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Item 2. Management’s Discussion and Analysis

2022-07-29 compared with 2022-04-28 · 194 added, 65 removed, 264 unchanged (50% 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 March 31, 2022 and March 31, 2021 as the “2022 Quarter” and the “2021 Quarter,” respectively.

We refer to the three months ended June 30, 2022 and June 30, 2021 as the “2022 Quarter” and the “2021 Quarter,” respectively, and the six months ended June 30, 2022 and June 30, 2021 as the “2022 Period” and “2021 Period,” respectively.

Forward-Looking Statements

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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;

the impact from macroeconomic factors (including inflation, increases in interest rates, potential economic slowdown or a recession and geopolitical conflicts;

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

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• Results of Operations.

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

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

• Liquidity and Capital Resources.

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

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

As of June 30, 2022, we owned approximately 8,900 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.

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Our 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 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.

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 simplified our portfolio to one reportable segment (residential) (the “strategic transformation”).

We used 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.

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.

During the 2022 Period, we completed acquisitions of three apartment communities in Georgia with a combined total of 1,079 apartment homes for a total contract purchase price of $283.2 million.

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

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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 recognized $2.0 million and $4.2 million of transformation costs, net of amounts capitalized, on the condensed consolidated statements of operations during the 2022 Quarter and 2022 Period, respectively, and anticipate incurring approximately $6.3 - $7.3 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 March 31, 2022 and 2021 were as follows (in thousands):

Three Months Ended March 31,

Net loss, NOI and NAREIT FFO for the three months ended June 30, 2022 and 2021 were as follows (in thousands):

Three Months Ended June 30,

2022 2021 $ Change % Change

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(2) See page 37 of the MD&A for a reconciliation of NAREIT FFO to net income.

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 increase in net loss is primarily due to lower income from discontinued operations ($9.7 million) due to the sales of the Office Portfolio and Retail Portfolio during 2021, higher depreciation and amortization expenses ($6.7 million), higher general and administrative expenses ($1.4 million), lower other income ($1.5 million) and higher property management expenses ($0.3 million).

These were partially offset by higher NOI ($6.2 million), the loss on interest rate derivatives in 2021 ($5.8 million), lower interest expense ($4.0 million) and lower transformation expenses ($1.8 million).

The higher NOI is primarily due to the acquisitions of Assembly Eagles Landing ($1.2 million) and The Oxford ($0.3 million) in 2021 and Carlyle of Sandy Spring ($0.8 million), Marietta Crossing ($0.8 million) and Alder Park ($0.5 million) in 2022, higher NOI from same-store properties ($1.2 million) and higher NOI from Trove ($1.1 million), which achieved stabilization in the fourth quarter of 2021, and higher NOI at Watergate 600 ($0.3 million).

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).

Residential same-store average occupancy for our portfolio increased to 95.8% as of June 30, 2022 from 95.1% as of June 30, 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 ($20.0 million), lower other income ($1.5 million), higher general and administrative expenses ($1.4 million) and higher property management expenses ($0.3 million).

Investment Activity

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.

Significant investment transactions during the 2022 Period 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 during the first quarter of 2022.

• Acquisition of Marietta Crossing, a 420-unit apartment community in Marietta, Georgia for a contract purchase price of $107.9 million during the 2022 Quarter.

We assumed a $42.8 million mortgage with this acquisition.

• Acquisition of Alder Park, a 270-unit apartment community in Smyrna, Georgia for a contract purchase price of $69.8 million during the 2022 Quarter.

We assumed a $33.7 million mortgage with this acquisition.

Financing Activity

Significant financing transactions during the 2022 Quarter included the following:

Significant financing transactions during the 2022 Period 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.

As of June 30, 2022, the interest rate on the $700.0 million unsecured revolving credit facility (“Revolving Credit Facility”) was one month LIBOR plus 1.79% and the facility fee was 0.20%.

As of July 25, 2022, we had no outstanding balance and a full borrowing capacity of $700.0 million on our Revolving Credit Facility and $31.4 million of cash on hand.

Capital Requirements

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All amounts are in thousands, except percentage amounts.

Three Months Ended March 31,

Three Months Ended June 30,

2022 2021 $ Change % Change

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Total NOI 32,796 26,553 6,243 23.5 %

Reconciliation to net income (loss):

Reconciliation to net loss:

Property management expenses (1,796) (1,486) (310) 20.9 %

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Interest expense (6,156) (10,158) 4,002 (39.4) %

Loss on interest rate derivatives — (5,760) 5,760 (100.0) %

Other income — 1,522 (1,522) (100.0) %

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The Oxford and Assembly Eagles Landing

Carlyle of Sandy Springs

Carlyle of Sandy Springs, Alder Park, Marietta Crossing

(2) Development/redevelopment:

Trove, Riverside Development (multifamily development adjacent to Riverside Apartments)

(3) Non-residential:

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

Includes revenues and expenses from retail operations at residential properties.

(4) Other (classified as continuing operations):

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Real Estate Rental Revenue

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 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 2021 Quarter.

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 increased $1.9 million, or 5.3%, to $37.2 million for the 2022 Quarter, compared to $35.3 million for the 2021 Quarter, primarily due to higher rental income ($1.9 million), lower rent abatements ($0.5 million) and higher move-in charges ($0.1 million), partially offset by higher credit losses ($0.6 million).

Real estate rental revenue from acquisitions increased $6.6 million due to the acquisitions of Carlyle of Sandy Springs ($1.7 million) during the first quarter of 2022, Marietta Crossing ($1.1 million) and Alder Park ($0.8 million) during the 2022 Quarter, Assembly Eagles Landing ($2.1 million) during the fourth quarter of 2021, and The Oxford ($0.9 million) during the third quarter of 2021.

Real estate rental revenue from development properties increased $1.2 million due to the continued lease-up of Trove, which reached stabilization in the fourth quarter of 2021.

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

March 31, 2022 March 31, 2021 Increase

June 30, 2022 June 30, 2021 % Change

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

95.8 % 94.4 % 95.5 % 95.1 % 49.9 % 92.5 % 0.7 % 44.5 % 3.0 %

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.

The increase in same-store average occupancy was primarily due to higher average occupancy at The Kenmore, Park Adams, 3801 Connecticut Avenue, Assembly Germantown and Assembly Herndon, partially offset by lower average occupancy at The Ashby at McLean and Maxwell.

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 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).

Residential real estate expenses as a percentage of residential revenue for the 2022 Quarter and the 2021 Quarter were 37.1% and 36.5%, respectively.

Real estate expenses from same-store residential properties increased $0.7 million, or 5.6%, to $13.3 million for the 2022 Quarter, compared to $12.6 million for the 2021 Quarter, primarily due to higher real estate taxes ($0.3 million), higher utilities ($0.2 million) and higher insurance ($0.1 million) expenses.

Real estate expenses from acquisitions increased $3.0 million due to the acquisitions of Carlyle of Sandy Springs ($0.9 million) during the first quarter of 2022, Marietta Crossing ($0.4 million) and Alder Park ($0.3 million) during the 2022 Quarter, Assembly Eagles Landing ($0.8 million) during the fourth quarter of 2021, and The Oxford ($0.6 million) during the third quarter of 2021.

Other NOI classified as continuing operations increased due to lower NOI at Watergate 600 ($0.3 million).

Other Income and Expenses

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General and administrative expenses:

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).

Increase primarily due to corporate overhead no longer being allocated to office management due to the sales of the Office and Retail Portfolios in 2021 ($0.9 million), higher legal fees ($0.8 million) and higher office rent ($0.3 million) from the commencement of the corporate office lease during the third quarter of 2021.

The increase was partially offset by lower short term incentive compensation expense ($0.7 million) during the 2022 Quarter.

Transformation costs:

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.

Decrease of $1.8 million during 2022 Quarter primarily due to lower consulting and professional fees ($2.1 million) and lower severance expense ($0.8 million), partially offset by higher software depreciation ($0.5 million), higher employee time allocations ($0.3 million) and higher software costs ($0.2 million).

Depreciation and amortization :

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).

Increase primarily due to the acquisitions of Marietta Crossing ($1.3 million), Alder Park ($0.6 million), Carlyle of Sandy Springs ($2.4 million), Assembly Eagles Landing ($1.9 million) and The Oxford ($0.5 million) and higher depreciation and amortization at Watergate 600 ($0.2 million).

The increase was partially offset by lower depreciation and amortization at same-store residential properties ($0.1 million) and Trove ($0.1 million).

Interest Expense :

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,

Interest expense by debt type for the three months ended June 30, 2022 and 2021 was as follows (in thousands):

Three Months Ended June 30,

Debt Type 2022 2021 $ Change % Change

Notes payable $ 5,055 $ 9,475 $ (4,420) (46.6) %

Mortgage notes payable 490 — 490 100.0 %

Line of credit 701 854 (153) (17.9) %

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• Notes payable :

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.

Decrease primarily due to the prepayment of $300.0 million of unsecured notes during the third quarter of 2021 that had been 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.

• Mortgage notes payable :

Increase due to assumed mortgages of $42.8 million and $33.7 million in the acquisitions of Marietta Crossing and Alder Park, respectively, during the 2022 Quarter.

• Line of credit :

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• Capitalized interest :

Decrease primarily due to placing assets into service at Trove.

Decrease primarily due to ceasing capitalization of interest on spending related to the multifamily development adjacent to Riverside Apartments due to a pause in development activities resulting from macroeconomic uncertainty.

Other income :

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

Loss on interest rate derivatives :

We 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 the 2021 Quarter (see note 6 to the consolidated financial statements).

Discontinued operations

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

2022 Period Compared to 2021 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 2022 Period compared to the 2021 Period.

All amounts are in thousands, except percentage amounts.

Six Months Ended June 30,

2022 2021 $ Change % Change

Residential revenue:

Same-store portfolio $ 73,931 $ 70,233 $ 3,698 5.3 %

Acquisitions (1)

10,568 — 10,568 100.0 %

Development (2)

4,931 2,306 2,625 113.8 %

Non-residential (3)

550 490 60 12.2 %

Total 89,980 73,029 16,951 23.2 %

Residential expenses:

Same-store portfolio 26,397 25,586 811 3.2 %

Acquisitions 4,892 — 4,892 100.0 %

Development 1,779 1,574 205 13.0 %

Non-residential 145 134 11 8.2 %

Total 33,213 27,294 5,919 21.7 %

Residential NOI:

Same-store portfolio 47,534 44,647 2,887 6.5 %

Acquisitions 5,676 — 5,676 100.0 %

Development 3,152 732 2,420 (330.6) %

Non-residential 405 356 49 13.8 %

Total 56,767 45,735 11,032 24.1 %

Other NOI (4)

6,681 6,434 247 3.8 %

Total NOI 63,448 52,169 11,279 21.6 %

Reconciliation to net loss:

Property management expenses (3,546) (2,949) (597) (20.2) %

General and administrative expenses (14,595) (11,929) (2,666) (22.3) %

Transformation costs (4,246) (3,780) (466) (12.3) %

Depreciation and amortization (46,239) (34,290) (11,949) (34.8) %

Interest expense (11,806) (20,281) 8,475 41.8 %

Loss on interest rate derivatives — (5,760) 5,760 100.0 %

Other income 386 2,806 (2,420) 86.2 %

Discontinued operations (5) :

Income from operations of properties sold or held for sale — 15,875 (15,875) (100.0) %

Net loss $ (16,598) $ (8,139) $ (8,459) (103.9) %

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(1) Acquisitions:

The Oxford and Assembly Eagles Landing

Carlyle of Sandy Springs, Alder Park, Marietta Crossing

(2) Development/redevelopment:

Trove, Riverside Development (multifamily development adjacent to Riverside Apartments)

(3) Non-residential:

Includes revenues and expenses from retail operations at residential properties.

(4) Other (classified as continuing operations)

Watergate 600

(5) 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 increased $3.7 million, or 5.3%, to $73.9 million for the 2022 Period, compared to $70.2 million for the 2021 Period, primarily due to higher rental income ($3.2 million), lower rent abatements ($0.6 million) and higher recoveries ($0.2 million), partially offset by higher credit losses ($0.3 million).

Real estate rental revenue from acquisitions increased $10.6 million due to the acquisitions of Carlyle of Sandy Springs ($2.8 million) during the first quarter of 2022, Marietta Crossing ($1.1 million) and Alder Park ($0.8 million) during the 2022 Quarter, Assembly Eagles Landing ($4.0 million) during the fourth quarter of 2021 and The Oxford ($1.9 million) during the third quarter of 2021.

Real estate rental revenue from development properties increased $2.6 million due to the continued lease-up of the Trove development, which reached stabilization in the fourth quarter of 2021.

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

June 30, 2022 June 30, 2021 % Change

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

95.8 % 94.5 % 95.5 % 94.7 % 40.6 % 91.6 % 1.1 % 53.9 % 3.9 %

The increase in same-store average occupancy was primarily due to higher average occupancy at The Kenmore, 3801 Connecticut Avenue, Park Adams, Assembly Germantown and Assembly Herndon.

Real Estate Expenses

Residential real estate expenses as a percentage of residential revenue for the 2022 Period and 2021 Period were 36.9% and 37.4%, respectively.

Real estate expenses from same-store residential properties increased $0.8 million, or 3.2%, to $26.4 million for the 2022 Period, compared to $25.6 million for the six months ended June 30, 2021, primarily due to higher real estate tax ($0.3 million), utilities ($0.2 million), insurance ($0.2 million) and contract maintenance and supplies ($0.1 million) expenses.

Real estate expenses from acquisitions increased $4.9 million due to the acquisitions of Carlyle of Sandy Springs ($1.4 million) during the first quarter of 2022, Marietta Crossing ($0.4 million) and Alder Park ($0.3 million) during the 2022 Quarter, Assembly Eagles Landing ($1.8 million) during the fourth quarter of 2021, and The Oxford ($1.0 million) during the third quarter of 2021.

Other NOI classified as continuing operations increased due to higher 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, respectively.

Increase primarily due to the acquisitions of The Oxford and Assembly Eagles Landing during the third and fourth quarters of 2021, the acquisitions of Carlyle of Sandy Springs, Marietta Crossing and Alder Park during the 2022 Period and Trove reaching stabilization during the fourth quarter of 2021.

General and administrative expenses :

Increase primarily due to corporate overhead no longer being allocated to office management due to the sales of the Office and Retail Portfolios in 2021 ($1.7 million), higher legal fees ($0.8 million), higher office rent ($0.6 million) from the commencement of the corporate office lease during the third quarter of 2021, higher accounting fees ($0.4 million) and higher recruitment fees ($0.1 million).

The increase was partially offset by lower short term incentive compensation expense ($0.9 million) during the 2022 Quarter.

Transformation costs:

Increase of $0.5 million primarily due to higher software depreciation ($1.0 million), higher employee time allocations ($0.6 million) related to the strategic transformation, higher software costs ($0.3 million) and higher rebranding expenses ($0.1 million), partially offset by lower consulting ($1.0 million) and severance ($0.6 million) expenses.

Depreciation and amortization :

Increase primarily due to the acquisitions of Marietta Crossing ($1.3 million), Alder Park ($0.6 million), Carlyle of Sandy Springs ($3.6 million), Assembly Eagles Landing ($4.7 million) and The Oxford ($1.1 million) and higher depreciation and amortization at same-store residential properties ($0.3 million) and at Watergate 600 ($0.3 million).

Interest Expense :

Interest expense by debt type for the six months ended June 30, 2022 and 2021 was as follows (in thousands):

Six Months Ended June 30,

Debt Type 2022 2021 $ Change % Change

Notes payable $ 10,204 $ 18,961 $ (8,757) (46.2) %

Mortgage notes payable 490 — 490 100.0 %

Line of credit 1,395 1,699 (304) (17.9) %

Capitalized interest (283) (379) 96 (25.3) %

Total $ 11,806 $ 20,281 $ (8,475) (41.8) %

• Notes payable :

• Mortgage notes payable :

Increase due to the assumed mortgages of $42.8 million and $33.7 million in the acquisitions of Marietta Crossing and Alder Park, respectively, during the 2022 Period.

• Line of credit :

Decrease primarily due to no borrowings in the 2022 Period, as compared to weighted average borrowings of $59.5 million and weighted average interest rate of 1.1% during the 2021 Period.

• Capitalized interest :

Decrease primarily due to ceased capitalization of interest on spending related to the multifamily development adjacent to Riverside Apartments due to a pause in development activities.

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 the 2021 Period (see note 6 to the consolidated financial statements).

Other income :

Income during 2022 Period relates to real estate tax refunds ($0.4 million) received in Q1 2022 on previously sold properties.

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

Discontinued operations

Income from properties sold or held for sale:

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 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.

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

As of July 25, 2022, we had cash and cash equivalents totaling $31.4 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 $731.4 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.

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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.

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

As of June 30, 2022, our future debt principal payments are scheduled as follows (in thousands):

Future Maturities of Debt

Year Unsecured Debt Revolving Credit Facility Total Debt Average Interest Rate

Year Secured Debt Unsecured Debt Revolving Credit Facility Total Debt Average Interest Rate

2022 — $ — $ — $ — —%

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Thereafter 76,554 (1)

400,000 — 476,554 4.5%

Scheduled principal payments $ 76,554 $ 500,000 $ — $ 576,554 4.1%

3 unchanged sentences

______________________________

(1) WashREIT assumed mortgages of $42.8 million and $33.7 million in the acquisitions of Marietta Crossing and Alder Park, respectively, during the 2022 Quarter.

The mortgages mature on May 1, 2030.

(2) 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.

3 unchanged sentences

Prevailing interest rates or other factors at the time of a refinancing, such as possible reluctance of lenders to make commercial real estate loans, may result in higher interest rates and increased interest expense or inhibit our ability to finance our obligations.

From time to time, we may seek to repurchase and cancel our outstanding unsecured notes and term loans through open market purchases, privately negotiated transactions or otherwise.

From time to time, we may seek to repurchase and cancel our outstanding secured and 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.

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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

Pursuant to the terms of our Revolving Credit Facility, 2018 Term Loan and secured 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, secured and unsecured notes or other debt instruments could result in a default under one or more of our debt instruments.

This could cause our lenders

to accelerate the timing of payments and could therefore have a material adverse effect on our business, operations, financial condition and liquidity.

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

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

As of June 30, 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 87.4 million shares were outstanding at March 31, 2022.

We have authorized for issuance 150.0 million common shares, of which 87.4 million shares were outstanding at June 30, 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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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 for the 2022 Quarter and 2021 Quarter were as follows ($ in thousands, except per share data):

Three Months Ended March 31,

We did not issue common shares under the Equity Distribution Agreements during the 2022 Quarter or 2021 Quarter.

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

Six Months Ended June 30,

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 months ended March 31, 2022 and 2021 were as follows ($ in thousands, except per share data):

Three Months Ended March 31,

Our issuances and net proceeds on the dividend reinvestment program for the three and six months ended June 30, 2022 and 2021 were as follows ($ in thousands, except per share data):

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

2022 2021 2022 2021

Issuance of common shares 10 22 20 45

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

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

As of June 30, 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):

Three Months Ended March 31, Change

Six Months Ended June 30, Change

2022 2021 $ %

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Net cash used in investing activities (217,129) (18,195) (198,934) 1,093.3 %

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

Net cash used in financing activities (4,299) (48,687) 44,388 (91.2) %

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.

Net cash used in investing activities increased primarily due to the acquisition of Marietta Crossing, Alder Park and Carlyle of Sandy Springs during the 2022 Period.

Net cash used in financing activities decreased primarily due to higher net proceeds from equity issuances and lower dividends paid in the 2022 Period.

Off-Balance Sheet Arrangements

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.

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

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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 loss for the three months ended March 31, 2022 and 2021 (in thousands):

Three Months Ended March 31,

The following table provides the calculation of our NAREIT FFO and a reconciliation of NAREIT FFO to net loss for the three and six months ended June 30, 2022 and 2021 (in thousands):

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

2022 2021 2022 2021

Net loss $ (8,874) $ (6,992) $ (16,598) $ (8,139)

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

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

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