Welcome to the Washington Real Estate Investment Trust First Quarter 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, Director of Investor Relations, will provide some introductory information. Ms. Engman, please go ahead.

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 website, and to our periodic reports furnished or filed with the SEC, the definitions and further information regarding our use of these non-GAAP financial measures and a 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 to certain of these risks in our SEC filings. Please refer to pages 8 through 25 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; 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 2019 earnings conference call. While the focus of today's call will be the transformative strategic capital allocation we announced on April 2nd. Let me begin with a quick summary of our three biggest first quarter achievements. First, we signed new leases for 90,000 square feet of office, including 51,000 square feet at Watergate 600 in Washington DC for a term of nearly 18 years with rent commencement expected in early 2020. Second, we've leased nearly 50,000 square feet of challenging retail vacancies and achieved 80 basis points of year-over-year ending occupancy gains driven by new lease commencements in our retail portfolio. And third, we grew our multi-family same store NOI by 4.4% year-over-year by driving very strong renewal trade outs while maintaining average occupancy at 95.4%. The $0.44 of core FFO we generated in the first quarter was driven by our solid internal growth momentum with almost 3% GAAP and 3.8% cash same-store NOI growth. Moreover, we signed leases this month for both the 28,000 square foot former hhgregg vacancy at Hagerstown and the 23,000 square foot former hhgregg vacancy at Frederick Crossing and expect rents commencement on both spaces in the first half of 2020. We are pleased we have made solid progress on our 2019 commercial leasing goals in the first four months of the year and two have delivered a strong operational performance in the first quarter. Let me now move on to the planned Class B value-add multifamily portfolio acquisition, which we will be granting assembly at our planned commercial dispositions. First, I would like to discuss why this is a transformative strategic capital allocation for Washington REIT and outline the long-term objectives we expect to accomplish with these transactions. I…

Thanks, Paul, and good morning everyone. Beginning with the acquisition that Paul described, we are acquiring the assembly multifamily portfolio for $461 million. We expect the transaction to close in two tranches with the first tranche comprising the Northern Virginia assets expected to close next week. Second tranche comprising the two Maryland assets is expected to close by the end of the May if the assets are not pursued by the Montgomery County Housing Opportunities Commission or the Department of Housing and Community Affairs. We plan to match fund the acquisition with commercial assets sales. We expect to be under agreement on the sales and be able to announce them in the second quarter and to close the sales primarily in the third quarter. Due to first closing the acquisition as part of the reverse 1031 exchange process, we have commitments in place from members of our bank group for a new $450 million term loan with a six month maturity at the same pricing as our revolver. We expect to repay debt and return to our normal leverage levels once the asset sales are complete. Moving on to our first quarter performance, net loss attributable to controlling interest was $4.4 million or a negative $0.06 per diluted share, which was lower than the net income of $3.3 million or $0.04 per diluted share reported in the first quarter of 2018 mainly due to the recognition of an $8.4 million impairment charge to reduce the carrying value of Quantico Corporate Center to its estimated fair value. On a year-over-year basis, core FFO per share was $0.02 lower, primarily due to the disposition of 2445 M Street in June 2018. On a sequential basis, core FFO was $0.02 lower, primarily due to the known tenant move outs in the office portfolio…

Thank you, Steve. An additional positive element in the first quarter was that Washington REIT was included in the S&P Small Cap 600 Index as of March 7th, 2019. In addition to the increased passive ownership, we expect the move to create greater long-term interest from active managers, who follow the index. To conclude, we are excited to execute what we believe will be a very meaningful capital allocation that will significantly improve WashREIT’s long-term risk adjusted returns. We expect to accomplish several key strategic goals, including further de-risking the portfolio, improving the stability and strength of our cash flows and FAD and solving for some of the large embedded tax gains in our commercial portfolio. We also expect to emerge as one of the largest value-add multifamily REITs in the DC metro region with a portfolio that addresses one of the regions most pressing needs affordability. We continue to execute well on our key leasing milestones and on our development of The Trove, which delivers its first units at the end of this year. We expect to regain our balance REIT strength when the asset sales are complete and are working hard to accelerate our execution, so we can provide you with updated guidance as soon as possible. With that, let me now open the call to answer your questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.

Thanks, good morning, guys. So I appreciate there is not a lot you can discuss with the respect to the details on the multifamily transaction and disposition at this point. But maybe I can just ask whether or not you can give any color on whether the transactions are going to initially be dilutive or creative based on the yields on the acquisitions and visitation side and further to what extent is possible?

Blaine, it's Paul. I greatly appreciate your question, but I hope you can understand we are weld into a process right now and we can't comment while it's under way. We hope to be able to provide updates in the second quarter, but right now we're in the middle of a process and for – I'd say gets in the best interest of our shareholders to remain steadfast in are our comments or lack thereof. So…

All right, have to try. I guess on the office side, there's still a lot of redevelopment going on, converting Class B to “Class A” space and new supply coming on. How is this in the already high vacancy affected rents in Class A? And are you guys seeing those factors as a threat to your ability to push rents on Class B assets at this point?

Well, I think the average rent rate now Blaine in our Class B portfolio is around $50 a foot gross. We, kind of, cap out the ceiling for Class B in Washington DC in the mid 50s, $55 to $56 a foot. So I still feel like we have adequate runway in front of us. The Class As that you're referring to that are delivering – a lot of those have a seven in front of them and probably for the higher quality ones had an eight in front of them. So I still feel like we have room to run. With that said, we still see it being extremely competitive for the larger tenants in town here. And if you look at the deal we just did at the Watergate that was a highly competitive situation. We're happy with the economics that we got. But concessions still play an important role in any negotiation. And I don't see those concessions diminishing in the near-term.

All right, that's helpful. And then lastly, you guys talked about this in your prepared remarks and in the press release. You noted that you've achieved leasing goals at your Space+ units in Rosslyn. I guess given the success that you guys have had, what's your capacity for expanding that program into additional buildings as you guys look forward?

Well, I would say that it's a fluid situation. We initially were looking up to 5% of the portfolio. I think given the success we've had, we’re probably going to expand that, but I would also say that when we look at it, every time we look at examining a Space+ in a vacancy, it has to hit those three metrics that we outlined. First and foremost, we'd like to achieve a market premium. We're targeting between 8% and 10% of a market premium over a regular leasing metric. Second is we look at the space that we've had, how long has it been on the market and is there an opportunity to greatly accelerate bringing NOI to the market through that space and so we look at compression time. I think that the Space+ that we delivered at Arlington Tower was quite frankly one of the more successful opportunities that we capitalize on. And then third, we're looking to obviously reuse a lot of the TIs up to 90% that go into Space+. So I think if we feel like we can accommodate those three metrics, we will look at Space+ and other opportunities and other office assets that we have, Blaine.

And Blaine, this is Steve. I'll just add what you referenced from our prepared remarks that we've already delivered 173,000 square feet in across the 11 buildings.

Got it, thanks guys.

Thanks, Blaine.

[Operator Instructions] Our next question comes from the line of Dave Rodgers with Robert W. Baird. Please proceed with your question.

Good morning. Paul, I think a lot of your commentary was really targeted at why apartments are better than commercial for the bulk of your portfolio and I'm summarizing quickly. But I guess I wanted to know your thoughts on continuing to own any components of the commercial portfolio given the length of the comments that you just made about apartments and what your long-term target is, if there's an update for the apartment division NOI as a percentage of the total?

Sure, Dave. I think we've been remarkably consistent since I've been here that we wanted to increase our multifamily presence in the region. And specifically with our portfolio, we have continued to try to recalibrate with more of a multifamily waiting. Ultimately, I would like to see more than half of our portfolio be in the multifamily space. I think we've been successful at opportunities that we've targeted since its management team has come on board. I think our affordability GAAP strategy and continuing to pursue affordability has really distinguished us from other owners of a multifamily product here in Washington. And I view it as a continual de-risking of the portfolio and strengthening of our cash flows and our FAD projections moving forward.

That's helpful. What type of acceleration do you think kind of adding the suburban component to the strategy really adds to that and use that more than half and that is consistent, but does that kind of change that more than half becomes substantially more than half with the suburban strategy invoked?

Well, I mean, let me – let's step back for a second. And then, if I go back to my prepared remarks, the bigger isn't better for Washington REIT, better is better. And I think, we've tried to remain – I think the term I use was thoughtful and discipline in our underwriting. We've passed on more multifamily than we've bid on. Without hesitation, we've passed on some portfolios that were out there, just because, we saw the moniker value-add, but we didn't – we definitely understood that there was capital needed for those assets, but was it truly creating value-add opportunities for our shareholders. I think this portfolio, I'm very happy with our team that we were patient and we've waited for the right deal. We're going to continue to do that. We do believe that there'll be both opportunities for us to look at portfolios, but also one-off. And then let's not forget, we have a 401 unit Trove asset that Phase 2 will commence this month. We'll begin delivering units at the end of this year. And then we have Riverside to also – I focus on. And I also think we have some other embedded multifamily growth opportunities in our portfolio. So I think between acquisition, development and redevelopment, we feel like we're on a good trajectory to continue to grow our multifamily portfolio, create long-term NAV for our shareholders and de-risk the portfolio.

Great. Thanks for that. And then, I don’t know for Paul or Steve, the leasing economics and retail isn’t the quarter. Is that just indicative of kind of work big buck leasing is today?

Well, I think from quarter-to-quarter, you have to look at the mix of what's being leased. Just maybe a big picture on leasing, we put the 8-K out in the fourth quarter of last year. And what you focused on there was the explorations in office that we really needed to address. And then the office factor, we're still in April and we've addressed excluding the Quantico that we're selling, we've already addressed either through lease or LOI 60% of those leases that are expiring. In retail, the amount of explorations, we’re really quite normal – almost on the light side of normal. Our real focus on retail this year has been on the vacancies that were in the portfolio. Some of them a little bit stubborn, some of them have been out there for a while. And so when you look at what we've already executed in terms of all of that, we've got our leasing done at Concord, Montrose, Randolph and also the two former hhgregg spaces in terms of focusing on our big vacancy. So we've knocked off most of that. And really the lease economics are not that bad when you look at leases that have been vacant for a little bit longer. And again, the mix can change from quarter-to-quarter today.

Great. That's helpful. Steve, maybe just two or more for me, one is, have you issued any equity year-to-date?

We have not.

Okay. And then the last question, I guess it sounds like, on the guidance in respect that you just saw a lot of moving pieces at this point. But it sounds like, when you'll close the acquisition and you sounded fairly certain that you've closed the dispositions in the third quarter. So I guess without indicating which assets those would be, what's the variability I guess, that you're concerned with by that kind of taking guidance completely away?

Well, if we – we have – we've got dual processes going along and there's interest in a lot of our assets and we're trying to find a way that makes the most sense in terms of match funding, creating the most value for our shareholders. And quite frankly, we've modeled various combinations of what we might sell to match fund and the interest is pretty deep. So we would like to get a little further along in the sales process and have more certainty of whether or not something will close in more than one tranche in terms of the sale, therefore affecting the timing. And we also really don't want to affect the sales process by sort of backdoor giving – how we think it's going to turn out until we've further along in execution.

Got it, that's helpful. Thank you.

We do have a follow-up from the line of Blaine Heck from Wells Fargo. Please proceed with your question.

Thanks. Just a couple more, well I have the time. So maybe Paul, can you comment on the sales process for Quantico? And how long you guys were marketing the asset and how would you describe interest levels out there?

I would say that, we've been looking at Quantico as – I think, we've said a couple of times, Blaine, we wanted to get further along in the leasing process, before we decided to take it to market. But I can't really go a whole lot further than that because we're still negotiating some aspects of that. But that was an asset that I think we had identified, as a non-core asset that we want it to monetize at the appropriate time, when we feel like now is the right time to make that move.

Got it, okay. Steve, the press release noted that office same-store NOI growth benefited from term fees. Does that all associated with Watergate 600. Or was there something else driving those fees. And I guess what would the office same-store growth have been backing out the term fees?

Well, we did disclose the amount of term fees and I don’t have the calculation that’s in the supplement there. So it was a little over 500,000 for the quarter. So you can do the math, I apologize that I haven’t done that, but that’s why we gave the disclosure in the supplements, because you would see with and without. And it wasn’t all in one place.

It was not.

Correct.

Okay. And then lastly, the multifamily year-over-year rental rate growth stats that you guys report on page 21. It’s been accelerating for awhile. It reached the high, and I think that’s quarter of 2.6%. Can you just talk about the main drivers of that growth, you did a little bit in the remarks. But do you think that the HQ2 announcement has had a direct impact on the market at this point?

I think, we really haven’t factored HQ2 and I think that’s still the comp, in terms that are going to affect future rent growth and all of that. We’ve just – I think as Paul referenced, we’ve done a great job with our team in terms of revenue management and optimizing and maximizing nightly what the right units are at each property based upon traffic counts, et cetera. And we’ve done that while maintaining occupancy. So we also had renovation programs, which has helped and they’re going to continue through this year at Riverside and Wellington. And so that has helped as well. And, no, that’s part of what the next portfolio opportunities as well. Our renewal trade-outs for the quarter, we’re strong as well, they were 4%. And so I just think we – it’s all back to affordability. We think we own apartments that – the growing sector that needs affordable housing needs. And so we think our demographics are going to continue to be very strong. That’s why we’re allocating more capital to multifamily.

All right, thanks again.

Our next question comes from the line of John Guinee with Stifel. Please proceed with your question.

Great. Okay, hey thanks. What do you think Paul is replacement cost for the product you’re buying Herndon, Manassas, Leesburg, Germantown, Gaithersburg?

Well, John, we’re going in to the product. I believe we’re all in, we’ll probably be in the 217 to 218 a door, on our math the – because they are obviously in different locations. The replacement costs could vary anywhere from, I think a low of 220 a door to a high of 260 a door on average. We look at it like we’re going in probably, let’s just say 218 and the replacement cost on average on the portfolio is a 238 a door.

Got you, okay. Second, in a way before your time, but Quantico was bought at $60 million, $220 a foot getting sold at $121 a foot, 60% occupied. Is that representative of market conditions for commodity DC office space in this day and age?

I do not believe it is, John, I think that that is being kind a tertiary market and we are executing a non-core asset. I think we have – our asset management team has done a yeoman's effort at trying to get that back up to leasing metric that was palatable for all of us. But I think, we’re in a position now where we’d like to make a move and exit a non-core asset and reallocate the capital elsewhere.

Then on the retail, just out of curiosity, your hhgregg vacancies are being backfilled, are – is economics on Page 2 of the press release, the economics for those two spaces, and who's moving into those spaces and why not sooner? Why not – why waiting a full year?

Well, the spaces have to be reconfigured. I'll start with the [indiscernible] it’s the same tenant for both spaces. It is a furniture brand or multiple brands. And both deals are 10-year terms from rent commencement date. The rental rates vary from the low $6 a foot to the upper $6 a foot, and the TI packages are $2.30 per year of term. So, I think it was a very competitive process. We looked at other tenants, John, quite frankly, that probably could have paid a bit higher rent, but that was outsized by the amount of TIs that needed to go into the space. So we're comfortable moving forward with this tenant and we feel we did a little bit better than the market was offering us with these two leasing executions.

Okay. And then last question, it appears from your commentary on the asset sales that you're going to be selling lower quality product, and if Quantico's any indication, you'll be selling from the bottom of the list. Why not just take this opportunity to cut the dividend as you throw out the baby with the bathwater?

Well, I think we're looking, I mean, you've definitely identified the worst asset in our portfolio and that's why it's being monetized. But I think you need to look at a blended rate. I don't think we said, at least in our remarks that we were selling the worst assets in our portfolio. We're selling the assets that we think we can, that help us derisk the portfolio, and from a CapEx standpoint, we're probably pruning out some of the larger consumers of that. But beyond that, I can't really comment on any other assets that we're monetizing at the point.

Great. Okay. Thank you very much. Good quarter.

Thank you, John.

Our next question comes from the line of Michael Lewis with SunTrust Robinson Humphrey. Please proceed with your question.

Thank you. Paul, if you had to choose between keeping only your office portfolio or only your retail for the long-term, which would you choose?

Great. Today, given the D.C. market conditions, I think that retail would probably be a better bet considering our retail is very well located. It's generational. And it has – if you look at how retail's performed over the last, since I've gotten here and this new management team has gotten here, retail has performed well and office has presented its challenges, Michael.

Second, I wanted to ask you, it looks like last month you changed short-term incentive plan targets to leasing targets instead of FAD targets. Maybe you could just comment on why you made that change and why you think leasing targets might be more appropriate than FAD?

That was a board mandate and the board recognized that 2019 and 2020 we're going to be all about leasing. We have some significant, as we've outlined, both in our K and as we continue to try to be transparent with you and our other investors, we had some significant leasing challenges embedded in our portfolio from the next 18 to 24 months. And we wanted to address those head on and highlight those, and that's why that change was made, Michael.

Okay. And then lastly from me. I saw Charles Nason retiring from the board. He was the Chairman until last year. He's been a lead independent director since then. My question is just on the composition of the board, are you going to look to replace him? Anything you'd say there?

I can't really comment. We have a governance process, but my comment about Charles Nason in particular is he gave 16 years to this organization. He did an outstanding job leading virtually every committee here. And quite frankly, Chuck has been a great mentor to this leadership team and to the Board. He will be severely missed.

Okay. Thanks for taking my questions.

Thank you, Michael.

Our next question comes from the line of Chris Lucas with Capital One. Please proceed with your question.

Hey, good morning guys. Just a couple of quick ones I hope. On guidance to you I know you're not updating, but I guess I'm just curious if there are some of the underlying initial assumptions that you guys provided that we should still be counting on, particularly related to sort of the other dispositions that were initially outlined in some of the other items, G&A and portfolio same-store NOI, those kinds of things.

Well we've been basically counseled and advised that if you're not going to update guidance, don't go reaffirm partially and confuse people. But the main factor for us not updating guidance right now is just the reallocation due to the asset acquisitions in the sales timing and the actual proceeds, et cetera Chris. In terms of total dispositions, I think, we have been clear on the script that this match funding is in addition to the prior guidance for the level of disposition. So I think we're saying we're not changing the level of prior disposition guidance. And in fact Quantico would comprise part of the original guidance in terms of dispositions if that helps. And we're looking forward to updating on everything else. I mean we've reported our same-store results. So we gave a little bit of color in terms of our performance for the quarter. So that would have been what we guided to before as an example.

Okay, great. And then I guess Paul just on the thought process behind dispositions generally, is your goal to execute at the best level relative to sort of what the market is valuing versus what your own internal value is, or is it related to more of a de-risking process?

I think we're – first and foremost, we're trying to create long-term NAV for our shareholders. We've said before, Chris that we think every asset has its own individual inflection point. And we continue to try to play that in conjunction with the market, I think. But our longer term objective is to continue to de-risk this portfolio, take out much of the volatility and provide a stable, long-term cash flow growth for our shareholders. I think we've had different opportunities to do that. If you look back and you look at some of the executions we had done like getting out of suburban Maryland where we did not feel like we could – that capital can be reallocated into a higher growth trajectory that’s what we’ve done. And that's what I believe we're continuing to do is reallocate capital into space that we feel offers better growth trajectory for us as well as minimizing the big CapExs that this portfolio has sustained in the past.

And then, I guess just one last question for me as it relates to the dispositions, any chance that any of this could end up in sort of a joint venture structure as opposed to outright sales?

I would never rule out anything. Chris. Yes I'm assuming if someone looked it up and said, yes, we'd like to do this with you, WashREIT, yes that could happen. But beyond that, we have to let the process play out to see what the final execution and structure will look like.

Okay. Thank you. I appreciate it.

There are no further questions in the queue. I'd like to hand the call back to management for closing comments.

Thank you. Again, I would like to thank everyone for your time today. And we look forward to seeing many of you at the NAREIT Conference in June. Good afternoon, everyone.