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Item 2. Management’s Discussion and Analysis

2021-08-03 compared with 2021-04-29 · 219 added, 125 removed, 211 unchanged (62% of the section changed)

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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.

We refer to the three months ended June 30, 2021 and June 30, 2020 as the “2021 Quarter” and the “2020 Quarter,” respectively, and the six months ended June 30, 2021 and June 30, 2020 as the “2021 Period” and the “2020 Period,” respectively.

Forward-Looking Statements

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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.

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 distribution, 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;

Additional factors which may cause the actual results, performance, or achievements of WashREIT to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements include, but are not limited to the risks associated with the failure to enter into and/or complete contemplated acquisitions or dispositions (including the expected retail asset sales) within the price ranges anticipated and on the terms and timing anticipated, or at all;

our ability to execute on our strategies, including new strategies with respect to our operations and our portfolio, including the acquisition of multifamily properties in the Southeastern markets and the repayment of debt, on the terms anticipated, or at all, and to realize any anticipated benefits, including the performance of any acquired multifamily properties at the levels anticipated;

our ability to lease up Trove on the timing anticipated;

our ability to reduce actual net leverage to levels consistent with our targeted net leverage range, the risks associated with ownership of real estate in general and our real estate assets in particular;

the economic health of the greater Washington, DC metro region and the larger Southeastern region;

changes in the composition and geographic location of our portfolio;

fluctuations in interest rates;

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• Results of Operations.

Discussion of our financial results comparing the 2021 Quarter to the 2020 Quarter.

Discussion of our financial results comparing the 2021 Quarter to the 2020 Quarter and the 2021 Period to the 2020 Period.

• Liquidity and Capital Resources.

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• 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.

• Average occupancy , calculated as average monthly occupied multifamily units as a percentage of total multifamily units.

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.

Same-store portfolio properties include properties that were owned for the entirety of the years being compared, and exclude properties under redevelopment or development and properties acquired, sold or classified as held for sale during the years being compared.

We categorize our properties as “same-store” or non-“same-store” for purposes of evaluating comparative operating performance.

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.

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

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.

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

As of June 30, 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.

During the 2021 Quarter, we executed a purchase and sale agreement for the sale of twelve office properties (the “Office Portfolio”) (see note 3 to the condensed consolidated financial statements) for a purchase price of $766.0 million.

Subsequent to the 2021 Quarter, we executed a purchase and sale agreement for the sale of eight retail properties (the “Retail Portfolio”) (see note 3 to the condensed consolidated financial statements) for a purchase price of $168.3 million.

Both the Office Portfolio and Retail Portfolio met the criteria for classification as held for sale as of June 30, 2021 and are classified as discontinued operations in our condensed consolidated financial statements.

We closed on the sale of the Office Portfolio on July 26, 2021 and expect to close on the Retail Portfolio in the third quarter of 2021.

The closing of the Retail Portfolio is subject to customary closing conditions, however, no assurance can be given that the sale will be completed.

The remaining office property, Watergate 600, does not meet the qualitative or quantitative criteria for a reportable segment (see note 9 to the condensed consolidated financial statements).

The properties in the Office Portfolio and Retail Portfolio met the criteria for classification as held for sale as of June 30, 2021 and are classified as discontinued operations.

The dispositions of office and retail properties are part of a strategic shift away from the commercial sector to the multifamily sector which simplifies our portfolio to one reportable segment (multifamily) (the “strategic transformation”).

We plan to use the net proceeds from the sales to fund the expansion of our multifamily platform through acquisitions in Southeastern markets and to reduce our leverage by repaying outstanding debt.

The planned acquisitions of multifamily

properties and dispositions of office and retail properties are part of a strategic shift away from the commercial sector to the multifamily sector (the “strategic transformation”).

This strategic shift simplifies our portfolio to one reportable segment (multifamily).

We believe the successful execution of this research-driven strategic shift will lead to greater, more sustainable growth.

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.

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.

The COVID-19 pandemic caused state and local governments within the Washington, DC 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 impacted the 2021 Quarter, as of July 28, 2021, we collected 99% of cash rent during the 2021 Quarter.

We saw a decrease in credit losses of $0.3 million during the 2021 Quarter compared to the 2020 Quarter.

The effects of COVID-19 on our multifamily tenants led to a decline in rental rates during the 2021 Quarter compared to the 2020 Quarter.

However, we expect to be able to increase rental rates in the remainder of 2021 as market conditions have begun to improve.

We had an increase in average occupancy of approximately 60 basis points during the 2021 Quarter compared to the 2020 Quarter, excluding Trove, which began lease-up in the first quarter of 2020.

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.

Given our current concentration in the Washington, DC 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 previously initiated various operational cost-saving initiatives across our portfolio.

Due to the uncertainty of the future impacts of the COVID-19 pandemic, 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.

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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.

The legislation did not have a material impact on our results of operations for the 2021 Period and 2020 Period.

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,

Net loss, NOI and NAREIT FFO for the three months ended June 30, 2021 and 2020 were as follows (in thousands):

Three Months Ended June 30,

2021 2020 $ Change % Change

Net (loss) income $ (1,147) $ 1,719 $ (2,866) (166.7) %

Net loss $ (6,992) $ (5,406) $ (1,586) 29.3 %

$ 25,067 $ 27,169 $ (2,102) (7.7) %

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(2) See page 39 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.

The increase in net loss is primarily due to the loss on interest rate derivatives ($5.8 million), transformation costs ($3.8 million), lower NOI ($2.1 million), higher interest expense ($1.4 million) and higher general and administrative expenses ($1.0 million) in the 2021 Quarter, partially offset by the loss on sale of real estate ($7.5 million) and a loss on extinguishment of debt ($0.2 million) in the 2020 Quarter and higher income from discontinued operations ($3.2 million) and a real estate tax refund ($1.5 million) in the 2021 Quarter.

The lower NOI is primarily due to the sales of Monument II ($1.1 million), 1227 25th Street ($0.7 million) and John Marshall II ($0.2 million) during 2020 and lower same-store NOI ($0.6 million), partially offset by placing Trove, a multifamily development, into service starting in 2020 ($0.5 million).

Multifamily same-store average occupancy for our portfolio increased to 95.1% as of June 30, 2021 from 94.5% as of June 30, 2020, due to higher occupancy across the portfolio as the portfolio recovers from the COVID-19 pandemic.

The lower NAREIT FFO is primarily due to loss on interest rate derivatives ($5.8 million), transformation costs ($3.8 million), lower NOI ($2.1 million), higher interest expense ($1.4 million) and higher general and administrative expenses ($1.0 million).

These were partially offset by a real estate tax refund ($1.5 million) and higher income from discontinued operations, net of depreciation and amortization ($1.2 million) in the 2021 Quarter and loss on extinguishment of debt ($0.2 million) in 2020 Quarter.

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.

During the 2021 Quarter, we entered into a purchase and sale agreement with a single buyer to sell the Office Portfolio for a contract sales price of $766.0 million.

Subsequent to the 2021 Quarter, we closed on the Office Portfolio sale transaction on July 26, 2021.

Subsequent to the end of the 2021 Quarter, we entered into a purchase and sale agreement with a single buyer to sell the Retail Portfolio for a contract sales price of $168.3 million.

We expect to close on the sale of the Retail Portfolio in the third quarter of 2021.

We plan to use the net proceeds from the sales to fund the expansion of our multifamily platform through acquisitions in Southeastern markets and to reduce our leverage by repaying outstanding debt.

We expect to redeem $300.0 million of our Senior Notes due 2022 and repay $150.0 million of borrowings outstanding under the 2018 Term Loan, respectively.

In conjunction with these repayments, we expect to terminate five interest rate swaps (see note 5 to the consolidated financial statements).

As of June 30, 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 July 28, 2021, we had no outstanding balance and a full borrowing capacity of $700.0 million on our Revolving Credit Facility and approximately $665.0 million of cash on hand, primarily due to the proceeds from the Office Portfolio sale.

Capital Requirements

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

As discussed above, we plan to use a portion of the net proceeds from the sales of the Office Portfolio and Retail Portfolio to redeem $300.0 million of our Senior Notes scheduled to mature in 2022.

If such redemption is completed, we will have no debt maturities until 2023.

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.

The discussion that follows is based on our consolidated results of operations for the 2021 Quarter and 2021 Period and 2020 Quarter and 2020 Period.

The ability to compare one period to another is significantly affected by dispositions made during 2021 and 2020 (see note 3 to the consolidated financial statements).

Additionally, the COVID-19 pandemic adversely impacted our operating results for the 2021 Quarter, 2020 Quarter, 2021 Period and 2020 Period, 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.

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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.

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

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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.

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.

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NOI $ 24,644 $ 25,230 $ (586) (2.3) % $ 423 $ (90) $ — $ 2,029 $ 25,067 $ 27,169 $ (2,102) (7.7) %

Reconciliation to net (loss) income:

Reconciliation to net loss:

Depreciation and amortization (17,303) (17,372) 69 (0.4) %

General and administrative expenses (6,325) (5,296) (1,029) 19.4 %

Transformation costs (3,780) — (3,780) — %

Loss on sale of real estate — (7,539) 7,539 (100.0) %

Interest expense (10,158) (8,751) (1,407) 16.1 %

Other income 1,522 — 1,522 — %

Gain on extinguishment of debt — 468 (468) (100.0) %

Net (loss) income $ (1,147) $ 1,719 $ (2,866) (166.7) %

Loss on interest rate derivatives (5,760) — (5,760) — %

Loss on extinguishment of debt — (206) 206 (100.0) %

Discontinued operations (3) :

Income from operations of properties sold or held for sale 9,745 6,589 3,156 47.9 %

Net loss $ (6,992) $ (5,406) $ (1,586) 29.3 %

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

(3) Discontinued operations:

2021 Office - 1901 Pennsylvania Avenue, 515 King Street, 1220 19th Street, 1600 Wilson Boulevard, Silverline Center, Courthouse Square, 2000 M Street, 1140 Connecticut Avenue, Army Navy Club, 1775 Eye Street, Fairgate at Ballston and Arlington Tower

2021 Retail - Takoma Park, Westminster, Concord Centre, Chevy Chase Metro Plaza, 800 S.

Washington Street, Randolph Shopping Center, Montrose Shopping Center and Spring Valley Village

Real Estate Rental Revenue

Real estate rental revenue 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

$ 35,156 $ 36,541 $ (1,385) (3.8) %

Office 28,599 31,014 (2,415) (7.8) %

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).

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.

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

Real estate rental revenue from same-store multifamily properties decreased $0.3 million, or 0.9%, to $35.5 million for the 2021 Quarter, compared to $35.9 million for the 2020 Quarter, primarily due to lower rental revenue ($0.7 million) and higher rent abatements ($0.5 million).

These were partially offset by lower credit losses ($0.4 million), lower waived fees ($0.2 million), higher recoveries ($0.2 million) and higher termination fees ($0.1 million).

Real estate rental revenue from development properties increased due to continued lease-up of Trove ($1.1 million).

We placed the remainder of the Trove development costs into service during the first quarter of 2021.

Real estate rental revenue from held for sale and sold properties classified as continuing operations decreased due to sales of Monument II ($1.7 million) and 1227 25th Street ($1.3 million) during the fourth quarter of 2020 and the sale of John Marshall II ($0.4 million) during the second quarter of 2020.

Average occupancy for multifamily properties classified as continuing operations for the 2021 Quarter and 2020 Quarter was as follows:

June 30, 2021 June 30, 2020 Increase

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

Multifamily 95.1 % 49.9 % 92.5 % 94.5 % 7.5 % 89.5 % 0.6 % 42.4 % 3.0 %

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.

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:

(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

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(1) Consists of tenant improvements and leasing commissions.

The increase in same-store average occupancy was primarily due to higher average occupancy at The Paramount, The Maxwell and The Ashby at McLean, partially offset by lower average occupancy at Clayborne Apartments and Park Adams.

Real Estate Expenses

Real estate expenses as a percentage of revenue for the 2021 Quarter and 2020 Quarter were 39.3% and 37.9%, 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

$ 14,405 $ 13,738 $ 667 4.9 %

Office 10,117 11,324 (1,207) (10.7) %

Real estate expenses from same-store multifamily properties increased $0.1 million, or 0.9%, to $13.9 million for the 2021 Quarter, compared to $13.8 million for the 2020 Quarter, primarily due to higher contract maintenance ($0.2 million), utilities ($0.1 million) and insurance ($0.1 million) expenses, partially offset by lower real estate taxes ($0.3 million).

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.

These decreases were partially offset by placing into service a portion of the Trove development ($1.1 million) and higher depreciation and amortization at same-store properties ($0.2 million).

General and administrative expenses:

Increase primarily due to a higher estimate of short-term incentive compensation ($0.9 million) during the 2021 Quarter.

Transformation costs:

During the 2021 Quarter we incurred $3.8 million of costs related to the strategic transformation, including consulting, advisory and termination benefits.

Interest Expense :

Interest expense by debt type for the three months ended June 30, 2021 and 2020 was as follows (in thousands):

Three Months Ended June 30,

Debt Type 2021 2020 $ Change % Change

Notes payable $ 9,475 $ 7,562 $ 1,913 25.3 %

Line of credit 854 1,725 (871) (50.5) %

Capitalized interest (171) (536) 365 (68.1) %

Total $ 10,158 $ 8,751 $ 1,407 16.1 %

• Notes payable :

Increase primarily due to $350.0 million Green Bonds executed in December 2020, partially offset by prepayment of our $150.0 million 2015 Term Loan in December 2020 and by the new $150.0 million 2020 Term Loan executed in May 2020 and prepaid in November 2020.

• Line of credit :

Decrease primarily due to lower weighted average interest rate of 1.1% and lower weighted average borrowings of $60.9 million in 2021 Quarter, as compared to 1.5% and $269.1 million during the 2020 Quarter.

• Capitalized interest :

Decrease primarily due to placing into service assets at Trove.

Loss on extinguishment of debt :

We recognized a $0.2 million loss on extinguishment of debt during 2020 Quarter related to the prepayment of the $250 million of 4.95% Senior Notes that were scheduled to mature in October 2020.

Other income :

During the 2021 Quarter we recognized $1.5 million in other income related to a tax refund for an office property sold in 2018.

Loss on interest rate derivatives :

We currently expect to prepay a $150.0 million portion of the 2018 Term Loan during the third quarter of 2021.

We have determined that the hedged transactions for the five interest rate swap arrangements with an aggregate notional value of $150.0 million are probable not to occur and that these interest swap arrangements are no longer effective cash flow hedges as of June 30, 2021.

As a result of the ineffectiveness, the accumulated fair value of the five interest rate swap

arrangements of $5.8 million was reclassified from Accumulated other comprehensive loss to Loss on interest rate derivatives on our condensed consolidated financial statements.

Income from discontinued operations:

Increase primarily due to lower depreciation and amortization ($2.0 million), higher recoveries ($0.7 million) and lower credit losses ($0.7 million) from retail and office properties classified as discontinued operations.

These increases were partially offset by higher utilities ($0.2 million) expenses.

2021 Period Compared to 2020 Period

The following tables reconcile NOI to net (loss) income and provide the basis for our discussion of our consolidated results of operations and NOI in the 2021 Period compared to the 2020 Period.

All amounts are in thousands, except percentage amounts.

Non-Same-Store

Same-Store Development/Redevelopment (1)

Held for Sale or Sold (2)

All Properties

Change 2021 2020 2021 2020 2021 2020 $

Real estate rental revenue $ 79,598 $ 81,267 $ (1,669) (2.1) % $ 2,306 $ 251 $ — $ 7,982 $ 81,904 $ 89,500 $ (7,596) (8.5) %

Real estate expenses

31,010 30,205 805 2.7 % 1,674 551 — 3,290 32,684 34,046 (1,362) (4.0) %

Total same-store real estate expenses $ 25,927 $ 26,399 $ (472) (1.8) %

NOI $ 48,588 $ 51,062 $ (2,474) (4.8) % $ 632 $ (300) $ — $ 4,692 $ 49,220 $ 55,454 $ (6,234) (11.2) %

Reconciliation to net loss:

Depreciation and amortization (34,290) (34,619) 329 (1.0) %

General and administrative expenses (11,929) (11,633) (296) 2.5 %

Transformation costs (3,780) — (3,780) — %

Loss on sale of real estate — (7,539) 7,539 (100.0) %

Interest expense (20,281) (19,596) (685) 3.5 %

Other income 2,806 — 2,806 — %

Loss on interest rate derivatives (5,760) — (5,760) — %

Gain on extinguishment of debt — 262 (262) (100.0) %

Discontinued operations (3) :

Income from operations of properties sold or held for sale 15,875 13,984 1,891 13.5 %

Net loss (8,139) (3,687) (4,452) 120.7 %

(1) Development/redevelopment:

Multifamily - Trove

(2) Sold (classified as continuing operations):

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

(3) Discontinued operations:

2021 Retail - Takoma Park, Westminster, Concord Centre, Chevy Chase Metro Plaza, 800 S.

Washington Street, Randolph Shopping Center, Montrose Shopping Center and Spring Valley Village

Real Estate Rental Revenue

Real estate rental revenue from same-store multifamily properties decreased $1.7 million, or 2.3%, to $70.7 million for the 2021 Period, compared to $72.4 million for the 2020 Period, primarily due to lower rental revenue ($1.7 million) and higher rent abatements ($0.9 million), partially offset by higher recoveries ($0.4 million), lower waived fees ($0.1 million), higher termination fees ($0.1 million) and lower credit losses ($0.1 million).

Real estate rental revenue from development properties increased due to the continued lease-up of the Trove development ($2.1 million).

We placed the remainder of the Trove development costs into service during the first quarter of 2021.

Real estate rental revenue from sold properties classified as continuing operations decreased due to sales of Monument II ($3.1 million) and 1227 25th Street ($2.7 million) during the fourth quarter of 2020, and due to the sale of John Marshall II ($2.2 million) during the second quarter of 2020.

Average occupancy for multifamily properties classified as continuing operations for the 2021 Period and 2020 Period was as follows:

June 30, 2021 June 30, 2020 Increase

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

Multifamily 94.7 % 40.6 % 91.6 % 94.9 % 4.0 % 89.8 % (0.2) % 36.6 % 1.8 %

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.

Decrease primarily due to lower administrative ($0.5 million), utilities ($0.4 million) and repairs and maintenance ($0.3 million) expenses.

The decrease in same-store average occupancy was primarily due to lower average occupancy at 3801 Connecticut Avenue, The Kenmore and Cascade at Landmark, partially offset by higher average occupancy at The Paramount and Assembly Leesburg.

Real Estate Expenses

Real estate expenses as a percentage of revenue for the 2021 Period and 2020 Period were 39.9% and 38.0%, respectively.

Real estate expenses from same-store multifamily properties increased $0.8 million, or 2.9%, to $28.3 million for the six months ended June 30, 2021, compared to $27.5 million for the six months ended June 30, 2020, primarily due to higher contract maintenance and supplies ($0.4 million), utilities ($0.3 million) and repairs and maintenance ($0.2 million) expenses, partially offset by lower real estate tax expenses ($0.2 million).

Other Income and Expenses

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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.

Increase primarily due to a higher estimate of short term incentive compensation ($1.0 million), partially offset by lower professional fees ($0.3 million), recruitment fees ($0.1 million) and information technology expenses ($0.1 million).

Transformation costs:

During the 2021 Period we incurred $3.8 million of costs related to the strategic transformation, including consulting, advisory and termination benefits.

Loss on sale of real estate:

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

Gain on extinguishment of debt:

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

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

Interest Expense :

Interest expense by debt type for the three months ended March 31, 2021 and 2020 was as follows (in thousands):

Three Months Ended March 31,

Interest expense by debt type for the six months ended June 30, 2021 and 2020 was as follows (in thousands):

Six Months Ended June 30,

Debt Type 2021 2020 $ Change % Change

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• 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.

Increase primarily due to $350.0 million Green Bonds executed in December 2020, partially offset by prepayment of all $250.0 million of our 4.95% Senior Notes in April 2020, prepayment of our $150.0 million 2015 Term Loan in December 2020 and by the new $150.0 million 2020 Term Loan executed in May 2020 and prepaid in November 2020.

• Mortgage notes payable :

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• 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.

Decrease primarily due to a lower weighted average interest rate of 1.1% and lower weighted average borrowings of $59.5 million during the 2021 Period, as compared to 1.8% and $188.6 million, respectively, during the 2020 Period.

• 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.

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

Other income :

We recognized $1.3 million in other income related to a legal settlement during the 2021 Quarter.

We recognized $1.3 million in other income related to a legal settlement and $1.5 million related to a real estate tax refund for an office property sold in 2018 during 2021 Period.

Loss on interest rate derivatives :

We currently expect to prepay a $150.0 million portion of the 2018 Term Loan during the third quarter of 2021.

We have determined that the hedged transactions for five interest rate swap arrangements with an aggregate notional value of $150.0 million are probable not to occur and that these interest swap arrangements are no longer effective cash flow hedges as of June 30, 2021.

As a result of the ineffectiveness, the accumulated fair value of the five interest rate swap arrangements of $5.8 million was reclassified from Accumulated other comprehensive loss to Loss on interest rate derivatives on our condensed consolidated financial statements.

Income from discontinued operations:

Increase primarily due to lower depreciation and amortization ($1.8 million) from retail and office properties classified as discontinued operations.

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.

We believe we will have adequate liquidity over the next 12 months to operate our business and to meet our cash requirements.

As of July 26, 2021, we had cash and cash equivalents totaling approxim ately $665.0 million and n o outstanding balance and a full borrowing capacity of $700.0 million on our Revolving Credit Facility, resulting in a total liquidity position of approximatel y $1.4 billion.

Through our Office Portfolio sale and expected Retail Portfolio sale, we executed strategic transactions that will allow us to pursue multifamily expansion in Southeastern markets, meet our debt obligations for the next twelve months, including our plans to redeem all $300.0 million of Senior Notes due 2022 in the third quarter of 2021, and pay a dividend on a quarterly basis.

When the redemption of the Senior Notes due in 2022 is completed, we will have no debt maturities until 2023.

We will continue to assess the payment of our dividends on a quarterly basis.

Future determinations regarding the declaration and payment of dividends, if any, will be at the discretion of our Board of Trustees who considers, among other factors, trends in our levels of funds from operations and ongoing capital requirements to achieve a targeted payout ratio.

Capital Requirements

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• Approximately $7.5 - $10.0 million to invest in our development and redevelopment projects;

• Funding for potential property acquisitions throughout 2021, offset by proceeds from potential property dispositions.

• Funding for potential property acquisitions throughout 2021 and additional debt reductions, 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.

However, as a result of the uncertainty of the general market conditions in the greater Washington, DC 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.

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2025 — — — —%

Thereafter 400,000 (3)

2026 — — — —%

Thereafter 400,000 — 400,000 4.5%

Scheduled principal payments $ 950,000 $ 43,000 $ 993,000 3.8%

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______________________________

(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.

(1) Subsequent to the end of the 2021 Quarter, WashREIT provided notice to the holders of its $300.0 million of Senior Notes due in 2022 that it plans to redeem all $300.0 million of Senior Notes due in 2022 in the third quarter of 2021, which it intends to fund using cash available following the sale of the Office Portfolio.

The Senior Notes are scheduled to mature in October 2022.

(2) 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 a $150.0 million portion of the term loan.

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%.

WashREIT expects to repay $150.0 million of the 2018 Term Loan using sales proceeds from the Office Portfolio and the Retail Portfolio in the third quarter of 2021.

(3) 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 4.7 years.

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

As of March 31, 2021, we were in compliance with the covenants related to our Revolving Credit Facility, 2018 Term Loan, and unsecured notes.

As of June 30, 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.

We have authorized for issuance 150.0 million common shares, of which 84.6 million shares were outstanding at June 30, 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.

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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,

We did not issue common shares under the Equity Distribution Agreements during the 2021 Quarter or 2020 Quarter.

Our issuances and net proceeds on the Equity Distribution Agreements and the Original Equity Distribution Agreements, respectively, for the 2021 Period and 2020 Period are as follows ($ in thousands, except per share data):

Six Months Ended June 30,

Issuance of common shares 24 47

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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,

Our issuances and net proceeds on the dividend reinvestment program for the three and six months ended June 30, 2021 and 2020 are as follows ($ in thousands, except per share data):

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

2021 2020 2021 2020

Issuance of common shares 22 6 45 41

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

As of March 31, 2021, no preferred shares were issued or outstanding.

As of June 30, 2021, no preferred shares were issued or outstanding.

Historical Cash Flows

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

Three Months Ended March 31, Change

Six Months Ended June 30, Change

2021 2020 $ %

Net cash provided by operating activities $ 64,622 $ 51,182 $ 13,440 26.3 %

Net cash used in investing activities (8,200) (20,342) 12,142 (59.7) %

Net cash (used in) provided by investing activities (18,195) 12,131 (30,326) (250.0) %

Net cash used in financing activities (48,687) (69,463) 20,776 (29.9) %

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.

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 Period.

Net cash used in investing activities increased primarily due to the sale of John Marshall II during the 2020 Period, partially offset by lower expenditures on capital improvements to real estate and development during the 2021 Period.

Net cash used in financing activities decreased primarily due to net repayments of term loans and the prepayment of the mortgage note secured by Yale West during the 2020 Period, partially offset by lower net borrowings on the Revolving Credit Facility in the 2021 Period.

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.

We have no off-balance sheet arrangements as of June 30, 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.

Funds From Operations

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

The following table provides the calculation of our NAREIT FFO and a reconciliation of NAREIT FFO to net (loss) income for the three months ended March 31, 2021 and 2020 (in thousands):

Three Months Ended March 31,

Net (loss) income $ (1,147) $ 1,719

NAREIT FFO is a non-GAAP measure.

The following table provides the calculation of our NAREIT FFO and a reconciliation of NAREIT FFO to net loss for the three and six months ended June 30, 2021 and 2020 (in thousands):

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

2021 2020 2021 2020

Net loss $ (6,992) $ (5,406) $ (8,139) $ (3,687)

Depreciation and amortization 17,303 17,372 34,290 34,619

Loss on sale of depreciable real estate — 7,539 — 7,539

Discontinued operations:

Depreciation and amortization 10,248 12,227 22,904 24,700

NAREIT FFO $ 20,559 $ 31,732 $ 49,055 $ 63,171

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

There were no changes made by management to the critical accounting policies in the three months ended March 31, 2021.

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

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis