Company Quick10K Filing
Quick10K
Washington Real Estate Investment Trust
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$27.54 80 $2,200
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-06-27 M&A, Regulation FD, Exhibits
8-K 2019-06-26 Enter Agreement, Regulation FD, Exhibits
8-K 2019-05-30 Officers, Shareholder Vote, Regulation FD, Exhibits
8-K 2019-04-30 Enter Agreement, M&A, Off-BS Arrangement, Regulation FD, Exhibits
8-K 2019-04-24 Earnings, Regulation FD, Exhibits
8-K 2019-04-02 Enter Agreement, Regulation FD, Exhibits
8-K 2019-03-18 Officers
8-K 2019-02-14 Earnings, Regulation FD, Exhibits
8-K 2019-02-11 Officers
8-K 2019-02-05 Officers
8-K 2018-11-26 Regulation FD
8-K 2018-10-25 Earnings, Regulation FD, Exhibits
8-K 2018-07-26 Earnings, Regulation FD, Exhibits
8-K 2018-05-31 Shareholder Vote
8-K 2018-05-04 Other Events, Exhibits
8-K 2018-04-25 Earnings, Regulation FD, Exhibits
8-K 2018-03-29 Enter Agreement, Leave Agreement, Off-BS Arrangement, Exhibits
8-K 2018-02-15 Earnings, Regulation FD, Exhibits
8-K 2018-01-18 M&A, Regulation FD, Exhibits
8-K 2017-12-29 Enter Agreement, Regulation FD, Exhibits
WELL Welltower 30,810
TRK Speedway Motorsports 755
THFF First Financial 504
CPSI Computer Programs & Systems 405
FARM Farmer Brothers 303
LEE Lee Enterprises 147
LGCY Legacy Reserves 48
EVOK Evoke Pharma 16
DYNT Dynatronics 14
IVFH Innovative Food 0
WRE 2019-03-31
Part I
Item 1: Financial Statements
Note 1: Nature of Business
Note 2: Summary of Significant Accounting Policies and Basis of Presentations
Note 3: Real Estate
Note 4: Unsecured Line of Credit Payable
Note 5: Derivative Instruments
Note 6: Fair Value Disclosures
Note 7: Stock Based Compensation
Note 8: Earnings per Common Share
Note 9: Segment Information
Note 10: Shareholders' Equity
Note 11: Subsequent Event
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Item 4: Controls and Procedures
Part II
Item 1: Legal Proceedings
Item 1A: Risk Factors
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
Item 3: Defaults Upon Senior Securities
Item 4: Mine Safety Disclosures
Item 5: Other Information
Item 6: Exhibits
EX-10.1 executivestipamendment.htm
EX-10.2 separationagreement.htm
EX-10.3 amendmenttosepgreement.htm
EX-31.1 wre-03312019exhibit311.htm
EX-31.2 wre-03312019exhibit312.htm
EX-31.3 wre-03312019xexhibit313.htm
EX-32 wre-03312019exhibit32.htm

Washington Real Estate Investment Trust Earnings 2019-03-31

WRE 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 wre-331201910xq.htm 10-Q Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________
FORM 10-Q
 ___________________________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended March 31, 2019
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
COMMISSION FILE NO. 1-6622
 WASHINGTON REAL ESTATE
INVESTMENT TRUST
(Exact name of registrant as specified in its charter)
MARYLAND
 
53-0261100
(State of incorporation)
 
(IRS Employer Identification Number)
1775 EYE STREET, NW, SUITE 1000, WASHINGTON, DC 20006
(Address of principal executive office) (Zip code)
Registrant’s telephone number, including area code: (202) 774-3200
___________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Shares of Beneficial Interest
WRE
NYSE
Securities registered pursuant to Section 12(g) of the Act: None
 ___________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    YES x   NO  o
Indicate by checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    YES  x      NO  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
o
 
 
Emerging growth company
o



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    YES  o    NO  x  
As of April 25, 2019, 80,033,588 common shares were outstanding.
 



WASHINGTON REAL ESTATE INVESTMENT TRUST
INDEX
 
 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 

3


PART I
FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

The information furnished in the accompanying unaudited Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Comprehensive (Loss) Income, Consolidated Statements of Equity and Consolidated Statements of Cash Flows reflects all adjustments, consisting of normal recurring items, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The accompanying financial statements and notes thereto should be read in conjunction with the financial statements and notes for the three years ended December 31, 2018 included in Washington Real Estate Investment Trust’s 2018 Annual Report on Form 10-K.

4


WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
 
 
March 31, 2019
 
December 31, 2018
 
(Unaudited)
 
Assets
 
 
 
Land
$
612,692

 
$
614,659

Income producing property
2,276,385

 
2,271,926

 
2,889,077

 
2,886,585

Accumulated depreciation and amortization
(781,302
)
 
(770,535
)
Net income producing property
2,107,775

 
2,116,050

Properties under development or held for future development
97,288

 
87,231

Total real estate held for investment, net
2,205,063

 
2,203,281

Cash and cash equivalents
12,025

 
6,016

Restricted cash
1,368

 
1,624

Rents and other receivables
73,293

 
73,861

Prepaid expenses and other assets
116,718

 
132,322

Total assets
$
2,408,467

 
$
2,417,104

Liabilities
 
 
 
Notes payable, net
$
995,750

 
$
995,397

Mortgage notes payable, net
58,805

 
59,792

Line of credit
228,000

 
188,000

Accounts payable and other liabilities
67,279

 
59,567

Dividend payable

 
24,022

Advance rents
10,418

 
11,736

Tenant security deposits
10,019

 
10,112

Total liabilities
1,370,271

 
1,348,626

Equity
 
 
 
Shareholders’ equity
 
 
 
Preferred shares; $0.01 par value; 10,000 shares authorized; no shares issued or outstanding

 

Shares of beneficial interest, $0.01 par value; 100,000 shares authorized; 80,029 and 79,910 shares issued and outstanding, as of March 31, 2019 and December 31, 2018, respectively
800

 
799

Additional paid in capital
1,529,916

 
1,526,574

Distributions in excess of net income
(498,537
)
 
(469,085
)
Accumulated other comprehensive income
5,670

 
9,839

Total shareholders’ equity
1,037,849

 
1,068,127

Noncontrolling interests in subsidiaries
347

 
351

Total equity
1,038,196

 
1,068,478

Total liabilities and equity
$
2,408,467

 
$
2,417,104

 

See accompanying notes to the consolidated financial statements.

5


WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
 
 
Three Months Ended March 31,
 
2019
 
2018
Revenue
 
 
 
Real estate rental revenue
$
83,174

 
$
84,881

Expenses
 
 
 
Real estate expenses
29,210

 
29,901

Depreciation and amortization
29,547

 
29,969

General and administrative expenses
7,429

 
5,821

Lease origination expenses
378

 

Real estate impairment
8,374

 
1,886

 
74,938

 
67,577

Real estate operating income
8,236

 
17,304

Other (expense) income
 
 
 
Interest expense
(12,641
)
 
(12,827
)
Loss on extinguishment of debt

 
(1,178
)
 
(12,641
)
 
(14,005
)
Net (loss) income
(4,405
)
 
3,299

Less: Net income attributable to noncontrolling interests in subsidiaries

 

Net (loss) income attributable to the controlling interests
$
(4,405
)
 
$
3,299

 
 
 
 
Basic net (loss) income attributable to the controlling interests per common share
$
(0.06
)
 
$
0.04

 
 
 
 
Diluted net (loss) income attributable to the controlling interests per common share
$
(0.06
)
 
$
0.04

Weighted average shares outstanding – basic
79,881

 
78,483

Weighted average shares outstanding – diluted
79,881

 
78,547


See accompanying notes to the consolidated financial statements.

6


WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(IN THOUSANDS)
(UNAUDITED)
 
 
Three Months Ended March 31,
 
2019
 
2018
Net (loss) income
$
(4,405
)
 
$
3,299

Other comprehensive (loss) income:
 
 
 
Unrealized (loss) gain on interest rate hedges
(4,169
)
 
4,065

Comprehensive (loss) income
(8,574
)
 
7,364

Less: Comprehensive income attributable to noncontrolling interests

 

Comprehensive (loss) income attributable to the controlling interests
$
(8,574
)
 
$
7,364


See accompanying notes to the consolidated financial statements.


7


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 Income
 
Total Shareholders’ Equity
 
Noncontrolling Interests in Subsidiaries
 
Total Equity
Balance at December 31, 2018
79,910

 
$
799

 
$
1,526,574

 
$
(469,085
)
 
$
9,839

 
$
1,068,127

 
$
351

 
$
1,068,478

Cumulative effect of change in accounting principle (see note 2)

 

 

 
(906
)
 

 
(906
)
 

 
(906
)
Net loss attributable to the controlling interests

 

 

 
(4,405
)
 

 
(4,405
)
 

 
(4,405
)
Unrealized loss on interest rate hedges

 

 

 

 
(4,169
)
 
(4,169
)
 

 
(4,169
)
Distributions to noncontrolling interests

 

 

 

 

 

 
(4
)
 
(4
)
Dividends

 

 

 
(24,141
)
 

 
(24,141
)
 

 
(24,141
)
Shares issued under dividend reinvestment program
43

 

 
1,097

 

 

 
1,097

 

 
1,097

Share grants, net of forfeitures and tax withholdings
76

 
1

 
2,245

 

 

 
2,246

 

 
2,246

Balance at March 31, 2019
80,029

 
$
800

 
$
1,529,916

 
$
(498,537
)
 
$
5,670

 
$
1,037,849

 
$
347

 
$
1,038,196



 
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, December 31, 2017
78,510

 
$
785

 
$
1,483,980

 
$
(399,213
)
 
$
9,419

 
$
1,094,971

 
$
365

 
$
1,095,336

Net income attributable to the controlling interests

 

 

 
3,299

 

 
3,299

 

 
3,299

Unrealized gain on interest rate hedges

 

 

 

 
4,065

 
4,065

 

 
4,065

Distributions to noncontrolling interests

 

 

 

 

 

 
(3
)
 
(3
)
Dividends

 

 

 
(23,719
)
 

 
(23,719
)
 

 
(23,719
)
Shares issued under dividend reinvestment program
37

 

 
717

 

 

 
717

 

 
717

Share grants, net of forfeitures and tax withholdings
89

 
1

 
1,068

 

 

 
1,069

 

 
1,069

Balance, March 31, 2018
78,636

 
$
786

 
$
1,485,765

 
$
(419,633
)
 
$
13,484

 
$
1,080,402

 
$
362

 
$
1,080,764


See accompanying notes to the consolidated financial statements.

8



WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
 
 
 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
 
 
 
 
 
Three Months Ended March 31,
 
2019
 
2018
Cash flows from operating activities
 
 
 
Net (loss) income
$
(4,405
)
 
$
3,299

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
29,547

 
29,969

Credit losses on lease related receivables

 
176

Real estate impairment
8,374

 
1,886

Share-based compensation expense
2,826

 
1,541

Amortization of debt premiums, discounts and related financing costs
536

 
446

Loss on extinguishment of debt

 
1,178

Changes in operating other assets
(2,035
)
 
(1,374
)
Changes in operating other liabilities
(7,265
)
 
(475
)
Net cash provided by operating activities
27,578

 
36,646

Cash flows from investing activities
 
 
 
Real estate acquisitions, net

 
(106,400
)
Net cash received for sale of real estate

 
78,483

Capital improvements to real estate
(7,281
)
 
(7,845
)
Development in progress
(6,091
)
 
(4,754
)
Non-real estate capital improvements
(67
)
 
(172
)
Net cash used in investing activities
(13,439
)
 
(40,688
)
Cash flows from financing activities
 
 
 
Line of credit borrowings, net
40,000

 
94,000

Dividends paid
(48,165
)
 
(47,300
)
Principal payments – mortgage notes payable
(610
)
 
(136,309
)
Repayments of unsecured term loan debt

 
(150,000
)
Proceeds from term loan

 
250,000

Payment of financing costs
(252
)
 
(5,411
)
Distributions to noncontrolling interests
(4
)
 
(3
)
Proceeds from dividend reinvestment program
1,097

 
717

Payment of tax withholdings for restricted share awards
(452
)
 
(296
)
Net cash (used in) provided by financing activities
(8,386
)
 
5,398

Net increase in cash, cash equivalents and restricted cash
5,753

 
1,356

Cash, cash equivalents and restricted cash at beginning of period
7,640

 
12,623

Cash, cash equivalents and restricted cash at end of period
$
13,393

 
$
13,979

 
 
 
 

9


WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
 
 
 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
 
 
 
 
 
Three Months Ended March 31,
 
2019
 
2018
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest, net of amounts capitalized
$
6,848

 
$
7,416

Change in accrued capital improvements and development costs
8,119

 
2,675

 
 
 
 
Reconciliation of cash, cash equivalents and restricted cash:
 
 
 
Cash and cash equivalents
$
12,025

 
$
11,510

Restricted cash
1,368

 
2,469

Cash, cash equivalents and restricted cash
$
13,393

 
$
13,979


See accompanying notes to the consolidated financial statements.

10


WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(UNAUDITED)

NOTE 1: NATURE OF BUSINESS

Washington Real Estate Investment Trust (“Washington REIT”), 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 metro region. We own a diversified portfolio of office buildings, multifamily buildings and retail centers.

Federal Income Taxes

We believe that we qualify as a real 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. We have considered the provisions of the Tax Cuts and Jobs Act (the "TCJA"), which was signed into law on December 22, 2017 and which generally took effect for taxable years beginning on or after January 1, 2018, and the TCJA does not have a material impact on our ability to continue to qualify as a REIT. 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), excluding any net capital gains and any deductions for dividends paid to our shareholders 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. As of both March 31, 2019 and December 31, 2018, our TRSs had a deferred tax asset of $1.4 million that was fully reserved. As of both March 31, 2019 and December 31, 2018, we had deferred state and local tax liabilities of $0.6 million. These deferred tax liabilities are primarily related to temporary differences in the timing of the recognition of revenue, depreciation and amortization.

11


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, 2018, except as noted in note 3 related to our adoption of ASU 2016-02, Leases (Topic 842) as of January 1, 2019.

Pronouncements Adopted
Standard/Description
Effective Date and Adoption Considerations
Effect on Financial Statements or Other significant Matters
ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). This standard amends existing lease accounting standards for both lessees and lessors.

Lessees

Lessees must classify most leases as either finance or operating leases. For lease contracts, or contracts with an embedded lease, with a duration of more than one year in which we are the lessee, the present value of future lease payments are recognized on our consolidated balance sheets as a right-of-use asset and a corresponding lease liability.

Lessors

Lease contracts currently classified as operating leases are accounted for similarly to as under existing guidance. However, lessors are required to account for each lease and non-lease component, such as common area maintenance or tenant service revenues, of a contract separately. In July 2018, the Financial Accounting Standards Board (“FASB”) issued 2018-11,
Leases (Topic 842) - Targeted Improvements (“ASU 2018-11”), which provides lessors optional transition relief from implementing this aspect of ASU 2016-02 if the following criteria are met: (1) both components have the same timing and pattern of revenue and (2) if accounted for separately, both components would be classified as an operating lease.

Also under ASU 2016-02, only incremental costs or initial direct costs of executing a lease contract qualify for capitalization, while prior accounting standards allowed for the capitalization of indirect leasing costs.
We adopted the new standard as of January 1, 2019.
We adopted ASU 2016-02 as of January 1, 2019 using the modified retrospective approach and by applying the transitional practical expedients noted below. Under the modified retrospective approach, we recognized a cumulative effect adjustment of $0.9 million to retained earnings as of January 1, 2019 (see note 3 for further discussion of the impact of adoption on our consolidated financial statements). We did not elect the hindsight expedient, which would have allowed us to reevaluate lease terms in calculating lease liabilities as part of adoption.

Under ASU 2018-11, the FASB offered optional transition relief, if elected as a package, and applied consistently by an entity to all of its leases. Accordingly, upon adoption we elected, as a package, the practical expedients for all leases as follows: (1) we will not reassess whether any expired or existing contracts are or contain leases, (2) we will not reassess the lease classification for any expired or existing leases, and (3) we will not reassess initial direct costs for any existing leases.




12


Pronouncements Not Yet Adopted
Standard/Description
Effective Date and Adoption Considerations
Effect on Financial Statements or Other significant Matters
ASU 2016-13, Measurement of Credit Losses on Financial Instruments. This standard requires financial assets measured at an amortized cost basis, including trade receivables, to be presented at the net amount expected to be collected.
The new standard is effective for public entities for fiscal years beginning after December 15, 2019 and for interim periods therein, with adoption one year earlier permitted.
We are currently evaluating the impact the new standard may have on our consolidated financial statements.
ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software. This standard requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance to determine which implementation costs to capitalize as assets.
The standard is effective for public entities for fiscal years beginning after December 31, 2019 and for interim periods therein, with early adoption permitted.
We are currently evaluating the impact the new standard may have on our consolidated financial statements.

Principles of Consolidation and Basis of Presentation

The accompanying unaudited consolidated financial statements include the consolidated accounts of Washington REIT, our majority-owned subsidiaries and entities in which Washington REIT has a controlling 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”). 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, 2018.

Within these notes to the financial statements, we refer to the three months ended March 31, 2019 and March 31, 2018 as the “2019 Quarter” and the “2018 Quarter,” respectively.

Restricted Cash

Restricted cash includes funds escrowed for tenant security deposits, real estate tax, insurance and mortgage escrows and escrow deposits required by lenders on certain of our properties to be used for future building renovations or tenant improvements.

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.

13



NOTE 3: REAL ESTATE

Leasing as a lessor

Revenue Recognition

We lease multifamily properties under operating leases with terms of generally one year or less. We lease commercial properties (our office and retail segments) under operating leases with an average term of seven years. Substantially all commercial leases contain fixed escalations or, in some instances, changes based on the Consumer Price Index, which occur at specified times during the term of the lease. In certain commercial leases, variable lease income, such as percentage rent, is recognized when rents are earned. We recognize rental income and rental abatements from our multifamily and commercial leases when earned on a straight-line basis over the lease term. Recognition of rental income commences when control of the leased space has been transferred to the tenant.

We recognize cost reimbursement income from pass-through expenses on an accrual basis over the periods in which the expenses were incurred. Pass-through expenses are comprised of real estate taxes, operating expenses and common area maintenance costs which are reimbursed by tenants in accordance with specific allowable costs per tenant lease agreements.

Parking revenues are derived from leases, monthly parking agreements and transient parking. We recognize parking revenues from leases on a straight-line basis over the lease term and other parking revenues as earned. We recognize transient parking revenue when our performance obligation is met.

Upon adoption of ASU 2016-02, we elected not to bifurcate lease contracts into lease and non-lease components, since the timing and pattern of revenue is not materially different and the non-lease components is not the primary component of the lease. Accordingly, both lease and non-lease components are presented in “Real estate rental revenue” in our consolidated financial statements. The adoption of ASU 2016-02 did not result in a material change to our recognition of real estate rental revenue.

Accounts Receivable

Lease related receivables, which include contractual amounts accrued and unpaid from tenants and accrued straight-line rents receivable, are reduced for credit losses. Such amounts are recognized as a reduction to real estate rental revenues. We evaluate the collectability of lease receivables monthly using several factors including a lessee’s creditworthiness. We recognize the credit loss on lease related receivables when, in the opinion of management, collection of substantially all lease payments is not probable. While collectability is determined not probable, any lease income subsequent to recognizing the credit loss is limited to the lesser of the lease income reflected on a straight-line basis or cash collected. The adoption of ASU 2016-02 resulted in an adjustment to our opening distributions in excess of net income balance of $0.9 million, associated with lease related receivables where collection of substantially all operating lease payments is not probable as of January 1, 2019.

Future Minimum Rental Income

As of March 31, 2019, non-cancelable commercial operating leases provide for future minimum rental income as follows (in thousands). Apartment leases are not included as the terms are generally for one year or less.

2019
 
$
192,841

2020
 
181,544

2021
 
159,607

2022
 
139,518

2023
 
114,521

Thereafter
 
343,439

 
 
$
1,131,470



14


As of December 31, 2018, non-cancelable commercial operating leases provide for future minimum rental income as follows (in thousands):
2019
 
$
191,252

2020
 
175,925

2021
 
153,395

2022
 
133,359

2023
 
108,564

Thereafter
 
304,876

 
 
$
1,067,371


Leasing as a Lessee

2000 M Street, an office property in Washington, DC, is subject to an operating ground lease with a remaining term of 52 years. Rental payments under this lease are subject to percentage rent variable payments, which are not included as part of our measurement of straight-line rental expense. We recognized variable rental payments of $0.2 million during each of the 2019 and 2018 Quarters.

Upon adoption of ASU 2016-02, we recognized a right of use asset (included in Income producing property) and lease liability (included in Accounts payable and other liabilities) of $4.2 million. We used a discount rate of approximately 5.9%, which was derived from our assessment of securitized rates for similar assets and credit quality. We recognized $0.1 million of right-of-use and lease liability amortization during the 2019 Quarter. In addition, as of January 1, 2019 we reclassified the associated below-market ground lease intangible asset of $10.0 million, net of accumulated amortization of $2.1 million, from Prepaid expenses and other assets to Income producing property on our consolidated balance sheets.

The following table sets forth the undiscounted cash flows of our schedule obligations for future minimum payments on our operating ground lease at March 31, 2019 and a reconciliation of those cash flows to the operating lease liability at March 31, 2019 (in thousands):
2019
 
$
195

2020
 
260

2021
 
260

2022
 
260

2023
 
260

2024
 
260

Thereafter
 
11,895

 
 
13,390

Imputed interest
 
(9,233
)
Lease liability
 
$
4,157


Acquisitions

We did not execute any acquisitions during the 2019 Quarter. Properties and land for development acquired during the year ended December 31, 2018 were as follows:
Acquisition Date
 
Property
 
Type
 
# of units (unaudited)
 
Rentable
Square  Feet
(unaudited)
 
Contract
Purchase  Price
(in thousands)
January 18, 2018
 
Arlington Tower
 
Office
 
N/A
 
391,000
 
$
250,000


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


15


Development/Redevelopment

We have properties under development/redevelopment and held for current or future development as of March 31, 2019.

In the multifamily segment, we have The Trove, a multifamily development adjacent to The Wellington, and own land held for future multifamily development adjacent to Riverside Apartments. As of March 31, 2019, we had invested $71.3 million and $23.3 million, including the costs of acquiring the land, in The Trove and the development adjacent to Riverside Apartments, respectively.

In the retail segment, we had a redevelopment project to add rentable space at Spring Valley Village. As of March 31, 2019, we had invested $6.6 million in the redevelopment. We substantially completed major construction activities on this project during the fourth quarter of 2018 and placed into service assets totaling $4.3 million.

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. We had no properties classified as held for sale requiring discontinuation of depreciation during the 2019 Quarter. Operating revenues, other operating expenses and interest continue to be recognized until the date of sale.

We did not sell or classify as held for sale any properties during the 2019 Quarter. We sold our interests in the following properties in 2018:
Disposition Date
 
Property Name
 
Segment
 
Rentable Square Feet/ Number of Units
 
Contract
Sales  Price
(in thousands)
 
Gain on Sale
(in thousands)
January 19, 2018
 
Braddock Metro Center
 
Office
 
356,000
 
$
93,000

 
$

June 28, 2018
 
2445 M Street
 
Office
 
292,000
 
101,600

 
2,495

 
 
 
 
Total 2018
 
648,000
 
$
194,600

 
$
2,495


We have fully transferred control of the assets associated with these disposed properties.

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

During the first quarter of 2019, we executed a letter of intent for the sale of Quantico Corporate Center, an office property in Stafford, Virginia, consisting of two office buildings totaling 272,000 square feet. The property did not meet the criteria for classification as held for sale as of March 31, 2019. Due to the negotiations to sell the property, we evaluated Quantico Corporate Center for impairment and recognized a $8.4 million impairment charge during the 2019 Quarter in order to reduce the carrying value of the property to its estimated fair value. We based this fair valuation on the expected sale price from a potential sale. There 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.

On April 22, 2019, we executed a purchase and sale agreement to sell Quantico Corporate Center for a contract sale price of $33.0 million. We anticipate settlement in the second quarter of 2019. However, there can be no assurances that this proposed sale will be consummated. Upon execution of the purchase and sale agreement and receipt of a non-refundable deposit, we determined that the property met the criteria for classification as held for sale as of that date.

16


NOTE 4: UNSECURED LINE OF CREDIT PAYABLE

During the first quarter of 2018, we entered into an amended and restated credit agreement (“Credit Agreement”) which provides for a $700.0 million unsecured revolving credit facility (“Revolving Credit Facility”), the continuation of an existing $150.0 million unsecured term loan (“2015 Term Loan”) and an additional $250.0 million unsecured term loan (“2018 Term Loan”). The Revolving Credit Facility has a four-year term ending in March 2022, with two six-month extension options, and expands our prior $600.0 million unsecured revolving credit facility that was set to expire in June 2019. The Credit Agreement has an accordion feature that allows us to increase the aggregate facility to $1.5 billion, subject to the extent lenders agree to provide additional revolving loan commitments or term loans.

The Revolving Credit Facility bears interest at a rate of either one month LIBOR plus a margin ranging from 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’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 plus 1.0%. In addition, the Revolving Credit Facility requires the payment of a facility fee ranging from 0.10% to 0.30% (depending on Washington REIT’s credit rating) on the $700.0 million committed revolving loan capacity, without regard to usage. As of March 31, 2019, the interest rate on the Revolving Credit Facility is one month LIBOR plus 1.00%, the one month LIBOR is 2.49% 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 two six-month extension options. Interest only payments are due and payable generally on a monthly basis.

The 2018 Term Loan increases and replaces 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 Washington REIT’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 March 31, 2019 is as follows (in thousands):
Committed capacity
$
700,000

Borrowings outstanding
(228,000
)
Unused and available
$
472,000


We executed borrowings and repayments on the Revolving Credit Facility during the 2019 Quarter as follows (in thousands):
Balance at December 31, 2018
$
188,000

Borrowings
71,000

Repayments
(31,000
)
Balance at March 31, 2019
$
228,000


NOTE 5: DERIVATIVE INSTRUMENTS

On September 15, 2015, we entered into two interest rate swap arrangements with a total notional amount of $150.0 million to swap the floating interest rate under the $150.0 million 2015 Term Loan (see note 4) to an all-in fixed interest rate of 2.72% starting on October 15, 2015 and extending until the maturity of the 2015 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 $150.0 million to swap the floating interest rate under the $150.0 million 2016 Term Loan (see note 4) to an all-in fixed interest rate of 2.86% starting on March 31, 2017 and extending until the maturity of the 2016 Term Loan on July 21, 2023.


17


On March 29, 2018, we entered into the $250.0 million 2018 Term Loan (see note 4) 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 now 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 four interest rate swap arrangements with a total notional amount of $100.0 million to effectively fix the interest rate on the remaining $100.0 million of the 2018 Term Loan at 3.71%, that commenced on June 29, 2018 and extending until the maturity of the 2018 Term Loan on July 21, 2023. The $250.0 million 2018 Term Loan has an all-in fixed interest rate of 2.87% .

The interest rate swaps qualify as cash flow hedges and are recorded at fair value in accordance with GAAP, based on discounted cash flow methodologies and observable inputs. We record the total change in fair value of the interest rate swap arrangements associated with our cash flow hedges in other comprehensive (loss) income. The resulting unrealized (loss) gain of the cash flow hedges was the only activity in other comprehensive (loss) 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. The cash flow hedges were effective for all periods presented.
 
The fair values of the interest rate swaps as of March 31, 2019 and December 31, 2018, are as follows (in thousands):
 
 
 
 
Fair Value
 
 
 
 
Derivative Assets (Liabilities)
Derivative Instrument
Aggregate Notional Amount
Effective Date
Maturity Date
March 31, 2019
 
December 31, 2018
Interest rate swaps
$
150,000

October 15, 2015
March 15, 2021
$
1,779

 
$
2,720

Interest rate swaps
150,000

March 31, 2017
July 21, 2023
5,808

 
7,918

Interest rate swaps
100,000

June 29, 2018
July 21, 2023
(1,917
)
 
(799
)
 
$
400,000

 
 
$
5,670

 
$
9,839


We record interest rate swaps on our consolidated balance sheets within prepaid expenses and other assets when in a net asset position and within accounts payable and other liabilities when in a net liability position. The interest rate swaps have been effective since inception. The net gains or losses on the effective swaps are recognized in other comprehensive (loss) income, as follows (in thousands):
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Unrealized (loss) gain on interest rate hedges
 
$
(4,169
)
 
$
4,065


Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate debt. During the next twelve months, we estimate that an additional $2.7 million will be reclassified as a decrease 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 March 31, 2019, the fair value of derivative assets, including accrued interest, was $7.6 million, and the fair value of the derivative liabilities, including accrued interest, was $1.9 million. As of March 31, 2019, 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. 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 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

18


Level 2: Significant other observable inputs
Level 3: Significant unobservable inputs

The only assets or liabilities we had at March 31, 2019 and December 31, 2018 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 swaps (see note 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 swaps is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each interest rate swap. This analysis reflects the contractual terms of the interest rate swaps, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps 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 swaps fall into Level 2 in the fair value hierarchy.

The fair values of these assets and liabilities at March 31, 2019 and December 31, 2018 were as follows (in thousands):
 
March 31, 2019
 
December 31, 2018
 
Fair
Value
 
Level 1
 
Level 2
 
Level 3
 
Fair
Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SERP
$
1,476

 
$

 
$
1,476

 
$

 
$
1,364

 
$

 
$
1,364

 
$

Interest rate swaps
7,587

 

 
7,587

 

 
10,638

 

 
10,638

 

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$
(1,917
)
 
$

 
$
(1,917
)
 
$

 
$
(799
)
 
$

 
$
(799
)
 
$


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 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 March 31, 2019 may differ significantly from the amounts presented. The valuations of cash and cash equivalents and restricted cash fall into Level 1 in the fair value hierarchy and the valuations of debt instruments fall into Level 3 in the fair value hierarchy.

As of March 31, 2019 and December 31, 2018, the carrying values and estimated fair values of our financial instruments were as follows (in thousands):
 
March 31, 2019
 
December 31, 2018
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Cash and cash equivalents
$
12,025

 
$
12,025

 
$
6,016

 
$
6,016

Restricted cash
1,368

 
1,368

 
1,624

 
1,624

Mortgage notes payable, net
58,805

 
59,973

 
59,792

 
60,398

Line of credit
228,000

 
228,000

 
188,000

 
188,000

Notes payable, net
995,750

 
1,018,430

 
995,397

 
1,015,210


19



NOTE 7: STOCK BASED COMPENSATION

Washington REIT maintains short-term (“STIP”) and long-term (“LTIP”) incentive plans that allow for stock based awards to officers and non-officer employees. Stock based awards are provided to officers and non-officer employees, as well as trustees, under the Washington Real Estate Investment Trust 2016 Omnibus Incentive Plan which allows for awards in the form of restricted shares, restricted share units, options and other awards up to an aggregate of 2,400,000 shares over the ten-year period in which the plan will be in effect. Restricted share units are converted into shares of our stock upon full vesting through the issuance of new shares.

During the first quarter of 2019, we amended the STIP for executive officers and the STIP and LTIP for non-executive officers and staff to replace the use of core funds available for distribution as a performance metric and performance goal, respectively, with a Leasing Target performance metric and performance goal. Leasing Target means the aggregate annual leasing target amount (measured in square feet of leasing space) as approved by the compensation committee of our board of trustees for a given performance period and performance year, respectively, with respect to our office and retail properties. The amendment became effective as of March 18, 2019 for performance periods beginning on or after January 1, 2019.

Total Compensation Expense

Total compensation expense recognized in the consolidated financial statements for all outstanding share based awards was $2.8 million and $1.5 million for the 2019 Quarter and 2018 Quarter, respectively.

Restricted Share Awards

The total fair values of restricted share awards vested was $1.3 million and $0.7 million for the 2019 Quarter and 2018 Quarter, respectively.

The total unvested restricted share awards at March 31, 2019 was 447,908 shares, which had a weighted average grant date fair value of $28.00 per share. As of March 31, 2019, the total compensation cost related to unvested restricted share awards was $10.3 million, which we expect to recognize over a weighted average period of 28 months.

NOTE 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 dilutive 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 all market condition awards under the contingently issuable method.


20


The computations of basic and diluted earnings per share for the three months ended March 31, 2019 and 2018 were as follows (in thousands, except per share data):
 
Three Months Ended March 31,
 
2019
 
2018
Numerator:
 
 
 
Net (loss) income
$
(4,405
)
 
$
3,299

Net income attributable to noncontrolling interests in subsidiaries

 

Allocation of earnings to unvested restricted share awards
(134
)
 
(144
)
Adjusted net (loss) income attributable to the controlling interests
$
(4,539
)
 
$
3,155

Denominator:
 
 
 
Weighted average shares outstanding – basic
79,881

 
78,483

Effect of dilutive securities:
 
 
 
Operating partnership units

 
12

Employee restricted share awards

 
52

Weighted average shares outstanding – diluted
79,881

 
78,547

 
 
 
 
Basic net (loss) income attributable to the controlling interests per common share
$
(0.06
)
 
$
0.04

Diluted net (loss) income attributable to the controlling interests per common share
$
(0.06
)
 
$
0.04

 
 
 
 
Dividends declared per common share
$
0.30

 
$
0.30


NOTE 9: SEGMENT INFORMATION

We have three reportable segments: office, multifamily and retail. 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 metro region. Retail properties are typically grocery store-anchored neighborhood centers that include other small shop tenants or regional power centers with several junior box tenants.

We evaluate performance based upon net operating income from 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 each segment’s performance. Net operating income is a key measurement of our segment profit and loss. Net operating income is defined as real estate rental revenue less real estate expenses.


21


The following tables present revenues, net operating income, capital expenditures and total assets for the three months ended March 31, 2019 and 2018 from these segments, and reconcile net operating income of reportable segments to net (loss) income attributable to the controlling interests as reported (in thousands):
 
Three Months Ended March 31, 2019
 
Office
 
Retail
 
Multifamily
 
Corporate and Other
 
Consolidated
Real estate rental revenue
$
42,293

 
$
16,546

 
$
24,335

 
$

 
$
83,174

Real estate expenses
15,224

 
4,516

 
9,470

 

 
29,210

Net operating income
$
27,069

 
$
12,030

 
$
14,865

 
$

 
$
53,964

Depreciation and amortization
 
 
 
 
 
 
 
 
(29,547
)
General and administrative expenses
 
 
 
 
 
 
 
 
(7,429
)
Lease origination expenses
 
 
 
 
 
 
 
 
(378
)
Interest expense
 
 
 
 
 
 
 
 
(12,641
)
Real estate impairment
 
 
 
 
 
 
 
 
(8,374
)
Net loss
 
 
 
 
 
 
 
 
(4,405
)
Less: Net income attributable to noncontrolling interests in subsidiaries
 
 
 
 
 
 
 
 

Net loss attributable to the controlling interests
 
 
 
 
 
 
 
 
$
(4,405
)
Capital expenditures
$
4,923

 
$
555

 
$
1,803

 
$
67

 
$
7,348

Total assets
$
1,238,795

 
$
336,229

 
$
796,525

 
$
36,918

 
$
2,408,467

 
Three Months Ended March 31, 2018
 
Office
 
Retail
 
Multifamily
 
Corporate
and Other
 
Consolidated
Real estate rental revenue
$
45,547

 
$
15,671

 
$
23,663

 
$

 
$
84,881

Real estate expenses
16,302

 
4,160

 
9,439

 

 
29,901

Net operating income
$
29,245

 
$
11,511

 
$
14,224

 
$

 
$
54,980

Depreciation and amortization
 
 
 
 
 
 
 
 
(29,969
)
General and administrative expenses
 
 
 
 
 
 
 
 
(5,821
)
Interest expense
 
 
 
 
 
 
 
 
(12,827
)
Real estate impairment
 
 
 
 
 
 
 
 
(1,886
)
Loss on extinguishment of debt
 
 
 
 
 
 
 
 
(1,178
)
Net income
 
 
 
 
 
 
 
 
3,299

Less: Net income attributable to noncontrolling interests in subsidiaries
 
 
 
 
 
 
 
 

Net income attributable to the controlling interests
 
 
 
 
 
 
 
 
$
3,299

Capital expenditures
$
4,945

 
$
475

 
$
2,425

 
$
172

 
$
8,017

Total assets
$
1,361,880

 
$
344,904

 
$
769,643

 
$
41,868

 
$
2,518,295

 
 

22


NOTE 10: SHAREHOLDERS' EQUITY

On May 4, 2018, we entered into eight separate equity distribution agreements (collectively, the “Equity Distribution Agreements”) with each of Wells Fargo Securities, LLC, BNY Mellon Capital Markets, LLC, Capital One Securities, Inc., Citigroup Global Markets Inc., Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, KeyBanc Capital Markets Inc. and SunTrust Robinson Humphrey, Inc. relating to the issuance of up to $250.0 million of our common shares from time to time. 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 corporate purposes, including, without limitation, working capital, the acquisition, renovation, expansion, improvement, development or redevelopment of income producing properties or the repayment of debt. During each of the 2019 and 2018 Quarters, we issued 0 common shares under the Equity Distribution Agreements.

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 2018 Quarter, we issued 37,079 common shares under this program at a weighted average price of $28.16 per share, raising $0.7 million in net proceeds. During the 2019 Quarter, we issued 42,842 common shares under this program at a weighted average price of $25.84 per share, raising $1.1 million in net proceeds.

NOTE 11: SUBSEQUENT EVENT

On April 2, 2019, we entered into an agreement of sale to acquire a portfolio of seven multifamily properties, with an aggregate total of 2,113 units, for a contract purchase price of approximately $461.0 million. We expect to settle on the acquisitions, potentially in multiple closings, during the second quarter of 2019. We currently plan to fund the acquisitions through the disposition of select office or retail properties.

In connection with the potential acquisitions, we have obtained a financing commitment to provide an unsecured bridge loan facility in the original principal amount of $450.0 million (the “Bridge Facility”) to fund the potential acquisitions, pursuant to a commitment letter, dated April 2, 2019, from members of our bank group. The Bridge Facility will provide interim funding prior to completing the expected asset sales. As of April 29, 2019, the commitments for the Bridge Facility have not been funded.



23


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, 2018 filed with the Securities and Exchange Commission (“SEC”) on February 19, 2019.

We refer to the three months ended March 31, 2019 and March 31, 2018 as the “2019 Quarter” and the “2018 Quarter,” respectively.

Forward-Looking Statements

This Form 10-Q contains forward-looking statements which involve risks and uncertainties. Forward-looking statements relate 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 by the use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” or “potential” or the negative of these words 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 factors which may cause the actual results, performance, or achievements of Washington REIT to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to the risks associated with the ownership of real estate in general and our real estate assets in particular; the risk of failure to complete contemplated acquisitions and dispositions, including completion of the acquisition and disposition transactions described in this quarterly report; the economic health of the greater Washington Metro region; fluctuations in interest rates; reductions in or actual or threatened changes to the timing of federal government spending; the risks related to use of third-party providers and joint venture partners; the ability to control our operating expenses; the economic health of our tenants; the supply of competing properties; shifts away from brick and mortar stores to e-commerce; the availability and terms of 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; terrorist attacks or actions and/or cyber attacks; weather conditions and natural disasters; ability to maintain key personnel; failure to qualify and maintain our qualification as a REIT and the risks of changes in laws affecting REITs; and other risks and uncertainties detailed from time to time in our filings with the SEC, including our 2018 Form 10-K and subsequent Quarterly Reports on Form 10-Q. 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:

Overview. Discussion of our business outlook, operating results, investment activity, financing activity and capital requirements to provide context for the remainder of MD&A.
Results of Operations. Discussion of our financial results comparing the 2019 Quarter to the 2018 Quarter.
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.

24


Ending occupancy, calculated as occupied square footage as a percentage of total square footage as of the last day of that period.
Leased percentage, calculated as the percentage of available physical net rentable area leased for our office and retail segments and percentage of apartments leased for our multifamily segment.
Leasing activity, including new leases, renewals and expirations.

For purposes of evaluating comparative operating performance, we categorize our properties as “same-store”, “non-same-store” or discontinued operations. Same-store 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 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 metro region. As of March 31, 2019, we owned a diversified portfolio of 48 properties, totaling approximately 6.1 million square feet of commercial space and 4,268 multifamily units, and land held for development. These 48 properties consisted of 19 office properties, 16 retail centers and 13 multifamily properties.

Operating Results

Net (loss) income attributable to the controlling interests, NOI and NAREIT FFO for the three months ended March 31, 2019 and 2018 were as follows (in thousands): 
 
Three Months Ended March 31,
 
 
 
 
 
2019
 
2018
 
$ Change
 
% Change
Net (loss) income attributable to the controlling interests
$
(4,405
)
 
$
3,299

 
$
(7,704
)
 
(233.5
)%
NOI (1)
$
53,964

 
$
54,980

 
$
(1,016
)
 
(1.8
)%
NAREIT FFO (2)
$
33,516

 
$
35,154

 
$
(1,638
)
 
(4.7
)%
 
 
 
 
 
 
 
 
(1) See page 27 of the MD&A for a reconciliation of NOI to net income.
(2) See page 33 of the MD&A for a reconciliation of NAREIT FFO to net income.
 

The lower net income attributable to the controlling interests is primarily due to higher real estate impairment ($6.5 million), higher general and administrative expenses ($1.6 million) and lower NOI ($1.0 million) during the 2019 Quarter, partially offset by loss on extinguishment of debt ($1.2 million) during the 2018 Quarter and lower depreciation and amortization ($0.4 million) during the 2019 Quarter.

The lower NOI is primarily due to property sales during 2018 ($2.9 million), partially offset by higher NOI from same-store properties ($1.4 million) and from Arlington Tower ($0.4 million), which was acquired during 2018. The higher same-store NOI is explained in further detail beginning on page 27 (Results of Operations - 2019 Quarter Compared to 2018 Quarter). Same-store ending occupancy decreased to 92.8% as of March 31, 2019, from 93.2% as of March 31, 2018, primarily due to lower occupancy in the office segment.

The lower NAREIT FFO is primarily attributable to the higher general and administrative expenses ($1.6 million) and lower NOI ($1.0 million) during the 2019 Quarter, partially offset by the loss on extinguishment of debt ($1.2 million) during the 2018 Quarter.


25


Investment and Financing Activity

We did not execute any acquisitions or dispositions during the 2019 Quarter.

Subsequent to the 2019 Quarter, on April 2, 2019, we entered into an agreement of sale to acquire a portfolio of seven multifamily properties, with an aggregate total of 2,113 units, for a contract purchase price of approximately $461.0 million. We expect to settle on the acquisitions, potentially in multiple closings, during the second quarter of 2019. We currently plan to fund the acquisitions through the disposition of select office or retail properties.

Also subsequent to the 2019 Quarter, in connection with the potential acquisitions, we have obtained a financing commitment to provide an unsecured bridge loan facility in the original principal amount of $450.0 million (the “Bridge Facility”) to fund the potential acquisitions, pursuant to a commitment letter, dated April 2, 2019, from members of our bank group. The Bridge Facility will provide interim funding prior to completing the expected asset sales. As of April 29, 2019, the commitments for the Bridge Facility have not been funded.

As of March 31, 2019, the interest rate on the Revolving Credit Facility was one month LIBOR plus 1.00% and the facility fee was 0.20%. As of April 25, 2019, our Revolving Credit Facility has a borrowing capacity of $452.0 million.

Capital Requirements

We have no debt maturities in 2019. We expect to have additional capital requirements as set forth on page 30 (Liquidity and Capital Resources - Capital Requirements).

Results of Operations

The discussion that follows is based on our consolidated results of operations for the 2019 Quarter and 2018 Quarter. The ability to compare one period to another is significantly affected by acquisitions completed and dispositions made during 2019 and 2018 (see note 3 to the consolidated financial statements).
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, general and administrative expenses, acquisition costs, real estate impairment and gain or loss on extinguishment of debt. We believe that NOI is useful as a performance measure because, when compared across periods, NOI reflects the impact on operations of trends in occupancy rates, rental rates and operating costs on an unleveraged basis, providing perspective not immediately apparent from net income. NOI excludes certain components from net income in order to provide results more closely related to a property’s results of operations. For example, interest expense is not necessarily linked to the operating performance of a real estate asset. In addition, depreciation and amortization, because of historical cost accounting and useful life estimates, may distort operating 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.

26


2019 Quarter Compared to 2018 Quarter

The following table reconciles NOI to net income attributable to the controlling interests and provides the basis for our discussion of our consolidated results of operations and NOI in the 2019 Quarter compared to the 2018 Quarter. All amounts are in thousands, except percentage amounts.
 
 
 
 
 
 
 
 
 
Non-Same-Store
 
 
 
 
 
 
 
 
 
Same-Store
 
 
 
 
 
Acquisitions (1)
 
Development/
Re-development (2)
 
Held for Sale or Sold (3)
 
All Properties
 
 
 
2019
 
2018
 
Change
 
Change
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
 

Change
 

Change
Real estate rental revenue
$
77,691

 
$
75,408

 
$
2,283

 
3.0
%
 
$
5,483

 
$
4,634

 
$

 
$

 
$

 
$
4,839

 
$
83,174

 
$
84,881

 
$
(1,707
)
 
(2.0
)%
Real estate expenses
27,858

 
27,000

 
858

 
3.2
%
 
1,352

 
927

 

 
21

 

 
1,953

 
29,210

 
29,901

 
(691
)
 
(2.3
)%
NOI
$
49,833

 
$
48,408

 
$
1,425

 
2.9
%
 
$
4,131

 
$
3,707

 
$

 
$
(21
)
 
$

 
$
2,886

 
$
53,964

 
$
54,980

 
$
(1,016
)
 
(1.8
)%
Reconciliation to net income attributable to the controlling interests:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(29,547
)
 
(29,969
)
 
422

 
(1.4
)%
General and administrative expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(7,429
)
 
(5,821
)
 
(1,608
)
 
27.6
 %
Lease origination expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(378
)
 

 
(378
)
 


Real estate impairment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(8,374
)
 
(1,886
)
 
(6,488
)
 
344.0
 %
Interest expense
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(12,641
)
 
(12,827
)
 
186

 
(1.5
)%
Loss on extinguishment of debt
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
(1,178
)
 
1,178

 
(100.0
)%
Net (loss) income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(4,405
)
 
3,299

 
(7,704
)
 
(233.5
)%
Less: Net income attributable to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 

 

 

 
 %
Net (loss) income attributable to the controlling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
$
(4,405
)
 
$
3,299

 
$
(7,704
)
 
(233.5
)%
 
(1) 
Acquisitions:
2018 Office – Arlington Tower

(2) 
Development/redevelopment:
Multifamily development property – land adjacent to Riverside Apartments

(3) 
Sold:
2018 Office – Braddock Metro Center and 2445 M Street

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) credit 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.

Real estate rental revenue from same-store properties by segment was as follows (in thousands):
 
Three Months Ended March 31,
 
 
 
 
 
2019
 
2018
 
$ Change
 
% Change
Office
$
36,810

 
$
36,074

 
$
736

 
2.0
%
Multifamily
24,335

 
23,663

 
672

 
2.8
%
Retail
16,546

 
15,671

 
875

 
5.6
%
Total same-store real estate rental revenue
$
77,691

 
$
75,408

 
$
2,283

 
3.0
%

Office: Increase primarily due to higher recoveries of operating expenses and lease termination fees. New leases at Army Navy Building, 1140 Connecticut Avenue, Monument II and 1901 Pennsylvania Avenue were offset by lease expirations at Watergate 600 and 2000 M Street.
Multifamily: Increase primarily due to higher rental rates across the portfolio.
Retail: Increase primarily due to new leases at Spring Valley Shopping Center and Gateway Overlook and higher percentage rent.

Real estate rental revenue from acquisitions increased due to the acquisition of Arlington Tower ($0.4 million) in the first quarter of 2018.


27


Real estate rental revenue from held for sale and sold properties decreased due to the sale of 2445 M Street ($2.7 million) during the second quarter of 2018 and Braddock Metro Center ($0.2 million) during the first quarter of 2018.

Ending occupancy represents occupied square footage indicated as a percentage of total square footage as of the last day of that period. Ending occupancy by segment for the 2019 Quarter and 2018 Quarter was as follows:
 
March 31, 2019
 
March 31, 2018
 
Increase (decrease)
Segment
Same-Store
 
Non-Same-Store
 
Total
 
Same-Store
 
Non-Same-Store
 
Total
 
Same-Store
 
Non-Same-Store
 
Total
Office
90.4
%
 
81.9
%
 
89.6
%
 
92.3
%
 
94.4
%
 
92.8
%
 
(1.9
)%
 
(12.5
)%
 
(3.2
)%
Multifamily
95.6
%
 
N/A

 
95.6
%
 
95.4
%
 
N/A

 
95.4
%
 
0.2
 %
 
N/A

 
0.2
 %
Retail
91.9
%
 
N/A

 
91.9
%
 
91.1
%
 
N/A

 
91.1
%
 
0.8
 %
 
N/A

 
0.8
 %
Total
92.8
%
 
81.9
%
 
92.3
%
 
93.2
%
 
94.4
%
 
93.3
%
 
(0.4
)%
 
(12.5
)%
 
(1.0
)%

Office: The decrease in same-store ending occupancy was primarily due to lower ending occupancy at Watergate 600, 1600 Wilson Boulevard and 2000 M Street, partially offset by higher ending occupancy at Army Navy Building.
Multifamily: The increase in same-store ending occupancy was primarily due to higher ending occupancy at The Paramount, Bennett Park, The Ashby at McLean and Roosevelt Towers, partially offset by lower ending occupancy at The Kenmore.
Retail: The increase in same-store ending occupancy was primarily due to higher ending occupancy at Randolph Shopping Center and Chevy Chase Metro, partially offset by lower ending occupancy at Concord Centre and Gateway Overlook.

During the 2019 Quarter, we executed new and renewal leases in our office and retail segments as follows:
 
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
176

 
$
54.66

 
17.2
%
 
$
124.98

 
5.7

 
35.7
%
Retail
88

 
19.92

 
9.1
%
 
13.98

 
0.6

 
56.9
%
Total
264

 
42.68

 
15.8
%
 
87.72

 
4.9

 
40.6
%
(1) Consists of tenant improvements and leasing commissions.

Real Estate Expenses

Real estate expenses as a percentage of revenue for the 2019 Quarter and 2018 Quarter were 35.1% and 35.2%, respectively.

Real estate expenses from same-store properties by segment were as follows (in thousands):
 
Three Months Ended March 31,
 
 
 
 
 
2019
 
2018
 
$ Change
 
% Change
Office
$
13,872

 
$
13,422

 
$
450

 
3.4
%
Multifamily
9,470

 
9,418

 
52

 
0.6
%
Retail
4,516

 
4,160

 
356

 
8.6
%
Total same-store real estate expenses
$
27,858

 
$
27,000

 
$
858

 
3.2
%

Office: Increase primarily due to higher real estate tax ($0.2 million), administrative ($0.2 million) and repairs and maintenance ($0.1 million) expenses.
Multifamily: Increase primarily due to higher utilities ($0.1 million) and administrative ($0.1 million) expenses, partially offset by lower real estate tax ($0.1 million) expenses.
Retail: Increase primarily due to higher snow removal ($0.1 million) and real estate tax ($0.1 million) expenses, with the remainder of the variance spread across several categories.

Other Income and Expenses

Depreciation and Amortization: Decrease primarily due to disposition of 2445 M Street.

General and administrative expenses: Increase primarily due to higher share-based compensation ($1.3 million) and severance expenses ($0.6 million) related to a corporate restructuring.

28



Lease Origination Expenses: In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASU 2016-02”), which amended existing lease accounting standards for both lessees and lessors (see note 2 to the consolidated financial statements). We adopted the new standard for the fiscal year beginning on January 1, 2019. Under ASU 2016-02, the FASB determined that only incremental costs or initial direct costs of executing a lease contract qualify for capitalization, while prior accounting standards allowed for the capitalization of indirect leasing costs. We incurred $0.4 million of indirect leasing expenses during the 2019 Quarter.

Real estate impairment: The real estate impairment charge of $8.4 million during the 2019 Quarter reduced the carrying value of Quantico Corporate Center to its estimated fair value (see note 3 to the consolidated financial statements). During the 2018 Quarter, 2445 M Street met the criteria for classification as held for sale. We consequently recorded an impairment charge of $1.9 million in order to reduce the carrying value of the property to its estimated fair value, less estimated selling costs.

Interest Expense: Interest expense by debt type for the three months ended March 31, 2019 and 2018 was as follows (in thousands):
 
Three Months Ended March 31,
 
 
 
 
Debt Type
2019
 
2018
 
$ Change
 
% Change
Notes payable
$
10,132

 
$
9,438

 
$
694

 
7.4
 %
Mortgage notes payable
666

 
1,135

 
(469
)
 
(41.3
)%
Line of credit
2,556

 
2,626

 
(70
)
 
(2.7
)%
Capitalized interest
(713
)
 
(372
)
 
(341
)
 
91.7
 %
Total
$
12,641

 
$
12,827

 
$
(186
)
 
(1.5
)%

Notes payable: Increase primarily due to executing the $250.0 million term loan in March 2018, which increased and replaced a $150 million term loan.
Mortgage notes payable: Decrease primarily due to repayment of the mortgage note secured by Kenmore Apartments in August 2018.
Line of credit: Decrease primarily due to lower weighted average borrowings of $210.3 million during the 2019 Quarter, as compared to $310.6 million during the 2018 Quarter. The impact of the lower weighted average borrowings was partially offset by a higher weighted average interest rate of 3.6% during the 2019 Quarter, as compared to 2.6% during the 2018 Quarter.
Capitalized interest: Increase primarily due to higher spending related to the Trove, the multifamily development adjacent to The Wellington.

Loss on extinguishment of debt: We recognized a $1.2 million non-cash loss on extinguishment of debt during the 2018 Quarter related to the write-off of unamortized loan origination costs associated with the refinancing of an existing $150.0 million seven-year unsecured term loan with a $250.0 million five-year unsecured term loan and the execution of an amended, extended and expanded $700.0 million unsecured revolving credit facility.


29


Liquidity and Capital Resources

Capital Requirements

As of the end of the first quarter of 2019, we summarize our full-year 2019 capital requirements as follows:
Funding dividends and distributions to our shareholders;
Approximately $80 - $85 million to invest in our existing portfolio of operating assets, including approximately $25 - $30 million to fund tenant-related capital requirements and leasing commissions;
Approximately $62.5 - $67.5 million to invest in our development and redevelopment projects; and
Funding for potential property acquisitions throughout 2019, offset by proceeds from potential property dispositions.

Subsequent to the 2019 Quarter, on April 2, 2019, we entered into an agreement of sale to acquire a portfolio of seven multifamily properties, with an aggregate total of 2,113 units, for a contract purchase price of approximately $461.0 million. We expect to settle on the acquisitions, potentially in multiple closings, during the second quarter of 2019. We currently plan to fund the acquisitions through the disposition of select office or retail properties.

Also subsequent to the 2019 Quarter, in connection with the potential acquisitions, we have obtained a financing commitment to provide an unsecured bridge loan facility in the original principal amount of $450.0 million (the “Bridge Facility”) to fund the potential acquisitions, pursuant to a commitment letter, dated April 2, 2019, from members of our bank group. The Bridge Facility will provide interim funding prior to completing the expected asset sales. As of April 29, 2019, the commitments for the Bridge Facility have not been funded.

Debt Financing

We generally use secured or unsecured, corporate-level debt, including unsecured notes, our $700.0 million unsecured revolving credit facility (the “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 hedge our variable rate debt to give it an effective fixed interest rate and hedge fixed rate debt to give it an effective variable interest rate.

Our future debt principal payments are scheduled as follows (in thousands):

chart-288e91aa2267503e23d.jpg


30


 
Future Maturities of Debt
Year
Secured Debt
 
Unsecured Debt
 
Credit Facility
 
Total Debt
 
Average Interest Rate
2019
$

 
$

 
$

 
$

 
 
2020

 
250,000

 

 
250,000

 
5.1%
2021

 
150,000

(2) 

 
150,000

 
2.7%
2022
44,517

 
300,000

 
 
 
344,517

 
4.0%
2023

 
250,000

(3) 
228,000

(1) 
478,000

 
3.2%
2024

 

 

 

 

Thereafter

 
50,000

 

 
50,000

 
7.4%
Scheduled principal payments
$
44,517

 
$
1,000,000

 
$
228,000

 
$
1,272,517

 
3.9%
Scheduled amortization payments
12,243

 

 

 
12,243

 
4.8%
Net discounts/premiums
2,308

 
(1,091
)