Elme Communities Q3 FY2020 Earnings Call

Welcome to Washington Real Estate Investment Trust Third Quarter 2020 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. Good morning, and welcome to WashREIT's third quarter earnings conference call. 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, which may cause actual results to differ materially, and we undertake no duty to update them as actual events unfold. We refer to these risks in our SEC filings. Reconciliations of the GAAP and non-GAAP financial measures discussed on the call are available on 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. I hope everyone is safe and healthy, and we appreciate you being with us today. We're joining you from our corporate headquarters in Washington, D.C., 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 has 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 protracted 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 7 months, we swiftly adjusted to the demands of today's market. We have fully prepared our commercial properties for reentry by upgrading ventilation filters, implementing enhanced cleaning protocols and installing contactless opening technology and protective shields in addition to many other safety enhancements. We've 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 protracted 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 3 reasons. First, our portfolio and local economy continue to show resilience. We attribute our strong collection performance, which Steve will discuss in detail later on this call, to the fact that the composition of our office tenants and the employers of our multifamily residents are concentrated in industry sectors that have experienced the lowest job losses. 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 stable office-using tenants linked to important programs, which results in significantly more stability in our region compared to other major metro areas and the U.S. 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 shortage that has been accumulating over many years as well as an affordability crisis that is only getting worse as the cost of homeownership continues to rise above affordable levels for median income earners. Thus, the largest renter cohorts remain underserved by new supply. Over 95% of the multifamily units that have been constructed over the past 7 years are unaffordable for renters who earn $75,000 per year or less, a segment which comprises 57% of the Washington Metro renter 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 ranked second in the nation based on the presence of the best-performing, large-cap tech companies and the best combination of moderate 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 in high-net-worth neighborhoods. Our office portfolio is also well positioned with a weighted average lease 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 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, D.C. as lobbyists and law firms ramp up for drafting and implementing changing legislation. While we are not relying on this result, it will represent a unique catalyst for the Washington, D.C. office market among 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. Before I turn the call over to Steve, I'd like to briefly discuss recent ESG program developments. 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 D.C. 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 Council 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. Now I'll turn it over to Steve to review our collection performance, balance sheet, third quarter results, and outlook.

Thank you, Paul, and good morning, everyone. 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 credit and the resilience of the Washington Metro economy. We collected 99% of cash and contractual rents during the third quarter, and our rent collections through the first 3 weeks of October are in line with our quarterly trend. 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 to the leisure and hospitality, education, 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 improved 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 U.S. 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 $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 BREEAM 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 lacked investment in sustainability and efficiency opportunities. We intend to be among the first in the country to achieve BREEAM 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 5 years, further strengthening our liquidity. In 2020, we've demonstrated access to long-term unsecured debt markets, term loan markets, and eliminated secured debt. We maintained 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 on occupancy and lease rate growth due to high demand for spacious value-oriented units. Gross lease rates for our 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 our 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 and other 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 by 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 were hit by the economic shutdown, 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 6,000 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 remain 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 costs 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 tenant's 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. As reiterated in our earnings release last evening, we withdrew our previously issued 2020 outlook in April due to the volatile macro environment and continued uncertainty related to COVID-19. While uncertainty remains surrounding the magnitude of the pandemic and the durability of recovery, we are now 7 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. However, we are still uncertain overall about the extent, impact, and duration of the pandemic disruption. We are reinstating full year 2020 guidance with a 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 have previously expected significant multifamily growth in 2020, but 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 while 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 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 2 this month. Trove lease-up had just begun when social distancing measures drew on-site touring to a halt. And while we had much success converting virtual tours into signed 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 for 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 resumed towards the end of the second quarter, and while traffic continued 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 reentry is slower than originally anticipated, but 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 expectation 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 million 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 are 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. And with that, I'll now turn the call back over to Paul.

Thanks, Steve. 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 our eye 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, a development and renovation pipeline that can and will be reactivated once conditions improve, and a solid long-term growth story. Now we would like to open the call to answer your questions.

Our first question is from Blaine Heck with Wells Fargo.

So Paul, I think last quarter or maybe the quarter before when I asked about the investment sales market, you talked about how the transaction side of things is still relatively slow. Are you seeing any signs of an increase in transactional volume? And if so, is there enough to figure out what the effect on pricing has been both in multifamily and office?

Let's begin with multifamily, Blaine. I see a distinction between urban and suburban markets, starting with D.C. proper. There has been a slowdown in occupancy downtown, but the major issue continues to be TOPA, which is negatively affecting investment sales in the area. For those who hoped to finalize deals by the end of the year, it has become a significant hurdle. In suburban markets, especially in Northern Virginia, multifamily properties are currently very popular. Reflecting back to the end of the fourth quarter of 2019, when the market was extremely active, we observed significant activity and some cap rate compression in January and February this year. There was a pause in March, but activity has surged again, largely due to agency lending. We have witnessed some cap rate compression. Although I prefer not to rely solely on cap rates because of variables like actual occupancy, collections, and tax adjustments, underwriting has become more aggressive since Labor Day. I've observed a shift in year 2 growth assumptions in multifamily. In previous discussions, some had projected 0 to negative growth, but feedback now suggests a growth rate between 1% and 3%. Regarding capital, as we mentioned with the Odyssey Index, core funds have largely disappeared, but 1031 activity is still strong with cash flows from solid collections and value-add opportunities. Debt plays a crucial role here, and investors are aiming for 6% unlevered IRRs and 11% to 12% levered, based on just over 2% debt. It's all about levered yields in multifamily. Moving to the office sector, the situation differs slightly, Blaine. In the suburbs, we're seeing activity primarily from core plus capital, which is looking for longer-term leases or shorter ones with an emphasis on retention. This capital seeks levered returns in the range of 11% to 13% or 12% to 14%, typically with 60% to 65% loan-to-value ratios. However, core capital is scarce in the main market right now. When examining both sectors, larger deals, even in downtown areas, are underperforming in terms of pricing. Those active in the market are generally not expecting significant growth in the commercial sector over the next two years. They seem to be adjusting face rates downward by more than 10%, contributing to an ongoing bid-ask gap, as we discussed previously. In D.C. proper, many are exploring options but not seriously pursuing capital investments. Deal size is important as local and regional banks seem to be capping their loans around $25 million to $50 million in total value. Life insurance companies are only lending on top-tier properties. While CMBS is available, many borrowers are hesitant. Debt funds offering 4% to 5% rates are not very attractive either. We're starting to notice seller financing reemerging in the market, particularly from sellers eager to complete transactions sooner rather than later. Lastly, there has been a resurgence of interest from foreign capital, as they perceive D.C. as a favorable investment, often partnering with local operators. I anticipate that foreign investment will likely increase after the election.

That's great commentary, very helpful. Maybe just a couple of follow-ups there and focusing on the multifamily side. Are you seeing more core deals on the market? Or are there also value-add deals? And if so, I guess, what's the pricing differential between the two? And then assuming you guys are looking at deals, are you mostly focused on Northern Virginia? Or are you looking at properties in D.C. proper and Maryland as well?

Let me start with the last point and I'll address the rest in reverse order, Blaine. Currently, the district comprises only 13% of our NOI stream. As I mentioned earlier, we aren't observing many transactions in the district due to TOPA. If you're seeking reliable execution on closings, D.C. has extended their restrictions to year-end, and it's possible that those restrictions could be prolonged into December 31. Considering the occupancy and concession issues currently facing the district, there's likely a wider-than-usual gap between bidding and asking prices. In the suburbs, particularly Northern Virginia, the strong job market and government contracting have resulted in more deals and value-add opportunities. I recall discussing this with you last year when we finalized the Assembly portfolio, and there was interest in suburban garden-style walk-ups, which are currently among the most sought-after properties and are being priced well above replacement cost. This indicates clear value-add potential, as it’s not a question of if rents will grow, but when they will. They've certainly accelerated the rent growth curve compared to some long-standing operators. As I mentioned, they're likely increasing rents to secure these deals by the beginning of year two. So, I haven't seen much core capital looking into those deals at this time, Blaine.

Okay. That's great. And the last one on the transaction side. At this point, would you guys be comfortable taking on more development risk through the acquisition of land or maybe an asset that's still under construction?

Let's examine our development pipeline at the moment. We currently have 767 units ready to go in a market that we are very familiar with. Our primary measure of success has been the outstanding renovation projects we've completed. We also have strategic land holdings already incorporated into our portfolio, along with some multifamily assets that offer additional development potential. Regarding broken construction deals, that situation varies by submarket, and while there are areas we remain interested in due to affordability gaps, I haven't encountered any broken construction deals in Northern Virginia that we would consider. However, we would align with several other eager capital investors in the market.

Okay. That's great color. Last one for me, maybe sticking with you, Paul, or maybe even for Grant. And I think Paul, you mentioned this a little bit in your prepared remarks, but I'm thinking back 4 years ago when we were looking at a pretty subdued office environment in D.C., and I think the hope was that alignment of the White House and Congress would spur more bills being passed and thus drive demand for office. But for, I think, a bunch of different reasons, that didn't really pan out like it has in past elections. Now who knows what happens in this election. But if we do see alignment of the White House and Congress, do you think there's an argument that we actually could see a surge in office demand this time around? And if so, I guess, what's the difference between now and 4 years ago?

Sure. I'm glad to respond to that, Blaine. You’ve highlighted a key point; the last four years have differed for various reasons compared to previous trends. We believe that if we achieve alignment, there may be a chance for a more typical dynamic between the legislative and executive branches within the party, something that hasn't really been present over the past four years. A cooperative stance, should alignment occur, could potentially lead us back to a historical pattern. This usually correlates with an increase in the number of legislative bills passed, accompanied by more lobbying efforts and legal precedents in D.C., which could result in greater absorption.

Our next question is from Anthony Paolone with JPMorgan.

When I think about your markets, you've got, on the office side, the law firms and government and some companies as the big space users. And then you have the smaller folks like foundations and lobbyists and consultants and stuff. Just wondering if you have a sense as to the smaller tenants, any initial thoughts as to whether you see them trying to give up space or work in a more remote world going forward or just what you're seeing in terms of their thought process right now.

Yes, Tony, it's Paul. I would use our experience and our portfolio as a benchmark. Smaller tenants are currently returning to the office, which makes sense as every employee in a firm of 12 to 15 people is essential. Additionally, many do not have the technology infrastructure to support remote work. In our portfolio, smaller tenants average around 5,500 square feet. While we have worked with some of them, many are focused on making their current space work. Larger tenants, for liability or other reasons, are not actively returning to office spaces. However, those larger tenants are reviewing their workforce strategies and we are starting to see some interested in longer-term deals, taking advantage of favorable market conditions such as free rent and parking clauses. I wouldn't categorize them as visionaries, but they are certainly looking at their workforce strategy with a longer-term perspective compared to the smaller tenants we engage with.

Got it. And what's happening in your Space+ space and with the leasing or just utilization there?

I believe we've made significant progress. Similar to others in the office sector, we've noticed an increasing demand for shorter leases with flexibility. This trend aligns well with our Space+ offering, which currently represents about 3% of our net operating income. As more decision-makers return to the office, I expect our Space+ inquiries to increase. Our first deal during the pandemic involved companies transitioning from WeWork and co-working spaces to Space+, allowing them to establish their own identity and have better control over safety protocols in their environment. I anticipate this momentum will continue throughout the remainder of 2020 and into 2021, and I look forward to providing more updates as we move forward.

Okay. And then just last question for me. You talked a lot about and gave a lot of color on the transaction environment. Anything specific to you all on the disposition side that could make sense or that you're contemplating now that could be used to fund capital to redeploy elsewhere?

Tony, I’m not trying to avoid your question, but as you know, we always aim to be opportunistic with our capital allocation. If we spot a chance to monetize an asset, we will likely take it. We're consistently looking at recycling as well. We strive to manage our investors' capital effectively and keep an eye on the market trends regarding buying and selling. There's still a noticeable divide between multifamily and office spaces, and much of the office sales market is influenced by lenders. We need to find the right opportunity, but we would certainly consider it if it makes sense for us.

Our next question is from Chris Lucas with Capital One Securities.

Following up on Tony's question, Paul, it's somewhat counterintuitive, but we understand that you have some attractive infill retail properties. While there hasn't been much retail trading, the properties that have sold, particularly those considered high-quality infill in major markets, are trading at cap rates similar to or even lower than pre-COVID levels, especially when considering NOI risk. I'm interested to know if you would consider monetizing a couple of your assets, specifically Takoma Park and Spring Valley, in this market environment.

Well, I'm not trying to repeat myself, Chris. We're always open for business like any real estate investors should be. I look at some of those assets, specifically Takoma, which is directly on the purple line. We have good cash flow and viable land opportunities there. If someone believes those assets could be worth more as fully developed mixed-use properties, we would definitely consider it. Regarding Spring Valley, we completed an addition and made sure the leasing was finalized. We're performing well there compared to others. However, we haven't tested the market against pre-pandemic cap rates. Previously, we were comfortable with the high 6% cap rate we achieved on 75% of our retail portfolio NOI last year. But we haven't really explored that yet. I'm not saying that we wouldn't carefully evaluate a strong offer if someone came in with one.

Yes. I saw your note, Chris, and thanks for the question. I'm glad you asked. I think when you were looking at total NOI guidance and trying to find all the pieces, there's something you're probably missing because we did not update guidance on JMII because we sold it mid-year, but it had contributed about $1.3 million to NOI before the sale. And when I think you were looking at total numbers, that if you put that in there...

No, we took that out.

Okay. You got that.

No, we took that out. Yes, yes.

It seems you might have overlooked some details. Regarding our outlook for the fourth quarter, this is our first time providing guidance since the onset of COVID-19. In the office sector, it appears we may be slightly more cautious due to expectations of lower recoveries in operating expenses compared to what we've recently experienced. We are also being conservative with our projections for bad debt, particularly in the commercial and multifamily sectors, where we expect to see higher figures than in the past. On the multifamily side, we've noticed some decline in trade-outs and rents starting in September relative to the remainder of the quarter. However, when we analyze other major markets, a decrease in gross rents of 1.7% or even effective rents falling by 3% does not seem overly concerning given the broader data across these markets. As we enter the winter months, we are maintaining a cautious approach. We're pleased that our lease maturity schedule is heavily weighted towards spring and summer months, allowing us to navigate this period conservatively. For context, we have recently reset our original guidance. If you recall, we had plans to build up momentum throughout 2020, expecting a strong finish and a lot of momentum going into 2021. This included speculative lease commencements which have now been pushed to 2021, as well as negotiations that have also been delayed. Since we froze multifamily rents during the robust spring and summer months, we anticipated some growth by the fourth quarter. Additionally, we paused our value-add renovation program, which was also expected to contribute by this time. When comparing our original guidance to the new one, we're only $0.02 per share short based on year-to-date figures through September 30, which is not much as most of the anticipated growth was expected in the fourth quarter. While we cannot foresee the full impact and duration of the pandemic, we believe growth will ultimately return; it seems to be a matter of timing. Our office portfolio still contains strong assets with interest. In multifamily, we anticipate stronger leasing seasons and hopefully rent increases this year, along with a chance to resume our renovation program. Moreover, the Trove, which was completed just before the pandemic, is experiencing slower lease-up, but we expect solid growth in 2021 and even more in 2022 as leasing activity picks up. This reflects our perspective as we look towards the fourth quarter and the early winter months.

Okay. With no questions in the queue, I would like to turn it back over to Paul for his closing comments.

Thank you. Again, I'd like to thank everyone for taking the time to join us today. We appreciate your continued support, and we look forward to talking with you at NAREIT and over the coming weeks and months. So thank you. Please stay healthy and positive, and have a good day.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.