Q1 2021 Washington Real Estate Investment Trust Earnings Call
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Welcome to the Washington Real estate investment Trust first quarter earnings Conference call.
As a reminder, today's call is being recorded before turning the call over to the company's President and Chief Executive Officer, Paul Mcdermott Drew Hammond, Vice President Chief Accounting Officer, and Treasurer will provide some introductory information. Please go ahead.
Thank you and good morning, everyone. Before we begin please note that forward looking statements may be made during this discussion such statements involve known and unknown risks and uncertainties, which may cause actual results to differ materially and we undertake no duty to update them as actual events unfold we refer to.
Of these risks in our SEC filings.
Reconciliations of the GAAP and non-GAAP financial measures discussed on this call are available in our most recent earnings press release and financial supplement which were distributed yesterday and can be found on the investor Relations page of our website.
Participating in todays call with me will be Paul Mcdermott, President and Chief Executive Officer, Steve <unk> Executive Vice President and Chief Financial Officer, and Grant Montgomery, Vice President and head of research now I'd like to turn the call over to Paul.
Thank you drew and I appreciate you filling in for Andy on the call today, while she Val.
Good morning, everyone.
Thanks for joining us today.
Last evening, we released our first quarter earnings results, which reflect performance that was in line with our expectations.
We are pleased to report that the gradual rebound in demand across our multifamily and commercial properties that commenced in January continued throughout the first quarter and into April.
Looking ahead, we remain optimistic about the accelerating vaccine deployment, which we anticipate will translate to increased visibility on our near term performance, allowing us to reinstate full year <unk> guidance.
We are now heading into the spring multifamily leasing season, and urban demand continues to rebound, while our suburban portfolio fundamentals remained strong.
Pricing trends are improving.
Both the volume of concessions and average concession amount per unit continues to decline.
We expect multifamily rents to show steady improvement as urban markets recover and concession decline and burn off.
Trove continues to lease up with increasing momentum, reaching 51% leased this week and remains on track to stabilize in the second quarter of 2022.
Over the long term our value oriented multifamily portfolio is positioned very well with favorable supply and demand fundamentals.
From a demand perspective, the Washington Metro region has a significant housing shortage that has been accumulating over many years and an affordability crisis for only getting worse as the cost of homeownership continues to rise above affordable web affordable levels for median income earners.
And from a supply perspective, while class a supply has been growing the majority of renters remain underserved by new supply because our region has not been producing housing product at the price point that would address the growing demand.
Therefore, we expect demand for our value oriented multifamily units, which are price to target the largest most underserved renter cohort.
To benefit from having a large and growing target market and limited competitive supply over the long term.
In commercial both new and renewal leasing activity has picked up significantly thus far this year.
We have executed over 150000 square feet of commercial leases in Q1, 2021 which is 25% above our year to date leasing volume at this time last year.
This amount includes back filling of 21000 square for tenant at Arlington tower with a new tenant through 2029.
Since quarter end, we have signed a 74000 square foot eight year renewal with Sunrise senior living at silver line.
Year to date, we have eliminated approximately 55% of our 2021 commercial lease explorations.
Also sworn and proposal activity increased in March to the highest level. It has been since the pandemic hit.
We currently have approximately 135000 square feet of new and renewal commercial leases that LOI, including a 44000 square for renewal with a two floor tenant at Arlington Tower and a five year 12000 square foot extension at 17, 75 I Street.
While office utilization remained relatively stable during the second half of 2020, we're now seeing more tenants returning to their office spaces.
At year end, just over half of our bases were being used by tenants and that percentage has increased to over 60% and is on the rise as the pace of vaccinations rapidly increases.
Alongside the ryzen tenants returning to the office.
We are experiencing an increase in parking income.
In response to the increasing activity levels in the city. The district is phasing back in the parking restrictions that were eased at the onset of the pandemic.
In an effort to capture more transient parking income, we've recently rolled out new parking programs, including short term passes or parking reservations and we are experiencing a significant pickup in transient parking in April.
We expect parking income to continue to grow going forward as we still have about half of our parking capacity available, which provides an alternative to public transportation for companies that want to provide options as their employees return to the office.
Now before turning the call over to Steve to discuss our financial performance and outlook I would like to take a few minutes to discuss our strategy and key areas of focus as we continue to navigate through the recovery phase of the pandemic.
First we are focused on optimizing our daily pricing model for multifamily in order to capture increasing demand for apartments as renters, particularly younger renters returned to urban areas.
Multifamily net applications remained strong at our urban properties and are up approximately 50% year to date and over 100% and March leaving room to continue reducing concessions and increasing rents.
Concessions are declining and effective lease rates remain on an upward trend.
Occupancy excluding our two rent control properties now stands at 95, 8% and our emphasis is increasingly focused on improving effective rents as we head into the spring leasing season.
Our two rent controlled urban properties.
More than 30 801, Connecticut have experienced renewed strength recently included Kenmore leasing 10 units last week.
Higher amounts since the start of the pandemic.
This strength has driven the 30 day occupancy trend for a rent controlled assets above 94%.
Our 440 basis point improvement from 30 days ago.
Second we are focused on driving value creation through renovations.
Two thirds of our 3000 unit renovation pipeline is in our suburban garden style communities, where occupancy remained strong and effective lease rates are positive on a blended basis.
When the pandemic hit we temporarily put our renovation programs on hold yet continued to closely monitor each of our submarkets for rent growth and renovation potential.
We are encouraged by the demand levels that we're seeing in nearly all of our suburban markets, which allow for rent increases to deliver an accretive ROI.
Therefore, we have reactivated our renovation process and we'll continue to test the market and scale these programs as market conditions improve.
Third we are focused on driving new commercial leasing as a regional vaccination rates accelerate schools return to in person classes.
Metro rail and bus ridership increases.
We believe that these three factors.
Proved to be the key catalyst for driving new leasing decisions.
We have positioned our portfolio to benefit from the rebound in new leasing activity with high quality moving ready space at price points and floor layouts that capture the highest volume of leasing in our region.
Over half of our current vacancy is in northern Virginia, where job growth in touring activity are strongest.
Since we have no co working tenants all of our spaces are private which allows tenants to control the health and safety of their environments.
Our move in ready spaces offer more flexibility than traditional leases.
However, we do not offer month to month leases, which allows us to participate and the increasing demand for flexible office space. While also maintaining our favorable weighted average lease term and preserving our opportunities for future portfolio transformation.
We expect moving ready space to translate into quicker lease commencements than spaces that require longer tenant build outs.
Lastly, we are focused on pursuing opportunities as part of the wash REIT transformation.
We continue to believe that transformation towards multifamily is in the best long term interest of wash REIT and our shareholders.
This pandemic has reaffirmed our commitment to and the direction of our research driven multifamily investment strategy.
Our investment process includes an extensive evaluation of a wide range of ROI drivers using a dynamic proprietary system to evaluate investment performance metrics at both the market level and sub market level.
We plan to continue to enhance and broaden the scope of our research as we evaluate and pursue opportunities for further transformation.
And with that I will turn it over to Steve to review, our balance sheet collection performance first quarter results and our outlook.
Thank you Paul and good morning, everyone I'll start off today with a quick update on our balance sheet and collection performance before discussing our first quarter financial performance and future outlook.
Our balance sheet remains strong with no debt maturities until the fourth quarter of 2022, and we've maximized liquidity.
Last year, we took steps to strengthen our balance sheet and increase our operational flexibility putting us in a strong position that we are today.
At quarter end, we only had $33 million outstanding on our fully available $700 million line of credit and all of our covenant ratios remained strong.
Now I'll turn to our cash collection performance.
Our multifamily collections continued to be excellent tracking well above national averages, we collected over 98% of cash and contractual rents during the first quarter and our rent collections through April are in line with our quarterly trend.
Our office and retail collections remained strong we collected 99% of office contractual rents, which excludes rents that have been deferred and 99% of office cash rents during the first quarter.
Cumulative net deferred rent associated with office tenants declined to $700000 as of March 31, 2021.
Our retail portfolio continues to hold up exceptionally well and we've even upgraded two of our major restaurant tenants during the pandemic.
We collected 97% of retail contractual rents for the quarter and 96% of retail cash rich.
Cumulative deferred rent associated with retail tenants has now dropped to $900000 as of March 31 2021.
Overall, we have only deferred a small portion of rent and we expect the cumulative future cash NOI impact to be less than one cent per share by year end 2021.
Now turning to our financial performance for our first quarter operating results had a challenging comparison to prior year results. When we were building significant momentum pre pandemic.
Net loss for the first quarter of 2021 was $1 $1 million or two cents per diluted share compared to net income of $1 $7 million or two cents per diluted share in the prior year.
Core <unk> of <unk> 34 cents per diluted share was <unk> <unk> above the top end of our guidance range as we received slightly more than a penny per share of settlements of prior claims reported in other income and NOI was slightly stronger than we had forecasted.
On a year over year basis core <unk> per share declined by <unk> <unk> due primarily to asset sales and the impact of the pandemic on rental and other income on a comparative period basis.
Overall same store NOI declined six 5% year over year on a GAAP basis, and 6% on a cash basis for the quarter.
Multifamily same store NOI declined 9% on a GAAP basis, and and the cash basis for the first quarter compared to 2020.
Which was the best performing quarter in the last 10 years.
Revenue decreased three 8%, primarily driven by lower lease rates at our urban properties for the year over year basis due to COVID-19, while expenses increased due to more snow removal the timing of utility expenses and insurance.
Multifamily lease rates declined four 8% and seven 4% on a gross and effective blended basis during the first quarter.
Reaffirming our view that December represented the height of new lease rate pressure.
New lease rates, thus far have increased over 5% in April from March on an effective basis.
Moreover, lease executions with May move in dates are indicating further improvement.
Multifamily fundamentals continue to improve overall and we believe that the first quarter represented the low point for same store multifamily NOI.
Office same store NOI declined six 1% and for 7% on a GAAP and cash basis in the first quarter compared to 2020, driven by lower parking income and lower lease termination fees.
Same store GAAP NOI increased at our remaining retail centers, which we report as other by $300000 on a GAAP and cash basis, primarily due to lower credit losses and higher expense reimbursements.
Overall commercial credit losses reduced our core <unk> by less than one cent per share in the first quarter.
We continue to believe that we have substantially addressed our pandemic or pandemic related credit risks and we anticipate.
Continued improvement in credit performance over the course of the year.
Turning to leasing activity, we signed approximately 29000 square feet of new office leases and 57000 square feet of office renewals in the first quarter.
Office rental rates increased four 3% on a GAAP basis and declined 11, 1% on a cash basis for new office leases and increased seven 1% on a GAAP basis and declined one 1% on a cash basis for office renewals.
During the quarter, we saw an increase in commitments to extend office leases and as Paul discussed in March we experienced the highest level of tours and proposals since the pandemic began.
Since quarter, Ed we have continued to progress leasing, notably signing Sunrise senior living to a lease extension of approximately 74000 square feet.
We also continued to progress lease extension discussions with a large senate at Arlington Tower.
For retail assets, we executed approximately 68000 square feet of renewal leases during the quarter and achieved an average rental rate increase of 12, 6% on a GAAP basis with only a slight for share decline of 0.9% on a cash basis.
These renewals represent approximately 10% of our retail portfolios revenues since year end 2020.
Now turning to our outlook with the continued rollout of vaccine programs our growth prospects are improving however, the timing of when we will reach an inflection point in the market is still difficult to assess at this time, therefore, the extent that vaccine deployment and the corresponding improvement in economic activity and overall sentiment.
We will offset the pandemic impact in 2021 prior to that inflection is uncertain.
We do however believe there will be improvement once we reach that point given that the embedded growth drivers that we had prior to the pandemic remain substantially intact.
While we believe that the most disrupted part of the pandemic is behind us the timing and pace of the economy reopening remains uncertain.
And we're not ready to forecast with a sufficient degree of accuracy, the timing and extent of the recovery over the course of the full year to provide <unk> guidance for the full year.
We are however, providing second quarter episode guidance.
We are encouraged by the early signs of growth that we're experiencing across the multifamily and commercial portfolios as our regional economy continues to gradually recover from the pandemic.
Starting with multifamily total operating portfolio occupancy ended the quarter at approximately 95%.
Excluding the two rent controlled assets, we have managed operating portfolio occupancy to 95, 8% after quarter Ed.
Allowing us to begin to further reduce concessions and increased effective rents as we began the spring leasing season.
We gained occupancy since year end effective lease rates are trending in a positive direction.
Our urban touring and Ed application volumes remained strong and concessions are normalizing.
These are all positive trends heading into the spring and summer leasing seasons, which support our expectation for sequential quarterly same store multifamily NOI improvement in 2021.
Beyond the 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.
And trove, which represents our only non same store multifamily property leasing momentum continues to grow well we are seeing April tours higher than any prior month during the lease up and net leases this month more than double the regional average.
Occupancy is currently 48% and as Paul said the property is now 51% lease with less than 200 units left to lease.
Well trove contributed approximately $200000 of income in the first quarter, we expect its contribution to ramp up each quarter for approximately $1 billion by the fourth quarter of 2021 with significantly greater growth in 2022 over 2021 levels and then again further growth in 2023.
Now moving on to commercial we were pleased to see increased increased touring and proposals, indicating that the new leasing decision, making is increase in.
And we continue to experience strong collections and long term renewal activity.
However, we do not yet have enough visibility to the timing of the inflection point for new office leasing to accurately forecast occupancy growth and NOI growth throughout the remainder of the year.
We believe that inflection point will be driven by a combination of widespread vaccination rollout schools reopening to a further degree.
Increased confidence in the safety of public transportation in the general community returning to more normalized activities.
This continues to occur it should impact the timing of new lease Commencements. However, these potential anticipated commencements are at risk from a timing standpoint, if new leasing commitments and build out of spaces delay.
Therefore, we are not ready to provide our full year guidance range, yet without more visibility.
Following the retail renewals that we've executed year to day, which represent approximately 10% of our retail revenues, we have less than 2% of retail revenue expiring in 2021.
While we are seeing recent signs 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 and once again when those additional lease commencements will beget.
Considering those factors, we believe we are well positioned once activity improves and we expect our office portfolio to be highly responsive to the economy reopening.
The majority of our vacancy is in high quality space, some of which is moving rep.
Nearly 60% of our current vacancy is in northern Virginia, where job growth and absorption rates are the strongest and where we are seeing the most touring and leasing activity.
As Paul mentioned, we expect parking revenue to continue to improve going forward driven primarily by an increase in transient parking.
We are guiding to a core <unk> per share range of 32 to 35 per share for the second quarter, excluding any potential acquisitions or dispositions.
We expect same store multifamily NOI to range from 20 and a half.
$221 billion.
Office to range from 18 to $18 $75 million in other NOI to be approximately $3 million.
For the full year, we expect G&A to range from 22, and a half to 23 and a half million dollars intra.
Interest expense to now range from approximately 45 to $41 $5 million and development expenditures are expected to range from five to $7 $5 million again, excluding excluding any potential acquisition or disposition activity.
We believe that throughout 2021, a vaccine that economic recovery will continue to strengthen our markets and provide growth opportunities going forward.
And with that I will now turn the call back to Paul.
Thank you Steve.
To conclude we are pleased with the early signs of recovery that we're seeing across our multifamily and commercial portfolios.
In multifamily improving lease rates and declining concessions combined with stable occupancy point toward continued NOI growth over the course of the year.
Leasing momentum of true continues to grow and we expect true to be a key growth driver in 2022 and 2023.
Our suburban portfolio continues to outperform and the pricing power that we are experiencing in our suburban markets combined with strong occupancy rates are positive early indicators for future renovations.
We are also encouraged to see much stronger recent leasing momentum in our urban multifamily assets.
And commercial renewal activity has been very strong and tenants are becoming more comfortable making long term renewal decisions.
Year to date.
We have achieved a significant reduction in 2020 one explorations.
New lease decision, making appears to be picking up as evidenced by the long term lease with a new accredited tenant at Arlington tower and the increase in touring and proposal activity that we are experiencing heading into the spring and summer months.
These are positive trends and we are optimistic that this momentum will continue.
Now we would like to open the call to answer your questions.
Thank you.
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Our first question is from Blaine Heck with Wells Fargo. Please proceed.
Great. Thanks, good morning.
Paul I think last quarter, you talked about how the transaction side of things was relatively slow in that those you know multifamily.
<unk> that came to market either were highly competitive or have some sort of a development or redevelopment component that could be risky are you seeing any signs of an increase in transactional volume do you think there will be any attractive properties that come to you guys at a reasonable price.
Well.
Let's start out with the.
The volume that we're seeing that we've witnessed in the first quarter and then blame we can talk about kind of.
The capital the capital markets, what we're observing there and then kind of what the investors the investor profiles are looking like.
For Q1 volume for multifamily was down and I think everybody anticipated that because we were really coming off.
A big fourth quarter in 2020.
Theres not as much product on the market right now and I think you know our observation would be the real softness that we're seeing.
From the fourth quarter, partly into the first quarter was really in the urban core markets and Thats why I think that's being reflected in the lack of product out there.
I talked with one of the one of the more prominent brokers. They are definitely seeing more in the suburbs I mean his his quote was more grass the more grass and more trees, the better, but I think we're probably down 25% to 30% from the first quarter of <unk>.
2020.
In terms of what we're seeing in the capital markets.
Fannie and Freddie their allocations were cut.
This year from 80 billion to 70 billion Ed.
And rates debt that we looked at that we are in the mid twos last summer in the or in the mid threes today.
The life companies have really done a nice job stepping in and filling the gap on lower Levered.
Trophy product and then likewise I think we talked about on the last call. The debt funds are kind of really playing that 65% to 70% LTV mid two hundreds over LIBOR seeing a lot of shorter term product Blaine lot of 311.
On floating spreads and that's probably price near about about two and a half, but Fannie and Freddie did cut spreads on Monday, I think that I heard that 15 bps. So I think theyre trying to time that with what.
What brokers pipeline, what we're hearing is that we're going to see more product Q2 through Q4 of this year.
And that would probably be a portion both urban and suburban.
But I do think you are probably going to see a more push as we see more recoveries as we see concessions burning off in that urban space. The value funds that are still trying to achieve.
10 to 11, levered or probably.
Really looking at achieving 99 and a half the folks that we're talking about and even how we're underwriting looks.
Looking out.
In the three to five year timeframe.
I think youre going to see Blaine.
Late 'twenty two early 'twenty 'twenty, three folks underwriting a more of a rent push especially our supply pressure is coming off in this region. You know in that 'twenty 'twenty three to 'twenty 'twenty four.
We look at we're continuing to look at every deal.
Both urban and suburban I'd say, the least amount of product that we've seen has really been obviously for total reasons and the emergency risk.
Restraints, we haven't really seen a lot or looked at a lot in D C.
But we're still continuing to look at product and I think it's going to vary submarket by Submarket, we're definitely seeing suburban markets tighten up more than the urban.
But we think the urban is coming and I think our activity and our portfolio is bearing that out.
Great that's very helpful commentary.
Just switching real quick to the office side it looks like from your presentation that you guys have now addressed the Sunrise Raytheon and B Riley upcoming expirations, along with the new activity you guys have at Arlington Tower, you know all of which is very impressive in this environment.
I think that just leaves capital one at silver line is your biggest upcoming exploration can you just talk a little bit more about the ongoing discussions with them.
Sure Blayne I mean at this point, we have capital one through March of 2022, and we have been in our current actively marketing that space for other users and we're seeing you know we.
We have active interest active tours and we're happy with the with the foot traffic that we're seeing on that space.
So that's a definite move out.
We're marketing it like we're assuming that they are going to.
Vacate the space and we are aggressively marketing the backfill it as we speak.
Fair enough okay. Thank you guys.
Sure.
Our next question is from Chris Lucas with capital One Securities. Please proceed.
Speak of the Devil.
Paul just a.
Couple of quick questions for you on the.
Apartment side with the seasonality typically see.
For the spring and summer fall lease up does the pandemic.
Perfect sort of have a hangover effect on expectations as it relates to sort of that see that seasonal push or is it sort of back to normal on that front.
I'll I'll I'll start that and then I'll I'll asking I've got granted Steve here and I'll ask them to jump in in terms of the hangover from the pandemic I actually believe Chris it's kind of like an accordion feature on the leasing season. I mean, we think if you look at it and I'll I'll pick on trove for example.
<unk>.
When we thought that some of those months, we would wouldnt be idle but.
We wouldn't have the activity that we would currently have mean I think the leasing season started earlier I think there was a lot of pent up demand and I think we're now starting to see that in.
And a lot of that dovetails with our vaccine deployment and folks starting to ready themselves to go back to work.
But I think that our season started earlier and I think it will be more protracted.
Beyond kind of the traditional labor day early fall stevia.
And Chris I'll just add.
You know our strategy coming off of the winter months of COVID-19 were to focus on occupancy and I think we talked about that really at our year end call and get to the point, where we can build up.
Occupancy and start driving down concessions that improving effective rents and we've seen that since quarter Ed.
We've gotten into April which is the early early days of your traditional spring leasing season and since quarter end we've gotten.
Occupancy up to 90 over 90.
95, eight on that excluding the two rent controlled assets or.
<unk> 95 for things like touched.
Touch 95, three overall, including them.
And then when you think about rates, which is what we really for together effective rates just in the 30 day looking up about where we are in April looking back we've had overall effective rents already.
Improve on a blended basis by 5%.
I think kind of even more importantly is when you look at the new rates, they're up over 6% Ed and when you think about how we've managed our portfolio is we've intentionally driven the heaviest.
Explorations into the spring and summer leasing season, so that we can participate in that there's a new risks have a bigger effect.
And so it's moving in the right direction in terms of the rates are trending I think I said in the in the prepared remarks that even after April when we're looking at the leasing that we're doing and the early indications of transactions for Mei Li.
At least.
Commencement, it's even improving over April so so we like that obviously, we're coming off of.
Negatives, but it is it's moving very strong and I think were you know were expecting.
We're only guiding through the second quarter right now, but this is the right quarter to be building the momentum.
Okay. Thanks for that and then Paul just on the on the restart of the renovation program I guess, just curious as to whether or not you're.
Dealing with any supply chain issues as it relates to clients and skilled labor from more in cabinets or anything like that at this point or is it too early to say or how are you guys managing through.
Some of those items that have come up as issues for others.
Well.
So Chris we have.
As you remember, we paused our renovation program.
Right when the pandemic hit.
Now we are reactivating the process with the vendors and obviously, we're renovating units that need renovation too.
To be.
Released but right now to date because the number has been so limited we haven't really had any supply chain issues to speak of.
In talking to developers.
But are doing ground up spec I'm hearing of some.
Some delays and then obviously, we're all observing pricing spikes in lumber and other materials, but we.
We have not personally Chris experienced anything yet.
I would also say that were.
Evaluating <unk>.
Each one of our Submarkets on an individual basis and we are anticipating.
Doing more renovations as we progressed throughout 2021.
Okay and last question for me Paul Thank you for that.
As it relates to Riverside.
Talking about the housing shortage.
Typically coming out of a recession, even one is unique it is dependent on it.
Construction costs, and just sort of moderate relative to sort of the heart.
Yeah, Keith that was coming into <unk>.
Developers where experience prior to COVID-19 crisis, I guess I'm just curious as to how you think about the timing of when you'll be evaluating that.
How that fits into sort of.
The longer term outlook.
Well I mean, the straight answer Chris is we evaluated every quarter.
Because we've got 1200 board there.
That are.
Live ball, so to speak and I think our renovation program. There is an excellent litmus test in terms of when we would want to go in the ground I think what we look for in the river in the Riverside Submarket is we want to see market rent stabilized and project some grow.
Ed.
And when we do that I think that's one of the discussions will obviously become much more granular in terms of start times.
We were fully entitled.
And the project was shovel ready so I do think that we'll be able to act, but I think the first thing we're looking for Chris is some stabilization in that market and.
A positive a positive forward look.
Thanks, Paul I appreciate it.
As a reminder, this star one on your telephone keypad.
Good question. Our next question is from Anthony Hello, and with J P. Morgan. Please proceed.
Yeah, Thanks, Hi.
My first question is as it relates to just thinking about.
Apartment assets and making investments there it seems like a lot of the discussions around going in cap rates in the threes is that something that you feel you can make sense of even if it has decent trajectory upward or are you seeing things, where maybe there are some slices of the market where you go in it.
Yield.
Anthony It's Paul.
I'll start with that question.
We're not we're not seeing three caps.
I've definitely I'm on a lot of national calls and I see.
Seeing that in other parts of the country.
We haven't really seen a three cap deal.
The broader question is as you know will be will we.
Go to market on underwriting.
And will we will we will.
We challenge our product coming to the market, especially the value add products that.
We like so much the answer is yes, we underwrite to be competitive, but I also want to say the lens is a long term value creation lens that we look through for our shareholders and I think.
We've because of our research we've identified the submarkets that we want to be and we understand the growth metrics.
I've seen a lot of people that have done deals in the last 12 months kind of underwrite right through either rent caps.
Sure.
Evictions or things like that and just assume its not there I think we've done our research we know the markets that we want to be in and I think wash REIT has proven that it can be competitive.
When it comes from time to put the pen to paper to to go after transactions that we view is big value creation opportunities for our shareholders.
Got it and then on the other side with some of the leasing and <unk>.
For that you've done in office does that tee up anything for for sale.
Expect over the course of the year.
We're always looking Anthony at at opportunity.
Right now to create value for our shareholders and.
So.
We will continue.
To monitor opportunities as they present themselves.
Okay, and then just last one.
For me for Steve I think like in your second quarter guidance, how should we think about things like garage income and that stuff that's been depressed because of the pandemic whats in there versus say normal just trying to understand.
What the trajectory back might look like.
We didn't give that much detail, but we did we did give you an NOI expectation for the SEC.
Quarter. It doesn't it does include.
Some improvement in transient parking.
Income Tony we didn't break it out separately.
We see that building I mean, you can see.
People returning to work even before.
Entire teams come to work now that people are being vaccinated I think we've talked about the district.
Relax.
Restrictions, allowing people to park on the streets, that's being kind of pulled back which is forcing people in the garages.
And we're being a little more flexible and creative in our programs offering monthly programs.
For transient parkers, not just month monthly daily.
Daily program short term parking is not just monthly programs.
And so we do have some of that buildup in AR in our NOI expectations for.
For the second.
Okay, but not but still pretty far off from fully back I presume.
Yes, yes.
We're.
That's that hole.
Predicting exactly when everyone will return in full forces, we think half starts to happen in 'twenty, one, but we're not really making that call. We don't think that parking at Stifel.
To full levels pre pandemic in the second quarter.
But hopefully it's building as we go throughout the.
For the year.
Okay, great. Thank you.
Our next question is from Daniel.
With Green Street. Please proceed.
Great. Thank you just a follow up on that last question.
Parking activity rebounding are expected to rebound.
Our rates the same as they were pre COVID-19 or has there been any change from that funds.
We've done a little bit of discounting because we've got a lot of capacity to one of the things daily that we talked about in our parking is D. C is a little bit different than the other gateway cities and that it's low rise not high rise Ed.
People will not universally at the same pace need to go.
Take public transit to get to work you can drive more because we can park up to 50% of the building populations at our buildings and we have about 50% capacity so it.
To help with the income we've done some discounting and some creative things too.
Pick up more parking revenue.
Is that more of a moment in time type reaction or do you think there's likely some impairments going forward.
Post vaccination and post post COVID-19.
Well, you're asking me to guess you know what the inflection is going to look like post COVID-19, we haven't given a lot of guidance, but if you ask me to guess.
I think more people will drive that used to take public transit.
Ed I think that'll start to drive the demand will be pretty competitive and when we get to that point I'm, assuming we will have pretty good pricing power.
Great.
Helpful. And then just last one for me on net effective rents on the office portfolio.
I'm curious you know sort of in your Submarkets.
How about how much those have changed year over year and.
And you.
You know if you're if you're seeing any more upward pressure because of rising construction costs on the concession for reps.
Danny I would say that pre pandemic for now.
Theres, probably been a 5% to 10% discount on net effective rents in D C.
And that's real time lets go <unk>, and then I would say in northern Virginia.
Wanna say slightly negative, but the data would say that it's essentially been flat.
So in <unk>.
Going off of the.
J O L data that I did I just saw yesterday, but I would say northern Virginia is definitely holding up better.
And then I guess on that.
Last question do you think that you'll.
You'll see.
The filtering through rising construction costs on concessions or do you think that will be mostly needed.
I think it really depends on on what the market what market you are talking about I think in downtown D C.
Especially for larger tenants with broader footprint I think.
Getting this space leased.
Is is the top priority.
And I think that landlords are going to do I don't I don't I.
It is getting pass through on the concession I mean, we're seeing Ti numbers obviously.
Increase, but I think landlords are going to do what they have to do too.
To get get these larger blocks of space leased.
Thanks, Ed Thanks, everyone.
There are no further questions I would like to turn the conference back over to management for closing comments.
Thank you again, everybody I'd like to thank everyone for your time today, and we look forward to seeing many of you over the next several months.
Thank you.
Okay.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
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