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Item 2. Management’s Discussion and Analysis

2022-04-28 compared with 2021-10-29 · 117 added, 266 removed, 212 unchanged (64% of the section changed)

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The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto appearing in Item 1 of this report and the more detailed information contained in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission (“SEC”) on February 18, 2022.

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

We refer to the three months ended March 31, 2022 and March 31, 2021 as the “2022 Quarter” and the “2021 Quarter,” respectively.

Forward-Looking Statements

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Such statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of WashREIT to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.

Currently, one of the most significant factors continues to be the adverse effect of the COVID-19 virus, including any variants and mutations thereof, the actions taken to contain the pandemic or mitigate the impact of COVID-19, and the direct and indirect economic effects of the pandemic and containment measures.

The extent to which COVID-19 continues to impact WashREIT, its properties and its residents and tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, the continued speed and success of the vaccine distribution, effectiveness and willingness of people to take COVID-19 vaccines, and the duration of associated immunity and their efficacy against emerging variants of COVID-19, among others.

Moreover, investors are cautioned to interpret many of the risks identified in the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2020 filed on February 16, 2021 and elsewhere in this Quarterly Report on Form 10-Q, as being heightened as a result of the ongoing and numerous adverse impacts of COVID-19.

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

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

our ability to reduce actual net leverage to levels consistent with our targeted net leverage range;

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

the risks associated with ownership of real estate in general and our real estate assets in particular;

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

changes in the composition and geographic location of our portfolio;

fluctuations in interest rates;

the economic health of the areas in which our properties are located, particularly with respect to greater Washington, DC metro region and the larger Southeastern region;

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;

changes in the composition of our portfolio;

fluctuations in interest rates and other risks related to changes in interest rates;

reductions in or actual or threatened changes to the timing of federal government spending;

the risks related to use of third-party providers;

the economic health of our residents and tenants;

the availability and terms of financing and capital and the general volatility of securities markets;

compliance with applicable laws, including those concerning the environment and access by persons with disabilities;

the economic health of our residents;

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 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;

compliance with applicable laws and corporate social responsibility goals, including those concerning the environment and access by persons with disabilities;

the risks related to not having adequate insurance to cover potential losses;

the risks related to our organizational structure and limitations of stock ownership;

changes in the market value of securities;

terrorist attacks or actions and/or cyber-attacks;

whether we will succeed in the day-to-day property management and leasing activities that we have previously outsourced;

the availability and terms of financing and capital and the general volatility of securities markets;

the risks related to our organizational structure and limitations of stock ownership;

failure to qualify and maintain our qualification as a REIT and the risks of changes in laws affecting REITs;

and other risks and uncertainties detailed from time to time in our filings with the SEC, including our 2020 Form 10-K filed on February 16, 2021 and elsewhere in this Quarterly Report on Form 10-Q.

whether our estimated transformation costs for 2022 will be correct;

whether we will realize significant operation benefits from our operating model redesign on the timing contemplated or at all;

and other risks and uncertainties detailed from time to time in our filings with the SEC, including our 2021 Form 10-K filed on February 18, 2022.

While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance.

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• Results of Operations.

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

Discussion of our financial results comparing the 2022 Quarter to the 2021 Quarter.

• Liquidity and Capital Resources.

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• Funds From Operations .

Calculation of NAREIT Funds From Operations (“NAREIT FFO”), a non-GAAP supplemental measure to net income.

• Critical Accounting Policies and Estimates.

Calculation of National Association of Real Estate Investment Trusts, Inc.

(“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.

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• 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 homes as a percentage of total homes.

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

We define development properties as those for which we have planned or ongoing major construction activities on existing or acquired land pursuant to an authorized development plan.

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Our revenues are derived primarily from the ownership and operation of income producing properties.

As of September 30, 2021, we owned approximately 7,300 residential apartment homes in the Washington, DC metro and Southeast regions.

As of March 31, 2022, we owned approximately 8,200 residential apartment homes in the Washington, DC metro and Southeastern regions.

We also own and operate approximately 300,000 square feet of commercial space in the Washington, DC metro region.

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

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

We closed on the sale of the Office Portfolio on July 26, 2021 and on the sale of the Retail Portfolio on September 22, 2021.

Both the Office Portfolio and Retail Portfolio are classified as discontinued operations in our condensed consolidated financial statements.

The remaining office property, Watergate 600, does not meet the qualitative or quantitative criteria for a reportable segment (see note 10 to the condensed consolidated financial statements).

The dispositions of 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”).

Subsequent to the end of the 2021 Quarter, we executed a purchase and sale agreement for the acquisition of two apartment communities in Henry County, Georgia, for a contract purchase price of $106.0 million.

The apartment communities have a combined total of 490 apartment units and we currently anticipate closing on the transaction during the fourth quarter of 2021, subject to customary closing conditions.

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

The planned acquisitions of residential properties and dispositions of office and retail properties are part of a strategic shift away from the commercial sector to the residential sector.

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

During the third quarter of 2021, we sold twelve office properties (the “Office Portfolio”) and eight retail properties (the “Retail Portfolio”) (see note 3 to the condensed consolidated financial statements) for contract sale prices of $766.0 million and $168.3 million, respectively.

Both the Office Portfolio and Retail Portfolio meet the criteria for classification as discontinued operations in our condensed consolidated financial statements.

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

The dispositions of the Office Portfolio and Retail Portfolio 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.

During the 2022 Quarter, we completed the acquisition of an apartment community in Georgia with 389 apartment homes for a contract purchase price of $105.6 million.

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

On March 11, 2020, the World Health Organization declared COVID-19, a respiratory illness caused by the novel coronavirus, a pandemic, and on March 13, 2020, the United States declared a national emergency concerning COVID-19.

The COVID-19 pandemic caused state and local governments within the Washington, DC metro region to institute quarantines, shelter-in-place rules and restrictions on travel, the types of business that may continue to operate and/or the types of construction projects that may continue.

While the COVID-19 pandemic impacted the 2021 Quarter, as of October 26, 2021, we collected 99% of cash rent at same-store communities during the 2021 Quarter.

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

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

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

We had an increase in average occupancy of approximately 150 basis points during the 2021 Quarter compared to the 2020 Quarter, excluding Trove, which began lease-up in the first quarter of 2020.

We expect the COVID-19 outbreak, including any variants and mutations thereof, to continue to affect our financial condition and results of operations during 2021, including but not limited to real estate rental revenues, credit losses and leasing activity.

Given our current concentration in the Washington, DC metro region, the majority of our existing portfolio could be impacted at the same time by quarantines, shelter in place rules and various other restrictions imposed or re-imposed in response to a surge in COVID-19 cases.

To help mitigate the impact on our operating results of the COVID-19 pandemic, we previously initiated various operational cost-saving initiatives across our portfolio.

Due to the uncertainty of the future impacts of the COVID-19 pandemic, the extent of the financial impact remains difficult to reasonably estimate.

New legislation was enacted to provide relief to businesses in response to the COVID-19 pandemic.

We have evaluated and will continue to evaluate the relief options available, or that become available in the future, such as the Coronavirus Aid, Relief, and Economic Securities Act (“CARES Act”), or other emergency relief initiatives and stimulus packages instituted by the federal government.

A number of the available relief options contain restrictions on future business activities that require careful evaluation and consideration, including the ability to repurchase shares and pay dividends.

We will continue to assess these options and any subsequent legislation or other relief packages, including the accompanying restrictions on our business, as the pandemic continues to evolve.

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

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 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 recognized $2.2 million of transformation costs on the condensed consolidated statements of operations during the 2022 Quarter and anticipate incurring approximately $8.8 - $10.8 million of additional transformation costs during 2022.

We expect to realize significant operational benefits from this operating model redesign and complete its implementation in 2023.

Operating Results

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

Three Months Ended September 30,

Net loss, NOI and NAREIT FFO for the three months ended March 31, 2022 and 2021 were as follows (in thousands):

Three Months Ended March 31,

2022 2021 $ Change % Change

Net income (loss) $ 31,319 $ (956) $ 32,275 (3,376.0) %

Net loss $ (7,724) $ (1,147) $ (6,577) 573.4 %

$ 30,652 $ 25,616 $ 5,036 19.7 %

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(2) See page 31 of the MD&A for a reconciliation of NAREIT FFO to net income.

The increase in net income is primarily due to the net gain on sale of real estate ($46.4 million), higher income from discontinued operations ($1.1 million) and lower interest expense ($0.6 million), partially offset by loss on extinguishment of debt ($12.7 million), higher general and administrative expenses ($1.6 million), higher transformation expenses ($1.0 million), lower NOI ($0.5 million) and higher depreciation and amortization expenses ($0.2 million).

The lower NOI is primarily due to the sales of Monument II ($0.9 million) and 1227 25th Street ($0.8 million) during 2020, partially offset by placing Trove, a residential development, into service starting in 2020 ($1.0 million) and the acquisition of The Oxford ($0.3 million) in the 2021 Quarter.

Residential same-store average occupancy for our portfolio increased to 95.8% as of September 30, 2021 from 94.3% as of September 30, 2020, due to higher occupancy across the portfolio as the portfolio recovers from the COVID-19 pandemic.

The lower NAREIT FFO is primarily due to the loss on extinguishment of debt ($12.7 million), lower income from discontinued operations, net of depreciation and amortization ($11.3 million), higher general and administrative expenses ($1.6 million) and transformation expenses ($1.0 million) and lower NOI ($0.5 million).

These were partially offset by lower interest expense ($0.6 million).

The increase in net loss is primarily due to lower income from discontinued operations ($6.1 million) due to the sales of the Office Portfolio and Retail Portfolio during 2021, higher depreciation and amortization expenses ($5.2 million), higher transformation expenses ($2.2 million), higher general and administrative expenses ($1.3 million), lower other income ($0.9 million) and higher property management expenses ($0.3 million).

These were partially offset by higher NOI ($5.0 million) and lower interest expense ($4.5 million).

The higher NOI is primarily due to the acquisitions of Assembly Eagles Landing ($1.0 million) and The Oxford ($0.5 million) in 2021 and Carlyle of Sandy Spring ($0.6 million) in 2022, higher NOI from same-store properties ($1.7 million) and higher NOI from Trove ($1.3 million), which achieved stabilization in the fourth quarter of 2021.

The higher same-store NOI was primarily due to higher rental rates and occupancy.

Residential same-store average occupancy for our portfolio increased to 95.8% as of March 31, 2022 from 94.3% as of March 31, 2021, due to higher occupancy across the portfolio as the portfolio recovers from the COVID-19 pandemic.

The lower NAREIT FFO is primarily due to lower income from discontinued operations, net of depreciation and amortization ($18.8 million), higher transformation expenses ($2.2 million), higher general and administrative expenses ($1.3 million), lower other income ($0.9 million) and higher property management expenses ($0.3 million).

These were partially offset by higher NOI ($5.0 million) and lower interest expense ($4.5 million).

Investment Activity

Significant investment transactions during the 2021 Period included the following:

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

We closed on the Office Portfolio sale transaction on July 26, 2021.

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

We closed on the sale of the Retail Portfolio on September 22, 2021.

• During the 2021 Quarter, we acquired The Oxford, a 240-unit apartment community in Conyers, Georgia for a contract purchase price of $48.0 million.

Significant investment transactions during the 2022 Quarter included the following:

• Acquisition of Carlyle of Sandy Springs, a 389-unit apartment community in Sandy Springs, Georgia for a contract purchase price of $105.6 million.

Financing Activity

Significant financing transactions during the 2021 Period 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 6 to the consolidated financial statements).

• During the 2021 Quarter, 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.

As of September 30, 2021, the interest rate on the $700.0 million unsecured revolving credit facility (“Revolving Credit Facility”) was one month LIBOR plus 0.85% and the facility fee was 0.20%.

As of October 26, 2021, we had no outstanding balance and a full borrowing capacity of $700.0 million on our Revolving Credit Facility and $297.1 million of cash on hand, primarily due to the proceeds from the Office Portfolio and Retail Portfolio sales.

Significant financing transactions during the 2022 Quarter included the following:

• Issuance of 1.0 million common shares at a weighted average price per share of $26.27 for net proceeds of $26.9 million through our at-the-market program.

As of March 31, 2022, the interest rate on the $700.0 million unsecured revolving credit facility (“Revolving Credit Facility”) was one month LIBOR plus 0.85% and the facility fee was 0.20%.

As of April 26, 2022, we had no outstanding balance and a full borrowing capacity of $700.0 million on our Revolving Credit Facility and $132.0 million of cash on hand, primarily due to the proceeds from the Office Portfolio and Retail Portfolio sales.

Capital Requirements

With the redemption of the $300.0 million of Senior Notes scheduled to mature in 2022, as discussed above, we have no debt maturities until 2023.

We have no debt maturities scheduled until the third quarter of 2023.

We expect to have additional capital requirements as set forth on page 30 (Liquidity and Capital Resources - Capital Requirements).

Results of Operations

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

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

Additionally, the COVID-19 pandemic adversely impacted our operating results for the 2021 Quarter, 2020 Quarter, 2021 Period and 2020 Period, and we expect that the COVID-19 outbreak will continue to adversely affect our business, financial condition, results of operations and cash flows going forward, including but not limited to, real estate rental revenues, credit losses, and leasing activity, in ways that may vary widely depending on the duration and magnitude of the COVID-19 pandemic and ensuing economic turmoil, as well as numerous other factors, many of which are outside of our control, as discussed under “Part I - Item 1A.

Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2020 filed on February 16, 2021 and elsewhere in this Quarterly Report on Form 10-Q.

The discussion that follows is based on our consolidated results of operations for the 2022 Quarter and 2021 Quarter.

The ability to compare one period to another is significantly affected by acquisitions and dispositions made during 2022 and 2021 (see note 3 to the consolidated financial statements).

Net Operating Income

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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 measures 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.

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.

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.

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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 (loss) follows.

A reconciliation of NOI to net loss follows.

2022 Quarter Compared to 2021 Quarter

The following table reconciles NOI to net (loss) income and provides the basis for our discussion of our consolidated results of operations and NOI in the 2021 Quarter compared to the 2020 Quarter.

The following table reconciles NOI to net loss and provides the basis for our discussion of our consolidated results of operations and NOI in the 2022 Quarter compared to the 2021 Quarter.

All amounts are in thousands, except percentage amounts.

Three Months Ended September 30,

Three Months Ended March 31,

2022 2021 $ Change % Change

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Interest expense (5,650) (10,123) 4,473 (44.2) %

Loss on interest rate derivatives (106) — (106) — %

Loss on extinguishment of debt (12,727) — (12,727) — %

Other income 386 1,284 (898) (69.9) %

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Income from operations of properties sold or held for sale — 6,130 (6,130) (100.0) %

Gain on sale of real estate, net 46,441 — 46,441 — %

Net income (loss) $ 31,319 $ (956) $ 32,275 (3376.0) %

Net loss $ (7,724) $ (1,147) $ (6,577) 573.4 %

______________________________

(1) Acquisitions:

The Oxford and Assembly Eagles Landing

Carlyle of Sandy Springs

(2) Development/redevelopment:

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Includes revenues and expenses from retail and public parking garage operations at residential properties.

(4) Sold (classified as continuing operations):

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

(4) Other (classified as continuing operations):

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Real estate rental revenue from our apartment communities is comprised of (a) rent from operating leases of multifamily 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 $0.3 million, or 0.7%, to $35.4 million for the 2021 Quarter, compared to $35.7 million for the 2020 Quarter, primarily due to higher rent abatements ($0.4 million), partially offset by higher move-in charges ($0.1 million).

Real estate rental revenue from acquisitions increased due to the acquisition of The Oxford ($0.5 million) during the 2021 Quarter.

Real estate rental revenue from same-store residential properties increased $1.8 million, or 5.2%, to $36.7 million for the 2022 Quarter, compared to $34.9 million for the 2021 Quarter, primarily due to higher rental income ($1.3 million), lower credit losses ($0.3 million), higher recoveries ($0.1 million) and lower rent abatements ($0.1 million).

Real estate rental revenue from acquisitions increased $3.9 million due to the acquisition of Assembly Eagles Landing ($1.9 million) during the fourth quarter of 2021, Carlyle of Sandy Springs ($1.1 million) during the 2022 Quarter and The Oxford ($0.9 million) during the third quarter of 2021.

Real estate rental revenue from development properties increased due to continued lease-up of Trove ($1.5 million).

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

Real estate rental revenue from non-residential activity increased due to lower credit losses ($0.1 million).

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

Average occupancy for residential properties for the 2022 Quarter and 2021 Quarter was as follows:

September 30, 2021 September 30, 2020 Increase

March 31, 2022 March 31, 2021 Increase

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

95.8 % 94.6 % 95.6 % 94.3 % 31.3 % 90.7 % 1.5 % 63.3 % 4.9 %

The increase in same-store average occupancy was primarily due to higher average occupancy at 3801 Connecticut Avenue, The Paramount, The Kenmore and Yale West.

The increase in same-store average occupancy was primarily due to higher average occupancy at 3801 Connecticut Avenue, The Kenmore and Assembly Leesburg, partially offset by lower average occupancy at Clayborne Apartments.

Real Estate Expenses

Residential real estate expenses as a percentage of residential revenue for the 2022 Quarter and 2021 Quarter were 36.7% and 38.2%, respectively.

Real estate expenses from same-store residential properties decreased $0.2 million, or 1.3%, to $13.0 million for the 2021 Quarter, compared to $13.2 million for the 2020 Quarter, primarily due to lower repairs and maintenance ($0.2 million) expenses and lower real estate taxes ($0.2 million), partially offset by higher utilities ($0.1 million) and insurance ($0.1 million) expenses.

Other NOI classified as continuing operations decreased due to the sales of Monument II ($0.9 million) and 1227 25th Street ($0.8 million) during the fourth quarter of 2020 and lower NOI at Watergate 600 ($0.2 million).

Real estate expenses from same-store residential properties increased $0.1 million, or 0.8%, to $13.1 million for the 2022 Quarter, compared to $13.0 million for the 2021 Quarter, primarily due to higher real estate taxes ($0.1 million) and higher insurance ($0.1 million), partially offset by lower repairs and maintenance ($0.1 million) expenses.

Other NOI classified as continuing operations decreased due to lower NOI at Watergate 600 ($0.1 million).

Other Income and Expenses

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General and administrative expenses:

Increase primarily due to higher short-term incentive compensation expense ($1.0 million), higher office rent ($0.2 million) due to the commencement of the corporate office lease during the 2021 Quarter, higher accounting fees ($0.2 million) and higher insurance expense ($0.1 million).

Increase primarily due to higher share-based compensation expense ($0.4 million), higher office rent ($0.3 million) due to the commencement of the corporate office lease during the third quarter of 2021, higher accounting fees ($0.2 million), higher corporate payroll expense ($0.2 million) and higher recruitment fees ($0.1 million).

Transformation costs:

During the 2021 Quarter we incurred $1.0 million of costs related to the strategic transformation, including consulting, advisory and termination benefits.

During the 2022 Quarter, we incurred $2.2 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 ($0.8 million), the acquisition of The Oxford ($0.6 million) and higher depreciation and amortization at same-store properties ($0.3 million).

These increases were partially offset by the dispositions of Monument II ($0.9 million) and 1227 25th Street ($0.5 million) in the fourth quarter of 2020.

Increase primarily due to the acquisitions of Eagles Landing ($2.8 million), Carlyle of Sandy Springs ($1.2 million) and The Oxford ($0.6 million) and higher depreciation and amortization at same-store residential properties ($0.5 million) and at Watergate 600 ($0.1 million).

Interest Expense :

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

Three Months Ended September 30,

Interest expense by debt type for the three months ended March 31, 2022 and 2021 was as follows (in thousands):

Three Months Ended March 31,

Debt Type 2022 2021 $ Change % Change

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• Notes payable :

Decrease primarily due to the prepayment during the 2021 Quarter 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 the 2021 Quarter.

These were partially offset by the $350.0 million Green Bonds executed in December 2020.

Decrease primarily due to the prepayment of $300.0 million of unsecured notes during the third quarter of 2021 originally scheduled to mature in October 2022 and the prepayment of a $150.0 million portion of the 2018 Term Loan during the third quarter of 2021.

• Line of credit :

Decrease primarily due to lower weighted average borrowings of $20.9 million and a weighted average interest rate of 1.1% in the 2021 Quarter, as compared to $202.2 million and 1.2%, respectively, during the 2020 Quarter.

Decrease primarily due to no borrowings in the 2022 Quarter, as compared to weighted average borrowings of $58.2 million and weighted average interest rate of 1.1% during the 2021 Quarter.

• Capitalized interest :

Decrease primarily due to placing into service assets at Trove.

Loss on extinguishment of debt :

During the 2021 Quarter, 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.

Discontinued operations:

Income from operations of properties sold or held for sale:

Increase primarily due to lower depreciation and amortization ($12.4 million), lower real estate expenses ($6.7 million) and lower management fees ($0.6 million), partially offset by lower operating income ($18.6 million) due to the sale of the Office Portfolio and the Retail Portfolio during the 2021 Quarter.

Gain on sale of real estate:

The net gain during 2021 Quarter is due to the sales of the Office Portfolio and Retail Portfolio.

2021 Period Compared to 2020 Period

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

All amounts are in thousands, except percentage amounts.

Nine Months Ended September 30,

2021 2020 $ Change % Change

Residential revenue:

Same-store portfolio $ 105,641 $ 107,651 $ (2,010) (1.9) %

Acquisitions (1)

488 — 488 — %

Development (2)

4,152 696 3,456 496.6 %

Non-residential (3)

794 595 199 33.4 %

Total 111,075 108,942 2,133 2.0 %

Residential expenses:

Same-store portfolio 38,589 37,997 592 1.6 %

Acquisitions 212 — 212 — %

Development 2,420 895 1,525 170.4 %

Non-residential 219 208 11 5.3 %

Total 41,440 39,100 2,340 6.0 %

Residential NOI:

Same-store portfolio 67,052 69,654 (2,602) (3.7) %

Acquisitions 276 — 276 — %

Development 1,732 (199) 1,931 (970.4) %

Non-residential 575 387 188 48.6 %

Total 69,635 69,842 (207) (0.3) %

Other NOI (4), (5)

9,588 16,356 (6,768) (41.4) %

Total NOI 79,223 86,198 (6,975) (8.1) %

Reconciliation to net income (loss):

Property management expenses (4,448) (4,682) 234 (5.0) %

General and administrative expenses (19,838) (17,963) (1,875) 10.4 %

Transformation costs (4,796) — (4,796) — %

Depreciation and amortization (52,542) (52,683) 141 (0.3) %

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

Interest expense (28,387) (28,307) (80) 0.3 %

Loss on interest rate derivatives (5,866) — (5,866) — %

(Loss) gain on extinguishment of debt (12,727) 262 (12,989) (4957.6) %

Other income 3,037 — 3,037 — %

Decrease primarily due to placing assets into service at Trove.

Discontinued operations:

Income from operations of properties sold or held for sale:

Gain on sale of real estate, net 46,441 — 46,441 — %

Net income (loss) $ 23,180 $ (4,643) $ 27,823 (599.2) %

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(1) Acquisitions:

(2) Development/redevelopment:

(3) Non-residential:

Includes revenues and expenses from retail and public parking garage operations at residential properties.

(4) Sold (classified as continuing operations):

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

Real Estate Rental Revenue

Real estate rental revenue from same-store residential properties decreased $2.1 million, or 1.9%, to $105.6 million for the 2021 Period, compared to $107.7 million for the 2020 Period, primarily due to lower rental rates ($1.8 million), higher rent abatements ($1.3 million) and lower late fees ($0.1 million), partially offset by higher recoveries ($0.5 million), lower waived fees ($0.2 million), higher termination fees ($0.1 million), higher move-in charges ($0.1 million), lower credit losses ($0.1 million) and higher parking income ($0.1 million).

Real estate rental revenue from acquisitions increased due to the acquisition of The Oxford ($0.5 million) during the 2021 Quarter.

Real estate rental revenue from development properties increased due to the continued lease-up of the Trove development ($3.5 million).

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

Real estate rental revenue from non-residential activity increased due to lower credit losses ($0.1 million) and higher rental revenue ($0.1 million).

Average occupancy for residential properties for the 2021 Period and 2020 Period was as follows:

September 30, 2021 September 30, 2020 Increase

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

95.1 % 57.6 % 92.7 % 94.7 % 8.4 % 89.8 % 0.4 % 49.2 % 2.9 %

The increase in same-store average occupancy was primarily due to higher average occupancy at The Paramount, The Ashby, The Maxwell and Assembly Leesburg, partially offset by lower average occupancy at Cascade at Landmark.

Real Estate Expenses

Residential real estate expenses as a percentage of residential revenue for the 2021 Period and 2020 Period were 37.3% and 35.9%, respectively.

Real estate expenses from same-store residential properties increased $0.6 million, or 1.6%, to $38.6 million for the 2021 Period, compared to $38.0 million for the nine months ended September 30, 2020, primarily due to higher expenses related to contract maintenance and supplies ($0.4 million), utilities ($0.4 million) and insurance ($0.3 million), partially offset by lower real estate tax expenses ($0.4 million) and administrative expenses ($0.1 million).

Other NOI classified as continuing operations decreased due to the sales of Monument II ($3.0 million) and 1227 25th Street ($2.2 million) during the fourth quarter of 2020, the sale of John Marshall II ($1.4 million) during the second quarter of 2020 and lower NOI at Watergate 600 ($0.2 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.

General and administrative expenses :

Increase primarily due to a higher short-term incentive compensation expense ($2.0 million) and higher share-based compensation expense ($0.3 million), partially offset by lower legal fees ($0.4 million).

Transformation costs:

During the 2021 Period we incurred $4.8 million of costs related to the strategic transformation, including consulting, advisory and termination benefits.

Depreciation and amortization :

Increase primarily due to placing into service the remainder of the Trove development ($3.2 million), the acquisition of The Oxford ($0.6 million) and higher depreciation and amortization at Watergate 600 ($0.2 million).

These increases were partially offset by the dispositions of Monument II ($2.9 million) and 1227 25th Street ($1.3 million) in the fourth quarter of 2020.

Loss on sale of real estate:

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

Interest Expense :

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

Nine Months Ended September 30,

Debt Type 2021 2020 $ Change % Change

Notes payable $ 26,484 $ 25,623 $ 861 3.4 %

Mortgage notes payable — 172 (172) (100.0) %

Line of credit 2,464 4,404 (1,940) (44.1) %

Capitalized interest (561) (1,892) 1,331 (70.3) %

Total $ 28,387 $ 28,307 $ 80 0.3 %

• Notes payable :

Increase primarily due to the $350.0 million Green Bonds executed in December 2020, partially offset by the prepayment of all $250.0 million of our 4.95% Senior Notes in April 2020, prepayment of our $150.0 million 2015 Term Loan in December 2020, prepayment of the $150.0 million 2020 Term Loan in November 2020 and the prepayment during the 2021 Quarter of the $300.0 million of unsecured notes originally scheduled to mature in October 2022.

• Mortgage notes payable :

Decrease due to repayment of the mortgage note secured by Yale West Apartments in January 2020.

• Line of credit :

Decrease primarily due to lower weighted average borrowings of $46.5 million and a lower weighted average interest rate of 1.1% during the 2021 Period, as compared to $193.2 million and 1.6%, respectively, during the 2020 Period.

• 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 $5.9 million loss on interest rate derivatives during the 2021 Period (see note 6 to the consolidated financial statements).

(Loss) gain on extinguishment of debt:

During the 2021 Period 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.

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

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

Other income :

We recognized $1.3 million in other income related to a legal settlement, $1.3 million related to a real estate tax refund for an office property sold in 2018 and $0.4 million related to a construction easement at a retail property during the 2021 Period.

Discontinued operations:

Income from properties sold or held for sale:

Increase primarily due to lower depreciation and amortization ($14.2 million), lower real estate expenses ($7.3 million) and lower management fees ($0.6 million), partially offset by lower operating income ($19.1 million) due to the sale of the Office Portfolio and the sale of the Retail Portfolio during the 2021 Period.

Gain on sale of real estate:

The net gain during the 2021 Period is due to the sales of the Office Portfolio and the Retail Portfolio.

Decrease due to the sale of the Office Portfolio and the Retail Portfolio during the third quarter of 2021.

Liquidity and Capital Resources

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

As of October 26, 2021, we had cash and cash equivalents totaling $297.1 million and no outstanding balance and a full borrowing capacity of $700.0 million on our Revolving Credit Facility, resulting in a total liquidity position of $997.1 million.

Through our Office Portfolio and Retail Portfolio sales, we executed strategic transactions that will allow us to pursue residential expansion in Southeastern markets, meet our debt obligations for the next twelve months, including our completed redemption of all $300.0 million of unsecured notes originally due to mature in 2022 during the 2021 Quarter, and pay a dividend on a quarterly basis.

We have no debt maturities until 2023.

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

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

We believe we will have adequate liquidity over the next twelve months to operate our business and to meet our cash requirements, which including meeting our debt obligations, capital commitments and contractual obligations, as well as the payment of dividends, on-going transformational costs and funding possible growth opportunities.

Through our Office Portfolio and Retail Portfolio sales in 2021, which had a combined contract sales price of approximately $934.3 million, we executed strategic transactions that will allow us to pursue residential expansion in Southeastern markets, meet our debt obligations for the next twelve months, and pay a dividend on a quarterly basis.

In connection with our strategic transformation, we are designing our operating model for purposes of more efficiently and effectively supporting residential operations.

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.

As of April 26, 2022, we had cash and cash equivalents totaling $132.0 million and no outstanding balance and a full borrowing capacity of $700.0 million on our Revolving Credit Facility, resulting in a total liquidity position of $832.0 million.

While we currently intend to continue to pay dividends at or about current levels , 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 NAREIT FFO and ongoing capital requirements to achieve a targeted payout ratio.

Capital Requirements

As of the end of the 2021 Quarter, we summarize our full-year 2021 capital requirements as follows:

As of the end of the 2022 Quarter, our full-year 2022 capital requirements are summarized below:

• Funding dividends and distributions to our shareholders;

• Approximately $25.0 - $30.0 million to invest in our existing portfolio of operating assets, including approximately $2.5 - $7.5 million to fund tenant-related capital requirements and leasing commissions;

• Approximately $35.0 - $40.0 million to invest in our existing portfolio of operating assets;

• Approximately $7.5 - $12.5 million to invest in our development and redevelopment projects;

• Funding for potential property acquisitions throughout 2021 and additional debt reductions, offset by proceeds from potential property dispositions.

• 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 generate sufficient cash flow from operations and potential property sales and have access to the capital resources necessary to fund our requirements for the remainder of 2022 .

However, as a result of the uncertainty of the 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.

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

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Long-term, we generally use fixed rate debt instruments in order to match the returns from our real estate assets.

If we issue unsecured debt in the future, we would seek to “ladder” the maturities of our debt to mitigate exposure to interest rate risk in any particular future year.

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.

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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.

Our future debt principal payments are scheduled as follows (in thousands):

As of March 31, 2022, our future debt principal payments are scheduled as follows (in thousands):

Future Maturities of Debt

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______________________________

(1) WashREIT entered into interest rate swaps to effectively fix a LIBOR plus 100 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.

(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.

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

As of September 30, 2021, we were in compliance with the covenants related to our Revolving Credit Facility, 2018 Term Loan, and unsecured notes.

As of March 31, 2022, we were in compliance with the covenants related to our Revolving Credit Facility, 2018 Term Loan, and unsecured notes.

Common Equity

We have authorized for issuance 150.0 million common shares, of which 84.6 million shares were outstanding at September 30, 2021.

We have authorized for issuance 150.0 million common shares, of which 87.4 million shares were outstanding at March 31, 2022.

On February 17, 2021, we entered into separate amendments to each of our existing equity distribution agreements (“Original Equity Distribution Agreements”) with each of Wells Fargo Securities, LLC, BNY Mellon Capital Markets, LLC, Capital One Securities, Inc., Citigroup Global Markets Inc., Goldman Sachs & Co.

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and Truist Securities, Inc.

(f/k/a SunTrust Robinson Humphrey, Inc.), each dated May 4, 2018 (collectively, as amended, the “Equity Distribution Agreements”).

(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”).

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We may use net proceeds from the issuance of common shares under this program for general business purposes, including, without limitation, working capital, the acquisition, renovation, expansion, improvement, development or redevelopment of income producing properties or the repayment of debt.

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):

Nine Months Ended September 30,

Our issuances and net proceeds on the Equity Distribution Agreements for the 2022 Quarter and 2021 Quarter were as follows ($ in thousands, except per share data):

Three Months Ended March 31,

Issuance of common shares 1,032 24

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The common shares sold under this program may either be common shares issued by us or common shares purchased in the open market.

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

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

Our issuances and net proceeds on the dividend reinvestment program for the three months ended March 31, 2022 and 2021 were as follows ($ in thousands, except per share data):

Three Months Ended March 31,

Issuance of common shares 10 23

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

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

As of March 31, 2022, no preferred shares were issued and outstanding.

Historical Cash Flows

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

Nine Months Ended September 30, Change

Three Months Ended March 31, Change

2022 2021 $ %

Net cash provided by operating activities $ 8,651 $ 37,239 $ (28,588) (76.8) %

Net cash provided by (used in) investing activities 823,241 (5,787) 829,028 (14,325.7) %

Net cash used in financing activities (589,512) (88,759) (500,753) 564.2 %

Net cash provided by operating activities decreased primarily due to the sales of the Office Portfolio and the Retail Portfolio during the 2021 Quarter and costs associated with our strategic transformation .

Net cash provided by investing activities increased primarily due to the sales of the Office Portfolio and the Retail Portfolio during the 2021 Quarter partially offset by the acquisition of The Oxford during the 2021 Quarter.

Net cash used in financing activities increased primarily due to the repayment of $300.0 million of unsecured notes in the 2021 Quarter and higher net repayments on the Revolving Credit Facility during the 2021 Period.

Net cash used in investing activities (114,533) (8,200) (106,333) 1,296.7 %

Net cash provided by (used in) financing activities 12,009 (33,749) 45,758 (135.6) %

Net cash provided by operating activities decreased primarily due to the sales of the Office Portfolio and Retail Portfolio in 2021 (see note 3 to the consolidated financial statements) and timing differences on the payment of certain liabilities.

Net cash used in investing activities increased primarily due to the acquisition of Carlyle of Sandy Springs during the 2022 Quarter.

Net cash provided by financing activities increased primarily due to higher net proceeds from equity issuances and lower dividends paid in the 2022 Quarter.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements as of September 30, 2021 that are reasonably likely to have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

We have no off-balance sheet arrangements as of March 31, 2022 that are reasonably likely to have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Funds From Operations

NAREIT FFO is a widely used measure of operating performance for real estate companies.

In its 2018 NAREIT FFO Whitepaper Restatement, the National Association of Real Estate Investment Trusts, Inc.

(“NAREIT”) defined NAREIT FFO as net income (computed in accordance with GAAP) excluding gains (or losses) associated with sales of properties;

In its 2018 NAREIT FFO Whitepaper Restatement, NAREIT defined NAREIT FFO as net income (computed in accordance with GAAP) excluding gains (or losses) associated with sales of properties;

impairments of depreciable real estate, and real estate depreciation and amortization.

We consider NAREIT FFO to be a standard supplemental measure for equity REITs because it facilitates an understanding of the operating performance of our properties without giving effect to real estate depreciation and amortization, which historically assumes that the value of real estate assets diminishes predictably over time.

We consider NAREIT FFO to be a standard supplemental measure for REITs because it facilitates an understanding of the operating performance of our properties without giving effect to real estate depreciation and amortization, which historically assumes that the value of real estate assets diminishes predictably over time.

Since real estate values have instead historically risen or fallen with market conditions, we believe that NAREIT FFO more accurately provides investors an indication of our ability to incur and service debt, make capital expenditures and fund other needs.

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NAREIT FFO is a non-GAAP measure.

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

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

Net income (loss) $ 31,319 $ (956) $ 23,180 $ (4,643)

The following table provides the calculation of our NAREIT FFO and a reconciliation of NAREIT FFO to net loss for the three months ended March 31, 2022 and 2021 (in thousands):

Three Months Ended March 31,

Net loss $ (7,724) $ (1,147)

Depreciation and amortization 22,200 16,987

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

Discontinued operations:

Depreciation and amortization — 12,656

Gain on sale of depreciable real estate (46,441) — (46,441) —

NAREIT FFO $ 14,476 $ 28,496

Critical Accounting Policies and Estimates

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 accounting principles generally accepted in the United States.

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

There were no changes made by management to the critical accounting policies in the three and nine months ended September 30, 2021.

There were no changes made by management to the critical accounting policies in the three months ended March 31, 2022.

We discuss the most critical estimates in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 18, 2022.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis