Elme Communities 10-Q

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto appearing in Item 1 of this report and the more detailed information contained in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission (“SEC”) on February 16, 2021. We refer to the three months ended March 31, 2021 and March 31, 2020 as the “2021 Quarter” and the “2020 Quarter,” respectively. Forward-Looking Statements This Form 10-Q contains forward-looking statements which involve risks and uncertainties. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward looking statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” or “potential” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. Such statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of WashREIT to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Currently, one of the most significant factors continues to be the adverse effect of the COVID-19 virus, including any variants and mutations thereof, the actions taken to contain the pandemic or mitigate the impact of COVID-19, and the direct and indirect economic effects of the pandemic and containment measures. The extent to which COVID-19 continues to impact WashREIT and its tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, 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 continued speed and success of the vaccine rollout, effectiveness and willingness of people to take COVID-19 vaccines, and the duration of associated immunity and their efficacy against emerging variants of COVID-19, among others. Moreover, investors are cautioned to interpret many of the risks identified in the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2020 filed on February 16, 2021, as being heightened as a result of the ongoing and numerous adverse impacts of COVID-19. Additional factors which may cause the actual results, performance, or achievements of WashREIT to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements include, but are not limited to the risks associated with ownership of real estate in general and our real estate assets in particular; the economic health of the greater Washington metro region; the risk of failure to enter into and/or complete potential acquisitions and dispositions, at all, within the price ranges anticipated and on the terms and timing anticipated; changes in the composition of our portfolio; fluctuations in interest rates; reductions in or actual or threatened changes to the timing of federal government spending; the risks related to use of third-party providers; the economic health of our tenants; shifts away from brick and mortar stores to e-commerce; the availability and terms of financing and capital and the general volatility of securities markets; compliance with applicable laws, including those concerning the environment and access by persons with disabilities; the risks related to not having adequate insurance to cover potential losses; the risks related to our organizational structure and limitations of stock ownership; changes in the market value of securities; terrorist attacks or actions and/or cyber-attacks; failure to qualify and maintain our qualification as a REIT and the risks of changes in laws affecting REITs; and other risks and uncertainties detailed from time to time in our filings with the SEC, including our 2020 Form 10-K filed on February 16, 2021. While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We undertake no obligation to update our forward-looking statements or risk factors to reflect new information, future events, or otherwise. General Introductory Matters We provide our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations and financial condition. We organize the MD&A as follows: • Overview. Discussion of our business outlook, operating results, investment and financing activity and capital requirements to provide context for the remainder of MD&A. • Results of Operations. Discussion of our financial results comparing the 2021 Quarter to the 2020 Quarter. 19 • Liquidity and Capital Resources. Discussion of our financial condition and analysis of changes in our capital structure and cash flows. • Funds From Operations . Calculation of NAREIT Funds From Operations (“NAREIT FFO”), a non-GAAP supplemental measure to net income. • Critical Accounting Policies and Estimates. Descriptions of accounting policies that reflect significant judgments and estimates used in the preparation of our consolidated financial statements. When evaluating our financial condition and operating performance, we focus on the following financial and non-financial indicators: • Net operating income (“NOI”) , calculated as set forth below under the caption "Results of Operations - Net Operating Income." NOI is a non-GAAP supplemental measure to net income. • Funds From Operations (“NAREIT FFO”) , calculated as set forth below under the caption “Funds from Operations.” NAREIT FFO is a non-GAAP supplemental measure to net income. • 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. • Leasing activity , including new leases, renewals and expirations. For purposes of evaluating comparative operating performance, we categorize our properties as “same-store” or “non-same-store”. Same-store properties include properties that were owned for the entirety of the years being compared, and exclude properties under redevelopment or development and properties acquired, sold or classified as held for sale during the years being compared. We define development properties as those for which we have planned or ongoing major construction activities on existing or acquired land pursuant to an authorized development plan. We consider a property's development activities to be complete when the property is ready for its intended use. The property is categorized as same-store when it has been ready for its intended use for the entirety of the years being compared. We define redevelopment properties as those for which we have planned or ongoing significant development and construction activities on existing or acquired buildings pursuant to an authorized plan, which has an impact on current operating results, occupancy and the ability to lease space with the intended result of a higher economic return on the property. We categorize a redevelopment property as same-store when redevelopment activities have been complete for the majority of each year being compared. Overview Our revenues are derived primarily from the ownership and operation of income producing properties in the greater Washington metro region. As of March 31, 2021 we owned a diversified portfolio of 43 properties, totaling approximately 3.4 million square feet of commercial space and 7,059 multifamily units, and land held for development. These 43 properties consisted of 22 multifamily properties, 13 office properties and 8 retail centers. Outlook 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 concerning 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. While the COVID-19 pandemic had a significant impact on the 2021 Quarter, as of April 23, 2021, we collected 99% and 97% of office and retail cash rent, respectively, during the 2021 Quarter, excluding the impact of contractual rent deferral agreements. The effects of COVID-19 on our commercial tenants did not result in an increase in credit losses for the 2021 Quarter compared to the 2020 Quarter. As of April 23, 2021, we have $0.7 million and $0.9 million of deferred rent outstanding, net of repayments, from our office segment and retail properties, respectively. We continue to monitor and communicate with our commercial tenants to assess their needs and ability to pay rent. At our multifamily properties, as of April 23, 2021, we collected 98% of cash rent during the 2021 Quarter, 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 $0.3 million and led to a decline in rental rates during the 2021 Quarter compared to the 2020 Quarter. We expect our ability to increase rental rates to be limited until the economic disruption of the pandemic subsides. 20 We had a decline in average occupancy of approximately 160 basis points during the 2021 Quarter compared to the 2020 Quarter, 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 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 53% for commercial space during the 2021 Quarter compared to the 2020 Quarter. As of March 31, 2021, we had approximately 490,000 square feet of vacant commercial space and approximately 200,000 square feet of commercial lease expirations scheduled for 2021. We expect the COVID-19 outbreak, including any variants and mutations thereof, to continue to affect our financial condition and results of operations during 2021, including but not limited to real estate rental revenues, credit losses and leasing activity. Given our concentration in the Washington metro region, our entire existing portfolio could be impacted at the same time by quarantines, shelter-in-place rules and various other restrictions imposed or re-imposed in response to a surge in COVID-19 cases. 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. Due to the uncertainty of the future impacts of the COVID-19 pandemic and the speed of the vaccine rollout in the Washington metro region, the extent of the financial impact remains difficult to reasonably estimate. New legislation was enacted 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 that require careful evaluation and consideration, including the ability to repurchase shares and pay dividends. 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 did not have a material impact on our results of operations for the 2021 and 2020 Quarters. Operating Results Net (loss) income, NOI and NAREIT FFO for the three months ended March 31, 2021 and 2020 were as follows (in thousands): Three Months Ended March 31, 2021 2020 $ Change % Change Net (loss) income $ (1,147) $ 1,719 $ (2,866) (166.7) % NOI (1) $ 42,939 $ 48,153 $ (5,214) (10.8) % NAREIT FFO (2) $ 28,496 $ 31,439 $ (2,943) (9.4) % ______________________________ (1) See page 23 of the MD&A for a reconciliation of NOI to net income. (2) See page 30 of the MD&A for a reconciliation of NAREIT FFO to net income. The decrease in net income is primarily due to lower NOI ($5.2 million) in the 2021 Quarter and a gain on extinguishment of debt ($0.5 million) in the 2020 Quarter, partially offset by a gain on the settlement of litigation ($1.3 million), lower interest expense ($0.7 million) and lower general and administrative expenses ($0.7 million) in the 2021 Quarter. The lower NOI is primarily due to lower NOI from same-store properties ($3.0 million) during 2021 and the sales of John Marshall II ($1.1 million), Monument II ($0.9 million) and 1227 25th Street ($0.7 million) during 2020, partially offset by placing Trove, a multifamily development, into service during 2020 ($0.4 million). The lower same-store NOI is explained in further detail beginning on page 23 (Results of Operations - 2021 Quarter Compared to 2020 Quarter). Same-store ending occupancy for our portfolio decreased to 90.9% as of March 31, 2021 from 92.4% as of March 31, 2020, due to lower occupancy across the portfolio resulting from the COVID-19 pandemic. The lower NAREIT FFO is primarily due to lower NOI ($5.2 million) in the 2021 Quarter and a gain on extinguishment of debt ($0.5 million) in the 2020 Quarter, partially offset by a gain on the settlement of litigation ($1.3 million), lower interest expense ($0.7 million) and lower general and administrative expenses ($0.7 million) in the 2021 Quarter. 21 Investment and Financing Activity As of March 31, 2021, the interest rate on the $700.0 million unsecured revolving credit facility (“Revolving Credit Facility”) was one month LIBOR plus 1.00% and the facility fee was 0.20%. As of April 26, 2021, our Revolving Credit Facility has a borrowing capacity of $629.0 million. Capital Requirements We have no debt maturities until the fourth quarter of 2022. We expect to have additional capital requirements as set forth on page 31 (Liquidity and Capital Resources - Capital Requirements). Results of Operations The discussion that follows is based on our consolidated results of operations for the 2021 Quarter and 2020 Quarter. The ability to compare one period to another is significantly affected by acquisitions completed and dispositions made during 2020 (see note 3 to the consolidated financial statements). Additionally, the COVID-19 pandemic adversely impacted our operating results for the 2021 Quarter, and we expect that the COVID-19 outbreak will continue to adversely affect our business, financial condition, results of operations and cash flows going forward, including but not limited to, real estate rental revenues, credit losses, and leasing activity, in ways that may vary widely depending on the duration and magnitude of the COVID-19 pandemic and ensuing economic turmoil, as well as numerous other factors, many of which are outside of our control, as discussed under “Part I - Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2020 filed on February 16, 2021. Net Operating Income NOI, defined as real estate rental revenue less real estate expenses, is a non-GAAP measure. NOI is calculated as net income, less non-real estate revenue and the results of discontinued operations (including the gain or loss on sale, if any), plus interest expense, depreciation and amortization, 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. For example, interest expense is not necessarily linked to the operating performance of a real estate asset. In addition, depreciation and amortization, because of historical cost accounting and useful life estimates, may distort operating performance at the property level. As a result of the foregoing, we provide NOI as a supplement to net income, calculated in accordance with GAAP. NOI does not represent net income or income from continuing operations, in either case calculated in accordance with GAAP. As such, it should not be considered an alternative to these measures as an indication of our operating performance. A reconciliation of NOI to net income follows. 22 2021 Quarter Compared to 2020 Quarter The following table reconciles NOI to net (loss) income and provides the basis for our discussion of our consolidated results of operations and NOI in the 2021 Quarter compared to the 2020 Quarter. All amounts are in thousands, except percentage amounts. Non-Same-Store Same-Store Development/ Re-development (1) Held for Sale or Sold (2) Consolidated 2021 2020 $ Change % Change 2021 2020 2021 2020 2021 2020 $ Change % Change Real estate rental revenue $ 68,657 $ 72,099 $ (3,442) (4.8) % $ 976 $ 37 $ — $ 4,656 $ 69,633 $ 76,792 $ (7,159) (9.3) % Real estate expenses 25,927 26,399 (472) (1.8) % 767 247 — 1,993 26,694 28,639 (1,945) (6.8) % NOI $ 42,730 $ 45,700 $ (2,970) (6.5) % $ 209 $ (210) $ — $ 2,663 $ 42,939 $ 48,153 $ (5,214) (10.8) % Reconciliation to net (loss) income: Depreciation and amortization (29,643) (29,720) 77 (0.3) % General and administrative expenses (5,604) (6,337) 733 (11.6) % Interest expense (10,123) (10,845) 722 (6.7) % Other income 1,284 — 1,284 Gain on extinguishment of debt — 468 (468) (100.0) % Net (loss) income $ (1,147) $ 1,719 $ (2,866) (166.7) % ______________________________ 1. Development/redevelopment: Multifamily - Trove 2. Sold (classified as continuing operations): 2020 Office - John Marshall II, Monument II and 1227 25th Street Real Estate Rental Revenue Real estate rental revenue is comprised of (a) minimum base rent, which includes rental revenues recognized on a straight-line basis, (b) revenue from the recovery of operating expenses from our tenants, (c) credit losses on lease related receivables, (d) revenue from the collection of lease termination fees and (e) parking and other tenant charges such as percentage rents. Real estate rental revenue from same-store properties for the three months ended March 31, 2021 and 2020 by segment was as follows (in thousands): Three Months Ended March 31, 2021 2020 $ Change % Change Multifamily $ 35,156 $ 36,541 $ (1,385) (3.8) % Office 28,599 31,014 (2,415) (7.8) % Other 4,902 4,544 358 7.9 % Total same-store real estate rental revenue $ 68,657 $ 72,099 $ (3,442) (4.8) % • Multifamily : Decrease primarily due to lower rental revenue ($1.0 million), higher rent abatements ($0.4 million) and higher credit losses ($0.3 million). These were partially offset by higher recoveries ($0.2 million) and termination fees ($0.1 million). • Office : Decrease primarily due to lower parking income ($0.8 million), lower termination fees ($0.6 million), higher credit losses ($0.4 million), lower rental revenue ($0.3 million), lower reimbursements ($0.1 million) and lower specialty leasing ($0.1 million). The lower parking income and higher credit losses were primarily due to the COVID-19 pandemic. Real estate rental revenue from development properties increased due to placing into service the Trove development ($0.9 million). We placed the remainder of the Trove development costs into service during the 2021 Quarter. Real estate rental revenue from held for sale and sold properties classified as continuing operations decreased due to the sale of John Marshall II ($1.8 million) during the second quarter of 2020 and sales of Monument II ($1.5 million) and 1227 25th Street ($1.4 million) during the fourth quarter of 2020. 23 Ending occupancy for properties classified as continuing operations by segment for the 2021 Quarter and 2020 Quarter was as follows: March 31, 2021 March 31, 2020 (Decrease) increase Segment Same-Store Non-Same-Store Total Same-Store Non-Same-Store Total Same-Store Non-Same-Store Total Multifamily 94.9 % 44.1 % 92.0 % 95.1 % 3.0 % 89.9 % (0.2) % 41.1 % 2.1 % Office 83.3 % N/A 83.3 % 86.8 % 94.9 % 88.1 % (3.5) % N/A (4.8) % Other 87.4 % N/A 87.4 % 91.1 % N/A 91.1 % (3.7) % N/A (3.7) % Total 90.9 % 44.1 % 89.5 % 92.4 % 62.9 % 89.9 % (1.5) % (18.8) % (0.4) % • Multifamily : Decrease in same-store ending occupancy was primarily due to lower ending occupancy at our DC rent-controlled properties (3801 Connecticut Avenue and The Kenmore), partially offset by higher ending occupancy at The Maxwell and Park Adams. • Office : Decrease in same-store ending occupancy was primarily due to lower ending occupancy at 2000 M Street, Silverline Center, 515 King Street, 1901 Pennsylvania Avenue and 1140 Connecticut Avenue, partially offset by higher ending occupancy at 1220 19th Street. During the 2021 Quarter, we executed new and renewal leases in our office segment as follows: Square Feet (in thousands) Average Rental Rate (per square foot) % Rental Rate Increase Leasing Costs (1) (per square foot) Free Rent (weighted average months) Office 86 $ 57.71 6.1 % $ 14.67 2.7 ______________________________ (1) Consists of tenant improvements and leasing commissions. Real Estate Expenses Real estate expenses as a percentage of revenue for the 2021 Quarter and 2020 Quarter were 38.3% and 37.3%, respectively. Real estate expenses from same-store properties for the three months ended March 31, 2021 and 2020 by segment were as follows (in thousands): Three Months Ended March 31, 2021 2020 $ Change % Change Multifamily $ 14,405 $ 13,738 $ 667 4.9 % Office 10,117 11,324 (1,207) (10.7) % Other 1,405 1,337 68 5.1 % Total same-store real estate expenses $ 25,927 $ 26,399 $ (472) (1.8) % • Multifamily : Increase primarily due to higher contract maintenance ($0.2 million), utilities ($0.2 million), repairs and maintenance ($0.1 million) and insurance ($0.1 million) expenses. • Office : Decrease primarily due to lower administrative ($0.5 million), utilities ($0.4 million) and repairs and maintenance ($0.3 million) expenses. Other Income and Expenses Depreciation and Amortization : Decrease primarily due to the dispositions of Monument II ($1.0 million) and 1227 25th Street ($0.4 million) in the fourth quarter of 2020 and lower depreciation and amortization at same-store properties ($0.1 million). These decreases were partially offset by placing into service a portion of the Trove development ($1.4 million). General and administrative expenses: Decrease primarily due to lower professional fees ($0.5 million) and lower recruitment expense ($0.1 million) during the 2021 Quarter. Interest Expense : Interest expense by debt type for the three months ended March 31, 2021 and 2020 was as follows (in thousands): 24 Three Months Ended March 31, Debt Type 2021 2020 $ Change % Change Notes payable $ 9,486 $ 10,159 $ (673) (6.6) % Mortgage notes payable — 172 (172) (100.0) % Line of credit 845 1,398 (553) (39.6) % Capitalized interest (208) (884) 676 (76.5) % Total $ 10,123 $ 10,845 $ (722) (6.7) % • Notes payable : Decrease primarily due to prepayment of all $250.0 million of our 4.95% Senior Notes in April 2020 and prepayment of our $150.0 million 2015 Term Loan in December 2020, partially offset by the $350.0 million Green Bonds executed in December 2020. • Mortgage notes payable: 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 interest rate of 1.1% and lower weighted average borrowings of $58.2 million in 2021 Quarter, as compared to 2.6% and $108.3 million during the 2020 Quarter. • Capitalized interest : Decrease primarily due to placing into service assets at Trove. Gain on extinguishment of debt : We recognized a $0.5 million gain on extinguishment of debt during 2020 Quarter related to the prepayment of the mortgage note secured by Yale West Apartments. Other income : We recognized $1.3 million in other income related to a legal settlement during the 2021 Quarter. 25 Liquidity and Capital Resources In light of local and global economic uncertainty 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. Due to our remaining borrowing capacity on our Revolving Credit Facility and the fact that we do not have any debt maturing until the fourth quarter of 2022, we believe we have adequate liquidity to meet any major capital needs and commitments for the remainder of 2021. Capital Requirements As of the end of the 2021 Quarter, we summarize our full-year 2021 capital requirements as follows: • Funding dividends and distributions to our shareholders; • Approximately $42.5 - $47.5 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; • Approximately $5.0 - $7.5 million to invest in our development and redevelopment projects; and • Funding for potential property acquisitions throughout 2021, offset by proceeds from potential property dispositions. There can be no assurance that our capital requirements will not be materially higher or lower than the above expectations. 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 for the remainder of 2021. 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 above. If capital were not available, we may be unable to satisfy the distribution requirement applicable to REITs, make required principal and interest payments, make strategic acquisitions or make necessary and/or routine capital improvements or undertake improvement/redevelopment opportunities with respect to our existing portfolio of operating assets. 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. Long-term, we generally use fixed rate debt instruments in order to match the returns from our real estate assets. If we issue unsecured debt in the future, we would seek to “ladder” the maturities of our debt to mitigate exposure to interest rate risk in any particular future year. We also utilize variable rate debt for short-term financing purposes. At times, our mix of variable and fixed rate debt may not suit our needs. At those times, we may use derivative financial instruments including interest rate swaps and caps, forward interest rate options or interest rate options in order to assist us in managing our debt mix. We may 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. 26 Our future debt principal payments are scheduled as follows (in thousands): Future Maturities of Debt Year Unsecured Debt Revolving Credit Facility Total Debt Average Interest Rate 2021 $ — $ — $ — —% 2022 300,000 — 300,000 4.0% 2023 250,000 (1) 33,000 (2) 283,000 2.7% 2024 — — — —% 2025 — — — —% 2026 — — — —% Thereafter 400,000 (3) — 400,000 4.5% Scheduled principal payments $ 950,000 $ 33,000 $ 983,000 3.8% Net premiums/discounts (408) — (408) Loan costs, net of amortization (3,958) — (3,958) Total $ 945,634 $ 33,000 $ 978,634 3.8% ______________________________ (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 5.0 years. If principal amounts due at maturity cannot be refinanced, extended or paid with proceeds of other capital transactions, such as new equity capital, our cash flow may be insufficient to repay all maturing debt. Prevailing interest rates or other factors at the time of a refinancing, such as possible reluctance of lenders to make commercial real estate loans, may result in higher interest rates and increased interest expense or inhibit our ability to finance our obligations. From time to time, we may seek to repurchase and cancel our outstanding unsecured notes and term loans through open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. 27 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 March 31, 2021, we were in compliance with the covenants related to our Revolving Credit Facility, 2018 Term Loan, and unsecured notes. Common Equity We have authorized for issuance 150.0 million common shares, of which 84.6 million shares were outstanding at March 31, 2021. On February 17, 2021, we entered into separate amendments to each of our existing equity distribution agreements (“Original Equity Distribution Agreements”) with each of Wells Fargo Securities, LLC, BNY Mellon Capital Markets, LLC, Capital One Securities, Inc., Citigroup Global Markets Inc., Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, KeyBanc Capital Markets Inc. and Truist Securities, Inc. (f/k/a SunTrust Robinson Humphrey, Inc.), each dated May 4, 2018 (collectively, as amended, the “Amended Equity Distribution Agreements”). Also on February 17, 2021, we entered into a separate equity distribution agreement with BTIG, LLC on the same terms as the Amended Equity Distribution Agreements (the “BTIG Equity Distribution Agreement,” together with the Amended Equity Distribution Agreements, the “Equity Distribution Agreements”). Pursuant to the Equity Distribution Agreements, we may sell, from time to time, up to an aggregate price of $550.0 million of our common shares of beneficial interest, $0.01 par value per share. Issuances of our common shares are made at market prices prevailing at the time of issuance. We may use net proceeds from the issuance of common shares under this program for general business purposes, including, without limitation, working capital, the acquisition, renovation, expansion, improvement, development or redevelopment of income producing properties or the repayment of debt. Our issuances and net proceeds on the Equity Distribution Agreements and the Original Equity Distribution Agreements, respectively, for the three months ended March 31, 2021 and 2020 are as follows: Three Months Ended March 31, 2021 2020 Issuance of common shares 24 47 Weighted average price per share $ 22.06 $ 31.07 Net proceeds $ 467 $ 1,241 We have a dividend reinvestment program, whereby shareholders may use their dividends and optional cash payments to purchase common shares. The common shares sold under this program may either be common shares issued by us or common shares purchased in the open market. Our issuances and net proceeds on the dividend reinvestment program for the 2021 Quarter and 2020 Quarter were as follows (in thousands, except per share data): Three Months Ended March 31, 2021 2020 Issuance of common shares 23 35 Weighted average price per share $ 22.07 $ 26.96 Net proceeds $ 520 $ 921 28 Preferred Equity WashREIT’s board of trustees can, at its discretion, authorize the issuance of up to 10.0 million preferred shares. The ability to issue preferred equity provides WashREIT an additional financing tool that may be used to raise capital for future acquisitions or other business purposes. As of March 31, 2021, no preferred shares were issued or outstanding. Historical Cash Flows Cash flows from operations are an important factor in our ability to sustain our dividend at its current rate. If our cash flows from operations were to decline significantly from current levels, we may have to reduce our dividend. Consolidated cash flow information is summarized as follows (in thousands): Three Months Ended March 31, Change 2021 2020 $ % Net cash provided by operating activities $ 37,239 $ 28,860 $ 8,379 29.0 % Net cash used in investing activities (8,200) (20,342) 12,142 (59.7) % Net cash used in financing activities (33,749) (2,034) (31,715) 1,559.2 % Net cash provided by operating activities increased primarily due to timing differences on the payment of certain liabilities and lower interest payments in the 2021 Quarter. Net cash used in investing activities decreased primarily due to lower expenditures on capital improvements to real estate and lower expenditures on development during the 2021 Quarter. Net cash used in financing activities increased primarily due to lower net borrowings on the Revolving Credit Facility in the 2021 Quarter, partially offset by the prepayment of the mortgage note secured by Yale West during the 2020 Quarter. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements as of March 31, 2021 that are reasonably likely to have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. 29 Funds From Operations NAREIT FFO is a widely used measure of operating performance for real estate companies. In its 2018 NAREIT FFO Whitepaper Restatement, the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”) defined NAREIT FFO as net income (computed in accordance with GAAP) excluding gains (or losses) associated with sales of properties; impairments of depreciable real estate, and real estate depreciation and amortization. We consider NAREIT FFO to be a standard supplemental measure for equity 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. 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. Our NAREIT FFO may not be comparable to FFO reported by other REITs. These other REITs may not define the term in accordance with the current NAREIT definition or may interpret the current NAREIT definition differently. The following table provides the calculation of our NAREIT FFO and a reconciliation of NAREIT FFO to net (loss) income for the three months ended March 31, 2021 and 2020 (in thousands): Three Months Ended March 31, 2021 2020 Net (loss) income $ (1,147) $ 1,719 Adjustments: Depreciation and amortization 29,643 29,720 NAREIT FFO $ 28,496 $ 31,439 Critical Accounting Policies and Estimates We base the discussion and analysis of our financial condition and results of operations upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. There were no changes made by management to the critical accounting policies in the three months ended March 31, 2021. We discuss the most critical estimates in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on February 16, 2021. 30