Quarterly report pursuant to Section 13 or 15(d)

Real Estate

v3.3.0.814
Real Estate
9 Months Ended
Sep. 30, 2015
Real Estate [Abstract]  
Real Estate
REAL ESTATE

Acquisition

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 as compared to other areas. We seek to upgrade our portfolio with acquisitions as opportunities arise. Properties and land for development acquired during the 2015 Period were as follows:
Acquisition Date
 
Property
 
Type
 
# of units (unaudited)
 
Contract
Purchase  Price
(In thousands)
July 1, 2015
 
The Wellington
 
Multifamily
 
711
 
$
167,000



The Wellington, which we acquired during the 2015 Quarter, consists of an apartment building and an adjacent parcel of land for potential future multifamily development. The purchase of the Wellington was structured as a reverse exchange under Section 1031 of the Internal Revenue Code in a manner such that legal title is held by a Qualified Intermediary until certain identified properties are sold and the reverse exchange transaction is completed.  We retain essentially all of the legal and economic benefits and obligations related to the Wellington.  As such, the Wellington is considered to be a VIE until legal title is transferred to us upon completion of the 1031 exchange, which is expected during the fourth quarter.  We have consolidated the assets and liabilities of the Wellington as we have determined that Washington REIT is the primary beneficiary of the VIE. The results of operations from the acquired operating property are included in the consolidated statements of income as of the acquisition date.

The revenue and earnings of the acquisition during the year of acquisition are as follows (in thousands):
 
Three and Nine Months Ended September 30, 2015
Real estate rental revenue
$
3,441

Net loss
(1,463
)


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 acquisition as follows (in thousands):
Land
$
30,548

Land for development
15,000

Buildings
116,563

Leasing commissions/absorption costs
4,889

Total
$
167,000


 
The weighted remaining average life for leasing commissions/absorption costs is two months.

The difference in the total contract price of $167.0 million for the acquisition and the acquisition cost per the consolidated statements of cash flows of $166.7 million is primarily due to credits received at settlement totaling $0.3 million.

The following unaudited pro-forma combined condensed statements of operations set forth the consolidated results of operations for the 2015 and 2014 Quarters and Periods as if the above-described acquisition in 2015 had occurred on January 1, 2014. The pro forma adjustments include reclassifying costs related to the above-described acquisition to 2014. 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 2015 and 2014 Quarters and Periods. The unaudited data presented is in thousands, except per share data.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Real estate rental revenue
$
78,243

 
$
76,853

 
$
234,095

 
$
224,488

Income (loss) from continuing operations
1,626

 
2,205

 
29,811

 
(323
)
Net income
1,626

 
2,205

 
29,811

 
106,208

Diluted net income per share
0.02

 
0.03

 
0.43

 
1.59



Redevelopment

In the office segment, we had a redevelopment project to renovate Silverline Center, an office property in Tysons, Virginia. As of September 30, 2015, we had invested $35.8 million in the renovation. We completed major construction activities on this project during the second quarter of 2015, and placed into service substantially completed portions of the project totaling $25.8 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 owned 95% and 5% of the joint venture, respectively. During the second quarter of 2015, 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 second quarter of 2015 in order to reduce the carrying value of the property to its estimated fair value. We based this fair value on the contact sale price in the purchase and sale agreement. This fair valuation falls into Level 2 of the fair value hierarchy. During the 2015 Quarter, we sold our 95% interest in the joint venture for a contract sale price of $14.5 million, as this joint venture has previously been consolidated as Washington REIT was the primary beneficiary of the VIE.
   
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 Maxwell joint venture is a VIE primarily based on the fact that the equity investment at risk is not sufficient to permit the entity to finance its activities without additional financial support. As of September 30, 2015, $31.7 million was outstanding on The Maxwell's construction loan. We have also determined that Washington REIT is the primary beneficiary of the VIE due to the fact that Washington REIT is providing 90% of the equity contributions.

We include joint venture land acquisitions and capitalized development on our consolidated balance sheets in properties under development or held for future development until placed in service or sold. As of December 31, 2014, the land and capitalized development costs for 1225 First Street totaled $20.8 million.

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

 
$
12,851

Income producing property
37,914

 
18,432

Accumulated depreciation and amortization
(1,767
)
 

Properties under development or held for future development

 
17,947

Other assets
765

 

 
$
49,763

 
$
49,230



As of September 30, 2015 and December 31, 2014, The Maxwell's liabilities were as follows (in thousands):
 
September 30, 2015
 
December 31, 2014
Mortgage notes payable
$
31,707

 
$
27,690

Accounts payable and other liabilities
669

 
2,196

Tenant security deposits
66

 
17

 
$
32,442

 
$
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 second quarter of 2015, 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 did 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 second quarter of 2015.

During the 2015 Quarter, 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 closed on the sale in October 2015 (see note 11). The property met the criteria for classification as held for sale as of September 30, 2015.

Subsequent to the end of the 2015 Period, we executed a purchase and sale agreement for the sale of Montgomery Village Center, a 197,000 square foot retail property in Gaithersburg, Maryland, for a contract sale price of $27.8 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 Period and is included on our consolidated balance sheets as follows:
 
September 30, 2015
 
December 31, 2014
Land
$
11,625

 
$
11,625

Income producing property
12,606

 
12,443

Accumulated depreciation and amortization
(6,081
)
 
(5,832
)
Other assets
1,562

 
1,585

Total assets
$
19,712

 
$
19,821



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):
 
Nine Months Ended September 30,
 
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 or classified as held for sale the following properties in 2015 and 2014:
Disposition Date
 
Property Name
 
Segment
 
# of units
 
Rentable Square Feet
 
Contract
Sales  Price
(in thousands)
 
Gain on Sale
(in thousands)
March 20, 2015
 
Country Club Towers (1)
 
Multifamily
 
227
 
N/A
 
$
37,800

 
$
30,277

September 9, 2015
 
1225 First Street (1), (2)
 
Multifamily
 
N/A
 
N/A
 
14,500

 

N/A
 
Munson Hill Towers (1)
 
Multifamily
 
279
 
N/A
 
57,100

 
N/A

 
 
 
 
Total 2015
 
 
 

 
$
109,400

 
$
30,277

 
 
 
 
 
 
 
 
 
 
 
 
 
January 21, 2014
 
Medical Office Portfolio Transactions III & IV (3)
 
Medical Office
 
N/A
 
427,000
 
$
193,561

 
$
105,985

May 2, 2014
 
5740 Columbia Road (1)
 
Retail
 
N/A
 
3,000
 
1,600

 
570

 
 
 
 
Total 2014
 
 
 
430,000
 
$
195,161

 
$
106,555


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

As of September 30, 2015 and December 31, 2014, investment in real estate held for sale was as follows (in thousands):
 
September 30, 2015
 
Land
$
322

 
Income producing property
19,321

 
Accumulated depreciation and amortization
(14,633
)
 
Total real estate held for investment, net
$
5,010

 


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

 
$

 
$

 
$
892

Real estate expenses

 

 

 
(346
)
Income from operations classified as discontinued operations
$

 
$

 
$

 
$
546