Washington Real Estate Investment Trust Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Real Estate Investments

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.

- Definition

The entire disclosure for certain real estate investment financial statements, real estate investment trust operating support agreements, real estate owned, retail land sales, time share transactions, as well as other real estate related disclosures.

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