Washington Real Estate Investment Trust

Welcome to the Washington Real Estate Investment Trust Second Quarter Earnings Conference Call. As a reminder, today's call is being recorded. Before turning over the call to Company's President and Chief Executive Officer, Paul McDermott, Amy Hopkins, Vice President of Investor Relations, will provide some introductory information. Amy, please go ahead.

Thank you and good morning, everyone. Before we begin, please note that forward-looking statements may be made during this discussion. Such statements involve known and unknown risks and uncertainties, which may cause actual results to differ materially, and we undertake no duty to update them as actual events unfold. We refer to certain of these risks in our FCC filings. Reconciliations of the GAAP and non-GAAP financial measures discussed on this call are available in our most recent earnings press release and financial supplement, which were distributed yesterday and can be found on the investor relations page of our website. Participating in today's call with me will be Paul McDermott, President and Chief Executive Officer, Steve Riffey, Executive Vice President and Chief Financial Officer, Drew Hammond, Vice President, Chief Accounting Officer and Treasurer, and Grant Montgomery, Vice President and Head of Research. Now I'd like to turn the call over to Paul.

Thank you, Amy, and it's good to have you back following your maternity leave. Good morning, everyone, and thanks for joining us today. Last evening, we released our second quarter earnings results. Core FFO was at the top end of our guidance range and above consensus expectations. We will, of course, discuss those results, but we know our transformation that we announced on June 15th is top of mind for investors and the key focus of this management team. Today, I will update you on the progress of our strategic commercial portfolio sales and our research-led southeastern markets expansion. I will also address the strengthening Washington Metro multifamily market as well as southeastern markets and the status of our value creation opportunities. Steve will discuss recent multifamily performance and trends, our views on strategic differentiators that we believe will continue to help us succeed, our second quarter results, and our strengthened balance sheet as we execute our transformation. I will wrap up by recapping our priorities for the balance of 2021 as we complete our transformation and move forward as a multifamily REIT. Let me start with our progress on our strategic transformation. Since our mid-June announcement of the transformation, we have completed the sale of our office portfolio, excluding our best office asset, Watergate 600, for which we believe we can drive even greater value, for $766 million. we have also given notice that we are redeeming the $300 million 2022 notes and expect to complete that redemption in late August. We also are now under a binding agreement to sell a remaining retail assets to a single buyer for $168.3 million and expect that transaction to close in the third quarter. Following the retail closing, We expect to pay down our term loan by $150 million as we message on our webcast. I'd like to turn now to our progress on multifamily capital deployment. As you know, we are in the final stages of a strategic transformation that has taken place over several years. We went from four asset classes to one, and we are moving forward as a multifamily REIT with proven research-driven strategies a solid pipeline of investment opportunities, and a good economic backdrop. Following these transactions, not only will we have recycled only over $5 billion of assets to improve our portfolio, but we also decreased leverage, increased liquidity, and lengthened our debt ladder. These actions increased our financial flexibility and uncovered the right side of our balance sheet to position us for growth. As we covered in our transformation webcast, in multifamily, we are experiencing positive drivers to fuel our growth from this time of post-pandemic inflection onward. In office, we were facing challenging and increasing headwinds, including increasing capital requirements, and we expect those headwinds to continue. This contrast in growth prospects boosts our confidence that we will create more value for our investors going forward through our portfolio recalibration. We understand that these transactions are dilutive to earnings and FFO, yet we believe they are initially NAV neutral and offer a far greater opportunity to increase NAV, not only in the near term, but over the long term as well. As we discussed during our June 15th webcast, this transformation is a reset, and as such, Our board reset our dividend and we continue to prioritize the strength of our balance sheet and access to capital for the long term. Because of this, we have enough capital to execute these transformative steps and have access to capital beyond that. Additionally, we have a roadmap to continue to grow and create value for our shareholders. We are focusing on middle income renters, which is a strong underserved and growing cohort and southeastern markets that we are targeting, as well as here in D.C., where we have successfully been executing our affordability-based investment and operational strategies. Over the past several months, we have been actively underwriting deals in the southeastern markets where we believe our strategies can successfully achieve long-term rent growth outperformance. These markets include Atlanta, Raleigh-Durham, and Charlotte. We are positioning ourselves to acquire assets that have the targeted renter cohorts and growth opportunities by vintage to allow us to execute our Class A minus, Class B value add, and Class B portfolio strategies. We are targeting some markets with attributes that we believe are most likely to drive rent growth and tailoring our specific investment strategy to best create value, just as we've done in the Washington Metro region. The pipeline has been active, and while we have passed on some deals that do not fit our strategies, we see opportunities ahead that make us confident we can allocate this capital appropriately over the balance of this year. At this point, we have an initial asset under contract in suburban Atlanta and are in the process of acquiring additional assets that fit our strategies and are in submarkets where we expect to be able to grow rents. We will provide more color through ongoing updates as we close on asset acquisitions. The markets that we are targeting are projected to be among the best in the nation in population growth and net migration over the next decade, and the already strong rent growth that we've been tracking accelerated further throughout the second quarter. Year-over-year effective rents for Atlanta, Raleigh-Durham, and Charlotte grew by 14.3%, 10.3%, and 10.6%, respectively, in June, as reported by RealPage. New lease tradeouts were even stronger, averaging 17.9% across the three markets and a 670 basis point inflection between April and June. Average concessions remained in the low single digits in each market, averaging just 5.5%, itching up slightly over the quarter from 5.1%, in the first quarter. However, the breadth of the market offering concessions retreated markedly, with just 15% of units across the three markets offering concessions in the second quarter, down 630 basis points over the quarter. Annual demand also surged across these markets, as in-migration and household formation drove record-setting absorption. first quarter annual demand had already exceeded the five-year average in each target market, yet it jumped nearly 30% higher in the second quarter. Raleigh, Durham, and Charlotte posted second quarter annual demand at 156% and 151% of their five-year averages, respectively, while Atlanta's second quarter annual demand topped 186% of its five-year demand trend. These market data points further illustrate the rationale behind our expansion into these markets, where we believe strong demand and rent growth outperformance will continue to power our expanding portfolio over the near and long term. Here in our home-based markets, we also have great optimism for growth ahead. The Washington apartment market also experienced a performance inflection during the second quarter, with significant improvement from April through June, as reported by RealPage. Year over year, effective rents turned positive in June for the first time since April 2020, with particular improvement in June, as effective rents climbed 214 basis points higher than the second quarter average. Suburban Virginia's performance followed a similar pattern, but with even stronger growth. with year-over-year effective rent growth accelerating to 5.9 percent in June, 245 basis points better than the second quarter average. Average concessions in the Washington market declined 200 basis points in the second quarter to 9.1 percent. The breadth of the market offering concessions also declined, with 19.7 percent of units in the Washington market offering concessions in the second quarter down 250 basis points versus the first quarter. Our current same-store multifamily portfolio has approximately 6,700 units and is 96% occupied. Our average monthly rent is just under $1,700 per door. Our suburban Virginia apartments have performed well during the pandemic and continue to do well. Much like the Sunbelt markets, we have researched and analyzed the last several years. We are slightly above 96 percent occupied in suburban multifamily assets and 95.8 percent overall, and effective rents continue to be strengthening. Furthermore, two-thirds of our current 2,800-unit renovation pipeline is in our suburban assets, and we have activated the renovation programs and are targeting low double-digit ROIs at a minimum. Urban effective rents have grown stronger every month since the December bottom, and urban blended lease rates have turned positive on an effective basis. Meanwhile, suburban lease rate growth has been exceptionally strong, reaching over 5% on an effective basis for July move-ins. We have now fully delivered and invested in Trove, which delivered only $200,000 of NOI in the first quarter and approximately $425,000 in the second quarter. But most importantly, its lease-up now has tremendous momentum. Since April 1, we have signed 160 leases, or slightly over 40 leases per month, well above the regional average of 13 leases per month. This increased demand allowed us to further push market rents by over 8%, while also reducing concessions. We now expect Trove to stabilize near year end as opposed to our prior expectation of May of 2022. Our multifamily rent collections have remained strong at 99% throughout the pandemic as our research has led us to focus on renters with solid credit in areas that offer a higher relative exposure to the strongest employment sectors. The combination of the strong spring and summer leasing seasons and the vaccination-led end of pandemic restrictions leads us to believe that further strengthening from here is underway. Over the long term, our research forward approach has positioned us with a multifamily portfolio and submarkets with strong supply and demand fundamentals. From a demand perspective, The Washington Metro region has a significant housing shortage and an affordability crisis that is only getting worse as the cost of home ownership continues to rise. From a supply perspective, our region has been underproducing housing product at the price point that would address the growing demand, and therefore, most mentors remain underserved by new supply. Our ability to successfully position ourselves to benefit from a large and growing target renter market and limited competitive supply over the long term in our Washington metro markets sets us up well to expand the key elements of our strategy into the targeted southeastern markets. We intend to utilize the learnings from the Washington metro market and further adapt to continue our growth as we geographically diversify. We are extremely grateful to all the Wash Creek team members who have diligently reshaped this company over the past several years, and while we will miss those moving on to further their commercial portfolio careers, we are also excited by the team in place to continue to build our multifamily future. We are augmenting our multifamily operational leadership and team for the new markets, and we are following the roadmap that we have created over the last year to build out our infrastructure for the future. We believe we will create efficiencies as well as further enable our ability to scale up very effectively. And with that, I will now turn it over to Steve.