Welcome to the Washington Real Estate Investment Trust's Second Quarter 2019 Earnings Conference Call. As a reminder, today's call is being recorded. Before turning over the call over to the company's President and Chief Legal Officer, Paul McDermott, Tejal Engman, Vice President 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, but our non-GAAP measures as defined in Reg G. Please refer to our most recent financial supplements and our earnings press release, both available on the investor page of our website and to our product reports furnished or filed with the SEC for definitions and further information regarding the use of these non-GAAP financial measures and reconciliation of them to all 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 eight through 25 of our Form 10-Q for a 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; Amy Hopkins, who will take over as Vice President, Investor Relations, following this call; 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 second quarter 2019 earnings conference call. We are pleased to have delivered core FFO of $0.47 per diluted share this quarter.Our second quarter performance has exceeded consensus in our own expectations and has enabled us to raise the midpoint of our 2019 guidance range by $0.01 per diluted share. Steve will explain our quarterly outperformance and the changes to our guidance in his remarks.I would like to focus on the three key drivers of our near and long-term business performance. The first is the execution of our 2019 strategic capital allocation plan, which significantly grows our multifamily exposure, while reducing our exposure to the riskier commercial assets in our portfolio.The second is the continued strengthening of our multifamily portfolio and WashREIT's ability to capitalize on growing regional demands for value-oriented multifamily product. And third is creating greater visibility on our NOI and FAD growth trajectories to office leasing, multifamily rent growth and the delivery of The Trove multifamily development, all of which will continue to grow WashREIT's net asset value.Beginning with our 2019 strategic capital allocation plan, we successfully executed the largest components of our plan in the second quarter. We close on the acquisition of the assembly multifamily portfolio comprising 2,113 units for $461 million and completed the transaction in two tranches as planned.We closed on the Northern Virginia tranche, comprising 1,685 on April 30th and the Maryland tranche comprising 428 units on June 27th. We also closed on the acquisition of Cascade at landmark apartments in Alexandria, Virginia, for approximately $70 million on July 23rd.On the dispositions front, we closed on the sale of Quantico for gross proceeds of $33 million on June 26th and on the sale of the five retail shopping centers for…

Thanks Paul and good morning everyone. Net income attributable to controlling interest was $1 million or $0.01 per diluted share. Second quarter core FFO exceeded our expectations and consensus by $0.02 per diluted share, approximately $0.01 of this quarter our performance is timing related, and will likely be offset in the third and fourth quarters.The second set of outperformance is likely due to higher settlements of prior year reimbursements. We have therefore, raised the midpoint of our 2019 core FFO guidance range by $0.01 per fully diluted share. We expect to deliver broadly equal core FFO per diluted share in the third and fourth quarters of 2019 in order to achieve the $1.71 midpoint of our updated 2019 core FFO guidance range.On a year-over-year basis, core FFO per share was $0.01 lower, primarily due to the sale of 2445 M Street in June 2018, and increased interest expense, partially offset by the acquisition of the assembly portfolio. The increase in interest expense was due to the short-term bridge loan we used to temporary finance multifamily acquisitions in the second quarter of 2019.We have already paid down $350 million of this loan, $100 million on our line, approximately $10 million of a mortgage associated with the retail assets we just sold. Following the completion of the sale of the five shopping centers on July 23rd, and we plan to pay of the balance of the term loan when the 1031 exchange transactions are completed.On the sequential basis, core FFO was $0.03 higher, primarily due to the acquisition of the family portfolio in the second quarter as well as higher settlements of prior year reimbursements. Same-store NOI declined 0.6% year-over-year on a GAAP basis, and was flat on a cash basis, largely due to a 6.4% decline in the same-store office NOI.As…

Thank you, Steve. We have achieved several milestones in the first half of the year, beginning with signing a 51,000 square-foot long-term lease at Watergate 600 in the first quarter and acquiring almost 2,400 multifamily units and selling Quantico and a large portion of our retail portfolio thereafter.As we work to execute the remainder of 2019 strategic capital allocation plan, we expect that the plan sales of our power centers in the third quarter increased office leasing momentum and the assumed commercial asset sales by year-end will generate additional positive capitalist that further de-risk the portfolio and create visibility on our quarterly NOI inflection point as well as our longer-term NOI and FAD growth.While a recycling assets and the scale at, which we have described inevitably results in an earnings reset, we are pleased to have significantly grown multifamily, our strongest and most impressive class, which also commands among the highest public market earning multiples, from less than a third to nearly half of our overall NOI.We have simultaneously shrunk retail and office from over 70% to just over half of NOI on a second quarter pro forma basis. Not only are we derisking our portfolio, improving the stability and strength of our cash flows and FAD, and solving for some of the large embedded tax gains of our commercial portfolio, but we are also cementing our position as one of the largest value add, multifamily rates in the D.C. Metro region.And finally, as many of you know, today is Tejal's day with WashREIT. On behalf of our Board, management team, and everyone associated with this company over the last five years, we want to thank her for her tremendous efforts in Investor Relations. She has done a remarkable job in creating a role basically from scratch to where it is today. Tejal, we wish you all the best in your future endeavors.I would also like to welcome our new Vice President of Investor Relations, Amy Hopkins. Amy joins us from Investor Relations at Booz Allen, following several years of working in senior research analyst roles at institutions, including Duff & Phelps, Compass Point, and FBR Capital Markets. Amy will be your Investor Relations contact going forward.With that, let me now open the call to answer your questions.

At this time, we'll be conducting a question-and-answer session. [Operator Instructions]Our first question comes from the line of Blaine Heck from Wells Fargo. Please proceed with your question.

Thanks. Good morning. Just big picture, Paul, when you think about the ideal portfolio for Washington REIT, what's it look like? Is it close to 60/40 multifamily to office? Or do you think you guys are going to continue to migrate even more towards the multifamily side? And if that's the case, how do you think about managing the dilution and possible dividend implications?

Thanks Blaine. Well, I don't have a precise number in mind. I think what we've said pretty consistently for the last couple of years is we wanted to try to overweight in multifamily. I think we are considerably seeing more multifamily value creation opportunities than we are in the office space and so we are going to continue down that path.I think right now we've gone through and you looked at most of the executions that we've done, we managed to sell our assets and take care of the other thing that we need to keep in mind is the embedded tax gains, but we also have organic growth that's built into our portfolio. So, we believe that we are heading on the right path, Blaine, and we're going to continue to try to service more value-add, multifamily opportunities as the office market continues to recover in D.C.

That's helpful. On the dispositions later this year, first off, I just want to confirm the cap rate range you put out in the press release a month ago still stands at 6.5% to 7% range. And then do you guys have any more visibility on the mix between office and retail that you guys are targeting in that bucket?

We're not updating that now, so we're good with that as a placeholder. We haven't finally identified the answers that we'll sell; so we're good with that as a place for cap rate. What we have said is it's a range of 125 to 175 we've certainly had some price discovery on some additional retail assets as a result of a process, but the majority of it we've been saying would at least be 90%, probably office. So, we'll update that more as those assets are officially identified.

All right. That's helpful. Lastly, congrats on getting the World Bank deal under the LOI. I'm sure you can give specific, but I was hoping you could give some color around the economics are at least whether the spread is expected to be positive, negative or neutral and maybe some color on the concession package?

Blaine, as we've been pretty consistent in the past, and I think you asked the question last call about the retail economics, we can't really get into those while we're in negotiations. We're in negotiations with the World Bank right now. I think we're moving in a positive direction and we will be prepared to comment on the deal once it's executed.

All right, fair enough. Thanks guys.

Thank you, Blaine.

Our next question comes from line of Bill Crow from Raymond James. Please proceed with your question.

Thanks. Good morning. Couple of follow-ups, actually, from Blaine's question. As you think about that idea portfolio, what are the odds that you're in more markets two or three years from the now in Mid-Atlantic, whether that's Baltimore, Philly or some of the regional markets there?

Bill, I think right now, we've got enough to keep us busy here between our acquisition pipeline and development pipeline, but I think we will always consider new opportunities, create value for our shareholders. So, we'll keep an open mind to that.

All right. The other part of Blaine's question on the dividend that I'm not sure actually got to answered and I think that was an issue last quarter, I just want to make sure that you talk about the ability to grow cash flow internally, and I think that starts the second half of next year. Are you confident that dividend can be maintained at this level?

Yes. I think it was an issue someone asked about last quarter. We're still targeting for the balance of this year to be in the low 80s from a FAD payout ratio and even while we were going through sort of the gradual reset as the leases commence, we cover all the time in 2020.When you look beyond that, you think about the relative regarding leasing capital in the less downtime in a more weighted multifamily portfolio versus commercial portfolio, we see this is a very long-term strong FAD growth opportunity and that's how we allocated our capital. So, we'll have a capital allocation decision to make in 2021 and beyond because our FAD should be stronger than its traditionally been.

That's helpful. I just want to make sure it was clear. My other question really is just given the changes to the portfolio. Paul, have you affected changes internally at the corporate level to strengthen the multifamily side? Tom departed a quarter or so ago. Or do you still have some work to do to realign the focus internally?

Well, I think a lot of that depends, Bill -- on the acquisition side, I think clearly, we have the appropriate sized team in place and we'll continue to stay that course. I think on the development side, we have an opportunity to augment the staff and that's going to depend on how aggressive the development pipeline can be, and that's just going to come down to the math.I think we have an excellent multifamily team in place right now. They're doing an outstanding job on The Trove, and we are getting through design development and the appropriate processes on Riverside, but I think if we were to take on obviously more opportunities on the development front, we would have to supplement the staff accordingly.

Okay. Thanks guys. Appreciate it.

Thank you, Bill.

Our next question comes from the line of Dave Rodgers from Baird. Please proceed with your question.

Yes, Paul, and Steve may be just well upon the development CommNet. You talk about doing new development on some of the residential sites that you've acquired. Maybe talk about the ability to build to that Class B price point that seems to be a difficult thing to do and how you'd manage that.And I guess the second component is when you look at the other multifamily REITs that are big developers, I think they're levered at four times plus or minus; you guys are still over six. So, how do you get down into that range in order to be comfortable and comparable to your new peer set?

Well, let's start with the development. I mean, we're -- if you look at what we have, Dave, we've got probably three or four covered land place that we're exploring. We're very price sensitive. We're not trying to build to the high A or kind of the lower side B.And I think we talked probably a couple of calls ago about what our basis would be going forward. I think for us, on the development front, we're really -- like if you look at our current portfolio, we're targeting incomes from 50,000 to 80,000. I think we would still like to maintain that affordability gap post stick A. And so I don't really feel like you can bill B today for the middle market, you have to build a value conscious A product and I think that's what we're doing.I think we can afford to do that because we have a low land basis, both like at The Wellington and at Riverside and we're doing stick instead of high-rise concrete. So, that's really when we talk about these new opportunities for development, that's the type of product we're talking about, and then it's down to whether it's below grade structured or above grade structured.

And Dave, was part two, I'm sorry I didn't quite pick it all up, was part two just looking at our leverage level and our ability to fund development? Is that what you were getting at or?

Yes, I mean they were two separate questions rolled under one, but yes, that was one and then the second is just when you look at kind of that multifamily peers set being much more lower levered as where you guys sit today. Do you feel like you need to get down to that leverage level in order to, again, get the multiple of being residential redeveloper or developer, et cetera?

Well, I think most of the multifamily you're looking are large caps that have been out there for quite some time at all. I think we're still in transition, but I think we're already going to enter next year with some optionality by selling more, will be low normal target levels.I think we're comfortable with what we think potential sources of capital are and as we're still transforming the company, staying in our targeted six to six and a half ratio for now. I do think that when you think about just the risk of the cash flows of the company, we went from something like 28% to 45% multifamily as a percentage of our NOI, and our retail, which has been 22% is looking like about 6% going forward until we make further decisions. That's a significant change in the risk profile of the company the risk cash flows. And I think with we're hoping that we'll get recognized by the market.

And just a second, Paul, I think as you look at Space+ versus the residential redevelopment, which gives you the better return today and I knew you're doing for different reasons about the difference in the returns are and how it did Space+ impact of leasing metrics were?

Well, I do think there are two separate distinct products. I think Space+ right now, we're continuing to get that 8% to 10% market premium, I think, in the office space we like that. I think our average duration is about 48 months on lease that we do, and I think that in terms of comparing that to multifamily development, I mean, since have been here, Dave, I've probably seen a 150 basis points to 200 basis points compression on development right now, and I think that people in D.C. right now, are probably developing realistically from like a 5.1% to 5.25% in a quarter.And I don't think that's obviously not something that we're going to pursue at this time. We need to see little bit more stability in the math in terms of construction, labor, and material costs. But Space+ right now, also, is really what it's 5% to 8% of our office portfolio. I think our big -- our observation on Space+ is some of our leases that we have in their can turn into long -- can graduate into long-term viable leases for the general office portfolio, and so we are trying to incubate some of the Space+ tenants to become more permanent tenants in the office portfolio.And I think so far, we've -- Space+ has probably been up and running for 12 to 18 months, we were happy with the program, but I think we have the organic growth that's in there, but I don't think it's something that's going to take over on a relative basis a large component of our office portfolio if you were to compare that to some of the development projects with contemplating either at Riverside or some of the other opportunities we have, just think they're different value propositions with different return on cost.

Appreciate the color. Thank you.

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

Great. Thank you. Nice quarter. Hey Steve, it looks to me, quick math is your guiding towards about $0.80 FFO for the second half of the year, which feels a bit like maybe $0.42, $0.38 in the third quarter and fourth quarter. Is a bottom at $0.38 and what's a good start for early 2020?

John, I think we even said in the prepared remarks, we expect it to basically be even between the third and fourth. We don't normally give quarterly guidance, but we are basically implying if you use your math of $0.80 left for the year, $0.40 and $0.40.In terms of not giving 2020 guidance, but just thinking about the lease up pattern, we've been very transparent since the 8-K last November, of the lease -- major lease expirations in the year, we've progressed 72% either Middle East or the LOI, and we think about the lease commencements, the big lease commitment will be early 2020, which will be the EIG lease at Watergate to top 4s of Watergate 600.And so the first quarter is probably the low point, and then that will lease alone should then begin to show some progress as you go forward on a quarterly basis. And then the progress on the other leases that are signing one with Space, we don't even get back to yet till September 1st of this year, the anchor space. Those kick-in our models throughout 2020.So, we think the bottom will be -- and we're not giving guidance for 2020, but just the pattern should be -- the bottom should be around the first quarter, you should progress as those spaces lease up. And then our Trove development is, we've said, it's probably expected to breakeven around midyear, next year and contribute for the year about $800,000, but it's significantly higher the following year in 2021, so The Trove starts to kick-in as well in terms of the pattern of growth. And that's about as far as we can do in terms of the out years till we're ready to give full guidance.

Great. And then Paul, any -- kind of big picture in D.C, the leasing numbers continue to be just brutal. Is there any submarkets or any assets that are buck in the trend and you feel a bit better about it and kind of deterring TI world we seem to be in?

I think, John, if I was -- I mean if I was going to evaluate kind of the overall market, I think the DC B is marginally improving. And when I say that, I think we're seeing pickups on the concession packages and parking free rent and TIs. DC A, the commodity A, no, I'm not seeing improvement there. I believe it is the turnkey package that you highlighted. D.C. trophy, while we're not playing in that space, we see that their deals are getting better. And then if I turned over to Northern Virginia, we're definitely seeing pickups along the Silverline and Rosslyn, both kind of the B plus A space, we're seeing slight pickups.And then obviously I think you know, the Borough you've seen kind of some of the moves there. I think -- I was just told the remaining space at the Borough has now gone up to $62.50 a foot. So, I think that we're definitely seeing improvement in that market. But again, any improvement we see is pre any new supply coming on, especially in Tysons.

Great. Good luck. Thanks a lot.

Thank you, John.

Thank you.

Our next question comes from the line of Daniel Ismail from Green Street Advisors. Please proceed with your question.

Thanks guys. Maybe just sticking to D.C. office. With transfer taxes and property taxes on the rise, Paul, I'm curious does this alter any interest in long-term ownership in that region, both for office or multifamily? And then do you currently have an estimate of the potential impact of those tax increases?

Right now, I mean it doesn't alter our desire to continue to overweight, Danny, in multifamily. I think the taxes, what the D.C. government is just layered on is kind of another pain point for D.C. office. And I think what we try to demonstrate to the market is we're continuing to look at opportunities to monetize components of our commercial portfolio. I do believe it will have a dampening effect, and I have talked to the -- probably the top three investment sales brokers here. I think that the D.C. investment sales market has its own challenges right now, but this was just kind of another layer of difficulty to put on to it.I mean we look at our portfolio right now in D.C., and when you're talking about whether or not we'd hold or monetize it, the core capital is really what's dried up in Washington. We still see a lot of value-add in our D.C. B. We think that there is leasing upside, and we think that there's an ability to get paid for it. This -- the D.C. tax increase will obviously play into that, but it's not going to completely eradicate it.But I'd like the value-add space, Danny. That's what is still continuing to move. Our observation will probably be that the biggest disconnect we're seeing kind of in pricing right now is on vacant space, how owners are pricing it and how potential buyers are pricing it or should I say significantly discounting it.And so we haven't really seen the amount of trades that we would expect to have seen in the first two quarters of this year. And even if you look at the last two deals that were done in D.C., they're both done by co-working companies trying to establish a bigger beachhead here in Washington.

That's helpful. Thanks. And just -- maybe just last one on development. Curious to hear your updated thoughts on keeping the entirety of developments on balance sheet versus potentially JV?

So, we've been approached by a number of different institutions about joint venturing some of our multifamily opportunities. We are definitely looking at those and processing them. I think for us, cost of capital is paramount. I think we need to see some stabilization in the -- if you look at the last two to three years, construction costs have probably increased between 5% and 6%.So for us, the math has to work for WashREIT before we start going soliciting other partners. But I definitely think in terms of capital uses, we would certainly consider JVs if both the cost of capital and the structure makes sense for WashREIT and its shareholders.

Great. Thanks guys.

Thanks Danny.

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

Hey, good morning everybody. Paul, just on the Landmark transaction, maybe you could walk us through the investment thesis there as you've been pretty clear in the past about some of the boxes you need to check for allocating capital to multifamily. I guess just curious as to how Landmark stacks up.

Sure, Chris. Well, I mean as you know, we look for urban infill as well as suburban properties that we feel have an affordability gap. I think when we look in this respect, if we look at our comparable set here, we see rents ranging from a low of, let's call it, mid-1,500 to a high of over 2,100. We're probably in the 1,700 to 1,750 range. We see renovation potential here. We saw an affordability gap in excess of $350, which is, as you know from talking to us, one of our litmus tests.And we wanted to see if the market can bear additional -- or the project inside the market can bear additional renovations. We think we can grow rents through very light renovations, at least $100 a door, and we think that the capital spend that we would be looking at would not be of the magnitude of like a Wellington or a Riverside.So, the thesis is continue to get in there, work on the management of the property, work on some of the optics and do some light renovations for probably over 60% of the property and capitalize on the rent growth there.We think that if you look at the market itself, if you look at Alexandria, I think over the last eight years, it's grown over 15% compared to a national average of just over 6%. We like where that market is going. It's a 10-minute drive from HQ2. We also have other centers there. We're going to be running a shuttle on this asset combined with the Assembly at Alexandria.So, -- and then there's also metro bus out front from the Yoakum Pkwy and Cascade at Landmark that runs between there and the Pentagon. So, we think that we're going to be able to capture both value-conscious military and civilian personnel. And we think it's, again, kind of another value-add, affordable thesis that we're going to be able to incorporate at this asset.

Okay, great. Thanks. And then just on the 8-asset retail portfolio sale, you had previously guided sort of a 6.2% cap rate on that NOI for the aggregate. Is that still a good number overall given the slight change in this sort of dynamics with the power center sales?

Yes. Chris, obviously, we will update everything in a more final way once we close, and we're still working on the rest of the sales, but a lot is closed. So, we're still expecting to be in the low 6s, and we'll refine it as we get a little further along.

Okay. And then last one, Steve, for you, just there were a couple of little changes on the guidance assumptions. But I guess the one that caught my attention was just on the projected development expenditures. Is there anything specific there? Or is this just kind of a cumulative delay in some spendings?

There's a slight delay just due to some utility delays that we had at The Trove. But honestly, we -- just while we're going through and trying to get the math to work on Riverside, we actually spent a little less -- we're spending a little less from now to the end of the year on Riverside than we had originally projected.

Great. Thank you.

We have reached the end of the question-and-answer session, and I'd like to turn the floor back over to management for any closing comments.

Thank you. Again, I would like to thank everyone for your time today and we hope that you enjoy the remainder of your summer. We look forward to seeing many of you on our upcoming non-deal roadshows in the very near future. Good afternoon, everyone.