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Participating in today's call with me will be Paul McDermott, President and Chief Executive Officer; Steve Riffee, Executive Vice President and Chief Financial Officer; Taryn Fielder, Senior Vice President and General Counsel; Drew Hammond, Vice President, Chief Accounting Officer and Treasurer; and Grant Montgomery, Vice President and Head of Research.
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.
With the vaccine roll-out that commenced toward the end of last year, we are seeing signs of 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-date 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 rents.
Currently, multifamily occupancy is over 95%, excluding our two rent-controlled properties where we are not emphasizing occupancy gains as they offer 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 3.6% and 5.7% 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 a month-over-month basis and concession 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 3.1% respectively, and those renewal rate increases remained stable through January.
The continued pricing power that we are experiencing at our suburban assets, combined with the ability to influence lease terms with concessions, has allowed us to roll more leases into future spring and summer lease maturities at our newest multifamily assets.
As a result of the strategic management of our lease expiration 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-date trends that we are seeing.
We believe the vaccine-led recovery will lead to an inflection in 2021 heading into 2022.
However, it is too early to know the precise timing and extent of this benefit in 2021.
Approximately two-thirds of our multifamily leases expire in the stronger spring and summer months, and 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 onto 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 is 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've received the signed LOI from Sunrise Senior Living to renew their space at Silverline, which currently represents approximately 1.5% of office revenue.
We also have signed LOIs with B. Riley and then an accredited third-party at Arlington Tower.
B. Riley has a termination option in December 2022 and will exercise this option on only one of its three floors, which allow the third-party to enter into 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 45,000 square foot five-year lease renewal with Giant Food that at Takoma Park, which represents our second largest retail tenant and over 6% of other rental income.
We also signed a 15,000 square foot 10-year lease renewal with our grocery-anchored at Montrose Shopping Center.
These two lease renewals represent approximately 10% of our retail rental income.
Heading into the recovery, our office portfolio offers 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 in our market and the space requirement that seizes the most volume is about 4,000 to 6,000 square feet, which is both our medium 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 spaces 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 environment and 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 achieve allowing us to participate in the increasing demand for flexible office space, while preserving our weighted average lease term, and thus our opportunities 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 180,000 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 in 2020 according to BLS data.
As we continued down the path toward a vaccine-driven recovery, our region has several unique catalysts to accelerate the rebound in demand.
The growing, high-tech labor pool, federal investments 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 HQ2 hiring.
Over the course of 2020, the tech sector contributed 36% of total leasing volume and more than 800,000 square feet of occupancy growth in Northern Virginia according to CBRE.
Tech-driven leasing demand drove positive absorption for the sector in the fourth quarter and that momentum has continued into January with the announcement of Microsoft's new 180,000 square foot sales headquarters in Rosslyn, next door to Arlington Tower and strategically located at the nexus of four bridges, five major road networks and three metro lines and offers easy access to the Pentagon and Downtown DC.
Government contract awards should remain at record highs in 2021 and the cloud market alone is forecasted to grow 9% to 10% annually over the next three years according to JLL.
Lot of Virginia's diversification over the past decade, blending government contracting with direct federal leasing, technology sector growth, investments in higher education, and medicine have set it up for a quicker-than-average office market recovery in 2021 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 DC to influence, write and then implement legislation resulting in higher absorption in the DC office market.
A historical correlation to office absorption in years with aligned [Phonetic] branches of 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 DC Metro rent growth was more than double the US 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, 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 WashREIT transformation.
Following our fourth quarter office asset sales and including stabilized income from Trove, multifamily comprises 53% of our NOI, while office and retail comprise 41% and 6% respectively.
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 in a stronger position as we head toward the recovery phase of 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 3.44%, and we used the proceeds to pay off the new $150 million term loan 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 turned out our maturity ladder.
Third, we fully 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 into the recovery is more clear.
In 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 Baa2 and BBB 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 trucking well above national averages.
We collected 99% of cash and contractual rents during the fourth quarter, and our rent collections through January are in line with our quarterly trend.
We've offered deferred payment programs to residents who've been financially impacted by the pandemic and only a very small amount, about $15,000 of 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 year-end 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 at year-end.
Overall, we've only deferred a small portion of rent and the expected cumulative cash NOI impact is less than $0.01 per share through year-end 2021.
Now turning to our financial performance.
Net loss for 2020 was $15.7 million or $0.20 per diluted share, compared to net income of $383.6 million or $4.75 per diluted share in 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 recorded on sales in 2020.
Core FFO 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 FFO per share declined by $0.26 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 NOI declined 5.4% year-over-year on a GAAP basis and 4.9% 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 7.3% 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 comprise 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 of urban flight [Phonetic] on overall demand levels had a greater impact on lease rates during the winter months that were weaker.
Our suburban properties where lease rate performance has been the best will be included in the same-store results in 2021.
During the fourth quarter, we focused on maintaining occupancy and ended at 94.3%, excluding Trove.
Office same-store NOI declined 7.1% and 6.4% on a GAAP and cash basis for the year and 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, no 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 report as other, by $2.1 million and $1.8 million on a GAAP and cash basis for the year and $0.7 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 in the fourth quarter primarily due to the write-off of intangibles related to two leases.
Overall, commercial credit losses reduced our core FFO by approximately $0.02 per share this quarter, which is higher than the third quarter impact and in line with the second quarter.
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 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 non-cash 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 9,000 square feet of new office leases and 22,000 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 and 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 at Silverline Center and Arlington Tower, for example.
Retail signed approximately 8,000 square feet of new leases and 3,000 square feet of renewals during the quarter and achieved rental rate increases of 13% on a GAAP basis for new retail leases and 3% on a GAAP basis for retail renewals.
And as Paul referenced, we signed approximately 60,000 square feet of retail leases, representing 10% of our retail portfolio revenues since year-end.
Now turning to our outlook.
With the development and roll-out of vaccine programs and our growth prospects heading into 2021 have improved, but the timing of when we will reach, an inflection point is still unknown.
Therefore, the extent that vaccine roll-outs 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 then, it will carry over into 2022 given that the embedded growth drivers that we had prior to the pandemic are still intact.
While 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 not ready to forecast with a sufficient degree of accuracy, the timing and extent of the recovery over the course of the full year.
Just close to quarter-end, we have enough visibility to provide FFO guidance for the first quarter.
However, we do not have enough visibility to provide FFO guidance for the full year.
We are, however, providing full-year guidance ranges for 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 is 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 year-end and leading indicators point toward 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 have previously expected significant multifamily growth in 2020 and that growth is likely now going to be deferred until the economic recovery led by the greater vaccination takes hold.
While we do expect the seasonal lift in the second quarter, we expect the broader inflections incur at some point in 2021 heading into 2022.
It's important 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 in the Trove, which I'll 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, and 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 widening, which is an early indicator of renovation potential, while other submarkets continue to see rent gaps tightening.
We are monitoring these trends, and we will resume renovations when the sub-market fundamentals allow for rent increases to deliver the appropriate ROI and we know that capital allocation is accretive.
Trove delivered its final phase in the fourth quarter, and leasing momentum continues to increase.
While lease-up has just begun when social distancing measures drew on-site touring to a halt in April, we continue to make substantial progress on lease-up and have maintained the 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 $100,000 of income in the first quarter, ramping up each quarter to approximately $1 billion by the fourth quarter of 2021 with significantly greater growth in 2022 over 2021 levels.
Now moving onto commercial.
As expected, occupancy remained relatively flat through the year-end.
And while we only have a small amount, approximately 20,000 square feet of signed new leases that have not yet rent commenced and approximately 20,000 square feet of signed LOIs for new leases that are expected to rent commence during 2021, we have minimal lease expirations during 2021.
Our 2021 office lease expirations represent less than 3% of our overall revenue.
And we believe that our renewals likely over go [Phonetic] or 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 leasing, but it will be driven by combination of widespread vaccination roll-out, schools reopening and 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 an occupancy growth of up to 4%, but that forecast is at risk if new leasing is delayed.
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 infection does not happen sooner.
So we're not ready to provide a guidance range yet without more visibility.
Following the two retail renewals, which were executed in January and which represent 10% of our retail NOI, we have less than 3% of retail revenue expiring in 2021.
While we are seeing recent signs, I've been experiencing increased activity across our office portfolio.
One of the most challenging calls for us to make is when sentiment will return and decision-making will pick up to even higher levels again and when those additional lease commencements will begin.
With that said, we believe that we are positioned well 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 in move-in ready status.
Nearly 60% of our current vacancy in Northern Virginia where job growth and absorption rates were the strongest and where we are 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, our parking coverage is higher, which allows more of our tenants to choose to drive instead of taking public transportation.
Our parking garages' capacity can 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 employees to return to the office before sentiment improves toward public transportation.
We are guiding to a core FFO per share range of $0.29 to $0.32 per share for the first quarter.
We expect multifamily NOI to range from $20.25 million to $20.75 million, office NOI to range from $17.75 million to $18.5 million and other NOI of approximately $3 million.
G&A is projected to range from $6 million to $6.25 million; interest expense is expected to range from $10 million to $10.25 million; and development expenditures are expected to range from $5 million to $7.5 million.
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 through the current gradual pace of reopening, we expect sequential growth throughout the year to be driven by the lease-up of the Trove, the benefit of the more favorable multifamily leasing seasons coming off in the winter months, the phased 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 aligns with opportunity 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, will further strengthen our balance sheet and lower full-year 2021 core FFO by approximately $0.09 per share.
For the full year, we expect G&A to range from $22.25 million to $23.25 million and interest expense to range from approximately $41.5 million to $42.5 million.
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 expect commercial operating expenses to increase by approximately $1 million by the fourth quarter from the first quarter expected range of $11.75 million to $12.25 million.
We believe that during '21, the vaccine distribution should create a positive recovery inflection point.
And from that point forward, we should see improvement with more to follow in 2022.
During what was a challenging and unexpected year, we supported and protected our residents and tenants, stabilized our operating fundamentals, strengthened our balance sheet and preserved 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 2021 and that we are positioned for rapid improvement once we reach that point.
Our region has several unique catalysts to accelerate the rebound in demand, including a strong economy and favorable demographics.
Historically, we have seen Washington office absorption increase 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 boost 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 emerged from the pandemic at this point, we are seeing signs of our multifamily occupancy strengthening, concessions starting to decline and improvement in effective lease rates, all of which are positive trends heading into our stronger, seasonal leasing months.

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qtrly nareit ffo was $26.7 million, or $0.32 per diluted share.

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