Washington Real Estate Investment Trust : Transcript Q2 2021

Trading Under the Symbol ISDR

Transcript of

WashREIT

Second Quarter 2021 Earnings Conference Call

July 30, 2021

Participants

Paul McDermott - Chairman, President & Chief Executive Officer

Stephen Riffee - Executive Vice President & Chief Financial Officer

Amy Hopkins - Vice President, Investor Relations

Grant Montgomery - Vice President, Head of Research

Drew Hammond - Vice President, Chief Accounting Officer and Treasurer

Analysts

Tony Paolone - JP Morgan

Presentation

Operator

Welcome to the Washington Real Estate Investment Trust Second 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, Amy Hopkins, Vice President, Investor Relations will provide some introductory information. Amy, please go ahead.

Amy Hopkins - Vice President, Investor Relations

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, 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 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, 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.

Paul McDermott - President & Chief Executive Officer

Thank you, Amy, and it is good to have you back following your maternity leave. Good morning everyone, and thanks for joining us today. Last evening, we released our second quarter earnings results. Core FFO was at the top end of our guidance range and above consensus expectations. We will of course discuss those results, but we know our transformation that we announced on June 15 is top of mind for investors and the key focus of this management team.

Trading Under the Symbol: ISDR

Transcript:

WashREIT

Second Quarter 2021 Earnings Conference Call

July 30, 2021

Today I will update you on the progress of our strategic commercial portfolio sales and our research-led Southeastern markets expansion. I will also address the strengthening Washington Metro multifamily market as well as Southeastern markets, and the status of our value creation opportunities. Steve will discuss recent multifamily performance and trends, our views on strategic differentiators that we believe will continue to help us succeed, our second quarter results, and our strengthened balance sheet as we execute our transformation. Then, I will wrap up by recapping our priorities for the balance of 2021 as we complete our transformation and move forward as a multifamily REIT.

Let me start with our progress on our strategic transformation. Since our mid-June announcement of the transformation, we have completed the sale of our office portfolio, excluding our best office asset, Watergate 600, for which we believe we can derive even greater value, for $766 million. We have also given notice that we are redeeming the $300 million 2022 notes and expect to complete that redemption in late August. We also are now under a binding agreement to sell our remaining retail assets to a single buyer for $168.3 million and expect that transaction to close in the third quarter. Following the retail closing, we expect to pay down our term loan by $150 million as we messaged on our webcast.

I'd like to turn now to our progress on multifamily capital deployment. As you know, we are in the final stages of a strategic transformation that has taken place over several years. We went from four asset classes to one and we are moving forward as a multifamily REIT with proven research-driven strategies, a solid pipeline of investment opportunities and a good economic backdrop. Following these transactions, not only will we have recycled over $5 billion of assets to improve our portfolio, but we also decreased leverage, increased liquidity, and lengthened our debt ladder. These actions increased our financial flexibility and unencumbered the right side of our balance sheet to position us for growth.

As we covered in our transformation webcast, in multifamily, we are experiencing positive drivers to fuel our growth from this time of post-pandemic inflection onward. In office, we were facing challenging and increasing headwinds, including increasing capital requirements, and we expect those headwinds to continue. This contrast in growth prospects boosts our confidence that we will create more value for our investors going forward through our portfolio recalibration.

We understand that these transactions are dilutive to earnings and FFO, yet we believe they are initially NAV neutral and offer a far greater opportunity to increase NAV, not only in the near term, but over the long term as well. As we discussed during our June 15 webcast, this transformation is a reset, and as such, our Board reset our dividend and we continue to prioritize the strength of our balance sheet and access to capital for the long- term. Because of this, we have enough capital to execute these transformative steps and have access to capital beyond that. Additionally, we have a roadmap to continue to grow and create value for our shareholders. We are focusing on middle income renters which is a strong, underserved and growing cohort in the Southeastern markets that we are targeting, as well as here in DC, where we have successfully been executing our affordability-based investment and operational strategies.

Over the past several months we have been actively underwriting deals in the Southeastern markets where we believe our strategies can successfully achieve long-term rent growth outperformance. These markets include Atlanta, Raleigh/Durham and Charlotte. We are positioning ourselves to acquire assets that have the targeted renter cohorts and growth opportunities by vintage to allow us to execute our Class A-, Class B value-add, and Class B portfolio strategies. We are targeting submarkets with attributes that we believe are most likely to drive

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Trading Under the Symbol: ISDR

Transcript:

WashREIT

Second Quarter 2021 Earnings Conference Call

July 30, 2021

rent growth and tailoring our specific investment strategy to best create value, just as we've done in the Washington Metro region. The pipeline has been active and while we have passed on some deals that do not fit our strategies, we see opportunities ahead that make us confident we can allocate this capital appropriately over the balance of this year. At this point, we have an initial asset under contract in suburban Atlanta and are in the process of acquiring additional assets that fit our strategies and are in submarkets where we expect to be able to grow rents. We will provide more color through ongoing updates as we close on asset acquisitions.

The markets that we are targeting are projected to be among the best in the nation in population growth and net migration over the next decade, and the already strong rent growth that we've been tracking accelerated further throughout the second quarter. Year-over-year effective rents for Atlanta, Raleigh/Durham and Charlotte grew by 14.3%, 10.3% and 10.6%, respectively, in June as reported by RealPage. New lease tradeouts were even stronger, averaging 17.9% across the three markets, and a 670 basis point inflection between April and June.

Average concessions remained in the low single digits in each market, averaging just 5.5% inching up slightly over the quarter from 5.1% in the first quarter. However, the breadth of the market offering concessions retreated markedly, with just 15% of units across the three markets offering concessions in the second quarter, down 630 basis points over the quarter.

Annual demand also surged across these markets as in-migration and household formation drove record-setting absorption. Reported first quarter annual demand had already exceeded the five-year average in each target market, yet it jumped nearly 30% higher in the second quarter. Raleigh/Durham and Charlotte posted second quarter annual demand at 156% and 151% of their five-year averages, respectively, while Atlanta's second quarter annual demand topped 186% of its five-year demand trend.

These market data points further illustrate the rationale behind our expansion into these markets, where we believe strong demand and rent growth outperformance will continue to power our expanding portfolio over the near and long-term.

Here, in our home-base markets, we also have great optimism for growth ahead.

The Washington apartment market also experienced a performance inflection during the second quarter, with significant improvement from April through June, as reported by RealPage. Year-over-year effective rents turned positive in June for the first time since April 2020, with particular improvement in June, as effective rents climbed 214 basis points higher than the second quarter average. Suburban Virginia's performance followed a similar pattern, but with even stronger growth, with year-over-year effective rent growth accelerating to 5.9% in June, 245 basis points better than second quarter average.

Average concessions in the Washington market declined 200 basis points in the second quarter, to 9.1%. The breadth of the market offering concessions also declined, with 19.7% of units in the Washington market offering concessions in the second quarter, down 250 basis points versus the first quarter.

Our current same-store multifamily portfolio has approximately 6,700 units and is 96% occupied. Our average monthly rent is just under $1,700 per door.

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Trading Under the Symbol: ISDR

Transcript:

WashREIT

Second Quarter 2021 Earnings Conference Call

July 30, 2021

Our suburban Virginia apartments have performed well during the pandemic and continue to do well, much like the Sunbelt markets we have researched and analyzed the last several years. We are slightly above 96% occupied in suburban multifamily assets, and 95.8% overall, and effective rents continue to be strengthening. Furthermore, two-thirds of our current 2,800 unit renovation pipeline is in our suburban assets and we have activated the renovation programs and are targeting low-double-digit ROIs, at a minimum. Urban effective rents have grown stronger every month since the December bottom and urban blended lease rates have turned positive on an effective basis. Meanwhile, suburban lease rate growth has been exceptionally strong, reaching over 5% on an effective basis for July move-ins.

We have now fully delivered and invested in Trove which delivered only $200 thousand of NOI in the first quarter and approximately $425 thousand in the second quarter but most importantly, its lease up now has tremendous momentum. Since April 1, we have signed 160 leases, or slightly over 40 leases per month, well above the regional average of 13 leases per month. This increased demand allowed us to further push market rents by over 8% while also reducing concessions. We now expect Trove to stabilize near year-end as opposed to our prior expectation of May of 2022.

Our multifamily rent collections have remained strong at 99% throughout the pandemic as our research has led us to focus on renters with solid credit in areas that offer a higher relative exposure to the strongest employment sectors. The combination of the strong spring and summer leasing seasons and the vaccination-led end of pandemic restrictions leads us to believe that further strengthening from here is underway.

Over the long-term, our research-forward approach has positioned us with a multifamily portfolio in submarkets with strong supply and demand fundamentals. From a demand perspective, the Washington Metro region has a significant housing shortage and an affordability crisis that is only getting worse as the cost of homeownership continues to rise. From a supply perspective, our region has been underproducing housing product at the price point that would address the growing demand, and therefore, most renters remain underserved by new supply. Our ability to successfully position ourselves to benefit from a large and growing target renter market and limited competitive supply over the long-term in our Washington Metro markets sets us up well to expand the key elements of our strategy into the targeted Southeastern markets. We intend to utilize the learnings from the Washington Metro market and further adapt to continue our growth as we geographically diversify.

We are extremely grateful to all the WashREIT team members who have diligently reshaped this company over the past several years and while we will miss those moving on to further their commercial portfolio careers, we are also excited by the team in place to continue to build our multifamily future. We are augmenting our multifamily operational leadership and team for the new markets, and we are following the roadmap that we have created over the last year, to build-out our infrastructure for the future. We believe we will create efficiencies as well as further enable our ability to scale up very effectively.

And with that, I will turn it over to Steve.

Steve Riffee - Executive Vice President & Chief Financial Officer

Thank you Paul, and good morning everyone.

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Trading Under the Symbol: ISDR

Transcript:

WashREIT

Second Quarter 2021 Earnings Conference Call

July 30, 2021

I will first cover our multifamily trends and results as well as our overall reported results for the quarter. I will also address our views on strategic differentiators that we believe will continue to help us succeed, recap our balance sheet focus to allow us to continue to be strong even after our initial deployment of this transformation capital and finally, I will discuss our outlook.

We ended the second quarter on a positive note and we are starting to experience the significant inflection that we had anticipated. All signs point to increased demand momentum, and we are seeing pricing power return.

Concessions are pulling back dramatically, effective lease rates have turned positive, and available rents indicate further improvement throughout the summer months. Rate growth on new lease executions has improved over 10% over the last seven weeks on a gross basis. The average concession per unit for move-ins scheduled for July and August is 70% lower than the second quarter average, representing a $630 decline in concessions per unit.

Blended lease rate growth improved 460 basis points from the first quarter to the second quarter on an effective basis, yet the most significant growth occurred during the last two weeks of June. The acceleration has continued into July and blended effective lease rates have already improved by another 240 basis points thus far in July on an effective basis. New lease rates have shown the most significant improvement, with average new lease rate growth improving by over 600 basis points from June to July on an effective basis.

Our suburban properties continue to outperform our urban properties and average new lease rate growth increased to 5% thus far in July on a year-over-year basis. And urban new lease rates have reached their inflection and turned positive on a blended basis for the first time on leases executed in late July. Both urban and suburban lease executions with August and September move-in dates indicate further improvement. Looking at our rents on our available homes, this upward trend is continuing into the third quarter.

Applications and move-in activity remain strong as net applications increased 35% during the second quarter compared to the prior year. Same store occupancy grew 60 basis points post quarter-end to 95.8%, allowing us to continue to push rents. And on the renewal side, there has been very good demand, and renewal lease rate growth is currently tracking above 3%, on average, with suburban renewal lease rate growth tracking above 5% on average.

Trove is now fully invested and should begin to grow its NOI contribution significantly. Leasing momentum continues to grow with Trove now over 76% occupied and 81% leased. We expect Trove to be a key growth driver in 2022 and 2023.

As Paul said two-thirds of our 2,800-unit renovation pipeline is in our suburban communities, where occupancy and effective lease rates are the strongest. When the pandemic hit, we temporarily paused our renovation programs but have since activated these programs at properties that have appropriate affordability gaps and new and renewal lease rate growth. We began by rolling out market test renovations, lining up the materials and contracts, and executing the renovations at certain assets on turns. Year-to-date, we have fully renovated over 90 units and invested capital in upgrading 80 additional units. We are securing rent increases on renovated and improved units that meet or exceed our targeted ROIs and we are picking up the pace of renovations through the

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