Q4 2020 Washington Real Estate Investment Trust Earnings Call
Yeah.
Welcome to the Washington Real estate investment Trust fourth quarter earnings Conference call.
As a reminder, today's call is being recorded.
Before turning over the call 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.
Thank you on good morning, everyone before I begin please call Ed.
That may be made during this discussion such statements involve known and unknown risks and uncertainties, including those related to the effect from the ongoing COVID-19, pandemic, which may cause actual results to differ materially and we undertake no duty to update on that the actual events and Paul at the front of certain of these risks in our SEC filings.
Tiliaceous of the GAAP and non-GAAP financial measures discussed on this call are available on our most recent earnings press release from the financial supplement which was distributed yesterday and can be found in the Investor Relations page of our website.
Participating on today's call with me will be Paul Mcdermott, President and Chief Executive Officer, Steve Riney, 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 will turn on.
All over to Paul.
Thank you and good morning, everyone and thanks for joining us today.
I Hope you and your families are keeping safe and well.
Last evening, we released our fourth quarter earnings results, which rounded out a year dedicated to stabilizing our operating fundamentals and maintaining and preserving future growth drivers against the backdrop of one of the most challenging operating environments in recent history.
Thanks to the dedication shown by the Wall Street team the strong credit.
Credit profile of our portfolio.
On the resilience of the Washington Metro region, we continue to successfully navigate through the pandemic and expect to enter the vaccine my recovery phase with a stronger balance sheet, a reaffirmed strategic direction and a portfolio that is positioned for growth as demand returns.
What the vaccine rollout to commence towards the end of last year, we are seeing signs on increased activity across both our multifamily and commercial portfolios.
For multifamily net applications were up 30% year over year in January for our urban properties and year to day trends already reflect improvement in occupancy as we head into the spring leasing season.
We are focused on growing occupancy to begin reducing concessions and increasing range.
Currently multifamily occupancy is over 95%, excluding our tube rent control properties, where we are not emphasizing occupancy gains as they offered limited rent growth potential in the current environment.
Multifamily credit performance continues to remain very strong at both our urban and suburban properties and has consistently outperformed the national average by a wide margin over the past year.
While multifamily lease rates declined three 6% and five 7% on a gross and effective blended basis. During the fourth quarter. We believe that December represented the height of rental rate pressure as lease rate changes improved in January on <unk>.
Once over must basis and concessions declined.
Furthermore, new and renewal lease executions with commencement dates in February and March indicate continued improvement and effective lease rate growth.
Our renewal rates were strong during the fourth quarter and that strength has continued into 2021.
Both urban and suburban renewal lease rate growth increased by 90 basis points during the fourth quarter to 1.7% and three 1%, respectively and those renewal rate increases remained stable through January.
Our continued pricing power that we are experiencing at our suburban assets combined with the ability to influence the lease terms with concessions has allowed us to roll board leases into future spring and summer lease maturities at our newest multifamily assets.
As a result of the strategic management of our lease exploration schedule only 20% of our leases expired during the fourth quarter and only 17% expire in the first quarter.
We think December marked the low point for pricing given the improving year to day trends that we're seeing.
We believe the vaccine led recovery will lead to them on an inflection in 'twenty and 'twenty one heading into 2022. However, it is too early to know the precise timing and extent of this benefit in 'twenty and 'twenty one.
Approximately two thirds of our multifamily leases expire.
On a stronger spring and summer months.
We anticipate that these leases will benefit from an increased number of vaccinations.
In the meantime, we plan to continue to focus on building occupancy and maximizing our retention rates, which continue to outperform our region.
Moving on to commercial our credit performance continues to hold up very well as Steve will discuss in greater detail and we expect that the vast majority of our commercial credit losses are behind us.
Our forecast indicates that commercial occupancy could increase by nearly 4% by year end, although there's still too much uncertainty to accurately forecast occupancy gains over the course of the year.
However, our outlook is improving and we are seeing signs that tenant decision making is accelerating.
Leasing activity picked up significantly in January and active long term renewal discussions with significant tenants are progressing well.
For example in January we received a signed LOI from Sunrise senior living to renew their space at Silver line, which currently represents approximately 1.5% of office revenue.
We also have signed LOI with B Riley and then accredited third party at Arlington Tower.
B Riley has a termination option in December 2022, and we'll exercise this option on only one of its three floors.
Which allows a third party to enter on a sublease for this entire floor through 2022, and then enter into a direct lease with us through 2029.
B Riley will extend the balance of their premises through 2026.
Additionally in January we signed a 45000 square foot.
Five year lease renewal with giant food to come of park, which represents our second largest retail tenant and over 6% of other rental income.
We also signed a 15000 square foot 10 year lease renewal with our grocery anchor at Montrose shopping center.
These two lease renewals represent approximately 10% of our retail rental income.
Heading into the recovery our office portfolio offer substantial growth potential given that much of the available space is high quality move in ready and located in our best assets.
We have a weighted average lease term of approximately five years.
Limited near term lease expirations, and our price points and floor layouts are well positioned for our market.
The average tenant size on our market and the space requirement that sees the most volume is about four to 6000 square feet, which is both our median tenant size and the tenant size with the highest demand in the current environment.
We have zero exposure to co working operators no co working tenants and no single tenant risk.
We continue to see good traction with space, plus which is our proprietary flexible office program that is managed in house with space is strategically located in our portfolio.
Space plus represents approximately 3% of our office portfolio and is very well positioned once decision making picks up.
Space plus is move in ready space that is private not co working space that allows tenants to control the health and safety of their environments.
It offers more flexibility than traditional leases.
Additionally, space plus offers premium pricing compared to traditional leases and on average has much longer terms than co working providers achieved allowing us to participate in the increasing demands from flexible office space, while preserving our weighted average lease term and thus our.
As for future portfolio transformation.
While uncertainty about the timing and pace of reopening remains the resilience of our region provides relative stability compared to other major metropolitan areas.
Since the onset of the pandemic the Washington Metro has benefited from fewer job losses than other major metropolitan areas and has already gained back roughly 180000 jobs or 56% of the jobs lost from February to May.
Additionally, those job losses have been largely contained to non office using sectors as office using sector employment in the Washington Metro market declined only 2% year over year and 2020, according to the BLS data.
As we continue down the path toward a vaccine driven recovery our region has several unique catalyst to accelerate the rebound in demand.
The growing high check labor pool.
Federal investment in cloud cyber and artificial intelligence as well as affordable office rents continue to drive information sector leasing activity in northern Virginia.
Amazon continues to expand their regional office footprint and remains on pace with HQ two hiring.
Over the course of 2020, the tech sector contributed 36% of total leasing volume and more than 800000 square feet on occupancy growth in northern Virginia. According to CBRE.
Check driven leasing demand drove Paul.
As it is absorption for the sector on the fourth quarter and that momentum has continued into January with the announcement of Microsoft's New 180000 square foot sales headquarters in Roslyn next door to Arlington tower and strategically located at the Nexus of four bridges.
Five major road networks, and three Metro mines and offers easy access to the Pentagon and downtown D C.
Government contract awards should remain at record highs in 'twenty 'twenty, one and the cloud market alone is forecasted to grow 9% to 10% annually over the next three years. According to J L. L.
Northern Virginia is diversification over the past decade blending.
Blending government contracting with direct federal leasing technology sector growth investments and higher education and.
Ed Medicine have set it up for a quicker than average office market recovery in 'twenty 'twenty, one and beyond according to Newmark.
With the arrival of our newly aligned administration, the Washington Metro market is positioned to benefit from a surge in activity.
Historically alignment between the executive and Legislative branches has resulted in a higher number of legislative bills passed with increased lobbying and legal presence in D. C to influence right and then implement legislation, resulting in a higher absorption in the D C office market.
So historical correlation to office absorption in years with our main branches on the government is very strong.
Additionally, the election should have a positive effect on our local partner market and may even accelerate a shift.
Back into the city for renters.
Data analyzed by CBRE over the past six presidential elections indicates that on average D. C Metro our rent growth was more than double the U S average during the six months subsequent to each election.
Furthermore, market level data indicates that urban submarkets, which have underperformed suburban areas. During this downturn.
We will likely benefit the most from the boost of activity associated with the presidential election.
Again these are catalysts historically unique to the Washington Metro area as opposed to other gateway metropolitan markets.
It has been an eventful and unexpected year and alongside the challenges that we have successfully navigated we continue to make progress on derisking and improving our portfolio.
This pandemic has reaffirmed our commitment to and the direction of our capital allocation strategy as part of the wash REIT transformation.
Following our fourth quarter office asset sales and including stabilized income from trove multifamily comprises 53% of our NOI, while office and retail comprised 41% and 6% respectively.
And with that I will turn it over to Steve to review our balance sheet collection performance.
Fourth quarter and full year results and our outlook.
Thank you Paul and good morning, everyone I'll start off today by reviewing the balance sheet before discussing our fourth quarter and full year financial performance and future outlook.
In the midst of the uncertainty that dominated the capital markets during 2020.
We took steps to strengthen our balance sheet and increase our operational flexibility, which has put us on a stronger position as we head towards the recovery phase on the pandemic.
First we made sure that we had ample liquidity at the onset of the pandemic by entering into a $150 million one year term loan with extension rights.
Second we closed and funded in December a $350 million 10 year Green bond at 344% and we used the proceeds to pay off the new $150 million term on and our other $150 million term loan that was scheduled to expire in March of 2021.
These actions address all of our debt maturities through the fourth quarter of 2022, and it turned out our maturity ladder.
Third we fully unencumbered unencumbered the balance sheet, allowing us optimal flexibility as we continue to allocate capital to further multifamily growth.
Finally, we increased our balance sheet flexibility heading into 2021 with our strategic office asset sales.
And issued some equity through the ATM program to be ready to continue our capital allocation when visibility until the recovery is more clear.
On that regard at year end, we only had $42 million outstanding on our fully available $700 million line of credit underscoring that we increased our liquidity further during the pandemic.
All of our covenant ratios remained strong and we maintained our B E two and Triple B flat investment grade ratings with Moody's and S&P.
Now I'll turn to our cash collection performance, our multifamily collections continue to be excellent tracking well above national averages, we collected 99% of cash and contractual rents during the fourth quarter.
On a rent collections through January are in line with our quarterly trend we.
We've offered deferred payment programs to residents who've been financially impacted by the pandemic and only a very small amount about $15000 a deferred multifamily rent remains outstanding.
Our office and retail collections for the fourth quarter improved sequentially, continuing the trend of steady quarterly improvement since the beginning of the pandemic.
We collected 99% of cash rents from office rents from office tenants during the fourth quarter and over 99% of contractual rents, which excludes rent that has been deferred.
We deferred rent associated with office tenants and that amount was $1 million as of January 31, and we expect to collect approximately 75% of that rent that was deferred by your Ed with the balance thereafter.
We collected 94% of retail cash rents in the fourth quarter and excluding deferred rent our collection rate was approximately 97%.
Net deferred rent associated with retail tenants was $1 million as of January 31, 2021, and we expect to collect 40% of that rent by year end.
Overall.
We've only deferred a small portion of rent and they expected cumulative cash NOI impact is less than a penny per share through year end 2021.
Now turning to our financial performance net loss for 2020 was $15 $7 million or 20 cents per diluted share compared to net income of $383 $6 million for $4.75 per diluted share. The prior year. The largest decrease is primarily due to the net gains on asset sales that were executed during 2019 compared to small losses.
As reported on sales in 2020.
Core <unk> of $1 45 per diluted share for full year 2020 was in line with the midpoint of our guidance range.
On a year over year basis core <unk> per share declined by 26 cents due to the strategic transactions completed during 2019 as well as the impact of the pandemic on leasing activity parking income and credit losses.
Overall same store NOI declined five 4% year over year on a GAAP basis, and four 9% on a cash basis for the full year 2020.
Multifamily same store NOI declined, 0.9% and 1% on a GAAP and cash basis for the year and 7.2, and seven 3% on a GAAP and cash basis for the fourth quarter.
The full year and fourth quarter declines were primarily driven by the year over year, new lease rate declines at our urban assets, which comprised 100% of our same store portfolio during 2020.
The impact of lease rate declines has an outsized impact on our same store results during the fourth quarter as the impact on urban flight on overall demand levels had a greater impact on.
On lease rates.
During the winter months that were weaker.
Our suburban properties. We're at lease rate performance has been the best will be included in our same store results in 2021.
During the fourth quarter, we focused on maintaining occupancy ended at 94, 3% excluding true.
Office same store NOI declined seven 1% and six 4% on a GAAP and cash basis for the year from 12, 7% on a GAAP and cash basis for the fourth quarter.
The full year and fourth quarter declines were primarily.
Driven by lower parking income known move outs and increased credit losses reflected in the write off of two isolated and specific receivables and a more significant lease intangibles related to COVID-19.
Same store GAAP NOI decreased for our remaining retail centers, which we reported as other by 2.1 on $1.8 million on a GAAP and cash basis for the year and zero point $7 million on a GAAP and cash basis for the fourth quarter.
The full year and fourth quarter declines were primarily driven by credit losses related to COVID-19, which increased from the fourth quarter, primarily due to the write off of intangibles related to two leases.
Overall commercial credit losses reduced our core <unk> by approximately <unk> <unk> per share this quarter, which is higher than the third quarter impact and in line with the second quarter. However.
However, the sequential increase this quarter was primarily driven by the write off of intangibles related to the aforementioned leases, which are not indicative of a change in the credit performance of our overall portfolio, which remains very strong and stable.
Over 60% of the credit losses related to these leases were noncash straight line rent write offs.
As our cash losses were relatively flat on a sequential basis.
We believe that we've addressed the credit risks that are apparent at this point in time.
And we anticipate steady improvement in credit performance over the coming year.
Turning to leasing activity for the fourth quarter and full year, we signed approximately 9000 square feet of new office leases and 22000 square feet of office renewals in the fourth quarter.
Office rental rates declined 5% on a GAAP and 9% on a cash basis for new office leases, but increased 22% on a GAAP basis, and 8% on a cash basis for office renewals.
More importantly in December the exchange of proposals in the negotiation of lease renewals picked up substantially and that momentum has carried into January.
Earlier, Paul gave color on two of our largest renewals and extensions that silver on center in Arlington Tower for example.
Retail signed approximately 8000 square feet of new leases on 3000 square feet of renewals during the quarter net.
<unk> rental rate increases of 13% on a GAAP basis for new retail leases and 3% on a GAAP basis for retail renewals.
As Paul referenced we signed approximately 60000 square feet of retail leases, representing 10% of our retail portfolio revenues since you're at.
Now turning to our outlook.
With the development and rollout of vaccine programs on our growth prospects heading into 2021 had.
They have improved but the timing of when we will reach an inflection point is still on.
Therefore, the extent that vaccine rollouts will offset the pandemic in 2021 prior to the inflection is uncertain. We do however believe we will see rapid improvement once we get to that point.
And it will carryover into 2022, given that the embedded growth drivers that we had prior to the pandemic are still intact.
We believe the most disruptive part of the pandemic is behind us the timing and pace of the economy reopening still remains uncertain and we're on.
Not ready to forecast with a sufficient degree of accuracy, the timing and extent of the recovery over the course of the full year.
This close to quarter end, we have enough visibility to provide guidance for the first quarter. However, we do not have enough visibility to provide <unk> guidance from the player. We are however, providing full year guidance ranges from the financial performance metrics that we believe we are able to forecast with a reasonable degree of accuracy.
While we're not calling the timing of and therefore, the full impact of the pandemic prior to the anticipated inflection point.
We will discuss the areas of our portfolio that we would expect to be the most responsive and to offer the most upside growth potential once the economy resumes.
Starting with multifamily.
Total operating portfolio occupancy ended the year at 94, 3%, which was in line with our expectations and represents a relatively stable trend since the end of the second quarter.
On a positive note as Paul mentioned, we've gained occupancy since you're in and leading indicators point towards steady improvement in occupancy as we head into the strong leasing season.
We've increased occupancy to slightly over 95%, excluding our two rent controlled assets and we are seeing effective lease rates trending in the right direction.
Additionally, net application volumes have increased significantly on a year over year basis for urban properties.
Overall, we had previously expected significant multifamily growth in 2020 and that growth is likely not going to be deferred until the economic recovery led.
Led by the greater vaccination takes hold.
Okay.
While we do expect a seasonal lift in the second quarter, we expect a broader inflection to occur at some point in 2021 heading into 2022 and for it to have a greater impact on 2022.
We have a five year pipeline of value add renovations ready to resume once conditions improve.
And we still expect future NOI growth from the true, which I will cover next.
In terms of our renovation pipeline, we're constantly evaluating the health of each of our submarkets for rent growth and renovation potential. We are encouraged by the metrics that we're seeing especially in our newly acquired suburban portfolio.
Certain submarkets in the Metro area are seeing the rent gaps between class a and class b rents widened which is an early indicator of renovation potential while their submarkets continue to see rent gaps tightening.
We are monitoring these trends and we will resume renovations when the submarket fundamentals allow for rent increases to deliver the appropriate ROI.
And we know the capital allocation is accretive.
Trove delivered its final phase in the fourth quarter and leasing momentum continues to increase.
While our lease up had just begun when social distancing measures drew on site touring to a halt in April we continued to make substantial progress on on lease up and have maintained a monthly lease up rate that is above long term regional average against an extremely challenging backdrop.
We reached breakeven in December and remain on track to reach stabilization in early 2022, we expect trove to add $100000 of income in the first quarter ramping up each quarter to approximately $1 billion by the fourth quarter 2021 with significantly greater growth in 2022 over 'twenty 'twenty one on levels.
Now moving on to commercial as expected occupancy remained relatively flat through the year and while we only have a small amount approximately 20000 square feet of signed new leases that have not yet rent commence in approximately 20000 square feet of signed LOI from new leases that are expected to rent commence during 'twenty 'twenty, one we have minimal lease expirations during 2021.
Our 2021 office lease expirations represent less than 3% of our overall revenue and we believe that a renewal was likely where we'd go or where we are under negotiation for renewal for over 60% of that space.
We do not have enough visibility on the timing of the inflection point for new office leases.
But it will be driven by a combination of widespread vaccination rollout schools reopening in the general community returning to more normalized activities.
When that occurs it will impact the timing of new lease commencements.
We have a forecast that can result in occupancy growth of up to 4%, but that forecast is at risk if new leasing is delay.
For example that forecast includes a little over $3 million of new leasing revenue in the fourth quarter that would be at risk. If the inflection does not happen sooner enough. So we're not ready to provide a guidance range yet without more visibility.
Following the two retail renewals, which were executed in January on which represent 10% of our retail NOI, we have less than 3% of retail revenue expiring in 2021.
While we are seeing recent signs of and experiencing increased activity across our office portfolio. One of the most challenging calls for us to make is when sentiment will turn and decision, making will pick up to even higher levels again and when those additional lease commencements will beget.
With that said we.
We believe that we're positioned well once activity improves.
And we expect our office portfolio it would be highly responsive to the economy reopening.
The majority of our vacancy is in high quality space, some of which isn't moving ready status nearly.
Nearly 60% of our current vacancy in northern Virginia, where job growth and absorption rates are the strongest and where we're seeing the most touring and leasing activity.
Parking revenue improved slightly over the course of 2020, driven by an increase in transient parking but remains below normalized levels.
Compared to other major metropolitan areas are parking coverage is higher which allows more of our tenants to choose to drive instead of taking public transportation.
Our parking garages capacity and serve over 50% of our building population prior to the pandemic on average and we still currently have at least 50% parking capacity available, which provides an option for companies that want to encourage and poised to return to the office before sentiment improves towards public transportation.
We are guiding to a core <unk> per share range of 29 to 32 per share for the first quarter, we expect multifamily NOI to range from <unk> 20 in the quarter to $20 $75 million office NOI to range from $17 75 to $18 $5 million.
In other NOI of approximately $3 million.
G&A is projected to range from six to six on a quarter billion dollars ish.
Trust expense is expected to range from 10 to 10 on a quarter million dollars and development expenditures are expected to range from five to seven and a half million dollars.
We expect NOI to bottom in the first quarter, driven primarily by our year end asset sales following the first quarter and absent any major setbacks to the current graduate pace of reopening we expect sequential growth throughout the year to be driven by the lease up of the true.
The benefit of the more favorable multi leased family leasing seasons coming off in the winter months, the face resumption of unit renovations and commercial rent Commencements. Therefore, we expect our full year results for 2021 to be higher than the first quarter annualized results.
Since our last earnings call, we sold two office assets and issued approximately 2 million shares through our ATM program at an average price of $23 86 per share to improve our balance sheet and position us to further strengthen our capital allocation once visibility on us with opportunities to increase multifamily. Currently we are not planning on reinvesting those proceeds in the near term.
Thus we estimate at this time that these two initiatives net of their interest impact.
We'll further strengthen our balance sheet and lower full year 2021 core <unk> by approximately <unk> <unk> per share.
For the full year, we expect G&A to range from 22 on a quarter to 23 on a quarter million dollars and interest expense to range from approximately 41, and a half to 42 and a half million dollars. These ranges do not assume any acquisitions are completed during the year.
Additionally, assuming that leasing activity and utilization continues to increase and we achieve occupancy growth by year end, we would expect commercial operating expenses to increase by approximately $1 million by the fourth quarter from the first quarter expected range of $11 75 to 12 on a quarter million dollars.
We believe that during 'twenty, one the vaccine distribution should create a positive recovery inflection point, but from that point forward, we should see improvement with more to follow in 2022.
And with that I'll turn the call back to Paul.
Thank you Steve.
During what was a challenging and unexpected year.
We supported and protected our residents and tenants stay.
Stabilized our operating fundamentals.
Strengthened our balance sheet and preserve long term growth opportunities.
While the timing of when we will reach an inflection remains uncertain.
We believe that it will happen at some time in the second half of 'twenty 'twenty, one and that we are positioned for rapid improvement.
Once we reach that point.
Our region has several unique catalyst to accelerate the rebound in demand, including a strong economy and favorable demographics.
Historically, we have seen Washington office absorption increased significantly when the White house and both branches of Congress are aligned with one party correlating with increased legislation lobbying and law implementation.
That is a promising opportunities that we will be monitoring.
We also expect the apartment market in the region to receive a relative booths compared to other markets over the six months based on historical patterns following presidential elections, which should coincide with our strongest seasonal leasing months.
Long term our research indicates that we should expect sustained growth in northern Virginia, driven by government contracting technology sector growth and investments in higher education.
While we certainly have not emerge from the pandemic at this point, we are seeing signs of our multifamily occupancy strengthening concessions starting to decline and improvement and effective lease rates all of which are positive trends heading into our stronger seasonal leasing months.
Now we would like to open the call to answer your questions.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the Q.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star T.
Our first question comes from the line of Anthony payload with J P. Morgan. Please proceed with your question.
Okay, Thanks, and good morning.
I guess first question for Paul just from a bigger picture point of view can you talk about just how you're thinking about capital allocation.
On the push to multifamily in an environment, where it seems like cap rates have.
Compressed actually go on to like 4% on apartments.
So how are you thinking about potentially making that trade. If that's still a you know push that you want to Medicare.
Sure Tony.
First off.
Just wanted to.
Acknowledge we've been getting some feedback that we got some static on our lines. So my apologies for that upfront.
In terms of capital allocation, Tony I mean, we are going to continue to you know.
To look for multifamily opportunities.
I would say that you know right now when we look at the markets and what we're seeing out there.
I think your question the sustainability of those cap rates.
And just anecdotally from some color on that I mean agency borrowing costs.
Increased over 50 basis points since last summer.
And even the new lending from the life companies and the debt funds.
They're pushing back and they are really gravitating towards the kind of trailing ones and trailing three.
I think the folks that we're competing against are probably core plus and value add folks really.
Essentially competing for the same deals, but with different leverage strategy.
When I look around and like.
Where would we allocate capital right now.
In D C. I mean with total in the restrictions I think D C probably had its lowest sales volume.
The numbers I'm hearing around $30 million from 2020.
And in a in a basically a multibillion dollar region.
I do think Tony Theyre going to be opportunities.
In terms of looking at.
Potentially some unstable lies deals.
Decent some markets I mean, we always preached research around here and we followed jobs and we track the rents in the income demographics.
And I do think there are decent some markets and I do think that there are you know when we're looking at potentially in on stabilized property those aren't going to have agency gain on those and I think there's.
An opportunity for us to jump in and make a basis debt.
But we are we're definitely committed to continuing to work on capital allocation to.
Multifamily we look at.
Whats taking place in the market right now.
Just in terms of you know on.
Our operating fundamentals.
I think that you know.
As we.
Look at how we drove occupancy in our owner operators driving occupancy using concessions.
It really feels like D C as a region.
Region held up pretty good through September.
A tough fourth quarter.
But.
Candidly, we like where.
We're seeing in January and we think that the traffic has picked up and hoping that bodes well for the spring season.
And.
Just just some other observation Sony in general because I've been reading the same things other people are about.
Multifamily on how we're going to perform coming are entering into a recovery phase and a reentry phase.
We actually.
We still feel like the class B strategy.
Is the appropriate strategy and has really only been amplified in these times people look at D C and a and a question.
Supply that's going to deliver over the next couple of years I mean I'm looking at.
Units that are supposed to deliver in 'twenty three.
Debt you know I think there were 11000 units forecasted to deliver in 'twenty three.
On our math on the things that we're tracking only about 3300 of those units have been capitalized on those units are delivering at price points.
Class a price points, where the rent gap between our average this is net effective on.
Our average class B and the net effect of class a there is still a $650 GAAP there.
We think that debt a lot of folks right now I mean, we're through them move home to mom and dad phase.
People are planning on a reentry in 2021, whether it's you know summer or fall and that's really that's really driving a lot of the traffic right now.
And with the growth that we've seen in rents in the suburbs.
We think that some of the urban D. C deals are looking.
On a relative basis kind of inexpensive. So we think there are going to be opportunities out there I never.
We'd say, it's not going to be competitive, they're all competitive, but I think it gets back to.
Knowing what markets you want to be in and what price point do you want to be at and.
We as you know, we don't really typically utilized debt.
But we do think there while I believe the first quarter will probably be slow because we had a we had a big fourth quarter in terms of multifamily sales and why I think the first quarter is going to be slow.
We do think we're going to be presented with the multifamily opportunities from the balance.
Got it I appreciate all that color, where you are active in some of the bidding contests in that and the <unk> deal deal flow and did you find yourselves. If so far behind are they just didn't line up and it wasn't stuff you want it or how does that work.
I think.
Again, I hate to keep going back to research we knew them. We think we have a good handle on the market.
<unk> basically.
Upon this in his remarks, we have an idea of the markets. We think are kind of out in front and are going to recover quicker than.
That will probably reactivate our renovation pipeline, but when I see folks.
We're we have marked market observations, Tony where we're seeing negative rent trade outs and I'm seeing smokes dinner.
We're winning these deals growing rents simultaneously at 1% to 3%.
We wish them well, but that's not we want to be pragmatic about it now on our underwriting and we looked at deals certainly in the fourth quarter, we always look at deals.
But I think we were very comfortable when we saw some of the some of the price per pounds that were being pony.
We were comfortable passing and and maintaining discipline and being shot selective.
Got it. Thank you and then just one.
One other on the comment about potential a 400 basis points of occupancy pickup just what's what's behind that is there a set of leases that just barely knock on your ways or specific asset that you've got some traction on just curious horsepower on the 400.
Well that is.
Steve and Tony.
That's really looking at all of our leasing and if you think about what we're experiencing we are having.
We're having really good traction on renewals I think renewals are.
Showing that there's conviction and people are ready to move on that and thats happening already so to get our occupancy gains it's got to be our new leasing and thats. The one that we've been a little bit.
We're very confident in terms of the space that we have in some of the very best space and assets that we had going into the call.
And that's our normal lease up.
Moving just looking at market colored activity. The question is really.
For new leasing where people have the conviction soon enough.
The work force is ready to return to work on all we see the conviction happening pretty actively on the renewable front.
And so that's basically reflecting our new leasing assumptions and for us.
It's honestly a win on an if question.
When is really driven by when schools open when the vaccine.
As.
More widely distributed when activities return and really companies are feeling like they've got to get ahead of it we're seeing it in the apartment side, we're seeing people now starting to move back in our our applications are up getting closer to where they want to work we're seeing in on the renewal side, where companies are saying, okay. We are ready to make our long term decisions.
We just need to see the inflection helped with new leasing a little bit Ed.
And so that's the risk for US is it's really a timing risk in terms of whether that will happen soon enough in 'twenty one for us to get the benefit of grow that occupancy that's the call we weren't ready to make.
Got it great. Thank you for the car.
Thank you.
Uh huh.
Our next question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.
Great. Thanks, Good morning, Paul you touched a little bit on the 60000 square feet of retail leasing you've signed in January.
First is there any detail you can give on the rent spreads on that leasing and second now that you have longer term renewals signed on that.
10% of the retail portfolio does that maybe change the pricing profile and make you any more willing to look to sell your remaining retail assets.
Blaine.
I don't have the rent spreads right in front of me, but I'm happy to follow up with you after the call okay.
We're too.
Those were two critical.
Anchors at their respective centers.
In terms of changing it certainly I think it changes the risk profile.
But both of those centers.
Or in that debt.
Potential redevelopment bucket as you know that.
The giant at Takoma.
Not only is it in an opportunity zone, but it's literally right on the purple line. So we think that that debt.
It does represent a real redevelopment opportunity I think like most of you know.
Going back to Ed Tony's earlier question, and we want to allocate capital most of it is.
Do the rents that we're seeing right now justify.
New development in that respective Submarket or Jones day.
Right now I don't believe the rents are there for.
Tacoma.
And then when I look at it.
I'd, probably say the same for.
On the mantra shopping center right now I think suburban Maryland.
Is still has a couple of bumps.
As we're all well aware off so I do think that there are people that are starting to put depend on paper right now looking at new return on cost metrics looking at forward rents too.
Two years from now and obviously looking at their land basis, and I think if somebody like.
Like we've always said these were covered land plays and I think the Optionality to Washington, Rehabs. It does it does it do in itself or does it sells a dream and I think that that's you know.
I think that that's still.
Where we are and I think Steve do you have those rights.
Yes, I do.
Blaine pretty.
Pretty much flat in terms of initial cash rent, but we've got bumps on it so.
The GAAP increases about 15% lease over lease.
Okay, that's great.
And then Steve one for you I know we've talked about this in past, but just for an update in light of the recent office sales just wanted to get a sense of how you guys are thinking about the dividend going forward.
Out ratio was between 90 and 95% this quarter and you've also talked about recycling more capital out of office and into multifamily.
You know, which is which is likely to be dilutive going forward. So just updated thoughts on the dividend would be helpful.
Yes.
<unk> provide our forecast and guidance in the board room, we discuss the dividend every quarter.
As the board thinks on with Us.
We're expecting to cover the forecast the cover the dividend and our forecast for the year.
And the board is confident that we should keep paying it we we do believe that once we get to a point of inflection.
Assuming where we are we're going forward.
Through this pandemic and coming out the other side, we think our coverage ratio should strengthen.
So theres really been no.
No thought or discussion of cutting the dividend honestly in our and our board discussions.
Great. That's helpful. Thanks, guys.
Our next question comes from the line of Dave Rodgers with Robert W. Baird. Please proceed with your question.
Yes, good morning, everybody I wanted to talk about the class B rent GAAP I think it came up maybe a couple of times in a variety of that comment, but can you maybe dive down a little bit deeper and maybe this is for grant as well in terms of kind of the class B rent GAAP I think you said, it's getting wider.
And I would think that given the decline in rents and kind of the pandemic, we would see compression in those those numbers. So I want to give you the chance to clarify maybe bolt on the multifamily side and then within the office component as well.
Okay.
Can you hear me now.
Yes, sorry about that.
Getting used to hitting the mute buttons here.
So I think the comments in the note are our script said that we had had some compression market wide.
Throughout 2020, but that we had net had actually starting to flatten out in the fourth quarter. So there was no longer compression at the market level.
The sub market level, which we are watching very closely as part of our ongoing.
Analysis of when it will be the right time to turn on.
On renovations back on there is.
Quite a bit of variety in terms of the rent GAAP. So that some sub mercury is actually on why.
Living in that GAAP is growing because we are getting rent growth in those particularly in some suburban locations. So.
And there is.
Variety of some of the Submarkets, that's actually sort of.
How we chose our sub markets to begin with and that we chose submarket.
On that had a greater than average rent GAAP. So even the ones that we had some compression and we.
We have.
350 basis points, greater GAAP and some of our Submarkets like Columbia, Pike, where dwelling tenant drove relocated than you would have and market wide zone.
We're watching that closely it's flattening out at the market level net is not compressing further as it had and in some submarkets.
Actually seen it go the other way in a positive direction, hopefully that clears that up.
Maybe just a quick follow up on that before talking office, if we could just.
Suburban versus urban component of where that compression has been is there a way to generalize between the two of those without kind of going each submarket by Submarket.
I would say if there's a.
It's it's wider I don't have the exact number in front of me, but the average for the region is around 20%.
I'd say it is wider.
Wider in the Submarkets.
In the suburbs, where there has been less.
Decline.
In class eight and there is class B I think.
Over the course of the Panther.
Pandemic B has outperformed by about.
230, 240 basis points, so I think that would probably sort of back into the difference there between those.
Those rank GAAP levels.
Okay.
Okay. That's helpful. And then maybe just on the office component and I don't know if thats for you Paul.
Rents Delta is compressing maybe within and around the district.
Well.
Dave It's I'm looking at you know and I would like to.
Look at it kind of pre pandemic and what we're currently seeing like if I were to look at large deals in the in the class a space.
Pre pandemic at Ti package, who is probably let's.
Let's say 110 affluent and today it could be anywhere from 130 to 140.
Free rent.
<unk> was right on top of a months per year and today, it's probably.
One on a quarter to one and a half months per year of term and then you. Then you have your unused ti conversion, which as you know.
Probably gone from 10% maybe upwards to 20%, we're not really seeing those types of lift I think we see less slippage in the class B space.
And probably more importantly.
Just like in the multifamily space.
It's about retention I mean I looked.
Reading with J O L. A.
Their deck.
Retention.
Excuse me renewals.
In Northern Virginia were up.
A third and I think.
They're they're more economically can be more economically viable.
For both the tenant and the land certainly from the landlord.
And so we're really focused on renewals you have to remember I mean, especially in the B space and looking at our portfolio. We're playing in that four to 6000 square foot range.
We're not really competing from us.
There's hefty ti packages and big free rent packages.
Tenants are very savvy and.
Theyre going to obviously trying to negotiate the best deal possible, but there is definitely a spread.
For the big.
Renovated ace and trophies that our debt path to achieve our occupancy on what they are willing to do to buy occupancy in the class BS.
So I still think there is we have an adequate delta.
Between class, a rents and class b rents on.
On the region.
Okay. Thanks for that and then you'd mentioned the two renewals B Riley in Sunrise.
Can you talk about the tone of those conversations was that just it sounds like some flexibility was important in at least one of those deals but kind of talk about maybe the economics on how those shook out at the end.
Well we.
Just to be transparent.
Sunrise, we've been talking about pre pandemic.
And we applaud them.
In terms of their decision decision makers coming back having a workforce strategy and putting depends on the paper and it was a competitive bid situation.
Flexibility when we talk about flexibility.
We see tenants that.
Our operating in the space of Wanna.
Are recognizing that it's kind of a tenants market right now making workforce strategy decisions.
I think in terms of flexibility I think tenants, we're seeing more just folks requesting.
Partial.
A partial termination option in a future lease.
Not that they're going to exercise it but that day.
They definitely want that at their disposal income.
Base.
Their model.
Require some type of shift in operating expenses when I look at B Riley.
B Riley is committed to the space, but.
<unk> looked at their model and said.
We can we have an option here too.
Back a floor and that's what they've done Fortunately.
It was.
Not that there are bachelors, but there was a it was a good floor.
In Arlington Tower and.
On it.
It showed just because.
As they as Thats the space came to marketing was immediately picked up by a full floor user and so the situation we have with B Riley is.
On that user will do their sublease.
Through the end of the to the pointed a termination option, which I believe is December of 'twenty, two and then.
Net user will have a primary lease with wash REIT through 2029 again, a lot of the tenants that we're talking to.
Dave we're not.
We're not seeing tenants, saying, hey, I want to get back half my space, but what they're looking for is optionality going forward based on how protracted or not.
A recovery of recovery can.
It can be and those have been in discussions we haven't seen huge redesigns. We just have not experienced in that that in our portfolio to date.
Yes, thanks for those details Paul maybe just a final question from me, Steve You mentioned using the ATM can you talk about kind of when and how you are looking at using that going forward in terms of adding capital to the balance sheet.
Yes.
Dave We just looked at.
The opportunity to continue our capital allocation first of all.
We wanted to strengthen the balance sheet.
Also wanted to you can't time everything at the same time.
So we wanted to get the office sales executed debt that.
Debt we felt.
Well, good and could get executed we did just a little bit of ATM I think.
On some somewhere around two percentage is just a small sliver of capital, but we wanted to go into 'twenty.
'twenty, one with a strong balance sheet as we could until we had more visibility for the inflection that we think.
Sure we have spring leasing seasons, but we think the pandemic is going to give us the lift and we just wanted to be as strong as possible. When we finally have that visibility.
We're not planning on using it or or or going to the ATM. At this point. We wanted to we wanted to go into 'twenty, one and decide how much conviction we had on visibility.
Really.
We're also monitoring what's happening and we like the multifamily business. We commented on the call I'll just I'll just make a comment or two in terms of what we were observing because we did have some investor meetings.
On the road at the end of the year to October November were really good months for us still.
I would say the leasing season extended a little bit.
The September October months for us it looks like December was the bottom from a multifamily standpoint.
In terms of it's the winter months, Fortunately, we only have about 20% of our portfolio.
Hiring at that time, and we have about two thirds in the summer.
We saw December was tough and our focus was on maintaining and then starting to push.
On the push occupancy and Thats really helped US we commented on in our prepared in our prepared remarks.
We didn't think it made sense to push on to rent controlled assets, but for everything else since year end, we've got it up to about 95%.
That is getting to the point, where we can start to burn off concession start improving effective rents than we saw in the month of January 300 basis point improvement in effective rents for new for new leases, which is the right trend and as we look at our early indicators renewals in the leases getting signed in early February it looks like federal.
Our remarks, improving in the right direction to both from an effective standpoint.
That said, we've improved our occupancy so we feel good about that.
When I think about January versus the fourth quarter. If December was our toughest month.
And I look at January.
It's better than December and in fact January has already kind of to the average of the four.
Quarter, which led to better months in February and March are truly trending as they seem to be trending and hopefully the first quarter will be better in all and you think about our guidance we saw the winter coming in but we actually outperformed our fourth quarter multifamily guidance from a same store standpoint.
And from an NOI standpoint.
And hopefully will prove to be conservative on the first quarter, but we're just going to have to see.
And in terms of the other inflection points, Dave It's just as I said earlier, it's it's win win will things happen soon enough and how much were they benefit 'twenty one.
I appreciate all the added color Steve Thanks.
Thank you.
Yeah.
As a reminder, ladies and gentlemen, it is star one to ask a question.
Our next question comes from the line of Chris Lucas with capital One Securities. Please proceed with your question.
So it's now good afternoon guys.
Just a couple of quick follow ups on the Sunrise.
Renewal.
Did you provide the duration of that renewal.
It's seven years Chris.
Excellent Okay, and then the one sort of nearer term lease that you haven't talked about is the capital one exploration, which I guess is first quarter of 'twenty two.
Any movement or conversation there.
What's what do you see as sort of.
Things that you need to see in order to get a response out of them.
We are having we are.
Our having dialogue and kind of broker to broker in kind of real estate to wash REIT the only real.
Only thing tangible Kristen I think has happened in the last.
<unk> 90 to 120 plus days is just them executing.
They are in three buildings as you know in Tysons.
Outside of their their main campus and then executing a short term extension at one of the buildings.
We are hearing that that debt.
That same type of activity.
May be coming our way.
On.
That's obviously one Chris we've all got our eye on.
But to date.
We have and have not traded paper.
Since the beginning of the year.
Okay. Thank you that's all I had.
Yeah.
There are no further questions in the queue I'd like to hand, the call back to management for closing remarks.
Okay.
Thank you.
Again, I would like to thank everybody for your time today, and we look forward to seeing many of you at upcoming conferences over the next several weeks.
Everyone.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.