Quarterly report pursuant to Section 13 or 15(d)

Real Estate

v3.7.0.1
Real Estate
6 Months Ended
Jun. 30, 2017
Real Estate [Abstract]  
Real Estate
REAL ESTATE

Acquisition

Our current strategy is focused on properties inside the Washington metro region’s Beltway, near major transportation nodes and in areas with strong employment drivers and superior growth demographics. We seek to upgrade our portfolio with acquisitions as appropriate opportunities arise. We acquired the following property during the 2017 Quarter (the “2017 acquisition”):
Acquisition Date
 
Property
 
Type
 
Net Rentable
Square Feet
 
Contract Purchase Price (In thousands)
April 4, 2017
 
Watergate 600
 
Office
 
289,000
 
$
135,000



The results of operations from the 2017 acquisition are included in the consolidated statements of income from the acquisition date and are as follows (in thousands):
 
 
Three and Six Months Ended
June 30, 2017
Real estate rental revenue
 
$
4,902

Net income
 
964



We accounted for the acquisition of Watergate 600 as an asset acquisition. Accordingly, we capitalized $2.8 million of costs directly associated with the acquisition. We measured the value of the acquired physical assets (land and building), in-place leases (tenant origination costs, leasing commissions, absorption costs and lease intangible assets/liabilities), and any other liabilities by allocating the total cost of the acquisition on a relative fair value basis.

We have recorded the total cost of the 2017 acquisition as follows (in thousands):
Land
 
$
45,981

Building
 
66,241

Tenant origination costs
 
12,084

Leasing commissions/absorption costs
 
23,161

Lease intangible assets
 
498

Lease intangible liabilities
 
(9,585
)
Deferred tax liability
 
(560
)
Total
 
$
137,820



The weighted remaining average life for the 2017 acquisition components above, other than land, building and deferred tax liability, are 92 months for tenant origination costs, 84 months for leasing commissions/absorption costs, 19 months for net lease intangible assets and 97 months for net lease intangible liabilities.

The difference in the total contract purchase 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 Washington REIT. These Operating Partnership Units may be redeemed for either cash equal to the fair market value of a share of Washington REIT common stock at the time of redemption (based on a 20-day average price) or, at the option of Washington REIT, one registered or unregistered share of Washington REIT 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 have an obligation to make available to the contributors approximately one year after the issuance of the Operating Partnership Units.

Development/Redevelopment

We have properties under development/redevelopment and held for current or future development as of June 30, 2017. In the office segment, we have a redevelopment project at the Army Navy Building, an office property in Washington, DC, to upgrade its common areas and add significant amenities in order to make the property more competitive within its sub-market. As of June 30, 2017, we had invested $4.1 million in the redevelopment and have placed $3.4 million of the project into service. We have substantially completed the additional amenities and expect to place the remainder of the project, consisting of upgrades to common areas, into service during the remainder of 2017.
 
In the multifamily segment, we have the Trove, a multifamily development adjacent to The Wellington, and own land held for future multifamily development adjacent to Riverside Apartments. As of June 30, 2017, we had invested $23.8 million and $18.3 million, including the costs of acquired land, in the Trove and the development adjacent to Riverside Apartments, respectively.

In the retail segment, we currently have a redevelopment project to add rentable space at Spring Valley Village. As of June 30, 2017, we had invested $1.6 million in the redevelopment.

Variable Interest Entity
 
In June 2011, we executed a joint venture operating agreement with a real estate development company to develop The Maxwell, a mid-rise multifamily property at 650 North Glebe Road in Arlington, Virginia. Major construction activities at The Maxwell ended during December 2014, and the building became available for occupancy during the first quarter of 2015. Washington REIT is the 90% owner of the joint venture. The real estate development company owns 10% of the joint venture and was responsible for the development and construction of the property.

We have determined that The Maxwell joint venture is a VIE primarily based on the fact that the equity investment at risk is not sufficient to permit the entity to finance its activities without additional financial support. We also determined that Washington REIT was the primary beneficiary of the VIE due to the fact that Washington REIT was determined to have a controlling financial interest in the entity. In January 2016, Washington REIT exercised its right to purchase at par The Maxwell’s construction loan from the original third-party lender. Upon the purchase, the construction loan became an intercompany loan payable from the consolidated VIE to Washington REIT that is eliminated in consolidation.

As of June 30, 2017 and December 31, 2016, The Maxwell’s assets were as follows (in thousands):
 
June 30, 2017
 
December 31, 2016
Land
$
12,851

 
$
12,851

Income producing property
37,955

 
37,949

Accumulated depreciation and amortization
(5,689
)
 
(4,571
)
Other assets
536

 
456

 
$
45,653

 
$
46,685



As of June 30, 2017 and December 31, 2016, The Maxwell’s liabilities were as follows (in thousands):
 
June 30, 2017
 
December 31, 2016
Mortgage notes payable (1)
$
31,690

 
$
31,869

Accounts payable and other liabilities
199

 
186

Tenant security deposits
89

 
99

 
$
31,978

 
$
32,154


(1) The mortgage notes payable balances as of June 30, 2017 and December 31, 2016 are eliminated in consolidation due to the purchase of the loan by Washington REIT in January 2016.

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 until the date of sale.

During the 2017 Quarter, we executed a purchase and sale agreement for the sale of Walker House, a multifamily property in Gaithersburg, Maryland. We expect to close on this sale during 2017. We determined Walker House met the criteria for classification as held for sale as of June 30, 2017. There can be no assurances that this purchase and sale agreement will close on time or at all.

We sold the following properties in 2016:
Disposition Date
 
Property Name
 
Segment
 
Number of Units/ Rentable Square Feet
 
Contract
Sales  Price
(in thousands)
 
Gain on Sale
(in thousands)
May 26, 2016
 
Dulles Station II (1)
 
Office
 
N/A
 
$
12,100

 
$
527

June 27, 2016
 
Maryland Office Portfolio Transaction I (2)
 
Office
 
692,000
 
111,500

 
23,585

September 22, 2016
 
Maryland Office Portfolio Transaction II (3)
 
Office
 
491,000
 
128,500

 
77,592

 
 
Total 2016
 
1,183,000
 
$
252,100

 
$
101,704


(1) 
Land held for future development and an interest in a parking garage.
(2) 
Maryland Office Portfolio Transaction I consists of 6110 Executive Boulevard, 600 Jefferson Plaza, Wayne Plaza and West Gude Drive.
(3) 
Maryland Office Portfolio Transaction II consists of 51 Monroe Street and One Central Plaza.      

While the sale of the Maryland Office Portfolio, in the aggregate, constituted an individually significant disposition, the Maryland Office Portfolio does not qualify for presentation and disclosure as a discontinued operation as it does not represent a strategic shift in our operations. Real estate rental revenue and net income for the Maryland Office Portfolio for the three and six months ended June 30, 2017 and 2016 are as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Real estate rental revenue
$

 
$
8,147

 
$

 
$
16,577

Net income

 
4,176

 

 
6,902



We do not have significant continuing involvement in the operations of the disposed properties.