Welcome to Washington Real Estate Investment Trust First Quarter 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; Amy Hopkins, Vice President of Investor Relations, will provide some introductory information. Amy, please go ahead.

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, including those related to the effects of the ongoing COVID-19 pandemic that 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 in 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; Taryn Fielder, Senior Vice President and General Counsel; 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.

Thank you, Amy and good morning everyone. Thanks for joining us on our first quarter earnings call. The past few months have certainly been eventful. And while we posted excellent first quarter results, clearly, everyone's focus today, including ours, is on the COVID-19 pandemic. Before discussing our near and longer term outlook and the operational and financial impacts that we are experiencing, I would first like to discuss our priorities as we manage through this unfortunate and unprecedented situation.As a company, WashREIT has always prioritized, and we will remain committed to the safety of our residents, tenant, employees, and each of their families. We continue to closely monitor recommendations from healthcare authorities and orders from our local governments as we are following their requirements and being proactive, even when we have not had government direction to do so.In the early days of this global crisis, we created a task force to evaluate developments and deliver recommendations designed to ensure the security of our workforce, our tenants and our residents. As a result, we acted in advance of jurisdictional orders to move our business to remote work capabilities.Beyond safety, we are focused on business continuity. Four years ago, we embarked on a plan to develop the tools and resources to allow us to perform nearly all of our corporate functions from remote locations. Our critical assessment critique and enhancement of those capabilities has positioned us well for continuing to perform during these challenging times.We are very confident in the company's ability to maintain this productivity. I'm extremely proud of how the WashREIT team has reacted to these circumstances. Everyone has shown incredible commitment and dedication, especially our essential property staff, whose extraordinary efforts at our properties have shown during this outbreak.We started to see the first signs of the impact of…

Thank you, Paul. Good morning, everyone. We entered 2020 with a strong balance sheet, which has proven to be even more important than usual. As of March 31, 2020, our net debt-to-EBITDA ratio was six times, at the lower end of our targeted range, and we have no secured debt following the payoff of our final mortgage in January. In early April, we prepaid in full without penalty our $250 million, 4.95% bonds that were scheduled to mature in October 2020. As of today, we have approximately $370 million of available liquidity, consisting of the remaining capacity under the company's $700 million revolving credit facility and cash on hand.Moreover, we are engaged with members of our bank group to add even further liquidity through an additional term loan of up to $150 million that will have a term of one year with extension rights for a second year. We have received commitments from the administrative agent for $50 million, and the other banks are targeting to commit later this week. Assuming the term loan of $150 million, our liquidity is expected to increase to approximately $520 million, with no significant capital commitments for the balance of the year and only $150 million of debt maturing in 2021. Further, as I will detail, we are reducing our capital expenditure plans as well. We currently expect to remain well within our bank and bond covenants and to have access to the remaining line of credit if needed.Based on our current projections, we have reduced 2020 assumed capital expenditures for the balance of the year by approximately $40 million. Included in this amount is almost $30 million of lower assumed capital expenditures and an $11 million less in development spending as we are -- as we no longer expect to break ground on…

Thanks, Steve. In conclusion, while we are operating in an environment that continues to rapidly change, we are confident in our ability to effectively manage through this period of uncertainty. Our 2019 strategic capital allocation and strong liquidity position will help us to stay positioned for long-term growth as we navigate through this economic shutdown. Although we, like everyone, will need to absorb the near-term impact, we still have well-located residential units and the path of growth when the economy resumes and a 3,000 unit 5-year renovation pipeline that will provide growth.Although the lease-up of the trove will now be more protracted, the trove still provides substantial growth once it begins to stabilize, with much of the investment already made. Furthermore, we have office leases to provide year-over-year growth in 2021 and beyond once those leases commence. All in all, we remain confident in our ability to manage through this while remaining in a position to expand and grow our business post COVID-19.Now we would like to open the call to answer your questions.

[Operator Instructions] Our first question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.

Hey thanks. Good morning guys. So Paul, when you consider the disruption that we're seeing on the investment sales side of the market, how are you thinking about your overall plan of shifting from office and retail into multifamily? Do you have any sense of the price dislocation that, maybe you're expecting to see in each one of those sectors? And ultimately, how does all of this affect the timing of that shift toward multifamily?

So Blaine, just looking back on the last 30 to 45 days, obviously our worlds has changed and the transaction market has virtually stopped. I mean, I think I was reading yesterday, the failure rate in transactions in March alone was six times the normal average. And every multifamily deal that we were looking at in the first quarter that probably had this do in March or early April have pulled. So I also -- outside of Jan 2, I also haven't seen a lot of office transactions get executed. So I think it's tough without a fact pattern to really talk about movement cap rates and what that -- what the inventory is going to look like. I think a lot of people that we see a lot of the owners and operators that we've talked to are waiting and as pullback assets that we're going to come to the market.We're taking a harder look at the refinance market, which is also obviously been highly impacted, and I think the lenders are becoming much more selective. But some refi deal that don't get refi I think the ones that are going to be on sale and those are obviously ones that we're going to take a look at. I don't -- in terms of going -- I don't see why cap rate swings in the multifamily space and I probably say that, we're not in it, but I'd say they are probably in the industrial space also. I do think office could people are definitely going to be looking at certainty of cash flow and duration, that's going to be much more important. And in terms of retail, I think that's just going to be a bit more protracted and I don't anticipate that we're going to see a lot of retail trades coming up in 2020.

Got it. Thanks. That's helpful commentary. Steve. Last quarter, you guys that said, you expected to be in the high-80s on your payout ratio during 2020. I know you guys aren't giving guidance, but can you give us any sort of updated expectations on that metric and whether any of the impact of the Coronavirus can have any implications as far as the dividend is concerned?

Thanks, Blaine, hope you and all of yours are going okay, good to hear from you. So we really have given a lot of our guidance, but we couldn't sum it up for three parts of it. Maybe at the end of answering this, I'll recap that because we through a lot of people. So we haven't given a full FFO guidance. So by implication, we haven't given bad guidance. I think there's multiple aspects to that. But maybe I should just kind of reiterate and summarize sort of the broader view on our guidance in the lack of it and what we have commented on and then I'll try to -- try to get back to just that, if that's okay. Because we really did throw a lot of people today, this is little unusual call.So, we've actually not suffered, what I would say is material impact today through April. And I'm actually not that I think this is likely and things were resumed right now, we would not. We've also given a lot of visibility shared many parts of the potential impact. What we think is not prudent to do today is to project the duration the impact of this global pandemic shutdown. No one -- in our view, no one really does. And we've done a lot of research, how long and how impactful it will be. But maybe if I recap a few things that we have brought clarity to, it might help as you model, since we haven't answered the full question.And let's just -- we've been transparent about a lot of things and realistic about things that we're modeling, but we're not ready to project. I think I misspoke in my recorded remarks, but we've actually collected 95% of our multifamily rents overall for…

All right. Great. Appreciate the additional detail there, Steve. Very helpful. Last one for me. Can you just talk about the drivers of the operating expense savings? You guys are seeing and expecting to continue to see on the multifamily side and maybe quantify the amount of savings we should expect to see?

We haven't quantified them on a run rate basis. I would say that we experienced maybe three weeks of reduced utilization of our commercial space started to drop-off fast in March. In that month, we saved $450,000. Our operating team has obviously been in action longer than that. In our own models, we have substantial savings. But that really, again, to tell you how much that would really depend on how long we think the thing is protracted to go. So we haven't quantified that. But it's -- I would say we think that we found additional opportunities beyond what we experienced in March. I think that's as far as we can go right now.

Our next question comes from the line of Michael Lewis with SunTrust Robinson Humphreys. Please proceed with your question.

Thank you. Did you guys share concessions that you're offering on new leasing? I know you said that, obviously, the volume is down, but the success rate is up. Is there anything you're in to entice those people that are looking for a new apartment?

Yes, Michael, for the units that we are doing, I believe, we're offering in a month free, the ones that are just coming online right now, the trove, we're offering a month free per year term.

Okay. On the development lease-up, that would probably be pretty typical, but even on the existing operating portfolio in month three?

No. We haven't given detail on -- I think that's going to vary asset-by-asset and submarket-by-submarket.

Okay. Understood. And then on the office portfolio, how do you think about -- obviously, there's been -- we know all about the heavy new supply and class As and the rent spread there. Given what's going on now, I mean, how do you -- do you think the positioning of Class B buildings is still relatively better than the As? Or do you -- or maybe that do you think that the tenants and the Bs maybe are a little bit more at risk when you think about credit losses and rent a firm and that sort of thing?

Well, I think the people that are in the B space are there because they're economically conscious. I mean, I look at our B space downtown right now. And our amount of tenants that have -- I haven't seen any tremendous differentiation between the amount of tenants that paid rent in the B versus the A. And I think that right now, price point sensitivity, I think, more people think our average rate in our B space, Michael, is $51.5 a foot. I think a lot more people want to pay $51.5 then want to pay $70, $150 a foot. So the credit profile is a good one. And that's a good question. But again, I think that there is some tenant to tenant. We have some very high-profile credit tenants that are in the B space. And again, I think, that people are going to be more sensitive to price at a time like this than before we came into the pandemic.

Sure. That makes sense. And then last for me. Not to kind of belabor the guidance point, I think, Steve, if I could answer. But the decision to withdraw the guidance, it's certainly understandable. But I think if anybody was going to do was going to keep the guidance. I thought you guys are very data-driven, research-driven. You've obviously been thoughtful about this. You've got plans. You were able to detail a lot of the underlying items. What -- is the biggest unknown here credit losses? I know you mentioned some of the LOIs and whether those will convert and that sort of thing. And then I guess the real question for me is, what do you need to see, do you think to reestablish the guidance?

I'll take a crack at it, Michael. I think we really laid out it a bit. And I think we followed up our reputation of being transparent. But why did we pull it? I do think the three things that I said, I think when I was talking to Blaine, I think, number one is credit loss. So, I'll get specifically to your point there. And then number two is timing really matters on lease commencements because this year was about lease commencement for us.We've got 3% of leases that we had an original schedule that would commence that were already signed, and 3% of lives that we had built into our expectation before. And we had another $4 million of spec leasing and some really good assets in Space plus that we were getting tremendous traction with in many cases. And all of a sudden, nobody is physically out there anymore, and it's really hard for us for this year to project when that happens.I think credit losses is a really tough thing to forecast when you don't have any, okay? I mean, we are -- we statistically not really experienced material credit loss. And we do have tremendous research. We're running models and data about who might default. But now we're guessing who might not be able to pay their rent that's actually paying the rent so far. And we're going to monitor it closely. And I -- we actually came into preparing for this call, hoping that we'd have some conviction to go ahead and update guidance. But quite frankly, our view is, if we guide, it needs to be based on facts and data and not just an opinion. And we have no actual material credit loss data to project that with. And I think we're…

Our next question comes from the line of Bill Crow with Raymond James. Please proceed with your question.

Good morning. Appreciate the time. Paul, I guess, two questions. Number one what are you hearing about the potential impact to new supply, both multifamily and office in your market given this current environment? And number two, would be, a lot of the discussions on your office portfolio has been the success of locations near mass transit I'm just wondering, how you're thinking about that going forward? I think in the prepared remarks, you talked about that there's an opportunity to potentially capture more parking revenue, if people choose not to use mass transit and etc.? I guess those were the two questions.

Okay, Bill. Well, let's take them one at a time. Just in terms of new supply, I mean, a lot of the churn was already in the water office in D.C. already. And so buildings that are in motion. And again, supply chain disruption aside, I think, those building -- those are going to continue to deliver and that will be -- that will be what we all deal with in terms of new absorption. But -- and the same with multifamily. I mean, I take us, for example, we are finishing out the Trove, expediently. We've had minimal supply disruption, and we'll be delivering the balance of it at the back end of the year.In terms of new development and new supply coming on after that, I'm already seeing LPs walking from commitments. And I'm even not anecdotally in the Washington, D.C. proper, per se, but I've also heard some developers like Jamie Murphy's and I'm out because just kicking the leasing strategy out and taking them out of the promote. So, I do think there's going to be disruption. And obviously, in new supply, I don't think you'll see a lot of people announcing multifamily was clearly the hot ticket in Washington. I don't see a lot of new multifamily starts being announced for the balance of this year.In terms of mass transit, I think, it's a good observation, but I would probably bifurcate that to urban versus suburban. There people -- when you're in dense locations like Downtown Washington, I think, people are really trying to use the public transportation. Our metro system is a good one on a relative basis with other gateway city markets. I think people are going to gradually ease their way back in build.I think the bigger question, recognizing that our world…

That's helpful. So if you had to throw a guess out there three to five years from now, Paul, do you think we have more square footage per employee or less or it stays neutral because some are working at home and others are more spread out? Do you have a thought on where we go?

I think that it comes down to there is no one size that, Bill. I think people are going to take social distancing very seriously because I think that -- look, part of the experience of working in the office, number one, you want to be comfortable coming in. But number two is the social interaction and the comradery, and I'm not trying to be Polyana, but having been locked up in the house for six weeks. I mean, I'm really -- I like my colleagues, I'm just tired to seeing them on a screen, right?But I do think people will -- I do think people are going to be very sensitive to their space, and I don't think that right now, people are going to talk about dramatically increasing their footprint. They're probably going to talk about how do you use your existing footprint more efficiently and better. And the tenants that we've talked to over the last three to four weeks have all talked about, no one's called us and said, "Hey, we really want to expand," but they spent a tremendous amount of time asking about thoughtful reconfiguration. So I don't have an opinion of whether it's going to be more or less, I think it really depends where we are economically right now.

Our next question comes from the line of Joab Dempsey with Stifel. Please proceed with your question.

Hi, Good morning. Paul, good morning. Thanks for taking my question. Just wanted to start off with sort of a modeling question. Interest expense came in at about $10.8 million this quarter. I know you prepaid the $250 million note and have increased the line which looking at the stop has a lower cost of debt. Is it safe to assume that the interest expense would trend down for the rest of the year?

Yes. I think we've given enough disclosure that without us giving you a specific guidance point there, if you work off of what we've told you: One, we prepaid the debt. So that was 4.95% bonds that are no longer there as of April 2. Two, we've got amounts on the line. Three, I think, we've said that we expect another term loan that we've disclosed in terms of that, our LIBOR plus 1.5% with a LIBOR floor of 50 basis points. So we haven't told you what we're going to do, but if you wanted to model it, it would be safe to assume we draw that and pay down our line and just increase our liquidity on our line.And then the thing that we -- the thing we can't tell you because we don't know yet is, but we are ready any day that it makes sense and is good for our shareholders to go term out debt. We're poised to go. We don't have to go at a time that's just advantage that would be a disadvantage to our shareholders. But if we do, we would take advantage of that, whether it's the bond market or other things that we keep exploring every day. And then when we do that, we'll be paying down line debt and probably some of next year's $150 million that would mature. So that's all the right now, the potential for us to move in the comments that we've made.

Perfect. Sounds good. And then just a follow-up on Blaine's earlier question and I know you mentioned the office sales market kind of coming -- craning to a haul. Looking forward, though, with the sale of John Marshall and the trove stabilizing, when this is all over, hopefully sooner rather than later, could this be an opportunity for Washington REIT to become a net acquirer and possibly take advantage of market disruptions that you're seeing in the market?

Absolutely. I mean, look, our original guidance for this year was really, as you know, we had only had one transaction opportunity highlight and that was the sale of JM II. I think we will always be opportunistic like we've tried to do over the last several years. I do think that there are going to be opportunities because I think that there are refi deals where there may be an elevated equity requirement that won't pencil out and there's going to be a shortfall on proceeds. And I think that those are precisely the assets that may turn back to the market. And yes, I just -- I mean, first and foremost, in a time like this is -- and I've had my Chief Financial Officer, Steve to protect the balance sheet. And that's first and foremost and be able to cover our ratios and maintain our liquidity. But absolutely, we will try to be as opportunistic as we possibly can. And I think we know our market -- we know the submarkets that we want to be in. And if we see some type of distressed activity, I can assure you, we'll be taking a look at it.

Perfect. Perfect. And then just last one for me. Thank you for providing the multifamily and off collection numbers. I know those are top of mind for a lot of people. And I know it's early, but sort of generally speaking, what are some high-level thoughts you have around May collections and what those might look like, just given that the pandemic really started in earnest in late March, do you think May maybe more effective from a collection standpoint than April was?

Sure. This is Steve. I'm going to start it, but I may actually kick it over to Grant, our Head of Research just to tell you, since we've been quarantine all along, what our advanced researchers tell us about the profile of the people in our portfolio, which I think is more indicative than what we've experienced. Because keep in mind, we are like within 1% of what we experienced a year ago. We're within 1% of what we experienced in March when no one was acting like there was a disruption.And the other thing is, one of the things that we monitor is, what percentage of people pay by their credit card, and that hasn't gone up, which is all a good sign. So, I mean, when you're basically at normal and people have been locked in their homes for what would then be six to eight weeks, you have to assume it's going to get worse. I think we do a lot of research. There are a lot of different things out there about V-Shape and U-shape recoveries. We have research perspective on all in terms of how either one of those could affect us, but we think we're okay either way. But so again, we now are going to have to project using analysis. And Grant can talk about that and maybe the composition of our portfolio, because they paid us so far. So Grant, maybe you could add a little color to that?

Sure. Happy to. When we've been looking at this, as Steve alluded to, we've been really looking and digging into the share of industries that our residents work in and those that we have overexposure or underexposure. And so first off, I would just say that to point out to listeners that in the same way that Washington is different than the country. When we dug into our data, our properties are different than even Washington, for example.So for the more immediately exposed industries of leisure and hospitality and retail. Those comprise nationally about 21% of all jobs in the Washington region, that's around 19%. And digging into our Class B portfolio, we just have 13% exposure to those in median industries, doesn't mean that other industries won't be more widely impacted, but those sort of the first ones that we've watched.And in terms of the data that has come in thus far for late payment in April, there have been a group of industries that have outperformed and those that underperformed. And I think we pointed that out to some extent in the call. One that really shows up well, I guess, talked a lot about is Washington's exposure to government employment and we have an outsized share of that in our portfolio. And those residents are paying. So for example, there's 17% of our household that are employed, but they're only 9% of our uncollected share.So that's an example, as well as professional business services, like 24% of our employee -- of our employee residents, and it's only about 14% of the uncollected share. So we've had some stronger sectors like that and we have outsized exposure to those, which we think going forward we'll continue to track, but they seem to be holding up early. And then we have less exposure to some of the ones that have been more immediately impacted, but that's the framework that we're really looking at. And we'll continue to monitor as we gather more data like we've been saying, we really only have one data set. But as we move forward, we'll be obtaining that as we move forward. I hope that helps.

No. That perfect. Thank you guys so much for the caller. I really appreciate. Stay safe, all right.

You too.

Our next question comes from the line of Chris Lucas with Capital One Securities. Please proceed with your question.

Good morning guys. So, yeah, good afternoon now, sorry. I guess, just wanted a bigger picture question, just as it relates to sort of rent accommodations. When you're thinking about that rent deferral approach, is it strictly going to be a payback over a period of time? Or are you looking at lease extension as a possible accommodation as well?

Chris, I'm going to answer you, but the last part faded out. Could you just repeat it so that I'm clear what you asked?

Yes. No. So when you're dealing with rent accommodations, are you looking primarily at a payback over a period of time, 12, 18 months, whatever? Or are you looking also at potentially doing lease extensions as a sort of trade-off for that deferral?

Sounds good. I think we really have three approaches that we're -- and again, this is early days. We built a proprietary system of application and review. And we're engaged -- I'm talking about commercial tenants right here. And so, we're engaged in that process with the ones representing the numbers that we talked about on the call. We look at it this way, first of all, they've got to be capable of paying and have done the things that make us feel like it's working with it from a financial standpoint. But our -- we think the majority of people, Chris, are going to get a deferment. And we're going to look at their ability to pay in terms of how long we're willing to go.I think many are going to fall into the bucket within the first 12 months. If some -- if it's appropriate, some could be longer than that, but they're likely going to help pay an interest cost or something if they go beyond that. We really -- if it makes sense and it's a tenant where we really wanted an extension and they're really strong, but they'd like to trade-off a little rent release now.In those scenarios, we would look at a blend and extend where there could be some abatement. We think that's not going to be a huge majority of what we've seen so far. So those are -- that's how we think about it. I think in all three cases, you have to look at collectability that governs everything.And that's where it comes back to, it's more than just the rent if they got straight-line rent balances, and I don't know if people accommodating that when you expect to see something in guidance, but it's required, okay, under GAAP. And then other than that, it's really ability to pay. And then, if there's something in it that they can pay and we want them to stay longer, and everyone is agreeable, then we'd look at extensions.

Okay. Thanks for that Stephen. And, Paul, just kind of going back to Bill's question about sort of the future sort of uses of office and how it will be thought about. How are you guys thinking about Space Plus at this point?

Well, I mean, so first off, in terms of itself, we actually think that it's going to be probably getting a little bit of a shot in the arm here, Chris. We've actually already experienced that. We've got folks that are trying to go out of open plan benching, co-working spaces, into Space Plus because Space Plus, as you know, has been suites. But Space Plus, just in terms of the math, really only takes up just approximately over 8% of our commercial portfolio. As I think we've said in the past, we don't want to build the cottage industry inside our commercial portfolio.But I do think, Chris, we're going to see more of a need for Space Plus as people continue, we just signed a tenant at 2,000 that left we work for that exact reason, they don't want to be in a big open plan and benching and want their own privacy. And that was kind of the Genesis space for us is, really people graduating out of that, that add maybe 10 to 12 people and wanted their own designs tweet. But I think Space Plus and in terms of the credit profile, only 1% of our uncollected rent in April was Space Plus. So, we're -- and that particular deferral we'll approach in the same way, same protocols what Steve just answered on.

Okay. Thanks for that. And then as it relates to the apartment portfolio 97% on the same-store portfolio implies about 91% on the recently a buyer or non-same-store portfolio, is there any characteristics that you can point out that sort of imply or gives us a sense is to why there's that gap is the geographic is it rent. Just to makeup of the tenant deals?

I'll start it, but I think the makeup of the tenant deals, I'm going to throw this to Grant pretty fast, because I would have said you might want to have some perspective on that. Yeah. That would tell you that a disproportionate amount of what hadn't been collected is slightly airing in that favor. And I think for the most part, it is because they have a higher exposure to the industries that have been a little bit more impacted. But I think that would be generally the answer. I mean, we're still very pleased, Chris with what we've collected and we're in discussions with tenants. And so they're working with us.We just -- what's hard is, how much harder will it be for them. Some people that might be disrupted probably don't even have all their federal resources in hand yet, such as the federal stimulus check, the bonus -- they may not even be fully in the unemployment program, and then there's extra bonus money coming out of the government programs for them in that regard. And so those are the kinds of things that if you are disrupted, that probably factor into guessing what they will be like. But I think the main thing is just there's a little bit of difference in terms of degree of exposure to impacted industries and Grant can give you color on that.

Yes. The composition is slightly different, as you would expect between Class A and Class B. So just in terms of the two immediately impacted industries, which we really called out of retail trade and leisure hospitality overall for our portfolio is I think we said in the prepared remarks, it's about 12.3% of our employee renter base, but there is a dichotomy between A and B. That's about 13% exposure in Class B and about 6% exposure in Class A. So there is a slight difference there. On the plus side though for Class B, we actually have slightly more exposure to government in Class B than we do in Class A, and that's one of the more solid industries thus far in terms of payment history.

Okay. Thanks for that. And then just last question for me. Well they have gone with it. All right. Actually, you know what, I'll just move on. Thanks. I appreciate it.

Okay, Chris.

There are no further questions left in the queue. I'd like to turn the floor back over to management for any closing remarks.

Thank you, operator. I would like to thank everyone for your time today. We appreciate your continued support during these challenging time and we hope that you all stay space and healthy. Thank you and have a good day.

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.