Welcome to the Washington Real Estate Investment Trust's First Quarter 2018 Earnings Conference Call. As a reminder, today's call is being recorded. Before turning over the call to the company's President and Chief Executive Officer, Paul McDermott, Tejal Engman, Vice President of Investor Relations will provide some introductory information. Ms. Engman, please go ahead. We are having technical difficulties, please stay on the line.

Thank you and good morning everyone. Please note that our conference call today will contain financial measures, such as FFO, core FFO, NOI, core FAD, and adjusted EBITDA that are non-GAAP measures as defined in Reg G. Please refer to our most recent financial supplement and to our earnings press release both available on the Investor page of our Web site and to our periodic reports furnished or filed with the SEC for definitions and further information regarding our use of these non-GAAP financial measures and reconciliation of them to our GAAP results. Please also note that some statements during this call are forward-looking statements within the Private Securities Litigation Reform Act. Forward-looking statements in the earnings press release along with our remarks are made as of today, and we undertake no duty to update them as actual events unfold. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially. We refer certain of these risks in our SEC filings. Please refer to Pages 9 through 24 of our Form 10-K for our complete risk factor disclosure. Participating in today's call with me will be Paul McDermott, President and Chief Executive Officer; Steve Riffee, Executive Vice President and Chief Financial Officer; Tom Bakke, Executive Vice President and Chief Operating Officer; and Drew Hammond, Vice President, Chief Accounting Officer and Treasurer. Now, I'd like to turn the call over to Paul.

Thank you, Tejal, and good morning everyone. Thanks for joining us on our first quarter 2018 earnings conference call. We achieved strong first quarter results across multiple fronts. We grew core FFO per share by 4.5% on a year-over-year and sequential basis driven by strong revenue growth. We delivered solid internal growth momentum with 2.4% GAAP and 2.9% cash year-over-year same-store NOI growth. We grew year-over-year same-store cash NOI by 5.3% for office and 3.7% for multifamily by driving occupancy gains and rental rate growth. We amended and expanded our credit facility and refinanced an existing term loan to increase liquidity and provide greater flexibility to make optimal capital allocation decisions. And finally, we plan to move forward the sale of 2445 M Street from September to June to accelerate the continued strengthening of our balance sheet. While Steve will detail the drivers of our first quarter operational and financial performance, I would like to provide an update on our six key NOI growth drivers, and discuss the long-term strategic growth opportunity for Washington REIT within the context of our outlook on D.C. Metro real estate. Let me begin with the office portfolio and our lease up opportunity at Arlington Tower and Rosslyn, Virginia. Following the close of the acquisition, on January 18th, we have experienced nearly 220,000 square feet of demand for the approximately 70,000 square feet of availability at Arlington Tower in 2019. We are implanting a spec suite leasing strategy focused on creating flexible space solutions with shared amenities to provide an increased speed to market where tenants are willing to pay a premium for such conveniences. As an example, we have had tremendous success with our leasing strategy at 1600 Wilson where our spec suites have achieved an 8% net effective rent premium to market and…

Thanks, Paul, and good morning everyone. Net income attributable to controlling interest with $3.3 million or $0.04 per diluted share which was lower than the $6.6 million or $0.09 per diluted share reported in the first quarter of 2017. That's mainly due to higher depreciation amortization real estate impairment and interest expense. Our first quarter operating results outperformed our prior expectation by approximately $0.01 of core FFO per share driven by higher occupancy multifamily and lower operating expenses across all three asset classes and our prior forecast. On a year-over-year basis, core FFO per share was $0.02 higher due to same-store NOI growth and the contribution of acquisitions of Watergate 600 and Arlington Tower more than offsetting the sales of Walker House and Braddock Metro Center? As well as higher year-over-year weather operating related expenses and real estate taxes. Same-store office NOI grew 4.8% year-over-year driven by 200 basis points of average occupancy gains due to new lease commencements and tenant expansions across several assets including the Army, Navy building 1776G, 2000M, 1140 Connecticut and 1901 Pennsylvania in Washington D.C. and the Silver Line center 1600 Wilson Boulevard in Northern Virginia. Notably, the same-store office portfolio delivered strong year-over-year growth despite approximately $400,000 of lower termination fee income compared to the first quarter of 2017 as well as higher operating expenses. Multifamily first quarter same-store NOI was up 3.7% year-over-year as average occupancy increased 120 basis points on a unit basis. We drove year-over-year occupancy gains and rental rate growth at over half of our multifamily assets including the Wellington and Riverside. Overall we grew multifamily rental rates by 200 basis points year-over-year and average monthly rent per unit by 110 basis points for class A properties and 220 basis points for class B properties. As a result we outperform…

Thank you, Steve. The two questions we are most frequently asked on the road these days are regarding the D.C. metro regions prospects from winning Amazon HQ2 and whether or not we have seen a pickup in leasing activity following the passage of tax reform in December; the Bipartisan Budget Act of 2018 and in early February and the fiscal year 2018 Omnibus Spending Bill at the end of March. At this time, any comments that we or others make on HQ2 would be largely speculative. However, we and the brokerage community are seeing a definitive increase in our office tour activity in the region especially in North of Virginia and our multifamily portfolio has also outperformed our occupancy and renewal trade out expectations in the first quarter. The sustainability of this improvement will depend upon the speed at which contracts are awarded and moneys are dispersed from the departments and agencies whose budgets have increased. Historically, just having a federal budget instead of a continuing resolution has had a significant positive impact on the metro economy as most continuing resolutions prohibit new starts over the initiation of new activity that weren't funded in the prior year and this naturally inhibits growth. Prior to the budget act and fiscal year 2018 Omnibus Spending Bill, the region had been operating under a continuing resolution for 13 of 18 past months, which created significant uncertainty for a meaningful portion of the private sector in Washington DC. The cloud of uncertainty is now lifting as Congress has passed a Bipartisan Budget Act that significantly increases authorize spending for the next two years over levels previously controlled by the Budget Control Act of 2011. For fiscal 2018 amounts have already been appropriated and for 2019 amounts have been authorized just providing clarity to government serving private sector businesses to determine their hiring and expansion plans as they can now be awarded business. With unemployment in the metro region hovering around 3.6%, we believe growth at this stage in the cycle is likely resolved in net migration into the region, which will provide continued support for multifamily in retail. Washington REIT remains a secular way to play the D.C. recovery with a platform that strategically positioned in segments with the strongest supply demand dynamics within the D.C. real estate. Now I would like to open the call to answer your questions. Operator, please go head.

Thank you. [Operator Instructions] Our first question comes from Jed Reagan with Green Street Advisors. Please go ahead.

Hey, good morning guys. Paul, you mentioned the pick up in tenant activity following the budget passage, I mean is that -- would you say you are seeing sort of that translating into tangible result at this point or is it just more towards just kind of a sense of optimism?

Yes. Jed, it's Tom. The short answer is that the activity has definitely picked up. We've seen about 75% increase into our activity in our B Portfolio of D.C, which has manifested itself in three expansions as well. So I think both new activity and existing growth has shown up. I think Northern Virginia with our new acquisition of Arlington Tower, we were surprised with how much activity we got shortly after closing on that, and I think that is an indication as well of the optimism that's starting to penetrate into a lot of the users in both the defense and government contracting segment as well as just the basic business and professional sector.

Okay, that's helpful. And then Paul, you mentioned in your opening comments that you're talking to co-working groups for the space at Watergate. Just curious to get your general comments on how you are viewing the co-working trend and how you guys sort of approach leasing with that group of tenants, and then if you consider doing an in-house co-working concept like few of your peers have done?

I mean I'll start and I will ask Tom to jump in. I mean if you look back, Jed, at this last quarter, tech and co-working were the real drivers of occupancy gains in the region. You look at like Facebook [indiscernible]. WeWork just opened their ninth location at 7776, which WeWork has a half million square feet downtown, which is kind of the largest private sector tenant in the city. We, I think through our flexible spec suites, I will turn it over to Tom, I mean, I think we are looking at various concepts but co-working is clearly here to stay. People want the flexibility on duration and size, and I think they are willing to pay for that.

Yes, I think that's exactly right. There's no doubt that tenants demand more flexibility, and if you can't address that I think you are going to lose out on a lot of the demand in the market. And we think it's also going to become almost like an amenity in a sense that you are able to provide a flexible solution for tenants that need to search for various project work or consulting work, and that's just something that we think is going to continue to grow over time. That being said, I think there's been a rapid growth in some of the co-working platforms, and it's going to take some time for that to sort of get absorbed. And we've heard recently interestingly enough that some of the large co-working is starting to compete against landlords, and so, I think you've got to be careful with that in how you make decisions on co-working.

In terms of the flexible spec suites, I mean are you looking to sign shorter deals on those or open -- signing shorter deals of two, three years?

Yes, yes. In fact, what we have found in our spec suite programs to date, Jed, is that we can do a two or three year deal in a spec suite and when they decide to move on and hopefully to something bigger and more permanent, which we have found occur that we backfill that pretty quickly, and there was no capital investment. It's a little bit like -- one of the benefits of us being in the multifamily business is we see how that business works and how there is some parallels and the trending changes in the office dynamic.

I think we saw that show up in your numbers a little bit, last quarter average new lease term was under four years, I believe. So, is that kind of reflective of some of the leasing you are talking about?

It's a little bit reflective and then some of it was some shorter term expansions that we are going to set up to go terminus for a longer term renewal.

Okay. And then just last follow-up on the topic, is there a hard cap for maybe the percentage of your rent role that you're willing to have with co-working?

We haven't -- so you've probably read a lot of stats, you guys have done some good work on analyzing co-working. I think the -- the penetration today 1% to 2% in the lot of the gateway markets on co-working, and there are some studies that say it could be upwards of 20%. We look at and a building like Arlington Tower 400,000 foot building, and if you think if you've got a flexible platform in there that can address these emerging talent demands, that takes up maybe 10% of the building that feels like the right amount of that product in a given asset of that size.

Okay, great. Thanks, guys.

Thank you. Our next question comes from John Guinee with Stifel. Please go ahead.

Oh, John Guinee here. Good morning. Sort about really big picture question, it looks to me like you are about 53 office and 26% multifamily. If instead of investing in 600 Watergate and Arlington Tower about $380 million, if you didn't invested that in multifamily, your ratio instead of being 53% office would be about 41% office, and your multifamily would have gone from 26 to 38. So you would have been about 50% office or 40% office, 40% multifamily, 20% retail. And I realize that probably would have been up $0.08 to $0.10 hit in FFO, but you probably would have changed your peer group in terms of multiples. I'm sure you guys did a ton of analysis on this. What was the sort of big picture decision to ex invest into office and invest first multifamily and thereby sort of putting yourself in a different peer group in terms of multiples?

Sure, John. Well, first off, I think primarily and I think one of the things that we've tried to articulate on our calls and certainly on our NDRs and it may read Face-to-Face was we had two objectives one with the sell off risk in the portfolio and the other and simultaneously elevate the quality of the portfolio. So when I look at a trade out from Braddock, Arlington tower or 2445 through the Watergate. I think we've sold off risks in a band and elevated the quality of the portfolio. In terms of capital allocation for us, we never said we were going to abandon office we just said we wanted to improve what was in our portfolio. And I think we've accomplished that. In terms of the multi-family I think we've increased our unit count by 76%. We've almost doubled the NOI contribution percentage since I've taken over and I think we are going to continue to pursue value-add multifamily. I think right now for us it's just what is going to be the best capital execution to help us grow that. We continue to recalibrate, we are going to be selling as we mentioned we are selling 2445. We will be selling another office asset later in the year and I do believe that we are continuing to scrutinize our office portfolio for other monetization opportunities, so the 53 and the 26 is yes, that's a 90 day snapshot I just wouldn't hang my hat on those percentages, John.

Okay, great. And then two other questions ones more curiosity than anything, where is that 95,000 square foot Kmart, and then the second question would be the [indiscernible] 400 unit ground up development if you fully loaded it up all your structure all your structure parking costs to it to create that opportunity for 400 units, what sort of cost per unit are you looking at and what sort of return on cost are you expecting?

Sure. Well, the lovely Kmart is in Frederick, Maryland, and that Kmart, which by the way we would love to have the space back. That Kmart is currently paying I believe $2.50 a square foot in a market that's over $7. So, while we have been hoping that they would -- that would be one of the short stores, it remains open. And, we had forecasted them to go out at the end of their lease term this year. And now, we are not so sure that is going to happen. So I think that below market rate that they are paying is an asset for them, candidly. The Trove, the 401 units we are constructing on side the Wellington, I think we are in that for that for just over 300 a door when it's all in loaded up and I think that is a low six going in and stabilizing in the mid sixes.

Wonderful. Thank you very much.

Thank you, John.

[Operator Instructions] Our next question comes from Dave Rodgers with Robert W. Baird. Please go ahead.

Yes, good morning. Maybe a couple of questions to start off on office, Paul, you talked about 220,000 square feet of demand for Arlington Tower. I think it's 70,000 square feet that will be available next year for you. Why go into Spec Suite Avenue with that much demand? Is it just not fit the space, is there not one large tenant? Little more color on that. And then, can you talk about at the Watergate, are you in term sheets or deeper negotiations with any office tenants maybe besides that we working that you had mentioned earlier? Co-working sorry -- in that building?

Dave, it's Tom. I'll take a stab at it. So, we just said -- as I mentioned earlier, we look this flex space demand as a trend that we need to address. And that you are going to miss out demand in the market if you don't really have it. And so, I think that is -- and we proved it out 1600 [indiscernible] which is what gave us confidence to expand our presence in Rosslyn as it was because we just have seen Rosslyn start to really evolve into the 24x7 market that it's going to be I think a long term success story. And we believe that having a flex space -- or option in Arlington Tower is going to help us outperform the market not only demand side, but I think we drive premiums on the rents. And we saw that at 1600 as well. So, do we have of the 220k or whatever of activity? We have got some that are in fact moving into LOI. But they are small to midsized tenants and we are going to be breaking up close those. So, I think it works well to have a flexible space option to address these what is as we know the majority of the demand in the market is in the small to midsize segment. What was the other question? Was that Watergate? Yes, Watergate, we still have ways to go on the existing lease obligation. And the trick there is to ensure that if we are going to sign a deal to start any earlier than the end of '19, we've got to make sure we can get a win-win arrangement with the current lease obligation that ends up being a value add to the project. And so, we've got some deals but we've got to be careful that we structure those the right way. So, we're still not quite at lease on any of those.

Great. Then maybe last on the residential side, can you talk about maybe what the impact is from the unit renovation program? The return sounds strong. So, what impact is that having on your sort of revenue or same-store NOI growth in the residential portfolio?

So, Dave, this is Steve. So, when we look at incremental but what's already in our run rate or embedded, when we finished the remaining renovation at waterside or riverside that should be an incremental of about $1.8 million of NOI.

Wellington?

I am sorry. Yes, Wellington and Riverside…

And you said that you are about half way through that program or…

Yes we gave…

Roughly half.

Yes, roughly half. I think we threw out different numbers. One is at 52%. One is a little under.

Okay, great. Thank you.

Our next question comes from Jed Reagan with Green Street Advisors. Please go ahead.

Hey guys. I spoken somebody recently in the market who indicated that they think pricing may actually be up a bit and perhaps cap rates down a bit in the last call it three to six months in the market. Can you at least for better quality stuff maybe Paul any perspective you might have on does that sound right to you or maybe just kind of a general trends you have seen in the valuation side of things in D.C. area?

Sure, Jed. Let's -- since there is a lot involved in that in investment sales let's probably start with the capital. There is no storage of capital either on the debt side or on the equity side. I think I alluded to this at the last time we met. And I think we did on the call, the debt funds are continuing to be extremely aggressive and that's both for urban and suburban product. Quite frankly, I think the light companies have been trying to do yeoman's job to compete. But clearly the debt funds have capital get out and they are going to do it. And frankly, we did even talk some owners that said look with debt rates this low, we thought we would risk off and sell. But, we can now cut a deal and help us carry us through a downturn. So when we think we are going to -- some of these concessions to burn off and we can plough through where we left. On the private equity side, that is just continues to flow into D.C. We have seen high net worth funds, state pension fund, big push on foreign capital in terms of I assuming a defensive play because can't see value creation like when somebody is paying $1275 a foot, I mean that's pretty rarified air. We have seen Middle Eastern capital come in. they have the recapped borough [indiscernible] through MetLife, seen Israeli capital be active, 1440 New York just traded a 404 cap for a law firm credit and that's Munich Re and a JV I believe at Eastbank. So the capital has been extremely aggressive. I wouldn't say though on like that Deerwood $1275 a foot, you have six or seven buyers. You probably have one that really wants…

Okay, great. Thanks very much.

Sure, Jed.

Now I would like to turn call back over to Mr. McDermott for final remark.

Thank you. Again, I would like to thank everyone for your time today and look forward to spending time with many of you as we get back out on the road next month and at NAREIT. Thank you everyone.