UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________
FORM 10-Q
 ___________________________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended September 30, 2013
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
COMMISSION FILE NO. 1-6622
 WASHINGTON REAL ESTATE
INVESTMENT TRUST
(Exact name of registrant as specified in its charter)
MARYLAND
 
53-0261100
(State of incorporation)
 
(IRS Employer Identification Number)
6110 EXECUTIVE BOULEVARD, SUITE 800, ROCKVILLE, MARYLAND 20852
(Address of principal executive office) (Zip code)
Registrant’s telephone number, including area code: (301) 984-9400
___________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of exchange on which registered
Shares of Beneficial Interest
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
 ___________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past ninety (90) days.    YES x   NO  o
Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x      NO  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    YES  o    NO  x  
As of October 29, 2013, 66,521,481 common shares were outstanding.
 


WASHINGTON REAL ESTATE INVESTMENT TRUST
INDEX
 
 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 

2

PART I
FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS
The information furnished in the accompanying unaudited Consolidated Balance Sheets, Condensed Consolidated Statements of Income, Consolidated Statement of Shareholders' Equity and Consolidated Statements of Cash Flows reflects all adjustments, consisting of normal recurring items, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The accompanying financial statements and notes thereto should be read in conjunction with the financial statements and notes for the three years ended December 31, 2012 included in WRIT’s 2012 Annual Report on Form 10-K.

3

WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
 
 
September 30,
2013
 
December 31,
2012
Assets
 
 
 
Land
$
418,008

 
$
418,008

Income producing property
1,624,617

 
1,587,375

 
2,042,625

 
2,005,383

Accumulated depreciation and amortization
(548,549
)
 
(497,057
)
Net income producing property
1,494,076

 
1,508,326

Properties under development or held for future development
55,580

 
45,270

Total real estate held for investment, net
1,549,656

 
1,553,596

Investment in real estate sold or held for sale, net
346,157

 
364,999

Cash and cash equivalents
7,923

 
19,105

Restricted cash
7,547

 
13,423

Rents and other receivables, net of allowance for doubtful accounts of $8,271 and $10,442, respectively
48,619

 
46,904

Prepaid expenses and other assets
110,116

 
107,303

Other assets related to properties sold or held for sale
18,337

 
19,046

Total assets
$
2,088,355

 
$
2,124,376

Liabilities
 
 
 
Notes payable
$
846,576

 
$
906,190

Mortgage notes payable
290,838

 
319,025

Lines of credit
85,000

 
—

Accounts payable and other liabilities
57,116

 
50,094

Advance rents
11,749

 
12,925

Tenant security deposits
7,639

 
7,642

Liabilities related to properties sold or held for sale
31,275

 
32,357

Total liabilities
1,330,193

 
1,328,233

Equity
 
 
 
Shareholders’ equity
 
 
 
Preferred shares; $0.01 par value; 10,000 shares authorized; no shares issued or outstanding
—

 
—

Shares of beneficial interest; $0.01 par value; 100,000 shares authorized: 66,500 and 66,437 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively
665

 
664

Additional paid in capital
1,148,837

 
1,145,515

Distributions in excess of net income
(395,816
)
 
(354,122
)
Total shareholders’ equity
753,686

 
792,057

Noncontrolling interests in subsidiaries
4,476

 
4,086

Total equity
758,162

 
796,143

Total liabilities and equity
$
2,088,355

 
$
2,124,376

 

See accompanying notes to the consolidated financial statements.

4

WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2013
 
2012
 
2013
 
2012
Revenue
 
 
 
 
 
 
 
Real estate rental revenue
$
65,828

 
$
64,471

 
$
196,303

 
$
190,134

Expenses
 
 
 
 
 
 
 
Real estate expenses
23,243

 
22,527

 
69,467

 
64,820

Depreciation and amortization
21,168

 
21,682

 
63,328

 
63,593

Acquisition costs
148

 
(164
)
 
448

 
144

General and administrative
3,850

 
3,173

 
11,717

 
10,943

 
48,409

 
47,218

 
144,960

 
139,500

Real estate operating income
17,419

 
17,253

 
51,343

 
50,634

Other income (expense)
 
 
 
 
 
 
 
Interest expense
(15,930
)
 
(14,886
)
 
(47,944
)
 
(43,983
)
Other income
220

 
237

 
705

 
733

 
(15,710
)
 
(14,649
)
 
(47,239
)
 
(43,250
)
Income from continuing operations
1,709

 
2,604

 
4,104

 
7,384

Discontinued operations:
 
 
 
 
 
 
 
Income from operations of properties sold or held for sale
4,131

 
3,233

 
11,139

 
9,642

Gain on sale of real estate
—

 
3,724

 
3,195

 
3,724

Net income
5,840

 
9,561

 
18,438

 
20,750

Less: Net income attributable to noncontrolling interests in subsidiaries
—

 
—

 
—

 
—

Net income attributable to the controlling interests
$
5,840

 
$
9,561

 
$
18,438

 
$
20,750

Basic net income per share:
 
 
 
 
 
 
 
Continuing operations
$
0.03

 
$
0.04

 
$
0.06

 
$
0.11

Discontinued operations
0.06

 
0.10

 
0.21

 
0.20

Net income per share
$
0.09

 
$
0.14

 
$
0.27

 
$
0.31

Diluted net income per share:
 
 
 
 
 
 
 
Continuing operations
$
0.03

 
$
0.04

 
$
0.06

 
$
0.11

Discontinued operations
0.06

 
0.10

 
0.21

 
0.20

Net income per share
$
0.09

 
$
0.14

 
$
0.27

 
$
0.31

Weighted average shares outstanding – basic
66,410

 
66,246

 
66,403

 
66,227

Weighted average shares outstanding – diluted
66,561

 
66,379

 
66,545

 
66,363

Dividends declared per share
$
0.3000

 
$
0.3000

 
$
0.9000

 
$
1.1675


See accompanying notes to the consolidated financial statements.

5

WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
 
 
Shares Outstanding
 
Shares of Beneficial Interest at Par Value
 
Additional Paid in Capital
 
Distributions in Excess of Net Income Attributable to the Controlling Interests
 
Total Shareholders’ Equity
 
Noncontrolling Interests in Subsidiaries
 
Total Equity
Balance, December 31, 2012
66,437

 
$
664

 
$
1,145,515

 
$
(354,122
)
 
$
792,057

 
$
4,086

 
$
796,143

Net income attributable to the controlling interests
—

 
—

 
—

 
18,438

 
18,438

 
—

 
18,438

Contributions from noncontrolling interests
—

 
—

 
—

 
—

 
—

 
390

 
390

Dividends
—

 
—

 
—

 
(60,132
)
 
(60,132
)
 
—

 
(60,132
)
Share grants, net of share grant amortization and forfeitures
63

 
1

 
3,322

 
—

 
3,323

 
—

 
3,323

Balance, September 30, 2013
66,500

 
$
665

 
$
1,148,837

 
$
(395,816
)
 
$
753,686

 
$
4,476

 
$
758,162


See accompanying notes to the consolidated financial statements.

6

WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
 
 
Nine Months Ended September 30,
 
2013
 
2012
Cash flows from operating activities
 
 
 
Net income
$
18,438

 
$
20,750

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization, including amounts in discontinued operations
75,489

 
77,803

Provision for losses on accounts receivable
3,012

 
2,847

Gain on sale of real estate
(3,195
)
 
(3,724
)
Amortization of share grants, net
3,615

 
3,996

Amortization of debt premiums, discounts and related financing costs
2,980

 
2,836

Changes in operating other assets
(8,856
)
 
(14,317
)
Changes in operating other liabilities
2,002

 
2,574

Net cash provided by operating activities
93,485

 
92,765

Cash flows from investing activities
 
 
 
Real estate acquisitions, net
—

 
(52,142
)
Net cash received for sale of real estate
15,161

 
13,399

Capital improvements to real estate
(39,348
)
 
(36,310
)
Development in progress
(9,385
)
 
(4,525
)
Real estate deposits, net
(6,800
)
 
—

Non-real estate capital improvements
(125
)
 
(510
)
Net cash used in investing activities
(40,497
)
 
(80,088
)
Cash flows from financing activities
 
 
 
Line of credit borrowings, net
85,000

 
(99,000
)
Dividends paid
(60,132
)
 
(77,805
)
Net contributions from noncontrolling interests
390

 
211

Financing costs
—

 
(4,647
)
Proceeds from dividend reinvestment program
—

 
1,315

Net proceeds from debt offering
—

 
298,314

Principal payments – mortgage notes payable
(32,461
)
 
(25,527
)
Borrowings under construction loan
3,033

 
—

Notes payable repayments
(60,000
)
 
(50,000
)
Net proceeds from exercise of share options
—

 
100

Net cash (used in) provided by financing activities
(64,170
)
 
42,961

Net (decrease) increase in cash and cash equivalents
(11,182
)
 
55,638

Cash and cash equivalents at beginning of period
19,105

 
12,765

Cash and cash equivalents at end of period
$
7,923

 
$
68,403

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest, net of amounts capitalized
$
42,075

 
$
42,415

Decrease (increase) in accrued capital improvements and development costs
$
2,978

 
$
1,989


See accompanying notes to the consolidated financial statements.

7

WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
(UNAUDITED)
NOTE 1: NATURE OF BUSINESS
Washington Real Estate Investment Trust (“WRIT”), a Maryland real estate investment trust, is a self-administered, self-managed equity real estate investment trust, successor to a trust organized in 1960. Our business consists of the ownership and operation of income-producing real estate properties in the greater Washington metro region. We own a diversified portfolio of office buildings, medical office buildings, multifamily buildings and retail centers. We have entered into purchase and sale agreements to effectuate the sale of our medical office segment, and have classified this segment as discontinued operations (see note 3).
Federal Income Taxes
We believe that we qualify as a real estate investment trust (“REIT”) under Sections 856-860 of the Internal Revenue Code and intend to continue to qualify as such. To maintain our status as a REIT, we are required to distribute 90% of our ordinary taxable income to our shareholders. When selling properties, we have the option of (a) reinvesting the sales proceeds of properties sold, allowing for a deferral of income taxes on the sale, (b) paying out capital gains to the shareholders with no tax to WRIT or (c) treating the capital gains as having been distributed to the shareholders, paying the tax on the gain deemed distributed and allocating the tax paid as a credit to the shareholders.
Generally, and subject to our ongoing qualification as a REIT, no provisions for income taxes are necessary except for taxes on undistributed REIT taxable income and taxes on the income generated by our taxable REIT subsidiaries (“TRSs”). Our TRSs are subject to corporate federal and state income tax on their taxable income at regular statutory rates. There were no material income tax provisions or material net deferred income tax items for our TRSs for the three and nine months ended September 30, 2013 and 2012.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Significant Accounting Policies
We have prepared our consolidated financial statements using the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2012.

Principles of Consolidation and Basis of Presentation
The accompanying unaudited consolidated financial statements include the consolidated accounts of WRIT, our majority-owned subsidiaries and entities in which WRIT has a controlling interest, including where WRIT has been determined to be a primary beneficiary of a variable interest entity (“VIE”). See note 3 for additional information on the properties for which there is a noncontrolling interest. All intercompany balances and transactions have been eliminated in consolidation.
We have prepared the accompanying unaudited financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to make the information presented not misleading. In addition, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results for the periods presented have been included. These unaudited financial statements should be read in conjunction with the financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2012.
Within these notes to the financial statements, we refer to the three months ended September 30, 2013 and September 30, 2012 as the “2013 Quarter” and the “2012 Quarter,” respectively, and the nine months ended September 30, 2013 and September 30, 2012 as the “2013 Period” and the “2012 Period,” respectively.
Use of Estimates in the Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

8

Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation due to the reclassification of certain properties as discontinued operations (see note 3 to the consolidated financial statements).
NOTE 3: REAL ESTATE

Variable Interest Entities
In June 2011, we executed a joint venture operating agreement with a real estate development company to develop a mid-rise multifamily property at 650 North Glebe Road in Arlington, Virginia. We estimate the total cost of the project to be $49.9 million. During the first quarter of 2013, we secured third-party debt financing for approximately 70% of the project's cost. WRIT is the 90% owner of the joint venture, and will have management and leasing responsibilities when the project is completed and stabilized (defined as 90% of the residential units leased). The real estate development company owns 10% of the joint venture and is responsible for the development and construction of the property. The joint venture currently expects to complete this development project during the fourth quarter of 2014.

In November 2011, we executed a joint venture operating agreement with a real estate development company to develop a high-rise multifamily property at 1225 First Street (formerly 1219 First Street) in Alexandria, Virginia. We estimate the total cost of the project to be $95.3 million, with approximately 70% of the project to be financed with debt. WRIT is the 95% owner of the joint venture and will have management and leasing responsibilities when the project is completed and stabilized. The real estate development company owns 5% of the joint venture and is responsible for the development and construction of the property. During the first quarter of 2013, we decided to delay commencement of construction, due to market conditions and concerns of oversupply, and stopped capitalizing interest costs on this project. We will reassess this project on a periodic basis going forward.

We have determined that the 650 North Glebe Road and 1225 First Street joint ventures are variable interest entities (“VIE's”) primarily based on the fact that the equity investment at risk is not sufficient to permit either entity to finance its activities without additional financial support. We expect that 70% of the total development costs will be financed through debt. We have also determined that WRIT is the primary beneficiary of each VIE due to the fact that WRIT is providing 90% to 95% of the equity contributions and will manage each property after stabilization.

We include the joint venture land acquisitions on our consolidated balance sheets in properties under development or held for future development. As of September 30, 2013 and December 31, 2012, the land and capitalized development costs are as follows (in thousands):
 
September 30, 2013
 
December 31, 2012
650 North Glebe
$
24,185

 
$
15,646

1225 First Street
21,409

 
19,807


As of September 30, 2013 and December 31, 2012, the accounts payable and accrued liabilities related to the joint ventures are as follows (in thousands):
 
September 30, 2013
 
December 31, 2012
650 North Glebe
$
2,584

 
$
115

1225 First Street
249

 
1,676


On February 21, 2013, WRIT, through its consolidated joint venture to develop a mid-rise multifamily property at 650 North Glebe Road, entered into a construction loan agreement with Citizens Bank for $33.0 million. The loan bears interest at LIBOR plus 2.15%, which decreases to LIBOR plus 2.0% upon completion of construction and the joint venture not being in default. The loan matures on February 21, 2016, with two one year extension options exercisable by the joint venture, subject to fees and compliance with certain provisions in the loan agreement. As of September 30, 2013, the consolidated joint venture had $3.0 million outstanding on this construction loan agreement.

Discontinued Operations

We dispose of assets that no longer meet our long-term strategy or return objectives and where market conditions for sale are favorable. The proceeds from the sales may be reinvested into other properties, used to fund development operations or to support other corporate needs, or distributed to our shareholders. Properties are considered held for sale when they meet the criteria specified (see "Discontinued Operations" in note 2 of the consolidated financial statements included in WRIT's Annual Report on Form 10-

9

K for the year ended December 31, 2012). Depreciation on these properties is discontinued at that time, but operating revenues, other operating expenses and interest continue to be recognized until the date of sale.

In September 2013, we entered into four separate purchase and sale agreements to effectuate the sale of our entire medical office segment (including land held for development at 4661 Kenmore Avenue) and two office buildings (Woodholme Center and 6565 Arlington Boulevard) for an aggregate purchase price of $500.8 million. The sale will be structured as four transactions with projected closing dates in the fourth quarter 2013 and first quarter 2014.

The results of our medical office segment are summarized as follows (amounts in thousands, except per share data):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2013
 
2012
 
2013
 
2012
Real estate revenues
$
10,889

 
$
11,282

 
$
32,928

 
$
33,580

Net income
$
3,820

 
$
2,463

 
$
10,080

 
$
7,456

Basic net income per share
$
0.06

 
$
0.04

 
$
0.15

 
$
0.11

Diluted net income per share
$
0.06

 
$
0.04

 
$
0.15

 
$
0.11

We classified as held for sale or sold the following properties in 2013 and 2012:
Disposition Date
 
Property Name
 
Segment
 
Rentable Square Feet
 
Contract
Purchase  Price
(In thousands)
March 19, 2013
 
Atrium Building
 
Office
 
79,000

 
$
15,750

N/A
 
Medical Office Portfolio (1)
 
Medical Office / Office
 
1,520,000

 
500,750

 
 
 
 
Total 2013
 
1,599,000

 
$
516,500

 
 
 
 
 
 
 
 
 
August 31, 2012
 
1700 Research Boulevard
 
Office
 
101,000

 
$
14,250

December 20, 2012
 
Plumtree Medical Center
 
Medical Office
 
33,000

 
8,750

 
 
 
 
Total 2012
 
134,000

 
$
23,000

(1) The Medical Office Portfolio consists of every property in our medical office segment (including land held for development at 4661 Kenmore Avenue) and two office buildings (6565 Arlington Boulevard and Woodholme Center).

As of September 30, 2013 and December 31, 2012, investment in real estate for properties sold or held for sale were as follows (in thousands):
 
September 30, 2013
 
December 31, 2012
Office
$
55,049

 
$
71,605

Medical office
409,486

 
406,873

Total
464,535

 
478,478

Less accumulated depreciation
(118,378
)
 
(113,479
)
Investment in real estate sold or held for sale, net
$
346,157

 
$
364,999


As of September 30, 2013 and December 31, 2012, liabilities related to properties sold or held for sale were as follows (in thousands):
 
September 30, 2013
 
December 31, 2012
Mortgage notes
$
23,467

 
$
23,945

Other liabilities
7,808

 
8,412

Liabilities related to properties sold or held for sale
$
31,275

 
$
32,357


10


Income from operations of properties sold or held for sale for the three and nine months ended September 30, 2013 and 2012 were as follows (in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2013
 
2012
 
2013
 
2012
Revenues
$
12,073

 
$
13,725

 
37,141

 
41,338

Property expenses
(4,398
)
 
(4,793
)
 
(12,856
)
 
(13,992
)
Depreciation and amortization
(3,215
)
 
(4,536
)
 
(12,161
)
 
(14,210
)
Interest expense
(329
)
 
(1,163
)
 
(985
)
 
(3,494
)
 
$
4,131

 
$
3,233

 
$
11,139

 
$
9,642


Income from operations of properties sold or held for sale by property for the three and nine months ended September 30, 2013 and 2012 were as follows (in thousands):
 
 
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
Property
 
Segment
 
2013
 
2012
 
2013
 
2012
1700 Research Boulevard
 
Office
 
$
—

 
$
106

 
—

 
225

Atrium Building
 
Office
 
—

 
320

 
185

 
833

Plumtree Medical Center
 
Medical Office
 
—

 
88

 
—

 
117

Medical Office Portfolio
 
Medical Office / Office
 
4,131

 
2,719

 
10,954

 
8,467

 
 
 
 
$
4,131

 
$
3,233

 
$
11,139

 
$
9,642


NOTE 4: MORTGAGE NOTES PAYABLE

On January 11, 2013, we repaid without penalty the remaining $30.0 million of principal on the mortgage note secured by West Gude Drive.
NOTE 5: UNSECURED LINES OF CREDIT PAYABLE
As of September 30, 2013, we maintained a $100.0 million unsecured line of credit maturing in June 2015 ("Credit Facility No. 1") and a $400.0 million unsecured line of credit maturing in July 2016 ("Credit Facility No. 2"). Credit Facilities No. 1 and No. 2 have accordion features that allow us to increase the facilities to $200.0 million and $600.0 million, respectively, subject to additional lender commitments. The amounts of these lines of credit unused and available at September 30, 2013 are as follows (in thousands):
 
Credit Facility
No. 1
 
Credit Facility
No. 2
Committed capacity
$
100,000

 
$
400,000

Borrowings outstanding
(25,000
)
 
(60,000
)
Unused and available
$
75,000

 
$
340,000


We executed borrowings and repayments on the unsecured lines of credit during the 2013 Period as follows (in thousands):
 
Credit Facility
No. 1
 
Credit Facility
No. 2
Balance at December 31, 2012
$
—

 
$
—

Borrowings
50,000

 
60,000

Repayments
(25,000
)
 
—

Balance at September 30, 2013
$
25,000

 
$
60,000


We made borrowings during the 2013 Period to pay off the West Gude mortgage note, repay our 5.125% unsecured notes and for general corporate purposes. We made repayments during the 2013 Period using proceeds from the sale of The Atrium Building and cash from operations.

11

NOTE 6: NOTES PAYABLE
We repaid without penalty the remaining $60.0 million of our 5.125% unsecured notes on their due date of March 15, 2013, using borrowings on our unsecured line of credit.
NOTE 7: STOCK BASED COMPENSATION
WRIT maintains short-term ("STIP") and long-term ("LTIP") incentive plans that allow for stock-based awards to officers and non-officer employees. Stock based awards are provided to officers and non-officer employees, as well as trustees, under the Washington Real Estate Investment Trust 2007 Omnibus Long-Term Incentive Plan which allows for awards in the form of restricted shares, restricted share units, options and other awards up to an aggregate of 2,000,000 shares over the ten year period in which the plan will be in effect. Restricted share units are converted into shares of our stock upon full vesting through the issuance of new shares.
Total Compensation Expense
Total compensation expense recognized in the consolidated financial statements for all outstanding share based awards was $1.2 million and $1.3 million for the 2013 and 2012 Quarters, respectively, and $3.6 million and $4.0 million for the 2013 and 2012 Periods, respectively.

Restricted Share Awards

During the 2013 Period, 103,312 restricted share grants were awarded at a weighted average grant date fair value of $26.97.

The total fair values of restricted share grants vested was $0.7 million and $0.3 million for the 2013 and 2012 Periods, respectively.

The total unvested restricted share awards at September 30, 2013 was 224,484 shares, which had a weighted average grant date fair value of $27.24 per share.

As of September 30, 2013, the total compensation cost related to non-vested restricted share awards was $2.1 million, which we expect to recognize over a weighted average period of 15 months.

During the first quarter of 2013, Mr. George F. “Skip” McKenzie, our prior president and Chief Executive Officer, announced his intention to retire from WRIT at the end of 2013. As such, we have entered into a separation and general release agreement with the executive dated July 23, 2013, the terms of which were previously disclosed on a Current Report on Form 8-K dated January 28, 2013. On September 30, 2013, Mr. McKenzie resigned from WRIT's Board of Trustees and from his positions as WRIT's President and Chief Executive Officer. Mr. McKenzie will remain an employee of WRIT through December 31, 2013. The separation and release agreement includes a modification to certain of his stock awards. In addition, the agreement provides for the payment of consulting fees during 2014 and 2015 totaling $0.5 million, which will be expensed during the fourth quarter of 2013.
NOTE 8: FAIR VALUE DISCLOSURES
Assets and Liabilities Measured at Fair Value
For assets and liabilities measured at fair value on a recurring basis, quantitative disclosures about the fair value measurements are required to be disclosed separately for each major category of assets and liabilities, as follows:
Level 1: Quoted prices in active markets for identical assets
Level 2: Significant other observable inputs
Level 3: Significant unobservable inputs
The only assets or liabilities we had at September 30, 2013 and December 31, 2012 that are recorded at fair value on a recurring basis are the assets held in the Supplemental Executive Retirement Program (“SERP”). We base the valuations related to this asset on assumptions derived from significant other observable inputs and accordingly these valuations fall into Level 2 in the fair value hierarchy. The fair values of these assets at September 30, 2013 and December 31, 2012 were as follows (in thousands):
 
September 30, 2013
 
December 31, 2012
 
Fair
Value
 
Level 1
 
Level 2
 
Level 3
 
Fair
Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SERP
$
3,004

 
$
—

 
$
3,004

 
$
—

 
$
2,421

 
$
—

 
$
2,421

 
$
—


12


Financial Assets and Liabilities Not Measured at Fair Value
The following disclosures of estimated fair value were determined by management using available market information and established valuation methodologies, including discounted cash flow. Many of these estimates involve significant judgment. The estimated fair value disclosed may not necessarily be indicative of the amounts we could realize on disposition of the financial instruments. The use of different market assumptions or estimation methodologies could have an effect on the estimated fair value amounts. In addition, fair value estimates are made at a point in time and thus, estimates of fair value subsequent to September 30, 2013 may differ significantly from the amounts presented.
Following is a summary of significant methodologies used in estimating fair values and a schedule of fair values at September 30, 2013.
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents and restricted cash include cash and commercial paper with original maturities of less than 90 days, which are valued at the carrying value, which approximates fair value due to the short maturity of these instruments (Level 1 inputs).
Notes Receivable
We acquired a note receivable ("2445 M Street note") in 2008 with the purchase of 2445 M Street. We estimate the fair value of the 2445 M Street note based on a discounted cash flow methodology using market discount rates (Level 3 inputs).
Debt
Mortgage notes payable consist of instruments in which certain of our real estate assets are used for collateral. We estimate the fair value of the mortgage notes payable by discounting the contractual cash flows at a rate equal to the relevant treasury rates (with respect to the timing of each cash flow) plus credit spreads estimated through independent comparisons to real estate assets or loans with similar characteristics. Lines of credit payable consist of bank facilities which we use for various purposes including working capital, acquisition funding or capital improvements. The lines of credit advances are priced at a specified rate plus a spread. We estimate the market value based on a comparison of the spreads of the advances to market given the adjustable base rate. We estimate the fair value of the notes payable by discounting the contractual cash flows at a rate equal to the relevant treasury rates (with respect to the timing of each cash flow) plus credit spreads derived using the relevant securities’ market prices. We classify these fair value measurements as Level 3 as we use significant unobservable inputs and management judgment due to the absence of quoted market prices.
As of September 30, 2013 and December 31, 2012, the carrying values and estimated fair values of our financial instruments were as follows (in thousands):
 
September 30, 2013
 
December 31, 2012
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Cash and cash equivalents (1)
$
7,923

 
$
7,923

 
$
19,324

 
$
19,324

Restricted cash (1)
7,674

 
7,674

 
14,582

 
14,582

2445 M Street note
6,166

 
6,990

 
6,617

 
6,654

Mortgage notes payable (1)
314,305

 
337,266

 
342,970

 
374,591

Lines of credit
85,000

 
85,000

 
—

 
—

Notes payable
846,576

 
873,702

 
906,190

 
968,040

(1) Includes amounts that have been reclassified to "Other assets related to properties sold or held for sale" or "Other liabilities related to properties sold or held for sale" on the consolidated balance sheets (see note 3).


13

NOTE 9: EARNINGS PER COMMON SHARE

We determine “Basic earnings per share” using the two-class method as our unvested restricted share awards have non-forfeitable rights to dividends, and are therefore considered participating securities. We compute basic earnings per share by dividing net income attributable to the controlling interest less the allocation of undistributed earnings to unvested restricted share awards by the weighted-average number of common shares outstanding for the period.

We also determine “Diluted earnings per share” under the two-class method with respect to the unvested restricted share awards. We further evaluate any other potentially dilutive securities at the end of the period and adjust the basic earnings per share calculation for the impact of those securities that are dilutive. Our diluted earnings per share calculation includes the dilutive impact of employee stock options based on the treasury stock method and our incentive share awards with performance or market conditions under the contingently issuable method. The diluted earnings per share calculation also considers our operating partnership units under the if-converted method.

The computations of basic and diluted earnings per share for the three and nine months ended September 30, 2013 and 2012 were as follows (in thousands, except per share data):
 
Three Months Ended September 30,
 
Nine Months Ended 
 September 30,
 
2013
 
2012
 
2013
 
2012
Numerator:
 
 
 
 
 
 
 
Income from continuing operations
$
1,709

 
$
2,604

 
$
4,104

 
$
7,384

Allocation of undistributed earnings to unvested restricted share awards
(32
)
 
(34
)
 
(83
)
 
(173
)
Adjusted income from continuing operations attributable to the controlling interests
1,677

 
2,570

 
4,021

 
7,211

Income from discontinued operations, including gain on sale of real estate, net of taxes
4,131

 
6,957

 
14,334

 
13,366

Allocation of undistributed earnings to unvested restricted share awards
(77
)
 
(91
)
 
(288
)
 
(312
)
Adjusted income from discontinuing operations attributable to the controlling interests
4,054

 
6,866

 
14,046

 
13,054

Adjusted net income attributable to the controlling interests
$
5,731

 
$
9,436

 
$
18,067

 
$
20,265

Denominator:
 
 
 
 

 

Weighted average shares outstanding – basic
66,410

 
66,246

 
66,403

 
66,227

Effect of dilutive securities:
 
 
 
 
 
 
 
Operating partnership units
117

 
117

 
117

 
117

Employee stock options and restricted share awards
34

 
16

 
25

 
19

Weighted average shares outstanding – diluted
66,561

 
66,379

 
66,545

 
66,363

Earnings per common share, basic:
 
 
 
 

 

Continuing operations
$
0.03

 
$
0.04

 
$
0.06

 
$
0.11

Discontinued operations
0.06

 
0.10

 
0.21

 
0.20

 
$
0.09

 
$
0.14

 
$
0.27

 
$
0.31

Earnings per common share, diluted:

 

 

 

Continuing operations
$
0.03

 
$
0.04

 
$
0.06

 
$
0.11

Discontinued operations
0.06

 
0.10

 
0.21

 
0.20

 
$
0.09

 
$
0.14

 
$
0.27

 
$
0.31

NOTE 10: SEGMENT INFORMATION
We have four reportable segments: office, retail, multifamily and medical office. Office buildings provide office space for various types of businesses and professions. Retail shopping centers are typically grocery store anchored neighborhood centers that include other small shop tenants or regional power centers with several junior box tenants. Multifamily properties provide rental housing for individuals and families throughout the Washington metropolitan area. Medical office buildings provide offices and facilities

14

for a variety of medical services. We have entered into purchase and sale agreements to effectuate the sale of our medical office segment, and have classified this segment as discontinued operations (see note 3).
We evaluate performance based upon operating income from the combined properties in each segment. Our reportable operating segments are consolidations of similar properties. GAAP requires that segment disclosures present the measure(s) used by the chief operating decision maker for purposes of assessing segments’ performance. Net operating income is a key measurement of our segment profit and loss. Net operating income is defined as segment real estate rental revenue less segment real estate expenses.
The following tables present revenues, net operating income, capital expenditures and total assets for the 2013 and 2012 Quarters and Periods from these segments, and reconciles net operating income of reportable segments to net income attributable to the controlling interests as reported (in thousands):
 
Three Months Ended September 30, 2013
 
Office
 
Medical Office
 
Retail
 
Multifamily
 
Corporate and Other
 
Consolidated
Real estate rental revenue
$
38,221

 
$
—

 
$
13,990

 
$
13,617

 
$
—

 
$
65,828

Real estate expenses
14,517

 
—

 
3,207

 
5,519

 
—

 
23,243

Net operating income
$
23,704

 
$
—

 
$
10,783

 
$
8,098

 
$
—

 
$
42,585

Depreciation and amortization
 
 
 
 
 
 
 
 
 
 
(21,168
)
General and administrative
 
 
 
 
 
 
 
 
 
 
(3,850
)
Acquisition costs
 
 
 
 
 
 
 
 
 
 
(148
)
Interest expense
 
 
 
 
 
 
 
 
 
 
(15,930
)
Other income
 
 
 
 
 
 
 
 
 
 
220

Discontinued operations:
 
 
 
 
 
 
 
 
 
 
 
Income from operations of properties sold or held for sale
 
 
 
 
 
 
 
 
 
 
4,131

Net income
 
 
 
 
 
 
 
 
 
 
5,840

Less: Net income attributable to noncontrolling interests in subsidiaries
 
 
 
 
 
 
 
 
 
 
—

Net income attributable to the controlling interests
 
 
 
 
 
 
 
 
 
 
$
5,840

Capital expenditures
$
9,535

 
$
505

 
$
198

 
$
4,041

 
$
16

 
$
14,295

Total assets
$
1,116,087

 
$
319,928

 
$
348,490

 
$
258,027

 
$
45,823

 
$
2,088,355


15

 
Three Months Ended September 30, 2012
 
Office
 
Medical
Office
 
Retail
 
Multifamily
 
Corporate
and Other
 
Consolidated
Real estate rental revenue
$
37,477

 
$
—

 
$
13,604

 
$
13,390

 
$
—

 
$
64,471

Real estate expenses
14,114

 
—

 
3,015

 
5,398

 
—

 
22,527

Net operating income
$
23,363

 
$
—

 
$
10,589

 
$
7,992

 
$
—

 
$
41,944

Depreciation and amortization
 
 
 
 
 
 
 
 
 
 
(21,682
)
Acquisition costs
 
 
 
 
 
 
 
 
 
 
164

General and administrative
 
 
 
 
 
 
 
 
 
 
(3,173
)
Interest expense
 
 
 
 
 
 
 
 
 
 
(14,886
)
Other income
 
 
 
 
 
 
 
 
 
 
237

Discontinued operations:
 
 
 
 
 
 
 
 
 
 
 
Income from operations of properties sold or held for sale
 
 
 
 
 
 
 
 
 
 
3,233

Gain on sale of real estate
 
 
 
 
 
 
 
 
 
 
3,724

Net income
 
 
 
 
 
 
 
 
 
 
9,561

Less: Net income attributable to noncontrolling interests in subsidiaries
 
 
 
 
 
 
 
 
 
 
—

Net income attributable to the controlling interests
 
 
 
 
 
 
 
 
 
 
$
9,561

Capital expenditures
$
10,058

 
$
2,399

 
$
832

 
$
1,496

 
$
95

 
$
14,880

Total assets
$
1,144,975

 
$
343,876

 
$
361,383

 
$
247,508

 
$
101,053

 
$
2,198,795


 
Nine Months Ended September 30, 2013
 
Office
 
Medical Office
 
Retail
 
Multifamily
 
Corporate and Other
 
Consolidated
Real estate rental revenue
$
113,849

 
$
—

 
$
42,105

 
$
40,349

 
$
—

 
$
196,303

Real estate expenses
42,697

 
—

 
10,355

 
16,415

 
—

 
69,467

Net operating income
$
71,152

 
$
—

 
$
31,750

 
$
23,934

 
$
—

 
$
126,836

Depreciation and amortization
 
 
 
 
 
 
 
 
 
 
(63,328
)
General and administrative
 
 
 
 
 
 
 
 
 
 
(11,717
)
Acquisition costs
 
 
 
 
 
 
 
 
 
 
(448
)
Interest expense
 
 
 
 
 
 
 
 
 
 
(47,944
)
Other income
 
 
 
 
 
 
 
 
 
 
705

Discontinued operations:
 
 
 
 
 
 
 
 
 
 
 
Income from operations of properties sold or held for sale
 
 
 
 
 
 
 
 
 
 
11,139

Gain on sale of real estate
 
 
 
 
 
 
 
 
 
 
3,195

Net income
 
 
 
 
 
 
 
 
 
 
18,438

Less: Net income attributable to noncontrolling interests in subsidiaries
 
 
 
 
 
 
 
 
 
 
—

Net income attributable to the controlling interests
 
 
 
 
 
 
 
 
 
 
$
18,438

Capital expenditures
$
26,773

 
$
3,035

 
$
2,732

 
$
6,808

 
$
125

 
$
39,473



16

 
Nine Months Ended September 30, 2012
 
Office
 
Medical Office
 
Retail
 
Multifamily
 
Corporate and Other
 
Consolidated
Real estate rental revenue
$
109,632

 
$
—

 
$
41,019

 
$
39,483

 
$
—

 
$
190,134

Real estate expenses
39,905

 
—

 
9,488

 
15,427

 
—

 
64,820

Net operating income
$
69,727

 
$
—

 
$
31,531

 
$
24,056

 
$
—

 
$
125,314

Depreciation and amortization
 
 
 
 
 
 
 
 
 
 
(63,593
)
General and administrative
 
 
 
 
 
 
 
 
 
 
(10,943
)
Acquisition costs
 
 
 
 
 
 
 
 
 
 
(144
)
Interest expense
 
 
 
 
 
 
 
 
 
 
(43,983
)
Other income
 
 
 
 
 
 
 
 
 
 
733

Discontinued operations:
 
 
 
 
 
 
 
 
 
 
 
Income from operations of properties sold or held for sale
 
 
 
 
 
 
 
 
 
 
9,642

Gain on sale of real estate
 
 
 
 
 
 
 
 
 
 
3,724

Net income
 
 
 
 
 
 
 
 
 
 
20,750

Less: Net income attributable to noncontrolling interests in subsidiaries
 
 
 
 
 
 
 
 
 
 
—

Net income attributable to the controlling interests
 
 
 
 
 
 
 
 
 
 
$
20,750

Capital expenditures
$
25,076

 
$
5,020

 
$
2,246

 
$
3,968

 
$
510

 
$
36,820



NOTE 11: SUBSEQUENT EVENT

On October 1, 2013, we closed on the purchase of The Paramount, a 135-unit residential building in Arlington, Virginia, for $48.2 million. We funded the acquisition through borrowings of $50.0 million on our unsecured line of credit.
 

17

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto appearing in Item 1 of this report and the more detailed information contained in our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission on February 27, 2013.
We refer to the three months ended September 30, 2013 and September 30, 2012 as the “2013 Quarter” and the “2012 Quarter,” respectively, and the the nine months ended September 30, 2013 and September 30, 2012 as the “2013 Period” and the “2012 Period,” respectively.
Forward-Looking Statements
This Form 10-Q contains forward-looking statements which involve risks and uncertainties. Forward-looking statements include statements in this report preceded by, followed by or that include the words “believe,” “expect,” “intend,” “anticipate,” “potential,” “project,” “will” and other similar expressions. We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for these statements. The following important factors, in addition to those discussed elsewhere in this Form 10-Q, could affect our future results and could cause those results to differ materially from those expressed in the forward-looking statements: (a) the effect of credit and financial market conditions; (b) the availability and cost of capital; (c) fluctuations in interest rates; (d) the economic health of our tenants; (e) the timing and pricing of lease transactions; (f) the timing of the closings on the sale of the medical office segment; (g) the economic health of the greater Washington metro region, or other markets we may enter; (h) the effects of changes in Federal government spending; (i) the supply of competing properties; (j) consumer confidence; (k) unemployment rates; (l) consumer tastes and preferences; (m) our future capital requirements; (n) inflation; (o) compliance with applicable laws, including those concerning the environment and access by persons with disabilities; (p) governmental or regulatory actions and initiatives; (q) changes in general economic and business conditions; (r) terrorist attacks or actions; (s) acts of war; (t) weather conditions; (u) the effects of changes in capital available to the technology and biotechnology sectors of the economy, and (v) other factors discussed under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission on February 27, 2013 and our subsequent Quarterly Reports on Form 10-Q. We undertake no obligation to update our forward-looking statements or risk factors to reflect new information, future events, or otherwise.
General
Introductory Matters
We provide our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations and financial condition. We organize the MD&A as follows:
•
Overview. Discussion of our business, operating results, investment activity and capital requirements, and summary of our significant transactions to provide context for the remainder of MD&A.
•
Results of Operations. Discussion of our financial results comparing the 2013 Quarter to the 2012 Quarter and the 2013 Period to the 2012 Period.
•
Liquidity and Capital Resources. Discussion of our financial condition and analysis of changes in our capital structure and cash flows.
•
Critical Accounting Policies and Estimates. Descriptions of accounting policies that reflect significant judgments and estimates used in the preparation of our consolidated financial statements.
When evaluating our financial condition and operating performance, we focus on the following financial and non-financial indicators:
•
Net operating income (“NOI”), calculated as real estate rental revenue less real estate expenses excluding depreciation and amortization and general and administrative expenses. NOI is a non-GAAP supplemental measure to net income;
•
Funds From Operations (“FFO”), calculated as set forth below under the caption “Funds from Operations.” FFO is a non-GAAP supplemental measure to net income;
•
Occupancy, calculated as occupied square footage as a percentage of total square footage as of the last day of that period;

18

•
Leased percentage, calculated as the percentage of available physical net rentable area leased for our commercial segments and percentage of apartments leased for our multifamily segment;
•
Rental rates;
•
Leasing activity, including new leases, renewals and expirations.
For purposes of evaluating comparative operating performance, we categorize our properties as “same-store,” “non-same-store” or discontinued operations. A “same-store” property is one that was owned for the entirety of the periods being evaluated, is stabilized from an occupancy standpoint and is included in continuing operations. We consider newly constructed properties to be stabilized when they achieve 90% occupancy. A “non-same-store” property is one that was acquired or placed into service during either of the periods being evaluated or is not stabilized from an occupancy standpoint, and is included in continuing operations. We classify results for properties sold or held for sale during any of the periods evaluated as discontinued operations.

Overview

Business

Our revenues are derived primarily from the ownership and operation of income-producing properties in the greater Washington metro region. As of September 30, 2013, we owned a diversified portfolio of 69 properties, totaling approximately 8.5 million square feet of commercial space and 2,540 multifamily units, and land held for development. These 69 properties consisted of 25 office properties, 17 medical office properties, 16 retail centers and 11 multifamily properties. We have entered into purchase and sale agreements to effectuate the sale of our medical office segment, and have classified this segment as discontinued operations (see note 3 to the consolidated financial statements).

As previously disclosed on a Current Report on Form 8-K filed October 2, 2013, Mr. George F. “Skip” McKenzie, our prior President and Chief Executive Officer, resigned from WRIT's Board of Trustees and from his positions as WRIT's President and Chief Executive Officer effective September 30, 2013. Mr. Paul T. McDermott joined WRIT as a member of its Board of Trustees and as its President and Chief Executive Officer on October 1, 2013. He is responsible for WRIT's financial performance after such date.

Operating Results

Real estate rental revenue, NOI, net income and FFO for the three months ended September 30, 2013 and 2012 were as follows (in thousands): 
 
Three Months Ended September 30,
 
 
 
 
 
2013
 
2012
 
$ Change
 
% Change
Real estate rental revenue
$
65,828

 
$
64,471

 
$
1,357

 
2.1
 %
NOI (1)
$
42,585

 
$
41,944

 
$
641

 
1.5
 %
Net income
$
5,840

 
$
9,561

 
$
(3,721
)
 
(38.9
)%
FFO (2)
$
30,223

 
$
32,055

 
$
(1,832
)
 
(5.7
)%
 
 
 
 
 
 
 
 
(1) See page 25 of the MD&A for reconciliations of NOI to net income.
(2) See page 36 of the MD&A for reconciliations of FFO to net income.
 

The increase in NOI is primarily due to higher rental rates, partially offset by lower occupancy and higher real estate taxes. Occupancy decreased to 89.6% from 90.0% one year ago, as decreases in the retail and multifamily segments were partially offset by a small increase occupancy in the office segment. Real estate rental revenue and NOI do not include the medical office segment, which is classified as discontinued operations.

Investment Activity

In September 2013, we entered into four separate purchase and sale agreements to effectuate the sale of the Medical Office Portfolio, which consists of our entire medical office segment (including land held for development at 4661 Kenmore Avenue) and two office buildings (Woodholme Center and 6565 Arlington Boulevard), for an aggregate purchase price of $500.8 million. The dispositions consist of four independent transactions, each of which will close pursuant to a separate purchase and sale agreement. The projected closing date under both Purchase and Sale Agreement #1 and Purchase and Sale Agreement #2 is on or about November 12, 2013

19

(although we currently anticipate such date could be extended by approximately one week) and the outside closing date under both Purchase and Sale Agreement #3 and Purchase and Sale Agreement #4 is January 31, 2014.

Although we have entered into these purchase and sale agreements, there could still be conditions to the closings of such transactions that may not be achieved, or we or the potential purchaser otherwise may not be successful in completing such transactions. We may also not be successful in reinvesting some or all of the proceeds of the Medical Office Portfolio sales on a substantially concurrent basis. If we do not successfully reinvest some or all of the sales proceeds, the resulting decrease in our net income attributable to the controlling interests will not be completely offset by income from the reinvestment of disposition proceeds. This decrease in net income attributable to the controlling interests would have a negative impact on our earnings to fixed charges and debt service coverage ratios and could have a negative impact on our ability to pay dividends at their current level. Even if we do successfully reinvest some or all of the sales proceeds, we still expect some decrease in net income attributable to the controlling interests in future quarters due to the timing and cost of future potential acquisitions.
Capital Requirements
There are no debt maturities for the remainder of 2013, though we will continue to make recurring principal amortization payments. As of September 30, 2013, our unsecured lines of credit had $85.0 million of borrowings outstanding, leaving a remaining borrowing capacity of $415.0 million.
Significant Transactions
Our significant transactions during the 2013 and 2012 Periods are summarized as follows:
2013 Period
•
The execution of four separate contracts with a single buyer for the sale of the entire medical office segment, consisting of 17 medical office assets, and two office assets, 6565 Arlington Boulevard and Woodholme Center (both of which have significant medical office tenancy), encompassing in total approximately 1.5 million square feet. The assets to be sold also include land held for development at 4661 Kenmore Avenue. The sales prices under the four agreements aggregate to $500.8 million. The projected closing date under both Purchase and Sale Agreement #1 ($303.4 million of the aggregate sales price) and Purchase and Sale Agreement #2 ($3.8 million of the aggregate sales price) is on or about November 12, 2013 (although we currently anticipate such date could be extended by approximately one week) and the outside closing date under both Purchase and Sale Agreement #3 ($79.0 million of the aggregate sales price) and Purchase and Sale Agreement #4 ($114.6 million of the aggregate sales price) is January 31, 2014.
•
The disposition of the Atrium Building, a 79,000 square foot office building, for a contract sales price of $15.8 million, resulting in a gain on sale of $3.2 million.
•
The execution of new leases for 1.2 million square feet of commercial space, excluding leases at properties classified as held for sale, with an average rental rate increase of 9.3% over expiring leases.
2012 Period
•
The issuance of $300.0 million of 3.95% unsecured notes due October 15, 2022, with net proceeds of $296.4 million. The notes bear an effective interest rate of 4.018%.
•
The disposition of 1700 Research Boulevard, a 101,000 square foot office building, for a contract sales price of $14.3 million, resulting in a gain on sale of $3.7 million.
•
The acquisition of Fairgate at Ballston, a 142,000 square foot office building, for $52.3 million.
•
The execution of an amended and restated credit agreement for Credit Facility No. 1 to expand the facility from $75.0 million to $100.0 million, with an accordion feature that allows us to increase the facility to $200.0 million, subject to additional lender commitments. The amended and restated facility matures June 2015, with a one-year extension option, and bears interest at a rate of LIBOR plus a margin, based on our credit rating.
•
The execution of an amended and restated credit agreement for Credit Facility No. 2, our $400.0 million unsecured line of credit, to extend the maturity date of the facility to July 2016, with a one-year extension option. The amended and restated facility bears interest at a rate of LIBOR plus a margin, based on our credit rating.
•
The execution of new leases for 0.7 million square feet of commercial space, with an average rental rate increase of 12.1% over expiring leases.

20

Results of Operations
The discussion that follows is based on our consolidated results of operations for the 2013 and 2012 Quarters and Periods. The ability to compare one period to another may be significantly affected by acquisitions completed and dispositions made during those periods. To provide more insight into our operating results, we divide our discussion into two main sections:
•
Consolidated Results of Operations: Overview analysis of results on a consolidated basis.
•
Net Operating Income: Detailed analysis of same-store and non-same-store NOI results by segment.
Consolidated Results of Operations
Real Estate Rental Revenue
Real estate rental revenue for properties classified as continuing operations for the three and nine months ended September 30, 2013 and 2012 were as follows (in thousands):
 
Three Months Ended September 30,
 
Change
 
Nine Months Ended September 30,
 
Change
 
2013
 
2012
 
$
 
%
 
2013
 
2012
 
$
 
%
Minimum base rent
$
56,762

 
$
56,355

 
$
407

 
0.7
 %
 
$
169,373

 
$
165,808

 
$
3,565

 
2.2
 %
Recoveries from tenants
6,576

 
6,217

 
359

 
5.8
 %
 
20,159

 
18,902

 
1,257

 
6.7
 %
Provisions for doubtful accounts
(813
)
 
(1,262
)
 
449

 
(35.6
)%
 
(2,725
)
 
(3,632
)
 
907

 
(25.0
)%
Parking and other tenant charges
3,303

 
3,161

 
142

 
4.5
 %
 
9,496

 
9,056

 
440

 
4.9
 %
 
$
65,828

 
$
64,471

 
$
1,357

 
2.1
 %
 
$
196,303

 
$
190,134

 
$
6,169

 
3.2
 %

Minimum Base Rent: Minimum base rent increased by $0.4 million in the 2013 Quarter primarily due to higher rental rates ($1.4 million), partially offset by lower occupancy ($0.6 million) and higher rent abatements ($0.3 million).

Minimum base rent increased by $3.6 million in the 2013 Period primarily due to acquisitions ($2.1 million) and higher rental rates ($4.6 million) at same-store properties, partially offset by lower occupancy ($2.4 million) and higher rent abatements ($0.7 million) at same-store properties.

Recoveries from Tenants: Recoveries from tenants increased by $0.4 million in the 2013 Quarter primarily due to higher reimbursements for operating expenses ($0.3 million) and real estate taxes ($0.1 million).

Recoveries from tenants increased by $1.3 million in the 2013 Period primarily due to higher reimbursements for operating expenses ($0.9 million) and real estate taxes ($0.3 million) at same-store properties and reimbursements for real estate taxes ($0.1 million) at acquisitions.

Provisions for Doubtful Accounts: Provisions for doubtful accounts decreased by $0.4 million in the 2013 Quarter primarily due to lower net provisions in the retail segment.

Provisions for doubtful accounts decreased by $0.9 million in the 2013 Period primarily due to lower net provisions in the retail segment.

Parking and Other Tenant Charges: Parking and other tenant charges increased by $0.1 million in the 2013 Quarter primarily due to higher parking income.

Parking and other tenant charges increased by $0.4 million in the 2013 Period primarily due to acquisitions ($0.4 million) and higher parking income ($0.5 million) from same-store properties, partially offset by lower lease termination fees ($0.3 million) from same-store properties.


21

Occupancy for properties classified as continuing operations by segment as of September 30, 2013 and 2012 was as follows:
 
As of September 30,
 
 
 
2013
 
2012
 
Change
Office
86.4
%
 
86.3
%
 
0.1
 %
Retail
91.4
%
 
92.8
%
 
(1.4
)%
Multifamily
94.1
%
 
94.8
%
 
(0.7
)%
Total
89.6
%
 
90.0
%
 
(0.4
)%

Occupancy represents occupied square footage indicated as a percentage of total square footage as of the last day of that period.
A detailed discussion of occupancy by segment can be found in the Net Operating Income section.
Real Estate Expenses
Real estate expenses for properties classified as continuing operations for the three and nine months ended September 30, 2013 and 2012 were as follows (in thousands):
 
Three Months Ended September 30,
 
Change
 
Nine Months Ended September 30,
 
Change
 
2013
 
2012
 
$
 
%
 
2013
 
2012
 
$
 
%
Property operating expenses
$
15,990

 
$
15,581

 
$
409

 
2.6
%
 
$
48,007

 
$
44,775

 
$
3,232

 
7.2
%
Real estate taxes
7,253

 
6,946

 
307

 
4.4
%
 
21,460

 
20,045

 
1,415

 
7.1
%
 
$
23,243

 
$
22,527

 
$
716

 
3.2
%
 
$
69,467

 
$
64,820

 
$
4,647

 
7.2
%

Real estate expenses as a percentage of revenue were 35.3% and 34.9% for the 2013 and 2012 Quarters, respectively, and 35.4% and 34.1% for the 2013 and 2012 Periods, respectively.
Property Operating Expenses: Property operating expenses include utilities, repairs and maintenance, property administration and management, operating services, common area maintenance, property insurance, bad debt and other operating expenses.
Property operating expenses increased by $0.4 million in the 2013 Quarter primarily due to bad debt ($0.2 million) and repairs and maintenance ($0.1 million) expenses.
Property operating expenses increased by $3.2 million in the 2013 Period primarily due to higher bad debt ($1.0 million), administrative ($0.5 million), repairs and maintenance ($0.5 million) and snow removal ($0.3 million) expenses from same-store properties, and acquisitions ($0.7 million).
Real Estate Taxes: Real estate taxes increased by $0.3 million in the 2013 Quarter primarily due to higher assessments across the portfolio.
Real estate taxes increased by $1.4 million in the 2013 Period primarily due to higher assessments at same-store properties ($1.1 million) and acquisitions ($0.3 million).

Other Operating Expenses
Other operating expenses for the three and nine months ended September 30, 2013 and 2012 were as follows (in thousands):
 
Three Months Ended September 30,
 
Change
 
Nine Months Ended September 30,
 
Change
 
2013
 
2012
 
$
 
%
 
2013
 
2012
 
$
 
%
Depreciation and amortization
$
21,168

 
$
21,682

 
$
(514
)
 
(2.4
)%
 
$
63,328

 
$
63,593

 
$
(265
)
 
(0.4
)%
Interest expense
15,930

 
14,886

 
1,044

 
7.0
 %
 
47,944

 
43,983

 
3,961

 
9.0
 %
Acquisition costs
148

 
(164
)
 
312

 
190.2
 %
 
448

 
144

 
304

 
211.1
 %
General and administrative
3,850

 
3,173

 
677

 
21.3
 %
 
11,717

 
10,943

 
774

 
7.1
 %
 
$
41,096

 
$
39,577

 
$
1,519

 
3.8
 %
 
$
123,437

 
$
118,663

 
$
4,774

 
4.0
 %

22

Interest Expense: Interest expense by debt type for the three and nine months ended September 30, 2013 and 2012 was as follows (in thousands):
 
Three Months Ended September 30,
 
Change
 
Nine Months Ended September 30,
 
Change
 
2013
 
2012
 
$
 
%
 
2013
 
2012
 
$
 
%
Notes payable
$
10,640

 
$
8,896

 
$
1,744

 
19.6
 %
 
$
32,531

 
$
26,526

 
$
6,005

 
22.6
 %
Mortgages
4,551

 
5,145

 
(594
)
 
(11.5
)%
 
13,625

 
15,814

 
(2,189
)
 
(13.8
)%
Lines of credit
863

 
1,237

 
(374
)
 
(30.2
)%
 
2,395

 
2,893

 
(498
)
 
(17.2
)%
Capitalized interest
(124
)
 
(392
)
 
268

 
(68.4
)%
 
(607
)
 
(1,250
)
 
643

 
(51.4
)%
Total
$
15,930

 
$
14,886

 
$
1,044

 
7.0
 %
 
$
47,944

 
$
43,983

 
$
3,961

 
9.0
 %

Interest expense from notes payable increased in the 2013 Quarter and Period primarily due to the issuance of $300.0 million of 3.95% unsecured notes in September 2012, partially offset by the paydowns of $50.0 million of 5.05% notes and of $60.0 million of 5.125% notes. Interest expense from mortgage notes decreased primarily due to the repayments of various mortgage notes during 2012 and 2013. Interest expense from our unsecured lines of credit decreased due to lower borrowings. Capitalized interest decreased because we stopped capitalizing interest on expenditures on our joint venture to develop a multifamily property at 1225 First Street during the second quarter of 2013 because there was no qualified development activity. We decided to delay commencement of construction at this development due to market conditions and concerns of oversupply. We will reassess this project on a periodic basis going forward.
 
General and Administrative Expense: General and administrative expense increased by $0.7 million in the 2013 Quarter, primarily due to higher provisions for incentive compensation and recruitment fees associated with the search for a new chief executive officer.
General and administrative expense increased by $0.8 million in the 2013 Period, primarily due to recruitment fees associated with the search for a new chief executive officer.
Discontinued Operations
We classified as held for sale or sold the following properties in 2013 and 2012:
Disposition Date
 
Property
 
Type
 
Rentable Square Feet
 
Contract Sales Price
(in thousands)
March 19, 2013
 
Atrium Building
 
Office
 
79,000

 
$
15,750

N/A
 
Medical Office Portfolio(1)
 
Medical Office / Office
 
1,520,000

 
500,750

 
 
 
 
 
 
1,599,000

 
$
516,500

 
 
 
 
 
 
 
 
 
August 31, 2012
 
1700 Research Boulevard
 
Office
 
101,000

 
$
14,250

December 20, 2012