UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

___________________________________________________


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For quarterly period ended ~~March 31,~~June 30, 2021


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

COMMISSION FILE NO. 1-6622


WASHINGTON REAL ESTATE INVESTMENT TRUST
(Exact name of registrant as specified in its charter)


Maryland						53-0261100
(State of incorporation)						(IRS Employer Identification Number)

1775 EYE STREET, NW, SUITE 1000, WASHINGTON, DC 20006

(Address of principal executive office) (Zip code)

Registrant’s telephone number, including area code: (202) 774-3200

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Shares of Beneficial Interest	WRE	NYSE

___________________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large Accelerated Filer	☒	Accelerated Filer	☐
Non-accelerated Filer	☐	Smaller Reporting Company	☐
		Emerging Growth Company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

As of ~~April 26,~~July 28, 2021, ~~84,581,984~~84,607,533 common shares were outstanding.

WASHINGTON REAL ESTATE INVESTMENT TRUST

INDEX


		Page
Part I: Financial Information

Item 1.	Consolidated Financial Statements (Unaudited)
	Consolidated Balance Sheets	5
	Condensed Consolidated Statements of Operations	6
	Condensed Consolidated Statements of Comprehensive Income (Loss)	7
	Consolidated Statements of Equity	8
	Consolidated Statements of Cash Flows	910
	Notes to Consolidated Financial Statements	1012

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1924

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	3140

Item 4.	Controls and Procedures	3242

Part II: Other Information

Item 1.	Legal Proceedings	3343

Item 1A.	Risk Factors	3343

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3343

Item 3.	Defaults upon Senior Securities	3343

Item 4.	Mine Safety Disclosures	3343

Item 5.	Other Information	3343

Item 6.	Exhibits	3444

	Signatures	3545

PART I

FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

The information furnished in the accompanying unaudited Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Comprehensive Income (Loss), Consolidated Statements of Equity and Consolidated Statements of Cash Flows reflects all adjustments, consisting of normal recurring items, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The accompanying financial statements and notes thereto should be read in conjunction with the financial statements and notes for the three years ended December 31, 2020 included in Washington Real Estate Investment Trust’s 2020 Annual Report on Form 10-K filed on February 16, 2021.

WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)


		March 31, 2021		December 31, 2020			June 30, 2021		December 31, 2020
		(Unaudited)
Assets	Assets					Assets
Land	Land	$	551,578	$	551,578	Land	$	301,709	$	301,709
Income producing property	Income producing property	2,443,104		2,432,039		Income producing property	1,490,975		1,473,335
		2,994,682		2,983,617			1,792,684		1,775,044
Accumulated depreciation and amortization	Accumulated depreciation and amortization	(775,691)		(749,014)		Accumulated depreciation and amortization	(367,519)		(335,006)
Net income producing property	Net income producing property	2,218,991		2,234,603		Net income producing property	1,425,165		1,440,038
Properties under development or held for future development	Properties under development or held for future development	30,840		37,615		Properties under development or held for future development	30,065		36,494
Total real estate held for investment, net	Total real estate held for investment, net	2,249,831		2,272,218		Total real estate held for investment, net	1,455,230		1,476,532

Investment in real estate held for sale, net						Investment in real estate held for sale, net	779,121		795,687
Cash and cash equivalents	Cash and cash equivalents	3,017		7,700		Cash and cash equivalents	5,435		7,697
Restricted cash	Restricted cash	576		603		Restricted cash	595		593
Rents and other receivables	Rents and other receivables	59,396		58,257		Rents and other receivables	12,916		9,725
Prepaid expenses and other assets	Prepaid expenses and other assets	67,216		71,040		Prepaid expenses and other assets	28,297		29,587

Other assets related to properties held for sale						Other assets related to properties held for sale	86,811		89,997
Total assets	Total assets	$	2,380,036	$	2,409,818	Total assets	$	2,368,405	$	2,409,818
Liabilities	Liabilities					Liabilities
Notes payable, net	Notes payable, net	$	945,634	$	945,370	Notes payable, net	$	945,905	$	945,370

Line of credit	Line of credit	33,000		42,000		Line of credit	43,000		42,000
Accounts payable and other liabilities	Accounts payable and other liabilities	60,339		58,773		Accounts payable and other liabilities	47,897		44,067
Dividend payable	Dividend payable	25,424		25,361		Dividend payable	25,474		25,361
Advance rents	Advance rents	6,642		7,215		Advance rents	1,572		2,461
Tenant security deposits	Tenant security deposits	10,095		9,990		Tenant security deposits	4,374		4,221

Other liabilities related to properties held for sale						Other liabilities related to properties held for sale	23,748		25,229
Total liabilities	Total liabilities	1,081,134		1,088,709		Total liabilities	1,091,970		1,088,709
Equity	Equity					Equity
Shareholders’ equity	Shareholders’ equity					Shareholders’ equity
Preferred shares; $0.01 par value; 10,000 shares authorized; 0 shares issued or outstanding	Preferred shares; $0.01 par value; 10,000 shares authorized; 0 shares issued or outstanding	0		0		Preferred shares; $0.01 par value; 10,000 shares authorized; 0 shares issued or outstanding	0		0
Shares of beneficial interest, $0.01 par value; 150,000 and 100,000 shares authorized; 84,564 and 84,409 shares issued and outstanding, as of March 31, 2021 and December 31, 2020, respectively		846		844
Shares of beneficial interest, $0.01 par value; 150,000 and 100,000 shares authorized; 84,590 and 84,409 shares issued and outstanding, as of June 30, 2021 and December 31, 2020, respectively						Shares of beneficial interest, $0.01 par value; 150,000 and 100,000 shares authorized; 84,590 and 84,409 shares issued and outstanding, as of June 30, 2021 and December 31, 2020, respectively	846		844
Additional paid in capital	Additional paid in capital	1,651,680		1,649,366		Additional paid in capital	1,654,409		1,649,366
Distributions in excess of net income	Distributions in excess of net income	(325,469)		(298,860)		Distributions in excess of net income	(357,934)		(298,860)
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(28,473)		(30,563)		Accumulated other comprehensive loss	(21,200)		(30,563)
Total shareholders’ equity	Total shareholders’ equity	1,298,584		1,320,787		Total shareholders’ equity	1,276,121		1,320,787
Noncontrolling interests in subsidiaries	Noncontrolling interests in subsidiaries	318		322		Noncontrolling interests in subsidiaries	314		322
Total equity	Total equity	1,298,902		1,321,109		Total equity	1,276,435		1,321,109
Total liabilities and equity	Total liabilities and equity	$	2,380,036	$	2,409,818	Total liabilities and equity	$	2,368,405	$	2,409,818

See accompanying notes to the consolidated financial statements.

WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)


		Three Months Ended March 31,				Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020				2021		2020		2021		2020
Revenue	Revenue						Revenue
Real estate rental revenue	Real estate rental revenue	$	69,633	$	76,792		Real estate rental revenue	$	41,297	$	43,757	$	81,904	$	89,500
Expenses	Expenses						Expenses
Real estate expenses	Real estate expenses	26,694		28,639			Real estate expenses	16,230		16,588		32,684		34,046
Depreciation and amortization	Depreciation and amortization	29,643		29,720			Depreciation and amortization	17,303		17,372		34,290		34,619

General and administrative expenses	General and administrative expenses	5,604		6,337			General and administrative expenses	6,325		5,296		11,929		11,633
Transformation costs							Transformation costs	3,780		0		3,780		0

								43,638		39,256		82,683		80,298
Loss on sale of real estate							Loss on sale of real estate	0		(7,539)		0		(7,539)
Real estate operating income							Real estate operating income	(2,341)		(3,038)		(779)		1,663
Other income (expense)							Other income (expense)
Interest expense							Interest expense	(10,158)		(8,751)		(20,281)		(19,596)

(Loss) gain on extinguishment of debt							(Loss) gain on extinguishment of debt	0		(206)		0		262
Loss on interest rate derivatives							Loss on interest rate derivatives	(5,760)		0		(5,760)		0
Other income							Other income	1,522		0		2,806		0

								(14,396)		(8,957)		(23,235)		(19,334)

Loss from continuing operations							Loss from continuing operations	(16,737)		(11,995)		(24,014)		(17,671)
Discontinued operations:							Discontinued operations:
Income from operations of properties sold or held for sale							Income from operations of properties sold or held for sale	9,745		6,589		15,875		13,984

		61,941		64,696

Real estate operating income		7,692		12,096
Other income (expense)
Interest expense		(10,123)		(10,845)

Gain on extinguishment of debt		0		468

Other income		1,284		0
Net loss							Net loss	$	(6,992)	$	(5,406)	$	(8,139)	$	(3,687)

		(8,839)		(10,377)

Basic net (loss) income per share:							Basic net (loss) income per share:
Continuing operations							Continuing operations	$	(0.20)	$	(0.15)	$	(0.29)	$	(0.22)
Discontinued operations							Discontinued operations	0.12		0.08		0.19		0.17
Basic net loss per common share							Basic net loss per common share	$	(0.08)	$	(0.07)	$	(0.10)	$	(0.05)

Net (loss) income		$	(1,147)	$	1,719

Basic net (loss) income per common share:		$	(0.02)	$	0.02

Diluted net (loss) income per common share:		$	(0.02)	$	0.02
Diluted net (loss) income per share:							Diluted net (loss) income per share:
Continuing operations							Continuing operations	$	(0.20)	$	(0.15)	$	(0.29)	$	(0.22)
Discontinued operations							Discontinued operations	0.12		0.08		0.19		0.17
Diluted net loss per common share							Diluted net loss per common share	$	(0.08)	$	(0.07)	$	(0.10)	$	(0.05)

Weighted average shares outstanding – basic	Weighted average shares outstanding – basic	84,413		82,086			Weighted average shares outstanding – basic	84,461		82,153		84,437		82,120
Weighted average shares outstanding – diluted	Weighted average shares outstanding – diluted	84,413		82,287			Weighted average shares outstanding – diluted	84,461		82,153		84,437		82,120

See accompanying notes to the consolidated financial statements.

WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(IN THOUSANDS)

(UNAUDITED)


		Three Months Ended March 31,				Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020				2021		2020		2021		2020
Net (loss) income		$	(1,147)	$	1,719
Net loss							Net loss	$	(6,992)	$	(5,406)	$	(8,139)	$	(3,687)
Other comprehensive income (loss):	Other comprehensive income (loss):						Other comprehensive income (loss):
Unrealized gain (loss) on interest rate hedges	Unrealized gain (loss) on interest rate hedges	1,580		(34,567)			Unrealized gain (loss) on interest rate hedges	1,004		(1,789)		2,584		(36,356)
Reclassification of unrealized loss on interest rate derivatives to earnings	Reclassification of unrealized loss on interest rate derivatives to earnings	510		0			Reclassification of unrealized loss on interest rate derivatives to earnings	6,269		0		6,779		0
Comprehensive income (loss)	Comprehensive income (loss)	$	943	$	(32,848)		Comprehensive income (loss)	$	281	$	(7,195)	$	1,224	$	(40,043)

See accompanying notes to the consolidated financial statements.

WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(IN THOUSANDS)

(UNAUDITED)


		Shares Issued and Out-standing	Shares of Beneficial Interest at Par Value		Additional Paid in Capital		Distributions in Excess of Net Income		Accumulated Other Comprehensive Loss		Total Shareholders’ Equity		Noncontrolling Interests in Subsidiaries		Total Equity			Shares Issued and Out-standing	Shares of Beneficial Interest at Par Value		Additional Paid in Capital		Distributions in Excess of Net Income		Accumulated Other Comprehensive Loss		Total Shareholders’ Equity		Noncontrolling Interests in Subsidiaries		Total Equity
Balance, December 31, 2020	Balance, December 31, 2020	84,409	$	844	$	1,649,366	$	(298,860)	$	(30,563)	$	1,320,787	$	322	$	1,321,109	Balance, December 31, 2020	84,409	$	844	$	1,649,366	$	(298,860)	$	(30,563)	$	1,320,787	$	322	$	1,321,109

Net loss	Net loss	—	—		—		(1,147)		—		(1,147)		—		(1,147)		Net loss	—	—		—		(8,139)		—		(8,139)		—		(8,139)

Unrealized gain on interest rate hedges	Unrealized gain on interest rate hedges	—	—		—		—		1,580		1,580		—		1,580		Unrealized gain on interest rate hedges	—	—		—		—		2,584		2,584		—		2,584

Loss on interest rate derivatives																	Loss on interest rate derivatives	—	—		—		—		5,760		5,760		—		5,760
Amortization of swap settlements	Amortization of swap settlements	—	—		—		—		510		510		—		510		Amortization of swap settlements	—	—		—		—		1,019		1,019		—		1,019
Distributions to noncontrolling interests	Distributions to noncontrolling interests	—	—		—		—		—		—		(4)		(4)		Distributions to noncontrolling interests	—	—		—		—		—		—		(8)		(8)

Dividends ($0.30 per common share)		—	—		—		(25,462)		—		(25,462)		—		(25,462)
Dividends ($0.60 per common share)																	Dividends ($0.60 per common share)	—	—		—		(50,935)		—		(50,935)		—		(50,935)
Equity issuances, net of issuance costs	Equity issuances, net of issuance costs	24	0		467		—		—		467		—		467		Equity issuances, net of issuance costs	24	0		467		—		—		467		—		467
Shares issued under Dividend Reinvestment Program	Shares issued under Dividend Reinvestment Program	23	0		520		—		—		520		—		520		Shares issued under Dividend Reinvestment Program	45	0		1,009		—		—		1,009		—		1,009
Share grants, net of forfeitures and tax withholdings	Share grants, net of forfeitures and tax withholdings	108	2		1,327		—		—		1,329		—		1,329		Share grants, net of forfeitures and tax withholdings	112	2		3,567		—		—		3,569		—		3,569
Balance, March 31, 2021		84,564	$	846	$	1,651,680	$	(325,469)	$	(28,473)	$	1,298,584	$	318	$	1,298,902
Balance, June 30, 2021																	Balance, June 30, 2021	84,590	$	846	$	1,654,409	$	(357,934)	$	(21,200)	$	1,276,121	$	314	$	1,276,435


		Shares Issued and Out-standing	Shares of Beneficial Interest at Par Value		Additional Paid in Capital		Distributions in Excess of Net Income		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity		Noncontrolling Interests in Subsidiaries		Total Equity			Shares Issued and Out-standing	Shares of Beneficial Interest at Par Value		Additional Paid in Capital		Distributions in Excess of Net Income		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity		Noncontrolling Interests in Subsidiaries		Total Equity
Balance, December 31, 2019	Balance, December 31, 2019	82,099	$	821	$	1,592,487	$	(183,405)	$	1,823	$	1,411,726	$	336	$	1,412,062	Balance, December 31, 2019	82,099	$	821	$	1,592,487	$	(183,405)	$	1,823	$	1,411,726	$	336	$	1,412,062

Net income		—	—		—		1,719		—		1,719		—		1,719
Net loss																	Net loss	—	—		—		(3,687)		—		(3,687)		—		(3,687)
Unrealized loss on interest rate hedges	Unrealized loss on interest rate hedges	—	—		—		—		(34,567)		(34,567)		—		(34,567)		Unrealized loss on interest rate hedges	—	—		—		—		(36,356)		(36,356)		—		(36,356)
Distributions to noncontrolling interests	Distributions to noncontrolling interests	—	—		—		—		—		—		(3)		(3)		Distributions to noncontrolling interests	—	—		—		—		—		—		(7)		(7)
Dividends ($0.30 per common share)		—	—		—		(24,820)		—		(24,820)		—		(24,820)
Dividends ($0.60 per common share)																	Dividends ($0.60 per common share)	—	—		—		(49,581)		—		(49,581)		—		(49,581)
Equity issuances, net of issuance costs	Equity issuances, net of issuance costs	46	1		1,241		—		—		1,242		—		1,242		Equity issuances, net of issuance costs	46	1		1,241		—		—		1,242		—		1,242
Shares issued under Dividend Reinvestment Program	Shares issued under Dividend Reinvestment Program	35	0		921		—		—		921		—		921		Shares issued under Dividend Reinvestment Program	41	0		1,065		—		—		1,065		—		1,065
Share grants, net of forfeitures and tax withholdings	Share grants, net of forfeitures and tax withholdings	135	1		1,593		—		—		1,594		—		1,594		Share grants, net of forfeitures and tax withholdings	141	1		3,827		—		—		3,828		—		3,828
Balance, March 31, 2020		82,315	$	823	$	1,596,242	$	(206,506)	$	(32,744)	$	1,357,815	$	333	$	1,358,148
Balance, June 30, 2020																	Balance, June 30, 2020	82,327	$	823	$	1,598,620	$	(236,673)	$	(34,533)	$	1,328,237	$	329	$	1,328,566

See accompanying notes to the consolidated financial statements.

WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended March 31,
2021 2020
Cash flows from operating activities
Net (loss) income $ (1,147) $ 1,719
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization 29,643 29,720
Credit losses on lease related receivables 1,043 923
Share-based compensation expense 1,664 1,778
Net amortization of debt premiums, discounts and related financing costs 1,112 645
Gain on extinguishment of debt 0 (468)
Changes in operating other assets (1,619) 895
Changes in operating other liabilities 6,543 (6,352)
Net cash provided by operating activities 37,239 28,860
Cash flows from investing activities
Capital improvements to real estate (4,032) (10,846)
Development in progress (4,161) (9,402)
Non-real estate capital improvements (7) (94)
Net cash used in investing activities (8,200) (20,342)
Cash flows from financing activities
Line of credit borrowings, net (9,000) 92,000
Dividends paid (25,398) (49,485)
Principal payments – mortgage notes payable 0 (46,567)
Distributions to noncontrolling interests (4) (3)
Proceeds from dividend reinvestment program 520 921
Net proceeds from equity issuances 467 1,241
Payment of tax withholdings for restricted share awards (334) (141)
Net cash used in financing activities (33,749) (2,034)
Net (decrease) increase in cash, cash equivalents and restricted cash (4,710) 6,484
Cash, cash equivalents and restricted cash at beginning of period 8,303 14,751
Cash, cash equivalents and restricted cash at end of period $ 3,593 $ 21,235
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized $ 4,345 $ 5,133
Change in accrued capital improvements and development costs (3,844) 4,851
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents $ 3,017 $ 20,601
Restricted cash 576 634
Cash, cash equivalents and restricted cash $ 3,593 $ 21,235
WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(IN THOUSANDS)

(UNAUDITED)


	Shares Issued and Out-standing	Shares of Beneficial Interest at Par Value		Additional Paid in Capital		Distributions in Excess of Net Income		Accumulated Other Comprehensive Loss		Total Shareholders’ Equity		Noncontrolling Interests in Subsidiaries		Total Equity
Balance, March 31, 2021	84,564	$	846	$	1,651,680	$	(325,469)	$	(28,473)	$	1,298,584	$	318	$	1,298,902

Net loss	—	—		—		(6,992)		—		(6,992)		—		(6,992)
Unrealized loss on interest rate hedges	—	—		—		—		1,004		1,004		—		1,004
Loss on interest rate derivatives	—	—		—		—		5,760		5,760		—		5,760
Amortization of swap settlements	—	—		—		—		509		509		—		509
Distributions to noncontrolling interests	—	—		—		—		—		—		(4)		(4)

Dividends ($0.30 per common share)	—	—		—		(25,473)		—		(25,473)		—		(25,473)

Shares issued under Dividend Reinvestment Program	22	0		489		—		—		489		—		489
Share grants, net of share grant amortization and forfeitures	4	0		2,240		—		—		2,240		—		2,240
Balance, June 30, 2021	84,590	$	846	$	1,654,409	$	(357,934)	$	(21,200)	$	1,276,121	$	314	$	1,276,435


	Shares Issued and Out-standing	Shares of Beneficial Interest at Par Value		Additional Paid in Capital		Distributions in Excess of Net Income		Accumulated Other Comprehensive Income		Total Shareholders’ Equity		Noncontrolling Interests in Subsidiaries		Total Equity
Balance, March 31, 2020	82,315	$	823	$	1,596,242	$	(206,506)	$	(32,744)	$	1,357,815	$	333	$	1,358,148
Net loss	—	—		—		(5,406)		—		(5,406)		—		(5,406)
Unrealized gain on interest rate hedges	—	—		—		—		(1,789)		(1,789)		—		(1,789)
Distributions to noncontrolling interests	—	—		—		—		—		—		(4)		(4)
Dividends ($0.30 per common share)	—	—		—		(24,761)		—		(24,761)		—		(24,761)
Shares issued under dividend reinvestment program	6	0		144		—		—		144		—		144
Share grants, net of forfeitures and tax withholdings	6	0		2,234		—		—		2,234		—		2,234
Balance, June 30, 2020	82,327	$	823	$	1,598,620	$	(236,673)	$	(34,533)	$	1,328,237	$	329	$	1,328,566

See accompanying notes to the consolidated financial statements.


WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

	Six Months Ended June 30,
	2021		2020
Cash flows from operating activities
Net loss	$	(8,139)	$	(3,687)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	57,194		59,319
Credit losses on lease related receivables	1,337		2,271


Loss on sale of real estate	0		7,539
Share-based compensation expense	3,750		3,783

Net amortization of debt premiums, discounts and related financing costs	2,227		1,314
Loss on interest rate derivatives	5,760		0
Gain on extinguishment of debt	0		(262)
Changes in operating other assets	(6,071)		(4,482)
Changes in operating other liabilities	8,564		(14,613)
Net cash provided by operating activities	64,622		51,182
Cash flows from investing activities

Net cash received for sale of real estate	0		56,353

Capital improvements to real estate	(10,370)		(25,452)
Development in progress	(7,794)		(18,646)


Non-real estate capital improvements	(31)		(124)
Net cash (used in) provided by investing activities	(18,195)		12,131
Cash flows from financing activities
Line of credit borrowings, net	1,000		125,000
Dividends paid	(50,821)		(49,485)
Principal payments – mortgage notes payable	0		(46,567)

Repayments of unsecured notes payable	0		(250,000)
Proceeds from term loan	0		150,000
Payment of financing costs	0		(560)
Distributions to noncontrolling interests	(7)		(7)
Proceeds from dividend reinvestment program	1,009		1,065
Net proceeds from equity issuances	467		1,241
Payment of tax withholdings for restricted share awards	(335)		(150)

Net cash used in financing activities	(48,687)		(69,463)
Net decrease in cash, cash equivalents and restricted cash	(2,260)		(6,150)
Cash, cash equivalents and restricted cash at beginning of period	8,290		14,751
Cash, cash equivalents and restricted cash at end of period	$	6,030	$	8,601


WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

	Six Months Ended June 30,
	2021		2020

Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized	$	12,038	$	21,380
Change in accrued capital improvements and development costs	(4,697)		3,687
Dividend payable	25,474		24,760


Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents	$	5,435	$	7,971
Restricted cash	595		630
Cash, cash equivalents and restricted cash	$	6,030	$	8,601

See accompanying notes to the consolidated financial statements.

911

WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~March 31,~~June 30, 2021

(UNAUDITED)

NOTE 1: NATURE OF BUSINESS

Washington Real Estate Investment Trust (“WashREIT”), a Maryland real estate investment trust, is a self-administered equity real estate investment trust, successor to a trust organized in 1960. Our business consists of the ownership and operation of income producing real estate properties in the greater Washington, DC metro region. We own a portfolio of multifamily and commercial (office and retail) properties. Within these notes to the financial statements, we refer to the three months ended June 30, 2021 and June 30, 2020 as the “2021 Quarter” and the “2020 Quarter,” respectively, and the six months ended June 30, 2021 and June 30, 2020 as the “2021 Period” and the “2020 Period,” respectively. During the 2021 Quarter, we executed a purchase and sale agreement for the sale of 12 office properties (see note 3). Subsequent to the 2021 Quarter, we executed a purchase and sale agreement for the sale of all of our remaining 8 retail properties (see note 3). Both these office and retail properties met the criteria for classification as held for sale as of June 30, 2021 and are classified as discontinued operations. The remaining office property, Watergate 600, does not meet the qualitative or quantitative criteria for a reportable segment (see note 9). The retail properties have not been a reportable segment since 2019. The dispositions of office and retail properties are part of a strategic shift away from the commercial sector to the multifamily sector which simplifies our portfolio to 1 reportable segment (multifamily) (the “strategic transformation”).

Federal Income Taxes

We believe that we qualify as a real estate investment trust (“REIT”) under Sections 856-860 of the Internal Revenue Code of 1986, as amended (the “Code”), and intend to continue to qualify as such. To maintain our status as a REIT, we are, among other things, required to distribute 90% of our REIT taxable income (determined before the deduction for dividends paid and excluding net capital gains to our shareholders) on an annual basis. When selling a property, we generally have the option of (a) reinvesting the sales proceeds of property sold in a way that allows us to defer recognition of some or all taxable gain realized on the sale, (b) distributing gains to the shareholders with no tax to us or (c) treating net long-term capital gains as having been distributed to our shareholders, paying the tax on the gain deemed distributed and allocating the tax paid as a credit to our shareholders.

Generally, and subject to our ongoing qualification as a REIT, no provisions for income taxes are necessary except for taxes on undistributed taxable income and taxes on the income generated by our taxable REIT subsidiaries (“TRSs”). Our TRSs are subject to corporate federal and state income tax on their taxable income at regular statutory rates. As of both ~~March 31,~~June 30, 2021 and December 31, 2020, our TRSs had a deferred tax asset of $1.4 million that was fully reserved.

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATIONS

Significant Accounting Policies

We have prepared our consolidated financial statements using the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2020.

Principles of Consolidation and Basis of Presentation

The accompanying unaudited consolidated financial statements include the consolidated accounts of WashREIT, our majority-owned subsidiaries and entities in which WashREIT has a controlling interest. All intercompany balances and transactions have been eliminated in consolidation.

We have prepared the accompanying unaudited financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to make the information presented not misleading. In addition, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results for the periods presented have been included. These unaudited financial statements should be read in conjunction with the financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2020.

~~Within these notes~~

Held for Sale and Discontinued Operations

We classify properties as held for sale when they meet the necessary criteria, which include: (a) senior management commits to a plan to sell the assets; (b) the assets are available for immediate sale in their present condition subject only to terms that are usual and customary for sales of such assets; (c) an active program to locate a buyer and other actions required to complete the plan to sell the assets has been initiated; (d) the sale of the assets is probable and transfer of the assets is expected to qualify for recognition as a completed sale within one year; (e) the assets are being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (f) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. Depreciation on these properties is discontinued at the time they are classified as held for sale, but operating revenues, operating expenses and interest expense continue to be recognized until the date of sale.

Revenues and expenses of properties that are either sold or classified as held for sale are presented as discontinued operations for all periods presented in the consolidated statements of operations if the dispositions represent a strategic shift that has (or will have) a major effect on our operations and financial results. If the dispositions do not represent a strategic shift that has (or will have) a major effect on our operations and financial results, then the revenues and expenses of the properties that are classified as sold or held for sale are presented as continuing operations in the consolidated statements ~~we refer to the three months ended March 31, 2021 and March 31, 2020 as the “2021 Quarter” and the “2020 Quarter,” respectively.~~of operations for all periods presented.

Restricted Cash

Restricted cash includes funds held in escrow for tenant security deposits.

10Transformation Costs

Transformation costs include costs related to the strategic transformation, including consulting, advisory and termination benefits. As of June 30, 2021, $3.4 million is accrued and included in Accounts payable and other liabilities on the Consolidated Balance Sheets.

Use of Estimates in the Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

NOTE 3: REAL ESTATE

Development/Redevelopment

We have properties under development/redevelopment and held for current or future development. As of ~~March 31,~~June 30, 2021, we have invested ~~$28.9~~$29.1 million, including the cost of acquired land, in a multifamily development adjacent to Riverside Apartments. In addition, in our multifamily ~~and office segments,~~segment, we continue to capitalize qualifying costs on several other projects with minor development activity necessary to ready each project for its intended use. We placed the remainder of the Trove development costs into service during the ~~2021 Quarter.~~first quarter of 2021.

Properties Sold and Held for Sale

We intend to hold our properties for investment with a view to long-term appreciation, to engage in the business of acquiring, developing and owning our properties and to make occasional sales of properties that no longer meet our long-term strategy or return objectives and where market conditions for sale are favorable. The proceeds from the sales may be reinvested into other properties, used to fund development operations or to support other corporate needs or distributed to our shareholders. Depreciation on these properties is discontinued at the time they are classified as held for sale, but operating revenues, operating expenses and interest expense continue to be recognized until the date of sale.

We ~~did not sell or classify any properties~~classified as held for sale ~~during the 2021 Quarter. We~~or sold ~~our interests in~~ the following properties during 2021 and 2020:


Disposition Date	Disposition Date	Property Name	Property Type	Rentable Square Feet	Contract Sales Price (in thousands)		(Loss) Gain on Sale (in thousands)		Disposition Date	Property Name	Property Type	Rentable Square Feet	Contract Sales Price (in thousands)		(Loss) Gain on Sale (in thousands) (1)
July 26, 2021									July 26, 2021	Office Portfolio (2)	Office	2,370,000	$	766,000
N/A (3)									N/A (3)	Retail Portfolio (4)	Retail	693,000	168,314
											Total 2021	3,063,000	$	934,314

April 21, 2020	April 21, 2020	John Marshall II	Office	223,000	$	57,000	$	(6,855)	April 21, 2020	John Marshall II	Office	223,000	$	57,000	$	(6,855)
December 2, 2020	December 2, 2020	Monument II	Office	207,000	53,000		(8,595)		December 2, 2020	Monument II	Office	207,000	53,000		(8,595)
December 17, 2020	December 17, 2020	1227 25th Street NW	Office	135,000	53,500		1,125		December 17, 2020	1227 25th Street NW	Office	135,000	53,500		1,125
			Total 2020	565,000	$	163,500	$	(14,325)			Total 2020	565,000	$	163,500	$	(14,325)

(1) Amount determined and disclosed in the quarter of disposition.

(2) Consists of 12 office properties: 1901 Pennsylvania Avenue, 515 King Street, 1220 19th Street, 1600 Wilson Boulevard, Silverline Center, Courthouse Square, 2000 M Street, 1140 Connecticut Avenue, Army Navy Club, 1775 Eye Street, Fairgate at Ballston and Arlington Tower.

(3) Disposition of the Retail Portfolio is expected to occur in the third quarter of 2021.

(4) Consists of 8 retail properties: Takoma Park, Westminster, Concord Centre, Chevy Chase Metro Plaza, 800 S. Washington Street, Randolph Shopping Center, Montrose Shopping Center and Spring Valley Village.

We have fully transferred control of the assets associated with ~~these disposed properties~~assets sold in 2020 and do not have continuing involvement in their operations.

In June 2021, we entered into a purchase and sale agreement with a single buyer to sell the Office Portfolio for a purchase price of $766.0 million. As of ~~March 31,~~June 30, 2021, the properties in the Office Portfolio met the criteria for classification as held for sale. We closed on the sale of the Office Portfolio on July 26, 2021.

In June 2021, we executed a letter of intent to sell the Retail Portfolio. As of June 30, 2021, we expected to enter into a purchase and sale agreement and receive a non-refundable deposit from the potential buyer of the Retail Portfolio in July 2021. As of June 30, 2021, the Retail Portfolio met the criteria for classification as held for sale. Subsequent to the 2021 Quarter, we executed a purchase and sale agreement for the sale of our remaining 8 retail properties for a purchase price of $168.3 million and received a non-refundable deposit of $6.7 million from the potential buyer. The closing of the Retail Portfolio is subject to customary closing conditions, however no assurance can be given that the sale will be completed.

The disposition of the Office Portfolio and expected disposition of the Retail Portfolio represent a strategic shift that will have a major effect on our financial results and we have accordingly reported the Office Portfolio and Retail Portfolio as discontinued operations. The remaining office property, Watergate 600, does not meet the criteria for office to be a reportable segment (see note 9).

As of June 30, 2021, we anticipate the disposition of certain properties prior to the end of their useful lives. We assessed ~~certain~~these properties for impairment as of June 30, 2021 and did ~~not~~0t recognize any impairment charges during the 2021 Quarter. We applied reasonable estimates and judgments in evaluating each of the properties as of ~~March 31,~~June 30, 2021. Should external or internal circumstances change requiring the need to shorten holding periods or adjust future estimated cash flows from our properties, we could be required to record impairment charges in the future.

Discontinued Operations

The results of the Office Portfolio and Retail Portfolio are classified as discontinued operations and are summarized as follows (amounts in thousands, except for share data):


	Three months ended June 30,				Six months ended June 30,
	2021		2020		2021		2020
Real estate rental revenue	$	30,561	$	29,113	$	59,587	$	60,163
Real estate expenses	(10,568)		(10,297)		(20,808)		(21,479)
Depreciation and amortization	(10,248)		(12,227)		(22,904)		(24,700)



Income from discontinued operations	$	9,745	$	6,589	$	15,875	$	13,984

Basic net income per share	$	0.12	$	0.08	$	0.19	$	0.17
Diluted net income per share	$	0.12	$	0.08	$	0.19	$	0.17

Capital expenditures	$	2,109	$	5,346	$	2,483	$	7,586

As of June 30, 2021 and December 31, 2020, assets and liabilities related to the Office Portfolio and Retail Portfolio were as follows (in thousands):


	June 30, 2021		December 31, 2020
Land	$	249,869	$	249,869
Income producing property	961,359		958,704
	1,211,228		1,208,573
Accumulated depreciation and amortization	(433,229)		(414,008)
Income producing property, net	777,999		794,565
Development in progress and land held for development	1,122		1,122
Investment in real estate, net	$	779,121	$	795,687
Cash and cash equivalents	3		3
Restricted cash	10		10
Rents and other receivables	48,563		48,532
Prepaid expenses and other assets	38,235		41,452
Total assets	$	865,932	$	885,684
Accounts payable and other liabilities	$	12,738	$	14,706
Advance rents	4,977		4,754
Tenant security deposits	6,033		5,769
Liabilities related to properties sold or held for sale	$	23,748	$	25,229

NOTE 4: UNSECURED LINE OF CREDIT PAYABLE

During the first quarter of 2018, we entered into an amended and restated credit agreement (“Credit Agreement”) which provides for a $700.0 million unsecured revolving credit facility (“Revolving Credit Facility”), the continuation of an existing $150.0 million unsecured term loan (“2015 Term Loan”) and an additional $250.0 million unsecured term loan (“2018 Term Loan”). In the fourth quarter of 2020, we repaid all $150.0 million of borrowings on the 2015 Term Loan. The Revolving Credit Facility has a four-year term ending in March 2022, with 2 six-month extension options. The Credit Agreement has an accordion feature that allows us to increase the aggregate facility to $1.5 billion, subject to the lenders’ agreement to provide additional revolving loan commitments or term loans.

The Revolving Credit Facility bears interest at a rate of either one month LIBOR plus a margin ranging from 0.775% to 1.55% or the base rate plus a margin ranging from 0.0% to 0.55% (in each case depending upon WashREIT’s credit rating). The base rate is the highest of the administrative agent’s prime rate, the federal funds rate plus 0.50% and the LIBOR market index rate

1115

plus 1.0%. In addition, the Revolving Credit Facility requires the payment of a facility fee ranging from 0.10% to 0.30% (depending on WashREIT’s credit rating) on the $700.0 million committed revolving loan capacity, without regard to usage. As of ~~March 31,~~June 30, 2021, the interest rate on the Revolving Credit Facility is one month LIBOR plus 1.00%, the one month LIBOR is ~~0.11%~~0.10% and the facility fee is 0.20%.

All outstanding advances for the Revolving Credit Facility are due and payable upon maturity in March 2022, unless extended pursuant to one or both of the 2 six-month extension options. Interest only payments are due and payable generally on a monthly basis.

The 2018 Term Loan ~~increases~~increased and ~~replaces~~replaced the $150.0 million unsecured term loan, initially entered into on July 22, 2016 (“2016 Term Loan”), that was scheduled to mature in July 2023. The 2018 Term Loan is scheduled to mature in July 2023 and bears interest at a rate of either one month LIBOR plus a margin ranging from 0.85% to 1.75% or the base rate plus a margin ranging from 0.0% to 0.75% (in each case depending upon WashREIT’s credit rating). We used the $100.0 million of additional proceeds from the 2018 Term Loan primarily to repay outstanding borrowings on the Revolving Credit Facility.

We had previously used interest rate derivatives to effectively fix the interest rate of the 2016 Term Loan. These interest rate derivatives now effectively fix the interest rate on a $150.0 million portion of the 2018 Term Loan at 2.31%. In March 2018, we entered into interest rate derivatives that commenced on June 29, 2018 to effectively fix the interest rate on the remaining $100.0 million of the 2018 Term Loan at 3.71%. The 2018 Term Loan has an all-in fixed interest rate of 2.87%.

The amount of the Revolving Credit Facility’s unsecured line of credit unused and available at ~~March 31,~~June 30, 2021 is as follows (in thousands):


Committed capacity	$	700,000
Borrowings outstanding	~~(33,000)~~(43,000)

Unused and available	$	~~667,000~~657,000

We executed borrowings and repayments on the Revolving Credit Facility during the 2021 ~~Quarter~~Period as follows (in thousands):


Balance at December 31, 2020	$	42,000
Borrowings	~~27,000~~72,000
Repayments	~~(36,000)~~(71,000)
Balance at ~~March 31,~~June 30, 2021	$	~~33,000~~43,000

NOTE 5: DERIVATIVE INSTRUMENTS

On July 22, 2016, we entered into 2 forward interest rate swap arrangements with ~~a total~~ notional ~~amount~~amounts of ~~$150.0~~$100.0 million and $50.0 million, respectively, to swap the floating interest rate under the $150.0 million 2016 Term Loan to an all-in fixed interest rate of 2.86% starting on March 31, 2017 and extending until the scheduled maturity of the 2016 Term Loan on July 21, 2023.

On March 29, 2018, we entered into the $250.0 million 2018 Term Loan maturing on July 21, 2023, which increased and replaced the 2016 Term Loan. The interest rate swap arrangements that had effectively fixed the 2016 Term Loan then effectively fix the interest rate on a $150.0 million portion of the 2018 Term Loan at 2.31%. On March 29, 2018, we entered into 4 interest rate swap arrangements with a total notional amount of $100.0 million to effectively fix the interest rate on the remaining $100.0 million of the 2018 Term Loan at 3.71%, that commenced on June 29, 2018 and extending until the maturity of the 2018 Term Loan on July 21, 2023. The $250.0 million 2018 Term Loan has an all-in fixed interest rate of 2.87%.

In November 2019, we entered into 4 forward interest rate swap arrangements, each effective as of April 1, 2020 (“2020 Forward Swaps”) with a total notional amount of $200.0 million to reduce our exposure to adverse fluctuations in interest rates on future fixed-rate debt to replace all $250.0 million of our 4.95% 10-year unsecured notes that were scheduled to mature in October 2020. In April 2020, we used borrowings from our Revolving Credit Facility to prepay all $250.0 million of our 4.95% 10-year unsecured notes without penalty. In September 2020, in conjunction with the entry into the note purchase agreement to issue $350.0 million aggregate principal amount of 3.44% senior unsecured 10-year notes payable (the “Green Bonds”), we terminated the 2020 Forward Swaps. At the time of termination, the 2020 Forward Swaps had a liability fair value of $20.4 million, which will be amortized as interest expense over the 10-year term of the Green Bonds. On October 2, 2020, we paid the $20.4 million liability associated with the termination of the 2020 Forward Swaps.

The interest rate swaps ~~qualify as cash flow hedges and~~ are recorded at fair value in accordance with ~~GAAP,~~Generally Accepted Accounting Principles (“GAAP”), based on discounted cash flow methodologies and observable inputs. We record the effective portion of changes in fair value of the cash flow hedges in other comprehensive income. The resulting unrealized loss on the effective portions of the cash flow hedges was the only activity in other comprehensive income (loss) during the periods presented in our consolidated financial statements. We assess the effectiveness of our cash flow hedges both at inception and on an ongoing basis. ~~The~~If a cash flow hedge is no longer expected to be effective, hedge accounting is discontinued. Hedge ineffectiveness of our cash flow hedges ~~were highly~~is recorded in earnings.

We currently expect to use a portion of the proceeds from the sale of the Office and potential sale of the Retail Portfolios (see note 3) to prepay a $150.0 million portion of the 2018 Term Loan during the third quarter of 2021. We expect to hold the remaining $100.0 million portion of the 2018 Term Loan until maturity. Due to this intention to prepay a $150.0 million portion of the 2018 Term Loan, we have determined that the hedged transactions for the 5 interest rate swap arrangements with an

aggregate notional value of $150.0 million are probable not to occur and that these interest swap arrangements are no longer effective cash flow hedges as of June 30, 2021. As a result, we recognized a loss of $5.8 million for ~~all periods presented.~~the 2021 Quarter, which was recorded to Loss on interest rate derivatives on our condensed consolidated statements of operations. The interest rate swap arrangement with a notional value of $100.0 million related to the remaining portion of the 2018 Term Loan that we intend to hold to maturity is an effective cash flow hedge as of June 30, 2021.

The fair values of the interest rate swaps as of ~~March 31,~~June 30, 2021 and December 31, 2020, are as follows (in thousands):


						Fair Value									Fair Value
						Derivative Liabilities									Derivative Liabilities
Derivative Instrument	Derivative Instrument	Aggregate Notional Amount		Effective Date	Maturity Date	March 31, 2021		December 31, 2020		Derivative Instrument	Aggregate Notional Amount		Effective Date	Maturity Date	June 30, 2021		December 31, 2020
Interest rate swaps	Interest rate swaps	$	150,000	March 31, 2017	July 21, 2023	$	(3,263)	$	(4,009)	Interest rate swaps	$	150,000	March 31, 2017	July 21, 2023	$	(2,869)	$	(4,009)
Interest rate swaps	Interest rate swaps	100,000		June 29, 2018	July 21, 2023	(5,411)		(6,246)		Interest rate swaps	100,000		June 29, 2018	July 21, 2023	(4,802)		(6,246)
						$	(8,674)	$	(10,255)						$	(7,671)	$	(10,255)

We record interest rate swaps on our consolidated balance sheets within Prepaid expenses and other assets when in a net asset position and within Accounts payable and other liabilities when in a net liability position. The ~~interest rate swaps have been effective since inception. The~~ net unrealized gains or losses on the effective swaps are recognized in Other comprehensive loss, as follows (in thousands):

Three Months Ended March 31,
2021 2020
Unrealized gain (loss) on interest rate hedges 1,580 (34,567)


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Unrealized gain (loss) on interest rate hedges	$	1,004	$	(1,789)	$	2,584	$	(36,356)

Amounts reported in Accumulated other comprehensive loss related to ~~derivatives~~effective cash flow hedges will be reclassified to interest expense as interest payments are made on our variable-rate debt. The gains or losses reclassified from Accumulated other comprehensive loss into interest expense for the three and six months ended ~~March 31,~~June 30, 2021 and 2020, were as follows (in thousands):

Three Months Ended March 31,
2021 2020
Loss reclassified from Accumulated other comprehensive loss into interest expense $ 510 $ 0


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Loss reclassified from Accumulated other comprehensive loss into interest expense	$	509	$	0	$	1,019	$	0

During the next twelve months, we estimate that an additional ~~$6.1~~$3.1 million will be reclassified as an increase to interest expense.

We have agreements with each of our derivative counterparties that contain a provision whereby we could be declared in default on our derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to our default on the indebtedness. As of ~~March 31,~~June 30, 2021, we did 0t have any derivatives in an asset position and the fair value of the derivative liabilities, including accrued interest, was ~~$8.7~~$7.7 million. As of ~~March 31,~~June 30, 2021, we have not posted any collateral related to these agreements.

Derivative instruments expose us to credit risk in the event of non-performance by the counterparty under the terms of the interest rate hedge agreements. We believe that we minimize our credit risk on these transactions by dealing with major, creditworthy financial institutions. We monitor the credit ratings of counterparties and our exposure to any single entity, thus minimizing our credit risk concentration.

NOTE 6: FAIR VALUE DISCLOSURES

Assets and Liabilities Measured at Fair Value

For assets and liabilities measured at fair value on a recurring basis, quantitative disclosures about the fair value measurements are required to be disclosed separately for each major category of assets and liabilities, as follows:

Level 1: Quoted prices in active markets for identical assets

1317

Level 2: Significant other observable inputs

Level 3: Significant unobservable inputs

The only assets or liabilities we had at ~~March 31,~~June 30, 2021 and December 31, 2020 that are recorded at fair value on a recurring basis are the assets held in the Supplemental Executive Retirement Plan (“SERP”), which primarily consist of investments in mutual funds, and the interest rate ~~swaps~~derivatives (see note 5).

We base the valuations related to the SERP on assumptions derived from significant other observable inputs and accordingly these valuations fall into Level 2 in the fair value hierarchy.

The valuation of the interest rate ~~swaps~~derivatives is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each interest rate ~~swap.~~derivative. This analysis reflects the contractual terms of the interest rate ~~swaps,~~derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate ~~swaps~~derivatives are determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. To comply with the provisions of ASC 820, Fair Value Measurement, we incorporate credit valuation adjustments in the fair value measurements to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk. These credit valuation adjustments were concluded to not be significant inputs for the fair value calculations for the periods presented. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as the posting of collateral, thresholds, mutual puts and guarantees. The valuation of interest rate ~~swaps~~derivatives fall into Level 2 in the fair value hierarchy.

The fair values of these assets and liabilities at ~~March 31,~~June 30, 2021 and December 31, 2020 were as follows (in thousands):


		March 31, 2021								December 31, 2020									June 30, 2021								December 31, 2020
		Fair Value		Level 1		Level 2		Level 3		Fair Value		Level 1		Level 2		Level 3			Fair Value		Level 1		Level 2		Level 3		Fair Value		Level 1		Level 2		Level 3
Assets:	Assets:																	Assets:
SERP	SERP	$	2,191	$	0	$	2,191	$	0	$	2,433	$	0	$	2,433	$	0	SERP	$	2,386	$	0	$	2,386	$	0	$	2,433	$	0	$	2,433	$	0

Liabilities:	Liabilities:																	Liabilities:
Interest rate swaps		$	(8,674)	$	0	$	(8,674)	$	0	$	(10,255)	$	0	$	(10,255)	$	0
Interest rate derivatives																		Interest rate derivatives	$	(7,671)	$	0	$	(7,671)	$	0	$	(10,255)	$	0	$	(10,255)	$	0

Financial Assets and Liabilities Not Measured at Fair Value

The following disclosures of estimated fair value were determined by management using available market information and established valuation methodologies, including discounted cash flow models. Many of these estimates involve significant judgment. The estimated fair value disclosed may not necessarily be indicative of the amounts we could realize on disposition of the financial instruments. The use of different market assumptions or estimation methodologies could have an effect on the estimated fair value amounts. In addition, fair value estimates are made at a point in time and thus, estimates of fair value subsequent to ~~March 31,~~June 30, 2021 may differ significantly from the amounts presented. The valuations of cash and cash equivalents and restricted cash fall into Level 1 in the fair value hierarchy and the valuations of debt instruments fall into Level 3 in the fair value hierarchy.

As of ~~March 31,~~June 30, 2021 and December 31, 2020, the carrying values and estimated fair values of our financial instruments were as follows (in thousands):


		March 31, 2021				December 31, 2020					June 30, 2021				December 31, 2020
		Carrying Value		Fair Value		Carrying Value		Fair Value			Carrying Value		Fair Value		Carrying Value		Fair Value
Cash and cash equivalents	Cash and cash equivalents	$	3,017	$	3,017	$	7,700	$	7,700	Cash and cash equivalents	$	5,435	$	5,435	$	7,697	$	7,697
Restricted cash	Restricted cash	576		576		603		603		Restricted cash	595		595		593		593

Line of credit	Line of credit	33,000		33,000		42,000		42,000		Line of credit	43,000		43,000		42,000		42,000
Notes payable, net	Notes payable, net	945,634		974,595		945,370		978,678		Notes payable, net	945,905		977,200		945,370		978,678

1418

NOTE 7: STOCK BASED COMPENSATION

WashREIT maintains short-term (“STIP”) and long-term (“LTIP”) incentive plans that allow for stock based awards to officers and non-officer employees. Stock based awards are provided to officers and non-officer employees, as well as trustees, under the Washington Real Estate Investment Trust 2016 Omnibus Incentive Plan which allows for awards in the form of restricted shares, restricted share units, options and other awards up to an aggregate of 2,400,000 shares over the ten-year period in which the plan will be in effect. Restricted share units are converted into shares of our stock upon full vesting through the issuance of new shares.

Total Compensation Expense

Total compensation expense recognized in the consolidated financial statements for all outstanding share based awards was ~~$1.7~~$2.2 million and ~~$1.8~~$2.0 million for the 2021 Quarter and 2020 Quarter, respectively, and $3.8 million and $3.8 million for the 2021 Period and 2020 Period, respectively.

Restricted Share Awards

The total fair values of restricted share awards vested was ~~$1.0~~$2.0 million and ~~$0.4~~$0.8 million for the 2021 ~~Quarter~~Period and 2020 ~~Quarter,~~Period, respectively.

The total unvested restricted share awards at ~~March 31,~~June 30, 2021 was ~~463,100~~456,326 shares, which had a weighted average grant date fair value of ~~$28.36~~$28.38 per share. As of ~~March 31,~~June 30, 2021, the total compensation cost related to unvested restricted share awards was ~~$9.2~~$7.4 million, which we expect to recognize over a weighted average period of 2320 months.

NOTE 8: EARNINGS PER COMMON SHARE

We determine “Basic earnings per share” using the two-class method as our unvested restricted share awards and units have non-forfeitable rights to dividends, and are therefore considered participating securities. We compute basic earnings per share by dividing net income less the allocation of undistributed earnings to unvested restricted share awards and units by the weighted-average number of common shares outstanding for the period.

We also determine “Diluted earnings per share” as the more dilutive of the two-class method or the treasury stock method with respect to the unvested restricted share awards. We further evaluate any other potentially dilutive securities at the end of the period and adjust the basic earnings per share calculation for the impact of those securities that are dilutive. Our dilutive earnings per share calculation includes the dilutive impact of operating partnership units under the if-converted method and our share based awards with performance conditions prior to the grant date and all market condition awards under the contingently issuable method.

1519

The computations of basic and diluted earnings per share for the three and six months ended ~~March 31,~~June 30, 2021 and 2020 were as follows (in thousands, except per share data):


		Three Months Ended March 31,				Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020				2021		2020		2021		2020
Numerator:	Numerator:						Numerator:
Net (loss) income		$	(1,147)	$	1,719
Loss from continuing operations							Loss from continuing operations	$	(16,737)	$	(11,995)	$	(24,014)	$	(17,671)

Allocation of distributed earnings to unvested restricted share awards	Allocation of distributed earnings to unvested restricted share awards	(139)		(151)			Allocation of distributed earnings to unvested restricted share awards	(137)		(151)		(276)		(302)
Adjusted net loss from continuing operations							Adjusted net loss from continuing operations	(16,874)		(12,146)		(24,290)		(17,973)
Income from discontinued operations							Income from discontinued operations	9,745		6,589		15,875		13,984

Adjusted net (loss) income		$	(1,286)	$	1,568
Adjusted net loss							Adjusted net loss	$	(7,129)	$	(5,557)	$	(8,415)	$	(3,989)
Denominator:	Denominator:						Denominator:
Weighted average shares outstanding – basic	Weighted average shares outstanding – basic	84,413		82,086			Weighted average shares outstanding – basic	84,461		82,153		84,437		82,120
Effect of dilutive securities:	Effect of dilutive securities:						Effect of dilutive securities:
Employee restricted share awards	Employee restricted share awards	0		189			Employee restricted share awards	0		0		0		0
Operating partnership units	Operating partnership units	0		12			Operating partnership units	0		0		0		0
Weighted average shares outstanding – diluted	Weighted average shares outstanding – diluted	84,413		82,287			Weighted average shares outstanding – diluted	84,461		82,153		84,437		82,120

Basic net (loss) income per common share		$	(0.02)	$	0.02

Diluted net (loss) income per common share		$	(0.02)	$	0.02
Earnings per common share, basic:							Earnings per common share, basic:
Continuing operations							Continuing operations	$	(0.20)	$	(0.15)	$	(0.29)	$	(0.22)
Discontinued operations							Discontinued operations	0.12		0.08		0.19		0.17
Basic net loss per common share							Basic net loss per common share	$	(0.08)	$	(0.07)	$	(0.10)	$	(0.05)
Earnings per common share, diluted:							Earnings per common share, diluted:
Continuing operations							Continuing operations	$	(0.20)	$	(0.15)	$	(0.29)	$	(0.22)
Discontinued operations							Discontinued operations	0.12		0.08		0.19		0.17
Diluted net loss per common share							Diluted net loss per common share	$	(0.08)	$	(0.07)	$	(0.10)	$	(0.05)

Dividends declared per common share	Dividends declared per common share	$	0.30	$	0.30		Dividends declared per common share	$	0.30	$	0.30	$	0.60	$	0.60

On July 29, 2021, we announced that the Board of Trustees declared a quarterly dividend of $0.17 per share for the three months ended September 30, 2021.

NOTE 9: SEGMENT INFORMATION

We ~~evaluate real estate performance and allocate resources by property type through~~previously had 2 reportable segments: office and multifamily. Office properties provide office space for various types of businesses and professions. Multifamily properties provide rental housing for individuals and families throughout the Washington, DC metro region. We have 8 retail properties that dodid not meet the ~~qualitative or quantitative~~ criteria for a reportable segment and are classified as “Corporate and other” in our segment disclosure tables. During the 2021 Quarter, we executed a purchase and sale agreement for the sale of 12 office properties (see note 3). Subsequent to the 2021 Quarter, we executed a purchase and sale agreement for the sale of 8 retail properties (see note 3). Both the office and retail properties met the criteria for classification as held for sale as of June 30, 2021 and are classified as discontinued operations. We closed on the sale of the Office Portfolio on July 26, 2021 and expect to close on the Retail Portfolio in the third quarter of 2021. We have 1 remaining office property, Watergate 600, which does not meet the criteria for a reportable segment, has been classified within “Corporate and other” on our segment disclosure tables.

We evaluate performance based upon net operating income of the combined properties in each segment. Our reportable operating segments are consolidations of similar properties. GAAP requires that segment disclosures present the measure(s) used by the chief operating decision maker for purposes of assessing each segment’s performance. Net operating income is a key measurement of our segment profit and loss and is defined as real estate rental revenue less real estate expenses.

1620

The following tables present revenues, net operating income, capital expenditures and total assets for the three and six months ended ~~March 31,~~June 30, 2021 and 2020 from ~~these segments,~~our Multifamily segment as well as Corporate and Other, and reconcile net operating income of our reportable segments to net ~~(loss) income~~loss as reported (in thousands):


		Three Months Ended March 31, 2021						Three Months Ended June 30, 2021
		Multifamily		Office		Corporate and Other			Consolidated			Multifamily		Corporate and Other (1), (2)		Consolidated
Real estate rental revenue	Real estate rental revenue	$	36,132	$	28,599	$	4,902		$	69,633	Real estate rental revenue	$	36,862	$	4,435	$	41,297
Real estate expenses	Real estate expenses	15,172		10,117		1,405			26,694		Real estate expenses	14,832		1,398		16,230
Net operating income	Net operating income	$	20,960	$	18,482	$	3,497		$	42,939	Net operating income	$	22,030	$	3,037	$	25,067
Depreciation and amortization	Depreciation and amortization								(29,643)		Depreciation and amortization					(17,303)
General and administrative expenses	General and administrative expenses								(5,604)		General and administrative expenses					(6,325)

Transformation costs											Transformation costs					(3,780)

Interest expense	Interest expense								(10,123)		Interest expense					(10,158)
Other income	Other income								1,284		Other income					1,522
Loss on interest rate derivatives											Loss on interest rate derivatives					(5,760)

Discontinued operations:											Discontinued operations:
Income from operations of properties sold or held for sale											Income from operations of properties sold or held for sale					9,745

Net loss	Net loss								$	(1,147)	Net loss					$	(6,992)

Capital expenditures	Capital expenditures	$	3,737	$	172	$	130		$	4,039	Capital expenditures	$	4,062	$	2,300	$	6,362
Total assets	Total assets	$	1,322,738	$	927,757	$	129,541		$	2,380,036	Total assets	$	1,315,640	$	1,052,765	$	2,368,405

Three Months Ended March 31, 2020
Multifamily Office Corporate and Other Consolidated
Real estate rental revenue $ 36,578 $ 35,670 $ 4,544 $ 76,792
Real estate expenses 13,985 13,317 1,337 28,639
Net operating income $ 22,593 $ 22,353 $ 3,207 $ 48,153
Depreciation and amortization (29,720)
General and administrative expenses (6,337)
Interest expense (10,845)
Gain on extinguishment of debt 468
Net income $ 1,719
Capital expenditures $ 3,469 $ 7,088 $ 383 $ 10,940
Total assets $ 1,339,925 $ 1,130,013 $ 152,682 $ 2,622,620


	Three Months Ended June 30, 2020
	Multifamily		Corporate and Other (1), (2)		Consolidated
Real estate rental revenue	$	36,066	$	7,691	$	43,757
Real estate expenses	14,110		2,478		16,588
Net operating income	$	21,956	$	5,213	$	27,169
Depreciation and amortization					(17,372)

General and administrative expenses					(5,296)

Interest expense					(8,751)

Loss on sale of real estate					(7,539)


Loss on extinguishment of debt					(206)

Discontinued operations:

Income from operations of properties sold or held for sale					6,589


Net loss					$	(5,406)


Capital expenditures	$	5,488	$	9,118	$	14,606
Total assets	$	1,337,731	$	1,204,991	$	2,542,722

1721


	Six Months Ended June 30, 2021
	Multifamily		Corporate and Other (1), (2)		Consolidated
Real estate rental revenue	$	73,029	$	8,875	$	81,904
Real estate expenses	30,004		2,680		32,684
Net operating income	$	43,025	$	6,195	$	49,220
Depreciation and amortization					(34,290)

General and administrative					(11,929)
Transformation costs					(3,780)
Interest expense					(20,281)
Other income					2,806
Loss on interest rate derivatives					(5,760)





Discontinued operations:

Income from operations of properties sold or held for sale					15,875


Net loss					$	(8,139)


Capital expenditures	$	7,799	$	2,602	$	10,401


	Six Months Ended June 30, 2020
	Multifamily		Corporate and Other (1), (2)		Consolidated
Real estate rental revenue	$	72,651	$	16,849	$	89,500
Real estate expenses	28,095		5,951		34,046
Net operating income	$	44,556	$	10,898	$	55,454
Depreciation and amortization					(34,619)

General and administrative					(11,633)

Interest expense					(19,596)

Loss on sale of real estate					(7,539)


Gain on extinguishment of debt					262

Discontinued operations:

Income from operations of properties sold or held for sale					13,984

Net loss					$	(3,687)


Capital expenditures	$	8,957	$	16,619	$	25,576

(1) Corporate and Other represents Watergate 600, an office property that does not meet the qualitative or quantitative criteria for a reportable segment.

(2) Total assets and capital expenditures include office and retail properties classified as discontinued operations.

NOTE 10: SHAREHOLDERS' EQUITY

On February 17, 2021, we entered into separate amendments to each of our existing equity distribution agreements (“Original Equity Distribution Agreements”) with each of Wells Fargo Securities, LLC, BNY Mellon Capital Markets, LLC, Capital One Securities, Inc., Citigroup Global Markets Inc., Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, KeyBanc Capital Markets Inc. and Truist Securities, Inc. (f/k/a SunTrust Robinson Humphrey, Inc.), each dated May 4, 2018 (collectively, as amended, the “Amended Equity Distribution Agreements”). Also on February 17, 2021, we entered into a separate equity distribution agreement with BTIG, LLC on the same terms as the Amended Equity Distribution Agreements (the “BTIG Equity Distribution Agreement,” together with the Amended Equity Distribution Agreements, the “Equity Distribution Agreements”). Pursuant to the Equity Distribution Agreements, we may sell, from time to time, up to an aggregate price of $550.0 million of our common shares of beneficial interest, $0.01 par value per share. Issuances of our common shares are made at market prices prevailing at the time of issuance. We may use net proceeds from the issuance of common shares under this program for general business purposes, including, without limitation, working capital, the acquisition, renovation, expansion, improvement, development or redevelopment of income producing properties or the repayment of debt. We did not issue common shares under the Equity Distribution Agreements during the 2021 Quarter or 2020 Quarter. Our issuances and net proceeds on the Equity Distribution Agreements and the Original Equity Distribution Agreements, respectively, for the ~~three months ended March 31,~~ 2021 Period and 2020 Period are as ~~follows:~~follows ($ in thousands, except per share data):


		Three Months Ended March 31,					Six Months Ended June 30,
		2021		2020				2021		2020
Issuance of common shares	Issuance of common shares	24		47		Issuance of common shares		24		47
Weighted average price per share	Weighted average price per share	$	22.06	$	31.07	Weighted average price per share		$	22.06	$	31.07
Net proceeds	Net proceeds	$	467	$	1,241	Net proceeds		$	467	$	1,241

We have a dividend reinvestment program whereby shareholders may use their dividends and optional cash payments to purchase common shares. The shares sold under this program may either be common shares issued by us or common shares purchased in the open market. Net proceeds under this program are used for general corporate purposes.

Our issuances and net proceeds on the dividend reinvestment program for the three and six months ended ~~March 31,~~June 30, 2021 and 2020 are as ~~follows:~~follows ($ in thousands, except per share data):


		Three Months Ended March 31,				Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020				2021		2020		2021		2020
Issuance of common shares	Issuance of common shares	23		35			Issuance of common shares	22		6		45		41
Weighted average price per share	Weighted average price per share	$	22.07	$	26.96		Weighted average price per share	$	23.21	$	22.68	$	22.63	$	26.38
Net proceeds	Net proceeds	$	520	$	921		Net proceeds	$	489	$	144	$	1,009	$	1,065

1823

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, 2020 filed with the Securities and Exchange Commission (“SEC”) on February 16, 2021.

We refer to the three months ended ~~March 31,~~June 30, 2021 and ~~March 31,~~June 30, 2020 as the “2021 Quarter” and the “2020 Quarter,” respectively, and the six months ended June 30, 2021 and June 30, 2020 as the “2021 Period” and the “2020 Period,” respectively.

Forward-Looking Statements

This Form 10-Q contains forward-looking statements which involve risks and uncertainties. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward looking statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” or “potential” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. Such statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of WashREIT to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. 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 and its 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 ~~rollout,~~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, 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 (including the expected retail asset sales) 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 multifamily properties in the Southeastern markets and the repayment of debt, on the terms anticipated, or at all, and to realize any anticipated benefits, including the performance of any acquired multifamily properties at the levels anticipated; our ability to lease up Trove on the timing anticipated; our ability to reduce actual net leverage to levels consistent with our targeted net leverage range, 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;~~region and the ~~risk of failure to enter into and/or complete potential acquisitions and dispositions, at all, within the price ranges anticipated and on the terms and timing anticipated;~~larger Southeastern region; changes in the composition and geographic location of our portfolio; fluctuations 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 tenants; shifts away from brick and mortar stores to e-commerce; 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 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; 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. While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We undertake no obligation to update our forward-looking statements or risk factors to reflect new information, future events, or otherwise.

General

Introductory Matters

We provide our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations and financial condition. We organize the MD&A as follows:

•Overview. Discussion of our business outlook, operating results, investment and financing activity and capital requirements to provide context for the remainder of MD&A.

•Results of Operations. Discussion of our financial results comparing the 2021 Quarter to the 2020 ~~Quarter.~~Quarter and the 2021 Period to the 2020 Period.

•Liquidity and Capital Resources. Discussion of our financial condition and analysis of changes in our capital structure and cash flows.

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

•Critical Accounting Policies and Estimates. Descriptions of accounting policies that reflect significant judgments and estimates used in the preparation of our consolidated financial statements.

When evaluating our financial condition and operating performance, we focus on the following financial and non-financial indicators:

•Net operating income (“NOI”), calculated as set forth below under the caption "Results of Operations - Net Operating Income." NOI is a non-GAAP supplemental measure to net income.

•Funds From Operations (“NAREIT FFO”), calculated as set forth below under the caption “Funds from Operations.” NAREIT FFO is a non-GAAP supplemental measure to net income.

•~~Ending~~Average occupancy, calculated as average monthly occupied ~~square footage or~~ multifamily units as a percentage of total ~~square footage or~~ multifamily ~~units, respectively, as of the last day of that period.~~

•~~Leased percentage, calculated as the percentage of apartments leased for our multifamily properties and percentage of available physical net rentable area leased for our commercial properties.~~

•~~Leasing activity, including new leases, renewals and expirations.~~units.

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. We consider a property's development activities to be complete when the property is ready for its intended use. The property is categorized as same-store when it has been ready for its intended use for the entirety of the years being compared. We define redevelopment properties as those for which we have planned or ongoing significant development and construction activities on existing or acquired buildings pursuant to an authorized plan, which has an impact on current operating results, occupancy and the ability to lease space with the intended result of a higher economic return on the property. We categorize a redevelopment property as same-store when redevelopment activities have been complete for the majority of each year being compared.

Overview

Our revenues are derived primarily from the ownership and operation of income producing properties in the greater Washington, DC metro region. As of ~~March 31,~~June 30, 2021 we owned a diversified portfolio of 43 properties, totaling approximately 3.4 million square feet of commercial space and 7,059 multifamily units, and land held for development. These 43 properties consisted of 22 multifamily properties, 13 office properties and 8 retail centers.

During the 2021 Quarter, 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. Subsequent to 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. Both the Office Portfolio and Retail Portfolio met the criteria for classification as held for sale as of June 30, 2021 and are classified as discontinued operations in our condensed consolidated financial statements. We closed on the sale of the Office Portfolio on July 26, 2021 and expect to close on the Retail Portfolio in the third quarter of 2021. The closing of the Retail Portfolio is subject to customary closing conditions, however, no assurance can be given that the sale will be completed. The 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 properties in the Office Portfolio and Retail Portfolio met the criteria for classification as held for sale as of June 30, 2021 and are classified as discontinued operations. The dispositions of office and retail properties are part of a strategic shift away from the commercial sector to the multifamily sector which simplifies our portfolio to one reportable segment (multifamily) (the “strategic transformation”).

Outlook

properties and dispositions of office and retail properties are part of a strategic shift away from the commercial sector to the multifamily sector (the “strategic transformation”). This strategic shift simplifies our portfolio to one reportable segment (multifamily). 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 ~~had a significant impact on~~impacted the 2021 Quarter, as of ~~April 23,~~July 28, 2021, we collected 99% ~~and 97%~~ of ~~office and retail~~ cash rent ~~respectively,~~ during the 2021 ~~Quarter, excluding the impact of contractual rent deferral agreements. The effects of COVID-19 on our commercial tenants did not result in an increase~~Quarter. We saw a decrease in credit losses ~~for~~of $0.3 million during the 2021 Quarter compared to the 2020 Quarter. As of April 23, 2021, we have $0.7 million and $0.9 million of deferred rent outstanding, net of repayments, from our office segment and retail properties, respectively. We continue to monitor and communicate with our commercial tenants to assess their needs and ability to pay rent.

At our multifamily properties, as of April 23, 2021, we collected 98% of cash rent during the 2021 Quarter, excluding rent that has been deferred. Deferred rent outstanding, net of repayments, from our multifamily tenants is less than $0.1 million. The effects of COVID-19 on our multifamily tenants ~~have been reflected in an increase in credit losses of $0.3 million and~~ led to a decline in rental rates during the 2021 Quarter compared to the 2020 Quarter. WeHowever, we expect ~~our ability~~to be able to increase rental rates in the remainder of 2021 as market conditions have begun to ~~be limited until the economic disruption of the pandemic subsides.~~

improve. We had ~~a decline~~an increase in average occupancy of approximately ~~160~~60 basis points during the 2021 Quarter compared to the 2020 Quarter, excluding Trove, which began lease-up in the first quarter of 2020. The effects of the COVID-19 pandemic have also impacted our ability to lease up available commercial space as lease decisions have been slower for prospective tenants than in previous years as they re-evaluate re-entry and space plans. New gross leasing square footage declined by 53% for commercial space during the 2021 Quarter compared to the 2020 Quarter. As of March 31, 2021, we had approximately 490,000 square feet of vacant commercial space and approximately 200,000 square feet of commercial lease expirations scheduled for 2021.

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, our entire existing portfolio could be impacted at the same time by quarantines, ~~shelter-in-place~~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 ~~have~~previously initiated various operational cost-saving initiatives across our portfolio. Due to the uncertainty of the future impacts of the COVID-19 pandemic, ~~and the speed of the vaccine rollout in the Washington metro region,~~ 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 ~~Quarters.~~Period.

Operating Results

Net ~~(loss) income,~~loss, NOI and NAREIT FFO for the three months ended ~~March 31,~~June 30, 2021 and 2020 were as follows (in thousands):


		Three Months Ended March 31,									Three Months Ended June 30,
		2021		2020		$ Change		% Change			2021		2020		$ Change		% Change
Net (loss) income		$	(1,147)	$	1,719	$	(2,866)	(166.7)	%
Net loss										Net loss	$	(6,992)	$	(5,406)	$	(1,586)	29.3	%
NOI (1)	NOI (1)	$	42,939	$	48,153	$	(5,214)	(10.8)	%	NOI (1)	$	25,067	$	27,169	$	(2,102)	(7.7)	%
NAREIT FFO (2)	NAREIT FFO (2)	$	28,496	$	31,439	$	(2,943)	(9.4)	%	NAREIT FFO (2)	$	20,559	$	31,732	$	(11,173)	(35.2)	%
______________________________	______________________________									______________________________
(1) See page 23 of the MD&A for a reconciliation of NOI to net income.
(2) See page 30 of the MD&A for a reconciliation of NAREIT FFO to net income.
(1) See page 29 of the MD&A for a reconciliation of NOI to net income.										(1) See page 29 of the MD&A for a reconciliation of NOI to net income.
(2) See page 39 of the MD&A for a reconciliation of NAREIT FFO to net income.										(2) See page 39 of the MD&A for a reconciliation of NAREIT FFO to net income.

The ~~decrease~~increase in net ~~income~~loss is primarily due to the loss on interest rate derivatives ($5.8 million), transformation costs ($3.8 million), lower NOI ($~~5.2~~2.1 million), higher interest expense ($1.4 million) and higher general and administrative expenses ($1.0 million) in the 2021 Quarter, partially offset by the loss on sale of real estate ($7.5 million) and a ~~gain~~loss on extinguishment of debt ($~~0.5~~0.2 million) in the 2020 Quarter ~~partially offset by a gain on the settlement of litigation~~and higher income from discontinued operations ($~~1.3 million), lower interest expense ($0.7~~3.2 million) and ~~lower general and administrative expenses~~a real estate tax refund ($~~0.7~~1.5 million) in the 2021 Quarter.

The lower NOI is primarily due to ~~lower NOI from same-store properties ($3.0 million) during 2021 and~~ the sales of ~~John Marshall~~Monument II ($1.1 million), ~~Monument II ($0.9 million) and~~ 1227 25th Street ($0.7 million) and John Marshall II ($0.2 million) during 2020 and lower same-store NOI ($0.6 million), partially offset by placing Trove, a multifamily development, into service ~~during~~starting in 2020 ($~~0.4~~0.5 million). ~~The lower~~Multifamily same-store ~~NOI is explained in further detail beginning on page~~ 23 ~~(Results of Operations - 2021 Quarter Compared to 2020 Quarter). Same-store ending~~average occupancy for our portfolio ~~decreased~~increased to ~~90.9%~~95.1% as of ~~March 31,~~June 30, 2021 from ~~92.4%~~94.5% as of ~~March 31,~~June 30, 2020, due to ~~lower~~higher occupancy across the portfolio ~~resulting~~as the portfolio recovers from the COVID-19 pandemic.

The lower NAREIT FFO is primarily due to loss on interest rate derivatives ($5.8 million), transformation costs ($3.8 million), lower NOI ($~~5.2~~2.1 million), higher interest expense ($1.4 million) and higher general and administrative expenses ($1.0 million). These were partially offset by a real estate tax refund ($1.5 million) and higher income from discontinued operations, net of depreciation and amortization ($1.2 million) in the 2021 Quarter and ~~a gain~~loss on extinguishment of debt ($~~0.5~~0.2 million) in ~~the~~ 2020 ~~Quarter, partially offset by a gain on the settlement of litigation ($1.3 million), lower interest expense ($0.7 million) and lower general and administrative expenses ($0.7 million) in the 2021~~ Quarter.

Investment and Financing Activity

During the 2021 Quarter, 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. Subsequent to the 2021 Quarter, we closed on the Office Portfolio sale transaction on July 26, 2021.

Subsequent to the end of 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 expect to close on the sale of the Retail Portfolio in the third quarter of 2021.

We plan to use the net proceeds from the sales to fund the expansion of our multifamily platform through acquisitions in Southeastern markets and to reduce our leverage by repaying outstanding debt. We expect to redeem $300.0 million of our Senior Notes due 2022 and repay $150.0 million of borrowings outstanding under the 2018 Term Loan, respectively. In conjunction with these repayments, we expect to terminate five interest rate swaps (see note 5 to the consolidated financial statements).

As of ~~March 31,~~June 30, 2021, the interest rate on the $700.0 million unsecured revolving credit facility (“Revolving Credit Facility”) was one month LIBOR plus 1.00% and the facility fee was 0.20%. As of ~~April 26,~~July 28, 2021, we had no outstanding balance and a full borrowing capacity of $700.0 million on our Revolving Credit Facility ~~has a borrowing capacity~~and approximately $665.0 million of ~~$629.0 million.~~cash on hand, primarily due to the proceeds from the Office Portfolio sale.

Capital Requirements

We have no debt maturities until the fourth quarter of 2022. As discussed above, we plan to use a portion of the net proceeds from the sales of the Office Portfolio and Retail Portfolio to redeem $300.0 million of our Senior Notes scheduled to mature in 2022. If such redemption is completed, we will have no debt maturities until 2023. We expect to have additional capital requirements as set forth on page 31 (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.~~Quarter and 2020 Period. The ability to compare one period to another is significantly affected by ~~acquisitions completed and~~ 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.

Net Operating Income

NOI, defined as real estate rental revenue less real estate expenses, is a non-GAAP measure. NOI is calculated as net income, less non-real estate revenue and the results of discontinued operations (including the gain or loss on sale, if any), plus interest expense, depreciation and amortization, lease origination expenses, general and administrative expenses, acquisition costs, real estate impairment, casualty gains and losses and gain or loss on extinguishment of debt. We believe that NOI is useful as a performance measure because, when compared across periods, NOI reflects the impact on operations of trends in occupancy rates, rental rates and operating costs on an unleveraged basis, providing perspective not immediately apparent from net income. NOI excludes certain components from net income in order to provide results more closely related to a property’s results of operations. For example, interest expense is not necessarily linked to the operating performance of a real estate asset. In addition, depreciation and amortization, because of historical cost accounting and useful life estimates, may distort operating

performance at the property level. As a result of the foregoing, we provide NOI as a supplement to net income, calculated in accordance with GAAP. NOI does not represent net income or income from continuing operations, in either case calculated in accordance with GAAP. As such, it should not be considered an alternative to these measures as an indication of our operating performance. A reconciliation of NOI to net income follows.

2228

2021 Quarter Compared to 2020 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. All amounts are in thousands, except percentage amounts.


											Non-Same-Store																												Non-Same-Store
		Same-Store								Development/ Re-development (1)			Held for Sale or Sold (2)				Consolidated									Same-Store												Development/ Re-development (1)	Held for Sale or Sold (2)						Consolidated
		2021		2020		$ Change		% Change			2021		2020		2021		2020		2021			2020		$ Change			% Change			2021		2020		$ Change		% Change			2021			2020			2021			2020			2021		2020		$ Change		% Change
Real estate rental revenue	Real estate rental revenue	$	68,657	$	72,099	$	(3,442)	(4.8)	%		$	976	$	37	$	—	$	4,656	$	69,633		$	76,792	$	(7,159)		(9.3)	%	Real estate rental revenue	$	39,967	$	40,217	$	(250)	(0.6)	%		$	1,330		$	214		$	—		$	3,326		$	41,297	$	43,757	$	(2,460)	(5.6)	%
Real estate expenses	Real estate expenses	25,927		26,399		(472)		(1.8)	%		767		247		—		1,993		26,694			28,639		(1,945)			(6.8)	%	Real estate expenses	15,323		14,987		336		2.2	%		907			304			—			1,297			16,230		16,588		(358)		(2.2)	%
NOI	NOI	$	42,730	$	45,700	$	(2,970)	(6.5)	%		$	209	$	(210)	$	—	$	2,663	$	42,939		$	48,153	$	(5,214)		(10.8)	%	NOI	$	24,644	$	25,230	$	(586)	(2.3)	%		$	423		$	(90)		$	—		$	2,029		$	25,067	$	27,169	$	(2,102)	(7.7)	%
Reconciliation to net (loss) income:
Reconciliation to net loss:																					Reconciliation to net loss:
Depreciation and amortization	Depreciation and amortization																		(29,643)			(29,720)		77			(0.3)	%	Depreciation and amortization																						(17,303)		(17,372)		69		(0.4)	%

General and administrative expenses	General and administrative expenses																		(5,604)			(6,337)		733			(11.6)	%	General and administrative expenses																						(6,325)		(5,296)		(1,029)		19.4	%
Transformation costs																					Transformation costs																				(3,780)			—			(3,780)			—		%

Loss on sale of real estate																					Loss on sale of real estate																				—			(7,539)			7,539			(100.0)		%
Interest expense																					Interest expense																				(10,158)			(8,751)			(1,407)			16.1		%
Other income																					Other income																				1,522			—			1,522			—		%
Loss on interest rate derivatives																					Loss on interest rate derivatives																				(5,760)			—			(5,760)			—		%
Loss on extinguishment of debt																					Loss on extinguishment of debt																				—			(206)			206			(100.0)		%

Discontinued operations (3):																					Discontinued operations (3):
Income from operations of properties sold or held for sale																					Income from operations of properties sold or held for sale																				9,745			6,589			3,156			47.9		%

Interest expense																			(10,123)			(10,845)		722			(6.7)	%
Other income																			1,284			—		1,284

Gain on extinguishment of debt																			—			468		(468)			(100.0)	%
Net loss																					Net loss																				$	(6,992)		$	(5,406)		$	(1,586)		29.3		%

Net (loss) income																			$	(1,147)		$	1,719	$	(2,866)		(166.7)	%

______________________________

1.(1)Development/redevelopment:

Multifamily - Trove

2.(2)Sold (classified as continuing operations):

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

(3)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 is comprised of (a) minimum base rent, which includes rental revenues recognized on a straight-line basis, (b) revenue from the recovery of operating expenses from our tenants, (c) credit losses on lease related receivables, (d) revenue from the collection of lease termination fees and (e) parking and other tenant charges such as percentage rents.

Real estate rental revenue from same-store multifamily properties decreased $0.3 million, or 0.9%, to $35.5 million for the ~~three months ended March 31,~~ 2021 ~~and~~Quarter, compared to $35.9 million for the 2020 ~~by segment was as follows (in thousands):~~

Three Months Ended March 31,
2021 2020 $ Change % Change
Multifamily $ 35,156 $ 36,541 $ (1,385) (3.8) %
Office 28,599 31,014 (2,415) (7.8) %
Other 4,902 4,544 358 7.9 %
Total same-store real estate rental revenue $ 68,657 $ 72,099 $ (3,442) (4.8) %

•~~Multifamily: Decrease~~Quarter, primarily due to lower rental revenue ($~~1.0~~0.7 million), and higher rent abatements ($~~0.4 million) and higher credit losses ($0.3~~0.5 million). These were partially offset by ~~higher recoveries ($0.2 million) and termination fees ($0.1 million).~~

•~~Office: Decrease primarily due to~~ lower ~~parking income ($0.8 million), lower termination fees ($0.6 million), higher~~ credit losses ($0.4 million), lower ~~rental revenue~~waived fees ($~~0.3~~0.2 million), ~~lower reimbursements~~higher recoveries ($~~0.1~~0.2 million) and ~~lower specialty leasing~~higher termination fees ($0.1 million). ~~The lower parking income and higher credit losses were primarily due to the COVID-19 pandemic.~~

Real estate rental revenue from development properties increased due to ~~placing into service the~~continued lease-up of Trove ~~development~~ ($~~0.9~~1.1 million). We placed the remainder of the Trove development costs into service during the ~~2021 Quarter.~~first quarter of 2021.

Real estate rental revenue from held for sale and sold properties classified as continuing operations decreased due to sales of Monument II ($1.7 million) and 1227 25th Street ($1.3 million) during the fourth quarter of 2020 and the sale of John Marshall II ($~~1.8~~0.4 million) during the second ~~quarter of 2020 and sales of Monument II ($1.5 million) and 1227 25th Street ($1.4 million) during the fourth~~ quarter of 2020.

2329

~~Ending~~Average occupancy for multifamily properties classified as continuing operations ~~by segment~~ for the 2021 Quarter and 2020 Quarter was as follows:

March 31, 2021 March 31, 2020 (Decrease) increase
Segment Same-Store Non-Same-Store Total Same-Store Non-Same-Store Total Same-Store Non-Same-Store Total
Multifamily 94.9 % 44.1 % 92.0 % 95.1 % 3.0 % 89.9 % (0.2) % 41.1 % 2.1 %
Office 83.3 % N/A 83.3 % 86.8 % 94.9 % 88.1 % (3.5) % N/A (4.8) %
Other 87.4 % N/A 87.4 % 91.1 % N/A 91.1 % (3.7) % N/A (3.7) %
Total 90.9 % 44.1 % 89.5 % 92.4 % 62.9 % 89.9 % (1.5) % (18.8) % (0.4) %


	June 30, 2021						June 30, 2020						Increase
Segment	Same-Store		Non-Same-Store		Total		Same-Store		Non-Same-Store		Total		Same-Store		Non-Same-Store		Total
Multifamily	95.1	%	49.9	%	92.5	%	94.5	%	7.5	%	89.5	%	0.6	%	42.4	%	3.0	%

•~~Multifamily: Decrease~~The increase in same-store ~~ending~~average occupancy was primarily due to ~~lower ending~~higher average occupancy at ~~our DC rent-controlled properties (3801 Connecticut Avenue~~The Paramount, The Maxwell and The ~~Kenmore),~~Ashby at McLean, partially offset by ~~higher ending~~lower average occupancy at ~~The Maxwell~~Clayborne Apartments and Park Adams.

•~~Office~~: Decrease in same-store ending occupancy was primarily due to lower ending occupancy at 2000 M Street, Silverline Center, 515 King Street, 1901 Pennsylvania Avenue and 1140 Connecticut Avenue, partially offset by higher ending occupancy at 1220 19th Street.

~~During the 2021 Quarter, we executed new and renewal leases in our office segment as follows:~~

Square Feet
(in thousands) Average Rental Rate
(per square foot) % Rental Rate Increase
Leasing Costs (1)
(per square foot)
Free Rent (weighted average months)
Office 86 $ 57.71 6.1 % $ 14.67 2.7

~~______________________________~~

~~(1)~~ ~~Consists of tenant improvements and leasing commissions.~~

Real Estate Expenses

Real estate expenses as a percentage of revenue for the 2021 Quarter and 2020 Quarter were ~~38.3%~~39.3% and ~~37.3%~~37.9%, respectively.

Real estate expenses from same-store multifamily properties increased $0.1 million, or 0.9%, to $13.9 million for the ~~three months ended March 31,~~ 2021 ~~and~~Quarter, compared to $13.8 million for the 2020 ~~by segment were as follows (in thousands):~~

Three Months Ended March 31,
2021 2020 $ Change % Change
Multifamily $ 14,405 $ 13,738 $ 667 4.9 %
Office 10,117 11,324 (1,207) (10.7) %
Other 1,405 1,337 68 5.1 %
Total same-store real estate expenses $ 25,927 $ 26,399 $ (472) (1.8) %

•~~Multifamily: Increase~~Quarter, primarily due to higher contract maintenance ($0.2 million), utilities ($~~0.2 million), repairs and maintenance ($~~0.1 million) and insurance ($0.1 million) ~~expenses.~~

•~~Office: Decrease primarily due to~~expenses, partially offset by lower ~~administrative ($0.5 million), utilities ($0.4 million) and repairs and maintenance~~real estate taxes ($0.3 million) ~~expenses.~~.

Other Income and Expenses

Depreciation and Amortization: Decrease primarily due to the dispositions of Monument II ($1.0 million) and 1227 25th Street ($0.4 million) in the fourth quarter of 2020. These decreases were partially offset by placing into service a portion of the Trove development ($1.1 million) and higher depreciation and amortization at same-store properties ($0.2 million).

General and administrative expenses: Increase primarily due to a higher estimate of short-term incentive compensation ($0.9 million) during the 2021 Quarter.

Transformation costs: During the 2021 Quarter we incurred $3.8 million of costs related to the strategic transformation, including consulting, advisory and termination benefits.

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


	Three Months Ended June 30,
Debt Type	2021		2020		$ Change		% Change
Notes payable	$	9,475	$	7,562	$	1,913	25.3	%
Line of credit	854		1,725		(871)		(50.5)	%
Capitalized interest	(171)		(536)		365		(68.1)	%
Total	$	10,158	$	8,751	$	1,407	16.1	%

•Notes payable: Increase primarily due to $350.0 million Green Bonds executed in December 2020, partially offset by prepayment of our $150.0 million 2015 Term Loan in December 2020 and by the new $150.0 million 2020 Term Loan executed in May 2020 and prepaid in November 2020.

•Line of credit: Decrease primarily due to lower weighted average interest rate of 1.1% and lower weighted average borrowings of $60.9 million in 2021 Quarter, as compared to 1.5% and $269.1 million during the 2020 Quarter.

•Capitalized interest: Decrease primarily due to placing into service assets at Trove.

Loss on extinguishment of debt: We recognized a $0.2 million loss on extinguishment of debt during 2020 Quarter related to the prepayment of the $250 million of 4.95% Senior Notes that were scheduled to mature in October 2020.

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 currently expect to prepay a $150.0 million portion of the 2018 Term Loan during the third quarter of 2021. We have determined that the hedged transactions for the five interest rate swap arrangements with an aggregate notional value of $150.0 million are probable not to occur and that these interest swap arrangements are no longer effective cash flow hedges as of June 30, 2021. As a result of the ineffectiveness, the accumulated fair value of the five interest rate swap

arrangements of $5.8 million was reclassified from Accumulated other comprehensive loss to Loss on interest rate derivatives on our condensed consolidated financial statements.

Income from discontinued operations: Increase primarily due to lower depreciation and amortization ($2.0 million), higher recoveries ($0.7 million) and lower credit losses ($0.7 million) from retail and office properties classified as discontinued operations. These increases were partially offset by higher utilities ($0.2 million) expenses.

2021 Period Compared to 2020 Period

The following tables reconcile NOI to net (loss) income 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.


										Non-Same-Store
	Same-Store								Development/Redevelopment (1)			Held for Sale or Sold (2)				All Properties
	2021		2020		$ Change		% Change			2021		2020		2021		2020		2021		2020		$ Change		% Change
Real estate rental revenue	$	79,598	$	81,267	$	(1,669)	(2.1)	%		$	2,306	$	251	$	—	$	7,982	$	81,904	$	89,500	$	(7,596)	(8.5)	%
Real estate expenses	31,010		30,205		805		2.7	%		1,674		551		—		3,290		32,684		34,046		(1,362)		(4.0)	%
NOI	$	48,588	$	51,062	$	(2,474)	(4.8)	%		$	632	$	(300)	$	—	$	4,692	$	49,220	$	55,454	$	(6,234)	(11.2)	%
Reconciliation to net loss:
Depreciation and amortization																		(34,290)		(34,619)		329		(1.0)	%

General and administrative expenses																		(11,929)		(11,633)		(296)		2.5	%
Transformation costs																		(3,780)		—		(3,780)		—	%

Loss on sale of real estate																		—		(7,539)		7,539		(100.0)	%
Interest expense																		(20,281)		(19,596)		(685)		3.5	%
Other income																		2,806		—		2,806		—	%
Loss on interest rate derivatives																		(5,760)		—		(5,760)		—	%
Gain on extinguishment of debt																		—		262		(262)		(100.0)	%

Discontinued operations (3):
Income from operations of properties sold or held for sale																		15,875		13,984		1,891		13.5	%


Net loss																		(8,139)		(3,687)		(4,452)		120.7	%

(1)Development/redevelopment:

Multifamily - Trove

(2)Sold (classified as continuing operations):

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

(3)Discontinued operations:

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 multifamily properties decreased $1.7 million, or 2.3%, to $70.7 million for the 2021 Period, compared to $72.4 million for the 2020 Period, primarily due to lower rental revenue ($1.7 million) and higher rent abatements ($0.9 million), partially offset by higher recoveries ($0.4 million), lower waived fees ($0.1 million), higher termination fees ($0.1 million) and lower credit losses ($0.1 million).

Real estate rental revenue from development properties increased due to the continued lease-up of the Trove development ($2.1 million). We placed the remainder of the Trove development costs into service during the first quarter of 2021.

Real estate rental revenue from sold properties classified as continuing operations decreased due to sales of Monument II ($3.1 million) and 1227 25th Street ($2.7 million) during the fourth quarter of 2020, and due to the sale of John Marshall II ($2.2 million) during the second quarter of 2020.

Average occupancy for multifamily properties classified as continuing operations for the 2021 Period and 2020 Period was as follows:


	June 30, 2021						June 30, 2020						Increase
Segment	Same-Store		Non-Same-Store		Total		Same-Store		Non-Same-Store		Total		Same-Store		Non-Same-Store		Total
Multifamily	94.7	%	40.6	%	91.6	%	94.9	%	4.0	%	89.8	%	(0.2)	%	36.6	%	1.8	%

The decrease in same-store average occupancy was primarily due to lower average occupancy at 3801 Connecticut Avenue, The Kenmore and Cascade at Landmark, partially offset by higher average occupancy at The Paramount and Assembly Leesburg.

Real Estate Expenses

Real estate expenses as a percentage of revenue for the 2021 Period and 2020 Period were 39.9% and 38.0%, respectively.

Real estate expenses from same-store multifamily properties increased $0.8 million, or 2.9%, to $28.3 million for the six months ended June 30, 2021, compared to $27.5 million for the six months ended June 30, 2020, primarily due to higher contract maintenance and supplies ($0.4 million), utilities ($0.3 million) and repairs and maintenance ($0.2 million) expenses, partially offset by lower real estate tax expenses ($0.2 million).

Other Income and Expenses

Depreciation and Amortization: Decrease primarily due to the dispositions of Monument II ($1.9 million) and 1227 25th Street ($0.8 million) in the fourth quarter of 2020 and lower depreciation and amortization at same-store properties ($0.1 million). These decreases were partially offset by placing into service a portion of the Trove development ($~~1.4~~2.5 million).

General and administrative ~~expenses:~~ expenses~~Decrease~~: Increase primarily due to a higher estimate of short term incentive compensation ($1.0 million), partially offset by lower professional fees ($~~0.5~~0.3 million), recruitment fees ($0.1 million) and ~~lower recruitment expense~~information technology expenses ($0.1 million).

Transformation costs: During the 2021 Period we incurred $3.8 million of costs related to the strategic transformation, including consulting, advisory and termination benefits.

Loss on sale of real estate: The loss during the ~~2021 Quarter.~~2020 Period is due to the sale of John Marshall II.

Gain on extinguishment of debt: 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.

Interest Expense: Interest expense by debt type for the ~~three~~six months ended ~~March 31,~~June 30, 2021 and 2020 was as follows (in thousands):


		Three Months Ended March 31,									Six Months Ended June 30,
Debt Type	Debt Type	2021		2020		$ Change		% Change		Debt Type	2021		2020		$ Change		% Change
Notes payable	Notes payable	$	9,486	$	10,159	$	(673)	(6.6)	%	Notes payable	$	18,961	$	17,721	$	1,240	7.0	%
Mortgage notes payable	Mortgage notes payable	—		172		(172)		(100.0)	%	Mortgage notes payable	—		172		(172)		(100.0)	%
Line of credit	Line of credit	845		1,398		(553)		(39.6)	%	Line of credit	1,699		3,123		(1,424)		(45.6)	%
Capitalized interest	Capitalized interest	(208)		(884)		676		(76.5)	%	Capitalized interest	(379)		(1,420)		1,041		(73.3)	%
Total	Total	$	10,123	$	10,845	$	(722)	(6.7)	%	Total	$	20,281	$	19,596	$	685	3.5	%

•Notes payable: ~~Decrease~~Increase primarily due to $350.0 million Green Bonds executed in December 2020, partially offset by prepayment of all $250.0 million of our 4.95% Senior Notes in April 2020, ~~and~~ prepayment of our $150.0 million 2015 Term Loan in December 2020 ~~partially offset~~and by the ~~$350.0~~new $150.0 million ~~Green Bonds~~2020 Term Loan executed in ~~December~~May 2020 and prepaid in November 2020.

•Mortgage notes ~~payable:~~ payable: Decrease due to repayment of the mortgage note secured by Yale West Apartments in January 2020.

•Line of credit: Decrease primarily due to a lower weighted average interest rate of 1.1% and lower weighted average borrowings of ~~$58.2~~$59.5 million induring the 2021 ~~Quarter,~~Period, as compared to ~~2.6%~~1.8% and ~~$108.3~~$188.6 million, respectively, during the 2020 ~~Quarter.~~Period.

•Capitalized interest: Decrease primarily due to placing into service assets at ~~Trove.~~

~~Gain on extinguishment of debt: We recognized a $0.5 million gain on extinguishment of debt during 2020 Quarter related~~Trove, the multifamily development adjacent to ~~the prepayment of the mortgage note secured by Yale West Apartments.~~The Wellington.

Other income: 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.

Loss on interest rate derivatives: We currently expect to prepay a $150.0 million portion of the 2018 Term Loan during the ~~2021 Quarter.~~third quarter of 2021. We have determined that the hedged transactions for five interest rate swap arrangements with an aggregate notional value of $150.0 million are probable not to occur and that these interest swap arrangements are no longer effective cash flow hedges as of June 30, 2021. As a result of the ineffectiveness, the accumulated fair value of the five interest rate swap arrangements of $5.8 million was reclassified from Accumulated other comprehensive loss to Loss on interest rate derivatives on our condensed consolidated financial statements.

Income from discontinued operations: Increase primarily due to lower depreciation and amortization ($1.8 million) from retail and office properties classified as discontinued operations.

2534

Liquidity and Capital Resources

~~In light of local and global economic uncertainty as a result of COVID-19, ensuring adequate liquidity is critical.~~ We believe we will have ~~access~~adequate liquidity over the next 12 months to ~~adequate resources~~operate our business and to meet ~~the needs~~our cash requirements. As of ~~our existing operations, mandatory capital expenditures, dividend payments~~July 26, 2021, we had cash and ~~working capital, to the extent not funded by~~ cash provided by operating activities. However, we expect the COVID-19 pandemic to continue to adversely impact our future operating cash flows. Such adverse impacts include the inability of some of our tenants to pay their rent on time or at all, longer lease-up periods for both anticipatedequivalents totaling approximately $665.0 million and ~~unanticipated vacancies, temporary rental rate freezes~~no outstanding balance and ~~contractual rent deferral arrangements.~~

~~Due to our remaining~~a full borrowing capacity of $700.0 million on our Revolving Credit Facility, resulting in a total liquidity position of approximately $1.4 billion.

Through our Office Portfolio sale and expected Retail Portfolio sale, we executed strategic transactions that will allow us to pursue multifamily expansion in Southeastern markets, meet our debt obligations for the ~~fact that we do not have any debt maturing until~~next twelve months, including our plans to redeem all $300.0 million of Senior Notes due 2022 in the ~~fourth~~third quarter of 2021, and pay a dividend on a quarterly basis. When the redemption of the Senior Notes due in 2022 is completed, we ~~believe we~~will have ~~adequate liquidity~~no debt maturities until 2023.

We will continue to ~~meet~~assess the payment of our dividends on a quarterly basis. Future determinations regarding the declaration and payment of dividends, if any, ~~major~~will be at the discretion of our Board of Trustees who considers, among other factors, trends in our levels of funds from operations and ongoing capital ~~needs and commitments for the remainder of 2021.~~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:

•Funding dividends and distributions to our shareholders;

•Approximately ~~$42.5~~$25.0 - ~~$47.5~~$30.0 million to invest in our existing portfolio of operating assets, including approximately ~~$10.0~~$2.5 - ~~$15.0~~$7.5 million to fund tenant-related capital requirements and leasing commissions;

•Approximately ~~$5.0~~$7.5 - ~~$7.5~~$10.0 million to invest in our development and redevelopment projects; and

•Funding for potential property acquisitions throughout 2021 and additional debt reductions, 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 2021. However, as a result of the uncertainty of the ~~future impacts of the COVID-19 pandemic,~~ general market conditions in the greater Washington, DC metro region, 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. If capital were not available, we may be unable to satisfy the distribution requirement applicable to REITs, make required principal and interest payments, make strategic acquisitions or make necessary and/or routine capital improvements or undertake improvement/redevelopment opportunities with respect to our existing portfolio of operating assets.

Debt Financing

We generally use secured or unsecured, corporate-level debt, including unsecured notes, our Revolving Credit Facility, bank term loans and mortgages to meet our borrowing needs. Long-term, we generally use fixed rate debt instruments in order to match the returns from our real estate assets. If we issue unsecured debt in the future, we would seek to “ladder” the maturities of our debt to mitigate exposure to interest rate risk in any particular future year. We also utilize variable rate debt for short-term financing purposes. At times, our mix of variable and fixed rate debt may not suit our needs. At those times, we may use derivative financial instruments including interest rate swaps and caps, forward interest rate options or interest rate options in order to assist us in managing our debt mix. We may either hedge our variable rate debt to give it an effective fixed interest rate or hedge fixed rate debt to give it an effective variable interest rate.

2635

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


		Future Maturities of Debt										Future Maturities of Debt
Year	Year	Unsecured Debt			Revolving Credit Facility			Total Debt		Average Interest Rate	Year	Unsecured Debt			Revolving Credit Facility			Total Debt		Average Interest Rate
2021	2021	$	—		$	—		$	—	—%	2021	$	—		$	—		$	—	—%
2022	2022	300,000			—			300,000		4.0%	2022	300,000		(1)	—			300,000		4.0%
2023	2023	250,000		(1)	33,000		(2)	283,000		2.7%	2023	250,000		(2)	43,000		(3)	293,000		2.6%
2024	2024	—			—			—		—%	2024	—			—			—		—%
2025	2025	—			—			—		—%	2025	—			—			—		—%
2026	2026	—			—			—		—%	2026	—			—			—		—%
Thereafter	Thereafter	400,000		(3)	—			400,000		4.5%	Thereafter	400,000			—			400,000		4.5%
Scheduled principal payments	Scheduled principal payments	$	950,000		$	33,000		$	983,000	3.8%	Scheduled principal payments	$	950,000		$	43,000		$	993,000	3.8%

Net premiums/discounts	Net premiums/discounts	(408)			—			(408)			Net premiums/discounts	(360)			—			(360)
Loan costs, net of amortization	Loan costs, net of amortization	(3,958)			—			(3,958)			Loan costs, net of amortization	(3,735)			—			(3,735)
Total	Total	$	945,634		$	33,000		$	978,634	3.8%	Total	$	945,905		$	43,000		$	988,905	3.8%

______________________________

(1)Subsequent to the end of the 2021 Quarter, WashREIT provided notice to the holders of its $300.0 million of Senior Notes due in 2022 that it plans to redeem all $300.0 million of Senior Notes due in 2022 in the third quarter of 2021, which it intends to fund using cash available following the sale of the Office Portfolio. The Senior Notes are scheduled to mature in October 2022.

(2) WashREIT entered into interest rate swaps to effectively fix a LIBOR plus 110 basis points floating interest rate to a 2.31% all-in fixed interest rate for a $150.0 million portion of the term loan. For the remaining $100.0 million portion of the term loan, WashREIT entered into interest rate swaps to effectively fix a LIBOR plus 100 basis points floating interest rate to a 3.71% all-in fixed ~~interest~~ rate. The interest rates are fixed through the term loan maturity of July 2023. The 2018 Term Loan has an all-in fixed interest rate of 2.87%. WashREIT expects to repay $150.0 million of the 2018 Term Loan using sales proceeds from the Office Portfolio and the Retail Portfolio in the third quarter of 2021.

~~(2)~~(3) Maturity date for credit facility of March 2023 assumes election of option for two additional 6-month periods.

~~(3)~~ ~~The closing and full funding of the $350.0 million 10-year 3.44% Green Bonds occurred on December 17, 2020. The Green Bonds have an all-in fixed interest rate of 4.09%.~~

The weighted average maturity for our debt is ~~5.0~~4.7 years. If principal amounts due at maturity cannot be refinanced, extended or paid with proceeds of other capital transactions, such as new equity capital, our cash flow may be insufficient to repay all maturing debt. Prevailing interest rates or other factors at the time of a refinancing, such as possible reluctance of lenders to make commercial real estate loans, may result in higher interest rates and increased interest expense or inhibit our ability to finance our obligations.

From time to time, we may seek to repurchase and cancel our outstanding unsecured notes and term loans through open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

2736

Debt Covenants

Pursuant to the terms of our Revolving Credit Facility, 2018 Term Loan and unsecured notes, we are subject to customary operating covenants and maintenance of various financial ratios.

Failure to comply with any of the covenants under our Revolving Credit Facility, 2018 Term Loan, unsecured notes or other debt instruments could result in a default under one or more of our debt instruments. This could cause our lenders to accelerate the timing of payments and could therefore have a material adverse effect on our business, operations, financial condition and liquidity. In addition, our ability to draw on our Revolving Credit Facility or incur other unsecured debt in the future could be restricted by the debt covenants.

As of ~~March 31,~~June 30, 2021, we were in compliance with the covenants related to our Revolving Credit Facility, 2018 Term Loan, and unsecured notes.

Common Equity

We have authorized for issuance 150.0 million common shares, of which 84.6 million shares were outstanding at ~~March 31,~~June 30, 2021.


		Three Months Ended March 31,					Six Months Ended June 30,
		2021		2020				2021		2020
Issuance of common shares	Issuance of common shares	24		47		Issuance of common shares		24		47
Weighted average price per share	Weighted average price per share	$	22.06	$	31.07	Weighted average price per share		$	22.06	$	31.07
Net proceeds	Net proceeds	$	467	$	1,241	Net proceeds		$	467	$	1,241

We have a dividend reinvestment program, whereby shareholders may use their dividends and optional cash payments to purchase common shares. The 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 six months ended June 30, 2021 ~~Quarter~~ and 2020 ~~Quarter were~~are as follows ~~(in~~($ in thousands, except per share data):


		Three Months Ended March 31,				Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020				2021		2020		2021		2020
Issuance of common shares	Issuance of common shares	23		35			Issuance of common shares	22		6		45		41
Weighted average price per share	Weighted average price per share	$	22.07	$	26.96		Weighted average price per share	$	23.21	$	22.68	$	22.63	$	26.38
Net proceeds	Net proceeds	$	520	$	921		Net proceeds	$	489	$	144	$	1,009	$	1,065

2837

Preferred Equity

WashREIT’s board of trustees can, at its discretion, authorize the issuance of up to 10.0 million preferred shares. The ability to issue preferred equity provides WashREIT an additional financing tool that may be used to raise capital for future acquisitions or other business purposes. As of ~~March 31,~~June 30, 2021, no preferred shares were issued or outstanding.

Historical Cash Flows

Cash flows from operations are an important factor in our ability to sustain our dividend at its current rate. If our cash flows from operations were to decline significantly from current levels, we may have to reduce our dividend. Consolidated cash flow information is summarized as follows (in thousands):


		Three Months Ended March 31,				Change					Six Months Ended June 30,				Change
		2021		2020		$		%			2021		2020		$		%
Net cash provided by operating activities	Net cash provided by operating activities	$	37,239	$	28,860	$	8,379	29.0	%	Net cash provided by operating activities	$	64,622	$	51,182	$	13,440	26.3	%
Net cash used in investing activities		(8,200)		(20,342)		12,142		(59.7)	%
Net cash (used in) provided by investing activities										Net cash (used in) provided by investing activities	(18,195)		12,131		(30,326)		(250.0)	%
Net cash used in financing activities	Net cash used in financing activities	(33,749)		(2,034)		(31,715)		1,559.2	%	Net cash used in financing activities	(48,687)		(69,463)		20,776		(29.9)	%

Net cash provided by operating activities increased primarily due to timing differences on the payment of certain liabilities and lower interest payments in the 2021 ~~Quarter.~~Period.

Net cash used in investing activities ~~decreased~~increased primarily due to the sale of John Marshall II during the 2020 Period, partially offset by lower expenditures on capital improvements to real estate and ~~lower expenditures on~~ development during the 2021 ~~Quarter.~~Period.

Net cash used in financing activities ~~increased~~decreased primarily due to ~~lower~~ net ~~borrowings on the Revolving Credit Facility in the 2021 Quarter, partially offset by~~repayments of term loans and the prepayment of the mortgage note secured by Yale West during the 2020 ~~Quarter.~~Period, partially offset by lower net borrowings on the Revolving Credit Facility in the 2021 Period.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements as of ~~March 31,~~June 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.

2938

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; 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. Since real estate values have instead historically risen or fallen with market conditions, we believe that NAREIT FFO more accurately provides investors an indication of our ability to incur and service debt, make capital expenditures and fund other needs. Our NAREIT FFO may not be comparable to FFO reported by other REITs. These other REITs may not define the term in accordance with the current NAREIT definition or may interpret the current NAREIT definition differently. 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) income~~loss for the three and six months ended ~~March 31,~~June 30, 2021 and 2020 (in thousands):


		Three Months Ended March 31,				Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020				2021		2020		2021		2020
Net (loss) income		$	(1,147)	$	1,719
Net loss							Net loss	$	(6,992)	$	(5,406)	$	(8,139)	$	(3,687)
Adjustments:	Adjustments:						Adjustments:
Depreciation and amortization	Depreciation and amortization	29,643		29,720			Depreciation and amortization	17,303		17,372		34,290		34,619

Loss on sale of depreciable real estate							Loss on sale of depreciable real estate	—		7,539		—		7,539
Discontinued operations:							Discontinued operations:
Depreciation and amortization							Depreciation and amortization	10,248		12,227		22,904		24,700

NAREIT FFO	NAREIT FFO	$	28,496	$	31,439		NAREIT FFO	$	20,559	$	31,732	$	49,055	$	63,171

Critical Accounting Policies and 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 six months ended ~~March 31,~~June 30, 2021. We discuss the most critical estimates in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on February 16, 2021.

3039

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The principal material financial market risk to which we are exposed is interest rate risk. Our exposure to market risk for changes in interest rates relates primarily to refinancing long-term fixed rate obligations, the opportunity cost of fixed rate obligations in a falling interest rate environment and our variable rate line of credit.

The table below presents principal, interest and related weighted average interest rates by year of maturity, with respect to debt outstanding on ~~March 31,~~June 30, 2021 (in thousands):


		2021			2022			2023			2024			2025			Thereafter			Total			Fair Value			2021				2022			2023			2024			2025			Thereafter			Total			Fair Value
Unsecured fixed rate debt (1)	Unsecured fixed rate debt (1)																								Unsecured fixed rate debt (1)
Principal	Principal	$	—		$	300,000		$	250,000		$	—		$	—		$	400,000		$	950,000		$	974,595	Principal	$	—		(2)	$	300,000		$	250,000		$	—		$	—		$	400,000		$	950,000		$	977,200
Interest payments	Interest payments	$	26,997		$	37,218		$	22,177		$	17,995		$	17,995		$	87,364		$	209,746				Interest payments	$	19,177			$	37,218		$	22,177		$	17,995		$	17,995		$	87,364		$	201,926
Interest rate on debt maturities	Interest rate on debt maturities	—		%	4.0		%	2.7		%	—		%	—		%	4.5		%	3.8		%			Interest rate on debt maturities	—		%		4.0		%	2.6		%	—		%	—		%	4.5		%	3.8		%
Unsecured variable rate debt ~~(2)~~(3)	Unsecured variable rate debt ~~(2)~~(3)																								Unsecured variable rate debt ~~(2)~~(3)
Principal	Principal	$	—		$	—		$	33,000		$	—		$	—		$	—		$	33,000		$	33,000	Principal	$	—			$	—		$	43,000		$	—		$	—		$	—		$	43,000		$	43,000
Variable interest rate on debt maturities	Variable interest rate on debt maturities							1.1		%										1.1		%			Variable interest rate on debt maturities								1.1		%										1.1		%

(1) Includes a $250.0 million term loan with a floating interest rate. The interest rate on the $250.0 million term loan is effectively fixed by interest rate swap arrangements at 2.9%.

(2) Subsequent to the end of the 2021 Quarter, WashREIT provided notice to the holders of its $300.0 million of Senior Notes due in 2022 that it plans to redeem all $300.0 million of Senior Notes due in 2022 in the third quarter of 2021, which it intends to fund using cash available following the sale of the Office Portfolio. The Senior Notes are scheduled to mature in October 2022.

(3) Maturity date on the unsecured credit facility of 2023 assumes the election of two additional six-month options.

We enter into interest rate swap arrangements designated and qualifying as cash flow hedges to reduce our exposure to the variability in future cash flows attributable to changes in interest rates. Derivative instruments expose us to credit risk in the event of non-performance by the counterparty under the terms of the interest rate hedge agreement. We believe that we minimize our credit risk on these transactions by dealing with major, creditworthy financial institutions. As part of our ongoing control procedures, we monitor the credit ratings of counterparties and our exposure to any single entity, thus minimizing our credit risk concentration.

The following table sets forth information pertaining to interest rate swap contracts in place as of ~~March 31,~~June 30, 2021 and December 31, 2020 and their respective fair values (in thousands):


Notional Amount	Notional Amount		Floating Index Rate						Fair Value as of:						Notional Amount						Floating Index Rate						Fair Value as of:
		Fixed Rate		Effective Date		Expiration Date		March 31, 2021			December 31, 2020						Fixed Rate					Effective Date		Expiration Date		June 30, 2021			December 31, 2020
$	100,000	1.205%		One-Month USD-LIBOR		3/31/2017		7/21/2023			$	(2,173)			$	(2,671)		100,000		1.205%		One-Month USD-LIBOR		3/31/2017		7/21/2023			$	(1,911)			$	(2,671)
50,000	50,000	1.208%	One-Month USD-LIBOR		3/31/2017		7/21/2023		(1,090)				(1,338)		50,000				1.208%		One-Month USD-LIBOR		3/31/2017		7/21/2023		(958)				(1,338)
25,000	25,000	2.610%	One-Month USD-LIBOR		6/29/2018		7/21/2023		(1,353)				(1,562)		25,000				2.610%		One-Month USD-LIBOR		6/29/2018		7/21/2023		(1,201)				(1,562)
25,000	25,000	2.610%	One-Month USD-LIBOR		6/29/2018		7/21/2023		(1,353)				(1,562)		25,000				2.610%		One-Month USD-LIBOR		6/29/2018		7/21/2023		(1,201)				(1,562)
25,000	25,000	2.610%	One-Month USD-LIBOR		6/29/2018		7/21/2023		(1,353)				(1,561)		25,000				2.610%		One-Month USD-LIBOR		6/29/2018		7/21/2023		(1,200)				(1,561)
25,000	25,000	2.610%	One-Month USD-LIBOR		6/29/2018		7/21/2023		(1,352)				(1,561)		25,000				2.610%		One-Month USD-LIBOR		6/29/2018		7/21/2023		(1,200)				(1,561)
$	250,000								$	(8,674)			$	(10,255)	250,000												$	(7,671)			$	(10,255)

We enter into debt obligations primarily to support general corporate purposes including acquisition of real estate properties, capital improvements and working capital needs.

We currently expect to use a portion of the proceeds from the sale of the Office and potential sale of the Retail Portfolios to prepay a $150.0 million portion of the 2018 Term Loan during the third quarter of 2021. We expect to hold the remaining $100.0 million portion of the 2018 Term Loan until maturity. Due to this intention to prepay a $150.0 million portion of the 2018 Term Loan, we have determined that the hedged transactions for the five interest rate swap arrangements with an aggregate notional value of $150.0 million are probable not to occur and that these interest swap arrangements are no longer effective cash flow hedges as of June 30, 2021. As a result, we recognized a loss of $5.8 million for the 2021 Quarter, which was recorded to Loss on interest rate derivatives on our condensed consolidated statements of operations. The interest rate swap arrangement with a notional value of

$100.0 million related to the remaining portion of the 2018 Term Loan that we intend to hold to maturity is an effective cash flow hedge as of June 30, 2021.

As the majority of our outstanding debt is long-term, fixed rate debt, our interest rate risk has not changed significantly from what was disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on February 16, 2021. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Debt Financing.”

3141

ITEM 4: CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

There have not been any changes in WashREIT’s internal control over financial reporting (as defined by Rule 13a-15(f)) that occurred during the period covered by the report that have materially affected, or are reasonably likely to materially affect, WashREIT’s internal control over financial reporting.

3242

PART II

OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

None.

ITEM 1A: RISK FACTORS

~~There~~Other than as noted below, there have been no material changes from the risk factors previously disclosed in response to “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.

We may be unable to successfully expand our operations into new markets and submarkets.

In connection with our strategic transformation, we intend to expand of our multifamily platform through acquisitions in Southeastern markets. The risks applicable to our ability to acquire, integrate and operate properties in the Washington, DC metro region are also applicable to our ability to acquire, integrate and operate properties in new markets. In addition to these risks, we will not possess the same level of familiarity with the dynamics and market conditions of any new markets that we may enter, which could adversely affect our ability to expand into those markets. We may be unable to build a significant market share or achieve a desired return on our investments in new markets.

ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

~~A summary of our repurchases of shares of our common stock for the three months ended March 31, 2021 was as follows:~~

Issuer Purchases of Equity Securities
Period
Total Number of Shares Purchased (1)
Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased
January 1 -January 31, 2021 — $ — N/A N/A
February 1 - February 28, 2021 12,940 23.45 N/A N/A
March 1 - March 31, 2021 — — N/A N/A
Total 12,940 $ 23.45 N/A N/A

~~(1)~~ Represents restricted shares surrendered by employees to WashREIT to satisfy such employees' applicable statutory minimum tax withholding obligations in connection with the vesting of restricted shares.

None.

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4: MINE SAFETY DISCLOSURES

None.

ITEM 5: OTHER INFORMATION

None.

3343

ITEM 6: EXHIBITS

Incorporated by Reference
Exhibit
Number Exhibit Description Form File
Number Exhibit Filing Date Filed
Herewith
3.1
Articles of Amendment and Restatement of Declaration of Trust of the Company, as amended
10-K 001-06622 3.1 2/16/2021
3.2
Amended and Restated Bylaws of Washington Real Estate Investment Trust, as adopted on February 8, 2017
10-Q 001-06622 3.2 7/31/2017
31.1
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended (“the Exchange Act”)
X
31.2
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act
X
31.3
Certification of the Chief Accounting Officer pursuant to Rule 13a-14(a) of the Exchange Act
X
32
Certification of the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
X
101.INS Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. X
101.SCH Inline XBRL Taxonomy Extension Schema Document X
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document X
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document X
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document X
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document X
104 Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101)

Incorporated by Reference

Exhibit
Number

Exhibit Description

Form

File
Number

Exhibit

Filing Date

Filed
Herewith

3.1

Articles of Amendment and Restatement of Declaration of Trust of the Company, as amended

10-K

001-06622

3.1

2/16/2021

3.2

Amended and Restated Bylaws of Washington Real Estate Investment Trust, as adopted on February 8, 2017

10-Q

001-06622

3.2

7/31/2017

10.1

Purchase and Sale Agreement, dated as of June 14, 2021 between WashREIT and BPG Acquisitions, LLC.

31.1

Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended (“the Exchange Act”)

31.2

Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act

31.3

Certification of the Chief Accounting Officer pursuant to Rule 13a-14(a) of the Exchange Act

Certification of the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101)

3444

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


WASHINGTON REAL ESTATE INVESTMENT TRUST

						/s/ Paul T. McDermott
						Paul T. McDermott
						President and Chief Executive Officer

						/s/ Stephen E. Riffee
						Stephen E. Riffee
						Executive Vice President and Chief Financial Officer (Principal Financial Officer)

						/s/ W. Drew Hammond
						W. Drew Hammond
						Vice President, Chief Accounting Officer and Treasurer (Principal Accounting Officer)

DATE: ~~April 29,~~August 2, 2021

3545


	Three Months Ended March 31, 2020
	Multifamily		Office		Corporate and Other		Consolidated
Real estate rental revenue	$	36,578	$	35,670	$	4,544	$	76,792
Real estate expenses	13,985		13,317		1,337		28,639
Net operating income	$	22,593	$	22,353	$	3,207	$	48,153
Depreciation and amortization							(29,720)

General and administrative expenses							(6,337)

Interest expense							(10,845)




Gain on extinguishment of debt							468






Net income							$	1,719


Capital expenditures	$	3,469	$	7,088	$	383	$	10,940
Total assets	$	1,339,925	$	1,130,013	$	152,682	$	2,622,620


	March 31, 2021						March 31, 2020						(Decrease) increase
Segment	Same-Store		Non-Same-Store		Total		Same-Store		Non-Same-Store		Total		Same-Store		Non-Same-Store		Total
Multifamily	94.9	%	44.1	%	92.0	%	95.1	%	3.0	%	89.9	%	(0.2)	%	41.1	%	2.1	%
Office	83.3	%	N/A		83.3	%	86.8	%	94.9	%	88.1	%	(3.5)	%	N/A		(4.8)	%
Other	87.4	%	N/A		87.4	%	91.1	%	N/A		91.1	%	(3.7)	%	N/A		(3.7)	%
Total	90.9	%	44.1	%	89.5	%	92.4	%	62.9	%	89.9	%	(1.5)	%	(18.8)	%	(0.4)	%


	Square Feet (in thousands)	Average Rental Rate (per square foot)		% Rental Rate Increase		Leasing Costs (1) (per square foot)		Free Rent (weighted average months)
Office	86	$	57.71	6.1	%	$	14.67	2.7