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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 September 30, 2019
OR
|
| |
☐ | 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 October 24, 2019, 80,594,744 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. | | |
| | |
| | |
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 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)
|
| | | | | | | |
| September 30, 2019 | | December 31, 2018 |
| (Unaudited) | |
Assets | | | |
Land | $ | 611,797 |
| | $ | 526,572 |
|
Income producing property | 2,486,966 |
| | 2,055,349 |
|
| 3,098,763 |
| | 2,581,921 |
|
Accumulated depreciation and amortization | (724,433 | ) | | (669,281 | ) |
Net income producing property | 2,374,330 |
| | 1,912,640 |
|
Properties under development or held for future development | 110,572 |
| | 87,231 |
|
Total real estate held for investment, net | 2,484,902 |
| | 1,999,871 |
|
Investment in real estate held for sale, net | — |
| | 203,410 |
|
Cash and cash equivalents | 12,931 |
| | 6,016 |
|
Restricted cash | 1,578 |
| | 1,624 |
|
Rents and other receivables | 69,414 |
| | 63,962 |
|
Prepaid expenses and other assets | 106,251 |
| | 123,670 |
|
Other assets related to properties held for sale | — |
| | 18,551 |
|
Total assets | $ | 2,675,076 |
| | $ | 2,417,104 |
|
Liabilities | | | |
Notes payable, net | $ | 996,455 |
| | $ | 995,397 |
|
Mortgage notes payable, net | 47,319 |
| | 48,277 |
|
Line of credit | 211,000 |
| | 188,000 |
|
Accounts payable and other liabilities | 75,735 |
| | 57,946 |
|
Dividend payable | — |
| | 24,022 |
|
Advance rents | 9,475 |
| | 9,965 |
|
Tenant security deposits | 10,849 |
| | 9,501 |
|
Other liabilities related to properties held for sale | — |
| | 15,518 |
|
Total liabilities | 1,350,833 |
| | 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; 80,292 and 79,910 shares issued and outstanding, as of September 30, 2019 and December 31, 2018, respectively | 803 |
| | 799 |
|
Additional paid in capital | 1,539,734 |
| | 1,526,574 |
|
Distributions in excess of net income | (212,978 | ) | | (469,085 | ) |
Accumulated other comprehensive (loss) income | (3,659 | ) | | 9,839 |
|
Total shareholders’ equity | 1,323,900 |
| | 1,068,127 |
|
Noncontrolling interests in subsidiaries | 343 |
| | 351 |
|
Total equity | 1,324,243 |
| | 1,068,478 |
|
Total liabilities and equity | $ | 2,675,076 |
| | $ | 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 September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Revenue | | | | | | | |
Real estate rental revenue | $ | 80,259 |
| | $ | 71,001 |
| | $ | 228,513 |
| | $ | 219,990 |
|
Expenses | | | | | | | |
Real estate expenses | 30,692 |
| | 25,988 |
| | 84,969 |
| | 79,938 |
|
Depreciation and amortization | 37,340 |
| | 27,951 |
| | 97,441 |
| | 83,134 |
|
General and administrative expenses | 6,045 |
| | 5,267 |
| | 18,517 |
| | 16,737 |
|
Lease origination expenses | 416 |
| | — |
| | 1,286 |
| | — |
|
Real estate impairment | — |
| | — |
| | 8,374 |
| | 1,886 |
|
| 74,493 |
| | 59,206 |
| | 210,587 |
| | 181,695 |
|
(Loss) gain on sale of real estate | — |
| | — |
| | (1,046 | ) | | 2,495 |
|
Real estate operating income | 5,766 |
| | 11,795 |
| | 16,880 |
| | 40,790 |
|
Other expense | | | | | | | |
Interest expense | (14,198 | ) | | (12,342 | ) | | (41,946 | ) | | (38,155 | ) |
Loss on extinguishment of debt | — |
| | — |
| | — |
| | (1,178 | ) |
| (14,198 | ) | | (12,342 | ) | | (41,946 | ) | | (39,333 | ) |
(Loss) income from continuing operations | (8,432 | ) | | (547 | ) | | (25,066 | ) | | 1,457 |
|
Discontinued operations: | | | | | | | |
Income from operations of properties sold or held for sale | 2,942 |
| | 6,440 |
| | 16,158 |
| | 18,485 |
|
Gain on sale of real estate | 339,024 |
| | — |
| | 339,024 |
| | — |
|
Loss on extinguishment of debt | (764 | ) | | — |
| | (764 | ) | | — |
|
Income from discontinued operations | 341,202 |
| | 6,440 |
| | 354,418 |
| | 18,485 |
|
Net income | 332,770 |
| | 5,893 |
| | 329,352 |
| | 19,942 |
|
Less: Net income attributable to noncontrolling interests in subsidiaries | — |
| | — |
| | — |
| | — |
|
Net income attributable to the controlling interests | $ | 332,770 |
| | $ | 5,893 |
| | $ | 329,352 |
| | $ | 19,942 |
|
| | | | | | | |
Basic net (loss) income attributable to the controlling interests per share: | | | | | | | |
Continuing operations | $ | (0.10 | ) | | $ | (0.01 | ) | | $ | (0.31 | ) | | $ | 0.01 |
|
Discontinued operations | 4.24 |
| | 0.08 |
| | 4.41 |
| | 0.23 |
|
Net income attributable to the controlling interests per share (1) | $ | 4.14 |
| | $ | 0.07 |
| | $ | 4.10 |
| | $ | 0.25 |
|
| | | | | | | |
Diluted net (loss) income attributable to the controlling interests per share: | | | | | | | |
Continuing operations | $ | (0.10 | ) | | $ | (0.01 | ) | | $ | (0.31 | ) | | $ | 0.01 |
|
Discontinued operations | 4.24 |
| | 0.08 |
| | 4.41 |
| | 0.23 |
|
Net income attributable to the controlling interests per share (1) | $ | 4.14 |
| | $ | 0.07 |
| | $ | 4.10 |
| | $ | 0.25 |
|
Weighted average shares outstanding – basic | 79,981 |
| | 79,076 |
| | 79,933 |
| | 78,695 |
|
Weighted average shares outstanding – diluted | 79,981 |
| | 79,076 |
| | 79,933 |
| | 78,802 |
|
(1)
See accompanying notes to the consolidated financial statements.
WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Net income | $ | 332,770 |
| | $ | 5,893 |
| | $ | 329,352 |
| | $ | 19,942 |
|
Other comprehensive (loss) income: | | | | | | | |
Unrealized (loss) gain on interest rate hedges | (2,387 | ) | | 1,474 |
| | (13,498 | ) | | 7,762 |
|
Comprehensive income | 330,383 |
| | 7,367 |
| | 315,854 |
| | 27,704 |
|
Less: Comprehensive income attributable to noncontrolling interests | — |
| | — |
| | — |
| | — |
|
Comprehensive income attributable to the controlling interests | $ | 330,383 |
| | $ | 7,367 |
| | $ | 315,854 |
| | $ | 27,704 |
|
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 Income (Loss) | | Total Shareholders’ Equity | | Noncontrolling Interests in Subsidiaries | | Total Equity |
Balance, 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 4) | — |
| | — |
| | — |
| | (906 | ) | | — |
| | (906 | ) | | — |
| | (906 | ) |
Net income attributable to the controlling interests | — |
| | — |
| | — |
| | 329,352 |
| | — |
| | 329,352 |
| | — |
| | 329,352 |
|
Unrealized loss on interest rate hedges | — |
| | — |
| | — |
| | — |
| | (13,498 | ) | | (13,498 | ) | | — |
| | (13,498 | ) |
Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (8 | ) | | (8 | ) |
Dividends | — |
| | — |
| | — |
| | (72,339 | ) | | — |
| | (72,339 | ) | | — |
| | (72,339 | ) |
Equity issuances, net of issuance costs | 145 |
| | 2 |
| | 3,679 |
| | — |
| | — |
| | 3,681 |
| | — |
| | 3,681 |
|
Shares issued under dividend reinvestment program | 128 |
| | 1 |
| | 3,429 |
| | — |
| | — |
| | 3,430 |
| | — |
| | 3,430 |
|
Share grants, net of forfeitures and tax withholdings | 109 |
| | 1 |
| | 6,052 |
| | — |
| | — |
| | 6,053 |
| | — |
| | 6,053 |
|
Balance, September 30, 2019 | 80,292 |
| | $ | 803 |
| | $ | 1,539,734 |
| | $ | (212,978 | ) | | $ | (3,659 | ) | | $ | 1,323,900 |
| | $ | 343 |
| | $ | 1,324,243 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 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 | — |
| | — |
| | — |
| | 19,942 |
| | — |
| | 19,942 |
| | — |
| | 19,942 |
|
Unrealized gain on interest rate hedges | — |
| | — |
| | — |
| | — |
| | 7,762 |
| | 7,762 |
| | — |
| | 7,762 |
|
Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (11 | ) | | (11 | ) |
Dividends | — |
| | — |
| | — |
| | (71,478 | ) | | — |
| | (71,478 | ) | | — |
| | (71,478 | ) |
Equity issuances, net of issuance costs | 1,165 |
| | 11 |
| | 35,461 |
| | — |
| | — |
| | 35,472 |
| | — |
| | 35,472 |
|
Shares issued under dividend reinvestment program | 74 |
| | 1 |
| | 1,810 |
| | — |
| | — |
| | 1,811 |
| | — |
| | 1,811 |
|
Share grants, net of forfeitures and tax withholdings | 95 |
| | 1 |
| | 4,874 |
| | — |
| | — |
| | 4,875 |
| | — |
| | 4,875 |
|
Balance, September 30, 2018 | 79,844 |
| | $ | 798 |
| | $ | 1,526,125 |
| | $ | (450,749 | ) | | $ | 17,181 |
| | $ | 1,093,355 |
| | $ | 354 |
| | $ | 1,093,709 |
|
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 | | Total Shareholders’ Equity | | Noncontrolling Interests in Subsidiaries | | Total Equity |
Balance, June 30, 2019 | 80,082 |
| | $ | 801 |
| | $ | 1,532,497 |
| | $ | (521,661 | ) | | $ | (1,272 | ) | | $ | 1,010,365 |
| | $ | 343 |
| | $ | 1,010,708 |
|
Net income attributable to the controlling interests | — |
| | — |
| | — |
| | 332,770 |
| | — |
| | 332,770 |
| | — |
| | 332,770 |
|
Unrealized loss on interest rate hedges | — |
| | — |
| | — |
| | — |
| | (2,387 | ) | | (2,387 | ) | | — |
| | (2,387 | ) |
Dividends | — |
| | — |
| | — |
| | (24,087 | ) | | — |
| | (24,087 | ) | | — |
| | (24,087 | ) |
Equity offerings, net of issuance costs | 145 |
| | 2 |
| | 3,679 |
| | — |
| | — |
| | 3,681 |
| | — |
| | 3,681 |
|
Shares issued under Dividend Reinvestment Program | 64 |
| | — |
| | 1,757 |
| | — |
| | — |
| | 1,757 |
| | — |
| | 1,757 |
|
Share grants, net of share grant amortization and forfeitures | 1 |
| | — |
| | 1,801 |
| | — |
| | — |
| | 1,801 |
| | — |
| | 1,801 |
|
Balance, September 30, 2019 | 80,292 |
| | $ | 803 |
| | $ | 1,539,734 |
| | $ | (212,978 | ) | | $ | (3,659 | ) | | $ | 1,323,900 |
| | $ | 343 |
| | $ | 1,324,243 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 Income | | Total Shareholders’ Equity | | Noncontrolling Interests in Subsidiaries | | Total Equity |
Balance, June 30, 2018 | 78,661 |
| | $ | 787 |
| | $ | 1,488,366 |
| | $ | (432,585 | ) | | $ | 15,707 |
| | $ | 1,072,275 |
| | $ | 358 |
| | $ | 1,072,633 |
|
Net income attributable to the controlling interests | — |
| | — |
| | — |
| | 5,893 |
| | — |
| | 5,893 |
| | — |
| | 5,893 |
|
Unrealized gain on interest rate hedges | — |
| | — |
| | — |
| | — |
| | 1,474 |
| | 1,474 |
| | — |
| | 1,474 |
|
Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (4 | ) | | (4 | ) |
Dividends | — |
| | — |
| | — |
| | (24,057 | ) | | — |
| | (24,057 | ) | | — |
| | (24,057 | ) |
Equity issuances, net of issuance costs | 1,165 |
| | 11 |
| | 35,461 |
| | — |
| | — |
| | 35,472 |
| | — |
| | 35,472 |
|
Shares issued under dividend reinvestment program | 18 |
| | — |
| | 565 |
| | — |
| | — |
| | 565 |
| | — |
| | 565 |
|
Share grants, net of forfeitures and tax withholdings | — |
| | — |
| | 1,733 |
| | — |
| | — |
| | 1,733 |
| | — |
| | 1,733 |
|
Balance, September 30, 2018 | 79,844 |
| | $ | 798 |
| | $ | 1,526,125 |
| | $ | (450,749 | ) | | $ | 17,181 |
| | $ | 1,093,355 |
| | $ | 354 |
| | $ | 1,093,709 |
|
See accompanying notes to the consolidated financial statements.
|
| | | | | | | |
WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES |
| | | |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
(IN THOUSANDS) |
(UNAUDITED) |
| | | |
| Nine Months Ended September 30, |
| 2019 | | 2018 |
Cash flows from operating activities | | | |
Net income | $ | 329,352 |
| | $ | 19,942 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 102,367 |
| | 90,119 |
|
Credit (recoveries) losses on lease related receivables | (45 | ) | | 1,077 |
|
Real estate impairment | 8,374 |
| | 1,886 |
|
Gain on sale of real estate | (337,978 | ) | | (2,495 | ) |
Share-based compensation expense | 6,265 |
| | 5,064 |
|
Amortization of debt premiums, discounts and related financing costs | 2,632 |
| | 1,565 |
|
Loss on extinguishment of debt | 764 |
| | 1,178 |
|
Changes in operating other assets | (12,353 | ) | | (9,233 | ) |
Changes in operating other liabilities | (8,098 | ) | | (8,229 | ) |
Net cash provided by operating activities | 91,280 |
| | 100,874 |
|
Cash flows from investing activities | | | |
Real estate acquisitions, net | (528,588 | ) | | (106,400 | ) |
Net cash received for sale of real estate | 582,551 |
| | 174,297 |
|
Capital improvements to real estate | (30,588 | ) | | (33,437 | ) |
Development in progress | (26,884 | ) | | (25,036 | ) |
Non-real estate capital improvements | (317 | ) | | (626 | ) |
Net cash (used in) provided by investing activities | (3,826 | ) | | 8,798 |
|
Cash flows from financing activities | | | |
Line of credit borrowings, net | 23,000 |
| | 17,000 |
|
Dividends paid | (96,361 | ) | | (95,059 | ) |
Principal payments – mortgage notes payable | (12,596 | ) | | (169,480 | ) |
Repayments of unsecured term loan debt | (450,000 | ) | | (150,000 | ) |
Proceeds from term loan | 450,000 |
| | 250,000 |
|
Payment of financing costs | (1,219 | ) | | (5,565 | ) |
Distributions to noncontrolling interests | (8 | ) | | (11 | ) |
Proceeds from dividend reinvestment program | 3,430 |
| | 1,811 |
|
Net proceeds from equity issuances | 3,681 |
| | 35,472 |
|
Payment of tax withholdings for restricted share awards | (512 | ) | | (301 | ) |
Net cash used in financing activities | (80,585 | ) | | (116,133 | ) |
Net increase (decrease) in cash, cash equivalents and restricted cash | 6,869 |
| | (6,461 | ) |
Cash, cash equivalents and restricted cash at beginning of period | 7,640 |
| | 12,623 |
|
Cash, cash equivalents and restricted cash at end of period | $ | 14,509 |
| | $ | 6,162 |
|
| | | |
|
| | | | | | | |
WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES |
| | | |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
(IN THOUSANDS) |
(UNAUDITED) |
| | | |
| Nine Months Ended September 30, |
| 2019 | | 2018 |
Supplemental disclosure of cash flow information: | | | |
Cash paid for interest, net of amounts capitalized | $ | 34,481 |
| | $ | 32,021 |
|
Change in accrued capital improvements and development costs | 13,638 |
| | 6,352 |
|
| | | |
Reconciliation of cash, cash equivalents and restricted cash: | | | |
Cash and cash equivalents | $ | 12,931 |
| | $ | 4,810 |
|
Restricted cash | 1,578 |
| | 1,352 |
|
Cash, cash equivalents and restricted cash | $ | 14,509 |
| | $ | 6,162 |
|
See accompanying notes to the consolidated financial statements.
WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 and multifamily buildings. During the 2019 Quarter (as defined below), we sold eight retail properties (see note 3). These properties met the criteria for classification 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 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. 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.
Seven of the eight retail properties sold during the 2019 Quarter were identified for deferred exchanges under Section 1031 of the Code (see note 3). We acquired eight multifamily replacement properties (see note 3) during the 2019 Period (as defined below).
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 September 30, 2019 and December 31, 2018, our TRSs had a deferred tax asset of $1.4 million that was fully reserved. As of both September 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 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 September 30, 2019 and September 30, 2018 as the “2019 Quarter” and the “2018 Quarter,” respectively, and the nine months ended September 30, 2019 and September 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 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 |
|
July 23, 2019 | | Cascade at Landmark | | Multifamily | | 277 |
| | 69,750 |
|
| | | | | | 2,390 |
| | $ | 530,920 |
|
(1) Consists of Assembly Alexandria, Assembly Manassas, Assembly Dulles, Assembly Leesburg, and Assembly Herndon.
(2) Consists of Assembly Germantown and Assembly Watkins Mill. The Assembly Portfolio - Virginia and Assembly Portfolio - Maryland properties are collectively the “Assembly Portfolio.”
The purchases of the Assembly Portfolio and Cascade at Landmark were structured as exchanges under Section 1031 of the Code in a manner such that legal title was held by an Exchange Accommodator until certain identified properties were sold and the deferred exchanges were completed. We retained all of the legal and economic benefits and obligations related to the Assembly Portfolio and Cascade at Landmark. As such, the Assembly Portfolio and Cascade at Landmark were considered to be variable interest entities until legal title was transferred to us upon completion of the 1031 exchanges, which occurred during the 2019 Quarter. We consolidated the assets and liabilities of the Assembly Portfolio and Cascade at Landmark because we determined that WashREIT was the primary beneficiary of the Assembly Portfolio and Cascade at Landmark.
The results of operations from the 2019 acquisitions are included in the consolidated statements of operations as of their acquisition dates and are as follows:
|
| | | | | | | |
| Three Months Ended September 30, 2019 | | Nine Months Ended September 30, 2019 |
Real estate rental revenue | $ | 11,013 |
| | $ | 16,467 |
|
Net loss | (4,698 | ) | | (8,179 | ) |
We accounted for the 2019 acquisitions as asset acquisitions. Accordingly, we capitalized $2.9 million of costs directly associated with the acquisitions. 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 acquisitions on a relative fair value basis.
The total cost of the 2019 acquisitions was as follows (in thousands):
|
| | | | | | | | | | | |
| Assembly Portfolio | | Cascade at Landmark | | Total |
Contract purchase price | $ | 461,170 |
| | $ | 69,750 |
| | $ | 530,920 |
|
Credit to buyer | (2,252 | ) | | — |
| | (2,252 | ) |
Capitalized acquisition costs | 2,362 |
| | 498 |
| | 2,860 |
|
Total | $ | 461,280 |
| | $ | 70,248 |
| | $ | 531,528 |
|
We have recorded the total cost of the 2019 acquisitions as follows (in thousands):
|
| | | |
Land | $ | 92,391 |
|
Building | 423,663 |
|
Absorption costs | 15,474 |
|
Total | $ | 531,528 |
|
The weighted remaining average life for the absorption costs is two months.
The difference in the total cost of the acquisitions of $531.5 million and the acquisition cost per the consolidated statements of cash flows of $528.6 million is primarily due to credits received at settlement totaling $2.9 million.
Development/Redevelopment
We have properties under development/redevelopment and held for current or future development as of September 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 September 30, 2019, we had invested $95.7 million and $24.2 million, including the costs of acquiring the land, in The Trove and the development adjacent to Riverside Apartments, respectively. We substantially completed major construction activities for The Trove garage levels 1-5 during the 2019 Quarter and placed into service assets totaling $12.0 million.
We also had a redevelopment project to add rentable space at Spring Valley Village, a retail center in Washington, DC. As of September 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 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) |
June 26, 2019 | | Quantico Corporate Center (1) | | Office | | 272,000 | | $ | 33,000 |
| | $ | (1,046 | ) |
July 23, 2019 | | Shopping Center Portfolio (2) | | Retail | | 800,000 | | 485,250 |
| | 333,023 |
|
August 21, 2019 | | Frederick Crossing and Frederick County Square | | Retail | | 520,000 | | 57,500 |
| | 9,507 |
|
August 27, 2019 | | Centre at Hagerstown | | Retail | | 330,000 | | 23,500 |
| | (3,506 | ) |
| | | | Total 2019 | | 1,922,000 | | $ | 599,250 |
| | $ | 337,978 |
|
| | | | | | | |
|
| | |
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 925 and 1000 Corporate Drive.
(2) Consists of five retail properties: Gateway Overlook, Wheaton Park, Olney Village Center, Bradlee Shopping Center and Shoppes of Foxchase.
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.
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 (Frederick Crossing, Frederick County Square and Centre at Hagerstown). 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 (as defined below) met the criteria for classification as held for sale.
We closed on the Shopping Center Portfolio sale transaction on July 23, 2019, recognizing a gain on sale of real estate of $333.0 million. 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 recognized in the 2019 Quarter.
Subsequent to the end of the second quarter of 2019, the purchase and sale agreement to sell the Power Center Portfolio was amended to include only Frederick Crossing and Frederick County Square. We closed on the sales of these assets on August 21, 2019, recognizing a gain on sale of real estate of $9.5 million. 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 separate buyer. We closed on the sales of this asset on August 27, 2019, recognizing a loss on sale of real estate of $3.5 million.
References to the “Retail Portfolio” include the Shopping Center Portfolio, Frederick Crossing, Frederick County Square and Centre at Hagerstown. 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 have fully transferred control of the assets associated with the sold properties.
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 September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Real estate rental revenue | $ | 4,126 |
| | $ | 11,500 |
| | $ | 28,200 |
| | $ | 33,998 |
|
Real estate expenses | (1,095 | ) | | (2,582 | ) | | (6,803 | ) | | (8,036 | ) |
Depreciation and amortization | (59 | ) | | (2,321 | ) | | (4,926 | ) | | (6,985 | ) |
Interest expense | (30 | ) | | (157 | ) | | (313 | ) | | (492 | ) |
Loss on extinguishment of debt | (764 | ) | | — |
| | (764 | ) | | — |
|
Gain on sale of real estate | 339,024 |
| | — |
| | 339,024 |
| | — |
|
Income from discontinued operations | $ | 341,202 |
| | $ | 6,440 | |