Q2 2020 Washington Real Estate Investment Trust Earnings Call
A reminder, today's call is being recorded.
Before turning the call over to the President is cheap.
Executive Officer, Paul Mcdermott, any Watkins Vice President Investor Relations will provide some introductory information Amy. Please go ahead.
Thank you and good morning, everyone.
Yes. Please note the forward looking statements made during this discussion.
Such statements involve known and unknown.
Including those related to the effects of the ongoing carbonite team.
Which may cause actual results to differ materially.
No did it actually.
[music].
Reconciliations to GAAP and non-GAAP financial measures discussed color for luxury earnings press release financials.
Sure distributed yesterday can be found any investor relations website.
Today's call with me will be called Mcdermott, President and Chief Executive Officer, Steve Riffee Executive Vice President and Chief Financial Officer parents builder Senior Vice President and General Counsel, <unk>, Vice President Chief Accounting Officer, and Treasurer, and Grant Montgomery Vice President head of research now I'd like to turn call over double.
Thank you Amy and good morning, everyone. Thanks for joining us on our second quarter earnings call.
We delivered strong second quarter financial performance against the backdrop.
<unk> economic disruption.
The resilience of our portfolio.
So local economy graduate real.
Our primary focus continues to centered around the health and safety.
Tenants employees and their families.
Over the past several monks wash free creators and implemented comprehensive reentry.
To mitigate the spread co good night changed at all property.
We connected with our office tenants to personalized outreach to understand their needs and discuss our truck.
Make sure we're still comfortable with protocols we haven't.
We are fortunate not experienced material bad debt today.
Alongside reentry planning, we've been diligently working with tenants.
And that's really impacted by the economic shutdown to discuss and finalized so right.
Today, we're pleased to report we discussed dastardly completed.
There was no doubt, but these are trying.
However, we have adjusted their demands today's operating.
And that's taking swift and deliberate action to protect and support our residents.
I could not be more proud of the dedication shown by the wash Ritchie.
That's challenging period.
Furthermore, these times highlighted the importance of social selling equity and justice.
He has responded with a refocus commit.
Sure improving diversity inclusion and belonging within our company Ghandour community and creating long lasting positive change.
As we enter into second half the year, we're increasingly confident in the resilience of our region and likewise our portfolio.
Oh watching that Charles focus provides economic stability compared to other major metropolitan area.
That's true both historically and during the current downtown.
Washington Metro area continues to experience fewer job losses pandemic yet.
Large metro areas and the U.S. overall.
Washington Metro employment declined 9% during the second quarter compared to over 11% to the U.S. overall.
A recent analysis completed by Delta Associates determined that Washington, multifamily market is better positioned to weather a down cycle nearly all the nations other large metropolitan areas.
This is due in large part does present.
And the corresponding stability.
<unk> business services sector.
It's together comprise 46%.
See metro economy, compared to 25% 30 largest metro areas.
Furthermore, our professional business services sector is more heavily weighted towards the traditional scientific and technical stop sector, which has fared very well during this crisis in generated year over year job growth of 1.6% in June.
This sector is expected to bounce back much quicker than other sectors in continues to be the primary private job creation source in the region over the long term.
According to Delta.
Oh surprisingly the federal government sector has been the lease negatively impacted by the pandemic thus far.
Any federal agencies actually received funding funding boost which could lead to additional hiring, especially critical wages agencies, such as the Sta NIH and FDIC.
Oh, my contractors have seen $1.2 billion in contracts awarded year to date that are directly tied to the cold. It 19 response according to jail.
Employment trends for the regional information sector reflect limited disruption and major tech industry investments, including Amazon H. Q2 campuses construction and Virginia Tech the topic yard campus.
When you without disruption.
Washington Metro area led the country in Q2 leasing activity driven by 1.6 million square feet positive net absorption in northern Virginia.
Despite the stay at home orders.
Leasing activity in Northern Virginia declined only 12% in the second quarter compared to the five year trailing quarterly average according to see Ari.
Over half of the leasing activity in Northern Virginia was driven by government contracting services.
Government contractor awards are up 4% year over year due to the government's response to go the Nike.
Check and government contracting terms, 60% of our office leasing volume in Northern Virginia last year and looking forward, we expect demand from these sectors to continue to grow.
Oh surprisingly, Washington, D.C. office leasing activity has slowed more than it did in northern Virginia due to lower amounts from leading into this down.
However, the impact of local job losses for office using sectors in DC has been limited.
No office, usually sector, losing more than 5% all the total workforce during the second quarter. According to BLS data.
Additionally, the numbers tours increased substantially in July.
We expect our DC office portfolio to act defensively against this backdrop.
Maryland, Virginia, and DC each took a phased approach to re entry beginning at the end does matter.
Do you see and Maryland are currently in phase two what's limited reopenings of shops, and restaurants, and Virginia isn't phase three which has allowed all retail went public services to resume with social distancing measures in place.
With the implementation phase to re entry protocols, we are seeing increased activity across all the more asset classes.
Multifamily Torrington application volumes have increased three so.
Early April for both our same store and non same store assets and same store applications are trending above prior year losses.
Following the closure or leasing office, we took advantage of our virtual torn capabilities and continued leasing in April and May and wants social does it take requirements for east locally we began offering self guided tours in June.
Just recently, we have opened or multifamily amenities common areas and started offering in person tours with additional safety precautions.
Lisa Hook true continues to progress and is expected to reach stabilized occupancy in the fourth quarter 2021.
Well the economic shutdown has impacted the original expected pace we saw.
We averaged approximately 16 leases per month during the second quarter and expect to reach breakeven level occupancy by year end, followed by study quarterly NOI growth thereafter.
Our total lease rate growth for the quarter was a positive 40 basis point.
Which combined with our sequential decline in ending occupancy of less than 80 basis points for stabilized properties.
Straight the resilience of our value oriented multifamily portfolio.
Lease rates for our non same store portfolio, which includes strong performance more class b suburban communities.
Uhhuh over 2% during the quarter on a blended basis.
Price of 2.6% of renewal lease rate growth and 1% of new lease rate growth.
Our suburban garden style apartments office larger unit sizes.
Open air hallways, and less density compared to mid or high rise buildings, allowing us to participate in the increase in demand. So these quality over the near term in the wake it depends damage.
Over the long term the expansion of our multifamily portfolio to growing suburban markets in the DC metro suburbs positioned us to capture and increasing share.
Regional household formation and job growth.
We began to experience an uptick in utilization at all of our office properties towards the end up the core although most notably at our Northern Virginia office assets as Northern Virginia is now, let's say three reopening.
In preparation for the re population of our properties, we prepared a detailed property reentry plan.
The size of employee and tenant health and wellbeing that's top priorities.
We have reached out to our tenants to discuss the plans and protocol. The we have put in place.
The feedback regarding our collaborative approach has been very positive and in many cases, we strengthened our relationships with our tenants.
We've got great car office buildings to Merck 13, ventilation filters, which at the standards for superior commercial office buildings.
Installed directional safety practices signage.
Okay.
Contact list.
And in technology.
Yes, correct she'll around front office death. In addition to a variety of other measures taken to facilitate safe re entry.
We'll also established enhanced cleaning protocols that include more frequent cleaning and the use of electro static claims jeans and have developed elevator and common area safety protocols designed to mitigate the risk a virus transmission.
Our tenant experience out and you which began rolling out in January has kept that's connected with many of our tenants despite working remotely.
The cost here program has continued to provide a wide range of on demand services and partner with local vendors and farmers to provide grocery and other central deliveries.
We could not have picked a more critical time to roll out this technology to assist start tenants both professionally and personally during this challenging time.
Our space bought program has allowed us to meet changing tenant need.
More efficiently with flexible lease terms.
Our spaces offer tenants move ins all in pricing flexibility for short and long term planning as well as privacy and independent.
Not just for brand building, but now more importantly than ever more control over the health of the tenant losses.
All of our space.
I have control over their own private space, which is becoming increasingly important in this code at 19 environment.
In an environment, where many tenants are moving slower on larger and longer requirements.
Its ability is key.
Plus is playing a crucial meeting tenant needs.
We enter 2020 expecting to see sequential quarterly gross.
In buying for innovation led value creation and commercial lease commencement.
Well the pandemic has disrupted the timing of that grows our key growth drivers remain intact.
In multi family, we have positioned our portfolio to retain the growth drivers. So we make captured that value for shareholders as normal activities and opportunities return.
We've allocated capital to class B properties and stop markets, what's wider than average gaps between class H class B rents and limited competitive supply, which sets us up for a quick recovery and preserve the value add rent growth from renovations for the future.
Through our 2019 strategic allocation, we increased our renovation pipeline to over 3000 units, which represents five years of growth compelling return on cost.
Well most of our portfolio does not directly compete with new supply.
The northern Virginia, where 80% or Multiforme family portfolio is located.
Our expected to decreased by 24% over the next 12 months.
Furthermore, the pandemic will likely cause delays in project a construction starts in the second half was 2020, which will reduce the number of deliveries in 2022, and it's a 2023.
Overall, it was an acute housing shortage in the Washington Metro region in our in House research affirms our confidence that growth opportunities are still ahead.
We also have a tremendous opportunity for growth having substantially made the capital outlay for true with phase two delivering and a couple of months.
Well the disruption certainly changed the initial pace of lease up.
We expect to reach a breakeven occupancy level in the fourth quarter and thereafter, Ritchie quarterly sequential and alike rose to stabilization at 2021 and it to 2022.
In the office portfolio, our embedded growth is comprised of future commencement for high quality space at value or your pricing and move in ready space with flexible lease terms.
We expect sign leases to continue to occupy we expect it benefits from higher occupancy in the fourth quarter and throughout 2021.
Many of our speculative leasing opportunities, which we had excellent momentum before the pandemic yet are located in our best assets, including Watergate 600, Arlington Tower, and Silverline center as well as our space plus program, which is positioned well to meet demand in these early cautious try.
In addition months.
While fiscal Tory did pause. It is now we sent me although decision making remains slower than normal Barbree entry is being works turbine prospective tenants.
We believe those leasing opportunities are a matter of when not yes. They welcome Matt.
And with that I'd like to turn it over to Steve to review our collection performance.
Let's see <unk>.
Second quarter results and our outlook.
Thank you Paul and good morning, everyone.
I'll start off by discussing our cash collection performance before reviewing our second quarter results and outlook for the remainder of 20 Twond.
Our multifamily collections continue to be very strong, which is a testament to the resilience of our sub markets and industry mix and lower average rent to income ratio of 26%.
We collected over 99% of cash rents during the second quarter and over 99% of contractual rents.
And our rent collections through the first three weeks so do I have been strong also.
While we were offering deferred payment programs to residents who have been substantially impacted by the pandemic today deferrals had been relatively low representing less than 0.4% total monthly rental income on average.
Our monthly multifamily collection performance continues to track about national averages.
We collected 99% of cash rents engine compared to 96% per annum H.C.
We attribute our outperformance impart to high exposure to industries that have outperformed during this crisis.
And the lower relative exposure to underperforming industries.
The impact of Cobot 19 on the Washington Metro market, that's been contain primarily to three sectors, representing approximately 75% of Washington Metro job losses.
The impact has been more broadly spread across a wider range of sectors in the U.S. overall.
This is those same three sectors represented less than 60% of total losses nationally Bridget.
Does the U.S. overall is experiencing job losses that are spread across more industries that are region.
The Washington Metro markets relative strength reflects the stability in business revenue provided by technology and federal contracting.
We track the industries. Our residents are employed now and our exposure is most heavily weighted to the most resilient economic sectors and likewise last weighted to the industries that have been most impacted which has resulted in very high collection rates and stable cash flows.
Turning to office, we caught that 97% of cash rents during the second quarter and over 99% of contractual rents, which excludes read that has been deferred.
As of July 22nd our collections for July or in line with the same period in June.
Similar to our multifamily resident industry nuts.
Our office tenants were relatively weighted to the stronger economic sectors. The U.S. overall.
This helps us experience limited bad debt thus far.
We have agreed to defer $1.2 million, a red prop as tenants and we expect the clock over 85% of that deferred rent a yearend 2021 with the balance thereafter.
We believe our efforts to substantially de risk our portfolio by selling all single tenant office assets and 75% of our prior retail exposure, including all the power centers and reallocating that capital to our multifamily portfolio. It's certainly proving its value in these economic cars.
Retail now comprises just 6% of in Hawaii, and while retail tenants have struggled the most we collect that 72% a retail rents in the second quarter.
Excluding deferred rent our collection rate was approximately 90% during the second quarter and 91% during the first three weeks since July.
Your today.
The only incurred approximately $770000 the bad debt expense related to retail.
$638000, but that was related to covert 19.
We will continue to monitor their strength that ability its economy where assets.
We've agreed to defer approximately $1 million <unk> retail tenant.
We expect the clock over 50% of that rent by year end 2021.
This assumes that our region continues to gradually reopened through year end.
To date was not incurred material bad that's related to cope with my team overall.
We have only deferred a small portion of rent and the expected cash NOI impact is less than a penny per share through yearend 2021.
Well, we have possibly experienced the most disruptive part of the pandemic uncertainty regarding its duration and future impact remains.
We currently believe the second quarter represented the most challenging quarter, however, future and ongoing economic disruption could result in bad debt greater than what we haven't heard today.
We will continue to monitor future developments in proactively address them as they occur.
Turning to the balance sheet, we have a strong liquidity position with approximately $530 million available liquidity as of June Thirtyth, no significant capital commitments for the balance of the year no remaining maturities and 20 Twond.
As of June Thirtyth, our net debt to EBITDA ratio was 6.1 class at the lower end of our part of the branch.
We prepaid or 250 million dollar 4.95% bonds in early April.
We can go to the capital markets. The further turned out that when it makes sense to do so.
We expect to remain well within our bank and bond covenants.
And have access to our mostly on draw a line of credit if needed.
[laughter] based on her career.
The actions, we have reduced 2020 assume capital expenditures for the year by approximately $40 million compared to our initial 2020 guidance.
Included in this amount is almost $30 million lower assume capital expenditures and $11 million and develop and less development spending as we no longer expect to break ground on the Riverside development. This year.
Our capital expenditure reductions, including include Nonessential building improvements tenant improvements the leasing cost perspective at least as well as lower multifamily renovation capex.
Our future multifamily renovation pipeline remains intact, although we are suspending the program until after the market disruptions subside.
We plan to allocate the renovation capital at a later date when the market allows for rent increases still look to deliver the appropriate ROI.
[laughter] as we navigate through the second half a year, we will continue to explore opportunities to further reduce not a central capex.
Spending to further bolster our liquidity.
Looking forward, we feel confident our ability to executing a short term goals for providing payment flexibility for residents incentive Cindy.
Well I would say the operational flexibility necessary to execute our long term goals.
As Paul mentioned.
Posted a solid second quarter, despite the challenging operating environment I will discuss those results before addressing our future outlook.
We reported core Epo 39 cents per diluted share.
Overall same store in the why declined 4.5% year over year on a GAAP basis, it's 3.5% on a cash basis due to the same store office in a wide declined 4.8% on a GAAP basis, 3.7% of the cash basis as well as bad debt expenses related to cobot 19th of approximately $720000.
The same store office in a wide decline was driven by expected decline in parking income as well as an increase in bad debt expenses related to kind of at night.
Excluding the decline in parking income and the increase in bad debt expenses compared to our prior 2020 expectations.
Same store opposite of why would have increased slightly.
On a year over year basis.
[laughter], our multifamily same store in a in a wide increase by 0.7% year over year on a GAAP basis, 0.8% year over year on the cash basis.
The company achieved 40 basis points, a blended year over year lease rate growth driven by strong performance from our suburban assets in our non same store portfolio.
Same store new lease rates declined by just under 4%, while renewal rates increased by over 1.4%, reflecting blended lease rate decline of approximately 40 basis points.
Non same store lease rates grew over 2% during the quarter on a blended basis comprised of 2.6% of renewal lease rate growth and 1% of newly sorry growth.
Our same store multifamily portfolio is currently approximately 94% occupied and our total stabilize for oil is over 90% occupied and 97% lease.
[laughter] same store NOI decrease that opens the door retail centers, which we reported another 24.6% on a GAAP basis, and 22.1% of the cash basis, driven primarily by higher credit losses, which included amounts due from tenets impacting the cobot 19, even like deemed likely not collectible.
And lower recoveries compared to the prior year period, the combined right all impact to cover 19 in the quarter was approximately $560000, which included straight line rents at least intangibles and the cash impact was approximately $335000.
Turning to lease leasing activity for the quarter, Bob velocity and touring was hit by the economic shutdown, we signed approximately 20000 square feet of New office leases at 15000 square feet of office renewals in the second quarter.
We achieved rental rate increases of 0.8% on a cash basis, a negative 2.3% on the cash basis.
For new leases.
19.4% on a GAAP basis and 1.9%.
Cash basis for renewals.
The impact of operational cost savings initiatives reduce operating costs by approximately $848000. During the second quarter net of tenant recoveries and expenses related to preparing our office buildings for reentry [laughter].
Second quarter operational cost savings, primarily included reduce utility consumption lower our NIM security expenses.
Lower tenant event in a minute expenses relative to our original forecast.
Now I'd like to discuss our financial outlook. We're now four months since independently, while we're not the positioned to predict the ongoing magnitude or the pandemic or durability of the recovery.
We believe that we were able to forecast subject to certain caveats the impact of cobot 19 for the balance of 2021 or at all I and interest expense exclusive of future bad debt.
Today I will describe the impacts that we're experiencing on various financial performance metrics.
Our expectations are based on the assumption that the gradual reopening will continue uninterrupted through year end.
[laughter] multifamily occupancy dipped to 94% engine and has remained stable through July.
With the easing of confinement measures and increased staffing in our leasing offices, we've seen touring and application volumes increase substantially.
Total application volumes have increased by three times from early April laws and same store applications have trended over 30% above prior year levels, that's the other than that.
We expect the continue increase and leasing volume to drive the gradual increase in occupancy to 95% by yearend.
We did not increase rents on 12 plus months renewals.
For the second quarter, which impacted our rental I growth as we normally wouldn't be achieving significant rent increases during the strong second quarter leasing season.
Especially since we had such strong lease rate growth in March.
As a result, we experienced an increase in renewal retention to 60%.
Well this higher renewal retention has helped us to maintain occupancy and preserve our seasonal level. During these uncertain times did not fully offset the impact of occupancy below or new leasing volumes.
Lower new and renewal lease rate growth as well as lower move in and other fee income were partially offset operating expense savings initiatives during the second quarter.
The majority of the expected full year impact to operating expense savings related to cope at night theme was recognized in the second quarter.
Excluding the impact the bad debt.
We expect the impact of cobot 19, or multifamily in a wide to translate to a reduction of approximately three cents per share relative to our initial core FFO guidance for 2020.
Overall, we had previously expected significant multifamily growth and 20 funny that growth is likely now going to be deferred until 2021 and thereafter.
As Paul said with a five year pipeline a value add renovations once conditions improve and it is appropriate to resume such growth.
And we and we still expect future into microcontroller.
Which I will cover next.
[laughter] trove is on pace to deliver phase two in the fourth quarter.
Our lease up and just begun with social doesn't see measures drew on site talking to a halt however, we've been successfully converting virtual tours into signed leases.
Well virtual touring is having continued success, we expect lease up the take longer than we had originally guided.
Well I couldn't inquiry loss of between six or $700000 and 20 point, which translates to a negative impact from core epicel relative to our initial guidance of approximately one cents per share.
[laughter]. It's Paul also said, we expect to reach breakeven occupancy.
Here this year in and it's a reach stabilization fourth quarter 2021, therefore, the trends should not only provides substantial growth in 2021, but also further year over year growth in 2022.
Now moving on the commercial.
Tenant improvement build outs for near term lease Commencements are expected to continue uninterrupted.
We have over 55000 square feet, representing approximately 150 basis points of future increased occupancy signed leases that have not yet rent commenced.
Although physical tours had stop they recently and towards the end of the quarter. That's substantially increase through July just below a pretty cobot Nike levels.
Overall decision, making has been slower.
The pace of phase reentry hasn't many cases allow prospective tenants more time.
Additionally, we are lease extension negotiations with a handful of tenants who were previously expected to vacate.
Our previous revenue expectations for 2020 included speculative office lease commencement.
I've been impacted by the current economic disruption I don't know likely to be substantially executed in 2021 releases not signed as of today.
The majority of this leasing was expected to occur during the third or fourth quarters at high quality space is a cross Watergate 600, Silverline Center Arlington Tower space, plus releasing the minimum had been the strongest.
We expect the impact of lower speculative leasing to be only partially offset by higher revenue for at least renewals and extensions.
We have minimal commercially separations for the remainder of 2020 limiting the downside risk of art and try to leasing estimates.
[noise] office lease expirations represent approximately 4% of our office provenance and less than 2% of or our overall revenue.
And as many tenants are opting to deliver long term decisions short term lease extensions or renewal activity could trend higher on your progress.
Parking revenue was down as people are not driving to their offices.
Our current projection is the parking revenue will decline to over $1.3 million over the remainder of the year. However that estimate could change at the shutdown as more protracted with us.
Likewise once the economy returns, we could experienced an increase in parking income from higher utilization as tenant transportation preferences shift away from public transportation.
We're already seeing signs of increased transit parking at many of our properties.
Currently we are assuming that we may achieve additional operating cost savings of approximately $750000 for the balance of the year, assuming a gradual increase in office utilization over the remainder of the here.
This amount is net of expenses associated with preparing our buildings reentry and the cost savings that we expect the pass along to our tenant.
Excluding future bad debt, we expect the impact of Cobot 19 are all in our office and other renoir translate to a negative impact of approximately eight cents per share relative to our initial core FFO guidance for 20 Twond.
Most of that impact will occur during the second half of the here as we previously expected a ramp up in that timeframe.
We now expect to occur throughout 2021.
Offsetting a part of the negative impact of Cobot 19, and our business. It's a reduction in our expectations for interest expense by four cents per share relative to our initial core up at the 2020 guidance, excluding any future refinancings to further term out that.
On a combined basis, we expect the impact of cobot 19 on in Hawaii, and interest and interest expense the translate to a negative impact of approximately eight cents per share relative to our initial guidance for 2020.
We're not updating other guidance assumptions at this time the majority of the impact will occur during the second half of the Irrs, we previously expected ramp up in that timeframe.
That we now have expected to occur throughout 2021.
Overall, we're actually slightly ahead of our original budget for the first six months of 2020, despite going through a historically challenging poor month period.
As we just explain much of the growth we had planned for the second half. The 2020 appears to be deferred, but we believe still intact for the future.
And with that I will now turn the call back over to Paul.
Thanks, Steve.
Clothing, while we are operating in a challenging environment, we're confident in our ability to effectively manage through this period of uncertainty while preserving the embedded gross of our assets.
Our value oriented portfolio has demonstrated resilience as we absorbed the near term impact which is further underscored by our strong rent collection performance.
Proven stability.
The Washington Metro economy.
Furthermore, our sustained multifamily lease break growth and stabilizing occupancy trends I like the value of our research driven capital allocation strategy.
It's just let us joined us in well located residential units that will be in the path to gross once the economy reserve.
Now.
We would like to open the call to answer your question.
At this time will be conducting a question answer session. If you like to ask questions. Please press star one on your telephone keypad got permission to indicated lobbies and the question Q.
Let me first start to feel we'll let you move your question from the Q.
For participants using speaker agreement and made the necessary to pick up into before pessimist Starkey when moving pieces, we pull for questions.
Our first question comes from line of anti Palo with JP Morgan. Please proceed with your question.
Oh, Thank you and good morning.
My first question is with regards to the more family portfolio can you give us a sense as to what's happened to market rents and the last say month or two or where your new lease spreads are trending right now.
[noise] Ah Tony its Paul.
I would say market rents right now I mean, we're you know just in the overall portfolio, we're seeing concessions rise on the market, but not materially.
The market has become more concessionaries properties kinda opened up and I'll. Just just give an example, you know throughout our portfolio depending on the respective submarket.
We've seen a concessions range from.
$250 to one month and that the largest concessions were seeing are really at trove.
And that that you know the markets move from one month or two months free.
We're also offering up to three months for 24 month deal at the trough.
I don't see that materially changing in the future.
In terms of spreads.
Yeah, I would say Ah, Tony we did pretty well, but a in the second quarter. We are on renewals. We've now started at August increasing rates of renewals for 12 month, plus leases that we were holding flat.
We're doing okay on new lease rates in recent weeks, although I will say for us we're going to emphasize a holding occupancy and keeping our lease maturity ladder impact. So we might have a little bit of trade off on on new leases. So maybe in the and the most current month, they blend or slightly negative up up up new on renewals.
But but we feel they're holding very well and up and we've done when we look at or just sort of relative basis, we think things are going well.
Okay.
And then on the office side or any I know you ought to try to volume, but just any color on on what's happening there with net effective rents or or how are those tenants that maybe in the market or.
You know are behaving in terms of what they'd like to see together deal done.
Ah Tony I wish I.
I had better you know a better fact pattern or really articulate the second quarter I would say overall, what we're seeing and the market in terms of leasing.
We are seeing a lot of short term lot of two to three year deals a with extensions.
Definitely seeing a a bit of an out migration from co working.
I think D C and D C proper the activity, probably dropped a 50% and ER and the second quarter in terms of leasing volume to us I can't I can't really provide you a a great track record there I think the thing that we were probably most impressed about in this region was northern Virginia.
You know, leaving the U.S. with a 1.6 million square feet.
Absorbed I would also comment that in July.
Both and downtown and in Northern Virginia are our traffic at our velocity picked up notably.
And you know, we hope that a lot of that will crystallize for us a I'd say realistically, it's probably post labor day, that's where we're getting from a a lot of our tenants. When we think there's gonna be a lot more decision makers waiting back in but we're optimistic about about the balance of the year.
Okay. Thanks, and then just last one I I know, it's early but just any anything on the investment sale side or any commentary on on.
Early indications of price discovery or anything being brought to market.
Let me, let me split that you know I'll talk a lot about office and multifamily Tony.
On the office side or very low volume, obviously, interestingly I've seen some single tenant credit deals a work yeah, we see some investors trying to.
Played a spread to fixed income.
Seeing a lot of recaps versus selling a into this market right now are the key for investors and lenders and the capital markets execution has to be there, but it's just a the weighted average lease term and what we're hearing both from lenders and equity or folks they're looking for set.
Seven plus years on that I think the big Big Challenge right now, we haven't really seen a lot of multi multi tenanted buildings come to the market is just the you know the.
Lack of traditional I know a buyers.
I think the good thing I would observe over the last 90 days and especially talking with the lenders is there hasn't been any motivation on the lenders part to to take any of these assets back they are working with with deferral plans.
For their borrowers to try to try to do some type of bridge.
Multifamily a bit of a different story, obviously, a with Fannie and Freddie being you know aggressively opened for business I think the biggest challenge and we and we have seen definitely more multifamily deals hit the market in the last 60 days and I think just talking to folks.
A definite notable pickup and B O V activity, you know probably with the top three brokerage firms and this region.
The feedback we get is really the first two years.
Our the challenging underwriting.
And people are always trying to make up for those first two years and then people are incorporating I'd say 22023, 24, 25, we're seeing rent spikes being implemented between five and 8%.
But the convergence really over the last 30 60 days, it's been around like a five cap we seen old deals a that probably would have it away pretty cove in being dusted off and we looked at and seeing some small off market activity.
But like I said the debt the debt. Some of these folks are getting you know sub three so investors are clipping, an AC and DC I think the biggest challenge you're gonna see in far as turnover in product is you know as as you're aware Tony we have to go through a top of process and you can't summit.
TOBA until October 12, which is where the Magyar extended.
State of emergency too so.
That's that's really you know.
Put to tap the brakes, there in northern Virginia not seeing.
Any slowdown in the end the appetite for people with.
No investors still are looking at that long term bet that like the Amazon renter changes the footprint.
But but both on the commercial side and on the multifamily side, we've got plenty of feedback that they'll be a lot more product moving to the market post labor day.
Okay, Great that's already Greg car. Thank you.
Thanks, Tony.
Our next question comes a lot of Black with Wells Fargo. Please proceed with your question.
Great. Thanks. Good morning, So just a follow up on my last question do you think Paul that that the the fallout from the pandemic ultimately increases a the spread between office cap rates that you'll be selling out and the multifamily cap rates that you'll be Bonnie.
I think that look at it like I said earlier, Blaine I think to monetize assets in this environment or specialty office environment.
People are got both lenders and investors are gonna be looking for duration I think we're fortunate to have that at a number of our assets. If we choose if we choose to do that execution.
I do think when Oh, you know when the when the dust settle that you will definitely be seeing more activity in the multifamily space a there's still a lot of capital out there that was on the sidelines prior to a prior to covert.
19, and just recently over the last 30 days I I'd say I've seen you know activity and pricing people definitely becoming a little bit more aggressive like I said to Tony I mean, it's really the separation gate is really that or how you're underwriting years wanting to and multifamily.
But I would expect it to be you know again with the assistance of Fannie and Freddie I wouldn't expect to see a a competitive fall for multifamily product in the region.
Got it that's helpful.
And clearly your your retail and other allocation has decreased a lot over the years down to I think 6% of and then why now but it continues to be a little bit of a drag on the rest of the portfolio in results seem to be getting worse is as a code that the syrups those businesses even more.
Can you just talked about your plan for that portfolio does it make sense to try to dispose of the rest as soon as possible or do you think it's best to hold onto you know what you have in hopes that you can backfill any sort of move outs that you haven't and maybe get get better pricing after the crisis.
Hey, Blake, Steve I'll start it I think Paul I will just tag team. This is 6% and we've had left set a penny a share of bad debts.
And when we look at what Weve contractually work that you know we've collected 90% there. So it's really not that big a drag and it's some of our best retail assets and yeah, there's probably not much of a market right now I'll, let Paul come in that in terms of trading retail assets, but these assets. We kept because they also have the ability to be eventually convert it into multifamily you know another mix.
Yes, so there's there's more than one path.
Some of those assets.
So if I don't know if you want to add if you know anything because I know I I'd say that you know that the thing that's probably change Blayne is obviously, a pretty small pipeline of retail investors out there right now and we're obviously sensitive to dilution I think first and foremost you know where.
Happy we got rid of our riskiest assets a with the most lease turned over last year as Steve said over half of the assets in that inside of that 6%.
I have redevelopment.
Potential he ran off Montrose, Tacoma, Chevy Chase Metro and very good locations or Matt and I think they're more comfortable of with that we're actually working pretty well with our our retail tenants right now and I'm I'm comfortable or some of the program.
So we've implemented with them, but also due to the quality locations. If we did have some move outs I'm I'm also equally comfortable with our ability to to backfill the space. So right now I think retail given that it's only 6% is ah.
A manageable a situation.
Alright, great. Thanks, guys.
Thanks, Mike.
Our next question comes on line up do Rogers with Baird. Please proceed with your question.
Yeah. Good morning, guys, maybe two on off at the first is it sounds like northern Virginia recovering a little bit faster by parking or any of your internal systems are you able to determine what percentage of employees are kinda back in the office or where utilization has gone to and then maybe a second question office, what's been your experience with base plus in that.
Current environment with collections renewals that you have any that are far enough along new demand for that product or your thoughts around that thanks.
Dave I'll take the first shot at that and Steve can can jump in.
First in terms of northern Virginia, and occupancy levels, Northern Virginia, you know I mean, we obviously are through our FOPS. We track a activity I think northern Virginia or got up over 20% a first we've seen that dial back a little bit.
And I attribute a lot of that to you know we're in the month of August and I think some folks are candidly just kicking the can toll pass labor day, a D C. A little bit different I think D C a probably.
Peaked in the 12% to 15% and we've you know we we think that that is probably going to.
Remain probably at a lower occupancy levels in northern Virginia.
I'd say the activity, you know and I'm comfortable saying that the activity in terms of you know that has to that that people coming back we want that to translate into leasing activity.
And you know two of the three assets that were focusing on our Arlington tower, and Silverline center or some of our best assets with some of our best space. So I think we're optimistic that that will that that will turn into something post labor day, just in terms of of execution.
I believe the second part of your question was space plus without a doubt you know weve.
That's not just me we've talked to a lot of 10 of reps and a lot of the the larger the the larger shops, both on the agency side in the tenant Rep side here definitely seeing a bit of an out migration or out of the co working space folks looking for their own identity.
As I made a comment earlier on leasing.
You know space, plus really is kind of a slip or fit.
For people looking for two to three year terms with flexible leasing not only that but they also get to create their own identity and they get to get most importantly in this environment they get to control the protocols in their own space.
And so we actually have seen the first deal that we did.
At 2000 M Street was the space flawless execution that that I believe was coming out of a coming out of we work and.
We expect that trend to continue a we haven't had any.
Steve I'm, asking I don't believe we've had any real material.
Rent hiccups in the space plus space so not at all any no no credit I mean, I think you covered just about everything Paul I think you know the key words or flexibility of you know that people are slow to make longer term decision. So space plus that's it really well it fits for those that are worried about the health of the environment that they've been is so they can have their own independent.
Sweet and King and it can be healthy and they don't have to interact like and co working with you know with others and it allows people who have longer term needs to get started it'll have a short term basis, and so and I think the fact that they have space plus and some of our best assets.
Available in some cases is actually helping it might even people over to at least decisions after that.
Okay. That's helpful. And then maybe just one on the multifamily side. The 3000 units over five years, and I guess I understand and taking a pause here, but as you talked about starting to push rents a little bit here in into August as you get to talk about the confidence just in the broader economy with not having as many deliveries.
Maybe over the next couple of years, you know when we expect you to see more b b more aggressive on the apartment renovations that would seem like you know that trade up today might make sense, especially as you get a little bit more vacancy in the apartment portfolio to just kind of continue through with that product. So I guess ultimately what would you want to see to get more aggressive there and get back on.
Right.
Well I I'd say, David your you know you've you've heard from us before I mean, the whole the renovation pipeline is based on the affordability gap and we still see a good affordability gap a and b, it's not like there's been a wide divergence like a is come in and be dropped precipitously.
We've seen them kind of move lockstep and I'll defer to grant Montgomery, our head of research, but we're going to evaluated on a submarket by Submarket basis, Dave I think as you're aware, we you know had achieved Uh huh.
Mid teens return on cost metrics I think we're going to reevaluate that is that still appropriate in this environment and then what type of movements are we seeing particularly in the be space. A I think we've been pretty pleased with a with the be space and how it's performing even on the.
Not only on the collections, but you know on some rent movements are both on the renewal.
Side of it so but you know we're going to look at each one of those properties. We're doing it on a monthly basis right now and I would tell you that if we saw an opportunity where we thought that that affordability gap was intact and we could achieve a suitable return on cost we would move forward.
And the Submarket and again I'll defer to grant Grant if you had anything you want it to add there.
No Paul I think you said it well I think you know we have seen you know very similar path with A.M.B. I think you know through April that's really been within 30 40 basis points in terms of there they're.
Tracking in terms of you ever rent growth. So you know that mid 20% rent gap that we have between a and b regionwide is still intact.
Really speaks to how be has held up during this during this time speaks to sort of the exposure of our residents to the strong industries, which we've talked about in the script, but last quarter and that's in that the majority of a job losses in our region. It didn't really concentrated.
A couple of three industries, particularly in a retail and leisure and hospitality or almost 60% of the job losses, we only have about 13.5% exposure to that industry and so that's really spoken on annually to the strength of our class B in light of what's going on broadly and has really held that.
Well relative to what's going on in the market.
The only other thing I'd add Dave is you know and we've we've told you. This before we're very sensitive to the you know income to rent metric and all our average rent or I believe is a 26%. So we want to keep that are intact. We think that's important given the economic.
Economic disruption, we're going through so.
I'm comfortable with that and we'll monitor that as we as we kind of move forward and look at reactivating our renovation program.
I appreciate all the detailed color good thing.
Thanks, Dave.
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Our next question comes on line of Bill Crow with Raymond James. Please proceed with your question.
Hi, good morning folks up Paul on the multifamily front.
If we see a big reduction than the unemployment.
Benefits would you anticipate your collection rate to to decline in the next few quarters.
Yes.
So Steve I'll I'll start it in and grant maybe able to help out and Paul as well one of the things that.
But we're really pleased with obviously, we've we've collected 99% of our Reds and Ah Theres a lot information in our materials and that that we've put out as we met with investors about the strength of our the sectors that are residents are employed by and how they've held up so well on a relative basis to the U.S. overall a one.
Of the things that we noticed a in and we were looking at recent stuff and grant maybe comment a little further on it but broadly speaking in terms of the large metro.
Areas, what the DC rent income is better than say, New Yorker, Los Angeles or the Bay area. So first since I'm. The cares Act is really just very less of the burden here in D.C. and again, that's not really affecting that month many of our tenants as we're collecting they per se, but but I think it also.
Speaks to justify our region I don't have Grand if you if you want to add a little to that or Paul.
Sure I can just add to the echo what I didn't know Mason way answered. The previous question is I think it really does get down to how our portfolio.
It's somewhat insulated based on the employment distribution of our residents I'm looking at another way you know within the Washington region.
National business services government and finance and on average declined less than 2.5% during the period, we're going through and those those industries comprise approximately 60% of our tenant base.
In class B, which really speaks to perhaps how Washington.
D C class the in particular, our class B in within Washington, DC is somewhat different than perhaps some of the pressures that might occur on other markets as Steve mentioned that have higher rent to income ratios or alternatively, a different employing that base that make up their economy.
Alright, Thanks, and a one an office.
I know, it's early and I know what are the tenants are tied to the government in one way or another but any buzz among the tenant reps that some of the CBD tenets might be looking for the suburbs are either to avoid mass transit or a in reaction to some of the the protest that the activities or anything like that.
Bill I haven't you know I haven't seen that per se with you know and executed lease do I think that some folks just given.
The you know the remote working paradigm that we are you know going through right now I do think you're gonna see a hub and spoke a approach a I know a number of companies that have downtown presences are also going to be employing a satellite.
Offices, you know in Virginia or in Maryland.
I think that we definitely without question a you know we if you look at our same store numbers on multifamily I know you asked about office, but you know you look people are definitely moving out there and I'd say that folks want to live close to where they work so I wouldn't anticipate something.
That follow on activity I don't think there's a some massive trend we're observing over the last 90 days bill, but that's clearly something that we're going to keep our eye on moving forward.
That said Bill I'd say, what great you can correct me if it looks like 70% of the job growth for the last a period of time has been in the northern Virginia, It's been real the growth engine for you to for our region for Awhile, So and pack is a huge part of it and that the contracting in the government contracting is has as increase it has a decrease so.
And I think you know about many of the big.
Tech firms that are moving in and big ways HQ to Microsoft Facebook or even Walmart labs people like that so I just think there's just more job, there's just more growth coming in northern Virginia.
Great appreciate the timing.
Thanks Bill.
And if there are no further questions. That's it sooner I would like to go back over the amendment for any closing remarks.
Like the thank everyone again.
For taking time to join US. This morning. We appreciate your continued support during these challenging times and we look forward to talking with you over the coming weeks and months.
Thank you and have a good day.
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