Item 7. Management’s Discussion and Analysis
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We provide Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations and financial condition. We organize the MD&A as follows:
• Overview. Discussion of our business outlook, operating results, investment activity, financing activity and capital requirements to provide context for the remainder of MD&A.
• Results of Operations. Discussion of our financial results comparing 2021 to 2020 and 2020 to 2019.
• Liquidity and Capital Resources. Discussion of our financial condition and analysis of changes in our capital structure and cash flows.
• Funds From Operations . Calculation of NAREIT Funds From Operations (“NAREIT FFO”), a non-GAAP supplemental measure to net income.
• Critical Accounting Estimates. Descriptions of accounting policies that reflect significant judgments and estimates used in the preparation of our consolidated financial statements.
When evaluating our financial condition and operating performance, we focus on the following financial and non-financial indicators:
• Net operating income (“NOI”) , calculated as set forth below under the caption "Results of Operations - Net Operating Income." NOI is a non-GAAP supplemental measure to net income.
• Funds From Operations (“NAREIT FFO”) , calculated as set forth below under the caption “Funds from Operations.” NAREIT FFO is a non-GAAP supplemental measure to net income.
• Average occupancy , calculated as average daily occupied apartment homes as a percentage of total apartment homes.
For purposes of evaluating comparative operating performance, we categorize our properties as “same-store” or “non-same-store”. 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 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. Development properties are categorized as same-store when they have reached stabilized occupancy (90%) before the start of the prior year. We define redevelopment properties as those for which we have planned or ongoing significant development and construction activities on existing or acquired buildings pursuant to an authorized plan, which has an impact on current operating results, occupancy and the ability to lease space with the intended result of a higher economic return on the property. We categorize a redevelopment property as same-store when redevelopment activities have been complete for the majority of each year being compared.
Overview
During the third quarter of 2021, we completed the sale of twelve office properties (the “Office Portfolio”) (see note 3 to the consolidated financial statements) for a contract sale price of $766.0 million. Also during the third quarter of 2021, we completed the sale of eight retail properties (the “Retail Portfolio”) (see note 3 to the consolidated financial statements) for a contract sale price of $168.3 million. Both the Office Portfolio and Retail Portfolio are classified as discontinued operations in our consolidated financial statements. The remaining office property, Watergate 600, does not meet the qualitative or quantitative criteria for a reportable segment (see note 13 to the consolidated financial statements).
The dispositions of our office and retail properties are part of a strategic shift away from the commercial sector to the residential sector, which simplifies our portfolio to one reportable segment (residential) (the “strategic transformation”). We have used and plan to continue using the net proceeds from the sales to fund the expansion of our residential platform through acquisitions in Southeastern markets and reduce our leverage by repaying outstanding debt. During the third and fourth quarters of 2021, we completed the acquisitions of two apartment communities in Georgia for contract purchase prices of $48.0 million and $106.0 million, respectively. The apartment communities have a combined total of 730 apartment homes. We believe the successful execution of this research-driven strategic shift will lead to greater, more sustainable growth.
In connection with this strategic transformation, we are redesigning our operating model for purposes of more efficiently and effectively supporting residential operations. This operating model redesign includes insourcing the property-level management
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activities currently performed by third-party management companies. Costs related to the strategic transformation, including the allocation of internal costs, consulting, advisory and termination benefits, are included in Transformation costs on our consolidated statements of operations. We anticipate incurring approximately $11.0 - $13.0 million of transformation costs during 2022. We expect to realize significant operational benefits from this operating model redesign and complete its implementation in 2023.
COVID-19
On March 11, 2020, the World Health Organization declared COVID-19, a respiratory illness caused by a 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, DC metro and Southeast regions 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 our operating results for the years ended December 31, 2021 and 2020, we experienced strong cash collections throughout the pandemic at our apartment communities. As of February 16, 2022, we collected 98% of cash rent at same-store communities during the fourth quarter of 2021. We saw an inflection point during the third quarter of 2021, as indicated by the improvement in blended effective lease rate growth, which increased 8.4% in the fourth quarter of 2021 compared to a decrease of 6.4% in the fourth quarter of 2020. Same-store average occupancy increased approximately 190 basis points during the fourth quarter of 2021 compared to the fourth quarter of 2020. We expect continued increases in rental rates and strong occupancy during 2022 as the market recovery continues.
New legislation was enacted to provide relief to businesses in response to the COVID-19 pandemic. We have evaluated and will continue to evaluate the relief options available, or that become available in the future, such as the Coronavirus Aid, Relief, and Economic Securities Act (“CARES Act”), or other emergency relief initiatives and stimulus packages instituted by the federal government. A number of the available relief options contain restrictions on future business activities that require careful evaluation and consideration, including the ability to repurchase shares and pay dividends. We will continue to assess these options and any subsequent legislation or other relief packages, including the accompanying restrictions on our business, as the pandemic continues to evolve. The legislation did not have a material impact on our results of operations for 2021 and 2020.
Selected Financial Data
The following table sets forth our selected financial data on a historical basis. The following data should be read in conjunction with our financial statements and notes thereto included elsewhere in this Form 10-K and this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
2021 2020 2019 2018 2017
(in thousands, except per share data)
Real estate rental revenue $ 169,151 $ 176,004 $ 176,748 $ 163,154 $ 178,568
Loss from continuing operations $ (53,140) $ (40,318) $ (4,253) $ (30,808) $ (29,567)
Discontinued operations:
Income from operations of properties sold or held for sale $ 23,083 $ 24,638 $ 49,543 $ 56,438 $ 48,102
Gain on sale of real estate $ 46,441 $ — $ 339,024 $ — $ —
Net income (loss) $ 16,384 $ (15,680) $ 383,550 $ 25,630 $ 18,535
Net income (loss) attributable to the controlling interests $ 16,384 $ (15,680) $ 383,550 $ 25,630 $ 18,591
Loss from continuing operations attributable to the controlling interests per share – diluted $ (0.63) $ (0.50) $ (0.05) $ (0.40) $ (0.39)
Net income (loss) attributable to the controlling interests per share – diluted $ 0.19 $ (0.20) $ 4.75 $ 0.32 $ 0.25
Total assets $ 1,875,994 $ 2,409,818 $ 2,628,328 $ 2,417,104 $ 2,359,426
Amounts outstanding on line of credit $ — $ 42,000 $ 56,000 $ 188,000 $ 166,000
Mortgage notes payable, net $ — $ — $ 47,074 $ 48,277 $ 81,624
Notes payable, net $ 496,946 $ 945,370 $ 996,722 $ 995,397 $ 894,358
Shareholders’ equity $ 1,316,755 $ 1,320,787 $ 1,411,726 $ 1,068,127 $ 1,094,971
Cash dividends declared $ 80,018 $ 99,775 $ 96,964 $ 95,502 $ 92,834
Cash dividends declared per share $ 0.94 $ 1.20 $ 1.20 $ 1.20 $ 1.20
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Operating Results
The discussion that follows is based on our Operating Results. The ability to compare one period to another is significantly affected
by the strategic transformation in 2021 and other acquisitions completed and dispositions made during those years (see note 3 to the
consolidated financial statements).
Net income (loss), NOI and NAREIT FFO for the years ended December 31, 2021 and 2020 were as follows (in thousands, except percentage amounts):
Year Ended December 31,
2021 2020 Change % Change
Net income (loss)
$ 16,384 $ (15,680) $ 32,064 204.5 %
NOI (1)
$ 108,369 $ 113,022 $ (4,653) (4.1) %
NAREIT FFO (2)
$ 65,503 $ 119,359 $ (53,856) (45.1) %
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(1) See page 29 of the MD&A for reconciliations of NOI to net income.
(2) See page 44 of the MD&A for reconciliations of NAREIT FFO to net income.
The increase in net income is primarily due to the change in net gain on sale of real estate ($61.5 million), higher other income ($4.1 million) and lower interest expense ($3.2 million), partially offset by higher loss on extinguishment of debt ($12.7 million), higher transformation costs ($6.6 million), higher loss on interest rate derivatives ($5.3 million), lower NOI ($4.7 million), higher general and administrative expenses ($3.6 million), higher depreciation and amortization expenses ($2.3 million) and lower income from discontinued operations ($1.6 million).
The lower NOI is primarily due to the sales of Monument II ($3.7 million), 1227 25th Street ($2.8 million) and John Marshall II ($1.4 million) during 2020 and lower same-store NOI ($1.7 million), partially offset by placing Trove, a residential development, into service starting in 2020 ($3.3 million) and the acquisitions of The Oxford ($0.8 million) and Assembly Eagles Landing ($0.6 million) in 2021. Residential same-store average occupancy for our portfolio increased to 95.3% in 2021 from 94.5% in 2020 as occupancy increased across the portfolio due to recovery from the impact of the COVID-19 pandemic.
The lower NAREIT FFO is primarily due to lower income from discontinued operations, net of depreciation and amortization ($28.3 million), higher loss on extinguishment of debt ($12.7 million), higher transformation expenses ($6.6 million), higher loss on interest rate derivatives ($5.3 million), lower NOI ($4.7 million) and higher general and administrative expenses ($3.6 million). These were partially offset by higher other income ($4.1 million) and lower interest expense ($3.2 million).
Investment Activity
Significant investment transactions during 2021 included the following:
• The disposition of the Office Portfolio for a contract sales price of $766.0 million. As a result of the transaction, we recognized a loss on sale of real estate of $11.2 million.
• The disposition of the Retail Portfolio for a contract sales price of $168.3 million. As a result of the transaction, we recognized a gain on sale of real estate of $57.7 million.
• The acquisition of The Oxford, a 240-unit apartment community in Conyers, Georgia, for a contract purchase price of $48.0 million.
• The acquisition of Assembly Eagles Landing, a 490-unit apartment community in Stockbridge, Georgia, for a contract purchase price of $106.0 million.
Financing Activity
Significant financing transactions during 2021 included the following:
• We redeemed $300.0 million of our Senior Notes due 2022 and repaid $150.0 million of borrowings outstanding under the 2018 Term Loan. In conjunction with these repayments, we terminated five interest rate swaps (see note 7 to the consolidated financial statements).
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• We entered into an amended and restated credit agreement which provides for a $700.0 million unsecured revolving credit facility (“Revolving Credit Facility”). The Revolving Credit Facility has a four-year term ending in August 2025, with two six-month extension options. We recognized a $0.2 million non-cash loss on extinguishment of debt related to the write-off of unamortized loan origination costs.
• We issued 1.6 million common shares at a weighted average price per share of $25.44 for net proceeds of $40.5 million through our at-the-market program. Subsequent to December 31, 2021, we issued an additional 1.0 million shares at a weighted average price per share of $26.27 for net proceeds of $26.9 million.
As of December 31, 2021, the interest rate on the $700.0 million unsecured revolving credit facility was one-month LIBOR plus 0.85% and the facility fee was 0.20%. The LIBOR was 0.10% as of that date. As of February 16, 2022, we had no outstanding balance and a full borrowing capacity of $700.0 million on our Revolving Credit Facility and $151.6 million of cash on hand, primarily due to the proceeds from the Office Portfolio and Retail Portfolio sales.
Capital Requirements
We do not have any debt maturities scheduled during 2022. We expect to have additional capital requirements as set forth on page 37 (Liquidity and Capital Resources - Capital Requirements).
Results of Operations
The discussion that follows is based on our consolidated results of operations for the three years ended December 31, 2021. The ability to compare one period to another is significantly affected by the strategic transformation in 2021, including the resulting classification of certain assets as discontinued operations, and other acquisitions completed and dispositions made during those years (see note 3 to the consolidated financial statements). Our Results of Operations for 2020 Compared to 2019 have also been reclassified to reflect the strategic transformation in 2021, including the resulting classification of certain assets as discontinued operations, and other acquisitions completed and dispositions made during those years.
Net Operating Income
NOI, defined as real estate rental revenue less direct real estate operating 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, acquisition costs, real estate impairment, casualty gain and losses and gain or loss on extinguishment of debt. NOI does not include management expenses, which consist of corporate property management costs and property management fees paid to third parties. We believe that NOI is a useful performance measure because, when compared across periods, it reflects the impact on operations of trends in occupancy rates, rental rates and operating costs on an unleveraged basis, providing perspective not immediately apparent from net income. NOI excludes certain components from net income in order to provide results more closely related to a property’s results of operations. For example, interest expense is not necessarily linked to the operating performance of a real estate asset. In addition, depreciation and amortization, because of historical cost accounting and useful life estimates, may distort operating performance at the property level. As a result of the foregoing, we provide NOI as a supplement to net income, calculated in accordance with GAAP. NOI does not represent net income or income from continuing operations calculated in accordance with GAAP. As such, NOI should not be considered an alternative to these measures as an indication of our operating performance. A reconciliation of NOI to net income follows.
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2021 Compared to 2020
The following tables reconcile NOI to net income and provide the basis for our discussion of our consolidated results of operations and NOI in 2021 compared to 2020. All amounts are in thousands except percentage amounts.
Year Ended December 31,
2021 2020 $ Change % Change
Residential revenue:
Same-store portfolio $ 141,301 $ 142,856 $ (1,555) (1.1) %
Acquisitions (1)
2,262 — 2,262 — %
Development (2)
6,375 1,394 4,981 357.3 %
Non-residential (3)
1,027 888 139 15.7 %
Total 150,965 145,138 5,827 4.0 %
Residential expenses:
Same-store portfolio 51,112 50,993 119 0.2 %
Acquisitions 865 — 865 — %
Development 3,258 1,579 1,679 106.3 %
Non-residential 292 280 12 4.3 %
Total 55,527 52,852 2,675 5.1 %
Residential NOI:
Same-store portfolio 90,189 91,863 (1,674) (1.8) %
Acquisitions 1,397 — 1,397 — %
Development 3,117 (185) 3,302 1784.9 %
Non-residential 735 608 127 20.9 %
Total 95,438 92,286 3,152 3.4 %
Other NOI (4), (5)
12,931 20,736 (7,805) (37.6) %
Total NOI 108,369 113,022 (4,653) (4.1) %
Reconciliation to net income (loss):
Property management expenses (6,133) (6,145) 12 0.2 %
General and administrative expenses (27,538) (23,951) (3,587) (15.0) %
Transformation costs (6,635) — (6,635) — %
Depreciation and amortization (72,656) (70,336) (2,320) (3.3) %
Loss on sale of real estate, net — (15,009) 15,009 100.0 %
Interest expense (34,063) (37,305) 3,242 8.7 %
Loss on interest rate derivatives (5,866) (560) (5,306) (947.5) %
Loss on extinguishment of debt (12,727) (34) (12,693) (37332.4) %
Other income 4,109 — 4,109 — %
Discontinued operations (6) :
Income from operations of properties sold or held for sale 23,083 24,638 (1,555) (6.3) %
Gain on sale of real estate, net 46,441 — 46,441 — %
Net income (loss) $ 16,384 $ (15,680) $ 32,064 204.5 %
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(1) Acquisitions:
2021: The Oxford, Assembly at Eagles Landing
(2) Development/redevelopment:
Trove
(3) Non-residential:
Includes revenues and expenses from retail operations at residential properties.
(4) Sold (classified as continuing operations):
2020 Office - John Marshall II, Monument II and 1227 25th Street
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(5) Other (classified as continuing operations)
Watergate 600
(6) 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 from our apartment communities is comprised of (a) rent from operating leases of residential apartments with terms of approximately one year or less, recognized on a straight-line basis, (b) revenue from the recovery of operating expenses from our residents, (c) credit losses on lease related receivables, (d) revenue from leases of retail space at our apartment communities and (e) parking and other tenant charges.
Real estate rental revenue from same-store residential properties decreased $1.6 million, or 1.1%, to $141.3 million for 2021, compared to $142.9 million for 2020, primarily due to higher rent abatements ($1.3 million), lower rental income ($1.1 million) and higher credit losses ($0.3 million), partially offset by higher recoveries ($0.5 million), lower waived one-time fees ($0.3 million) due to COVID-19 concessions, higher move-in charges ($0.2 million) and higher parking income ($0.1 million).
Real estate rental revenue from acquisitions increased due to the acquisition of The Oxford ($1.4 million) during the third quarter of 2021 and Assembly Eagles Landing ($0.9 million) during the fourth quarter of 2021.
Real estate rental revenue from development properties increased due to the continued lease-up of the Trove development ($5.0 million). We placed the remainder of the Trove development costs into service during the first quarter of 2021 and achieved stabilization during the fourth quarter of 2021.
Average occupancy for residential properties for 2021 and 2020 was as follows:
December 31, 2021 December 31, 2020 Increase
Same-Store Non-Same-Store Total Same-Store Non-Same-Store Total Same-Store Non-Same-Store Total
95.3 % 71.0 % 93.4 % 94.5 % 13.0 % 89.9 % 0.8 % 58.0 % 3.5 %
The increase in same-store average occupancy was primarily due to higher average occupancy at The Paramount, 3801 Connecticut Avenue, Kenmore Apartments, The Maxwell, The Wellington, Park Adams, and Ashby at McLean. The increase in non-same-store average was primarily due to the lease-up of Trove, which was placed into service during the first quarter of 2020.
Real Estate Expenses
Residential real estate expenses as a percentage of residential revenue for 2021 and 2020 were 36.8% and 36.4%, respectively.
Real estate expenses from same-store residential properties increased $0.1 million, or 0.2%, to $51.1 million for 2021, compared to $51.0 million for 2020, primarily due to higher expenses related to contract maintenance and supplies ($0.5 million), utilities ($0.4 million) and insurance ($0.4 million) expenses, partially offset by lower real estate tax expenses ($0.8 million), repairs and maintenance ($0.2 million) and administrative ($0.2 million) expenses.
Real estate expenses from development properties increased $1.7 million due to the continued lease-up of the Trove development.
Other NOI
Other NOI classified as continuing operations decreased due to the sales of Monument II ($3.7 million) and 1227 25th Street ($2.8 million) during the fourth quarter of 2020 and the sale of John Marshall II ($1.4 million) during the second quarter of 2020, partially offset by higher NOI at Watergate 600 ($0.1 million).
Other Income and Expenses
Property management expenses: These expenses include costs directly related to the third-party management of property operations and corporate management and other costs.
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General and administrative expenses : Increase primarily due to a higher short-term incentive compensation expense ($2.5 million), higher deferred tax expense ($0.5 million), higher office rent ($0.5 million), higher share-based compensation expense ($0.4 million) and higher corporate insurance expense ($0.3 million), partially offset by lower legal fees ($0.6 million).
Transformation costs: During 2021 we incurred $6.6 million of costs related to the strategic transformation, including the allocation of internal costs, consulting, advisory and termination benefits.
Depreciation and amortization : Increase primarily due to placing into service the remainder of the Trove development ($3.7 million), the acquisitions of The Oxford ($1.8 million) and Assembly Eagles Landing ($1.4 million) and higher depreciation and amortization at same store properties ($0.4 million) and Watergate 600 ($0.2 million). These increases were partially offset by the dispositions of Monument II ($3.5 million) and 1227 25th Street ($1.7 million) in the fourth quarter of 2020.
Loss on sale of real estate, net: The loss during 2020 was primarily due to losses on the sales of John Marshall II ($6.9 million) and Monument II ($8.6 million), partially offset by a gain on the sale of 1227 25th Street ($1.1 million).
Interest Expense : Interest expense by debt type for the year ended December 31, 2021 and 2020 was as follows (in thousands):
Year Ended December 31,
Debt Type 2021 2020 $ Change % Change
Notes payable $ 31,652 $ 33,569 $ (1,917) (5.7) %
Mortgage notes payable — 172 (172) (100.0) %
Line of credit 3,161 5,783 (2,622) (45.3) %
Capitalized interest (750) (2,219) 1,469 66.2 %
Total $ 34,063 $ 37,305 $ (3,242) (8.7) %
• Interest expense for notes payable : Decrease primarily due to lower interest payments resulting from the prepayment during 2021 of $300.0 million of unsecured notes originally scheduled to mature in October 2022, the prepayment of our $150.0 million 2015 Term Loan in December 2020, the $150.0 million 2020 Term Loan executed in May 2020 and prepaid in November 2020 and the prepayment of a $150.0 million portion of the 2018 Term Loan during 2021. These were partially offset by the $350.0 million Green Bonds executed in December 2020.
• Interest expense for mortgage notes payable : Decrease due to repayment of the mortgage note secured by Yale West Apartments in January 2020.
• Interest expense for line of credit : Decrease primarily due to lower weighted average borrowings of $34.8 million and a lower weighted average interest rate of 1.1% during 2021, as compared to $204.8 million and 1.5%, respectively, during 2020.
• Capitalized interest : Decrease primarily due to placing into service assets at Trove.
Loss on interest rate derivatives : We terminated five interest rate swap arrangements with an aggregate notional value of $150.0 million and recognized a $5.8 million loss on interest rate derivatives during 2021 (see note 7 to the consolidated financial statements).
Loss on extinguishment of debt: During the third quarter of 2021 we recognized a $12.3 million loss on extinguishment of debt related to the prepayment of the $300.0 million of unsecured notes that were originally scheduled to mature in October 2022, a $0.2 million loss on extinguishment of debt related to the prepayment of a $150.0 million portion of the $250.0 million 2018 Term Loan and a $0.2 million loss on extinguishment of debt related to the renewal of our Revolving Credit Facility, all of which were repaid in connection with our strategic transformation, using the proceeds from the sales of the Office Portfolio and Retail Portfolio. During the fourth quarter of 2020, we recognized a loss on extinguishment of debt of $0.3 million related to the prepayments of the $150.0 million 2020 Term Loan originally scheduled to mature in May 2021 and the $150.0 million 2015 Term Loan originally scheduled to mature in March 2021. During the second quarter of 2020, we recognized a loss of $0.2 million related to the prepayment of all $250.0 million of our 4.95% Senior Notes originally scheduled to mature in October 2020. These losses were partially offset by a gain of $0.5 million on the prepayment of the mortgage note secured by Yale West Apartments during the first quarter of 2020.
Other income : Other income in 2021 primarily consists of a legal settlement ($1.3 million), a real estate tax refund for an office property sold in 2018 ($1.3 million), a gain on life insurance ($1.0 million) and a construction easement at a retail property ($0.4 million).
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Discontinued operations:
Income from properties sold or held for sale: The decrease during 2021 is primarily due to lower real estate rental revenue ($47.6 million) as a result of the sale of the Office Portfolio and the sale of the Retail Portfolio during the third quarter of 2021. This was partially offset by lower depreciation and amortization ($26.8 million), lower real estate expenses ($17.7 million) and lower management fees ($1.6 million).
Gain on sale of real estate, net: The net gain during 2021 is due to the gain on sale of the Retail Portfolio ($57.7 million), partially offset by the loss on sale of the Office Portfolio ($11.2 million).
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2020 Compared to 2019
The following tables reconcile NOI to net income and provide the basis for our discussion of our consolidated results of operations and NOI in 2020 compared to 2019. These results of operations have also been reclassified to reflect the strategic transformation in 2021, including the resulting classification of certain assets as discontinued operations, and other acquisitions completed and dispositions made during the applicable years. All amounts are in thousands except percentage amounts.
Year Ended December 31,
2020 2019 $ Change % Change
Residential revenue:
Same-store portfolio $ 97,102 $ 97,584 $ (482) (0.5) %
Acquisitions (1)
45,757 27,641 18,116 65.5 %
Development (2)
1,394 35 1,359 3882.9 %
Non-residential (3)
885 937 (52) (5.5) %
Total 145,138 126,197 18,941 15.0 %
Residential expenses:
Same-store portfolio 34,019 33,880 139 0.4 %
Acquisitions 16,976 10,306 6,670 64.7 %
Development 1,579 66 1,513 2292.4 %
Non-residential 278 285 (7) (2.5) %
Total 52,852 44,537 8,315 18.7 %
Residential NOI:
Same-store portfolio 63,083 63,704 (621) (1.0) %
Acquisitions 28,781 17,335 11,446 66.0 %
Development (185) (31) (154) (496.8) %
Non-residential 607 652 (45) (6.9) %
Total 92,286 81,660 10,626 13.0 %
Other NOI (4), (5)
20,736 31,762 (11,026) (34.7) %
Total NOI 113,022 113,422 (400) (0.4) %
Reconciliation to net income (loss):
Property management expenses (6,145) (6,098) (47) (0.8) %
General and administrative expenses (23,951) (26,068) 2,117 8.1 %
Depreciation and amortization (70,336) (83,362) 13,026 15.6 %
Real estate impairment — (8,374) 8,374 100.0 %
(Loss) gain on sale of real estate, net (15,009) 59,961 (74,970) (125.0) %
Interest expense (37,305) (53,734) 16,429 30.6 %
Loss on interest rate derivatives (560) — (560) — %
Loss on extinguishment of debt (34) — (34) — %
Discontinued operations (6) :
Income from operations of properties sold or held for sale 24,638 49,543 (24,905) (50.3) %
Gain on sale of real estate, net — 339,024 (339,024) (100.0) %
Loss on extinguishment of debt — (764) 764 100.0 %
Net (loss) income $ (15,680) $ 383,550 $ (399,230) (104.1) %
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(1) Acquisitions:
2019: Assembly Alexandria, Assembly Manassas, Assembly Dulles, Assembly Leesburg, Assembly Herndon, Assembly Germantown and Assembly Watkins Mill (collectively, the “Assembly Portfolio”) and Cascade at Landmark
(2) Development/redevelopment:
Trove and land adjacent to Riverside Apartments
(3) Non-residential:
Includes revenues and expenses from retail operations at residential properties.
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(4) Sold (classified as continuing operations):
2020 Office - John Marshall II, Monument II and 1227 25th Street
2019 Office – Quantico Corporate Center and 1776 G Street
(5) Other (classified as continuing operations)
Watergate 600
(6) 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
2019 Retail - Wheaton Park, Bradlee Shopping Center, Shoppes of Foxchase, Gateway Overlook, Olney Village Center, Frederick County Square, Centre at Hagerstown and Frederick Crossing
Real Estate Rental Revenue
Real estate rental revenue from our apartment communities is comprised of (a) rent from operating leases of residential apartments with terms of approximately one year or less, recognized on a straight-line basis, (b) revenue from the recovery of operating expenses from our residents, (c) credit losses on lease related receivables, (d) revenue from leases of retail space at our apartment communities and (e) parking and other tenant charges.
Real estate rental revenue from same-store residential properties decreased $0.5 million, or 0.5%, to $97.1 million for 2020, compared to $97.6 million for 2019, primarily due to higher rent abatements ($0.5 million), lower move-in charges ($0.5 million) and higher credit losses related to the COVID-19 pandemic ($0.2 million). These were partially offset by higher termination fees ($0.3 million), rental rates ($0.2 million), parking income ($0.1 million) and late fees ($0.1 million).
Real estate rental revenue from acquisitions increased due to the inclusion of a full year of operations at the Assembly Portfolio ($14.6 million) and Cascade at Landmark ($3.6 million), which were acquired in 2019.
Real estate rental revenue from development properties increased due to placing 374 units in service at the Trove development ($1.4 million) during 2020.
Average occupancy for residential properties for 2020 and 2019 was as follows:
December 31, 2020 December 31, 2019 Increase
Same-Store Non-Same-Store Total Same-Store Non-Same-Store Total Same-Store Non-Same-Store Total
94.1 % 83.4 % 89.9 % 95.2 % 68.6 % 87.7 % (1.1) % 14.8 % 2.2 %
The decrease in same-store average occupancy was primarily due to lower average occupancy at The Paramount, The Maxwell, 3801 Connecticut Avenue, The Ashby at McLean, and Yale West.
Real Estate Expenses
Residential real estate expenses as a percentage of residential revenue for 2020 and 2019 were 36.4% and 35.3%, respectively.
Real estate expenses from same-store residential properties increased $0.1 million, or 0.4%, to $34.0 million for 2020, compared to $33.9 million for 2019, primarily due to higher real estate tax ($0.5 million) and insurance ($0.2 million) expenses, partially offset by lower utilities ($0.3 million), repairs and maintenance ($0.2 million) and administrative ($0.1 million) expenses.
Other NOI
Other NOI decreased due to the sales of 1776 G Street ($9.0 million) and Quantico Shopping Center ($1.9 million) during 2019 and the sales of John Marshall II ($3.4 million), 1227 25th Street ($0.5 million) and Monument II ($0.4 million) during 2020. These decreases were partially offset by higher NOI at Watergate 600 ($4.1 million).
Other Income and Expenses
Depreciation and Amortization : Decrease primarily due to higher amortization of intangible lease assets at the Assembly Portfolio ($6.6 million) and Cascade at Landmark ($0.3 million) in 2019, lower depreciation and amortization at same-store properties ($3.4 million) and the dispositions of 1776 G Street ($2.7 million) and Quantico Corporate Center ($0.8 million) in 2019 and John
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Marshall II ($2.8 million) and Monument II ($0.4 million) in 2020. These decreases were partially offset by placing the Trove development ($3.1 million) into service during 2020 and higher depreciation and amortization at Watergate 600 ($0.9 million).
General and administrative expenses : Decrease primarily due to lower short term incentive compensation ($2.0 million) and severance ($1.1 million) expenses in 2020, partially offset by the reversal of a transfer tax liability in 2019 ($0.7 million).
Real estate impairment: The real estate impairment charge of $8.4 million during the first quarter of 2019 reduced the carrying value of Quantico Corporate Center to its then-estimated fair value (see note 3 to the consolidated financial statements).
Loss on sale of real estate: The loss during 2020 is primarily due to losses on the sales of John Marshall II ($6.9 million) and Monument II ($8.6 million), partially offset by a gain on the sale of 1227 25th Street ($1.1 million). The gain during 2019 is due to the sale of 1776 G Street ($61.0 million), partially offset by a loss on the sale of Quantico Corporate Center ($1.0 million).
Loss on extinguishment of debt: During the fourth quarter of 2020, we recognized a loss on extinguishment of debt of $0.3 million related to the prepayments of the $150.0 million 2020 Term Loan originally scheduled to mature in May 2021 and the $150.0 million 2015 Term Loan originally scheduled to mature in March 2021. During the second quarter of 2020, we recognized a loss of $0.2 million related to the prepayment of all $250.0 million of our 4.95% Senior Notes originally scheduled to mature in October 2020. These losses were partially offset by a gain of $0.5 million on the prepayment of the mortgage note secured by Yale West Apartments during the first quarter of 2020.
Loss on interest rate derivatives : In December 2020, in connection with the prepayment of our 2015 Term Loan, we terminated interest rate swap agreements with notional amounts in the aggregate of $150.0 million. As a result of the termination, the accumulated fair value of the interest rate swaps of $0.6 million was reclassified from Accumulated other comprehensive loss to Loss on interest rate derivatives on our consolidated income statements.
Interest Expense : Interest expense by debt type for the twelve months ended December 31, 2020 and 2019 was as follows (in thousands):
Year Ended December 31,
Debt Type 2020 2019 $ Change % Change
Notes payable $ 33,569 $ 45,595 $ (12,026) (26.4) %
Mortgage notes payable 172 2,074 (1,902) (91.7) %
Line of credit 5,783 9,279 (3,496) (37.7) %
Capitalized interest (2,219) (3,214) 995 31.0 %
Total $ 37,305 $ 53,734 $ (16,429) (30.6) %
• Interest expense for notes payable : Decrease primarily due to lower interest paid resulting from the prepayment of all $250.0 million of our 4.95% Senior Notes in April 2020 and the execution of a six-month $450.0 million 2019 Term Loan in April 2019 to fund the Assembly Portfolio acquisition that was repaid in the third quarter of 2019, partially offset by the new $150.0 million 2020 Term Loan executed in May 2020 and prepaid in November 2020, and the issuance of the $350.0 million Green Bonds in December 2020.
• Interest expense for mortgage notes payable : Decrease due to repayment of the mortgage note secured by Yale West Apartments in January 2020.
• Interest expense for line of credit : Decrease primarily due to a lower weighted average interest rate of 1.5% during 2020, as compared to 3.3% during 2019, partially offset by higher weighted average borrowings of $204.8 million during 2020, as compared to $196.1 million during 2019.
• Capitalized interest : Decrease primarily due to placing into service assets at Trove.
Discontinued operations:
Income from properties sold or held for sale: Decrease primarily due to lower real estate rental revenue ($42.5 million) due to the sale of eight retail properties in 2019, partially offset by lower depreciation and amortization ($8.1 million), lower real estate expenses ($8.1 million), lower management fees ($1.1 million) and interest expense ($0.3 million) in 2019.
Gain on sale of real estate: The net gain during 2019 is due to gains on the sales of a portfolio of five retail properties ($333.0 million) and Frederick Crossing and Frederick County Square ($9.5 million), partially offset by a loss on the sale of Centre at
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Hagerstown ($3.5 million) during 2019.
Loss on extinguishment of debt: We recognized a $0.8 million loss on extinguishment of debt during 2019 related to the prepayment of the mortgage note secured by Olney Village Center prior to that property’s disposition as part of the sale of a portfolio of five retail properties.
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Liquidity and Capital Resources
We believe we will have adequate liquidity over the next twelve months to operate our business and to meet our cash requirements, which include meeting our debt obligations, capital commitments and contractual obligations, as well as the payment of dividends, and funding possible growth opportunities. Through our Office Portfolio and Retail Portfolio sales, which had a combined sale price of approximately $934.3 million, we executed strategic transactions that allowed us and will continue to allow us to expand in Southeastern markets, meet our debt obligations for the next twelve months, complete redemption of all $300.0 million of unsecured notes originally due to mature in 2022 during the third quarter of 2021, and pay a dividend on a quarterly basis. In connection with our strategic transformation, we are redesigning our operating model for purposes of more efficiently and effectively supporting residential operations. We anticipate incurring approximately $11.0 - $13.0 million of transformation costs during 2022. We expect to realize significant operational benefits from this operating model redesign and complete its implementation in 2023. We also believe we have adequate liquidity beyond 2022, with only $100.0 million of scheduled debt maturities within the next five years.
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 which considers, among other factors, trends in our levels of funds from operations and ongoing capital requirements to achieve a targeted payout ratio.
Capital Structure
We manage our capital structure to reflect a long-term investment approach, generally seeking to match the cash flow of our assets with a mix of equity and various debt instruments. We expect that our capital structure will allow us to obtain additional capital from diverse sources that could include additional equity offerings of common shares, public and private secured and unsecured debt financings, asset dispositions, operating units and joint venture equity. Our ability to raise funds through the incurrence of debt and issuance of equity securities is dependent on, among other things, general economic conditions including the impacts of the COVID-19 pandemic, general market conditions for REITs, our operating performance, our debt rating, the current trading price of our common shares and other capital market conditions. We analyze which source of capital we believe to be most advantageous to us at any particular point in time.
As of February 16, 2022, we had cash and cash equivalents of approximately $151.6 million and availability under our Revolving Credit Facility of $700.0 million. We currently expect that our potential sources of liquidity for acquisitions, development, redevelopment, expansion and renovation of properties, and operating and administrative expenses, may include:
• Cash flow from operations;
• Borrowings under our Revolving Credit Facility or other new short-term facilities;
• Issuances of our equity securities and/or common units in operating partnerships;
• Issuances of preferred shares;
• Proceeds from long-term secured or unsecured debt financings, including construction loans and term loans, or the issuance of debt securities;
• Investment from joint venture partners; and
• Net proceeds from the sale of assets.
During 2022, we expect that we will have significant capital requirements, including the following items:
• Funding dividends and distributions to our shareholders (which we intend to continue to pay at or about current levels);
• Approximately $35.0 - $40.0 million to invest in our existing portfolio of operating assets;
• Approximately $10.0 - $15.0 million to invest in our development and redevelopment projects; and
• Funding for potential property acquisitions throughout 2022, 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 have enough cash on hand and/or will generate sufficient cash flow from operations and potential property sales and have access to the capital resources necessary to fund our requirements in 2022. However, as a result of the uncertainty of the future impacts of the COVID-19 pandemic, general market conditions in the greater Washington, DC metro and Southeast regions, economic conditions affecting the ability to attract and retain tenants, declines in our share price, unfavorable changes in the supply of competing properties, or our properties not performing as expected, we may not generate sufficient cash flow from operations and property sales or otherwise have access to capital on favorable terms, or at all. If we are unable to obtain capital from other sources, we may need to alter capital spending to be materially different than what is stated in the prior paragraph. If capital were not available, we may be unable to satisfy the distribution requirement applicable
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to REITs, make required principal and interest payments, make strategic acquisitions or make necessary and/or routine capital improvements or undertake improvement/redevelopment opportunities with respect to our existing portfolio of operating assets.
Debt Financing
We generally use unsecured or secured, corporate-level debt, including unsecured notes, our Revolving Credit Facility, bank term loans and mortgages, to meet our borrowing needs. Long-term, we generally use fixed rate debt instruments in order to match the returns from our real estate assets. If we issue unsecured debt in the future, we will seek to ladder the maturities of our debt to mitigate exposure to interest rate risk in any particular future year. We also utilize variable rate debt for short-term financing purposes. At times, our mix of variable and fixed rate debt may not suit our needs. At those times, we may use derivative financial instruments including interest rate swaps and caps, forward interest rate options or interest rate options in order to assist us in managing our debt mix. We may either hedge our variable rate debt to give it an effective fixed interest rate or hedge fixed rate debt to give it an effective variable interest rate.
As of December 31, 2021, our future debt principal payments are scheduled as follows (in thousands):
Year Unsecured Notes Payable/Term Loans Revolving Credit Facility Total Debt Average Interest Rate
2022 $ — $ — $ — — %
2023 100,000 (1) — 100,000 2.3 %
2024 — — — — %
2025 — — — — %
2026 — — — — %
Thereafter 400,000 — 400,000 4.5 %
Scheduled principal payments 500,000 — 500,000 4.1 %
Premiums and discounts, net (138) — (138)
Debt issuance costs, net (2,916) — (2,916)
Total $ 496,946 $ — $ 496,946 4.1 %
______________________________
(1) WashREIT entered into an interest rate swap to effectively fix a LIBOR plus 110 basis points floating interest rate to a 2.31% all-in fixed rate for the remaining $100.0 million portion of the 2018 Term Loan. The interest rates are fixed through the term loan maturity of July 2023.
The weighted average maturity for our debt is 7.2 years. If principal amounts due at maturity cannot be refinanced, extended or paid with proceeds of other capital transactions, such as new equity capital, our cash flow may be insufficient to repay all maturing debt. Prevailing interest rates or other factors at the time of a refinancing, such as possible reluctance of lenders to
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make commercial real estate loans, may result in higher interest rates and increased interest expense or inhibit our ability to finance our obligations.
From time to time, we may seek to repurchase and cancel our outstanding unsecured notes and term loans through open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Debt Covenants
Pursuant to the terms of our Revolving Credit Facility, 2018 Term Loan and unsecured notes, we are subject to customary operating covenants and maintenance of various financial ratios.
Failure to comply with any of the covenants under our Revolving Credit Facility, 2018 Term Loan, unsecured notes or other debt instruments could result in a default under one or more of our debt instruments. This could cause our lenders to accelerate the timing of payments and could therefore have a material adverse effect on our business, operations, financial condition and liquidity. In addition, our ability to draw on our Revolving Credit Facility or incur other unsecured debt in the future could be restricted by the debt covenants.
As of December 31, 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 approximately 86.3 million shares were outstanding at December 31, 2021.
On February 17, 2021, we entered into separate amendments to each of our existing equity distribution agreements (“Original Equity Distribution Agreements”) with each of Wells Fargo Securities, LLC, BNY Mellon Capital Markets, LLC, Capital One Securities, Inc., Citigroup Global Markets Inc., Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, KeyBanc Capital Markets Inc. and Truist Securities, Inc. (f/k/a SunTrust Robinson Humphrey, Inc.), each dated May 4, 2018 (collectively, as amended, the “Equity Distribution Agreements”) for our at-the-market program. 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”). On September 22, 2021, BTIG, LLC notified us that it was terminating the BTIG Equity Distribution Agreement, effective as of September 27, 2021. Pursuant to the Equity Distribution Agreements, we may sell, from time to time, up to an aggregate price of $550.0 million of our common shares of beneficial interest, $0.01 par value per share. Issuances of our common shares are made at market prices prevailing at the time of issuance. We may use net proceeds from the issuance of common shares under this program for general business purposes, including, without limitation, working capital, the acquisition, renovation, expansion, improvement, development or redevelopment of income producing properties or the repayment of debt.
Our issuances and net proceeds on the Equity Distribution Agreements in 2021 and 2020 and the Original Equity Distribution Agreements in 2020 and 2019, respectively, were as follows (in thousands, except per share data):
Year Ended December 31,
2021 2020 2019
Issuance of common shares 1,636 2,046 1,859
Weighted average price per share $ 25.44 $ 23.86 $ 30.00
Net proceeds $ 40,462 $ 48,355 $ 54,916
Subsequent to December 31, 2021, we issued an additional 1.0 million shares at a weighted average price per share of $26.27 for net proceeds of $26.9 million.
We have a dividend reinvestment program, whereby shareholders may use their dividends and optional cash payments to purchase common shares. The common shares sold under this program may either be common shares issued by us or common shares purchased in the open market.
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Our issuances and net proceeds on the dividend reinvestment program for the three years ended December 31, 2021 were as follows (in thousands; except per share data):
Year Ended December 31,
2021 2020 2019
Issuance of common shares 75 90 173
Weighted average price per share $ 23.37 $ 24.12 $ 27.58
Net proceeds $ 1,744 $ 2,121 $ 4,755
Preferred Equity
Our board of trustees can, at its discretion, authorize the issuance of up to 10.0 million preferred shares. The ability to issue preferred equity provides WashREIT an additional financing tool that may be used to raise capital for future acquisitions or other business purposes. As of December 31, 2021, no preferred shares are issued and outstanding.
Capital Commitments
We will require capital for development and redevelopment projects currently underway and in the future. We are currently engaged in development activities on land adjacent to The Wellington and predevelopment activities for the ground-up development of a residential property on land adjacent to Riverside Apartments. As of December 31, 2021, we had no outstanding contractual commitments related to our development and redevelopment projects, and expect to fund approximately $10.0 - $15.0 million of total development and redevelopment spending during 2022.
In addition to our development and redevelopment projects, we anticipate funding approximately $25.0 million on several major renovation projects at our residential properties during 2022.
These projects include unit renovations, property technology initiatives, common area and mechanical upgrades, pool deck renovations, facade and retaining wall restorations and fire system and roof replacements. Not all of the anticipated spending had been committed via executed construction contracts at December 31, 2021. We expect to fund these projects using cash generated by our real estate operations, through borrowings on our Revolving Credit Facility, or raising additional debt or equity capital in the public market.
Contractual Obligations
As of December 31, 2021, certain contractual obligations will require significant capital as follows (in thousands):
Payments due by Period
Total Less than 1
year 1-3 years 4-5 years After 5
years
Long-term debt (1)
$ 668,127 $ 21,700 $ 159,063 $ 35,990 $ 451,374
Purchase obligations (2)
951 823 128 — —
Tenant-related capital (3)
1,813 1,813 — — —
Building capital (4)
1,769 1,769 — — —
Operating leases 4,378 1,148 3,230 — —
______________________________
(1) See notes 5 and 6 of the consolidated financial statements. Amounts include principal, interest and facility fees.
(2) Represents electricity and gas purchase agreements with terms through 2024.
(3) Committed tenant-related capital based on executed leases as of December 31, 2021.
(4) Committed building capital additions based on contracts in place as of December 31, 2021.
We have various standing or renewable contracts with vendors. The majority of these contracts can be canceled with immaterial or no cancellation penalties, with the exception of our elevator maintenance agreements and our electricity and gas purchase agreements, which are included above on the purchase obligations line. Contract terms on leases that can be canceled are generally one year or less. We are currently committed to fund tenant-related capital improvements as described in the table above for executed leases. However, expected leasing levels could require additional tenant-related capital improvements which are not currently committed.
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Historical Cash Flows
Cash flows from operations are an important factor in our ability to sustain our dividend at its current rate. If our cash flows from operations were to decline significantly, we may have to reduce our dividend. Consolidated cash flows for the three years ended December 31, 2021 were as follows (in thousands):
Year ended December 31, Variance
2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Cash provided by operating activities $ 89,156 $ 112,978 $ 130,923 $ (23,822) $ (17,945)
Cash provided by investing activities 702,170 65,760 61,036 636,410 4,724
Cash used in financing activities (565,396) (185,199) (184,848) (380,197) (351)
Net cash provided by operating activities decreased in 2021 as compared to 2020 primarily due to the sales of the Office Portfolio and the Retail Portfolio during 2021 (see note 3 to the consolidated financial statements) and costs associated with our strategic transformation. Net cash provided by operating activities decreased in 2020 as compared to 2019 primarily due to the sales of the 8 retail properties and 1776 G Street during 2019 and John Marshall II in 2020 (see note 3 to the consolidated financial statements).
Net cash provided by investing activities increased in 2021 as compared to 2020 primarily due to the sales of the Office Portfolio and the Retail Portfolio partially offset by the acquisitions of The Oxford and Assembly Eagles Landing during 2021. Net cash provided by investing activities increased in 2020 as compared to 2019 primarily due to lower development expenditures during 2020.
Net cash used in financing activities increased in 2021 as compared to 2020 primarily due to the repayment of $300.0 million of unsecured notes and higher net repayments on the Revolving Credit Facility during 2021. Net cash used in financing activities increased in 2020 as compared to 2019 primarily due to higher repayments of notes payable and term loans, the repayment of the mortgage note and the settlement of certain interest rate swaps (see note 7 to the consolidated financial statements), partially offset by lower net repayments on the Revolving Credit Facility.
Capital Improvements and Development Costs
Our capital improvement, development and redevelopment costs for the three years ended December 31, 2021 were as follows (in thousands):
Year Ended December 31,
2021 2020 2019
Accretive capital improvements and development costs:
Acquisition related $ 7,218 $ 10,487 $ 9,158
Expansions and major renovations 17,096 16,561 25,008
Development/redevelopment 8,406 28,812 47,492
Tenant improvements (including first generation leases) 2,427 21,785 28,565
Total accretive capital improvements (1)
35,147 77,645 110,223
Other capital improvements: 5,669 9,262 5,725
Total $ 40,816 $ 86,907 $ 115,948
______________________________
(1) We consider these capital improvements to be accretive to revenue and not necessarily to net income.
Included in the capital improvement and development costs listed above are capitalized interest in the amount of $0.8 million, $2.2 million and $3.2 million for the three years ended December 31, 2021, respectively, and capitalized employee compensation in the amount of $1.6 million, $2.0 million and $1.2 million for the three years ended December 31, 2021, respectively.
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Accretive Capital Improvements
Acquisition Related Improvements: Acquisition related improvements are capital improvements to properties acquired during the preceding three years which were anticipated at the time we acquired the properties. These types of improvements were made in 2021 to the Assembly Portfolio and Cascade at Landmark.
Expansions and Major Renovations: Expansion projects increase the rentable area of a property, while major renovation projects are improvements sufficient to increase the income otherwise achievable at a property. Expansions and major renovations during 2021 included common area, lobby, unit and facade renovations at Riverside Apartments; heating system replacement, unit renovations and solar panel installations at 3801 Connecticut Avenue; plaza restoration and elevator modernization at The Ashby and common area and unit renovations at the Assembly Portfolio.
Development/Redevelopment: Development costs represent expenditures for ground up development of new operating properties. Redevelopment costs represent expenditures for improvements intended to reposition properties in their markets and generate more income than would be otherwise achievable. Development/redevelopment costs in 2021 primarily include development costs for Trove, which was placed into service in the first quarter of 2021, and predevelopment costs for a future residential development adjacent to Riverside Apartments.
Other Capital Improvements
Other capital improvements, also referred to as recurring capital improvements, are those not included in the above categories. Over time these costs will be recurring in nature to maintain a property's income and value. This category includes improvements made as needed upon vacancy of an apartment. Such improvements totaled $3.9 million in 2021, averaging approximately $1,206 per unit for the 41% of units which turned over relative to our total portfolio of apartment homes. Aside from improvements related to apartment turnover, these improvements include facade repairs, installation of new heating and air conditioning equipment, asphalt replacement, permanent landscaping, new lighting and new finishes. In addition, we incurred repair and maintenance expense of $3.8 million during 2021 to maintain the quality of our buildings.
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements as of December 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.
Forward-Looking Statements
Some of the statements contained in this Form 10-K constitute forward-looking statements within the meaning of federal securities laws. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” or “potential” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. Such statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of WashREIT to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Additional factors include, but are not limited to:
(a) the risks associated with ownership of real estate in general and our real estate assets in particular;
(b) the economic health of the greater Washington, DC metro and Southeast region;
(c) the risk of failure to enter into and/or complete contemplated acquisitions and dispositions, at all, within the price ranges anticipated and on the terms and timing anticipated;
(d) changes in the composition of our portfolio;
(e) fluctuations in interest rates;
(f) reductions in or actual or threatened changes to the timing of federal government spending;
(g) the risks related to use of third-party providers;
(h) the economic health of our residents;
(i) the ultimate duration of the COVID-19 global pandemic, including any mutations thereof, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment
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measures, the effectiveness and willingness of people to take COVID-19 vaccines, and the duration of associated immunity and efficacy of the vaccines against emerging variants of COVID-19;
(j) compliance with applicable laws and corporate social responsibility goals, including those concerning the environment and access by persons with disabilities;
(k) the risks related to not having adequate insurance to cover potential losses;
(l) changes in the market value of securities;
(m) terrorist attacks or actions and/or cyber-attacks;
(n) whether we will succeed in the day-to-day property management and leasing activities that we have previously outsourced;
(o) the availability and terms of financing and capital and the general volatility of securities markets;
(p) risks related to changes in interest rates, including the future of the reference rate used in our existing floating rate debt instruments;
(q) the risks related to our organizational structure and limitations of stock ownership;
(r) failure to qualify and maintain our qualification as a REIT and the risks of changes in laws affecting REITs; and
(s) other factors discussed under the caption “Risk Factors.”
While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. For a further discussion of these and other factors that could cause our future results to differ materially from any forward-looking statements, see the section entitled “Risk Factors.” We undertake no obligation to update our forward-looking statements or risk factors to reflect new information, future events, or otherwise.
Funds From Operations
NAREIT FFO is a widely used measure of operating performance for real estate companies. In its 2018 NAREIT FFO White Paper Restatement, the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”) defines NAREIT FFO as net income (computed in accordance with GAAP) excluding gains (or losses) associated with sales of properties; impairments of depreciable real estate, and real estate depreciation and amortization. We consider NAREIT FFO to be a standard supplemental measure for REITs, and believe it is a useful metric because it facilitates an understanding of the operating performance of our properties without giving effect to real estate depreciation and amortization, which historically assumes that the value of real estate assets diminishes predictably over time. Since real estate values have instead historically risen or fallen with market conditions, we believe that NAREIT FFO more accurately provides investors an indication of our ability to incur and service debt, make capital expenditures and fund other needs. Our NAREIT FFO may not be comparable to FFO reported by other REITs. These other REITs may not define the term in accordance with the current NAREIT definition or may interpret the current NAREIT definition differently.
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The following table provides the calculation of our NAREIT FFO and a reconciliation of NAREIT FFO to net income for the three years ended December 31, 2021 (in thousands):
Year Ended December 31,
2021 2020 2019
Net income (loss) $ 16,384 $ (15,680) $ 383,550
Adjustments:
Depreciation and amortization 72,656 70,336 83,362
Real estate impairment — — 8,374
Loss (gain) on sale of depreciable real estate, net — 15,009 (59,961)
Discontinued operations:
Depreciation and amortization 22,904 49,694 57,817
Gain on sale of depreciable real estate, net (46,441) — (339,024)
NAREIT FFO $ 65,503 $ 119,359 $ 134,118
Critical Accounting Estimates
We base the discussion and analysis of our financial condition and results of operations upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We evaluate these estimates on an on-going basis, including those related to estimated useful lives of real estate assets, estimated fair value of acquired leases, cost reimbursement income, bad debts, contingencies and litigation. We base the estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We cannot assure you that actual results will not differ from those estimates.
We believe the following accounting estimates are the most critical to aid in fully understanding our reported financial results, and they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.
Accounting for Asset Acquisitions
We allocate the purchase price, including transaction costs, of acquired assets, including physical assets and in-place leases, and assumed liabilities, based on their fair values. We determine the estimated fair values of the assets and liabilities in accordance with current GAAP fair value provisions. We determine the fair values of acquired buildings on an “as-if-vacant” basis considering a variety of factors, including the replacement cost of the property, estimated rental and absorption rates, estimated future cash flows and valuation assumptions consistent with current market conditions. We determine the fair value of land acquired based on comparisons to similar properties that have been recently marketed for sale or sold.
The fair value of in-place leases are based upon our evaluation of the specific characteristics of the leases. Factors considered in the fair value analysis include the estimated cost to replace the leases, including foregone rents and expense reimbursements during hypothetical expected lease-up periods (referred to as “absorption cost”), consideration of current market conditions and costs to execute similar leases. We classify absorption costs as other assets and amortize absorption costs as amortization expense on a straight-line basis over the remaining life of the underlying leases.
Real Estate Impairment
We recognize impairment losses on long-lived assets used in operations, development assets or land held for future development, if indicators of impairment are present and the net undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Estimates of undiscounted cash flows are based on forward-looking assumptions, including annual and residual cash flows and our estimated holding period for each property. Such assumptions involve a high degree of judgment and could be affected by future economic and market conditions. When determining if a property has indicators of impairment, we evaluate the property's occupancy, our expected holding period for the property, strategic decisions regarding the property's future operations or development and other market factors. If such carrying amount is in excess of the estimated undiscounted cash flows from the operation and disposal of the property, we would recognize an impairment loss equivalent to an amount required to adjust the carrying amount to its estimated fair value, calculated in
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accordance with current GAAP fair value provisions. Assets held for sale are recorded at the lower of cost or fair value less costs to sell.
U.S. Federal Income Taxes
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. Our taxable REIT subsidiaries are subject to corporate U.S. federal and state income tax on their taxable income at regular statutory rates, or as calculated under the alternative minimum tax, as appropriate. As of both December 31, 2021 and 2020, our TRSs had a deferred tax asset of $1.4 million that was fully reserved.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.