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 September 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 October 24, 2019, 80,594,744 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 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	43

Item 4.	Controls and Procedures	44

Part II: Other Information

Item 1.	Legal Proceedings	45

Item 1A.	Risk Factors	45

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45

Item 3.	Defaults upon Senior Securities	45

Item 4.	Mine Safety Disclosures	45

Item 5.	Other Information	45

Item 6.	Exhibits	46

	Signatures	47

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)			December 31, 2018
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⁾ 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 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