Given the structure, we do not anticipate ever realizing the full impact in any quarter because of the benefit of paying down debt and we currently expect reinvestments like the Paramount to occur along the way. Since we are only scheduling the first two closings on November 12, we double play the fourth quarter impact to be – to total $0.04. This will be offset by approximately $0.01 due to the multifamily acquisition. Also, as we have discussed throughout the year, G&A expense will increase in the fourth quarter due to an estimated charge for one-half of the payout on our executive comp management’s 2011 to 2013 long-term intended competition plan. The plan spans strategic performance over the past three years, and is paid out 100% in equity which 50% is delivered at the end of this year, and 50% vest next year. This year’s impact is estimated to be $0.03 to $0.04. Additionally, G&A will be impacted by severance cost related to the retirement of the CEO, and the separation agreements with employees relating to the medical office portfolio sale. This severance cost impact is estimated to be $0.04 which by definition will not be included in our Core FFO results. Adding these all up, we expect fourth quarter Core FFO remains between $0.39 and $0.41 and the full year Core FFO to range between $1.76 and $1.78. We plan on giving full year guidance for 2014 during our fourth quarter earnings call in February. Now, I’ll turn the call back over to Paul.

[Paul McDermott:]

Thank, Bill. Before we open the call for questions, I thought it would be important to mention, that our live, work, shop strategy, is key to growing this company and getting back on the path of growing future dividends for our investors. I’ve had the opportunity to observe this company throughout my nearing 30-year real estate career. I thought I would share a few initial thoughts under the backdrop that I think is a great competitive advantage that this company can invest, asset manage, and when appropriate, dispose of asset successfully in the three major classes of commercial real estate, and one of the best commercial real estate markets in the world. With that said, first, I want to reinforce that WRIT is committed to the continued implementation of the work – live, work, shop strategy. Second, to accomplish this, we will utilize all vehicles at our disposal, to execute on this strategy. This includes acquisition, new development, and the redevelopment of some of the legacy assets in our portfolio. Next, we will aggressively continue to improve our current portfolio and recycle out of those non-core assets in an effort to create long term value for our shareholders. And lastly, I want to assure investors that all the resources of this firm will be appropriately aligned to accomplish this mission. I’d also like to point out that with the completion of our MOB portfolio sale, and subsequent reinvestment of the proceeds. This firm will have recycled properties representing one-third of our entire market cap over the past three years. To me, that’s quite an accomplishment for a firm that historically, did not sell many assets. Moving forward, I see the value proposition for our shareholders, even driving the strategy of improving the quality and location of the assets and focusing inside the beltway and near metro or in areas with strong demographics. As some of you may know, I’ve lived and worked in this market my entire life, and I believe there’s still many quality investment opportunities to WRIT, and its shareholders as we look toward the future. Now, I will open the call for questions.

[Operator:]

Thank you. We will now be conduction a question and answer session. (Operator instructions) Our first question comes from John Guinee with Stifel. Please proceed.

[John Guinee:]

Great. Thank you, and Paul, welcome aboard.

[Paul McDermott:]

Thank you.

[John Guinee:]

The essence of what I think on everybody’s mind is that, as we all know, to buy a core asset, whether it’s a – office apartment or retain in any location you really want to own in the live, work, play strategy, it’s anywhere from sub five on a – apartment to sub six on an office, so how are the – how’s the team going to sort of look at those options versus value add option, going out the risk curve a little bit, versus share buybacks.

[Paul McDermott:]

Well I’ll speak to the real estate side of it first. In terms of how we’re looking at those assets, you’re right, on terms of going in cap rates, but I see a couple of opportunities for WRIT in terms of – we’re going to have to pay to improve the quality of this portfolio. And we are focused on long term value proposition for our shareholders. So while I understand that the year one going in cap rate, maybe below our cost of capital, we think that the assets that we’re moving into, the asset classes that we’re moving into in terms of quality, we will have a better opportunity to grow NOI in those assets rather than the one that we’re getting out of. I do see us being able to, because I do feel like we have a quality team that can lease and manage assets to drive value. I would say that I think in certain, in some markets, we are willing to take some leasing risk, and to your point going out the risk curve a little bit, but that will be a evaluated on a sub market by sub market basis.

[Bill Camp:]

And so John, in terms of the share repurchase, we’re obviously, you know, with $307 million closing, that’s free and clear to us, it becomes a mathematical calculation to see if that makes sense, at least for a portion of those proceeds, haven’t ruled anything out at this point, but capital is hard to come buying [ph] in the real estate, especially for WRITs that have to give 100% of their capital back in the form of dividend every year. So you have to treat those decisions very cautiously.

[John Guinee:]

Great. And then the second question is, you know, very successful 480,000 square feet of office leasing, but it was fairly costly by my math, it’s about $5.65 per square – per year, $5.65 per square – per year of recounted [ph] in cost for a 4% to 12% increase in GAAP rents. Do you think that’s the market going forward in the office world in DC?

[Paul McDermott:]

It’s breaking up into two things, John. First, yes, you’re right, absolutely. The answer to your overall question is, you’re right. It is expensive to do the business in the DC market right now, but let’s break this up into two parts. We did 85,000 foot lease for the Alexandria schools, John, in our Bradek [ph] location. That lease is a 15-year lease, it had some substantial TIs and leasing commissions and some free rent. And when you take that deal out of the mix, you could assume that our office statistics like up almost on top of the last five quarters’ statistics. The lease term basically falls to about seven years, the average cost TIs fall to kind of that 36, 37 area, the leasing commissions fall to $10 compared to where they were the last few quarters, they’re actually better, and the free rent number basically is on top of where it was, so that one deal, I think if I had to categorize it, it’s certainly better than to have an 85,000 feet [inaudible].

[John Guinee:]

Great. Thank you very much.

[Paul McDermott:]

A lot to do in business.

[John Guinee:]

Great. Thank you.

[Operator:]

Thank you, our next question comes from David Rodgers with Robert W. Baird. Please proceed.

[David Rodgers:]

Paul, welcome. And brokers [ph] are managing the fact that around the MOB sale – you know, I guess, really I wanted to maybe dive in and follow up on John’s question and kind of the economic side of it with that, maybe the more real time scenario of, you know, what are you seeing in DC in terms of the pipeline for apartment resale and office reinvestment that kind of hits your criteria and how should we think about that over the next six or nine months in terms of putting that money to work in some form or another.

[Paul McDermott:]

Well on a macro level, I mean, the lack of quality product out there is again, we’re heading in towards year-end, the lack of quality products has been you know, a bit disconcerting, but we are focused on looking at the some office product in and around downtown Washington. We have both from a, you know, development standpoint, and acquisition standpoint, we are looking in multifamily right now. And as from a retail standpoint, I don’t know if we’re going to see a lot more product before year-end. But we’re trying to exhaust our relationships and get out and meet with appropriate owners and brokers. And we retail in multifamily, I think if you look at our concentrations across all the asset classes in our portfolio, I think we would like to see a little bit more activity in the retail and multifamily space. And in the office space, we would like to probably opportunistically recycle out of our legacy office product and add and improve the quality of our office portfolio.

[Bill Camp:]

Hey, Dave, in terms of the medical office sale proceeds, you know, one thing that is important to note because I know there was some conversation in the market place about it, this is – what Paul was describing in terms of on the year-end and the thinness of the market in terms of acquisition opportunities, is precisely why we kind of put these closings out as far as we did on that transaction and quite honesty get that 10-31, the 10-31 timing of the transactions closing out in January.

[David Rodgers:]

OK. That’s helpful. I guess maybe on the apartment side, going back to an early comment you had made Paul and that was regarding the redevelopment renovation, pitching in that upgrade, however you want, I guess view that, can you talk about kind of what you’re putting in to ease up [ph] or average investment per unit and what the returns have been to date, and kind of how far through that process as you look at kind of what you can upgrade on the portfolio, how far through that process are you?

[Paul McDermott:]

I can tell you that year-to-date, I think we’ve done 163 units. We probably average about 12,200 plus per unit. I think our target number this year is 200 units by year-end. Bill, in terms of before or after stratifying [ph] that?

[Bill Camp:]

Yes, the – we are getting basically – it depends on the asset. We’re getting about 8% to 12% returns on those things. It’s actually, Dave, we’re getting about $100, $150 extra a month in every unit that we’re renovating across the portfolio, so I mean it’s really good capital. It’s hard to find a better return on our capital in any place in the portfolio that’s that good right now.

[David Rodgers:]

And I guess is this how you’re viewing the apartment acquisition going forward if that ends up being an avenue for growth? Is it kind of more of a redevelopment or a rehab play, and then maybe a dovetail to that is that – how are you underwriting apartment growth in the first couple of years given the supply coming in DC?

[Paul McDermott:]

Well, we’re definitely slowing down our rental growth projections. And given the supply, the oncoming supply that you’ve talked about, I think that, again, it’s going to be a bifurcated strategy. We are continuing to actively look for joint venture opportunities to position ourselves at quality class A units or portfolio. We currently have only 2,540 units. So I think we have plenty of room for growth in the multifamily sector. And then given the age of some of our current assets in our portfolio, I think there are still redevelopment opportunities and repositioning opportunities with those units. But I don’t see that – us having hat much depth to do that going forward in terms of – I think a lot of these units are up to speed and or competitive in the marketplace. So we’re really attacking the – kind of the older units right now and we’re trying to get that immediate income pop. But again, we have a multifamily group here led by Ed Murn, and we want to continue to grow that multifamily footprint in the metropolitan area. David Rodgers – Robert W. Baird & Co. Great. Thank you.

[Operator:]

Thank you. Our next question comes from Michael Knott with Green Street Advisors. Please proceed.

[Michael Knott:]

Hey, Paul, welcome to the WRIT world.

[Paul McDermott:]

Thank you.

[Michael Knott:]

I’d like to just ask you I guess, now that you’ve said you’re on your 17th day, what’s sort of your view of the Wall Street operating platform, strengths and weaknesses? And I guess, do you feel like you’re going to be able to compete with the great specialized companies in each of these three business segments in a competitive market like DC? What’s your initial take?

[Paul McDermott:]

Well, thank you for the soft ball. First off, let’s talk about Washington WRIT. I think it’s safe to say, good platform like any company in Washington in the WRIT space, I think there are opportunities for improvement anywhere. We are focused right now. And so what you can expect out of the next 90 to 120 days is we are focused on really becoming a little bit more granular on the type of product in each asset class that we want to go after. I’m talking about unit size, unit mix and multifamily, age of product, specific submarkets. We’re going to try to drill down on all of that before year-end. And then we are going to make sure that we are appropriately aligned in terms of WRIT’s resources both to execute on the acquisition or on the development. And then we want to be best-in-class asset managers and we are going to align ourselves accordingly to do that. In terms of strengths and weaknesses, I think the strength of this organization, number one, are its rich history; number two, I’ve been fortunate enough to become part of a great team and good people with outstanding skill sets. I think there are probably some opportunities for growth in terms of certain disciplines within the WRIT infrastructure. And when I say that, I’d like to – obviously, once we are fortunate enough to acquire asset, we need to continue to try to drive the bottom line, and so we’re trying to look at that on an asset by asset, on an asset class by asset class basis, and then on the portfolio. And then, three, we do have a – the good news is we have a portfolio. The challenging news on some of it is just really CapEx. And CapEx in Washington DC, as a market, has some older product both downtown and in the Suburbs and you – the one thing we were mentioning earlier, how competitive and how expensive it is to do leasing right now. It’s really forcing landlords to take a good hard look at their assets and look at every dollar that needs to go back in to be competitive. And that’s what I think one of the biggest – one of the most immediate priorities for WRIT is going forward. How do we sack up against groups that are, let’s say are specifically retail focused, multifamily focused or office focused? Right now, in terms of at the highest level, we own approximately 1% of the office products. We own 2% of the retail and approximately 0.5% of the multifamily within our portfolio. I think what that says is there’s plenty of opportunity for growth in all of those asset classes. And I think that you can look for WRIT to look outward more in terms of new product, considering potentially new structures to do potentially deal. We are definitely going to be looking specifically in multifamily for more joint venture opportunities. And I would say that that’s probably an opportunity for us across all the asset classes.

[Michael Knott:]

Okay, thanks for that answer. I appreciate that. On the multifamily side, when you talked about joint ventures, are you thinking more in terms of development like the firm has already lined up before you came on board or are you talking about existing assets?

[Paul McDermott:]

I think both. I think there are probably redevelopment opportunities within our portfolio. And then we want to continue to execute – evaluate and execute on the JV that we are currently in. But we are spending a tremendous amount of time in the fourth quarter, led by Ed, reanalyzing the submarkets that we want to be in and to penetrate those submarkets. And they take the form of either a straight up acquisition or a development opportunity with an outside developer.

[Michael Knott:]

Okay. And just if I can ask one more question. I would infer from all your comments you’ve made that you’re most optimistic about maybe apartments and then maybe retail. And it seems like that would be where we would probably expect to –

[Paul McDermott:]

Office is currently 56% of our portfolio, retail is fine trying to – I’ve been asking them to really be thoughtful on how to grow the footprint. We’ve talked about strong demographics. We’re trying to be in front of the curve, not behind it. And so, I think our office footprint, you won’t see it expand tremendously, but we do have the opportunity to prune some of our current portfolio holdings to add room to increase quality portfolio office holdings within the portfolio.

[Michael Knott:]

Okay, thanks a lot, Paul. I look forward to meeting you.

[Paul McDermott:]

Thank you.

[Operator:]

(Operator Instructions) Our next question comes from Brendan Maiorana with Wells Fargo Securities. Please proceed.

[Brendan Maiorana:]

Thanks. Good morning. Paul, the question for you is, just thinking about the investment activity, and maybe this is for Bill too, if I heard your comments correctly, Bill, you’ve got $300 million first few tranches of closing the MOB. You can – and that is, there wouldn’t be implications if you didn’t invest that right away, there are no tax implications. Would you kind of think about maybe sitting a little bit and waiting if you don’t view that asset pricing in the district today or in the metro DC area is attractive, and is that something that is a possibility if we think about rich investment strategy over the next several quarters?

[Bill Camp:]

Brendan, I would say you’re right on target. I mean the – we structured this thing – we worked hard to structure this thing to get as much free and clear money to us as we could. So $280 million – if you get any kind of return, I’m going to pay off debt temporarily. That buys us some time that I get at least a little bit of return on it. But you’re absolutely right. If we don’t see the opportunities and we don’t have a gun to our head with that set of proceeds and we have $280 million after we pay off the mortgage debt out of that sale, so it’s $280 million. We’re probably sitting around 135 on the line right now with the buy of the apartment building and then the $100 million in January, so $235 million right now I can kind of set aside for debt repayments. And then we have $40 million of cash out. And quite honestly, I think all of you would want us to wait and be patient with that money even if it is – it’s a near-term delusion.

[Brendan Maiorana:]

Yes, that’s helpful. And I mean, so, I guess your view, Bill, would be it’s – let’s not worry too much about what the implications might be for near-term earnings because we think about ‘14 as better and we think the prices have gotten a little bit – probably [ph] and we can’t find good investment opportunities, we’ll pay it a little bit and it’ll be better for us, or longer-term outlook [ph] as opposed to maybe trying to meet a particular number for ‘14.

[Bill Camp:]

Yes. I mean, obviously, we’re very focused on that second set of closings. So we have $194 million closing in January, sometime or latest date is January 31st. Those are – we are certainly anticipating that those transactions will be in 10-31 transactions. So that was a gun to your head, as you know. So you have after that, as most of you know on the call, 45 days to identify properties in each sale. And then you have six months to close. We like to get that done. We don’t really want to have a kind of a tax defense because of the 10-31s. But at the same time, the alternatives aren’t all that bad. The worst case scenario here is we give part of the proceeds back to the shareholders in the form of this special dividend if we had to. And we like to invest them, but we also know that it’s kind of your money. So we’re trying to do what we think is the right thing.

[Brendan Maiorana:]

Yes, that’s helpful. So Paul, maybe if I can ask you, given that you’ve had your entire career in DC, as you think about a risk reward outlook and where asset prices hit today, do you feel like it is a good entry point in terms of DC real estate if you think about apartments and retail office or is it an area where maybe there’s a little bit on the scarcity value, as you guys have talked about, which has driven prices up and returns down, and maybe that equation changes a little bit sometime over the next 12-months or so?

[Paul McDermott:]

Well, I think it’s a combination of a number of factors. Number one is I don’t see the inflow of capital – of people that want to be in DC stopping anytime soon. Some of the deals that we have looked at in the last 30 days, the traffic counts and tourists have been over 50. And these are for what I would consider class A assets, not trophy assets. So that’s not going to go away. Number two is that a lot of the people and a lot of the portfolio managers that I talked to from just interacting with them from prior lot [ph], they’re not as aggressive to sell assets right now, specifically any of the core assets because they don’t know where they’re going to put the money next. And as we all know, it’s tough to sell with these cap rates and then find a deal that’s equal or better. I think we have to be very selective about the assets that we go in, and that’s not just – that’s office, multifamily, and retail. I think that looking at some of the – and I’ll pick on multifamily first a second, looking at sub-five multifamily deals, that’s hard for us to make it work because near term we think that income is going to be tough to grow and we do think that expenses are going to continue to grow. So that’s why we’re, as I said earlier in my remarks, we’re going to try to look at all vehicles possible at our disposal to break in and expand the footprint in each one of these asset classes. But please make no mistake. We understand the current pricing, but we are focused on creating long-term value creation for our shareholders, not next quarter.

[Brendan Maiorana:]

Sure. No, that’s helpful. And then just last one for me for Bill. And I think if I heard your prepared remarks correctly, as we think about G&A for next year also which is also a factor in a roughly comparable level of [inaudible] cost and for ‘14 as well?

[Paul McDermott:]

It’s a little bit less, Brendan. It is 50-50, but you have to remember that because of Skip’s retirement, his portion of that plan will accelerate into this year. It’s part of the severance cost that I’ve added up in the other bucket. So it’s probably a $0.02 hit next year. And it would be spread out over the four quarters.

[Brendan Maiorana:]

Okay. And did his severance cost and his portion of the [inaudible] that’s included in your core, and then I guess the other thing associated with the MOB severance is – that’s not included in the core guidance, is that right?

[Paul McDermott:]

Let’s go back. So obviously, the solution in things like that, it’s associated with medical offices in the core numbers. The severance cost for Skip and for the medical office personnel that are going out are not in the core numbers. So, the only thing that’s in the core numbers are actually compensation to those employees that would remain at the firm. Does that make sense?

[Brendan Maiorana:]

Okay. But the L tip [ph] that changed that – Skip’s portion of the L tip [ph] which is again a ‘13 number, is that also not included in the core part, you’re stripping that out of the core?

[Paul McDermott:]

Yes.

[Brendan Maiorana:]

Okay. Okay, got it. Thank you.

[Operator:]

Thank you. We have a follow-up question from Michael Knott. Please proceed.

[Michael Knott:]

Paul, I was wondering if you can just give us your view on the different DC area markets sort of Maryland versus downtown versus Virginia. And I know it sounds like you’re focused on inside the beltway, but just curious, your views on the different markets where we might expect to see you get bigger or smaller and then just also any views on what might bring the office market back to life a little bit.

[Paul McDermott:]

We’ll have to – I’ll start on 1600 Pennsylvania Avenue then talk about one of those. But let’s start with DC right now. And just let’s review the facts. Right now, in 2013, we’ve delivered almost 400,000 square feet a year. We’re used to probably delivering about 2.5 million square feet a year. We’ve only absorbed – we haven’t even absorbed 0.5 million square feet net this year in DC. Vacancy is just over 10%. And we’re seeing a lot of small deals get done with shorter durations, not the kind of big meaty deals that we’re used to. I think the – kind of the good news, the takeaway out of that is that we recognize that we’re about to come into a pretty voracious cycle in terms of from 2015 to 2019, you’re going to have a lot of these law firms and associations turning over. And there’s going to be really limited new supply coming on. So we like DC long-term. I don’t think, given our current portfolio holdings, that you’re going to see us continue to load up in the west end. I think we’ve got concentration risk there in terms of adding more products. We are going to look into CBD. We are currently looking into CBD and we are currently looking in the east end. I think those two markets are probably going to be our main focus in terms of downtown. Maryland, just a jump up the corridor. We really are keeping our eye on what’s going on with NIH and more importantly, what’s going on with the health sector, a big driver up here. We do have suburban products. And we are trying to recycle out of that product, and in terms of putting ourselves in front of the path of NOI growth and quality growth for our portfolio. So, I probably wouldn’t see us adding a lot of new products in Maryland. That might be a net depletion from the portfolio. North Virginia, there are so many submarkets to talk about. As you know, we have product in Titans and we have products a lot closer in. I think in terms of our immediate need, I wouldn’t really see us focusing from an office standpoint and kind of that Crystal City 3-95 Rosslyn Corridor only just because we’re still digesting like everybody else the residual on brack [ph]. But we do think there are pockets, especially [ph] with some of the products that we have. We’re looking at a redevelopment opportunity in Titans right now. I think we’re going to continue to try to be opportunistic in terms of our growth. But Northern Virginia as a whole right now, I mean I’m used to that market probably being in the 12% to 13% vacancy and it’s at 17% right now. And so, we’re going to be very selective of how we dip our toe on the water. These comments are obviously almost exclusively geared on the office front. We are just in general trying to expand our footprint in multifamily. And as I said earlier, Ed’s going to be looking at a number of different submarkets. We just did a deal in Crystal City. I could see us doing another on there just because we like the demographics, we like the transportation, those that are in our disposal there. And then retail is – admittedly, we think retail is going to be the most challenging to break into, but I’m very confident that we’ve got a good team and a good strategy to execute on a retail deal. And that’s the big goal of ours to have that sort of portfolio in the first half of next year.

[Michael Knott:]

Okay. And then just one more for me would be, on our numbers, you guys created something like a 10% NAV discount. And when you think about the changes you want to make to the portfolio, how much of the public market cost of capital signal, how much is that figure into your thinking in terms of whether if you’ll expand on a net basis or maybe recycle out and use those funds to make your investments? How does the public market aspect of it figure into your thinking?

[Paul McDermott:]

Well, Michael, if you take our share price down to like $10, I’m not going to be able to do much of anything. But all kidding aside, obviously the public market valuation is important to us. Right now, one of the main drivers behind getting out of medical office was, we thought it was a cheaper source of capital than we could get elsewhere externally besides just levering up the company. So that was one of the strategies behind that sale, was to kind of capitalize on our internal value of equity capital and being able to redeploy that into areas that we think might be a little diluted, but it’s not going to be as diluted as going out to the open market and raising equity. So, we are very conscious of where that equity price is and what the cost is. And certainly, we don’t want to lose the balance of – the flexibility of our balance sheet that we’ve built over the last four, five years. We don’t want to lose that. So, it’s not like we’re just going to lever up the firm and try and do crazy deals at low cap rates. That’s not the plan. So, it could enter in. I mean, it could be – back to Brendan’s question is it wise to delay some of this reinvestment? It could be, and those are all things that we have to consider as we move forward.

[Michael Knott:]

Okay, thanks.

[Operator:]

I would like to turn the floor back over to Paul McDermott for closing comments.

[Paul McDermott:]

Okay. I want to thank everyone for listening to the call today. And I look forward to personally meeting many of you at NAREIT in a few weeks. Have a good rest of your day, folks. Thank you.