Washington Real Estate Investment Trust

Welcome to the Washington Real Estate Investment Trust first quarter earnings conference call. As a reminder, today's call is being recorded. At this time, I would like to turn the call over to Amy Hopkins, Vice President of Investor Relations. Amy, please go ahead.

Good morning, everyone, and thank you for joining us on our first quarter earnings call. On the call with me today are 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. Before we begin, I would like to remind everyone that this conference call contains forward-looking statements that involve known and unknown risks and uncertainties, which may cause actual results to differ materially. 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 was distributed yesterday and can be found on the investor relations page of our website. I'd now like to turn the call over to our president and chief executive officer, Paul McDermott.

Thank you, Amy. Good morning, everyone, and thanks for joining us today. Our first quarter results reflect the beginning of the earnings momentum that we expect to generate over the coming years as we capture the strong rent growth embedded in our portfolio and continue to expand our footprint in the southeast. On today's call, I will provide an update on our geographic expansion, which is progressing well and is delivering results that exceed our initial expectations. I will then discuss first quarter operating highlights and the historic multifamily market conditions in the Washington Metro and Atlanta. I will also touch on the latest progress on our operating model and technology transformation, which is focused on resident satisfaction, and driving better performance and operating leverage as we scale the company. Steve will discuss our first quarter results and performance highlights, our 2022 guidance, and the earnings momentum that we are building, which will carry over into the years ahead. I'll start with our expansion into the Southeast. In March, we entered into binding agreements to acquire two garden style communities in Cobb County, Georgia for $178 million, which completes the full deployment of the net proceeds of our commercial asset sales at a combined cap rate of four and a quarter percent. Following the completion of these acquisitions, our Atlanta portfolio will include over 1800 apartment homes, which represents over 20% of our total apartment portfolio. The Cobb County communities align with our Class B value-add strategy, offering price points that range from 80% to 95% of their sub-market averages and the opportunity to renovate a portion of the homes. Following these acquisitions, our total renovation pipeline will grow to 3,000 homes. The communities also offer the opportunity for immediate operational improvements as we onboard them to our daily pricing revenue management system. Cobb County, Georgia is known for its pro-business environment, superior quality of life, and low real estate taxes, making it a sought-after location for both businesses and residents. The workforce is the highest educated in Georgia and supports a variety of key sectors in the economy, including aerospace and advanced equipment manufacturing, bioscience, healthcare services, IT and software development, professional and business services, travel and tourism, and wholesale trade. The area is home to the second largest university in Georgia, Kennesaw State, as well as multiple Fortune 500 companies and major employers. We expect to generate strong NOI growth on our Cobb County communities over the next few years with above market growth driven by value add renovations thereafter. Beyond our two latest acquisitions, we have a pipeline of opportunities that will contribute strong NOI growth. Recently, we have seen an increase in opportunities that fit our strategy and offer the potential to gain scale quickly. As interest rates rise and more portfolio deals and other opportunities come to the market, we anticipate the field will continue to become more level for all cash buyers relative to higher levered buyers. Thus far, we have executed on our geographic expansion by targeting specific assets, but we are also evaluating portfolios and other opportunities which would allow us to swiftly scale our portfolio in line with our strategic direction. Fortunately, we are seeing more and more opportunities for continued growth as we build the track record and the interest rate environment shifts. We will continue to remain disciplined with our underwriting and will pursue opportunities that align with our strategy and provide stronger NOI growth and more value for our shareholders. Nearly 80% of our same store portfolio is located in Northern Virginia, where the rapidly expanding consumer technology sector continues to drive job and income growth. Year over year, effective rents in Northern Virginia continue to accelerate, rising nearly 14% on average during the first quarter according to RealPage. New lease trade-outs for the Washington region, which continue to have positive momentum, were up 10% for the first quarter, up 1.7% from the last quarter. In Atlanta, year-over-year effective rents grew by over 20% in Q1, as reported by RealPage, and remain at near record levels. Occupancy, driven by continued solid demand in the Atlanta region remains very tight at nearly 97% for the first quarter. In order to invest in Atlanta without directly competing with New Supply, we are targeting submarkets where mid-market renters form the deepest part of the demand curve. These renters are benefiting from economic and wage growth, but remain underserved by New Supply. Similar to our investment strategy in the Washington Metro, Our geographic expansion strategy provides the opportunity to deliver a high-quality living experience while also growing rents without competing with new supply. Furthermore, as the housing shortage continues, the cost of ownership in our markets has skyrocketed, with home prices up by 29 percent in the Washington metro and 57 percent in Atlanta compared to three years ago. Our value-oriented price points are positioned to benefit from favorable supply and demand fundamentals over the long term. In addition to these favorable market dynamics that are driving strong fundamental trends, we continue to execute value-add renovations, which is a key part of our growth strategy. We are currently completing renovations at nearly half of our same-store communities, and we expect the pace of renovations to pick up significantly in 2022 compared to 2021. As we continue to acquire communities with renovation potential, we expect renovation-led value creation to have an increasing impact on our growth trajectory alongside our geographic expansion. Before I turn it over to Steve, I'd like to update you on the progress of our operational infrastructure transformation, which is focused on raising the bar for customer service at value-oriented communities. We are executing a major overhaul of our operating model technology platform human resource infrastructure and brand strategy ahead of internalizing property level residential operations later this year this transformation includes includes three phases in total and we are currently in phase two since our last update we have designed our near-term and future state human capital models and have filled several key management level positions and are continuing to recruit for corporate positions that will support our internalized model. We are redefining our culture, building out our training program, and developing compensation and incentive packages to align all team members with our resident-centric mission and long-term vision and ultimately support our business strategy and growth. We are implementing our core technology platform and are planning for testing and cutover of third-party data into our new core operating system. We are also creating a resident-focused brand strategy with plans to launch our new name, brand, and website later this year. A significant component of our marketing will be focused on customer experience and technology enablement. Phase three, which starts in the second half of 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 September and for most of the costs related to the broader infrastructure transformation to be absorbed this year in line with the guidance range we have provided. By the end of 2022, we expect to have the G and A expense base, which will not be substantially different from the level that it's at today, to support a doubling of our unit count. Going forward, we expect to realize significant benefits as we scale the business and optimize our expense base. Now, I'd like to turn the call over to Steve to discuss our performance and trends, the status of our value creation opportunities, our first quarter results, and our near-term outlook as we execute our transformation.