Quarterly report pursuant to Section 13 or 15(d)

Real Estate

v3.10.0.1
Real Estate
9 Months Ended
Sep. 30, 2018
Real Estate [Abstract]  
Real Estate
REAL ESTATE

Acquisition

Our current strategy includes recycling 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. We acquired the following property during the 2018 Period (the “2018 acquisition”):
Acquisition Date
 
Property
 
Type
 
Net Rentable
Square Feet
 
Contract Purchase Price (In thousands)
January 18, 2018
 
Arlington Tower
 
Office
 
391,000
 
$
250,000



The results of operations from the 2018 acquisition are included in the condensed consolidated statements of income from the acquisition date and are as follows (in thousands):
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
Real estate rental revenue
$
5,947

 
$
16,485

Net income
843

 
2,457



We accounted for the 2018 acquisition as an asset acquisition. Accordingly, we capitalized $0.6 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 2018 acquisition as follows (in thousands):
Land
$
63,970

Building
142,900

Tenant origination costs
13,625

Leasing commissions/absorption costs
27,465

Lease intangible assets
3,142

Lease intangible liabilities
(545
)
Total
$
250,557



The weighted remaining average life for the 2018 acquisition components above, other than land and building, are 74 months for tenant origination costs, 64 months for leasing commissions/absorption costs, 66 months for lease intangible assets and 81 months for lease intangible liabilities.

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 ($1.8 million).

Development/Redevelopment

We have properties under development/redevelopment and held for current or future development as of September 30, 2018.

In the multifamily segment, we have The Trove, a multifamily development adjacent to The Wellington, and own land held for future multifamily development adjacent to Riverside Apartments. As of September 30, 2018, we had invested $52.7 million and $22.4 million, including the costs of acquiring the 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 September 30, 2018, we had invested $6.4 million in the redevelopment.

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.

We sold our interests in the following properties in 2018 and 2017:
Disposition Date
 
Property Name
 
Segment
 
Rentable Square Feet/ Number of Units
 
Contract
Sales  Price
(in thousands)
 
Gain on Sale
(in thousands)
January 19, 2018
 
Braddock Metro Center
 
Office
 
356,000
 
$
93,000

 
$

June 28, 2018
 
2445 M Street
 
Office
 
292,000
 
101,600

 
2,495

 
 
 
 
Total 2018
 
648,000
 
$
194,600

 
$
2,495

 
 
 
 
 
 
 
 
 
 
 
October 23, 2017
 
Walker House Apartments
 
Multifamily
 
212
 
$
32,200

 
$
23,838



We have fully transferred control of the assets associated with these disposed properties.

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 value 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.