Welcome to Washington Real Estate Investment Trust Second Quarter Earnings Conference Call. As a reminder, today's call is being recorded. Before turning the call over 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, including those related to the effects of the ongoing COVID-19 pandemic 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 in this call are available in 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. 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; Taryn Fielder, Senior Vice President and General Counsel; Drew Hammond, Vice President, Chief Accounting Officer and Treasurer; and Grant Montgomery, Vice President and Head of Research. Now, I'd like to turn the call over to Paul.

Thank you, Amy and good morning everyone. Thanks for joining us on our second quarter earnings call. We delivered strong second quarter financial performance against the backdrop of the ongoing economic disruption, highlighting the resilience of our portfolio. As the local economy gradually reopen, our primary focus continues to center around the health and safety of our residents, tenants, employees and their families. Over the past several months WashREIT created and implemented a comprehensive reentry plan to mitigate the spread of COVID-19 at our properties. We connected with our office tenants through personalized outreach to understand their needs and discuss our approach, make sure that they are comfortable with the protocols that we have implemented. We are fortunate to have not experienced material bad debts to date in alongside reentry planning, we've been diligently working with tenants who have been financially impacted by the economic shutdown to discuss and finalize deferral arrangements. As of today, we are pleased to report that we have substantially completed that effort. There was no doubt that these are trying time. However, we have adjusted to the new demands of today's operating environment, and have taken swift and deliberate action to protect and support our residents and tenants. I could not be more proud of the dedication shown by the WashREIT team during this challenging period. Furthermore, these times have highlighted the importance of social fairness, equity and justice. And our company has responded with a refocused commitment to improving diversity, inclusion and belonging within our company and our community and creating long lasting, positive change. As we enter the second half of the year, we are increasingly confident in the resilience of our region and likewise, our portfolio. Our Washington metro focus provides economic stability compared to other major metropolitan areas. This is true…

Thank you, Paul and good morning everyone. I'll start off by discussing our cash collection performance before reviewing our second quarter results and outlook for the remainder of 2020. Our multifamily collections continue to be very strong, which is a testament to the resilience of our sub markets in the industry mix and lower average rent to income ratio of 26%. We collected over 99% of cash rents during the second quarter in over 99% of contractual rents. And our rent collections through the first three weeks of July have been strong also. While we are offering deferred payment programs to residents who've been financially impacted by the pandemic today, deferrals have been relatively low, representing less than 0.4% of total monthly rental income on average. Our monthly multifamily collection performance continues to track above national averages. We collected 99% of cash rents in June compared to 96% per NMHC. We attribute outperformance in part to high exposure to industries that have outperformed during this crisis and lower relative exposure to underperforming industries. The impact of COVID-19 on the Washington Metro market has been contained primarily to three sectors, representing approximately 75% of Washington Metro job losses while the impact has been more broadly spread across a wider range of sectors in the US overall, as those same three sectors represented less than 60% of total losses nationally, through June. Thus the US overall is experiencing job losses that are spread across more industries than our region. The Washington Metro markets relative strength reflects the stability and business revenue provided by technology and federal contracting. We track the industries our residents employed in and our exposure is most heavily weighted to the most resilient economic sectors and likewise less weighted to the industries that have been most impacted, which has…

Thanks Steve. In closing, while we are operating in a challenging environment, we're confident in our ability to effectively manage through this period of uncertainty while preserving the embedded growth of our assets. Our value-oriented portfolio has demonstrated resilience as we absorb the near-term impact, which is further underscored by our strong rent collection performance and the proven stability of the Washington Metro economy. Furthermore, our sustained multifamily lease rate growth and stabilizing occupancy trends highlight the value of our research driven capital allocation strategy, which has led us to invest in well located residential units that will be in the path of growth once the economy resumes. Now, we would like to open the call to answer your questions.

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from line of Antony Paolone with JP Morgan. Please proceed with your question.

Thank you and good morning. My first question is with regards to the multifamily portfolio. Can you give us a sense as to what's happened to market rents in the last say a month or two where your new lease spreads are trending right now?

Tony, it's Paul, I would say market rents right now, I mean, we're just in the overall portfolio, we're seeing concessions rise in the market, but not materially. The market has become more concessionary as properties kind of open up. And I'm just giving an example throughout our portfolio depending on the respective sub market we've seen concessions range from $250 to one month. And the largest concessions we're seeing are really a Trove and at that the markets move from one month to two months free. We're also offering up to three months for 24-month deal to Trove. I don't see that materially changing in the future in terms of spreads.

Yeah, I would say, Tony, we did pretty well in the second quarter. We are – on renewals, we've now started in August, increasing rates on renewals for 12 months plus leases that we were holding flat. We're doing okay on new lease rates in recent weeks. Although I will say for us, we're going to emphasize holding occupancy and keeping our leased maturity ladder intact so we might have a little bit of trade off on new leases. So maybe in the most current month, they blend to slightly negative of new and renewals, but we feel they're holding very well and we've done – when we look at just on a relative basis, we think things are going well.

Okay. And then on the office side, any – I know there's not a ton of volume, but just any color on what's happening there with net effective rents or how those tenants that may be in the market are behaving in terms of what they'd like to see to get a deal done.

Tony, I wish I had a better fact pattern to really articulate the second quarter. I would say overall what we're seeing in the market in terms of leasing are seeing a lot of short-term, a lot of two to three-year deal with extensions, definitely seeing a bit of an out migration from co-working. I think in DC the activity probably dropped 50% in the second quarter in terms of leasing volume, thus I can't really provide you a great track record there. I think the thing that we were probably most impressed about in this region was Northern Virginia leaving the US with 1.6 million square feet absorbed. I would also comment that in July, both in downtown and in Northern Virginia, our traffic and our velocity picked up notably. And we hope that a lot of that will crystallize for us, I'd say realistically, it's probably post Labor Day. That's what we're getting from a lot of our tenants when we think there's going to be a lot more decision makers waiting back in, but we're optimistic about the balance of the year.

Okay, thanks. And then just last one again, I know it's early, but just anything on the investment sale side or any commentary on early indications of price discovery or anything being brought to market?

Let me let me split that. I'll talk both about office and multifamily, Tony. On the office side, very low volume, obviously. Interestingly, I've seen some single tenant credit deals where we see some investors trying to play the spread to fixed income, seeing a lot of recaps versus selling into this market right now. The key for investors and lenders in the capital markets execution has to be there, but is just the weighted average lease term and what we're hearing both from lenders and equity folks that are looking for seven plus years on that. I think the big challenge right now we haven't really seen a lot of multi tenanted buildings come to the market. It is just the lack of traditional buyers. I think the good thing I would observe over the last 90 days and especially talking with the lenders is there hasn't been any motivation on the lenders part to take any of these assets back. They are working with deferral plans for their borrowers to try to do some type of bridge. Multifamily, a bit of a different story, obviously, with Fannie and Freddie being aggressively open for business. I think the biggest challenge and we have seen definitely more multifamily deals hit the market in the last 60 days. And I think just talking to folks, a definite notable pickup in BOV activity probably with the top three brokerage firms in this region. The feedback we get is really the first two years are the challenging underwriting. And people are always trying to make up for those first two years. And then people are incorporating, I'd say 2023, '24, '25 we're seeing rent spikes being implemented between 5% and 8%. But the convergence really over the last 30 to 60 days has been around like a five cap. We've seen old deals that probably were the way pre-COVID being dusted off and re-looked at and seeing some small off market activity. But like I said, the debt some of these folks are getting, sub three. So investors are clipping an eight. In DC I think the biggest challenge you're going to see in far as turnover and product is as you're aware of Tony, we have to go through a TOPA process. And you can't submit TOPA until October 12, which is where the Mayor extended the state of emergency too, so that's really put – tapped the brakes there. In Northern Virginia not seeing any slowdown in the appetite for people with investors still looking at that long-term debt that like the Amazon renter changes the footprint, but both on the commercial side and on the multifamily side, we've gotten plenty of feedback that there'll be a lot more product moving to the market post Labor Day.

Okay, great. That's all I had, great color, thank you.

Thanks, Tony.

Our next question comes in line of Blaine Heck with Wells Fargo. Please proceed with your question.

Great, thanks. Good morning. So just a follow up on the last question, do you think Paul that the fallout from the pandemic ultimately increases the spread between office cap rates that you'll be selling at and the multifamily cap rates that you'll be buying.

I think that – look it's like I said earlier Blaine, I think to monetize assets in this environment, especially the office environment, people are – both lenders and investors are going to be looking for duration. I think we're fortunate to have that at a number of our assets if we choose to do that execution. I do think when the dust does settle that you will definitely be seeing more activity in the multifamily space. There's still a lot of capital out there that was on the sidelines prior to COVID-19. And just recently over the last year 30 days, I'd say I've seen activity and pricing people definitely becoming a little bit more aggressive. Like I said to Tony, I mean, it's really the separation gate is really that how you're underwriting years one and two in multifamily. But I would expect it to be – again, with the assistance of Fannie and Freddie, I would expect to see a competitive fall for multifamily product in the region.

Yeah, that's helpful. And clearly your retail and other allocation has decreased a lot over the years down to I think 6% of NOI now, but it continues to be a little bit of a drag on the rest of the portfolio and results seem to be getting worse as COVID disrupts those businesses even more. Can you just talk about your plan for that portfolio? Does it make sense to try to dispose of the rest as soon as possible or do you think it's best to hold on to what you have in the hopes that you can backfill any sort of move outs that you have and maybe get better pricing after the crisis.

Hey, Blaine it's Steve. I'll start and I think Paul will just tag team this. This 6% and we've had less than a penny share of bad debts. And when we look at what we've contractually looked at we've collected 90% there, so it's really not that big a drag and it's some of our best retail assets. And there's probably not much of a market right now, I'll let Paul comment on that in terms of trading retail assets, but these assets we kept because they also have the ability to be eventually converted into multifamily and other mixed uses. So there's more than one path to some of those assets. Paul, I don't know if you want to add anything to that.

No, I'd say that the thing that's probably changed Blaine is obviously a pretty small pipeline of retail investors out there right now. And we're obviously sensitive to dilution. I think first and foremost we're happy we got rid of our riskiest assets with the most lease turnover last year. As Steve said, over half of the assets inside of that 6% have redevelopment potential i.e., Randolph, Montrose, Tacoma, Chevy Chase Metro and in very good locations. And I think that we're comfortable with that. We're actually working pretty well with our retail tenants right now and I'm comfortable over some of the programs that we've implemented with them, but also due to the quality of the locations if we did have some move outs, I'm also equally comfortable with our ability to backfill the space. So right now, I think retail, given that it's only 6% is a manageable situation.

All right, great, thanks, guys.

Thanks, Blaine.

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

Yeah. Good morning, guys. Maybe two on office, the first is, it sounds like Northern Virginia recovering a little bit faster. By parking or any of your internal systems are you able to determine what percentage of employees are kind of back in the office or where utilization has gone to? And then maybe a second question on office, what's been your experience with Space Plus in this current environment with collections, renewal, if you have any that are far enough along new demand for that product? Your thoughts around that will be helpful. Thanks.

Dave, I'll take the first shot at that and Steve can jump in. First, in terms of Northern Virginia and occupancy levels, Northern Virginia, I mean, we obviously through our flops we track activity. I think Northern Virginia got up over 20% first. We've seen that dial back a little bit. And I attribute a lot of that to, we're in the month of August and I think some folks are candidly just kicking the can until past Labor Day. DC a little bit different, I think DC probably peaked in the 12% to 15%. And we've – we think that that is probably going to remain probably at a lower occupancy level than Northern Virginia. I'd say the activity and I'm comfortable saying that the activity in terms of that has to – that people coming back, we want that to translate into leasing activity. And two of the three assets that we're focusing on are Arlington Tower and Silverline Centre, some of our best assets with some of our best space. So I think we're optimistic that that will turn into something post Labor Day just in terms of execution. I believe the second part of your question was Space Plus, without a doubt we've – and it's not just me, we've talked to a lot of tenant reps and a lot of the larger shops, both on the agency side and the tenant rep side here, definitely seeing a bit of an out migration out of the co-working space, folks looking for their own identity. As I made a comment earlier on leasing, Space Plus really is kind of a slipper fit for people looking for two to three-year terms with flexible leasing. Not only that, but they also get to create their own identity and they get to, most importantly in this environment, they get to control the protocols in their own space. And so we actually have seen – the first deal that we did at 2000 M Street was a Space Plus execution that I believe was coming out of We Work and we expect that trend to continue. We haven't had any – Steve, asking, I don't believe we've had any real material rent hiccups in the Space Plus space, so.

Not at all, let me – no, credit. I mean, I think you've covered just about everything. Paul. I think the key words are flexibility. People are slow to make longer term decisions. So Space Plus fits it really well. It fits for those that are worried about the health of the environment that they've been in so they can have their own independent suite. And it can be healthy and they don't have to interact like in co-working with others. And it allows people who have longer term needs to get started on the short-term basis and so. And I think the fact that we have Space Plus in some of our best assets that's available in some cases is actually helping and they might even need longer term lease decisions after that.

Okay, that's helpful. And then maybe just one on the multifamily side, the 3000 units over five years. And I guess I understand taking a pause here, but as you talked about starting to push rents a little bit here into August, as you guys talked about the confidence just in the broader economy with not having as many deliveries maybe over the next couple of years. When will we expect you to see more – be more aggressive on the apartment renovations? It would seem like that trade up today might make sense, especially as you get a little bit more vacancy in the apartment portfolio to just kind of continue through with that product. So I guess ultimately, what would you want to see to get more aggressive there and get back on track?

Well, I'd say Dave is you've heard from us before, I mean, the whole – the renovation pipeline is based on the affordability gap. And we still see a good affordability gap, A and B, it's not like there's been a wide divergence like A is come in and B is dropped precipitously. We've seen them kind of move lockstep, and I'll defer to Grant Montgomery, our head of research, but we're going to evaluate it on a sub market by sub market basis, Dave. I think, as you're aware, we had achieved mid-teens return on cost metrics. I think we're going to reevaluate that, is that still appropriate in this environment? And then what type of movements are we seeing, particularly in the B space. I think we've been pretty pleased with the B space and how it's performed even on – not only on the collections, but on some rent movements, both on the renewal side of it. But we're going to look at each one of those properties. We're doing it on a monthly basis right now. And I would tell you that if we saw an opportunity where we thought that that affordability gap was intact, and we could achieve a suitable return on cost, we would move forward in the sub market. Again, I'll defer to Grant, Grant if you had anything you wanted to add there.

No. Paul, I think you said it well. I think we have seen very similar past with A and B, I think through April, it's really been within 30, 40 basis points in terms of their tracking, in terms of your overall rent growth. So that mid 20% rent gap that we have between A and B region wide is still intact, and it really speaks to how B has held up during this time speaks to sort of The exposure of our residents to the stronger industries, which we've talked about in the scripts both last quarter and this and that the majority of f job losses in our region have been really concentrated in a couple of three industries, particularly in retail, and leisure and hospitality are only 60% of the job losses. But we only have about 13.5% exposure to that industry. And so that's really spoken and relate to the strength of our Class B in light of what's going on broadly, and has really held that up quite well, relative to what's going on the market.

The only other thing I'd add, Dave is and we've told you this before, we're very sensitive to the income to rent metric, and our average renter, I believe, is a 26%. So we want to keep that intact. We think that's important, given the economic disruption we're going through. So I'm comfortable with that. And we'll monitor that as we kind of move forward and look at reactivating our renovation program.

Appreciate all the detailed color guys, thanks.

Thanks, Dave.

[Operator Instructions] Our next question comes from the line of Bill Crow with Raymond James. Please proceed with your question.

Hey, good morning, folks. Paul, on the on the multifamily front, if we see a big reduction in the unemployment benefits, would you anticipate your collection rate to decline in the next few quarters?

Bill?

Bill this is Steve, I'll start it and Grant may be able to help out and follow as well. One of the things that we're really pleased with obviously, we've collected 99% of our rents and there's a lot of information in our materials and that we've put out, as we've met with investors about the strength of our – the sectors that our residents are employed by and how they've held up so well on a relative basis to the US overall. One of the things that we noticed and we were looking at recent stuff and Grant, maybe you can comment a little further on it. But broadly speaking, in terms of the large metro areas, the DC rent income is better than, say, New York or Los Angeles or the Bay Area. So for instance, the CARES Act is really very less of a burden here in DC. And again, that's not really affecting that many of our tenants as we're collecting 99%. But I think it also speaks to just our region. I don't know Grant if you want to add a little to that or Paul.

I can just add to that to echo what I – in a way sort of the way I answered the previous question is, I think it really does get down to how our portfolio is somewhat insulated based on the employment distribution of our residents. Looking at another way within the Washington region, professional business services, government and finance has on average declined less than 2.5% during the period we're going through, and those industries comprise approximately 60% of our tenant base in class B, which really speaks to perhaps our Washington DCs Class B, in particular our Class B within Washington DC is somewhat different than perhaps some of the pressures that might occur in other markets as Steve mentioned, that have higher rent to income ratios or alternatively a different employment base make up their economy.

All right, thanks and one an office, I know it's early and I know one of the tenants are tied to the government in one way or another, but any buzz among the tenant reps that some of the CBD tenants might be looking for the suburbs, either to avoid mass transit or in reaction to some of the protest, the activities or anything like that.

Bill, I haven't seen that per se with an executed lease. I think that some folks just given the remote working paradigm that we are going through right now, I do think you're going to see a hub and spoke approach. I know a number of companies that have downtown presences are also going to be employing satellite offices in Virginia or in Maryland. I think that we've definitely without question we – if you look at our same-store numbers and multifamily, I know you asked about office, but you look, people are definitely moving out there. And I think that folks want to live close to where they work. So I would anticipate some of that follow-on activity. I don't think there's some massive trend we're observing over the last 90 days Bill, but that's clearly something that we're going to keep our eye on moving forward.

That said, Bill, I'd say what – Grant, you can correct me if I'm wrong, like 70% of the job growth, for the last period of time has been in the Northern Virginia, it's been really the growth engine for our region for a while. And tech is a huge part of it and the contracting and the government contracting has increased that hasn't decreased. And I think you know about many big tech firms that are moving are in big ways, HQ2, Microsoft, Facebook, even Wallmart Labs, people like that. So I just think there's just more job – there's just more growth coming in Northern Virginia.

Great, I appreciate the time and thanks.

Thanks Bill.

And as there are no further questions left in the queue now. I'd like to pass the floor back over to management for any closing remarks.

I would like to thank everyone again for taking time to join us this morning. We appreciate your continued support during these challenging times and we look forward to talking with you over the coming weeks and months. Thank you and have a good day.

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.