Annual report pursuant to Section 13 and 15(d)

Real Estate

v3.19.3.a.u2
Real Estate
12 Months Ended
Dec. 31, 2019
Real Estate [Abstract]  
Real Estate REAL ESTATE

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


______________________________ 
(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
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

______________________________ 
(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.

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



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.

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.

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