Transcript
of
Washington Real Estate Investment Trust (WRE)
First Quarter 2008 Earnings Conference Call
April 29, 2008
Kelly Shiflett, Senior Manager of Finance
George F. McKenzie, President and
Chief Executive Officer
Sara L. Grootwassink, Executive Vice
President and Chief Financial Officer
Laura M. Franklin, Executive Vice
President and Chief Accounting & Administrative Officer
Michael S. Paukstitus, Senior Vice President of Real
Estate
Operator
Greetings and welcome to the
Washington Real Estate Investment Trust First Quarter 2008 Earnings Conference
Call. At this time, all participants are on a listen-only mode. A brief
question and answer session will follow the formal presentation. If anyone
should require operator assistance during the conference, please press *0 on
your telephone keypad. As a reminder, this conference is being recorded. It
is now my pleasure to introduce your host, Ms. Kelly Shiflett. Thank you, Ms.
Shiflett, you may begin.
Kelly Shiflett – Washington Real Estate Investment
Trust – Senior Manager of Finance
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 first quarter
supplemental financial information is also available on our website.
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. Although such
statements and projections are based upon what we believe to be reasonable
assumptions, actual results may differ from those projected. Key factors that
could cause actual results to differ materially include changes in the economy,
the successful and timely completion of acquisitions, changes in interest
rates, leasing activities and other risks associated with the commercial real
estate business and as detailed in our filings from time to time with the
Securities and Exchange Commission.
Participating in today’s call with
me will be Skip McKenzie, President and CEO; Sara Grootwassink, Executive Vice
President and Chief Financial Officer; Laura Franklin, Executive Vice President
and Chief Accounting and Administrative Officer; and Mike Paukstitus, Senior
Vice President of Real Estate. Now I’d like to turn this call over to Skip.
George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer
Thank you, Kelly. Good morning and
thank you for joining the Washington REIT’s conference call today. Much has
changed in the U.S. economy and the real estate markets even since our last
conference call. The economy continues to weaken as evidenced by the loss of
80,000 jobs reported in March and the national unemployment rate, which increased
to 5.1%, a nearly three-year high. Although Washington is not immune from this
nationwide slowdown, our region continues to remain very resilient and
consistently outperforms the nation in almost all major metrics. The Washington area’s unemployment rate is 3.5%, the lowest in the nation. It’s actually below
the national average, the average rate experienced in the 90’s, which was 3.9%
in our region. It has only increased slightly from 3.4% one year ago.
Payroll growth in our region over
the last 12 months increased 27,600 jobs which is approximately one-half the
long-term average of 53,000 per annum. This slowdown is material and has had a
significant impact on the leasing absorption in our markets.
Our region typically absorbs 8
million square feet of office space per year or 2 million square feet per
quarter. For the first quarter of 2008, the net absorption was approximately one
million square feet or one-half the long-term average. While occupancies are
generally healthy, when vacancy does occur, the lease up times have
significantly increased.
Overall vacancy in a region is up
from a year ago, but I encourage you not to paint the region with a broad
brush. While there are pockets of vacancy, most of the submarkets where we
invest are solid. The District of Columbia remains one of the best performing
markets in the country. Rents are up and vacancy is actually down in this
market. While there is some concern about the impact of the 8.7 million square
feet under construction in the District, we expect single digit vacancy rates
to continue over the next 12 months. The District is joined by most inside the
Beltway submarkets, which enjoy strong occupancies and arduous development processes.
Market conditions in the fringe sub-markets,
and specific to WRIT - the Dulles Corridor, remain weak and will continue to be
the most challenging market to navigate through this year. WRIT’s only notable exposure to these markets is our Dulles Station development, as Mike will
discuss shortly.
The dysfunction in the credit
markets continues to impact acquisition activity. Deal flow is down
dramatically as sellers are generally reluctant to mark their assets to market
and buyers are either struggling to find financing or are waiting for the
better deal on the horizon. Having said that, the DC region continues to be
recognized as one of the top investment markets in the world, and ready capital
continues to be aggressively deployed for select assets and high barrier–to-entry
submarkets such as downtown office, grocery anchored retail, and infill
high-rise multifamily.
Over the past 47 years, WRIT has weathered many numerous challenging real estate cycles. Our diversified portfolio,
infill property location, and hands-on management focus continue to provide
superior results. Our first quarter performance exemplifies our ability to succeed
even in a challenging environment.
I’ll now turn the call over to Sara
to discuss this quarter’s performance.
Sara L. Grootwassink – Washington Real Estate Investment Trust – Executive Vice President and Chief Financial
Officer
Thanks, Skip and good morning,
everyone.
Adjusted funds from operations grew
2% to $0.59 per diluted share for the quarter, excluding the impact of the $0.18
per diluted share non-recurring charge related to extinguishment of debt. Including
the charge, funds from operations was $0.41 per diluted share.
Cash basis core net operating income
increased to 5.8% and core occupancy increased 160 basis points to 95.2%
compared to the same period one year ago. I would like to highlight that for
the third consecutive quarter, core occupancy is above 95%. Rent increases on
lease rollovers were 7.1% on a cash basis and 16.4% on a GAAP basis. Rental
rate growth for the core portfolio was 2.9%.
By sector our performance is broken
down as follows:
Industrial properties cash core NOI
increased 6%, compared to the same period one year ago. The increase is
primarily due to rental rate growth of 3.1%.
Multifamily properties core cash NOI
for the first quarter increased to 5.4%, compared to the same period one year
ago. Rental rate growth is 2.5%, while economic occupancy increased 210 basis
points to 92.7%.
Office properties core cash NOI for
the first quarter increased 6.6%, compared to the same period one year ago. Economic
occupancy increased 290 basis points to 95.4% primarily due to leasing at 7900 Westpark Drive and the West Gude Office Building. Rental rate growth for the office
sector was 2.5%.
Retail properties core cash NOI for
the first quarter increased 6.9%, compared to the same period one year ago. Economic
occupancy increased 90 basis points to 95.2% due to occupancy gains at Montrose Shopping Center.
Medical office properties core cash
NOI for the first quarter increased 1.5%. Rental rate growth was 3.4% and
economic occupancy remains high for the medical office sector at 98.4%.
During the quarter we refinanced our
only debt maturity in 2008. We completed an extinguishment of debt on a $60
million 10-year Mandatory Par Put Remarketed Securities that came due for
remarketing in February. The MOPPRS were issued in 1998 with an option to the
underwriters to remarket the bonds in 2008 with a 10-year treasury rate of 5.6%
plus the current market spread.
We evaluated remarketing as well as other
long-term debt alternatives. Both would have resulted in unattractively priced
capital. Therefore, the MOPPRS were refinanced with a $100 million two-year
term loan which was swapped at a fixed rate of 4.45%. The remaining proceeds
were used to refinance a portion of line outstanding. This refinancing saved an
estimated $5.6 million over the two-year period, the first two-year period,
compared to the estimated remarketing coupon and will allow time for the credit
markets to settle out before issuing long-term debt.
Consistent with our earnings
guidance, the extinguishment resulted in an $8.4 million net charge or $0.18
per fully diluted share. The net loss is calculated as net present value of
the difference between fixed 10-year treasury rate that we would’ve achieved at
the time of issuance versus the current treasury rate.
We have also exercised a portion of
the accordion feature on one of our unsecured revolving credit facilities. Our
total borrowing capacity was increased to $337 million with no increase in
spread. The ability to continue to borrow at LIBOR plus 42.5 basis points puts
us in a strong position as we evaluate future investment opportunities.
We are contemplating other methods
of financing due to the continued volatility in the credit markets. We will
continue our strategy of maintaining a conservative balance sheet with the lowest
possible cost of capital.
With that I will turn the call over
to Mike to discuss operations.
Michael S. Paukstitus – Washington Real Estate Investment
Trust – Senior Vice President of Real Estate
Thanks, Sara. Good morning.
Leasing activity this quarter was on
target. We have less than one million square feet or about 10% of our total
portfolio expiring during the remaining of the year. We’ve already renewed or
have prospects to lease much of this expiring space. This quarter, we signed
61 leases at an average term of 4.75 years for a total of 270,000 square feet.
Tenant improvements average $5.65 per square foot.
We renewed 61,000 square foot of
expiring space at 1776 G. Street with the World Bank. The lease is for a five-year
term. It’s on an as-is basis with a 12% increase in cash rents. In February,
we converted the garage lease at 2000 M Street to a management contract,
resulting in an expected increase in annual parking revenue at that property of
24%. At our industrial property, Albemarle Point, we renewed 29,000 square
feet for the US Federal Air Marshals for a five-year term.
Leasing activity at our development
properties is moving along. Upon its completion in February, we began leasing
units at the Clayborne Apartments in Old Town Alexandria, Virginia. The
property consists of 74-units with 2,700 square feet of retail space and has
been well received in the marketplace. Rents are averaging more than $3 per
square foot and the property was leased 15% at quarter-end.
Bennett Park, our apartment
development in Arlington, Virginia, was completed in December. As of quarter-end
we have leased 88 of the 224 units in high and mid-rise buildings. Rents are averaging
$2.61 per square foot.
As reflected in our 2008 guidance,
we do not have any leases signed at Dulles Station, our 180,000 square foot
office development in Herndon, Virginia. The market in the Dulles Quarter
continues to be soft. However we are cautiously optimistic that the property
will be leased soon. Dulles Station, which NAIOP awarded the best suburban
mid-rise office building in Northern Virginia, continues to stand out among the
competition due to a superb visibility along the Dulles Toll Road, its mixed-use
environment and WRIT's sponsorship, known for our local presence and expertise
in the DC metropolitan region.
As we indicated last quarter, we
continue to evaluate our portfolio for opportunities to change or increase
density where local governments are considering revisions to the county growth
plans. We have now filed two formal requests for projects in close proximity
to Fort Belvoir, just south of the Capital Beltway, where the Department of Defense
is projected to begin relocations of the government facilities in December of
2011. Additionally, we are very active in two other governmental jurisdictions
considering revisions to their master plans due to close proximity to existing
or proposed metro sites.
This quarter we entered into an
agreement to acquire Lansdowne Medical Office Building, a five-story, 85,300
square foot medical office development for $19.5 million. The project is
located at the intersection of Riverside Parkway and Lansdowne Boulevard in Loudoun County, Virginia directly across from the Inova Loudoun Hospital. The site is
currently under construction. Loudoun County is both one of the affluent and
rapidly growing counties in the country. WRIT will purchase the property upon
its completion, which is estimated to be in the first quarter of 2009.
Also this quarter, we acquired 6100 Columbia Park Road, a 150,000 square foot industrial warehouse in Landover, Maryland for $11.2 million. The property is located just inside the Capital Beltway, adjacent
to Route 50, between Interstates 95 and 495 and the Baltimore-Washington
Parkway. With lease stabilization, we expect the second year cash return to
be 8.2%. With immediate access to major roadways in this region, the location
is excellent for small or big industrial. We will continue to look for
industrial opportunities in this marketplace.
With that, I would like now to turn
the call back to Sara.
Sara L. Grootwassink – Washington Real Estate Investment Trust – Executive Vice President and Chief Financial
Officer
Thanks, Mike. In conclusion,
guidance for 2008 FFO per diluted share remains unchanged at $2.11 to $2.21 and
$2.29 to $2.39, excluding non-recurring items. We would now like to open the
call for questions.
Operator
Thank you. We will now be
conducting a question and answer session. If you would like to ask a question,
please press *1 on your telephone keypad. A confirmation tone will indicate
your line is in the question queue. You may press *2 if you would like to
remove your question from the queue. For participants using speaker equipment,
it may be necessary to pick up your handset before pressing the * key. Again,
please press *1 if you would like to ask a question. Our first question comes
from the line of Chris Lucas with Robert W. Baird. Please proceed with your
question.
Chris Lucas – Robert W. Baird
Good morning, everyone.
Sara L. Grootwassink – Washington Real Estate Investment Trust – Executive Vice President and Chief Financial
Officer
Hi, Chris.
George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer
Good morning,
Chris.
Chris Lucas – Robert W. Baird
Just a couple of questions to follow-up
on the leasing front. In terms of what you have remaining for the remainder of
the year, are there any significant leases that you’re concerned about? I know
United Communications is set to expire in May. Is there anything else beyond
that is disconcerting at this point?
George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer
Of significant size?
Chris Lucas – Robert W. Baird
Yes, of significant size.
George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer
And just so that everybody knows the
page you’re on there, Chris had referenced the United Communications Group lease,
which is at One Central Plaza in North Bethesda, it’s approximately 62,000
feet. At the present moment we’re actually, we’re talking about one user for
approximately 9,000 square feet of that space. So the balance at this point is
uncommitted. Other than that, that’s really the only large office user that
we’re sort of looking at in terms of exposure right now. As Mike had mentioned
in his comments, the World Bank with 60,000 square feet and we early renewed
them.
Chris Lucas – Robert W. Baird
So the remainder of the year really
is more small-tenant expirations, essentially?
George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer
Largely.
Chris Lucas – Robert W. Baird
Okay. And then just a comment
related to the retail same store NOI, the cash and GAAP variance, and there was
a comment about an increase in bad debt reserves. Is there any more color you
can shed on that?
Sara L. Grootwassink – Washington Real Estate Investment Trust – Executive Vice President and Chief Financial
Officer
Well, it’s generally consistent with
our reserve policy.
Chris Lucas – Robert W. Baird
Okay, so nothing specific. It’s
more of a function of your general policy.
Laura Franklin – Washington Real
Estate Investment Trust – Executive Vice President and Chief Accounting &
Administrative Officer
That’s exactly right based on
historical reserve ratios.
Chris Lucas – Robert W. Baird
Okay. And then just are you guys
seeing any pressure on the expense side either from local property tax issues
or utility issues going forward for the remainder of the year?
George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer
Well, there have been significant
increases in property taxes and utilities. We’ve already experienced that. Arlington has announced for example that their increasing their tax rate among others. We’re
hopeful that with declining property valuations that there’d be some progress
made on some of the tax issues but at this moment, no, we have not seen any
relief of those particular matters.
Chris Lucas – Robert W. Baird
Okay. And then I guess, Skip, just
more generally about the current conditions in the market as it relates to
opportunities. Can you provide any more color in terms of the kind of deal
flow that you’re looking at and kind of what in terms of property type and what
you’re sense is about where cap rates are?
George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer
Acquisition opportunities,
specifically?
Chris Lucas – Robert W. Baird
Yes.
George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer
Well, that’s the $100,000 question,
where cap rates are today. The first observation I’d make is that acquisition
activity and just properties on the market is dramatically down. You could ask
any of the prominent brokers in the market and they’ll tell you anywhere from 40%
to 80% reduction in activity. Now where cap rates are, a lot of it depends on
the property type. I mean we’re still seeing very aggressive cap rates on
downtown office buildings, some of the more prominent downtown buildings. We
made a pretty hard run at some retail properties and we’re disappointed to find
the cap rates were still sub 6% range. I do think sort of as you move out into
the suburbs and sort of the more commodity type properties, you probably have
seen cap rates move from 50 to 100 basis points but to be quite honest with
you, the data set out there isn’t extensive. So it’s tough to put a bulls eye
on it.
Chris Lucas – Robert W. Baird
Is there any more flow of data or
flow of deals at this point just in terms of product being offered?
George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer
No. I would say it’s very thin. I
would quantify it as a very thin deal-flow. There are deals out there but it’s
relatively thin.
Chris Lucas – Robert W. Baird
Okay. And then I guess just the
last question just has to do with sort of the interest expense for the quarter.
Sara, I guess your floating rate number remains relatively high compared to
where expectations, I guess, would have been given the drop in LIBOR. Can you
give us a sense as to what that number should be or when we should expect some
improvement in that floating rate number?
Sara L. Grootwassink – Washington Real Estate Investment Trust – Executive Vice President and Chief Financial
Officer
Sure. Earlier in the year, the
yield curved on one, three, and six months LIBOR was inverted pretty steeply
and so we went out with longer LIBOR contracts early in the year and so
unfortunately, we haven’t participated in the last couple of months decrease in
LIBOR. Most of the contracts are expiring in June and July and so we’ll be
able to pick up a little bit of savings there when we roll those over assuming that
rates are below where they were in January.
Chris Lucas – Robert W. Baird
Okay. Great, thank you.
Operator
Thank you. Our next question comes
from the line of Michael Knott with Green Street Advisors. Please proceed with
the question.
Michael Knott – Green Street
Advisors
Hey, guys. Question on your office
expiration schedule. It looks pretty heavy in 2009, 2010. Can you just talk
about the composition of that rollover and any large tenants in those two
years?
George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer
Wow, 2009. I couldn’t tell you
right off the top of my head. Mike would you know?
Michael S. Paukstitus – Washington Real Estate Investment
Trust – Senior Vice President of Real Estate
Well, 2010 would be LaFarge.
George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer
Yes, 2010 is LaFarge, which is the
large tenant in the Dulles Corridor. I’m trying to think right now. I’m
pondering 2009. I can’t think of any major tenants off the top of my head. GSA,
I believe, has a lease out in our Picket Street property for 120,000 feet. Who
knows when that would be? It’s currently leased by the FBI for storage. Sort
of looking through some papers right now, as we are thinking through this.
Michael Knott - Green Street
Advisors
Okay. And then can you give a
little more color on, Mike, on your comment about the optimism for Dulles
Station? Is there more activity recently? I know you had been doing lots of
tours, etcetera. Has there been a change in your outlook for the leasing of
that building?
Michael S. Paukstitus – Washington Real Estate Investment
Trust – Senior Vice President of Real Estate
I think that we feel the project has
been positioned very well, so the tours that were moving through the
marketplace, we certainly see everything that’s coming through. We've narrowed
down several that we’re very close on the short list. And we see some activity
on that We see some decisions being made pretty imminently on those
transactions.
Michael Knott - Green Street
Advisors
Okay. And then on your multifamily
developments, are the current percentage lease statistics, are those behind
your pro formas? Are they basically on schedule? Or how would you describe
that?
George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer
I’d say Clayborne is just a little
bit behind schedule because it came online a little bit later, but Bennett Park
is pretty much on or about, pretty close to schedule. And we have had really
good leasing activity at Clayborne; we’re expecting to catch up. So we expect
both of them to be more or less on sort of a glide path to lease up soon.
Michael S. Paukstitus – Washington Real Estate Investment Trust – Senior Vice President of Real Estate
Especially as we move more to peak
season now, too.
Michael Knott - Green Street Advisors
Right. And then my last question,
can you just talk a little bit about your strategy for acquisitions and
dispositions? I think the guidance had previously assumed some capital
recycling in the second and third quarters to fund some of that.
George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer
That’s right. Let me just give you
just a quick snapshot on sort of the dispositions. We do have some properties
on the market for sale. They are actually in a due diligence period with a
good prospective purchaser. And we expect that property to close some time in
the second quarter later on in the quarter. There are two properties to close
in the later part of the second quarter. With regards to acquisitions, I think
we just reiterate our previously disclosed guides of 100 to 120 million. Obviously,
we got a lot of work to do to get that done. But certainly, to the extent we
need to replace the disposition income, we intend to do so.
Michael Knott - Green Street
Advisors
Okay. Thanks.
Operator
Thank you. Our next question comes
from the line of Dave Rodgers with RBC Capital Mortgage. Please proceed with
the question.
Dave Rodgers – RBC Capital Markets
Good morning.
George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer
Good morning, Dave.
Dave Rodgers – RBC Capital Markets
On the leasing activity in the multifamily,
have you had to increase concessions or incentives at all over the last couple
of months?
George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer
We’ve had a short burst in there,
right, Mike? Where…for about a month…where leasing activity seemed a little
dormant and we…
Michael S. Paukstitus – Washington Real Estate Investment Trust – Senior Vice President of Real Estate
In the new development.
George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer
Right.
Michael S. Paukstitus – Washington Real Estate Investment Trust – Senior Vice President of Real Estate
But I would say, too, that there are
several pockets in the marketplace where we have experienced a lot more supply
that has moved into the marketplace. And we’ve aggressively moved forward to
meet the competition in those sectors.
George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer
The good news is that rental rates
have generally been holding out with multifamily.
Dave Rodgers – RBC Capital Markets
Oh, okay. Good. And along the same
lines for Sara, maybe, because of the later completion of Clayborne, have you
pushed some of the dilution that would have expected in the first quarter from
that completion into the second quarter? Or is it still pretty much in line
with your expectation?
Sara L. Grootwassink – Washington Real Estate Investment Trust – Executive Vice President and Chief Financial
Officer
In terms of revenue, or in terms of
expense?
Dave Rodgers – RBC Capital Markets
Well, I guess a combination of the both
from the later completion. You obviously would have been capitalizing up until
the completion, and then after the completion expensing.
Sara L. Grootwassink – Washington Real Estate Investment Trust – Executive Vice President and Chief Financial
Officer
Right.
Dave Rodgers – RBC Capital Markets
So, I guess, if you are a little bit
behind on leasing, and you have finished a little bit later, I guess a
combination of the both.
Sara L. Grootwassink – Washington Real Estate Investment Trust – Executive Vice President and Chief Financial
Officer
Well, in terms of Bennett Park, that
was all on line at the beginning of the quarter.
Dave Rodgers – RBC Capital Markets
Right.
Sara L. Grootwassink – Washington Real Estate Investment Trust – Executive Vice President and Chief Financial
Officer
And so we would have been expensing
throughout the entire quarter. Clayborne came on line, I believe, on February
11th. And so that has about six weeks of interest expense that
would have been capitalizing…would capitalize prior to the middle of February. So
within the quarter, there was about $800,000 in interest expense that would
have been capitalized in a previous quarter.
Dave Rodgers – RBC Capital Markets
Okay. Thank you. That’s helpful. In
terms of in office, well, I guess across the commercial portfolio, are
delinquencies anywhere concerning you at this point? I know there was the
question about the bad debt reserve in retail, but anywhere overall are you
looking at delinquencies? Or is your watch list growing?
George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer
I mean, our bad debt expense has
grown up, grown above our, sort of, historical standard. Typically, we were in
that sort of 0.7 to 0.8% and we’re up around 1 now, so we have seen just sort
of on a macro level and I can’t identify any specific major tenants. Say
again?
Michael S. Paukstitus – Washington Real Estate Investment Trust – Senior Vice President of Real Estate
(inaudible)
George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer
Yes.
Michael S. Paukstitus – Washington Real Estate Investment Trust – Senior Vice President of Real Estate
We have one tenant that we were in a
condition of sort of a write-off but that has been resolved where cash will be
coming back to reversal on that as well.
Sara L. Grootwassink – Washington Real Estate Investment Trust – Executive Vice President and Chief Financial
Officer
That already occurred in Q1.
Michael S. Paukstitus – Washington Real Estate Investment Trust – Senior Vice President of Real Estate
Okay. That did. All right. Good.
George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer
But I think as a general rule, yes,
we have seen slightly increased delinquencies, and particularly as it relates
to the retail sector. I mean, there had been workouts that had occurred and as
a general rule, we've incurred higher bad debt expense.
Dave Rodgers – RBC Capital Markets
Sure. On the Lansdowne acquisition,
is that preleased or will you be able to do preleasing on that asset?
George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer
Yes. I mean, basically what that,
just to make sure everybody understands that we are on the same page, on the
Lansdowne acquisition, we’re working with the developer who is basically
responsible for completing the base shell. And we are assuming all of the
leasing risks. So we have actually engaged a third party, sort of medical
leasing broker, to assist our in-house team in a marketing process. And we’re basically
aggressively out there today trying to prelease as much of the building as
possible. Now, keep in mind a medical office building is a little more
difficult to get a huge preleasing commitment because there’s just not that
many big tenants for medical office buildings. But we feel confident that we
will have some preleasing on that when we actually close on the property, which
we expect to be in early 2009. Does that give you the right color?
Dave Rodgers – RBC Capital Markets
Yes. That’s helpful. And then one
last question for me. Skip, do you feel good enough or do you think that their
fundamentals are at least healthy enough to begin thinking about any redevelopment
opportunities in 2008 or is that something that you are going to put on the
back burner until you evaluate it later?
George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer
Well, I mean there’s not going to be
any material impact in 2008 from further redevelopment. We’re concentrating on
leasing out the development projects that we have on our plate right now. Now having
said that, there is a lot of work going on in the entitlement process and some
fairly significant redevelopment projects. Mike had mentioned a number of them
as they relate to the BRAC initiatives down in Fort Belvoir area. We also have
one spitting distance of our corporate office here, Randolph, Montrose. But
those are not going to happen in 2008. Really, they’re not going to happen in
2009. So, they’re fairly longer-term initiatives.
Dave Rodgers – RBC Capital Markets
Okay. Great. Thank you.
Operator
Thank you. Again, if you would like
to ask a question, please press *1 on your telephone keypad. For participants
using speaker equipment, it may be necessary to pick up your handset before
pressing the * key. Our next question comes from the line of John Guinee with
Stifel Nicolaus. Please proceed with your question.
John Guinee – Stifel Nicolaus
Oh, John Guinee here. Thank you. Either
Skip or Sara, I guess, you’ve been running the business at $0.58 to $0.59 a
quarter through 2007, and then this quarter after taking into effect the cash
charge on the debt. At the same time, occupancy is up 150. Same-store numbers
look good. Mark-to-market looks good. Your debt cost is coming down. It sure
feels as if you ought to be running the business at a little bit more than $0.58
or $0.59 with all those positives, yet your guidance still implies a $0.58 to $0.59
run rate in the rest of 2008. Any sense for what’s dragging things down? Is
it capitalizing versus expensing Dulles Station? Is it a higher OpEx number? Is
it other things that we can’t readily identify?
George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer
I would say it’s capitalized
interest pretty much 100% of it. Not only do you have the Dulles factor, which
is going to kick in, I believe, August 1, correct me if I am wrong, but also,
you‘re backtracking to 2007, I mean the capitalized interest in 2007 was
significantly different than what we are recognizing today in the first quarter
of 2008 and as we move forward. So I don't know if Sara has any more
amplification to that, but essentially we are flying through a little bit of
headwind with the capitalized interest. And I actually think it’s pretty
amazing that we have been able to maintain $0.59 as we've sort of taken this
interest expense down.
Sara L. Grootwassink – Washington Real Estate Investment Trust – Executive Vice President and Chief Financial
Officer
Right.
George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer
Do you have anything to add to that,
Sara?
Sara L. Grootwassink – Washington Real Estate Investment Trust – Executive Vice President and Chief Financial
Officer
No, I think that we were
conservative in how we modeled the UCG lease expiration, what happens in that
phase. We modeled no revenues for Dulles Station. So, I would say this is a
very good quarter as you look out through the rest of the year from the
standpoint of, as Skip mentioned, interest expense is ramping up. He has got a
vacancy coming small – relatively small overall, but a vacancy coming up with
the UCG. And it’s a somewhat uncertain economy. I just don’t think it’s
prudent to raise guidance at this point.
John Guinee – Stifel Nicolaus
Okay. Second question. On page 5,
it looks like your real estate expenses are running sort of in the 31% to 31.5%
range and they bumped up to 33 this quarter. Is that a good run rate? Also,
are OpEx numbers increasing greater than gross rents are increasing?
Sara L. Grootwassink – Washington Real Estate Investment Trust – Executive Vice President and Chief Financial
Officer
There is some seasonality to
operating expense, but I think that that’s a fairly good run rate.
George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer
Yes. I mean, Sara makes a good
point. Certainly with respect to the residential portfolio, you could go into the
summer season and you start experiencing higher expenses, mitigated by the lack
of snow removal, which would be only in the fourth quarter, in general. So I
think it is a fairly good run rate. I can’t think of anything large and
material.
John Guinee – Stifel Nicolaus
Well, yes, that is the first quarter
’07 was about 31.2% and this quarter, first quarter ’08, is about 33%. Last
question, the dividend increase time, when do you usually do that?
George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer
We usually do it in our next…
Sara L. Grootwassink – Washington Real Estate Investment Trust – Executive Vice President and Chief Financial
Officer
Yes. Historically, it’s in the
second quarter.
George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer
Yes, second quarter.
John Guinee – Stifel Nicolaus
Okay. And actually last question, I
know you just did a big ground lease deal in the CBD. How many assets do you
have with ground leases? And do you bifurcate that anywhere in your SEC
disclosures?
George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer
Technically, we have several of them
but we own the fee and the ground lease but there is only one property, the one
you mentioned, where we just own the ground lease.
John Guinee – Stifel Nicolaus
Great. Okay. Hey, thanks a lot.
Operator
Thank you. Our next question comes
from the line of Paul Puryear with Raymond James. Please proceed with your
question.
Paul Puryear – Raymond James
Hey. Good morning, everyone.
George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer
Hi, Paul.
Sara L. Grootwassink – Washington Real Estate Investment Trust – Executive Vice President and Chief Financial
Officer
Hi, Paul.
Paul Puryear – Raymond James
We feel like we are losing a little
NAV in our calculation here. So I think maybe we've identified it. Sara,
could you tell us, a year ago you had about 150 million in CIP; now you are
down to almost 50, so 100 million is gone out of that line item.
Sara L. Grootwassink – Washington Real Estate Investment Trust – Executive Vice President and Chief Financial
Officer
Yes. We took out both Bennett Park
and Clayborne.
Paul Puryear – Raymond James
How much income are you getting on
that?
Sara L. Grootwassink – Washington Real Estate Investment Trust – Executive Vice President and Chief Financial
Officer
Little, as they are just leasing up
now, so very little.
Paul Puryear – Raymond James
So what is little? A million, two
million?
Sara L. Grootwassink – Washington Real Estate Investment Trust – Executive Vice President and Chief Financial
Officer
I can get you that number after the
call. But if you think about how many units we have leased and the average
rental rate, you come up with a number.
George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer
I would almost think you could just
assume, on average for the year, 50% occupied. Because essentially in round
numbers, we are leasing them for pretty close to 0 in January to 95% at year
end.
Sara L. Grootwassink – Washington Real Estate Investment Trust – Executive Vice President and Chief Financial
Officer
Right.
George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer
So it’s almost like you could come
pretty close to assuming 50% revenue for that property for this year, in round
numbers.
Paul Puryear – Raymond James
Yes. But what are the pro forma
yields for that $100 million?
George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer
Well, it’s sort of a mixture of
different assets. The $100 million, I don’t think they just relate to those
apartment buildings. If it was just the apartment buildings, it would be in
that 6% range.
Paul Puryear – Raymond James
Okay. One more, sort of, minor
detail here. What’s in minority interest on your balance sheet?
George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer
With property does it relate to or…?
Paul Puryear – Raymond James
Is it a property?
George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer
Yes. There is Northern Virginia Industrial Park is a very small minority interest and the other one is Alexandria, is that correct?
Sara L. Grootwassink – Washington Real Estate Investment Trust – Executive Vice President and Chief Financial
Officer
Right. Kenmore.
George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer
Yes. Last year, Paul, I don’t know
if you… I guess this was middle of the year, we bought that land parcel. It
was a small acquisition. It was a land parcel across from Inova Alexandria Hospital. It was $3.7 million. So, there is a minority interest in that and
then we had a very small minority interest in Northern Virginia Industrial Park, which has been around for 10 years or more.
Sara L. Grootwassink – Washington Real Estate Investment Trust – Executive Vice President and Chief Financial
Officer
Right.
George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer
So, that’s it. Those two
properties.
Paul Puryear – Raymond James
Yes. Okay. Thank you.
Operator
Thank you. There are no further
questions at this time. So, let’s turn the floor back over to management for
closing comments.
George F. McKenzie – Washington Real Estate Investment Trust – President and Chief Executive Officer
Okay. Well, thank you, everyone,
for your interest in the company and have a good week. And we look forward to
talking to you in another 90 days.
Operator
This concludes today’s
teleconference. You may disconnect your lines at this time. Thank you for
your participation.
