Transcript of
Washington REIT (WRE)
First
Quarter 2009 Earnings Conference Call
April 28, 2009
Kelly Shiflett, Director of Finance
Skip McKenzie, President & Chief
Executive Officer
Bill Camp, Executive Vice President &
Chief Financial Officer
Michael Paukstitus, Senior Vice President,
Real Estate
Laura Franklin, Exec. Vice President &
Chief Accounting & Administrative Officer
Operator
Welcome to the Washington Real Estate
Investment Trust First Quarter 2009 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, Skip McKenzie, Kelly Shiflett, Director
of Finance will provide some introductory information. Ms. Shiflett, please go
ahead.
Kelly Shiflett – Washington REIT – Director 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. Our conference call
today will contain financial measures such as FFO, NOI and EBITDA that are
non-GAAP measures and in accordance with Reg G we have provided a
reconciliation to those measures in the supplemental. 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. Such risks, uncertainties
and other factors include but are not limited to the effect of the current
credit and financial market conditions, the availability and cost of capital,
fluctuations in interest rates, tenant's financial conditions, the timing and
pricing of leasing transactions, levels of competition, the effects of
government regulations, the impact of newly adopted accounting principles,
changes in general and local economic and real estate market conditions, and
other risks and uncertainties detailed from time to time in our filings with
the SEC, including our 2008 Form 10K. We assume no obligation to update or
supplement forward-looking statements that become untrue because of subsequent
events.
Participating on today's call with me will be
Skip McKenzie, President and Chief Executive Officer; Bill Camp, Executive Vice
President and Chief Financial Officer; Laura Franklin, Executive Vice President
and Chief Accounting and Administrative Officer; and Mike Paukstitus, Senior
Vice President, Real Estate. Now I'd like to turn the call over to Skip.
Skip McKenzie – Washington REIT – President & CEO
Good morning and thank you for joining
Washington Real Estate Investment Trust's conference call today.
The effects of the slowing economy continue
to have a dampening effect on real estate conditions, not only nationwide, but
here in the metropolitan DC region as well. While we believe our market is
arguably the best commercial real estate market in the country and I expect it
to continue to be so for the foreseeable future, Washington is not immune to
the economic malaise affecting our country. And real estate performance
region-wide has reflected these lackluster conditions.
In virtually all of our sub-markets,
vacancies have risen and leasing progress has been slow. In general, business
mangers, retailers and consumers continue to manage risk conservatively and are
reluctant to increase liabilities, such as expansions of the space needs or
extensions of real estate leases. Having said that, we believe the WRIT
portfolio has performed admirably while flying into these recessionary
headwinds. I attribute this to the infill location of our properties,
portfolio diversification by property types and our hands-on approach to
management leasing.
Overall occupancies in our core portfolio are
generally healthy at 93% for the first quarter. Sequentially, same-store NOI
grew 1.8% over the fourth quarter of '08, and we retained 76% of our expiring
commercial tenants. On the downside, we continue to experience significantly
greater than historical bad debt, particularly in our retail and industrial
segments and occupancy declines in our industrial portfolio were 180 basis
points over the fourth quarter.
In the first quarter, we were active on the
capital markets and financing front, raising $14.8 million of equity in early
January through our Bank of New York SAFE program and re-purchasing $48.6
million of convertible debt at attractive discounts and closing a $37.5 million
loan at a very attractive 10-year rate of 5.37% on our Kenmore Apartments. And
finally, the Board of Trustees approved our 190th consecutive dividend at equal
or increasing rates. Now I would like to turn the call over to Bill Camp who
will review in greater detail our financial performance, and Mike Paukstitus
who will review our real estate operations. Bill?
Bill Camp – Washington REIT – Exec. VP & CFO
Thanks Skip. Good morning everyone. For the
first quarter, funds from operations were $34.2 million or $0.65 per diluted
share; this compares to FFO for the first quarter 2008 of $17.8 million or
$0.38 per diluted share. Funds available for distribution were $26.7 million
or $0.50 per diluted share compared to $13.3 million or $0.29 per diluted share
for the first quarter of 2008. On a sequential quarter basis, FFO per share
increased $0.10. I would like to spend a couple of minutes talking about the
quarter's FFO in more detail.
First quarter FFO of $0.65 includes $0.11
gain related to repurchase of convertible debt, which I'll explain further in a
moment. Excluding the gain, FFO was $0.53 per diluted share. This compares to
the fourth quarter 2008 FFO of $0.55 per diluted share, which included a $0.05
gain related to the repurchase of convertible debt. So, FFO, excluding gain on
extinguishment of debt, in the first quarter was $0.03 ahead of the fourth
quarter. The primary difference between the fourth and first quarter on a
pre-gain basis is two-fold. First, the impact of owning 2445 M for the full
quarter positively impacted this quarter. Second, the fourth quarter included
the effect of losing Circuit City. Other than those two items, the first and
the fourth quarters were very close.
This quarter, we continue to strengthen our
balance sheet. As discussed on the last quarter's call, we have been
opportunistically repurchasing our convertible debt which has a 2011 put date.
In the quarter, we repurchased approximately $48.6 million of our 3.875%
convertible notes at a discount price ranging from 80 to 84% of par. In conjunction
with these repurchases, we reported a gain of approximately $0.11 per diluted
share. We have continued to repurchase these securities in the beginning of
the second quarter, and currently $182.8 million of the original 260 is left
outstanding.
In January, we issued approximately $14.8
million of equity through our Sales Agency Finance Agreement with the Bank of
New York at a weighted average price of $26.47. We used the proceeds to reduce
our line of credit balances and for other general corporate purposes.
As previously discussed on the fourth quarter
earnings call in February, we closed on a 10-year $37.5 million loan for the
Kenmore Apartments at a fixed rate of 5.37%. These proceeds were used to reduce
our line of credit and to fund additional purchases of our convertible notes.
We are actively working on refinancing our
October 1st, 2009 $50 million par multi-family loan that is
pre-payable on July 1st. Typically we can lock the interest rate for about 60
days without a premium. So we believe we are close to coming to terms on this
financing. We are also in final negotiations to extend our 2010, $100 million
term loan. Our line of credit balance currently stands at $59 million, down
slightly from the beginning of the year. Looking at the changes in the balance
sheet in the quarter, we reduced total debt by $27.5 million while raising only
$14.8 million in equity. We are getting close to wrapping up our 2009 debt
maturity and our $100 million term loan exposure in 2010. We have a $25
million mortgage that actually has an interest reset date in 2010, we show it as
a maturity that we plan to retire. Our lines which come due in 2010 and 2011,
both can be extended at our option for one year. For 2011, as I mentioned, we
are down to $182.8 million on the convertible notes. We also have a $150
million of senior notes maturing. We believe we have several options to help
fund these future obligations.
In the first quarter, WRIT paid a dividend of
$0.4325 per share achieving its 189th consecutive quarterly dividend at equal
or increasing rates. And as Skip mentioned, yesterday we issued a press
release announcing our second quarter 2009 dividend at the same rate. This is
payable on June 30, 2009.
We are reiterating our FFO per share guidance
for 2009 of $1.95 to $2.15. I want to clarify what is in this guidance. Our
guidance does not include the gains from the convertible repurchase. We
continue to assume that we will complete asset dispositions totaling $50 to $70
million. We continue to assume that we will complete acquisitions totaling $20
million. We believe the combination of vacancy, bad debt reserves and
abatements will remain fairly steady the rest of the year. Currently we are
assuming that rate is about 11.4%. We expect rents on renewals and rollovers
to be mixed ending the year flat to slightly down. Now I will turn the call
over to Mike to discuss operations.
Mike Paukstitus – Washington REIT – Senior VP Real Estate
Thanks Bill and good morning everyone.
Overall our real estate portfolio showed a
stronger than expected performance this quarter. On a same-store basis, our
economic occupancy was 93% compared to 95.4% in the same period one year ago,
and 93.6% at the end of the fourth quarter.
This quarter WRIT executed over 235,000
square feet of commercial lease transactions with an average GAAP rental rate
increase of 11.1% over expiring leases and an average lease term of 3.6 years.
Rental rates on the residential sector increased 2.2% compared to the same
period one year ago.
In the office sector we executed leases for a
total of 63,000 square feet at an average rental rate increase of 13.4% on a
GAAP basis.
In the medical office sector, we signed
leases for a total of 11,000 square feet at an average rental rate increase of
9.8% on a GAAP basis. Our medical office portfolio continues to be the most
occupied sector at 97%.
In the retail sector, we executed leases for
a total of 21,000 square feet with a rental rate increase of minus 5.2% on a
GAAP basis. This roll-down was primarily generated from the workout of a 6000
square feet tenant, which represented a 28% of the Q1 retail leasing activity.
Additionally, the retail leases this quarter involved non-typical retail leases
more similar to industrial transactions in less than prime space.
In the industrial sector, we entered into
leases for a total of 140,000 square feet with a rental rate increase of 13.4%
on a GAAP basis. This was higher than usual leasing velocity, thanks to three
leases in excess of 15,000 square feet signed at Picket, NVIP and Sully Square.
Our two apartment development projects,
Bennett Park and Clayborne were 79% leased and 82% leased at the end of the
first quarter. This compares to 79% and 64% at the end of the fourth quarter. We
have experienced increased activity at both of these properties over the last
month, with Bennett Park now at 88% leased and Claiborne now at 89% leased.
Now I would 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 that 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 * keys. Once again, to
ask a question, please press *1. Our first question comes from Mark Biffert with
Oppenheimer & Co. Please state your question.
Mark Biffert, Oppenheimer & Co.
<Q>: Good morning guys. Related to
leasing, I have a couple questions just on what you're seeing from the
discussions, the last quarter you had mentioned you're negotiating with the
World Bank on their renewal next year. And across your other portfolios you
have a sizeable amount renewing as well. I am just wondering what you're
hearing from tenants and the likelihood that they will renew versus those that
have said that they are giving back space?
Skip McKenzie – Washington REIT – President & CEO
Okay, good morning Mark. As it relates to
World Bank, I am extremely optimistic that that's going to be signed very soon.
I'd have liked to have said we would have it signed today but I can't say that
right now. But I am extremely optimistic on that front. With respect to the
rest of rollover, it's actually for the balance of 2009 just to clarify; it's
actually a very light year. We only have something on the order of about 6.5%
of our economic lease income rolling for the balance of this year. So this
year is actually a very light year. As it relates to 2010 which I think is
where you might be seeing a little bit of a blip up in some of our exposure,
one of the tenants is LaFarge out in the Reston Corridor actually in our
Herndon project, I don't have any particular intel on that right now. We've
just begun the process of trying to discuss with them. That World Bank lease
that I had just mentioned that actually is the biggest sort of participant in
those 2010 rollovers. And those are probably the two that stick out more than
any other. Yeah, across the street we have a 40,000 square feet lease at our
Atrium office building and they have renewed. How long was that for Mike? That
was for?
Mike Paukstitus – Washington REIT – Senior VP Real Estate
Another five years.
Skip McKenzie – Washington REIT – President & CEO
Another five years. So, those are the three
biggest exposures and with the dramatically biggest impact being the World Bank
lease. That's a 148,000 square feet, and that's high $40s rents. So, that has
a huge impact on that number.
Mark
Biffert, Oppenheimer & Co
<Q>: How about the rest of
the portfolios, the retail, the industrial portfolios?
Skip McKenzie – Washington REIT – President & CEO
We don't have any giant tenants rolling in
those areas. I would say just sort of from a macro level, I mean the markets
are soft. We've actually been able to have a pretty good retention rate even
throughout this. As I reported on my comments we were 76% for the first
quarter. Having said that, it's going to be sort of a bare knuckle environment
for the rest of the year in my view. I think we're going to continue to have retention
rates that we've experienced historically. But I'd be lying to you if I didn't
tell you that the leasing dynamics market-wide are relatively soft.
Mark
Biffert, Oppenheimer & Co.
<Q>: Okay and then last
quarter you; Bill I think mentioned that your occupancies would be in the 90 to
95% range with industrial being at the low end and it appears that industrial
is already down at that low end. I mean what are your expectations in terms of
being able to maintain occupancy at that level through the rest of this year?
Skip McKenzie – Washington REIT – President & CEO
Yeah, I mean I think we can, I mean we have
been hit pretty hard in the industrial sector. Interestingly enough, probably
the area that we've been hurt as much as any is down the 395 Corridor, which
has historically been one of our strongest markets, which is our Northern Virginia Industrial Park. We have two buildings down in the Fullerton area. And I
think I've mentioned on previous conference calls, one of the things that's
really impacting us in that market is these aren't the traditional large bay
industrial buildings. These are small bay warehouses, generally 5 to 20,000
square feet, and they are mostly consumer oriented type operators. So we would
have small general contractors in there. We actually have a Deer Park
distributor in there, for example, that's actually doing well. But it is those
types of users that are down there and they are being hit by very much the same
forces that are hitting the consumer retailers that have problems today.
Mark
Biffert, Oppenheimer & Co.
<Q>: Okay. And then Bill
if you can talk a little bit about what you're hearing from the GSEs on their
underwriting. Today it seems that the coupon rates continue to fall, and I am
just wondering what they are basing that on and given the longer terms that
they are also offering people on a fixed basis?
Bill Camp – Washington REIT – Exec. VP & CFO
Well, I mean we did the Kenmore loan at, that
was a 5.37, at 10-year rate, that was a 10-year deal. I would say today we are
probably in that same ballpark. Quite honestly, treasuries have come up but
the spreads have gone down a little bit. So, we are modeling right now,
anything can change, but right now we are modeling that we'd be at the same
kind of level somewhere in that 5.35, 5.40 maybe as high as 5.50 range on those
apartment loans that would come due. So, I think that GSEs are actively in
business. I think they probably make more money on the bulk. I don't know, but
I'm guessing they make probably more money on the multi-family than they do on
all the housing stuff that's defaulting on them. So, they probably need that
business, and I think they are still at the terms quite honestly that the
proceeds are locked up. It's typically 65% loan to value or 125% debt service
coverage, depending on where your numbers shake out, one of those two will cap
the proceeds on how much you can generate out of the building.
Mark
Biffert, Oppenheimer & Co.
<Q>: Okay thanks.
Bill Camp – Washington REIT – Exec. VP & CFO
Sure.
Operator
Thank you. Our next question comes from
Anthony Paolone with JP Morgan. Please state your question.
Anthony
Paolone, JP Morgan
<Q>: Thanks,
just
a follow up on the GSE debt discussion. Do you intend on taking out any excess
proceeds from the upcoming maturity in October or even throughout the apartment
portfolio given that attractive financing source near term?
Bill Camp – Washington REIT – Exec. VP & CFO
Right now Tony, I think the plan is to just
re-finance the 50. I think that logic would say you want to wait through the
spring and summer lease-up in those buildings. It's the active time of the
year to lease buildings up and the more occupancy you have the higher your
proceeds are going to be. I mean there is a little bit of a risk on the
interest rate, but I personally don't see the interest rates being able to move
too quickly too soon. So, it may be a situation where when we have stabilization
of Bennett and Clayborne, that we lock in the rest of it. However let me just
say this, as we can do the $50 million refinance with 2 of the 5. So we're
un-encumbering. So from a ratio perspective, we're un-encumbering three
assets, that's always a good thing for ratios. And quite honestly, adding
secured debt while I am eliminating unsecured debt puts some strain on ratios
that the credit rating agencies look at. And if that gets too out of whack, I
am looking at the rating agencies downgrading our debt at some point if I
continue on that path, something that I have to analyze, not saying that it
will control what I do.
Anthony
Paolone, JP Morgan
<Q>: Okay, that's helpful.
And then just another question is I was wondering if you can provide just your
thoughts looking out the next 12 to 24 months on the deal environment. I mean
do you have the potential of some movement with maybe like Archstone assets on
the apartment side or just any variety of opportunity funds that bought assets
aggressively on the office side. And just what your thoughts are in terms of
maybe those things hitting the market or how you see yourselves maybe getting
involved?
Skip McKenzie – Washington REIT – President & CEO
We monitor the market closely Tony, to be
quite honest with you, there hasn't been much of that available today. There's
limited product available in the market, the transaction activity has been
extremely slow. There have been some transactions, but avery small quantity of
them. We're monitoring the market closely. We don't think, just from a
temperature and pricing standpoint, that super attractive pricing is out there
in our market. As you know everybody seems to think this is the best market in
the country. So there haven't been any screaming buys at this point. But we
are monitoring it closely and to the extent there are those super attractive
opportunities, we plan to evaluate them on a case-by-case basis.
Anthony
Paolone, JP Morgan
<Q>: Okay, thank you.
Operator
Thank you. Our next question comes from
Michael Knott with Green Street Advisors. Please state your question.
Michael
Knott, Green Street Advisors
<Q>: Hey guys, did you
mention anything about asset sales in your comments?
Skip McKenzie – Washington REIT – President & CEO
We did not mention anything specific but I
can give you general comment. We have announced in the past that we had the
Avondale Apartments on the market. And just to give you the latest update on
that, we do have that contract is firm with a buyer. And we anticipate actual
closing on that next week. So, that's sort of the glide path that's on. We do
have another property on the market today and that's our Crossroads warehouse;
it's a very small transaction. So, it's not going to move the needle too much
up in the Baltimore-Washington Corridor area. Those are the only two projects
we have actively on the market now. We have received a number of unsolicited
interests on properties, which we are evaluating, but nothing firm on any of
those. But we do anticipate closing on the Avondale Apartments sale next week.
Michael
Knott, Green Street Advisors
<Q>: Do you care to share
any details on that?
Skip McKenzie – Washington REIT – President & CEO
I'd rather, its not that it's double top
secret but I never like to talk about a transaction that hasn't occurred yet. And
certainly the day that it occurs and the check clears that, we'll put out a
press release.
Michael
Knott, Green Street Advisors
<Q>: Okay. And Bill, you
talked about having several options for future unsecured maturities, how does
issuing additional equity or potentially cutting the dividend factor into the
menu of choices that you talked about?
Bill Camp – Washington REIT – Exec. VP & CFO
Well obviously those are all choices, and you
evaluate them all equally. I'll take the second part of that question first,
in terms of the dividend, if we look at our taxable income for this year,
obviously projections and who knows exactly how things are going to shake out. But
if we, if we look at our taxable income this year, and we include the gains
that I am taking on the converts, and gains that we anticipate we would take on
selling $50 to $70 million of dispositions, we will have a taxable income,
pretty much equal to our current dividend. So for this particular year at
least, I don't think I have a whole lot of wiggle room. In terms of equity,
obviously we raised a little equity in the first week of the year. I'm not
opposed to doing that. We evaluate that versus raising more leverage or
selling more assets quite honestly everyday I look at that stuff. So it's a
matter of deciding if you need capital and when you need it and what the best
option is to get it at that point in time.
Michael
Knott, Green Street Advisors
<Q>: Okay and you guys
have about 50 million left under that original program?
Bill Camp – Washington REIT – Exec. VP & CFO
No, it's about 92 or 3.
Michael
Knott, Green Street Advisors
<Q>: Okay, and Mike, could
you comment on Suburban Maryland office versus Northern Virginia in terms of
leasing fundamentals, tenant demand perhaps inside outside the Beltway? That
would be helpful.
Mike Paukstitus – Washington REIT – Senior VP Real Estate
Well again I think the dynamics of inside,
outside are very similar. Inside the Beltway obviously being much stronger
than outside. Generally speaking, we've seen increased vacancies in Virginia outside as opposed to Maryland which has been a more steady environment. The
markets that we're in, on the office sector generally we're faring much more
favorably than the market in general. The market vacancies are much higher
than the ones we are experiencing. But we are seeing some aggressive deals
being done in our one project on Rockville Pike. The good news is that we're
closing just about everything that's occurring in that marketplace. So we're
getting velocity but we're not getting tremendous growth out of that. And then
in Virginia, for the most part, we're pretty stable, our two Virginia
properties out near Dulles are full and 1600 Wilson in Rosslyn the same way,
it's almost 100 leased. So we're trying to close down Dulles. We've got a
6000 footer that we're close to signing. And there are some others in the
pipeline they could stop that or close that gap and then at Monument, our other
project, there is the one deal that Skip had mentioned. There is a rollover in
that asset next year that we're working on right now.
Skip McKenzie – Washington REIT – President & CEO
This is Skip, Michael. I would say that, I
mean just region wide I think I mentioned in my comments that leasing
velocities are down, I mean fairly dramatically. In the recent Delta report, I
think they've reported a negative, almost million square feet of net absorption
in the first quarter region wide. That's not necessarily good. I mean, the
first quarter is usually a slow quarter admittedly but you'd almost have to say
region wide almost everywhere just transactional activity, leasing, sales, what
have you, in all property types is significantly abated.
Michael
Knott, Green Street Advisors
<Q>: Okay. And then my
last question and I'll get back in the queue. Skip, how would you evaluate the
possibility of in the future investing in the new areas of the DC marketplace,
north of Massachusetts, down by the ballpark, et cetera, I'm just curious your
view on that?
Skip McKenzie – Washington REIT – President & CEO
Yeah, I mean I think we would certainly
approach there opportunistically, I mean I think those are certainly emerging
markets, and their day will come, they will be dynamic, particularly by the
baseball stadium, you can see the vision there. And it could be an exciting
place. I think they're going to be evaluated on a case-by-case basis and
certainly today if you were to make a move in one of those two markets, you'd
want an extraordinarily good deal, because you're going to be looking at a lot
of downtime, in those two particular markets. But just from a long term sort
of visionary sort of point of view, I think that those are, will be major parts
of the city. I think over time they will fill in like the rest of DC just like
the East End did 20 years ago when you might have asked the same question. And
they certainly would, the long term strategy will fit in, but today if you were
to make a move on either those sectors you'd want a pretty good discount.
Michael
Knott, Green Street Advisors
<Q>: Okay. Thanks.
Operator
Our next question comes from Dave Rodgers
with RBC Capital Markets. Please state your question.
Dave
Rodgers, RBC Capital Markets
<Q>: Hey good morning
guys. Thank you. First question on the One Central Plaza move-out, can you
give us a little bit of additional detail on that? And particularly with
respect to prospects and the incremental impact to second quarter versus first
quarter FFO, is that significant?
Skip McKenzie – Washington REIT – President & CEO
Dave, that was a vacancy that occurred almost
a year ago now, that was United Communications Group. Over the last year I
will be honest with you, I've been very disappointed in the leasing performance
there. That building historically has been a very tight building and I would
say that we felt pretty optimistic when United Communications moved out that we
would lease it up quickly but we have not done so. It's a little bit unusual
in that it's not contiguous. There is a number, that tenant grew sporadically
throughout that building. So it had some space on four, some space on six. So
it's very heavily broken up. We've actually leased some of it but we've done a
little bit sort of the two steps forward, two steps back over the intervening
12 months and really net have made little progress. We've actually, over this
timeframe have actually hired a third-party broker to assist our leasing team
in leasing that space up. So we do have activity on it. I'd like to say I'm
optimistic about leasing some of that up, but I'm not going to jump for joy and
tell you that I'm really pleased with the leasing activity there. Long-term I
think that's going to be a good building and a good market. If you're familiar
with its location, it is right up the street from NIH, and NIH and Bethesda Naval Hospital which is across the street from it; they're going to be major
beneficiaries of many of the initiatives that are going on, especially with
Walter Reed moving to Bethesda Naval. So I think long-term it's going to do
fine, but it's a rocky road right now to be quite honest with you Dave.
Dave
Rodgers, RBC Capital Markets
<Q>: Thanks for that
color. With respect to distress, you obviously talked about it, it was an
earlier question on distress in the market overall. It hasn't I guess fully
emerged as maybe we had all anticipated it at this point and likely still on to
come. But how do you think Skip about positioning the balance sheet and how to
take advantage of that when it does come?
Skip McKenzie – Washington REIT – President & CEO
I mean we think we're in a good spot. If the
opportunities came, we think even today we could make a move. I mean obviously
like everybody else we would like to have less leverage so that we could be
even more aggressive and make bigger moves on that. But quite frankly right
now, we don't see that opportunity out there, we don't see as I just mentioned
a caller ago, that there just are not screaming buys in the marketplace today. And
do I think that they will occur? I don't know, I really don't know whether in
the Washington, DC region, if we are going to see the screaming discounts that
many people are forecasting for many markets in the country. Will I think
we'll see better deals? Absolutely. I do think we will see more attractive
rates of return on investment and I think we are poised to do so. But I am not
so sure we are going to be seeing that $0.50 on the dollar type transactions that
we saw in the last time we had the meltdown in the early 90s.
Dave
Rodgers, RBC Capital Markets
<Q>: Okay. Final
question, Bill, I think you mentioned earlier in response to another question
you characterized the discussions with GSE. Could you characterize discussions
with the other lenders maybe with respect to the term loan for next year or
just broader discussions on potentially the unsecured side whether from
institutions or banks and characterize those two sources of capital in your
discussion?
Bill Camp – Washington REIT – Exec. VP & CFO
Let's start with the term loan, as I
mentioned in my prepared remarks we are in final discussions on extending the
term loan. It's an extension. It's not a renewal. So it's not like a new loan
necessarily. It's kind of a blend and extend type of situation that we are
looking at. It’ll cost us a little bit more, I think the loan rate right now
is we pay a swapped out fixed rate of 4.45 on that term loan, that was a two
year loan that was set in February of 2008. Quite honestly the concept behind
this, obviously its not done yet, the concept is just to take it out to the end
of or towards the end of 2011 so I'm extending it about by 17 months and the
rate would probably be up 75 basis points or may be little higher than that. That's
kind of where it is at. If you asked me where new term loan terms are, what
the market looks like. If I went for new two year term loan today, I'm kind of
guessing a little bit, to be perfectly honest with you Dave because I haven't
talked to people about it yet. I mean I talked to a couple of bankers, but not
a lot. What you're seeing in today's market is you're seeing floors on LIBOR
rates, somewhere around 150 to 200 basis points. So 1.5%, 2% floors. You can
get those floors waived obviously if you swap it with whoever you're getting
the loan with and you can either get it waived or becomes a non-factor. The
spreads are 275, 300 over for a credit like us, and might be a little lower
today, than it was a few weeks back when I was talking about it, but that's
kind of the number. And I think that's kind of the term loan market right now.
In terms of the other property types secured
financing, a lot of the lenders and insurance companies there is money to be
put out in this market. In fact, we had one insurer come to us to ask if they
could try and be competitive against Fannie and Freddie because they wanted
apartment exposure in this market. And lo and behold they couldn't be, but
they wanted to be. But they wanted deals in the under 10 million size and we
don't have many of those. So I think they were looking for smaller exposure on
an individual basis. It doesn't sound like they want any kind of pooled
transactions right now, they just want to be simple and have one asset that
they can watch. And I would say they are probably, if Fannie and Freddie are
in the low fives, I would say they are probably in the high fives or sixes. In
terms of other property types, it seems or feels like everyone thinks, at least
in our area I don't know about other parts of the country, that those rates are
seven to seven and a half. And they have been that way for a while, and if
interest rates move up a little bit their spreads come down. And if interest
rates move down their spreads go up. It feels like a floor to me, but that's
kind of where we we're at. Does that give you enough color?
Dave
Rodgers, RBC Capital Markets
<Q>: Yeah, I appreciate
the color. Thanks guys.
Operator
Thank you. Just a reminder, if you would like
to ask a question, please press *1 on your telephone keypad. Our next question
comes from John Guinee with Stifel Nicolaus. Please state your question.
John
Guinee, Stifel Nicolaus
<Q>: Hi, thank you. Nice
quarter guys.
Skip McKenzie – Washington REIT – President & CEO
Thanks, John.
John
Guinee, Stifel Nicolaus
<Q>: Question, you talked
about the relative strength of the investment sales market in DC versus the
rest of the country. And you also talked about the seemingly availability of
debt in DC and then your desire to de-lever a little more. If you kind of add
that all together it would imply a much more aggressive disposition policy than
$50 or $60 million in 2009. So my question is really two-fold, why not more
than $50 or $60 million of assets sold in 2009? And then second what is, more
of the dispositions, like one small industrial apartment, what are the reasons
there?
Bill Camp – Washington REIT – Exec. VP & CFO
Well, first of all we like our diversified
portfolio, John, I think, there is but let's go to the meatier questions, why
not more dispositions and I think as Skip said, earlier he said there was
several properties that we've had unsolicited offers on. I think when you go
to the broader markets and really show to market that you want to try and sell
building, I think everyone thinks that you're willing to give it away. So
Skip McKenzie – Washington REIT – President & CEO
I think that's a good point, tactically
Bill Camp – Washington REIT – Exec. VP & CFO
You know I think right now, what we're seeing
is these one-off transactions that are unsolicited by us, some of them are
attractive and we're going to look at them and quite honestly, the number could
go higher than $50 to $70 million, which is what I'm advertising. It could go
higher but with the market the way it is and the fact that money is as tight as
it is, and some guys can get lending and other guys can't. And these are
one-off buyers. Sometimes you just I am not ready to say or saying that we're
going to push the disposition program up, we're looking at a lot of stuff.
Skip McKenzie – Washington REIT – President & CEO
I think we agree with you John. I think it's
a valid comment and we were evaluating it. I think as Bill mentioned that
number could be greater than that at the end of the year but maybe we're being
a little conservative on our numbers. But we feel comfortable with the numbers
that we put on the table in terms of our projections. And it very well could
be a larger number than that when the chips are finally counted at the end of
the year.
Bill Camp – Washington REIT – Exec. VP & CFO
The other point, John, I think is that even
if we would decide that we were going to sell another asset and then move down
the path we're kind of at the end of April here. By the time we actually get
it all done and said and done, we're going to be very late in the year or it
could be certainly late third quarter and if not fourth quarter. Some of these
things may push out and we haven't given any guidance on dispositions next
year. They could push out the next year too. I don't know if we're going to
hit higher than $70 million this year or not but I think the thought process
is, we're going to continue to work on a lot of different things. And if someof
them hit, that number may go up this year or it may kind of wiggle into next
year.
John
Guinee, Stifel Nicolaus
<Q>: Great. Thank you
very much.
Bill Camp – Washington REIT – Exec. VP & CFO
Sure.
Operator
Our next question comes from Chris Lucas with
Robert W. Baird. Please state your questions.
Chris
Lucas, Robert W. Baird
<Q>: Good morning
everyone.
Bill Camp – Washington REIT – Exec. VP & CFO
Hi Chris.
Chris
Lucas, Robert W. Baird
<Q>: Bill, just kind of
follow up on train of thought here on the capital side. I guess two quick
questions; one is that, have you even bothered to look at the unsecured market
at this point and is there any pricing that's being dented about that you would
care to discuss?
Bill Camp – Washington REIT – Exec. VP & CFO
I have not; quite honestly I think there are
some of our REIT counterparts out there that that have tested the waters in
that market and I don't think at this point. Chris, I actually think that at
some point in the future that market might become more attractive but right now
that pricing looks pretty expensive.
Chris
Lucas, Robert W. Baird
<Q>: Okay. And then just
in terms of thinking about the debt maturities over the next couple of years,
it seems like the general consensus is to try to get as much pay down through
the sort of 2012 timeframe. So, given that as a sort of conventional wisdom,
what's the thought process on just extending the line into essentially the end
of 2011 as opposed to further out?
Bill Camp – Washington REIT – Exec. VP & CFO
Well, we have an option at the same terms.
Our line is at plus 42 basis points, the rates now are under 1% for us to
borrow.
Chris
Lucas, Robert W. Baird
<Q>: I guess some, I'm
sorry, I'm talking about the term loan is really what I am talking about
Bill Camp – Washington REIT – Exec. VP & CFO
The term loan, well the thought process, I
will be real candid, the thought process is that term loan is with our lead
line of credit bank. It is under the same covenants and various things as that
line. If we extend the line, the line matures in November of 2011. And if I
want to keep that term loan basically, I have a penalty if I pay it off. So my
cheapest source of capital with regard to that term loan right now is just to
negotiate an extension rather than pay it off and issue a new term loan. And
they are unwilling to move it beyond that maturity date of the line because then
they'll have exposure to the same set of covenants that they have now. And I
think they're not really interested in keeping covenants exactly the same. I
don't think any bank is.
Chris
Lucas, Robert W. Baird
<Q>: Okay, that's helpful.
And then just I guess kind of a technical question and if Laura is there,
maybe she can help me with this. I am just trying to understand the APB 14-1
application and what was the actual adjustment in terms of interest expense for
the quarter?
Laura Franklin –
Washington REIT – EVP & Chief Accounting & Admin Officer
Sure. As you saw in our press release we
mentioned which included the gain on extinguishment the $0.05 in the first
quarter of 2009, and $0.03 in the first quarter of 2008. If you exclude the
gain Chris, it's basically $0.02 in the first quarter of 2009 versus $0.03, of
the same $0.03 obviously in the first quarter of 2008.
Chris
Lucas, Robert W. Baird
<Q>: Okay. I think there
is a footnote that references and I don't have it in front of me, about $1.2
million of adjustment for each quarter and that was the part that I was
struggling with.
Laura Franklin –
Washington REIT – EVP & Chief Accounting & Admin Officer
We basically have, excluding the gain we have
$1.2 in first quarter 2009. About $900,000 of that is the non-cash related to the
fair value adjustment.
Chris
Lucas, Robert W. Baird
<Q>: Okay.
Laura Franklin –
Washington REIT – EVP & Chief Accounting & Admin Officer
The difference for that, you see it, added
back in our FAD, is basically the amortization of the fair value on these
mortgages in the first quarter.
Chris
Lucas, Robert W. Baird
<Q>: Okay. I'll probably
need a little more help on this, if I can get you offline that'll be great.
Laura Franklin –
Washington REIT – EVP & Chief Accounting & Admin Officer
Sure.
Skip McKenzie – Washington REIT – President & CEO
That's fine.
Chris
Lucas, Robert W. Baird
<Q>: Thanks a lot.
Laura Franklin –
Washington REIT – EVP & Chief Accounting & Admin Officer
Sure.
Operator
Our next question comes from Michael Knott
with Green Street Advisors. Please state your question.
Michael
Knott, Green Street Advisors
<Q>: Hi guys, I was just
going to ask for an update on Sunrise?
Skip McKenzie – Washington REIT – President & CEO
Okay, Michael, I guess the way I would answer
Sunrise is as the’ve were advertised in the marketplace, they're attempting to
sublease a significant portion of the premises, I think I announced on the
prior call we're working with them to assist them in subleasing 60,000 square
feet which they have identified as excess space needs. And they've actually got
a decent amount of prospects on, I would say, almost all of that space. And
we're actively working with them to facilitate releasing them of some of those
lease liabilities. So that's sort of an ongoing process. Nothing is firm;
it's all subject to change, but I feel pretty good about the activity on that
space and the ability for us to basically help them sort of deal with their
G&A issues on a going-forward basis. In terms of them as a tenant, for us,
they've been a phenomenal tenant, they are current on their rent. And we
recognize that they've still more things to do in terms of their business plan
going forward, but I think they are making some progress.
Michael
Knott, Green Street Advisors
<Q>: How was that building
received in the marketplace from potential subtenants?
Skip McKenzie – Washington REIT – President & CEO
I think the activity has been very, very
good. Let me just make sort of a general market comment. I mean one of the, if
you might hear negative comments about Tysons Corner in general today is one of
the issues is that there is a tremendous amount of construction activity going
on in Tysons. They have what’s called a hot lane project, which is adding lanes
to the beltway, which is a lot of disruption in the vicinity of Tysons Corner
as well as the whole metro construction project is now underway. So sort of a
macro level, you are hearing concerns just from the marketplace on the
willingness of some new tenants to want to expand in Tysons because of those
sort of just big macro level issues, that don't relate to our property
necessarily, it relates to the whole market as a whole. Having said that as I
mentioned earlier, I mean these guys have had really activity on our space. We're
probably one of the, if not the most prominent buildings on the beltway there. So
that has wonderful signage opportunities. Sunrise has a sign on the building. The
other building across the street Capital One has an equally prominent building
signage. So they've had good progress there.
Mike Paukstitus – Washington REIT – Senior VP Real Estate
I guess the other thing to address is that
given our pricing, the price points of that building is substantially below new
delivery in the marketplace. So it's a fabulous deal for a tenant to come in
there and get that location at that price.
Michael
Knott, Green Street Advisors
<Q>: Okay. And then on the
retail portfolio, maybe you mentioned this and I missed it but can you just
talk about your feeling as to the health of your retail portfolio? Looks like
occupancy was up a little bit sequentially and you had to roll down just a
little bit of releasing on a cash basis. Can you talk about your expectation
of where the entire retail portfolio, where market rents are versus your
in-place rents?
Skip McKenzie – Washington REIT – President & CEO
Yeah, I can make a general comment on that,
Michael. First of all, firstly I think you should just ignore the rent roll
down in retail. The activity this quarter was so light, it was 21,000 feet,
and it had sort of an aberrant tenant in there. It had on the backside of our
Montrose Crossing Shopping Center, it had a quasi Industrial tenant there on
the back side of the center. And then as Mike mentioned, I think in his
comments, we had a workout tenant for another part. So it's really... it's
kind of an aberration. I don't think that negative 5% is indicative of where
our leases are relative to market on a macro level. I think we are showing
that our rolling leases over the next 12 months are slightly below market, so
that we're still, I would say as we re-lease over the next 12 months, we will
see modest or moderate rental rate increases on those rollovers. Having said
that, I would comment that retail is still a very tough environment for our
tenants out there. As we reported, we're still experiencing higher than
historical bad debt expense in the retail world. And we are hearing from our
tenants that their sales are down fairly significantly. The good news is, is
that we have primarily supermarket-anchored grocery centers in in-fill
locations, and those are doing well. We sort of are keeping a close eye on as
we do have two power centers, and we're keeping our eye on some of the big
boxes out there. We don't know of any other further problems other than the Circuit City that we had in the fourth quarter, but we are keeping a close eye on those. But
I'd say we are reasonably optimistic given the region that we are in that we're
going to sort of get through this okay. But we're not going to see, sort of
those 20% rental rate increases and 98% occupancies that we have enjoyed over
the past five years, maybe over the next 24 months.
Michael
Knott, Green Street Advisors
<Q>: Okay, Thank you
Operator
Our next question comes from Chris Lucas with
Robert W. Baird. Please state your questions.
Chris
Lucas, Robert W. Baird
<Q>: Two quick questions,
just a follow up; what was the bad debt expense for the quarter?
Skip McKenzie – Washington REIT – President & CEO
The overall number?
Chris
Lucas, Robert W. Baird
<Q>: Yes.
Bill Camp – Washington REIT – Exec. VP & CFO
The cash number was $1.4 mil, and the GAAP
number was 1.76.
<Q>: Okay. And then just
following up on the comments, Skip, any prospects on the Circuit City space? I know it's early.
Skip McKenzie – Washington REIT – President & CEO
Let me answer this two ways. Do we have prospects
on it? Yes, Chris, but I wouldn't factor in a permanent tenant in that space. It's
a very difficult retailing environment. We will probably get some rental
income on that space over the next 12 months with some seasonal tenants. We'll
probably do like a Halloween store, and we'll probably do like a Christmas tree
store. So we'll probably actually mitigate the income dislocation from Circuit City. But as a practical matter, the chances of putting in a 23,000 square foot
tenant on a permanent basis there over the next 12 months, it's probably not
that good right now. But from an income basis, I think we will cut down some
of that with some seasonal tenants.
Chris
Lucas, Robert W. Baird
<Q>: Great. Thank you.
Operator
Thank you. Ladies and gentlemen, there are no
further questions at this time. I'll turn the conference back to management
for any closing comments.
Skip McKenzie – Washington REIT – President & CEO
Okay, well thank you everyone for listening
to our conference call today. I hope you are enjoying as good weather as we
have here at Washington. And we look forward to discussing with you the
results of the second quarter. Have a good day.
