Welcome to the Washington Real Estate Investment Trust Third Quarter 2019 Earnings Conference Call. As a reminder, today's call is being recorded. Before turning over 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. Please note that our conference call today will contain non-GAAP financial measures. Please refer to our most recent financial supplements and to our earnings press release, both available on the investor page of our Web site and to the periodic reports furnished or filed with the SEC for definitions and further information regarding the use of these non-GAAP financial measures and a reconciliation of our GAAP results.Please also note that some statements during this call are forward-looking statements within the Private Securities Litigation Reform Act, which 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.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, Director 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 third quarter 2019 earnings conference call, today I would like to discuss the strategic objectives that we have achieved this year and have those achievements shape the next phase of growth for WashREIT. I will also provide an update on our multifamily strategy and how our newly acquired assets are positioned for success. And I will discuss our commercial leasing momentum as we progress towards a return to office NOI growth in 2020.Starting with our 2019 strategic capital allocation plan. Over the past six months, we have completed $1.1 billion of transactions that recycle capital out of higher risk retail assets and into value-add multifamily assets. We significantly strengthened and de-risked our portfolio, while allocating more capital to assets with greater growth potential.We expanded our ability to capitalize on the supply demand imbalance for value conscious renters in the DC area, and improved our geographic mix by increasing our exposure to Northern Virginia, which is increasingly becoming the job engine for the region. Moreover, our asset sales reduced our 2020 lease expiration by over 40%, creating greater visibility on future NOI growth.As a final point, our execution was strong in all regards. The cap rate on the combined retail asset sale was 6.3%. All-in-all, we are confident that this year's strategic capital recycling has improved our shareholder value proposition and ability to capitalize on regional demand drivers. As we look ahead to the next phase of growth for WashREIT, we expect multifamily to soon become our largest asset class. Over the near and intermediate term, multifamily growth will be fueled by continued base rent growth that will be further enhanced by value-add unit renovations, and income for the Trove multifamily development, which we'll lease up through 2020.Going…

Thanks Paul, and good morning, everyone. Net income was $332.8 million or $4.14 per diluted share compared to net income of $5.9 million or $0.07 per diluted share in the prior year. The large increase is primarily due to net gains on asset sale from our executed strategic capital allocation transactions.Core FFO was $0.41 per diluted share, which was in line with our expectations. On a year-over-year basis, core FFO per share declined $0.04 due to our asset sale, partially offset by the acquisition of the Assembly portfolio and Cascade, as well as the previously disclosed office vacancies that we continue to make substantial progress on backfilling.Now turning to same store performance. Overall, same store NOI declined 1 .6% year-over-year on a GAAP basis and 0.7% on a cash basis due to the expected 5.2% cash decline and 3.7% cash decline in same store office NOI. The primary driver of the same store office NOI decline is the expiration of two large leases at Watergate 600 at the beginning of the year.Excluding the impact of these spaces, which have since been substantially released with long-terms to credit tenant, same store office NOI increased slightly compared to the third quarter of 2018, driven by positive rent spreads when new and renewal leases signed this year. We expect both, same-store office NOI and total NOI, to return to growth on an annual basis in 2020.Turning to multifamily, same store NOI has increased 4.6% year-to-date and 3% in the third quarter. Moreover, excluding the net impact of higher than usual tax appeal settlements that were recognized in the third quarter of 2018, same store multifamily NOI grew by 4.6% year-over-year for the quarter. Rents grew across all of our same-store multifamily assets on a sequential basis, as well as year-over-year. And rent trade…

Thank you, Steve. We have made significant strides in executing on our multifamily strategy in 2019. We've recycled capital out of higher risk retail assets into value-add multifamily assets, and stabilized and improved our NOI growth outlook. Our portfolio is well positioned to capitalize on the supply-demand imbalance for value conscious renters in the DC area, and we've now expanded to the surrounding suburbs, where over 70% of the regional household growth is projected to occur over the next five years.In addition, we have potential development opportunities that will unlock embedded value by adding on-site density at desirable returns. Following the Trove, we have the near-term opportunity at Riverside, as well as longer-term opportunities to increase density at some of our remaining retail and multifamily assets.Alongside the execution of our multifamily strategy, we've made significant progress on leasing our 2019 commercial expirations. As we signaled at the end of last year, 2019 was a difficult year with an elevated level of vacancy due to several large commercial lease expirations. Year-to-date, we have addressed approximately 80% of that vacancy and we expect to deliver improvement in same-store office NOI growth in 2020.To conclude, it's been a transformative year for WashREIT with key achievements across both our multifamily and commercial portfolios. Looking forward, we're focused on driving a strong trajectory during 2020, and a very strong year-over-year FFO growth in 2021. Now I would like to open the call to answer your questions. Operator, please go ahead.

At this time, we'll be conducting a question-and-answer session [Operator Instructions]. Our first question is from Brendan Finn, Wells Fargo. Please proceed with your question.

I wanted to ask about the redeployment of proceeds from your year-end asset sales. I guess, just given the success you've had with your multifamily development and the opportunity you have for more units at Riverside. How are you thinking about using those proceeds on development versus additional multifamily acquisitions?

Well, we're going to continue to fund out The Trove, Brendan. As we complete that, we're delivering units this quarter and that will continue into 2020. And then as you've pointed out, we have a capital spend on renovated units in 2021. I mean, we have a pipeline of 3,300 units to renovate. So that will continue over the next three to four years. And then in terms of new development, I mean, I think we're going to consider all opportunities for capital sourcing at that level.

And Brendan, I'll just add, it's Steve. One of the things that we wanted to do and it's been in our guidance all year that we expected asset sales at the end of the year. And we always said, especially since we're not ready to give 2020 guidance is, we thought it was appropriate for you and everyone to know that that's the case. So our expectations are that we would end the year assuming we execute asset sales with a stronger balance sheet. And I think that's important, because that really explains why the inflection point is in the first quarter of next year, instead of the fourth quarter of this year. And so, we're not committed. In terms of being able to plan, we do not have to reinvest those. So we're going to give ourselves optionality. We've done enough execution and tax planning for this year that we've assumed that we can complete asset sales and just have a stronger balance sheet with optionality going forward.

And then, Steve, on guidance, you talked about the purchase option that World Bank has. Is that assumed that they'll exercise that in the $125 million to $150 million of dispositions?

Brendan, that's a great question. And if they do exercise that option then that will be our asset sales at the end of the year. We're not going to comment on transactions until they close. But if they exercise that right, then there you have it that would be one of the ways we would get there. The other thing I should say for everybody's benefit is, we literally got the signed lease for the World Bank last night and it was after the earnings release went out. We were expecting it earlier throughout the day, yesterday. We held the release as long as we could and we do apologize that it went out a little later than normal. It did at least arrived last night, so that we could at least comment on today, and we're glad that we could.

And then just then following up on that World Bank lease. Are you able to give any just kind of high level commentary on either the mark-to-market on that, the TIs or like any free rent components?

So we re-sign the World Bank lease. It's actually from today. It's a six-year deal, given the year that they still had left. That lease is for 218,000 square feet. It's basically a five-year extension. We are going from an old face rate of 54.33 down to 52.50 on a cash basis, so about a 3% decline. But we have 2.25 rental rate bumps annually built into that. We have six months of free rent that will be associated with that commencing in 2021, and TIs of $45 a foot. They can spend that now, but the pay would not take place anytime before 2021. And then associated with that, they also have two extension options of five years each, which is consistent with the way the World Bank has been leasing that space for the last 20-plus years. In addition, they also had a right of first offer on any space remaining in the building, which comes available.

And Brendan, Steve, again. I'll add one thing. It really is a point of emphasis and Paul said it in the prepared remarks. The big point for us is we announced the strategic capital allocation plan at the end of April when we tied up the Assembly portfolio, and we've been talking all year about our lease execution. And as of last night, we've actually been able to address 70%, up more than 70% of the lease expirations for 2020 and that is what we said we set out to do this year, and that's significantly derisks the company, and its cash flows going forward. So that's a big point for us.

Our next question is from John Guinee, Stifel. Please proceed with your question.

Paul, nice job. Got to ask you one important question. How good does it feel to say you have zero co-working tenants?

It feels okay, John. I am not only happy about that but I'm happy with our Space Plus program, which is doing quite well, and is 80% leased also.

Out of curiosity, what happens on your OpEx? What's your operating expense on the World Bank building? And do you have an OpEx reset when you renew this lease?

I believe, we have a base year reset but I can check that and circle back with you, John.

And then talk a little bit about $30 billion cyber-security contracts. I'm assuming that's a combination of government, military and corporate. But you correct me. And then where do those employees, contract employees, want to office? Do they want to office in their own buildings these days? Do they want to office in government or DoD buildings? And how is that working out these days?

John, this is Grant getting back to your call. So there are about five contracts that are set to be awarded over the next 24 months. The one that's really gotten all the headlines is the JEDI contract with the DoD, that's $10 billion. But there are others, including agencies like NOAH, DHS and even the GSA that are in the range of $2 billion to $8 billion, and those are all set to be awarded, I guess at over the next 24 months. We expect or we are looking forward that it is highly likely that these will be in commercial space and in that corridor that Paul mentioned during the call in the Silver Line Corridor, sort of starting in the Roswell, Boston area and out through the Dulles Tech Corridor.

And then, last question. It looks to me, Steve, like you guys are going to be creating you're creating at about 19 times 2020 FFO, and maybe a little below on a fixed implied cap. How do you guys feel about issuing equity at this level?

Well, John, I think the answer -- we can't answer we get, but it's meant sincerely is, we certainly would look at all sources of capital and if it's appropriate where we can create value, we would. So I mean, we always evaluate it and obviously conditions are more favorable now than they have been over the last few months. But on the other hand, we also have some assets that we think might be appropriate to recycle as another source of capital. And clearly, we're not giving guidance on 2020. So those are your numbers for now and we'll take responsibility for those when we're ready to update them.

Up and to the right, thanks a lot.

John. Just one other thing, it's Paul. The base year reset up is correct, the base reset. But it's not until this current lease expires. So the reset is not until 2021.

And when you look at the old expense stock plus the pass-throughs and look at the new base year reset. Does that end up helping or hurting the 3% cash decline? Said another way is on a net basis, is it more than 3% decline or less than 3% decline?

That one I will have to get back to you on. I don't have that in front of me, John.

As a reminder, we are now conducting a question-and-answer session [Operator Instructions]. Our next question is from Anthony Paolone, JP Morgan. Please proceed with your question.

Congrats on World Bank. Just a question about the purchase option. You mentioned exercise it by the end of the year. Would that also mean close and be done with it as well?

Tony, this is Steve. Yes. If they exercise the right, it will be our year-end transaction.

So do you have other assets for sale in the market right now? So I'm just trying to understand how you juggle or if they exercise, and if you have other things in the market, because it sounds like this 1.25 to 1.50 is the number?

Well, we do have other options and we can't comment on things, because they're just not far enough along. But we do believe it's appropriate at this point to signal that we do expect to have asset sales. We'll certainly update it and how they turn out once we execute the transactions. And we've done that all year in our guidance even before the strategic capital allocation plan was announced, just so people would understand when to expect an inflection point.

But if you have stuff in the market and it goes well and then World Bank does exercise. It's a possible you could gain more or you'll just stop there as other deals?

Yes, it's inappropriate right now to comment. I think we have some optionality. And so I think we've done enough planning to be able to execute more than one way. And look forward to being able to tell you more what we did once we complete some transactions.

And then you talked about some of the pipeline beyond Trove on the multifamily side in terms of areas to invest. Is that kind of what was meant when I look at the press release, the comment about expanded opportunities for renovations on the apartment side, or are there other projects that you've got teed up?

Well, we have, I mean two, if you're looking at newer opportunities, Tony. Like I said, we're going to be finishing up The Trove, and that will deliver throughout 2020, it's delivering right now. First wave of units are delivering right now, as we speak. We have a pipeline of 3,300 doors teed up for renovation between the assembly and what it was already embedded in our portfolio prior to that. And then we are looking at -- we can add 757 units at Riverside. And we are looking at our options on that right now, as we speak.

And then last question, as you build out multifamily here. I know you already used a couple of third-party providers to kind of run some of those assets. At what point would you think of bringing that in-house, or do you feel like that's just not necessary, because you're getting good execution as it stands, or how would we think about that?

I think first and foremost, Tony, I mean we want to make sure we're constantly offering the best product and the best service to our residents. And I think our two third-party service providers are doing that. With that said, we're extremely sensitive as we grow and scale the business of controlling our brand. I think we've always looked at between 8,000 and 10,000 doors, that it may make sense to look at that. But we still have a little time before that. But that's definitely something that we will be giving due consideration to.

Our next question is from Daniel Ismail, Green Street Advisors. Please proceed with your question.

Just one quick one for me on World Bank, or any potential sales. Are any of those that wouldn't necessitate a 10 31 exchange or just how much capacity do you guys have to shelter any capital gains?

I tried to address that earlier, so sorry, if I wasn't clear. We've done enough tax planning and execution this year that we've assumed we can execute these year end transactions without having to do a 10 31, without having to reinvest the proceeds. And so we can absorb them within our taxable income and our dividend levels.

Our next question is from Chris Lucas, Capital One Securities. Please proceed with your question.

Quick ones from me. On the World Bank, if the World Bank does not exercise their option to purchase. Is that an asset that you would look to sell regardless you know down the road here, or say the next year?

As we've talked about and we've been pretty transparent about it, for a company of our size to have concentration risk with single tenants, we just don't think it's a proposition, a good proposition for our shareholders. So I think if the World Bank does not exercise its option to purchase this year, we would look at monetizing that asset going forward.

And then as it relates to sort of expected development yields on say, whether it's Riverside or the next phase of The Trove. How do those yields compare today from an underwriting perspective to what is available in the market in terms of the transaction market. Is that gap stay the same, does it narrowed, or does it widen, what are you seeing in the marketplace?

Well, it depends on which market and where you're playing. But like when I look at the multifamily space right now, and I'll start with acquisitions. In the core space, it's pretty thin, Chris, in terms of the product that's available. And that space is really trading in the low-to-mid fours and they're solving for the five. The value add capital that's out there that's chasing yield, they're probably on the acquisition front, they're probably looking for high-fours and they're solving for an 11 to 12 IRR with about a 65% LTV. And those guys are being pretty aggressive on rental growth.I think the interesting thing that we're seeing on the acquisitions front since we've probably done a little bit more of that than we've done development is really in the kind of sub-urban core to core plus. And what I'm talking about there is the 2013 to 2015 deliveries. You know the Atley at Greenway, Northwestern Mutual just sold, that's a four-storey walk up in Loudon County. And we know the broker was guiding to a 5, and that went for I think about a 4.6, which translates to about 285 a door. So it's pretty aggressive.I look at the people that are getting squeezed out of those core acquisitions. And they're definitely willing to develop the core and they are probably developing to mid-fives, Chris. And in some cases, one deal we shadowed, they were at a low 5 return on cost metric. That's not what we would do. If you look at The Trove and you look at Riverside, for example, our low land basis really gives us a competitive advantage. And when I look at 285 out on the Greenway versus, I think, we're going to deliver The Trove for just over 300 a door for new product. I'm pretty comfortable with what we're putting on the table from a development front.

There are no further questions at the time. And I would like to pass the call back over to Paul McDermott for closing comments.

Again, we'd like to thank everybody for your time on our call today. And we look forward to seeing many of you at NAREIT in a couple of weeks. Good afternoon.

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