What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-10-30 compared with 2020-07-29 · 129 added, 110 removed, 399 unchanged (37% of the section changed)

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1 to the Annual Report on Form 10-K filed on March 6, 2020.

We refer to the three months ended June 30, 2020 and June 30, 2019 as the “2020 Quarter” and the “2019 Quarter,” respectively, and the six months ended June 30, 2020 and June 30, 2019 as the “2020 Period” and the “2019 Period”, respectively.

We refer to the three months ended September 30, 2020 and September 30, 2019 as the “2020 Quarter” and the “2019 Quarter,” respectively, and the nine months ended September 30, 2020 and September 30, 2019 as the “2020 Period” and the “2019 Period”, respectively.

Forward-Looking Statements

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1 to the Annual Report on Form 10-K, filed on March 6, 2020, as well as the risks set forth below, as being heightened as a result of the ongoing and numerous adverse impacts of COVID-19.

Additional factors which may cause the actual results, performance, or achievements of WashREIT to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements include, but are not limited to the risks associated with the ownership of real estate in general and our real estate assets in particular;

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 the risks associated with the closing and funding of our recent notes offering, the ownership of real estate in general and our real estate assets in particular;

the economic health of the greater Washington metro region;

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We organize the MD&A as follows:

Discussion of our business outlook, operating results, investment activity, financing activity and capital requirements to provide context for the remainder of MD&A.

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.

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Our revenues are derived primarily from the ownership and operation of income producing properties in the greater Washington metro region.

As of June 30, 2020, we owned a diversified portfolio of 45 properties, totaling approximately 3.7 million square feet of commercial space and 6,861 multifamily units, and land held for development.

As of September 30, 2020 we owned a diversified portfolio of 45 properties, totaling approximately 3.7 million square feet of commercial space and 6,863 multifamily units, and land held for development.

These 45 properties consisted of 15 office properties, 8 retail centers and 22 multifamily properties.

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We are adhering to occupancy restrictions at our properties where required.

The effects of the COVID-19 pandemic had a significant impact on our operating results for the 2020 Quarter.

The effects of the COVID-19 pandemic had a significant impact on our operating results for the 2020 Period.

Beginning late in the first quarter of 2020 and continuing into the second quarter of 2020, many of our commercial tenants were closed or were

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Starting in April 2020, we began working with our commercial tenants on a case-by-case basis to the extent they demonstrated hardship as a result of the pandemic and financial ability to work through a satisfactory arrangement on a variety of relief options, generally involving negotiated deferral payment plans, early blend-and-extend renewals or abatement of rent.

As of July 22, 2020, we collected 97% and 72% of office and retail cash rent during the 2020 Quarter, respectively, excluding the impact of contractual rent deferral agreements.

By mid-June, most of our retail tenants had reopened.

The effects of COVID-19 on our commercial tenants have been reflected in an increase in credit losses of $0.6 million for the 2020 Quarter compared to the first quarter of 2020.

As of October 20, 2020, we collected 97% and 88% of office and retail cash rent for the 2020 Quarter, respectively, excluding the impact of contractual rent deferral agreements.

The effects of COVID-19 on our commercial tenants have been reflected in an increase in credit losses of $1.3 million for the 2020 Period compared to the 2019 Period.

At our multifamily properties we temporarily froze rents on full-year lease renewals, waived late fees and offered a payment deferral plan to residents who have been adversely financially impacted by COVID-19.

As of June 30, 2020, we had collected 99% of multifamily cash rent during the 2020 Quarter excluding rent that has been deferred.

As of July 22, 2020, we agreed to defer $1.2 million, $1.0 million, and $0.1 million of rent due from office, retail, and multifamily tenants, respectively.

The expected timing of the executed deferred rent paybacks is as follows:

______________________________

(1) Includes paybacks on deferred rent beginning July 1, 2020.

We had a decline in average occupancy of approximately 0.9% for the 2020 Quarter compared to both the first quarter of 2020 and second quarter of 2019, excluding the Trove which began lease-up in the first quarter of 2020.

As of October 20, 2020, we have collected 99% of multifamily cash rent during the 2020 Quarter excluding rent that has been deferred and have deferred $1.4 million, $1.0 million, and $0.1 million of rent due from office, retail, and multifamily tenants, net, respectively.

We had a decline in average occupancy of approximately 120 basis points for the 2020 Quarter compared to the 2019 Quarter, excluding Trove which began lease-up in the first quarter of 2020.

We continue to monitor and communicate with our commercial tenants to assess their needs and ability to pay rent.

The effects of the COVID-19 pandemic have also impacted our ability to lease up available commercial space as physical touring stopped during shelter in place orders and lease decisions have been slower for prospective tenants as they re-evaluate re-entry and space plans.

New gross leasing square footage for the 2020 Quarter declined by 38% and 99% for office and retail space, respectively, compared to the 2019 Quarter.

As of June 30, 2020, we had approximately 420,000 square feet of vacant commercial space and approximately 140,000 square feet of commercial lease expirations scheduled for the remainder of 2020.

For our multifamily properties, we expect the economic disruptions caused by the COVID-19 pandemic to limit our ability to increase rental rates for the foreseeable future.

New gross leasing square footage declined by 46% for office space and increased by 28% for retail space for the 2020 Quarter compared to the 2019 Quarter.

As of September 30, 2020, we had approximately 440,000 square feet of vacant commercial space and approximately 70,000 square feet of commercial lease expirations scheduled for the remainder of 2020.

For our multifamily properties, we expect the economic disruptions caused by the COVID-19 pandemic to limit our ability to increase rental rates until the economic disruption of the pandemic subsides.

To help mitigate the impact on our operating results of the COVID-19 pandemic, we have initiated various operational cost saving initiatives across our portfolio.

We expect the COVID-19 outbreak will continue to affect our financial condition and results of operations going forward, including but not limited to, real estate rental revenues, credit losses and leasing activity.

Given our concentration in a single region, the Washington metro region, our entire portfolio could be impacted for the foreseeable future by quarantines, "shelter-in-place" rules and various other restrictions imposed or re-imposed in response to a surge in COVID-19 cases.

Due to the uncertainty of the future impacts of the COVID-19 pandemic, the extent of the financial impact cannot be reasonably estimated at this time.

Given our sole concentration in the Washington metro region, our entire portfolio could be impacted for the foreseeable future by quarantines, "shelter-in-place" rules and various other restrictions imposed or re-imposed in response to a surge in COVID-19 cases.

Due to the uncertainty of the future impacts of the COVID-19 pandemic, including the unknown effects of the upcoming flu season, the extent of the financial impact cannot be reasonably estimated at this time.

For more information, see Part II - Item 1A.

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Operating Results

Net (loss) income attributable to the controlling interests, NOI and NAREIT FFO for the three months ended June 30, 2020 and 2019 were as follows (in thousands):

Three Months Ended June 30,

Net (loss) income attributable to the controlling interests, NOI and NAREIT FFO for the three months ended September 30, 2020 and 2019 were as follows (in thousands):

Three Months Ended September 30,

2020 2019 $ Change % Change

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(2) See page 43 of the MD&A for a reconciliation of NAREIT FFO to net income.

The decrease in net income attributable to the controlling interests is primarily due to lower income from discontinued operations ($7.2 million), higher loss on sale of real estate ($6.5 million), lower NOI ($2.7 million) and loss on extinguishment of debt ($0.2 million), partially offset by lower interest expense ($6.5 million), lower depreciation and amortization ($3.4 million) and lower general and administrative expenses ($0.2 million) in the 2020 Quarter.

The lower NOI is primarily due to the sales of 1776 G Street ($2.2 million) and Quantico Corporate Center ($0.9 million) during 2019 and John Marshall II ($0.9 million) during the 2020 Quarter and lower NOI from same-store properties ($1.8 million) partially offset by the acquisitions of seven suburban Class B apartment communities in northern Virginia and Montgomery County, Maryland (“Assembly Portfolio”), and Cascade at Landmark ($3.2 million) during 2019.

The decrease in net income attributable to the controlling interests is primarily due to a gain on sale of real estate from discontinued operations ($339.0 million) in the 2019 Quarter and lower NOI ($5.0 million) and lower income from discontinued operations ($2.9 million) in the 2020 Quarter, partially offset by lower interest expense ($5.5 million) and

depreciation and amortization ($6.9 million) in the 2020 Quarter and a loss on extinguishment of debt from discontinued operations ($0.8 million) in the 2019 Quarter.

The lower NOI is primarily due to the sales of 1776 G Street ($2.3 million) during 2019 and John Marshall II ($1.1 million) during the second quarter of 2020 and lower NOI from same-store properties ($1.9 million), partially offset by the acquisitions of seven suburban Class B apartment communities in northern Virginia and Montgomery County, Maryland (“Assembly Portfolio”) and Cascade at Landmark ($0.3 million) during 2019.

The lower same-store NOI is explained in further detail beginning on page 28 (Results of Operations - 2020 Quarter Compared to 2019 Quarter).

Same-store ending occupancy decreased to 90.0% as of June 30, 2020 from 92.2% as of June 30, 2019, due to lower occupancy across the portfolio.

The lower NAREIT FFO is primarily attributable to lower income from discontinued operations net of depreciation and amortization ($9.5 million) and lower NOI ($2.7 million), partially offset by lower interest expense ($6.5 million).

Same-store ending occupancy decreased to 90.3% as of September 30, 2020 from 91.9% as of September 30, 2019, due to lower occupancy across the portfolio resulting from the COVID-19 pandemic.

The lower NAREIT FFO is primarily due to to lower income from discontinued operations net of depreciation and amortization ($3.0 million) and lower NOI ($5.0 million), partially offset by lower interest expense ($5.5 million) and loss on extinguishment of debt from discontinued operations ($0.8 million) in the 2019 quarter.

Investment and Financing Activity

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As a result of this transaction, we recognized a loss on sale of real estate of $6.9 million.

• The prepayment of the $250.0 million of 4.95% Senior Notes without penalty using borrowings from our Revolving Credit Facility.

• The prepayment of all $250.0 million of our 4.95% Senior Notes without penalty using borrowings from our Revolving Credit Facility.

• The execution of the one-year, $150.0 million 2020 Term Loan, maturing on May 5, 2021 with a one-year extension option.

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We used the proceeds to repay borrowings under our Revolving Credit Facility.

As of June 30, 2020, the interest rate on the $700.0 million unsecured revolving credit facility (“Revolving Credit Facility”) was one month LIBOR plus 1.00% and the facility fee was 0.20%.

As of July 27, 2020, our Revolving Credit Facility has a borrowing capacity of $496.0 million.

• The entry into a note purchase agreement to issue $350.0 million aggregate principal amount of 3.44% senior unsecured 10-year notes payable (the “Green Bonds”).

The closing and funding of the Green Bonds is expected to occur no later than December 29, 2020, with the ability for such closing and funding to occur earlier upon our election, in each case, subject to the satisfaction of standard closing conditions.

We intend to use the proceeds of the sale of the Green Bonds to finance or refinance recently completed and future green building and energy efficiency, sustainable water and wastewater management and renewable energy projects (“Eligible Green Projects”) and, pending allocation to such Eligible Green Projects, such net proceeds may be used to repay borrowings outstanding on the Revolving Credit Facility or term loans and may be held in cash and cash equivalents.

• In conjunction with the entry into the note purchase agreement to issue the Green Bonds, we terminated $200.0 million of four forward interest rate swap arrangements designated as cash flow hedges.

Subsequent to the 2020 Quarter, we paid the $20.4 million liability associated with the termination of the forward swaps.

As of September 30, 2020, the interest rate on the $700.0 million unsecured revolving credit facility (“Revolving Credit Facility”) was one month LIBOR plus 1.00% and the facility fee was 0.20%.

As of October 28, 2020, our Revolving Credit Facility has a borrowing capacity of $450.0 million.

Capital Requirements

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Results of Operations

The discussion that follows is based on our consolidated results of operations for the 2020 Quarter and 2020 Period and 2019 Quarter and 2019 Period.

The discussion that follows is based on our consolidated results of operations for the 2020 Quarter and 2020 Period and the 2019 Quarter and 2019 Period.

The ability to compare one period to another is significantly affected by acquisitions completed and dispositions made during 2020 and 2019 (see note 3 to the consolidated financial statements).

Additionally, the COVID-19 pandemic adversely impacted our operating results for the 2020 Quarter, and we expect that the COVID-19 outbreak will continue to adversely affect our business, financial condition, results of operations and cash flows going forward, including but not limited to, real estate rental revenues, credit losses, and leasing activity, in ways that may vary widely depending on the duration and magnitude of the COVID-19 pandemic and ensuing economic turmoil, as well as numerous factors, many of which are outside of our control, as discussed under “Risk Factors.”

Additionally, the COVID-19

pandemic adversely impacted our operating results for the 2020 Quarter, and we expect that the COVID-19 outbreak will continue to adversely affect our business, financial condition, results of operations and cash flows going forward, including but not limited to, real estate rental revenues, credit losses, and leasing activity, in ways that may vary widely depending on the duration and magnitude of the COVID-19 pandemic and ensuing economic turmoil, as well as numerous other factors, many of which are outside of our control, as discussed under “Risk Factors.”

Net Operating Income

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2020 Quarter Compared to 2019 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 2020 Quarter compared to the 2019 Quarter.

The following table reconciles NOI to net (loss) income attributable to the controlling interests and provides the basis for our discussion of our consolidated results of operations and NOI in the 2020 Quarter compared to the 2019 Quarter.

All amounts are in thousands, except percentage amounts.

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NOI $ 37,738 $ 39,665 $ (1,927) (4.9) % $ 6,828 $ 6,536 $ (11) $ (11) $ — $ 3,377 $ 44,555 $ 49,567 $ (5,012) (10.1) %

Reconciliation to net income attributable to the controlling interests:

Reconciliation to net (loss) income attributable to the controlling interests:

Depreciation and amortization (30,470) (37,340) 6,870 (18.4) %

General and administrative expenses (6,330) (6,461) 131 (2.0) %

Loss on sale of real estate (7,539) (1,046) (6,493) 620.7 %

Interest expense (8,711) (14,198) 5,487 (38.6) %

Loss on extinguishment of debt (206) — (206)

Discontinued operations (4) :

Income from properties sold or held for sale — 2,942 (2,942) (100.0) %

Gain on sale of real estate — 339,024 (339,024) (100.0) %

Loss on extinguishment of debt — (764) 764 (100.0) %

Net (loss) income (956) 332,770 (333,726) (100.3) %

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(2) Development/redevelopment:

Multifamily - The Trove

Multifamily - Trove

(3) Sold (classified as continuing operations):

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Real estate rental revenue from same-store properties by segment was as follows (in thousands):

Three Months Ended June 30,

Three Months Ended September 30,

2020 2019 $ Change % Change

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• Multifamily :

Increase primarily due to higher rental revenue ($0.3 million) caused by higher rental rates, partially offset by waived fees ($0.1 million) and higher credit losses ($0.1 million) related to the COVID-19 pandemic.

Decrease primarily due to lower parking income ($0.9 million), lower termination fees ($0.8 million), lower rental revenue ($0.4 million), higher credit losses ($0.4 million) and lower recoveries ($0.3 million), partially offset by higher specialty leasing ($0.2 million).

Decrease primarily due to higher rent abatements ($0.2 million), lower rental revenue ($0.2 million), lower move-in charges ($0.1 million), waived fees ($0.1 million) and higher credit losses ($0.1 million) related to the COVID-19 pandemic.

These were partially offset by higher termination fees ($0.1 million) and higher recoveries ($0.1 million).

Decrease primarily due to lower parking income ($0.7 million), lower termination fees ($0.6 million), higher credit losses ($0.4 million) and lower recoveries ($0.2 million).

The lower parking income and higher credit losses were primarily due to the COVID-19 pandemic.

Real estate rental revenue from acquisitions increased due to the acquisitions of Assembly Portfolio ($4.2 million) during the 2019 Quarter and Cascade at Landmark ($1.6 million) during the third quarter of 2019.

Real estate rental revenue from held for sale and sold properties classified as continuing operations decreased due to the sale of 1776 G Street ($3.5 million) during the fourth quarter of 2019, Quantico Corporate Center ($1.4 million) during the second quarter of 2019 and John Marshall II ($1.5 million) during the 2020 Quarter.

Real estate rental revenue from acquisitions increased due to the acquisitions of Cascade at Landmark ($0.4 million) during the third quarter of 2019 and Assembly Portfolio ($0.2 million) during the second quarter of 2019.

Real estate rental revenue from held for sale and sold properties classified as continuing operations decreased due to the sale of 1776 G Street ($3.6 million) during the fourth quarter of 2019 and John Marshall II ($1.8 million) during the second quarter of 2020.

Ending occupancy for properties classified as continuing operations by segment for the 2020 Quarter and 2019 Quarter was as follows:

June 30, 2020 June 30, 2019 (Decrease) increase

September 30, 2020 September 30, 2019 (Decrease) increase

Segment Same-Store Non-Same-Store Total Same-Store Non-Same-Store Total Same-Store Non-Same-Store Total

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• Multifamily :

Decrease in same-store ending occupancy was primarily due to lower ending occupancy at The Ashby, 3801 Connecticut Avenue, The Maxwell and The Paramount, partially offset by higher ending occupancy at The Kenmore.

Decrease in same-store ending occupancy was primarily due to lower ending occupancy at 1220 19th Street, 515 King Street, 1775 Eye Street and Fairgate at Ballston, partially offset by higher ending occupancy at Watergate 600.

Decrease in same-store ending occupancy was primarily due to lower ending occupancy at The Kenmore, Riverside Apartments and The Wellington.

Decrease in same-store ending occupancy was primarily due to lower ending occupancy at Silverline Center, 1901 Pennsylvania Avenue, 1775 Eye Street and 2000 M Street, partially offset by higher ending occupancy at 1220 19th Street and Watergate 600.

During the 2020 Quarter, we executed new and renewal leases in our office segment as follows:

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Real estate expenses from same-store properties by segment were as follows (in thousands):

Three Months Ended June 30,

Three Months Ended September 30,

2020 2019 $ Change % Change

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• Multifamily :

Increase primarily due to higher real estate taxes ($0.1 million), partially offset by lower repairs and maintenance ($0.1 million) expenses.

Decrease primarily due to lower utilities ($0.7 million), lower contract maintenance ($0.5 million) and lower administrative ($0.4 million) expenses.

Increase primarily due to higher real estate tax ($0.1 million) and utilities ($0.1 million) expenses, partially offset by lower repairs and maintenance ($0.2 million) expenses.

Decrease primarily due to lower utilities ($0.4 million), lower contract maintenance ($0.3 million) and lower administrative ($0.2 million) expenses, partially offset by higher real estate taxes ($0.1 million).

Other Income and Expenses

Depreciation and Amortization :

Decrease primarily due to the amortization of intangible lease assets at the Assembly Portfolio ($2.8 million) in 2019 and the dispositions of John Marshall II ($0.8 million), 1776 G Street ($0.7 million) and Quantico Corporate Center ($0.2 million), and by lower depreciation and amortization at same-store properties ($0.3 million).

These decreases were

partially offset by the acquisition of Cascade at Landmark ($0.6 million) and placing into service a portion of The Trove development ($0.7 million).

Decrease primarily due to the amortization of intangible lease assets at the Assembly Portfolio ($5.7 million) and Cascade at Landmark ($0.8 million) in 2019 and the dispositions of John Marshall II ($0.8 million) in the second quarter of 2020 and 1776 G Street ($0.7 million) in the fourth quarter of 2019.

These decreases were partially offset by placing into

service a portion of Trove development ($0.9 million) and by higher depreciation and amortization at same-store properties ($0.2 million).

General and administrative expenses:

Decrease primarily due to lower short-term incentive compensation ($0.8 million), partially offset by the reversal of a tax liability related to a prior acquisition ($0.7 million) during the 2019 Quarter.

Loss on sale of real estate:

The loss during 2020 Quarter is due to the sale of John Marshall II.

The loss during 2019 Quarter is due to the sale of Quantico Corporate Center.

Decrease primarily due to lower short term incentive compensation ($0.5 million) in the 2020 Quarter and higher severance expenses ($0.3 million) in the 2019 Quarter, partially offset by higher legal fees ($0.4 million) and higher share based compensation ($0.2 million) during the 2020 Quarter.

Interest Expense :

Interest expense by debt type for the three months ended June 30, 2020 and 2019 was as follows (in thousands):

Three Months Ended June 30,

Interest expense by debt type for the three months ended September 30, 2020 and 2019 was as follows (in thousands):

Three Months Ended September 30,

Debt Type 2020 2019 $ Change % Change

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• Notes payable :

Decrease primarily due to prepayment of the $250.0 million of 4.95% Senior Notes in April 2020 and executing a six-month $450.0 million 2019 Term Loan in April 2019 which was repaid in the third quarter of 2019, partially offset by a new $150.0 million 2020 Term Loan executed in May 2020.

Decrease primarily due to prepayment of all $250.0 million of our 4.95% Senior Notes in April 2020 and executing a six-month $450.0 million 2019 Term Loan in April 2019 which was repaid in the third quarter of 2019, partially offset by a new $150.0 million 2020 Term Loan executed in May 2020.

• Mortgage notes payable:

Decrease due to repayments of the mortgage note secured by Olney Village Center in July 2019 and the mortgage note secured by Yale West Apartments in January 2020.

Decrease due to repayment of the mortgage note secured by Yale West Apartments in January 2020.

• Line of credit :

Decrease primarily due to weighted average interest rate of 1.5% during the 2020 Quarter, as compared to 3.5% during the 2019 Quarter.

The impact of the lower weighted average interest rate was partially offset by higher weighted average borrowings of $269.1 million in 2020 Quarter, as compared to $190.8 million during the 2019 Quarter.

Decrease primarily due to lower weighted average interest rate of 1.2% and lower weighted average borrowings of $202.2 million in 2020 Quarter, as compared to 3.2% and $203.1 million during the 2019 Quarter.

• Capitalized interest :

Decrease primarily due to placing into service assets at The Trove, the multifamily development adjacent to The Wellington.

Loss on extinguishment of debt:

We recognized a $0.2 million loss on extinguishment of debt during the 2020 Quarter related to the prepayment of the $250.0 million of 4.95% Senior Notes that were scheduled to mature in October 2020 .

Decrease primarily due to placing into service assets at Trove, the multifamily development adjacent to The Wellington.

Discontinued operations:

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Decrease primarily due to the sale of the properties classified as discontinued operations during the third quarter of 2019.

Gain on sale of real estate:

Decrease due to gains on the sales of the Shopping Center Portfolio ($333.0 million) and Frederick Crossing and Frederick County Square ($9.5 million), partially offset by a loss on the sale of Centre at Hagerstown ($3.5 million) in the 2019 Quarter.

Loss on Extinguishment of debt:

We recognized a $0.8 million loss on extinguishment of debt during the 2019 Quarter related to the prepayment of the mortgage note secured by Olney Village Center prior to that property’s disposition as part of the Shopping Center Portfolio.

2020 Period Compared to 2019 Period

The following tables reconcile NOI to net income attributable to the controlling interests and provide the basis for our discussion of our consolidated results of operations and NOI in the 2020 Period compared to the 2019 Period.

The following tables reconcile NOI to net (loss) income attributable to the controlling interests and provide the basis for our discussion of our consolidated results of operations and NOI in the 2020 Period compared to the 2019 Period.

All amounts are in thousands, except percentage amounts.

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NOI $ 117,267 $ 121,670 $ (4,403) (3.6) % $ 20,405 $ 9,942 $ (311) $ (11) $ 1,332 $ 11,943 $ 138,693 $ 143,544 $ (4,851) (3.4) %

Reconciliation to net income attributable to the controlling interests:

Reconciliation to net (loss) income attributable to the controlling interests:

Depreciation and amortization (89,789) (97,441) 7,652 (7.9) %

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Gain on extinguishment of debt 262 — 262 — %

Loss from continuing operations (4,643) (25,066) 20,423 (81.5) %

Discontinued operations (4) :

Income from properties sold or held for sale — 16,158 (16,158) (100.0) %

Net loss (3,687) (3,418) (269) 7.9 %

Gain on sale of real estate — 339,024 (339,024) (100.0) %

Loss on extinguishment of debt — (764) 764 — %

Net (loss) income (4,643) 329,352 (333,995) (101.4) %

Net income attributable to noncontrolling interests — — — — %

Net loss attributable to the controlling interests $ (3,687) $ (3,418) $ (269) 7.9 %

Net (loss) income attributable to the controlling interests $ (4,643) $ 329,352 $ (333,995) (101.4) %

(1) Acquisitions:

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(2) Development/redevelopment:

Multifamily – The Trove

Multifamily – Trove

(3) Sold (classified as continuing operations):

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Real estate rental revenue from same-store properties by segment was as follows (in thousands):

Six Months Ended June 30,

Nine Months Ended September 30,

2020 2019 $ Change % Change

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• Multifamily :

Increase primarily due to higher rental rates ($1.0 million) and parking income ($0.1 million), partially offset by higher waived fees ($0.1 million) and credit losses ($0.1 million) related to the COVID-19 pandemic.

Decrease primarily due to lower rental income ($1.2 million) due to lease expirations at 1220 19th Street, 1227 25th Street, 1775 Eye Street and Arlington Tower, partially offset by new leases at Watergate 600, lower lease termination fees ($1.2 million), lower parking income ($0.9 million), higher credit losses ($0.9 million) and lower recoveries ($0.8 million).

Increase primarily due to higher rental rates ($0.9 million), higher termination fees ($0.1 million), higher parking income ($0.1 million) and higher late fees ($0.1 million), partially offset by higher rent abatements ($0.3 million), waived fees ($0.2 million), lower move-in charges ($0.2 million) and higher credit losses ($0.2 million) related to the COVID-19 pandemic.

Decrease primarily due to lower lease termination fees ($1.8 million), lower parking income ($1.5 million), higher credit losses ($1.3 million), lower recoveries ($1.0 million) and lower rental income ($1.0 million).

The lower parking income and higher credit losses are primarily due to the COVID-19 pandemic.

These decreases were partially offset by higher specialty leasing ($0.4 million) and lower rent abatements ($0.2 million).

Real estate rental revenue from acquisitions increased due to the acquisitions of the Assembly Portfolio ($14.1 million) during the 2019 Quarter and Cascade at Landmark ($3.2 million) during the third quarter of 2019.

Real estate rental revenue from sold properties classified as continuing operations decreased due to the sale of 1776 G Street ($7.0 million) during the fourth quarter of 2019, Quantico Corporate Center ($2.8 million) during the second quarter of 2019 and John Marshall II ($1.6 million) during the 2020 Quarter.

These decreases were partially offset by higher specialty leasing ($0.4 million).

Real estate rental revenue from acquisitions increased due to the acquisitions of the Assembly Portfolio ($14.2 million) during the second quarter of 2019 and Cascade at Landmark ($3.6 million) during the 2019 Quarter.

Real estate rental revenue from sold properties classified as continuing operations decreased due to the sale of 1776 G Street ($10.5 million) during the fourth quarter of 2019, John Marshall II ($3.4 million) during the second quarter of 2020 and Quantico Corporate Center ($2.8 million) during the second quarter of 2019.

During the 2020 Period, we executed new and renewal leases in our office segment as follows:

(in thousands) Average Rental Rate

(per square foot) % Rental Rate Increase Leasing Costs (1) (per square foot)

(per square foot) % Rental Rate Increase Leasing Costs (1)

(per square foot)

Free Rent (weighted average months)

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Real estate expenses from same-store properties by segment were as follows (in thousands):

Six Months Ended June 30,

Nine Months Ended September 30,

2020 2019 $ Change % Change

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• Multifamily :

Decrease primarily due to lower utilities ($0.3 million), repairs and maintenance ($0.1 million) and contract maintenance ($0.1 million) expenses, partially offset by higher real estate tax ($0.2 million) and insurance ($0.1 million) expenses.

Decrease primarily due to lower repairs and maintenance ($0.3 million) and lower utilities ($0.2 million) expenses, partially offset by higher real estate tax expenses ($0.3 million).

Decrease primarily due to lower utilities ($1.3 million), contract maintenance ($0.8 million) and administrative ($0.6 million) expenses.

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Depreciation and Amortization :

Decrease primarily due to the dispositions of John Marshall II ($1.5 million), 1776 G Street ($1.4 million), Quantico Corporate Center ($0.8 million) and by lower depreciation and amortization at same-store properties ($1.2 million).

These decreases were partially offset by the acquisitions of Assembly Portfolio ($1.9 million) and Cascade at Landmark ($1.3 million) and placing into service a portion of The Trove development ($0.9 million) during the 2020 Period.

Decrease primarily due to the amortization of intangible lease assets at the Assembly Portfolio ($3.8 million) in 2019, dispositions of John Marshall II ($2.3 million), 1776 G Street ($2.1 million) and Quantico Corporate Center ($0.8 million) and lower depreciation and amortization at same-store properties ($1.0 million).

These decreases were partially offset by placing into service a portion of the Trove development ($1.9 million) during the 2020 Period and the acquisition of Cascade at Landmark ($0.5 million) in the 2019 Quarter.

General and administrative expenses :

Decrease primarily due to severance expenses ($0.7 million) and lower payroll ($0.5 million) related to a corporate restructuring in the 2019 Period, and due to lower short term incentive compensation ($0.8 million) and lower share-based compensation ($0.6 million) in the 2020 Period, partially offset by the reversal of a transfer tax liability related to a prior year acquisition ($0.7 million).

Decrease primarily due to lower severance expenses ($1.0 million) and lower payroll ($0.6 million) due to a corporate restructuring in the 2019 Period and lower short term incentive compensation ($1.2 million) in the 2020 Period, partially offset by the reversal of a transfer tax liability related to a prior year acquisition ($0.7 million) and higher legal fees ($0.3 million).

Real estate impairment:

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We recognized a gain on extinguishment of debt $0.5 million during the first quarter of 2020 related to the prepayment of the mortgage note secured by Yale West Apartments.

This was partially offset by a loss on extinguishment of debt of $0.2 million during the 2020 Quarter related to the prepayment of the $250.0 million of 4.95% Senior Notes that were scheduled to mature in October 2020.

This was partially offset by a loss on extinguishment of debt of $0.2 million during the second quarter of 2020 related to the prepayment of all $250.0 million of our 4.95% Senior Notes that were scheduled to mature in October 2020.

Interest Expense :

Interest expense by debt type for the six months ended June 30, 2020 and 2019 was as follows (in thousands):

Six Months Ended June 30,

Interest expense by debt type for the nine months ended September 30, 2020 and 2019 was as follows (in thousands):

Nine Months Ended September 30,

Debt Type 2020 2019 $ Change % Change

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• Notes payable :

Decrease primarily due to prepayment of the $250.0 million of 4.95% Senior Notes in April 2020 and the execution of a six-month $450.0 million 2019 Term Loan in April 2019 that was repaid in the third quarter of 2019, partially offset by the new $150.0 million 2020 Term Loan executed in May 2020.

Decrease primarily due to prepayment of all $250.0 million of our 4.95% Senior Notes in April 2020 and the execution of a six-month $450.0 million 2019 Term Loan in April 2019 that was repaid in the third quarter of 2019, partially offset by the new $150.0 million 2020 Term Loan executed in May 2020.

• Mortgage notes payable :

Decrease due to repayments of the mortgage note secured by Olney Village Center in July 2019 and the mortgage note secured by Yale West Apartments in January 2020.

Decrease due to repayment of the mortgage note secured by Yale West Apartments in January 2020.

• Line of credit :

Decrease primarily due to lower weighted average borrowings of $188.6 million and a lower weighted average interest rate of 1.8% during the 2020 Period, as compared to $200.5 million and 3.5%, respectively, during the 2019 Period.

Decrease primarily due to a lower weighted average interest rate of 1.6% and lower weighted average borrowings of $193.2 million during the 2020 Period, as compared to 3.4% and $201.4 million, respectively, during the 2019 Period.

• Capitalized interest :

Decrease primarily due to placing into service assets at The Trove, the multifamily development adjacent to The Wellington.

This decrease was partially offset by higher spending related to The Trove and the multifamily development adjacent to Riverside Apartments.

Decrease primarily due to placing into service assets at Trove, the multifamily development adjacent to The Wellington.

Discontinued operations:

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Decrease primarily due to the sale of the properties classified as discontinued operations during third quarter of 2019.

Gain on sale of real estate:

Loss on Extinguishment of debt:

Liquidity and Capital Resources

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However, we expect the COVID-19 pandemic to continue to adversely impact our future operating cash flows.

Such adverse impacts include the inability of some of our tenants to pay their rent on time or at all, longer lease-up periods for both anticipated and unanticipated vacancies and temporary rental rate freezes.

In April 2020, we prepaid without penalty our $250.0 million of 4.95% unsecured notes using borrowings on our Revolving Credit Facility.

Such adverse impacts include the inability of some of our tenants to pay their rent on time or at all, longer lease-up periods for both anticipated and unanticipated vacancies, temporary rental rate freezes and contractual rent deferral arrangements.

In April 2020, we prepaid without penalty all $250.0 million of our 4.95% unsecured notes using borrowings on our Revolving Credit Facility.

Following that prepayment, we have no remaining debt maturities in 2020 and $150 million of debt maturities in 2021.

In April 2020, we executed an amendment to John Marshall II purchase and sale agreement decreasing the contract sale price to $57.0 million and closed on the sale on April 21, 2020.

In April 2020, we executed an amendment to the John Marshall II purchase and sale agreement, decreasing the contract sale price to $57.0 million, and closed on the sale on April 21, 2020.

In May 2020, the Company closed on a one-year unsecured term loan, with a one-year extension option, in a principal amount of $150.0 million.

We used the proceeds to repay borrowings under our Revolving Credit Facility.

As of July 27, 2020, we had $204.0 million of borrowings outstanding on our Revolving Credit Facility, leaving $496.0 million of borrowing capacity.

As of October 28, 2020, we had $250.0 million of borrowings outstanding on our Revolving Credit Facility, leaving $450.0 million of borrowing capacity.

On September 29, 2020, we entered into a note purchase agreement to issue $350.0 million aggregate principal amount of 3.44% senior unsecured 10-year notes payable.

The closing and funding of the Green Bonds is expected to occur no later than December 29, 2020.

Following the closing and funding of the Green Bonds, and pending allocation to such Eligible Green Projects, we expect to repay $300 million of existing term loans maturing in 2021 and 2022 and to use the balance to pay down amounts due under the Revolving Credit Facility.

Following the closing and funding of the Green Bonds and repayment of the term loans, we will have no debt maturing until the fourth quarter of 2022.

Due to our remaining borrowing capacity on our Revolving Credit Facility and the fact that we do not have any debt maturities for the remainder of 2020, we believe we have adequate liquidity to meet any major capital needs and commitments for the remainder of 2020.

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In response to the COVID-19 pandemic, we have significantly reduced our estimated capital requirements as compared to the estimates we disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.

We have reduced 2020 assumed capital expenditures for the balance of the year by approximately $40 million, including by deferring non-essential building restorations, some tenant improvements and leasing costs for speculative leasing, and lower multifamily renovation capital expenditures, as well as decreasing our anticipated development spending as we no longer expect to break ground on the new Riverside development this year.

As of the end of the second quarter of 2020, our full-year 2020 capital requirements are currently expected to consist of the following:

We have reduced 2020 assumed capital expenditures by approximately $40 million by deferring non-essential building restorations, certain tenant improvements and leasing costs for speculative leasing, decreasing multifamily renovation capital expenditures, and lowering our anticipated development spending as we no longer expect to break ground on the new Riverside development this year.

As of the end of the 2020 Quarter, our full-year 2020 capital requirements are currently expected to consist of the following:

• Funding dividends and distributions to our shareholders;

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Thereafter (5)

50,000 — 50,000 7.4%

Scheduled principal payments $ 900,000 $ 186,000 $ 1,086,000 3.0%

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(4) Maturity date for credit facility of March 2023 assumes election of option for two additional 6-month periods.

(5) The Green Bonds are not included in this table as the closing and funding of the Green Bonds has not yet occurred.

It is expected to occur no later than December 29, 2020.

Following the closing and funding of the Green Bonds, and pending allocation to such Eligible Green Projects, WashREIT expects to repay $300 million of existing term loans maturing in 2021 and 2022 and to use the balance to pay down amounts due under the revolving credit facility and will have no debt maturing until the fourth quarter of 2022.

The weighted average maturity for our debt is 2.2 years.

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• ratio of unsecured indebtedness to the unencumbered pool value of properties satisfying certain criteria specified in, and valued per the terms of, the Credit Agreement of not more than 0.60 to 1.00 (subject to a higher level following material acquisitions).

Our unsecured notes contain covenants with which we must comply, including:

Our outstanding unsecured notes contain covenants with which we must comply, including:

• A maximum ratio of 65.0% of total indebtedness to total assets;

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In addition, our ability to draw on our Revolving Credit Facility or incur other unsecured debt in the future could be restricted by the debt covenants.

As of June 30, 2020, we were in compliance with the covenants related to our Revolving Credit Facility and unsecured notes.

As of September 30, 2020, we were in compliance with the covenants related to our Revolving Credit Facility and unsecured notes.

We expect to be able to continue to comply with these ratios and covenants for the remainder of 2020, but no assurance can be given that we will be able to maintain compliance with these ratios and other debt covenants, particularly if conditions worsen.

Common Equity

We have authorized for issuance 100.0 million common shares, of which 82.3 million shares were outstanding at June 30, 2020.

We have authorized for issuance 100.0 million common shares, of which 82.4 million shares were outstanding at September 30, 2020.

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.

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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 the first quarter of 2020, we issued 46,500 shares under this program at a weighted average price of $31.07 for net proceeds of $1.2 million.

We did not issue common shares under the Equity Distribution Agreements during the 2020 Quarter and 2019 Period.

We did not issue common shares under the Equity Distribution Agreements during the 2020 Quarter or in the second quarter of 2020.

During the 2019 Quarter and Period, we issued 0.1 million common shares at a weighted average price of $27.52 for net proceeds of $3.7 million.

We have a dividend reinvestment program, whereby shareholders may use their dividends and optional cash payments to purchase common shares.

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Our issuances and net proceeds on the dividend reinvestment program for the 2020 Quarter and 2019 Quarter and 2020 Period and 2019 Period were as follows (in thousands, except per share data):

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

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The ability to issue preferred equity provides WashREIT an additional financing tool that may be used to raise capital for future acquisitions or other business purposes.

As of June 30, 2020, no preferred shares were issued or outstanding.

As of September 30, 2020, no preferred shares were issued or outstanding.

Historical Cash Flows

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Consolidated cash flow information is summarized as follows (in thousands):

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2020 2019 $ %

Net cash provided by operating activities $ 84,224 $ 91,280 $ (7,056) (7.7) %

Net cash provided by (used in) investing activities 12,131 (467,214) 479,345 102.6 %

Net cash (used in) provided by financing activities (69,463) 406,437 (475,900) (117.1) %

Net cash provided by operating activities decreased primarily due to the sales of the Retail Portfolio, Quantico Corporate Center and 1776 G Street during the 2019 Period.

Net cash provided by investing activities increased primarily due to the acquisition of the Assembly Portfolio during the 2019 Quarter.

Net cash used in financing activities increased primarily due to the prepayment of the 2020 Senior Notes during the 2020 Quarter and higher proceeds from the 2019 Term Loan in the 2019 Quarter, partially offset by higher net borrowings on the Revolving Credit Facility in the 2020 Period.

Net cash used in investing activities (5,787) (3,826) (1,961) 51.3 %

Net cash used in financing activities (88,759) (80,585) (8,174) 10.1 %

Net cash provided by operating activities decreased primarily due to the sales of John Marshall II in the second quarter of 2020 and the Retail Portfolio, Quantico Corporate Center and 1776 G Street during the 2019 Period.

Net cash used in investing activities increased primarily due to higher expenditures on capital improvements to real estate during the 2020 Period.

Net cash used in financing activities increased primarily due to the prepayment of the $250.0 million of the 4.95% 10-year unsecured notes during the 2020 Period, partially offset by higher net borrowings on the Revolving Credit Facility and proceeds from the $150.0 million unsecured term loan in the 2020 Period.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements as of June 30, 2020 that are reasonably likely to have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

We have no off-balance sheet arrangements as of September 30, 2020 that are reasonably likely to have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Funds From Operations

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These other REITs may not define the term in accordance with the current NAREIT definition or may interpret the current NAREIT definition differently.

The following table provides the calculation of our NAREIT FFO and a reconciliation of NAREIT FFO to net income for the three and six months ended June 30, 2020 and 2019 (in thousands):

Three Months Ended June 30, Six Months Ended June 30,

The following table provides the calculation of our NAREIT FFO and a reconciliation of NAREIT FFO to net (loss) income for the three and nine months ended September 30, 2020 and 2019 (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

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Depreciation and amortization — 59 — 4,926

Gain on sale of depreciable real estate — (339,024) — (339,024)

NAREIT FFO $ 29,514 $ 31,145 $ 92,685 $ 102,115

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The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.

There were no changes made by management to the critical accounting policies in the three months ended June 30, 2020.

There were no changes made by management to the critical accounting policies in the three months ended September 30, 2020.

We discuss the most critical estimates in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 19, 2020, as amended by Amendment No.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis