Washington Real Estate Investment Trust

F:WRI

Earnings Call Transcript 2020-Q4

[Operator]

Welcome to the Washington Real Estate Investment Trust fourth quarter earnings conference call. As a reminder, today's call is being recorded.

Before turning over the call 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.

[Amy Hopkins, executive]

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, which 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 on this call are available on our most recent earnings press release and financial supplement, which were distributed yesterday and can be found in 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 will turn the call over to Paul.

[Paul T. McDermott, executive]

Thank you, and good morning, everyone, and thanks for joining us today. I hope you and your families are keeping safe and well. Last evening, we released our fourth quarter earnings results, which rounded out a year dedicated to stabilizing our operating fundamentals and maintaining and preserving future growth drivers against the backdrop of one of the most challenging operating environments in recent history.

Thanks to the dedication shown by the WashREIT team, the strong credit profile of our portfolio and the resilience of the Washington Metro region, we continue to successfully navigate through the pandemic and expect to enter the vaccine-led recovery phase with a stronger balance sheet, a reaffirmed strategic direction and a portfolio that is positioned for growth as demand returns.

With the vaccine rollout that commenced toward the end of last year, we are seeing signs of increased activity across both our multifamily and commercial portfolios. For multifamily, net applications were up 30% year-over-year in January for our urban properties, and year-to-date trends already reflect improvement in occupancy as we head into the spring leasing season.

We are focused on growing occupancy to begin reducing concessions and increasing rents. Currently, multifamily occupancy is over 95%, excluding our 2 rent control properties, where we are not emphasizing occupancy gains as they offer limited rent growth potential in the current environment. Multifamily credit performance continues to remain very strong at both our urban and suburban properties and has consistently outperformed the national average by a wide margin over the past year. While multifamily lease rates declined 3.6% and 5.7% on a gross and effective blended basis during the fourth quarter, we believe that December represented the height of rental rate pressure as lease rate changes improved in January on a month-over-month basis and concessions declined. Furthermore, new and renewal lease executions with commencement dates in February and March indicate continued improvement in effective lease rent growth.

Our renewal rates were strong during the fourth quarter, and that strength has continued into 2021. Both urban and suburban renewal lease rate growth increased by 90 basis points during the fourth quarter to 1.7% and 3.1%, respectively, and those renewal rate increases remained stable through January.

The continued pricing power that we are experiencing at our suburban assets, combined with the ability to influence lease terms with concessions, has allowed us to roll more leases into future spring and summer lease maturities at our newest multifamily assets. As a result of the strategic management of our lease expiration schedule, only 20% of our leases expired during the fourth quarter and only 17% expired in the first quarter. We think December marked a low point for pricing given the improving year-to-date trends that we are seeing.

We believe the vaccine-led recovery will lead to an inflection in 2021 heading into 2022. However, it is too early to know the precise timing and extent of this benefit in 2021. Approximately 2/3 of our multifamily leases expire in the stronger spring and summer months, and we anticipate that these leases will benefit from an increased number of vaccinations. In the meantime, we plan to continue to focus on building occupancy and maximizing our retention rates, which continue to outperform our region. Moving on to commercial. Our credit performance continues to hold up very well, as Steve will discuss in greater detail, and we expect that the vast majority of our commercial credit losses are behind us. Our forecast indicates that commercial occupancy could increase by nearly 4% by year-end, although there is still too much uncertainty to accurately forecast occupancy gains over the course of the year. However, our outlook is improving, and we are seeing signs that tenant decision-making is accelerating.

Leasing activity picked up significantly in January, and active long-term renewal discussions with significant tenants are progressing well. For example, in January, we received a signed LOI from Sunrise Senior Living to renew their space at Silverline, which currently represents approximately 1.5% of office revenue. We also have signed LOIs with B. Riley and an accredited third party at Arlington Tower. B. Riley has a termination option in December 2022 and will exercise this option on only 1 of its 3 floors, which allows a third party to enter into a sublease for this entire floor through 2022 and then enter into a direct lease with us through 2029. B. Riley will extend the balance of their premises through 2026. Additionally, in January, we signed a 45,000-square-foot 5-year lease renewal with Giant Food at Takoma Park, which represents our second largest retail tenant and over 6% of other rental income. We also signed a 15,000-square-foot 10-year lease renewal with our grocery anchor at Montrose Shopping Center. These 2 lease renewals represent approximately 10% of our retail rental income.

Heading into the recovery, our office portfolio offers substantial growth potential given that much of the available space is high-quality, move-in-ready and located in our best assets. We have a weighted average lease term of approximately 5 years, limited near-term lease expirations, and our price points and floor layouts are well positioned for our market. The average tenant size in our market and the space requirement that sees the most volume is about 4,000 to 6,000 square feet, which is both our median tenant size and the tenant size with the highest demand in the current environment. We have 0 exposure to co-working operators, no co-working tenants and no single-tenant risk.

We continue to see good traction with Space+, which is our proprietary flexible office program that is managed in-house, with spaces strategically located in our portfolio. Space+ represents approximately 3% of our office portfolio and is very well positioned once decision-making picks up. Space+ is move-in-ready space that is private, not co-working space, that allows tenants to control the health and safety of their environment, and it offers more flexibility than traditional leases.

Additionally, Space+ offers premium pricing compared to traditional leases, and on average, has much longer terms than co-working providers achieve, allowing us to participate in the increasing demand for flexible office space while preserving our weighted average lease term, and thus, our opportunities for future portfolio transformation.

While uncertainty about the timing and pace of reopening remains, the resilience of our region provides relative stability compared to other major metropolitan areas. Since the onset of the pandemic, the Washington Metro has benefited from fewer job losses than other major metropolitan areas and has already gained back roughly 180,000 jobs or 56% of the jobs lost from February to May. Additionally, those job losses have been largely contained to non-office-using sectors as office-using sector employment in the Washington Metro market declined only 2% year-over-year in 2020, according to BLS data.

As we continue down the path toward a vaccine-driven recovery, our region has several unique catalysts to accelerate the rebound in demand: the growing high-tech labor pool; federal investments in cloud, cyber and artificial intelligence; as well as affordable office rents continue to drive information sector, leasing activity in Northern Virginia.

Amazon continues to expand their regional office footprint and remains on pace with H Q2 hiring. Over the course of 2020, the tech sector contributed 36% of total leasing volume and more than 800,000 square feet of occupancy growth in Northern Virginia, according to CBRE. Tech-driven leasing demand drove positive absorption for the sector in the fourth quarter, and that momentum has continued into January with the announcement of Microsoft's new 180,000-square-foot sales headquarters in Rosslyn, next door to Arlington Tower and strategically located at the nexus of 4 bridges, 5 major road networks and 3 metro lines and offers easy access to the Pentagon and downtown D.C.

Government contractor awards should remain at record highs in 2021, and the cloud market alone is forecasted to grow 9% to 10% annually over the next 3 years, according to JLL. Northern Virginia's diversification over the past decade, blending government contracting with direct federal leasing, technology sector growth, investments in higher education and medicine have set it up for a quicker-than-average office market recovery in 2021 and beyond, according to Newmark.

With the arrival of our newly aligned administration, the Washington Metro market is positioned to benefit from a surge in activity. Historically, alignment between the executive and legislative branches has resulted in a higher number of legislative bills passed with increased lobbying and legal presence in D.C. to influence, write and then implement legislation, resulting in higher absorption in the D.C. office market. The historical correlation to office absorption in years with aligned branches of the government is very strong.

Additionally, the election should have a positive effect on our local apartment market and may even accelerate a shift back into the city for renters. Data analyzed by CBRE over the past 6 presidential elections indicates that, on average, D.C. metro rent growth was more than double the U.S. average during the 6 months subsequent to each election. Furthermore, market-level data indicates that urban submarkets, which have underperformed suburban areas during this downturn, will likely benefit the most from the boost of activity associated with the presidential election. Again, these are catalysts historically unique to the Washington Metro area as opposed to other gateway metropolitan markets.

It has been an eventful and unexpected year, and alongside the challenges that we have successfully navigated, we continue to make progress on derisking and improving our portfolio. This pandemic has reaffirmed our commitment to and the direction of our capital allocation strategy as part of the WashREIT transformation.

Following our fourth quarter office asset sales and including stabilized income from Trove, multifamily comprises 53% of our NOI, while office and retail comprised 41% and 6%, respectively.

And with that, I will turn it over to Steve to review our balance sheet, collection performance, fourth quarter and full year results and our outlook.

[Stephen Riffee, executive]

Thank you, Paul, and good morning, everyone. I'll start off today by reviewing the balance sheet before discussing our fourth quarter and full year financial performance and future outlook.

In the midst of the uncertainty that dominated the capital markets during 2020, we took steps to strengthen our balance sheet and increase our operational flexibility, which has put us in a stronger position as we head towards the recovery phase of the pandemic. First, we made sure that we had ample liquidity at the onset of the pandemic by entering into a $150 million 1-year term loan with extension rights. Second, we closed and funded in December a $350 million 10-year green bond at 3.44%. And we used the proceeds to pay off the new $150 million term loan and our other $150 million term loan that was scheduled to expire in March of 2021. These actions address all of our debt maturities through the fourth quarter of 2022 and turned out our maturity ladder. Third, we fully unencumbered the balance sheet, allowing us optimal flexibility as we continue to allocate capital to further multifamily growth. Finally, we increased our balance sheet flexibility heading into 2021, with our strategic office asset sales and issued some equity through the ATM program to be ready to continue our capital allocation when visibility into the recovery is more clear. In that regard, at year-end, we only had $42 million outstanding on our fully available $700 million line of credit, underscoring that we increased our liquidity further during the pandemic. All of our covenant ratios remain strong. And we maintained our Baa2 and BBB flat investment-grade ratings with Moody's and S&P.

Now I'll turn to our cash collection performance. Our multifamily collections continue to be excellent, tracking well above national averages. We collected 99% of cash and contractual rents during the fourth quarter, and our rent collections through January are in line with our quarterly trend. We've offered deferred payment programs to residents who've been financially impacted by the pandemic. And only a very small amount, about $15,000, of deferred multifamily rent remains outstanding.

Our office and retail collections for the fourth quarter improved sequentially, continuing the trend of steady quarterly improvement since the beginning of the pandemic. We collected 99% of cash rents from office rents -- from office tenants during the fourth quarter and over 99% of contractual rents, which excludes rent that has been deferred. We deferred rent associated with office tenants, and that amount was $1 million as of January 31. And we expect to collect approximately 75% of that rent that was deferred by year-end with the balance thereafter. We collected 94% of retail cash rents in the fourth quarter. And excluding deferred rent, our collection rate was approximately 97%. Net deferred rent associated with retail tenants was $1 million as of January 31, 2021, and we expect to collect 40% of that rent by year-end. Overall, we've only deferred a small portion of rent, and the expected cumulative cash NOI impact is less than $0.01 per share through year-end 2021.

Now turning to our financial performance. Net loss for 2020 was $15.7 million or $0.20 per diluted share compared to net income of $383.6 million or $4.75 per diluted share the prior year. The largest decrease is primarily due to the net gains on asset sales that were executed during 2019 compared to small losses recorded on sales in 2020.

Core FFO of $1.45 per diluted share for full year 2020 was in line with the midpoint of our guidance range. On a year-over-year basis, core FFO per share declined by $0.26 due to the strategic transactions completed during 2019 as well as the impact of the pandemic on leasing activity, parking income and credit losses.

Overall, same-store NOI declined 5.4% year-over-year on a GAAP basis and 4.9% on a cash basis for the full year 2020. Multifamily same-store NOI declined 0.9% and 1% on a GAAP and cash basis for the year, and 7.2% and 7.3% on a GAAP and cash basis for the fourth quarter. The full year and fourth quarter declines were primarily driven by the year-over-year new lease rate declines at our urban assets, which comprised 100% of our same-store portfolio during 2020. The impact of lease rate declines has an outsized impact on our same-store results during the fourth quarter as the impact of urban flight on overall demand levels had a greater impact on lease rates during the winter months that were weaker. Our suburban properties, where lease rate performance has been the best, will be included in the same-store results in 2021. During the fourth quarter, we focused on maintaining occupancy, and it ended at 94.3% excluding Trove.

Office same-store NOI declined 7.1% and 6.4% on a GAAP and cash basis for the year and 12.7% on a GAAP and cash basis for the fourth quarter. The full year and fourth quarter declines were primarily driven by lower parking income, no move-outs and increased credit losses reflected in the write-off of 2 isolated and specific receivables and a more significant lease intangibles related to COVID-19.

Same-store GAAP NOI decreased for our remaining retail centers, which we report as other, by $2.1 million and $1.8 million on a GAAP and cash basis for the year, and $0.7 million on a GAAP and cash basis for the fourth quarter. The full year and fourth quarter declines were primarily driven by credit losses related to COVID-19, which increased in the fourth quarter primarily due to the write-off of intangibles related to 2 leases.

Overall, commercial credit losses reduced our core FFO by approximately $0.02 per share this quarter, which is higher than the third quarter impact and in line with the second quarter. However, the sequential increase this quarter was primarily driven by the write-off of intangibles related to the aforementioned leases, which are not indicative of change in the credit performance of our overall portfolio, which remains very strong and stable. Over 60% of the credit losses related to these leases were noncash, straight-line rent write-offs as our cash losses were relatively flat on a sequential basis. We believe that we've addressed the credit risks that are apparent at this point in time, and we anticipate steady improvement in credit performance over the coming year.

Turning to leasing activity for the fourth quarter and full year. We signed approximately 9,000 square feet of new office leases and 22,000 square feet of office renewals in the fourth quarter. Office rental rates declined 5% on a GAAP and 9% on a cash basis for new office leases but increased 22% on a GAAP basis and 8% on a cash basis for office renewals. More importantly, in December, the exchange of proposals and the negotiation of lease renewals picked up substantially, and that momentum has carried into January.

Earlier, Paul gave color on 2 of our largest renewals and extensions at Silverline Center and Arlington Tower, for example. Retail signed approximately 8,000 square feet of new leases and 3,000 square feet of renewals during the quarter, and achieved rental rate increases of 13% on a GAAP basis for new retail leases and 3% on a GAAP basis for retail renewals. And as Paul referenced, we signed approximately 60,000 square feet of retail leases, representing 10% of our retail portfolio revenues since year-end.

Now turning to our outlook. With the development and rollout of vaccine programs and our growth prospects heading into 2021 have improved, but the timing of when we will reach an inflection point is still unknown. Therefore, the extent that vaccine rollouts will offset the pandemic in 2021 prior to the inflection is uncertain. We do, however, believe we will see rapid improvement once we get to that point and that it will carry over into 2022 given that the embedded growth drivers that we had prior to the pandemic are still intact.

While we believe the most disruptive part of the pandemic is behind us, the timing and pace of the economy reopening still remains uncertain, and we're not ready to forecast with a sufficient degree of accuracy the timing and extent of the recovery over the course of the full year. This close to quarter end, we have enough visibility to provide FFO guidance for the first quarter. However, we do not have enough visibility to provide FFO guidance for the full year. We are, however, providing full year guidance ranges for the financial performance metrics that we believe we are able to forecast with a reasonable degree of accuracy. While we're not calling the timing of, and therefore, the full impact of the pandemic prior to the anticipated inflection point, we will discuss the areas of our portfolio that we would expect to be the most responsive and to offer the most upside growth potential once the economy resumes.

Starting with multifamily. Total operating portfolio occupancy ended the year at 94.3%, which is in line with our expectations and represents a relatively stable trend since the end of the second quarter. On a positive note, as Paul mentioned, we've gained occupancy since year-end, and leading indicators point towards steady improvement in occupancy as we head into the strong leasing season. We've increased occupancy to slightly over 95% excluding our 2 rent-controlled assets, and we are seeing effective lease rates trending in the right direction. Additionally, net application volumes have increased significantly on a year-over-year basis for urban properties.

Overall, we have previously expected significant multifamily growth in 2020, and that growth is likely now going to be deferred until the economic recovery, led by the greater vaccination, takes hold. While we do expect a seasonal lift in the second quarter, we expect a broader inflection to incur at some point in 2021, heading into 2022 and for it to have a greater impact on 2022. We have a 5-year pipeline of value-add renovations ready to resume once conditions improve, and we still expect future NOI growth from The Trove, which I'll cover next.

In terms of our renovation pipeline, we're constantly evaluating the health of each of our submarkets for rent growth and renovation potential, and we are encouraged by the metrics that we're seeing, especially in our newly acquired suburban portfolio. Certain submarkets in the metro area are seeing the rent gaps between Class A and Class B rents widen, which is an early indicator of renovation potential, while other submarkets continue to see rent gaps tightening. We are monitoring these trends, and we will resume renovations when the submarket fundamentals allow for rent increases to deliver the appropriate ROI and we know the capital allocation is accretive.

Trove delivered its final phase in the fourth quarter, and leasing momentum continues to increase. While our lease-up had just begun with social-distancing measures through on-site touring to a halt in April, we continued to make substantial progress on lease-up and have maintained a monthly lease-up rate that is above long-term regional average against an extremely challenging backdrop. We reached breakeven in December and remain on track to reach stabilization in early 2022. We expect Trove to add $100,000 of income in the first quarter, ramping up each quarter to approximately $1 billion by the fourth quarter of 2021, with significantly greater growth in 2022 over 2021 levels.

Now moving on to commercial. As expected, occupancy remained relatively flat through the year-end. And while we only have a small amount, approximately 20,000 square feet, of signed new leases that have not yet rent commenced and approximately 20,000 square feet of signed LOIs for new leases that are expected to rent commence during 2021, we have minimal lease expirations during 2021. Our 2021 office lease expirations represent less than 3% of our overall revenue. And we believe that a renewal is likely or we are under negotiation for renewal for over 60% of that space.

We do not have enough visibility on the timing of the inflection point for new office leasing. But it will be driven by a combination of widespread vaccination rollout, schools reopening, and the general community returning to more normalized activities. When that occurs, it will impact the timing of new lease commencements.

We have a forecast that can result in occupancy growth of up to 4%, but that forecast is at risk if new leasing is delayed. For example, that forecast includes a little over $3 million of new leasing revenue in the fourth quarter. That would be at risk if the inflection does not happen soon enough. So we're not ready to provide a guidance range yet without more visibility.

Following the 2 retail renewals which were executed in January and which represent 10% of our retail NOI, we have less than 3% of retail revenue expiring in 2021. While we are seeing recent signs of and experiencing increased activity across our office portfolio, one of the most challenging calls for us to make is when sentiment will turn and decision-making will pick up to even higher levels again, and when those additional lease commencements will begin. With that said, we believe that we are positioned well once activity improves, and we expect our office portfolio to be highly responsive to the economy reopening. The majority of our vacancy is in high-quality space, some of which is in move-in-ready status. Nearly 60% of our current vacancy in Northern Virginia, where job growth and absorption rates are the strongest and where we're seeing the most touring in leasing activity.

Parking revenue improved slightly over the course of 2020 driven by an increase in transient parking, but remains below normalized levels. Compared to other major metropolitan areas, our parking coverage is higher, which allows more of our tenants to choose to drive instead of taking public transportation. Our parking garages' capacity can serve over 50% of our building population prior to the pandemic on average. And we still currently have at least 50% parking capacity available, which provides an option for companies that want to encourage employees to return to the office before sentiment improves towards public transportation.

We are guiding to a core FFO per share range of $0.29 to $0.32 per share for the first quarter. We expect multifamily NOI to range from $20 million in the quarter to $20.75 million, office NOI to range from $17.75 million to $18.5 million, and other NOI of approximately $3 million. G&A is projected to range from $6 million to $6.25 million, interest expense is expected to range from $10 million to $10.25 million, and development expenditures are expected to range from $5 million to $7.5 million.

We expect NOI to bottom in the first quarter, driven primarily by our year-end asset sales. Following the first quarter and absent any major setbacks to the current gradual pace of reopening, we expect sequential growth throughout the year to be driven by the lease-up of The Trove, the benefit of the more favorable multifamily leasing seasons coming off of the winter months, the phased resumption of unit renovations, and commercial rent commencements. Therefore, we expect our full year results for 2021 to be higher than the first quarter annualized results.

Since our last earnings call, we sold 2 office assets and issued approximately 2 million shares through our ATM program at an average price of $23.86 per share to improve our balance sheet and position us to further strengthen our capital allocation once visibility aligns with opportunity to increase multifamily. Currently, we are not planning on reinvesting those proceeds in the near term. Thus, we estimate at this time that these 2 initiatives, net of their interest impact, will further strengthen our balance sheet and lower full year 2021 core FFO by approximately $0.09 per share.

For the full year, we expect G&A to range from $22.25 million to $23.25 million and interest expense to range from approximately $41.5 million to $42.5 million. These ranges do not assume any acquisitions are completed during the year. Additionally, assuming that leasing activity and utilization continues to increase and we achieve occupancy growth by year-end, we expect commercial operating expenses to increase by approximately $1 million by the fourth quarter from the first quarter expected range of $11.75 million to $12.25 million.

We believe that during '21, the vaccine distribution should create a positive recovery inflection point. But from that point forward, we should see improvement with more to follow in 2022.

And with that, I'll turn the call back to Paul.

[Paul T. McDermott, executive]

Thank you, Steve. During what was a challenging and unexpected year, we supported and protected our residents and tenants, stabilized our operating fundamentals, strengthened our balance sheet and preserved long-term growth opportunities. While the timing of when we will reach an inflection remains uncertain, we believe that it will happen at some time in the second half of 2021 and that we are positioned for rapid improvement once we reach that point.

Our region has several unique catalysts to accelerate the rebound in demand, including a strong economy and favorable demographics. Historically, we have seen Washington office absorption increase significantly when the White House and both branches of Congress are aligned with one party correlating with increased legislation, lobbying and law implementation. That is a promising opportunity that we will be monitoring.

We also expect the apartment market in the region to receive a relative boost compared to other markets over the 6 months based on historical patterns following presidential elections, which should coincide with our strongest seasonal leasing months. Long term, our research indicates that we should expect sustained growth in Northern Virginia driven by government contracting, technology sector growth and investments in higher education.

While we certainly have not emerged from the pandemic at this point, we are seeing signs of our multifamily occupancy strengthening, concessions starting to decline and improvement in effective lease rates, all of which are positive trends heading into our stronger seasonal leasing months.

Now we would like to open the call to answer your questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Anthony Paolone with JPMorgan.

[Anthony Paolone, analyst]

I guess, first question for Paul, just from a bigger-picture point of view, can you talk about just how you're thinking about capital allocation in the push to multifamily in an environment where it seems like cap rates have compressed, actually, and gone to like 4% in apartments? And so how are you thinking about potentially making that trade, and if that's still a push that you want to make here?

[Paul T. McDermott, executive]

Sure, Tony. First off, I just want to acknowledge we've been getting some feedback that we've got static on our lines. So my apologies for that upfront. In terms of capital allocation, Tony, I mean, we are going to continue to look for multifamily opportunities. I would say that right now, when we look at the markets and what we're seeing out there, I do question the sustainability of those cap rates.

Just anecdotally, some color on that. I mean, agency borrowing costs have increased over 50 basis points since last summer. And even the new lending from the life companies and the debt funds, they're pushing back and they're really gravitating towards in kind of trailing 1s and trailing 3s. I think the folks that we are competing against are probably core-plus and value-add folks, really essentially competing for the same deals, but with different leverage strategies.

When I look around like where would we allocate capital right now, in D.C., I mean, with TOPA and the restrictions, I think D.C. probably had its lowest sales volume. The numbers I'm hearing's around $30 million for 2020 in, basically, a multibillion-dollar region.

But I do think, Tony, there are going to be opportunities in terms of looking at potentially some unstabilized deals in decent submarkets. I mean we always preach research around here. And we follow jobs, and we track the rents and the income demographics. And I do think there are decent submarkets. And I do think that there are -- when we're looking at potentially an unstabilized property, those aren't going to have agency debt on those. And I think there's an opportunity for us to jump in and make a basis bet.

But we're definitely committed to continuing our capital allocation to multifamily. We look at what's taking place in the market right now, just in terms of our operating fundamentals. I think that as we look at how we drove occupancy and how other operators drive the occupancy using concessions, it really feels like D.C. as a region, this region held up pretty good to September, had kind of a tough fourth quarter. But candidly, we like what we're seeing in January, and we think that the traffic has picked up, and hoping that bodes well for the spring season.

And just some other observations, Tony, in general, because I've been reading the same things other people are about multifamily and how we're going to perform coming -- entering into a recovery phase and a reentry phase. We actually -- we still feel like the Class B strategy is the appropriate strategy and has really only been amplified in these times. People look at D.C. and they question the supply that's going to deliver over the next couple of years. I mean, I'm looking at units that are supposed to deliver in '23 that -- I think there were 11,000 units forecasted to deliver in '23. On our math and the things that we're tracking, only about 3,300 of those units have been capitalized. And those units are delivering at price points -- Class A price points with a rent gap between our average -- and this is a net effect of our average Class Bs and the net effect of Class As. There's still a $650 gap there.

We think that a lot of folks right now -- I mean we're through the move-home-to-mom-and-dad phase. We think people are planning on a reentry in 2021, whether it's summer or fall, and that's really driving a lot of the traffic right now. And with the growth that we've seen in rents in the suburbs, we think that some of the urban and D.C. deals are looking, on a relative basis, kind of inexpensive.

So we think there are going to be opportunities out there. I never would say it's not going to be competitive. They're all competitive. But I think it gets back to knowing what markets you want to be in and what price points you want to be at. And we -- as you know, we don't really typically utilize debt, but we do think they're -- while I believe the first quarter will probably be slow because we had a big fourth quarter in terms of multifamily sales and while I think the first quarter is going to be slow, we do think we're going to be presented with some multifamily opportunities for the balance of the year.

[Anthony Paolone, analyst]

All right. I appreciate all that color. Were you all active in some of the bidding contests in the 4Q deal flow? And did you find yourselves, if so, far behind? Or it just didn't line up and it wasn't stuff you wanted? Or how did that work?

[Paul T. McDermott, executive]

I think -- again, I hate to keep going back to research. But we know that -- we think we have a good handle on the markets. And Steve basically touched upon this in his remarks. We have an idea of the markets we think are kind of out in front and are going to recover quicker, and that will probably reactivate our renovation pipeline.

But when I see folks -- when we're -- we have market observations, Tony, where we're seeing negative rent trade-outs. And I'm seeing folks that are winning these deals, growing rents simultaneously at 1% to 3%. We wish them well, but that's not -- we want to be pragmatic about our underwriting. And we looked at deals certainly in the fourth quarter. We always look at deals. But I think we were very comfortable when we saw some of the price per pounds that were being ponied up. We were comfortable passing and maintaining discipline and being shot selective.

[Anthony Paolone, analyst]

Got it. And then just one other. On the comment about potentially 400 basis points of occupancy pickup, just what's behind that? Is there a set of leases that just may or may not go your way? Is there a specific asset that you've got some traction on? Just curious what's behind the 400?

[Stephen Riffee, executive]

Well, that is -- this is Steve, Tony. That's really looking at all our leasing. And if you think about what we're experiencing, we're having really good traction on renewals. So I think renewals are showing that there's conviction, and people are ready to move on that. And that's happening already. So to get our occupancy gains, it's got to be our new leasing. And that's the one that we've been a little bit -- we're very confident in terms of the space that we have. It's some of the very best space and assets that we had going into the call. And that's our normal lease-up, including just looking at market color and activity.

The question is really for new leasing, will people have the conviction soon enough, that the workforce is ready to return to work and all? We see the conviction happening pretty actively on the renewal front. And so we -- that's basically reflecting our new leasing assumptions. And for us, it's honestly a when, not an if question. And the when is really driven by when schools open, when the vaccine has more widely distributed, when activities return and really companies feeling like they got to get ahead of it.

We're seeing it in the apartment side. We're seeing people now starting to move back in. Our applications are up, getting closer to where they want to work. We're seeing it on the renewal side where companies are saying, "Okay. We're ready to make our long-term decisions. We just need to see the inflection help with new leasing a little bit."

And so that's the risk for us. It's really a timing risk in terms of whether that will happen soon enough in '21 for us to get the benefit of -- to grow that occupancy. That's the call we weren't ready to make.

[Operator]

Our next question comes from the line of Blaine Heck with Wells Fargo.

[Blaine Heck, analyst]

Paul, you touched a little bit on the 60,000 square feet of retail leasing you signed in January. First, is there any detail you can give on the rent spreads on that leasing? And second, now that you have longer-term renewals signed on that 10% of the retail portfolio, does that maybe change the pricing profile and make you any more willing to look to sell your remaining retail assets?

[Paul T. McDermott, executive]

Blaine, I don't have the rent spreads right in front of me, but I'm happy to follow up with you after the call. And those were 2 critical anchors at their respective centers.

In terms of changing it, certainly, I think it changes the risk profile. But both of those centers are in that potential redevelopment bucket. As you know, the Giant at Takoma not only is in an opportunity zone, but it's literally right on the purple line. So we think that, that does represent a redevelopment opportunity.

I think like most of -- going back to Tony's earlier question then, we want to allocate capital. Most of it is, do the rents that we're seeing right now justify new development in that respective submarket, or don't they? Right now, I don't believe the rents are there for Takoma.

And then when I look at -- I probably said the same for the Montrose Shopping Center. Right now, I think suburban Maryland is -- still has a couple of bumps, as we're all well aware of. So I do think that there are people that are starting to put the pen to paper right now, looking at new return-on-cost metrics, looking at forward rents 2 years from now, and obviously, looking at their land bases. And I think if somebody -- like we've always said, these were covered land plays. And I think the optionality that Washington REIT has is does it do it itself or does it sell the dream? And I think that, that's still where we are. And I think -- Steve, do you have those rent spreads?

[Stephen Riffee, executive]

Yes, I do. Blaine, pretty much flat in terms of initial cash rent, but we've got bumps in it. So the gap increase is about 15% lease-over-lease.

[Blaine Heck, analyst]

Okay. That's great. And then, Steve, one for you. I know we've talked about this in the past, but just for an update in light of the recent office sales. Just wanted to get a sense of how you guys are thinking about the dividend going forward. Your payout ratio was between 90% and 95% this quarter. And you've also talked about recycling more capital out of office and into multifamily, which is likely to be dilutive going forward. So just updated thoughts on the dividend would be helpful.

[Stephen Riffee, executive]

Yes. We obviously provide our forecast and guidance in the Board room. We discuss the dividend every quarter, as the Board thinks along with us. We're expecting to cover the forecast -- to cover the dividend in our forecast for the year. And the Board is confident that we should keep paying it.

We do believe that once we get to a point of inflection, that -- assuming we're going forward through this pandemic and coming out the other side, we think our coverage ratio should strengthen. So there's really been no thought or discussion of cutting the dividend, honestly, in our Board discussions.

[Operator]

Our next question comes from the line of Dave Rodgers with Robert W. Baird.

[Dave Rodgers, analyst]

I wanted to talk about the Class B rent gap. I think it came up maybe a couple of times in a variety of the comments. But can you maybe dive down a little bit deeper? And maybe this is for Grant as well, in terms of kind of the Class B rent gap. I think you said it's getting wider? And I would think that given the decline in rents and kind of the pandemic, we would see compression in those numbers. So I wanted to give you the chance to clarify, maybe both on the multifamily side and then within the office component as well.

[Stephen Riffee, executive]

Can you hear me now? Yes. Sorry about that. Getting used to hitting the mute buttons here. So I think the comments in the note or our script said that we had, had some compression market-wide throughout 2020, but that we had -- that had actually started to flatten out in the fourth quarter. So there was no longer compression at the market level.

At the submarket level, which we are watching very closely as part of our ongoing analysis of when it will be the right time to turn renovations back on, there is quite a bit of variety in terms of the rent gap so that some submarkets actually are widening, and that gap is growing because we are getting rent growth in those, particularly in some suburban locations.

So -- and there is a variety -- some of the submarkets, that's actually sort of how we chose our submarkets to begin with, and that we chose submarket that had a greater-than-average rent gap. So even the ones that we've had some compression in, we have 350 basis points greater gap in some of our submarkets like Columbia Pike, where the Arlington and Trove are located, than you would have end market-wide.

So we're watching that closely. It's flattening out at the market level and is not compressing further as it had. And in some markets, we are actually seeing it go the other way in a positive direction. Hopefully, that clears that up.

[Dave Rodgers, analyst]

Maybe just a quick follow-up on that before talking office, if we could, is just suburban versus the urban component of where that compression has been. Is there a way to generalize between the 2 of those without kind of going each submarket by submarket?

[Stephen Riffee, executive]

I would say if there's -- it's wider. I don't have the exact number in front of me, but if the average for the region is around 20%, I would say it's wider in the submarkets in the suburbs, where there has been less decline in Class A than there is Class B.

I think over the course of the pandemic, B has outperformed A by about 230, 240 basis points. So I think that would probably sort of back into the difference there between those rent gap levels.

[Dave Rodgers, analyst]

Okay. That's helpful. And then thoughts maybe just on the office component. And I don't know if that's for you, Paul, but how the rent delta is compressing maybe within and around the district?

[Paul T. McDermott, executive]

Well, as I -- Dave, if I'm looking at -- and I'd like to look at it kind of pre-pandemic and what we're currently seeing, like if I were to look at large deals in the Class A space. Probably pre-pandemic, a TI package was probably, let's say, $110 a foot. And today, it could be anywhere from $130 to $140. Free rent probably was right on top of a month per year. And today, it's probably 1.25 to 1.5 months per year term. And then you have your unused TI conversion, which has probably gone from 10%, maybe upwards to 20%.

We're not really seeing those types of lifts. I think we've seen less slippage in the Class B space. And probably more importantly, just like in the multifamily space, it's about retention. I mean I looked -- just reading with JLL, their deck in retention, renewals in Northern Virginia were up 1/3. And I think they're more economically -- can be more economically viable for both the tenant and certainly for the landlord.

And so we're really focused on renewals. You have to remember, I mean, especially in the B space and looking at our portfolio, we're playing in that 4,000 to 6,000 square foot range. And so we're not really competing for those hefty TI packages and big free rent packages. I think tenants are very savvy, and they're going to obviously try to negotiate the best deal possible. But there's definitely a spread for the big renovated As and trophies that are -- that have to achieve occupancy and what they're willing to do to buy occupancy in the Class Bs. So I still think there's -- we have an adequate delta between Class A rents and Class B rents in the region, Dave.

[Dave Rodgers, analyst]

Okay. And then you mentioned the 2 renewals, B. Riley and Sunrise. Can you talk about the tone of those conversations? Was that just -- it sounds like some flexibility was important in at least one of those deals. But talk about maybe the economics and how those shook out at the end.

[Paul T. McDermott, executive]

Well, we -- just to be transparent, I mean, Sunrise, we've been talking about pre-pandemic. And we applaud them in terms of their decision-makers coming back, having a workforce strategy and putting the pen to the paper. And it was a competitive bid situation.

Flexibility. When we talk about flexibility, we see tenants that are operating in the space that want to -- are recognizing that it's kind of a tenant's market right now, making workforce strategy decisions. I think in terms of flexibility, I think tenants, we're seeing more just folks requesting a partial termination option in a future lease. Not that they're going to exercise it, but that they definitely want that at their disposal in case their model requires some type of shift in operating expenses.

When I look at B. Riley, B. Riley is committed to the space. But looked at their model and said, hey, we can -- we have an option here to give back a floor. And that's what they've done. Fortunately, it was -- not that there are bad floors, but there was -- it was a good floor in Arlington Tower. And it showed just because as they -- as that space came to market, it was immediately picked up by a full-floor user.

And so the situation we have with B. Riley is that user will do their sublease through the end of the -- to the point of the termination option, which I believe is December '22. And then that user will have a primary lease with WashREIT through 2029.

Again, a lot of the tenants that we were talking to, Dave -- we're not seeing tenants saying, "Hey, I want to get back half of my space." But what they're looking for is optionality going forward based on how protracted or not a recovery can be. And those have been the discussions. We haven't seen huge redesigns. We just have not experienced in -- that in our portfolio to date.

[Dave Rodgers, analyst]

Maybe just a final question for me. Steve, you mentioned using the ATM. Can you talk about kind of when and how you're looking at using that going forward in terms of adding capital to the balance sheet?

[Stephen Riffee, executive]

Yes. We -- Dave, we just looked at the opportunity to continue our capital allocation. First of all, we wanted to strengthen the balance sheet. And we also wanted to -- we can't time everything at the same time. So we wanted to get the office sales executed that we felt were good and could get executed.

We did just a little bit of ATM, I think somewhere around 2%. It's just a small sliver of capital. But we wanted to go into 2021 with a strong balance sheet as we could until we had more visibility for the inflection that we think -- sure, we have spring leasing seasons. But we think the pandemic is going to give us a lift. And we just wanted to be as strong as possible when we finally have that visibility.

We're not planning on using it or going to the ATM at this point. We wanted to go into '21 and decide how much conviction we had on visibility. And really, we're also monitoring what's happening. And we like the multifamily business. We commented on the call -- I'll just make a comment or 2 in terms of what we were observing because we did have some investor meetings on the road at the end of the year, too.

October and November were really good months for us still. I would say the leasing season extended a little bit into the September, October months. For us, it looks like December was the bottom from a multifamily standpoint. And in terms of -- it's the winter months. Fortunately, we only had about 20% of our portfolio expiring at that time, and we have about 2/3 in the summer.

But we saw December was tough, and our focus was on maintaining and then starting to push occupancy. And that's really helped us. We commented on it in our prepared remarks. But we didn't think it made sense to push our 2 rent-controlled assets. But for everything else, since year-end, we've got it up to about 95%. And that is getting to the point where we can start to burn off concessions, start improving effective rents. And we saw, in the month of January, a 300-basis-point improvement in effective rents for new leases, which is the right trend. And as we look at our early indicators, renewals and the leases getting signed in early February, it looks like February, March are improving in the right direction, too, both from an effective rent standpoint. And as I've said, we've improved our occupancy.

So we feel good about that. When I think about January versus the fourth quarter, if December was our toughest month, and I look at January, it's better than December. And in fact, January is already kind of to the average of the fourth quarter, which had 2 better months. And if February and March are truly trending as they seem to be trending, then hopefully, the first quarter will be better in all.

And you think about our guidance, we saw the winter coming and -- but we actually outperformed our fourth quarter multifamily guidance from a same-store standpoint or from an NOI standpoint. And hopefully, we'll prove to be conservative in the first quarter. But we're just going to have to see. And in terms of the other inflection points, Dave, it's just -- as I said earlier, it's when will things happen soon enough and how much will they benefit '21.

[Operator]

[Operator Instructions] Our next question comes from the line of Chris Lucas with Capital One Securities.

[Christopher Lucas, analyst]

Just a couple of quick follow-ups. On the Sunrise renewal, did you provide the duration of that renewal?

[Paul T. McDermott, executive]

It's 7 years, Chris.

[Christopher Lucas, analyst]

Excellent. Okay. And then the one sort of nearer-term lease that you haven't talked about is the Capital One expiration, which I guess is first quarter of '22. Any movement or conversation there? And what do you see as sort of things that you need to see in order to get a response out of them?

[Paul T. McDermott, executive]

We are having dialogue and kind of broker to broker and head of real estate to WashREIT. The only thing tangible, Chris, that I think has happened in the last 90 to 120-plus days is just them executing. They're in 3 buildings, as you know, in Tysons outside of their main campus and them executing a short-term extension at one of the buildings. We are hearing that, that same type of activity may be coming our way. But that's obviously one, Chris, we've all got our eye on. But to date, we have not traded paper since the beginning of the year.

[Operator]

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

[Paul T. McDermott, executive]

Thank you. Again, I would like to thank everybody for your time today, and we look forward to seeing many of you at the upcoming conferences over the next several weeks. Thank you, everyone.

[Operator]

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.