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Text: We refer to these risks in our SEC filings.
Participating in today's call with me will be Paul McDermott, President and Chief Executive Officer; Steve Riffee, Executive Vice President and Chief Financial Officer; Karen Filter, Senior Vice President and General Counsel; Drew Hammond, Vice President, Chief Accounting Officer and Treasurer; and Graham Montgomery, Vice President and Head of Research.
We are joining you from our corporate headquarters in Washington DC, where I've been working alongside many others from our team with social distancing and other safety protocols in place.
We are all very happy to be back together on a voluntary basis, and while our technology has been incredibly effective, and that's helped us be successful while working remotely, there is no substitute for in-person collaboration.
Last evening, we released our earnings for the third quarter of 2020.
Our results were largely in line with our expectations and our portfolio continues to demonstrate strong, stable credit performance as we absorb the near-term impact of the pandemic.
While uncertainty remains regarding how protractive this economic downturn will be, we remain well-positioned to bolster our long-term strategic growth plans once the operating environment improves.
Ahead of the downturn, we reshaped our portfolio with a long-term vision and this focus has proven to be prudent from a capital allocation perspective.
Our multifamily collections are consistently above national averages, and our suburban expansion through the Assembly portfolio acquisition is performing well.
While our operating environment has changed drastically over the past seven months, we swiftly adjusted to the demands of today's market.
We have fully prepared our commercial properties for reentry by upgrading ventilation filters, implemented enhanced cleaning protocols and installing contactless, opening technology and protective shields in addition to many other safety enhancements.
We have worked diligently with tenants who have been financially impacted by COVID-19 to arrange deferral agreements that support their financial position and cash flow needs.
Fortunately, these deferral arrangements have not been material and represent a cumulative impact of less than $0.01 per share through 2021.
While uncertainty remains regarding how protractive this eventual recovery will be, we are confident in our ability to absorb the near-term impact while preserving our long-term growth opportunities for three reasons.
First, our portfolio and local economy continued to show resilience.
The impact of local job losses for office using sectors in the Washington Metro region has been limited with no office using sector losing more than 4% of the total workforce year-over-year, according to BLS data.
45% of our multifamily residents and 56% of our office tenants are employed in professional and business services, government or information sector jobs.
Furthermore, nearly half of our professional and business services tenants are government contractors, which is a key differentiator as they are sticky office using tenants linked to important programs, which results in significantly more stability in our region compared to other major metro areas and the US overall.
The second reason we are confident in our near-term outlook and long-term growth prospects is the continued stability demonstrated by our multifamily portfolio.
Our value oriented multifamily portfolio has held up well during the pandemic and offers favorable demand and supply fundamentals over the long term.
The Washington Metro region has a significant housing [Phonetic] shortage that has been accumulating over many years, as well as an affordability crisis is only getting worse as the cost of homeownership continues to drive above affordable levels for median income earners.
Thus, the largest rental cohorts remain underserved by new supply.
Over 95% of the multifamily units that have been constructed over the past seven years are unaffordable for renters who earn $75,000 per year or less.
A segment, which comprises 57% of the Washington Metro rental base.
Over 75% of WashREIT's units are affordable to those renters with a sustainable rent to income ratio of 30% or lower.
Also driving our long-term demand fundamentals is that 80% of our multifamily portfolio is located in Northern Virginia, where job growth is the strongest and job losses have been the lowest.
Northern Virginia has mission-critical cyber and technology jobs as government programs continue to grow and an inbound market of technology jobs compared to more expensive markets which are losing technology jobs during the pandemic.
CBRE released its annual Tech-30 market report earlier this month, which ranks the nation's top tech markets in terms of resilience and potential for growth.
The Washington Metro ranks second in the nation based on the presence of the best performing large cap tech companies and the best combination of modern office rents with a growing high-tech labor pool.
Tech sector leasing activity in Northern Virginia is expected to increase in the coming quarters with more than 1.5 million square feet of active requirements in the pipeline according to CBRE.
The third reason we are able to absorb the near-term impact of the pandemic, while preserving our long-term growth opportunities is our research-driven approach to long-term capital allocation, which improved and derisked our portfolio ahead of this downturn.
Our suburban multifamily portfolio, which we acquired last year has performed very well as the preference for extra space, value and access to high quality schools offered in our suburban markets combined with a reduction in the perceived benefits of city Living during the pandemic has provided the rare opportunity to continue to grow rents at our suburban assets, despite challenging market conditions.
We have experienced minimal credit loss to date, largely due to the sale of 75% of our retail NOI last year, including our riskiest big box retail assets.
For the small amount of retail we retained, we collected 95% of contractual retail rents during the third quarter including retail tenants in our office properties.
Our retail portfolio includes a combination of assets in transit oriented locations with strong redevelopment and mixed-use densification potential, as well as highly integrated neighborhood centers and high net worth neighborhoods.
Our office portfolio is also well positioned with a weighted average lease to maturity of 5.2 years, no exposure to co-working, no single tenant risk, strong and stable collection rates and limited near term lease expirations.
All of our tenants have their own private space, which has become increasingly essential during the pandemic.
Additionally, over half of our office portfolio is located in Northern Virginia, where commercial technology and government technology are expected to continue to fuel growth in the years ahead.
While tenant decision making remains slower than normal, we are well positioned to once decision making accelerates with high quality, move-in ready space at value oriented pricing.
Many of our speculative leasing opportunities which had excellent momentum, pre-pandemic, are in our best assets including Watergate 600, Arlington Tower and Silverline Center.
We believe that cost effective, healthy and adaptive space is going to win in this environment as the market recovers.
Finally, we will soon learn the results of the federal elections and while we are not predicting the outcome, Washington has a potential catalyst if the results bring alignment between the executive and legislative branches of government.
Historically, if such alignment occurs, more legislation is passed, which has strongly correlated to greater office absorption for Washington DC as lobbyist and law firms ramp up for drafting and implementing changing legislation.
While we are not relying on this result, it would represent a unique catalyst for the Washington DC office market on all other gateway markets.
All in all, we are confident in the resilience of our portfolio over the near term, growth potential over the long term, and the opportunity for further transformation going forward.
While we are in the midst of a pandemic, now is not the time to take our eye off of our long-term goals.
The aspects of our business that define our strength as an institution over the long term are also critical to our success over the near term.
We were honored to be recently named the Best Corporate Responsibility Program in DC and Maryland by NAIOP.
This award recognizes our robust ESG program from the environmental projects that were recently implemented to WashREIT's commitment to giving back to our local communities.
Additionally, earlier this year, we formed the WashREIT Diversity, Equity, Inclusion and Belonging counsel to help the company continuously evolve to become an even more welcoming workplace for all individuals.
We look forward to updating our stakeholders as we execute our plans to continue to promote a workplace that engages the full potential of all individuals and where equity is a core value.
I'll start off by discussing our cash collection performance before reviewing our third quarter results and outlook for the remainder of 2020, as well as recap our most recent steps to further strengthen our balance sheet.
Our multifamily collections continue to be excellent, which as Paul outlined is a testament to our strong portfolio of credit and the resilience of the Washington Metro economy.
We collected 99% of cash in contractual rents during the third quarter, and our rent collections through the first three weeks of October are in line with our quarterly trends.
We have offered deferred payment programs to residents who have been financially impacted by the pandemic, and only $58,000 of deferred multifamily rent remains outstanding year-to-date.
Our monthly multifamily collection performance continues to track above national averages.
As Paul highlighted, we attribute our outperformance in part to our high exposure to industries that have outperformed during this crisis and low relative exposure to underperforming industries.
We track the industries our residents are employed in and our exposure is most heavily weighted to the most resilient economic sectors and likewise less weighted to the industries that have been most impacted, which has resulted in very high collection rates and stable cash flows.
The impact of COVID-19 on the Washington Metro market has been contained primarily through the leisure and hospitality, education and health and retail sectors, which represent over 75% of Washington Metro job losses, but only 55% of total job losses nationally through August.
These three sectors comprise approximately 20% of our resident exposure, and only 8% of our office tenant exposure.
Thus we are experiencing high collection rates and cash flows, despite this crisis.
Turning to commercial, our office and retail collections improve during the third quarter compared to already strong performance in the second quarter, primarily due to stabilizing trends.
We collected 97% of cash rents from office tenants during the third quarter and over 99% of contractual rents, which excludes rent that has been deferred.
As of October 20, our collections for October are in line with the same period in September.
Similarly to our multifamily resident industry mix, our office tenants are more weighted to the strong economic sectors than the US overall, which has helped us experience limited credit loss.
Year-to-date, we've agreed to defer a net $1.4 million of rent for office tenants, and we expect to collect 80% of that deferred rent by year-end 2021, with the balance thereafter.
These amounts have not grown significantly since the second quarter when we had worked through most of these arrangements.
Retail comprised 6% of NOI year-to-date, and while retail tenants have struggled the most, we collected 88% of cash rents in the third quarter.
Excluding deferred rent, our collection rate was approximately 95% during the third quarter.
Year-to-date, we've agreed to defer a net $1 million of rent for retail tenants, and we expect to collect 50% of that rent by year-end 2021.
Overall, we've only deferred a small portion of rent and the expected cumulative cash NOI impact is less than a $0.01 per share through year-end 2021.
To date, we've not incurred material credit losses related to COVID-19.
During the third quarter, we incurred approximately $0.01 per share of bad debt expense, and it was primarily attributable to COVID-19.
Turning to the balance sheet, we are pleased to report that we've addressed upcoming debt maturity needs and further strengthened our already strong liquidity position by executing a $350 million 10-year Green Bond.
This transaction represents our inaugural Green Bond and further demonstrates our commitment to sustainability goals, which now includes achieving IREM [Phonetic] certification for the Assembly portfolio, as well as LEED Silver certification for Trove.
Not only are these certifications a way to elevate operations to the WashREIT sustainability standard, but we are raising the bar for the entire value-add multifamily sector, which has often locked the investment in sustainability and efficiency opportunities.
We intend to be among the first in the country to achieve IREM certification for existing multifamily properties.
As of September 30, we have approximately $520 million of liquidity.
Following the closing of the executed 10-year Green Bond this quarter, we will have no debt maturing until the fourth quarter of 2022 and a weighted average debt maturity of five years, further strengthening our liquidity.
In 2020, we have demonstrated access to long-term, unsecured debt markets, term loan markets and eliminated secured debt.
We maintain investment grade ratings of BBB Flat and Baa2 by S&P and Moody's respectively.
We expect to continue to remain well within our bank and bond covenants and have access to the mostly undrawn line of credit, if needed.
Again, we have no secured debt on our balance sheet, which allows us flexibility as we continue to improve our portfolio.
Our third quarter financial performance was in line with our expectations given the ongoing economic disruption.
We reported core FFO of $0.36 per diluted share.
Compared to the prior year, overall same-store NOI declined 4.9% and 3.6% for the third quarter and year-to-date periods on a GAAP basis, and 4.1% and 2.9% respectively on a cash basis.
Our multifamily same-store NOI decreased by 3.8% year-over-year on a GAAP and cash basis.
Overall, our multifamily fundamentals are holding up well, given the operating environment that we're in, our suburban portfolio continues to outperform in occupancy and lease rate growth due to high demand for spaces value oriented units.
Gross lease rates for suburban properties increased 1.1% during the third quarter on a blended basis and effective lease rates increased 0.2% on a blended basis.
Gross lease rates for urban properties declined by 2.9% on a blended basis, and effective lease rates for our urban properties declined by 4.6% on a blended basis.
In total gross lease rates declined approximately 1.7% on a blended basis during the third quarter and effective lease rates declined 3.1% on a blended basis.
During the quarter, average same store occupancy dipped slightly but increased back to 94% at quarter end.
While urban rents were generally under more pressure, our new rent declines were modest compared to national averages, another major gateway markets.
Operating portfolio occupancy which excludes Trove, our recently delivered property that is in initial lease up was 94.6% at September 30, up from 94.3% for the end of the second quarter.
Same-store office NOI declined 4.9% on a GAAP basis and 3.7% on a cash basis, driven by an expected decline in parking income, a couple of known and expected move-outs and credit losses related to COVID-19.
While parking income increased by about 24% compared to the second quarter, as transient parking increased, we have experienced monthly parking contract cancellations as full reentry has been delayed.
Excluding the decline in parking income and credit loss related to COVID-19, third quarter same-store office NOI would have increased slightly on a year-over-year basis.
Same-store NOI decreased at our residual retail centers, which we report as other by approximately $300,000 on a GAAP basis and $270,000 on a cash basis driven primarily by higher credit loss, which included receivables due from retail tenants impacted back COVID-19 deemed uncollectible.
The combined write-off for all office and retail tenants was less than $0.01 per share and was primarily related to COVID-19.
Turning to leasing activity, while velocity and touring was hit by the economic shut down, we signed approximately 40,000 square feet of office renewals, approximately 8,000 square feet of retail renewals, and 19,000 square feet of new office leases and 6000 square feet of new retail leases during the quarter.
We achieved rental rate increases of 17.6% on a GAAP basis and 3.4% on a cash basis for office renewals and 10% on a GAAP basis and negative 3.9% on a cash basis for new office leases.
Rental rates increased 16.4% on a GAAP basis and 3.3% on a cash basis for retail renewals and remained relatively flat on a GAAP and cash basis for new retail leases.
The impact of operational cost saving initiatives at our commercial properties reduced operating cost by approximately $680,000 net of tenant recoveries during the third quarter.
This step down in cost savings compared to the $850,000 of cost savings recognized in the second quarter was primarily related to higher cleaning expenses due to an increase in the number of spaces being utilized at our office properties.
Today, approximately 50% of our office spaces are being utilized by some of the tenants personnel.
Even though utilization by headcount remains lower, our protocols require us to clean the entire office space, even if only a few employees are using it.
We expect to continue to benefit from operational cost savings until office spaces return to normalized utilization.
However, we anticipate operational cost savings will stabilize ahead of hitting normal pre-pandemic utilization levels.
Now I'd like to turn to discuss our financial outlook.
While uncertainty remains surrounding the magnitude of the pandemic and the durability of recovery, we are now seven months into the pandemic and feel better about our ability to forecast the impact of COVID-19 for the balance of 2020.
The historical economic stability of the Washington Metro region during downturns has been further demonstrated during 2020.
However, the duration and extent of economic disruption in 2021 remains uncertain.
While we're not providing guidance for 2021 today, we believe the growth in quarterly FFO that was originally expected in 2020 will resume in sequential quarters in 2021, from a low in the first quarter of 2021 in terms of cadence.
Furthermore, we are still uncertain overall about the extent, impact and duration of the pandemic disruption.
We are reinstating full-year 2020 guidance with the core FFO per share range of $1.44 per share to $1.46 per share.
We expect our multifamily NOI to range from $59.25 million to $59.75 million.
Non-same-store NOI, which includes Trove to range from $26.75 million to $27.25 million.
Office NOI to range from $81.5 million to $82 million and other NOI to range from $11.5 million to $12 million.
We previously expected significant multifamily growth in 2020 for growth is now likely going to be deferred until the second half of 2021 and thereafter.
Multifamily occupancy increased 30 basis points during the quarter supported by strong demand for our suburban properties, which allowed us to maintain occupancy for growing rents and preserving our seasonal rent roll.
We continue to outperform the Washington Metro market on resident retention, as more of our residents are choosing to stay with us relative to our multifamily operators in the region.
Our suburban retention was very strong at 63% during the third quarter, compared to the Washington Metro suburban average of 58%.
Our urban retention was 55% during the third quarter, well above the Washington Metro urban average of 46%.
Total portfolio retention was 58% during the third quarter compared to the Washington Metro overall average of 54% according to RealPage.
While we are experiencing more pricing power and occupancy growth in our suburban submarkets, our urban submarkets showed responsiveness to pricing strategies during the quarter.
Urban application volumes rebounded from March lows and trended 40% above prior year levels during the third quarter and remained above prior year levels through October.
Going forward, we will focus on keeping occupancy as strong as possible throughout the winter months in advance of the expected lift from the spring leasing season.
Trove continues to lease up and is on pace to add growth in 2021, and an additional growth in 2022.
The pace of lease-up continues to be in line with our post onset of the pandemic expectations and we just delivered Phase II of this month.
Trove lease-up had just begun when social distancing measures drew onsite touring to a halt.
And while we had much success converting virtual tours and design leases during the early summer months, we have pushed our expectations for stabilization to the first quarter of 2022 from the fourth quarter of 2021.
We now expect to incur a loss between $400,000 to $500,000 in 2020, and continue to expect to reach breakeven occupancy near year-end.
Now moving on to commercial, tenant improvement build outs or near-term lease commencements have continued to progress uninterrupted.
We still have approximately 39,000 square feet of signed leases that have not yet rent commenced, and expect 16,000 square feet of those signed leases to commence by year-end.
Although physical tours had paused, they resume toward the end of the second quarter and while traffic continue to increase throughout the third quarter, it remains well below pre-pandemic levels.
Overall, decision making continues to be slow and the pace of Phase III entry is slower than originally anticipated.
They picked up in recent weeks as some tenants have reassessed reopening strategies and are signaling a near-term phased approach to reentry.
Daycares and some local schools have reopened and if the trend continues, we expect office utilization to continue to increase at a current gradual pace.
Our initial revenue expectations for 2020 included speculative office lease commencements that have been impacted by the current economic disruption.
As Paul mentioned, the majority of this leasing was expected to occur during the second half of 2020 at high-quality space where leasing momentum had been the strongest.
We expect the lower speculative leasing assumptions to continue to be somewhat offset by higher revenue, lease renewals and extensions, and we have minimal commercial expirations for the remainder of 2020 limiting the downside risk of our internal leasing estimates.
We expect occupancy to remain stable through year-end.
Currently, we expect to achieve additional operating cost savings of approximately $525,000 during the fourth quarter.
This amount is net of expenses associated with preparing our buildings for reentry and the cost savings that we expect to pass along to our tenants.
We expect G&A including lease expenses to range from $23.5 to $24 million and interest expense to range from $37.5 million to $37.75 million.
As mentioned on previous calls, we've lowered our initial capital expenditure expectations, including lowering development spending.
We now expect development expenditures to range from $30 million to $35 million.
While our future multifamily renovation pipeline remains intact, the program remains suspended until the market allows for rent increases to deliver the appropriate ROI.
We are pleased that nearly all of our future renovation potential is our strongest performing suburban assets which will likely recover sooner than urban markets post pandemic.
And while market conditions remain highly uncertain, we feel confident in our ability to navigate these uncertain times over the near term, while retaining the operational flexibility necessary to bolster our long-term growth once operating conditions improve.
In closing, while we are operating in a challenging environment, we remain confident in our ability to effectively manage through this period of uncertainty, while preserving the embedded growth of our assets.
While we like others are dealing with an unprecedented pandemic, we have kept on executing, diligently strengthening the balance sheet, maintaining value, as well as preserving long-term growth opportunities.
At our current stock price, we believe that we offer a compelling value proposition for investors, with a 7% dividend yield on a dividend that we are covering, a strong liquidity position, our development and renovation pipeline that can and will be reactivated once conditions improve, and a solid long-term growth story.

user
compname reports q3 core ffo per share $0.36.
q3 core ffo per share $0.36.
q3 ffo per share $0.36.
sees fy 2020 core ffo per share $1.44 - $1.46.

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