Elme Communities 10-Q

ITEM 1: FINANCIAL STATEMENTS The information furnished in the accompanying unaudited Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Comprehensive Income (Loss), Consolidated Statements of Equity and Consolidated Statements of Cash Flows reflects all adjustments, consisting of normal recurring items, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The accompanying financial statements and notes thereto should be read in conjunction with the financial statements and notes for the three years ended December 31, 2020 included in Washington Real Estate Investment Trust’s 2020 Annual Report on Form 10-K filed on February 16, 2021. 4 WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA ) (UNAUDITED ) June 30, 2021 December 31, 2020 Assets Land $ 301,709 $ 301,709 Income producing property 1,490,975 1,473,335 1,792,684 1,775,044 Accumulated depreciation and amortization ( 367,519 ) ( 335,006 ) Net income producing property 1,425,165 1,440,038 Properties under development or held for future development 30,065 36,494 Total real estate held for investment, net 1,455,230 1,476,532 Investment in real estate held for sale, net 779,121 795,687 Cash and cash equivalents 5,435 7,697 Restricted cash 595 593 Rents and other receivables 12,916 9,725 Prepaid expenses and other assets 28,297 29,587 Other assets related to properties held for sale 86,811 89,997 Total assets $ 2,368,405 $ 2,409,818 Liabilities Notes payable, net $ 945,905 $ 945,370 Line of credit 43,000 42,000 Accounts payable and other liabilities 47,897 44,067 Dividend payable 25,474 25,361 Advance rents 1,572 2,461 Tenant security deposits 4,374 4,221 Other liabilities related to properties held for sale 23,748 25,229 Total liabilities 1,091,970 1,088,709 Equity Shareholders’ equity Preferred shares; $ 0.01 par value; 10,000 shares authorized; no shares issued or outstanding — — Shares of beneficial interest, $ 0.01 par value; 150,000 and 100,000 shares authorized; 84,590 and 84,409 shares issued and outstanding, as of June 30, 2021 and December 31, 2020, respectively 846 844 Additional paid in capital 1,654,409 1,649,366 Distributions in excess of net income ( 357,934 ) ( 298,860 ) Accumulated other comprehensive loss ( 21,200 ) ( 30,563 ) Total shareholders’ equity 1,276,121 1,320,787 Noncontrolling interests in subsidiaries 314 322 Total equity 1,276,435 1,321,109 Total liabilities and equity $ 2,368,405 $ 2,409,818 See accompanying notes to the consolidated financial statements. 5 WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Revenue Real estate rental revenue $ 41,297 $ 43,757 $ 81,904 $ 89,500 Expenses Real estate expenses 16,230 16,588 32,684 34,046 Depreciation and amortization 17,303 17,372 34,290 34,619 General and administrative expenses 6,325 5,296 11,929 11,633 Transformation costs 3,780 — 3,780 — 43,638 39,256 82,683 80,298 Loss on sale of real estate — ( 7,539 ) — ( 7,539 ) Real estate operating income ( 2,341 ) ( 3,038 ) ( 779 ) 1,663 Other income (expense) Interest expense ( 10,158 ) ( 8,751 ) ( 20,281 ) ( 19,596 ) (Loss) gain on extinguishment of debt — ( 206 ) — 262 Loss on interest rate derivatives ( 5,760 ) — ( 5,760 ) — Other income 1,522 — 2,806 — ( 14,396 ) ( 8,957 ) ( 23,235 ) ( 19,334 ) Loss from continuing operations ( 16,737 ) ( 11,995 ) ( 24,014 ) ( 17,671 ) Discontinued operations: Income from operations of properties sold or held for sale 9,745 6,589 15,875 13,984 Net loss $ ( 6,992 ) $ ( 5,406 ) $ ( 8,139 ) $ ( 3,687 ) Basic net (loss) income per share: Continuing operations $ ( 0.20 ) $ ( 0.15 ) $ ( 0.29 ) $ ( 0.22 ) Discontinued operations 0.12 0.08 0.19 0.17 Basic net loss per common share $ ( 0.08 ) $ ( 0.07 ) $ ( 0.10 ) $ ( 0.05 ) Diluted net (loss) income per share: Continuing operations $ ( 0.20 ) $ ( 0.15 ) $ ( 0.29 ) $ ( 0.22 ) Discontinued operations 0.12 0.08 0.19 0.17 Diluted net loss per common share $ ( 0.08 ) $ ( 0.07 ) $ ( 0.10 ) $ ( 0.05 ) Weighted average shares outstanding – basic 84,461 82,153 84,437 82,120 Weighted average shares outstanding – diluted 84,461 82,153 84,437 82,120 See accompanying notes to the consolidated financial statements. 6 WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (IN THOUSANDS) (UNAUDITED) Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Net loss $ ( 6,992 ) $ ( 5,406 ) $ ( 8,139 ) $ ( 3,687 ) Other comprehensive income (loss): Unrealized gain (loss) on interest rate hedges 1,004 ( 1,789 ) 2,584 ( 36,356 ) Reclassification of unrealized loss on interest rate derivatives to earnings 6,269 — 6,779 — Comprehensive income (loss) $ 281 $ ( 7,195 ) $ 1,224 $ ( 40,043 ) See accompanying notes to the consolidated financial statements. 7 WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY (IN THOUSANDS) (UNAUDITED) Shares Issued and Out-standing Shares of Beneficial Interest at Par Value Additional Paid in Capital Distributions in Excess of Net Income Accumulated Other Comprehensive Loss Total Shareholders’ Equity Noncontrolling Interests in Subsidiaries Total Equity Balance, December 31, 2020 84,409 $ 844 $ 1,649,366 $ ( 298,860 ) $ ( 30,563 ) $ 1,320,787 $ 322 $ 1,321,109 Net loss — — — ( 8,139 ) — ( 8,139 ) — ( 8,139 ) Unrealized gain on interest rate hedges — — — — 2,584 2,584 — 2,584 Loss on interest rate derivatives — — — — 5,760 5,760 — 5,760 Amortization of swap settlements — — — — 1,019 1,019 — 1,019 Distributions to noncontrolling interests — — — — — — ( 8 ) ( 8 ) Dividends ($ 0.60 per common share) — — — ( 50,935 ) — ( 50,935 ) — ( 50,935 ) Equity issuances, net of issuance costs 24 — 467 — — 467 — 467 Shares issued under Dividend Reinvestment Program 45 — 1,009 — — 1,009 — 1,009 Share grants, net of forfeitures and tax withholdings 112 2 3,567 — — 3,569 — 3,569 Balance, June 30, 2021 84,590 $ 846 $ 1,654,409 $ ( 357,934 ) $ ( 21,200 ) $ 1,276,121 $ 314 $ 1,276,435 Shares Issued and Out-standing Shares of Beneficial Interest at Par Value Additional Paid in Capital Distributions in Excess of Net Income Accumulated Other Comprehensive Income (Loss) Total Shareholders’ Equity Noncontrolling Interests in Subsidiaries Total Equity Balance, December 31, 2019 82,099 $ 821 $ 1,592,487 $ ( 183,405 ) $ 1,823 $ 1,411,726 $ 336 $ 1,412,062 Net loss — — — ( 3,687 ) — ( 3,687 ) — ( 3,687 ) Unrealized loss on interest rate hedges — — — — ( 36,356 ) ( 36,356 ) — ( 36,356 ) Distributions to noncontrolling interests — — — — — — ( 7 ) ( 7 ) Dividends ($ 0.60 per common share) — — — ( 49,581 ) — ( 49,581 ) — ( 49,581 ) Equity issuances, net of issuance costs 46 1 1,241 — — 1,242 — 1,242 Shares issued under Dividend Reinvestment Program 41 — 1,065 — — 1,065 — 1,065 Share grants, net of forfeitures and tax withholdings 141 1 3,827 — — 3,828 — 3,828 Balance, June 30, 2020 82,327 $ 823 $ 1,598,620 $ ( 236,673 ) $ ( 34,533 ) $ 1,328,237 $ 329 $ 1,328,566 See accompanying notes to the consolidated financial statements. 8 WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY (IN THOUSANDS) (UNAUDITED) Shares Issued and Out-standing Shares of Beneficial Interest at Par Value Additional Paid in Capital Distributions in Excess of Net Income Accumulated Other Comprehensive Loss Total Shareholders’ Equity Noncontrolling Interests in Subsidiaries Total Equity Balance, March 31, 2021 84,564 $ 846 $ 1,651,680 $ ( 325,469 ) $ ( 28,473 ) $ 1,298,584 $ 318 $ 1,298,902 Net loss — — — ( 6,992 ) — ( 6,992 ) — ( 6,992 ) Unrealized loss on interest rate hedges — — — — 1,004 1,004 — 1,004 Loss on interest rate derivatives — — — — 5,760 5,760 — 5,760 Amortization of swap settlements — — — — 509 509 — 509 Distributions to noncontrolling interests — — — — — — ( 4 ) ( 4 ) Dividends ($ 0.30 per common share) — — — ( 25,473 ) — ( 25,473 ) — ( 25,473 ) Shares issued under Dividend Reinvestment Program 22 — 489 — — 489 — 489 Share grants, net of share grant amortization and forfeitures 4 — 2,240 — — 2,240 — 2,240 Balance, June 30, 2021 84,590 $ 846 $ 1,654,409 $ ( 357,934 ) $ ( 21,200 ) $ 1,276,121 $ 314 $ 1,276,435 Shares Issued and Out-standing Shares of Beneficial Interest at Par Value Additional Paid in Capital Distributions in Excess of Net Income Accumulated Other Comprehensive Income Total Shareholders’ Equity Noncontrolling Interests in Subsidiaries Total Equity Balance, March 31, 2020 82,315 $ 823 $ 1,596,242 $ ( 206,506 ) $ ( 32,744 ) $ 1,357,815 $ 333 $ 1,358,148 Net loss — — — ( 5,406 ) — ( 5,406 ) — ( 5,406 ) Unrealized gain on interest rate hedges — — — — ( 1,789 ) ( 1,789 ) — ( 1,789 ) Distributions to noncontrolling interests — — — — — — ( 4 ) ( 4 ) Dividends ($ 0.30 per common share) — — — ( 24,761 ) — ( 24,761 ) — ( 24,761 ) Shares issued under dividend reinvestment program 6 — 144 — — 144 — 144 Share grants, net of forfeitures and tax withholdings 6 — 2,234 — — 2,234 — 2,234 Balance, June 30, 2020 82,327 $ 823 $ 1,598,620 $ ( 236,673 ) $ ( 34,533 ) $ 1,328,237 $ 329 $ 1,328,566 See accompanying notes to the consolidated financial statements. 9 WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) Six Months Ended June 30, 2021 2020 Cash flows from operating activities Net loss $ ( 8,139 ) $ ( 3,687 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 57,194 59,319 Credit losses on lease related receivables 1,337 2,271 Loss on sale of real estate — 7,539 Share-based compensation expense 3,750 3,783 Net amortization of debt premiums, discounts and related financing costs 2,227 1,314 Loss on interest rate derivatives 5,760 — Gain on extinguishment of debt — ( 262 ) Changes in operating other assets ( 6,071 ) ( 4,482 ) Changes in operating other liabilities 8,564 ( 14,613 ) Net cash provided by operating activities 64,622 51,182 Cash flows from investing activities Net cash received for sale of real estate — 56,353 Capital improvements to real estate ( 10,370 ) ( 25,452 ) Development in progress ( 7,794 ) ( 18,646 ) Non-real estate capital improvements ( 31 ) ( 124 ) Net cash (used in) provided by investing activities ( 18,195 ) 12,131 Cash flows from financing activities Line of credit borrowings, net 1,000 125,000 Dividends paid ( 50,821 ) ( 49,485 ) Principal payments – mortgage notes payable — ( 46,567 ) Repayments of unsecured notes payable — ( 250,000 ) Proceeds from term loan — 150,000 Payment of financing costs — ( 560 ) Distributions to noncontrolling interests ( 7 ) ( 7 ) Proceeds from dividend reinvestment program 1,009 1,065 Net proceeds from equity issuances 467 1,241 Payment of tax withholdings for restricted share awards ( 335 ) ( 150 ) Net cash used in financing activities ( 48,687 ) ( 69,463 ) Net decrease in cash, cash equivalents and restricted cash ( 2,260 ) ( 6,150 ) Cash, cash equivalents and restricted cash at beginning of period 8,290 14,751 Cash, cash equivalents and restricted cash at end of period $ 6,030 $ 8,601 10 WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) Six Months Ended June 30, 2021 2020 Supplemental disclosure of cash flow information: Cash paid for interest, net of amounts capitalized $ 12,038 $ 21,380 Change in accrued capital improvements and development costs ( 4,697 ) 3,687 Dividend payable 25,474 24,760 Reconciliation of cash, cash equivalents and restricted cash: Cash and cash equivalents $ 5,435 $ 7,971 Restricted cash 595 630 Cash, cash equivalents and restricted cash $ 6,030 $ 8,601 See accompanying notes to the consolidated financial statements. 11 WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2021 (UNAUDITED) NOTE 1: NATURE OF BUSINESS Washington Real Estate Investment Trust (“WashREIT”), a Maryland real estate investment trust, is a self-administered equity real estate investment trust, successor to a trust organized in 1960. Our business consists of the ownership and operation of income producing real estate properties in the greater Washington, DC metro region. We own a portfolio of multifamily and commercial (office and retail) properties. Within these notes to the financial statements, 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. During the 2021 Quarter, we executed a purchase and sale agreement for the sale of twelve office properties (see note 3). Subsequent to the 2021 Quarter, we executed a purchase and sale agreement for the sale of all of our remaining eight retail properties (see note 3). Both these office and retail properties met the criteria for classification as held for sale as of June 30, 2021 and are classified as discontinued operations. The remaining office property, Watergate 600, does not meet the qualitative or quantitative criteria for a reportable segment (see note 9). The retail properties have not been a reportable segment since 2019. 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”). Federal Income Taxes We believe that we qualify as a real estate investment trust (“REIT”) under Sections 856-860 of the Internal Revenue Code of 1986, as amended (the “Code”), and intend to continue to qualify as such. To maintain our status as a REIT, we are, among other things, required to distribute 90% of our REIT taxable income (determined before the deduction for dividends paid and excluding net capital gains to our shareholders) on an annual basis. When selling a property, we generally have the option of (a) reinvesting the sales proceeds of property sold in a way that allows us to defer recognition of some or all taxable gain realized on the sale, (b) distributing gains to the shareholders with no tax to us or (c) treating net long-term capital gains as having been distributed to our shareholders, paying the tax on the gain deemed distributed and allocating the tax paid as a credit to our shareholders. Generally, and subject to our ongoing qualification as a REIT, no provisions for income taxes are necessary except for taxes on undistributed taxable income and taxes on the income generated by our taxable REIT subsidiaries (“TRSs”). Our TRSs are subject to corporate federal and state income tax on their taxable income at regular statutory rates. As of both June 30, 2021 and December 31, 2020, our TRSs had a deferred tax asset of $ 1.4 million that was fully reserved. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATIONS Significant Accounting Policies We have prepared our consolidated financial statements using the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2020. Principles of Consolidation and Basis of Presentation The accompanying unaudited consolidated financial statements include the consolidated accounts of WashREIT, our majority-owned subsidiaries and entities in which WashREIT has a controlling interest. All intercompany balances and transactions have been eliminated in consolidation. We have prepared the accompanying unaudited financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to make the information presented not misleading. In addition, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results for the periods presented have been included. These unaudited financial statements should be read in conjunction with the financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2020. 12 Held for Sale and Discontinued Operations We classify properties as held for sale when they meet the necessary criteria, which include: (a) senior management commits to a plan to sell the assets; (b) the assets are available for immediate sale in their present condition subject only to terms that are usual and customary for sales of such assets; (c) an active program to locate a buyer and other actions required to complete the plan to sell the assets has been initiated; (d) the sale of the assets is probable and transfer of the assets is expected to qualify for recognition as a completed sale within one year; (e) the assets are being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (f) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. Depreciation on these properties is discontinued at the time they are classified as held for sale, but operating revenues, operating expenses and interest expense continue to be recognized until the date of sale. Revenues and expenses of properties that are either sold or classified as held for sale are presented as discontinued operations for all periods presented in the consolidated statements of operations if the dispositions represent a strategic shift that has (or will have) a major effect on our operations and financial results. If the dispositions do not represent a strategic shift that has (or will have) a major effect on our operations and financial results, then the revenues and expenses of the properties that are classified as sold or held for sale are presented as continuing operations in the consolidated statements of operations for all periods presented. Restricted Cash Restricted cash includes funds held in escrow for tenant security deposits. Transformation Costs Transformation costs include costs related to the strategic transformation, including consulting, advisory and termination benefits. As of June 30, 2021, $ 3.4 million is accrued and included in Accounts payable and other liabilities on the Consolidated Balance Sheets. Use of Estimates in the Financial Statements The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 3: REAL ESTATE Development/Redevelopment We have properties under development/redevelopment and held for current or future development. As of June 30, 2021, we have invested $ 29.1 million, including the cost of acquired land, in a multifamily development adjacent to Riverside Apartments. In addition, in our multifamily segment, we continue to capitalize qualifying costs on several other projects with minor development activity necessary to ready each project for its intended use. We placed the remainder of the Trove development costs into service during the first quarter of 2021. Properties Sold and Held for Sale We intend to hold our properties for investment with a view to long-term appreciation, to engage in the business of acquiring, developing and owning our properties and to make occasional sales of properties that no longer meet our long-term strategy or return objectives and where market conditions for sale are favorable. The proceeds from the sales may be reinvested into other properties, used to fund development operations or to support other corporate needs or distributed to our shareholders. Depreciation on these properties is discontinued at the time they are classified as held for sale, but operating revenues, operating expenses and interest expense continue to be recognized until the date of sale. 13 We classified as held for sale or sold the following properties during 2021 and 2020: Disposition Date Property Name Property Type Rentable Square Feet Contract Sales Price (in thousands) (Loss) Gain on Sale (in thousands) (1) July 26, 2021 Office Portfolio (2) Office 2,370,000 $ 766,000 N/A (3) Retail Portfolio (4) Retail 693,000 168,314 Total 2021 3,063,000 $ 934,314 April 21, 2020 John Marshall II Office 223,000 $ 57,000 $ ( 6,855 ) December 2, 2020 Monument II Office 207,000 53,000 ( 8,595 ) December 17, 2020 1227 25th Street NW Office 135,000 53,500 1,125 Total 2020 565,000 $ 163,500 $ ( 14,325 ) ______________________________ (1) Amount determined and disclosed in the quarter of disposition. (2) Consists of twelve office properties: 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. (3) Disposition of the Retail Portfolio is expected to occur in the third quarter of 2021. (4) Consists of eight retail properties: Takoma Park, Westminster, Concord Centre, Chevy Chase Metro Plaza, 800 S. Washington Street, Randolph Shopping Center, Montrose Shopping Center and Spring Valley Village . We have fully transferred control of the assets associated with assets sold in 2020 and do not have continuing involvement in their operations. In June 2021, we entered into a purchase and sale agreement with a single buyer to sell the Office Portfolio for a purchase price of $ 766.0 million. As of June 30, 2021, the properties in the Office Portfolio met the criteria for classification as held for sale. We closed on the sale of the Office Portfolio on July 26, 2021. In June 2021, we executed a letter of intent to sell the Retail Portfolio. As of June 30, 2021, we expected to enter into a purchase and sale agreement and receive a non-refundable deposit from the potential buyer of the Retail Portfolio in July 2021. As of June 30, 2021, the Retail Portfolio met the criteria for classification as held for sale. Subsequent to the 2021 Quarter, we executed a purchase and sale agreement for the sale of our remaining eight retail properties for a purchase price of $ 168.3 million and received a non-refundable deposit of $ 6.7 million from the potential buyer. 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 disposition of the Office Portfolio and expected disposition of the Retail Portfolio represent a strategic shift that will have a major effect on our financial results and we have accordingly reported the Office Portfolio and Retail Portfolio as discontinued operations. The remaining office property, Watergate 600, does not meet the criteria for office to be a reportable segment (see note 9). As of June 30, 2021, we anticipate the disposition of certain properties prior to the end of their useful lives. We assessed these properties for impairment as of June 30, 2021 and did no t recognize any impairment charges during the 2021 Quarter. We applied reasonable estimates and judgments in evaluating each of the properties as of June 30, 2021. Should external or internal circumstances change requiring the need to shorten holding periods or adjust future estimated cash flows from our properties, we could be required to record impairment charges in the future. 14 Discontinued Operations The results of the Office Portfolio and Retail Portfolio are classified as discontinued operations and are summarized as follows (amounts in thousands, except for share data): Three months ended June 30, Six months ended June 30, 2021 2020 2021 2020 Real estate rental revenue $ 30,561 $ 29,113 $ 59,587 $ 60,163 Real estate expenses ( 10,568 ) ( 10,297 ) ( 20,808 ) ( 21,479 ) Depreciation and amortization ( 10,248 ) ( 12,227 ) ( 22,904 ) ( 24,700 ) Income from discontinued operations $ 9,745 $ 6,589 $ 15,875 $ 13,984 Basic net income per share $ 0.12 $ 0.08 $ 0.19 $ 0.17 Diluted net income per share $ 0.12 $ 0.08 $ 0.19 $ 0.17 Capital expenditures $ 2,109 $ 5,346 $ 2,483 $ 7,586 As of June 30, 2021 and December 31, 2020, assets and liabilities related to the Office Portfolio and Retail Portfolio were as follows (in thousands): June 30, 2021 December 31, 2020 Land $ 249,869 $ 249,869 Income producing property 961,359 958,704 1,211,228 1,208,573 Accumulated depreciation and amortization ( 433,229 ) ( 414,008 ) Income producing property, net 777,999 794,565 Development in progress and land held for development 1,122 1,122 Investment in real estate, net $ 779,121 $ 795,687 Cash and cash equivalents 3 3 Restricted cash 10 10 Rents and other receivables 48,563 48,532 Prepaid expenses and other assets 38,235 41,452 Total assets $ 865,932 $ 885,684 Accounts payable and other liabilities $ 12,738 $ 14,706 Advance rents 4,977 4,754 Tenant security deposits 6,033 5,769 Liabilities related to properties sold or held for sale $ 23,748 $ 25,229 NOTE 4: UNSECURED LINE OF CREDIT PAYABLE During the first quarter of 2018, we entered into an amended and restated credit agreement (“Credit Agreement”) which provides for a $ 700.0 million unsecured revolving credit facility (“Revolving Credit Facility”), the continuation of an existing $ 150.0 million unsecured term loan (“2015 Term Loan”) and an additional $ 250.0 million unsecured term loan (“2018 Term Loan”). In the fourth quarter of 2020, we repaid all $ 150.0 million of borrowings on the 2015 Term Loan. The Revolving Credit Facility has a four-year term ending in March 2022, with two six-month extension options. The Credit Agreement has an accordion feature that allows us to increase the aggregate facility to $ 1.5 billion, subject to the lenders’ agreement to provide additional revolving loan commitments or term loans. The Revolving Credit Facility bears interest at a rate of either one month LIBOR plus a margin ranging from 0.775 % to 1.55 % or the base rate plus a margin ranging from 0.0 % to 0.55 % (in each case depending upon WashREIT’s credit rating). The base rate is the highest of the administrative agent’s prime rate, the federal funds rate plus 0.50 % and the LIBOR market index rate 15 plus 1.0 %. In addition, the Revolving Credit Facility requires the payment of a facility fee ranging from 0.10 % to 0.30 % (depending on WashREIT’s credit rating) on the $ 700.0 million committed revolving loan capacity, without regard to usage. As of June 30, 2021, the interest rate on the Revolving Credit Facility is one month LIBOR plus 1.00 %, the one month LIBOR is 0.10 % and the facility fee is 0.20 %. All outstanding advances for the Revolving Credit Facility are due and payable upon maturity in March 2022, unless extended pursuant to one or both of the two six-month extension options. Interest only payments are due and payable generally on a monthly basis. The 2018 Term Loan increased and replaced the $ 150.0 million unsecured term loan, initially entered into on July 22, 2016 (“2016 Term Loan”), that was scheduled to mature in July 2023. The 2018 Term Loan is scheduled to mature in July 2023 and bears interest at a rate of either one month LIBOR plus a margin ranging from 0.85 % to 1.75 % or the base rate plus a margin ranging from 0.0 % to 0.75 % (in each case depending upon WashREIT’s credit rating). We used the $ 100.0 million of additional proceeds from the 2018 Term Loan primarily to repay outstanding borrowings on the Revolving Credit Facility. We had previously used interest rate derivatives to effectively fix the interest rate of the 2016 Term Loan. These interest rate derivatives now effectively fix the interest rate on a $ 150.0 million portion of the 2018 Term Loan at 2.31 %. In March 2018, we entered into interest rate derivatives that commenced on June 29, 2018 to effectively fix the interest rate on the remaining $ 100.0 million of the 2018 Term Loan at 3.71 %. The 2018 Term Loan has an all-in fixed interest rate of 2.87 %. The amount of the Revolving Credit Facility’s unsecured line of credit unused and available at June 30, 2021 is as follows (in thousands): Committed capacity $ 700,000 Borrowings outstanding ( 43,000 ) Unused and available $ 657,000 We executed borrowings and repayments on the Revolving Credit Facility during the 2021 Period as follows (in thousands): Balance at December 31, 2020 $ 42,000 Borrowings 72,000 Repayments ( 71,000 ) Balance at June 30, 2021 $ 43,000 NOTE 5: DERIVATIVE INSTRUMENTS On July 22, 2016, we entered into two forward interest rate swap arrangements with notional amounts of $ 100.0 million and $ 50.0 million, respectively, to swap the floating interest rate under the $ 150.0 million 2016 Term Loan to an all-in fixed interest rate of 2.86 % starting on March 31, 2017 and extending until the scheduled maturity of the 2016 Term Loan on July 21, 2023. On March 29, 2018, we entered into the $ 250.0 million 2018 Term Loan maturing on July 21, 2023, which increased and replaced the 2016 Term Loan. The interest rate swap arrangements that had effectively fixed the 2016 Term Loan then effectively fix the interest rate on a $ 150.0 million portion of the 2018 Term Loan at 2.31 %. On March 29, 2018, we entered into four interest rate swap arrangements with a total notional amount of $ 100.0 million to effectively fix the interest rate on the remaining $ 100.0 million of the 2018 Term Loan at 3.71 %, that commenced on June 29, 2018 and extending until the maturity of the 2018 Term Loan on July 21, 2023. The $ 250.0 million 2018 Term Loan has an all-in fixed interest rate of 2.87 %. The interest rate swaps are recorded at fair value in accordance with Generally Accepted Accounting Principles (“GAAP”), based on discounted cash flow methodologies and observable inputs. We record the effective portion of changes in fair value of the cash flow hedges in other comprehensive income. We assess the effectiveness of our cash flow hedges both at inception and on an ongoing basis. If a cash flow hedge is no longer expected to be effective, hedge accounting is discontinued. Hedge ineffectiveness of our cash flow hedges is recorded in earnings. We currently expect to use a portion of the proceeds from the sale of the Office and potential sale of the Retail Portfolios (see note 3) to prepay a $ 150.0 million portion of the 2018 Term Loan during the third quarter of 2021. We expect to hold the remaining $ 100.0 million portion of the 2018 Term Loan until maturity. Due to this intention to prepay a $ 150.0 million portion of the 2018 Term Loan, we have determined that the hedged transactions for the five interest rate swap arrangements with an 16 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, we recognized a loss of $ 5.8 million for the 2021 Quarter, which was recorded to Loss on interest rate derivatives on our condensed consolidated statements of operations. The interest rate swap arrangement with a notional value of $ 100.0 million related to the remaining portion of the 2018 Term Loan that we intend to hold to maturity is an effective cash flow hedge as of June 30, 2021. The fair values of the interest rate swaps as of June 30, 2021 and December 31, 2020, are as follows (in thousands): Fair Value Derivative Liabilities Derivative Instrument Aggregate Notional Amount Effective Date Maturity Date June 30, 2021 December 31, 2020 Interest rate swaps $ 150,000 March 31, 2017 July 21, 2023 $ ( 2,869 ) $ ( 4,009 ) Interest rate swaps 100,000 June 29, 2018 July 21, 2023 ( 4,802 ) ( 6,246 ) $ ( 7,671 ) $ ( 10,255 ) We record interest rate swaps on our consolidated balance sheets within Prepaid expenses and other assets when in a net asset position and within Accounts payable and other liabilities when in a net liability position. The net unrealized gains or losses on the effective swaps are recognized in Other comprehensive loss, as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Unrealized gain (loss) on interest rate hedges $ 1,004 $ ( 1,789 ) $ 2,584 $ ( 36,356 ) Amounts reported in Accumulated other comprehensive loss related to effective cash flow hedges will be reclassified to interest expense as interest payments are made on our variable-rate debt. The gains or losses reclassified from Accumulated other comprehensive loss into interest expense for the three and six months ended June 30, 2021 and 2020, were as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Loss reclassified from Accumulated other comprehensive loss into interest expense $ 509 $ — $ 1,019 $ — During the next twelve months, we estimate that an additional $ 3.1 million will be reclassified as an increase to interest expense. We have agreements with each of our derivative counterparties that contain a provision whereby we could be declared in default on our derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to our default on the indebtedness. As of June 30, 2021, we did no t have any derivatives in an asset position and the fair value of the derivative liabilities, including accrued interest, was $ 7.7 million. As of June 30, 2021, we have not posted any collateral related to these agreements. Derivative instruments expose us to credit risk in the event of non-performance by the counterparty under the terms of the interest rate hedge agreements. We believe that we minimize our credit risk on these transactions by dealing with major, creditworthy financial institutions. We monitor the credit ratings of counterparties and our exposure to any single entity, thus minimizing our credit risk concentration. NOTE 6: FAIR VALUE DISCLOSURES Assets and Liabilities Measured at Fair Value For assets and liabilities measured at fair value on a recurring basis, quantitative disclosures about the fair value measurements are required to be disclosed separately for each major category of assets and liabilities, as follows: Level 1: Quoted prices in active markets for identical assets 17 Level 2: Significant other observable inputs Level 3: Significant unobservable inputs The only assets or liabilities we had at June 30, 2021 and December 31, 2020 that are recorded at fair value on a recurring basis are the assets held in the Supplemental Executive Retirement Plan (“SERP”), which primarily consist of investments in mutual funds, and the interest rate derivatives (see note 5). We base the valuations related to the SERP on assumptions derived from significant other observable inputs and accordingly these valuations fall into Level 2 in the fair value hierarchy. The valuation of the interest rate derivatives is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each interest rate derivative. This analysis reflects the contractual terms of the interest rate derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate derivatives are determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. To comply with the provisions of ASC 820, Fair Value Measurement , we incorporate credit valuation adjustments in the fair value measurements to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk. These credit valuation adjustments were concluded to not be significant inputs for the fair value calculations for the periods presented. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as the posting of collateral, thresholds, mutual puts and guarantees. The valuation of interest rate derivatives fall into Level 2 in the fair value hierarchy. The fair values of these assets and liabilities at June 30, 2021 and December 31, 2020 were as follows (in thousands): June 30, 2021 December 31, 2020 Fair Value Level 1 Level 2 Level 3 Fair Value Level 1 Level 2 Level 3 Assets: SERP $ 2,386 $ — $ 2,386 $ — $ 2,433 $ — $ 2,433 $ — Liabilities: Interest rate derivatives $ ( 7,671 ) $ — $ ( 7,671 ) $ — $ ( 10,255 ) $ — $ ( 10,255 ) $ — Financial Assets and Liabilities Not Measured at Fair Value The following disclosures of estimated fair value were determined by management using available market information and established valuation methodologies, including discounted cash flow models. Many of these estimates involve significant judgment. The estimated fair value disclosed may not necessarily be indicative of the amounts we could realize on disposition of the financial instruments. The use of different market assumptions or estimation methodologies could have an effect on the estimated fair value amounts. In addition, fair value estimates are made at a point in time and thus, estimates of fair value subsequent to June 30, 2021 may differ significantly from the amounts presented. The valuations of cash and cash equivalents and restricted cash fall into Level 1 in the fair value hierarchy and the valuations of debt instruments fall into Level 3 in the fair value hierarchy. As of June 30, 2021 and December 31, 2020, the carrying values and estimated fair values of our financial instruments were as follows (in thousands): June 30, 2021 December 31, 2020 Carrying Value Fair Value Carrying Value Fair Value Cash and cash equivalents $ 5,435 $ 5,435 $ 7,697 $ 7,697 Restricted cash 595 595 593 593 Line of credit 43,000 43,000 42,000 42,000 Notes payable, net 945,905 977,200 945,370 978,678 18 NOTE 7: STOCK BASED COMPENSATION WashREIT maintains short-term (“STIP”) and long-term (“LTIP”) incentive plans that allow for stock based awards to officers and non-officer employees. Stock based awards are provided to officers and non-officer employees, as well as trustees, under the Washington Real Estate Investment Trust 2016 Omnibus Incentive Plan which allows for awards in the form of restricted shares, restricted share units, options and other awards up to an aggregate of 2,400,000 shares over the ten-year period in which the plan will be in effect. Restricted share units are converted into shares of our stock upon full vesting through the issuance of new shares. Total Compensation Expense Total compensation expense recognized in the consolidated financial statements for all outstanding share based awards was $ 2.2 million and $ 2.0 million for the 2021 Quarter and 2020 Quarter, respectively, and $ 3.8 million and $ 3.8 million for the 2021 Period and 2020 Period, respectively. Restricted Share Awards The total fair values of restricted share awards vested was $ 2.0 million and $ 0.8 million for the 2021 Period and 2020 Period, respectively. The total unvested restricted share awards at June 30, 2021 was 456,326 shares, which had a weighted average grant date fair value of $ 28.38 per share. As of June 30, 2021, the total compensation cost related to unvested restricted share awards was $ 7.4 million, which we expect to recognize over a weighted average period of 20 months. NOTE 8: EARNINGS PER COMMON SHARE We determine “Basic earnings per share” using the two-class method as our unvested restricted share awards and units have non-forfeitable rights to dividends, and are therefore considered participating securities. We compute basic earnings per share by dividing net income less the allocation of undistributed earnings to unvested restricted share awards and units by the weighted-average number of common shares outstanding for the period. We also determine “Diluted earnings per share” as the more dilutive of the two-class method or the treasury stock method with respect to the unvested restricted share awards. We further evaluate any other potentially dilutive securities at the end of the period and adjust the basic earnings per share calculation for the impact of those securities that are dilutive. Our dilutive earnings per share calculation includes the dilutive impact of operating partnership units under the if-converted method and our share based awards with performance conditions prior to the grant date and all market condition awards under the contingently issuable method. 19 The computations of basic and diluted earnings per share for the three and six months ended June 30, 2021 and 2020 were as follows (in thousands, except per share data): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Numerator: Loss from continuing operations $ ( 16,737 ) $ ( 11,995 ) $ ( 24,014 ) $ ( 17,671 ) Allocation of distributed earnings to unvested restricted share awards ( 137 ) ( 151 ) ( 276 ) ( 302 ) Adjusted net loss from continuing operations ( 16,874 ) ( 12,146 ) ( 24,290 ) ( 17,973 ) Income from discontinued operations 9,745 6,589 15,875 13,984 Adjusted net loss $ ( 7,129 ) $ ( 5,557 ) $ ( 8,415 ) $ ( 3,989 ) Denominator: Weighted average shares outstanding – basic 84,461 82,153 84,437 82,120 Effect of dilutive securities: Employee restricted share awards — — — — Operating partnership units — — — — Weighted average shares outstanding – diluted 84,461 82,153 84,437 82,120 Earnings per common share, basic: Continuing operations $ ( 0.20 ) $ ( 0.15 ) $ ( 0.29 ) $ ( 0.22 ) Discontinued operations 0.12 0.08 0.19 0.17 Basic net loss per common share $ ( 0.08 ) $ ( 0.07 ) $ ( 0.10 ) $ ( 0.05 ) Earnings per common share, diluted: Continuing operations $ ( 0.20 ) $ ( 0.15 ) $ ( 0.29 ) $ ( 0.22 ) Discontinued operations 0.12 0.08 0.19 0.17 Diluted net loss per common share $ ( 0.08 ) $ ( 0.07 ) $ ( 0.10 ) $ ( 0.05 ) Dividends declared per common share $ 0.30 $ 0.30 $ 0.60 $ 0.60 On July 29, 2021, we announced that the Board of Trustees declared a quarterly dividend of $ 0.17 per share for the three months ended September 30, 2021. NOTE 9: SEGMENT INFORMATION We previously had two reportable segments: office and multifamily. Office properties provide office space for various types of businesses and professions. Multifamily properties provide rental housing for individuals and families throughout the Washington, DC metro region. We have eight retail properties that did not meet the criteria for a reportable segment and are classified as “Corporate and other” in our segment disclosure tables. During the 2021 Quarter, we executed a purchase and sale agreement for the sale of twelve office properties (see note 3). Subsequent to the 2021 Quarter, we executed a purchase and sale agreement for the sale of eight retail properties (see note 3). Both the office and retail properties met the criteria for classification as held for sale as of June 30, 2021 and are classified as discontinued operations. 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. We have one remaining office property, Watergate 600, which does not meet the criteria for a reportable segment, has been classified within “Corporate and other” on our segment disclosure tables. We evaluate performance based upon net operating income of the combined properties in each segment. Our reportable operating segments are consolidations of similar properties. GAAP requires that segment disclosures present the measure(s) used by the chief operating decision maker for purposes of assessing each segment’s performance. Net operating income is a key measurement of our segment profit and loss and is defined as real estate rental revenue less real estate expenses. 20 The following tables present revenues, net operating income, capital expenditures and total assets for the three and six months ended June 30, 2021 and 2020 from our Multifamily segment as well as Corporate and Other, and reconcile net operating income of our reportable segments to net loss as reported (in thousands): Three Months Ended June 30, 2021 Multifamily Corporate and Other (1), (2) Consolidated Real estate rental revenue $ 36,862 $ 4,435 $ 41,297 Real estate expenses 14,832 1,398 16,230 Net operating income $ 22,030 $ 3,037 $ 25,067 Depreciation and amortization ( 17,303 ) General and administrative expenses ( 6,325 ) Transformation costs ( 3,780 ) Interest expense ( 10,158 ) Other income 1,522 Loss on interest rate derivatives ( 5,760 ) Discontinued operations: Income from operations of properties sold or held for sale 9,745 Net loss $ ( 6,992 ) Capital expenditures $ 4,062 $ 2,300 $ 6,362 Total assets $ 1,315,640 $ 1,052,765 $ 2,368,405 Three Months Ended June 30, 2020 Multifamily Corporate and Other (1), (2) Consolidated Real estate rental revenue $ 36,066 $ 7,691 $ 43,757 Real estate expenses 14,110 2,478 16,588 Net operating income $ 21,956 $ 5,213 $ 27,169 Depreciation and amortization ( 17,372 ) General and administrative expenses ( 5,296 ) Interest expense ( 8,751 ) Loss on sale of real estate ( 7,539 ) Loss on extinguishment of debt ( 206 ) Discontinued operations: Income from operations of properties sold or held for sale 6,589 Net loss $ ( 5,406 ) Capital expenditures $ 5,488 $ 9,118 $ 14,606 Total assets $ 1,337,731 $ 1,204,991 $ 2,542,722 21 Six Months Ended June 30, 2021 Multifamily Corporate and Other (1), (2) Consolidated Real estate rental revenue $ 73,029 $ 8,875 $ 81,904 Real estate expenses 30,004 2,680 32,684 Net operating income $ 43,025 $ 6,195 $ 49,220 Depreciation and amortization ( 34,290 ) General and administrative ( 11,929 ) Transformation costs ( 3,780 ) Interest expense ( 20,281 ) Other income 2,806 Loss on interest rate derivatives ( 5,760 ) Discontinued operations: Income from operations of properties sold or held for sale 15,875 Net loss $ ( 8,139 ) Capital expenditures $ 7,799 $ 2,602 $ 10,401 Six Months Ended June 30, 2020 Multifamily Corporate and Other (1), (2) Consolidated Real estate rental revenue $ 72,651 $ 16,849 $ 89,500 Real estate expenses 28,095 5,951 34,046 Net operating income $ 44,556 $ 10,898 $ 55,454 Depreciation and amortization ( 34,619 ) General and administrative ( 11,633 ) Interest expense ( 19,596 ) Loss on sale of real estate ( 7,539 ) Gain on extinguishment of debt 262 Discontinued operations: Income from operations of properties sold or held for sale 13,984 Net loss $ ( 3,687 ) Capital expenditures $ 8,957 $ 16,619 $ 25,576 ______________________________ (1) Corporate and Other represents Watergate 600, an office property that does not meet the qualitative or quantitative criteria for a reportable segment. (2) Total assets and capital expenditures include office and retail properties classified as discontinued operations. 22 NOTE 10: SHAREHOLDERS' EQUITY 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. 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, 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 shares sold under this program may either be common shares issued by us or common shares purchased in the open market. Net proceeds under this program are used for general corporate purposes. 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 Weighted average price per share $ 23.21 $ 22.68 $ 22.63 $ 26.38 Net proceeds $ 489 $ 144 $ 1,009 $ 1,065 23