What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2021-02-16 compared with 2020-02-19 · 245 added, 272 removed, 306 unchanged (63% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For the discussion and analysis of our 2018 financial condition and results of operations compared to 2019, refer to Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2019.

We provide 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.

2 unchanged sentences

Results of Operations.

Discussion of our financial results comparing 2019 to 2018 and comparing 2018 to 2017 .

Discussion of our financial results comparing 2020 to 2019.

• Liquidity and Capital Resources.

7 unchanged sentences

• Funds From Operations (“NAREIT FFO”) , calculated as set forth below under the caption “Funds from Operations.” NAREIT FFO is a non-GAAP supplemental measure to net income.

Ending occupancy , calculated as occupied square footage as a percentage of total square footage as of the last day of that period.

• Ending occupancy , calculated as occupied square footage or multifamily units as a percentage of total square footage or multifamily units, respectively, as of the last day of that period.

• Leased percentage , calculated as the percentage of apartments leased for our multifamily properties and percentage of available physical net rentable area leased for our commercial properties.

7 unchanged sentences

We categorize a redevelopment property as same-store when redevelopment activities have been complete for the majority of each year being compared.

On March 11, 2020 the World Health Organization declared COVID-19, a respiratory illness caused by the novel coronavirus, a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19.

The COVID-19 pandemic caused state and local governments within the Washington metro region to institute quarantines, shelter-in-place rules and restrictions on travel, the types of business that may continue to operate and/or the types of construction projects that may continue.

These actions resulted in modifications to our normal operations, including requiring our employees to work remotely with the exception of essential building personnel.

In June 2020, shelter-in-place orders began to phase out in the Washington metro region.

We have developed and implemented

robust plans for commercial tenants returning to their leased space to reduce the risk of exposure and further spread of the virus at our properties and continue to follow the mandates of public health officials and government agencies.

We continue to adhere 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 year ended December 31, 2020.

Beginning late in the first quarter of 2020 and continuing into the second quarter of 2020, many of our retail commercial tenants were closed or were operating at significantly reduced capacity as a result of restrictions on non-essential businesses.

The majority of our commercial office tenants have experienced limited disruption to their businesses due to social distancing and lockdown measures taken in response to the COVID-19 pandemic.

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 or early blend-and-extend renewals.

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

As of January 31, 2021, we collected 99% and 97% of office and retail cash rent during the fourth quarter of 2020, 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 $4.5 million during 2020 compared to 2019.

We have $1.0 million of deferred rent outstanding, net of repayments, from each of our office and retail segments.

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

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 January 31, 2021, we collected 99% of multifamily cash rent during the fourth quarter of 2020, excluding rent that has been deferred.

Deferred rent outstanding, net of repayments, from our multifamily tenants is less than $0.1 million.

The effects of COVID-19 on our multifamily tenants have been reflected in an increase in credit losses of $0.9 million during 2020 compared to 2019.

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.

We had a decline in average occupancy of approximately 150 basis points during the fourth quarter of 2020 compared to the fourth quarter of 2019, excluding Trove which began lease-up in the first quarter of 2020.

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 than in previous years as they re-evaluate re-entry and space plans.

New gross leasing square footage declined by 54% and 77% for office and retail space during 2020 compared 2019, respectively.

The decline in new gross leasing was due to several factors, including the effects of the COVID-19 pandemic, the execution of some large tenant leases in 2019 and the sale of several office and retail properties during 2019 and 2020.

As of December 31, 2020, we had approximately 430,000 square feet of vacant commercial space and approximately 276,000 square feet of commercial lease expirations scheduled for 2021.

For our multifamily properties, the economic disruptions caused by the COVID-19 pandemic have limited our ability to maintain or increase rental rates.

We expect this to continue 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, including any mutations thereof, 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 sole concentration in the Washington metro region, our entire existing 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.

For more information, see "Part I - Item 1A.

Risk Factors" included elsewhere in this Annual Report on Form 10-K.

New legislation was enacted during 2020 to provide relief to businesses in response to the COVID-19 pandemic.

We have evaluated and will continue to evaluate the relief options available or that become available in the future, such as the Coronavirus Aid, Relief, and Economic Securities Act (“CARES Act”), or other emergency relief initiatives and stimulus packages instituted by the federal government.

A number of the available relief options contain restrictions on future business activities, including ability to repurchase shares and pay dividends that require careful evaluation and consideration.

We will continue to assess these options and any subsequent legislation or other relief packages, including the accompanying restrictions on our business, as the pandemic continues to evolve.

The legislation enacted in 2020 did not have a material impact on our results of operations for the year ended December 31, 2020.

Operating Results

Net income attributable to the controlling interests, NOI and NAREIT FFO for the years ended December 31, 2019 and 2018 were as follows (in thousands):

Net (loss) income, NOI and NAREIT FFO for the years ended December 31, 2020 and 2019 were as follows (in thousands, except percentage amounts):

Year Ended December 31,

Net income attributable to the controlling interests

2020 2019 Change % Change

Net (loss) income

$ (15,680) $ 383,550 $ (399,230) (104.1) %

$ 181,209 $ 193,600 $ (12,391) (6.4) %

NAREIT FFO (2)

$ 119,359 $ 134,118 $ (14,759) (11.0) %

(1) See pages 34 and 38 of the MD&A for reconciliations of NOI to net income.

______________________________

(1) See page 32 of the MD&A for reconciliations of NOI to net income.

(2) See page 44 of the MD&A for reconciliations of NAREIT FFO to net income.

The increase in net income attributable to the controlling interests is primarily due to higher gains on sale of real estate ($396.5 million) and higher NOI ( $7.5 million ), partially offset by higher depreciation and amortization expense ( $24.4 million ), lower income from discontinued operations ( $8.3 million ), higher real estate impairment charges ( $6.5 million ), higher interest expense ( $3.2 million ), higher general and administrative expenses ($2.3 million), and higher lease origination expenses ($1.7 million).

The higher NOI is primarily due to income from the multifamily acquisitions ($16.4 million), partially offset by the sales of 2445 M Street ($5.3 million), Quantico Corporate Center ($1.7 million), 1776 G Street ($0.7 million) and Braddock Metro Center ($0.2 million), and lower NOI from Arlington Tower ($0.7 million) and same-store properties ( $0.3 million ).

The decrease in net income is primarily due to lower gains on sale of real estate ($414.0 million), lower income from discontinued operations ($16.2 million) and lower NOI ($12.4 million), partially offset by lower depreciation and amortization expense ($16.2 million), lower interest expense ($16.4 million), lower real estate impairment charges ($8.4 million) and lower general and administrative expenses ($2.1 million).

The lower NOI is primarily due to the sales of 1776 G Street ($8.5 million) and Quantico Corporate Center ($1.8 million) in 2019 and John Marshall II ($3.2 million), 1227 25th Street ($0.5 million) and Monument II ($0.4 million) in 2020, lower same-store NOI ($8.4 million) and a net operating loss from Trove ($0.3 million).

These were partially offset by income from the multifamily acquisitions ($10.8 million) in 2019.

The lower same-store NOI is explained in further detail beginning on page 34 (Results of Operations - 2020 Compared to 2019).

The decrease in NAREIT FFO primarily reflects lower income from discontinued operations, net of depreciation and amortization ($12.8 million), higher interest expense ( $3.2 million ) and higher general and administrative ($2.3 million) and lease origination ($1.7 million) expenses, partially offset by higher NOI ( $7.5 million ) and lower losses on extinguishment of debt ($0.4 million).

The decrease in NAREIT FFO primarily reflects lower income from discontinued operations, net of depreciation and amortization ($21.1 million) and lower NOI ($12.4 million), partially offset by lower interest expense ($16.4 million) and lower general and administrative expenses ($2.1 million).

Investment and Financing Activity

Significant investment and financing transactions during 2020 included the following:

The disposition of Quantico Corporate Center, an office property in Stafford, Virginia, consisting of two office buildings totaling 272,000 square feet for a contract sales price of $33.0 million.

The acquisition of the Assembly properties in Virginia and Maryland (collectively, the "Assembly Portfolio"), consisting of seven multifamily properties with a total of 2,113 units, for a contract purchase price of $461.2 million.

In connection with the acquisition of these properties, w e entered into a six-month, $450.0 million unsecured term loan facility (the “2019 Term Loan”).

We repaid this term loan during the third quarter of 2019 using proceeds from the sales of retail properties (see note 6 to the consolidated financial statements).

The acquisition of Cascade at Landmark, a 277-unit multifamily property in Alexandria, Virginia, for a contract purchase price of $69.8 million.

The disposition of five retail shopping centers and three retail power centers in three separate transactions.

We recognized an aggregate gain on sale of real estate of $339.0 million from these transactions.

Prior to closing on the disposition of the five retail shopping centers (the "Shopping Center Portfolio"), we prepaid the mortgage note secured by Olney Village Center, incurring a loss on extinguishment of debt of approximately $0.8 million.

The disposition of 1776 G Street, a 262,000 square foot office property in Washington, DC, for a contract sale price of $129.5 million.

We recognized a gain on sale of real estate of $61.0 million related to this transaction.

As of February 13, 2020 , our Revolving Credit Facility has a borrowing capacity of $573.0 million .

• The prepayment of the $45.6 million mortgage note secured by Yale West, which was scheduled to mature in 2052.

As a result of the transaction, we recognized a gain on extinguishment of debt of $0.5 million related to the write-off of an unamortized mortgage premium of $1.4 million, partially offset by a prepayment penalty of $0.9 million.

• The disposition of John Marshall II, a 223,000 square foot office property in Tysons, Virginia, for a contract sales price of $57.0 million.

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

• The prepayment of all $250.0 million of our 4.95% Senior Notes originally scheduled to mature in October 2020 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.

The 2020 Term Loan bears interest at LIBOR + 1.50%, which margin is subject to change based on our credit ratings, with a 0.50% floor for the LIBOR rate.

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

We subsequently prepaid the 2020 Term Loan on November 30, 2020.

• 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 full funding of the Green Bonds occurred on December 17, 2020.

The proceeds of the sale of the Green Bonds were and will be used 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”).

• The prepayment of the $150.0 million of borrowings outstanding on the 2015 Term Loan.

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

At the time of termination, the forward swaps had a liability fair value of $20.4 million, which is amortized as interest expense over the 10-year term of the Green Bonds.

• In conjunction with the prepayment of the 2015 Term Loan, we terminated interest rate swap agreements with notional amounts in the aggregate of $150.0 million.

As a result of the termination, the accumulated liability fair value of the interest rate swaps of $0.6 million was reclassified from Accumulated other comprehensive loss to Loss on interest rate

swaps on our consolidated income statements.

As of February 11, 2021, our $700.0 million Revolving Credit Facility has an incremental borrowing capacity of $658.0 million.

As of December 31, 2020, the interest rate on the facility was LIBOR plus 1.00% and LIBOR was 0.14% as of that date.

Capital Requirements

In January 2020, we prepaid the $45.6 million mortgage note payable secured by Yale West, recognizing a gain on extinguishment of debt of $0.5 million.

Following this prepayment, we have no mortgage notes.

Our $250.0 million of 4.95% 10-year unsecured notes are scheduled to mature in October 2020, but may be prepaid without penalty beginning in April 2020.

We do not have any debt maturities scheduled during 2021.

We expect to have additional capital requirements as set forth on page 37 (Liquidity and Capital Resources - Capital Requirements).

4 unchanged sentences

NOI, defined as real estate rental revenue less real estate expenses, is a non-GAAP measure.

NOI is calculated as net income, less non-real estate revenue and the results of discontinued operations (including the gain on sale, if any), plus interest expense, depreciation and amortization, general and administrative expenses, lease origination expenses, real estate impairment and gain or loss on extinguishment of debt.

NOI is calculated as net income, less non-real estate revenue and the results of discontinued operations (including the gain on sale, if any), plus interest expense, depreciation and amortization, lease origination expenses, general and administrative expenses, real estate impairment and gain or loss on extinguishment of debt.

We believe that NOI is useful as a performance measure because, when compared across periods, NOI reflects the impact on operations of trends in occupancy rates, rental rates and operating costs on an unleveraged basis, providing perspective not immediately apparent from net income.

NOI excludes certain components from net income in order to provide results more closely

related to a property’s results of operations.

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.

5 unchanged sentences

2020 Compared to 2019

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 2019 compared to 2018 .

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

All amounts are in thousands except percentage amounts.

Non-Same-Store

Acquisitions (1)

Same-Store Acquisitions (1)

Development/Redevelopment (2)

1 unchanged sentence

All Properties

Change 2020 2019 2020 2019 2020 2019 2020 2019 $

Real estate rental revenue $ 233,904 $ 245,441 $ (11,537) (4.7) % $ 45,757 $ 27,641 $ 1,394 $ 35 $ 13,063 $ 36,063 $ 294,118 $ 309,180 $ (15,062) (4.9) %

Real estate expenses

Reconciliation to net income attributable to the controlling interests:

87,013 90,130 (3,117) (3.5) % 18,564 11,242 1,735 76 5,597 14,132 112,909 115,580 (2,671) (2.3) %

NOI $ 146,891 $ 155,311 $ (8,420) (5.4) % $ 27,193 $ 16,399 $ (341) $ (41) $ 7,466 $ 21,931 $ 181,209 $ 193,600 $ (12,391) (6.4) %

Reconciliation to net income:

Depreciation and amortization (120,030) (136,253) 16,223 (11.9) %

General and administrative expenses (23,951) (26,068) 2,117 (8.1) %

Lease origination expenses

Real estate impairment — (8,374) 8,374 (100.0) %

Gain on sale of real estate

(Loss) gain on sale of real estate (15,009) 59,961 (74,970) (125.0) %

Interest expense (37,305) (53,734) 16,429 (30.6) %

Loss on interest rate derivatives (560) — (560) 100.0 %

Loss on extinguishment of debt (34) — (34) 100.0 %

3 unchanged sentences

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

Net loss attributable to noncontrolling interests

Net income attributable to the controlling interests

Net (loss) income $ (15,680) $ 383,550 $ (399,230) (104.1) %

______________________________

(1) Acquisitions:

2019 Multifamily – Assembly Portfolio and Cascade at Landmark

2018 Office – Arlington Tower

2019 Multifamily – Assembly Alexandria, Assembly Manassas, Assembly Dulles, Assembly Leesburg, Assembly Herndon, Assembly Germantown and Assembly Watkins Mill (collectively, the “Assembly Portfolio”) and Cascade at Landmark

(2) Development/redevelopment properties:

Multifamily development property – The Trove and land adjacent to Riverside Apartments

Multifamily development property – Trove and land adjacent to Riverside Apartments

(3) Sold (classified as continuing operations):

2020 Office – John Marshall II, Monument II and 1227 25th Street

2019 Office – Quantico Corporate Center and 1776 G Street

2018 Office – Braddock Metro Center and 2445 M Street

Held for sale (classified as continuing operations):

2019 Office – John Marshall II

(4) Discontinued operations:

4 unchanged sentences

Year Ended December 31,

2020 2019 $ Change % Change

$ 97,894 $ 98,455 $ (561) (0.6) %

Office 119,264 127,996 (8,732) (6.8) %

16,746 18,990 (2,244) (11.8) %

Total same-store real estate rental revenue $ 233,904 $ 245,441 $ (11,537) (4.7) %

• Multifamily :

Increase primarily due to higher rental rates ($2.5 million), lower rent abatements ($0.3 million), higher recoveries ($0.3 million) and higher parking income ($0.2 million).

Decrease primarily due to lower rental income ($2.6 million) due to lease expirations at Watergate 600 and 1220 19th Street and higher rent abatements ($1.1 million), partially offset by higher lease termination fees ($1.4 million).

Real estate rental revenue from acquisitions increased due to the acquisition of Assembly Portfolio ($24.9 million) and Cascade at Landmark ($2.7 million) in 2019 and Arlington Tower ($0.2 million) in 2018.

Real estate rental revenue from held for sale or sold properties classified as continuing operations decreased due to the sale of 2445 M Street ($8.7 million) during the second quarter of 2018, Quantico Corporate Center ($2.7 million) during the second quarter of 2019, 1776 G Street ($0.7 million) during fourth quarter of 2019 and Braddock Metro Center ($0.4 million) during the first quarter of 2018.

These were partially offset by higher real estate rental revenue at John Marshall II ($0.1 million).

Ending occupancy is calculated as occupied square footage indicated as a percentage of total square footage as of the last day of that period.

Decrease primarily due to higher rent abatements ($0.5 million), lower move-in charges ($0.5 million) and higher credit losses ($0.4 million) related to the COVID-19 pandemic.

These were partially offset by higher termination

fees ($0.3 million), rental rates ($0.2 million) and parking income ($0.1 million).

Decrease primarily due to lower lease termination fees ($3.7 million), lower parking income ($2.2 million), higher credit losses ($2.1 million) and lower reimbursements ($0.8 million).

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

Real estate rental revenue from acquisitions increased due to the completion of a full year of operations at the Assembly Portfolio ($14.6 million) and Cascade at Landmark ($3.6 million) which were acquired in 2019.

Real estate rental revenue from sold properties classified as continuing operations decreased due to the sale of 1776 G Street ($13.7 million) during the fourth quarter of 2019, John Marshall II ($5.3 million) during the second quarter of 2020, Quantico Corporate Center ($2.8 million) during the second quarter of 2019, and 1227 25th Street ($0.6 million) and Monument II ($0.6 million) during the fourth quarter of 2020.

Ending occupancy for properties classified as continuing operations for the two years ended December 31, 2020 was as follows:

December 31, 2019

December 31, 2018

Increase (decrease)

Non-Same-Store

December 31, 2020 December 31, 2019 Decrease

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

Multifamily (1)

Increase in same-store ending occupancy was primarily due to higher ending occupancy at The Paramount, 3801 Connecticut Avenue and Roosevelt Towers, partially offset by lower ending occupancy at The Wellington.

Decrease in same-store ending occupancy was primarily due to lower ending occupancy at 1220 19th Street, Watergate 600 and 1227 25th Street.

During 2019 , we executed new and renewed leases in our office segment as follows:

(in thousands)

Average Rental Rate

(per square foot)

% Rental Rate Increase

Leasing Costs (1)

93.7 % 86.7 % 90.9 % 95.0 % 94.7 % 94.9 % (1.3) % (8.0) % (4.0) %

Office 85.7 % N/A 85.7 % 88.4 % 94.9 % 89.6 % (2.7) % N/A (3.9) %

Other 86.5 % N/A 86.5 % 90.9 % N/A 90.9 % (4.4) % N/A (4.4) %

90.1 % 86.7 % 89.7 % 92.0 % 94.7 % 92.8 % (1.9) % (8.0) % (3.1) %

(1) Ending occupancy includes the addition of the total rentable units at Trove, which began to lease-up in the first quarter of 2020.

Excluding Trove, total multifamily ending occupancy was 94.3% and total portfolio ending occupancy was 91.4% as of December 31, 2020.

• Multifamily :

Decrease in same-store ending occupancy was primarily due to lower ending occupancy at 3801 Connecticut Avenue, The Kenmore, Yale West and The Maxwell, partially offset by higher ending occupancy at Bethesda Hill Apartments.

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

During the year ended December 31, 2020, we executed new and renewed leases in our office segment as follows:

(in thousands) Average Rental Rate

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

(per square foot)

Free Rent (weighted average months)

Office 214 $ 47.37 14.4 % $ 32.34 4.4

______________________________

2 unchanged sentences

Real estate expenses as a percentage of revenue for the two years ended December 31, 2020 were 38.4% and 37.4%, respectively.

Real estate expenses from same-store properties for the two years ended December 31, 2019 were as follows (in thousands):

Real estate expenses from same-store properties for the two years ended December 31, 2020 were as follows (in thousands, except percentage amounts):

Year Ended December 31,

2020 2019 $ Change % Change

$ 37,816 $ 37,817 $ (1) — %

Office 43,855 46,791 (2,936) (6.3) %

5,342 5,522 (180) (3.3) %

Total same-store real estate expenses $ 87,013 $ 90,130 $ (3,117) (3.5) %

• Multifamily :

Increase primarily due to higher contract maintenance ($0.3 million), administrative ($0.1 million), repairs and maintenance ($0.1 million) and utility ($0.1 million) expenses.

Increase primarily due to higher real estate tax ($0.8 million) and administrative ($0.7 million) expenses, partially offset by lower utilities expenses ($0.2 million).

Higher real estate tax ($0.5 million) and insurance ($0.2 million) expenses were offset by lower utilities ($0.3 million), repairs and maintenance ($0.2 million) and administrative ($0.2 million) expenses.

Decrease primarily due to lower utilities ($1.7 million), contract maintenance ($1.0 million) and administrative ($0.8 million) expenses, partially offset by higher real estate tax ($0.3 million) and insurance ($0.2 million) expenses.

Other Income and Expenses

Depreciation and Amortization :

Increase primarily due to acquisitions of the Assembly Portfolio ($23.7 million) and Cascade at Landmark ($2.9 million), higher depreciation and amortization at same-store properties ($1.7 million) and placing into service a portion of the parking garage at The Trove development ($0.1 million) during 2019.

These increases were partially offset by lower depreciation and amortization at Arlington Tower ($1.6 million) and John Marshall II ($0.2 million) and the dispositions of Quantico Corporate Center ($1.7 million), 2445 M Street ($0.4 million) and 1776 G Street ($0.1 million).

General and ad ministrative expenses:

Increase primarily due to higher incentive compensation expense ($1.8 million) and professional fees ($0.6 million).

Lease Origination Expenses:

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASU 2016-02”) , which amended existing lease accounting standards for both lessees and lessors (see note 2 to the consolidated financial statements).

We adopted the new standard for the fiscal year beginning on January 1, 2019.

Under ASU 2016-02, the FASB determined that only incremental costs or initial direct costs of executing a lease contract qualify for capitalization, while prior accounting standards allowed for the capitalization of indirect leasing costs.

We incurred $1.7 million of indirect leasing expenses during 2019.

Decrease primarily due to the higher amortization of intangible lease assets at the Assembly Portfolio ($6.6 million) and Cascade at Landmark ($0.3 million) in 2019, lower depreciation and amortization at same-store properties ($5.7 million) and the dispositions of 1776 G Street ($2.7 million) and Quantico Corporate Center ($0.8 million) in 2019 and John Marshall II ($2.8 million) and Monument II ($0.4 million) in 2020.

These decreases were partially offset by placing the Trove development ($3.1 million) into service during 2020.

General and administrative expenses :

Decrease primarily due to lower short term incentive compensation ($2.0 million) and severance ($1.1 million) expenses in 2020, partially offset by the reversal of a transfer tax liability in 2019 ($0.7 million).

Real estate impairment:

The real estate impairment charge of $8.4 million during the first quarter of 2019 reduced the carrying value of Quantico Corporate Center to its estimated fair value (see note 3 to the consolidated financial statements).

During the first quarter of 2018, 2445 M Street met the criteria for classification as held for sale.

We consequently recorded an impairment charge of $1.9 million during the first quarter of 2018 in order to reduce the carrying value of the property to its estimated fair value, less estimated selling costs.

Gain on sale of real estate:

Loss on sale of real estate:

The loss during 2020 is primarily due to losses on the sales of John Marshall II ($6.9 million) and Monument II ($8.6 million), partially offset by a gain on the sale of 1227 25th Street ($1.1 million).

The gain during 2019 is due to the sale of 1776 G Street ($61.0 million), partially offset by a loss on the sale of Quantico Corporate Center ($1.0 million).

The gain during 2018 is due to the sale of 2445 M Street.

Loss on extinguishment of debt:

During the fourth quarter of 2020, we recognized a loss on extinguishment of debt of $0.3 million related to the prepayments of the $150.0 million 2020 Term Loan originally scheduled to mature in May 2021 and the $150.0 million 2015 Term Loan originally scheduled to mature in March 2021.

During the second quarter of 2020, we recognized a loss of $0.2 million related to the prepayment of all $250.0 million of our 4.95% Senior Notes originally scheduled to mature in October 2020.

These losses were partially offset by a gain of $0.5 million on the prepayment of the mortgage note secured by Yale West Apartments during the first quarter of 2020.

Loss on interest rate derivatives :

In December 2020, in connection with the prepayment of our 2015 Term Loan, we terminated interest rate swap agreements with notional amounts in the aggregate of $150.0 million.

As a result of the termination, the accumulated fair value of the interest rate swaps of $0.6 million was reclassified from Accumulated other comprehensive loss to Loss on interest rate derivatives on our consolidated income statements.

Interest Expense :

1 unchanged sentence

Year Ended December 31,

Debt Type 2020 2019 $ Change % Change

Notes payable $ 33,569 $ 45,595 $ (12,026) (26.4) %

2 unchanged sentences

Capitalized interest (2,219) (3,214) 995 31.0 %

Total $ 37,305 $ 53,734 $ (16,429) (30.6) %

• Notes payable :

Increase primarily due to executing the 2019 Term Loan in April 2019 and a $250 million term loan in March 2018, which increased and replaced a $150 million term loan.

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 to fund the Assembly Portfolio acquisition that was repaid in the third quarter of 2019, partially offset by the new $150.0 million 2020 Term Loan executed in May 2020 and prepaid in November 2020, and the issuance of the $350.0 million Green Bonds in December 2020.

• Mortgage notes payable :

Decrease primarily due to the repayment of the mortgage notes secured by Kenmore Apartments in 2018.

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 $196.1 million during 2019, as compared to $230.9 million during 2018, partially offset by a higher weighted average interest rate of 3.34% during 2019, as compared to 2.96% during 2018.

Decrease primarily due to a lower weighted average interest rate of 1.5% during 2020, as compared to 3.3% during 2019, partially offset by higher weighted average borrowings of $204.8 million during 2020, as compared to $196.1 million during 2019.

• Capitalized interest :

Increase primarily due to higher spending related to The Trove, the multifamily development adjacent to The Wellington, and the commencement in 2018 of interest capitalization on spending related to the multifamily development adjacent to Riverside Apartments.

Loss on extinguishment of debt:

We recognized a $1.2 million non-cash loss on extinguishment of debt during 2018 related to the write-off of unamortized loan origination costs associated with the refinancing of an existing $150 million seven-year unsecured term loan with a $250 million five-year unsecured term loan and the execution of an amended, extended and expanded $700 million unsecured revolving credit facility (see note 6 to the consolidated financial statements).

Decrease primarily due to placing into service assets at Trove.

Discontinued operations:

Income from properties sold or held for sale:

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

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

Gain on sale of real estate:

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

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) during 2019.

Loss on extinguishment of debt:

We recognized a $0.8 million loss on extinguishment of debt during 2019 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.

2018 Compared to 2017

All amounts are in thousands except percentage amounts.

Non-Same-Store

Acquisitions (1)

Development/Redevelopment (2)

Held for Sale or Sold (3)

All Properties

Real estate rental revenue

Real estate expenses

Reconciliation to net income attributable to the controlling interests:

Depreciation and amortization

General and administrative expenses

Real estate impairment

Gain on sale of real estate

Interest expense

Loss on extinguishment of debt

Income tax benefit (expense)

Discontinued operations (4) :

Income from properties sold or held for sale

Net loss attributable to noncontrolling interests

Net income attributable to the controlling interests

______________________________

Acquisitions:

2018 Office – Arlington Tower

2017 Office – Watergate 600

Development/redevelopment properties:

Multifamily development property – land adjacent to Riverside Apartments

2018 Office – Braddock Metro Center and 2445 M Street

2017 Multifamily – Walker House Apartments

Discontinued operations:

2019 Retail – Wheaton Park, Bradlee Shopping Center, Shoppes of Foxchase, Gateway Overlook, Olney Village Center, Frederick County Square, Centre at Hagerstown and Frederick Crossing

Real Estate Rental Revenue

Real estate rental revenue from same-store properties for the two years ended December 31, 2018 was as follows (in thousands, except percentage amounts):

Year Ended December 31,

Total same-store real estate rental revenue

Multifamily :

Increase primarily due to higher rental income ($2.3 million), tenant fees ($0.1 million) and parking income ($0.1 million).

Increase primarily due to higher rental income ($3.6 million) and reimbursements ($0.7 million).

Real estate rental revenue from acquisitions increased due to the acquisition of Arlington Tower ($22.4 million) in the first quarter of 2018 and Watergate 600 ($4.3 million) in the second quarter of 2017.

Real estate rental revenue from held for sale or sold properties decreased due to the sales of Braddock Metro Center ($10.5 million) during the first quarter of 2018, 2445 M Street ($9.7 million) during the second quarter of 2018 and Walker House Apartments ($2.8 million) during the fourth quarter of 2017.

Ending occupancy represents occupied square footage indicated as a percentage of total square footage as of the last day of that period.

Ending occupancy for properties classified as continuing operations for the two years ended December 31, 2018 was as follows:

December 31, 2018

December 31, 2017

Increase (decrease)

Non-Same-Store

Multifamily :

The increase in same-store ending occupancy was primarily due to higher ending occupancy at The Ashby at McLean, Bennett Park and Clayborne Apartments, partially offset by lower ending occupancy at Bethesda Hill Apartments.

The decrease in same-store ending occupancy was primarily due to lower ending occupancy at 2000 M Street and 1600 Wilson Boulevard, partially offset by higher ending occupancy at Army Navy Building.

During 2018 , we executed new and renewed leases in our office segment as follows:

(in thousands)

Average Rental Rate

(per square foot)

% Rental Rate Increase

Leasing Costs (1)

(per square foot)

Free Rent (weighted average months)

______________________________

Consist of tenant improvements and leasing commissions.

Real Estate Expenses

Real estate expenses as a percentage of revenue for the two years ended December 31, 2018 were 36.2% and 37.6% , respectively.

Real estate expenses from same-store properties for the two years ended December 31, 2018 were as follows (in thousands):

Year Ended December 31,

Total same-store real estate expenses

Multifamily :

Increase primarily due to higher administrative ($0.7 million), custodial ($0.1 million) and utilities ($0.1 million) expenses.

Increase primarily due to higher bad debt ($0.3 million), repairs and maintenance ($0.3 million), utilities ($0.2 million) and custodial ($0.2 million) expenses.

Other Expenses

Depreciation and Amortization :

Increase primarily due to the acquisition of Arlington Tower ($13.9 million) and Watergate 600 ($4.3 million) and due to higher depreciation and amortization at same-store properties ($2.1 million), partially offset by the dispositions of 2445 M Street ($5.2 million), Braddock Metro Center ($4.4 million), and Walker House Apartments ($0.3 million).

General and Administrative Expenses:

Decrease primarily due to lower expenses related to an information systems upgrade performed in 2017.

Real estate impairment:

During the first quarter of 2018, 2445 M Street met the criteria for classification as held for sale.

We consequently recorded an impairment charge of $1.9 million during that quarter to reduce the carrying value of the property to its estimated fair value, less estimated selling costs.

The real estate impairment losses of $24.1 million and $9.1 million in 2017 reduced the carrying values of 2445 M Street and Braddock Metro Center, respectively (see note 3 to the consolidated financial statements).

Gain on sale of real estate:

Gain during 2018 is due to completion of the sale of 2445 M Street.

An amendment to the purchase and sale agreement executed during the second quarter of 2018 increased the contract sales price to $101.6 million.

The gain during 2017 is due to the sale of Walker House Apartments for a contract sale price of $32.2 million.

Interest Expense :

Interest expense by debt type for the two years ended December 31, 2018 was as follows (in thousands, except percentage amounts):

Year Ended December 31,

Notes payable

Mortgage notes payable

Line of credit

Capitalized interest

Notes payable :

Increase primarily due to executing the $250 million term loan in March 2018, which increased and replaced the $150 million term loan.

Mortgage notes payable :

Decrease primarily due to the repayment of the mortgage notes secured by Kenmore Apartments in 2018 and Army Navy Building in 2017.

Line of credit :

Increase primarily due to weighted average borrowings of $230.9 million and a weighted average interest rate of 2.96% during 2018, as compared to $179.6 million and 2.15% , respectively, during 2017.

Capitalized interest :

Increase primarily due to higher spending related to the Trove, the multifamily development adjacent to The Wellington, and the commencement in 2018 of interest capitalization on spending related to the multifamily development adjacent to Riverside Apartments.

Loss on extinguishment of debt:

Discontinued operations:

Income from properties sold or held for sale:

Increase primarily due to lower depreciation and amortization and lower interest expense at the properties classified as discontinued operations (see note 3 to the consolidated financial statements).

Liquidity and Capital Resources

As the local and global economies have weakened as a result of COVID-19, ensuring adequate liquidity is critical.

We believe we have access to adequate resources to meet the needs of our existing operations, mandatory capital expenditures, dividend payments and working capital, to the extent not funded by cash provided by operating activities.

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, temporary rental rate freezes and contractual rent deferral arrangements.

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

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.

The term loan was subsequently repaid in full on November 30, 2020.

In September 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 full funding of the Green Bonds occurred on December 17, 2020.

In the fourth quarter of 2020, we repaid $300.0 million of existing term loans (including the $150.0 million term loan incurred in May 2020) maturing in 2021 and 2022.

We have no debt maturing until the fourth quarter of 2022.

Capital Structure

1 unchanged sentence

We expect that our capital structure will allow us to obtain additional capital from diverse sources that could include additional equity offerings of common shares, public and private secured and unsecured debt financings, asset dispositions, operating units and joint venture equity.

Our ability to raise funds through the incurrence of debt and issuance of equity securities is dependent on, among other things, general economic conditions, general market conditions for REITs, our operating performance, our debt rating and the current trading price of our common shares.

Our ability to raise funds through the incurrence of debt and issuance of equity securities is dependent on, among other things, general economic conditions including the impacts of the COVID-19 pandemic, general market conditions for REITs, our operating performance, our debt rating, the current trading price of our common shares and other capital market conditions.

We analyze which source of capital we believe to be most advantageous to us at any particular point in time.

8 unchanged sentences

• Net proceeds from the sale of assets.

During 2020 , we expect that we will have significant capital requirements, including the following items:

Funding dividends and distributions to our shareholders;

In response to the COVID-19 pandemic, we significantly reduced our 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 reduced our expected 2020 capital expenditures by approximately $40 million by deferring non-essential building restorations, not incurring certain tenant improvements and leasing costs for speculative leasing, decreasing multifamily renovation capital expenditures, and lowering our anticipated development spending as we did not break ground on the new Riverside development this year.

During 2021, we expect that we will have significant capital requirements, which will continue to be impacted by the COVID-19 pandemic, including the following items:

• Funding dividends and distributions to our shareholders (which we intend to continue to pay at or about current levels);

• Approximately $45.0 - $50.0 million to invest in our existing portfolio of operating assets, including approximately $10.0 - $15.0 million to fund tenant-related capital requirements and leasing commissions;

3 unchanged sentences

We currently believe that we will generate sufficient cash flow from operations and potential property sales and have access to the capital resources necessary to fund our requirements in 2021.

However, as a result of general market conditions in the greater Washington metro region, economic conditions affecting the ability to attract and retain tenants, rising interest rates or declines in our share price, unfavorable changes in the supply of competing properties, or our properties not performing as expected, we may not generate sufficient cash flow from operations and property sales or otherwise have access to capital on favorable terms, or at all.

However, as a result of the uncertainty of the future impacts of the COVID-19 pandemic, general market conditions in the greater Washington metro region, economic conditions affecting the ability to attract and retain tenants, declines in our share price, unfavorable changes in the supply of competing properties, or our properties not performing as expected, we may not generate sufficient cash flow from operations and property sales or otherwise have access to capital on favorable terms, or at all.

If we are unable to obtain capital from other sources, we may need to alter capital spending to be materially different than what is stated in the prior paragraph.

1 unchanged sentence

Debt Financing

We generally use secured or unsecured, corporate-level debt, including unsecured notes, our Revolving Credit Facility, bank term loans and mortgages, to meet our borrowing needs.

We generally use unsecured or secured, corporate-level debt, including unsecured notes, our Revolving Credit Facility, bank term loans and mortgages, to meet our borrowing needs.

Long-term, we generally use fixed rate debt instruments in order to match the returns from our real estate assets.

4 unchanged sentences

We may either hedge our variable rate debt to give it an effective fixed interest rate or hedge fixed rate debt to give it an effective variable interest rate.

In January 2020, we prepaid the $45.6 million mortgage note payable secured by Yale West, recognizing a gain on extinguishment of debt of $0.5 million.

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

Mortgage Notes Payable

Unsecured Notes Payable/Term Loans

Revolving Credit Facility

Average Interest Rate

As of December 31, 2020, our future debt principal payments are scheduled as follows (in thousands):

Year Unsecured Notes Payable/Term Loans Revolving Credit Facility Total Debt Average Interest Rate

2021 $ — $ — $ — — %

2022 300,000 — 300,000 4.0 %

2023 250,000 (1) 42,000 (2) 292,000 2.6 %

2024 — — — — %

2025 — — — — %

Thereafter 400,000 (3) — 400,000 4.5 %

Scheduled principal payments 950,000 42,000 992,000 3.8 %

Scheduled mortgage note

amortization payments

Premiums and discounts, net (456) — (456)

Debt issuance costs, net (4,174) — (4,174)

Total $ 945,370 $ 42,000 $ 987,370 3.8 %

______________________________

WashREIT uses interest rate derivatives to effectively fix the $150.0 million term loan's variable interest rate at 2.72%.

WashREIT uses interest rate derivatives to effectively fix the $250.0 million term loan's variable interest rate at 2.87%.

Maturity date for the unsecured line of credit of March 2023 assumes election of option for two additional 6-month periods.

In January 2020, WashREIT prepaid the existing mortgage note associated with Yale West.

We incurred a gain on extinguishment of debt of $0.5 million associated with this prepayment

(1) WashREIT entered into interest rate swaps to effectively fix a LIBOR plus 110 basis points floating interest rate to a 2.31% all-in fixed interest rate for $150.0 million portion of the term loan.

For the remaining $100.0 million portion of the term loan, WashREIT entered into interest rate swaps to effectively fix a LIBOR plus 100 basis points floating interest rate to a 3.71% all-in fixed interest rate.

The interest rates are fixed through the term loan maturity of July 2023.

The 2018 Term Loan has an all-in fixed interest rate of 2.87%.

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

(3) The closing and full funding of the $350.0 million 10-year 3.44% Green Bonds occurred on December 17, 2020.

The Green Bonds have an all-in fixed interest rate of 4.09%.

The weighted average maturity for our debt is 5.2 years.

5 unchanged sentences

Debt Covenants

Our Revolving Credit Facility contains financial and other covenants with which we must comply.

Some of these covenants include:

ratio of total debt to total asset value of not more than 0.60 to 1.00 (subject to a higher level following material acquisitions);

ratio of adjusted EBITDA (earnings before noncontrolling interests, interest expense, income tax expense, depreciation, amortization, acquisition costs, and extraordinary, unusual or nonrecurring gains and losses) to fixed charges of not less than 1.50 to 1.00;

ratio of secured indebtedness to total asset value of not more than 0.40 to 1.00;

ratio of adjusted net operating income from unencumbered properties satisfying certain criteria specified in the Credit Agreement to interest expense on unsecured indebtedness of not less than 1.75 to 1.00;

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:

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

A maximum ratio of 40.0% of secured indebtedness to total assets;

A minimum ratio of 1.50 of our income available for debt service payments to required debt service payments;

A minimum ratio of 1.50 of total unencumbered assets to total unsecured indebtedness.

Failure to comply with any of the covenants under our Revolving Credit Facility, unsecured notes or other debt instruments could result in a default under one or more of our debt covenants.

Pursuant to the terms of our Revolving Credit Facility, 2018 Term Loan and unsecured notes, we are subject to customary operating covenants and maintenance of various financial ratios.

Failure to comply with any of the covenants under our Revolving Credit Facility, 2018 Term Loan, unsecured notes or other debt instruments could result in a default under one or more of our debt instruments.

This could cause our lenders to accelerate the timing of payments and could therefore have a material adverse effect on our business, operations, financial condition and liquidity.

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 December 31, 2019 , we were in compliance with the covenants related to our then-existing mortgage notes, Revolving Credit Facility and unsecured notes.

As of December 31, 2020, we were in compliance with the covenants related to our Revolving Credit Facility, 2018 Term Loan and unsecured notes.

Common Equity

2 unchanged sentences

Morgan Securities LLC, KeyBanc Capital Markets Inc.

and SunTrust Robinson Humphrey, Inc.

relating to the issuance of up to $250.0 million of our common shares from time to time.

and Truist Securities, Inc.

(f/k/a SunTrust Robinson Humphrey, Inc.) relating to the issuance of up to $250.0 million of our common shares from time to time.

Issuances of our common shares are made at market prices prevailing at the time of issuance.

We may use net proceeds from the issuance of common shares under this program for general 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 2018 Equity Distribution Agreements for the years ended December 31, 2019 and 2018 were as follows (in thousands;

except per share data):

Our issuances and net proceeds on the 2018 Equity Distribution Agreements for the three years ended December 31, 2020 were as follows (in thousands, except per share data):

Year Ended December 31,

2020 2019 2018

Issuance of common shares 2,000 1,859 1,165

Weighted average price per share $ 23.86 $ 30.00 $ 31.18

The 2018 Equity Distribution Agreements replaced our previous equity distribution agreements with Wells Fargo Securities, LLC, BNY Mellon Capital Markets, LLC, Citigroup Global Markets Inc.

and RBC Capital Markets LLC, dated June 23, 2015.

We did not issue any common shares on the previous equity distribution agreements during 2018.

For the year ended December 31, 2017, we issued 3.6 million common shares at a weighted average price per share of $32.06 for net proceeds of $113.2 million on the previous equity distribution agreements.

Net proceeds $ 48,355 $ 54,916 $ 35,472

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

3 unchanged sentences

Year Ended December 31,

2020 2019 2018

Issuance of common shares 89 173 81

Weighted average price per share $ 24.12 $ 27.58 $ 29.18

Net proceeds $ 2,121 $ 4,755 $ 1,973

Preferred Equity

7 unchanged sentences

In addition to our development and redevelopment projects, we anticipate funding several major renovation projects in our portfolios during 2021, as follows (in thousands):

These projects include unit, common area and lobby renovations and roof replacements at multifamily properties;

elevator modernizations, lobby renovations, HVAC replacements and garage and facade repairs at office properties;

and roof and sprinklers replacements at retail properties.

Multifamily $ 15,500

Total $ 19,600

These projects include unit, common area, lobby and pool deck renovations, elevator modernizations, mechanical upgrades, facade restorations and roof replacements at multifamily properties;

HVAC replacements, common area renovations and new conference space buildout at office properties;

and garage repairs at retail properties.

Not all of the anticipated spending had been committed via executed construction contracts at December 31, 2020.

3 unchanged sentences

Payments due by Period

Total Less than 1

year 1-3 years 4-5 years After 5

Long-term debt (1)

$ 1,208,527 $ 38,618 $ 671,139 $ 35,990 $ 462,780

Purchase obligations (2)

8,332 3,669 4,663 — —

Tenant-related capital (3)

3,592 2,101 1,491 — —

Building capital (4)

2,061 2,061 — — —

Operating leases 13,480 285 780 520 11,895

6 unchanged sentences

We have various standing or renewable contracts with vendors.

The majority of these contracts can be canceled with immaterial or no cancellation penalties, with the exception of our elevator maintenance, electricity and gas purchase agreements, which are included above on the purchase obligations line.

The majority of these contracts can be canceled with immaterial or no cancellation penalties, with the exception of our elevator maintenance agreements and our electricity and gas purchase agreements, which are included above on the purchase obligations line.

Contract terms on leases that can be canceled are generally one year or less.

6 unchanged sentences

Consolidated cash flows for the three years ended December 31, 2020 were as follows (in thousands):

Year ended December 31,

Year ended December 31, Variance

2020 2019 2018 2020 vs.

2019 2019 vs.

Cash provided by operating activities $ 112,991 $ 130,923 $ 147,369 $ (17,932) $ (16,446)

Cash provided by (used in) investing activities 65,760 61,036 (38,942) 4,724 99,978

Cash (used in) provided by financing activities

Cash used in financing activities (185,199) (184,848) (113,410) (351) (71,438)

Net cash provided by operating activities decreased in 2020 as compared to 2019 primarily due to the sales of the Retail Portfolio and 1776 G Street during 2019 and John Marshall II in 2020 (see note 3 to the consolidated financial statements).

Net cash provided by operating activities decreased in 2019 as compared to 2018 primarily due to the sales of the Retail Portfolio during 2019 (see note 3 to the consolidated financial statements) and 2445 M Street in 2018, partially offset by the acquisition of the Assembly Portfolio and Cascade at Landmark during 2019.

Net cash provided by operating activities increased in 2018 as compared to 2017 primarily due to the acquisitions of Arlington Tower in January 2018 and Watergate 600 in April 2017, partially offset by higher interest payments and the sales of 2445 M Street in June 2018, Braddock Metro Center in January 2018 and Walker House Apartments in October 2017.

Net cash provided by investing activities increased in 2020 as compared to 2019 primarily due to lower development expenditures during 2020.

Net cash provided by investing activities increased in 2019 as compared to 2018 primarily due to a higher volume of disposition activity during 2019, partially offset by a higher volume of acquisition activity and higher development expenditures during 2019.

Net cash used in investing activities decreased in 2018 as compared to 2017 primarily due to a higher volume of disposition activity and lower volume of acquisition activity in 2018.

Net cash used in financing activities increased in 2020 as compared to 2019 primarily due to higher repayments of notes payable and term loans, the repayment of the mortgage note and the settlement of interest rate swaps (see note 8 to the consolidated financial statements), partially offset by lower net repayments on the Revolving Credit Facility.

Net cash used in financing activities increased in 2019 as compared to 2018 primarily due to higher net repayments on the Revolving Credit Facility, partially offset by lower mortgage note repayments and higher proceeds from equity issuances.

Net cash used in financing activities increased in 2018 as compared to 2017 due to lower proceeds from equity issuances, lower net borrowings on the Revolving Credit Facility, the repayment of the 2016 Term Loan and the repayments of a mortgage note secured by Kenmore Apartments and a mortgage note at Arlington Tower’s settlement during 2018, partially offset by proceeds from the 2018 Term Loan during 2018 and the repayment of the mortgage note secured by Army Navy Building during 2017.

Capital Improvements and Development Costs

1 unchanged sentence

Year Ended December 31,

2020 2019 2018

Accretive capital improvements and development costs:

4 unchanged sentences

Total accretive capital improvements (1)

77,645 110,223 99,254

Other capital improvements:

9,262 5,725 6,622

Total $ 86,907 $ 115,948 $ 105,876

______________________________

(1) We consider these capital improvements to be accretive to revenue and not necessarily to net income.

3 unchanged sentences

Acquisition related improvements are capital improvements to properties acquired during the preceding three years which were anticipated at the time we acquired the properties.

These types of improvements were made in 2019 to Watergate 600, Arlington Tower, Cascade at Landmark and the Assembly Portfolio.

These types of improvements were made in 2020 to the Assembly Portfolio and Cascade at Landmark.

Expansions and Major Renovations:

Expansion projects increase the rentable area of a property, while major renovation projects are improvements sufficient to increase the income otherwise achievable at a property.

Expansions and major renovations during 2019 included common area, lobby and unit renovations at Riverside Apartments;

roof replacement, common area renovations, unit renovations and facade repairs at The Wellington;

Expansions and major renovations during 2020 included common area, lobby, unit and facade renovations at Riverside Apartments;

retail space renovations at 1775 Eye Street;

heating system replacement, roof replacement and unit renovations at The Kenmore;

balcony and roof replacement at Bethesda Hill Apartments;

lobby renovations at 1227 25th Street;

roof replacement at 3801 Connecticut Avenue;

and elevator modernization at The Ashby.

heating system replacement and elevator modernization at The Ashby and roof replacement and unit renovations at 3801 Connecticut Avenue.

Development/Redevelopment:

1 unchanged sentence

Redevelopment costs represent expenditures for improvements intended to reposition properties in their markets and increase income than would be otherwise achievable.

Development/redevelopment costs in 2019 primarily include development costs for the Trove, a multifamily development adjacent to The Wellington and predevelopment costs for a future multifamily development adjacent to Riverside Apartments.

Development/redevelopment costs in 2020 primarily include development costs for Trove, a multifamily development adjacent to The Wellington and predevelopment costs for a future multifamily development adjacent to Riverside Apartments.

Tenant Improvements:

2 unchanged sentences

Year Ended December 31,

The $36.48 increase in 2019 in tenant improvement costs per square foot of office space leased was primarily due to new leases at Watergate 600 and Monument II executed in 2019.

The $28.77 decrease in 2018 in tenant improvement costs per square foot of office space leased was primarily due to tenant leases at Braddock Metro Center and Army Navy Building and a large lease renewal at 1775 Eye Street executed in 2017.

2020 2019 2018

Office $ 23.03 $ 69.99 $ 33.51

The $46.96 decrease in 2020 and the $36.48 increase in 2019 in tenant improvement costs per square foot of office space leased was primarily due to new leases at Watergate 600 and Monument II executed in 2019.

Other Capital Improvements

12 unchanged sentences

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.

Such factors include, but are not limited to:

(a) the risks associated with ownership of real estate in general and our real estate assets in particular;

(b) the economic health of the greater Washington Metro region;

(c) 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;

(d) changes in the composition of our portfolio;

(e) fluctuations in interest rates;

(f) reductions in or actual or threatened changes to the timing of federal government spending;

(g) the risks related to use of third-party providers and joint venture partners;

(h) the ability to control our operating expenses;

Additional factors include, but are not limited to:

(a) 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 speed of the vaccine rollout, 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;

(b) the risks associated with ownership of real estate in general and our real estate assets in particular;

(d) 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;

(e) changes in the composition of our portfolio;

(f) fluctuations in interest rates;

(g) reductions in or actual or threatened changes to the timing of federal government spending;

(h) the risks related to use of third-party providers;

(i) the economic health of our tenants;

(j) the supply of competing properties;

(k) shifts away from brick and mortar stores to e-commerce;

(l) the availability and terms of financing and capital and the general volatility of securities markets;

(m) compliance with applicable laws, including those concerning the environment and access by persons with disabilities;

(n) terrorist attacks or actions and/or cyber attacks;

(o) weather conditions and natural disasters;

(p) ability to maintain key personnel;

(j) shifts away from brick and mortar stores to e-commerce;

(k) the availability and terms of financing and capital and the general volatility of securities markets;

(l) compliance with applicable laws, including those concerning the environment and access by persons with disabilities;

(m) the risks related to not having adequate insurance to cover potential losses;

(n) the risks related to our organizational structure and limitations of stock ownership;

(o) changes in the market value of securities;

(p) terrorist attacks or actions and/or cyber-attacks;

(q) failure to qualify and maintain our qualification as a REIT and the risks of changes in laws affecting REITs;

4 unchanged sentences

NAREIT FFO is a widely used measure of operating performance for real estate companies.

We provide NAREIT FFO as a supplemental measure to net income calculated in accordance with GAAP.

Although NAREIT FFO is a widely used measure of operating performance for REITs, NAREIT FFO does not represent net income calculated in accordance with GAAP.

As such, it should not be considered an alternative to net income as an indication of our operating performance.

In addition, NAREIT FFO

does not represent cash generated from operating activities in accordance with GAAP, nor does it represent cash available to pay distributions and should not be considered as an alternative to cash flow from operating activities, determined in accordance with GAAP, as a measure of our liquidity.

In its 2018 NAREIT FFO White Paper Restatement, the National Association of Real Estate Investment Trusts, Inc.

1 unchanged sentence

impairments of depreciable real estate, and real estate depreciation and amortization.

We consider NAREIT FFO to be a standard supplemental measure for REITs because it facilitates an understanding of the operating performance of our properties without giving effect to real estate depreciation and amortization, which historically assumes that the value of real estate assets diminishes predictably over time.

We consider NAREIT FFO to be a standard supplemental measure for REITs, and believe it is a useful metric because it facilitates an understanding of the operating performance of our properties without giving effect to real estate depreciation and amortization, which historically assumes that the value of real estate assets diminishes predictably over time.

Since real estate values have instead historically risen or fallen with market conditions, we believe that NAREIT FFO more accurately provides investors an indication of our ability to incur and service debt, make capital expenditures and fund other needs.

3 unchanged sentences

Year Ended December 31,

2020 2019 2018

Net (loss) income $ (15,680) $ 383,550 $ 25,630

Depreciation and amortization 120,030 136,253 111,826

Real estate impairment — 8,374 1,886

Gain on sale of depreciable real estate

Loss (gain) on sale of depreciable real estate 15,009 (59,961) (2,495)

Discontinued operations:

1 unchanged sentence

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

NAREIT FFO $ 119,359 $ 134,118 $ 146,249

Critical Accounting Policies and Estimates

14 unchanged sentences

(d) the above/at/below market cash flow of the leases, determined by comparing the projected cash flows of the

leases in place, including consideration of renewal options, to projected cash flows of comparable market-rate leases (referred to as “net lease intangible”);

(d) the above/at/below market cash flow of the leases, determined by comparing the projected cash flows of the leases in place, including consideration of renewal options, to projected cash flows of comparable market-rate leases (referred to as “net lease intangible”);

and (e) the value, if any, of customer relationships, determined based on our evaluation of the specific characteristics of each tenant’s lease and our overall relationship with the tenant (referred to as “customer relationship value”).

4 unchanged sentences

We classify below market net lease intangible liabilities as other liabilities and amortize them on a straight-line basis as an increase to real estate rental revenue over the remaining term of the underlying leases.

If any of the fair value of below market lease intangibles includes fair value associated with a renewal option, such amounts are not amortized until the renewal option is executed.

If any of the fair value of below market lease intangibles

includes fair value associated with a renewal option, such amounts are not amortized until the renewal option is executed.

If the renewal option is not executed, the related value is expensed at that time.

18 unchanged sentences

As of both December 31, 2020 and 2019, our TRSs had a deferred tax asset of $1.4 million that was fully reserved.

As of both December 31, 2019 and 2018 , we had deferred state and local tax liabilities of $0.6 million .

These deferred tax liabilities are primarily related to temporary differences in the timing of the recognition of revenue, amortization and depreciation.

As of December 31, 2019, we had deferred state and local tax liabilities of $0.6 million.

These deferred tax liabilities were primarily related to temporary differences in the timing of the recognition of revenue, amortization and depreciation.

We did not have deferred state or local tax liabilities as of December 31, 2020.

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-K

Item 7. Management’s Discussion and Analysis