ELME (2021 - Q2)

Operator

Welcome to the Washington Real Estate Investment Trust Second Quarter Earnings Conference Call. Before turning over 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 on 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.

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 15 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. Then, 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 our 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 messaged 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 unencumbered the right side of our balance sheet to position us for growth.

Thank you, Paul and good morning, everyone. I will first cover our multifamily trends and results as well as our overall reported results for the quarter. I will also address our views and strategic differentiators that we believe will continue to help us succeed, recap our balance sheet focus to allow us to continue to be strong even after our initial deployment of this transformation capital. And finally, I will discuss our outlook. We ended the second quarter on a positive note, and we are starting to experience the significant inflection that we had anticipated. All signs point to increased demand momentum and we are seeing pricing power return. Concessions are pulling back dramatically, effective lease rates have turned positive, and available rents indicate further improvements throughout the summer months. Rate growth for new lease executions has improved over 10% over the last seven weeks, on a gross basis. The average concession per unit for move-ins scheduled for July and August is 70% lower than the second quarter average, representing a $630 decline in concessions per unit. Blended lease rate growth improved 460 basis points from the first quarter to the second quarter on an effective basis. Yet the most significant growth occurred during the last two weeks of June. The acceleration has continued into July and blended effective lease rates have already improved by another 240 basis points thus far, in July on an effective basis. New lease rates has shown the most significant improvement with average new lease rate growth improving over 600 basis points from June to July on an effective basis. Our suburban properties continue to outperform our urban properties and average new lease rate growth increased 5% thus far in July on a year-over-year basis. And urban new lease rates have reached their inflection and turn positive on a blended basis for the first time on leases executed in late-July. Both urban and suburban lease executions with August and September move-in dates indicate further improvement.

Thank you, Steve. We have operated both multifamily and commercial assets, and we know from experience that multifamily of the asset class that provides the most attractive long-term growth profile, delivers stronger and steadier cash flows, has lower capital requirements, and generates more consistent returns. Concentrating on multifamily strengthens our growth prospects and simplifies our story for investors, making access to capital even stronger, which further improves our business and credit profiles. Our research-led multifamily investment strategy has led us to invest in value-oriented multifamily assets that offer both favorable, long-term supply and demand fundamentals, and expanding into the selected Southeastern markets is a natural extension of the value creation strategies that we have proven in our local markets. Our multifamily strategies are differentiated and our execution track record convinces us that this is the best path forward for our shareholders, despite absorbing initial FFO dilution. For the balance of 2021, we are focused on allocating capital to our targeted Southeastern markets and taking steps to acquire additional talent and expand our presence in these markets, maintaining our leasing momentum at Watergate 600, scaling our renovation program, and sharpening our pencil as we evaluate our shovel ready development opportunity at Riverside, as well as others in our portfolio, as the market improves. We are excited about delivering value to our shareholders in this next important phase of WashREIT. We look forward to talking to many of you about our transformation over the coming weeks and months, and we plan to provide updates as we move forward. Now, we would like to open the call to answer your questions.

. And our first question is from Anthony Paolone with J.P. Morgan. Please proceed with your question.

Okay, thanks. Hi, everybody. I guess first question is just on the deal pipeline as you're sticking with the $450 million to get done over the balance of this year. Is it all in your new markets or are you also seeing things in the DC Metro that might help with build net out?

Hey, Tony, it's Paul. I would say our target is to place all of it in the new markets. We have seen a couple of opportunities here that have kept us interested, but I think our big goal is try to -- is trying to geographically diversify. I think as I said in my remarks, we have a deal tied up that we hope to close in August, we'll be able to give more color on that. I would also say that the pipeline, our pipeline, probably similar to other folks, and I believe we addressed this in our June 15 webinar, we're seeing both one-off transactions, Tony, as well as we said we had heard more portfolios would be coming to the market. We are evaluating some portfolio opportunities. I think our bigger -- our issue is to try to maintain disciplined underwriting, but also scale this opportunity appropriately and continue with our diversification objectives.

Okay. And to the extent portfolios become available, are you willing to expand the target markets into other, perhaps, Southeast cities, if there is more attached to a portfolio? Or are you being pretty strict around the three areas, your end?

I think our ideal situation would be in the three target markets. Been doing this a while, have never seen the perfect portfolio that fits perfectly into the box. I think that if we had to take on a one-off in another market, one or two assets to make sure we accomplished the bigger objective, I think we'd probably be open to that. I would also say that given the, as you've highlighted, even on our webinar, given the appetite, they're probably structural opportunities for pretty sales etc. that could help us maintain our focus but sure. I think we're trying to be open to really provide the best execution for our shareholders.

And Paul, I'll just add, as we said in our webcast and I think in some of the questions that we've been asked over the past calls, we've researched a lot of other markets. And just as much as we have these three, we wanted to be able to concentrate our expansion, but there are other markets that we do like if we got into that situation.

Got it. And then as this transformation unfolds here, when did you start to put some brackets around thinking about building a property management platform and just internalizing the operations of multifamily for you all?

Absolutely. And I think win is a really good -- it's a good question. We're clearly in a transition here, Tony. I think we're moving fast, but we are sunsetting part of our business and we are building out our infrastructure for the future and more geographically expanding. I think we talked about this in the webcast and we've been on the road right up until the quiet period here. We probably would have been able to execute our transformation a year earlier had it not been for the pandemic, but we didn't sit on our hands. And we worked with consultants and we've been building out our road map and our plans for the future, and our infrastructure for geographic expansion. It's a project that's underway. It's phased and I would think realistically, we'll start seeing some of the benefits 15 to 18 months, once as we started to announce this into the project. And what does that look like? Well, obviously we're going to have the ability to geographically expand where we have some third-party sort of helping us in property management in the transition. But we see a lot of efficiencies coming as we implement this plan and we see margin improvement, even in operations as we are able to build it out the way that we're planning. And most importantly, we see scalability, which provides additional efficiencies of margin. And so we have to go through a transition, but we have set up our capital structure so that we can -- it's not a one shot deal. It's not getting out the $450 million. We've tried to clear the deck and earn our -- through our execution a support and actually grow this company in this platform and achieve that scalability as we deliver all of that.

Yeah, and Tony, the last thing I'll add to that is, this has been a -- I'll be blunt, it's been an emotional week here, saying goodbye to colleagues that we've had the privilege to work with as we work up to this transformation. But what that has left us with is an outstanding multifamily team to build a platform off of. Let's not forget, all the heavy lifting that this multifamily team has done to get us here and grow our NOI to the -- to over 50%. So, I think we have a good foundation to build off of but Steve's exactly right. We've got some wood to chop in front of us, but I think we're confident we can execute.

Got it. And just last one, real quick for me. On Watergate 600, remind us, what should we watch as the sort of gating factor and ultimately letting our go-to?

Well, I mean, so if you look back at Watergate 600, I think we bought that at a nice basis. We went through, I think a very successful renovation program as reentry has taken place and as the Kennedy Center has reopened. I think we've got over 8 years of Waltz on that property. We still think that there is some nice leasing. I mean, you've actually been in the property, Tony, so you know some of the panoramic views we have down there. We've got some space that we think we can backfill. And then when we feel it's the appropriate time, we would look to monetize that asset.

Okay, got it. Thank you.

Thank you, Tony.

And if there are no further questions, I'd like to turn the floor back over to management for any closing comments.

Yes, we'd like to thank you. Again, I'd like to thank everyone for your time and interest today. We will continue to update you as we progress our multifamily transformation, and we look forward to speaking with many of you over the next several months. Thank you, everyone.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.