Annual report pursuant to Section 13 and 15(d)

Real Estate Investments

v2.4.0.8
Real Estate Investments
12 Months Ended
Dec. 31, 2013
Real Estate Investments, Net [Abstract]  
Real Estate Investments
Continuing Operations
As of December 31, 2013 and 2012, our real estate investment portfolio, at cost, consists of properties as follows (in thousands):
 
December 31,
 
2013
 
2012
Office
$
1,296,967

 
$
1,261,534

Retail
415,899

 
411,948

Multifamily
389,361

 
331,901

 
$
2,102,227

 
$
2,005,383


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 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, 2013, no single property or tenant accounted for more than 10% of total assets or total real estate rental revenue.
We had properties under development or held for development as of December 31, 2013. In the office segment, we had a redevelopment project to renovate 7900 Westpark Drive and land held for development at Dulles Station, Phase II. In the multifamily segment, we had land under development at 650 North Glebe Road and held for development at 1225 First Street.
The cost of our real estate portfolio under development or held for development as of December 31, 2013 and 2012 is as follows (in thousands):
 
December 31,
 
2013
 
2012
Office
$
12,175

 
$
8,922

Retail
495

 
587

Multifamily
48,645

 
35,761

 
$
61,315

 
$
45,270



Acquisitions

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 opportunities arise. Properties and land for development acquired during the years ending December 31, 2013, 2012 and 2011 were as follows:
Acquisition Date
 
Property
 
Type
 
Rentable
Square  Feet
(unaudited)
 
Contract
Purchase  Price
(In thousands)
October 1, 2013
 
The Paramount (135 units)
 
Multifamily
 
N/A
 
$
48,200

 
 
 
 
Total 2013
 


 
$
48,200

 
 
 
 
 
 
 
 
 
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

(1) Land for development. 650 North Glebe Road is currently under development and development has been suspended at 1225 First Street.

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 their year of acquisition for the three years ended December 31, 2013 are as follows (in thousands):
 
Year Ended December 31,
 
2013
 
2012
 
2011
Real estate rental revenue
$
907

 
$
3,358

 
$
20,944

Net (loss) income
(105
)
 
325

 
484


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 liabilities at their fair values.
We have recorded the total purchase price of the above acquisitions as follows (in thousands):
 
2013
 
2012
 
2011
Land
$
8,568

 
$
17,750

 
$
90,896

Buildings
37,930

 
26,893

 
219,613

Tenant origination costs
32

 
3,100

 
15,667

Leasing commissions/absorption costs
943

 
4,172

 
29,719

Net lease intangible assets
102

 
508

 
6,805

Net lease intangible liabilities
(117
)
 
(173
)
 
(2,454
)
Fair value of assumed mortgage

 

 
(78,500
)
Furniture, fixtures & equipment
742

 

 

Total
$
48,200

 
$
52,250

 
$
281,746


 
The weighted remaining average life for the 2013 acquisition components above, other than land and building, are 110 months for tenant origination costs, 22 months for leasing commissions/absorption costs, 81 months for net lease intangible assets and 88 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 primarily 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.

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. In November 2013, 4661 Kenmore Avenue was sold as part of the Medical Office Portfolio (see "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 $49.9 million, and we secured third-party debt financing totaling $33.0 million (see note 4). 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. In the first quarter of 2013, we decided to delay commencement of construction due to market conditions and concerns of oversupply. We continue to 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, 2013 and 2012, the land and capitalized development costs were as follows (in thousands):
 
December 31,
 
2013
 
2012
650 North Glebe Road
$
27,343

 
$
15,646

1225 First Street
20,788

 
19,807



As of December 31, 2013 and 2012, the accounts payable and accrued liabilities related to the joint ventures were as follows (in thousands):
 
December 31,
 
2013
 
2012
650 North Glebe Road
$
1,785

 
$
115

1225 First Street
39

 
1,676



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). 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.
In September 2013, we entered into four separate purchase and sale agreements to effectuate the sale of our entire medical office segment (including land held for development at 4661 Kenmore Avenue) and two office buildings (Woodholme Center and 6565 Arlington Boulevard) for an aggregate purchase price of $500.8 million. The sale was structured as four transactions. Transactions I & II closed in November 2013. In January 2014, we closed on the remaining two transactions.

The impact of the sale on our medical office segment on revenues and net income is summarized as follows (in thousands, except per share data):
 
December 31,
 
2013
 
2012
 
2011
Real estate revenues
$
41,012

 
$
44,674

 
$
44,431

Net income
14,044

 
8,128

 
10,393

Basic net income per share
0.21

 
0.12

 
0.16

Diluted net income per share
0.21

 
0.12

 
0.16


During 2011, we sold our industrial segment, the impact of the disposal on revenues and net income for the three years ended December 31, 2013 were as follows (in thousands, except per share data):
 
Year Ended December 31,
 
2013
 
2012
 
2011
Real estate revenues
$

 
$

 
$
23,045

Net income

 

 
16,484

Basic net income per share

 

 
0.23

Diluted net income per share

 

 
0.23


We sold or classified as held for sale the following properties during the three years ended December 31, 2013:
Property
 
Type
 
Rentable
Square Feet
(unaudited)
 
Contract
Sales Price
(in thousands)
 
Gain on Sale
(in thousands)
Atrium Building
 
Office
 
79,000

 
$
15,750

 
$
3,195

Medical Office Portfolio Transactions I & II
 
Medical Office / Office
 
1,093,000

 
307,189

 
18,949

Medical Office Portfolio Transactions III & IV
 
Medical Office
 
427,000

 
193,561

 
N/A

 
 
Total 2013
 
1,599,000

 
$
516,500

 
$
22,144

 
 
 
 
 
 
 
 
 
1700 Research Boulevard
 
Office
 
101,000

 
$
14,250

 
$
3,724

Plumtree Medical Center
 
Medical Office
 
33,000

 
8,750

 
1,400

 
 
Total 2012
 
134,000

 
$
23,000

 
$
5,124

 
 
 
 
 
 
 
 
 
Industrial Portfolio
 
Industrial/Office
 
3,092,000

 
$
350,900

 
$
97,491

Dulles Station, Phase I
 
Office
 
180,000

 
58,800

 

 
 
Total 2011
 
3,272,000

 
$
409,700

 
$
97,491

     
As of December 31, 2013 and 2012, investment in real estate for properties sold or held for sale were as follows (in thousands):
 
December 31,
 
2013
 
2012
Office
$

 
$
71,605

Medical office
125,967

 
406,874

Total
$
125,967

 
$
478,479

Less accumulated depreciation
(46,066
)
 
(113,480
)
Investment in real estate sold or held for sale, net
$
79,901

 
$
364,999



As of December 31, 2013 and 2012, liabilities related to properties sold or held for sale were as follows (in thousands):
 
December 31,
 
2013
 
2012
Mortgage notes payable
$

 
$
23,945

Other liabilities
1,533

 
8,412

Liabilities related to properties sold or held for sale
$
1,533

 
$
32,357



Income from operations of properties sold or held for sale for the three years ended December 31, 2013 was as follows (in thousands):
 
December 31,
 
2013
 
2012
 
2011
Revenues
$
45,791

 
$
54,344

 
$
80,948

Property expenses
(17,039
)
 
(18,273
)
 
(25,265
)
Real estate impairment

 
(2,097
)
 
(599
)
Depreciation and amortization
(12,161
)
 
(18,827
)
 
(26,125
)
Interest expense
(1,196
)
 
(4,331
)
 
(5,545
)
 
$
15,395

 
$
10,816

 
$
23,414


Income from operations of properties sold or held for sale by property for the three years ended December 31, 2013 was as follows (in thousands):
 
 
 
Year Ending December 31,
Property
Segment
 
2013
 
2012
 
2011
Dulles Station, Phase I
Office
 
$

 
$

 
$
(468
)
Industrial Portfolio
Industrial/Office
 

 

 
10,621

1700 Research Boulevard
Office
 

 
225

 
651

Plumtree Medical Center
Medical Office
 

 
197

 
67

Atrium Building
Office
 
185

 
1,063

 
1,052

Medical Office Portfolio
Medical/Office
 
15,210

 
9,331

 
11,491

 
 
 
$
15,395

 
$
10,816

 
$
23,414



Real Estate Impairment
During the fourth quarter of 2012, we determined that the development of a medical office building at 4661 Kenmore Avenue in Alexandria, Virginia was no longer probable due to a change in corporate strategy. Due to this determination, we recognized in discontinued operations an impairment charge of $2.1 million 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. 4661 Kenmore Avenue was sold during 2013.
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 in continuing operations 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. In addition, we recognized in discontinued operations an impairment charge of $0.6 million at Dulles Station, Phase I, which was sold during 2011.
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.