Annual report pursuant to Section 13 and 15(d)

Real Estate Investments

v2.4.0.6
Real Estate Investments
12 Months Ended
Dec. 31, 2012
Real Estate Investments, Net [Abstract]  
Real Estate Investments
REAL ESTATE INVESTMENTS
Continuing Operations
As of December 31, 2012 and 2011, our real estate investment portfolio, at cost, consists of properties as follows (in thousands):
 
December 31,
 
2012
 
2011
Office
$
1,315,633

 
$
1,234,499

Medical office
403,064

 
396,532

Retail
411,948

 
408,897

Multifamily
331,901

 
324,957

 
$
2,462,546

 
$
2,364,885


The amounts above reflect properties classified as continuing operations, which means they are to be held and used in rental operations (income producing property).
Our results of operations are dependent on the overall economic health of our markets, tenants and the specific segments in which we own properties. These segments include general purpose office, medical office, retail and multifamily. All segments are affected by external economic factors, such as inflation, consumer confidence, unemployment rates, etc. as well as changing tenant and consumer requirements.
As of December 31, 2012, no single property or tenant accounted for more than 10% of total assets or total real estate rental revenue.
We had several properties under development or held for development as of December 31, 2012. In the office segment, we had land held for development at Dulles Station, Phase II. In the medical office segment, we had land held for development at 4661 Kenmore Avenue. In the multifamily segment, we had land under development at 650 North Glebe Road and 1225 First Street.
The cost of our real estate portfolio under development or held for development as of December 31, 2012 and 2011 is as follows (in thousands):
 
December 31,
 
2012
 
2011
Office
$
8,977

 
$
8,953

Medical office
3,810

 
5,758

Retail
587

 
576

Multifamily
35,761

 
27,802

 
$
49,135

 
$
43,089



4661 Kenmore Avenue consists of undeveloped land in Alexandria, Virginia intended for development as a medical office building. During the fourth quarter of 2012, we determined that the development of a medical office building at this site was no longer probable due to a change in corporate strategy. Due to this determination, we recognized a $2.1 million impairment charge during the fourth quarter of 2012 in order to reduce the carrying value of the land at 4661 Kenmore Avenue to its estimated fair value of $3.8 million.

Dulles Station, Phase II consists of undeveloped land in Herndon, Virginia and a half interest in a parking garage that is adjacent to this land. The land is zoned for development as an office building. During the fourth quarter of 2011, we reviewed changes in market conditions, specifically higher vacancy and lower rental rates in the Washington metro region office market and other circumstances affecting the Herndon submarket, such as the increased uncertainty surrounding the timing of the completion of the second phase of the Dulles Metrorail project, and reassessed the likelihood that we would follow through on these development plans. Based upon the foregoing review and assessment, we determined that the development of the land at Dulles Station, Phase II was not probable under those market conditions. Due to this determination, we recognized a $14.5 million impairment charge during the fourth quarter of 2011 in order to reduce the carrying value of the land and garage at Dulles Station, Phase II to its fair value.
We used a combination of internal models and third-party valuation estimates to determine the fair values of 4661 Kenmore Avenue and Dulles Station, Phase II. These fair valuations incorporated both market and income approaches, including recent comparable land sales and return on cost of development metrics. The valuations are inherently subjective because there are few observable market transactions for similar land, and therefore we, through discussions with market participants, made certain significant assumptions with respect to appropriate comparable transactions to consider, cash flow estimates and discount rates. Our estimate of the fair value of the land was further corroborated by an independent third-party valuation specialist. These fair valuations fall into Level 3 in the fair value hierarchy due to its reliance on significant unobservable inputs.

Acquisitions

Properties and land for development acquired during the years ending December 31, 2012, 2011 and 2010 were as follows:
Acquisition Date
 
Property
 
Type
 
Rentable
Square  Feet
(unaudited)
 
Contract
Purchase  Price
(In thousands)
June 21, 2012
 
Fairgate at Ballston
 
Office
 
142,000

 
$
52,250

 
 
 
 
Total 2012
 
142,000

 
$
52,250

 
 
 
 
 
 
 
 
 
January 11, 2011
 
1140 Connecticut Ave
 
Office
 
188,000

 
$
80,250

March 30, 2011
 
1227 25th Street
 
Office
 
132,000

 
47,000

June 15, 2011
 
650 North Glebe Road (1)
 
Mutifamily
 
N/A

 
11,800

August 30, 2011
 
Olney Village Center
 
Retail
 
198,000

 
58,000

September 13, 2011
 
Braddock Metro Center
 
Office
 
351,000

 
101,000

September 15, 2011
 
John Marshall II
 
Office
 
223,000

 
73,500

November 23, 2011
 
1225 First Street (1)
 
Mutifamily
 
N/A

 
13,850

 
 
 
 
Total 2011
 
1,092,000

 
$
385,400

 
 
 
 
 
 
 
 
 
June 3, 2010
 
925 and 1000 Corporate Drive
 
Office
 
270,000

 
$
68,000

December 1, 2010
 
Gateway Overlook
 
Retail
 
223,000

 
88,350

 
 
 
 
Total 2010
 
493,000

 
$
156,350

(1) Land for development

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

The revenue and earnings of our acquisitions during the three years ended December 31, 2012 are as follows (in thousands):
 
Year Ended December 31,
 
2012
 
2011
 
2010
Real estate rental revenue
$
3,358

 
$
20,944

 
$
5,575

Net income
325

 
484

 
1,460


As discussed in Note 2, Summary of Significant Accounting Policies, 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 liabilities at their fair values.
We have recorded the total purchase price of the above acquisitions as follows (in thousands):
 
2012
 
2011
 
2010
Land
$
17,750

 
$
90,896

 
$
38,233

Buildings
26,893

 
219,613

 
93,332

Tenant origination costs
3,100

 
15,667

 
9,094

Leasing commissions/absorption costs
4,172

 
29,719

 
15,349

Net lease intangible assets
508

 
6,805

 
1,375

Net lease intangible liabilities
(173
)
 
(2,454
)
 
(1,503
)
Fair value of assumed mortgage

 
(78,500
)
 

Total
$
52,250

 
$
281,746

 
$
155,880


 
The weighted remaining average life for the 2012 acquisition components above, other than land and building, are 65 months for tenant origination costs, 59 months for leasing commissions/absorption costs, 76 months for net lease intangible assets and 29 months for net lease intangible liabilities.
The difference in the contract purchase price of $52.3 million for the 2012 acquisition and the cash paid for the acquisition per the consolidated statements of cash flows of $52.1 million is related to credits received at settlement totaling $0.1 million.
The difference in the total contract price of $385.4 million for the 2011 acquisitions and the acquisition cost per the consolidated statements of cash flows of $281.7 million is primarily related to the two mortgage notes assumed for $76.7 million relating to John Marshall II and Olney Village Center, cash paid for the acquisition of land at 650 North Glebe Road for $11.8 million and at 1225 First Street for $13.9 million included in development, and credits received at settlement totaling $1.3 million.
The difference in total 2010 contract purchase price of $156.4 million and the acquisition cost per the consolidated statements of cash flows of $155.9 million is due to a credit received at settlement for future tenant allowance obligations for Gateway Overlook.
The property acquired during the year ended December 31, 2012 had an immaterial impact on our consolidated results of operations. The following unaudited pro-forma combined condensed statements of operations set forth the consolidated results of operations for the year ended December 31, 2011 as if the above described 2011 acquisitions had occurred at the beginning of the period of acquisition. The unaudited pro-forma information does not purport to be indicative of the results that actually would have occurred if the acquisitions had been in effect for the entire year ended December 31, 2011. The unaudited data for the year ended December 31, 2011 were as follows (in thousands, except per share data):
Real estate revenues
$
302,836

Loss from continuing operations
(3,471
)
Net income
104,311

Diluted earnings per share
1.57


        
Noncontrolling Interests in Subsidiaries
In August 2007, we acquired a 0.8 acre parcel of land located at 4661 Kenmore Avenue, Alexandria, Virginia for future medical office development. The acquisition was funded by issuing operating partnership units in an operating partnership, which is a consolidated subsidiary of WRIT. This resulted in a noncontrolling ownership interest in this property based upon defined company operating partnership units at the date of purchase. The operating partnership units could have a dilutive impact on our earnings per share calculation. They are not dilutive for the years ended December 31, 2012, 2011 and 2010, and, as such, are not included in our earnings per share calculations.
In May 1998, we entered into an operating partnership agreement with a member of the entity that previously owned Northern Virginia Industrial Park in conjunction with the acquisition of this property. We accounted for this activity by applying the noncontrolling owner’s percentage ownership interest to the net income of the property and reporting such amount in our net income attributable to noncontrolling interests. In October 2011, we closed on the sale of Northern Virginia Industrial Park II, thereby terminating this noncontrolling interest in our earnings. As a result of this transaction, we recorded a gain on sale relating to the noncontrolling interest of $0.4 million in 2011. The amounts reported on the consolidated statements of income for noncontrolling interests are related to Northern Virginia Industrial Park II and classified as discontinued operations.

Variable Interest Entities
In June 2011, we executed a joint venture operating agreement with a real estate development company to develop a mid-rise multifamily property at 650 North Glebe Road in Arlington, Virginia. We estimate the total cost of the project to be $49.5 million, and we expect to secure third-party debt financing for approximately 70% of the project's cost. WRIT is the 90% owner of the joint venture, and will have management and leasing responsibilities when the project is completed and stabilized (defined as 90% of the residential units leased). The real estate development company owns 10% of the joint venture and is responsible for the development and construction of the property. The joint venture currently expects to complete this development project during the fourth quarter of 2014.

In November 2011, we executed a joint venture operating agreement with a real estate development company to develop a high-rise multifamily property at 1225 First Street (formerly 1219 First Street) in Alexandria, Virginia. We estimate the total cost of the project to be $95.3 million, with approximately 70% of the project financed with debt. WRIT is the 95% owner of the joint venture and will have management and leasing responsibilities when the project is completed and stabilized. The real estate development company owns 5% of the joint venture and is responsible for the development and construction of the property. Subsequent to December 31, 2012, we decided to delay commencement of construction due to market conditions and concerns of oversupply. We will reassess this project on a periodic basis going forward.

We have determined that the 650 North Glebe Road and 1225 First Street joint ventures are VIE's primarily based on the fact that the equity investment at risk is not sufficient to permit either entity to finance its activities without additional financial support. We expect that 70% of the total development costs will be financed through debt. We have also determined that WRIT is the primary beneficiary of each VIE due to the fact that WRIT is providing 90% to 95% of the equity contributions and will manage each property after stabilization.
      
We include the joint venture land acquisitions and related capitalized development costs on our consolidated balance sheets in properties under development or held for development, consistent with other development activity. As of December 31, 2012 and 2011, the land and capitalized development costs were as follows (in thousands):
 
December 31,
 
2012
 
2011
650 North Glebe Road
$
15,646

 
$
13,406

1225 First Street
19,807

 
14,396



As of December 31, 2012 and 2011, the accounts payable and accrued liabilities related to the joint ventures were as follows (in thousands):
 
December 31,
 
2012
 
2011
650 North Glebe Road
$
115

 
$
47

1225 First Street
1,676

 
235


Discontinued Operations
We dispose of assets 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. Properties are considered held for sale when they meet specified criteria (see "Discontinued Operations" in note 2 to the consolidated financial statements). Depreciation on these properties is discontinued at that time, but operating revenues, other operating expenses and interest continue to be recognized until the date of sale. Properties classified as sold or held for sale as of December 31, 2012 are included in "Investment in real estate sold or held for sale, net" on our consolidated balance sheets as follows (in thousands):
 
December 31,
 
2012
 
2011
Office
$
17,450

 
$
33,637

Medical Office

 
8,261

Total
17,450

 
41,898

Less accumulated depreciation
(5,922
)
 
(14,229
)
 
$
11,528

 
$
27,669


We sold or classified as held for sale the following properties during the three years ended December 31, 2012:
Disposition Date
 
Property
 
Type
 
Rentable
Square Feet
(unaudited)
 
Contract
Sales Price
(in thousands)
 
Gain on Sale
(in thousands)
August 31, 2012
 
1700 Research Boulevard
 
Office
 
101,000

 
$
14,250

 
$
3,724

December 20, 2012
 
Plumtree Medical Center
 
Medical Office
 
33,000

 
8,750

 
1,400

N/A - Held for Sale
 
Atrium Building
 
Office
 
79,000

 
N/A

 
N/A

 
 
 
 
Total 2012
 
213,000

 
$
23,000

 
$
5,124

 
 
 
 
 
 
 
 
 
 
 
Various (1)
 
Industrial Portfolio (1)
 
Industrial/Office
 
3,092,000

 
$
350,900

 
$
97,491

April 5, 2011
 
Dulles Station, Phase I
 
Office
 
180,000

 
58,800

 

 
 
 
 
Total 2011
 
3,272,000

 
$
409,700

 
$
97,491

 
 
 
 
 
 
 
 
 
 
 
June 18, 2010
 
Parklawn Portfolio (2)
 
Office/Industrial
 
229,000

 
$
23,430

 
$
7,942

December 21, 2010
 
The Ridges
 
Office
 
104,000

 
27,500

 
4,441

December 22, 2010
 
Ammendale I&II and Amvax
 
Industrial
 
305,000

 
23,000

 
9,216

 
 
 
 
Total 2010
 
638,000

 
$
73,930

 
$
21,599

 
(1) 
The Industrial Portfolio consists of every property in our industrial segment and two office properties (the Crescent and Albemarle Point), and we closed on the sale on three separate dates. On September 2, 2011, we closed on the sale of the two office properties (the Crescent and Albemarle Point) and 8880 Gorman Road, Dulles South IV, Fullerton Business Center, Hampton Overlook, Alban Business Center, Pickett Industrial Park, Northern Virginia Industrial Park I, 270 Technology Park, Fullerton Industrial Center, Sully Square, 9950 Business Parkway, Hampton South and 8900 Telegraph Road. On October 3, 2011, we closed the sale of Northern Virginia Industrial Park II. On November 1, 2011, we closed on the sale of 6100 Columbia Park Road and Dulles Business Park I and II.
(2) 
The Parklawn Portfolio consists of three office properties (Parklawn Plaza, Lexington Building and Saratoga Building) and one industrial property (Charleston Business Center).

Income from operations of properties sold or held for sale for the three years ended December 31, 2012 were as follows (in thousands):
 
December 31,
 
2012
 
2011
 
2010
Revenues
$
4,155

 
$
31,525

 
$
53,009

Property expenses
(1,542
)
 
(9,547
)
 
(17,163
)
Real estate impairment

 
(599
)
 

Depreciation and amortization
(867
)
 
(8,723
)
 
(17,263
)
Interest expense
(261
)
 
(733
)
 
(2,014
)
 
$
1,485

 
$
11,923

 
$
16,569


Income from operations of properties sold or held for sale by property for the three years ended December 31, 2012 were as follows (in thousands):
 
 
 
Operating Income For the Year Ending December 31,
Property
Segment
 
2012
 
2011
 
2010
Parklawn Plaza
Office
 
$

 
$

 
$
132

Lexington Building
Office
 

 

 
65

Saratoga Building
Office
 

 

 
225

Charleston Business Center
Industrial
 

 

 
370

The Ridges
Office
 

 

 
678

Ammendale I&II
Industrial
 

 

 
1,023

Amvax
Industrial
 

 

 
336

Dulles Station, Phase I
Office
 

 
(468
)
 
492

Industrial Portfolio
Industrial/Office
 

 
10,621

 
11,647

1700 Research Boulevard
Office
 
225

 
651

 
670

Atrium Building
Office
 
1,063

 
1,052

 
883

Plumtree Medical Center
Medical Office
 
197

 
67

 
48

 
 
 
$
1,485

 
$
11,923

 
$
16,569


The impact of the disposal of our industrial segment on revenues and net income for the three years ended December 31, 2012 were as follows (in thousands, except per share data):
 
Year Ended December 31,
 
2012
 
2011
 
2010
Real estate revenues
$

 
$
23,045

 
$
32,191

Net income

 
16,484

 
22,857

Basic net income per share

 
0.23

 
0.36

Diluted net income per share

 
0.23

 
0.36