Welcome to the Washington Real Estate Investment Trust First Quarter Earnings Conference Call. As a reminder, today's call is being recorded. At this time, I would like to turn the call over to Amy Hopkins, Vice President of Investor Relations. Amy, please go ahead.

Good morning everyone and thank you for joining us for our first quarter earnings call. On the call with me today are Paul McDermott, President and Chief Executive Officer; Steve Riffee, Executive Vice President and Chief Financial Officer; Drew Hammond, Vice President, Chief Accounting Officer and Treasurer; and Grant Montgomery, Vice President and Head of Research. Before we begin, I would like to remind everyone that this conference call contains forward-looking statements that involve known and unknown risks and uncertainties, which may cause actual results to differ materially, and we undertake no duty to update them as actual events unfold. We refer to certain of these risks in our SEC filings. Reconciliations of the GAAP and non-GAAP financial measures discussed on this call are available in our most recent earnings press release and financial supplement, which was distributed yesterday and can be found on the Investor Relations page of our website. I'd now like to turn the call over to President and Chief Executive Officer, Paul McDermott.

Thank you, Amy. Good morning, everyone, and thanks for joining us today. Our first quarter results reflect the beginning of the earnings momentum that we expect to generate over the coming years as we capture the strong rent growth embedded in our portfolio and continue to expand our footprint in the Southeast. On today's call I will provide an update on our geographic expansion, which is progressing well and is delivering results that exceed our initial expectations. I will then discuss first quarter operating highlights and the historic multifamily market conditions in the Washington Metro and Atlanta. I will also touch on the latest progress on our operating model and technology transformation, which is focused on resident satisfaction, and driving better performance and operating leverage as we scale the company. Steve will discuss our first quarter results and performance highlights, our 2022 guidance, and the earnings momentum that we are building which will carry over into the years ahead. I'll start with our expansion into the Southeast. In March we entered into binding agreements to acquire two garden-style communities in Cobb County, Georgia for $178 million, which completes the full deployment of the net proceeds of our commercial asset sales at a combined cap rate of 4.25%. Following the completion of these acquisitions, our Atlanta portfolio will include over 1,800 apartment homes which represents over 20% of our total apartment portfolio. The Cobb County communities align with our Class B Value-Add strategy, offering price points that range from 80% to 95% of their submarket averages and the opportunity to renovate a portion of the homes. Following these acquisitions, our total renovation pipeline will grow to 3,000 homes. The communities also offer the opportunity for immediate operational improvements as we onboard them to our daily pricing revenue management system. Cobb County,…

Thank you, Paul and good morning everyone. I'll start with an update on operating trends and will then cover our first quarter results and 2022 outlook. The year is off to a very strong start. Occupancy and retention remain very strong and are supporting low double digit effective lease rate growth across our portfolio on average. For same store move-ins that took place during the first quarter, effective new lease rate growth was 10% and effective renewal lease rate growth was 9.2%, which blends to 9.5%. For Atlanta move-ins that took place during the first quarter, effective new lease rate growth was 16% and effective renewal lease rate growth was 12.5%, both outperforming our underwriting as we are taking over new assets. New and renewal lease rate growth continue to trend upward. Renewal lease rates have outperformed our expectations so far this year driven by strong demand and very high retention. For leases signed thus far in April, we achieved blended lease rate growth of 20.5% in Atlanta and 11.5% in the Washington Metro on an effective basis. We expect blended lease rate growth to remain very strong through the spring and summer months. As we head into the spring and summer leasing seasons, our portfolio is positioned with the best growth prospects in recent history. Occupancy remains strong, with a forward trend that will allow us to continue to increase rents. Same store average occupancy was 95.8% during the quarter, up 150 basis points compared to the year ago period. Total same store occupancy increased to 96% post quarter end. Our loss-to-lease stands at 16% for our non-same store portfolio and 9% for our same store portfolio which blends to a total loss-to-lease of 10%. We expect to capture our loss-to-lease over the next 12 to 16 months, as…

Thank you, Steve. To conclude, we are pleased with our strong start to the year and the solid fundamentals that we are seeing across our portfolio which signal outsized growth this year and into 2023. Our Atlanta acquisitions continue to outperform our initial expectations and lease rate momentum at our Washington Metro apartment communities is the strongest we've seen in over 20 years. Over the coming year, we are focused on growing and geographically expanding our portfolio, capturing significant market rent growth as our portfolio turns, executing value-add renovations, launching our new resident-focused brand and culture, and weaving ESG into every aspect of our business as we execute our internal infrastructure transformation ahead of internalizing property-level operations. And with that I'll open the call up to answer questions.

Thank you. Ladies and gentlemen, the floor is now open for questions. Your first question today is coming from Blaine Heck . Please announce your affiliation then pose your question.

Great thanks. Blaine Heck from Wells Fargo here. Paul, can you talk about what you're seeing in terms of pricing in each of your key markets? Have you seen any backup in cap rates in any segments of the market given the rising rate environment? Or has pricing remained really competitive, kind of throughout the beginning of this year?

I think Blaine, great question. I'd answer that a couple of ways. We have not seen any material movement in cap rates. I know that we've had, over the last 12 months we've had cap rate compression in DC. I think first quarter to first quarter year-over-year; I think it's been about 40 basis points in Atlanta. I think the cap rate compression has been about 45 basis points, but what we have seen with a rising interest rate environment is really kind of on the seller side. We're definitely getting more feedback from selling brokers about a preference for cash buyers where we're seeing more portfolio deals come to the market, Blaine as I think people are trying to minimize execution risk for the second half of the year. I would say our deal team is getting calls more on a premarketing basis. Brokers are going to their sellers saying, hey, I've got three to five cash buyers. Do you want me to do a quick pre-market and see if we can select from here rather than doing a full, protracted marketing process? And the sellers are saying yes, and they're following that up, at least some of the larger portfolios that we've looked at that they are trying to stay away from fully lever buyers and don't want to take on any type of appraisal risk in the process. But it's clear to us, Blaine that certainty of execution has really jumped up the chart. And I think you're going to see a bit of a thinning of the herd as the year progresses.

Okay, that makes a lot of sense. And then just sticking with the potential impacts from rising rates and inflation as well, you think of renters in Class B properties are any more sensitive to rising rates and rising prices. And it doesn't seem like you've seen any pushback on rent increases that might be attributable to that squeeze on, on your tenant's purchasing power, but do you think there is any tipping point on that subject in the future?

Blaine, this is Steve and then maybe Grand will throw in a little color, too. So far, all of our indicators are, we're getting record retention. We're getting the strongest trade-offs that we've had historically. We're really not experiencing bad debt in a significant way. In fact, year-over-year, our forecast for bad debts is down 20%. So all the early indicators are that we're not really seeing any credit issues in our portfolio. Grant always researches as part of our capital allocation process: Who the employers are for the cohorts that we're allocating capital to? And we attribute a lot of that to just, you know, who our tenants and residents are? Grant and if you want to add anything?

Sure. Happy to and sort of add to that. So Blaine, we are seeing, in terms of our rent-to-income ratio it is over the last 12 months, it's remaining stable where we have seen historically and as Steve said, we track income ratios, but we also look at more high frequency data that Steve touched on, like collections and retention, because we do believe they do give you an immediate look at any changes that are occurring. We are seeing strong income growth in Atlanta, for example it's up 6.6%. And we do look at the industries that we have exposure to, and I think I have mentioned this in the past but some of the ones that we were exposed to most such as trade transportation, utilities and professional services are actually outperforming some of the headline numbers that you may see around the market. So thus far, we are not seeing anything showing up in our portfolio performance, even in these sort of early indicators that Steve mentioned.

Great. Thanks guys. Maybe just one more from me. Paul, can you give us an update on any conversations or potential interest you've had regarding the sale of Watergate? Have you seen any kind of positive signs in the investment sales market that might suggest it's getting closer to that optimal time to sell that property or vice versa?

Well, a couple of things, Blaine, let's start with leasing. The top leasing in the market in DC right now is probably a short-term, two-to-three-year spec suite that's basically turnkey ready-to-go. And with that as a backdrop, we still have a couple of years left at Watergate that we would like to complete. And I think we've only really had about 90 days to establish a fact pattern. And I still think there's ample room for recovery here and I don't want this, as you know we put a lot of blood, sweat and tears into that asset, renovating it and getting it. It still has eight years of WALT left on it. And we just don't want to have that asset positioned as any type of distress sale. So we're still letting the market recover. It is not a super long-term hold for us, as we've said on other calls. So, I think we'll know it when we see it, Blaine, but we'll keep you apprised of it as we move forward.

Very helpful. Thanks Paul.

Thanks Blaine.

Your next question for today is coming from Anthony Paolone . Please announce your affiliation then pose your question.

Thanks, JP Morgan. I guess my first question is Paul, I think you mentioned your G&A is effectively at a level that can support twice as many units as you have. And so I guess just trying to think through what the governor is in terms of really getting to that higher unit count and whether it's just the need for maybe more equity, or more capital, or is it just the pipeline is what it is, and you'll get the deals done as they happen?

Hey Tony, it's Steve. I'll start it and Paul can probably round it out a little bit. I think we've said this all along and we've executed a lot of transactions, over $5 billion of trades and repositioning this company. And we say it and I think we live it, that we work both sides of the equation at the same time. So we look for the opportunities to scale and then we match the right capital to do it. I think we're solving for two things at the same time. One is to profitably scale the company and the other is to geographically diversify it. I think there's multiple levers that we look at and evaluate. Pulling sometimes equity to do it will help with both. Sometimes we're looking at opportunities with portfolios where a structure, including units will help you tie up and scale faster. We keep a low leverage and complete pretty vanilla balance sheet and we have our maximum liquidity. So it gives us leverage and debt as a potential. And then there's our research is always looking at what's the right inflection point to recycle out of some assets into higher growth profile assets or assets where we wouldn't want to continue to reinvest capital into an asset because we see a greater and higher value. I think we'll continue to play all elements of the playbook. I think what we've done so far is a one at a time thing and we've certainly used our transformation capital. But I think we've seen some portfolio opportunities where there might be some value in what we can provide structurally above just normal equity prices. And we're looking at that as an option too. So the whole playbook is open, clearly the world's volatile and what might be the right way to go today might be different in a couple of months. So we keep evaluating all options.

Tony, the only other thing I'd add to that is that we consistently get calls from outsiders in terms of privates and that want to do ventures that are looking to see something. I can tell you that since we've made the switch and signal more expansion into the southeast markets, we've never seen more portfolio deals than we're seeing right now. So I think our ability to scale. If you had asked me this time last year where I felt like it was really more of a one-off environment. We're probably underwriting five or six portfolios right now, and that has been a bit of a shift from 2022 from 2021.

Okay. So I mean, is it fair to say that there's $100 million that you outlined for midyear to kind of round out the initial repositioning, that's one thing. But there's a chance that we could see like a portfolio or something that we're turbocharged.

We're only guiding, you're exactly right. I think we're only guiding what's visible and what we don't need additional capital for. But we are exploring all of those creative options and it's our goal to both scale the company profitably and to geographically diversify.

Okay. And then just another item, the renovations. What are you spending per unit on those these days? And you mentioned $8 million in 2022, just curious like in 3,000 units, curious like what the governor is and doing either more or less of that?

I will start off and then Steve if you want to jump in. Right now in the DC Metro market on renovations like something, Tony, like the Assembly, we're probably $13,000 to $15,000 a door and then Carlyle that we bought down in the Atlanta markets. That's probably $10,000 to $12,000 a door. And we're looking as Steve highlighted we are looking at low-to-mid-teens for those. It's also based on availability, Tony. I mean, we try to make as you know, you've known us for a long-time, we're trying to maintain that affordability gap when we do those renovations, it's based on availability. We've had pretty high retention in the first quarter here. So we're not actually getting access to the same amount of units that we normally would, but as that fluctuates, you asked what one of the governors was high retention and then also are we going to get paid for it while maintaining that affordability gap. So we try to include all of that in our calculus as we evaluate renovation opportunity.

Okay. Great. Thank you.

There are no further questions in the queue. I would like to turn the floor over to Paul for any closing comments.

Thank you again. I would like to thank everybody for their time today. And we look forward to seeing many of you in the near future. Thank you.

Thank you ladies and gentlemen. This does conclude today's event. You may disconnect your phone lines at this time and have a wonderful day. Thank you.