First Potomac Realty Trust's (FPO) CEO Bob Milkovich on Q4 2015 Results - Earnings Call Transcript

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First Potomac Realty Trust (NYSE:FPO)

Q4 2015 Earnings Conference Call

February 22, 2015 10:00 AM ET

Executives

Jaime Marcus - Director, Investor Relations

Bob Milkovich - Chief Executive Officer

Andy Blocher - Chief Financial Officer

Samantha Gallagher - General Counsel

Analysts

Jordan Sadler - KeyBanc Capital Markets

Craig Mailman - Keybanc Capital Markets

Brendan Maiorana - Wells Fargo Securities

Sheila McGrath - Evercore ISI

Michael Lewis - SunTrust Robinson Humphrey

Paul Adornato - BMO Capital Markets

Bill Crow - Raymond James

John Guinee - Stifel, Nicolaus

Operator

Good morning. This is the First Potomac Realty Trust Fourth Quarter 2015 Earnings Conference Call. As a reminder, today’s call is being recorded. At this time, I would like to turn the call over to Jaime Marcus, the Director of Investor Relations. Please go ahead.

Jaime Marcus

Good morning and welcome to First Potomac Realty Trust’s fourth quarter 2015 conference call. On the call today are Bob Milkovich, Chief Executive Officer; Andy Blocher, Chief Financial Officer; Samantha Gallagher, General Counsel and other members of our management team.

Before the market opened this morning, our Company issued its fourth quarter 2015 earnings press release and posted supplemental information relating to fourth quarter operating results and portfolio performance as well as the details of our strategic plan on our website. Shortly thereafter, we filed our 10-K. Many of you have signed up to receive this information automatically by email. This information was also included in the 8-K furnished this morning with the SEC. The press release can also be found under the Investor Relations section of our website, first-potomac.com.

During this call, we will discuss our anticipated operating results and future events, including anticipated earnings and related assumptions, certain non-GAAP financial measures such as FFO, FFO available to common shareholders, core FFO, and same-property NOI, expected benefits from the implementation of our strategic plan, anticipated debt repayments and other potential financing transactions, expected dispositions and our ability to complete such dispositions. As well our ability to identify and complete additional acquisitions. All non-GAAP financial measures are reconciled to the most directly comparable GAAP measures in our press release and supplemental information included in the morning's 8-K.

These and other statements relating to future results and events are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on our current assumptions; however, the company’s actual results or events might differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results or events to differ is contained in our Company’s Annual Report on Form 10-K and described from time to time in the Company’s other filings with the SEC. Many of these factors are beyond our ability to control or predict. We assume no obligation to update our forward-looking statements.

With that, I would like to turn the call over to our Chief Executive Officer, Bob Milkovich

Bob Milkovich

Thank you, Jamie. Good morning, everyone. And thank you for joining us. I'll start by reviewing our operating results for the fourth quarter and full year before turning the call over to Andy Blocher, our Chief Financial Officer for a review of our financial results. I'll then discuss the strategic plan and action items to implement the plan. In 2015, we continue to grow our operating metric, starting construction on the Northern Virginia build-to-suit and executed on the sale or strategic disposition and realign the executive team and Board of Director. We also spend a great deal of time and effort underwriting the business formulating the strategic plan. I am confident in the strategy, the action item and we'll discuss with you shortly.

Turning to our operating results for the fourth quarter. I am please to report core FFO of $0.28 per share, bringing our core FFO for 2015 to $1.02. We delivered strong same property GAAP NOI growth during the quarter and for the full year at 6.1% and 4.8% respectively. We also had a solid leasing year this quarter signing 104,000 square feet of new leases and 186,000 square feet of renewal leases, increasing our occupancy to 90.3% and our lease percentage to 92.1%. Year-over-year, our occupancy increased 240 basis point and our lease percentage increased 80 basis points. At 90.3%, we are currently the highest occupancy level we've seen since the second quarter of 2005.

Turning to fourth quarter, we signed 16 new leases totaling 104,000 square feet bringing our total new leasing for the year to 395,000 square feet. Of the new leases signed during the quarter five leases were comparable to prior leases representing 26,000 square feet. On these five leases we experienced a roll up of 5.6% on a GAAP basis and rolled down of 6.1% on cash basis.

For the year on comparable leases we experienced a roll up of 7.3% on a GAAP basis and roll down of 2.1% on cash basis which is consist with current market conditions. Significant new leases include 13,000 square foot lease with Steward Lender Services which backfilled the former BT Conferencing Space at Crossways Boulevard, a lease with the county government at Cloverleaf Center for just in 20,000 square feet bringing that property to 87% leased and over 14,000 square feet of leases with several tenants at 1401 K Street.

Turning to renewals. We signed 13 leases during the fourth quarter totaling 186,000 square feet representing tenant retention rate of 79%. Our tenant retention rate for the year was in line with our expectations at 61%. Significant renewals including expansion and extension of 13,000 square feet with Rep Equity at 1211Connecticut Avenue, 26,000 renewal with BAE at Hillside Center and 8,000 square foot renewal with Cross Fire Logistics at Gateway 2 and other expansion and extension totaling 131,000 square feet with Paxton Van Line at Plaza 500.

Our contractual lease expirations for 2016 are approximately 509,000 square feet totaling 7.4% of our total square footage. As we've discussed previously we have three large single tenant expirations over the next two years. At 500 First St, the Bureau of Prisons lease will expire on July 31 of 2016. While we do not expect them to renew, we do expect them to hold over to release year end. At One Fair Oaks, we expect CACI International to vacate at the end of their term on December 31 of 2016 and at 540 Gaither Road at Redland Corporate Center, Health and Human Services will vacate on March 22 of 2017 after previously providing notice. I will discuss our plans for these properties in greater detail when I review the strategic plan.

Turning to Northern Virgina build-to-suit. The base building construction was completed prior to year end 2015 and was both on time and on budget. Construction of the interior improvement has commenced and we expect to deliver the space to the tenant in the third quarter of 2016. Finally, I'd like to provide a brief update of our previously announced dispositions.

In January, we entered into a binding contract to sell the NOVA Non-Core portfolio which is comprised of 26 buildings totaling 946,000 square feet. We expect to receive net proceeds of $90.6 million from the sale and as a result we recorded an impairment charge of $26.9 million in our fourth quarter results. The sale is expected to be completed in the first half of 2016.

In February, we entered into a contract subject to study period to sell Storey Park, a development site in NoMa. The sale is expected to be completed in the first half of 2016.

Now I'd like to turn the call over to Andy to review our financial results after which I'll discuss the details of our strategic plan.

Andy Blocher

Thanks Bob. And good morning, everyone. On an absolute basis, FFO available to common shareholders decrease from $16.4 million or $0.27 per share in the fourth quarter of 2014 to $9.2 million or $0.15 per share in the fourth quarter of 2015.

The primary drivers of the decrease were $6.1 million of personnel separation costs related to the departure of our former Chief Executive Officer and Chief Investment Officer. And $1.8 million of debt extinguishment cost incurred to date due to the amendment and restatement of our unsecured revolving credit facility and unsecured term loan during the fourth quarter of 2015. Core FFO increased from $16.4 million in the fourth quarter of 2014 to $17.1 million in the fourth quarter of 2015, or from $0.27 to $0.28 per share which excluded the personnel separation cost of debt extinguishment charges I just mentioned.

Same property GAAP NOI increased 6.1% for the fourth quarter. The largest contributors to same property NOI were 1211 Connecticut Avenue, Atlantic Corporate Park, Hillside Center, TenThreeTwenty, Crossways Boulevard and Greenbrier Circle, which all experienced occupancy increases during the year.

For the full year FFO available to common shareholders decreased from $56 million in 2014 to $54.8 million in 2015 or from $0.92 per diluted share in 2014 to $0.90 per diluted share. The primary drivers of the decrease in FFO were the previously described fourth quarter 2015 personnel separate costs as well as $400,000 of personnel separate cost incurred earlier in the year as we streamlined our organizational structure. We also incurred debt extinguishment cost totaled $500,000 associated with the sale of the Richmond portfolio in the first quarter of 2015, in addition to the $1.8 million incurred in the fourth quarter.

Core FFO increased from $59.7 million in 2014 to $62 million in 2015, or from $0.98 per diluted share to $1.02 per diluted share. Please note that core FFO excludes both the personnel separation cost and debt extinguishment cost I discussed. Year-over-year our G&A was down approximately $2.2 million excluding personnel separation costs as we reduced our headcount by more than 20 employees over the course of 2015, in addition to the CEO and CIO departures. As Bob will discuss we've been keenly focused on reducing our corporate operating expenses. We will continue to remain disciplined and efficient as we move forward with our strategic plan.

Strong fourth quarter performance helped drive year-over-year same property NOI growth to 4.8% in 2015 as we increased occupancy across the portfolio. For the full year, occupancy increases at 1211 Connecticut Avenue, 840 First Street, TenThreeTwenty, Atlantic Corporate Park, Crossways Boulevard and Greenbrier Circle, more than offset declines at Ammendale Commerce Center, Plaza 500, Hendon Corporate Center and Enterprise Center.

Turning to balance sheet. In the fourth quarter, we amended and restated our unsecured revolving credit facility and unsecured term loan. The new credit agreement extends the maturity date of the unsecured revolving credit facility to 2019 and extends the maturity date of each of the $300 million tranches under the unsecured term loan facility to 2020, 2021 and 2022.

As part of the new agreement, we also reduced the LIBOR spreads to current market rates, decrease the capitalization rates used to calculate gross asset value and modify the applicable covenant packages to be more closely aligned with our strategic plan. In 2016, we have approximately $67 million of consolidated debt maturing. $32 million of this debt is related to a construction loan at 440 First St and $22 million is comprised of land loan of Storey Park, an asset we are currently in the process of selling.

Both of these loans are short-term variable rate financing. We expect the land loan to be paid off at the time of the sale and we are exploring long-term fixed rate alternative for 440 First St later this year.

Turning to dispositions. During fourth quarter we sold Newington Business Park Center and Cedar Hill I and III for aggregate net proceeds of $57.3 million. A reported gain on sale totaling $26.1 million. The combined proceeds from these two sales were utilized to fund their redemption of $2.2 million of our Series A preferred shares in mid January 2016. As previously discussed, the net proceeds from the sale of the Northern Virginia Non Core Portfolio in Storey Park will be used to redeem the remaining $4.2 million preferred shares and to reduce debt.

As Bob mentioned, we entered into a binding contract to sell the Northern Virginia Non Core Portfolio for $90.6 million. Based on the estimated net sales proceeds we recorded an impairment charge of $26.9 million. In addition at One Fair Oaks, we now expect the tenant CACI International to vacate property at their lease expiration in December 2016. As a result, we anticipate a loss of cash flow and the expected cost and challenges to release the property, we recorded an impairment charge of $33.9 million to bring the property to its estimated fair value.

Moving on to guidance. In our press release, we introduced our 2016 FFO guidance range of $0.98 to $1.04 per share. Our 2016 guidance reflects the following. We expect between $97 million and $100 million of portfolio NOI in 2016 which assumes the sale of the Northern Virgina Non Core Portfolio in the first half of 2016, and an addition $30 million of non core dispositions in the second half of 2016. As is our normal course to the extent we engage in any additional disposition or acquisition activity, or if our timing assumptions change materially, we will update our guidance accordingly.

Interest and other income assumes the $34 million of mezz loan at 950 F Street which is currently freely prepayable upon 30 days notice is not repaid during 2016. Preferred dividends of $2.5 million to $4 million reflect the redemption of the remaining $105 million of preferred shares in the first half of 2016. This compares to $12.4 million of preferred dividends for the full year of 2015. Our yearend occupancy range is 90% to 92.5% and our same property NOI guidance is positive 1% to positive 2.5%, driven primarily by 440 First St on Capital Hill in the Maryland region.

Though we feel confident that the $0.98 on the low end is a conservative assumption, the items that can potentially get us there includes the GSA moving in later than we anticipate at the Northern Virginia build-to-suit as well as the Bureau of Prisons vacating 500 First St at the end of their contractual lease rather than holding over as we have projected.

As you think about run rate, remember that with company our size annualized and smaller items can result in meaningful changes to the go forward result. As you model our earnings going forward please keep in mind the following things. Annualized in fourth quarter 2015 NOI get should about $114 million of NOI. We lost approximately $4 million of the NOI's fourth quarter NOI from Newington Business Park and Cedar Hill which were sold in late 2015.

To normalize the remaining $110 million of NOI and adjustment of approximately $5 million on an annualized basis is warranted to account for certain line items, non recurring items and seasonal adjustments to make a comparable to the full year. We expect to lose between $5 million to $7 million of NOI from the sale of Northern Virgina Non Core Portfolio which reflects a partial years ownership of the asset in 2016. The combination of same property NOI growth and occupancy by the GSA at the Northern Virgina build-to-suit in the second half of the year will more than offset the impact of the $30 million of assumed additional non core dispositions in the second half of 2016.

As a reminder, the three large upcoming lease expirations likely not impact our results until 2017. As CACI International at One Fair Oaks and Health and Human Services at 540 Gaither Road are contractually in place through the end of this year. Now we currently expect the Bureau of Prisons to hold over at 500 First St through the end of 2016.

With that I'll like to turn the call back over to Bob to discuss the details of our strategic plan.

Bob Milkovich

Thank you, Andy. I am pleased to say that our strategic plan is the combination of a team effort involving our executive leadership, third party consultants, and a strong and talented group of employees across the company and significant support from our Board of Trustees. Since being appointed CEO I worked diligently with the entire FPO team to evaluate, analyze a wide range of opportunities for enhancing the value of First Potomac. The outcome of this analysis has resulted in the strategic plan that we published this morning. And it is to de-risk the portfolio, de-lever the balance sheet and maximize asset values.

I believe the plan we've outlined maximizes value for shareholders and we have the team in place to execute effectively. As I have noted, the key action items of the plan include the following. Improving our portfolio of composition by increasing the disposition of non core assets from $200 million to $300 million. Addressing the upcoming lease expirations through the repositioning of 500 First St, 540 Gaither Road at Redland Corporate Center and the future sale of One Fair Oaks.

To strengthen the balance sheet and improve liquidity by reducing leverage, limiting our floating rate debt exposure over time and extending our debt maturities to align the capital structure with our assets. Managing our corporate overhead by reducing G&A and reducing our target annualized common dividend from $0.60 to $0.40.

Let me review each of our action items in greater detail. Starting with portfolio composition. Our focus remains on disposing of non-core assets in order to improve our portfolio quality, and we've recently taken a number of positive steps to do so. This includes the sales of Newington Business Park and Cedar Hill in the fourth quarter of 2015 as well as the upcoming sale of eight Business Park and flex properties that comprise our Northern Virginia Non Core Portfolio and the sale of Storey Park, our development site.

Our focus remains on the ownership of institutional quality, multi-storey office properties and liquid submarkets with inherent demand drivers. With the current favorable capital market pricing, we believe now is the time to pursue additional non-core asset sales. On pages 5 and 6 of the strategic plan presentation, we provided our assessment of each of the asset as well as the submarkets that current comprise our portfolio. As a result of this assessment, we are currently exploring the sales of additional $150 million of non-core assets which increases the dispositions target from $200 million to $350 million. This incremental $150 million of asset sales only represents a portion of our non-core pool. Over the longer term, we look to harvest additional value from the remaining non-core assets in a very disciplined and calculated way.

We believe that disposing of non-core assets is the best way to maximize long term value of First Potomac. Some of the details regarding the historic performance of non-core assets relative to our strategic hold and repositioned assets are listed on page 7 of the presentation. And the evaluation of portfolio from 2014 to the future disposition of all of our non core assets can be seen on page 8. With this new plan, we are accelerating the transformation of First Potomac resulting in a higher quality albeit smaller portfolio. In short, we are repositioning the company to maximize its value.

Turning to redevelopment opportunities. We are currently focused on several compelling redevelopment opportunities that we will be pursuing over the next few years to unlock value for First Potomac. First and foremost, we are focused on completing the final leasing at 440 First St which is currently 72% leased and to stabilize that redevelopment. As well as completing the Northern Virginia build-to-suit on time and on budget. We also believe we have potential to add value at both 11 Dupont Circle and 1401 K Street.

Finally, we took an in-depth look at the embedded investment potential associated with the three large single tenant lease expiration at 500 First St, 540 Gaither Road and One Fair Oaks. As you may recall, these three buildings represents just over $30 million of NOI on annual basis. After considering their potential for short -term renewals or hold over ramp, we believe all three tenants will vacate at various times throughout 2017. I'd discuss our analysis and conclusion for each asset individually.

Starting with 500 First St. We are confident about the redevelopment potential at 500 First St on Capital Hill. As I've discussed in the past, high quality office product is difficult to come by in downtown and we believe we can maximize value through redevelopment and re-tenanting of this property. We currently anticipate a construction period of nine months and expect to spend approximately $8 million of redevelopment capital to convert the single tenant building to a multi-tenant building, create a tenant only conference facility and fitness center, update the lobby and rest rooms and streetscape, and create a small parklet for the benefit of the tenants. Current market concession packages are running into 100 plus per square foot range excluding rental abatement with full service rents in the mid 50s.

If we get some leasing momentum or clarity on our recovery, the rental rent could be even higher similar to what we've seen at 440 First St which is only a half block away. At 540 Gaither Road, which is part of the Redland Corporate Center, we have an opportunity to enhance the amenity base for that building as well as the other 350,000 square feet of fully leased office space that comprises our ownership at Redland Corporate Center. We currently anticipate spending roughly $8 million of redevelopment capital when the GSA vacates in March of 2017. The capital will support the conversion from a single tenant building to a multi-tenant building as well as upgrading the lobby, the rest room, the common area and a fitness center. In addition to those improvements, we intend to create in many base class box and event space in the courtyard that will benefit all three buildings of the property.

Current market concession packages in this market are running at $85 per square foot excluding rental payment with full service rents in a low 30s. You should know we are currently in lease negotiations with the tenant for the lower two floors equating to a third of the building which demonstrates the quality of the offering and it helps to reduce the risk in this type of redevelopment in a suburban location. It also leaves the more desirable upper force available.

One Fair Oaks. Finally as discussed earlier we took a sizable impairment associated with One Fair Oaks during the quarter. The Fairfax submarket remains challenged with 350,000 square foot or greater block space that have been on the market for an average of 36 months or more. We believe that the submarket surrounding One Fair Oaks is suffering from a lack of demand and it isn't likely to be resolved in the near term. To further compound the lack of demand in the submarket, many government contractors are relocating to the Route 28 South Corridor or seeking to upgrade their space in other parts of Fairfax County.

This fact coupled with the potential downtime and lack of leverage with respect to leasing demand, represents risk we do not want to take at this time. Given the outside risks and our intent to de-risk the entire portfolio, we plan to sell One Fair Oaks. We anticipate selling this property after CACI International vacates. The impacts on both NOI and leverage associated with these redevelopment scenarios as well as previously discussed asset sales are described on pages 11 and 12 of the strategic plan presentation.

When looking at the balance sheet, we continue to actively manage our balance sheet in order to enhance our financial [Technical Difficulty] Turning to the balance sheet. We continue to actively manage our balance sheet in order to enhance our financial flexibility by reducing leverage, extending debt maturities and limiting our floating rate debt exposure over time. De-levering our balance sheet is a key tenant of our strategic plan. Having utilized the proceeds from our recent asset sales at Newington Business Park and Cedar Hill to redeem a portion of Series A preferred shares, our commitment to reducing total leverage and progress against this initiative is clear.

Our approach to reducing total leverage will be gradual and highly strategic. In the near-term, our focus will be to keep the leverage below 9x on a debt plus preferred to EBITDA basis. While these leverage levels are above average for both the industry and the office sector, we believe that operating at these levels is sustainable and allows for future potential leverage reductions as the DC economy improves. We also intend to reduce our reliance on floating rate debt. And to better align our duration of liabilities with the whole periods of our assets.

Acting deliberately, we've already benefited from a strong capital market condition by placing attractive long-term fixed rate debt on several assets including 11 Dupont Circle and Prosperity Metro Plaza in the past year. We anticipate utilizing the secured financing market to place long-term mortgage debt on both 440 First St and the Northern Virginia build-to-suit. Both of these high quality assets will reach stabilization in late 2016 or early 2017. And we believe the quality cash flow from those properties as stabilization will be highly desirable for lenders.

Managing our corporate overhead. We continue to take steps to manage our corporate cost structure by reducing our corporate overhead and G&A. A considerable portion of my time over the past several months has been devoted to designing an organizational structure that can execute our strategic plan, while keeping in mind that our smaller asset base can only support a limited G&A load. As Andy discussed in his prepared remarks, in 2015 we completed a reduction in force and a realignment of the executive team as well as refine focus on other operating cost. These changes are expected to result in a roughly $3.5 million reduction in overhead; $2 million of which is evident in our G&A line of our 2016 guidance with another $1.5 million reflected as a reduction in corporate overhead that is allocated to NOI.

Throughout this organizational restructuring process, a number of employees have taken on additional responsibilities. I am very pleased with the strong teamwork that I have witnessed as we continue to execute on our asset sales and the strategic plan. I believe these savings are sustainable and I remain committed to keeping our overhead as lean as possible.

And finally dividend. The focus on reducing risk necessitates reviewing our dividend policy. As a result, management recommended and the Board approved a reduction in our targeted annual common dividend from $0.60 per share to $0.40 per share beginning next quarter. This decision was not taken lightly but the Board of Trustees and the management team believes the targeted annual $0.40 per common share dividend level is appropriate; it's sustainable and reflects prudent management of our capital resources such as reinvesting in our redevelopment pipeline.

Our strategic plan is our immediate focus. And while we are currently in a period of corporate contraction and focused primarily on disposition and redevelopment activity. Our long-term strategy is to prudently grow our asset base. In concert with analysis of the plan we did a deep dive into the submarket where we currently own asset as well as those target market where we may look to expand our footprint in the future.

At this time and based on the current market condition, I do not believe we are missing any major opportunity but rather we are better positioning the company for the future.

In closing, I am confident in the plan that we've outlined for you today and the team that we have in place to execute the plan. I firmly believe that we are taking the right steps to de-risk and de-lever First Potomac as we work to best position the company to benefit from an improving DC office market over the long term.

With that we would like to open the lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions]

Our first question comes from the line of Craig Mailman with Keybanc Capital Markets. Please proceed with your question.

Jordan Sadler

Hey, it's Jordan Sadler here with Craig. Good morning. So first question is regarding the strategic plan. I guess I see the central tenets of the plan, and a lot of it makes sense. Some of it's actually familiar with -- relative to what you guys have been doing over the past couple of years. What would you say are the primary differences versus the prior regime that may be a little bit less evident to the eye in what you've laid out here?

Bob Milkovich

Sure. This is Bob. Good morning, Jordan. I think some of the major difference you will see is obviously we are going to be a leaner, more efficiency organization. I hope that through some of the work that we are presenting you can see that we are much more analytical in our decision making. And I think one of the major tenants and I see this cross lot of different businesses. We need to be able to tie out the corporate level, on the property level activities. When you think about certain activities such as spending, capital allocation, the property level, it really needs to make sure it's tied back at the corporate level and you are balancing these activities and concert. I also think that the teamwork has been really good over the last 90 days. I think having executive team on the same page is critical to our success. And I think those were probably the primary difference that you will see.

Jordan Sadler

Okay. I guess the other question would be: Was there any thought throughout the evaluation period of selling the entire Company as an alternative to just putting together the plan?

Bob Milkovich

Yes. Sure. So we looked at the full spectrum of opportunities. I think that we looked at lot of possibilities but we settled on what's more probably. We've gone to this internal evaluation, we utilized third parties to help that our assumptions validate our conclusions. We worked closely with the Board of Trustees and we really through all of the effort were able to come together with this plan. And we think that it's the best strategy but we explored just about every opportunity you can think of.

Jordan Sadler

Okay, and then lastly, with the departure of your CIO, is there a thought to backfilling that, or any other of the C-suite or senior leadership ranks?

Bob Milkovich

Perhaps over time I think as we go through 2016 we want to continue this theme of running lean. On the CIO side, I have investment acquisition disposition experience. I'll be working closely with the team. In terms of the COO role, again I come out of that over the last 18 months or so here at First Potomac. So we will be leveraging and then from more of the company op we will be leveraging people. I've asked few people to step up and they have come through in flying colors. So I think that in the 2016 calendar year, you will see us continue with the organization that we have.

Craig Mailman

Hey guys, it's Craig Mailman here. Just quickly on the redevelopment plan. You guys laid out the assets just curious the thought process kind of the investment hurdles you guys or return threshold you guys are targeting going into that decision to key versus maybe look to sell?

Bob Milkovich

Yes. Thank, Craig. So we looked at --let's see this 500 First St, it's kind of as a case example perhaps. And we looked at that and we certainly have enjoyed the income that we've been collecting from the Bureau of Prisons, we've recognized they are going to leave and so we really looked at, it's so hard to buy property in the district we looked at value over the property even on empty basis. We ran various scenarios there and we believe that those types of properties should be in high 6s perhaps 7% on a return in the urban core and then once when we look on the suburbs we think that's 50 to 75 basis points wider. But in both those cases where we've analyzed 500 First St and 540 Gaither, we believe we have a good plan, we believe that our representation as a base case scenario. So that if we can dry for better rents we could potentially do better. But we had to look at as where do spend our capital, how do we allocate it and candidly when we got to One Fair Oaks, we disbelieved it was a bridge too far.

Operator

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

Brendan Maiorana

Thanks. Good morning. So, wanted to start out just to maybe get your view of buyer interest in the non-core assets. It seems like based on the write-down at One Fair Oaks and the contract price for the Northern Virginia portfolio, those are maybe -- maybe Northern Virginia's a little bit less than the value assumption that we had for that portfolio. I wanted to understand how the interest level was for that portfolio, and maybe how you see those assets compare to the remaining non-core assets that you've got slated and would like to sell over the next year or two?

Bob Milkovich

Sure. Let me come at this from a macro level. In 2015, the investor interest of capital flows into Washington DC was at a very high rate. I think there was $7.5 billion of real estate close across the region. Most of that being in Washington DC proper, the second largest geography was Northern Virginia at about 30% of it and then the smallest percentage being in suburb in Maryland. And the point I wanted to bring to you is that there is never been a greater disparity between the interest level in the district and then as you go out little bit further on concentric rings, it gets less so further out. And it gets less so when you talk about non institutional grade real estate or perhaps moving from a core type product to value add. We've seen the pricing change there. So I hope that answers your question. Obviously something downtown would have a lot of demand, demand inherently pushes pricing and as you get further out your buyer pools thins out.

Brendan Maiorana

And then Bob it sounds like if I inferred from your comments correctly show that $150 million of non-core dispositions that you've got slated in the strategic plan, additional ones and maybe happen this year or maybe next year, that's not all of the non-core assets but it's an amount of value that you like to get. So how do you think about kind of moving the chest pieces around and how are you positioning those assets for sale? Is it putting everything out into the market and seeing where price discovery is best or do you have targeted number of portfolio that you want to release into the market?

Bob Milkovich

Yes. It's definitely programmatic. And when you think about it as we -- as I made the comment earlier, somebody asked the question what's different and one of my responses is talked about tying out the corporate level with the profit level activities. So that's a good example where certainly we are trying to moderate our capital spend on some of the properties that we are going to put in for disposition. And then also where do you spend additional to get some more stabilization in the NOI. We will come out immediately with probably another $25 million of targeted sales in the SoVa region. Then some of the other sales are based on timing. By example we want to make sure we are selling at the appropriate time. If you take something like One Fair Oaks as an example it would be imprudent to try to sell it in 2016 because we would rather capture the NOI that's coming off for that lease. And so again there are some just timing adjustments in there as to when will bring properties to market.

Brendan Maiorana

Okay. And then can you give us an update on where you guys are at Storey Park?

Bob Milkovich

We are under contract. We are in the diligence period and we hoped to close that in the first half of 2016.

Operator

Our next question comes from the line of Sheila McGrath with Evercore ISI. Please proceed with your question.

Sheila McGrath

Yes. Good morning. Bob, there is no share buyback in the guidance. I was wondering if you could give us your updated thoughts on that now that the shares are cheaper than where you executed in 2015. And just to clarify does that plan expire this year.

Bob Milkovich

It does. So you perfect segway into my answer. We have that capacity until about mid year 2016. We have additional capacity to buyback shares. And we will evaluate that solution as we move through the plan. Certainly we don't want to look at -- if you can just kind of step out or zoom back for a second think about the plan that we've laid out, it's very much tied together on certain elements. So we view this as one element that's all part of the plan. Although, we don't want to look at one solution versus the comprehensive view. So we know we have that capability available to us. We'll evaluate it as we go through the plan.

Sheila McGrath

Okay. Great. And then you did mention operating at or about 9x net debt to EBITDA including preferred. I am just wondering if you could give us any insight when you think you can move that ratio lower.

Andy Blocher

Yes. Sheila, it's Andy. We think that through some of these dispositions we are going to continue to make progress as Bob had stated in his prepared remarks. We view that as a gradual move. If you normalize our numbers out right now on a normalized debt plus preferred to EBITDA, we are probably over a bit north of 9. But as we execute we think that we can make some real progress and hopefully get into the high eight and then when they are out you are get into the mid eight. But it's going to be a gradual process over time.

Operator

Our next question comes in the line of Michael Lewis with SunTrust. Please proceed with your question.

Michael Lewis

Good morning. Thank you. This is similar to a question Brendan asked, but just to be clear; on slide 11 you show the NOI building blocks. It doesn't look like there's quite $350 million of sales in there. Maybe it is; maybe it's close. But is the $350 million on here, and then you might have other non-core stuff to sell on top of that? It looks like this is a little short of the $350 million.

Andy Blocher

Yes. Michael, its Andy. You need to remember that we had started a plan of non-core dispositions right. We sold Newington and Cedar Hill. So if you are looking on page 12 of the presentation where you are looking at the leverage pieces. You can see that we've got about $143 million to get to the initial $200 million which reflects $57 million or so of proceeds that we receive from the sale of Newington and Cedar Hill in the fourth quarter.

Michael Lewis

I see. Thanks. And then how likely or unlikely is it that the 950 F Street that its loan gets paid off in 2016? It looks like it's almost a 10% interest rate although I realized there are probably prepayment penalties. I know it's not in the guidance but I was just curious what the likelihood is.

Bob Milkovich

It's as anything is possible. I mean we are just we are in touch with these folks and anything is possible. So we are just monitoring as we go. But we haven't baked in.

Andy Blocher

Yes. It has been prepayable for a short period of time. So obviously we wanted to -- and being as forthright with the street as we can, we wanted to just indicate that yes we are assuming that we continue to receive that payment being throughout the rest of the year but it is prepayable. And upon repayment there was 2% fee. So --

Michael Lewis

Thanks. And then my last question is just you give FFO guidance but I am just curious about how your CapEx math may improve with the non-core asset sales. And then anything you could say about where you think that number might shakeout for 2016?

Andy Blocher

Yes. We are not providing FFO guidance at this point. But one of the things that we absolutely look at when we are looking at the attributes of those assets and I think that you can see them is really some -- in particular some of the business park assets, some pretty significant capital associated with them. So we would anticipate that those metrics will improve though we are not guiding to a specific measure.

Operator

Our next question comes from the line of Paul Adornato with BMO Capital Markets. Please proceed your question.

Paul Adornato

Thanks. Good morning. Bob you referenced some headcount reductions as well as employees taking on double duty during this strategic execution. I was wondering if you could remind us of the incentive comp that's in place both for you and for other levels of senior and middle management.

Bob Milkovich

Yes. I think in terms of executive, the executive team comp it's all pretty well laid out there in the public materials and then as you get below the levels that are not in the public materials we are certainly moving to a more merit based comp structure where we have defined goals for people's per individual performance. And then a percentage of that comp to be tied to the company performance.

Operator

Our next question comes from the line of Bill Crow with Raymond James. Please proceed with your question.

Bill Crow

Hi, guys. Thanks for continuing to bring some urgency to the change here at the company. My question is on the strategic hold assets and more than 45% of the square footage of those assets is in the Chesapeake market. And I look at the attributes that you wrote up and existing cash flow limited near term capital spend, financial ballast, it doesn't sound like your lauding the positive attributes too much. It almost like you can't sell it because you'd get too small and couldn't be a public company or couldn't pay a dividend. What is the long-term outlook of those assets from a strategic hold perspective?

Andy Blocher

Yes. Bill thanks. Let me start off and Bob can jump in. But I mean I think that if you look at our fourth quarter and full year performance on the same property NOI perspective, Southern Virginia has been doing really well. And we did reduce the cost of renting that region. Bob had implemented a plan where we brought on the third party manager who is actually executing the management of those assets. So from our perspective we feel pretty strong that when you look at the -- for the three months we had 8.6% same property NOI growth and 7.2% for the full year. Down Southern Virgina we feel like that pretty solid. And Bob if you want to go little bit.

Bob Milkovich

Yes. I think the other way to think about as well to your comments as we think about long-term and repositioning the portfolio and a challenge to do when you are not in acquisition mode is can we reinvest those dollars back into DC right now. So even if we were to harvest Chesapeake, I am not sure we find the right investment opportunities in downtown DC. So for the near term I think we are better off holding those, managing them efficiently and giving as much NOI growth as we can.

Bill Crow

Okay. Over the near term, that's fine. It just feels to me like you guys are trying to refocus the company almost exclusively on the CBD area and the greater DC area, and this market just doesn't seem to be in that long-term hold sort of position. That's it.

Bob Milkovich

That's a fair statement, yes.

Operator

[Operator Instructions] Our next question comes from the line of John Guinee with Stifel. Please proceed with your question.

John Guinee

Great. Thank you very much. Bob welcome aboard and to help people understand your background I was thinking about a Saturday afternoon in the fall 1979, 1980, 1981, what would you have been doing?

Bob Milkovich

Wow, I would have been at the University of Maryland participating in their football program.

John Guinee

Great. Your stats were pretty good. You are a great back.

Bob Milkovich

Well, I used to calculate my percentage completion no matter what color jersey I threw it to.

John Guinee

Great. Okay. As a shareholder fiduciary I got to ask this question. I noticed about $6 million in severance cost on a management team that took the stock from $25 when I started covering about 11 years ago down to sub $10. Any sense how that Board could justify that? Your Board could justify that. And Andy you can answer that.

Bob Milkovich

I think I'll take it on, John. I think that probably because I have the limited, it's mostly the least tenure here, I am not sure of all the historical facts and nuances that came to that conclusion. And I am sure the Board used their best thoughts and coming to a conclusion there. And I don't want to seem like I am ducking your question but I definitely want to think about we are looking forward. So I don't want to comment too much on the past or try to understand what went on at the Board level and in between certain individual. So the kind of the way I want to think about is that we get this behind us and that we move forward.

Andy Blocher

Yes. And John I mean just to add to what Bob said, I mean that's what they were contractually owed under the terms of their agreement. So that's how the payout works there.

John Guinee

All right -- had to ask the question. What made you decide to have a $0.40 dividend versus what it looks to me like you don't really have to pay a dividend for the next couple years? Is $0.40 just a number you arbitrarily thought was the right place to be, or is there some sort of tax issue I'm missing?

Bob Milkovich

We did, this is Bob. We did a fair amount of analytical work on what we found appropriate level would be and at the $0.40 mark it provides for $12 million annualized savings. And we felt that was appropriate. We also looked at kind of the different yields that would be off of the current stock or even any B type value. So we really triangulated all the way around through deep analysis. Andy pick up --

Andy Blocher

Yes. And John, I mean we looked at based on our internal numbers and certainly we have thoughts on our head with respect to which are the non-core we are going to be selling, when we are going to be selling it, certainly taxable income played a role in that and when we triangulated on all the different -- all of the different pieces including payout ratios, getting everything to really be focused in the right direction. We settled down and that was the appropriate level when we looked at it undertaking a multi factor analysis.

John Guinee

Okay. Just it's -- never mind. Okay last question is if you look at CACI impairment charge, you are essentially valuing the building vacant at about maybe $140 a square foot. If you had decided to not reposition 540 Gaither Road or 500 First St, any sense as to how much of impairment you would have to take on both of those? And the reason I asked that is on a forward NAV basis we are trying to get a sense for what that $13 million of NOI that disappears in about a year would be worth vacant 12 months from now.

Andy Blocher

Yes. Well, let me take the One Fair Oaks as an example. We did as Bob discussed in his prepared remarks. We did all over underwriting, we looked at that relative to -- we validate our assumptions with outside parties, validated our conclusion with outside parties. And that reflects a value of about $14 million bucks so that's where that asset has beer written down to at this point in time. And Bob I don't know if you want to talk a little bit about 500 First St.

Bob Milkovich

Yes. Some of analytical work that we did was -- we obviously looked at our base system, we also looked at returns those investors that might actually be a candidate to acquire those assets. And we looked at what would we need, what they would solve for us, so we did a fair amount of back solving, we did fair amount of analytical work and still believe that on these two assets that there is opportunity to maximize value and bring them to market. In terms of the impairment, I am not trying giving exact number on that. I think that was the heart of your question. I don't want you to think that I avoided your question.

Andy Blocher

Yes. And John in my converse here as well. I mean we evaluate each of our assets for impairment every quarter. And there was no need to take an impairment charge of 500 or 540. So we feel comfortable with that.

Bob Milkovich

Right. And both of those still collecting cash flow on the 540 through March of 2017 and then in 500 First through 2016.

John Guinee

I am just trying to decide if you were to value 540 Gaither vacant, is that worth of $100 a foot or $150 a foot, is 500 north First St worth $400 or $500 a foot vacant. I am just trying to get a sense for those numbers.

Bob Milkovich

Yes. I think if you were to try to diligence that for the market you would find that the Gaither Road would be in the $150 to $175 range and you would find that the 500 First St would be in the $400 to $500 range. And I know that's a wide, wide range for an empty building. But that's the way I think the market would respond to you.

John Guinee

All right. And Andy what did you say again for Fair Oaks building? What did it write down to?

Bob Milkovich

$14 million

Andy Blocher

$14 million

John Guinee

But you paid $63 million right?

Andy Blocher

Correct.

John Guinee

Oh I see. I got it. Okay. I forgot depreciation. Thanks a lot.

Operator

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

Brendan Maiorana

Hey, just had a follow up for Andy. So sources and uses, so you guys have about $ 290 million of expected proceeds left to get, $160 million over the preferred so that sort of take that part of it away. You have got a couple of mortgages that come to over the next year to year and half but then and then you mentioned putting long term debt of 440 First and the Northern Virgina build-to-suit, so just kind of from a further remainder of the sales proceeds that you get in, would you expect to use those for and what would the pieces of debt that would be paid down be when you are doing leverage reduction?

Andy Blocher

Yes. So if you just take it, if you -- I am going just back up a little bit because right now we paid down the line as of the end of December because we weren't able to redeem the preferred yet right so if you assume that we are going to get call it $350 million worth of proceeds, you got $160 million go to the preferred, you probably got another roughly $100 million that go to pay down debt and you got another $100 million that you go to reinvest in the company. Okay, when you think about the pieces of debt that you got to repay. We have some small mortgages like Hill Side, some of the typical CMBS type mortgages that are out there. I think that we are going to be looking to repay so if you look at the end of 2016 we got couple hundred thousands out on Getaway Center of Manassas, you got $12 million, $12.5 million over at Hill Side. And then you start looking at the rest of the secured debt that we have in place, it's either long-term fixed rate secured debt on high -- generally high quality office buildings. You have to remember we do have a construction loan on 440 First St so we would term that out maybe get some additional proceeds. Same thing with the Northern Virgina build-to-suit, we term that out maybe get some additional proceeds. And the use of those proceeds would largely go to paying down either the term loans or the credit facility as kind of your plug in the interim.

Operator

Our next question comes from John Guinee with Stifel. Please proceed with your question.

John Guinee

Yes. Just a follow up. And if you have already answered this let me know. The $34 million mezz loan at F Street is a 10% coupon it can be repaid at par but it hasn't been repaid at par, should we be worried about the ability of the borrower to actually repay that in full?

Bob Milkovich

Based on what we understand and kind of our underwriting of the capital structure we believe that it's secured.

Operator

There are no further questions at this time. I'd like to turn the floor back over to Bob Milkovich for closing comments.

Bob Milkovich

Okay. Thank you, everyone. I appreciate the time we spent together today. And I certainly appreciate your participation on the call today. We will be updating you as we move forward with the plan. And again thank you very much.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.

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