Annual report pursuant to Section 13 and 15(d)

Real Estate Investments

v2.4.1.9
Real Estate Investments
12 Months Ended
Dec. 31, 2014
Real Estate Investments, Net [Abstract]  
Real Estate Disclosure [Text Block]
NOTE 3: REAL ESTATE
Continuing Operations
As of December 31, 2014 and 2013, our real estate investment portfolio, at cost, consists of properties as follows (in thousands):
 
December 31,
 
2014
 
2013
Office
$
1,502,052

 
$
1,296,967

Retail
463,716

 
415,899

Multifamily
505,185

 
389,361

 
$
2,470,953

 
$
2,102,227


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, 2014, 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, 2014. In the office segment, we had a redevelopment project to renovate Silverline Center (formerly 7900 Westpark Drive). In the multifamily segment, we had land held for future development at 1225 First Street and the final phase of The Maxwell ground-up development project. During the fourth quarter of 2014, we substantially completed major construction activities at The Maxwell and placed into service assets totaling $31.3 million and will place the remaining assets totaling approximately $17.9 million at December 31, 2014 into service in 2015.
The cost of our real estate portfolio under development or held for future development as of December 31, 2014 and 2013 is as follows (in thousands):
 
December 31,
 
2014
 
2013
Office
$
36,379

 
$
12,175

Retail
500

 
495

Multifamily
39,356

 
48,645

 
$
76,235

 
$
61,315



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, 2014, 2013 and 2012 were as follows:
Acquisition Date
 
Property
 
Type
 
Rentable
Square  Feet
(unaudited)
 
Contract
Purchase  Price
(In thousands)
February 21, 2014
 
Yale West (216 units)
 
Multifamily
 
N/A
 
$
73,000

March 26, 2014
 
The Army Navy Club Building
 
Office
 
108,000

 
79,000

May 1, 2014
 
1775 Eye Street, NW
 
Office
 
185,000

 
104,500

October 1, 2014
 
Spring Valley Retail Center
 
Retail
 
75,000

 
40,500

 
 
 
 
Total 2014
 
368,000

 
$
297,000

 
 
 
 
 
 
 
 
 
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


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, 2014 are as follows (in thousands):
 
Year Ended December 31,
 
2014
 
2013
 
2012
Real estate rental revenue
$
16,260

 
$
907

 
$
3,358

Net (loss) income
(3,168
)
 
(105
)
 
325


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):
 
2014
 
2013
 
2012
Land
$
104,403

 
$
8,568

 
$
17,750

Buildings
172,671

 
37,930

 
26,893

Tenant origination costs
9,377

 
32

 
3,100

Leasing commissions/absorption costs
16,474

 
943

 
4,172

Net lease intangible assets
7,331

 
102

 
508

Net lease intangible liabilities
(8,323
)
 
(117
)
 
(173
)
Fair value of assumed mortgage
(107,125
)
 

 

Furniture, fixtures & equipment
932

 
742

 

Total
$
195,740

 
$
48,200

 
$
52,250


 
The weighted remaining average life for the 2014 acquisition components above, other than land and building, are 66 months for tenant origination costs, 59 months for leasing commissions/absorption costs, 69 months for net lease intangible assets and 105 months for net lease intangible liabilities.

The difference in the total contract price of $297.0 million for the 2014 acquisitions and the acquisition cost per the consolidated statements of cash flows of $194.5 million is primarily due to the assumption of two mortgage notes secured by Yale West and The Army Navy Club Building for an aggregate $100.9 million and the payment of a $3.6 million deposit for Yale West in 2013, partially offset by a credit to the seller for building renovations at 1775 Eye Street, NW for $1.9 million.
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 following unaudited pro-forma combined condensed statements of operations set forth the consolidated results of operations for the years ended December 31, 2014 and 2013 as if the above described acquisitions in 2014 had occurred on January 1, 2013. 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, 2014 and 2013. The unaudited data presented is in thousands, except per share data.
 
Year Ended December 31,
 
2014
 
2013
Real estate revenues
$
295,876

 
$
286,523

Income (loss) from continuing operations
$
4,524

 
$
(4,128
)
Net income
$
111,055

 
$
33,411

Diluted earnings per share
$
1.66

 
$
0.50



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 Washington REIT. 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 "Properties Sold or Held for Sale"), and in 2014 we distributed to the noncontrolling interest holder their share of the proceeds.

Variable Interest Entities
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. 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). Washington REIT 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. Major construction activities at The Maxwell ended during December 2014. However, as of December 31, 2014, only two of the six residential floors were available for occupancy. The remaining residential floors became available for occupancy during the first quarter of 2015.

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. Washington REIT 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 Maxwell 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 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 will manage each property after stabilization.
      
We include joint venture land acquisitions and related capitalized development costs 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 and 2013 the land and capitalized development costs for 1225 First Street were as follows (in thousands):
 
December 31,
 
2014
 
2013
Properties under development or held for future development
$
20,807

 
$
20,788



As of December 31, 2014 and 2013 the liabilities for 1225 First Street were as follows (in thousands):
 
December 31,
 
2014
 
2013
Accounts payable and other liabilities
$
38

 
$
39



During the fourth quarter of 2014, we substantially completed major construction activities at The Maxwell. As of December 31, 2014 and 2013 The Maxwell's assets were as follows (in thousands):
 
December 31,
 
2014
 
2013
Land
$
12,851

 
$

Income producing property
18,432

 

Properties under development or held for future development
17,947

 
27,343

 
$
49,230

 
$
27,343



As of December 31, 2014 and 2013, The Maxwell's liabilities were as follows (in thousands):
 
December 31,
 
2014
 
2013
Mortgage notes payable
$
27,690

 
$
7,297

Accounts payable and other liabilities
2,196

 
1,785

Tenant security deposits
17

 

 
$
29,903

 
$
9,082



Properties Sold or Held for Sale
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. 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 sold or classified as held for sale the following properties during the three years ended December 31, 2014:
Property
 
Type
 
Rentable
Square Feet
(unaudited)
 
Contract
Sales Price
(in thousands)
 
Gain on Sale
(in thousands)
Medical Office Portfolio Transactions III & IV (1)
 
Medical Office
 
427,000

 
193,561

 
$
105,985

5740 Columbia Road (2)
 
Retail
 
3,000

 
1,600

 
570

 
 
Total 2014
 
430,000

 
$
195,161

 
$
106,555

 
 
 
 
 
 
 
 
 
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

 
 
Total 2013
 
1,172,000

 
$
322,939

 
$
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

(1) These properties were initially classified as held for sale during 2013.
(2) The property is classified as continuing operations in accordance with ASU No. 2014-08 (see note 2). All other listed properties are classified as discontinued operations in accordance with ASC 205-10, "Discontinued Operations."
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 and Transactions III & IV in January 2014. We do not have significant continuing involvement in the operations of the disposed properties.

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):
 
Year Ending December 31,
 
2014
 
2013
 
2012
Real estate revenues
$
892

 
$
41,012

 
$
44,674

Net income
546

 
14,044

 
8,128

Basic and diluted net income per share
0.01

 
0.21

 
0.12


     
As of December 31, 2014 and 2013, investment in real estate for properties sold or held for sale were as follows (in thousands):
 
December 31,
 
2014
 
2013
Medical office
$

 
$
125,967

Less accumulated depreciation

 
(46,066
)
Investment in real estate sold or held for sale, net
$

 
$
79,901



As of December 31, 2014 and 2013, liabilities related to properties sold or held for sale were as follows (in thousands):
 
December 31,
 
2014
 
2013
Other liabilities
$

 
$
1,533



Income from properties classified as discontinued operations for the three years ended December 31, 2014 was as follows (in thousands):
 
Year Ending December 31,
 
2014
 
2013
 
2012
Revenues
$
892

 
$
45,791

 
$
54,344

Property expenses
(346
)
 
(17,039
)
 
(18,273
)
Real estate impairment

 

 
(2,097
)
Depreciation and amortization

 
(12,161
)
 
(18,827
)
Interest expense

 
(1,196
)
 
(4,331
)
 
$
546

 
$
15,395

 
$
10,816


Income from properties classified as discontinued operations by property for the three years ended December 31, 2014 was as follows (in thousands):
 
 
 
Year Ending December 31,
Property
Segment
 
2014
 
2013
 
2012
1700 Research Boulevard
Office
 
$

 
$

 
$
225

Plumtree Medical Center
Medical Office
 

 

 
197

Atrium Building
Office
 

 
185

 
1,063

Medical Office Portfolio
Medical/Office
 
546

 
15,210

 
9,331

 
 
 
$
546

 
$
15,395

 
$
10,816



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.
We used a combination of internal models and a third-party valuation estimate to determine the fair value of 4661 Kenmore Avenue. This fair valuation incorporated both market and income approaches, including recent comparable land sales and return on cost of development metrics. The valuation is 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. This fair valuation falls into Level 3 in the fair value hierarchy due to its reliance on significant unobservable inputs.