10-Q 1 wre-20220331.htm 10-Q wre-20220331
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________
FORM 10-Q
 ___________________________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended March 31, 2022
OR
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)
Maryland53-0261100
(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: (202774-3200
___________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Shares of Beneficial InterestWRENYSE
 ___________________________________________________
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      No  
Indicate by check mark 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      No  
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 definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated FilerAccelerated Filer
Non-accelerated FilerSmaller Reporting Company
Emerging Growth Company



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.     
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No   
As of April 26, 2022, 87,425,784 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 Income (Loss), 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, 2021 included in Washington Real Estate Investment Trust’s 2021 Annual Report on Form 10-K filed on February 18, 2022.
4


WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
 
March 31, 2022December 31, 2021
(Unaudited)
Assets
Land$340,046 $322,623 
Income producing property1,733,326 1,642,147 
2,073,372 1,964,770 
Accumulated depreciation and amortization(421,663)(402,560)
Net income producing property1,651,709 1,562,210 
Properties under development or held for future development31,157 30,631 
Total real estate held for investment, net1,682,866 1,592,841 
Cash and cash equivalents139,711 233,600 
Restricted cash636 620 
Rents and other receivables16,120 15,067 
Prepaid expenses and other assets37,391 33,866 
Total assets$1,876,724 $1,875,994 
Liabilities
Notes payable, net$497,093 $496,946 
Accounts payable and other liabilities33,184 40,585 
Dividend payable14,924 14,650 
Advance rents1,463 2,082 
Tenant security deposits4,817 4,669 
Total liabilities551,481 558,932 
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; 150,000 and 100,000 shares authorized; 87,414 and 86,261 shares issued and outstanding, as of March 31, 2022 and December 31, 2021, respectively
874 863 
Additional paid in capital1,725,828 1,697,477 
Distributions in excess of net income(385,108)(362,494)
Accumulated other comprehensive loss(16,656)(19,091)
Total shareholders’ equity1,324,938 1,316,755 
Noncontrolling interests in subsidiaries305 307 
Total equity1,325,243 1,317,062 
Total liabilities and equity$1,876,724 $1,875,994 
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,
 20222021
Revenue
Real estate rental revenue$47,804 $40,607 
Expenses
Property operating and maintenance10,565 9,395 
Real estate taxes and insurance6,587 5,596 
Property management1,750 1,463 
General and administrative6,939 5,604 
Transformation costs2,223  
Depreciation and amortization22,200 16,987 
50,264 39,045 
Real estate operating (loss) income(2,460)1,562 
Other income (expense)
Interest expense(5,650)(10,123)
Other income386 1,284 
(5,264)(8,839)
Loss from continuing operations(7,724)(7,277)
Discontinued operations:
Income from operations of properties sold or held for sale 6,130 
       Income from discontinued operations 6,130 
Net loss$(7,724)$(1,147)
Basic net (loss) income per common share:
Continuing operations$(0.09)$(0.09)
Discontinued operations 0.07 
Basic net loss per common share (1)
$(0.09)$(0.02)
Diluted net (loss) income per common share:
Continuing operations$(0.09)$(0.09)
Discontinued operations 0.07 
Diluted net loss per common share (1)
$(0.09)$(0.02)
Weighted average shares outstanding – basic87,214 84,413 
Weighted average shares outstanding – diluted87,214 84,413 

See accompanying notes to the consolidated financial statements.
6


WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
(UNAUDITED)
 
 Three Months Ended March 31,
 20222021
Net loss$(7,724)$(1,147)
Other comprehensive income:
Unrealized gain on interest rate hedges1,925 1,580 
Reclassification of unrealized loss on interest rate derivatives to earnings 510 510 
Comprehensive (loss) income$(5,289)$943 

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-standingShares of Beneficial Interest at Par ValueAdditional Paid in CapitalDistributions in Excess of
Net Income
Accumulated Other Comprehensive LossTotal Shareholders’ EquityNoncontrolling Interests in SubsidiariesTotal Equity
Balance, December 31, 202186,261 $863 $1,697,477 $(362,494)$(19,091)$1,316,755 $307 $1,317,062 
Net loss— — — (7,724)— (7,724)— (7,724)
Unrealized gain on interest rate hedges— — — — 1,925 1,925 — 1,925 
Amortization of swap settlements— — — — 510 510 — 510 
Distributions to noncontrolling interests— — — — — — (2)(2)
Dividends ($0.17 per common share)
— — — (14,890)— (14,890)— (14,890)
Equity issuances, net of issuance costs1,032 10 26,841 — — 26,851 — 26,851 
Shares issued under Dividend Reinvestment Program10 — 264 — — 264 — 264 
Share grants, net of forfeitures and tax withholdings111 1 1,246 — — 1,247 — 1,247 
Balance, March 31, 202287,414 $874 $1,725,828 $(385,108)$(16,656)$1,324,938 $305 $1,325,243 

Shares Issued and Out-standingShares of Beneficial Interest at Par ValueAdditional Paid in CapitalDistributions in Excess of
Net Income
Accumulated Other Comprehensive LossTotal Shareholders’ EquityNoncontrolling Interests in SubsidiariesTotal Equity
Balance, December 31, 202084,409 $844 $1,649,366 $(298,860)$(30,563)$1,320,787 $322 $1,321,109 
Net loss— — — (1,147)— (1,147)— (1,147)
Unrealized loss on interest rate hedges— — — — 1,580 1,580 — 1,580 
Amortization of swap settlements— — — — 510 510 — 510 
Distributions to noncontrolling interests— — — — — — (4)(4)
Dividends ($0.30 per common share)
— — — (25,462)— (25,462)— (25,462)
Equity issuances, net of issuance costs24 467 — — 467 — 467 
Shares issued under Dividend Reinvestment Program23 520 — — 520 — 520 
Share grants, net of forfeitures and tax withholdings108 2 1,327 — — 1,329 — 1,329 
Balance, March 31, 202184,564 $846 $1,651,680 $(325,469)$(28,473)$1,298,584 $318 $1,298,902 

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,
20222021
Cash flows from operating activities
Net loss$(7,724)$(1,147)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization22,200 29,643 
Credit losses on lease related receivables410 1,043 
Share-based compensation expense2,082 1,664 
Net amortization of debt premiums, discounts and related financing costs1,001 1,112 
Changes in operating other assets(735)(1,619)
Changes in operating other liabilities(8,583)6,543 
Net cash provided by operating activities8,651 37,239 
Cash flows from investing activities
Real estate acquisitions, net(104,572) 
Capital improvements to real estate(4,004)(4,032)
Development in progress(595)(4,161)
Real estate deposits, net(5,330) 
Non-real estate capital improvements(32)(7)
Net cash used in investing activities(114,533)(8,200)
Cash flows from financing activities
Line of credit repayments, net (9,000)
Dividends paid(14,615)(25,398)
Payment of financing costs(39) 
Distributions to noncontrolling interests(2)(4)
Proceeds from dividend reinvestment program264 520 
Net proceeds from equity issuances26,852 467 
Payment of tax withholdings for restricted share awards(451)(334)
Net cash provided by (used in) financing activities12,009 (33,749)
Net decrease in cash, cash equivalents and restricted cash(93,873)(4,710)
Cash, cash equivalents and restricted cash at beginning of period234,220 8,303 
Cash, cash equivalents and restricted cash at end of period$140,347 $3,593 
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized$8,557 $4,345 
Change in accrued capital improvements and development costs1,145 (3,844)
Dividend payable14,924 25,424 
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents$139,711 $3,017 
Restricted cash636 576 
Cash, cash equivalents and restricted cash$140,347 $3,593 
See accompanying notes to the consolidated financial statements.
9


WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022
(UNAUDITED)

NOTE 1: NATURE OF BUSINESS

Washington Real Estate Investment Trust (“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 primarily consists of the ownership of apartment communities in the greater Washington, DC metro and Southeastern regions. Within these notes to the financial statements, we refer to the three months ended March 31, 2022 and March 31, 2021 as the “2022 Quarter” and the “2021 Quarter,” respectively.

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. To maintain our status as a REIT, we are, among other things, required to distribute 90% of our REIT taxable income (determined before the deduction for dividends paid and excluding net capital gains 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 subsidiary (“TRS”). Our TRS is subject to corporate federal and state income tax on its taxable income at regular statutory rates. As of both March 31, 2022 and December 31, 2021, our TRS had a deferred tax asset of $1.4 million 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, 2021.

Principles of Consolidation and Basis of Presentation

The accompanying unaudited consolidated financial statements include the consolidated accounts of WashREIT, our majority-owned subsidiaries and entities in which WashREIT 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 Generally Accepted Accounting Principles (“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, 2021.

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Held for Sale and Discontinued Operations

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 of operations for all periods presented.

Lessee Accounting

For leases where we are the lessee, primarily our corporate office operating lease, we recognize a right-of-use asset and a lease liability in accordance with Accounting Standards Codification (“ASC”) Topic 842. The right-of-use asset and associated liability is equal to the present value of the minimum lease payments, applying our incremental borrowing rate. Our borrowing rate is computed based on observable borrowing rates taking into consideration our credit quality and adjusting to a secured borrowing rate for similar assets and term. As of March 31, 2022, our balance sheet included $3.7 million in right-of-use assets and liabilities, net of amortization.

Lease expense for the operating lease is recognized on a straight-line basis over the expected lease term and is included in “General and administrative expense.”

Restricted Cash

Restricted cash includes funds held in escrow for tenant security deposits.

Transformation Costs

Transformation costs include costs related to the strategic shift away from the commercial sector to the residential sector, including the allocation of internal costs, consulting, advisory and termination benefits.

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

Acquisitions

We acquired the following property during the 2022 Quarter (the “2022 acquisition”):
Acquisition DatePropertyType# of homesAverage OccupancyContract
Purchase Price
(in thousands)
February 1, 2022Carlyle of Sandy SpringsResidential38994.4%$105,586 

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The results of operations from the acquired operating property are included in the condensed consolidated statements of operations as of its acquisition date and were as follows (in thousands):
Three Months Ended March 31, 2022
Real estate rental revenue$1,075 
Net loss(664)

We accounted for the 2022 acquisition as an asset acquisition. We measured the value of the acquired physical assets (land and building) and in-place leases (absorption costs) by allocating the total cost of the acquisition on a relative fair value basis.

The total cost of the 2022 acquisition was as follows (in thousands):
Contract purchase price$105,586 
Capitalized acquisition costs134 
Total$105,720 

We have recorded the total cost of the 2022 acquisition as follows (in thousands):
Land$17,423 
Building85,783 
Absorption costs2,514 
Total$105,720 

The weighted remaining average life for the absorption costs is four months.

Development/Redevelopment

We have properties under development/redevelopment and held for current or future development. As of March 31, 2022, we have invested $30.3 million, including the cost of acquired land, in a residential development adjacent to Riverside Apartments. In addition, in our residential segment, we continue to capitalize qualifying costs on several other projects with minor development activity necessary to ready each project for its intended use.

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 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 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.

We sold the following properties during 2021 ($ in thousands):
Disposition DateProperty NameProperty TypeRentable Square FeetContract Sales Price(Loss) Gain on Sale
July 26, 2021
Office Portfolio (1)
Office2,370,000 $766,000 $(11,220)
September 22, 2021
Retail Portfolio (2)
 Retail693,000 168,314 57,661 
Total 20213,063,000$934,314 $46,441 
______________________________
(1)    Consists of twelve 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.
(2)    Consists of eight 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 sold in 2021 and do not have continuing involvement in their operations.

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The dispositions of the Office Portfolio and the Retail Portfolio represent a strategic shift that had a major effect on our financial results and we have accordingly reported the Office Portfolio and Retail Portfolio as discontinued operations.

As of March 31, 2022, we assessed our properties for impairment and did not recognize any impairment charges during the 2022 Quarter. We applied reasonable estimates and judgments in evaluating each of the properties as of March 31, 2022. Should external or internal circumstances change requiring the 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.

Discontinued Operations

The results of the 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 March 31, 2021
Real estate rental revenue$29,026 
Expenses
Property operating and maintenance(4,476)
Real estate taxes and insurance(4,877)
Property management(887)
Depreciation and amortization(12,656)
       Income from discontinued operations$6,130 
Basic net income per share$0.07 
Diluted net income per share$0.07 
Capital expenditures $374 

All assets and liabilities related to the Office Portfolio and Retail Portfolio were sold as of December 31, 2021.


NOTE 4: UNSECURED LINE OF CREDIT PAYABLE

During the third quarter of 2021, 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”) and the continuation of an existing $250.0 million unsecured term loan (“2018 Term Loan”). The Revolving Credit Facility has a four-year term ending in August 2025, with two six-month extension options. The Credit Agreement has an accordion feature that allows us to increase the aggregate facility to $1.5 billion, subject to the lenders’ agreement 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 0.70% to 1.40% or the base rate plus a margin ranging from 0.0% to 0.40% (in each case depending upon WashREIT’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 WashREIT’s credit rating) on the $700.0 million committed revolving loan capacity, without regard to usage. As of March 31, 2022, the interest rate on the Revolving Credit Facility is one month LIBOR plus 0.85%, the one month LIBOR is 0.45% and the facility fee is 0.20%.

All outstanding advances for the Revolving Credit Facility are due and payable upon maturity in August 2025, 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 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
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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.

On September 27, 2021, we prepaid a $150.0 million portion of the 2018 Term Loan using proceeds from the sale of the Office Portfolio and Retail Portfolio (see note 3). We currently expect to hold the remaining $100.0 million portion of the 2018 Term Loan until maturity.

The amount of the Revolving Credit Facility’s unsecured line of credit unused and available at March 31, 2022 was as follows (in thousands):
Committed capacity$700,000 
Borrowings outstanding 
Unused and available$700,000 

There were no borrowings or repayments on the Revolving Credit Facility during the 2022 Quarter.

NOTE 5: DERIVATIVE INSTRUMENTS

We have one interest rate swap arrangement with a notional amount of $100.0 million that effectively fixes the remaining $100.0 million portion of the 2018 Term Loan. The interest rate swap arrangement is recorded at fair value in accordance with GAAP, based on discounted cash flow methodologies and observable inputs. We record the effective portion of changes in fair value of the cash flow hedge in Other comprehensive income (loss). We assess the effectiveness of a cash flow hedge both at inception and on an ongoing basis. If a cash flow hedge is no longer expected to be effective, hedge accounting is discontinued. Hedge ineffectiveness of our cash flow hedges is recorded in earnings.

The fair values of the interest rate swap as of March 31, 2022 and December 31, 2021, were as follows (in thousands):
Fair Value
Derivative Assets (Liabilities)
Derivative InstrumentAggregate Notional AmountEffective DateMaturity DateMarch 31, 2022December 31, 2021
Interest rate swap$100,000 March 31, 2017July 21, 2023$1,104 $(821)

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 net unrealized gains or losses on the effective swaps were recognized in Other comprehensive income (loss), as follows (in thousands):
Three Months Ended March 31,
20222021
Unrealized gain on interest rate hedges$1,925 $1,580 

Amounts reported in Accumulated other comprehensive loss related to effective 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 months ended March 31, 2022 and 2021, were as follows (in thousands):
Three Months Ended March 31,
20222021
Loss reclassified from accumulated other comprehensive loss into interest expense$510 $510 

During the next twelve months, we estimate that an additional $0.6 million will be reclassified as an 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 March 31, 2022, the fair value of derivative assets, including accrued interest, was $1.1 million and
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we did not have any derivatives in a liability position. As of March 31, 2022, 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 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 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
Level 2: Significant other observable inputs
Level 3: Significant unobservable inputs

The only assets or liabilities we had at March 31, 2022 and December 31, 2021 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 derivatives (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 derivatives is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each interest rate derivative. This analysis reflects the contractual terms of the interest rate 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 derivatives 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 derivatives fall into Level 2 in the fair value hierarchy.

The fair values of these assets and liabilities at March 31, 2022 and December 31, 2021 were as follows (in thousands):
 March 31, 2022December 31, 2021
 Fair
Value
Level 1Level 2Level 3Fair
Value
Level 1Level 2Level 3
Assets:
SERP$2,231 $ $2,231 $ $2,566 $ $2,566 $ 
Interest rate derivatives1,104  1,104      
Liabilities:
Interest rate derivatives$ $ $ $ $(821)$ $(821)$ 

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
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subsequent to March 31, 2022 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, 2022 and December 31, 2021, the carrying values and estimated fair values of our financial instruments were as follows (in thousands):
 March 31, 2022December 31, 2021
Carrying ValueFair ValueCarrying ValueFair Value
Cash and cash equivalents$139,711 $139,711 $233,600 $233,600 
Restricted cash636 636 620 620 
Notes payable, net497,093 494,553 496,946 515,341 

NOTE 7: STOCK BASED COMPENSATION

WashREIT 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.

Total Compensation Expense

Total compensation expense recognized in the consolidated financial statements for all outstanding share based awards was $2.1 million and $1.7 million for the 2022 Quarter and 2021 Quarter, respectively.

Restricted Share Awards

The total fair values of restricted share awards vested was $1.2 million and $1.0 million for the 2022 Quarter and 2021 Quarter, respectively.

The total unvested restricted share awards at March 31, 2022 was 421,017 shares, which had a weighted average grant date fair value of $27.26 per share. As of March 31, 2022, the total compensation cost related to unvested restricted share awards was $6.9 million, which we expect to recognize over a weighted average period of 23 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 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.

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The computations of basic and diluted earnings per share for the three months ended March 31, 2022 and 2021 were as follows (in thousands, except per share data):
 Three Months Ended March 31,
 20222021
Numerator:
Loss from continuing operations$(7,724)$(7,277)
Allocation of earnings to unvested restricted share awards(72)(139)
Adjusted net loss from continuing operations(7,796)(7,416)
Income from discontinued operations 6,130 
Adjusted net loss$(7,796)$(1,286)
Denominator:
Weighted average shares outstanding – basic and diluted87,214 84,413 
Earnings per common share, basic:
Continuing operations$(0.09)$(0.09)
Discontinued operations 0.07 
Basic net loss per common share (1)
$(0.09)$(0.02)
Earnings per common share, diluted:
Continuing operations$(0.09)$(0.09)
Discontinued operations 0.07 
Diluted net loss per common share (1)
$(0.09)$(0.02)
Dividends declared per common share$0.17 $0.30 


NOTE 9: SEGMENT INFORMATION

We operate in a single reportable segment which includes the ownership, development, redevelopment and acquisition of apartment communities. Each of our operating properties, including our remaining office property, do not meet the criteria to be considered separate operating segments on a stand-alone basis. We do not distinguish or group our consolidated operations based on size, type or geography. All but three communities are within the Washington, DC metro region and one community, Riverside Apartments, comprises more than 10% of consolidated revenues. Further, our apartment communities have similar long-term economic characteristics and provide similar products and services to our residents. As a result, our operating properties are aggregated into a single reportable segment: residential.

Prior to the end of the second quarter of 2021, we had two reportable segments: office and residential. During the third quarter of 2021, we closed on the sales of the Office Portfolio and the Retail Portfolio (see note 3), and following such sales, we have one remaining office property, Watergate 600, which does not meet the criteria for a reportable segment, and has been classified within “Other” on our segment disclosure tables.

We evaluate performance based upon net operating income (“NOI”) of the combined properties in the segment. Our reportable operating segment consolidates 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. NOI is a key measurement of our segment profit and loss and is defined as real estate rental revenue less real estate expenses.

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The following tables present revenues, NOI, capital expenditures and total assets for the three months ended March 31, 2022 and 2021 from our Residential segment as well as Other, and reconcile NOI to net income (loss) as reported (in thousands):
 Three Months Ended March 31, 2022
 Residential
Other (1)
Consolidated
Real estate rental revenue43,334 4,470 $47,804 
Real estate expenses15,901 1,251 17,152 
Net operating income$27,433 $3,219 $30,652 
Other income (expense):
Property management expenses(1,750)
General and administrative expenses(6,939)
Transformation costs(2,223)
Depreciation and amortization(22,200)
Interest expense(5,650)
Other income386 
Net loss$(7,724)
Capital expenditures$3,430 $596 $4,026 
Total assets$1,545,731 $330,993 $1,876,724 

 Three Months Ended March 31, 2021
 Residential
Other (1), (2)
Consolidated
Real estate rental revenue36,167 4,440 $40,607 
Real estate expenses13,826 1,165 14,991 
Net operating income$22,341 $3,275 $25,616 
Other income (expense):
Property management expenses(1,463)
General and administrative expenses(5,604)
Depreciation and amortization(16,987)
Interest expense(10,123)
Other income1,284 
Discontinued operations:
Income from operations of properties sold or held for sale6,130 
Net loss$(1,147)
Capital expenditures$3,737 $302 $4,039 
Total assets$1,322,831 $1,057,205 $2,380,036 
______________________________
(1)     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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NOTE 10: SHAREHOLDERS' EQUITY

On February 17, 2021, we entered into separate amendments to each of our existing equity distribution agreements (“Original 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 Truist Securities, Inc. (f/k/a SunTrust Robinson Humphrey, Inc.), each dated May 4, 2018 (collectively, as amended, the “Equity Distribution Agreements”) for our at-the-market program. Also on February 17, 2021, we entered into a separate equity distribution agreement with BTIG, LLC on the same terms as the Amended Equity Distribution Agreements (the “BTIG Equity Distribution Agreement”). On September 22, 2021, BTIG, LLC notified us that it was terminating the BTIG Equity Distribution Agreement, effective as of September 27, 2021. Pursuant to the Equity Distribution Agreements, we may sell, from time to time, up to an aggregate price of $550.0 million of our common shares of beneficial interest, $0.01 par value per share. Issuances of our common shares are made at market prices prevailing at the time of issuance. We may use net proceeds from the issuance of common shares under this program for general business purposes, including, without limitation, working capital, the acquisition, renovation, expansion, improvement, development or redevelopment of income producing properties or the repayment of debt. Our issuances and net proceeds on the Equity Distribution Agreements for the 2022 Quarter and 2021 Quarter were as follows ($ in thousands, except per share data):

Three Months Ended March 31,
20222021
Issuance of common shares1,032 24 
Weighted average price per share$26.27 $22.06 
Net proceeds$26,851 $467 

We have a dividend reinvestment program whereby shareholders may use their dividends and optional cash payments to purchase common shares. The shares sold under this program may either be common shares issued by us or common shares purchased in the open market. Net proceeds under this program are used for general corporate purposes.

Our issuances and net proceeds on the dividend reinvestment program for the three months ended March 31, 2022 and 2021 were as follows ($ in thousands, except per share data):
Three Months Ended March 31,
20222021
Issuance of common shares10 23 
Weighted average price per share$26.04 $22.07 
Net proceeds$264 $520 
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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, 2021 filed with the Securities and Exchange Commission (“SEC”) on February 18, 2022.

We refer to the three months ended March 31, 2022 and March 31, 2021 as the “2022 Quarter” and the “2021 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 WashREIT to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. 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 include, but are not limited to: risks associated with our ability to execute on our strategies, including new strategies with respect to our operations and our portfolio, including the acquisition of residential properties in the Southeastern markets, on the terms anticipated, or at all, and to realize any anticipated benefits, including the performance of any acquired residential properties at the levels anticipated; the risks associated with ownership of real estate in general and our real estate assets in particular; the economic health of the areas in which our properties are located, particularly with respect to greater Washington, DC metro region and the larger Southeastern region; the risk of failure to enter into and/or complete contemplated acquisitions and dispositions, at all, within the price ranges anticipated and on the terms and timing anticipated; changes in the composition of our portfolio; fluctuations in interest rates and other risks related to changes 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; the economic health of our residents; the ultimate duration of the COVID-19 global pandemic, including any mutations thereof, 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 effectiveness and willingness of people to take COVID-19 vaccines, and the duration of associated immunity and efficacy of the vaccines against emerging variants of COVID-19; compliance with applicable laws and corporate social responsibility goals, including those concerning the environment and access by persons with disabilities; the risks related to not having adequate insurance to cover potential losses; changes in the market value of securities; terrorist attacks or actions and/or cyber-attacks; whether we will succeed in the day-to-day property management and leasing activities that we have previously outsourced; the availability and terms of financing and capital and the general volatility of securities markets; the risks related to our organizational structure and limitations of stock ownership; failure to qualify and maintain our qualification as a REIT and the risks of changes in laws affecting REITs; whether our estimated transformation costs for 2022 will be correct; whether we will realize significant operation benefits from our operating model redesign on the timing contemplated or at all; and other risks and uncertainties detailed from time to time in our filings with the SEC, including our 2021 Form 10-K filed on February 18, 2022. 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 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 2022 Quarter to the 2021 Quarter.
Liquidity and Capital Resources. Discussion of our financial condition and analysis of changes in our capital structure and cash flows.
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Funds From Operations. Calculation of National Association of Real Estate Investment Trusts, Inc. (“NAREIT”) Funds From Operations (“NAREIT FFO”), a non-GAAP supplemental measure to net income.
Critical Accounting 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.
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 daily occupied apartment homes as a percentage of total apartment homes.

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 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. Development properties are categorized as same-store when they have reached stabilized occupancy (90%) before the start of the prior year. 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. As of March 31, 2022, we owned approximately 8,200 residential apartment homes in the Washington, DC metro and Southeastern regions. We also own and operate approximately 300,000 square feet of commercial space in the Washington, DC metro region.

During the third quarter of 2021, we sold twelve office properties (the “Office Portfolio”) and eight retail properties (the “Retail Portfolio”) (see note 3 to the condensed consolidated financial statements) for contract sale prices of $766.0 million and $168.3 million, respectively. Both the Office Portfolio and Retail Portfolio meet the criteria for classification as discontinued operations in our condensed consolidated financial statements. Our 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 dispositions of the Office Portfolio and Retail Portfolio are part of a strategic shift away from the commercial sector to the residential sector, which simplifies our portfolio to one reportable segment (residential) (the “strategic transformation”). We have used and plan to continue using the net proceeds from the sales to fund the expansion of our residential platform through acquisitions in Southeastern markets and reduce our leverage by repaying outstanding debt. During the third and fourth quarters of 2021, we completed the acquisitions of two apartment communities in Georgia for contract purchase prices of $48.0 million and $106.0 million, respectively. The apartment communities have a combined total of 730 apartment homes. During the 2022 Quarter, we completed the acquisition of an apartment community in Georgia with 389 apartment homes for a contract purchase price of $105.6 million. We believe the successful execution of this research-driven strategic shift will lead to greater, more sustainable growth.

In connection with this strategic transformation, we are redesigning our operating model for purposes of more efficiently and effectively supporting residential operations. This operating model redesign includes insourcing the property-level management activities currently performed by third-party management companies. Costs related to the strategic transformation, including the allocation of internal costs, consulting, advisory and termination benefits, are included in Transformation costs on our consolidated statements of operations. We recognized $2.2 million of transformation costs on the condensed consolidated statements of operations during the 2022 Quarter and anticipate incurring approximately $8.8 - $10.8 million of additional transformation costs during 2022. We expect to realize significant operational benefits from this operating model redesign and complete its implementation in 2023.

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Operating Results

Net loss, NOI and NAREIT FFO for the three months ended March 31, 2022 and 2021 were as follows (in thousands): 
Three Months Ended March 31,
20222021$ Change% Change
Net loss$(7,724)$(1,147)$(6,577)573.4 %
NOI (1)
$30,652 $25,616 $5,036 19.7 %
NAREIT FFO (2)
$14,476 $28,496 $(14,020)(49.2)%
______________________________
(1) See page 24 of the MD&A for a reconciliation of NOI to net income.
(2) See page 31 of the MD&A for a reconciliation of NAREIT FFO to net income.
 
The increase in net loss is primarily due to lower income from discontinued operations ($6.1 million) due to the sales of the Office Portfolio and Retail Portfolio during 2021, higher depreciation and amortization expenses ($5.2 million), higher transformation expenses ($2.2 million), higher general and administrative expenses ($1.3 million), lower other income ($0.9 million) and higher property management expenses ($0.3 million). These were partially offset by higher NOI ($5.0 million) and lower interest expense ($4.5 million).

The higher NOI is primarily due to the acquisitions of Assembly Eagles Landing ($1.0 million) and The Oxford ($0.5 million) in 2021 and Carlyle of Sandy Spring ($0.6 million) in 2022, higher NOI from same-store properties ($1.7 million) and higher NOI from Trove ($1.3 million), which achieved stabilization in the fourth quarter of 2021. The higher same-store NOI was primarily due to higher rental rates and occupancy. Residential same-store average occupancy for our portfolio increased to 95.8% as of March 31, 2022 from 94.3% as of March 31, 2021, due to higher occupancy across the portfolio as the portfolio recovers from the COVID-19 pandemic.

The lower NAREIT FFO is primarily due to lower income from discontinued operations, net of depreciation and amortization ($18.8 million), higher transformation expenses ($2.2 million), higher general and administrative expenses ($1.3 million), lower other income ($0.9 million) and higher property management expenses ($0.3 million). These were partially offset by higher NOI ($5.0 million) and lower interest expense ($4.5 million).

Investment Activity

Significant investment transactions during the 2022 Quarter included the following:
Acquisition of Carlyle of Sandy Springs, a 389-unit apartment community in Sandy Springs, Georgia for a contract purchase price of $105.6 million.

Financing Activity

Significant financing transactions during the 2022 Quarter included the following:
Issuance of 1.0 million common shares at a weighted average price per share of $26.27 for net proceeds of $26.9 million through our at-the-market program.

As of March 31, 2022, the interest rate on the $700.0 million unsecured revolving credit facility (“Revolving Credit Facility”) was one month LIBOR plus 0.85% and the facility fee was 0.20%. As of April 26, 2022, we had no outstanding balance and a full borrowing capacity of $700.0 million on our Revolving Credit Facility and $132.0 million of cash on hand, primarily due to the proceeds from the Office Portfolio and Retail Portfolio sales.

Capital Requirements

We have no debt maturities scheduled until the third quarter of 2023. We expect to have additional capital requirements as set forth on page 30 (Liquidity and Capital Resources - Capital Requirements).
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Results of Operations

The discussion that follows is based on our consolidated results of operations for the 2022 Quarter and 2021 Quarter. The ability to compare one period to another is significantly affected by acquisitions and dispositions made during 2022 and 2021 (see note 3 to the consolidated financial statements).
Net Operating Income

NOI, defined as real estate rental revenue less direct real estate operating 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 gain and losses and gain or loss on extinguishment of debt. NOI does not include management expenses, which consist of corporate property management costs and property management fees paid to third parties. We believe that NOI is a useful performance measure because, when compared across periods, it 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 calculated in accordance with GAAP. As such, NOI should not be considered an alternative to these measures as an indication of our operating performance. A reconciliation of NOI to net loss follows.

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2022 Quarter Compared to 2021 Quarter

The following table reconciles NOI to net loss and provides the basis for our discussion of our consolidated results of operations and NOI in the 2022 Quarter compared to the 2021 Quarter. All amounts are in thousands, except percentage amounts.
Three Months Ended March 31,
20222021$ Change% Change
Residential revenue:
Same-store portfolio$36,733 $34,912 $1,821 5.2 %
Acquisitions (1)
3,925 — 3,925 — %
Development (2)
2,431 976 1,455 149.1 %
Non-residential (3)
245 279 (34)(12.2)%
Total43,334 36,167 7,167 19.8 %
Residential expenses:
Same-store portfolio13,138 13,036 102 0.8 %
Acquisitions1,843 — 1,843 — %
Development845 721 124 17.2 %
Non-residential75 69 8.7 %
Total15,901 13,826 2,075 15.0 %
Residential NOI:
Same-store portfolio23,595 21,876 1,719 7.9 %
Acquisitions2,082 — 2,082 — %
Development1,586 255 1,331 522.0 %
Non-residential170 210 (40)(19.0)%
Total27,433 22,341 5,092 22.8 %
Other NOI (4)
3,219 3,275 (56)(1.7)%
Total NOI30,652 25,616 5,036 19.7 %
Reconciliation to net income (loss):
Property management expenses(1,750)(1,463)(287)19.6 %
General and administrative expenses(6,939)(5,604)(1,335)23.8 %
Transformation costs(2,223)— (2,223)— %
Depreciation and amortization(22,200)(16,987)(5,213)30.7 %
Interest expense(5,650)(10,123)4,473 (44.2)%
Other income386 1,284 (898)(69.9)%
Discontinued operations (5):
Income from operations of properties sold or held for sale— 6,130 (6,130)(100.0)%
Net loss$(7,724)$(1,147)$(6,577)573.4 %
 ______________________________ 
(1)Acquisitions:
2021: The Oxford and Assembly Eagles Landing
2022: Carlyle of Sandy Springs
(2)Development/redevelopment: Trove
(3)Non-residential: Includes revenues and expenses from retail and public parking garage operations at residential properties.
(4)Other (classified as continuing operations): Watergate 600
(5)Discontinued operations:
2021 Office - 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
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 from our apartment communities is comprised of (a) rent from operating leases of multifamily residential apartments with terms of approximately one year or less, recognized on a straight-line basis, (b) revenue from the recovery of operating expenses from our residents, (c) credit losses on lease related receivables, (d) revenue from leases of retail space at our apartment communities and (e) parking and other tenant charges.
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Real estate rental revenue from same-store residential properties increased $1.8 million, or 5.2%, to $36.7 million for the 2022 Quarter, compared to $34.9 million for the 2021 Quarter, primarily due to higher rental income ($1.3 million), lower credit losses ($0.3 million), higher recoveries ($0.1 million) and lower rent abatements ($0.1 million).

Real estate rental revenue from acquisitions increased $3.9 million due to the acquisition of Assembly Eagles Landing ($1.9 million) during the fourth quarter of 2021, Carlyle of Sandy Springs ($1.1 million) during the 2022 Quarter and The Oxford ($0.9 million) during the third quarter of 2021.

Real estate rental revenue from development properties increased due to continued lease-up of Trove ($1.5 million). We placed the remainder of the Trove development costs into service during the 2021 Quarter.

Average occupancy for residential properties for the 2022 Quarter and 2021 Quarter was as follows:
March 31, 2022March 31, 2021Increase
Same-StoreNon-Same-StoreTotalSame-StoreNon-Same-StoreTotalSame-StoreNon-Same-StoreTotal
95.8 %94.6 %95.6 %94.3 %31.3 %90.7 %1.5 %63.3 %4.9 %

The increase in same-store average occupancy was primarily due to higher average occupancy at 3801 Connecticut Avenue, The Kenmore and Assembly Leesburg, partially offset by lower average occupancy at Clayborne Apartments.

Real Estate Expenses

Residential real estate expenses as a percentage of residential revenue for the 2022 Quarter and 2021 Quarter were 36.7% and 38.2%, respectively.

Real estate expenses from same-store residential properties increased $0.1 million, or 0.8%, to $13.1 million for the 2022 Quarter, compared to $13.0 million for the 2021 Quarter, primarily due to higher real estate taxes ($0.1 million) and higher insurance ($0.1 million), partially offset by lower repairs and maintenance ($0.1 million) expenses.

Other NOI

Other NOI classified as continuing operations decreased due to lower NOI at Watergate 600 ($0.1 million).

Other Income and Expenses

Property management expenses: These expenses include costs directly related to the third-party management of property operations and corporate management and other costs.

General and administrative expenses: Increase primarily due to higher share-based compensation expense ($0.4 million), higher office rent ($0.3 million) due to the commencement of the corporate office lease during the third quarter of 2021, higher accounting fees ($0.2 million), higher corporate payroll expense ($0.2 million) and higher recruitment fees ($0.1 million).

Transformation costs: During the 2022 Quarter, we incurred $2.2 million of costs related to the strategic transformation, including the allocation of internal costs, consulting, advisory and termination benefits.

Depreciation and amortization: Increase primarily due to the acquisitions of Eagles Landing ($2.8 million), Carlyle of Sandy Springs ($1.2 million) and The Oxford ($0.6 million) and higher depreciation and amortization at same-store residential properties ($0.5 million) and at Watergate 600 ($0.1 million).
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Interest Expense: Interest expense by debt type for the three months ended March 31, 2022 and 2021 was as follows (in thousands):
Three Months Ended March 31,
Debt Type20222021$ Change% Change
Notes payable$5,149 $9,486 $(4,337)(45.7)%
Line of credit694 845 (151)(17.9)%
Capitalized interest(193)(208)15