Quarterly report pursuant to Section 13 or 15(d)

Real Estate

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Real Estate
6 Months Ended
Jun. 30, 2015
Real Estate [Abstract]  
Real Estate
NOTE 3: REAL ESTATE

Redevelopment

In the office segment, we had a redevelopment project to renovate Silverline Center, an office property in Tysons, Virginia. As of June 30, 2015, we had invested $35.4 million in the renovation. We completed major construction activities on this project during the 2015 Quarter, and placed into service substantially completed portions of the project totaling $25.3 million. The remaining components of the redevelopment project will be placed into service the earlier of when they are substantially completed and available for occupancy or one year from completion of major construction activities.

Variable Interest Entities

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 in Alexandria, Virginia. Washington REIT and the real estate development company own 95% and 5% of the joint venture, respectively. In the first quarter of 2013, we decided to delay commencement of construction due to market conditions and concerns of oversupply. During the 2015 Quarter, we determined that we would not develop the property and began negotiations to sell our interest in the joint venture. We recognized a $5.9 million impairment charge for the 2015 Quarter in order to reduce the carrying value of the property to its estimated fair value. We based this fair value on the $14.5 million sale price in the purchase and sale agreement to sell our 95% interest in the joint venture that we executed subsequent to the 2015 Quarter. The property did not meet the criteria for classification as held for sale as of June 30, 2015. This fair valuation falls into Level 2 of the fair value hierarchy.
   
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 1225 First Street and The Maxwell joint ventures are variable interest entities ("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. As of June 30, 2015, $31.1 million was outstanding on The Maxwell's construction loan. For 1225 First Street, we originally expected that 70% of the total development costs would be financed through debt. We have also determined that Washington REIT is the primary beneficiary of each VIE due to the fact that Washington REIT is providing 90% to 95% of the equity contributions and would oversee management of each property, if built, no later than stabilization.

We included the development costs associated with the joint venture for 1225 First Street on our consolidated balance sheets in properties under development or held for future development, as the property met the criteria for classification as held for sale subsequent to June 30, 2015. As of June 30, 2015 and December 31, 2014, the land and capitalized development costs for 1225 First Street were as follows (in thousands):
 
June 30, 2015
 
December 31, 2014
Properties under development or held for future development
$
15,292

 
$
20,807

Cash and cash equivalents
18

 
395



As of June 30, 2015 and December 31, 2014, the liabilities for 1225 First Street were as follows (in thousands):
 
June 30, 2015
 
December 31, 2014
Accounts payable and other liabilities
$
11

 
$
38



As of June 30, 2015 and December 31, 2014, The Maxwell's assets were as follows (in thousands):
 
June 30, 2015
 
December 31, 2014
Land
$
12,851

 
$
12,851

Income producing property
37,690

 
18,432

Accumulated depreciation and amortization
(1,167
)
 

Properties under development or held for future development

 
17,947

Other assets
513

 
$

 
$
49,887

 
$
49,230



As of June 30, 2015 and December 31, 2014, The Maxwell's liabilities were as follows (in thousands):
 
June 30, 2015
 
December 31, 2014
Mortgage notes payable
$
31,115

 
$
27,690

Accounts payable and other liabilities
782

 
2,196

Tenant security deposits
51

 
17

 
$
31,948

 
$
29,903



Sold and Held for Sale Properties and 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.

During the 2015 Quarter, 15,000 square feet of land at Montrose Shopping Center, a retail property in Rockville, Maryland, was condemned as part of an eminent domain taking action. The taken land was at the periphery of the property and its taking does not impact the property's operations. We received $2.0 million as compensation for the taken land, and recognized a $1.5 million gain on sale of real estate during the 2015 Quarter.

Subsequent to the end of the 2015 Period, we executed a purchase and sale agreement for the sale of Munson Hill Towers, a 279 unit multifamily property in Falls Church, Virginia, for a contract sale price of $57.1 million. We expect to close on the sale before the end of 2015. The property did not meet the criteria for classification as held for sale until after the 2015 Quarter and is included on our consolidated balance sheets as follows:

 
 
June 30, 2015
 
December 31, 2014
Land
$
322

 
$
322

Income producing property
19,279

 
19,076

Accumulated depreciation and amortization
(14,508
)
 
(14,111
)
Net income producing property
$
5,093

 
$
5,287



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 and II closed in November 2013 and Transactions III and IV closed in January 2014.

The results of the assets in our former medical office segment sold in January 2014 are summarized as follows (amounts in thousands, except per share data):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Real estate rental revenue
$

 
$

 
$

 
$
892

Net income

 

 

 
546

Basic net income per share

 

 

 
0.01

Diluted net income per share

 

 

 
0.01



We sold the following properties in 2015 and 2014:
Property Name
 
Segment
 
Rentable Square Feet
 
Contract
Sales  Price
(in thousands)
 
Gain on Sale
(in thousands)
Country Club Towers (227 units) (1)
 
Multifamily
 
N/A
 
$
37,800

 
$
30,277

 
 
Total 2015
 

 
$
37,800

 
$
30,277

 
 
 
 
 
 
 
 
 
Medical Office Portfolio Transactions III & IV (2)
 
Medical Office
 
427,000
 
$
193,561

 
$
105,985

5740 Columbia Road (1)
 
Retail
 
3,000
 
1,600

 
570

 
 
Total 2014
 
430,000
 
$
195,161

 
$
106,555


(1) 
These properties are classified as continuing operations.
(2) Woodburn Medical Park I and II and Prosperity Medical Center I, II and III, which are classified as discontinued operations.

Income from operations of properties classified as discontinued operations for the three and six months ended June 30, 2015 and 2014 was as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Real estate rental revenue
$

 
$

 
$

 
$
892

Real estate expenses

 

 

 
(346
)
Income from operations classified as discontinued operations
$

 
$

 
$

 
$
546