Item 1. Business
ITEM 1: BUSINESS
WashREIT Overview
Washington Real Estate Investment Trust (“WashREIT”) is a self-administered equity real estate investment trust (“REIT”), successor to a trust organized in 1960. Our business consists of the ownership and operation of income producing real estate properties in the greater Washington metro region. We own a portfolio of multifamily and commercial (office and retail) properties.
Our strategy is to generate returns and maximize shareholder value through proactive asset management and prudent capital allocation decisions. Consistent with this strategy, we invest in additional income producing properties through acquisitions, development and redevelopment. We invest in properties where we believe we will be able to improve the operating results and increase the value of the property. We focus on properties in the Washington metro region, near major transportation nodes and in areas with strong employment drivers and superior growth demographics. We will seek to continue to upgrade our portfolio as opportunities arise, funding development and acquisitions with a combination of cash, equity, debt and proceeds from property sales.
While we have historically focused most of our investments in the greater Washington metro region, in order to maximize acquisition opportunities we also may consider opportunities to replicate our strategy in other geographic markets which meet the criteria described above.
Our Regional Economy and Real Estate Markets
The Washington metro region continues to slowly recover from the economic shock resulting from the COVID-19 pandemic. Positive monthly job growth through November 2020 brought back much of the Washington metro region’s jobs that were initially lost in the spring. However, the 12-month job growth figure remains sharply negative at approximately 179,700 net job losses, according to Delta Associates / Transwestern Commercial Services (“Delta”), a national full-service real estate firm that provides market research and evaluation services for commercial property.
Payroll Job Growth
Major Metro Areas
12 Months Ending November 2020
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Source: U.S. Bureau of Labor Statistics; January 2021
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The unemployment rate in the Washington metro region was 5.8% in November 2020, a 300-basis point increase over November 2019, but 400 basis points less than the pandemic peak of 9.8% in April, according to Delta. The Washington metro region retains one of the lowest unemployment rates in the country and is well under the national unemployment rate of 6.4%, according to Delta.
Unemployment Rate
Major Metro Areas
November 2020 vs. November 2019
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Source: U.S. Bureau of Labor Statistics; January 2021
Certain market statistics and information from several third-party providers for the Washington metro region are set forth below:
Multifamily
The multifamily real estate market had lower effective rents and occupancy rates in 2020, reflecting disruption from the COVID-19 pandemic, according to statistics from RealPage Market Analytics, a commercial real estate management software company that provides market research:
Year-Over-Year Year-Over-Year
Apartment Effective Rent Change Apartment Occupancy
Washington Metro 2020 vs. 2019 Washington Metro 2020 vs. 2019
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Source: RealPage Market Analytics; January 2021
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Demand in the Washington metro region has continued to fall since the pandemic began, a trend also seen among some of the nation’s gateway markets (i.e., San Francisco, Los Angeles, New York City and Boston).
The development pipeline for the Washington metro region remains elevated and is expected to suppress occupancy and rental rates in 2021 as approximately 14,800 new deliveries are expected while approximately 32,000 units are under construction.
Class A (1) properties are expected to struggle the most as new lease-ups should create significant competition throughout 2021. Class B (2) properties, especially properties located in suburban areas, have outperformed Class A properties during the COVID-19 pandemic and are expected to continue to outperform Class A units as no new supply of Class B units are expected to be added to the market in 2021.
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(1) Defined by Delta as product generally built in 1995 or later and offering a separate clubhouse, decorated model units, two bedroom/ two bath units, and a large community amenity package most often including a fitness center and swimming pool.
(2) Defined by Delta as product that is well maintained, older, generally built in the 1960’s or 1970’s, and which does not offer a separate clubhouse nor decorated model unit nor two bedroom/two bathroom floor plans. Class B communities typically offer limited project amenities.
Office
Washington Metro Region 2020 2019
Average asking rent per square foot $ 43.72 $ 43.30
Total vacancy rate at year end 18.7 % 16.1 %
Net absorption (in millions of square feet) (1)
(5.2) 4.5
Office space under construction at year end (in millions of square feet) 7.0 9.8
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(1) Net absorption is defined as the change in occupied, standing inventory from one year to the next.
Source: Jones Lang LaSalle ("JLL"), a commercial real estate services firm
The Washington metro region's office market performance in 2020 reflected the stress of the COVID-19 pandemic. Total vacancy rose to 15.8% in Washington, D.C. and 20.0% in Northern Virginia, according to JLL. Direct asking rents remained relatively stable, as landlords increased focus on concessions to secure transactions. Net effective rents declined by approximately 12.5% in Washington, D.C. and 25% in Northern Virginia. Leasing volume declined across the Washington metro region. In Washington, D.C., overall leasing volume decreased by 49% compared to 2019, with renewals representing over two-thirds of the annual volume. In Northern Virginia, despite a record year for government contract awards, leasing volume was down 32% year over year. In the second half of 2020, renewals accounted for 68% of leasing volume in Northern Virginia as tenants continue to delay space decisions. Construction has slowed in Washington, D.C. as 2.7 million square feet is under construction, with 56% pre-leased. In Northern Virginia, 677,000 of the 5 million square feet of space under construction is available for lease, with 64% of the space owner-built, 21% build to suit and 15% speculative development.
Historically, there has been a positive correlation between political alignment in the federal government and leasing in the Washington metro region for the office market. For example, since 2000, aligned government correlated to 14.9 million square feet of absorption compared to periods of divided government, which resulted in only 5.7 million square feet of absorption in Washington, D.C. JLL notes that elevated contract awards under a new presidential administration could provide a lift to the market over the intermediate term, particularly in Northern Virginia, but the actual effect remains to be seen. In the near term, elevated vacancy and subdued leasing demand will drive office leasing performance metrics.
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Our Portfolio
As of December 31, 2020, we owned a diversified portfolio of 43 properties, totaling approximately 3.4 million square feet of commercial space and 7,059 residential units and land held for development. These 43 properties consist of 22 multifamily properties, 13 office properties and 8 retail centers. The percentage of total real estate rental revenue from continuing operations by property type for the three years ended December 31, 2020, 2019 and 2018, and the percent leased as of December 31, 2020, were as follows:
Percent Leased at
December 31, 2020 (1)
% of Total Real Estate Rental Revenue
2020 2019 2018
92% Multifamily 49 % 41 % 33 %
87% Office 45 % 53 % 61 %
89% Other 6 % 6 % 6 %
100 % 100 % 100 %
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(1) Calculated as the percentage of physical net rentable area leased, except for multifamily, which is calculated as the percentage of units leased. The net rentable area leased for office and retail properties includes temporary lease agreements.
On a combined basis, our commercial portfolio (i.e., our office and retail properties, excluding properties classified as discontinued operations) was 87%, 93% and 93% leased at December 31, 2020, 2019 and 2018, respectively.
Total real estate rental revenue from continuing operations for each of the three years ended December 31, 2020 was $294.1 million, $309.2 million and $291.7 million, respectively. During the three years ended December 31, 2020, we acquired eight multifamily properties and one office property, and substantially completed major construction activities at one retail redevelopment project and one multifamily development project. During that same period, we sold eight retail properties and seven office properties. See note 14 to the consolidated financial statements for further discussion of our operating results by segment.
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The commercial lease expirations for the next ten years and thereafter are as follows:
# of Leases Square Feet Gross Annual Rent
(in thousands) Percentage of Total Gross Annual Rent
Office:
2021 49 205,717 $ 8,644 7 %
2022 46 375,218 18,663 15 %
2023 55 317,740 16,101 13 %
2024 52 257,568 14,188 11 %
2025 43 190,367 10,461 8 %
2026 28 183,715 11,163 9 %
2027 25 273,483 18,047 14 %
2028 16 78,455 4,989 4 %
2029 12 50,801 3,074 2 %
2030 13 120,279 7,660 6 %
Thereafter 16 175,724 12,621 11 %
Total 355 2,229,067 $ 125,611 100 %
Other:
2021 11 70,127 $ 1,368 9 %
2022 14 92,934 1,934 13 %
2023 18 65,858 1,630 11 %
2024 17 134,586 3,172 21 %
2025 11 79,292 1,476 10 %
2026 7 29,239 968 7 %
2027 5 47,611 1,109 7 %
2028 5 21,582 785 5 %
2029 5 18,133 913 6 %
2030 4 21,831 607 5 %
Thereafter 3 13,415 917 6 %
Total 100 594,608 $ 14,879 100 %
According to Delta, the professional/business services and government sectors constituted over 45% of payroll jobs in the Washington metro region at the end of 2020. Due to our geographic concentration in the Washington metro region, a significant number of our tenants have historically been concentrated in the professional/business services and government sectors, although the exact number will vary from time to time. As a result of this concentration, we are susceptible to business trends (both positive and negative) that affect the outlook for these sectors.
No single tenant accounted for more than 3% of real estate rental revenue in 2020 and no more than 5% in 2019 or 2018. All federal government tenants in the aggregate accounted for less than 1% of our real estate rental revenue in 2020.
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Our ten largest commercial tenants, in terms of real estate rental revenue for 2020, are as follows:
1. Atlantic Media, Inc.
2. Capital One, N.A.
3. EIG Management Company, LLC
4. B. Riley Financial, Inc.
5. Epstein, Becker & Green, P.C.
6. Hughes Hubbard & Reed LLP
7. Morgan Stanley Smith Barney Financing
8. Promontory Interfinancial Network, LLC
9. Graham Holdings Company
10. Raytheon BBN Technologies Corporation
We enter into arrangements from time to time by which various service providers conduct day-to-day property management and/or leasing activities at our properties. Bozzuto Management Company ("Bozzuto") and Greystar Real Estate Partners ("Greystar") currently provide property management and leasing services at our multifamily properties. Bozzuto and Greystar provide such services under individual property management agreements for each property, each of which is separately terminable by us or Bozzuto/Greystar, as applicable. Although they vary by property, on average, the fees charged by the service provider under each agreement are approximately 3% of revenues at each property.
We expect to continue investing in additional income-producing properties through acquisitions, development and redevelopment and plan to allocate more capital to multifamily as an asset class over time than we currently allocate. We invest in properties where we believe we will be able to improve the operating results and increase the value of the property. Our properties typically compete for residents and tenants with other properties on the basis of location, quality and rental rates.
We make capital improvements to our properties on an ongoing basis for the purpose of maintaining and increasing their value and income. However, we reduced our capital improvement spending for the year ended December 31, 2020 as a cost-saving measure due to the COVID-19 pandemic. Major improvements and/or renovations to the properties during the three years ended December 31, 2020 are discussed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the heading “Capital Improvements and Development Costs.”
Further description of the properties is contained in Item 2, Properties, and note 14 to the consolidated financial statements, Segment Information, and in Schedule III. Reference is also made to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Human Capital
Employees, Training and Development
On February 11, 2021, we had 112 employees including 48 persons engaged in property management functions and 64 persons engaged in corporate, financial, leasing, asset management and other functions. All of our officers and substantially all of our employees live and work in or near the greater Washington metro region.
Our human capital resources objectives include identifying, recruiting, retaining, incentivizing and integrating our existing and new employees. At WashREIT, we place great value on employee growth through goals, feedback and professional and leadership development offerings. Our leadership courses are internally developed and delivered through multi-session, cohort-based experiential learning environments and are offered to employees at multiple levels. A certified executive leadership coach provides ongoing development support for leadership program participants and the employee population at large. We financially support employees pursuing industry-specific training and certification programs. Also, we encourage individuals to join professional organizations that offer technical, soft skill and leadership development workshops.
We also survey our employees regularly on a variety of topics including strategic initiatives, employee engagement, diversity, town hall meetings, community service, and others and incorporate the feedback to ensure our programs and initiatives are best serving employee needs.
Additionally, our equity and cash incentive plans are designed to attract, retain and reward our workforce through the granting
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of stock-based and cash-based compensation awards, with the goal of motivating such individuals to perform to the best of their abilities and achieve our objectives, including increasing stockholder value.
Health, Safety and Well-being
We support our employees with a robust employee benefits program, including a flexible vacation policy, parental leave, 401(k) matching, tuition reimbursement, an Employee Assistance Program, and other programs.
Additionally, we have a wellness program that provides fun, engaging challenges to encourage employees to continuously improve their physical, mental, and financial well-being. Programs we run throughout the year include biometric screenings, personal finance check-ups, and healthy lunch challenges. In our corporate offices, we recently improved our wellness room by doubling the space for employees to take a break to decompress. The rooms also provide nursing mothers a peaceful place to meet their needs.
Our technological advances and multiple properties around the DC metro area allow our teams the flexibility to work from anywhere that suits their needs at any time. This allows us to easily meet our tenants’ needs as well as those of our employees, which has been especially important during the COVID-19 pandemic.
Diversity and Inclusion
WashREIT’s Diversity, Equity, Inclusion, and Belonging Initiative ("DEIB") is a long-term commitment to promote an environment where each individual feels comfortable being their most authentic selves. We believe diversity of backgrounds, experiences, cultures, ethnicities, and interests leads to new ways of thinking and drives organizational success. Our diverse 17 member DEIB Council is overseen by WashREIT’s senior leadership team and Board of Trustees. The DEIB Council both tracks and monitors our diversity metrics and facilitates learning and training opportunities that include: Diversity Speaker Series, targeted recruitment and relationship development of historically black colleges and universities and other diverse industry groups for internships, annual inclusion and belonging employee survey, partnership with diverse local non-profit to provide tutoring for school aged children among others.
Community Engagement
As a real estate investment trust, investing is at the core of what we do. But the most valuable investments we make are not in our buildings—they are in our people and our community. With more than five decades of experience operating exclusively in the Washington metro region, we’re passionate about making a difference in the region we call home.
We are committed to improving the lives of those in need, and our employees participate in a wide variety of philanthropic activities throughout the year. Whether volunteering at a food bank, running a toy drive, walking for a cause, or participating in our company-wide community service day, we’re proud to foster a culture of giving back.
Regulation
REIT Tax Status
We believe that we qualify as a REIT under Sections 856-860 of the Internal Revenue Code of 1986, as amended (the "Code"), and intend to continue to qualify as such. To maintain our status as a REIT, we are among other things required to distribute 90% of our REIT taxable income (determined before the deduction for dividends paid and excluding net capital gains), to our shareholders on an annual basis. When selling a property, we generally have the option of (a) reinvesting the sales proceeds of property sold, in a way that allows us to defer recognition of some or all of the taxable gain realized on the sale, (b) distributing gains to the shareholders with no tax to us or (c) treating net long-term capital gains as having been distributed to our shareholders, paying the tax on the gain deemed distributed and allocating the tax paid as a credit to our shareholders.
Generally, and subject to our ongoing qualification as a REIT, no provisions for income taxes are necessary except for taxes on undistributed taxable income and taxes on the income generated by our taxable REIT subsidiaries (“TRSs”). Our TRSs are subject to corporate U.S. federal, state and local income tax on their taxable income at regular statutory rates (see note 1 to the consolidated financial statements for further disclosure).
Americans with Disabilities Act ("ADA")
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The properties in our portfolio must comply with Title III of the ADA, to the extent that such properties are “public accommodations” as defined by the ADA. The ADA may require removal of structural barriers to access by persons with disabilities in certain public areas of our properties where such removal is readily achievable. We believe that our properties are in substantial compliance with the ADA and that we will not be required to make substantial capital expenditures to address the requirements of the ADA. However, noncompliance with the ADA could result in imposition of fines or an award of damages to private litigants. The obligation to make readily accessible accommodations is an ongoing one, and we will continue to assess our properties and make alterations as appropriate in this respect.
Fair Housing Act ("FHA")
The FHA, its state law counterparts and the regulations promulgated by the U.S. Department of Housing and Urban Development and various state agencies, prohibit discrimination in housing on the basis of race or color, national origin, religion, sex, familial status (including children under the age of 18 living with parents or legal custodians, pregnant women and people securing custody of children under 18) or handicap (disability) and, in some states, financial capability or other bases. A failure to comply with these laws in our operations could result in litigation, fines, penalties or other adverse claims, or could result in limitations or restrictions on our ability to operate, any of which could materially and adversely affect us. We believe that we operate our properties in substantial compliance with the FHA.
Environmental Matters
We are subject to numerous federal, state and local environmental, health, safety and zoning laws and regulations that govern our operations, including with respect to air emissions, wastewater, and the use, storage and disposal of hazardous and toxic substances and petroleum products. If we fail to comply with such laws, including if we fail to obtain any required permits or licenses, we could face substantial fines or possible revocation of our authority to conduct some of our operations.
In addition, under various federal, state and local laws and regulations relating to the environment, as a current or former owner or operator of real property, we may be liable for costs and damages resulting from the presence or discharge of hazardous or toxic substances, waste or petroleum products at, on, in, under, or migrating from such property, including costs to investigate and clean up such contamination and liability for natural resources damage. In addition, we also may be liable for the costs of remediating contamination at off-site waste disposal facilities to which we have arranged for the disposal or treatment of hazardous substances, without regard to whether we complied with environmental laws in doing so. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such contamination, and the liability may be joint and several. These liabilities could be substantial and the cost of any required remediation, removal, fines, or other costs could exceed the value of the property and/or our aggregate assets. In addition, the presence of contamination or the failure to remediate contamination at our properties may expose us to third-party liability for costs of remediation and/or bodily injury or property damage or materially adversely affect our ability to sell, lease or develop our properties or to borrow using the properties as collateral. In addition, environmental laws may create liens on contaminated sites in favor of the government for damages and costs it incurs to address such contamination. Moreover, if contamination is discovered on our properties, environmental laws may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures.
Availability of Reports
Copies of this Annual Report on Form 10-K, as well as our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to such reports are available, free of charge, on our website www.washreit.com. All required reports are made available on the website as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission. The reference to our website address does not constitute incorporation by reference of the information contained in the website and such information should not be considered part of this document.
The Securities and Exchange Commission maintains a website ( http://www.sec.gov ) that contains reports, proxy statements, information statements, and other information regarding issuers that file electronically with Securities and Exchange Commission.
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