What changed in this filing

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Item 1A. Risk Factors

2020-11-03 compared with 2020-08-04 · 41 added, 37 removed, 44 unchanged (64% of the section changed)

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Risks Related to COVID-19

The current outbreak of the novel coronavirus, or COVID-19, has significantly impacted and disrupted our business, and is expected to continue to significantly, and perhaps even materially adversely, impact and cause disruption to, our business, financial performance and condition, operating results and cash flows.

The current outbreak of COVID-19 has significantly impacted and disrupted our business, and is expected to continue to significantly, and perhaps even materially adversely, impact and cause disruption to, our business, financial performance and condition, operating results and cash flows.

Future outbreaks of highly infectious or contagious diseases or other public health crises could have similar adverse effects on our business.

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Income from our interest in the operations of the Crystal City Marriott hotel decreased in the second quarter due to temporary closure during the pandemic.

Further, during the second quarter we recorded an impairment charge of $6.5 million due to a decline in the fair value of The Marriott Wardman Park hotel and losses incurred during the quarter resulting from its closure in March 2020 due to the effects of COVID-19.

Additionally, we experienced a $2.4 million decrease in revenue due to bad debt reserves recorded in connection with the filing for bankruptcy by one of our parking operators.

Further, during the second quarter of 2020, we recorded an impairment charge of $6.5 million due to a decline in the fair value of The Marriott Wardman Park hotel and losses incurred during the quarter resulting from its closure in March 2020 due to the effects of COVID-19.

Additionally, during the second quarter of 2020 , we experienced a $2.4 million decrease in revenue due to bad debt reserves recorded in connection with the filing for bankruptcy by a parking operator.

Additional factors that could negatively impact our ability to successfully operate during or following COVID-19 or another pandemic, or that have otherwise significantly adversely impacted and disrupted our business, financial performance and condition, operating results and cash flows, or otherwise adversely impact our shareholders and may continue to do so include:

● Property rental income, our primary source of operating cash flow, is dependent on a number of factors, including occupancy levels and rental rates, as well as our tenants’ ability and willingness to pay rent, and our ability to continue to collect rents, on a timely basis or at all, without reductions or other concessions, in our commercial and multifamily properties.

For the three months ended June 30, 2020, 1.5% of our commercial office tenants on a consolidated basis and 1.4% at our share, 1.5% on both a consolidated basis and at our share of our multifamily tenants and 38.2% of our retail tenants on a consolidated basis and 42.0% at our share had not yet paid their rent for the months of April, May and June;

● We have experienced and continue to experience decreased property rental revenue, due to deferral of rent and increases in uncollectable operating lease receivables.

For the three months ended September 30, 2020, 0.7% on a consolidated basis and 0.6% at our share of our commercial office tenants, 1.4% on a consolidated basis and 1.5% at our share of our multifamily tenants, and 33.5% of our retail tenants on a consolidated basis and 36.9% at our share had not yet paid their rent for the months of July through September;

● We have experienced and continue to experience decreased property rental revenue, due to deferral of rent for tenants that were placed on the cash basis of accounting and increases in uncollectable operating lease receivables.

Property rental income may be reduced or eliminated due to delays in enforcing our rights as landlord, including the inability to evict tenants that fail to pay rent, new federal and state governmental regulations related to the pandemic or otherwise.

As a result, we may incur substantial costs in protecting our investments, and we can provide no assurances that such efforts will be successful.

Furthermore, certain categories of tenants, such as retail, multifamily and certain types of office tenants, such as those that utilize shared spaces and co-working, are particularly hard hit by COVID-19 and the resulting economic disruption ( coworking tenants comprised approximately 2.9% of our total square feet on a consolidated basis and 3.3% at our share as of June 30, 2020 );

● Demand for office space in the Washington, D.C.

metropolitan area and nationwide is likely to decline due to the current economic downturn, bankruptcies, downsizing, layoffs, “stay-at-home” regulations that may be extended in duration and become recurring or potentially recurring, increased usage of teleworking arrangements and cost cutting resulting from the pandemic, which could lead to lower office occupancy (as of June 30, 2020, approximately 7.8% of our commercial leases, based on square footage, were scheduled to expire in 2020 or had month-to-month terms);

● A component of “Third-party real estate services, including reimbursements,” the metric we use to measure and evaluate the performance of our third-party asset management and real estate services business operating segment, may decline if we do not receive reimbursements revenue, which represents reimbursements of expenses incurred by us on

behalf of third parties, including allocated payroll costs and amounts paid to third-party contractors for construction management projects.

Reimbursements revenue decreased in the second quarter and may continue to decline where third-party clients cannot or do not reimburse us for such expenses, resulting in us incurring these costs in “General and administrative:

third-party real estate services,” but not being reimbursed for them, which could have a material adverse effect on this operating segment (“General and administrative:

third-party real estate services” was $58.1 million for the six months ended June 30, 2020 and $113.5 million for the year ended December 31, 2019, and “reimbursements revenue” was nearly half of total revenue of our third-party asset management and real estate services business – $27.7 million of $56.9 million for the six months ended June 30, 2020, and $55.4 million of $120.9 million, for the year ended December 31, 2019);

metropolitan area and nationwide has had and is likely to continue to decline due to the current economic downturn, bankruptcies, downsizing, layoffs, government regulations and restrictions on travel and permitted businesses operations that may be extended in duration and become recurring or potentially recurring, increased usage of teleworking arrangements and cost cutting resulting from the pandemic, which could lead to lower office occupancy (as of September 30, 2020, approximately 3.5% of our commercial and retail leases, based on square footage, were scheduled to expire in 2020 or had month-to-month terms);

● A component of "

Third-party real estate services, including reimbursements, "

the metric we use to measure and evaluate the performance of our third-party asset management and real estate services business operating segment, may

decline if we do not receive reimbursements revenue, which represents reimbursements of expenses incurred by us on behalf of third parties, including allocated payroll costs and amounts paid to third-party contractors for construction management projects.

Reimbursements revenue decreased in the second and third quarters and may continue to decline where third-party clients cannot or do not reimburse us for such expenses, resulting in us incurring these costs in "

General and administrative:

third-party real estate services, "

but not being reimbursed for them, which could have a material adverse effect on this operating segment ( "

General and administrative:

third-party real estate services expense "

was $86.3 million for the nine months ended September 30, 2020 and $113.5 million for the year ended December 31, 2019, and "

reimbursements revenue "

was nearly half of total revenue of our third-party asset management and real estate services business – $41.4 million of $83.9 million for the nine months ended September 30, 2020, and $55.4 million of $120.9 million, for the year ended December 31, 2019);

● The potential deterioration of the appeal of our Placemaking model of amenity-rich, walkable Metro-served neighborhoods.

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COVID-19 may change how people think about work and residential spaces, as well as the appeal of public transportation, which could have a material adverse effect on our Placemaking model.

Furthermore, certain of our properties may be considered less desirable and see their occupancy rates suffer, such as West Half, which was completed in the third quarter of 2019 and was 47.2% leased as of June 30, 2020 and is located adjacent to Nationals Stadium.

Whether and when fans of professional athletic teams will return to physical stadiums and the appeal of such locations is unclear;

● We may experience reductions in demand for retail space in our submarkets as most of our retail tenants continue to experience diminished revenues and loss of cash flow due to government “stay-at-home” regulations, reduced or eliminated foot traffic and economic uncertainty.

Furthermore, certain of our properties may be considered less desirable and see their occupancy rates suffer, such as West Half, which was completed in the third quarter of 2019 and was 50.7% leased as of September 30, 2020 and is located adjacent to Nationals Stadium.

The extent to which and when fans of professional athletic teams will return to physical stadiums and the appeal of such locations is unclear;

● We may experience reductions in demand for retail space in our submarkets as most of our retail tenants continue to experience diminished revenues and loss of cash flow due to government regulations and restrictions on travel and permitted businesses operations, reduced or eliminated foot traffic and economic uncertainty.

Furthermore, our Placemaking model depends in significant part on a retail component, which frequently involves retail assets embedded in or adjacent to our office and/or multifamily assets.

Temporary store closures are significantly affecting our retail tenants’ ability to generate sales and have caused many retailers to, among other things, permanently close stores, decrease the size of new or existing stores, ask for concessions from us or go bankrupt;

● We have incurred and continue to incur unanticipated costs and operating expenses and may experience decreased anticipated revenue related to compliance with regulations, such as inability to sue non-paying tenants, requirements to provide employees with additional mandatory paid time off and increased expenses related to sanitation measures performed at our properties, as well as additional expenses incurred to protect the welfare of our employees, such as expanded access to health services and acquisition of additional technology related to employees working from home;

Temporary store closures and government mandated physical distancing requirements are significantly affecting our retail tenants’ ability to generate sales and have caused many retailers to, among other things, permanently close stores, decrease the size of new or existing stores, ask for concessions from us or go bankrupt;

● We have incurred and continue to incur unanticipated costs and operating expenses and may continue to experience decreased revenue related to compliance with regulations, such as our inability to sue non-paying tenants, requirements to provide employees with additional mandatory paid time off and increased expenses related to sanitation measures performed at our properties, as well as additional expenses incurred to protect the welfare of our employees, such as expanded access to health services and acquisition of additional technology related to employees working from home;

● We may be susceptible to increased litigation related to, among other things, the financial impacts of COVID-19 on our business, individuals contracting COVID-19 as a result of alleged exposures on our premises or alleging that we have taken insufficient preventative measures, our ability to meet contractual obligations due to the pandemic, employment practices or policies adopted during the pandemic, or otherwise;

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● Changes to our sources and uses of cash.

For instance, as of June 30, 2020, we have construction in progress that will require an additional $52.6 million to complete ($35.3 million related to our consolidated entities and $17.3 million related to our unconsolidated real estate ventures at our share), based on our current plans and estimates, which we anticipate will be primarily expended over the next one to two years.

These expenditures are generally due as the work is performed, and we continue to expect to finance them with debt proceeds, proceeds from asset recapitalizations and sales, issuance and sale of equity securities and available cash over that period, though the relative attractiveness of reliance on debt proceeds, asset recapitalizations and sales and issuance and sale of equity securities may vary and change our reliance on them at any given time;

● Assets that were recently moved from Under Construction assets to operating assets (including West Half, 4747 Bethesda Avenue, 901 W Street and 900 W Street (formerly collectively referred to as Atlantic Plumbing C)) and 1900 N Street, totaling approximately 569,000 square feet and 721 units in the aggregate as of June 30, 2020 may take longer to stabilize and contribute to NOI;

● Our current Under Construction assets likely will take longer to reach completion, be moved to operating assets and stabilize;

For instance, as of September 30, 2020, we have construction in progress that will require an additional $34.0 million to complete ($20.2 million related to our consolidated entities and $13.8 million related to our unconsolidated real estate ventures at our share), based on our current plans and estimates, which we anticipate will be primarily expended over the next two years.

These expenditures are generally due as the work is performed, and we continue to expect to finance them with debt proceeds, proceeds from asset recapitalizations and sales and available cash over that period, though the relative attractiveness of reliance on debt proceeds and asset recapitalizations may vary and change our reliance on them at any given time;

● Assets that were recently moved from Under-Construction assets to operating assets (including West Half, 4747 Bethesda Avenue, 901 W Street and 900 W Street (formerly collectively referred to as Atlantic Plumbing C)), 1900 N Street and The Wren (formerly referred to as 965 Florida Avenue), totaling approximately 569,000 square feet and 1,154 units in the aggregate as of September 30, 2020 may take longer to stabilize and contribute to NOI;

● Our current Under-Construction assets may take longer to reach completion and will likely take longer to stabilize;

● The inability to renew leases, lease vacant space or re-let space as leases expire, or a decline in rental rates on new leases due to a deterioration in the economy and market conditions due to the pandemic.

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Our inability or the inability of our tenants to timely refinance maturing liabilities and access the capital markets to meet liquidity needs may materially affect our financial condition and results of operations and the value of our equity securities and any debt securities we may issue in the future;

● Our outstanding debt was $2.2 billion as of June 30, 2020, a $590.7 million increase from December 31, 2019, primarily from an additional $300.0 million drawn under our revolving credit facility, a $175.0 million mortgage payable collateralized by 4747 Bethesda Avenue and the remaining $100.0 million draw under our Tranche A-1 Term Loan.

Additionally, in July 2020, we entered into three separate mortgage loans with an aggregate principal balance of $385.0 million, collateralized by The Bartlett, 1221 Van Street and 220 20th Street.

● Our outstanding debt was $2.1 billion and $1.6 billion as of September 30, 2020 and December 31, 2019.

The $473.4 million increase in outstanding debt was primarily from four separate mortgage loans with an aggregate principal balance of $560.0 million, collateralized by 4747 Bethesda Avenue, The Bartlett, 1221 Van Street and 220 20 th Street, and the remaining $100.0 million draw under our Tranche A-1 Term Loan, partially offset by the repayment of the revolving credit facility.

Increased indebtedness and decreased operating revenues could increase our risk of default;

● A potential delay or reversal of the anticipated rebound in our 2020 NOI that we had anticipated from the combined effects of (i) the burn off of free rent associated with lease renewals we executed in 2017 and 2018 to stabilized levels, (ii) delivery on or ahead of schedule of our Under Construction assets and (iii) acquisition of F1RST Residences;

● A delay or reversal of the anticipated rebound in our 2020 NOI that we had anticipated from the combined effects of (i) the burn off of free rent associated with lease renewals we executed in 2017 and 2018 to stabilized levels, (ii) delivery on or ahead of schedule of our Under-Construction assets and (iii) acquisition of F1RST Residences;

● The continued service and availability of personnel, including our executive officers and other leaders that are part of our management team and our ability to recruit, attract and retain skilled personnel to the extent our management or personnel are impacted in significant numbers or in other significant ways by the outbreak of pandemic or epidemic disease and are not available or allowed to conduct work;

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Our real estate ventures may be subject to debt, and the refinancing of such debt may require equity capital calls.

(As of June 30, 2020, approximately 11.7% of our assets measured by total square feet were held through real estate ventures, and we expect to co-invest in the future with other third parties through partnerships, real estate ventures or other entities, acquiring noncontrolling interests in or sharing responsibility for managing the affairs of a property, partnership, real estate venture or other entity);

As of September 30, 2020, approximately 11.7% of our assets measured by total square feet were held through real estate ventures, and we expect to co-invest in the future with other third parties through partnerships, real estate ventures or other entities, acquiring noncontrolling interests in or sharing responsibility for managing the affairs of a property, partnership, real estate venture or other entity;

● The continued volatility of our share price;

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For example, we have deferred planned discretionary capital expenditures for our operating assets of approximately $69 million on a consolidated basis and $73 million at our share;

● Increased risk of the occurrence of a cyber incident and of disruptions to our internal control procedures due to the significant number of our employees that are currently teleworking due to the pandemic and state stay-at-home orders, and the processes, procedures and controls that we have implemented to help mitigate cyber risks may not be sufficient or that our internal control procedures may experience challenges or delays;

permitted businesses operations, and the processes, procedures and controls that we have implemented to help mitigate cyber risks may not be sufficient or that our internal control procedures may experience challenges or delays;

● Construction or redevelopment costs for our projects may exceed original estimates.

Also, we have experienced and may continue to experience supply chain and/or labor delays and disruptions as a result of new job site procedures or for other reasons, such as insufficient construction personnel, delays in advancing entitlements, or the inability to obtain necessary permits;

● Our cash flow from operations may be materially reduced if our tenants fail to pay rent, a risk heightened by COVID-19, and as a result, we may be unable to satisfy our covenants or maintain the required financial ratios under our debt agreements.

Failure to comply with our covenants could cause a default under one of our debt instruments, which may require us to repay such debt with capital from other sources or give possession of a property to the lender;

Our cash flow from operations may be materially reduced if our tenants fail to pay rent and as a result we may be unable to satisfy our covenants or maintain the required financial ratios under our debt agreements;

● The extent and duration of the COVID-19-related stay-at-home orders and restrictions on travel and the types of businesses that may continue to operate will have an effect on estimates used in the preparation of the underlying cash flows used in assessing our long-lived assets for impairment and the assessment of the collectability of receivables from tenants, including deferred rent receivables, due to the effects of COVID-19 on their financial position.

● The extent and duration of the COVID-19-related restrictions on travel and the types of businesses that may continue to operate will have an effect on estimates used in the preparation of the underlying cash flows used in assessing our long-lived assets for impairment and the assessment of the collectability of receivables from tenants, including deferred rent receivables, due to the effects of COVID-19 on their financial position.

We have made what we believe to be appropriate accounting estimates based on the facts and circumstances available as of the reporting date.

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● The significance, extent and duration of the impact of COVID-19 on our business remains largely uncertain and dependent on future developments that cannot be accurately predicted at this time, such as the continued severity, duration, transmission rate and geographic spread of COVID-19 in the United States, the extent and effectiveness of the containment measures taken, and the response of the overall economy, the financial markets and the population, particularly in areas in which we operate, once the current containment measures are lifted.

Moreover, the impact of the COVID-19 pandemic may also exacerbate many of the risks identified under the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019.

Moreover, the impact of COVID-19 may also exacerbate many of the risks identified under the section entitled "

Risk Factors "

in our Annual Report on Form 10-K for the year ended December 31, 2019.

The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19.

As a result, we cannot provide an estimate of the overall impact of the COVID-19 pandemic on our business or when, or if, we will be able to resume normal operations.

As a result, we cannot provide an estimate of the overall impact of COVID-19 on our business or when, or if, we will be able to resume normal operations.

Nevertheless, COVID-19 presents material uncertainty and risk with respect to our business, financial performance and condition, operating results and cash flows.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) Not applicable.

(b) Not applicable.

DEFAULTS UPON SENIOR SECURITIES

MINE SAFETY DISCLOSURES

Not applicable.

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 1A. Risk Factors