Annual report pursuant to Section 13 and 15(d)

Real Estate Investments

v2.4.0.6
Real Estate Investments
12 Months Ended
Dec. 31, 2011
Real Estate Investments [Abstract]  
Real Estate Investments
REAL ESTATE INVESTMENTS
Continuing Operations
Our real estate investment portfolio, at cost, consists of properties located in Maryland, Washington, D.C. and Virginia as follows (in thousands):
 
December 31,
 
2011
 
2010
Office
$
1,268,136

 
$
980,263

Medical office
404,793

 
398,559

Retail
408,897

 
351,395

Multifamily
324,957

 
321,719

 
$
2,406,783

 
$
2,051,936


The amounts above reflect properties classified as continuing operations, which means they are to be held and used in rental operations (income producing property).
We have several properties in development. In the office segment, we have land for development at Dulles Station, Phase II. In the medical office segment, we have land under development at 4661 Kenmore Avenue. In the residential segment, we have land for development at 650 North Glebe Road and 1219 First Street. The cost of our real estate portfolio held for development as of December 31, 2011 and 2010 is illustrated below (in thousands):
 
December 31,
 
2011
 
2010
Office
$
8,953

 
$
20,172

Medical office
5,758

 
5,463

Retail
576

 
546

Multifamily
27,802

 
59

 
$
43,089

 
$
26,240


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 is not probable under current 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 of $12.1 million.
We used a combination of internal models and third-party valuation estimates to determine the fair value of Dulles Station, Phase II. This fair valuation incorporated both market and income approaches, including recent comparable land sales, return on cost of development metrics and input from third-party real estate brokers on the value of the land and the half share of the parking garage. The valuation is inherently subjective because there are not many 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 land was further corroborated by an independent third-party valuation specialist. This fair valuation falls into Level 3 in the fair value hierarchy due to its reliance on significant unobservable inputs.
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. Because the properties are located in the Washington metro region, the Company is subject to a concentration of credit risk related to these properties.
As of December 31, 2011 no single property or tenant accounted for more than 10% of total assets or total real estate rental revenue.

Acquisitions

Properties and land for development we acquired during the years ending December 31, 2011, 2010 and 2009 are as follows:
Acquisition Date
 
Property
 
Type
 
Rentable
Square  Feet
(unaudited)
 
Contract
Purchase  Price
(In thousands)
January 11, 2011
 
1140 Connecticut Ave
 
Office
 
184,000

 
$
80,250

March 30, 2011
 
1227 25th Street
 
Office
 
130,000

 
47,000

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

 
11,800

August 30, 2011
 
Olney Village Center
 
Retail
 
199,000

 
58,000

September 13, 2011
 
Braddock Metro Center
 
Office
 
345,000

 
101,000

September 15, 2011
 
John Marshall II
 
Office
 
223,000

 
73,500

November 23, 2011
 
1219 First Street (1)
 
Mutifamily
 
N/A

 
13,850

 
 
 
 
Total 2011
 
1,081,000

 
$
385,400

 
 
 
 
 
 
 
 
 
June 3, 2010
 
925 and 1000 Corporate Drive
 
Office
 
271,000

 
$
68,000

December 1, 2010
 
Gateway Overlook
 
Retail
 
223,000

 
88,400

 
 
 
 
Total 2010
 
494,000

 
$
156,400

 
 
 
 
 
 
 
 
 
August 13, 2009
 
Lansdowne Medical Office Building
 
Medical Office
 
87,000

 
$
19,900

 
 
 
 
Total 2009
 
87,000

 
$
19,900

(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 2011 and 2010 acquisitions are as follows (amounts in thousands):
 
December 31,
 
2011
 
2010
Real estate revenue
$
35,259

 
$
5,575

Net income
$
4,701

 
$
1,460


As discussed in note 2 to the consolidated financial statements, 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. Our sole 2009 acquisition, Lansdowne Medical Office Building, was vacant as of the acquisition date, so we did not acquire any absorption costs, leasing commissions, tenant origination costs or net intangible lease assets/liabilities during 2009.
We have recorded the total purchase price of the above acquisitions as follows (in millions):
 
Recordation of Purchase Price
 
2011
 
2010
 
2009
Land
$
90.9

 
$
38.2

 
$
1.3

Buildings
219.6

 
93.3

 
18.6

Tenant origination costs
15.7

 
9.1

 

Leasing commissions/absorption costs
29.7

 
15.4

 

Net lease intangible assets
6.8

 
1.4

 

Net lease intangible liabilities
(2.5
)
 
(1.5
)
 

Fair value of assumed mortgage
(78.5
)
 

 

Total
$
281.7

 
$
155.9

 
$
19.9


 
The weighted remaining average life in months for the 2011 acquisition components above, other than land and building, are 62 months for tenant origination costs, 51 months for leasing commissions/absorption costs, 65 months for net lease intangible assets and 62 months for net lease intangible liabilities.
The difference in total contract price of $385.4 million 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 1219 First Street for $13.9 million included in development, and credits received at settlement totaling $1.3 million.
The $0.5 million difference in total 2010 contract purchase price of $156.4 million and the recordation of purchase price of $155.9 million is due to a credit received at settlement for future tenant allowance obligations for Gateway Overlook.
The following unaudited pro-forma combined condensed statements of operations set forth the consolidated results of operations for the years ended December 31, 2011 and 2010 as if the above described acquisitions had occurred at the beginning of the period of acquisition and the same period in the year prior to the 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 years ended December 31, 2011 and December 31, 2010. The unaudited data presented is in thousands, except per share data.
 
Year Ended December 31,
 
2011
 
2010
Real estate revenues
$
308,027

 
$
295,767

Income from continuing operations
$
(1,701
)
 
$
1,083

Net income
$
104,311

 
$
37,517

Diluted earnings per share
$
1.57

 
$
0.60



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, 2011, 2010 and 2009, and are not included in our earnings per share calculations.
On June 15, 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 $43.5 million, with approximately 70% of the project financed with debt. 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, construction and lease-up of the property.

On November 23, 2011 we executed a joint venture operating agreement with a real estate development company to develop a high-rise multifamily property at 1219 First Street in Alexandria, Virginia. We estimate the total cost of the project to be $95.0 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, construction and lease-up of the property.

We have determined that the 650 North Glebe Road and 1219 First Street 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. 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, obtaining the debt financing, and will manage each property after stabilization.

We include the joint venture land acquisitions on our consolidated balance sheets in held for development. As of December 31, 2011, the land and capitalized development costs are as follows (in millions):
 
 
December 31, 2011
650 North Glebe
 
$
13.4

1219 First Street
 
$
14.4


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. 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.
Discontinued Operations
We dispose of assets (sometimes using tax-deferred exchanges) 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. We had no properties classified as sold or held for sale at December 31, 2011 and had the industrial portfolio plus three office properties as sold or held for sale at December 31, 2010, as follows (in thousands):
 
December 31,
 
2011
 
2010
Office property
$

 
$
80,024

Industrial/Flex properties

 
284,926

Total
$

 
$
364,950

Less accumulated depreciation

 
(78,108
)
 
$

 
$
286,842


On August 5, 2011 we entered into five separate purchase and sale agreements to effectuate the sale of our entire industrial segment and two office assets (the Crescent and Albemarle Point) for an aggregate purchase price of $350.9 million, resulting in a $97.5 million gain on sale of real estate.
The impact of the disposal of our industrial segment on revenues and net income is summarized as follows (amounts in thousands, except per share data):
 
December 31,
 
2011
 
2010
 
2009
Real estate revenues
$
23,045

 
$
32,191

 
$
34,288

Net income
$
16,484

 
$
22,857

 
$
24,905

Basic net income per share
$
0.23

 
$
0.36

 
$
0.43

Diluted net income per share
$
0.23

 
$
0.36

 
$
0.43


We sold the following properties during the three years ended December 31, 2011:
Disposition Date
 
Property
 
Type
 
Rentable
Square Feet
(unaudited)
 
Contract
Sales Price
(in thousands)
 
Gain on Sale
(in  thousands)
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

 
$
23,400

 
$
7,900

December 21, 2010
 
The Ridges
 
Office
 
104,000

 
27,500

 
4,500

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

 
23,000

 
9,200

 
 
 
 
Total 2010
 
638,000

 
$
73,900

 
$
21,600

 
 
 
 
 
 
 
 
 
 
 
May 13, 2009
 
Avondale
 
Multifamily
 
170,000

 
$
19,800

 
$
6,700

July 23, 2009
 
Tech 100 Industrial Park
 
Industrial
 
166,000

 
10,500

 
4,100

July 31, 2009
 
Brandywine Center
 
Office
 
35,000

 
3,300

 
1,000

November 13, 2009
 
Crossroads Distribution Center
 
Industrial
 
85,000

 
4,400

 
1,500

 
 
 
 
Total 2009
 
456,000

 
$
38,000

 
$
13,300

 
(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).

Operating results of the properties classified as discontinued operations are summarized as follows (in thousands):
 
Operating Income For the Year Ending
December 31,
 
2011
 
2010
 
2009
Revenues
$
26,154

 
$
47,646

 
$
53,726

Property expenses
(7,697
)
 
(15,248
)
 
(16,646
)
Real estate impairment
(599
)
 

 

Depreciation and amortization
(7,231
)
 
(15,680
)
 
(16,896
)
Interest expense
(474
)
 
(1,750
)
 
(2,307
)
 
$
10,153

 
$
14,968

 
$
17,877


Operating income by each property classified as discontinued operations is summarized below (in thousands):
 
 
 
 
Operating Income For the Year Ending December 31,
Property
 
Segment
 
2011
 
2010
 
2009
Avondale
 
Multifamily
 
$

 
$

 
$
392

Tech 100 Industrial Park
 
Industrial
 

 

 
261

Brandywine Center
 
Office
 

 

 
85

Crossroads Distribution Center
 
Industrial
 

 

 
153

Parklawn Plaza
 
Office
 

 
132

 
147

Lexington Building
 
Office
 

 
65

 
127

Saratoga Building
 
Office
 

 
225

 
436

Charleston Business Center
 
Industrial
 

 
370

 
688

The Ridges
 
Office
 

 
678

 
175

Ammendale I&II
 
Industrial
 

 
1,023

 
986

Amvax
 
Industrial
 

 
336

 
327

Dulles Station, Phase I
 
Office
 
(468
)
 
492

 
449

Industrial Portfolio
 
Industrial/Office
 
10,621

 
11,647

 
13,651

 
 
 
 
$
10,153

 
$
14,968

 
$
17,877