WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWSEQUITY
(IN THOUSANDS)
(UNAUDITED)
| Nine Months Ended September 30, | |||||||
| 2017 | 2016 | ||||||
| Cash flows from operating activities | |||||||
| Net income | $ | 17,275 | $ | 113,862 | |||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
| Depreciation and amortization | 83,271 | 82,104 | |||||
| Provision for losses on accounts receivable | 768 | 1,163 | |||||
| Casualty gain | — | (676 | ) | ||||
| Real estate impairment | 5,000 | — | |||||
| Gain on sale of real estate | — | (101,704 | ) | ||||
| Share-based compensation expense | 3,561 | 2,736 | |||||
| Deferred tax benefit | (107 | ) | (741 | ) | |||
| Amortization of debt premiums, discounts and related financing costs | 1,422 | 2,389 | |||||
| Changes in operating other assets | (21,300 | ) | (12,864 | ) | |||
| Changes in operating other liabilities | 4,381 | (505 | ) | ||||
| Net cash provided by operating activities | 94,271 | 85,764 | |||||
| Cash flows from investing activities | |||||||
| Real estate acquisitions, net | (138,371 | ) | (227,413 | ) | |||
| Net cash received for sale of real estate | — | 243,624 | |||||
| Capital improvements to real estate | (35,186 | ) | (38,202 | ) | |||
| Development in progress | (12,988 | ) | (19,658 | ) | |||
| Deposit on real estate held for sale | 775 | — | |||||
| Cash released from replacement reserve escrows, net | 4,572 | 1,947 | |||||
| Insurance proceeds | — | 883 | |||||
| Non-real estate capital improvements | (3,306 | ) | (278 | ) | |||
| Net cash used in investing activities | (184,504 | ) | (39,097 | ) | |||
| Cash flows from financing activities | |||||||
| Line of credit borrowings, net | 69,000 | 20,000 | |||||
| Dividends paid | (91,666 | ) | (85,648 | ) | |||
| Principal payments – mortgage notes payable | (51,815 | ) | (167,197 | ) | |||
| Proceeds from term loan | 50,000 | — | |||||
| Payment of financing costs | (234 | ) | (1,508 | ) | |||
| Distributions to noncontrolling interests | (67 | ) | (143 | ) | |||
| Proceeds from dividend reinvestment program | 2,482 | 545 | |||||
| Net proceeds from equity issuances | 113,225 | 172,936 | |||||
| Payment of tax withholdings for restricted share awards | (671 | ) | (889 | ) | |||
| Net cash provided by (used in) financing activities | 90,254 | (61,904 | ) | ||||
| Net increase (decrease) in cash and cash equivalents | 21 | (15,237 | ) | ||||
| Cash and cash equivalents at beginning of period | 11,305 | 23,825 | |||||
| Cash and cash equivalents at end of period | $ | 11,326 | $ | 8,588 | |||
| Supplemental disclosure of cash flow information: | |||||||
| Cash paid for interest, net of amounts capitalized | $ | 29,188 | $ | 34,421 | |||
| Change in accrued capital improvements and development costs | 3,959 | 2,622 | |||||
| Operating partnership units issued with acquisition | 376 | — | |||||
| Shares Issued and Out-standing | Shares of Beneficial Interest at Par Value | Additional Paid in Capital | Distributions in Excess of Net Income | Accumulated Other Comprehensive Loss | Total Shareholders’ Equity | Noncontrolling Interests in Subsidiaries | Total Equity | ||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | 84,409 | $ | 844 | $ | 1,649,366 | $ | (298,860) | $ | (30,563) | $ | 1,320,787 | $ | 322 | $ | 1,321,109 | ||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (8,139) | — | (8,139) | — | (8,139) | |||||||||||||||||||||||||||||||||||||||
| Unrealized gain on interest rate hedges | — | — | — | — | 2,584 | 2,584 | — | 2,584 | |||||||||||||||||||||||||||||||||||||||
| Loss on interest rate derivatives | — | — | — | — | 5,760 | 5,760 | — | 5,760 | |||||||||||||||||||||||||||||||||||||||
| Amortization of swap settlements | — | — | — | — | 1,019 | 1,019 | — | 1,019 | |||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | — | (8) | (8) | |||||||||||||||||||||||||||||||||||||||
| Dividends ($0.60 per common share) | — | — | — | (50,935) | — | (50,935) | — | (50,935) | |||||||||||||||||||||||||||||||||||||||
| Equity issuances, net of issuance costs | 24 | 0 | 467 | — | — | 467 | — | 467 | |||||||||||||||||||||||||||||||||||||||
| Shares issued under Dividend Reinvestment Program | 45 | 0 | 1,009 | — | — | 1,009 | — | 1,009 | |||||||||||||||||||||||||||||||||||||||
| Share grants, net of forfeitures and tax withholdings | 112 | 2 | 3,567 | — | — | 3,569 | — | 3,569 | |||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2021 | 84,590 | $ | 846 | $ | 1,654,409 | $ | (357,934) | $ | (21,200) | $ | 1,276,121 | $ | 314 | $ | 1,276,435 | ||||||||||||||||||||||||||||||||
| Shares Issued and Out-standing | Shares of Beneficial Interest at Par Value | Additional Paid in Capital | Distributions in Excess of Net Income | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity | Noncontrolling Interests in Subsidiaries | Total Equity | ||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | 82,099 | $ | 821 | $ | 1,592,487 | $ | (183,405) | $ | 1,823 | $ | 1,411,726 | $ | 336 | $ | 1,412,062 | ||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (3,687) | — | (3,687) | — | (3,687) | |||||||||||||||||||||||||||||||||||||||
| Unrealized loss on interest rate hedges | — | — | — | — | (36,356) | (36,356) | — | (36,356) | |||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | — | (7) | (7) | |||||||||||||||||||||||||||||||||||||||
| Dividends ($0.60 per common share) | — | — | — | (49,581) | — | (49,581) | — | (49,581) | |||||||||||||||||||||||||||||||||||||||
| Equity issuances, net of issuance costs | 46 | 1 | 1,241 | — | — | 1,242 | — | 1,242 | |||||||||||||||||||||||||||||||||||||||
| Shares issued under Dividend Reinvestment Program | 41 | 0 | 1,065 | — | — | 1,065 | — | 1,065 | |||||||||||||||||||||||||||||||||||||||
| Share grants, net of forfeitures and tax withholdings | 141 | 1 | 3,827 | — | — | 3,828 | — | 3,828 | |||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2020 | 82,327 | $ | 823 | $ | 1,598,620 | $ | (236,673) | $ | (34,533) | $ | 1,328,237 | $ | 329 | $ | 1,328,566 | ||||||||||||||||||||||||||||||||
See accompanying notes to the consolidated financial statements.
8
WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(IN THOUSANDS)
(UNAUDITED)
| Shares Issued and Out-standing | Shares of Beneficial Interest at Par Value | Additional Paid in Capital | Distributions in Excess of Net Income | Accumulated Other Comprehensive Loss | Total Shareholders’ Equity | Noncontrolling Interests in Subsidiaries | Total Equity | ||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2021 | 84,564 | $ | 846 | $ | 1,651,680 | $ | (325,469) | $ | (28,473) | $ | 1,298,584 | $ | 318 | $ | 1,298,902 | ||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (6,992) | — | (6,992) | — | (6,992) | |||||||||||||||||||||||||||||||||||||||
| Unrealized loss on interest rate hedges | — | — | — | — | 1,004 | 1,004 | — | 1,004 | |||||||||||||||||||||||||||||||||||||||
| Loss on interest rate derivatives | — | — | — | — | 5,760 | 5,760 | — | 5,760 | |||||||||||||||||||||||||||||||||||||||
| Amortization of swap settlements | — | — | — | — | 509 | 509 | — | 509 | |||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | — | (4) | (4) | |||||||||||||||||||||||||||||||||||||||
| Dividends ($0.30 per common share) | — | — | — | (25,473) | — | (25,473) | — | (25,473) | |||||||||||||||||||||||||||||||||||||||
| Shares issued under Dividend Reinvestment Program | 22 | 0 | 489 | — | — | 489 | — | 489 | |||||||||||||||||||||||||||||||||||||||
| Share grants, net of share grant amortization and forfeitures | 4 | 0 | 2,240 | — | — | 2,240 | — | 2,240 | |||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2021 | 84,590 | $ | 846 | $ | 1,654,409 | $ | (357,934) | $ | (21,200) | $ | 1,276,121 | $ | 314 | $ | 1,276,435 | ||||||||||||||||||||||||||||||||
| Shares Issued and Out-standing | Shares of Beneficial Interest at Par Value | Additional Paid in Capital | Distributions in Excess of Net Income | Accumulated Other Comprehensive Income | Total Shareholders’ Equity | Noncontrolling Interests in Subsidiaries | Total Equity | ||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2020 | 82,315 | $ | 823 | $ | 1,596,242 | $ | (206,506) | $ | (32,744) | $ | 1,357,815 | $ | 333 | $ | 1,358,148 | ||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (5,406) | — | (5,406) | — | (5,406) | |||||||||||||||||||||||||||||||||||||||
| Unrealized gain on interest rate hedges | — | — | — | — | (1,789) | (1,789) | — | (1,789) | |||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | — | (4) | (4) | |||||||||||||||||||||||||||||||||||||||
| Dividends ($0.30 per common share) | — | — | — | (24,761) | — | (24,761) | — | (24,761) | |||||||||||||||||||||||||||||||||||||||
| Shares issued under dividend reinvestment program | 6 | 0 | 144 | — | — | 144 | — | 144 | |||||||||||||||||||||||||||||||||||||||
| Share grants, net of forfeitures and tax withholdings | 6 | 0 | 2,234 | — | — | 2,234 | — | 2,234 | |||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2020 | 82,327 | $ | 823 | $ | 1,598,620 | $ | (236,673) | $ | (34,533) | $ | 1,328,237 | $ | 329 | $ | 1,328,566 | ||||||||||||||||||||||||||||||||
See accompanying notes to the consolidated financial statements.
9
| WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES | |||||||||||
| CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||||||
| (IN THOUSANDS) | |||||||||||
| (UNAUDITED) | |||||||||||
| Six Months Ended June 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net loss | $ | (8,139) | $ | (3,687) | |||||||
| Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 57,194 | 59,319 | |||||||||
| Credit losses on lease related receivables | 1,337 | 2,271 | |||||||||
| Loss on sale of real estate | 0 | 7,539 | |||||||||
| Share-based compensation expense | 3,750 | 3,783 | |||||||||
| Net amortization of debt premiums, discounts and related financing costs | 2,227 | 1,314 | |||||||||
| Loss on interest rate derivatives | 5,760 | 0 | |||||||||
| Gain on extinguishment of debt | 0 | (262) | |||||||||
| Changes in operating other assets | (6,071) | (4,482) | |||||||||
| Changes in operating other liabilities | 8,564 | (14,613) | |||||||||
| Net cash provided by operating activities | 64,622 | 51,182 | |||||||||
| Cash flows from investing activities | |||||||||||
| Net cash received for sale of real estate | 0 | 56,353 | |||||||||
| Capital improvements to real estate | (10,370) | (25,452) | |||||||||
| Development in progress | (7,794) | (18,646) | |||||||||
| Non-real estate capital improvements | (31) | (124) | |||||||||
| Net cash (used in) provided by investing activities | (18,195) | 12,131 | |||||||||
| Cash flows from financing activities | |||||||||||
| Line of credit borrowings, net | 1,000 | 125,000 | |||||||||
| Dividends paid | (50,821) | (49,485) | |||||||||
| Principal payments – mortgage notes payable | 0 | (46,567) | |||||||||
| Repayments of unsecured notes payable | 0 | (250,000) | |||||||||
| Proceeds from term loan | 0 | 150,000 | |||||||||
| Payment of financing costs | 0 | (560) | |||||||||
| Distributions to noncontrolling interests | (7) | (7) | |||||||||
| Proceeds from dividend reinvestment program | 1,009 | 1,065 | |||||||||
| Net proceeds from equity issuances | 467 | 1,241 | |||||||||
| Payment of tax withholdings for restricted share awards | (335) | (150) | |||||||||
| Net cash used in financing activities | (48,687) | (69,463) | |||||||||
| Net decrease in cash, cash equivalents and restricted cash | (2,260) | (6,150) | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 8,290 | 14,751 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 6,030 | $ | 8,601 | |||||||
10
| WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES | |||||||||||
| CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||||||
| (IN THOUSANDS) | |||||||||||
| (UNAUDITED) | |||||||||||
| Six Months Ended June 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Cash paid for interest, net of amounts capitalized | $ | 12,038 | $ | 21,380 | |||||||
| Change in accrued capital improvements and development costs | (4,697) | 3,687 | |||||||||
| Dividend payable | 25,474 | 24,760 | |||||||||
| Reconciliation of cash, cash equivalents and restricted cash: | |||||||||||
| Cash and cash equivalents | $ | 5,435 | $ | 7,971 | |||||||
| Restricted cash | 595 | 630 | |||||||||
| Cash, cash equivalents and restricted cash | $ | 6,030 | $ | 8,601 | |||||||
See accompanying notes to the consolidated financial statements.
11
WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1:NATURE OF BUSINESS
Washington Real Estate Investment Trust (“Washington REIT”WashREIT”), a Maryland real estate investment trust, is a self-administered equity real estate investment trust, successor to a trust organized in 1960. Our business consists of the ownership and operation of income producing real estate properties in the greater Washington, DC metro region. We own a diversified portfolio of multifamily and commercial (office and retail) properties. Within these notes to the financial statements, we refer to the three months ended June 30, 2021 and June 30, 2020 as the “2021 Quarter” and the “2020 Quarter,” respectively, and the six months ended June 30, 2021 and June 30, 2020 as the “2021 Period” and the “2020 Period,” respectively. During the 2021 Quarter, we executed a purchase and sale agreement for the sale of 12 office buildings, multifamily buildingsproperties (see note 3). Subsequent to the 2021 Quarter, we executed a purchase and sale agreement for the sale of all of our remaining 8 retail properties (see note 3). Both these office and retail centers.properties met the criteria for classification as held for sale as of June 30, 2021 and are classified as discontinued operations. The remaining office property, Watergate 600, does not meet the qualitative or quantitative criteria for a reportable segment (see note 9). The retail properties have not been a reportable segment since 2019. The dispositions of office and retail properties are part of a strategic shift away from the commercial sector to the multifamily sector which simplifies our portfolio to 1 reportable segment (multifamily) (the “strategic transformation”).
Federal Income Taxes
We believe that we qualify as a Real Estate Investment Trustreal estate investment trust (“REIT”) under Sections 856-860 of the Internal Revenue Code of 1986, as amended (the “Code”), and intend to continue to qualify as such. To maintain our status as a REIT, we are, among other things, required to distribute 90% of our REIT taxable income (which is, generally, our ordinary taxable income, with certain modifications),(determined before the deduction for dividends paid and excluding any net capital gains and any deductions for dividends paid to our shareholdersshareholders) on an annual basis. When selling a property, we generally have the option of (a) reinvesting the sales proceeds of property sold in a way that allows us to defer recognition of some or all taxable gain realized on the sale, (b) distributing gains to the shareholders with no tax to us or (c) treating net long-term capital gains as having been distributed to our shareholders, paying the tax on the gain deemed distributed and allocating the tax paid as a credit to our shareholders.
Generally, and subject to our ongoing qualification as a REIT, no provisions for income taxes are necessary except for taxes on undistributed taxable income and taxes on the income generated by our taxable REIT subsidiaries (“TRSs”). Our TRSs are subject to corporate federal and state income tax on their taxable income at regular statutory rates, or as calculated under the alternative minimum tax, as appropriate.rates. As of Septemberboth June 30, 20172021 and December 31, 2016,2020, our TRSs had deferred tax assets of $0.6 million and $0.5 million, respectively, net of valuation allowances of $2.7 million and $2.9 million, respectively. During the 2017 Period (as defined below), we recognized a deferred tax liabilityasset of $0.6$1.4 million in connection with the acquisition of Watergate 600 (see note 3). As of September 30, 2017 and December 31, 2016, we had net deferred tax liabilities of $1.0 million and $0.4 million, respectively. The deferred tax liabilities are primarily related to temporary differences in the timing of the recognition of revenue, amortization and depreciation.that was fully reserved.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATIONS
Significant Accounting Policies
We have prepared our consolidated financial statements using the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2016.2020.
Principles of Consolidation and Basis of Presentation
The accompanying unaudited consolidated financial statements include the consolidated accounts of Washington REIT,WashREIT, our majority-owned subsidiaries and entities in which Washington REITWashREIT has a controlling interest, including where Washington REIT has been determined to be a primary beneficiary of a variable interest entity (“VIE”). See note 3 for additional information on the property for which there is a noncontrolling interest. All intercompany balances and transactions have been eliminated in consolidation.
We have prepared the accompanying unaudited financial statements pursuant to the rules and regulations of the Securities and Exchange Commission “SEC”(“SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to make the information presented not misleading. In addition, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results for the periods presented have been included. These unaudited financial statements should be read in conjunction with the financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2016.2020.
12
We classify properties as held for sale when they meet the necessary criteria, which include: (a) senior management commits to a plan to sell the assets; (b) the assets are available for immediate sale in their present condition subject only to terms that are usual and customary for sales of such assets; (c) an active program to locate a buyer and other actions required to complete the plan to sell the assets has been initiated; (d) the sale of the assets is probable and transfer of the assets is expected to qualify for recognition as a completed sale within one year; (e) the assets are being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (f) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. Depreciation on these properties is discontinued at the time they are classified as held for sale, but operating revenues, operating expenses and interest expense continue to be recognized until the date of sale.
Revenues and expenses of properties that are either sold or classified as held for sale are presented as discontinued operations for all periods presented in the consolidated statements of operations if the dispositions represent a strategic shift that has (or will have) a major effect on our operations and financial results. If the dispositions do not represent a strategic shift that has (or will have) a major effect on our operations and financial results, then the revenues and expenses of the properties that are classified as sold or held for sale are presented as continuing operations in the consolidated statements we referof operations for all periods presented.
Restricted Cash
Restricted cash includes funds held in escrow for tenant security deposits.
Transformation Costs
Transformation costs include costs related to the three months ended Septemberstrategic transformation, including consulting, advisory and termination benefits. As of June 30, 20172021, $3.4 million is accrued and September 30, 2016 asincluded in Accounts payable and other liabilities on the “2017 Quarter” and the “2016 Quarter,” respectively and the nine months ended September 30, 2017 and September 30, 2016 as the "2017 Period" and "2016 Period," respectively.Consolidated Balance Sheets.
Use of Estimates in the Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
NOTE 3: REAL ESTATE
| Acquisition Date | Property | Type | Net Rentable Square Feet | Contract Purchase Price (In thousands) | ||||||
| April 4, 2017 | Watergate 600 | Office | 293,000 | $ | 135,000 | |||||
| Three Months Ended September 30, 2017 | Nine Months Ended September 30, 2017 | |||||||
| Real estate rental revenue | $ | 4,831 | $ | 9,733 | ||||
| Net income | 356 | 1,320 | ||||||
| Land | $ | 45,981 | ||
| Building | 66,241 | |||
| Tenant origination costs | 12,084 | |||
| Leasing commissions/absorption costs | 23,161 | |||
| Lease intangible assets | 498 | |||
| Lease intangible liabilities | (9,585 | ) | ||
| Deferred tax liability | (560 | ) | ||
| Total | $ | 137,820 | ||
Development/Redevelopment
We have properties under development/redevelopment and held for current or future development asdevelopment. As of SeptemberJune 30, 2017. In the office segment,2021, we have a redevelopment project atinvested $29.1 million, including the Army Navy Building, an office propertycost of acquired land, in Washington, DC, to upgrade its common areas and add significant amenities in order to make the property more competitive within its sub-market. As of September 30, 2017, we had invested $4.4 million in the redevelopment and have placed $4.3 million of the project into service. We have substantially completed the additional amenities and common areas and expect to place 11th floor common areas into service by the end of 2017.
| September 30, 2017 | December 31, 2016 | ||||||
| Land | $ | 12,851 | $ | 12,851 | |||
| Income producing property | 37,960 | 37,949 | |||||
| Accumulated depreciation and amortization | (6,255 | ) | (4,571 | ) | |||
| Other assets | 1,016 | 456 | |||||
| $ | 45,572 | $ | 46,685 | ||||
| September 30, 2017 | December 31, 2016 | ||||||
Mortgage notes payable (1) | $ | 31,580 | $ | 31,869 | |||
| Accounts payable and other liabilities | 395 | 186 | |||||
| Tenant security deposits | 94 | 99 | |||||
| $ | 32,069 | $ | 32,154 | ||||
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 whenat the time they are classified as held for sale, but operating revenues, other operating expenses and interest expense continue to be recognized until the date of sale.
13
We classified as held for sale or sold the 2017 Quarter,following properties during 2021 and 2020:
| Disposition Date | Property Name | Property Type | Rentable Square Feet | Contract Sales Price (in thousands) | (Loss) Gain on Sale (in thousands) (1) | |||||||||||||||||||||||||||
| July 26, 2021 | Office Portfolio (2) | Office | 2,370,000 | $ | 766,000 | |||||||||||||||||||||||||||
N/A (3) | Retail Portfolio (4) | Retail | 693,000 | 168,314 | ||||||||||||||||||||||||||||
| Total 2021 | 3,063,000 | $ | 934,314 | |||||||||||||||||||||||||||||
| April 21, 2020 | John Marshall II | Office | 223,000 | $ | 57,000 | $ | (6,855) | |||||||||||||||||||||||||
| December 2, 2020 | Monument II | Office | 207,000 | 53,000 | (8,595) | |||||||||||||||||||||||||||
| December 17, 2020 | 1227 25th Street NW | Office | 135,000 | 53,500 | 1,125 | |||||||||||||||||||||||||||
| Total 2020 | 565,000 | $ | 163,500 | $ | (14,325) | |||||||||||||||||||||||||||
(1) Amount determined and disclosed in the quarter of disposition.
(2) Consists of 12 office properties: 1901 Pennsylvania Avenue, 515 King Street, 1220 19th Street, 1600 Wilson Boulevard, Silverline Center, Courthouse Square, 2000 M Street, 1140 Connecticut Avenue, Army Navy Club, 1775 Eye Street, Fairgate at Ballston and Arlington Tower.
(3) Disposition of the Retail Portfolio is expected to occur in the third quarter of 2021.
(4) Consists of 8 retail properties: Takoma Park, Westminster, Concord Centre, Chevy Chase Metro Plaza, 800 S. Washington Street, Randolph Shopping Center, Montrose Shopping Center and Spring Valley Village.
We have fully transferred control of the assets associated with assets sold in 2020 and do not have continuing involvement in their operations.
In June 2021, we entered into negotiations to sell Braddock Metro Center, a 356,000 square foot office property in Alexandria, Virginia. Subsequent to the 2017 Quarter, we executed a letter of intent with a potential buyer for the property and are in the process of negotiating a purchase and sale agreement. Due to the negotiationsagreement with a single buyer to sell the property, we evaluated Braddock Metro CenterOffice Portfolio for impairment. We recognized a $5.0 million impairment charge forpurchase price of $766.0 million. As of June 30, 2021, the 2017 Quarterproperties in order to reduce the carrying value of the property to its estimated fair value. We based this fair valuation on the expected net proceeds 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. Braddock Metro Center does not meetOffice Portfolio met the criteria for classification as held for sale. We closed on the sale of the Office Portfolio on July 26, 2021.
In June 2021, we executed a letter of intent to sell the Retail Portfolio. As of June 30, 2021, we expected to enter into a purchase and sale agreement and receive a non-refundable deposit from the potential buyer of the Retail Portfolio in July 2021. As of June 30, 2021, the Retail Portfolio met the criteria for classification as of September 30, 2017.
The disposition of the Office Portfolio and expected disposition of the Retail Portfolio represent a strategic shift that will have a major effect on our financial results and we have accordingly reported the Office Portfolio and Retail Portfolio as discontinued operations. The remaining office property, metWatergate 600, does not meet the criteria for classification as heldoffice to be a reportable segment (see note 9).
As of June 30, 2021, we anticipate the disposition of certain properties prior to the end of their useful lives. We assessed these properties for saleimpairment as of June 30, 2017,2021 and did 0t recognize any impairment charges during the property continues to meet2021 Quarter. We applied reasonable estimates and judgments in evaluating each of the criteria for classification as held for saleproperties as of SeptemberJune 30, 2017. We closed on2021. Should external or internal circumstances change requiring the sale on October 23, 2017.need to shorten holding periods or adjust future estimated cash flows from our properties, we could be required to record impairment charges in the future.
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| Disposition Date | Property Name | Segment | Number of Units/ Rentable Square Feet | Contract Sales Price (in thousands) | Gain on Sale (in thousands) | |||||||||
| May 26, 2016 | Dulles Station II (1) | Office | N/A | $ | 12,100 | $ | 527 | |||||||
| June 27, 2016 | Maryland Office Portfolio Transaction I (2) | Office | 692,000 | 111,500 | 23,585 | |||||||||
| September 22, 2016 | Maryland Office Portfolio Transaction II (3) | Office | 491,000 | 128,500 | 77,592 | |||||||||
| Total 2016 | 1,183,000 | $ | 252,100 | $ | 101,704 | |||||||||
Discontinued Operations
The results of the Maryland Office Portfolio and Retail Portfolio are classified as discontinued operations and are summarized as follows (amounts in thousands, except for share data):
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Real estate rental revenue | $ | 30,561 | $ | 29,113 | $ | 59,587 | $ | 60,163 | |||||||||||||||
| Real estate expenses | (10,568) | (10,297) | (20,808) | (21,479) | |||||||||||||||||||
| Depreciation and amortization | (10,248) | (12,227) | (22,904) | (24,700) | |||||||||||||||||||
| Income from discontinued operations | $ | 9,745 | $ | 6,589 | $ | 15,875 | $ | 13,984 | |||||||||||||||
| Basic net income per share | $ | 0.12 | $ | 0.08 | $ | 0.19 | $ | 0.17 | |||||||||||||||
| Diluted net income per share | $ | 0.12 | $ | 0.08 | $ | 0.19 | $ | 0.17 | |||||||||||||||
| Capital expenditures | $ | 2,109 | $ | 5,346 | $ | 2,483 | $ | 7,586 | |||||||||||||||
As of June 30, 2021 and December 31, 2020, assets and liabilities related to the aggregate, constituted an individually significant disposition, the Maryland Office Portfolio does not qualify for presentation and disclosureRetail Portfolio were as a discontinued operation as it does not represent a strategic shift in our operations. Real estate rental revenue and net income for the Maryland Office Portfolio for the three and nine months ended September 30, 2017 and 2016 are as follows:follows (in thousands):
| June 30, 2021 | December 31, 2020 | ||||||||||
| Land | $ | 249,869 | $ | 249,869 | |||||||
| Income producing property | 961,359 | 958,704 | |||||||||
| 1,211,228 | 1,208,573 | ||||||||||
| Accumulated depreciation and amortization | (433,229) | (414,008) | |||||||||
| Income producing property, net | 777,999 | 794,565 | |||||||||
| Development in progress and land held for development | 1,122 | 1,122 | |||||||||
| Investment in real estate, net | $ | 779,121 | $ | 795,687 | |||||||
| Cash and cash equivalents | 3 | 3 | |||||||||
| Restricted cash | 10 | 10 | |||||||||
| Rents and other receivables | 48,563 | 48,532 | |||||||||
| Prepaid expenses and other assets | 38,235 | 41,452 | |||||||||
| Total assets | $ | 865,932 | $ | 885,684 | |||||||
| Accounts payable and other liabilities | $ | 12,738 | $ | 14,706 | |||||||
| Advance rents | 4,977 | 4,754 | |||||||||
| Tenant security deposits | 6,033 | 5,769 | |||||||||
| Liabilities related to properties sold or held for sale | $ | 23,748 | $ | 25,229 | |||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Real estate rental revenue | $ | — | $ | 3,689 | $ | — | $ | 20,266 | |||||||
| Net income | — | 2,474 | — | 9,376 | |||||||||||
NOTE 5:4: UNSECURED LINESLINE OF CREDIT PAYABLE
The Revolving Credit Facility bears interest at a rate of either one month LIBOR plus a margin ranging from 0.875%0.775% to 1.55% or the base rate plus a margin ranging from 0.0% to 0.55% (in each case depending upon Washington REIT’sWashREIT’s credit rating). The base rate is the highest of the administrative agent’s prime rate, the federal funds rate plus 0.50% and the LIBOR market index rate
15
plus 1.0%. In addition, the Revolving Credit Facility requires the payment of a facility fee ranging from 0.125%0.10% to 0.30% (depending on Washington REIT’sWashREIT’s credit rating) on the $600.0$700.0 million committed revolving loan capacity, without regard to usage. As of SeptemberJune 30, 2017,2021, the interest rate on the facilityRevolving Credit Facility is one month LIBOR plus 1.00%, the one month LIBOR is 0.10% and the facility fee is 0.20%.
All outstanding advances for the Revolving Credit Facility are due and payable upon maturity in March 2022, unless extended pursuant to one or both of the 2 six-month extension options. Interest only payments are due and payable generally on a monthly basis.
The 2018 Term Loan increased and replaced the $150.0 million unsecured term loan, initially entered into on July 22, 2016 (“2016 Term Loan”), that was scheduled to mature in July 2023. The 2018 Term Loan is scheduled to mature in July 2023 and bears interest at a rate of either one month LIBOR plus a margin ranging from 0.85% to 1.75% or the base rate plus a margin ranging from 0.0% to 0.75% (in each case depending upon WashREIT’s credit rating). We used the $100.0 million of additional proceeds from the 2018 Term Loan primarily to repay outstanding borrowings on the Revolving Credit Facility.
We had previously used interest rate derivatives to effectively fix the interest rate of the 2016 Term Loan. These interest rate derivatives now effectively fix the interest rate on a $150.0 million portion of the 2018 Term Loan at 2.31%. In March 2018, we entered into interest rate derivatives that commenced on June 29, 2018 to effectively fix the interest rate on the remaining $100.0 million of the 2018 Term Loan at 3.71%. The 2018 Term Loan has an all-in fixed interest rate of 2.87%.
The amount of the Revolving Credit Facility’s unsecured line of credit unused and available at SeptemberJune 30, 20172021 is as follows (in thousands):
| Committed capacity | $ | 700,000 | |||
| Borrowings outstanding | (43,000) | ||||
| Unused and available | $ | 657,000 | |||
| Committed capacity | $ | 600,000 | |
| Borrowings outstanding | (189,000 | ) | |
| Unused and available | $ | 411,000 | |
We executed borrowings and repayments on the Revolving Credit Facility during the 20172021 Period as follows (in thousands):
| Balance at December 31, 2020 | $ | 42,000 | |||
| Borrowings | 72,000 | ||||
| Repayments | (71,000) | ||||
| Balance at June 30, 2021 | $ | 43,000 | |||
| Revolving Credit Facility | |||
| Balance at December 31, 2016 | $ | 120,000 | |
| Borrowings | 259,000 | ||
| Repayments | (190,000 | ) | |
| Balance at September 30, 2017 | $ | 189,000 | |
NOTE 7:5: DERIVATIVE INSTRUMENTS
On September 15, 2015,July 22, 2016, we entered into two2 forward interest rate swap arrangements with notional amounts of $100.0 million and $50.0 million, respectively, to swap the floating interest rate under the $150.0 million 2016 Term Loan to an all-in fixed interest rate of 2.86% starting on March 31, 2017 and extending until the scheduled maturity of the 2016 Term Loan on July 21, 2023.
On March 29, 2018, we entered into the $250.0 million 2018 Term Loan maturing on July 21, 2023, which increased and replaced the 2016 Term Loan. The interest rate swap arrangements that had effectively fixed the 2016 Term Loan then effectively fix the interest rate on a $150.0 million portion of the 2018 Term Loan at 2.31%. On March 29, 2018, we entered into 4 interest rate swap arrangements with a total notional amount of $150.0$100.0 million to swapeffectively fix the floating interest rate underon the 2015remaining $100.0 million of the 2018 Term Loan (see note 5) to an all-in fixed interest rate of 2.7% startingat 3.71%, that commenced on October 15, 2015June 29, 2018 and extending until the maturity of the 20152018 Term Loan on March 15, 2021. On July 22, 2016, we entered into two forward interest rate swap arrangements with a total notional amount of $150.021, 2023. The $250.0 million to swap the floating interest rate under the 2016
2018 Term Loan (see note 6) tohas an all-in fixed interest rate of 2.9% starting on March 31, 2017 and extending until the maturity of the 2016 Term Loan on July 21, 2023.2.87%.
The interest rate swaps qualify as cash flow hedges and are recorded at fair value in accordance with GAAP,Generally Accepted Accounting Principles (“GAAP”), based on discounted cash flow methodologies and observable inputs. We record the effective portion of changes in fair value of the cash flow hedges in other comprehensive income. The resulting unrealized gain (loss) on the effective portions of the cash flow hedges was the only activity in other comprehensive income during the periods presented in our consolidated financial statements. We assess the effectiveness of our cash flow hedges both at inception and on an ongoing basis. TheIf a cash flow hedge is no longer expected to be effective, hedge accounting is discontinued. Hedge ineffectiveness of our cash flow hedges were effectiveis recorded in earnings.
We currently expect to use a portion of the proceeds from the sale of the Office and potential sale of the Retail Portfolios (see note 3) to prepay a $150.0 million portion of the 2018 Term Loan during the third quarter of 2021. We expect to hold the remaining $100.0 million portion of the 2018 Term Loan until maturity. Due to this intention to prepay a $150.0 million portion of the 2018 Term Loan, we have determined that the hedged transactions for the 20175 interest rate swap arrangements with an
16
aggregate notional value of $150.0 million are probable not to occur and that these interest swap arrangements are no longer effective cash flow hedges as of June 30, 2021. As a result, we recognized a loss of $5.8 million for the 2021 Quarter, and 2017 Period and 2016 Quarter and 2016 Period, and thereforewhich was recorded to Loss on interest rate derivatives on our condensed consolidated statements of operations. The interest rate swap arrangement with a notional value of $100.0 million related to the remaining portion of the 2018 Term Loan that we intend to hold to maturity is an effective cash flow hedge ineffectiveness did not impact earnings during the 2017 Quarter and 2017 Period and 2016 Quarter and 2016 Period.as of June 30, 2021.
The fair values of the interest rate swaps as of SeptemberJune 30, 20172021 and December 31, 2016,2020, are as follows (in thousands):
| Fair Value | ||||||||||||||||||||
| Derivative Liabilities | ||||||||||||||||||||
| Derivative Instrument | Aggregate Notional Amount | Effective Date | Maturity Date | June 30, 2021 | December 31, 2020 | |||||||||||||||
| Interest rate swaps | $ | 150,000 | March 31, 2017 | July 21, 2023 | $ | (2,869) | $ | (4,009) | ||||||||||||
| Interest rate swaps | 100,000 | June 29, 2018 | July 21, 2023 | (4,802) | (6,246) | |||||||||||||||
| $ | (7,671) | $ | (10,255) | |||||||||||||||||
| Fair Value | ||||||||||||
| Asset Derivatives | ||||||||||||
| Derivative Instrument | Aggregate Notional Amount | Effective Date | Maturity Date | September 30, 2017 | December 31, 2016 | |||||||
| Interest rate swaps | $ | 150,000 | October 15, 2015 | March 15, 2021 | $ | 747 | $ | 417 | ||||
| Interest rate swaps | 150,000 | March 31, 2017 | July 21, 2023 | 6,101 | 7,194 | |||||||
| $ | 300,000 | $ | 6,848 | $ | 7,611 | |||||||
We record interest rate swaps on our consolidated balance sheets with prepaidwithin Prepaid expenses and other assets when in a net asset position and with accountswithin Accounts payable and other liabilities when in a net liability position. The interest rate swaps have been effective since inception. The net unrealized gains or losses on the effective swaps are recognized in otherOther comprehensive income,loss, as follows (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Unrealized gain (loss) on interest rate hedges | $ | 1,004 | $ | (1,789) | $ | 2,584 | $ | (36,356) | |||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Unrealized (loss) gain on interest rate hedges | $ | (9 | ) | $ | 739 | $ | (763 | ) | $ | (4,320 | ) | ||||
Amounts reported in accumulatedAccumulated other comprehensive income (loss)loss related to derivativeseffective cash flow hedges will be reclassified to interest expense as interest payments are made on our variable-rate debt. The gains or losses reclassified from Accumulated other comprehensive loss into interest expense for the three and six months ended June 30, 2021 and 2020, were as follows (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Loss reclassified from Accumulated other comprehensive loss into interest expense | $ | 509 | $ | 0 | $ | 1,019 | $ | 0 | |||||||||||||||
During the next twelve months, we estimate that an additional $0.1$3.1 million will be reclassified as decreasean increase to interest expense.
We have agreements with each of our derivative counterparties that contain a provision whereby we could be declared in default on our derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to our default on the indebtedness. As of SeptemberJune 30, 2017,2021, we did 0t have any derivatives in an asset position and the fair value of derivatives is in a net asset position of $6.8 million, which includesthe derivative liabilities, including accrued interest, but excludes any adjustment for nonperformance risk.was $7.7 million. As of SeptemberJune 30, 2017,2021, we have not posted any collateral related to these agreements.
Derivative instruments expose us to credit risk in the event of non-performance by the counterparty under the terms of the interest rate hedge agreement.agreements. We believe that we minimize our credit risk on these transactions by dealing with major, creditworthy financial institutions. We monitor the credit ratings of counterparties and our exposure to any single entity, thus minimizing our credit risk concentration.
NOTE 8:6: FAIR VALUE DISCLOSURES
Assets and Liabilities Measured at Fair Value
For assets and liabilities measured at fair value on a recurring basis, quantitative disclosures about the fair value measurements are required to be disclosed separately for each major category of assets and liabilities, as follows:
Level 1: Quoted prices in active markets for identical assets
17
Level 2: Significant other observable inputs
Level 3: Significant unobservable inputs
The only assets or liabilities we had at SeptemberJune 30, 20172021 and December 31, 20162020 that are recorded at fair value on a recurring basis are the assets held in the Supplemental Executive Retirement Plan (“SERP”), which primarily consist of investments in mutual funds, and the interest rate swapsderivatives (see note 7)5).
We base the valuations related to the SERP on assumptions derived from significant other observable inputs and accordingly these valuations fall into Level 2 in the fair value hierarchy.
The valuation of the interest rate swapsderivatives is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each interest rate swap.derivative. This analysis reflects the contractual terms of the interest rate swaps,derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swapsderivatives are determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. To comply with the provisions of ASC 820,Fair Value Measurement, we incorporate credit valuation adjustments in the fair value measurements to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk. These credit valuation adjustments were concluded to not be significant inputs for the fair value calculations for the periods presented. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as the posting of collateral, thresholds, mutual puts and guarantees. The valuation of interest rate swapsderivatives fall into Level 2 in the fair value hierarchy.
The fair values of these assets and liabilities at SeptemberJune 30, 20172021 and December 31, 20162020 were as follows (in thousands):
| June 30, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||
| Fair Value | Level 1 | Level 2 | Level 3 | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||||||||||||||||||||
| SERP | $ | 2,386 | $ | 0 | $ | 2,386 | $ | 0 | $ | 2,433 | $ | 0 | $ | 2,433 | $ | 0 | |||||||||||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest rate derivatives | $ | (7,671) | $ | 0 | $ | (7,671) | $ | 0 | $ | (10,255) | $ | 0 | $ | (10,255) | $ | 0 | |||||||||||||||||||||||||||||||
| September 30, 2017 | December 31, 2016 | ||||||||||||||||||||||||||||||
Fair Value | Level 1 | Level 2 | Level 3 | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||||
| SERP | $ | 1,727 | $ | — | $ | 1,727 | $ | — | $ | 1,407 | $ | — | $ | 1,407 | $ | — | |||||||||||||||
| Interest rate swaps | 6,848 | — | 6,848 | — | 7,611 | — | 7,611 | — | |||||||||||||||||||||||
Financial Assets and Liabilities Not Measured at Fair Value
The following disclosures of estimated fair value were determined by management using available market information and established valuation methodologies, including discounted cash flow.flow models. Many of these estimates involve significant judgment. The estimated fair value disclosed may not necessarily be indicative of the amounts we could realize on disposition of the financial instruments. The use of different market assumptions or estimation methodologies could have an effect on the estimated fair value amounts. In addition, fair value estimates are made at a point in time and thus, estimates of fair value subsequent to SeptemberJune 30, 20172021 may differ significantly from the amounts presented.
As of SeptemberJune 30, 20172021 and December 31, 2016,2020, the carrying values and estimated fair values of our financial instruments were as follows (in thousands):
| June 30, 2021 | December 31, 2020 | ||||||||||||||||||||||
| Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||||||||||
| Cash and cash equivalents | $ | 5,435 | $ | 5,435 | $ | 7,697 | $ | 7,697 | |||||||||||||||
| Restricted cash | 595 | 595 | 593 | 593 | |||||||||||||||||||
| Line of credit | 43,000 | 43,000 | 42,000 | 42,000 | |||||||||||||||||||
| Notes payable, net | 945,905 | 977,200 | 945,370 | 978,678 | |||||||||||||||||||
| September 30, 2017 | December 31, 2016 | ||||||||||||||
| Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||
| Cash and cash equivalents | $ | 11,326 | $ | 11,326 | $ | 11,305 | $ | 11,305 | |||||||
| Restricted cash | 1,442 | 1,442 | 6,317 | 6,317 | |||||||||||
| 2445 M Street note receivable | 2,005 | 2,194 | 2,089 | 2,173 | |||||||||||
| Mortgage notes payable, net | 96,045 | 98,892 | 148,540 | 149,997 | |||||||||||
| Lines of credit | 189,000 | 189,000 | 120,000 | 120,000 | |||||||||||
| Notes payable, net | 894,103 | 932,766 | 843,084 | 873,516 | |||||||||||
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NOTE 9:7: STOCK BASED COMPENSATION
Total Compensation Expense
Total compensation expense recognized in the consolidated financial statements for all outstanding share based awards was $1.2$2.2 million and $0.3$2.0 million for the 20172021 Quarter and 20162020 Quarter, respectively, and $3.6$3.8 million and $2.7$3.8 million for the 20172021 Period and 20162020 Period, respectively.
Restricted Share Awards
The total fair values of restricted share awards vested was $2.0 million and $2.5$0.8 million for the 20172021 Period and 20162020 Period, respectively.
The total unvested restricted share awards at SeptemberJune 30, 20172021 was 355,120456,326 shares, which had a weighted average grant date fair value of $30.86$28.38 per share. As of SeptemberJune 30, 2017,2021, the total compensation cost related to unvested restricted share awards was $7.4 million, which we expect to recognize over a weighted average period of 3720 months.
NOTE 10:8: EARNINGS PER COMMON SHARE
We determine “Basic earnings per share” using the two-class method as our unvested restricted share awards and units have non-forfeitable rights to dividends, and are therefore considered participating securities. We compute basic earnings per share by dividing net income attributable to the controlling interest less the allocation of undistributed earnings to unvested restricted share awards and units by the weighted-average number of common shares outstanding for the period.
We also determine “Diluted earnings per share” as the more dilutive of the two-class method or the treasury stock method with respect to the unvested restricted share awards. We further evaluate any other potentially dilutive securities at the end of the period and adjust the basic earnings per share calculation for the impact of those securities that are dilutive. Our diluteddilutive earnings per share calculation includes the dilutive impact of operating partnership units under the if-converted method and our share based awards with performance conditions prior to the grant date and awards withall market conditionscondition awards under the contingently issuable method. The dilutive earnings per share calculation also considers the Operating Partnership Units issued in connection with the 2017 acquisition, which were not dilutive for any of the periods presented.
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The computations of basic and diluted earnings per share for the three and ninesix months ended SeptemberJune 30, 20172021 and 20162020 were as follows (in thousands, except per share data):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Loss from continuing operations | $ | (16,737) | $ | (11,995) | $ | (24,014) | $ | (17,671) | |||||||||||||||
| Allocation of distributed earnings to unvested restricted share awards | (137) | (151) | (276) | (302) | |||||||||||||||||||
| Adjusted net loss from continuing operations | (16,874) | (12,146) | (24,290) | (17,973) | |||||||||||||||||||
| Income from discontinued operations | 9,745 | 6,589 | 15,875 | 13,984 | |||||||||||||||||||
| Adjusted net loss | $ | (7,129) | $ | (5,557) | $ | (8,415) | $ | (3,989) | |||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted average shares outstanding – basic | 84,461 | 82,153 | 84,437 | 82,120 | |||||||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||||||||
| Employee restricted share awards | 0 | 0 | 0 | 0 | |||||||||||||||||||
| Operating partnership units | 0 | 0 | 0 | 0 | |||||||||||||||||||
| Weighted average shares outstanding – diluted | 84,461 | 82,153 | 84,437 | 82,120 | |||||||||||||||||||
| Earnings per common share, basic: | |||||||||||||||||||||||
| Continuing operations | $ | (0.20) | $ | (0.15) | $ | (0.29) | $ | (0.22) | |||||||||||||||
| Discontinued operations | 0.12 | 0.08 | 0.19 | 0.17 | |||||||||||||||||||
| Basic net loss per common share | $ | (0.08) | $ | (0.07) | $ | (0.10) | $ | (0.05) | |||||||||||||||
| Earnings per common share, diluted: | |||||||||||||||||||||||
| Continuing operations | $ | (0.20) | $ | (0.15) | $ | (0.29) | $ | (0.22) | |||||||||||||||
| Discontinued operations | 0.12 | 0.08 | 0.19 | 0.17 | |||||||||||||||||||
| Diluted net loss per common share | $ | (0.08) | $ | (0.07) | $ | (0.10) | $ | (0.05) | |||||||||||||||
| Dividends declared per common share | $ | 0.30 | $ | 0.30 | $ | 0.60 | $ | 0.60 | |||||||||||||||
On July 29, 2021, we announced that the Board of Trustees declared a quarterly dividend of $0.17 per share for the three months ended September 30, 2021.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Numerator: | |||||||||||||||
| Net income | $ | 2,813 | $ | 79,662 | $ | 17,275 | $ | 113,862 | |||||||
| Net loss attributable to noncontrolling interests in subsidiaries | 20 | 12 | 56 | 32 | |||||||||||
| Allocation of earnings to unvested restricted share awards | (107 | ) | (200 | ) | (291 | ) | (329 | ) | |||||||
| Adjusted net income attributable to the controlling interests | $ | 2,726 | $ | 79,474 | $ | 17,040 | $ | 113,565 | |||||||
| Denominator: | |||||||||||||||
| Weighted average shares outstanding – basic | 77,291 | 73,994 | 76,292 | 71,348 | |||||||||||
| Effect of dilutive securities: | |||||||||||||||
| Operating partnership units | 12 | — | 8 | — | |||||||||||
| Employee restricted share awards | 120 | 139 | 115 | 172 | |||||||||||
| Weighted average shares outstanding – diluted | 77,423 | 74,133 | 76,415 | 71,520 | |||||||||||
| Basic net income attributable to the controlling interests per common share | $ | 0.04 | $ | 1.07 | $ | 0.22 | $ | 1.59 | |||||||
| Diluted net income attributable to the controlling interests per common share | $ | 0.04 | $ | 1.07 | $ | 0.22 | $ | 1.59 | |||||||
NOTE 11:9: SEGMENT INFORMATION
We have threepreviously had 2 reportable segments: office multifamily and retail.multifamily. Office properties provide office space for various types of businesses and professions. Multifamily properties provide rental housing for individuals and families throughout the greater Washington, DC metro region. We have 8 retail properties that did not meet the criteria for a reportable segment and are classified as “Corporate and other” in our segment disclosure tables. During the 2021 Quarter, we executed a purchase and sale agreement for the sale of 12 office properties (see note 3). Subsequent to the 2021 Quarter, we executed a purchase and sale agreement for the sale of 8 retail properties (see note 3). Both the office and retail properties met the criteria for classification as held for sale as of June 30, 2021 and are classified as discontinued operations. We closed on the sale of the Office Portfolio on July 26, 2021 and expect to close on the Retail properties are typically grocery store-anchored neighborhood centers that include other small shop tenants or regional power centers with several junior box tenants.Portfolio in the third quarter of 2021. We have 1 remaining office property, Watergate 600, which does not meet the criteria for a reportable segment, has been classified within “Corporate and other” on our segment disclosure tables.
We evaluate performance based upon net operating income fromof the combined properties in each segment. Our reportable operating segments are consolidations of similar properties. GAAP requires that segment disclosures present the measure(s) used by the chief operating decision maker for purposes of assessing segments’each segment’s performance. Net operating income is a key measurement of our segment profit and loss. Net operating incomeloss and is defined as segment real estate rental revenue less segment real estate expenses.
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The following tables present revenues, net operating income, capital expenditures and total assets for the three and ninesix months ended SeptemberJune 30, 20172021 and 20162020 from these segments,our Multifamily segment as well as Corporate and Other, and reconcile net operating income of our reportable segments to net income attributable to the controlling interestsloss as reported (in thousands):
| Three Months Ended June 30, 2021 | |||||||||||||||||||||||||||||
| Multifamily | Corporate and Other (1), (2) | Consolidated | |||||||||||||||||||||||||||
| Real estate rental revenue | $ | 36,862 | $ | 4,435 | $ | 41,297 | |||||||||||||||||||||||
| Real estate expenses | 14,832 | 1,398 | 16,230 | ||||||||||||||||||||||||||
| Net operating income | $ | 22,030 | $ | 3,037 | $ | 25,067 | |||||||||||||||||||||||
| Depreciation and amortization | (17,303) | ||||||||||||||||||||||||||||
| General and administrative expenses | (6,325) | ||||||||||||||||||||||||||||
| Transformation costs | (3,780) | ||||||||||||||||||||||||||||
| Interest expense | (10,158) | ||||||||||||||||||||||||||||
| Other income | 1,522 | ||||||||||||||||||||||||||||
| Loss on interest rate derivatives | (5,760) | ||||||||||||||||||||||||||||
| Discontinued operations: | |||||||||||||||||||||||||||||
| Income from operations of properties sold or held for sale | 9,745 | ||||||||||||||||||||||||||||
| Net loss | $ | (6,992) | |||||||||||||||||||||||||||
| Capital expenditures | $ | 4,062 | $ | 2,300 | $ | 6,362 | |||||||||||||||||||||||
| Total assets | $ | 1,315,640 | $ | 1,052,765 | $ | 2,368,405 | |||||||||||||||||||||||
| Three Months Ended June 30, 2020 | |||||||||||||||||||||||||||||
| Multifamily | Corporate and Other (1), (2) | Consolidated | |||||||||||||||||||||||||||
| Real estate rental revenue | $ | 36,066 | $ | 7,691 | $ | 43,757 | |||||||||||||||||||||||
| Real estate expenses | 14,110 | 2,478 | 16,588 | ||||||||||||||||||||||||||
| Net operating income | $ | 21,956 | $ | 5,213 | $ | 27,169 | |||||||||||||||||||||||
| Depreciation and amortization | (17,372) | ||||||||||||||||||||||||||||
| General and administrative expenses | (5,296) | ||||||||||||||||||||||||||||
| Interest expense | (8,751) | ||||||||||||||||||||||||||||
| Loss on sale of real estate | (7,539) | ||||||||||||||||||||||||||||
| Loss on extinguishment of debt | (206) | ||||||||||||||||||||||||||||
| Discontinued operations: | |||||||||||||||||||||||||||||
| Income from operations of properties sold or held for sale | 6,589 | ||||||||||||||||||||||||||||
| Net loss | $ | (5,406) | |||||||||||||||||||||||||||
| Capital expenditures | $ | 5,488 | $ | 9,118 | $ | 14,606 | |||||||||||||||||||||||
| Total assets | $ | 1,337,731 | $ | 1,204,991 | $ | 2,542,722 | |||||||||||||||||||||||
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| Three Months Ended September 30, 2017 | Six Months Ended June 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
| Office | Retail | Multifamily | Corporate and Other | Consolidated | Multifamily | Corporate and Other (1), (2) | Consolidated | |||||||||||||||||||||||||||||||||||||||||
| Real estate rental revenue | $ | 42,982 | $ | 15,604 | $ | 24,233 | $ | — | $ | 82,819 | Real estate rental revenue | $ | 73,029 | $ | 8,875 | $ | 81,904 | |||||||||||||||||||||||||||||||
| Real estate expenses | 16,246 | 3,687 | 9,713 | — | 29,646 | Real estate expenses | 30,004 | 2,680 | 32,684 | |||||||||||||||||||||||||||||||||||||||
| Net operating income | $ | 26,736 | $ | 11,917 | $ | 14,520 | $ | — | $ | 53,173 | Net operating income | $ | 43,025 | $ | 6,195 | $ | 49,220 | |||||||||||||||||||||||||||||||
| Depreciation and amortization | (27,941 | ) | Depreciation and amortization | (34,290) | ||||||||||||||||||||||||||||||||||||||||||||
| General and administrative | (5,327 | ) | General and administrative | (11,929) | ||||||||||||||||||||||||||||||||||||||||||||
| Transformation costs | Transformation costs | (3,780) | ||||||||||||||||||||||||||||||||||||||||||||||
| Interest expense | (12,176 | ) | Interest expense | (20,281) | ||||||||||||||||||||||||||||||||||||||||||||
| Other income | 84 | Other income | 2,806 | |||||||||||||||||||||||||||||||||||||||||||||
| Real estate impairment | (5,000 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Net income | 2,813 | |||||||||||||||||||||||||||||||||||||||||||||||
| Less: Net loss attributable to noncontrolling interests in subsidiaries | 20 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income attributable to the controlling interests | $ | 2,833 | ||||||||||||||||||||||||||||||||||||||||||||||
| Loss on interest rate derivatives | Loss on interest rate derivatives | (5,760) | ||||||||||||||||||||||||||||||||||||||||||||||
| Discontinued operations: | Discontinued operations: | |||||||||||||||||||||||||||||||||||||||||||||||
| Income from operations of properties sold or held for sale | Income from operations of properties sold or held for sale | 15,875 | ||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | Net loss | $ | (8,139) | |||||||||||||||||||||||||||||||||||||||||||||
| Capital expenditures | $ | 5,934 | $ | 305 | $ | 5,024 | $ | 1,356 | $ | 12,619 | Capital expenditures | $ | 7,799 | $ | 2,602 | $ | 10,401 | |||||||||||||||||||||||||||||||
| Total assets | $ | 1,231,576 | $ | 346,374 | $ | 769,873 | $ | 36,471 | $ | 2,384,294 | ||||||||||||||||||||||||||||||||||||||
| Six Months Ended June 30, 2020 | |||||||||||||||||||||||||||||
| Multifamily | Corporate and Other (1), (2) | Consolidated | |||||||||||||||||||||||||||
| Real estate rental revenue | $ | 72,651 | $ | 16,849 | $ | 89,500 | |||||||||||||||||||||||
| Real estate expenses | 28,095 | 5,951 | 34,046 | ||||||||||||||||||||||||||
| Net operating income | $ | 44,556 | $ | 10,898 | $ | 55,454 | |||||||||||||||||||||||
| Depreciation and amortization | (34,619) | ||||||||||||||||||||||||||||
| General and administrative | (11,633) | ||||||||||||||||||||||||||||
| Interest expense | (19,596) | ||||||||||||||||||||||||||||
| Loss on sale of real estate | (7,539) | ||||||||||||||||||||||||||||
| Gain on extinguishment of debt | 262 | ||||||||||||||||||||||||||||
| Discontinued operations: | |||||||||||||||||||||||||||||
| Income from operations of properties sold or held for sale | 13,984 | ||||||||||||||||||||||||||||
| Net loss | $ | (3,687) | |||||||||||||||||||||||||||
| Capital expenditures | $ | 8,957 | $ | 16,619 | $ | 25,576 | |||||||||||||||||||||||
(1) Corporate and Other represents Watergate 600, an office property that does not meet the qualitative or quantitative criteria for a reportable segment.
(2) Total assets and capital expenditures include office and retail properties classified as discontinued operations.
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| Three Months Ended September 30, 2016 | |||||||||||||||||||
| Office | Retail | Multifamily | Corporate and Other | Consolidated | |||||||||||||||
| Real estate rental revenue | $ | 40,646 | $ | 15,404 | $ | 23,720 | $ | — | $ | 79,770 | |||||||||
| Real estate expenses | 15,839 | 3,570 | 9,755 | — | 29,164 | ||||||||||||||
| Net operating income | $ | 24,807 | $ | 11,834 | $ | 13,965 | $ | — | $ | 50,606 | |||||||||
| Depreciation and amortization | (30,905 | ) | |||||||||||||||||
| General and administrative | (4,539 | ) | |||||||||||||||||
| Interest expense | (13,173 | ) | |||||||||||||||||
| Other income | 83 | ||||||||||||||||||
| Gain on sale of real estate | 77,592 | ||||||||||||||||||
| Income tax benefit | (2 | ) | |||||||||||||||||
| Net income | 79,662 | ||||||||||||||||||
| Less: Net loss attributable to noncontrolling interests in subsidiaries | 12 | ||||||||||||||||||
| Net income attributable to the controlling interests | $ | 79,674 | |||||||||||||||||
| Capital expenditures | $ | 13,919 | $ | 2,107 | $ | 5,837 | $ | 236 | $ | 22,099 | |||||||||
| Total assets | $ | 1,107,687 | $ | 354,624 | $ | 761,388 | $ | 26,791 | $ | 2,250,490 | |||||||||
| Nine Months Ended September 30, 2017 | |||||||||||||||||||
| Office | Retail | Multifamily | Corporate and Other | Consolidated | |||||||||||||||
| Real estate rental revenue | $ | 125,118 | $ | 46,821 | $ | 71,837 | $ | — | $ | 243,776 | |||||||||
| Real estate expenses | 46,513 | 11,147 | 28,540 | — | 86,200 | ||||||||||||||
| Net operating income | $ | 78,605 | $ | 35,674 | $ | 43,297 | $ | — | $ | 157,576 | |||||||||
| Depreciation and amortization | (83,271 | ) | |||||||||||||||||
| General and administrative | (16,712 | ) | |||||||||||||||||
| Interest expense | (35,634 | ) | |||||||||||||||||
| Other income | 209 | ||||||||||||||||||
| Real estate impairment | (5,000 | ) | |||||||||||||||||
| Income tax benefit | 107 | ||||||||||||||||||
| Net income | 17,275 | ||||||||||||||||||
| Less: Net loss attributable to noncontrolling interests in subsidiaries | 56 | ||||||||||||||||||
| Net income attributable to the controlling interests | $ | 17,331 | |||||||||||||||||
| Capital expenditures | $ | 16,753 | $ | 551 | $ | 17,882 | $ | 3,306 | $ | 38,492 | |||||||||
| Nine Months Ended September 30, 2016 | |||||||||||||||||||
| Office | Retail | Multifamily | Corporate and Other | Consolidated | |||||||||||||||
| Real estate rental revenue | $ | 128,201 | 45,864 | $ | 62,247 | $ | — | $ | 236,312 | ||||||||||
| Real estate expenses | 49,508 | 11,660 | 24,905 | — | 86,073 | ||||||||||||||
| Net operating income | 78,693 | $ | 34,204 | $ | 37,342 | $ | — | $ | 150,239 | ||||||||||
| Depreciation and amortization | (82,104 | ) | |||||||||||||||||
| Acquisition costs | (1,178 | ) | |||||||||||||||||
| General and administrative | (15,018 | ) | |||||||||||||||||
| Interest expense | (41,353 | ) | |||||||||||||||||
| Other income | 205 | ||||||||||||||||||
| Gain on sale of real estate | 101,704 | ||||||||||||||||||
| Income tax benefit | 691 | ||||||||||||||||||
| Casualty gain | 676 | ||||||||||||||||||
| Net income | 113,862 | ||||||||||||||||||
| Less: Net loss attributable to noncontrolling interests in subsidiaries | 32 | ||||||||||||||||||
| Net income attributable to the controlling interests | $ | 113,894 | |||||||||||||||||
| Capital expenditures | $ | 21,944 | $ | 6,238 | $ | 10,037 | $ | 278 | $ | 38,497 | |||||||||
NOTE 12:10: SHAREHOLDERS' EQUITY
On June 23, 2015,February 17, 2021, we entered into four separate amendments to each of our existing equity distribution agreements (collectively, the “Equity(“Original Equity Distribution Agreements”) with each of Wells Fargo Securities, LLC, BNY Mellon Capital Markets, LLC, Capital One Securities, Inc., Citigroup Global Markets Inc. and RBC, Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, KeyBanc Capital Markets Inc. and Truist Securities, Inc. (f/k/a SunTrust Robinson Humphrey, Inc.), each dated May 4, 2018 (collectively, as amended, the “Amended Equity Distribution Agreements”). Also on February 17, 2021, we entered into a separate equity distribution agreement with BTIG, LLC relatingon the same terms as the Amended Equity Distribution Agreements (the “BTIG Equity Distribution Agreement,” together with the Amended Equity Distribution Agreements, the “Equity Distribution Agreements”). Pursuant to the issuance ofEquity Distribution Agreements, we may sell, from time to time, up to $200.0an aggregate price of $550.0 million of our common shares from time to time.of beneficial interest, $0.01 par value per share. Issuances of our common shares are made at market prices prevailing at the time of issuance. We may use net proceeds from the issuance of common shares under this program for general corporatebusiness purposes, including, without limitation, working capital, the acquisition, renovation, expansion, improvement, development or redevelopment of income producing properties or the repayment of debt. During the 2017 Quarter, we issued 1.5 millionWe did not issue common shares under the Equity Distribution Agreements at an average price of $32.89 per share, raising $49.3 million induring the 2021 Quarter or 2020 Quarter. Our issuances and net proceeds. During the 2017 Period, we issued 3.6 million common shares underproceeds on the Equity Distribution Agreements at an average price of $32.06and the Original Equity Distribution Agreements, respectively, for the 2021 Period and 2020 Period are as follows ($ in thousands, except per share raising $113.2 million in net proceeds.data):
| Six Months Ended June 30, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Issuance of common shares | 24 | 47 | |||||||||||||||||||||
| Weighted average price per share | $ | 22.06 | $ | 31.07 | |||||||||||||||||||
| Net proceeds | $ | 467 | $ | 1,241 | |||||||||||||||||||
We have a dividend reinvestment program whereby shareholders may use their dividends and optional cash payments to purchase common shares. The common shares sold under this program may either be common shares issued by us or common shares
purchased in the open market. During the 2017 Quarter, we issued 20,884 common sharesNet proceeds under this program at a weighted average price of $32.79 per share, raising $0.7 million inare used for general corporate purposes.
Our issuances and net proceeds. During the 2017 Period, we issued 0.1 million common shares underproceeds on the dividend reinvestment program at a weighted average price of $32.24for the three and six months ended June 30, 2021 and 2020 are as follows ($ in thousands, except per share raising $2.5 million in net proceeds.data):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Issuance of common shares | 22 | 6 | 45 | 41 | |||||||||||||||||||
| Weighted average price per share | $ | 23.21 | $ | 22.68 | $ | 22.63 | $ | 26.38 | |||||||||||||||
| Net proceeds | $ | 489 | $ | 144 | $ | 1,009 | $ | 1,065 | |||||||||||||||
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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto appearing in Item 1 of this report and the more detailed information contained in our Annual Report on Form 10-K for the year ended December 31, 20162020 filed with the Securities and Exchange Commission (“SEC”) on February 21, 2017.16, 2021.
We refer to the three months ended SeptemberJune 30, 20172021 and SeptemberJune 30, 20162020 as the “2017“2021 Quarter” and the “2016“2020 Quarter,” respectively, and the ninesix months ended SeptemberJune 30, 20172021 and SeptemberJune 30, 20162020 as the “2017“2021 Period” and “2016the “2020 Period,” respectively.
Forward-Looking Statements
This Form 10-Q contains forward-looking statements which involve risks and uncertainties. Forward-looking statements includerelate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward looking statements in this report preceded by followed bythe use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” or that include“potential” or the negative of these words “believe,” “expect,” “intend,” “anticipate,” “potential,” “project,” “will”and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. Such statements involve known and unknown risks, uncertainties, and other similar expressions. We claimfactors which may cause the protectionactual results, performance, or achievements of WashREIT to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Currently, one of the safe harbormost significant factors continues to be the adverse effect of the COVID-19 virus, including any variants and mutations thereof, the actions taken to contain the pandemic or mitigate the impact of COVID-19, and the direct and indirect economic effects of the pandemic and containment measures. The extent to which COVID-19 continues to impact WashREIT and its tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, the continued speed and success of the vaccine distribution, effectiveness and willingness of people to take COVID-19 vaccines, and the duration of associated immunity and their efficacy against emerging variants of COVID-19, among others. Moreover, investors are cautioned to interpret many of the risks identified in the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2020 filed on February 16, 2021, as being heightened as a result of the ongoing and numerous adverse impacts of COVID-19. Additional factors which may cause the actual results, performance, or achievements of WashREIT to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements containedinclude, but are not limited to the risks associated with the failure to enter into and/or complete contemplated acquisitions or dispositions (including the expected retail asset sales) within the price ranges anticipated and on the terms and timing anticipated, or at all; our ability to execute on our strategies, including new strategies with respect to our operations and our portfolio, including the acquisition of multifamily properties in the Private Securities Litigation Reform ActSoutheastern markets and the repayment of 1995 for these statements. The following important factors, in additiondebt, on the terms anticipated, or at all, and to those discussed elsewhere in this Form 10-Q, could affectrealize any anticipated benefits, including the performance of any acquired multifamily properties at the levels anticipated; our future results and could cause those resultsability to differ materially from those expressed in the forward-looking statements: (a) the effect of credit and financial market conditions; (b) the availability and cost of capital; (c) fluctuations in interest rates; (d) the economic health of our tenants; (e)lease up Trove on the timing and pricing of lease transactions; (f) the economic health of the greater Washington metro region, or other markets we may enter; (g)anticipated; our ability to reduce actual net leverage to levels consistent with our targeted net leverage range, the risks associated with ownership of real estate in general and our real estate assets in particular; (h) the effectseconomic health of the greater Washington, DC metro region and the larger Southeastern region; changes in the composition and geographic location of our portfolio; fluctuations in interest rates; reductions in or actual or threatened changes to the timing of federal government spending; (i) the supplyrisks related to use of competing properties; (j)third-party providers; the abilityeconomic health of our tenants; shifts away from brick and mortar stores to maintain an effective systeme-commerce; the availability and terms of internal controls; (k)financing and capital and the general volatility of securities markets; compliance with applicable laws, including those concerning the environment and access by persons with disabilities; (l) governmental or regulatory actionsthe risks related to not having adequate insurance to cover potential losses; the risks related to our organizational structure and initiatives; (m)limitations of stock ownership; changes in the market value of securities; terrorist attacks or actions; (n) weather conditions and natural disasters; (o)actions and/or cyber-attacks; failure to qualify and maintain our qualification as a REIT; (p)REIT and the availabilityrisks of changes in laws affecting REITs; and our abilityother risks and uncertainties detailed from time to attract and retain qualified personnel; (q) uncertaintytime in our ability to continue to pay dividends at the current rates; and (r) other factors discussed under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016 filedfilings with the SEC, including our 2020 Form 10-K filed on February 21, 2017.16, 2021. While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We undertake no obligation to update our forward-looking statements or risk factors to reflect new information, future events, or otherwise.
General
Introductory Matters
We provide our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations and financial condition. We organize the MD&A as follows:
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•Overview. Discussion of our business outlook, operating results, investment activity,and financing activity and capital requirements to provide context for the remainder of MD&A.
•Results of Operations. Discussion of our financial results comparing the 20172021 Quarter to the 20162020 Quarter and the 20172021 Period to the 20162020 Period.
•Liquidity and Capital Resources. Discussion of our financial condition and analysis of changes in our capital structure and cash flows.
•Funds From Operations. Calculation of NAREIT Funds From Operations (“NAREIT FFO”), a non-GAAP supplemental measure to net income.
•Critical Accounting Policies and Estimates. Descriptions of accounting policies that reflect significant judgments and estimates used in the preparation of our consolidated financial statements.
When evaluating our financial condition and operating performance, we focus on the following financial and non-financial indicators:
•Net operating income (“NOI”), calculated as set forth below under the caption "Results of Operations - Net Operating Income." NOI is a non-GAAP supplemental measure to net income.
•Funds From Operations (“NAREIT FFO”), calculated as set forth below under the caption “Funds from Operations.” NAREIT FFO is a non-GAAP supplemental measure to net income.
•Average occupancy, calculated as average monthly occupied multifamily units as a percentage of total multifamily units.
For purposes of evaluating comparative operating performance, we categorize our properties as “same-store” or “non-same-store”. Same-store portfolio properties include properties that were owned for the entirety of the years being compared, and exclude properties under redevelopment or development and properties acquired, sold or classified as held for sale during the years being compared. We categorize our properties as “same-store” or non-“same-store” for purposes of evaluating comparative operating performance. We define development properties as those for which we have planned or ongoing major construction activities on existing or acquired land pursuant to an authorized development plan. We consider a property's development activities to be complete when the property is ready for its intended use. The property is categorized as same-store when it has been ready for its intended use for the entirety of the years being compared. We define redevelopment properties as those for which we have planned or ongoing significant development and construction activities on existing or acquired buildings pursuant to an authorized plan, which has an impact on current operating results, occupancy and the ability to lease space with the intended result of a higher economic return on the property. We categorize a redevelopment property as same-store when redevelopment activities have been complete for the majority of each year being compared.
Overview
Our revenues are derived primarily from the ownership and operation of income producing properties in the greater Washington, DC metro region. As of June 30, 2021 we owned a diversified portfolio of 43 properties, totaling approximately 3.4 million square feet of commercial space and 7,059 multifamily units, and land held for development. These 43 properties consisted of 22 multifamily properties, 13 office properties and 8 retail centers.
During the 2021 Quarter, we executed a purchase and sale agreement for the sale of twelve office properties (the “Office Portfolio”) (see note 3 to the condensed consolidated financial statements) for a purchase price of $766.0 million. Subsequent to the 2021 Quarter, we executed a purchase and sale agreement for the sale of eight retail properties (the “Retail Portfolio”) (see note 3 to the condensed consolidated financial statements) for a purchase price of $168.3 million. Both the Office Portfolio and Retail Portfolio met the criteria for classification as held for sale as of June 30, 2021 and are classified as discontinued operations in our condensed consolidated financial statements. We closed on the sale of the Office Portfolio on July 26, 2021 and expect to close on the Retail Portfolio in the third quarter of 2021. The closing of the Retail Portfolio is subject to customary closing conditions, however, no assurance can be given that the sale will be completed. The remaining office property, Watergate 600, does not meet the qualitative or quantitative criteria for a reportable segment (see note 9 to the condensed consolidated financial statements). The properties in the Office Portfolio and Retail Portfolio met the criteria for classification as held for sale as of June 30, 2021 and are classified as discontinued operations. The dispositions of office and retail properties are part of a strategic shift away from the commercial sector to the multifamily sector which simplifies our portfolio to one reportable segment (multifamily) (the “strategic transformation”).
Outlook
We plan to use the net proceeds from the sales to fund the expansion of our multifamily platform through acquisitions in Southeastern markets and to reduce our leverage by repaying outstanding debt. The planned acquisitions of multifamily
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properties and dispositions of office and retail properties are part of a strategic shift away from the commercial sector to the multifamily sector (the “strategic transformation”). This strategic shift simplifies our portfolio to one reportable segment (multifamily). We believe the successful execution of this research-driven strategic shift will lead to greater, more sustainable growth.
On March 11, 2020, the World Health Organization declared COVID-19, a respiratory illness caused by the novel coronavirus, a pandemic, and on March 13, 2020, the United States declared a national emergency concerning COVID-19. The COVID-19 pandemic caused state and local governments within the Washington, DC metro region to institute quarantines, shelter-in-place rules and restrictions on travel, the types of business that may continue to operate and/or the types of construction projects that may continue.
While the COVID-19 pandemic impacted the 2021 Quarter, as of July 28, 2021, we collected 99% of cash rent during the 2021 Quarter. We saw a decrease in credit losses of $0.3 million during the 2021 Quarter compared to the 2020 Quarter. The effects of COVID-19 on our multifamily tenants led to a decline in rental rates during the 2021 Quarter compared to the 2020 Quarter. However, we expect to be able to increase rental rates in the remainder of 2021 as market conditions have begun to improve. We had an increase in average occupancy of approximately 60 basis points during the 2021 Quarter compared to the 2020 Quarter, excluding Trove, which began lease-up in the first quarter of 2020.
We expect the COVID-19 outbreak, including any variants and mutations thereof, to continue to affect our financial condition and results of operations during 2021, including but not limited to real estate rental revenues, credit losses and leasing activity. Given our current concentration in the Washington, DC metro region, our entire existing portfolio could be impacted at the same time by quarantines, shelter in place rules and various other restrictions imposed or re-imposed in response to a surge in COVID-19 cases. To help mitigate the impact on our operating results of the COVID-19 pandemic, we previously initiated various operational cost-saving initiatives across our portfolio. Due to the uncertainty of the future impacts of the COVID-19 pandemic, the extent of the financial impact remains difficult to reasonably estimate.
New legislation was enacted to provide relief to businesses in response to the COVID-19 pandemic. We have evaluated and will continue to evaluate the relief options available, or that become available in the future, such as the Coronavirus Aid, Relief, and Economic Securities Act (“CARES Act”), or other emergency relief initiatives and stimulus packages instituted by the federal government. A number of the available relief options contain restrictions on future business activities that require careful evaluation and consideration, including the ability to repurchase shares and pay dividends. We will continue to assess these options and any subsequent legislation or other relief packages, including the accompanying restrictions on our business, as the pandemic continues to evolve. The legislation did not have a material impact on our results of operations for the 2021 Period and 2020 Period.
Operating Results
Net loss, NOI and NAREIT FFO for the three months ended June 30, 2021 and 2020 were as follows (in thousands):
| Three Months Ended June 30, | |||||||||||||||||||||||
| 2021 | 2020 | $ Change | % Change | ||||||||||||||||||||
| Net loss | $ | (6,992) | $ | (5,406) | $ | (1,586) | 29.3 | % | |||||||||||||||
NOI (1) | $ | 25,067 | $ | 27,169 | $ | (2,102) | (7.7) | % | |||||||||||||||
NAREIT FFO (2) | $ | 20,559 | $ | 31,732 | $ | (11,173) | (35.2) | % | |||||||||||||||
| ______________________________ | |||||||||||||||||||||||
The increase in net loss is primarily due to the loss on interest rate derivatives ($5.8 million), transformation costs ($3.8 million), lower NOI ($2.1 million), higher interest expense ($1.4 million) and higher general and administrative expenses ($1.0 million) in the 2021 Quarter, partially offset by the loss on sale of real estate ($7.5 million) and a loss on extinguishment of debt ($0.2 million) in the 2020 Quarter and higher income from discontinued operations ($3.2 million) and a real estate tax refund ($1.5 million) in the 2021 Quarter.
The lower NOI is primarily due to the sales of Monument II ($1.1 million), 1227 25th Street ($0.7 million) and John Marshall II ($0.2 million) during 2020 and lower same-store NOI ($0.6 million), partially offset by placing Trove, a multifamily development, into service starting in 2020 ($0.5 million). Multifamily same-store average occupancy for our portfolio increased to 95.1% as of June 30, 2021 from 94.5% as of June 30, 2020, due to higher occupancy across the portfolio as the portfolio recovers from the COVID-19 pandemic.
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The lower NAREIT FFO is primarily due to loss on interest rate derivatives ($5.8 million), transformation costs ($3.8 million), lower NOI ($2.1 million), higher interest expense ($1.4 million) and higher general and administrative expenses ($1.0 million). These were partially offset by a real estate tax refund ($1.5 million) and higher income from discontinued operations, net of depreciation and amortization ($1.2 million) in the 2021 Quarter and loss on extinguishment of debt ($0.2 million) in 2020 Quarter.
Investment and Financing Activity
During the 2021 Quarter, we entered into a purchase and sale agreement with a single buyer to sell the Office Portfolio for a contract sales price of $766.0 million. Subsequent to the 2021 Quarter, we closed on the Office Portfolio sale transaction on July 26, 2021.
Subsequent to the end of the 2021 Quarter, we entered into a purchase and sale agreement with a single buyer to sell the Retail Portfolio for a contract sales price of $168.3 million. We expect to close on the sale of the Retail Portfolio in the third quarter of 2021.
We plan to use the net proceeds from the sales to fund the expansion of our multifamily platform through acquisitions in Southeastern markets and to reduce our leverage by repaying outstanding debt. We expect to redeem $300.0 million of our Senior Notes due 2022 and repay $150.0 million of borrowings outstanding under the 2018 Term Loan, respectively. In conjunction with these repayments, we expect to terminate five interest rate swaps (see note 5 to the consolidated financial statements).
As of June 30, 2021, the interest rate on the $700.0 million unsecured revolving credit facility (“Revolving Credit Facility”) was one month LIBOR plus 1.00% and the facility fee was 0.20%. As of July 28, 2021, we had no outstanding balance and a full borrowing capacity of $700.0 million on our Revolving Credit Facility and approximately $665.0 million of cash on hand, primarily due to the proceeds from the Office Portfolio sale.
Capital Requirements
We have no debt maturities until the fourth quarter of 2022. As discussed above, we plan to use a portion of the net proceeds from the sales of the Office Portfolio and Retail Portfolio to redeem $300.0 million of our Senior Notes scheduled to mature in 2022. If such redemption is completed, we will have no debt maturities until 2023. We expect to have additional capital requirements as set forth on page 31 (Liquidity and Capital Resources - Capital Requirements).
Results of Operations
The discussion that follows is based on our consolidated results of operations for the 2021 Quarter and 2021 Period and 2020 Quarter and 2020 Period. The ability to compare one period to another is significantly affected by dispositions made during 2021 and 2020 (see note 3 to the consolidated financial statements). Additionally, the COVID-19 pandemic adversely impacted our operating results for the 2021 Quarter, 2020 Quarter, 2021 Period and 2020 Period, and we expect that the COVID-19 outbreak will continue to adversely affect our business, financial condition, results of operations and cash flows going forward, including but not limited to, real estate rental revenues, credit losses, and leasing activity, in ways that may vary widely depending on the duration and magnitude of the COVID-19 pandemic and ensuing economic turmoil, as well as numerous other factors, many of which are outside of our control, as discussed under “Part I - Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2020 filed on February 16, 2021.
Net Operating Income
NOI, defined as real estate rental revenue less real estate expenses, is a non-GAAP measure. NOI is calculated as net income, less non-real estate revenue and the results of discontinued operations (including the gain or loss on sale, if any), plus interest expense, depreciation and amortization, lease origination expenses, general and administrative expenses, acquisition costs, real estate impairment, casualty gains and losses and gain or loss on extinguishment of debt.
| Three Months Ended September 30, | ||||||||||||||
| 2017 | 2016 | $ Change | % Change | |||||||||||
| Net income attributable to the controlling interests | $ | 2,833 | $ | 79,674 | $ | (76,841 | ) | (96.4 | )% | |||||
NOI (1) | $ | 53,173 | $ | 50,606 | $ | 2,567 | 5.1 | % | ||||||
NAREIT FFO (2) | $ | 35,754 | $ | 32,975 | $ | 2,779 | 8.4 | % | ||||||
(1) See page 26 of the MD&A for a reconciliation of NOI to net income. | ||||||||||||||
(2) See page 35 of the MD&A for a reconciliation of NAREIT FFO to net income. | ||||||||||||||
27
performance at the property level. As a result of the foregoing, we provide NOI as a supplement to net income, calculated in accordance with GAAP. NOI does not represent net income or income from continuing operations, in either case calculated in accordance with GAAP. As such, it should not be considered an alternative to these measures as an indication of our operating performance. A reconciliation of NOI to net income follows.
28
2021 Quarter Compared to 20162020 Quarter
The following tables reconciletable reconciles NOI to net (loss) income (loss) attributable to the controlling interests and provideprovides the basis for our discussion of our consolidated results of operations and NOI in the 20172021 Quarter compared to the 20162020 Quarter. All amounts are in thousands, except percentage amounts.
| Non-Same-Store | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Same-Store | Development/ Re-development (1) | Held for Sale or Sold (2) | Consolidated | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ Change | % Change | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Real estate rental revenue | $ | 39,967 | $ | 40,217 | $ | (250) | (0.6) | % | $ | 1,330 | $ | 214 | $ | — | $ | 3,326 | $ | 41,297 | $ | 43,757 | $ | (2,460) | (5.6) | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Real estate expenses | 15,323 | 14,987 | 336 | 2.2 | % | 907 | 304 | — | 1,297 | 16,230 | 16,588 | (358) | (2.2) | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| NOI | $ | 24,644 | $ | 25,230 | $ | (586) | (2.3) | % | $ | 423 | $ | (90) | $ | — | $ | 2,029 | $ | 25,067 | $ | 27,169 | $ | (2,102) | (7.7) | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reconciliation to net loss: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | (17,303) | (17,372) | 69 | (0.4) | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| General and administrative expenses | (6,325) | (5,296) | (1,029) | 19.4 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Transformation costs | (3,780) | — | (3,780) | — | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loss on sale of real estate | — | (7,539) | 7,539 | (100.0) | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest expense | (10,158) | (8,751) | (1,407) | 16.1 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other income | 1,522 | — | 1,522 | — | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loss on interest rate derivatives | (5,760) | — | (5,760) | — | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loss on extinguishment of debt | — | (206) | 206 | (100.0) | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Discontinued operations (3): | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income from operations of properties sold or held for sale | 9,745 | 6,589 | 3,156 | 47.9 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | $ | (6,992) | $ | (5,406) | $ | (1,586) | 29.3 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-Same-Store | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Same-Store | Acquisitions (1) | Development/Redevelopment (2) | Dispositions (3) | All Properties | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2017 | 2016 | $ Change | % Change | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| Real estate rental revenue | $ | 68,230 | $ | 66,788 | $ | 1,442 | 2.2 | % | $ | 10,463 | $ | 5,407 | $ | 4,126 | $ | 3,886 | $ | — | $ | 3,689 | $ | 82,819 | $ | 79,770 | $ | 3,049 | 3.8 | % | |||||||||||||||||||||||||
| Real estate expenses | 24,195 | 23,873 | 322 | 1.3 | % | 3,823 | 2,312 | 1,628 | 1,741 | — | 1,238 | 29,646 | 29,164 | 482 | 1.7 | % | |||||||||||||||||||||||||||||||||||||
| NOI | $ | 44,035 | $ | 42,915 | $ | 1,120 | 2.6 | % | $ | 6,640 | $ | 3,095 | $ | 2,498 | $ | 2,145 | $ | — | $ | 2,451 | $ | 53,173 | $ | 50,606 | $ | 2,567 | 5.1 | % | |||||||||||||||||||||||||
| Reconciliation to net income attributable to the controlling interests: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | (27,941 | ) | (30,905 | ) | 2,964 | (9.6 | )% | ||||||||||||||||||||||||||||||||||||||||||||||
| General and administrative expenses | (5,327 | ) | (4,539 | ) | (788 | ) | 17.4 | % | |||||||||||||||||||||||||||||||||||||||||||||
| Real estate impairment | (5,000 | ) | — | (5,000 | ) | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Gain on sale of real estate | — | 77,592 | (77,592 | ) | (100.0 | )% | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest expense | (12,176 | ) | (13,173 | ) | 997 | (7.6 | )% | ||||||||||||||||||||||||||||||||||||||||||||||
| Other income | 84 | 83 | 1 | 1.2 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Income tax expense | — | (2 | ) | 2 | (100.0 | )% | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | 2,813 | 79,662 | (76,849 | ) | (96.5 | )% | |||||||||||||||||||||||||||||||||||||||||||||||
| Less: Net loss attributable to noncontrolling interests | 20 | 12 | 8 | 66.7 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net income attributable to the controlling interests | $ | 2,833 | $ | 79,674 | $ | (76,841 | ) | (96.4 | )% | ||||||||||||||||||||||||||||||||||||||||||||
(1)Development/redevelopment:
(2)Sold (classified as continuing operations):
2020 Office – Watergate 600- John Marshall II, Monument II and 1227 25th Street
(3)Discontinued operations:
2021 Office redevelopment properties –- 1901 Pennsylvania Avenue, 515 King Street, 1220 19th Street, 1600 Wilson Boulevard, Silverline Center, Courthouse Square, 2000 M Street, 1140 Connecticut Avenue, Army Navy BuildingClub, 1775 Eye Street, Fairgate at Ballston and BraddockArlington Tower
2021 Retail - Takoma Park, Westminster, Concord Centre, Chevy Chase Metro Plaza, 800 S. Washington Street, Randolph Shopping Center, Montrose Shopping Center and Spring Valley Village
Real Estate Rental Revenue
Real estate rental revenue is comprised of (a) minimum base rent, which includes rental revenues recognized on a straight-line basis, (b) revenue from the recovery of operating expenses from our tenants, (c) provisions for doubtful accounts in the same quarter that we established the receivable, which include provisions for straight-linecredit losses on lease related receivables, (d) revenue from the collection of lease termination fees and (e) parking and other tenant charges such as percentage rents.
| Three Months Ended September 30, | ||||||||||||||
| 2017 | 2016 | $ Change | % Change | |||||||||||
| Minimum base rent | $ | 57,940 | $ | 56,154 | $ | 1,786 | 3.2 | % | ||||||
| Recoveries from tenants | 7,480 | 7,786 | (306 | ) | (3.9 | )% | ||||||||
| Provision for doubtful accounts | (284 | ) | (227 | ) | (57 | ) | 25.1 | % | ||||||
| Lease termination fees | 435 | 638 | (203 | ) | (31.8 | )% | ||||||||
| Parking and other tenant charges | 2,659 | 2,437 | 222 | 9.1 | % | |||||||||
| Total same-store real estate rental revenue | $ | 68,230 | $ | 66,788 | $ | 1,442 | 2.2 | % | ||||||
Real estate rental revenue from same-store multifamily properties by segment was as follows (in thousands):
| Three Months Ended September 30, | ||||||||||||||
| 2017 | 2016 | $ Change | % Change | |||||||||||
| Office | $ | 34,026 | $ | 33,071 | $ | 955 | 2.9 | % | ||||||
| Multifamily | 18,600 | 18,313 | 287 | 1.6 | % | |||||||||
| Retail | 15,604 | 15,404 | 200 | 1.3 | % | |||||||||
| Total same-store real estate rental revenue | $ | 68,230 | $ | 66,788 | $ | 1,442 | 2.2 | % | ||||||
Real estate rental revenue from acquisitionsdevelopment properties increased due to continued lease-up of Trove ($1.1 million). We placed the acquisitionremainder of Watergate 600 ($4.8 million) in the secondTrove development costs into service during the first quarter of 2017 and higher rental income at Riverside Apartments ($0.2 million).2021.
Real estate rental revenue from development/redevelopmentheld for sale and sold properties increased primarilyclassified as continuing operations decreased due to higher rental incomesales of Monument II ($1.7 million) and 1227 25th Street ($1.3 million) during the fourth quarter of 2020 and the sale of John Marshall II ($0.4 million) at Army Navy Building, which substantially completed redevelopment activities during the 2017 Quarter.second quarter of 2020.
29
Average occupancy represents occupied square footage indicatedfor multifamily properties classified as a percentage of total square footage as of the last day of that period. Ending occupancy by segmentcontinuing operations for the 20172021 Quarter and 20162020 Quarter was as follows:
| June 30, 2021 | June 30, 2020 | Increase | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Segment | Same-Store | Non-Same-Store | Total | Same-Store | Non-Same-Store | Total | Same-Store | Non-Same-Store | Total | ||||||||||||||||||||||||||||||||||||||||||||
| Multifamily | 95.1 | % | 49.9 | % | 92.5 | % | 94.5 | % | 7.5 | % | 89.5 | % | 0.6 | % | 42.4 | % | 3.0 | % | |||||||||||||||||||||||||||||||||||
| September 30, 2017 | September 30, 2016 | Increase (decrease) | ||||||||||||||||||||||||
| Segment | Same-Store | Non-Same-Store | Total | Same-Store | Non-Same-Store | Total | Same-Store | Non-Same-Store | Total | |||||||||||||||||
| Office | 93.4 | % | 92.5 | % | 93.2 | % | 91.0 | % | 86.4 | % | 90.5 | % | 2.4 | % | 6.1 | % | 2.7 | % | ||||||||
| Multifamily | 94.4 | % | 94.6 | % | 94.5 | % | 94.8 | % | 92.4 | % | 94.2 | % | (0.4 | )% | 2.2 | % | 0.3 | % | ||||||||
| Retail | 93.5 | % | N/A | 93.5 | % | 95.6 | % | N/A | 95.6 | % | (2.1 | )% | N/A | (2.1 | )% | |||||||||||
| Total | 93.8 | % | 93.7 | % | 93.8 | % | 93.6 | % | 90.5 | % | 93.2 | % | 0.2 | % | 3.2 | % | 0.6 | % | ||||||||
Square Feet (in thousands) | Average Rental Rate (per square foot) | % Rental Rate Increase (Decrease) | Leasing Costs (1) (per square foot) | Free Rent (weighted average months) | Retention Rate | ||||||||||||||
| Office | 56 | $ | 60.34 | 19.6 | % | $ | 94.11 | 6.3 | 6.8 | % | |||||||||
| Retail | 48 | 27.87 | 5.0 | % | 7.47 | 0.4 | 95.8 | % | |||||||||||
| Total | 104 | 45.38 | 15.0 | % | 54.18 | 4.5 | 27.1 | % | |||||||||||
Real Estate Expenses
Real estate expenses as a percentage of revenue for the 20172021 Quarter and 20162020 Quarter were 35.8%39.3% and 36.6%37.9%, respectively.
Real estate expenses from same-store multifamily properties by segment were as follows (in thousands):
| Three Months Ended September 30, | ||||||||||||||
| 2017 | 2016 | $ Change | % Change | |||||||||||
| Office | $ | 13,057 | $ | 12,860 | $ | 197 | 1.5 | % | ||||||
| Multifamily | 7,451 | 7,443 | 8 | 0.1 | % | |||||||||
| Retail | 3,687 | 3,570 | 117 | 3.3 | % | |||||||||
| Total same-store real estate expenses | $ | 24,195 | $ | 23,873 | $ | 322 | 1.3 | % | ||||||
Other Income and Expenses
Depreciation and Amortization: Decrease primarily due to lower amortizationthe dispositions of acquired lease assets at Riverside ApartmentsMonument II ($4.61.0 million) and lower1227 25th Street ($0.4 million) in the fourth quarter of 2020. These decreases were partially offset by placing into service a portion of the Trove development ($1.1 million) and higher depreciation and amortization at same-store properties ($1.10.2 million), partially offset by the Watergate 600 acquisition ($2.6 million). The lower same-store depreciation and amortization is primarily due to lower amortization of leasing commissions and acquired intangible lease assets.
General and administrative expenses:Increase primarily due to higher share-based compensation ($0.9 million) primarily due to a higher volumeestimate of forfeituresshort-term incentive compensation ($0.9 million) during the 20162021 Quarter.
Interest Expense: Interest expense by debt type for the three months ended SeptemberJune 30, 20172021 and 20162020 was as follows (in thousands):
| Three Months Ended June 30, | |||||||||||||||||||||||
| Debt Type | 2021 | 2020 | $ Change | % Change | |||||||||||||||||||
| Notes payable | $ | 9,475 | $ | 7,562 | $ | 1,913 | 25.3 | % | |||||||||||||||
| Line of credit | 854 | 1,725 | (871) | (50.5) | % | ||||||||||||||||||
| Capitalized interest | (171) | (536) | 365 | (68.1) | % | ||||||||||||||||||
| Total | $ | 10,158 | $ | 8,751 | $ | 1,407 | 16.1 | % | |||||||||||||||
| Three Months Ended September 30, | ||||||||||||||
| Debt Type | 2017 | 2016 | $ Change | % Change | ||||||||||
| Notes payable | $ | 9,446 | $ | 8,364 | $ | 1,082 | 12.9 | % | ||||||
| Mortgage notes payable | 1,163 | 3,419 | (2,256 | ) | (66.0 | )% | ||||||||
| Lines of credit | 1,798 | 1,578 | 220 | 13.9 | % | |||||||||
| Capitalized interest | (231 | ) | (188 | ) | (43 | ) | 22.9 | % | ||||||
| Total | $ | 12,176 | $ | 13,173 | $ | (997 | ) | (7.6 | )% | |||||
•Notes payable: Increase primarily due to executing the$350.0 million Green Bonds executed in December 2020, partially offset by prepayment of our $150.0 million term loan2015 Term Loan in 2016, which has a floating interest rate effectively fixed at 2.9%December 2020 and by interest rate swaps. We borrowed $100.0the new $150.0 million on the term loan2020 Term Loan executed in the fourth quarterMay 2020 and prepaid in November 2020.
•Line of 2016, and borrowed the remaining $50.0 million during the first quarter of 2017.
•Capitalized interest: Decrease primarily due to placing into service assets at Trove.
Loss on extinguishment of debt: We recognized a $0.2 million loss on extinguishment of debt during 2020 Quarter related to the prepayment of the $250 million of 4.95% Senior Notes that were scheduled to mature in October 2020.
Other income: During the 2021 Quarter we recognized $1.5 million in other income related to a tax refund for an office property sold in 2018.
Loss on interest rate derivatives: We currently expect to prepay a $150.0 million portion of the 2018 Term Loan during the third quarter of 2021. We have determined that the hedged transactions for the five interest rate swap arrangements with an aggregate notional value of $150.0 million are probable not to occur and that these interest swap arrangements are no longer effective cash flow hedges as of June 30, 2021. As a result of the ineffectiveness, the accumulated fair value of the five interest rate swap
30
arrangements of $5.8 million was reclassified from Accumulated other comprehensive loss to Loss on interest rate derivatives on our condensed consolidated financial statements.
Income from discontinued operations: Increase primarily due to capitalization of interest on spending related to the Trove, the multifamily development adjacent to The Wellington.lower depreciation and amortization ($2.0 million), higher recoveries ($0.7 million) and lower credit losses ($0.7 million) from retail and office properties classified as discontinued operations. These increases were partially offset by higher utilities ($0.2 million) expenses.
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The following tables reconcile NOI to net (loss) income attributable to the controlling interests and provide the basis for our discussion of our consolidated results of operations and NOI in the 20172021 Period compared to the 20162020 Period. All amounts are in thousands, except percentage amounts.
| Non-Same-Store | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Same-Store | Development/Redevelopment (1) | Held for Sale or Sold (2) | All Properties | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ Change | % Change | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Real estate rental revenue | $ | 79,598 | $ | 81,267 | $ | (1,669) | (2.1) | % | $ | 2,306 | $ | 251 | $ | — | $ | 7,982 | $ | 81,904 | $ | 89,500 | $ | (7,596) | (8.5) | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Real estate expenses | 31,010 | 30,205 | 805 | 2.7 | % | 1,674 | 551 | — | 3,290 | 32,684 | 34,046 | (1,362) | (4.0) | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| NOI | $ | 48,588 | $ | 51,062 | $ | (2,474) | (4.8) | % | $ | 632 | $ | (300) | $ | — | $ | 4,692 | $ | 49,220 | $ | 55,454 | $ | (6,234) | (11.2) | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reconciliation to net loss: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | (34,290) | (34,619) | 329 | (1.0) | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| General and administrative expenses | (11,929) | (11,633) | (296) | 2.5 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Transformation costs | (3,780) | — | (3,780) | — | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loss on sale of real estate | — | (7,539) | 7,539 | (100.0) | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest expense | (20,281) | (19,596) | (685) | 3.5 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other income | 2,806 | — | 2,806 | — | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loss on interest rate derivatives | (5,760) | — | (5,760) | — | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gain on extinguishment of debt | — | 262 | (262) | (100.0) | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Discontinued operations (3): | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income from operations of properties sold or held for sale | 15,875 | 13,984 | 1,891 | 13.5 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | (8,139) | (3,687) | (4,452) | 120.7 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-Same-Store | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Same-Store | Acquisitions (1) | Development/Redevelopment (2) | Dispositions (3) (continuing operations) | All Properties | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2017 | 2016 | $ Change | % Change | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| Real estate rental revenue | $ | 205,370 | $ | 195,472 | $ | 9,898 | 5.1 | % | $ | 26,309 | $ | 7,892 | $ | 12,097 | $ | 12,682 | $ | — | $ | 20,266 | $ | 243,776 | $ | 236,312 | $ | 7,464 | 3.2 | % | |||||||||||||||||||||||||
| Real estate expenses | 71,313 | 70,402 | 911 | 1.3 | % | 9,967 | 3,181 | 4,920 | 4,994 | — | 7,496 | 86,200 | 86,073 | 127 | 0.1 | % | |||||||||||||||||||||||||||||||||||||
| NOI | $ | 134,057 | $ | 125,070 | $ | 8,987 | 7.2 | % | $ | 16,342 | $ | 4,711 | $ | 7,177 | $ | 7,688 | $ | — | $ | 12,770 | $ | 157,576 | $ | 150,239 | $ | 7,337 | 4.9 | % | |||||||||||||||||||||||||
| Reconciliation to net income attributable to the controlling interests: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | (83,271 | ) | (82,104 | ) | (1,167 | ) | 1.4 | % | |||||||||||||||||||||||||||||||||||||||||||||
| Acquisition costs | — | (1,178 | ) | 1,178 | (100.0 | )% | |||||||||||||||||||||||||||||||||||||||||||||||
| General and administrative expenses | (16,712 | ) | (15,018 | ) | (1,694 | ) | 11.3 | % | |||||||||||||||||||||||||||||||||||||||||||||
| Casualty gain | — | 676 | (676 | ) | (100.0 | )% | |||||||||||||||||||||||||||||||||||||||||||||||
| Real estate impairment | (5,000 | ) | — | (5,000 | ) | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Gain on sale of real estate | — | 101,704 | (101,704 | ) | (100.0 | )% | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest expense | (35,634 | ) | (41,353 | ) | 5,719 | (13.8 | )% | ||||||||||||||||||||||||||||||||||||||||||||||
| Other income | 209 | 205 | 4 | 2.0 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Income tax benefit | 107 | 691 | (584 | ) | 84.5 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | 17,275 | 113,862 | (96,587 | ) | (84.8 | )% | |||||||||||||||||||||||||||||||||||||||||||||||
| Less: Net loss attributable to noncontrolling interests | 56 | 32 | 24 | 75.0 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net income attributable to the controlling interests | $ | 17,331 | $ | 113,894 | $ | (96,563 | ) | (84.8 | )% | ||||||||||||||||||||||||||||||||||||||||||||
Multifamily - Trove
(2)Sold (classified as continuing operations):
2020 Office – Watergate 600- John Marshall II, Monument II and 1227 25th Street
(3)Discontinued operations:
2021 Office redevelopment properties –- 1901 Pennsylvania Avenue, 515 King Street, 1220 19th Street, 1600 Wilson Boulevard, Silverline Center, Courthouse Square, 2000 M Street, 1140 Connecticut Avenue, Army Navy BuildingClub, 1775 Eye Street, Fairgate at Ballston and BraddockArlington Tower
2021 Retail - Takoma Park, Westminster, Concord Centre, Chevy Chase Metro Plaza, 800 S. Washington Street, Randolph Shopping Center, Montrose Shopping Center and Spring Valley Village
Real Estate Rental Revenue
Real estate rental revenue is comprised of (a) minimum base rent, which includes rental revenues recognized on a straight-line basis, (b) revenue from the recovery of operating expenses from our tenants, (c) provisions for doubtful accounts in the same quarter that we established the receivable, which include provisions for straight-linecredit losses on lease related receivables, (d) revenue from the collection of lease termination fees and (e) parking and other tenant charges such as percentage rents.
| Nine Months Ended September 30, | ||||||||||||||
| 2017 | 2016 | $ Change | % Change | |||||||||||
| Minimum base rent | $ | 173,494 | $ | 165,110 | $ | 8,384 | 5.1 | % | ||||||
| Recoveries from tenants | 23,667 | 23,104 | 563 | 2.4 | % | |||||||||
| Provision for doubtful accounts | (992 | ) | (679 | ) | (313 | ) | (46.1 | )% | ||||||
| Lease termination fees | 1,624 | 917 | 707 | 77.1 | % | |||||||||
| Parking and other tenant charges | 7,577 | 7,020 | 557 | 7.9 | % | |||||||||
| Total same-store real estate rental revenue | $ | 205,370 | $ | 195,472 | $ | 9,898 | 5.1 | % | ||||||
Real estate rental revenue from same-store multifamily properties by segment was as follows (in thousands):
| Nine Months Ended September 30, | ||||||||||||||
| 2017 | 2016 | $ Change | % Change | |||||||||||
| Office | $ | 103,289 | $ | 95,253 | $ | 8,036 | 8.4 | % | ||||||
| Multifamily | 55,260 | 54,355 | 905 | 1.7 | % | |||||||||
| Retail | 46,821 | 45,864 | 957 | 2.1 | % | |||||||||
| Total same-store real estate rental revenue | $ | 205,370 | $ | 195,472 | $ | 9,898 | 5.1 | % | ||||||
Real estate rental revenue from acquisitionsdevelopment properties increased due to the acquisitionscontinued lease-up of Watergate 600the Trove development ($9.72.1 million) in. We placed the 2017 Period and Riverside Apartments ($8.7 million) inremainder of the 2016 Period.Trove development costs into service during the first quarter of 2021.
Real estate rental revenue from development/redevelopmentsold properties classified as continuing operations decreased due to sales of Monument II ($3.1 million) and 1227 25th Street ($2.7 million) during the fourth quarter of 2020, and due to the sale of John Marshall II ($2.2 million) during the second quarter of 2020.
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Average occupancy for multifamily properties classified as continuing operations for the 2021 Period and 2020 Period was as follows:
| June 30, 2021 | June 30, 2020 | Increase | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Segment | Same-Store | Non-Same-Store | Total | Same-Store | Non-Same-Store | Total | Same-Store | Non-Same-Store | Total | ||||||||||||||||||||||||||||||||||||||||||||
| Multifamily | 94.7 | % | 40.6 | % | 91.6 | % | 94.9 | % | 4.0 | % | 89.8 | % | (0.2) | % | 36.6 | % | 1.8 | % | |||||||||||||||||||||||||||||||||||
The decrease in same-store average occupancy was primarily due to lower tenant reimbursements ($0.7 million)average occupancy at Army Navy Building, which substantially completed redevelopment activities during the 2017 Quarter.3801 Connecticut Avenue, The Kenmore and Cascade at Landmark, partially offset by higher average occupancy at The Paramount and Assembly Leesburg.
Square Feet (in thousands) | Average Rental Rate (per square foot) | % Rental Rate Increase | Leasing Costs (1) (per square foot) | Free Rent (weighted average months) | Retention Rate | ||||||||||||||
| Office | 411 | $ | 44.53 | 8.0 | % | $ | 88.74 | 10.3 | 48.0 | % | |||||||||
| Retail | 255 | 29.00 | 17.7 | % | 13.26 | 1.4 | 68.6 | % | |||||||||||
| Total | 666 | 38.57 | 10.6 | % | 59.77 | 7.7 | 56.2 | % | |||||||||||
Real Estate Expenses
Real estate expenses as a percentage of revenue for the 20172021 Period and 20162020 Period were 35.4%39.9% and 36.4%38.0%, respectively.
Real estate expenses from same-store multifamily properties by segment were as follows (in thousands):
| Nine Months Ended September 30, | ||||||||||||||
| 2017 | 2016 | $ Change | % Change | |||||||||||
| Office | $ | 38,533 | $ | 37,017 | $ | 1,516 | 4.1 | % | ||||||
| Multifamily | 21,633 | 21,725 | (92 | ) | (0.4 | )% | ||||||||
| Retail | 11,147 | 11,660 | (513 | ) | (4.4 | )% | ||||||||
| Total same-store real estate expenses | $ | 71,313 | $ | 70,402 | $ | 911 | 1.3 | % | ||||||
Other Income and Expenses
Depreciation and Amortization: Decrease primarily due to the dispositions of Monument II ($1.9 million) and 1227 25th Street ($0.8 million) in the fourth quarter of 2020 and lower depreciation and amortization at same-store properties ($0.1 million). These decreases were partially offset by placing into service a portion of the Trove development ($2.5 million).
General and administrative expenses: Increase primarily due to the Watergate 600 acquisitiona higher estimate of short term incentive compensation ($4.81.0 million), partially offset by lower amortization of acquired intangible lease assets at Riverside Apartmentsprofessional fees ($1.90.3 million), recruitment fees ($0.1 million) and same-store propertiesinformation technology expenses ($1.80.1 million).
Loss on sale of Riverside Apartmentsreal estate: The loss during the 2016 Period. We capitalized the costs associated with the acquisition of Watergate 600 in the 20172020 Period is due to accounting for the transaction as an asset acquisition in accordance with the adoptionsale of ASU No. 2017-01, Business Combinations (Topic 805) - Clarifying the DefinitionJohn Marshall II.
Gain on extinguishment of debt: We recognized a Business.
Interest Expense: Interest expense by debt type for the ninesix months ended SeptemberJune 30, 20172021 and 2016 were2020 was as follows (in thousands):
| Six Months Ended June 30, | |||||||||||||||||||||||
| Debt Type | 2021 | 2020 | $ Change | % Change | |||||||||||||||||||
| Notes payable | $ | 18,961 | $ | 17,721 | $ | 1,240 | 7.0 | % | |||||||||||||||
| Mortgage notes payable | — | 172 | (172) | (100.0) | % | ||||||||||||||||||
| Line of credit | 1,699 | 3,123 | (1,424) | (45.6) | % | ||||||||||||||||||
| Capitalized interest | (379) | (1,420) | 1,041 | (73.3) | % | ||||||||||||||||||
| Total | $ | 20,281 | $ | 19,596 | $ | 685 | 3.5 | % | |||||||||||||||
| Nine Months Ended September 30, | ||||||||||||||
| Debt Type | 2017 | 2016 | $ Change | % Change | ||||||||||
| Notes payable | $ | 28,042 | $ | 24,946 | $ | 3,096 | 12.4 | % | ||||||
| Mortgage notes payable | 3,651 | 12,628 | (8,977 | ) | (71.1 | )% | ||||||||
| Lines of credit | 4,617 | 4,255 | 362 | 8.5 | % | |||||||||
| Capitalized interest | (676 | ) | (476 | ) | (200 | ) | 42.0 | % | ||||||
| Total | $ | 35,634 | $ | 41,353 | $ | (5,719 | ) | (13.8 | )% | |||||
•Notes payable: Increase primarily due to executing the$350.0 million Green Bonds executed in December 2020, partially offset by prepayment of all $250.0 million of our 4.95% Senior Notes in April 2020, prepayment of our $150.0 million term loan2015 Term Loan in 2016, which has a floating interest rate effectively fixed at 2.9%December 2020 and by interest rate swaps. We borrowed $100.0the new $150.0 million on the term loan2020 Term Loan executed in the fourth quarter of 2016,May 2020 and borrowed the remaining $50.0 million during the first quarter of 2017.
prepaid in November 2020.•Mortgage notes payable: Decrease due to repayment of the mortgage note secured by Yale West Apartments in January 2020.
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•Line of credit: Decrease primarily due to the repayment of the mortgage notes secured by John Marshall II, 3801 Connecticut Avenue, Bethesda Hill Apartments, Walker House Apartments, 2445 M Street and the Army Navy Building in 2017 and 2016.
•Capitalized interest: IncreaseDecrease primarily due to capitalization of interest on spending related to theplacing into service assets at Trove, the multifamily development adjacent to The Wellington.
Loss on interest rate derivatives: We currently expect to prepay a reduction$150.0 million portion of the valuation allowance on a deferred tax asset at one2018 Term Loan during the third quarter of our taxable REIT subsidiaries due2021. We have determined that the hedged transactions for five interest rate swap arrangements with an aggregate notional value of $150.0 million are probable not to a net operating lossoccur and that these interest swap arrangements are no longer effective cash flow hedges as of June 30, 2021. As a result of the saleineffectiveness, the accumulated fair value of Dulles Station II. We further reduced the valuation allowance in the 2017 Periodfive interest rate swap arrangements of $5.8 million was reclassified from Accumulated other comprehensive loss to Loss on interest rate derivatives on our condensed consolidated financial statements.
Income from discontinued operations: Increase primarily due to an increase in anticipated income at the TRSlower depreciation and corresponding usage of the net operating loss. We have concluded that there is sufficient positive evidenceamortization ($1.8 million) from retail and office properties classified as of September 30, 2017 that it is more likely than not that a portion of the deferred tax asset related to the net operating loss is realizable.discontinued operations.
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Liquidity and Capital Resources
We believe we will have adequate liquidity over the next 12 months to operate our business and to meet our cash requirements. As of July 26, 2021, we had cash and cash equivalents totaling approximately $665.0 million and no outstanding balance and a full borrowing capacity of $700.0 million on our Revolving Credit Facility, resulting in a total liquidity position of approximately $1.4 billion.
Through our Office Portfolio sale and expected Retail Portfolio sale, we executed strategic transactions that will allow us to pursue multifamily expansion in Southeastern markets, meet our debt obligations for the next twelve months, including our plans to redeem all $300.0 million of Senior Notes due 2022 in the third quarter of 2021, and pay a dividend on a quarterly basis. When the redemption of the Senior Notes due in 2022 is completed, we will have no debt maturities until 2023.
We will continue to assess the payment of our dividends on a quarterly basis. Future determinations regarding the declaration and payment of dividends, if any, will be at the discretion of our Board of Trustees who considers, among other factors, trends in our levels of funds from operations and ongoing capital requirements to achieve a targeted payout ratio.
Capital Requirements
As of the end of the third quarter of 2017,2021 Quarter, we summarize our full-year 20172021 capital requirements as follows:
•Funding dividends and distributions to our shareholders;
•Approximately $75$25.0 - $80$30.0 million to invest in our existing portfolio of operating assets, including approximately $25$2.5 - $30$7.5 million to fund tenant-related capital requirements and leasing commissions;
•Approximately $20$7.5 - $25$10.0 million to invest in our development and redevelopment projects; and
•Funding for potential property acquisitions during 2017,throughout 2021 and additional debt reductions, offset by proceeds from potential property dispositions.
There can be no assurance that our capital requirements will not be materially higher or lower than the above expectations. We currently believe that we will generate sufficient cash flow from operations and potential property sales and have access to the capital resources necessary to fund our requirements for the remainder of 2021. However, as a result of the uncertainty of the general market conditions in the greater Washington, DC metro region, economic conditions affecting the ability to attract and retain tenants, declines in our share price, unfavorable changes in the supply of competing properties, or our properties not performing as expected, we may not generate sufficient cash flow from operations and property sales or otherwise have access to capital on favorable terms, or at all. If we are unable to obtain capital from other sources, we may need to alter capital spending to be materially different than what is stated above. If capital were not available, we may be unable to satisfy the distribution requirement applicable to REITs, make required principal and interest payments, make strategic acquisitions or make necessary and/or routine capital improvements or undertake improvement/redevelopment opportunities with respect to our existing portfolio of operating assets.
Debt Financing
We generally use secured or unsecured, corporate-level debt, including unsecured notes, our Revolving Credit Facility, bank term loans and mortgages to meet our borrowing needs. Long-term, we generally use fixed rate debt instruments in order to match the returns from our real estate assets. If we issue unsecured debt in the future, we would seek to “ladder” the maturities of our debt to mitigate exposure to interest rate risk in any particular future year. We also utilize variable rate debt for short-term financing purposes. At times, our mix of variable and fixed rate debt may not suit our needs. At those times, we may use derivative financial instruments including interest rate swaps and caps, forward interest rate options or interest rate options in order to assist us in managing our debt mix. We may either hedge our variable rate debt to give it an effective fixed interest rate or hedge fixed rate debt to give it an effective variable interest rate.
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Our totalfuture debt at September 30, 2017 and December 31, 2016 wasprincipal payments are scheduled as follows (in thousands):
| September 30, 2017 | December 31, 2016 | ||||||
| Mortgage notes payable | $ | 92,671 | $ | 144,485 | |||
| Lines of credit | 189,000 | 120,000 | |||||
| Notes payable | 900,000 | 850,000 | |||||
| 1,181,671 | 1,114,485 | ||||||
| Premiums and discounts, net | 1,927 | 2,383 | |||||
| Debt issuance costs, net | (4,450 | ) | (5,244 | ) | |||
| Total | $ | 1,179,148 | $ | 1,111,624 | |||
| Future Maturities of Debt | |||||||||||||||||||||||||||||
| Year | Unsecured Debt | Revolving Credit Facility | Total Debt | Average Interest Rate | |||||||||||||||||||||||||
| 2021 | $ | — | $ | — | $ | — | —% | ||||||||||||||||||||||
| 2022 | 300,000 | (1) | — | 300,000 | 4.0% | ||||||||||||||||||||||||
| 2023 | 250,000 | (2) | 43,000 | (3) | 293,000 | 2.6% | |||||||||||||||||||||||
| 2024 | — | — | — | —% | |||||||||||||||||||||||||
| 2025 | — | — | — | —% | |||||||||||||||||||||||||
| 2026 | — | — | — | —% | |||||||||||||||||||||||||
| Thereafter | 400,000 | — | 400,000 | 4.5% | |||||||||||||||||||||||||
| Scheduled principal payments | $ | 950,000 | $ | 43,000 | $ | 993,000 | 3.8% | ||||||||||||||||||||||
| Net premiums/discounts | (360) | — | (360) | ||||||||||||||||||||||||||
| Loan costs, net of amortization | (3,735) | — | (3,735) | ||||||||||||||||||||||||||
| Total | $ | 945,905 | $ | 43,000 | $ | 988,905 | 3.8% | ||||||||||||||||||||||
(1) Subsequent to the end of the 2021 Quarter, WashREIT provided notice to the holders of its $300.0 million of Senior Notes Payabledue in 2022 that it plans to redeem all $300.0 million of Senior Notes due in 2022 in the third quarter of 2021, which it intends to fund using cash available following the sale of the Office Portfolio. The Senior Notes are scheduled to mature in October 2022.
(3) Maturity date for credit facility of March 2023 assumes election of option for two additional 6-month periods.
The weighted average maturity for our debt is 4.7 years. If principal amounts due at maturity cannot be refinanced, extended or paid with proceeds of 3.7 years. Weother capital transactions, such as new equity capital, our cash flow may either initiate secured mortgage debtbe insufficient to repay all maturing debt. Prevailing interest rates or assume mortgage debt from time-to-timeother factors at the time of a refinancing, such as possible reluctance of lenders to make commercial real estate loans, may result in conjunction with property acquisitions.higher interest rates and increased interest expense or inhibit our ability to finance our obligations.
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Debt Covenants
Pursuant to the terms of our Revolving Credit Facility, 2018 Term Loan and unsecured notes, we are subject to customary operating covenants with which we must comply. and maintenance of various financial ratios.
Failure to comply with any of the covenants under our mortgage notes could result in a default under one or more of our debt instruments. This could cause our debt holders to accelerate the timing of payments and would therefore have a material adverse effect on our business, operations, financial condition and liquidity. As of September 30, 2017, we were in compliance with our mortgage notes covenants.
As of SeptemberJune 30, 2017,2021, we were in compliance with our loan covenants.
Common Equity
We have authorized for issuance 100.0150.0 million common shares, of which 78.584.6 million shares were outstanding at SeptemberJune 30, 2017.2021.
On June 23, 2015,February 17, 2021, we entered into four separate amendments to each of our existing equity distribution agreements (collectively, the “Equity(“Original Equity Distribution Agreements”) with each of Wells Fargo Securities, LLC, BNY Mellon Capital Markets, LLC, Capital One Securities, Inc., Citigroup Global Markets Inc. and RBC, Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, KeyBanc Capital Markets Inc. and Truist Securities, Inc. (f/k/a SunTrust Robinson Humphrey, Inc.), each dated May 4, 2018 (collectively, as amended, the “Amended Equity Distribution Agreements”). Also on February 17, 2021, we entered into a separate equity distribution agreement with BTIG, LLC relatingon the same terms as the Amended Equity Distribution Agreements (the “BTIG Equity Distribution Agreement,” together with the Amended Equity Distribution Agreements, the “Equity Distribution Agreements”). Pursuant to the issuance ofEquity Distribution Agreements, we may sell, from time to time, up to $200.0an aggregate price of $550.0 million of our common shares from time to time.of beneficial interest, $0.01 par value per share. Issuances of our common shares are made at market prices prevailing at the time of issuance. We may use net proceeds from the issuance of common shares under this program for general corporatebusiness purposes, including, without limitation, working capital, the acquisition, renovation, expansion, improvement, development or redevelopment of income producing properties or the repayment of debt. During the 2017 Period, we issued 3.6 millionWe did not issue common shares under the Equity Distribution Agreements at an average price of $32.06during the 2021 Quarter or 2020 Quarter. Our issuances and net proceeds on the Equity Distribution Agreements and the Original Equity Distribution Agreements, respectively, for the 2021 Period and 2020 Period are as follows ($ in thousands, except per share raising $113.2 million in net proceeds.data):
| Six Months Ended June 30, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Issuance of common shares | 24 | 47 | |||||||||||||||||||||
| Weighted average price per share | $ | 22.06 | $ | 31.07 | |||||||||||||||||||
| Net proceeds | $ | 467 | $ | 1,241 | |||||||||||||||||||
We have a dividend reinvestment program, whereby shareholders may use their dividends and optional cash payments to purchase common shares. The common shares sold under this program may either be common shares issued by us or common shares purchased in the open market. During
Our issuances and net proceeds on the 2017 Period, we issued 77,153 common shares under thisdividend reinvestment program at a weighted average price of $32.24for the three and six months ended June 30, 2021 and 2020 are as follows ($ in thousands, except per share raising $2.5 million in net proceeds.data):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Issuance of common shares | 22 | 6 | 45 | 41 | |||||||||||||||||||
| Weighted average price per share | $ | 23.21 | $ | 22.68 | $ | 22.63 | $ | 26.38 | |||||||||||||||
| Net proceeds | $ | 489 | $ | 144 | $ | 1,009 | $ | 1,065 | |||||||||||||||
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Preferred Equity
| Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||
| 2017 | 2016 | $ | % | 2017 | 2016 | $ | % | ||||||||||||||||||||||
| Common dividends | $ | 23,493 | $ | 22,365 | $ | 1,128 | 5.0 | % | $ | 91,666 | $ | 85,648 | $ | 6,018 | 7.0 | % | |||||||||||||
| Distributions to noncontrolling interests | 8 | 33 | (25 | ) | (75.8 | )% | 67 | 143 | (76 | ) | (53.1 | )% | |||||||||||||||||
| $ | 23,501 | $ | 22,398 | $ | 1,103 | 4.9 | % | $ | 91,733 | $ | 85,791 | $ | 5,942 | 6.9 | % | ||||||||||||||
Historical Cash Flows
Cash flows from operations are an important factor in our ability to sustain our dividend at its current rate. If our cash flows from operations were to decline significantly from current levels, we may have to reduce our dividend. Consolidated cash flow information is summarized as follows (in thousands):
| Six Months Ended June 30, | Change | ||||||||||||||||||||||
| 2021 | 2020 | $ | % | ||||||||||||||||||||
| Net cash provided by operating activities | $ | 64,622 | $ | 51,182 | $ | 13,440 | 26.3 | % | |||||||||||||||
| Net cash (used in) provided by investing activities | (18,195) | 12,131 | (30,326) | (250.0) | % | ||||||||||||||||||
| Net cash used in financing activities | (48,687) | (69,463) | 20,776 | (29.9) | % | ||||||||||||||||||
| Nine Months Ended September 30, | Change | |||||||||||||
| 2017 | 2016 | $ | % | |||||||||||
| Net cash provided by operating activities | $ | 94,271 | $ | 85,764 | $ | 8,507 | 9.9 | % | ||||||
| Net cash used in investing activities | (184,504 | ) | (39,097 | ) | (145,407 | ) | (371.9 | )% | ||||||
| Net cash provided by (used in) financing activities | 90,254 | (61,904 | ) | 152,158 | 245.8 | % | ||||||||
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as of SeptemberJune 30, 20172021 that are reasonably likely to have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
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Funds From Operations
NAREIT FFO is a widely used measure of operating performance for real estate companies. We provideIn its 2018 NAREIT FFO as a supplemental measure to net income calculated in accordance with GAAP. Although NAREIT FFO is a widely used measure of operating performance for REITs, NAREIT FFO does not represent net income calculated in accordance with GAAP. As such, it should not be considered an alternative to net income as an indication of our operating performance. In addition, NAREIT FFO does not represent cash generated from operating activities in accordance with GAAP, nor does it represent cash available to pay distributions and should not be considered as an alternative to cash flow from operating activities, determined in accordance with GAAP, as a measure of our liquidity. In its April, 2002 White Paper,Whitepaper Restatement, the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”) definesdefined NAREIT FFO as net income (computed in accordance with GAAP) excluding gains (or losses) associated with sales of properties,properties; impairments of depreciable real estate, and real estate depreciation and amortization. We consider NAREIT FFO to be a standard supplemental measure for equity REITs because it facilitates an understanding of the operating performance of our properties without giving effect to real estate depreciation and amortization, which historically assumes that the value of real estate assets diminishes predictably over time. Since real estate values have instead historically risen or fallen with market conditions, we believe that NAREIT FFO more accurately provides investors an indication of our ability to incur and service debt, make capital expenditures and fund other needs. Our NAREIT FFO may not be comparable to FFO reported by other REITs. These other REITs may not define the term in accordance with the current NAREIT definition or may interpret the current NAREIT definition differently. NAREIT FFO is a non-GAAP measure.
The following table provides the calculation of our NAREIT FFO and a reconciliation of NAREIT FFO to net incomeloss for the three and six months ended SeptemberJune 30, 20172021 and 20162020 (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net loss | $ | (6,992) | $ | (5,406) | $ | (8,139) | $ | (3,687) | |||||||||||||||
| Adjustments: | |||||||||||||||||||||||
| Depreciation and amortization | 17,303 | 17,372 | 34,290 | 34,619 | |||||||||||||||||||
| Loss on sale of depreciable real estate | — | 7,539 | — | 7,539 | |||||||||||||||||||
| Discontinued operations: | |||||||||||||||||||||||
| Depreciation and amortization | 10,248 | 12,227 | 22,904 | 24,700 | |||||||||||||||||||
| NAREIT FFO | $ | 20,559 | $ | 31,732 | $ | 49,055 | $ | 63,171 | |||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Net income | $ | 2,813 | $ | 79,662 | $ | 17,275 | $ | 113,862 | |||||||
| Adjustments: | |||||||||||||||
| Depreciation and amortization | 27,941 | 30,905 | 83,271 | 82,104 | |||||||||||
| Real estate impairment | 5,000 | — | 5,000 | — | |||||||||||
| Net gain on sale of depreciable real estate | — | (77,592 | ) | — | (101,704 | ) | |||||||||
| NAREIT FFO | $ | 35,754 | $ | 32,975 | $ | 105,546 | $ | 94,262 | |||||||
Critical Accounting Policies and Estimates
We base the discussion and analysis of our financial condition and results of operations upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. There were no changes made by management to the critical accounting policies in the three and six months ended June 30, 2021. We discuss the most critical estimates in our Annual Report on Form 10-K for the year ended December 31, 20162020 filed with the SEC on February 21, 2017.16, 2021.
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal material financial market risk to which we are exposed is interest rate risk. Our exposure to market risk for changes in interest rates relates primarily to refinancing long-term fixed rate obligations, the opportunity cost of fixed rate obligations in a falling interest rate environment and our variable rate linesline of credit.
The table below presents principal, interest and related weighted average fair value interest rates by year of maturity, with respect to debt outstanding on SeptemberJune 30, 2017.2021 (in thousands):
| 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | Total | Fair Value | ||||||||||||||||||||||||||||||||||||||||
Unsecured fixed rate debt (1) | |||||||||||||||||||||||||||||||||||||||||||||||
| Principal | $ | — | (2) | $ | 300,000 | $ | 250,000 | $ | — | $ | — | $ | 400,000 | $ | 950,000 | $ | 977,200 | ||||||||||||||||||||||||||||||
| Interest payments | $ | 19,177 | $ | 37,218 | $ | 22,177 | $ | 17,995 | $ | 17,995 | $ | 87,364 | $ | 201,926 | |||||||||||||||||||||||||||||||||
| Interest rate on debt maturities | — | % | 4.0 | % | 2.6 | % | — | % | — | % | 4.5 | % | 3.8 | % | |||||||||||||||||||||||||||||||||
Unsecured variable rate debt (3) | |||||||||||||||||||||||||||||||||||||||||||||||
| Principal | $ | — | $ | — | $ | 43,000 | $ | — | $ | — | $ | — | $ | 43,000 | $ | 43,000 | |||||||||||||||||||||||||||||||
| Variable interest rate on debt maturities | 1.1 | % | 1.1 | % | |||||||||||||||||||||||||||||||||||||||||||