Washington Real Estate Investment Trust

Welcome to the Washington Real Estate Investment Trust Fourth Quarter Earnings Conference Call. As a reminder, today's call is being recorded. Before turning the call to the 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 SEC 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. And now I'd like to turn the call over to Paul.

Thank you, Amy. Good morning, everyone, and thanks for joining us today. Last evening, we released our fourth quarter and full year 2021 earnings results. which were in line with our guidance. Our full year results reflect our transformation into multifamily, which is the asset class we identified as having the best long-term growth prospects in our region. We also expanded outside the Washington metro region for the first time in the history of our company, and we continue to make solid progress on growing our portfolio in Atlanta and evaluating opportunities in our other target markets. 2021 was an eventful year for Wash Reef, and as a result, our long-term growth prospects are much stronger going forward. Today, I plan to provide an update on our transformation progress, including our recent acquisitions and our plans for internalizing property level residential operations. I will also provide an update on the operating environment in the Washington Metro and Atlanta. where we are actively growing our footprint. Steve will provide an update on our performance and trends, and we'll discuss our fourth quarter and full year results and outlook. Starting with an update on capital deployment. Since our last update, we acquired 880 homes in Atlanta for a total of $212 million. Our latest acquisition, plus the one completed during the third quarter, amount to $260 million of our $450 million acquisition target. We expect to deploy the remainder of the net sale proceeds from our commercial portfolio sales by the end of the first quarter or early in the second quarter. Our pipeline is very active, having fully ramped up after the natural new origination market year-end taper. The transaction market remains competitive, but pricing has remained relatively stable since our last update. We are currently evaluating multiple opportunities that fit our portfolio strategies in Atlanta, as well as in our other targeted markets of Charlotte and Raleigh-Durham. We've got some good prospects and are in process on several opportunities and look forward to updating you with more details upon closing acquisitions. The acquisitions that we have completed thus far are performing very well and are generating strong revenue growth that will translate to even stronger NOI growth as we continue to expand our portfolio into new markets. While it's still in the early days, our Atlanta portfolio is outperforming our initial underwriting assumptions, and we remain confident that our research has led us to invest in areas that are poised for strong, sustained growth. As a case in point Rivian, the electronic car maker recently announced that they are building an assembly plant just minutes away from the Oxford, which is set to bring 7,500 jobs and ties directly to our strategy of selecting areas with industries of the future to drive demand. Furthermore, the jobs that Rivian will bring are expected to pay salaries, which align with our targeted income range. The Oxford has performed very well in the first six months that we've operated it and has generated new lease rate growth of over 20% and blended lease rate growth of 16% year to date. Occupancy is above 95% and retention has been strong at over 63% on a year to date basis with even better performance to come as the sub market continues to rapidly grow and add middle-income workers. Assembly Eagles Landing, which was acquired in November 2021, is a garden-style community with 490 homes located in Henry County in the southern suburbs of Atlanta. We acquired Assembly Eagles Landing for $106 million, which equates to an initial cap rate of over 4%. The community is comprised of two properties that are located immediately adjacent to each other. Historically, each asset has been operated and managed independently. However, our opportunity includes creating significant economies of scale by operating them as one community. As a 1990s Venice community with a price point that represents 85% of the market median rent and the opportunity to drive NOI growth through our operational efficiencies, Assembly Eagle's Landing fits squarely into our Class B strategy, which targets vintages from the 1980s to the 2000s and price points that range from 80% to 95% of the market median in high-growth submarkets. Assembly Eagle's Landing does not compete with New Supply in Henry County, as new deliveries have an average monthly rent that is nearly $375 per month above what we are currently offering. The property has performed very well during the first three months we've operated it, with very strong new lease rate growth of 23% and blended lease rate growth of 18% on a year-to-date basis. Furthermore, we are already beginning to realize operating efficiencies, as to date, our daily pricing models are achieving higher rents than we originally underwrote. We expect Assembly Eagles Landing to generate low double-digit NOI growth over the next few years with strong long-term growth prospects thereafter. Our investment strategy targets strategic locations proximate to growing job markets. As I mentioned earlier, Assembly Eagles Landing is located in Henry County, which is approximately 20 miles southeast of Atlanta's downtown business core via Interstate 975. The area is comprised of family households who are attracted to the value proposition afforded by the high quality yet more affordable units in a low density neighborhood with highly rated schools while providing nearby interstate accessibility and connectivity north to the urban core and south to employment and retail offerings in McDonough, Georgia. Henry County's strategic location with immediate access to Hartsfield Airport and within a two-day drive of 80% of the U.S. population, makes it one of the key supply chain management and premier e-commerce locations in the southeastern United States. Over the past five years, same-store rent annual growth for the sub-market's 1990s product has averaged 8.6%, outperforming the 4.9% average annual rent growth for all 90s vintage apartments in the Atlanta market, and also outperforming the overall Atlanta growth rate for all product of 5.1%, according to RealPage. Carlisle of Sandy Springs, which we acquired on February 1st for $106 million, an initial cap rate of approximately 4%, is a garden-style community with approximately 390 homes located in the desirable Sandy Springs Submarket of Atlanta, Georgia. As a 1970s vintage community with a price point that represents approximately 90% of the market median rent and the opportunity to drive NOI growth through value-add renovations, it fits squarely into our Class B value-add strategy. Our opportunity includes the implementation of a value-add renovation program for approximately 270 of the homes set to begin in year two of our ownership. We are positioned to generate strong returns on these renovations as Carlisle does not compete with new supply in the Sandy Springs sub market. New deliveries have an average monthly price point that is over $350 above the monthly rents that we are currently offering. Located north of downtown Atlanta, Sandy Springs attracts families and professionals seeking in a many rich suburban micro location providing proximity to entertainment and jobs. Fulton County is the most economically active in the state of Georgia, including the third largest concentration of Fortune 500 companies in the United States and one of the southeast largest technology capitals. The area is known for its pro-business environment and superior quality of life. making it a sought after location by businesses and residences alike. Additionally, excellent connectivity via Georgia 400 and I-285 provide quick and easy access to other major employment nodes throughout the Atlanta Metro as well. Built in 1972 and spanning approximately 30 acres, Carlisle of Sandy Springs features apartments and is primarily comprised of townhomes. Over the past five years, same-store rent annual growth for the sub-market 1970s product has averaged 6.4%, which significantly outperformed the overall Atlanta growth rate for all product of 4.5%. We expect Carlisle to generate high single-digit to low double-digit NOI growth over the next few years with above-market growth driven by value-add renovations thereafter. Our initial acquisitions fit squarely into the portfolio strategies that we laid out on our transformation rollout webinar last June 15th. Our strategies are tailored to each market and some market by vintage and price point and are designed to target mid-market renters, which represent the deepest sections of the demand curve in each market without competing with new supply. We are thoughtfully approaching each opportunity and passing on opportunities that do not fit our strategies or would not provide upside to NOI growth that will lead to long-term shareholder value creation as we scale our platform. While we believe diversifying and expanding our footprint makes sense, growing and scaling our portfolio is also a top priority and will allow us to be in a position to deliver greater value for our shareholders. The investment strategies we've used over the past few years to grow our portfolio in Northern Virginia have been very successful, and we will continue to explore acquisition opportunities in Northern Virginia should they create greater value. That said, at this time, we are seeing very good growth and geographic diversification prospects in the pipelines we are evaluating in our new target markets. Now, I would like to take a few minutes to update you on the operating environment in the Washington Metro and our expansion markets. While the Washington Metro apartment market is on the rise and is exhibiting some of the same positive trends that we are seeing in our southeastern target markets, the Washington Metro rebound has been less pronounced than it has been in other metropolitan areas that were hit harder by the pandemic. We believe that the Washington Metro market offers tailwinds that will carry over into 2023, which Steve will discuss in more detail later on this call. Furthermore, we are outperforming our region, and we attribute it to our affordability-based investment strategy, which led us to target the largest underserved renter cohorts in strong submarkets. Year-over-year effective market rents in the Washington Metro climbed 430 basis points from third quarter to fourth quarter 2021. Suburban Virginia continues to deliver stronger growth, with year-over-year effective rent growth accelerating to 9.5% in December. Overall, Washington Metro effective blended lease tradeouts increased 6.8% during the fourth quarter compared to the prior year period, while our same store blended lease rates grew 8.4% on an effective basis. Absorption hit an all-time high at nearly 27,000 units during 2021, and the Washington Metro had the fifth highest absorption by unit count in the U.S., according to RealPage data. Year-over-year effective market rents for Atlanta, Raleigh-Durham, and Charlotte grew by 20.9%, 21.6%, and 19.3% respectively in December, as reported by RealPage. Annual demand also surged across these three markets in 2021, as in-migration and household formation drove record-setting absorptions. Charlotte posted fourth quarter annual demand that was 56% above its five-year average, while Atlanta and Raleigh-Durham's fourth quarter annual demand topped 135 and 131% of their five-year averages, respectively. Moving on, I'd like to provide an update on the efforts that are underway to transform our infrastructure as we scale our portfolio and prepare to internalize property level residential operations. We're working on several major initiatives that will have a significant impact on our ability to drive better performance when implemented from defining our go forward technology strategy and implementing a scalable core technology platform to reshaping our human resource program ahead of internalizing property level residential operations later this year. Since our last update, we finalized our technology design and selected our core technology platform, evaluated our operating model cost structure to determine the optimal staffing model for each phase of our growth, and we wrapped up the background research phase of our branding initiative, which we plan to roll out over the summer. We are now moving into phase two of our project, which includes implementing our core technology platform, building our operating model and launching a brand that supports our transformation and resident focus strategy and designing and launching our new website. Phase three, which starts in late 2022 with expected completion in mid 2023, incorporates the onboarding of our property level operations to our internal systems. We expect the vast majority of the work that needs to be done to prepare for the onboarding process to be completed by year end. Following the complete internalization of property level operations and enhancements to our operating platform, which includes leveraging a centralized model for certain support functions, we expect to realize significant benefits as we scale the business and optimize our expense base. The future operational and financial benefits from these efforts will increase our ability to compete in the marketplace and will create long-term value for our shareholders. While transforming our operating platform will impact near-term expenses, it will generate more operating leverage over the long term as we continue to grow and scale the business. Steve will provide more details about the impact of these efforts later on this call. Before I turn the call over to Steve, I'm pleased to share that we have been recognized by BREEAM for achieving the first-ever BREEAM certification for the multifamily industry in the United States. The successful certification of eight of our multifamily assets, which was completed in alignment with our green bond allocation requirements, marks a milestone for WashReit and BREEAM. as we work together to create more opportunities for sustainability and efficiency advancement in the Class B multifamily space. As we continue our portfolio transformation, we remain committed to bringing all of our properties, including new acquisitions and developments, up to WASH REIT's standard for delivering superior efficiency and sustainability performance for our residents. I'd like to turn the call over to Steve to discuss our operating performance, our fourth quarter and full year results, and our outlook and 2022 guidance.