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Real Estate

12 Months Ended

Dec. 31, 2019

REAL ESTATE

As of December 31, 2019 and 2018, our real estate investment portfolio classified as income producing property that is held and used, at cost, consists of properties as follows (in thousands):



	December 31,
	2019		2018
Multifamily	$	1,469,011	$	919,285
Office	1,329,722		1,507,986
Other ⁽¹⁾	160,489		154,650
	$	2,959,222	$	2,581,921

______________________________


⁽¹⁾	Consists of the retail properties not classified as discontinued operations: Takoma Park, Westminster, Concord Centre, Chevy Chase Metro Plaza, 800 S. Washington Street, Randolph Shopping Center, Montrose Shopping Center and Spring Valley Village.

Our results of operations are dependent on the overall economic health of our markets, tenants and the specific segments in which we own properties. All property types are affected by external economic factors, such as inflation, consumer confidence and unemployment rates, as well as changing tenant and consumer requirements.

As of December 31, 2019, no property accounted for more than approximately 10% of total assets. No single property or tenant accounted for more than 10% of the real estate rental revenue.

We have properties under development/redevelopment and held for current or future development. The cost of our real estate portfolio under development or held for future development as of December 31, 2019 and 2018 is as follows (in thousands):



	December 31,
	2019		2018
Multifamily	$	123,071	$	83,945
Office	478		478
Other	644		2,808
	$	124,193	$	87,231

As of December 31, 2019, we have invested $110.4 million, including the cost of acquired land, in The Trove, a multifamily development adjacent to The Wellington. We substantially completed major construction activities for The Trove garage levels

1-5 during the third quarter of 2019 and placed into service assets totaling $12.3 million. We expect to place the remainder of Trove development cost into service during 2020. We have also invested $25.6 million, including the cost of acquired land, in a multifamily development adjacent to Riverside Apartments. In addition, there are several other projects with minor development activity in the multifamily and office segments.

Acquisitions

Our current strategy is to recycle legacy assets that lack the income growth potential we seek and to invest in high-quality assets with compelling value-add returns through redevelopment opportunities in our existing portfolio and acquisitions that meet our stringent investment criteria. We focus on properties inside the Washington metro region’s Beltway, near major transportation nodes and in areas with strong employment drivers and superior growth demographics.

Properties and land for development acquired during the three years ended December 31, 2019 were as follows:

Acquisition Date

Property

Type

# of units (unaudited)

Rentable

Square Feet

(unaudited)

Contract

Purchase Price

(in thousands)

April 30, 2019

Assembly Portfolio - Virginia ⁽¹⁾

Multifamily

1,685

N/A

379,100

June 27, 2019

Assembly Portfolio - Maryland ⁽²⁾

Multifamily

428

N/A

82,070

July 23, 2019

Cascade at Landmark

Multifamily

277

N/A

69,750

2,390

530,920

January 18, 2018

Arlington Tower

Office

N/A

391,000

250,000

April 4, 2017

Watergate 600

Office

N/A

293,000

135,000

______________________________


⁽¹⁾	Consists of Assembly Alexandria, Assembly Manassas, Assembly Dulles, Assembly Leesburg, and Assembly Herndon.


⁽²⁾	Consists of Assembly Germantown and Assembly Watkins Mill. The Assembly Portfolio - Virginia and Assembly Portfolio - Maryland properties are collectively the “Assembly Portfolio.”

The purchases of the Assembly Portfolio and Cascade at Landmark were structured as exchanges under Section 1031 of the Code in a manner such that legal title was held by a 1031 exchange facilitator (an "Exchange Accommodator") until certain identified properties were sold and the deferred exchanges were completed. We retained all of the legal and economic benefits and obligations related to the Assembly Portfolio and Cascade at Landmark. As such, the Assembly Portfolio and Cascade at Landmark were considered to be variable interest entities until legal title was transferred to us upon completion of the 1031 exchanges, which occurred during the third quarter of 2019. We consolidated the assets and liabilities of the Assembly Portfolio and Cascade at Landmark because we determined that WashREIT was the primary beneficiary of these properties.

The results of operations from acquired operating properties are included in the consolidated statements of operations as of their acquisition dates.

The revenue and earnings of our acquisitions during their year of acquisition for the three years ended December 31, 2019 are as follows (in thousands):



	Year Ended December 31,
	2019			2018		2017
Real estate rental revenue	$	27,641		$	22,389	$	14,518
Net (loss) income	(10,167		)	3,623		2,226

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 assumed liabilities on a relative fair value basis.

We recorded the total cost of the above acquisitions as follows (in thousands):



	2019		2018			2017
Land	$	92,391	$	63,970		$	45,981
Buildings and improvements	423,663		142,900			66,241
Tenant origination costs	—		13,625			12,084
Leasing commissions/absorption costs	15,474		27,465			23,161
Net lease intangible assets	—		3,142			498
Net lease intangible liabilities	—		(545		)	(9,585		)
Deferred tax liability	—		—			(560		)
Total	$	531,528	$	250,557		$	137,820

As of December 31, 2019, the weighted remaining average life of the absorption costs was two months.

The difference in the total cost of the 2019 acquisitions of $531.5 million and the cash paid for the acquisitions per the consolidated statements of cash flows of $528.6 million is primarily due to credits received at settlement totaling $2.9 million.

The difference in the total contract purchase price of $250.0 million for the 2018 acquisition and cash paid for the acquisition per the consolidated statements of cash flows of $106.4 million is primarily due to a mortgage note assumed and repaid at settlement ($135.5 million), an acquisition deposit made during 2017 ($6.3 million), and a net credit to the buyer for certain expenditures ($2.4 million), partially offset by capitalized acquisition related costs ($0.6 million).

The difference in the total contract price of $135.0 million for the 2017 acquisition and cash paid for the acquisition per the consolidated statements of cash flows of $138.4 million is primarily due to capitalized acquisition-related costs ($2.8 million) and a net credit to the buyer for certain expenditures ($1.0 million), partially offset by the issuance of 12,124 operating partnership units (“Operating Partnership Units”) as part of the consideration ($0.4 million). The Operating Partnership Units are units in WashREIT Watergate 600 OP LP, a consolidated subsidiary of WashREIT. These Operating Partnership Units may be redeemed for either cash equal to the fair market value of a share of WashREIT common stock at the time of redemption (based on a 20-day average price) or, at the option of WashREIT, one registered or unregistered share of WashREIT common stock. In connection with the 2017 acquisition, we granted registration rights to the two contributors of the Watergate 600 property relating to the resale of any shares issued upon exchange of Operating Partnership Units pursuant to a shelf registration statement that we had an obligation to make available to the contributors approximately one year after the issuance of the Operating Partnership Units. This shelf registration statement was filed on March 8, 2018.

Balances, net of accumulated depreciation or amortization, as appropriate, of the components of the fair value of in-place leases at December 31, 2019 and 2018 were as follows (in thousands):



	December 31,
	2019						2018
	Gross Carrying Value		Accumulated Amortization		Net		Gross Carrying Value		Accumulated Amortization		Net
Tenant origination costs	$	50,155	$	33,364	$	16,791	$	57,897	$	36,570	$	21,327
Leasing commissions/absorption costs	122,348		92,401		29,947		114,354		77,194		37,160
Net lease intangible assets	15,183		11,964		3,219		16,353		11,947		4,406
Net lease intangible liabilities	29,836		20,854		8,982		31,124		20,016		11,108
Below-market ground lease intangible asset	12,080		2,282		9,798		12,080		2,093		9,987

Amortization of these combined components during the three years ended December 31, 2019, 2018 and 2017 was as follows (in thousands):



	Year Ended December 31,
	2019			2018			2017
Depreciation and amortization expense	$	27,123		$	22,361		$	13,996
Real estate rental revenue increase, net	(924		)	(1,225		)	(776		)
	$	26,199		$	21,136		$	13,220

Amortization of these combined components over the next five years is projected to be as follows (in thousands):



	Depreciation and amortization expense		Real estate rental revenue, net increase			Total
2020	$	9,975	$	(406	)	$	9,569
2021	8,576		(547		)	8,029
2022	8,078		(736		)	7,342
2023	6,032		(974		)	5,058
2024	5,264		(862		)	4,402
Thereafter	18,611		(2,238		)	16,373

Properties Sold and Held for Sale

We intend to hold our properties for investment with a view to long-term appreciation, to engage in the business of acquiring, developing and owning our properties, and to make occasional sales of the properties 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 when classified as held for sale, but operating revenues, other operating expenses and interest continue to be recognized through the date of sale.

We classified as held for sale or sold our interests in the following properties during the three years ended December 31, 2019:



Disposition Date	Property	Type	# of units (unaudited)	Rentable Square Feet (unaudited)	Contract Sale Price (in thousands)		(Loss) Gain on Sale (in thousands)
June 26, 2019	Quantico Corporate Center ⁽¹⁾	Office	N/A	272,000	$	33,000	$	(1,046	)
July 23, 2019	Shopping Center Portfolio ⁽²⁾	Retail	N/A	800,000	485,250		333,023
August 21, 2019	Frederick Crossing and Frederick County Square	Retail	N/A	520,000	57,500		9,507
August 27, 2019	Centre at Hagerstown	Retail	N/A	330,000	23,500		(3,506		)
December 19, 2019	1776 G Street	Office	N/A	262,000	129,500		61,007
N/A	John Marshall II	Office	N/A	223,000	63,350		N/A
		Total 2019		2,407,000	$	792,100	$	398,985

January 19, 2018	Braddock Metro Center	Office	N/A	356,000	$	93,000	$	—
June 28, 2018	2445 M Street	Office	N/A	292,000	101,600		2,495
		Total 2018		648,000	$	194,600	$	2,495

October 23, 2017	Walker House Apartments	Multifamily	212	N/A	$	32,200	$	23,838
		Total 2017			$	32,200	$	23,838

______________________________


⁽¹⁾	Consists of 925 and 1000 Corporate Drive.


⁽²⁾	Consists of five retail properties: Gateway Overlook, Wheaton Park, Olney Village Center, Bradlee Shopping Center and Shoppes of Foxchase.

We have fully transferred control of the assets associated with these disposed properties and do not have continuing involvement in the operations of these properties.

During the second quarter of 2019, we sold Quantico Corporate Center, an office property in Stafford, Virginia, consisting of two office buildings totaling 272,000 square feet, for a contract sale price of $33.0 million, recognizing a loss on sale of real estate of $1.0 million. Prior to the sale, due to the negotiations to sell the property, we evaluated Quantico Corporate Center for impairment and recognized an $8.4 million impairment charge during the first quarter of 2019 in order to reduce the carrying value of the property to its estimated fair value. We based this fair valuation on the expected sale price from a potential sale. There were few observable market transactions for similar properties. This fair valuation falls into Level 2 of the fair value hierarchy due to its reliance on a quoted price in a market that is not active.

In June 2019, we entered into two separate purchase and sale agreements with two separate buyers to sell the Shopping Center Portfolio and the Power Center Portfolio (Frederick Crossing, Frederick County Square and Centre at Hagerstown). As of June 30, 2019, we received a non-refundable deposit from the potential buyer of the Shopping Center Portfolio and expected to receive a non-refundable deposit from the potential buyer of the Power Center Portfolio in July 2019. As of June 30, 2019, the properties in the Retail Portfolio (as defined below) met the criteria for classification as held for sale.

We closed on the Shopping Center Portfolio sale transaction on July 23, 2019, recognizing a gain on sale of real estate of $333.0 million. Prior to closing on the disposition of the Shopping Center Portfolio, we prepaid the mortgage note secured by Olney Village Center (a property in the Shopping Center Portfolio), incurring a loss on extinguishment of debt of approximately $0.8 million, which we recognized in the third quarter of 2019.

In the third quarter of 2019, the purchase and sale agreement to sell the Power Center Portfolio was amended to include only Frederick Crossing and Frederick County Square. We closed on the sales of these assets on August 21, 2019, recognizing a gain on sale of real estate of $9.5 million. Following the amendment to the purchase and sale agreement to sell the Power Center Portfolio, we marketed Centre at Hagerstown for sale and identified a separate buyer. We closed on the sale of this asset on August 27, 2019, recognizing a loss on sale of real estate of $3.5 million.

References to the “Retail Portfolio” include the Shopping Center Portfolio and the Power Center Portfolio. The disposition of the Retail Portfolio represents a strategic shift that had a major effect on our financial results and we have accordingly reported the Retail Portfolio as discontinued operations. The Retail Portfolio represents assets generating a majority of the revenue from our retail properties and we have determined that our retail line of business is no longer a reportable segment (see note 14).

In October 2019, we renewed and extended our lease with the World Bank at 1776 G Street NW, an office property in Washington, DC, through December 31, 2025. In December 2019, we sold the property to the World Bank for a contract sale price of $129.5 million, recognizing a gain on sale of real estate of $61.0 million.

In December 2019, we executed a purchase and sale agreement to sell John Marshall II for a contract sale price of $63.4 million. We anticipate settlement in the first quarter of 2020, however, there can be no assurances that this proposed sale will be consummated. Upon execution of the purchase and sale agreement, the property met the criteria for classification as held for sale.

During the first quarter of 2018, we sold Braddock Metro Center, a 356,000 square foot office property in Alexandria, Virginia for a contract sales price of $93.0 million. Due to then-ongoing negotiations to sell the property, we evaluated Braddock Metro Center for impairment and recognized a $9.1 million impairment charge during 2017 in order to reduce the carrying value of the property to its estimated fair value, less selling costs. We based this fair valuation on the expected sale price from a potential sale. There are few observable market transactions for similar properties. This fair valuation falls into Level 2 of the fair value hierarchy due to its reliance on a quoted price in a market that is not active.

During the first quarter of 2018, we executed a purchase and sale agreement to sell 2445 M Street, a 292,000 square foot office property in Washington, DC, for a contract sales price of $100.0 million, with settlement originally scheduled for the third quarter of 2018. During 2017, we evaluated 2445 M Street for impairment and recognized a $24.1 million impairment charge in order to reduce the carrying value of the property to its estimated fair value. Upon execution of the purchase and sale agreement, the property met the criteria for classification as held for sale. Due to the property’s classification as held for sale, we recorded an additional impairment charge of $1.9 million in the first quarter of 2018 in order to reduce the carrying value of the property to its estimated fair value, less estimated selling costs. We based this fair value on the expected sales price from a potential sale. There are few observable market transactions for similar properties. This fair valuation falls into Level 2 of the fair value hierarchy due to its reliance on a quoted price in a market that is not active. During the second quarter of 2018, we executed an amendment to the purchase and sale agreement which increased the contract sales price to $101.6 million and advanced the settlement date. On June 28, 2018, we sold 2445 M Street, recognizing a gain on sale of real estate of $2.5 million.

During the second quarter of 2017, we executed a purchase and sale agreement for the sale of Walker House Apartments, a 212- unit multifamily property in Gaithersburg, Maryland, for a contract sales price of $32.2 million. We closed on the sale during the fourth quarter of 2017, recognizing a gain on sale of $23.8 million.

Discontinued Operations

The results of the Retail Portfolio are classified as discontinued operations and are summarized as follows (amounts in thousands, except for share data):



	2019			2018			2017
Real estate rental revenue	$	28,200		$	45,160		$	44,797
Real estate expenses	(6,803		)	(10,638		)	(10,251		)
Depreciation and amortization	(4,926		)	(9,402		)	(10,626		)
Interest expense	(313		)	(643		)	(740		)
Loss on extinguishment of debt	(764		)	—			—
Gain on sale of real estate	339,024			—			—
Income from discontinued operations	$	354,418		$	24,477		$	23,180

Basic net income per share	$	4.39		$	0.31		$	0.30
Diluted net income per share	$	4.39		$	0.31		$	0.30

Capital expenditures	$	809		$	2,138		$	1,601

All assets related to the Retail Portfolio were sold as of December 31, 2019. As of December 31, 2018, assets related to the Retail Portfolio were as follows (in thousands):



Land	$	88,087
Income producing property	216,577
	304,664
Accumulated depreciation and amortization	(101,254		)
Income producing property, net	203,410
Rents and other receivables	9,898
Prepaid expenses and other assets	8,653
Total assets	$	221,961

All liabilities related to the Retail Portfolio were sold as of December 31, 2019. As of December 31, 2018, liabilities related to the Retail Portfolio were as follows (in thousands):



Mortgage notes payable, net	$	11,515
Accounts payable and other liabilities	1,620
Advance rents	1,771
Tenant security deposits	612
Liabilities related to properties sold or held for sale	$	15,518