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 March 31, 2020



☐	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

___________________________________________________

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 check mark 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 April 23, 2020, 82,317,095 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	7
	Consolidated Statements of Equity	8
	Consolidated Statements of Cash Flows	9
	Notes to Consolidated Financial Statements	11

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	36

Item 4.	Controls and Procedures	37

Part II: Other Information

Item 1.	Legal Proceedings	38

Item 1A.	Risk Factors	38

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40

Item 3.	Defaults upon Senior Securities	40

Item 4.	Mine Safety Disclosures	40

Item 5.	Other Information	40

Item 6.	Exhibits	41

	Signatures	42

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, 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, 2019 included in Washington Real Estate Investment Trust’s 2019 Annual Report on Form 10-K, as amended by Amendment No. 1 to the Annual Report on Form 10-K, filed on March 6, 2020.

WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT PER SHARE DATA)



	March 31, 2020			December 31, 2019
	(Unaudited)			December 31, 2019
Assets
Land	$	574,025		$	566,807
Income producing property	2,444,525			2,392,415
	3,018,550			2,959,222
Accumulated depreciation and amortization	(719,446		)	(693,610		)
Net income producing property	2,299,104			2,265,612
Properties under development or held for future development	89,791			124,193
Total real estate held for investment, net	2,388,895			2,389,805
Investment in real estate held for sale, net	57,028			57,028
Cash and cash equivalents	20,601			12,939
Restricted cash	634			1,812
Rents and other receivables	64,617			65,259
Prepaid expenses and other assets	84,722			95,149
Other assets related to properties held for sale	6,123			6,336
Total assets	$	2,622,620		$	2,628,328
Liabilities
Notes payable, net	$	997,075		$	996,722
Mortgage notes payable, net	—			47,074
Line of credit	148,000			56,000
Accounts payable and other liabilities	98,966			71,136
Dividend payable	—			24,668
Advance rents	8,681			9,353
Tenant security deposits	10,875			10,595
Other liabilities related to properties held for sale	875			718
Total liabilities	1,264,472			1,216,266
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; 82,315 and 82,099 shares issued and outstanding, as of March 31, 2020 and December 31, 2019, respectively	823			821
Additional paid in capital	1,596,242			1,592,487
Distributions in excess of net income	(206,506		)	(183,405		)
Accumulated other comprehensive (loss) income	(32,744		)	1,823
Total shareholders’ equity	1,357,815			1,411,726
Noncontrolling interests in subsidiaries	333			336
Total equity	1,358,148			1,412,062
Total liabilities and equity	$	2,622,620		$	2,628,328

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 March 31,
	2020			2019
Revenue
Real estate rental revenue	$	76,792		$	71,434
Expenses
Real estate expenses	28,639			26,143
Depreciation and amortization	29,720			27,057
General and administrative expenses	6,337			7,807
Real estate impairment	—			8,374
	64,696			69,381
Real estate operating income	12,096			2,053
Other expense
Interest expense	(10,845		)	(12,496		)
Gain on extinguishment of debt	468			—
	(10,377		)	(12,496		)
Income (loss) from continuing operations	1,719			(10,443		)
Discontinued operations:
Income from operations of properties sold or held for sale	—			6,038
Net income (loss)	1,719			(4,405		)
Less: Net income attributable to noncontrolling interests in subsidiaries	—			—
Net income (loss) attributable to the controlling interests	$	1,719		$	(4,405	)

Basic net income (loss) attributable to the controlling interests per share:
Continuing operations	$	0.02		$	(0.13	)
Discontinued operations	—			0.08
Net income (loss) attributable to the controlling interests per share ⁽¹⁾	$	0.02		$	(0.06	)

Diluted net income (loss) attributable to the controlling interests per share:
Continuing operations	$	0.02		$	(0.13	)
Discontinued operations	—			0.08
Net income (loss) attributable to the controlling interests per share ⁽¹⁾	$	0.02		$	(0.06	)
Weighted average shares outstanding – basic	82,086			79,881
Weighted average shares outstanding – diluted	82,287			79,881

______________________________


⁽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

(IN THOUSANDS)

(UNAUDITED)



	Three Months Ended March 31,
	2020			2019
Net income (loss)	$	1,719		$	(4,405	)
Other comprehensive loss:
Unrealized loss on interest rate hedges	(34,567		)	(4,169		)
Comprehensive loss	(32,848		)	(8,574		)
Less: Comprehensive income attributable to noncontrolling interests	—			—
Comprehensive loss attributable to the controlling interests	$	(32,848	)	$	(8,574	)

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, 2019	82,099	$	821	$	1,592,487	$	(183,405	)	$	1,823		$	1,411,726		$	336		$	1,412,062
Net income attributable to the controlling interests	—	—		—		1,719			—			1,719			—			1,719
Unrealized loss on interest rate hedges	—	—		—		—			(34,567		)	(34,567		)	—			(34,567		)
Distributions to noncontrolling interests	—	—		—		—			—			—			(3		)	(3		)
Dividends	—	—		—		(24,820		)	—			(24,820		)	—			(24,820		)
Equity issuances, net of issuance costs	46	1		1,241		—			—			1,242			—			1,242
Shares issued under dividend reinvestment program	35	—		921		—			—			921			—			921
Share grants, net of forfeitures and tax withholdings	135	1		1,593		—			—			1,594			—			1,594
Balance, March 31, 2020	82,315	$	823	$	1,596,242	$	(206,506	)	$	(32,744	)	$	1,357,815		$	333		$	1,358,148



	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	—	—		—		(906		)	—			(906		)	—			(906		)
Net loss attributable to the controlling interests	—	—		—		(4,405		)	—			(4,405		)	—			(4,405		)
Unrealized loss on interest rate hedges	—	—		—		—			(4,169		)	(4,169		)	—			(4,169		)
Distributions to noncontrolling interests	—	—		—		—			—			—			(4		)	(4		)
Dividends	—	—		—		(24,141		)	—			(24,141		)	—			(24,141		)
Shares issued under dividend reinvestment program	43	—		1,097		—			—			1,097			—			1,097
Share grants, net of forfeitures and tax withholdings	76	1		2,245		—			—			2,246			—			2,246
Balance, March 31, 2019	80,029	$	800	$	1,529,916	$	(498,537	)	$	5,670		$	1,037,849		$	347		$	1,038,196

See accompanying notes to the consolidated financial statements.



WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

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

	Three Months Ended March 31,
	2020			2019
Cash flows from operating activities
Net income (loss)	$	1,719		$	(4,405	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	29,720			29,547
Credit losses on lease related receivables	923			—
Real estate impairment	—			8,374
Share-based compensation expense	1,778			2,826
Amortization of debt premiums, discounts and related financing costs	645			536
Loss on extinguishment of debt	(468		)	—
Changes in operating other assets	895			(2,035		)
Changes in operating other liabilities	(6,352		)	(7,265		)
Net cash provided by operating activities	28,860			27,578
Cash flows from investing activities
Capital improvements to real estate	(10,846		)	(7,281		)
Development in progress	(9,402		)	(6,091		)
Non-real estate capital improvements	(94		)	(67		)
Net cash used in investing activities	(20,342		)	(13,439		)
Cash flows from financing activities
Line of credit borrowings, net	92,000			40,000
Dividends paid	(49,485		)	(48,165		)
Principal payments – mortgage notes payable	(46,567		)	(610		)
Payment of financing costs	—			(252		)
Distributions to noncontrolling interests	(3		)	(4		)
Proceeds from dividend reinvestment program	921			1,097
Net proceeds from equity issuances	1,241			—
Payment of tax withholdings for restricted share awards	(141		)	(452		)
Net cash used in financing activities	(2,034		)	(8,386		)
Net increase in cash, cash equivalents and restricted cash	6,484			5,753
Cash, cash equivalents and restricted cash at beginning of period	14,751			7,640
Cash, cash equivalents and restricted cash at end of period	$	21,235		$	13,393



WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

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

	Three Months Ended March 31,
	2020		2019
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized	$	5,133	$	6,848
Change in accrued capital improvements and development costs	4,851		8,119

Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents	$	20,601	$	12,025
Restricted cash	634		1,368
Cash, cash equivalents and restricted cash	$	21,235	$	13,393

See accompanying notes to the consolidated financial statements.

WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

(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 portfolio of multifamily and commercial (office and retail) properties.

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.

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 March 31, 2020 and December 31, 2019, our TRSs had a deferred tax asset of $1.4 million that was fully reserved. As of both March 31, 2020 and December 31, 2019, we had deferred state and local tax liabilities of $0.6 million. These deferred tax liabilities are recorded in Accounts payable and other liabilities on our consolidated balance sheets and 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, 2019, as amended by Amendment No. 1 to the Annual Report on Form 10-K, filed on March 6, 2020.

Pronouncements 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 on an amortized cost basis, including trade receivables, to be presented at the net amount expected to be collected.	We adopted the new standard as of January 1, 2020.	The adoption of the new standard did not have a material effect 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.	We adopted the new standard as of January 1, 2020.	The adoption of the new standard did not have a material effect on our consolidated financial statements.



Standard/Description	Effective Date and Adoption Considerations	Effect on Financial Statements or Other significant Matters
ASU 2020-04, Reference Rate Reform - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This standard contains optional practical expedients and exceptions for applying Generally Accepted Accounting Principles (“GAAP”) to contracts, hedging relations, and other transactions affected by reference rate reform if certain criteria are met.	We elected certain optional practical expedients as of January 1, 2020.	The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. As of January 1, 2020, we have elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. We continue to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.

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, 2019, as amended by Amendment No. 1 to the Annual Report on Form 10-K, filed on March 6, 2020.

Within these notes to the financial statements, we refer to the three months ended March 31, 2020 and March 31, 2019 as the “2020 Quarter” and the “2019 Quarter,” 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

Development/Redevelopment

We have properties under development/redevelopment and held for current or future development. As of March 31, 2020, we have invested $119.8 million, including the cost of acquired land, in The Trove, a 401-unit multifamily development adjacent to The Wellington. During the 2020 Quarter, we substantially completed major construction activities for The Trove’s base building and garage and delivered 121 units. As of March 31, 2020, we have placed into service assets totaling $58.9 million. We expect to place the remainder of The Trove development into service during 2020. We have also invested $27.0 million, including the cost of acquired land, in a multifamily development adjacent to Riverside Apartments. In addition, there are several other projects with minor development activity in the multifamily and office segments.

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 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 classified as held for sale or sold our interests in the following properties during 2020 and 2019:



Disposition Date	Property Name	Property Type	Rentable Square Feet	Contract Sales Price (in thousands)		(Loss) Gain on Sale (in thousands)
April 21, 2020	John Marshall II ⁽¹⁾	Office	223,000	$	57,000	N/A
		Total 2020	223,000	$	57,000	N/A

June 26, 2019	Quantico Corporate Center ⁽²⁾	Office	272,000	$	33,000	$	(1,046	)
July 23, 2019	Shopping Center Portfolio ⁽³⁾	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		)
December 19, 2019	1776 G Street	Office	262,000	129,500		61,007
		Total 2019	2,184,000	$	728,750	$	398,985

______________________________


⁽¹⁾	Held for sale as of March 31, 2020.


⁽²⁾	Consists of 925 and 1000 Corporate Drive.


⁽³⁾	Consists of five retail properties: Gateway Overlook, Wheaton Park, Olney Village Center, Bradlee Shopping Center and Shoppes of Foxchase.

During the second quarter of 2019, we sold Quantico Corporate Center, an office property in Stafford, Virginia, consisting of two office buildings totaling 272,000 square feet, for a contract sale price of $33.0 million, recognizing a loss on sale of real estate of $1.0 million. Prior to the sale, 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.

In June 2019, we entered into two separate purchase and sale agreements with two separate buyers to sell the Shopping Center Portfolio (Gateway Overlook, Wheaton Park, Olney Village Center, Bradlee Shopping Center and Shoppes of Foxchase) and the Power Center Portfolio (Frederick Crossing, Frederick County Square and Centre at Hagerstown). 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 third quarter of 2019.

In the third 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 sale 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 sale 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 represented a strategic shift that had a major effect on our financial results and we accordingly reported the Retail Portfolio as discontinued operations. The Retail Portfolio represented a majority of our retail assets and following its sale, we determined that our retail line of business was no longer a reportable segment.

In December 2019, we executed a purchase and sale agreement to sell John Marshall II for a contract sale price of $63.4 million. Upon execution of the purchase and sale agreement, the property met the criteria for classification as held for sale. As of March 31, 2020, the property continued to meet the criteria for classification as held for sale. Subsequent to the end of the 2020 Quarter, we executed an amendment to the purchase and sale agreement decreasing the contract sale price to $57.0 million and closed on the sale on April 21, 2020.

As of March 31, 2020, we assessed certain properties for impairment and did not recognize any impairment charges during the 2020 Quarter. We applied reasonable estimates and judgments in evaluating each of the properties as of March 31, 2020. 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 March 31, 2019
Real estate rental revenue	$	11,740
Real estate expenses	(3,067		)
Depreciation and amortization	(2,490		)
Interest expense	(145		)
Income from discontinued operations	$	6,038

Basic net income per share	$	0.08
Diluted net income per share	$	0.08

Capital expenditures	$	406

NOTE 4: LEASE ACCOUNTING

Leasing as a Lessor

Future Minimum Rental Income

As of March 31, 2020, 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.



2020	$	106,177
2021	137,244
2022	124,684
2023	107,647
2024	94,677
Thereafter	316,221
	$	886,650

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 51 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 $0.2 million during the 2020 Quarter and 2019 Quarter.

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 the 2020 Quarter and 2019 Quarter.

The following table sets forth the undiscounted cash flows of our scheduled obligations for future minimum payments on our operating ground lease as of March 31, 2020 and a reconciliation of those cash flows to the operating lease liability as of March 31, 2020 (in thousands):



2020	$	195
2021	260
2022	260
2023	260
2024	260
Thereafter	11,830
	13,065
Imputed interest	(9,156		)
Lease liability	$	3,909

NOTE 5: MORTGAGE NOTES PAYABLE

In January 2020, we prepaid the $45.6 million mortgage note secured by Yale West, which was scheduled to mature in 2052. As a result of the transaction, we recognized a gain on extinguishment of debt of $0.5 million related to the write-off of an unamortized mortgage premium of $1.4 million, partially offset by a prepayment penalty of $0.9 million.

NOTE 6: UNSECURED LINE OF CREDIT PAYABLE

During the first quarter of 2018, we entered into an amended and restated credit agreement (“Credit Agreement”) which provides for a $700.0 million unsecured revolving credit facility (“Revolving Credit Facility”), the continuation of an existing $150.0 million unsecured term loan (“2015 Term Loan”) and an additional $250.0 million unsecured term loan (“2018 Term Loan”). The Revolving Credit Facility has a four-year term ending in March 2022, with two six-month extension options. The Credit Agreement has an accordion feature that allows us to increase the aggregate facility to $1.5 billion, subject to the lenders’ agreement to provide additional revolving loan commitments or term loans.

The Revolving Credit Facility bears interest at a rate of either one month LIBOR plus a margin ranging from 0.775% to 1.55% or the base rate plus a margin ranging from 0.0% to 0.55% (in each case depending upon WashREIT’s credit rating). The base rate is the highest of the administrative agent’s prime rate, the federal funds rate plus 0.50% and the LIBOR market index rate plus 1.0%. In addition, the Revolving Credit Facility requires the payment of a facility fee ranging from 0.10% to 0.30% (depending on WashREIT’s credit rating) on the $700.0 million committed revolving loan capacity, without regard to usage. As of March 31, 2020, the interest rate on the Revolving Credit Facility is one month LIBOR plus 1.00%, the one month LIBOR is 0.99% and the facility fee is 0.20%.

All outstanding advances for the Revolving Credit Facility are due and payable upon maturity in March 2022, unless extended pursuant to one or both of the two six-month extension options. Interest only payments are due and payable generally on a monthly basis.

The 2018 Term Loan increases and replaces the $150.0 million unsecured term loan, initially entered into on July 22, 2016 (“2016 Term Loan”), that was scheduled to mature in July 2023. The 2018 Term Loan is scheduled to mature in July 2023 and bears interest at a rate of either one month LIBOR plus a margin ranging from 0.85% to 1.75% or the base rate plus a margin ranging from 0.0% to 0.75% (in each case depending upon WashREIT’s credit rating). We used the $100.0 million of additional proceeds from the 2018 Term Loan primarily to repay outstanding borrowings on the Revolving Credit Facility.

We had previously used interest rate derivatives to effectively fix the interest rate of the 2016 Term Loan. These interest rate derivatives now effectively fix the interest rate on a $150.0 million portion of the 2018 Term Loan at 2.31%. In March 2018, we entered into interest rate derivatives that commenced on June 29, 2018 to effectively fix the interest rate on the remaining $100.0 million of the 2018 Term Loan at 3.71%. The 2018 Term Loan has an all-in fixed interest rate of 2.87%.

The amount of the Revolving Credit Facility’s unsecured line of credit unused and available at March 31, 2020 is as follows (in thousands):



Committed capacity	$	700,000
Borrowings outstanding	(148,000		)
Unused and available	$	552,000

We executed borrowings and repayments on the Revolving Credit Facility during the 2020 Quarter as follows (in thousands):



Balance, December 31, 2019	$	56,000
Borrowings	115,000
Repayments	(23,000		)
Balance, March 31, 2020	$	148,000

NOTE 7: DERIVATIVE INSTRUMENTS

On September 15, 2015, we entered into two interest rate swap arrangements with a total notional amount of $150.0 million to swap the floating interest rate under the $150.0 million 2015 Term Loan to an all-in fixed interest rate of 2.72% starting on October 15, 2015 and extending until the maturity of the 2015 Term Loan on March 15, 2021.

On July 22, 2016, we entered into two forward interest rate swap arrangements with a total notional amount of $150.0 million to swap the floating interest rate under the $150.0 million 2016 Term Loan to an all-in fixed interest rate of 2.86% starting on March 31, 2017 and extending until the maturity of the 2016 Term Loan on July 21, 2023.

On March 29, 2018, we entered into the $250.0 million 2018 Term Loan maturing on July 21, 2023, which increased and replaced the 2016 Term Loan. The interest rate swap arrangements that had effectively fixed the 2016 Term Loan now effectively fix the interest rate on a $150.0 million portion of the 2018 Term Loan at 2.31%. On March 29, 2018, we entered into four interest rate swap arrangements with a total notional amount of $100.0 million to effectively fix the interest rate on the remaining $100.0 million of the 2018 Term Loan at 3.71%, that commenced on June 29, 2018 and extending until the maturity of the 2018 Term Loan on July 21, 2023. The $250.0 million 2018 Term Loan has an all-in fixed interest rate of 2.87%.

In November 2019, we entered into four interest rate swap arrangements with a total notional amount of $200.0 million to reduce our exposure to adverse fluctuations in interest rates on future fixed-rate debt (the “hedged debt transaction”) to replace our $250.0 million of 4.95% 10-year unsecured notes scheduled to mature in October 2020. In April 2020, we used borrowings from our Revolving Credit Facility to prepay the $250.0 million of 4.95% 10-year unsecured notes (“2020 Senior Notes”) without penalty. We still intend to execute fixed-rate debt in 2020 and have determined that the hedged debt transaction remains probable as of March 31, 2020.

The interest rate swaps qualify as cash flow hedges and are recorded at fair value in accordance with GAAP, based on discounted cash flow methodologies and observable inputs. We record the total change in fair value of the interest rate swap arrangements associated with our cash flow hedges in other comprehensive loss. The resulting unrealized loss on interest rate hedges was the only activity in other comprehensive loss during the periods presented in our consolidated financial statements. We assess the effectiveness of our cash flow hedges both at inception and on an ongoing basis. The cash flow hedges were highly effective for all periods presented.

The fair values of the interest rate swaps as of March 31, 2020 and December 31, 2019, are as follows (in thousands):



					Fair Value
					Derivative Assets (Liabilities)
Derivative Instrument	Aggregate Notional Amount		Effective Date	Maturity Date	March 31, 2020			December 31, 2019
Interest rate swaps	$	150,000	October 15, 2015	March 15, 2021	$	(1,851	)	$	(62	)
Interest rate swaps	150,000		March 31, 2017	July 21, 2023	(4,316		)	1,825
Interest rate swaps	100,000		June 29, 2018	July 21, 2023	(7,448		)	(3,664		)
Interest rate swaps	200,000		April 1, 2020	April 1, 2030	(19,129		)	3,724
	$	600,000			$	(32,744	)	$	1,823

We record interest rate swaps on our consolidated balance sheets within prepaid expenses and other assets when in a net asset position and within accounts payable and other liabilities when in a net liability position. The interest rate swaps have been effective since inception. The net unrealized gains or losses on the effective swaps are recognized in other comprehensive loss, as follows (in thousands):



	Three Months Ended March 31,
	2020			2019
Unrealized loss on interest rate hedges	$	(34,567	)	$	(4,169	)

Amounts reported in accumulated other comprehensive (loss) income related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate debt. During the next twelve months, we estimate that an additional $7.0 million will be reclassified as an increase to interest expense.

We have agreements with each of our derivative counterparties that contain a provision whereby we could be declared in default on our derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to our default on the indebtedness. As of March 31, 2020, the fair value of the derivative liabilities, including accrued interest, was $32.7 million. As of March 31, 2020, we have not posted any collateral related to these agreements.

Derivative instruments expose us to credit risk in the event of non-performance by the counterparty under the terms of the interest rate hedge agreements. We believe that we minimize our credit risk on these transactions by dealing with major, creditworthy financial institutions. We monitor the credit ratings of counterparties and our exposure to any single entity, thus minimizing our credit risk concentration.

NOTE 8: FAIR VALUE DISCLOSURES

Assets and Liabilities Measured at Fair Value

For assets and liabilities measured at fair value on a recurring basis, quantitative disclosures about the fair value measurements are required to be disclosed separately for each major category of assets and liabilities, as follows:

Level 1: Quoted prices in active markets for identical assets

Level 2: Significant other observable inputs

Level 3: Significant unobservable inputs

The only assets or liabilities we had at March 31, 2020 and December 31, 2019 that are recorded at fair value on a recurring basis are the assets held in the Supplemental Executive Retirement Plan (“SERP”), which primarily consist of investments in mutual funds, and the interest rate swaps (see note 7).

We base the valuations related to the SERP on assumptions derived from significant other observable inputs and accordingly these valuations fall into Level 2 in the fair value hierarchy.

The valuation of the interest rate swaps is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each interest rate swap. This analysis reflects the contractual terms of the interest rate swaps, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. To comply with the provisions of ASC 820, Fair Value Measurement, we incorporate credit valuation adjustments in the fair value measurements to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk. These credit valuation adjustments were concluded to not be significant inputs for the fair value calculations for the periods presented. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as the posting of collateral, thresholds, mutual puts and guarantees. The valuation of interest rate swaps fall into Level 2 in the fair value hierarchy.

The fair values of these assets and liabilities at March 31, 2020 and December 31, 2019 were as follows (in thousands):



	March 31, 2020										December 31, 2019
	Fair Value			Level 1		Level 2			Level 3		Fair Value			Level 1		Level 2			Level 3
Assets:
SERP	$	1,561		$	—	$	1,561		$	—	$	1,792		$	—	$	1,792		$	—
Interest rate swaps	—			—		—			—		5,549			—		5,549			—
Liabilities:
Interest rate swaps	$	(32,744	)	$	—	$	(32,744	)	$	—	$	(3,726	)	$	—	$	(3,726	)	$	—

Financial Assets and Liabilities Not Measured at Fair Value

The following disclosures of estimated fair value were determined by management using available market information and established valuation methodologies, including discounted cash flow models. Many of these estimates involve significant judgment. The estimated fair value disclosed may not necessarily be indicative of the amounts we could realize on disposition of the financial instruments. The use of different market assumptions or estimation methodologies could have an effect on the estimated fair value amounts. In addition, fair value estimates are made at a point in time and thus, estimates of fair value subsequent to March 31, 2020 may differ significantly from the amounts presented. The valuations of cash and cash equivalents and restricted cash fall into Level 1 in the fair value hierarchy and the valuations of debt instruments fall into Level 3 in the fair value hierarchy.

As of March 31, 2020 and December 31, 2019, the carrying values and estimated fair values of our financial instruments were as follows (in thousands):



	March 31, 2020				December 31, 2019
	Carrying Value		Fair Value		Carrying Value		Fair Value
Cash and cash equivalents	$	20,601	$	20,601	$	12,939	$	12,939
Restricted cash	634		634		1,812		1,812
Mortgage notes payable, net	—		—		47,074		47,899
Line of credit	148,000		148,000		56,000		56,000
Notes payable, net	997,075		995,875		996,722		1,022,937

NOTE 9: STOCK BASED COMPENSATION

WashREIT maintains short-term (“STIP”) and long-term (“LTIP”) incentive plans that allow for stock based awards to officers and non-officer employees. Stock based awards are provided to officers and non-officer employees, as well as trustees, under the Washington Real Estate Investment Trust 2016 Omnibus Incentive Plan which allows for awards in the form of restricted shares, restricted share units, options and other awards up to an aggregate of 2,400,000 shares over the ten-year period in which the plan will be in effect. Restricted share units are converted into shares of our stock upon full vesting through the issuance of new shares.

On February 14, 2020, the board of trustees adopted an Amended and Restated Executive Officer Short-Term Incentive Plan (the “Officer STIP”) and an Amended and Restated Executive Officer Long-Term Incentive Plan (the “Officer LTIP”). Upon adoption by the board of trustees, both plans became effective for the performance periods beginning January 1, 2020.

Officer LTIP

Under the Officer LTIP, as revised, all named executive officers will have the opportunity to receive awards based on (i) the achievement of performance measures, which will be established for each performance period, and (ii) continued employment with the Company. The aggregate weighting for the performance measures and the time-based measures, as determined by the Compensation Committee, will total 100%. The performance measures will consist of one or more shareholder return measures and one or more strategic measures. The awards earned under the Officer LTIP, if any, are payable in our common shares of beneficial interest. Each participant’s total award under the Officer LTIP with respect to a performance period will be stated as a percentage of the participant’s annual base salary determined as of the beginning of that performance period, which percentage will depend upon the participant’s position and the degree of achievement of threshold, target, and high performance goals for the performance period which, except as otherwise determined by the Compensation Committee, will be as set forth in the table below:



	Threshold	Target	High
President and Chief Executive Officer	198%	275%	440%
Executive Vice President	143%	200%	295%
Senior Vice President	100%	143%	207%

Any time-based awards under the Officer LTIP will be subject to a three-year vesting schedule, with any award vesting in one-third increments on each December 15 of the applicable performance period if the participant remains employed by the Company on each of such dates. The Officer LTIP provides that following a performance period, 100% of any performance-based award will vest immediately upon grant.

Each year, the Compensation Committee will establish the threshold, target and high performance goals for each performance measures. Upon or following completion of a performance period, the degree of achievement of each performance measures will be determined by the Compensation Committee in its discretion.

If a Change in Control (as defined in the Officer LTIP) occurs during a performance period while the participant is employed, the Officer LTIP provides that all time-based awards which are unvested will become vested, and the participant will receive a pro-rated portion of the shareholder return measure-based awards and the strategic measure-based awards will be calculated at target.

Total Compensation Expense

Total compensation expense recognized in the consolidated financial statements for all outstanding share based awards was $1.8 million and $2.8 million for the 2020 Quarter and 2019 Quarter, respectively.

Restricted Share Awards

The total fair values of restricted share awards vested was $0.4 million and $1.3 million for the 2020 Quarter and 2019 Quarter, respectively.

The total unvested restricted share awards at March 31, 2020 was 503,600 shares, which had a weighted average grant date fair value of $29.99 per share. As of March 31, 2020, the total compensation cost related to unvested restricted share awards was $11.9 million, which we expect to recognize over a weighted average period of 27 months.

NOTE 10: EARNINGS PER COMMON SHARE

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

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

The computations of basic and diluted earnings per share for the three months ended March 31, 2020 and 2019 were as follows (in thousands, except per share data):



	Three Months Ended March 31,
	2020			2019
Numerator:
Income (loss) from continuing operations	$	1,719		$	(10,443	)
Allocation of earnings to unvested restricted share awards to continuing operations	(151		)	(134		)
Adjusted income (loss) from continuing operations attributable to the controlling interests	1,568			(10,577		)
Adjusted income from discontinued operations	—			6,038
Adjusted net income (loss) attributable to the controlling interests	$	1,568		$	(4,539	)
Denominator:
Weighted average shares outstanding – basic	82,086			79,881
Effect of dilutive securities:
Employee restricted share awards	189			—
Operating partnership units	12			—
Weighted average shares outstanding – diluted	82,287			79,881
Earnings per common share, basic:
Continuing operations	$	0.02		$	(0.13	)
Discontinued operations	—			0.08
Basic net income (loss) attributable to the controlling interests per common share ⁽¹⁾	$	0.02		$	(0.06	)
Earnings per common share, diluted:
Continuing operations	$	0.02		$	(0.13	)
Discontinued operations	—			0.08
Diluted net income (loss) attributable to the controlling interests per common share ⁽¹⁾	$	0.02		$	(0.06	)

Dividends declared per common share	$	0.30		$	0.30

______________________________


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

NOTE 11: SEGMENT INFORMATION

We evaluate real estate performance and allocate resources by property type and have two reportable segments: office and multifamily. Office properties provide office space for various types of businesses and professions. Multifamily properties provide rental housing for individuals and families throughout the Washington metro region. We have eight retail properties that do not meet the qualitative or quantitative criteria for a reportable segment and are classified as “Corporate and other” in our segment disclosure tables.

We evaluate performance based upon net operating income from the combined properties in each segment. Our reportable operating segments are consolidations of similar properties. GAAP requires that segment disclosures present the measure(s) used by the chief operating decision maker for purposes of assessing each segment’s performance. Net operating income is a key measurement of our segment profit and loss. Net operating income is defined as real estate rental revenue less real estate expenses.

The following tables present revenues, net operating income, capital expenditures and total assets for the three months ended March 31, 2020 and 2019 from these segments, and reconcile net operating income of reportable segments to net income (loss) attributable to the controlling interests as reported (in thousands):



	Three Months Ended March 31, 2020
	Office		Multifamily		Corporate and Other ⁽¹⁾		Consolidated
Real estate rental revenue	$	35,670	$	36,578	$	4,544	$	76,792
Real estate expenses	13,317		13,985		1,337		28,639
Net operating income	$	22,353	$	22,593	$	3,207	$	48,153
Depreciation and amortization							(29,720		)
General and administrative expenses							(6,337		)
Interest expense							(10,845		)
Gain on extinguishment of debt							468
Net income							1,719
Less: Net income attributable to noncontrolling interests in subsidiaries							—
Net income attributable to the controlling interests							$	1,719
Capital expenditures	$	7,088	$	3,469	$	383	$	10,940
Total assets	$	1,130,013	$	1,339,925	$	152,682	$	2,622,620

______________________________


⁽¹⁾	Corporate and Other is comprised of eight retail properties that do not meet the qualitative or quantitative criteria for a reportable segment and are classified as “Corporate and other” in our segment disclosure tables.



	Three Months Ended March 31, 2019
	Office		Multifamily		Corporate and Other ⁽²⁾		Consolidated
Real estate rental revenue	$	42,293	$	24,335	$	4,806	$	71,434
Real estate expenses	15,224		9,470		1,449		26,143
Net operating income	$	27,069	$	14,865	$	3,357	$	45,291
Depreciation and amortization							(27,057		)
General and administrative expenses							(7,807		)
Interest expense							(12,496		)
Real estate impairment							(8,374		)
Discontinued operations:
Income from operations of properties sold or held for sale							6,038
Net loss							(4,405		)
Less: Net income attributable to noncontrolling interests in subsidiaries							—
Net loss attributable to the controlling interests							$	(4,405	)
Capital expenditures	$	4,923	$	1,803	$	622	$	7,348
Total assets	$	1,238,795	$	796,525	$	373,147	$	2,408,467

______________________________


⁽²⁾	Net operating income includes the retail properties not classified as discontinued operations: Takoma Park, Westminster, Concord Center, Chevy Chase Metro Plaza, 800 S. Washington Street, Randolph Shopping Center, Montrose Shopping Center and Spring Valley Village, and total assets and capital expenditures include all retail properties, including those classified as discontinued operations.

NOTE 12: SHAREHOLDERS' EQUITY

On May 4, 2018, we entered into eight separate equity distribution agreements (collectively, the “Equity Distribution Agreements”) with each of Wells Fargo Securities, LLC, BNY Mellon Capital Markets, LLC, Capital One Securities, Inc., Citigroup Global Markets Inc., Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, KeyBanc Capital Markets Inc. and SunTrust Robinson Humphrey, Inc. relating to the issuance of up to $250.0 million of our common shares from time to time. Issuances of our common shares are made at market prices prevailing at the time of issuance. We may use net proceeds from the issuance of common shares under this program for general corporate purposes, including, without limitation, working capital, the acquisition, renovation, expansion, improvement, development or redevelopment of income producing properties or the repayment of debt. During the 2020 Quarter, we issued 46,500 common shares at a weighted average price of $31.07 for net proceeds of $1.2 million. We did not issue common shares during the 2019 Quarter.