Welcome to the Washington Real Estate Investment Trust Year End 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 website and to 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 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 8 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 year-end 2018 earnings conference call. 2018 was another year of solid operational performance, continued asset recycling and further balance sheet improvement for WashREIT. We delivered approximately 2% core FFO per share and 3% same-store NOI growth on a year-over-year basis. We upgraded our Northern Virginia office portfolio with the sale of Braddock Metro Center in Alexandria and the acquisition of Arlington Tower in Rosslyn. We continued to upgrade our DC office portfolio with the sale of 2445 M Street in the West end, having acquired Watergate 600 on the DC Waterfront in 2017. And we ended the year with a net debt to adjusted EBITDA ratio of 6.2 times. As a result, we have entered 2019 with a strong balance sheet and a higher quality, better located portfolio with exciting lease-up opportunities in a region that is expected to benefit from a continued rise in defense spending and Amazon HQ2 related growth. This year, we are focused on multiple commercial lease-up opportunities that represent meaningful, long-term NOI growth for our shareholders. Our 2019 goal is to create solid visibility on our future revenue growth by executing commercial leases throughout the year and by delivering the first units at the Trove, our multifamily development by the Pentagon in the fourth quarter of this year. Let me now provide you with a progress report on our key commercial leasing opportunities that were referenced in the 8-K we filed last November. Starting with Watergate 600, we are very close to signing a 51,000 square foot long-term lease for the top two floors of the building with a blue chip company that considers Watergate 600 to be its best relocation option, as it looks to expand its regional footprint. We expect…

Thanks, Paul and good morning, everyone. 2018 net income attributable to controlling interests of $25.6 million or $0.32 per diluted share exceeded 2017 net income attributable to controlling interests of $19.7 million or $0.25 per diluted share. Core FFO of $1.86 per diluted share for the full year 2018 was in line with the midpoint of our most recent guidance range. We grew core FFO per share by approximately 2% year-over-year, partly due to 3.1% year-over-year same-store NOI growth. On a sequential basis, fourth quarter core FFO grew by a penny, primarily due to lower overall building operating expenses. Expenses, as a percentage of revenue, improved 110 basis points for the second consecutive year to 34.5% for full year 2018, driven by expense management initiatives across the same-store portfolio as well as lower real estate taxes. Core funds available for distribution or core FAD was approximately $121 million in 2018, representing a 78.4% payout ratio, which was better than the 80% payout ratio we had targeted for the year. For 2019, we are targeting a core FAD payout ratio of approximately 80%. Our full year 2018 same-store NOI growth of 3.1% GAAP and 3.7% cash was driven by higher revenues across the office, multi-family and retail portfolios, as average same store occupancy grew by 40 basis points year-over-year and rental rates and recoveries across all three property types trended higher. Moving onto office and retail leasing, we leased approximately 153,000 square feet in the fourth quarter, including 52,000 square feet of new leases and 101,000 square feet of renewal leases. Office renewals included the 42,000 square foot early renewal of one of our top 10 largest tenants. As we had detailed in the 8-K filed in November 2018, the renewal was for 11.3 years at rents that were single digit…

Thank you, Steve. I would like to take this opportunity to announce that Tom Bakke, our Chief Operating Officer, has informed the company of his retirement. As many of you know, Tom joined Washington REIT in 2014 to help transform the company. Tom turned the operations around by implementing a portfolio management model that increased accountability and drove superior performance. In a nutshell, Tom helped create WashREIT 2.0. I can't thank him enough for his many contributions, his passion, his leadership and for his friendship over the years. One of Tom's greatest successes is the development of an extremely talented team of portfolio managers across all three asset classes. I'm confident in their leadership and ability to achieve our operational and strategic goals. We wish Tom all the very best for this new phase of life and his very well-deserved retirement. To recap, we are excited about our multiple commercial lease-up opportunities and look forward to updating you on our progress on those, as well as on the robust, multi-family and retail growth, we expect this year. As our guidance implies, we are proactively reducing our G&A by approximately 17% at the midpoint of our 2019 guidance range, as we cut costs and maximize the FFO we generate for our shareholders, while working to create long-term NOI growth through leasing. We have entered 2019 with a strong balance sheet and a capital plan that enables us to deliver the first units at the Trove later this year. 2019 is about leasing execution at WashREIT and we look forward to updating you on our progress throughout the year. With that, let me now open the call to answer your questions.

[Operator Instructions] Our first question is from Blaine Heck from Wells Fargo. Please go ahead.

Thanks, good morning. Paul, thanks for all the commentary on Space+, that was very helpful. And it seems like pretty significant growth initiative for you guys. I guess how much of your office portfolio do you see as available to convert into Space+ and how big do you envision that segment could eventually represent?

Blaine, Tom is pioneering this over the last -- over the last six months and so, I'm going to just ask him to comment on the metrics.

Yeah. Thanks, Paul. So, Blaine, I think we've touched on Space+ before, it's our flexible space program and we do have a lot of things happening in the office business. One of the most important things is this push toward more flexibility and more experiential type offerings. You hear a lot of co-working data sort of geared and it could grow upwards of 10% of the office business. I think that's sort of on the aggressive side. The way we look at it is we are creating an offering sort of in the midpoint that addresses the small to mid-sized tenants that have a need for speed, that have a need for flexibility, have a need for sort of a broader service offering. And we think it could be upwards of 5% of our portfolio. So right now, it's probably about 3%. I don't think it gets much above 5, but we want it to be broad enough that we can address these evolving tenant needs in pretty much all the sub-markets we are in.

Great, that's helpful. Maybe for Paul or Steve, you guys have been trading at a discount to NAV most of this year so far. Good to see some of that is coming back today, but have you guys contemplated share repurchases and how do you think about that opportunity to invest in your own stock versus maybe going out and purchasing something at market cap rates?

Well, Blaine, I think we've probably been asked that over the years from time-to-time as the markets have fluctuated. It's certainly in our capital allocation analysis. We've always said that we do consider it, but we would do it on a leverage neutral basis to keep the balance sheet strong. And so to do that, the debt that we would be paying down alongside of a share repurchase would be on the cheaper end of our debt, it would be our short-term debt that we could pay down and we look at like their stock price, where we're at. It's -- we are in the 5s and we still have the Trove where we have, a guaranteed maximum price contract. We're well along -- the initial stabilization yields are over a 6 in that development and we think -- thereafter, we think that's an improving market for further growth and in the near term, we still have some of our renovation programs going on in our units, in our multi-family value add properties and that's been yielding in the mid teens. So, it is something that we do evaluate. It has not crossed the threshold is our best allocation to capital at this point.

Okay, makes sense. And then last from me, you guys have guidance for around 200 million of dispositions this year, can you just talk a little bit about what you guys are targeting to sell, whether it's going to be kind of one-offs or larger deals and maybe how you're thinking about the timing of those sales? Is there anything being marketed at this point?

Blaine, nothing is being marketed right now. But I would say that, as we look at our portfolio, we have some office assets that are probably reaching their inflection point and that has just been due to Tom's team's great leasing efforts. And so, we're, I think, at the end of the value creation from our standpoint there. And so those are types of assets we would take to market. Steve, just in terms of timing.

Sure. I mean, considering we're already a little bit into the year, our own models and forecasts assume that we get, I'd say, less than half done around mid-year, with the balance of our guidance range toward the end of the year.

Great, thanks. And Tom, good luck on everything in the future.

Thanks, Blaine. Appreciated. Great.

Our next question is from John Guinee from Stifel. Please, go ahead.

Great. Nice job. And Tom, we will miss you. Talk about the Trove, it looks to me like it's almost walking distance to the Pentagon, to Fashion Square, Pentagon City and a couple of blocks further east is the new Amazon HQ2 headquarters. Can you actually walk in a tunnel under 395 to get to it or do you have to cross 395 on foot?

You have to cross 395, but John, I think from the Trove, we will be running shuttles like we do from the Wellington, its sister property on the site, so we don't want people running across 395.

And is -- $300,000 a unit seems pretty reasonable. Can you talk about how you got there, did you allocate any land to it, did you have to build a bunch of structured parking et cetera?

Sure, John. So 300,000 units, it's just a hair above 300,000 a door. I think our competitive advantage, you hit on it, is really the land basis, our hard costs and I'm just going to go the Tower and a parking, but our hard costs are around 235 a door, soft costs around 36 and our land basis, we think if you were to try to go out and buy land and replicate what we're doing on the Trove, call it be about 70,000 a door and our land basis is just between 36 and 37 a door. The only thing I would add to that, again, if you're comparing it to kind of a market rate deal on our math, since we have looked at other opportunities, yes, you do, as you pointed out, John in terms of parking, if you're doing above grade, we're allocating probably 22,000 a stall for that and for going below grade, we're probably averaging around 45,000 a stall.

Great. Okay. And then shifting to FFO guidance, it's down $0.10 year-over-year, which on 80 million shares equals about $8 million. Your FFO for 2018 is $146 million. So, it's over a 5% decline year-over-year. What on earth is driving a $8 million, 5% decline in FFO?

John, this is Steve. I think one of the reasons that we wanted to give visibility in the 8-K that we filed in November 2018 was to kind of lay out the lease expirations. So they're laid out and pretty much in sequence with 60,000 square feet happening right off in mid-January. And so, and we also talked about in this call, our efforts in 2019 are really, we believe we're under the way, will be steady lease up throughout 2019 for the spaces that we have available. So I think in most of that, we will be really contributing in early 2020 and some of the leases will continue, in the 8-K, will continue to expire in May and August. So we believe, looking at our numbers, we're certainly not ready to give full guidance for 2020. But we believe that both same-store and overall -- overall same-store and office same store will then return to same-store growth in the first quarter of 2020.

Got you. Thank you.

[Operator Instructions] Our next question is from Daniel Ismail from Green Street Advisors. Please go ahead.

Great. Thanks, guys and good morning and Tom, all the best in retirement. Just a quick question on the dispositions, are there any tax consequences associated with the dispositions?

Dan, it is Steve. Right now, we always do tax planning and for having already recycled as a management team over $1 billion of capital, we've always made sure that is tax efficient. Right now, we believe that the guidance that we put out and the way we could execute it that we wouldn't have to reinvest the proceeds, but it really depends on what you sell and when you sell it. So it's something that we're always mindful of and that we would always keep an eye on.

Great. And I think you mentioned over the last few quarters some difficulty in finding acquisition opportunities in your -- the sweet spot of value add multifamily, can you expand on that and how you guys have seen the pipeline over the last quarter.

Sure, Danny. I think if you're looking at the DC market right now, I would say that predictably, given all the volatility that we saw in December, we saw a little bit of a pull back by some of the portfolio managers that we thought were going to bring product to the market in January. So I think we've had a slow start there. But we do see a lot of product particularly office product coming to the market. I think that is also pretty predictable, especially in Northern Virginia. I think you're going to really see a surge in Northern Virginia office product coming out, trying to draft off of the successes of both the Silver Line and HQ2. The type of -- we're still not really seeing any core capital out there, looking for product, it all has to have a value add component. I think as we've tried to say to you, we are going to continue to look for multifamily product, that's the part of the portfolio we want to continue to recalibrate. When I say that too, I think there's going to be some eye-popping numbers, I mean the rumor is now the Meridian, that's on the market, directly across the street from Amazon will trade in the upper three caps, that is not the products that we're looking for, we think that we are looking at some multifamily, both one-offs and portfolios right now. And the opportunities that we do look at are at better cap rates and I think have better -- offer better value propositions for our shareholders.

And maybe for the ones that you get a fee income to market, has pricing changed at all, maybe excluding the ones around National Landing?

I don't think we have enough data points for a fact pattern there. I think if anything, they've been flat, I think when you look at anything, I mean I can't pick up an OM that's come across my desk without giving me the precise proximity to HQ2. So I think people are definitely looking for a little juice there, but I think smart investors are discounting that. It's still -- like I said earlier, it still has to have, Danny, some type of value add characteristic to really get the juice and I think people are really looking for, just given the inflow of jobs over the next 10 years or what's projected to be and drafting off of defense and tech in Northern Virginia, I really think the multifamily is still kind of the sweet spot.

And maybe just last one for me, the Riverside land parcel, can you guys give us an update on your plans for that piece of land and maybe expectations for any type of development starts in the near future?

Well, we're in design development on Riverside right now. I think you're talking about the piece of land that was out in front of our property. Yes, we're still examining that. Our land basis right now in Riverside is, I want to say, between 20 and 21 a door and we think market land value if I was to do a market rate deal down there, it's probably about 35,000 a door. So roughly about a 40% discount, but we are looking at Riverside both with and without that parcel and as soon as we have something further to comment on about Danny, we'll let you know.

Okay, great. Thanks guys.

Thank you.

Our next question is from Chris Lucas from Capital One. Please go ahead.

Good morning, everyone. Tom, congratulations. Good luck and thanks for all of your help over the last several years. I appreciate it.

Thanks, Chris.

As it relates to the Trove, Paul, just kind of curious, I know Phase 1 is up and you're moving forward and expect delivery of units later in the year. Is Phase 2 under construction at this point and if so when or if not when will you start construction for that phase?

Phase 2 is not under construction right now. I believe that we are shooting forward in the back half of '20 in terms of delivery.

Right. So, when would you have to get started in order to meet that delivery timeframe?

Later on in the year, Chris.

Okay. Will the lease up pace at the Phase 1 impacted all your decision to move forward with Phase 2?

No. It will not.

Okay. So you're going to press forward with that. Okay. And then as it relates to sort of longer-term lease expirations, we're inside of two years now in World Bank, when should we be thinking about how to handicap that renewal?

This is Tom. I think we are in discussions with them right now, Chris and I think there is -- there are some things going on at the World Bank as we know, but the real estate department seems fairly focused on trying to get something done. So hopefully, we'll have some good news at some point in the not-too-distant future.

Okay, thank you. And then on the dispositions, I guess just kind of curious, you mentioned targeting office. I guess, just curious whether or not these would be lumpy transactions or whether or not there are some granularity to sort of the mix?

I think there will be some granularity if it's office, they're kind of on an asset management basis, kind of when they hit their different inflection points, so there may be separate opportunities and the timing might be different.

Okay. And then on the -- on Tom's retirement, I guess, just trying to understand, Paul, will you be back filling that role or how are you thinking about -- what your plans are there?

Well, like I said in my remarks, Chris, I think Tom has built out an exceptional team. I think they're kind of a self leading team, the three portfolio managers, and so we're not going to backfill it at this time. But, we will keep our options open going forward.

Okay. And then maybe if I could just pivot over to the G&A guidance, can you give me more color on just sort of how you're able to [indiscernible] that much savings year-over-year, I'm just trying to get my arms around it.

Sure, Chris. Well, in addition to everything else we've been executing over the last couple of years, we've had pretty large initiatives to invest in our technology and our processes. And also in our leadership development to prepare people to step up into bigger roles and all of that's creating efficiencies and we feel that it was very timely, we believe those efficiencies are going to allow us to reduce costs this year and that would be appropriate for our shareholders in this period of where revenues are down, what we're going to lease up again.

Okay, thank you. I appreciate it.

Thanks, Chris.

Thank you. This concludes the question-and-answer session. I'd like to turn the floor back to management for any closing comments.

Thank you, everyone. Again, I would like to thank you for your participation on our call today and we look forward to talking with many of you soon at the upcoming conferences. Have a good afternoon. Thank you.

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