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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________
FORM 10-Q
___________________________________________________
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For quarterly period ended September 30, 2021
OR
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
COMMISSION FILE NO. 1-6622
| | |
WASHINGTON REAL ESTATE INVESTMENT TRUST |
(Exact name of registrant as specified in its charter) |
| | | | | | | | |
Maryland | | 53-0261100 |
(State of incorporation) | | (IRS Employer Identification Number) |
1775 EYE STREET, NW, SUITE 1000, WASHINGTON, DC 20006
(Address of principal executive office) (Zip code)
Registrant’s telephone number, including area code: (202) 774-3200
___________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Shares of Beneficial Interest | WRE | NYSE |
___________________________________________________
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 October 26, 2021, 84,636,277 common shares were outstanding.
WASHINGTON REAL ESTATE INVESTMENT TRUST
INDEX
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Item 1. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 5. | | |
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Item 6. | | |
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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 (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, 2020 included in Washington Real Estate Investment Trust’s 2020 Annual Report on Form 10-K filed on February 16, 2021.
WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
| | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 |
| |
Assets | | | |
Land | $ | 306,507 | | | $ | 301,709 | |
Income producing property | 1,544,217 | | | 1,473,335 | |
| 1,850,724 | | | 1,775,044 | |
Accumulated depreciation and amortization | (384,392) | | | (335,006) | |
Net income producing property | 1,466,332 | | | 1,440,038 | |
Properties under development or held for future development | 30,254 | | | 36,494 | |
Total real estate held for investment, net | 1,496,586 | | | 1,476,532 | |
Investment in real estate held for sale, net | — | | | 795,687 | |
Cash and cash equivalents | 307,797 | | | 7,697 | |
Restricted cash | 605 | | | 593 | |
Rents and other receivables | 14,713 | | | 9,725 | |
Prepaid expenses and other assets | 33,109 | | | 29,587 | |
Other assets related to properties sold or held for sale | — | | | 89,997 | |
Total assets | $ | 1,852,810 | | | $ | 2,409,818 | |
Liabilities | | | |
Notes payable, net | $ | 496,823 | | | $ | 945,370 | |
| | | |
Line of credit | — | | | 42,000 | |
Accounts payable and other liabilities | 38,864 | | | 44,067 | |
Dividend payable | 14,440 | | | 25,361 | |
Advance rents | 1,747 | | | 2,461 | |
Tenant security deposits | 4,480 | | | 4,221 | |
Other liabilities related to properties sold or held for sale | — | | | 25,229 | |
Total liabilities | 556,354 | | | 1,088,709 | |
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; 150,000 and 100,000 shares authorized; 84,628 and 84,409 shares issued and outstanding, as of September 30, 2021 and December 31, 2020, respectively | 846 | | | 844 | |
Additional paid in capital | 1,656,821 | | | 1,649,366 | |
Distributions in excess of net income | (341,052) | | | (298,860) | |
Accumulated other comprehensive loss | (20,468) | | | (30,563) | |
Total shareholders’ equity | 1,296,147 | | | 1,320,787 | |
Noncontrolling interests in subsidiaries | 309 | | | 322 | |
Total equity | 1,296,456 | | | 1,321,109 | |
Total liabilities and equity | $ | 1,852,810 | | | $ | 2,409,818 | |
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, |
| 2021 | | 2020 | | 2021 | | 2020 |
Revenue | | | | | | | |
Real estate rental revenue | $ | 42,499 | | | $ | 43,716 | | | $ | 124,403 | | | $ | 133,216 | |
Expenses | | | | | | | |
Property operating and maintenance | 9,901 | | | 10,372 | | | 28,655 | | | 29,598 | |
Real estate taxes and insurance | 5,544 | | | 5,741 | | | 16,525 | | | 17,420 | |
Property management | 1,499 | | | 1,541 | | | 4,448 | | | 4,682 | |
General and administrative | 7,909 | | | 6,330 | | | 19,838 | | | 17,963 | |
Transformation costs | 1,016 | | | — | | | 4,796 | | | — | |
Depreciation and amortization | 18,252 | | | 18,064 | | | 52,542 | | | 52,683 | |
| | | | | | | |
| | | | | | | |
| 44,121 | | | 42,048 | | | 126,804 | | | 122,346 | |
Loss on sale of real estate | — | | | — | | | — | | | (7,539) | |
Real estate operating (loss) income | (1,622) | | | 1,668 | | | (2,401) | | | 3,331 | |
Other income (expense) | | | | | | | |
Interest expense | (8,106) | | | (8,711) | | | (28,387) | | | (28,307) | |
Loss on interest rate derivatives | (106) | | | — | | | (5,866) | | | — | |
(Loss) gain on extinguishment of debt | (12,727) | | | — | | | (12,727) | | | 262 | |
Other income | 231 | | | — | | | 3,037 | | | — | |
| | | | | | | |
| (20,708) | | | (8,711) | | | (43,943) | | | (28,045) | |
Loss from continuing operations | (22,330) | | | (7,043) | | | (46,344) | | | (24,714) | |
Discontinued operations: | | | | | | | |
Income from operations of properties sold or held for sale | 7,208 | | | 6,087 | | | 23,083 | | | 20,071 | |
Gain on sale of real estate, net | 46,441 | | | — | | | 46,441 | | | — | |
| | | | | | | |
| | | | | | | |
Income from discontinued operations | 53,649 | | | 6,087 | | | 69,524 | | | 20,071 | |
Net income (loss) | $ | 31,319 | | | $ | (956) | | | $ | 23,180 | | | $ | (4,643) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Basic net (loss) income per common share: | | | | | | | |
Continuing operations | $ | (0.26) | | | $ | (0.09) | | | $ | (0.55) | | | $ | (0.31) | |
Discontinued operations | 0.63 | | | 0.07 | | | 0.82 | | | 0.24 | |
Basic net income (loss) per common share (1) | $ | 0.37 | | | $ | (0.01) | | | $ | 0.27 | | | $ | (0.06) | |
| | | | | | | |
Diluted net (loss) income per common share: | | | | | | | |
Continuing operations | $ | (0.26) | | | $ | (0.09) | | | $ | (0.55) | | | $ | (0.31) | |
Discontinued operations | 0.63 | | | 0.07 | | | 0.82 | | | 0.24 | |
Diluted net income (loss) per common share (1) | $ | 0.37 | | | $ | (0.01) | | | $ | 0.27 | | | $ | (0.06) | |
| | | | | | | |
Weighted average shares outstanding – basic | 84,496 | | | 82,186 | | | 84,457 | | | 82,142 | |
Weighted average shares outstanding – diluted | 84,496 | | | 82,186 | | | 84,457 | | | 82,142 | |
______________
(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 (LOSS)
(IN THOUSANDS)
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Net income (loss) | $ | 31,319 | | | $ | (956) | | | $ | 23,180 | | | $ | (4,643) | |
Other comprehensive income (loss): | | | | | | | |
Unrealized gain (loss) on interest rate hedges | 221 | | | 1,774 | | | 2,805 | | | (34,582) | |
Reclassification of unrealized loss on interest rate derivatives to earnings | 511 | | | — | | | 7,290 | | | — | |
Comprehensive income (loss) | $ | 32,051 | | | $ | 818 | | | $ | 33,275 | | | $ | (39,225) | |
| | | | | | | |
| | | | | | | |
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, December 31, 2020 | 84,409 | | | $ | 844 | | | $ | 1,649,366 | | | $ | (298,860) | | | $ | (30,563) | | | $ | 1,320,787 | | | $ | 322 | | | $ | 1,321,109 | |
| | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | 23,180 | | | — | | | 23,180 | | | — | | | 23,180 | |
Unrealized gain on interest rate hedges | — | | | — | | | — | | | — | | | 2,805 | | | 2,805 | | | — | | | 2,805 | |
Loss on interest rate derivatives | — | | | — | | | — | | | — | | | 5,760 | | | 5,760 | | | — | | | 5,760 | |
Amortization of swap settlements | — | | | — | | | — | | | — | | | 1,530 | | | 1,530 | | | — | | | 1,530 | |
Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (13) | | | (13) | |
| | | | | | | | | | | | | | | |
Dividends ($0.77 per common share) | — | | | — | | | — | | | (65,372) | | | — | | | (65,372) | | | — | | | (65,372) | |
Equity issuances, net of issuance costs | 24 | | | — | | | 467 | | | — | | | — | | | 467 | | | — | | | 467 | |
Shares issued under Dividend Reinvestment Program | 65 | | | — | | | 1,468 | | | — | | | — | | | 1,468 | | | — | | | 1,468 | |
Share grants, net of forfeitures and tax withholdings | 130 | | | 2 | | | 5,520 | | | — | | | — | | | 5,522 | | | — | | | 5,522 | |
Balance, September 30, 2021 | 84,628 | | | $ | 846 | | | $ | 1,656,821 | | | $ | (341,052) | | | $ | (20,468) | | | $ | 1,296,147 | | | $ | 309 | | | $ | 1,296,456 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 loss | — | | | — | | | — | | | (4,643) | | | — | | | (4,643) | | | — | | | (4,643) | |
Unrealized loss on interest rate hedges | — | | | — | | | — | | | — | | | (34,582) | | | (34,582) | | | — | | | (34,582) | |
Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (11) | | | (11) | |
Dividends ($0.90 per common share) | — | | | — | | | — | | | (74,387) | | | — | | | (74,387) | | | — | | | (74,387) | |
Equity issuances, net of issuance costs | 46 | | | 1 | | | 1,241 | | | — | | | — | | | 1,242 | | | — | | | 1,242 | |
Shares issued under Dividend Reinvestment Program | 64 | | | 1 | | | 1,580 | | | — | | | — | | | 1,581 | | | — | | | 1,581 | |
Share grants, net of forfeitures and tax withholdings | 142 | | | 1 | | | 5,852 | | | — | | | — | | | 5,853 | | | — | | | 5,853 | |
Balance, September 30, 2020 | 82,351 | | | $ | 824 | | | $ | 1,601,160 | | | $ | (262,435) | | | $ | (32,759) | | | $ | 1,306,790 | | | $ | 325 | | | $ | 1,307,115 | |
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, 2021 | 84,590 | | | $ | 846 | | | $ | 1,654,409 | | | $ | (357,934) | | | $ | (21,200) | | | $ | 1,276,121 | | | $ | 314 | | | $ | 1,276,435 | |
| | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | 31,319 | | | — | | | 31,319 | | | — | | | 31,319 | |
Unrealized gain on interest rate hedges | — | | | — | | | — | | | — | | | 221 | | | 221 | | | — | | | 221 | |
| | | | | | | | | | | | | | | |
Amortization of swap settlements | — | | | — | | | — | | | — | | | 511 | | | 511 | | | — | | | 511 | |
Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (5) | | | (5) | |
| | | | | | | | | | | | | | | |
Dividends ($0.17 per common share) | — | | | — | | | — | | | (14,437) | | | — | | | (14,437) | | | — | | | (14,437) | |
| | | | | | | | | | | | | | | |
Shares issued under Dividend Reinvestment Program | 20 | | | — | | | 459 | | | — | | | — | | | 459 | | | — | | | 459 | |
Share grants, net of share grant amortization and forfeitures | 18 | | | — | | | 1,953 | | | — | | | — | | | 1,953 | | | — | | | 1,953 | |
Balance, September 30, 2021 | 84,628 | | | $ | 846 | | | $ | 1,656,821 | | | $ | (341,052) | | | $ | (20,468) | | | $ | 1,296,147 | | | $ | 309 | | | $ | 1,296,456 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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, 2020 | 82,327 | | | $ | 823 | | | $ | 1,598,620 | | | $ | (236,673) | | | $ | (34,533) | | | $ | 1,328,237 | | | $ | 329 | | | $ | 1,328,566 | |
Net loss | — | | | — | | | — | | | (956) | | | — | | | (956) | | | — | | | (956) | |
Unrealized gain on interest rate hedges | — | | | — | | | — | | | — | | | 1,774 | | | 1,774 | | | — | | | 1,774 | |
Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (4) | | | (4) | |
Dividends ($0.30 per common share) | — | | | — | | | — | | | (24,806) | | | — | | | (24,806) | | | — | | | (24,806) | |
Shares issued under dividend reinvestment program | 23 | | | 1 | | | 515 | | | — | | | — | | | 516 | | | — | | | 516 | |
Share grants, net of forfeitures and tax withholdings | 1 | | | — | | | 2,025 | | | — | | | — | | | 2,025 | | | — | | | 2,025 | |
Balance, September 30, 2020 | 82,351 | | | $ | 824 | | | $ | 1,601,160 | | | $ | (262,435) | | | $ | (32,759) | | | $ | 1,306,790 | | | $ | 325 | | | $ | 1,307,115 | |
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, |
| 2021 | | 2020 |
Cash flows from operating activities | | | |
Net income (loss) | $ | 23,180 | | | $ | (4,643) | |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | |
Depreciation and amortization | 75,446 | | | 89,789 | |
Credit losses on lease related receivables | 1,631 | | | 3,271 | |
| | | |
| | | |
(Gain) loss on sale of real estate, net | (46,441) | | | 7,539 | |
Share-based compensation expense | 6,478 | | | 5,901 | |
| | | |
Net amortization of debt premiums, discounts and related financing costs | 3,322 | | | 2,036 | |
Loss on interest rate derivatives | 5,866 | | | — | |
Loss (gain) on extinguishment of debt | 12,727 | | | (262) | |
Changes in operating other assets | (4,720) | | | (11,566) | |
Changes in operating other liabilities | (11,106) | | | (7,841) | |
Net cash provided by operating activities | 66,383 | | | 84,224 | |
Cash flows from investing activities | | | |
Real estate acquisitions, net | (47,757) | | | — | |
Net cash received for sale of real estate | 897,783 | | | 56,353 | |
| | | |
Capital improvements to real estate | (18,649) | | | (38,490) | |
Development in progress | (8,099) | | | (23,454) | |
| | | |
| | | |
Non-real estate capital improvements | (37) | | | (196) | |
Net cash provided by (used in) investing activities | 823,241 | | | (5,787) | |
Cash flows from financing activities | | | |
Line of credit (repayments) borrowings, net | (42,000) | | | 130,000 | |
Dividends paid | (76,292) | | | (74,285) | |
Principal payments – mortgage notes payable | — | | | (46,567) | |
| | | |
Repayments of unsecured notes payable, including penalties for early extinguishment | (311,894) | | | — | |
Repayments of unsecured term loan debt | (150,000) | | | (250,000) | |
Proceeds from term loan | — | | | 150,000 | |
Settlement of interest rate derivatives | (5,866) | | | — | |
Payment of financing costs | (4,828) | | | (567) | |
Distributions to noncontrolling interests | (13) | | | (11) | |
Proceeds from dividend reinvestment program | 1,468 | | | 1,581 | |
Net proceeds from equity issuances | 467 | | | 1,240 | |
Payment of tax withholdings for restricted share awards | (554) | | | (150) | |
| | | |
Net cash used in financing activities | (589,512) | | | (88,759) | |
Net decrease in cash, cash equivalents and restricted cash | 300,112 | | | (10,322) | |
Cash, cash equivalents and restricted cash at beginning of period | 8,290 | | | 14,751 | |
Cash, cash equivalents and restricted cash at end of period | $ | 308,402 | | | $ | 4,429 | |
| | | | | | | | | | | |
WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES |
| | | |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
(IN THOUSANDS) |
(UNAUDITED) |
| | | |
| Nine Months Ended September 30, |
| 2021 | | 2020 |
| | | |
Supplemental disclosure of cash flow information: | | | |
Cash paid for interest, net of amounts capitalized | $ | 26,409 | | | $ | 27,386 | |
Change in accrued capital improvements and development costs | (4,885) | | | 4,147 | |
Dividend payable | 14,440 | | | 24,767 | |
| | | |
| | | |
Reconciliation of cash, cash equivalents and restricted cash: | | | |
Cash and cash equivalents | $ | 307,797 | | | $ | 3,814 | |
Restricted cash | 605 | | | 615 | |
Cash, cash equivalents and restricted cash | $ | 308,402 | | | $ | 4,429 | |
See accompanying notes to the consolidated financial statements.
WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(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 primarily consists of the ownership of apartment communities in the greater Washington, DC metro and Southeastern regions. Within these notes to the financial statements, we refer to the three months ended September 30, 2021 and September 30, 2020 as the “2021 Quarter” and the “2020 Quarter,” respectively, and the nine months ended September 30, 2021 and September 30, 2020 as the “2021 Period” and the “2020 Period,” respectively. During the 2021 Period, we executed the sale of twelve office properties and the sale of eight retail properties in two separate transactions (see note 3). The sold office and retail properties are classified as discontinued operations. We have one remaining office property, Watergate 600, that does not meet the qualitative or quantitative criteria for a reportable segment (see note 10). The dispositions of the office and retail properties are part of a strategic shift away from the commercial sector to the residential sector which simplifies our portfolio to one reportable segment (residential) (the “strategic transformation”).
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 (determined before the deduction for dividends paid and excluding net capital gains 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. The net taxable gains on the sales of our office and retail properties were distributed to shareholders through quarterly dividends in 2021.
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. As of both September 30, 2021 and December 31, 2020, our TRSs had a deferred tax asset of $1.4 million that was fully reserved.
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, 2020.
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, 2020.
Held for Sale and 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 has 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. 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.
Lessee Accounting
For leases where we are the lessee, primarily our corporate office operating lease, we recognize a right-of-use asset and a lease liability in accordance with Accounting Standards Codification (“ASC”) Topic 842. The right-of-use asset and associated liability is equal to the present value of the minimum lease payments, applying our incremental borrowing rate. Our borrowing rate is computed based on observable borrowing rates taking into consideration our credit quality and adjusting to a secured borrowing rate for similar assets and term. As of September 30, 2021, our balance sheet included $4.6 million in right-of-use assets and liabilities.
Lease expense for the operating lease is recognized on a straight-line basis over the expected lease term and is included in “General and administrative expense.”
Restricted Cash
Restricted cash includes funds held in escrow for tenant security deposits.
Transformation Costs
Transformation costs include costs related to the strategic transformation, including consulting, advisory and termination benefits.
Use of Estimates in the Financial Statements
The preparation of financial statements in conformity with Generally Accepted Accounting Principles (“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 property during the 2021 Period (the “2021 acquisition”): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Acquisition Date | | Property | | Type | | # of homes (unaudited) | | Average Occupancy (unaudited) | | Contract Purchase Price (in thousands) |
August 10, 2021 | | The Oxford | | Residential | | 240 | | 93.5% | | $ | 48,000 | |
| | | | | | | | | | |
| | | | | | | | | | |
______________________________
The results of operations from the acquired operating property are included in the consolidated statements of operations as of its acquisition date and are as follows (in thousands): | | | | | | | |
| | | Three and Nine Months Ended September 30, 2021 |
Real estate rental revenue | | | $ | 488 | |
Net loss | | | (349) | |
We accounted for the 2021 acquisition as an asset acquisition. We measured the value of the acquired physical assets (land and building) and in-place leases (absorption costs) by allocating the total cost of the acquisition on a relative fair value basis.
The total cost of the 2021 acquisition was as follows (in thousands): | | | | | | | |
Contract purchase price | | | $ | 48,000 | |
| | | |
Capitalized acquisition costs | | | 52 | |
Total | | | $ | 48,052 | |
We have recorded the total cost of the 2021 acquisition as follows (in thousands): | | | | | | | |
Land | | | $ | 4,798 | |
Building | | | 42,079 | |
Absorption costs | | | 1,175 | |
Total | | | $ | 48,052 | |
The weighted remaining average life for the absorption costs is 4 months.
Development/Redevelopment
We have properties under development/redevelopment and held for current or future development. As of September 30, 2021, we have invested $29.4 million, including the cost of acquired land, in a residential development adjacent to Riverside Apartments. In addition, in our residential segment, we continue to capitalize qualifying costs on several other projects with minor development activity necessary to ready each project for its intended use. We placed the remainder of the Trove development costs into service during the first quarter of 2021.
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. 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.
We sold the following properties during 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Disposition Date | | Property Name | | Property Type | | Rentable Square Feet | | Contract Sales Price (in thousands) | | (Loss) Gain on Sale (in thousands) |
July 26, 2021 | | Office Portfolio (1) | | Office | | 2,370,000 | | | $ | 766,000 | | | $ | (11,220) | |
September 22, 2021 | | Retail Portfolio (2) | | Retail | | 693,000 | | | 168,314 | | | 57,661 | |
| | | | Total 2021 | | 3,063,000 | | $ | 934,314 | | | $ | 46,441 | |
| | | | | | | | | | |
April 21, 2020 | | John Marshall II | | Office | | 223,000 | | $ | 57,000 | | | $ | (6,855) | |
December 2, 2020 | | Monument II | | Office | | 207,000 | | 53,000 | | | (8,595) | |
December 17, 2020 | | 1227 25th Street NW | | Office | | 135,000 | | 53,500 | | | 1,125 | |
| | | | Total 2020 | | 565,000 | | $ | 163,500 | | | $ | (14,325) | |
______________________________
(1) Consists of twelve office properties: 1901 Pennsylvania Avenue, 515 King Street, 1220 19th Street, 1600 Wilson Boulevard, Silverline Center, Courthouse Square, 2000 M Street, 1140 Connecticut Avenue, Army Navy Club, 1775 Eye Street, Fairgate at Ballston and Arlington Tower.
(2) Consists of eight retail properties: Takoma Park, Westminster, Concord Centre, Chevy Chase Metro Plaza, 800 S. Washington Street, Randolph Shopping Center, Montrose Shopping Center and Spring Valley Village.
We have fully transferred control of the assets sold in 2020 and 2021 and do not have continuing involvement in their operations.
In June 2021, we entered into a purchase and sale agreement with a single buyer to sell the Office Portfolio for a purchase price of $766.0 million. Upon execution of the purchase and sale agreement, the properties in the Office Portfolio met the criteria for classification as held for sale. We closed on the sale of the Office Portfolio on July 26, 2021, recognizing a loss on sale of real estate of $11.2 million.
In June 2021, we executed a letter of intent to sell the Retail Portfolio. During the 2021 Quarter, we executed a purchase and sale agreement for the sale of our remaining eight retail properties for a purchase price of $168.3 million and closed on the sale on September 22, 2021, recognizing a gain on real estate of $57.7 million.
The dispositions of the Office Portfolio and the Retail Portfolio represent a strategic shift that will have a major effect on our financial results and we have accordingly reported the Office Portfolio and Retail Portfolio as discontinued operations.
As of September 30, 2021, we assessed our properties for impairment and did not recognize any impairment charges during the 2021 Quarter. We applied reasonable estimates and judgments in evaluating each of the properties as of September 30, 2021. 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 Office Portfolio and 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, |
| 2021 | | 2020 | | 2021 | | 2020 |
Real estate rental revenue | $ | 10,932 | | | $ | 29,511 | | | $ | 70,519 | | | $ | 89,673 | |
Expenses | | | | | | | |
Property operating and maintenance | (1,870) | | | (5,232) | | | (11,201) | | | (15,433) | |
Real estate taxes and insurance | (1,476) | | | (4,839) | | | (11,136) | | | (14,233) | |
Property management | (378) | | | (947) | | | (2,195) | | | (2,830) | |
Depreciation and amortization | — | | | (12,406) | | | (22,904) | | | (37,106) | |
| | | | | | | |
| | | | | | | |
Gain on sale of real estate, net | 46,441 | | | — | | | 46,441 | | | — | |
Income from discontinued operations | $ | 53,649 | | | $ | 6,087 | | | $ | 69,524 | | | $ | 20,071 | |
| | | | | | | |
Basic net income per share | $ | 0.63 | | | $ | 0.07 | | | $ | 0.82 | | | $ | 0.24 | |
Diluted net income per share | $ | 0.63 | | | $ | 0.07 | | | $ | 0.82 | | | $ | 0.24 | |
| | | | | | | |
Capital expenditures | $ | 833 | | | $ | 4,239 | | | $ | 3,316 | | | $ | 11,825 | |
All assets and liabilities related to the Office Portfolio and Retail Portfolio were sold as of September 30, 2021. As of December 31, 2020, assets and liabilities related to the Office Portfolio and Retail Portfolio were as follows (in thousands):
| | | | | | | | |
| | December 31, 2020 |
Land | | $ | 249,869 | |
Income producing property | | 958,704 | |
| | 1,208,573 | |
Accumulated depreciation and amortization | | (414,008) | |
Income producing property, net | | 794,565 | |
Development in progress and land held for development | | 1,122 | |
Investment in real estate, net | | $ | 795,687 | |
Cash and cash equivalents | | 3 | |
Restricted cash | | 10 | |
Rents and other receivables | | 48,532 | |
Prepaid expenses and other assets | | 41,452 | |
Total assets | | $ | 885,684 | |
Accounts payable and other liabilities | | $ | 14,706 | |
Advance rents | | 4,754 | |
Tenant security deposits | | 5,769 | |
Liabilities related to properties sold or held for sale | | $ | 25,229 | |
NOTE 4: UNSECURED LINE OF CREDIT PAYABLE
During the 2021 Quarter, 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”) and the continuation of an existing $250.0 million unsecured term loan (“2018 Term Loan”). The Revolving Credit Facility has a four-year term ending in August 2025, 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. As a result of the transaction, we recognized a loss on extinguishment of debt of $0.2 million related to the write-off of unamortized loan origination costs. We incurred $4.8 million of additional loan origination costs which will be amortized as interest expense over the term of the Revolving Credit Facility.
The Revolving Credit Facility bears interest at a rate of either one month LIBOR plus a margin ranging from 0.70% to 1.40% or the base rate plus a margin ranging from 0.0% to 0.40% (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 September 30, 2021, the interest rate on the Revolving Credit Facility is one month LIBOR plus 0.85%, the one month LIBOR is 0.08% and the facility fee is 0.20%.
All outstanding advances for the Revolving Credit Facility are due and payable upon maturity in August 2025, 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 increased and replaced 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.
On September 27, 2021, we prepaid a $150.0 million portion of the 2018 Term Loan using proceeds from the sale of the Office Portfolio and Retail Portfolio (see note 3). As a result of the prepayment, we recognized a loss on extinguishment of debt of $0.3 million related to the write-off of unamortized loan origination costs. Simultaneous with the prepayment, we terminated five interest rate swap arrangements (see note 6). We currently expect to hold the remaining $100.0 million portion of the 2018 Term Loan until maturity.
The amount of the Revolving Credit Facility’s unsecured line of credit unused and available at September 30, 2021 is as follows (in thousands):
| | | | | |
Committed capacity | $ | 700,000 | |
Borrowings outstanding | — | |
| |
Unused and available | $ | 700,000 | |
We executed borrowings and repayments on the Revolving Credit Facility during the 2021 Period as follows (in thousands):
| | | | | |
Balance at December 31, 2020 | $ | 42,000 | |
Borrowings | 108,000 | |
Repayments | (150,000) | |
Balance at September 30, 2021 | $ | — | |
NOTE 5: NOTES PAYABLE
In August 2021, we redeemed $300.0 million of our existing unsecured notes that were scheduled to mature in 2022. As a result of the prepayment, we recognized a loss on extinguishment of debt of $12.3 million comprised of a prepayment penalty of $11.9 million and the write-off of unamortized loan origination costs of $0.4 million.
NOTE 6: DERIVATIVE INSTRUMENTS
On July 22, 2016, we entered into two forward interest rate swap arrangements with notional amounts of $100.0 million and $50.0 million, respectively, 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 scheduled 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 then effectively fixed 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 had an all-in fixed interest rate of 2.87%.
In the second quarter of 2021 we determined that the hedged transactions for five interest rate swap arrangements with an aggregate notional value of $150.0 million were probable not to occur and that these interest swap arrangements were no longer effective cash flow hedges as of June 30, 2021 due to our intention to prepay a $150.0 million portion of the 2018 Term Loan. As a result, we recognized a loss of $5.8 million for the second quarter of 2021, which was recorded to Loss on interest rate derivatives on our condensed consolidated statements of operations. On September 27, 2021, we prepaid the $150.0 million portion of the 2018 Term Loan (see note 4). In connection with the prepayment, we terminated the five interest rate swap arrangements with an aggregate notional value of $150.0 million.
Our remaining interest rate swap arrangement with a notional amount of $100.0 million is recorded at fair value in accordance with GAAP, based on discounted cash flow methodologies and observable inputs. We record the effective portion of changes in fair value of the cash flow hedge in Other comprehensive income (loss). We assess the effectiveness of a cash flow hedge both at inception and on an ongoing basis. If a cash flow hedge is no longer expected to be effective, hedge accounting is discontinued. Hedge ineffectiveness of our cash flow hedges is recorded in earnings.
The fair values of the interest rate swaps as of September 30, 2021 and December 31, 2020, are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value |
| | | | Derivative Liabilities |
Derivative Instrument | Aggregate Notional Amount | Effective Date | Maturity Date | September 30, 2021 | | December 31, 2020 |
Interest rate swaps | $ | 100,000 | | March 31, 2017 | July 21, 2023 | $ | (1,689) | | | $ | (2,671) | |
Interest rate swaps | 50,000 | | March 31, 2017 | July 21, 2023 | — | | | (1,338) | |
Interest rate swaps | 100,000 | | June 29, 2018 | July 21, 2023 | — | | | (6,246) | |
| | | | $ | (1,689) | | | $ | (10,255) | |
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 net unrealized gains or losses on the effective swaps are recognized in Other comprehensive income (loss), as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Unrealized gain (loss) on interest rate hedges | $ | 221 | | | $ | 1,774 | | | $ | 2,805 | | | $ | (34,582) | |
Amounts reported in Accumulated other comprehensive loss related to effective cash flow hedges will be reclassified to interest expense as interest payments are made on our variable-rate debt. The gains or losses reclassified from Accumulated other comprehensive loss into interest expense for the three and nine months ended September 30, 2021 and 2020, were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Loss reclassified from Accumulated other comprehensive loss into interest expense | $ | 511 | | | $ | — | | | $ | |