Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________________________________________

FORM 10-Q

___________________________________________________



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For quarterly period ended June 30, 2019



☐	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)

1775 EYE STREET, NW, SUITE 1000, WASHINGTON, DC 20006

(Address of principal executive office) (Zip code)

Registrant’s telephone number, including area code: (202) 774-3200

___________________________________________________

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Shares of Beneficial Interest	WRE	NYSE

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 90 days. Yes ☒ No ☐

Indicate by checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large Accelerated Filer	☒	Accelerated Filer	☐
Non-accelerated Filer	☐	Smaller Reporting Company	☐
		Emerging Growth Company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

As of July 25, 2019, 80,083,801 common shares were outstanding.

WASHINGTON REAL ESTATE INVESTMENT TRUST

INDEX



		Page
Part I: Financial Information

Item 1.	Consolidated Financial Statements (Unaudited)
	Consolidated Balance Sheets	5
	Condensed Consolidated Statements of Operations	6
	Condensed Consolidated Statements of Comprehensive (Loss) Income	7
	Consolidated Statements of Equity	8
	Consolidated Statements of Cash Flows	10
	Notes to Consolidated Financial Statements	12

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	44

Item 4.	Controls and Procedures	45

Part II: Other Information

Item 1.	Legal Proceedings	46

Item 1A.	Risk Factors	46

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46

Item 3.	Defaults upon Senior Securities	46

Item 4.	Mine Safety Disclosures	46

Item 5.	Other Information	46

Item 6.	Exhibits	47

	Signatures	48

PART I

FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

The information furnished in the accompanying unaudited Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Comprehensive (Loss) Income, Consolidated Statements of 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, 2018 included in Washington Real Estate Investment Trust’s 2018 Annual Report on Form 10-K.

WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT PER SHARE DATA)



	June 30, 2019			December 31, 2018
	(Unaudited)			December 31, 2018
Assets
Land	$	597,258		$	526,572
Income producing property	2,407,898			2,055,349
	3,005,156			2,581,921
Accumulated depreciation and amortization	(697,714		)	(669,281		)
Net income producing property	2,307,442			1,912,640
Properties under development or held for future development	107,969			87,231
Total real estate held for investment, net	2,415,411			1,999,871
Investment in real estate held for sale, net	199,865			203,410
Cash and cash equivalents	5,756			6,016
Restricted cash	1,650			1,624
Rents and other receivables	65,739			63,962
Prepaid expenses and other assets	113,434			123,670
Other assets related to properties held for sale	16,242			18,551
Total assets	$	2,818,097		$	2,417,104
Liabilities
Notes payable, net	$	1,445,444		$	995,397
Mortgage notes payable, net	47,563			48,277
Line of credit	218,000			188,000
Accounts payable and other liabilities	62,603			57,946
Dividend payable	—			24,022
Advance rents	8,801			9,965
Tenant security deposits	10,588			9,501
Other liabilities related to properties held for sale	14,390			15,518
Total liabilities	1,807,389			1,348,626
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; 80,082 and 79,910 shares issued and outstanding, as of June 30, 2019 and December 31, 2018, respectively	801			799
Additional paid in capital	1,532,497			1,526,574
Distributions in excess of net income	(521,661		)	(469,085		)
Accumulated other comprehensive (loss) income	(1,272		)	9,839
Total shareholders’ equity	1,010,365			1,068,127
Noncontrolling interests in subsidiaries	343			351
Total equity	1,010,708			1,068,478
Total liabilities and equity	$	2,818,097		$	2,417,104

See accompanying notes to the consolidated financial statements.

WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Revenue
Real estate rental revenue	$	76,820		$	75,344		$	148,254		$	148,989
Expenses
Real estate expenses	28,134			26,919			54,277			53,950
Depreciation and amortization	33,044			27,552			60,101			55,183
General and administrative expenses	5,043			5,649			12,472			11,470
Lease origination expenses	492			—			870			—
Real estate impairment	—			—			8,374			1,886
	66,713			60,120			136,094			122,489
(Loss) gain on sale of real estate	(1,046		)	2,495			(1,046		)	2,495
Real estate operating income	9,061			17,719			11,114			28,995
Other expense
Interest expense	(15,252		)	(13,156		)	(27,748		)	(25,813		)
Loss on extinguishment of debt	—			—			—			(1,178		)
	(15,252		)	(13,156		)	(27,748		)	(26,991		)
(Loss) income from continuing operations	(6,191		)	4,563			(16,634		)	2,004
Discontinued operations:
Income from operations of properties sold or held for sale	7,178			6,187			13,216			12,045
Net income (loss)	987			10,750			(3,418		)	14,049
Less: Net income attributable to noncontrolling interests in subsidiaries	—			—			—			—
Net income (loss) attributable to the controlling interests	$	987		$	10,750		$	(3,418	)	$	14,049

Basic net (loss) income attributable to the controlling interests per share:
Continuing operations	$	(0.08	)	$	0.06		$	(0.21	)	$	0.02
Discontinued operations	0.09			0.08			0.17			0.15
Net income (loss) attributable to the controlling interests per share ⁽¹⁾	$	0.01		$	0.14		$	(0.05	)	$	0.18

Diluted net (loss) income attributable to the controlling interests per share:
Continuing operations	$	(0.08	)	$	0.06		$	(0.21	)	$	0.02
Discontinued operations	0.09			0.08			0.17			0.15
Net income (loss) attributable to the controlling interests per share ⁽¹⁾	$	0.01		$	0.13		$	(0.05	)	$	0.18
Weighted average shares outstanding – basic	79,934			78,520			79,908			78,501
Weighted average shares outstanding – diluted	79,934			78,616			79,908			78,582

⁽¹⁾ Earnings per share may not sum due to rounding

See accompanying notes to the consolidated financial statements.

WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(IN THOUSANDS)

(UNAUDITED)



	Three Months Ended June 30,					Six Months Ended June 30,
	2019			2018		2019			2018
Net income (loss)	$	987		$	10,750	$	(3,418	)	$	14,049
Other comprehensive (loss) income:
Unrealized (loss) gain on interest rate hedges	(6,942		)	2,223		(11,111		)	6,288
Comprehensive (loss) income	(5,955		)	12,973		(14,529		)	20,337
Less: Comprehensive income attributable to noncontrolling interests	—			—		—			—
Comprehensive (loss) income attributable to the controlling interests	$	(5,955	)	$	12,973	$	(14,529	)	$	20,337

See accompanying notes to the consolidated financial statements.

WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(IN THOUSANDS)

(UNAUDITED)



	Shares Issued and Out-standing	Shares of Beneficial Interest at Par Value		Additional Paid in Capital		Distributions in Excess of Net Income			Accumulated Other Comprehensive (Loss) Income			Total Shareholders’ Equity			Noncontrolling Interests in Subsidiaries			Total Equity
Balance at December 31, 2018	79,910	$	799	$	1,526,574	$	(469,085	)	$	9,839		$	1,068,127		$	351		$	1,068,478
Cumulative effect of change in accounting principle (see note 2)	—	—		—		(906		)	—			(906		)	—			(906		)
Net loss attributable to the controlling interests	—	—		—		(3,418		)	—			(3,418		)	—			(3,418		)
Unrealized loss on interest rate hedges	—	—		—		—			(11,111		)	(11,111		)	—			(11,111		)
Distributions to noncontrolling interests	—	—		—		—			—			—			(8		)	(8		)
Dividends	—	—		—		(48,252		)	—			(48,252		)	—			(48,252		)
Shares issued under dividend reinvestment program	64	1		1,672		—			—			1,673			—			1,673
Share grants, net of forfeitures and tax withholdings	108	1		4,251		—			—			4,252			—			4,252
Balance at June 30, 2019	80,082	$	801	$	1,532,497	$	(521,661	)	$	(1,272	)	$	1,010,365		$	343		$	1,010,708



	Shares Issued and Out-standing	Shares of Beneficial Interest at Par Value		Additional Paid in Capital		Distributions in Excess of Net Income			Accumulated Other Comprehensive (Loss) Income		Total Shareholders’ Equity			Noncontrolling Interests in Subsidiaries			Total Equity
Balance, December 31, 2017	78,510	$	785	$	1,483,980	$	(399,213	)	$	9,419	$	1,094,971		$	365		$	1,095,336
Net income attributable to the controlling interests	—	—		—		14,049			—		14,049			—			14,049
Unrealized gain on interest rate hedges	—	—		—		—			6,288		6,288			—			6,288
Distributions to noncontrolling interests	—	—		—		—			—		—			(7		)	(7		)
Dividends	—	—		—		(47,421		)	—		(47,421		)	—			(47,421		)
Shares issued under dividend reinvestment program	56	1		1,245		—			—		1,246			—			1,246
Share grants, net of forfeitures and tax withholdings	95	1		3,141		—			—		3,142			—			3,142
Balance, June 30, 2018	78,661	$	787	$	1,488,366	$	(432,585	)	$	15,707	$	1,072,275		$	358		$	1,072,633

See accompanying notes to the consolidated financial statements.

WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(IN THOUSANDS)

(UNAUDITED)



	Shares Issued and Out-standing	Shares of Beneficial Interest at Par Value		Additional Paid in Capital		Distributions in Excess of Net Income			Accumulated Other Comprehensive (Loss) Income			Total Shareholders’ Equity			Noncontrolling Interests in Subsidiaries			Total Equity
Balance at March 31, 2019	80,029	$	800	$	1,529,916	$	(498,537	)	$	5,670		$	1,037,849		$	347		$	1,038,196
Net income attributable to the controlling interests	—	—		—		987			—			987			—			987
Unrealized loss on interest rate hedges	—	—		—		—			(6,942		)	(6,942		)	—			(6,942		)
Distributions to noncontrolling interests	—	—		—		—			—			—			(4		)	(4		)
Dividends	—	—		—		(24,111		)	—			(24,111		)	—			(24,111		)
Shares issued under Dividend Reinvestment Program	21	1		575		—			—			576			—			576
Share grants, net of share grant amortization and forfeitures	32	—		2,006		—			—			2,006			—			2,006
Balance at June 30, 2019	80,082	$	801	$	1,532,497	$	(521,661	)	$	(1,272	)	$	1,010,365		$	343		$	1,010,708



	Shares Issued and Out-standing	Shares of Beneficial Interest at Par Value		Additional Paid in Capital		Distributions in Excess of Net Income			Accumulated Other Comprehensive (Loss) Income		Total Shareholders’ Equity			Noncontrolling Interests in Subsidiaries			Total Equity
Balance, March 31, 2018	78,636	$	786	$	1,485,765	$	(419,633	)	$	13,484	$	1,080,402		$	362		$	1,080,764
Net income attributable to the controlling interests	—	—		—		10,750			—		10,750			—			10,750
Unrealized gain on interest rate hedges	—	—		—		—			2,223		2,223			—			2,223
Distributions to noncontrolling interests	—	—		—		—			—		—			(4		)	(4		)
Dividends	—	—		—		(23,702		)	—		(23,702		)	—			(23,702		)
Shares issued under dividend reinvestment program	19	1		528		—			—		529			—			529
Share grants, net of forfeitures and tax withholdings	6	—		2,073		—			—		2,073			—			2,073
Balance, June 30, 2018	78,661	$	787	$	1,488,366	$	(432,585	)	$	15,707	$	1,072,275		$	358		$	1,072,633

See accompanying notes to the consolidated financial statements.



WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

	Six Months Ended June 30,
	2019			2018
Cash flows from operating activities
Net (loss) income	$	(3,418	)	$	14,049
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization	64,968			59,847
Credit (recoveries) losses on lease related receivables	(133		)	778
Real estate impairment	8,374			1,886
Loss (gain) on sale of real estate	1,046			(2,495		)
Share-based compensation expense	4,527			3,370
Amortization of debt premiums, discounts and related financing costs	1,404			1,015
Loss on extinguishment of debt	—			1,178
Changes in operating other assets	(5,781		)	(998		)
Changes in operating other liabilities	(10,444		)	(7,925		)
Net cash provided by operating activities	60,543			70,705
Cash flows from investing activities
Real estate acquisitions, net	(458,604		)	(106,400		)
Net cash received for sale of real estate	31,334			175,024
Capital improvements to real estate	(18,634		)	(18,094		)
Development in progress	(19,445		)	(15,428		)
Real estate deposits, net	(1,744		)	—
Non-real estate capital improvements	(121		)	(465		)
Net cash (used in) provided by investing activities	(467,214		)	34,637
Cash flows from financing activities
Line of credit borrowings, net	30,000			3,000
Dividends paid	(72,274		)	(71,002		)
Principal payments – mortgage notes payable	(1,231		)	(137,083		)
Repayments of unsecured term loan debt	—			(150,000		)
Proceeds from term loan	450,000			250,000
Payment of financing costs	(1,219		)	(5,565		)
Distributions to noncontrolling interests	(8		)	(7		)
Proceeds from dividend reinvestment program	1,673			1,245
Payment of tax withholdings for restricted share awards	(504		)	(300		)
Net cash provided by (used in) financing activities	406,437			(109,712		)
Net decrease in cash, cash equivalents and restricted cash	(234		)	(4,370		)
Cash, cash equivalents and restricted cash at beginning of period	7,640			12,623
Cash, cash equivalents and restricted cash at end of period	$	7,406		$	8,253



WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

	Six Months Ended June 30,
	2019			2018
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized	$	26,418		$	25,196
Change in accrued capital improvements and development costs	(5,277		)	885
Accrued selling costs related to sale of 2445 M Street	—			727

Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents	$	5,756		$	5,952
Restricted cash	1,650			2,301
Cash, cash equivalents and restricted cash	$	7,406		$	8,253

See accompanying notes to the consolidated financial statements.

WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(UNAUDITED)

NOTE 1: NATURE OF BUSINESS

Washington Real Estate Investment Trust (“WashREIT”), a Maryland real estate investment trust, is a self-administered 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 commercial office buildings, multifamily buildings and retail centers. During the 2019 Quarter, we executed two purchase and sale agreements for the sale of eight retail properties (see note 3). These properties met the criteria for classification as held for sale as of June 30, 2019 and are classified as discontinued operations. The remaining retail properties do not meet the qualitative or quantitative criteria for a reportable segment (see note 11). The acquisitions of multifamily properties and planned dispositions of retail properties are part of a strategic shift away from the retail sector to the multifamily sector. This strategic shift simplifies our portfolio to two reportable segments (office and multifamily) and reduces our exposure to future retail lease expirations.

Federal Income Taxes

We believe that we qualify as a real estate investment trust (“REIT”) under Sections 856-860 of the Internal Revenue Code of 1986, as amended (the "Code"), and intend to continue to qualify as such. We have considered the provisions of the Tax Cuts and Jobs Act (the "TCJA"), which was signed into law on December 22, 2017 and which generally took effect for taxable years beginning on or after January 1, 2018, and the TCJA does not have a material impact on our ability to continue to qualify as a REIT. To maintain our status as a REIT, we are, among other things, required to distribute 90% of our REIT taxable income (which is, generally, our ordinary taxable income, with certain modifications), excluding any net capital gains and any deductions for dividends paid to our shareholders on an annual basis. When selling a property, we generally have the option of (a) reinvesting the sales proceeds of property sold, in a way that allows us to defer recognition of some or all taxable gain realized on the sale, (b) distributing gains to the shareholders with no tax to us or (c) treating net long-term capital gains as having been distributed to our shareholders, paying the tax on the gain deemed distributed and allocating the tax paid as a credit to our shareholders.

Generally, and subject to our ongoing qualification as a REIT, no provisions for income taxes are necessary except for taxes on undistributed 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, or as calculated under the alternative minimum tax, as appropriate. As of both June 30, 2019 and December 31, 2018, our TRSs had a deferred tax asset of $1.4 million that was fully reserved. As of both June 30, 2019 and December 31, 2018, we had deferred state and local tax liabilities of $0.6 million. These deferred tax liabilities are primarily related to temporary differences in the timing of the recognition of revenue, depreciation and amortization.

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATIONS

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, 2018, except as noted in note 4 related to our adoption of ASU 2016-02, Leases (Topic 842) as of January 1, 2019.

Pronouncements Adopted



Standard/Description	Effective Date and Adoption Considerations	Effect on Financial Statements or Other significant Matters
ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). This standard amends existing lease accounting standards for both lessees and lessors. Lessees Lessees must classify most leases as either finance or operating leases. For lease contracts, or contracts with an embedded lease, with a duration of more than one year in which we are the lessee, the present value of future lease payments are recognized on our consolidated balance sheets as a right-of-use asset and a corresponding lease liability. Lessors Lease contracts currently classified as operating leases are accounted for similarly to as under existing guidance. However, lessors are required to account for each lease and non-lease component, such as common area maintenance or tenant service revenues, of a contract separately. In July 2018, the Financial Accounting Standards Board (“FASB”) issued 2018-11, Leases (Topic 842) - Targeted Improvements (“ASU 2018-11”), which provides lessors optional transition relief from implementing this aspect of ASU 2016-02 if the following criteria are met: (1) both components have the same timing and pattern of revenue and (2) if accounted for separately, both components would be classified as an operating lease. Also under ASU 2016-02, only incremental costs or initial direct costs of executing a lease contract qualify for capitalization, while prior accounting standards allowed for the capitalization of indirect leasing costs.	We adopted the new standard as of January 1, 2019.	We adopted ASU 2016-02 as of January 1, 2019 using the modified retrospective approach and by applying the transitional practical expedients noted below. Under the modified retrospective approach, we recognized a cumulative effect adjustment of $0.9 million to retained earnings as of January 1, 2019 (see note 4 for further discussion of the impact of adoption on our consolidated financial statements). We did not elect the hindsight expedient, which would have allowed us to reevaluate lease terms in calculating lease liabilities as part of adoption. Under ASU 2018-11, the FASB offered optional transition relief, if elected as a package, and applied consistently by an entity to all of its leases. Accordingly, upon adoption we elected, as a package, the practical expedients for all leases as follows: (1) we will not reassess whether any expired or existing contracts are or contain leases, (2) we will not reassess the lease classification for any expired or existing leases, and (3) we will not reassess initial direct costs for any existing leases.

Pronouncements Not Yet Adopted



Standard/Description	Effective Date and Adoption Considerations	Effect on Financial Statements or Other significant Matters
ASU 2016-13, Measurement of Credit Losses on Financial Instruments. This standard requires financial assets measured at an amortized cost basis, including trade receivables, to be presented at the net amount expected to be collected.	The new standard is effective for public entities for fiscal years beginning after December 15, 2019 and for interim periods therein, with adoption one year earlier permitted.	We are currently evaluating the impact the new standard may have on our consolidated financial statements.
ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software. This standard requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance to determine which implementation costs to capitalize as assets.	The standard is effective for public entities for fiscal years beginning after December 31, 2019 and for interim periods therein, with early adoption permitted.	We are currently evaluating the impact the new standard may have on our consolidated financial statements.

Principles of Consolidation and Basis of Presentation

The accompanying unaudited consolidated financial statements include the consolidated accounts of WashREIT, our majority-owned subsidiaries and entities in which WashREIT has a controlling 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 (“SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with 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, 2018.

Within these notes to the financial statements, we refer to the three months ended June 30, 2019 and June 30, 2018 as the “2019 Quarter” and the “2018 Quarter,” respectively, and the six months ended June 30, 2019 and June 30, 2018 as the “2019 Period” and the “2018 Period,” respectively.

Discontinued Operations

We classify properties as held for sale when they meet the necessary criteria, which include: (a) senior management commits to a plan to sell the assets, (b) the assets are available for immediate sale in their present condition subject only to terms that are usual and customary for sales of such assets, (c) an active program to locate a buyer and other actions required to complete the plan to sell the assets have been initiated, (d) the sale of the assets is probable, and transfer of the assets is expected to qualify for recognition as a completed sale, within one year, (e) the assets are being actively marketed for sale at a price that is reasonable in relation to its current fair value and (f) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. Depreciation on these properties is discontinued at the time they are classified as held for sale, but operating revenues, operating expenses and interest expense continue to be recognized until the date of sale.

Revenues and expenses of properties that are either sold or classified as held for sale are presented as discontinued operations for all periods presented in the consolidated statements of operations if the dispositions represent a strategic shift that has (or will have) a major effect on our operations and financial results. Interest on debt that can be identified as specifically attributed to these properties is included in discontinued operations. If the dispositions do not represent a strategic shift that has (or will have) a major effect on our operations and financial results, then the revenues and expenses of the properties that are classified as sold or held for sale are presented as continuing operations in the consolidated statements of operations for all periods presented.

Restricted Cash

Restricted cash includes funds escrowed for tenant security deposits, real estate tax, insurance and mortgage escrows and escrow deposits required by lenders on certain of our properties to be used for future building renovations or tenant improvements.

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.

NOTE 3: REAL ESTATE

Acquisitions

We acquired the following properties (collectively, the “Assembly Portfolio”) during the 2019 Period:



Acquisition Date	Property	Type	# of units (unaudited)	Contract Purchase Price (in thousands)
April 30, 2019	Assembly Portfolio - Virginia ⁽¹⁾	Multifamily	1,685	$	379,100
June 27, 2019	Assembly Portfolio - Maryland ⁽²⁾	Multifamily	428	82,070
			2,113	$	461,170

⁽¹⁾Consists of Assembly Alexandria, Assembly Manassas, Assembly Dulles, Assembly Leesburg, and Assembly Herndon.

⁽²⁾Consists of Assembly Germantown and Assembly Watkins Mill.

The purchase of the Assembly Portfolio (the “2019 acquisition”) was structured as a reverse exchange under Section 1031 of the Internal Revenue Code in a manner such that legal title will be held by a Qualified Intermediary until certain identified properties are sold and the reverse exchange transaction is completed. We retain all of the legal and economic benefits and obligations related to the Assembly Portfolio. As such, the Assembly Portfolio is considered to be a VIE until legal title is transferred to us upon completion of the 1031 exchange, which is expected during the third quarter of 2019. We have consolidated the assets and liabilities of the Assembly Portfolio because we have determined that WashREIT is the primary beneficiary of the Assembly Portfolio.

The results of operations from the 2019 acquisition are included in the consolidated statements of operations as of their acquisition dates and are as follows:



	Three and Six Months Ended June 30, 2019
Real estate rental revenue	$	5,453
Net loss	(3,481		)

We accounted for the 2019 acquisition as an asset acquisition. Accordingly, we capitalized $2.4 million of costs directly associated with the acquisition. We measured the value of the acquired physical assets (land and building) and in-place leases (absorption costs) by allocating the total cost of the acquisition on a relative fair value basis.

The total cost of the acquisition of the Assembly Portfolio was as follows (in thousands):



Contract purchase price	$	461,170
Credit to seller	(2,252		)
Capitalized acquisition costs	2,362
Total	$	461,280

We have recorded the total cost of the acquisition of the Assembly Portfolio as follows (in thousands):



Land	$	80,102
Building	367,427
Absorption costs	13,751
Total	$	461,280

The weighted remaining average life for the leasing commissions/absorption costs is five months.

The difference in the total cost of the acquisition of $461.3 million and the acquisition cost per the consolidated statements of cash flows of $458.6 million is primarily due to credits received at settlement totaling $2.4 million and additional acquisition-related costs not paid at closing of $0.3 million.

Development/Redevelopment

We have properties under development/redevelopment and held for current or future development as of June 30, 2019.

In the multifamily segment, we have The Trove, a multifamily development adjacent to The Wellington, and own land held for future multifamily development adjacent to Riverside Apartments. As of June 30, 2019, we had invested $81.7 million and $23.6 million, including the costs of acquiring the land, in The Trove and the development adjacent to Riverside Apartments, respectively.

We also had a redevelopment project to add rentable space at Spring Valley Village, a retail center in Washington, DC. As of June 30, 2019, we had invested $6.5 million in the redevelopment. We substantially completed major construction activities on this project during the fourth quarter of 2018 and placed into service assets totaling $4.2 million.

Properties Sold and Held for Sale

We intend to hold our properties for investment with a view to long-term appreciation, to engage in the business of acquiring, developing and owning our properties, and to make occasional sales of the properties 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. We had eight properties classified as held for sale requiring discontinuation of depreciation during the 2019 Quarter. Operating revenues, other operating expenses and interest will continue to be recognized until the date of sale.

We classified as held for sale or sold the following properties during 2019 and 2018:



Disposition Date	Property Name	Property Type	Rentable Square Feet	Contract Sales Price (in thousands)		(Loss) Gain on Sale (in thousands)
July 23, 2019	Shopping Center Portfolio ⁽¹⁾	Retail	800,000	$	485,250	N/A
N/A	Power Center Portfolio ⁽²⁾	Retail	850,000	84,600		N/A
June 26, 2019	Quantico Corporate Center	Office	272,000	33,000		(1,046		)
		Total 2019	1,922,000	$	602,850	$	(1,046	)

January 19, 2018	Braddock Metro Center	Office	356,000	$	93,000	$	—
June 28, 2018	2445 M Street	Office	292,000	101,600		2,495
		Total 2018	648,000	$	194,600	$	2,495

⁽¹⁾ Consists of five retail properties: Gateway Overlook, Wheaton Park, Olney Village Center, Bradlee Shopping Center and Shoppes of Foxchase.

⁽²⁾ Consists of three retail properties: Centre at Hagerstown, Frederick Crossing and Frederick County Square. The contract sales price listed in this table reflects the purchase and sale agreement in place as of June 30, 2019. Subsequent to the end of the 2019 Quarter, the purchase and sale agreement to sell the Power Center Portfolio was amended to include only Frederick Crossing and Frederick County Square.

During the first quarter of 2018, we executed a purchase and sale agreement to sell 2445 M Street, a 292,000 square foot office property in Washington, DC, for a contract sales price of $100.0 million, with settlement originally scheduled for the third quarter

of 2018. During 2017, we evaluated 2445 M Street for impairment and recognized a $24.1 million impairment charge in order to reduce the carrying value of the property to its estimated fair value. Upon execution of the purchase and sale agreement, the property met the criteria for classification as held for sale. Due to the property’s classification as held for sale, we recorded an additional impairment charge of $1.9 million in the first quarter of 2018 in order to reduce the carrying value of the property to its estimated fair value, less estimated selling costs. We based this fair value on the expected sales price from a potential sale. There are few observable market transactions for similar properties. This fair valuation falls into Level 2 of the fair value hierarchy due to its reliance on a quoted price in a market that is not active. During the second quarter of 2018, we executed an amendment to the purchase and sale agreement which increased the contract sales price to $101.6 million and advanced the settlement date. On June 28, 2018, we sold 2445 M Street, recognizing a gain on sale of real estate of $2.5 million.

During the first quarter of 2019, we executed a letter of intent for the sale of Quantico Corporate Center, an office property in Stafford, Virginia, consisting of two office buildings totaling 272,000 square feet. The property did not meet the criteria for classification as held for sale as of March 31, 2019. Due to the negotiations to sell the property, we evaluated Quantico Corporate Center for impairment and recognized an $8.4 million impairment charge during the first quarter of 2019 in order to reduce the carrying value of the property to its estimated fair value. We based this fair valuation on the expected sale price from a potential sale. There are few observable market transactions for similar properties. This fair valuation falls into Level 2 of the fair value hierarchy due to its reliance on a quoted price in a market that is not active. On April 22, 2019, we executed a purchase and sale agreement to sell Quantico Corporate Center for a contract sale price of $33.0 million. On June 26, 2019, we sold Quantico Corporate Center, recognizing a loss on sale of real estate of $1.0 million.

We have fully transferred control of the assets associated with the sold properties: Quantico Corporate Center, 2445 M Street and Braddock Metro Center.

In June 2019, we entered into two separate purchase and sale agreements with two separate buyers to sell the Shopping Center Portfolio and the Power Center Portfolio (collectively, the “Retail Portfolio”). As of June 30, 2019, we had a non-refundable deposit from the potential buyer of the Shopping Center Portfolio and expected to receive a non-refundable deposit from the potential buyer of the Power Center Portfolio in July 2019. As of June 30, 2019, the properties in the Retail Portfolio met the criteria for classification as held for sale. The disposition of the Retail Portfolio represents a strategic shift that will have a major effect on our financial results and we have accordingly reported the Retail Portfolio as discontinued operations. The Retail Portfolio represents a majority of our retail assets and we have determined that our retail line of business is no longer a reportable segment (see note 11).

We closed on the Shopping Center Portfolio sale transaction on July 23, 2019. Prior to closing on the disposition of the Shopping Center Portfolio, we prepaid the mortgage note secured by Olney Village Center, incurring a loss on extinguishment of debt of approximately $0.8 million, which we will recognize in the third quarter of 2019.

Subsequent to the end of the 2019 Quarter, the purchase and sale agreement to sell the Power Center Portfolio was amended to include only Frederick Crossing and Frederick County Square. We currently expect to close on this sale transaction during the third quarter of 2019. Following the amendment to the purchase and sale agreement to sell the Power Center Portfolio, we marketed Centre at Hagerstown for sale and identified a potential buyer. We have executed a letter of intent for the sale of Centre at Hagerstown to a separate buyer. We have not yet entered into a purchase and sale agreement with the potential buyer, but assuming we are able to do so, we expect to close on the sale during the third quarter of 2019. No assurance can be given that any of these power center sales will be completed.

As of June 30, 2019, we anticipate the disposition of certain properties prior to the end of their useful lives. We assessed these properties for impairment as of June 30, 2019 and did not recognize any impairment charges during the 2019 Quarter. We applied reasonable estimates and judgments in evaluating each of the properties as of June 30, 2019. Should external or internal circumstances change requiring the need to shorten holding periods or adjust future estimated cash flows from our properties, we could be required to record impairment charges in the future.

Discontinued Operations

The results of the Retail Portfolio are classified as discontinued operations and are summarized as follows (amounts in thousands, except for share data):



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Real estate rental revenue	$	12,334		$	11,262		$	24,074		$	22,498
Real estate expenses	(2,641		)	(2,584		)	(5,708		)	(5,454		)
Depreciation and amortization	(2,377		)	(2,326		)	(4,867		)	(4,664		)
Interest expense	(138		)	(165		)	(283		)	(335		)
Income from operations of properties sold or held for sale	$	7,178		$	6,187		$	13,216		$	12,045

Basic net income per share	$	0.09		$	0.08		$	0.17		$	0.15
Diluted net income per share	$	0.09		$	0.08		$	0.17		$	0.15

Capital expenditures	$	810		$	617		$	1,583		$	905

As of June 30, 2019 and December 31, 2018, assets related to the Retail Portfolio were as follows (in thousands):



	June 30, 2019			December 31, 2018
Land	$	88,087		$	88,087
Income producing property	217,313			216,577
	305,400			304,664
Accumulated depreciation and amortization	(105,535		)	(101,254		)
Income producing property, net	199,865			203,410
Rents and other receivables	9,526			9,898
Prepaid expenses and other assets	6,716			8,653
Total assets	$	216,107		$	221,961

As of June 30, 2019 and December 31, 2018, liabilities related to the Retail Portfolio were as follows (in thousands):



	June 30, 2019		December 31, 2018
Mortgage notes payable, net	$	10,476	$	11,515
Accounts payable and other liabilities	1,570		1,620
Advance rents	1,628		1,771
Tenant security deposits	716		612
Liabilities related to properties sold or held for sale	$	14,390	$	15,518

NOTE 4: LEASE ACCOUNTING

Leasing as a Lessor

Revenue Recognition

We lease multifamily properties under operating leases with terms of generally one year or less. We lease commercial properties (our office and retail properties) under operating leases with an average term of seven years. Substantially all commercial leases contain fixed escalations or, in some instances, changes based on the Consumer Price Index, which occur at specified times during the term of the lease. In certain commercial leases, variable lease income, such as percentage rent, is recognized when rents are earned. We recognize rental income and rental abatements from our multifamily and commercial leases when earned on a straight-line basis over the lease term. Recognition of rental income commences when control of the leased space has been transferred to the tenant.

We recognize cost reimbursement income from pass-through expenses on an accrual basis over the periods in which the expenses were incurred. Pass-through expenses are comprised of real estate taxes, operating expenses and common area maintenance costs which are reimbursed by tenants in accordance with specific allowable costs per tenant lease agreements.

Parking revenues are derived from leases, monthly parking agreements and transient parking. We recognize parking revenues from leases on a straight-line basis over the lease term and other parking revenues as earned. We recognize transient parking revenue when our performance obligation is met.

Upon adoption of ASU 2016-02, we elected not to bifurcate lease contracts into lease and non-lease components, since the timing and pattern of revenue is not materially different and the non-lease components are not the primary component of the lease. Accordingly, both lease and non-lease components are presented in “Real estate rental revenue” in our consolidated financial statements. The adoption of ASU 2016-02 did not result in a material change to our recognition of real estate rental revenue.

Accounts Receivable

Lease related receivables, which include contractual amounts accrued and unpaid from tenants and accrued straight-line rents receivable, are reduced for credit losses. Such amounts are recognized as a reduction to real estate rental revenues. We evaluate the collectability of lease receivables monthly using several factors including a lessee’s creditworthiness. We recognize the credit loss on lease related receivables when, in the opinion of management, collection of substantially all lease payments is not probable. When collectability is determined not probable, any lease income recognized subsequent to recognizing the credit loss is limited to the lesser of the lease income reflected on a straight-line basis or cash collected. The adoption of ASU 2016-02 resulted in an adjustment to our opening distributions in excess of net income balance of $0.9 million, associated with lease related receivables where collection of substantially all operating lease payments was not probable as of January 1, 2019.

Future Minimum Rental Income

As of June 30, 2019, non-cancelable commercial operating leases provide for future minimum rental income from continuing operations as follows (in thousands). Apartment leases are not included as the terms are generally for one year or less.



2019	$	77,813
2020	147,274
2021	129,169
2022	113,740
2023	96,577
Thereafter	308,503
	$	873,076

As of December 31, 2018, non-cancelable commercial operating leases provide for future minimum rental income from continuing operations as follows (in thousands):



2019	$	154,260
2020	143,566
2021	125,008
2022	108,688
2023	89,969
Thereafter	253,749
	$	875,240

Leasing as a Lessee

2000 M Street, an office property in Washington, DC, is subject to an operating ground lease with a remaining term of 52 years. Rental payments under this lease are subject to percentage rent variable payments, which are not included as part of our measurement of straight-line rental expense. We recognized variable rental payments of $0.3 million during each of the 2019 and 2018 Quarters and $0.6 million during each of the 2019 and 2018 Periods.

Upon adoption of ASU 2016-02, we recognized a right of use asset (included in Income producing property) and lease liability (included in Accounts payable and other liabilities) of $4.2 million. We used a discount rate of approximately 5.9%, which was derived from our assessment of securitized rates for similar assets and credit quality. We recognized $0.1 million of right-of-use and lease liability amortization during each of the 2019 Quarter and 2019 Period. In addition, as of January 1, 2019 we reclassified the associated below-market ground lease intangible asset of $10.0 million, net of accumulated amortization of $2.1 million, from Prepaid expenses and other assets to Income producing property on our consolidated balance sheets.