Welcome to The Washington Real Estate Investment Trust Third quarter 2018 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, 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 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 Web site and our periodic reports furnished or filed with the SEC for 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 the 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 9 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; Tom Bakke, Executive Vice President and Chief Operating 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 third quarter 2018 earnings conference call. Today, I would like to focus on our key leasing opportunities within the context of the current trends in D.C. real estate and increased federal spending. Steve will then highlight the main elements of our third quarter performance and provide greater color on our updated 2018 guidance assumptions. Starting with Watergate 600, we are at LOI with a large user for two of the top three floors of space that are currently leased to Blank Rome. Signing this highly coveted 50,000 square foot deal would further validate our acquisition thesis on tenants being drawn to the Watergate's iconic status and unparalleled waterfront location. The prospect is a blue chip company that considers Watergate to be its only relocation option as it looks to expand its regional footprint. As we are currently in lease negotiations, we look forward to providing further details after the lease is signed. Additionally in the current quarter, we signed leases with a law firm and then an association for over a third of the remaining floor leased to Blank Rome. Once we sign the top two floors, we will have leased approximately 80% of the upcoming expirations at Watergate 600. Moving on to Arlington tower, our collaborative suites within the space plus program are on track to deliver by the end of November. While our first floor, food and lounge amenities are scheduled to deliver at the end of the first quarter next year. Commensurate with the research we conducted with Congressional Quarterly that projected an increase in contract awards in the RB Corridor, there is robust activity among small and mid-sized office users looking for finished space with immediate availability and flexible terms in Roslyn. Tour…

Thank you, Paul and good morning everyone. Net income attributable to controlling interest was $5.9 million or $0.07 per diluted share which was higher than the $2.8 million or $0.04 per diluted share reported in the third quarter of 2017. As the 2017 quarter included the recognition of an impairment charge related to Braddock Metro Center. We grew core FFO by 1.1% year-over-year primarily due to 3.4% same-store NOI growth. Non same-store NOI declined by approximately 9.2% year-over-year due to the sales of 2445 M Street in Braddock Metro Center which were partially offset by the acquisition of Arlington Tower On a sequential basis core FFO declined mainly due to the sale of 2445 M Street at the end of the second quarter. Sequential same-store NOI was slightly lower due to a couple of known office tenant move outs as well as sequentially lower reimbursements and higher abatements in the office same-store portfolio. We delivered robust year-over-year same-store NOI growth across all three asset classes. Office delivered 4.1% GAAP and 5.6% cash year-over-year same-store NOI growth as we grew average occupancy by 80 basis points year-over-year through lease commencements at Army Navy 1901 Penn, 1140 Connecticut and 1220, 19th Street in D.C. as well as Silverline Center and Monument Two in Northern Virginia. Multi-family delivered 3.4% GAAP and cash year-over-year same-store NOI growth driven by 230 basis points of year-over-year rental growth and 20 basis points of average occupancy gains. Although one of our multifamily assets grew average rents both year-over-year and sequentially. New lease and renewal trade-outs were also strong at 3.3% and 4.1% respectively. Our Class B multifamily assets delivered 3.7% new lease and 3.9% renewal trade outs, while our Class A multifamily assets delivered 2.2% new lease and 4.9% renewal trade-outs during the quarter. And finally, retail…

Thank you, Steve. We believe prospects for a sustained acceleration in regional job growth appear bright with federal spending on the rise and large tech companies such as Amazon, Web Services and Apple looking to significantly increase their regional presence. With unemployment in the metro region at 3.5%, we believe growth at this stage in the cycle will likely result in net in-migration into the region, which should provide continued support for multi-family office and retail. Washington REIT remains a secular way to play the D.C. recovery with a platform that strategically positioned in segments with the strongest supply demand dynamics within D.C. real estate. To conclude on a topic that may be on your minds today, a few weeks ago there were media reports about Washington REIT considering a sale of all or a portion of its retail portfolio. In keeping with our company policy, we do not comment on market rumors or speculation and that will be our response to any questions on this particular topic. We delivered a stable third quarter with solid same-store NOI growth across all three asset classes and continued balance sheet strength. Washington REIT is well-positioned to capitalize on key regional growth drivers and create value for our shareholders. With that, I would like to open the call to answer your questions. Operator please go ahead.

At this time, we'll be conducting a question-answer-session. [Operator Instructions] Our first question comes from Dave Rodgers, Baird. Please proceed with your question.

Hey, good morning. Paul wanted to start with you on a comment you made early, I think in your prepared comments about spending on kind of the broader rollout of the co-working suite program that you guys have developed. Give us a sense of maybe how broad you're thinking of that program now or maybe I read too much into that. But thoughts on how much that might cost upfront and how pervasive that program could be here in the near-term?

I'll start it off and then I'll ask Tom Bakke, who is in-charge of that program to jump in. I think we're looking as an opportunity to draft off some of our current tenants and take a look at some of the vacancies within our portfolio. I think I gave some numbers in terms of total square footage that we have in the current portfolio and what we're building out. I think our -- what we're looking at in particular right now and what we're showcasing which will deliver soon is, this space plus program at Arlington Tower. And I will ask Tom maybe just to comment a little bit further on that Dave.

Yes. I think to follow on that -- the program we've talked about this on previous calls where you look at how much exposure you want to a flexible space program and some of that's dependent on the size of the building and then some of it's just dependent on the size of the portfolio and the types of assets you have in the portfolio. So we look at the Arlington Tower asset as a great example of where it's 400,000 foot building. We think Rosalyn is a perfect market to attack the opportunity with a flexible space program. We're starting off with one floor. We've got another floor behind that so that roughly be about 40k of flexible space in a 400,000 foot building so the 10% which we think is about the right amount. But our goal would be to probably not have the program be more than a couple hundred thousand across the entire four million foot portfolio and so that's sort of one way to look at it Dave.

Yes. I think that that's definitely helpful, so appreciate that. Maybe jump over to Watergate 600 really quickly and Steve heard your comments that if you were to sign this tenant, it sounds like in the fourth quarter that you can terminate the master lease. So that was clear. I think you mentioned another floor for law firm and association space, does that also fall under the master lease? And what's the timing on that?

So the master leases for three floors, if we sign the lease to build out the top two floors then we would break the master lease for that. We've got about one-third of the third floor already spoken for. So we won't be getting master leasing come for the space that we are building out but we are leasing for that. So that would leave the remainder of the third floor under the master lease until we get further leasing done.

Okay. That's helpful. And then Paul, sorry, I can't resist. On the retail side, you said there's a lack of options out there. Regardless of whether you may or may not sell it. What are the pros and the cons of keeping it at this point given the opportunity to kind of invest in other asset classes that seem to be having higher transaction volume?

Well, I think what I said is I'm not going to comment on the retail portfolio. I didn't talk about options out there Dave. We're always looking for opportunities on a macro level or create value for our shareholders on a long-term basis. We're going to consider all opportunities as they're presented. But aside from that I can't really comment any further on the retail portfolio.

I think the other thing Dave we've talked about is that 90% of the portfolio's community or neighborhood centers which we know are frankly some of the best real estate to own at any time in any cycle. And so we sort of like retail in that regard.

Okay great. Thank you for the color.

[Operator Instructions] Our next question comes from John Guinee, Stifel. Please proceed with your question.

Great. First congratulation on the ATM execution in the recent quarter. Very, very smart. Drill down a little bit more on Blank Rome. What's the master lease gross and net rent? And then, what do you think you'll be able to sign your next 50,000 square foot lease? And what kind of TIs will it take to get there?

John. This is Tom. So the deal is still in negotiation. I would tell you that any big deal in the market you sort of have a pretty good flavor on what those economics look like. We think we're outperforming the market at this point. That being said, the master lease is roughly 215k a month. And so depending on how this deal plays out that would go away at that time.

I know that, but it is 215k get replaced with 180k or 300k and what's it cost to put that new tenant in?

Yes. We just can't really comment on it right now. It's still in negotiation. And frankly, we got a lot of work to do to get it done. We -- presumptuous to even contemplate those numbers at this point.

Great. And then, second, I know you hear a lot of news in D.C. that the majority of new leasing relocations is happening along the Silverline from Tyson's out to Dallas. Can you sort of drill down a little bit Tom or Paul in terms of what sub-markets are benefiting and what aren't and sort of an evolution as these millennials get a little older.

I think our observation would be John that we're definitely seeing our RB corridor, Tyson's and the toll road in close proximity to Metro i.e., the Silverline benefiting the most. I think if you're beyond probably a half a mile to three quarters of a mile off of that we're not seeing any of the large deals really going into those areas. And in terms of millennial clustering that you're referring to I mean we're certainly seeing that around the rails. But specifically I would say that those three particular markets we think are probably getting the lion's share. But I hired but also dragged back into D.C. I think the ballpark area, and the capital riverfront while there's a lot of supply. There's also a tremendous amount of absorption taking place there. And those are probably more for people that are that are working within the confines of the district.

And then, the last question is, you hear about these gut rehabs in the CBDs and the market's very aggressive you're up to 10, 12, 14 dollars per square foot for re-lease year for tenant concessions. How is that affecting your bread and butter product in the CBD.

Well, I'll comment on a couple of things. New development and some of these glass boxing that you're seeing John when I look at new development right now and I'll just pick on the CBD for example. I believe the numbers I've seen is there's 1.8 million square feet in the CBD and 70% and that's under construction, 70% of that $1.8 million is being priced at eighty dollars a square foot or greater. And so, then I go to the glass box which still has kind of the same deficient eight point two foot ceiling height finished and 20 by 20 column spacing. And then, I drill down to probably an average B rent in Washington D.C. in the CBD being $55. We just have not really seen a tenant that is going to keep the same type of footprint decide that they want to pay anywhere from $15 to $25 for a floor to ceiling glass. The relocations where we're seeing people compress and give back space. Those are really gravitating towards new construction and particularly in these redevelopments that you're referring to, we can name a couple buildings right now that yes they've done a pop top, they are probably over nine feet on the top two or three floors that is getting leased as well as the street retail from a just monetization building and monetization standpoint. It's really the commodity. It's really the commodity lower ceiling height space in the middle that we're seeing probably very stagnant in the leasing market.

Great. Thank you.

Thank you, John.

[Operator Instructions] Our next question comes from Chris Lucas, Capital One Securities. Please proceed with your question.

Good morning everybody. Hey Steve. Just a quick follow-up question on the lease accounting charges that you mentioned. Is that a 9-month or a full year number that range that $1 million to $1.5 million?

That's a full year impact for 2018. We really don't have a rest with the '19. If that was said, it had been implemented in '18.

Yes. I guess the question is, does leasing volume matter to that number much. I mean is it or is it a pretty static number?

I think it's going to be pretty representative. It really depends on what you use to capitalize and who used to do your leasing and your legal work and your support work. So I think it will be representative for '19, but we still have a little bit more work to do before we finalize that.

Okay, great. Thanks. And then, Paul bigger picture as you look at the market from the -- in terms of opportunities in the office, the apartment side, is there any place that you find particularly attractive or maybe set differently what's the least unattractive pricing out there in the marketplace right now between office and apartments.

Well, Chris, it's hard to pick just one, but I mean I'll step back a second. Let's talk about what we're kind of competing with right now. And this is both for multifamily and office. Definitely have seen kind of a drying hub of core capital, a bulk of the -- the bulk of the capital that we're competing against is really value-add capital and that that can be either domestics or hedge funds. We've definitely seen the Asian capital pull out. Interestingly Chris just on some of the value add deals that we're seeing downtown I think three of the four deals that I've heard that have been tied up downtown our South American Capital and so that that's kind of a new one for us. I would say the elements of the deal where we think the pricing where there's just a disconnect. And I'll pick on say a value add multi-family or excuse me value add office deal in the CBD right now. Let's say that deal is probably 80% occupied and the sales pro forma is at 95%, where I think the disconnect we're seeing between sellers and buyers such as Washington REIT would be is on that 15% delta that 1% occupancy delta where we're hitting that pretty hard. We're not getting any credit to get it to ninety five percent stabilization because we think that that is a artificial number. Most of these value-add [BE's] [ph], usually have a store cloak somewhere between 90% and 92%. So we're not giving credit for that 30 basis points and that's quite frankly where a lot of people are losing deals. And multifamily, Chris, I think it's really the value-add capital. I think our multifamily team has really done a good job identifying affordability gaps in the submarkets that they are in. But we are definitely seeing people either not put them enough in to achieve that affordability gap or allocate capital that they think is value-add capital that they're going to get mid-teen to returns. And we think it's capital, they're going to need to put in just to hold the rents that they have from a competitive standpoint. And the cap rate compression has been fairly dramatic especially in the multifamily space over the last 12 months. I think as we've talked about before.

Great. Thank you. Appreciate the time.

Sure, Chris.

And if there are no further questions, I'd like to turn the floor back over to Paul McDermott for any closing remarks.

We'd like to thank you all for your time again today. I would like to thank everyone and we will look forward to talking with many of you soon. Have a good afternoon.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.