Elme Communities Q1 FY2020 Earnings Call

Welcome to 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; Amy Hopkins, Vice President of Investor Relations, will provide some introductory information. Amy, 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, including those related to the effects of the ongoing COVID-19 pandemic that may cause actual results to differ materially, and we undertake no duty to update them as actual events unfold. We refer to certain of these risks in our SEC filings. Reconciliations of the GAAP and non-GAAP financial measures discussed in 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 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. Now, I'd like to turn the call over to Paul.

Thank you, Amy and good morning everyone. Thanks for joining us on our first quarter earnings call. The past few months have certainly been eventful. And while we posted excellent first quarter results, clearly, everyone's focus today, including ours, is on the COVID-19 pandemic. Before discussing our near and longer term outlook and the operational and financial impacts that we are experiencing, I would first like to discuss our priorities as we manage through this unfortunate and unprecedented situation. As a company, WashREIT has always prioritized, and we will remain committed to the safety of our residents, tenants, employees, and each of their families. We continue to closely monitor recommendations from healthcare authorities and orders from our local governments as we are following their requirements and being proactive, even when we have not had government direction to do so. In the early days of this global crisis, we created a task force to evaluate developments and deliver recommendations designed to ensure the security of our workforce, our tenants, and our residents. As a result, we acted in advance of jurisdictional orders to move our business to remote work capabilities. Beyond safety, we are focused on business continuity. Four years ago, we embarked on a plan to develop the tools and resources to allow us to perform nearly all of our corporate functions from remote locations. Our critical assessment critique and enhancement of those capabilities has positioned us well for continuing to perform during these challenging times. We are very confident in the company's ability to maintain this productivity. I'm extremely proud of how the WashREIT team has reacted to these circumstances. Everyone has shown incredible commitment and dedication, especially our essential property staff, whose extraordinary efforts at our properties have shown during this outbreak. We started to see the first signs of the impact of the virus on our tenant's ability to pay rent about three weeks ago and we are still in the midst of assessing the full economic effect that this crisis may have. Therefore, while we will share what we have observed thus far, and how we plan to continue to monitor and operate as the situation further unfolds, we are obviously not in a position to predict the ongoing magnitude or protracted impact of this global pandemic. However, what we do know and what we plan to focus the majority of this call discussing is what we are doing operationally to support and protect our stakeholders as we manage through this and how the company is well positioned to come out the other side of this. These events absolutely confirm the importance of derisking, and we believe that the actions we took in the last five years to mitigate risk have been critical. We sold 75% of our retail NOI last year, including our riskiest retail assets, and allocated that capital to grow our multifamily business. Additionally, we entered the current year with plenty of liquidity. And as of today, have no major capital requirements for the balance of the year and access to additional liquidity, if needed. Following the sale of John Marshall II for $57 million on April 21, which was a critical execution as we continue to derisk our portfolio, we have further improved our liquidity position. As a landlord, we are focused on supporting residents and tenants during these difficult times. For our multifamily residents, thus far, we have aligned our policies to the recommendations from the National Multi Housing Council and conformed our processes to the requirements of all applicable jurisdictions. We are temporarily freezing rent increases on lease renewals, waiving late fees, halting evictions and offering a payment plan to residents who have been adversely financially impacted by COVID-19. In the commercial sector, comprised primarily of office tenants, we are similarly conforming our policies and processes as necessary to meet jurisdictional requirements. Anticipating that April would be a challenging month for some of our commercial tenants, we quickly appointed a second task force to evaluate and address the needs of these tenants. The task force with the support of our IT team developed a proprietary application system to solicit information from these tenants to evaluate their situations on a case-by-case basis. We will be working through these applications and credit evaluations through the end of the month and, if appropriate, agree on terms. For those tenants who demonstrate true financial hardship from the crisis, we are evaluating their credit, their participation in government backstop programs, and appropriately working together to create the best long-term outcomes for those tenants and our shareholders. We are also assessing federal stimulus programs, including the Cares Act as well as regional resources, and we are monitoring the relief that they are able to provide for our tenants and our residents as well as for our own business. We have appointed a third task force dedicated to understanding the myriad programs available, and we are also sharing resources to help tenants access the information about these programs. We believe that many of our tenants are pursuing near-term assistance through national and regional resources designed to support businesses during this pandemic. To date, WashREIT has not received any federal aid as clarifying details on many of the Cares Act provisions and federal reserve stimulus packages are still being worked out. Therefore, we believe that it's too early in the process to determine whether or not the company will directly benefit from any of the federal programs. We are also evaluating regional resources to determine whether those may offer some interim relief. Now, I'd like to put into perspective how we are positioned heading into this period of economic uncertainty. We reported very good first quarter results, even though the shutdown occurred in March, and we entered the second quarter with good occupancy and a well-positioned balance sheet. Although the crisis began to impact our tenants and residents toward the end of March, we quickly instituted operational expense-saving initiatives that reduced costs significantly, and our first quarter results were in line with our expectations prior to the COVID-19 outbreak. These expense-saving initiatives have carried over into the second quarter. While in the near-term, these economic conditions have slowed growth, we believe our path to growth is still there. While we are suspending our full-scale renovation programs until we can resume achieving rent-increased premiums, the renovation pipeline is still in place to provide up to five years of future growth. In the office, it was crucial that we executed so much leasing in 2019. And while in some cases, our 2020 lease commencements are likely to be late, they will ultimately provide growth once in place. Although physical tours have stopped for now, we continue to progress leases and have signed new leases in April. Our tenant improvement build-outs for the near-term lease commencements are expected to continue uninterrupted. In some cases, the tenant improvements are controlled by the tenants, and a subset of those projects are not moving quite as fast, however, we are seeing project completions. For example, we have a tenant at Silverline center, who recently completed their project work and will be ready to move in once government restrictions are lifted. In the meantime, our buildings are functioning with alternating skeleton crews, and we are realizing savings on operating and utility costs. We delivered Phase one of the Trove in the first quarter. And while breakeven occupancy will likely be pushed to the end of 2020, it should provide another layer of growth as it continues to lease-up and then stabilize going forward. The supply chain for Phase II has been minimally impacted, and we are moving its expected delivery to early in the fourth quarter of this year. Given the uncertainty in the current environment, we do not plan to break ground on the Riverside development project in 2020. We believe that the strength of our residential assets will be further confirmed as we have invested in strong submarkets with solid long-term economic drivers. Our capital allocation has always been research-based, and our affordability GAAP investment strategy led us to allocate capital into submarkets with a wider than average gap between Class A and Class B rents, with the opportunity to create value through the execution of renovation programs. These submarkets provide a cushion during periods of flat rents or even modest rent declines. Within the Washington region, Class A units are priced at a 23% premium to Class B units. However, Class A effective market rents in WashREIT submarkets are priced at a higher premium of up to 30%, providing flexibility to continue renovation in select projects as part of our wider capital allocation program. The decision to continue with our renovation program will be determined on a property-by-property basis, with particular attention paid to localized demand, in-place property performance, and occupancy metrics. With rent gaps of $400 or more between Class A and Class B units, at a $250 discount to a product, class B remains a good value proposition in a market with insufficient affordable housing for mid-market renters. In addition to our position of strength heading into this crisis and the embedded path to growth that will be realized as conditions improve, our focus on the D.C. Metro region is a positive one in times like these. A recent analysis ranked the top 50 U.S. Metros in terms of industries that are expected to see the most job losses and ranked Washington, D.C. as the least exposed due to our diversified economy, driven in large part by the federal government. The Washington, D.C. region has experienced less volatility and a faster recovery than peer markets during recent downturns as a result of counter-cyclical demand drivers, which remain the dominant tenant bases of today, including government, defense, and intelligence agencies and contractors, effectively countering losses from other sectors. As part of our review of the coronavirus impact on our performance, we analyzed the employer industry composition of the residents of our multifamily portfolio based on available data, and the results support the view that our D.C. Metro focus is a relative strength. In terms of pandemic-induced economic contraction on a national scale, leisure and hospitality, retail, and personal, maintenance, and in-home services have been the most directly impacted thus far, according to George Mason University, with a near-total shutdown of these industries by mid-March. In terms of regional job losses, we have seen that retail sales and hospitality and leisure have been most impacted by mandated business closures and reduced demand. These sectors represent approximately 19% of the region's workers and 8% of the region's gross regional product. Residents in our multifamily portfolio have a lower exposure to these industries than the Washington region overall, with less than 13% employed in these industries. Approximately 6% of our Class A residents are employed in these directly impacted industries, nearly 13% of our Class B residents. Likewise, our multifamily resident employer industry concentration shows less exposure to industries that have been impacted the most by immediate job losses. Approximately 61% of our employed residents work in professional and business services, government, education, and finance industries. With data from one monthly payment cycle since the coronavirus began impacting employment and incomes, for which approximately $600,000 was not collected in rent, some industries have outperformed in share of residents with non-payment, while others have underperformed. For example, professional and business services, while comprising 24% of our employed renter base, only account for 14% of our residents with late payments. Likewise, government, in which 17% of our employed residents work, comprises just 9% of our residents with late payments. Given the immediate and dramatic pullback in leisure and hospitality, we have seen that despite comprising just 7% of our renters, residents working in this industry comprised nearly 16% of our late payment residents. We will continue to monitor the patterns closely and are addressing residents' ability to pay through our deferred rental payment program, which I will discuss in further detail later in this call. We also analyze the industry composition for our office tenants to monitor the more adverse segments of the portfolio. We evaluated our office portfolio and our findings indicate that the professional and information services, healthcare, finance and insurance, legal services, and public administration sectors comprised approximately 75% of our total office base rent. The portfolio consists largely of strong credit tenants and based on what we are currently seeing, the segment should prove to be relatively stable from a payment standpoint. Our COVID monitoring focus will be the most heavily concentrated on tenants in retail trade, accommodations, food services, and non-profit organizations, which represent less than 20% of office-based rent. While 91% of our office tenants paid rent in April, we plan to continue to monitor tenants for ongoing rent payments, as we evaluate rent deferral requests and missed rent payments, and we will adjust or watch those categories appropriately as the situation continues to evolve. While it's clear that every industry and metro area will be impacted by the decline in economic activity, like everyone else, it is difficult to predict the impact on our residents and tenants and would not be prudent to do so. But we are confident in the resiliency of our assets and the strategy that we are implementing to shape the best long-term outcomes for our tenants, residents, and shareholders. And with that, I would like to turn the call over to Steve to cover our liquidity position, our first quarter financial performance, and to further discuss how we are addressing and assessing the impact of COVID-19.

Thank you, Paul. Good morning, everyone. We entered 2020 with a strong balance sheet, which has proven to be even more important than usual. As of March 31, 2020, our net debt-to-EBITDA ratio was six times, at the lower end of our targeted range, and we have no secured debt following the payoff of our final mortgage in January. In early April, we prepaid in full without penalty our $250 million, 4.95% bonds that were scheduled to mature in October 2020. As of today, we have approximately $370 million of available liquidity, consisting of the remaining capacity under the company's $700 million revolving credit facility and cash on hand. Moreover, we are engaged with members of our bank group to add even further liquidity through an additional term loan of up to $150 million that will have a term of one year with extension rights for a second year. We have received commitments from the administrative agent for $50 million, and the other banks are targeting to commit later this week. Assuming the term loan of $150 million, our liquidity is expected to increase to approximately $520 million, with no significant capital commitments for the balance of the year and only $150 million of debt maturing in 2021. Further, as I will detail, we are reducing our capital expenditure plans as well. We currently expect to remain well within our bank and bond covenants and to have access to the remaining line of credit if needed. Based on our current projections, we have reduced 2020 assumed capital expenditures for the balance of the year by approximately $40 million. Included in this amount is almost $30 million of lower assumed capital expenditures and $11 million less in development spending as we no longer expect to break ground on the Riverside development this year. Our capital expenditure reductions include non-essential building improvements, tenant improvements in leasing costs for speculative leasing as well as lower multifamily renovation capex. Our future multifamily renovation pipeline remains intact, although, as Paul said, we are suspending the program until after the market disruption subsides. We plan to allocate the renovation capital at a later date, when unit turnover accelerates, and we can resume achieving rent-increased premiums. While we have strong liquidity and no major capital requirements, we will continue to proactively assess all forms of additional liquidity if available. We have a completely unencumbered balance sheet with no secured debt and the ability to access the agency debt market using a portion of our unencumbered multifamily portfolio. Based on our exploration, the market is open to us at attractive rates if needed, although we do not project needing additional capital at this time. We do not expect delays for the remaining construction of Phase one of Trove, for current build-outs for office leases that are expected to commence later this year. As we navigate through the second half of the year, we will continue to explore opportunities to further reduce non-essential CapEx spending and opportunities to further bolster our liquidity, especially if the economic disruption lingers further. Looking forward, we feel confident in our ability to execute on our short-term goals of providing payment flexibility to residents and tenants in need, while retaining the operational flexibility necessary to execute on our long-term goals. As Paul mentioned, we had a strong first quarter and I will discuss those results before addressing the impact that we are beginning to experience and assess related to COVID-19. For the first quarter, we reported core FFO of $0.37 per diluted share in line with our expectations. On a year-over-year basis, core FFO per share declined by $0.07 as expected due to our 2019 commercial asset sales, partially offset by our multifamily acquisitions of the assembly portfolio and Cascade, which were all part of our capital allocation derisking execution. Overall, same-store NOI declined 1.6% year-over-year on a GAAP basis and 1.1% on a cash basis, due to a same-store office NOI decline of 6.6% on a GAAP basis and 6.1% on a cash basis, as well as an increase in bad debt at our retail properties. The same-store office NOI decline was driven by a couple of non-move-outs and lower CAM reimbursements due to timing differences compared to the prior year. Our multifamily same-store NOI increased by a strong 6.8% year-over-year, above our expectations, driven by stronger-than-expected rental rate growth, lower repairs and maintenance expenses, and lower real estate taxes. The company achieved 2.3% of blended year-over-year lease rate growth comprised of 4.8% of renewal rate growth, partially offset by 0.9% of new lease rate declines for the quarter. New lease rates grew 1.5% in March and our same-store multi-family portfolio is currently over 95% occupied and leased. Same-store NOI decreased at our residual retail centers, which we report as other by 4.5% on a GAAP basis and 3.2% on a cash basis, driven primarily by higher write-offs for bad debt, which included amounts due from tenants impacted by COVID-19 deemed not likely collectible and lower recoveries compared to the prior year period. Excluding those impacts, other NOI would have increased 1.3% year-over-year on a GAAP basis and 2.8% on a cash basis. The combined write-offs impact of COVID-19 was approximately $78,000, and the cash impact was approximately $16,000. Turning to leasing activity for the quarter, we signed approximately 46,000 square feet of new office leases and 43,000 square feet of office renewals in the first quarter. We achieved solid rental rate increases of 8.8% on a GAAP basis and 5.2% on a cash basis for new leases, and 6.7% on a GAAP basis and 0.7% on a cash basis for renewals, driven by solid rent increases spread across Class A and Class B office assets, both in the district and Northern Virginia. We signed approximately 15,000 square feet of new retail leases and 19,000 square feet of retail renewals in the first quarter and generated rental rate increases of 18.7% on a GAAP basis and 8.2% on a cash basis for new leases. And a 9.3% on a GAAP basis increase and a 1.5% decline on a cash basis for renewals. While rents were substantially paid for March before government regulations were imposed and social distancing efforts were implemented, we began to experience lower tenant use of their space when nonessential businesses were ordered to shut down in March. At that time, we began operational cost savings initiatives, which reduced operating costs in March by approximately $450,000, including a 40% reduction in utility consumption at our commercial properties, and lower tenant event and amenity expenses as well as other expense reductions. We also began to experience lower parking fee income during March. And with that, I'd like to transition to how we are addressing and evaluating the impact of social distancing caused by the COVID-19 global pandemic. Obviously, these are unprecedented times, and while we began to experience operational and some financial impacts in March, the first significant impact for us began in April. We are only three weeks into the month, do not yet have the financial results for April, and have substantially collected rents due through April. Furthermore, it is nearly impossible to predict the ultimate degree of impact or longevity of the economic and pandemic disruptions and given the uncertainty and limited credit loss experience to date, it would not be prudent to provide further financial guidance. For this reason, it is difficult to forecast with a reasonable degree of accuracy the impact of COVID-19 on our near-term financial performance. However, we recognize the importance of communicating with shareholders and providing transparency, especially in situations like we are in now. So I will do my best to explain where we stand today, what we're experiencing, how we are managing it and how we plan to assess those impacts going forward. First, in our residential properties, 94% of our residents paid their April rent, including almost 97% of our same-store residents. That tracks well relative to national averages reported at 89% for the national multifamily housing council. We also entered April at a stable occupancy level above 95%. As Paul said, we are not increasing rents on renewals for the second quarter, which is expected to lower our NOI growth as we normally would be achieving significant rental increases during the strong second quarter leasing season, especially since we had such strong lease rate growth in March. As a result, we expect a marked increase in renewal retention. This higher renewal retention will help maintain occupancy and preserve our seasonal rent roll during these uncertain times. Until market rents, occupancies, and retention stabilize, we are suspending our value-add renovation programs. We will be closely monitoring each program and will be prepared to allocate capital to our residential value-add programs when turnover resumes, renewals begin to decline, and we have a higher degree of confidence that the marketplace will provide adequate returns. We believe we are preserving opportunities for future growth in multiple ways. First, for our same-store apartments, the flexibility offered to our communities will help drive higher resident retention and will not negatively impact seasonal portfolio exploration management strategies, thereby preserving our ability to achieve strong recovery growth. For non-same-store properties, we see an opportunity to potentially cut in half the typical two to three-year transition to correct the lease expiration schedule inherited at acquisition. Additionally, while we are unable to predict when the economy will resume, we believe that operating expense-saving initiatives will substantially offset the reduction to multifamily rental income due to lower new and renewal lease rent growth in 2020. That said, we would expect fee income to decrease. We are committed to supporting our residents and are providing flexible payment options to defer a portion of rent over the next several months for those who have been financially impacted. Due to the slowdown in new leasing activity, our property managers have the capacity to execute our deferred payment options effectively, which requires evaluating enrollment requests monthly on an individual basis, while forming relationships and working closely with residents. Our overarching goal is to help residents who are experiencing temporary financial hardship to remain in their homes, which we believe to be the best long-term outcome for both our residents and our shareholders. Clearly, forecasting bad debt is challenging at this time. However, we are using many tools, including monitoring, what industries our residents work in and the likelihood that they could be impacted, using data from the history of past economic downturns and closely monitoring our collection efforts and tenant responses. We've been closely monitoring credit card payment as a percentage of rent and have not experienced an increase. Our leasing and management teams have been in communication with residents who have not paid April rent to make sure they are aware of the deferred payment option. Some residents have indicated that they plan to pay April rent with no further deferral. We will continue to track this. Uncollected rent for the month of April is approximately $600,000. It may not represent what we experience in May or beyond, but we do expect to work out payment plans with many tenants to collect deferred rents over the next few months. We will continue to monitor this impact. In terms of leasing activity, as we manage slower leasing volumes, our focus has shifted to maximizing resident retention and addressing their emerging needs. While guided tours for prospective residents have stopped, due to stay-at-home regulations from governments, we are utilizing our virtual touring capabilities to provide virtual tours and online leasing. Applications normally would be about 1% to 1.5% of our unit count each week. So far in April, we are running about 60 basis points of units, and entirely through virtual leasing tours, which are available at all of our apartments. Although traffic is down, those electing to tour virtually are motivated, doubling our typical closing rate. While we reasonably expect retention to increase, there will probably be negative impacts on occupancy tied to the decrease in traffic. We expect occupancy to remain at 95% through April and likely dip to between 94% and 94.5% by August. Overall, we have previously expected significant multifamily growth in 2020. And that growth is clearly going to be lower. We have a five-year pipeline of strong value-add renovations once conditions improve, and it is appropriate to resume such growth. We also still expect future NOI growth from the Trove, which I will cover next. As Paul mentioned, we still believe the Trove will deliver Phase two of the project this year, although the completion is now expected to occur in the fourth quarter instead of the third quarter. Our lease-up had just begun and social distancing measures ground physical touring to a halt. However, we have been successfully converting virtual tours and signed leases. While virtual touring is having success, we expect lease-up to take longer and are likely to incur a loss of between $600,000 to $700,000 in 2020 with growth expected in 2021, assuming we reach breakeven occupancy near year-end, which we believe to be a reasonable expectation based on where we stand today. Now, moving on to commercial, all of our office assets are located in the District and Northern Virginia, where non-essential businesses have been shut down. We collected 91% of office rents for April thus far. And of the remaining outstanding rents, we expect that approximately $300,000 is related to tenants, who are capable of paying but are perhaps trying to be opportunistic and from whom we expect to collect this rent, while we plan to evaluate the remaining outstanding amount for potential deferral. As Paul explained, we are accepting applications from tenants requesting rent deferral who have been financially impacted and are evaluating their financials and access to stimulus relief, among other factors. We do not plan to defer rent for those who are capable of paying and who are simply being opportunistic. It is very difficult for us to project bad debt with so little data thus far and not knowing the future extent or duration of disruption. However, our assessment of this early stage of processing of the tenants who have requested rent deferral or who have not paid April rent will be that they are likely to be able to meet their future rent obligations. For the remainder, we have reserved most of their balances through normal accounting practices. We will continue to evaluate this as we gain more information. We also know that parking revenue is down as people are not driving to their offices. Our current projection is that parking revenue will decline by $2 million, but that estimate could change if the shutdown is more protracted than we've assumed. Once the economy returns, we could experience an increase in parking income from higher utilization as tenants' transportation preferences shift away from public transportation. Also, while fortunately, much more leasing was done in 2019, 2020 was expected to be the year of lease commencements, which is expected to build into 2021 and have included some additional leasing that had been progressing nicely. We don't know the duration or continued severity of this disruption, and while some deals are still being executed, tour volume has slowed. While most build-outs controlled by us are progressing, we now believe lease commencements will be pushed out further in many cases. Our previous 2020 guidance included approximately 1.3% of revenue from speculative lease commencements, that leasing was projected for some of our most highly-quality space. And because of that, we believe that leasing is a matter of when, not if it will commence. While we cannot presently estimate the overall impact of lease commencements or payment delays, only 20 days into experiencing an impact on collections from this disruption, we will continue to monitor both closely. As we experienced in March, we expect to continue to find cost savings to partially offset the lower income and likely bad debt from lower collections through initiatives to save in the utilities, cleaning and other operating expenses. Finally, for our retail assets, which represent less than 7% of our total NOI, we are evaluating approximately $500,000 of April rent payments not received and potential rent deferral. As we said, these are very early days in an unprecedented global pandemic economic crisis, and we cannot yet provide 2020 guidance as predictions for when the spread of the virus will peak, how long social distancing measures will remain intact and what the ultimate toll in the economy will be continue to vary. Therefore, we have withdrawn our previous guidance and currently are not planning to update it. With that said, we have shed light on what we could experience based on where we stand today and the actions that we are taking to create the best long-term outcomes for our stakeholders. And with that, I will now turn the call back over to Paul.

Thanks, Steve. In conclusion, while we are operating in an environment that continues to rapidly change, we are confident in our ability to effectively manage through this period of uncertainty. Our 2019 strategic capital allocation and strong liquidity position will help us to stay positioned for long-term growth as we navigate through this economic shutdown. Although we, like everyone else, will need to absorb the near-term impact, we still have well-located residential units and the path to growth when the economy resumes and a 3,000 unit five-year renovation pipeline that will provide growth. Although the lease-up of the Trove will now be more protracted, the Trove still provides substantial growth once it begins to stabilize, with much of the investment already made. Furthermore, we have office leases to provide year-over-year growth in 2021 and beyond once those leases commence. All in all, we remain confident in our ability to manage through this while remaining in a position to expand and grow our business post COVID-19. Now we would like to open the call to answer your questions.

Our first question comes from Blaine Heck with Wells Fargo. Please go ahead with your question.

Hey thanks. Good morning guys. So Paul, when you consider the disruption that we're seeing on the investment sales side of the market, how are you thinking about your overall plan of shifting from office and retail into multifamily? Do you have any sense of the price dislocation that maybe you're expecting to see in each one of those sectors? And ultimately, how does all of this affect the timing of that shift toward multifamily?

So Blaine, reflecting on the past 30 to 45 days, our situation has certainly changed and the transaction market has nearly ceased. I came across information indicating that the transaction failure rate in March was six times higher than usual. Every multifamily deal we were considering in the first quarter, which was due in March or early April, has been withdrawn. Additionally, aside from one deal, I haven't observed many office transactions being finalized. Thus, it’s challenging to discuss cap rate movements or the outlook for inventory without clear data. Many of the owners and operators we've spoken with are in a wait-and-see mode, holding off on assets that might enter the market. We're also examining the refinancing sector, which has been significantly affected, and lenders are becoming increasingly choosy. Some refinancing deals that do not go through will likely end up for sale and those are ones we will consider. I don’t see significant changes in cap rates within the multifamily sector, and I suspect this might apply to the industrial sector as well. For office spaces, investors will definitely prioritize stable cash flow and duration moving forward. As for retail, I believe the situation will take more time to resolve, and I don’t expect many retail transactions to occur in 2020.

Got it. Thanks. That's helpful commentary. Steve. Last quarter, you guys said you expected to be in the high-80s on your payout ratio during 2020. I know you guys aren't giving guidance, but can you give us any sort of updated expectations on that metric and whether any of the impact of the Coronavirus can have any implications as far as the dividend is concerned?

Thanks, Blaine, I hope you and your family are doing well. It’s great to hear from you. We've provided quite a bit of our guidance, but let me sum it up in three parts. I’ll recap that after answering this since we’ve had a lot of discussion today, which is a bit unusual. We haven't experienced what I would consider a material impact up to April. If things were to resume as they are, we likely wouldn’t see a significant change. We have shared visibility on various aspects of the potential impact, but we believe it is not wise to predict how long the effects of this global pandemic shutdown will last, as no one truly knows. We've conducted extensive research on the duration and impact, but let me recap some things we've clarified that may assist you in your modeling, as we haven’t fully addressed the question. We've been open about many factors and realistic about what we're modeling, but we're not ready to make projections. I think I misspoke in my earlier comments, but we've actually collected 95% of our multifamily rents for April, and 97% for the same-store multifamily. This is within 1% of last April and March, so we've largely avoided disruption there. Additionally, I recently learned that we expect to collect another 2% of our office rents for April today, which would bring our total expectation to 93% for that sector. We've noted the relative impact on multifamily and are currently suspending revenue increases, while we anticipate operational cost savings will generally offset each other, although it will impact growth in that area.

All right. Great. Appreciate the additional detail there, Steve. Very helpful. Last one for me. Can you just talk about the drivers of the operating expense savings you guys are seeing and expecting to continue to see on the multifamily side and maybe quantify the amount of savings we should expect to see?

We haven't quantified them on a run rate basis. I would say that we experienced maybe three weeks of reduced utilization of our commercial space started to drop-off fast in March. In that month, we saved $450,000. Our operational team has obviously been in action longer than that. In our own models, we have substantial savings. But that really, again, to tell you how much that would really depend on how long we think the thing is protracted to go. So we haven't quantified that. But I would say we think that we found additional opportunities beyond what we experienced in March. I think that's as far as we can go right now.

Our next question comes from the line of Michael Lewis with SunTrust Robinson Humphreys. Please proceed with your question.

Thank you. Did you guys share concessions that you're offering on new leasing? I know you said that, obviously, the volume is down, but the success rate is up. Is there anything you're in to entice those people that are looking for a new apartment?

Yes, Michael, for the units that we are doing, I believe, we're offering a month free, the ones that are just coming online right now, the Trove, we're offering a month free per year term.

Okay. On the development lease-up, that would probably be pretty typical, but even on the existing operating portfolio in month three?

No. We haven't provided details on that as it will differ from one asset to another and from one submarket to another.

Okay. Understood. Regarding the office portfolio, how do you view the situation? We are all aware of the significant new supply in Class A buildings and the rent differentials. Given the current circumstances, do you believe that Class B buildings are still positioned relatively better than Class A? Or do you think tenants in Class B buildings may be more vulnerable when considering credit losses and rent deferrals?

I believe the tenants in the B space are more economically aware. Looking at our B space downtown, there isn't a significant difference in the number of tenants paying rent between B and A spaces. Currently, I feel that people are more inclined to pay an average rate of $51.5 per foot in our B space rather than $70 or $150 per foot. The credit profiles are strong, but there are variations among tenants. We do have some prominent credit tenants in the B space. I think tenants are generally more price-sensitive now compared to before the pandemic.

Absolutely, that makes sense. Just one last question from me. I don’t want to dwell too much on the guidance issue, but Steve, if I could respond. It’s completely understandable why you decided to withdraw the guidance. However, I thought that if anyone was going to maintain the guidance, it would be you, given your data-driven and research-focused approach. You've clearly been careful with this and have detailed many of the underlying factors. My main concern is whether credit losses are the biggest uncertainty. I know you've talked about some of the Letters of Intent and their potential conversion. The main question for me is, what indicators do you think would be necessary to reinstate the guidance?

I'll respond to that, Michael. I believe we've made our position clear and continued our commitment to transparency. As for why we withdrew our guidance, there are three main reasons I discussed with Blaine. First, credit loss is a significant concern. Specifically addressing your question, timing is crucial for lease commencements, which were a major focus for us this year. We had 3% of leases already signed that were scheduled to commence, along with another 3% factored into our previous expectations. Additionally, we had around $4 million in speculative leasing with promising assets that were gaining traction. However, with the current situation, physical activity has diminished, making it challenging to predict lease commencement timelines this year. Credit losses are difficult to forecast when we've not yet experienced any. Statistically, we haven’t seen material credit loss, and while we are analyzing data and models regarding potential defaults, we are essentially guessing who might fail to pay rent when they have been paying thus far. We're keeping a close eye on it, and we entered this call hoping we could update our guidance with confidence. However, if we provide guidance, it must be rooted in factual data rather than mere opinion. Currently, we lack substantial credit loss data to inform our projections, and we aim to be responsible in our approach. At this point, we aren't seeing significant negative impacts. It's challenging to predict the extent of circumstances that are unprecedented. If we do start experiencing credit losses, and our data supports it, we'll feel more assured about estimating those losses. A clearer understanding of when people will begin returning to offices and how that process will unfold will help us gain more confidence in predicting lease commencement dates. However, it appears that it will take time to gauge how quickly people feel comfortable re-entering society and resuming office operations. On another note regarding credit loss and accounting, it’s not just about anticipating who might not pay; we also need to consider the specific circumstances of those individuals, as some may have obligations that exceed the rent they're not paying. We want to be cautious and avoid misleading our investors by acting as if we have insights based on unfounded assumptions.

Our next question comes from the line of Bill Crow with Raymond James. Please proceed with your question.

Good morning. Appreciate the time. Paul, I guess, two questions. Number one, what are you hearing about the potential impact to new supply, both multifamily and office in your market given this current environment? And number two, would be a lot of the discussions on your office portfolio has been the success of locations near mass transit. I'm just wondering how you're thinking about that going forward? I think in the prepared remarks, you talked about that there's an opportunity to potentially capture more parking revenue, if people choose not to use mass transit and etc.? I guess those were the two questions.

Okay, Bill. Let's address them one at a time. Regarding new supply, much of the churn was already present in the D.C. office market. Buildings that are under construction will likely continue to deliver, despite supply chain disruptions. Similarly, for multifamily units, we are completing the Trove on schedule with minimal supply issues and expect to deliver the rest by year-end. However, I am noticing limited commitment from limited partners, and some developers are stepping back from projects due to shifting leasing strategies. I foresee disruptions in new supply, particularly in multifamily housing, which was previously thriving in Washington. I don't anticipate many new multifamily starts for the remainder of the year. As for mass transit, I believe it varies between urban and suburban areas. In dense areas like Downtown Washington, there's a strong desire to utilize public transportation, and our metro system is favorable compared to other gateway cities. People will gradually return to using it. A critical question is how the use of office space will evolve in light of the changes we've experienced. We established a reentry task force, focusing on both base building modifications and tenant space adjustments. For base buildings, we're prioritizing access points, receptions, elevators, parking, touchless technology, and HVAC systems, all aimed at improving overall wellness. However, gaining access to buildings will take time, with potential waiting times for elevators. Our approach to cleaning and managing touch points will need to evolve. Once inside the tenant space, companies will evaluate who comes to the office, deciding who is essential versus who can work from home, and possibly implementing team divisions. Our tenants are already discussing their own social distancing measures, like reduced occupancy and altered traffic patterns. One positive outcome is the increased communication between tenants and landlords. In the last 30 days, you may have engaged virtually with more people than you typically do face-to-face. Transportation and building operations may require a mix of familiar and new strategies that are still developing. Major firms are actively publishing reentry guidelines. Ultimately, I believe public transportation is here to stay and may receive necessary funding to enhance the experience for our tenants, residents, and their employees.

That's helpful. So if you had to throw a guess out there three to five years from now, Paul, do you think we have more square footage per employee or less or it stays neutral because some are working at home and others are more spread out? Do you have a thought on where we go?

I believe there isn't a universal answer to your question, Bill. People are going to take social distancing seriously because being comfortable in the office is important. Additionally, the social interaction and camaraderie are key aspects. After being isolated at home for six weeks, I appreciate my colleagues and I'm just weary of seeing them only on a screen. I think individuals will be quite mindful of their personal space, and right now, I don’t see many people discussing the need to significantly increase their office space. Rather, conversations are focused on how to utilize existing space more effectively. In the last few weeks, the tenants we've engaged with have not expressed any desire to expand; instead, they've been asking a lot about thoughtful reconfiguration. So, I don’t have a clear stance on whether we'll have more or less space per employee; it really hinges on our current economic situation.

Our next question comes from the line of Joab Dempsey with Stifel. Please proceed with your question.

Hi, good morning. Paul, good morning. Thanks for taking my question. Just wanted to start off with sort of a modeling question. Interest expense came in at about $10.8 million this quarter. I know you prepaid the $250 million note and have increased the line which looking at the stop has a lower cost of debt. Is it safe to assume that the interest expense would trend down for the rest of the year?

Yes, we've provided sufficient information, even without a specific guidance point. First, we've prepaid the debt, eliminating the 4.95% bonds as of April 2. Secondly, we have amounts available on our line. We've also indicated our expectation for another term loan at LIBOR plus 1.5%, with a LIBOR floor of 50 basis points. While we haven't specified our next move, it's reasonable to assume we would draw from that facility to pay down our line and enhance our liquidity. We are prepared to extend our debt whenever it's advantageous for our shareholders, but we will wait for the right timing. When we do proceed, we plan to reduce line debt and potentially address some of the $150 million maturing next year. That's the current outlook based on our comments.

Perfect. Sounds good. I have a follow-up on Blaine's earlier question. I know you mentioned that the office sales market is facing challenges. Looking ahead, with the sale of John Marshall and the market stabilizing, could this situation present an opportunity for Washington REIT to become a net acquirer and take advantage of the disruptions currently occurring in the market?

Absolutely. Our initial guidance for this year was based on having only one significant transaction opportunity, which was the sale of JM II. We will continue to be opportunistic, as we have been over the years. I believe there will be opportunities emerging from refinancing deals that could have increased equity requirements that may not be attainable, leading to a shortfall in proceeds. These are the types of assets that might re-enter the market. First and foremost, during times like these, my Chief Financial Officer, Steve, is focused on protecting the balance sheet, ensuring we can meet our ratios and maintain liquidity. We will definitely seek out opportunities as much as possible. We are familiar with our market and the submarkets we are interested in, and if we notice any distressed activities, we will certainly explore them.

Perfect. Perfect. And then just last one for me. Thank you for providing the multifamily and office collection numbers. I know those are top of mind for a lot of people. And I know it's early, but sorts of generally speaking, what are some high-level thoughts you have around May collections and what those might look like, just given that the pandemic really started in earnest in late March. Do you think May maybe more effective from a collection standpoint than April was?

Sure. This is Steve. I'm going to start it, but I may actually kick it over to Grant, our Head of Research just to tell you, since we've been quarantined all along, what our advanced researchers tell us about the profile of the people in our portfolio, which I think is more indicative than what we've experienced. Because keep in mind, we are like within 1% of what we experienced a year ago. We're within 1% of what we experienced in March when no one was acting like there was a disruption. And the other thing is, one of the things that we monitor is what percentage of people pay by their credit card, and that hasn't gone up, which is all a good sign. So, I mean, when you're basically at normal and people have been locked in their homes for what would then be six to eight weeks, you have to assume it's going to get worse. I think we do a lot of research. There are a lot of different things out there about V-Shape and U-shape recoveries. We have research perspective on all in terms of how either one of those could affect us, but we think we're okay either way. But so again, we now are going to have to project using analysis. And Grant can talk about that and maybe the composition of our portfolio, because they paid us so far. So Grant, maybe you could add a little color to that?

Sure. Happy to. When we've been looking at this, as Steve alluded to, we've been really looking and digging into the share of industries that our residents work in and those that we have overexposure or underexposure. And so first off, I would just say that to point out to listeners that in the same way that Washington is different than the country, when we dug into our data, our properties are different than even Washington, for example. So for the more immediately exposed industries of leisure and hospitality and retail. Those comprise nationally about 21% of all jobs in the Washington region, that's around 19%. And digging into our Class B portfolio, we just have 13% exposure to those in median industries, doesn't mean that other industries won't be more widely impacted, but those sort of the first ones that we've watched. And in terms of the data that has come in thus far for late payment in April, there have been a group of industries that have outperformed and those that underperformed. And I think we pointed that out to some extent in the call. One that really shows up well, I guess, talked a lot about is Washington's exposure to government employment and we have an outsized share of that in our portfolio. And those residents are paying. So for example, there's 17% of our household that are employed, but they're only 9% of our uncollected share. So that's an example, as well as professional and business services, like 24% of our employed renter base only accounts for 14% of our residents with late payments. So we've had some stronger sectors like that and we have outsized exposure to those, which we think going forward we'll continue to track, but they seem to be holding up early. And then we have less exposure to some of the ones that have been more immediately impacted, but that's the framework that we're really looking at. And we'll continue to monitor as we gather more data like we've been saying, we really only have one data set. But as we move forward, we'll be obtaining that as we move forward. I hope that helps.

No. That perfect. Thank you guys so much for the call. I really appreciate it. Stay safe, all right.

You too.

There are no further questions left in the queue. I'd like to turn the floor back over to management for any closing remarks.

Thank you, operator. I would like to thank everyone for your time today. We appreciate your continued support during these challenging times and we hope that you all stay safe and healthy. Thank you and have a good day.

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.