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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 D.C. metro region. We own a portfolio of multifamily and commercial properties. During 2019, we acquired eight multifamily properties with a total of 2,390 units and sold eight retail properties (see note 3). The eight sold retail properties met the criteria for classification as discontinued operations. The remaining retail properties do not meet the qualitative or quantitative criteria for a reportable segment (see note 14). The acquisitions of multifamily properties and dispositions of retail properties are part of a strategic shift away from the retail sector to the multifamily sector. This strategic shift simplifies our portfolio to two reportable segments (multifamily and office) and reduces our exposure to future retail lease expirations.

U.S. Federal Income Taxes

We believe that we qualify as a 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. During the three years ended December 31, 2019, we sold our interests in the following properties (in thousands):

Disposition Date	Property	Type	(Loss) Gain on Sale
June 26, 2019	Quantico Corporate Center (1)	Office	$	(1,046	)
July 23, 2019	Shopping Center Portfolio (2)	Retail	333,023
August 21, 2019	Frederick Crossing and Frederick County Square	Retail	9,507
August 27, 2019	Centre at Hagerstown	Retail	(3,506		)
December 19, 2019	1776 G Street	Office	61,007
		Total 2019	$	398,985
January 19, 2018	Braddock Metro Center	Office	$	—
June 28, 2018	2445 M Street	Office	2,495
		Total 2018	$	2,495
October 23, 2017	Walker House Apartments	Multifamily	$	23,838
		Total 2017	$	23,838

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(1)	Consists of 925 and 1000 Corporate Drive.

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

Seven of the eight retail properties sold during 2019 were identified for deferred exchanges under Section 1031 of the Code (see note 3). We acquired eight multifamily replacement properties (see note 3) during 2019. The taxable gains for 1776 G Street, a portion of the Shopping Center Portfolio proceeds not reinvested in the deferred exchange, and Walker House Apartments were distributed to shareholders through quarterly dividends in their respective year of sale.

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

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minimum tax, as appropriate. As of both December 31, 2019 and 2018, our TRSs had a deferred tax asset of $1.4 million that was fully reserved. As of both December 31, 2019 and 2018, we had deferred state and local tax liabilities of $0.6 million. These deferred tax liabilities are primarily related to temporary differences in the timing of the recognition of revenue, amortization and depreciation.

Beginning in 2018, ordinary taxable income per share is equal to the Section 199A dividend that was created by the TCJA. The following is a breakdown of the taxable percentage of our dividends for the years ended December 31, 2019, 2018 and 2017 (unaudited):

	2019			2018			2017
Ordinary income/Section 199A dividends	80	%		29	%		76	%
Return of capital	20	%		71	%		—	%
Qualified dividends	—	%		—	%		2	%
Unrecaptured Section 1250 gain	—	%		—	%		8	%
Capital gain	—	%		—	%		14	%

Principles of Consolidation and Basis of Presentation

The accompanying audited consolidated financial statements include the consolidated accounts of WashREIT and our subsidiaries and entities in which WashREIT has a controlling financial interest. All intercompany balances and transactions have been eliminated in consolidation.

We have prepared the accompanying audited consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission.

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.

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Recent Accounting Standards

Standards Adopted

Standard/Description	Effective Date and Adoption Considerations	Effect on Financial Statements or Other significant Matters
ASU 2016-02, Leases (Topic 842). This standard amends existing lease accounting standards for both lessees and lessors. Lessees must classify most leases as either finance or operating leases. For lease contracts, or contracts with an embedded lease, with a duration of more than one year in which we are the lessee, the present value of future lease payments are recognized on our consolidated balance sheets as a right-of-use asset and a corresponding lease liability. Lessors Lease contracts currently classified as operating leases are accounted for similarly to prior guidance. However, lessors are required to account for each lease and non-lease component, such as common area maintenance or tenant service revenues, of a contract separately. In July 2018, the FASB issued 2018-11, Leases (Topic 842) - Targeted Improvements (“ASU 2018-11”), which provides lessors optional transition relief from implementing this aspect of ASU 2016-02 if the following criteria are met: (1) both components have the same timing and pattern of revenue and (2) if accounted for separately, both components would be classified as an operating lease. Also, under ASU 2016-02, only incremental costs or initial direct costs of executing a lease contract qualify for capitalization, while prior accounting standards allowed for the capitalization of indirect leasing costs.	We adopted the new standard as of January 1, 2019.	We adopted ASU 2016-02 as of January 1, 2019 using the modified retrospective approach and by applying the transitional practical expedients noted below. Under the modified retrospective approach, we recognized a cumulative effect adjustment of $0.9 million to distributions in excess of net income as of January 1, 2019 (see note 4 for further discussion of the impact of adoption on our consolidated financial statements). We did not elect the hindsight expedient, which would have allowed us to reevaluate lease terms in calculating lease liabilities as part of adoption. We elected not to bifurcate lease contracts into lease and non-lease components, since: (1) the timing and pattern of revenue is not materially different and the non-lease components are not the primary component of the lease, and (2) the lease component, if accounted for separately, would be classified as an operating lease. Accordingly, both lease and non-lease components are presented in “Real estate rental revenue” in our consolidated financial statements. The adoption of ASU 2016-02 did not result in a material change to our recognition of real estate rental revenue.             Under ASU 2018-11, the FASB offered optional transition relief, if elected as a package, and applied consistently by an entity to all of its leases. Accordingly, upon adoption we elected, as a package, the practical expedients for all leases as follows: (1) we did not reassess whether any expired or existing contracts are or contain leases, (2) we did not reassess the lease classification for any expired or existing leases, and (3) we did not reassess initial direct costs for any existing leases under ASC 840.

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New Accounting Standards Issued But Not Yet Effective

Standard/Description	Effective Date and Adoption Considerations	Effect on Financial Statements or Other significant Matters
ASU 2016-13, Measurement of Credit Losses on Financial Instruments. This standard requires financial assets measured at an amortized cost basis, including trade receivables, to be presented at the net amount expected to be collected. This standard does not apply to receivables arising from operating leases accounted for in accordance with Topic 842.	We adopted the new standard as of January 1, 2020.	The adoption of the new standard did not have a material impact 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 impact on our consolidated financial statements.

Revenue Recognition

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

We recognize gains on sales of real estate when we have executed a contract for sale of the asset, transferred controlling financial interest in the asset to the buyer and determined that it is probable that we will collect substantially all of the consideration for the asset. Our real estate sale transactions typically meet these criteria at closing.

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

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

Rents and Other Receivables

Lease related receivables, which include contractual amounts accrued and unpaid from tenants and accrued straight-line rents receivable, are reduced for credit losses. Such amounts are recognized as a reduction to real estate rental revenues. We evaluate the collectability of lease receivables monthly using several factors including a lessee’s creditworthiness. We recognize the credit loss on lease related receivables when, in the opinion of management, collection of substantially all lease payments is not probable. When collectability is determined not probable, any lease income recognized subsequent to recognizing the credit loss is limited to the lesser of the lease income reflected on a straight-line basis or cash collected. The adoption of ASU 2016-02 resulted in an adjustment to our opening distributions in excess of net income balance of $0.9 million, associated with lease related receivables where collection of substantially all operating lease payments was not probable as of January 1, 2019. Rents and other receivables on the consolidated balance sheet is net of allowance for doubtful accounts of $2.4 million as of December 31, 2018.

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Debt Issuance Costs

We amortize external debt issuance costs using the effective interest rate method or the straight-line method which approximates the effective interest rate method, over the estimated life of the related debt. We record debt issuance costs related to notes and mortgage notes, net of amortization, on our consolidated balance sheets as an offset to their related debt. We record debt issuance costs related to revolving lines of credit on our consolidated balance sheets with Prepaid expenses and other assets, regardless of whether a balance on the line of credit is outstanding. We record the amortization of all debt issuance costs as interest expense.

Deferred Leasing Costs

We capitalize and amortize direct and incremental costs associated with the successful negotiation of leases, both external commissions and internal direct costs, on a straight-line basis over the terms of the respective leases. We record the amortization of deferred leasing costs in Depreciation and amortization on the consolidated statements of operations. If an applicable lease terminates prior to the expiration of its initial lease term, we write off the carrying amount of the costs to amortization expense.

We capitalize and amortize against revenue leasing incentives associated with the successful negotiation of leases on a straight-line basis over the terms of the respective leases. We record the amortization of deferred leasing incentives as a reduction of revenue. If an applicable lease terminates prior to the expiration of its initial lease term, we write off the carrying amount of the costs as a reduction of revenue.

Real Estate and Depreciation

We depreciate buildings on a straight-line basis over estimated useful lives ranging from 28 to 50 years. We capitalize all capital improvements associated with replacements, improvements or major repairs to real property that extend its useful life and depreciate them using the straight-line method over their estimated useful lives ranging from 3 to 30 years. We also capitalize costs incurred in connection with our development projects, including interest incurred on borrowing obligations and other internal costs during periods in which qualifying expenditures have been made and activities necessary to get the development projects ready for their intended use are in progress. Capitalization of these costs begins when the activities and related expenditures commence and ceases when the project is substantially complete and ready for its intended use, at which time the project is placed into service and depreciation commences. In addition, we capitalize tenant leasehold improvements when certain criteria are met, including when we supervise construction and will own the improvements. We depreciate all tenant improvements over the shorter of the useful life of the improvements or the term of the related tenant lease.

Real estate depreciation expense from continuing operations was $101.7 million, $82.9 million and $81.0 million during the years ended December 31, 2019, 2018 and 2017, respectively.

We charge maintenance and repair costs that do not extend an asset’s useful life to expense as incurred.

Interest expense from continuing operations and interest capitalized to real estate assets related to development and major renovation activities for the three years ended December 31, 2019 were as follows (in thousands):

	Year Ended December 31,
	2019				2018				2017
Total interest incurred	$	56,948			$	52,592			$	47,757
Capitalized interest	(3,214		)		(2,091		)		(964		)
Interest expense, net of capitalized interest	$	53,734			$	50,501			$	46,793

We recognize impairment losses on long-lived assets used in operations, development assets or land held for future development, if indicators of impairment are present and the net undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Estimates of undiscounted cash flows are based on forward-looking assumptions, including annual and residual cash flows and our estimated holding period for each property. Such assumptions involve a high degree of judgment and could be affected by future economic and market conditions. When determining if a property has indicators of impairment, we evaluate the property's occupancy, our expected holding period for the property, strategic decisions regarding the property's future operations or development and other market factors. If such carrying amount is in excess of the estimated undiscounted cash flows from the operation and disposal of the property, we would recognize an impairment loss equivalent to an amount required to adjust the carrying amount to its estimated fair value, calculated in accordance with current GAAP fair value provisions. Assets held for sale are recorded at the lower of cost or fair value less costs to sell.

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Acquisitions

The properties we acquire typically are not businesses as defined by ASU 2017-01, Business Combinations (Topic 805) - Clarifying the Definition of a Business. Per this definition, a set of transferred assets and activities is not a business when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. We therefore account for such acquisitions as asset acquisitions. Acquisition costs are capitalized and identifiable assets (including physical assets and in-place leases), liabilities assumed and any noncontrolling interests are measured by allocating the cost of the acquisition on a relative fair value basis. Acquisitions executed prior to our adoption of ASU 2017-01 as of January 1, 2017 were accounted for as business combinations.

We determine the fair values of acquired buildings on an “as-if-vacant” basis considering a variety of factors, including the replacement cost of the property, estimated rental and absorption rates, estimated future cash flows and valuation assumptions consistent with current market conditions. We determine the fair value of land acquired based on comparisons to similar properties that have been recently marketed for sale or sold.

The fair value of in-place leases consists of the following components – (a) the estimated cost to us to replace the leases, including foregone rents during the period of finding a new tenant and foregone recovery of tenant pass-throughs (referred to as “absorption cost”); (b) the estimated cost of tenant improvements, and other direct costs associated with obtaining a new tenant (referred to as “tenant origination cost”); (c) estimated leasing commissions associated with obtaining a new tenant (referred to as “leasing commissions”); (d) the above/at/below market cash flow of the leases, determined by comparing the projected cash flows of the leases in place, including consideration of renewal options, to projected cash flows of comparable market-rate leases (referred to as “net lease intangible”); and (e) the value, if any, of customer relationships, determined based on our evaluation of the specific characteristics of each tenant’s lease and our overall relationship with the tenant (referred to as “customer relationship value”). We have attributed no value to customer relationships as of December 31, 2019 and 2018.

We discount the amounts used to calculate net lease intangibles using an interest rate which reflects the risks associated with the leases acquired. We classify tenant origination costs as income producing property on our consolidated balance sheets and amortize the tenant origination costs as depreciation expense on a straight-line basis over the remaining life of the underlying leases. We classify leasing commissions and absorption costs as other assets and amortize leasing commissions and absorption costs as amortization expense on a straight-line basis over the remaining life of the underlying leases. We classify net lease intangible assets as other assets and amortize them on a straight-line basis as a decrease to real estate rental revenue over the remaining term of the underlying leases. We classify net lease intangible liabilities as other liabilities and amortize them on a straight-line basis as an increase to real estate rental revenue over the remaining term of the underlying leases. If any of the fair value of below market lease intangibles includes fair value associated with a renewal option, such amounts are not amortized until the renewal option is executed, else the related value is expensed at that time. Should a tenant terminate its lease prior to the expiration date, we accelerate the amortization of the unamortized portion of the tenant origination cost, leasing commissions, absorption costs and net lease intangible associated with that lease, over its new, shorter term.

Software Developed for Internal Use

The costs of software developed for internal use that qualify for capitalization are included with Prepaid expenses and other assets on our consolidated balance sheets. These capitalized costs include external direct costs utilized in developing or obtaining the applications and expenses for employees who are directly associated with the development of the applications. Capitalization of such costs begins when the preliminary project stage is complete and continues until the project is substantially complete and is ready for its intended purpose. Completed projects are amortized on a straight-line basis over their estimated useful lives.

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 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

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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.

Segments

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 segments’ performance. Net operating income is a key measurement of our segment profit and loss. Net operating income is defined as segment real estate rental revenue less segment real estate expenses.

Cash and Cash Equivalents

Cash and cash equivalents include cash and commercial paper with original maturities of 90 days or less. We maintain cash deposits with financial institutions that at times exceed applicable insurance limits. We reduce this risk by maintaining such deposits with high quality financial institutions that management believes are credit-worthy.

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.

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” under the two-class 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.

Stock Based Compensation

We currently maintain equity based compensation plans for trustees, officers and employees.

We recognize compensation expense for service-based share awards ratably over the period from the service inception date through the vesting period based on the fair market value of the shares on the date of grant. We account for forfeitures as they occur. If an award's service inception date precedes the grant date, we initially measure compensation expense for awards with performance conditions at fair value at the service inception date based on probability of payout, and we remeasure compensation expense at subsequent reporting dates until all of the award’s key terms and conditions are known and the grant date is established. We amortize awards with performance conditions using the graded expense method. We measure compensation expense for awards with market conditions based on the grant date fair value, as determined using a Monte Carlo simulation, and we amortize the expense ratably over the requisite service period, regardless of whether the market conditions are achieved and the awards ultimately vest. Compensation expense for the trustee grants, which fully vest immediately, is fully recognized upon issuance based upon the fair market value of the shares on the date of grant.

Accounting for Uncertainty in Income Taxes

We can recognize a tax benefit only if it is “more likely than not” that a particular tax position will be sustained upon examination or audit. To the extent that the “more likely than not” standard has been satisfied, the benefit associated with a tax position is measured as the largest amount that is greater than 50% likely of being recognized upon settlement. As of December 31, 2019 and 2018, we did not have any unrecognized tax benefits. We do not believe that there will be any material changes to our uncertain tax positions over the next twelve months.

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We are subject to federal income tax as well as income tax of the states of Maryland and Virginia, and the District of Columbia. However, as a REIT, we generally are not subject to income tax on our taxable income to the extent it is distributed as dividends to our shareholders.

Tax returns filed for 2015 through 2019 tax years are subject to examination by taxing authorities. We classify interest and penalties related to uncertain tax positions, if any, in our financial statements as a component of general and administrative expense.

Derivatives

We borrow funds at a combination of fixed and variable rates. Borrowings under our revolving credit facility and term loans bear interest at variable rates. Our interest rate risk management objectives are to minimize interest rate fluctuation on long-term indebtedness and limit the impact of interest rate changes on earnings and cash flows. To achieve these objectives, from time to time, we may enter into interest rate hedge contracts such as collars, swaps, caps and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We generally do not hold or issue these derivative contracts for trading or speculative purposes. The interest rate swaps we enter into are recorded at fair value on a recurring basis. We assess effectiveness of our cash flow hedges both at inception and on an ongoing basis. The effective portion of changes in fair value of the interest rate swaps associated with our cash flow hedges is recorded in accumulated other comprehensive income (loss). Our cash flow hedges become ineffective if critical terms of the hedging instrument and the debt instrument such as notional amounts, settlement dates, reset dates, calculation period and LIBOR do not perfectly match. In addition, we evaluate the default risk of the counterparty by monitoring the creditworthiness of the counterparty. When ineffectiveness of a cash flow hedge exists, the ineffective portion of changes in fair value of the interest rate swaps associated with our cash flow hedges is recognized in earnings in the period affected.

As of December 31, 2019 and 2018, our real estate investment portfolio classified as income producing property that is held and used, at cost, consists of properties as follows (in thousands):

	December 31,
	2019				2018
Multifamily	$	1,469,011			$	919,285
Office	1,329,722				1,507,986
Other (1)	160,489				154,650
	$	2,959,222			$	2,581,921

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(1)	Consists of the retail properties not classified as discontinued operations: Takoma Park, Westminster, Concord Centre, Chevy Chase Metro Plaza, 800 S. Washington Street, Randolph Shopping Center, Montrose Shopping Center and Spring Valley Village.

Our results of operations are dependent on the overall economic health of our markets, tenants and the specific segments in which we own properties. All property types are affected by external economic factors, such as inflation, consumer confidence and unemployment rates, as well as changing tenant and consumer requirements.

As of December 31, 2019, no property accounted for more than approximately 10% of total assets. No single property or tenant accounted for more than 10% of the real estate rental revenue.

We have properties under development/redevelopment and held for current or future development. The cost of our real estate portfolio under development or held for future development as of December 31, 2019 and 2018 is as follows (in thousands):

	December 31,
	2019				2018
Multifamily	$	123,071			$	83,945
Office	478				478
Other	644				2,808
	$	124,193			$	87,231

As of December 31, 2019, we have invested $110.4 million, including the cost of acquired land, in The Trove, a multifamily development adjacent to The Wellington. We substantially completed major construction activities for The Trove garage levels

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1-5 during the third quarter of 2019 and placed into service assets totaling $12.3 million. We expect to place the remainder of Trove development cost into service during 2020. We have also invested $25.6 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.

Acquisitions

Our current strategy is to recycle legacy assets that lack the income growth potential we seek and to invest in high-quality assets with compelling value-add returns through redevelopment opportunities in our existing portfolio and acquisitions that meet our stringent investment criteria. We focus on properties inside the Washington metro region’s Beltway, near major transportation nodes and in areas with strong employment drivers and superior growth demographics.

Properties and land for development acquired during the three years ended December 31, 2019 were as follows:

Acquisition Date

Property

Type

# of units (unaudited)

Rentable Square  Feet (unaudited)

Contract Purchase  Price (in thousands)

April 30, 2019

Assembly Portfolio - Virginia (1)

Multifamily

1,685

N/A

$

379,100

June 27, 2019

Assembly Portfolio - Maryland (2)

Multifamily

428

N/A

82,070

July 23, 2019

Cascade at Landmark

Multifamily

277

N/A

69,750

2,390

$

530,920

January 18, 2018

Arlington Tower

Office

N/A

391,000

$

250,000

April 4, 2017

Watergate 600

Office

N/A

293,000

$

135,000

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

(2)	Consists of Assembly Germantown and Assembly Watkins Mill. The Assembly Portfolio - Virginia and Assembly Portfolio - Maryland properties are collectively the “Assembly Portfolio.”

The purchases of the Assembly Portfolio and Cascade at Landmark were structured as exchanges under Section 1031 of the Code in a manner such that legal title was held by a 1031 exchange facilitator (an "Exchange Accommodator") until certain identified properties were sold and the deferred exchanges were completed. We retained all of the legal and economic benefits and obligations related to the Assembly Portfolio and Cascade at Landmark. As such, the Assembly Portfolio and Cascade at Landmark were considered to be variable interest entities until legal title was transferred to us upon completion of the 1031 exchanges, which occurred during the third quarter of 2019. We consolidated the assets and liabilities of the Assembly Portfolio and Cascade at Landmark because we determined that WashREIT was the primary beneficiary of these properties.

The results of operations from acquired operating properties are included in the consolidated statements of operations as of their acquisition dates.

The revenue and earnings of our acquisitions during their year of acquisition for the three years ended December 31, 2019 are as follows (in thousands):

	Year Ended December 31,
	2019				2018				2017
Real estate rental revenue	$	27,641			$	22,389			$	14,518
Net (loss) income	(10,167		)		3,623				2,226

As discussed in note 2, we record the acquired physical assets (land, building and tenant improvements), in-place leases (absorption, tenant origination costs, leasing commissions, and net lease intangible assets/liabilities), and any other assumed liabilities on a relative fair value basis.

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We recorded the total cost of the above acquisitions as follows (in thousands):

	2019				2018				2017
Land	$	92,391			$	63,970			$	45,981
Buildings and improvements	423,663				142,900				66,241
Tenant origination costs	—				13,625				12,084
Leasing commissions/absorption costs	15,474				27,465				23,161
Net lease intangible assets	—				3,142				498
Net lease intangible liabilities	—				(545		)		(9,585		)
Deferred tax liability	—				—				(560		)
Total	$	531,528			$	250,557			$	137,820

 

As of December 31, 2019, the weighted remaining average life of the absorption costs was two months.

The difference in the total cost of the 2019 acquisitions of $531.5 million and the cash paid for the acquisitions per the consolidated statements of cash flows of $528.6 million is primarily due to credits received at settlement totaling $2.9 million.

The difference in the total contract purchase price of $250.0 million for the 2018 acquisition and cash paid for the acquisition per the consolidated statements of cash flows of $106.4 million is primarily due to a mortgage note assumed and repaid at settlement ($135.5 million), an acquisition deposit made during 2017 ($6.3 million), and a net credit to the buyer for certain expenditures ($2.4 million), partially offset by capitalized acquisition related costs ($0.6 million).

The difference in the total contract price of $135.0 million for the 2017 acquisition and cash paid for the acquisition per the consolidated statements of cash flows of $138.4 million is primarily due to capitalized acquisition-related costs ($2.8 million) and a net credit to the buyer for certain expenditures ($1.0 million), partially offset by the issuance of 12,124 operating partnership units (“Operating Partnership Units”) as part of the consideration ($0.4 million). The Operating Partnership Units are units in WashREIT Watergate 600 OP LP, a consolidated subsidiary of WashREIT. These Operating Partnership Units may be redeemed for either cash equal to the fair market value of a share of WashREIT common stock at the time of redemption (based on a 20-day average price) or, at the option of WashREIT, one registered or unregistered share of WashREIT common stock. In connection with the 2017 acquisition, we granted registration rights to the two contributors of the Watergate 600 property relating to the resale of any shares issued upon exchange of Operating Partnership Units pursuant to a shelf registration statement that we had an obligation to make available to the contributors approximately one year after the issuance of the Operating Partnership Units. This shelf registration statement was filed on March 8, 2018.

Balances, net of accumulated depreciation or amortization, as appropriate, of the components of the fair value of in-place leases at December 31, 2019 and 2018 were as follows (in thousands):

	December 31,
	2019												2018
	Gross Carrying Value				Accumulated Amortization				Net				Gross Carrying Value				Accumulated Amortization				Net
Tenant origination costs	$	50,155			$	33,364			$	16,791			$	57,897			$	36,570			$	21,327
Leasing commissions/absorption costs	122,348				92,401				29,947				114,354				77,194				37,160
Net lease intangible assets	15,183				11,964				3,219				16,353				11,947				4,406
Net lease intangible liabilities	29,836				20,854				8,982				31,124				20,016				11,108
Below-market ground lease intangible asset	12,080				2,282				9,798				12,080				2,093				9,987

Amortization of these combined components during the three years ended December 31, 2019, 2018 and 2017 was as follows (in thousands):

	Year Ended December 31,
	2019				2018				2017
Depreciation and amortization expense	$	27,123			$	22,361			$	13,996
Real estate rental revenue increase, net	(924		)		(1,225		)		(776		)
	$	26,199			$	21,136			$	13,220

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Amortization of these combined components over the next five years is projected to be as follows (in thousands):

	Depreciation and amortization expense				Real estate rental revenue, net increase				Total
2020	$	9,975			$	(406	)		$	9,569
2021	8,576				(547		)		8,029
2022	8,078				(736		)		7,342
2023	6,032				(974		)		5,058
2024	5,264				(862		)		4,402
Thereafter	18,611				(2,238		)		16,373

Properties Sold and Held for Sale

We intend to hold our properties for investment with a view to long-term appreciation, to engage in the business of acquiring, developing and owning our properties, and to make occasional sales of the properties that no longer meet our long-term strategy or return objectives and where market conditions for sale are favorable. The proceeds from the sales may be reinvested into other properties, used to fund development operations or to support other corporate needs, or distributed to our shareholders. Depreciation on these properties is discontinued when classified as held for sale, but operating revenues, other operating expenses and interest continue to be recognized through the date of sale.

We classified as held for sale or sold our interests in the following properties during the three years ended December 31, 2019:

Disposition Date		Property		Type		# of units (unaudited)			Rentable Square Feet (unaudited)			Contract Sale Price (in thousands)				(Loss) Gain on Sale (in thousands)
June 26, 2019		Quantico Corporate Center (1)		Office		N/A			272,000			$	33,000			$	(1,046	)
July 23, 2019		Shopping Center Portfolio (2)		Retail		N/A			800,000			485,250				333,023
August 21, 2019		Frederick Crossing and Frederick County Square		Retail		N/A			520,000			57,500				9,507
August 27, 2019		Centre at Hagerstown		Retail		N/A			330,000			23,500				(3,506		)
December 19, 2019		1776 G Street		Office		N/A			262,000			129,500				61,007
N/A		John Marshall II		Office		N/A			223,000			63,350				N/A
				Total 2019					2,407,000			$	792,100			$	398,985
January 19, 2018		Braddock Metro Center		Office		N/A			356,000			$	93,000			$	—
June 28, 2018		2445 M Street		Office		N/A			292,000			101,600				2,495
				Total 2018					648,000			$	194,600			$	2,495
October 23, 2017		Walker House Apartments		Multifamily		212			N/A			$	32,200			$	23,838
				Total 2017								$	32,200			$	23,838

______________________________ 

(1)	Consists of 925 and 1000 Corporate Drive.

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

We have fully transferred control of the assets associated with these disposed properties and do not have continuing involvement in the operations of these properties.

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. We based this fair valuation on the expected sale price from a potential sale. There were few observable market transactions for similar properties. This fair valuation falls into Level 2 of the fair value hierarchy due to its reliance on a quoted price in a market that is not active.

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In June 2019, we entered into two separate purchase and sale agreements with two separate buyers to sell the Shopping Center Portfolio and the Power Center Portfolio (Frederick Crossing, Frederick County Square and Centre at Hagerstown). As of June 30, 2019, we received a non-refundable deposit from the potential buyer of the Shopping Center Portfolio and expected to receive a non-refundable deposit from the potential buyer of the Power Center Portfolio in July 2019. As of June 30, 2019, the properties in the Retail Portfolio (as defined below) met the criteria for classification as held for sale.

We closed on the Shopping Center Portfolio sale transaction on July 23, 2019, recognizing a gain on sale of real estate of $333.0 million. Prior to closing on the disposition of the Shopping Center Portfolio, we prepaid the mortgage note secured by Olney Village Center (a property in the Shopping Center Portfolio), 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 sales of these assets on August 21, 2019, recognizing a gain on sale of real estate of $9.5 million. Following the amendment to the purchase and sale agreement to sell the Power Center Portfolio, we marketed Centre at Hagerstown for sale and identified a separate buyer. We closed on the 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 and the Power Center Portfolio. The disposition of the Retail Portfolio represents a strategic shift that had a major effect on our financial results and we have accordingly reported the Retail Portfolio as discontinued operations. The Retail Portfolio represents assets generating a majority of the revenue from our retail properties and we have determined that our retail line of business is no longer a reportable segment (see note 14).

In October 2019, we renewed and extended our lease with the World Bank at 1776 G Street NW, an office property in Washington, DC, through December 31, 2025. In December 2019, we sold the property to the World Bank for a contract sale price of $129.5 million, recognizing a gain on sale of real estate of $61.0 million.

In December 2019, we executed a purchase and sale agreement to sell John Marshall II for a contract sale price of $63.4 million. We anticipate settlement in the first quarter of 2020, however, there can be no assurances that this proposed sale will be consummated. Upon execution of the purchase and sale agreement, the property met the criteria for classification as held for sale.

During the first quarter of 2018, we sold Braddock Metro Center, a 356,000 square foot office property in Alexandria, Virginia for a contract sales price of $93.0 million. Due to then-ongoing negotiations to sell the property, we evaluated Braddock Metro Center for impairment and recognized a $9.1 million impairment charge during 2017 in order to reduce the carrying value of the property to its estimated fair value, less selling costs. We based this fair valuation on the expected sale price from a potential sale. There are few observable market transactions for similar properties. This fair valuation falls into Level 2 of the fair value hierarchy due to its reliance on a quoted price in a market that is not active.

During the first quarter of 2018, we executed a purchase and sale agreement to sell 2445 M Street, a 292,000 square foot office property in Washington, DC, for a contract sales price of $100.0 million, with settlement originally scheduled for the third quarter of 2018. During 2017, we evaluated 2445 M Street for impairment and recognized a $24.1 million impairment charge in order to reduce the carrying value of the property to its estimated fair value. Upon execution of the purchase and sale agreement, the property met the criteria for classification as held for sale. Due to the property’s classification as held for sale, we recorded an additional impairment charge of $1.9 million in the first quarter of 2018 in order to reduce the carrying value of the property to its estimated fair value, less estimated selling costs. We based this fair value on the expected sales price from a potential sale. There are few observable market transactions for similar properties. This fair valuation falls into Level 2 of the fair value hierarchy due to its reliance on a quoted price in a market that is not active. During the second quarter of 2018, we executed an amendment to the purchase and sale agreement which increased the contract sales price to $101.6 million and advanced the settlement date. On June 28, 2018, we sold 2445 M Street, recognizing a gain on sale of real estate of $2.5 million.

During the second quarter of 2017, we executed a purchase and sale agreement for the sale of Walker House Apartments, a 212- unit multifamily property in Gaithersburg, Maryland, for a contract sales price of $32.2 million. We closed on the sale during the fourth quarter of 2017, recognizing a gain on sale of $23.8 million.

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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):

	2019				2018				2017
Real estate rental revenue	$	28,200			$	45,160			$	44,797
Real estate expenses	(6,803		)		(10,638		)		(10,251		)
Depreciation and amortization	(4,926		)		(9,402		)		(10,626		)
Interest expense	(313		)		(643		)		(740		)
Loss on extinguishment of debt	(764		)		—				—
Gain on sale of real estate	339,024				—				—
Income from discontinued operations	$	354,418			$	24,477			$	23,180
Basic net income per share	$	4.39			$	0.31			$	0.30
Diluted net income per share	$	4.39			$	0.31			$	0.30
Capital expenditures	$	809			$	2,138			$	1,601

All assets related to the Retail Portfolio were sold as of December 31, 2019. As of December 31, 2018, assets related to the Retail Portfolio were as follows (in thousands):

Land	$	88,087
Income producing property	216,577
	304,664
Accumulated depreciation and amortization	(101,254		)
Income producing property, net	203,410
Rents and other receivables	9,898
Prepaid expenses and other assets	8,653
Total assets	$	221,961

All liabilities related to the Retail Portfolio were sold as of December 31, 2019. As of December 31, 2018, liabilities related to the Retail Portfolio were as follows (in thousands):

Mortgage notes payable, net	$	11,515
Accounts payable and other liabilities	1,620
Advance rents	1,771
Tenant security deposits	612
Liabilities related to properties sold or held for sale	$	15,518

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Leasing as a Lessor

Future Minimum Rental Income

As of December 31, 2019, non-cancelable commercial operating leases provide for future minimum rental income from continuing operations as follows (in thousands):

2020		$	139,053
2021		133,907
2022		120,491
2023		102,877
2024		91,253
Thereafter		301,974
		$	889,555

Apartment leases are not included as the terms are generally for one year or less. Rental income under most of these commercial leases increase in future years based on agreed-upon percentages or in some instances, changes in the Consumer Price Index.

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 straight-line rental expense of $0.3 million and variable rental payments of $0.9 million during each of the three years ended December 31, 2019.

Upon adoption of ASU 2016-02, we recognized a right-of-use asset (included in Income producing property) and lease liability (included in Accounts payable and other liabilities) of $4.2 million. We used a discount rate of approximately 5.9%, which was derived from our assessment of securitized rates for similar assets and credit quality. We recognized $0.3 million of right-of-use asset and lease liability amortization during 2019. In addition, as of January 1, 2019, we reclassified the associated below-market ground lease intangible asset of $10.0 million, net of accumulated amortization of $2.1 million, from Prepaid expenses and other assets to Income producing property on our consolidated balance sheets.

The following table sets forth the undiscounted cash flows of our scheduled obligations for future minimum payments on our operating ground lease as of December 31, 2019 and a reconciliation of those cash flows to the operating lease liability as of December 31, 2019 (in thousands):

2020		$	260
2021		260
2022		260
2023		260
2024		260
Thereafter		11,895
		13,195
Imputed interest		(9,225		)
Lease liability		$	3,970

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As of December 31, 2019 and 2018, we had outstanding mortgage notes payable, collateralized by a building and related land from our portfolio, as follows (in thousands):

							December 31,
Properties		Assumption/Issuance Date (1)		Effective Interest Rate (2)			2019				2018				Payoff Date
Yale West (3)		2/21/2014		3.75	%		$	45,654			$	46,155			1/31/2020
Premiums and discounts, net							1,470				2,187
Debt issuance costs, net							(50		)		(65		)
							$	47,074			$	48,277

______________________________ 

(1)	This mortgage was assumed with the acquisition of the collateralized property. We record mortgages assumed in an acquisition at fair value.

(2)	Yield on the assumption/issuance date, including the effects of any premiums, discounts or fair value adjustments on the notes.

(3)	The maturity date of the mortgage note was January 1, 2052, but was prepaid in January 2020. We incurred a gain on extinguishment of debt of $0.5 million in association with this prepayment.

Except as noted above, principal and interest are payable monthly until the maturity date, at which time all unpaid principal and interest are payable in full.

Total cost basis of the above mortgaged properties was $77.4 million and $76.9 million at December 31, 2019 and 2018, respectively.

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, and expands our prior $600.0 million unsecured revolving credit facility that was set to expire in June 2019. The Credit Agreement has an accordion feature that allows us to increase the facility up to $1.5 billion in the aggregate, to the extent the lenders agree to provide additional revolving loan commitments or term loans.

The 2015 Term Loan has a 5.5 year term and currently has an interest rate of one month LIBOR plus 110 basis points, based on WashREIT's current unsecured debt ratings. We entered into two interest rate swaps to effectively fix the interest rate at 2.7% (see note 8).

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% 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 unused and available at December 31, 2019 was as follows (in thousands):

Committed capacity	$	700,000
Borrowings outstanding	(56,000		)
Unused and available	$	644,000

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We executed borrowings and repayments on the Revolving Credit Facility during 2019 as follows (in thousands):

Balance at December 31, 2018	$	188,000
Borrowings	687,000
Repayments	(819,000		)
Balance at December 31, 2019	$	56,000

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% 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 0.5% 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 million committed capacity, without regard to usage. As of December 31, 2019, the interest rate on the facility was LIBOR plus 1.00%, the one month LIBOR was 1.70% and the facility fee was 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.

For the three years ended December 31, 2019, we recognized interest expense (excluding facility fees) and facility fees as follows (in thousands):

	Year Ended December 31,
	2019				2018				2017
Interest expense (excluding facility fees)	$	6,554			$	6,843			$	3,857
Facility fees	1,400				1,371				1,217

The Revolving Credit Facility contains and the prior unsecured credit facility that it replaced contained certain financial and non-financial covenants, all of which we have met as of December 31, 2019 and 2018. Included in these covenants are limits on our total indebtedness, secured and unsecured indebtedness and required debt service payments.

Information related to revolving credit facilities for the three years ended December 31, 2019 as follows (in thousands, except percentage amounts):

	Year Ended December 31,
	2019				2018				2017
Total revolving credit facilities at December 31	$	700,000			$	700,000			$	600,000
Borrowings outstanding at December 31	56,000				188,000				166,000
Weighted average daily borrowings during the year	196,074				230,934				179,633
Maximum daily borrowings during the year	300,000				429,000				252,000
Weighted average interest rate during the year	3.34		%		2.96		%		2.15		%
Weighted average interest rate on borrowings outstanding at December 31	2.73		%		3.52		%		2.54		%

The covenants under our Revolving Credit Facility require us to insure our properties against loss or damage in amounts customarily maintained by similar businesses or as they may be required by applicable law. The covenants for the notes require us to keep all of our insurable properties insured against loss or damage at least equal to their then full insurable value. We have an insurance policy that has no terrorism exclusion, except for non-certified nuclear, chemical and biological acts of terrorism. Our financial condition and results of operations are subject to the risks associated with acts of terrorism and the potential for uninsured losses as the result of any such acts. Effective November 26, 2002, under this existing coverage, any losses caused by certified acts of terrorism would be partially reimbursed by the United States under a formula established by federal law. Under this formula, the United States pays 85% of covered terrorism losses exceeding the statutorily established deductible paid by the insurance provider, and insurers pay 10% until aggregate insured losses from all insurers reach $100 billion in a calendar year. If the aggregate amount of insured losses under this program exceeds $100 billion during the applicable period for all insured and insurers combined, then each insurance provider will not be liable for payment of any amount which exceeds the aggregate amount of $100 billion. On December 20, 2019, The Terrorism Risk Insurance Program Reauthorization Act of 2019 was signed into law, extending the program through December 31, 2027.

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Our unsecured notes and term loans outstanding as of December 31, 2019 and 2018 are as follows (in thousands):

				Effective			December 31,								Payoff Date/
	Coupon/Stated Rate			Rate (1)			2019				2018				Maturity Date (2)
10 Year Unsecured Notes	4.95	%		5.05	%		250,000				$	250,000			10/1/2020
2015 Term Loan	1 Month LIBOR + 110 basis points			2.72	%		150,000				150,000				3/15/2021
10 Year Unsecured Notes	3.95	%		4.02	%		300,000				300,000				10/15/2022
2018 Term Loan (3)	1 Month LIBOR + 110 basis points			2.87	%		250,000				250,000				7/21/2023
30 Year Unsecured Notes	7.25	%		7.36	%		50,000				50,000				2/25/2028
Total principal							1,000,000				1,000,000
Premiums and discounts, net							(797		)		(1,189		)
Deferred issuance costs, net							(2,481		)		(3,414		)
Total							$	996,722			995,397

______________________________

(1)	For fixed rate notes, the effective rate represents the yield on issuance date, including the effects of discounts on the notes. For variable rate notes, the effective rate represents the rate as fixed by interest rate derivatives (see note 8).

(2)	No principal amounts are due prior to maturity.

(3)	The 2018 Term Loan increased and replaced the 2016 Term Loan (see note 6).

On April 30, 2019, we entered into a six-month, $450.0 million unsecured term loan facility (“2019 Term Loan”), maturing on October 30, 2019 with an option to extend for a six-month period. The 2019 Term Loan bore interest, at WashREIT’s option, at a rate of either LIBOR plus a margin ranging from 0.75% to 1.65% or the base rate plus a margin ranging 0.0% to 0.65% (in each case depending upon WashREIT’s credit rating). The base rate was the highest of the administrative agent’s prime rate, the federal funds rate plus 0.50% and the daily one-month LIBOR rate plus 1.0%. At WashREIT’s election, the 2019 Term Loan had an interest rate of one-week LIBOR plus 100 basis points, based on WashREIT’s current unsecured debt rating. The 2019 Term Loan was used to fund the acquisition of the Assembly Portfolio (see note 3). During the third quarter of 2019, we repaid the $450.0 million of borrowings on the 2019 Term Loan with proceeds from the sale of the Retail Portfolio (see note 3).

The required principal payments on the unsecured notes and term loans as of December 31, 2019 are as follows (in thousands):

2020	$	250,000
2021	150,000
2022	300,000
2023	250,000
2024	—
Thereafter	50,000
	$	1,000,000

 

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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 2015 Term Loan (see note 7) 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 2016 Term Loan (see note 7) 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 (see note 7) 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% (see note 6 and note 7).

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 the future debt to replace our $250.0 million of 4.95% 10-year unsecured notes maturing in 2020 (see note 7).

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 effective portion of changes in fair value of the cash flow hedges in other comprehensive income. The resulting unrealized loss on the effective portions of the cash flow hedges was the only activity in other comprehensive income (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 effective for 2019 and 2018 and hedge ineffectiveness did not impact earnings in 2019 and 2018.

 

The fair values of the interest rate swaps as of December 31, 2019 and 2018, are as follows (in thousands):

	Aggregate Notional Amount			Effective Date		Fair Value
						Derivative Assets (Liabilities)
						December 31,
Derivative Instrument					Maturity Date	2019				2018
Interest rate swaps	$	150,000		October 15, 2015	March 15, 2021	$	(62	)		$	2,720
Interest rate swaps	150,000			March 31, 2017	July 21, 2023	1,825				7,918
Interest rate swaps	100,000			June 29, 2018	July 21, 2023	(3,664		)		(799		)
Interest rate swaps	200,000			April 1, 2020	April 1, 2030	3,724				—
	$	600,000				$	1,823			$	9,839

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

	Year Ending December 31,
	2019				2018				2017
Unrealized (loss) gain on interest rate hedges	$	(8,016	)		$	420			$	1,808

Amounts reported in accumulated other comprehensive 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 $0.1 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 December 31, 2019, the fair value of the derivative assets, including accrued interest, was $5.5 million, and the fair value of the derivative liabilities, including accrued interest, was $3.7 million. As of December 31, 2019, we have not

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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 agreement. 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.

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 December 31, 2019 and 2018 that are recorded at fair value on a recurring basis are the assets held in the Supplemental Executive Retirement Plan ("SERP"), which primarily consists of investments in mutual funds, and the interest rate swaps (see note 8).

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, 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 December 31, 2019 and 2018 were as follows (in thousands):

	December 31, 2019																December 31, 2018
	Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Assets:
SERP	$	1,792			$	—			$	1,792			$	—			$	1,364			$	—			$	1,364			$	—
Interest rate swaps	5,549				—				5,549				—				10,638				—				10,638				—
Liabilities:
Interest rate swaps	(3,726		)		—				(3,726		)		—				(799		)		—				(799		)		—

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

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amounts. In addition, fair value estimates are made at a point in time and thus, estimates of fair value subsequent to December 31, 2019 may differ significantly from the amounts presented.

Below is a summary of significant methodologies used in estimating fair values and a schedule of fair values at December 31, 2019.

Cash and Cash Equivalents and Restricted Cash

Cash and cash equivalents and restricted cash include cash and commercial paper with original maturities of less than 90 days, which are valued at the carrying value, which approximates fair value due to the short maturity of these instruments (Level 1 inputs).

Debt

Mortgage notes payable consist of instruments in which certain of our real estate assets are used for collateral. We estimate the fair value of the mortgage notes payable by discounting the contractual cash flows at a rate equal to the relevant treasury rates (with respect to the timing of each cash flow) plus credit spreads estimated through independent comparisons to real estate assets or loans with similar characteristics. Line of credit payable consist of bank facilities which we use for various purposes including working capital, acquisition funding and capital improvements. The line of credit advances and term loans with floating interest rates are priced at a specified rate plus a spread. We estimate the market value based on a comparison of the spreads of the advances to market given the adjustable base rate. We estimate the fair value of the notes payable by discounting the contractual cash flows at a rate equal to the relevant treasury rates (with respect to the timing of each cash flow) plus credit spreads derived using the relevant securities’ market prices. We classify these fair value measurements as Level 3 as we use significant unobservable inputs and management judgment due to the absence of quoted market prices.

As of December 31, 2019 and 2018, the carrying values and estimated fair values of our financial instruments were as follows (in thousands):

	December 31,
	2019								2018
	Carrying Value				Fair Value				Carrying Value				Fair Value
Cash and cash equivalents	$	12,939			$	12,939			$	6,016			$	6,016
Restricted cash	1,812				1,812				1,624				1,624
Mortgage notes payable	47,074				47,899				48,277				48,368
Line of credit payable	56,000				56,000				188,000				188,000
Notes payable	996,722				1,022,937				995,397				1,015,210

The mortgage note secured by Olney Village Center was reclassified to Other liabilities related to properties held for sale prior to its prepayment during the third quarter of 2019 (see note 3). As of December 31, 2018, the carrying value and estimated fair value of the mortgage note secured by Olney Village Center were $11.5 million and $12.0 million, respectively.

WashREIT maintains short-term and long-term 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. There were no options issued or outstanding as of December 31, 2019 and 2018.

Short-Term Incentive Plan ("STIP")

Under the STIP, executive officers earn awards, payable 50% in cash and 50% in restricted shares, based on a percentage of salary and an achievement rating subject to the discretion of the Compensation Committee of the board of trustees in consideration of various performance conditions and other subjective factors during a one-year performance period. With respect to the 50% of the STIP award payable in restricted shares, the restricted shares will vest over a three-year period commencing on the January 1 following the end of the one-year performance period. Prior to the adoption of the 2016 Omnibus Incentive Plan, stock based

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awards to officers, non-officer employees and trustees were issued under the Washington Real Estate Investment Trust 2007 Omnibus Long-Term Incentive Plan which allowed for awards in the form of restricted shares, restricted share units, options and other awards up to an aggregate of 2,000,000 shares while the plan was in effect.

The grant date for the 50% of the STIP award payable in restricted shares is the date on which the Compensation Committee approves the STIP awards. We recognize compensation expense on this 50% when the grant date occurs at the end of the one-year period through the three-year vesting period.

Bonuses payable under the short-term incentive plans for non-executive officers and staff are payable 100% in cash.

Long-Term Incentive Plan ("LTIP")

Under the LTIP, executive officers earn awards payable, 75% in unrestricted shares and 25% in restricted shares, based on a percentage of salary and the achievement of certain market conditions. For performance periods beginning prior to January 1, 2018, LTIP performance was evaluated based 50% on absolute total shareholder return (“TSR”) and 50% on relative TSR over a three-year evaluation period with a new three-year period initiating under the existing plan each year. During the first quarter of 2018, we amended the LTIP for executive officers to eliminate the absolute TSR component and only utilize relative TSR in the measurement of market condition performance. Under the amended LTIP, relative TSR is evaluated 50% relative to a defined population of peer companies and 50% relative to the FTSE NAREIT Diversified Index. The amendment became effective for three-year performance periods commencing on or after January 1, 2018. The officers' total award opportunities under the LTIP stated as a percentage of base salary ranges from 80% to 150% at target level. The unrestricted shares vest immediately at the end of the three-year performance period, and the restricted shares vest over a one-year period commencing on the January 1 following the end of the three-year performance period.

We recognize compensation expense ratably (over three years for the 75% unrestricted shares and over four years for the 25% restricted shares) based on the grant date fair value, as determined using a Monte Carlo simulation, and regardless of whether the market conditions are achieved and the awards ultimately vest.

We use a binomial model which employs the Monte Carlo method as of the grant date to determine the fair value of the officer LTIP awards. For three-year performance periods commencing on or after January 1, 2018, the market condition performance measurement is based on total shareholder return relative to a defined population of peer companies (50% weighting) and relative to the FTSE NAREIT Diversified Index (50% weighting). The model evaluates the awards for changing total shareholder return over the term of the vesting, relative to the peer companies and relative to the FTSE NAREIT Diversified Index, and uses random simulations that are based on past stock characteristics as well as dividend growth and other factors for WashREIT and each of the peer companies. For three-year performance periods commencing prior to January 1, 2018, the market condition performance measurement was based on total shareholder return on an absolute basis (50% weighting) and relative to a defined population of peer companies (50% weighting).

The assumptions used to value the officer LTIP awards were as follows:

	2019 Awards			2018 Awards			2017 Awards
Expected volatility (1)	18.1	%		17.9	%		18.5% - 18.7%
Risk-free interest rate (2)	2.4	%		2.4	%		1.5	%
Expected term (3)	3 and 4 years			3 and 4 years			3 and 4 years
Share price at grant date	$23.00			$26.06			$30.84 - $32.69

⁽¹⁾ Expected volatility based upon historical volatility of our daily closing share price.

⁽²⁾ Risk-free interest rate based on U.S. treasury constant maturity bonds on the measurement date with a maturity equal to the market condition performance period.

⁽³⁾ Expected term based on the market condition performance period.

The calculated grant date fair value as a percentage of base salary for the officers for the three-year performance period that commenced in 2019 ranged from approximately 35% to 68% for the 50% of the LTIP based on TSR relative to a defined population of peer companies and from 39% to 74% for the 50% of the LTIP based on TSR relative to the FTSE NAREIT Diversified Index.

The calculated grant date fair value as a percentage of base salary for the officers for the three-year performance period that commenced in 2018 ranged from approximately 31% to 60% for the 50% of the LTIP based on TSR relative to a defined population of peer companies and from 35% to 68% for the 50% of the LTIP based on TSR relative to the FTSE NAREIT Diversified Index.

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The calculated grant date fair value as a percentage of base salary for the officers for the three-year performance period that commenced in 2017 ranged from approximately 37% to 67% for the 50% of the LTIP based on relative TSR and from 13% to 31% for the 50% of the LTIP based on absolute TSR.

During 2017, our chief executive officer was granted a one-time equity award of 100,000 restricted shares. None of the restricted shares vest until the fifth anniversary of the grant date, at which time 100% of the restricted shares will vest, subject to Mr. McDermott's continued employment with WashREIT until such vesting date.

Our non-executive officers and other employees earn restricted share unit awards under a long-term incentive plan for non-executive officers and staff based upon various percentages of their salaries and annual performance calculations. The restricted share unit awards vest ratably over three years from December 15 preceding the grant date based upon continued employment. We recognize compensation expense for these awards according to a graded vesting schedule over the three-year requisite service period.

During the first quarter of 2019, we amended the STIP for executive officers and the STIP and LTIP for non-executive officers and staff to replace the use of core funds available for distribution as a performance metric and performance goal, respectively, with a Leasing Target performance metric and performance goal. Leasing Target means the aggregate annual leasing target amount (measured in square feet of leasing space) as approved by the compensation committee of our board of trustees for a given performance period and performance year, respectively, with regards to our office and retail properties. The amendments became effective as of March 18, 2019 for performance periods beginning on or after January 1, 2019.

Restricted share awards made to retirement-eligible employees fully vest on the grant date. Employees are considered retirement-eligible when they are both over the age of 55 and have been employed by WashREIT for at least 20 years, or over the age of 65. We fully recognize compensation expense for such awards as of the grant date.

Trustee Awards

We award share based compensation to our trustees in the form of restricted shares which vest immediately and are restricted from sale for the period of the trustees' service. The value of share-based compensation for each trustee was $100,000 for each of three years ended December 31, 2019.

Total Compensation Expense

Total compensation expense recognized in the consolidated financial statements for each of the three years ended December 31, 2019 for all share based awards was $7.7 million, $6.7 million and $4.8 million, respectively, net of capitalized stock-based compensation expense of $0.2 million, $0.3 million and $0.2 million, respectively.

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Restricted Share Awards with Performance and Service Conditions

The activity for the three years ended December 31, 2019 related to our restricted share awards, excluding those subject to market conditions, was as follows:

	Shares			Wtd Avg Grant Fair Value
Unvested at December 31, 2016	107,699			$	26.47
Granted	330,639			32.46
Vested during year	(194,569	)		30.50
Forfeited	(7,075	)		27.43
Unvested at December 31, 2017	236,694			27.96
Granted	304,087			25.98
Vested during year	(224,150	)		27.40
Forfeited	(5,621	)		29.43
Unvested at December 31, 2018	311,010			29.07
Granted	213,782			26.26
Vested during year	(236,013	)		27.43
Forfeited	(19,396	)		26.60
Unvested at December 31, 2019	269,383			28.45

The total fair value of share grants vested for each of the three years ended December 31, 2019 was $6.5 million, $6.1 million and $5.9 million, respectively.

As of December 31, 2019, the total compensation cost related to non-vested share awards not yet recognized was $5.9 million, which we expect to recognize over a weighted average period of 22 months.

Restricted and Unrestricted Shares with Market Conditions

Stock based awards with market conditions under the LTIP were granted in 2019, 2018 and 2017 with fair market values, as determined using a Monte Carlo simulation, as follows (in thousands):

	Grant Date Fair Value
	2019 Awards								2018 Awards								2017 Awards
	Restricted				Unrestricted				Restricted				Unrestricted				Restricted				Unrestricted
Relative Peer TSR	$	184			$	552			$	203			$	608			$	222			$	666
Absolute/Index TSR (1)	201				602				230				690				100				299

The unamortized value of these awards with market conditions as of December 31, 2019 was as follows (in thousands):

	2019 Awards								2018 Awards								2017 Awards
	Restricted				Unrestricted				Restricted				Unrestricted				Restricted				Unrestricted
Relative Peer TSR	$	138			$	368			$	85			$	171			$	44			$	—
Absolute/Index TSR (1)	151				401				96				194				20				—

______________________________ 

(1)	The performance conditions for the 2019 and 2018 awards were evaluated based on 50% on TSR relative to a defined population of peer companies and 50% on TSR relative to the FTSE NAREIT Diversified Index. The performance condition for the 2017 awards was evaluated based 50% on absolute TSR and 50% on relative TSR.

We have a Retirement Savings Plan (the “401(k) Plan”), which permits all eligible employees to defer a portion of their compensation in accordance with the Code. Under the 401(k) Plan, we may make discretionary contributions on behalf of eligible employees. For each of the three years ended December 31, 2019, we made contributions to the 401(k) plan of $0.5 million, $0.5 million and $0.4 million, respectively.

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We have adopted non-qualified deferred compensation plans for the officers and members of the board of trustees. The plans allow for a deferral of a percentage of annual cash compensation and trustee fees. The plans are unfunded and payments are to be made out of the general assets of WashREIT. The deferred compensation liability was $0.9 million and $1.1 million at December 31, 2019 and 2018, respectively.

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.

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The computation of basic and diluted earnings per share for the three years ended December 31, 2019 was as follows (in thousands; except per share data):

	Year Ended December 31,
	2019				2018				2017
Numerator:
Income (loss) from continuing operations	$	29,132			$	1,153			$	(3,568	)
Net loss attributable to noncontrolling interests	—				—				56
Allocation of losses (earnings) from continuing operations to unvested restricted share awards	(125		)		(526		)		(362		)
Adjusted income (loss) from continuing operations attributable to the controlling interests	29,007				627				(3,874		)
Income from discontinued operations, including gain on sale of real estate	354,418				24,477				23,180
Net loss attributable to noncontrolling interests	—				—				—
Allocation of earnings from discontinued operations to unvested restricted share awards	(1,837		)		—				—
Adjusted income from discontinued operations	352,581				24,477				23,180
Adjusted net income attributable to the controlling interests	$	381,588			$	25,104			$	19,306
Denominator:
Weighted average shares outstanding – basic	80,257				78,960				76,820
Effect of dilutive securities:
Operating partnership units	12				12				—
Employee restricted share awards	66				70				—
Weighted average shares outstanding – diluted	80,335				79,042				76,820
Earnings per common share, basic:
Continuing operations	$	0.36			$	0.01			$	(0.05	)
Discontinued operations	4.39				0.31				0.30
Basic net income attributable to the controlling interests per common share	$	4.75			$	0.32			$	0.25
Earnings per common share, diluted:
Continuing operations	$	0.36			$	0.01			$	(0.05	)
Discontinued operations	4.39				0.31				0.30
Diluted net income attributable to the controlling interests per common share	$	4.75			$	0.32			$	0.25
Dividends declared per common share	$	1.20			$	1.20			$	1.20

Development Commitments

At December 31, 2019, we had no committed contracts outstanding with third parties in connection with our development and redevelopment projects.

Litigation

We are involved from time to time in various legal proceedings, lawsuits, examinations by various tax authorities and claims that have arisen in the ordinary course of business. Management believes that the resolution of any such current matters will not have a material adverse effect on our financial condition or results of operations.

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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 previously had a retail segment consisting of grocery store-anchored neighborhood centers that include other small shop tenants and regional power centers with several junior box tenants. During 2019, we executed the sales of eight retail properties (see note 3). These properties met the criteria for classification as held for sale as of June 30, 2019 and are classified as discontinued operations. This strategic shift simplified our portfolio to two reportable segments (office and multifamily) and reduced our exposure to future retail lease expirations. The remaining retail properties do not meet the qualitative or quantitative criteria for a reportable segment, and are classified within “Corporate and other” on our segment disclosure tables. The dispositions of the eight retail properties are part of a strategic shift away from the retail sector.

Real estate rental revenue as a percentage of the total for each of the reportable operating segments for the three years ended December 31, 2019 was as follows:

	Year Ended December 31,
	2019			2018			2017
Multifamily	41	%		33	%		34	%
Office	53	%		61	%		60	%
Corporate and other	6	%		6	%		6	%

The percentage of income producing real estate assets classified as held and used, at cost, for each of the reportable operating segments as of December 31, 2019 and 2018 was as follows:

	December 31,
	2019			2018
Multifamily	50	%		36	%
Office	45	%		58	%
Corporate and other	5	%		6	%

The accounting policies of each of the segments are the same as those described in note 2.

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 segments’ performance. Net operating income is a key measurement of our segment profit and loss. Net operating income is defined as segment real estate rental revenue less segment real estate expenses.

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

	Year Ended December 31, 2019
	Office				Multifamily				Corporate and Other (1)				Consolidated
Real estate rental revenue	$	164,059			$	126,131			$	18,990			$	309,180
Real estate expenses	60,923				49,135				5,522				115,580
Net operating income	$	103,136			$	76,996			$	13,468			$	193,600
Depreciation and amortization													(136,253		)
General and administrative													(24,370		)
Lease origination expenses													(1,698		)
Interest expense													(53,734		)
Real estate impairment													(8,374		)
Gain on sale of real estate													59,961
Discontinued operations:
Income from properties sold or held for sale													16,158
Gain on sale of real estate													339,024
Loss on extinguishment of debt													(764		)
Net income													383,550
Less: Net loss attributable to noncontrolling interests													—
Net income attributable to the controlling interests													$	383,550
Capital expenditures	$	38,634			$	25,779			$	4,534			$	68,947
Total assets	$	1,134,147			$	1,340,634			$	153,547			$	2,628,328

 

	Year Ended December 31, 2018
	Office				Multifamily				Corporate and Other (1)				Consolidated
Real estate rental revenue	$	178,474			$	95,194			$	18,062			$	291,730
Real estate expenses	63,321				37,235				5,036				105,592
Net operating income	$	115,153			$	57,959			$	13,026			$	186,138
Depreciation and amortization													(111,826		)
General and administrative													(22,089		)
Real estate impairment													(1,886		)
Interest expense													(50,501		)
Gain on sale of real estate													2,495
Loss on extinguishment of debt													(1,178		)
Discontinued operations:
Income from properties sold or held for sale													24,477
Net income													25,630
Less: Net loss attributable to noncontrolling interests													—
Net income attributable to the controlling interests													$	25,630
Capital expenditures	$	42,019			$	25,117			$	4,897			$	72,033
Total assets	$	1,248,673			$	792,170			$	376,261			$	2,417,104

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	Year Ended December 31, 2017
	Office				Multifamily				Corporate and Other (1)				Consolidated
Real estate rental revenue	$	167,438			$	95,250			$	17,593			$	280,281
Real estate expenses	62,824				37,640				4,936				105,400
Net operating income	$	104,614			$	57,610			$	12,657			$	174,881
Depreciation and amortization													(101,430		)
General and administrative													(22,580		)
Casualty gain													(33,152		)
Interest expense													(46,793		)
Other income													507
Gain on sale of real estate													24,915
Income tax benefit													84
Discontinued operations:
Income from properties sold or held for sale													23,180
Net income													19,612
Less: Net loss attributable to noncontrolling interests													56
Net income attributable to the controlling interests													$	19,668
Capital expenditures	$	30,407			$	27,980			$	5,994			$	64,381
Total assets	$	1,203,187			$	767,279			$	388,960			$	2,359,426

______________________________

(1)	Includes the retail properties not classified as discontinued operations: Takoma Park, Westminster, Concord Centre, 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.

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Unaudited financial data by quarter in each of the years ended December 31, 2019 and 2018 were as follows (in thousands, except for per share data):

	Quarter(1), (2)
	First				Second				Third				Fourth
2019
Real estate rental revenue	$	71,434			$	76,820			$	80,259			$	80,667
(Loss) income from continuing operations	$	(10,443	)		$	(6,191	)		$	(8,432	)		$	54,198
Net (loss) income	$	(4,405	)		$	987			$	332,770			$	54,198
Net (loss) income attributable to the controlling interests	$	(4,405	)		$	987			$	332,770			$	54,198
(Loss) income from continuing operations per share
Basic	$	(0.13	)		$	(0.08	)		$	(0.10	)		$	0.66
Diluted	$	(0.13	)		$	(0.08	)		$	(0.10	)		$	0.66
Net income per share
Basic	$	(0.06	)		$	0.01			$	4.14			$	0.66
Diluted	$	(0.06	)		$	0.01			$	4.14			$	0.66
2018
Real estate rental revenue	$	73,645			$	75,344			$	71,001			$	71,740
(Loss) income from continuing operations	$	(2,559	)		$	4,563			$	(547	)		$	(304	)
Net income	$	3,299			$	10,750			$	5,893			$	5,688
Net income attributable to the controlling interests	$	3,299			$	10,750			$	5,893			$	5,688
Income (loss) from continuing operations per share
Basic	$	(0.03	)		$	0.06			$	(0.01	)		$	—
Diluted	$	(0.03	)		$	0.06			$	(0.01	)		$	—
Net income per share
Basic	$	0.04			$	0.14			$	0.07			$	0.07
Diluted	$	0.04			$	0.13			$	0.07			$	0.07

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(1)	With regard to per share calculations, the sum of the quarterly results may not equal full year results due to rounding.

(2)

The second quarter of 2019 includes a loss on sale of real estate of $1.0 million. The third and fourth quarters of 2019 include gains on sale of real estate of $339.0 million and $61.0 million, respectively. The second quarter of 2018 includes a gain on sale of real estate of $2.5 million. The first quarter of 2019 and first quarter of 2018 include real estate impairments of $8.4 million and $1.9 million, respectively.

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On May 4, 2018, we entered into eight separate equity distribution agreements (collectively, the “2018 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 under our at-the-market program. 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 business purposes, including, without limitation, working capital, the acquisition, renovation, expansion, improvement, development or redevelopment of income producing properties or the repayment of debt. Our issuances and net proceeds on the 2018 Equity Distribution Agreements for the years ended December 31, 2019 and 2018 were as follows (in thousands; except per share data):

	Year Ended December 31,
	2019				2018
Issuance of common shares	1,859				1,165
Weighted average price per share	$	30.00			$	31.18
Net proceeds	$	54,916			$	35,472

The 2018 Equity Distribution Agreements replaced our previous equity distribution agreements with Wells Fargo Securities, LLC, BNY Mellon Capital Markets, LLC, Citigroup Global Markets Inc. and RBC Capital Markets LLC, dated June 23, 2015. We did not issue any common shares on the previous equity distribution agreements during 2018. For the year ended December 31, 2017, we issued 3.6 million common shares at a weighted average price per share of $32.06 for net proceeds of $113.2 million on the previous equity distribution agreements.

We have a dividend reinvestment program, whereby shareholders may use their dividends and optional cash payments to purchase common shares. The common shares sold under this program may either be common shares issued by us or common shares purchased in the open market. Net proceeds under this program are used for general corporate purposes.

Our issuances and net proceeds on the dividend reinvestment program for the three years ended December 31, 2019 were as follows (in thousands; except per share data):

	Year Ended December 31,
	2019				2018				2017
Issuance of common shares	173				81				80
Weighted average price per share	$	27.58			$	29.18			$	32.25
Net proceeds	$	4,755			$	1,973			$	2,576

As of December 31, 2019 and 2018, deferred leasing costs and deferred leasing incentives were included in prepaid expenses and other assets as follows (in thousands):

	December 31,
	2019												2018
	Gross Carrying Value				Accumulated Amortization				Net				Gross Carrying Value				Accumulated Amortization				Net
Deferred leasing costs	$	60,900			$	29,580			$	31,320			$	63,659			$	31,438			$	32,221
Deferred leasing incentives	18,926				11,133				7,793				22,801				12,311				10,490

Amortization, including write-offs, of deferred leasing costs and deferred leasing incentives for the three years ended December 31, 2019 were as follows (in thousands):

---

	Year Ended December 31,
	2019				2018				2017
Deferred leasing costs amortization	$	6,599			$	5,881			$	5,784
Deferred leasing incentives amortization	2,862				2,811				3,009

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SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017

(IN THOUSANDS)

	Balance at Beginning of Year				Additions Charged to Expenses				Net Recoveries				Balance at End of Year
Valuation allowance for deferred tax assets
2019	$	1,419			$	—			$	(17	)		$	1,402
2018	$	1,413			$	6			$	—			$	1,419
2017	$	2,882			$	—			$	(1,469	)		$	1,413

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SCHEDULE III

				Initial Cost (b)								Net Improvements (Retirement) since Acquisition				Gross Amounts at Which Carried at December 31, 2019												Accumulated Depreciation at December 31, 2019
Properties		Location		Land				Buildings and Improvements								Land				Buildings and Improvements				Total (c)								Year of Construction		Date of Acquisition		Net  Rentable Square Feet			Units			Depreciation Life (d)
Multifamily Properties
3801 Connecticut Avenue		Washington, DC		$	420,000			$	2,678,000			$	19,357,000			$	420,000			$	22,035,000			$	22,455,000			$	13,543,000			1951		Jan 1963		178,000			307			30 years
Roosevelt Towers		Virginia		336,000				1,996,000				13,659,000				336,000				15,655,000				15,991,000				11,418,000				1964		May 1965		170,000			191			40 years
Park Adams		Virginia		287,000				1,654,000				13,636,000				287,000				15,290,000				15,577,000				11,178,000				1959		Jan 1969		173,000			200			35 years
The Ashby at McLean (f)		Virginia		4,356,000				17,102,000				27,319,000				4,356,000				44,421,000				48,777,000				29,047,000				1982		Aug 1996		274,000			256			30 years
Bethesda Hill Apartments		Maryland		3,900,000				13,412,000				16,545,000				3,900,000				29,957,000				33,857,000				21,017,000				1986		Nov 1997		225,000			195			30 years
Bennett Park		Virginia		2,861,000				917,000				81,896,000				4,774,000				80,900,000				85,674,000				40,308,000				2007		Feb 2001		215,000			224			28 years
The Clayborne		Virginia		269,000				—				31,374,000				699,000				30,944,000				31,643,000				16,971,000				2008		Jun 2003		60,000			74			26 years
The Kenmore		Washington, DC		28,222,000				33,955,000				18,109,000				28,222,000				52,064,000				80,286,000				17,415,000				1948		Sep 2008		268,000			374			30 years
The Maxwell		Virginia		12,787,000				—				38,145,000				12,848,000				38,084,000				50,932,000				11,018,000				2014		Jun 2011		116,000			163			30 years
The Paramount (f)		Virginia		8,568,000				38,716,000				3,101,000				8,568,000				41,817,000				50,385,000				11,261,000				1984		Oct 2013		141,000			135			30 years
Yale West (a)		Washington, DC		14,684,000				62,069,000				1,688,000				14,684,000				63,757,000				78,441,000				13,442,000				2011		Feb 2014		173,000			216			30 years
The Wellington		Virginia		30,548,000				116,563,000				16,178,000				30,548,000				132,741,000				163,289,000				21,947,000				1960		Jul 2015		600,000			711			30 years
The Trove (e)		Virginia		15,000,000				—				93,941,000				2,250,000				106,692,000				108,942,000				146,000				n/a		Jul 2015		—			n/a			n/a
Riverside Apartments		Virginia		38,924,000				184,854,000				35,517,000				38,924,000				220,371,000				259,295,000				30,363,000				1971		May 2016		1,001,000			1,222			30 years
Riverside Apartments land parcel (e)		Virginia		15,968,000				—				9,674,000				—				25,642,000				25,642,000				—				n/a		May 2016		—			n/a			n/a
Assembly Alexandria		Virginia		23,942,000				93,672,000				1,931,000				23,942,000				95,603,000				119,545,000				2,595,000				1990		Jun 2019		437,000			532			30 years
Assembly Manassas		Virginia		13,586,000				68,802,000				617,000				13,586,000				69,419,000				83,005,000				2,015,000				1986		Jun 2019		390,000			408			30 years
Assembly Dulles		Virginia		12,476,000				66,852,000				535,000				12,476,000				67,387,000				79,863,000				1,913,000				2000		Jun 2019		361,000			328			30 years
Assembly Leesburg		Virginia		4,113,000				21,286,000				102,000				4,113,000				21,388,000				25,501,000				691,000				1986		Jun 2019		124,000			134			30 years
Assembly Herndon		Virginia		11,225,000				51,534,000				690,000				11,225,000				52,224,000				63,449,000				1,618,000				1991		Jun 2019		221,000			283			30 years
Assembly Germantown		Maryland		7,609,000				34,431,000				179,000				7,609,000				34,610,000				42,219,000				891,000				1990		Jun 2019		211,000			218			30 years
Assembly Watkins Mill		Maryland		7,151,000				30,851,000				210,000				7,151,000				31,061,000				38,212,000				756,000				1975		Jun 2019		193,000			210			30 years
Cascade at Landmark		Virginia		12,289,000				56,235,000				578,000				12,289,000				56,813,000				69,102,000				1,141,000				1988		Sep 2019		273,000			277			30 years
				$	269,521,000			$	897,579,000			$	424,981,000			$	243,207,000			$	1,348,875,000			$	1,592,082,000			$	260,694,000							5,804,000			6,658
Office Buildings
1901 Pennsylvania Avenue		Washington, DC		$	892,000			$	3,481,000			$	20,595,000			$	892,000			$	24,076,000			$	24,968,000			$	18,613,000			1960		May 1977		101,000						28 years
515 King Street		Virginia		4,102,000				3,931,000				9,264,000				4,102,000				13,195,000				17,297,000				7,112,000				1966		Jul 1992		75,000						50 years
1220 19th Street		Washington, DC		7,803,000				11,366,000				16,634,000				7,803,000				28,000,000				35,803,000				18,859,000				1976		Nov 1995		103,000						30 years
1600 Wilson Boulevard		Virginia		6,661,000				16,742,000				31,274,000				6,661,000				48,016,000				54,677,000				29,563,000				1973		Oct 1997		170,000						30 years
Silverline Center (f)		Virginia		12,049,000				71,825,000				102,283,000				12,049,000				174,108,000				186,157,000				104,536,000				1972		Nov 1997		549,000						30 years
Courthouse Square		Virginia		—				17,096,000				10,172,000				—				27,268,000				27,268,000				17,615,000				1979		Oct 2000		120,000						30 years
Monument II		Virginia		10,244,000				65,205,000				12,332,000				10,244,000				77,537,000				87,781,000				35,474,000				2000		Mar 2007		209,000						30 years
2000 M Street		Washington, DC		—				61,101,000				41,735,000				—				102,836,000				102,836,000				40,369,000				1971		Dec 2007		232,000						30 years
1140 Connecticut Avenue		Washington, DC		25,226,000				50,495,000				18,799,000				25,226,000				69,294,000				94,520,000				24,486,000				1966		Jan 2011		184,000						30 years
1227 25th Street		Washington, DC		17,505,000				21,319,000				11,454,000				17,505,000				32,773,000				50,278,000				11,315,000				1988		Mar 2011		135,000						30 years
John Marshall II		Virginia		13,490,000				53,024,000				9,534,000				13,490,000				62,558,000				76,048,000				19,020,000				1996		Sep 2011		223,000						30 years
Fairgate at Ballston		Virginia		17,750,000				29,885,000				7,203,000				17,750,000				37,088,000				54,838,000				12,571,000				1988		Jun 2012		145,000						30 years
Army Navy Building		Washington, DC		30,796,000				39,315,000				13,201,000				30,796,000				52,516,000				83,312,000				13,078,000				1912		Mar 2014		108,000						30 years

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				Initial Cost (b)								Net Improvements (Retirement) since Acquisition				Gross Amounts at Which Carried at December 31, 2019												Accumulated Depreciation at December 31, 2019
Properties		Location		Land				Buildings and Improvements								Land				Buildings and Improvements				Total (c)								Year of Construction		Date of Acquisition		Net  Rentable Square Feet			Units			Depreciation Life (d)
1775 Eye Street, NW		Washington, DC		48,086,000				51,074,000				16,328,000				48,086,000				67,402,000				115,488,000				17,232,000				1964		May 2014		189,000						30 years
Watergate 600		Washington, DC		45,981,000				78,325,000				39,225,000				45,981,000				117,550,000				163,531,000				13,419,000				1972		Apr 2017		293,000						30 years
Arlington Tower		Virginia		63,970,000				156,525,000				10,951,000				63,970,000				167,476,000				231,446,000				14,437,000				1980		Jan 2018		391,000						30 years
				$	304,555,000			$	730,709,000			$	370,984,000			$	304,555,000			$	1,101,693,000			$	1,406,248,000			$	397,699,000							3,227,000

				Initial Cost (b)								Net Improvements (Retirement) since Acquisition				Gross Amounts at Which Carried at December 31, 2019												Accumulated Depreciation at December 31, 2019
Properties		Location		Land				Buildings and Improvements								Land				Buildings and Improvements				Total (c)								Year of Construction		Date of Acquisition		Net  Rentable Square Feet			Units		Depreciation Life (d)
Retail Centers
Takoma Park (f)		Maryland		$	415,000			$	1,084,000			$	289,000			$	366,000			$	1,423,000			$	1,789,000			$	1,205,000			1962		Jul 1963		51,000					50 years
Westminster		Maryland		519,000				1,775,000				9,988,000				519,000				11,763,000				12,282,000				8,614,000				1969		Sep 1972		150,000					37 years
Concord Centre		Virginia		413,000				850,000				7,415,000				413,000				8,265,000				8,678,000				4,036,000				1960		Dec 1973		75,000					33 years
Chevy Chase Metro Plaza		Washington, DC		1,549,000				4,304,000				8,377,000				1,549,000				12,681,000				14,230,000				8,287,000				1975		Sep 1985		49,000					50 years
800 S. Washington Street		Virginia		2,904,000				5,489,000				6,168,000				2,904,000				11,657,000				14,561,000				6,196,000				1955		Jun 1998		46,000					30 years
Randolph Shopping Center		Maryland		4,928,000				13,025,000				1,200,000				4,928,000				14,225,000				19,153,000				6,846,000				1972		May 2006		83,000					30 years
Montrose Shopping Center (f)		Maryland		11,612,000				22,410,000				2,604,000				11,020,000				25,606,000				36,626,000				11,856,000				1970		May 2006		149,000					30 years
Spring Valley Village		Washington, DC		10,836,000				32,238,000				10,740,000				10,836,000				42,978,000				53,814,000				7,197,000				1941		Oct 2014		92,000					30 years
				$	33,176,000			$	81,175,000			$	46,781,000			$	32,535,000			$	128,598,000			$	161,133,000			$	54,237,000							695,000

Total				$	607,252,000			$	1,709,463,000			$	842,746,000			$	580,297,000			$	2,579,166,000			$	3,159,463,000			$	712,630,000							9,726,000			6,658

______________________________ 

a)	At December 31, 2019, our properties were encumbered by non-recourse mortgage amounts of $45.7 million on Yale West. Mortgage amounts exclude premiums and debt loan costs.

b)	The purchase cost of real estate investments has been divided between land and buildings and improvements on the basis of management’s determination of the fair values.

c)	At December 31, 2019, total land, buildings and improvements are carried at $1,917.8 million for federal income tax purposes.

d)	The useful life shown is for the main structure. Buildings and improvements are depreciated over various useful lives ranging from 3 to 50 years.

e)	As of December 31, 2019, WashREIT had under development multifamily properties, The Trove and Riverside Apartments land parcel. The value not yet placed into service at December 31, 2019 was $96.7 million and $25.6 million, respectively.

f)	As of December 31, 2019, WashREIT had investments in various development, redevelopment and renovation projects, including The Ashby at McLean, Montrose Shopping Center, Silverline Center, Takoma Park and The Paramount. The total value of these projects, which has not yet been placed in service, is $1.9 million at December 31, 2019.

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The following is a reconciliation of real estate assets and accumulated depreciation for the three years ended December 31, 2019 (in thousands):

	Year Ended December 31,
	2019				2018				2017
Real estate assets
Balance, beginning of period	$	2,973,816			$	2,831,683			$	2,725,635
Additions:
Property acquisitions (1)	516,054				220,495				124,306
Improvements (1)	140,109				103,404				84,560
Deductions:
Impairment write-down	(24,432		)		(2,177		)		(81,982		)
Write-off of disposed assets	(7,430		)		(2,132		)		(2,655		)
Property sales	(438,654		)		(177,457		)		(18,181		)
Balance, end of period	$	3,159,463			$	2,973,816			$	2,831,683
Accumulated depreciation
Balance, beginning of period	$	770,535			$	690,417			$	657,425
Additions:
Depreciation	107,938				98,141				94,558
Deductions:
Impairment write-down	(16,058		)		(291		)		(48,830		)
Write-off of disposed assets	(2,173		)		(1,859		)		(1,708		)
Property sales	(147,612		)		(15,873		)		(11,028		)
Balance, end of period	$	712,630			$	770,535			$	690,417

______________________________  

(1)	Includes non-cash accruals for capital items.