UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For quarterly period ended September 30, 20212022
OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
COMMISSION FILE NO. 1-6622
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WASHINGTON REAL ESTATE INVESTMENT TRUSTELME COMMUNITIES |
(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 | WREELME | NYSE |
___________________________________________________
Indicate by check mark whether the registrantregistrant: (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 definitiondefinitions 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 Exchange Act). Yes ☐ No ☒
As of October 26, 2021, 84,636,27724, 2022, 87,517,479 common shares were outstanding.
WASHINGTON REAL ESTATE INVESTMENT TRUSTELME COMMUNITIES
INDEX
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Item 2. | | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 5. | | |
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Item 6. | | |
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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, 20202021 included in Washington Real Estate Investment Trust’s 2020our 2021 Annual Report on Form 10-K filed on February 16, 2021.18, 2022.
WASHINGTON REAL ESTATE INVESTMENT TRUSTELME COMMUNITIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
| | | September 30, 2021 | | December 31, 2020 | | September 30, 2022 | | December 31, 2021 |
| | | (Unaudited) | |
Assets | Assets | | | | Assets | | | |
Land | Land | $ | 306,507 | | | $ | 301,709 | | Land | $ | 373,171 | | | $ | 322,623 | |
Income producing property | Income producing property | 1,544,217 | | | 1,473,335 | | Income producing property | 1,882,235 | | | 1,642,147 | |
| | 1,850,724 | | | 1,775,044 | | | 2,255,406 | | | 1,964,770 | |
Accumulated depreciation and amortization | Accumulated depreciation and amortization | (384,392) | | | (335,006) | | Accumulated depreciation and amortization | (461,293) | | | (402,560) | |
Net income producing property | Net income producing property | 1,466,332 | | | 1,440,038 | | Net income producing property | 1,794,113 | | | 1,562,210 | |
Properties under development or held for future development | Properties under development or held for future development | 30,254 | | | 36,494 | | Properties under development or held for future development | 31,232 | | | 30,631 | |
Total real estate held for investment, net | Total real estate held for investment, net | 1,496,586 | | | 1,476,532 | | Total real estate held for investment, net | 1,825,345 | | | 1,592,841 | |
Investment in real estate held for sale, net | — | | | 795,687 | | |
| Cash and cash equivalents | Cash and cash equivalents | 307,797 | | | 7,697 | | Cash and cash equivalents | 8,436 | | | 233,600 | |
Restricted cash | Restricted cash | 605 | | | 593 | | Restricted cash | 1,437 | | | 620 | |
Rents and other receivables | Rents and other receivables | 14,713 | | | 9,725 | | Rents and other receivables | 16,088 | | | 15,067 | |
Prepaid expenses and other assets | Prepaid expenses and other assets | 33,109 | | | 29,587 | | Prepaid expenses and other assets | 28,228 | | | 33,866 | |
Other assets related to properties sold or held for sale | — | | | 89,997 | | |
| Total assets | Total assets | $ | 1,852,810 | | | $ | 2,409,818 | | Total assets | $ | 1,879,534 | | | $ | 1,875,994 | |
Liabilities | Liabilities | | | | Liabilities | | | |
Notes payable, net | Notes payable, net | $ | 496,823 | | | $ | 945,370 | | Notes payable, net | $ | 497,247 | | | $ | 496,946 | |
| Line of credit | Line of credit | — | | | 42,000 | | Line of credit | 43,000 | | | — | |
Accounts payable and other liabilities | Accounts payable and other liabilities | 38,864 | | | 44,067 | | Accounts payable and other liabilities | 36,219 | | | 40,585 | |
Dividend payable | Dividend payable | 14,440 | | | 25,361 | | Dividend payable | 14,919 | | | 14,650 | |
Advance rents | Advance rents | 1,747 | | | 2,461 | | Advance rents | 1,489 | | | 2,082 | |
Tenant security deposits | Tenant security deposits | 4,480 | | | 4,221 | | Tenant security deposits | 5,461 | | | 4,669 | |
Other liabilities related to properties sold or held for sale | — | | | 25,229 | | |
| Total liabilities | Total liabilities | 556,354 | | | 1,088,709 | | Total liabilities | 598,335 | | | 558,932 | |
Equity | Equity | | Equity | |
Shareholders’ equity | Shareholders’ equity | | Shareholders’ equity | |
Preferred shares; $0.01 par value; 10,000 shares authorized; no shares issued or outstanding | Preferred shares; $0.01 par value; 10,000 shares authorized; no shares issued or outstanding | — | | | — | | Preferred shares; $0.01 par value; 10,000 shares authorized; no shares issued or outstanding | — | | | — | |
Shares of beneficial interest, $0.01 par value; 150,000 and 100,000 shares authorized; 84,628 and 84,409 shares issued and outstanding, as of September 30, 2021 and December 31, 2020, respectively | 846 | | | 844 | | |
Shares of beneficial interest, $0.01 par value; 150,000 and 100,000 shares authorized; 87,504 and 86,261 shares issued and outstanding, as of September 30, 2022 and December 31, 2021, respectively | | Shares of beneficial interest, $0.01 par value; 150,000 and 100,000 shares authorized; 87,504 and 86,261 shares issued and outstanding, as of September 30, 2022 and December 31, 2021, respectively | 875 | | | 863 | |
Additional paid in capital | Additional paid in capital | 1,656,821 | | | 1,649,366 | | Additional paid in capital | 1,728,840 | | | 1,697,477 | |
Distributions in excess of net income | Distributions in excess of net income | (341,052) | | | (298,860) | | Distributions in excess of net income | (434,539) | | | (362,494) | |
Accumulated other comprehensive loss | Accumulated other comprehensive loss | (20,468) | | | (30,563) | | Accumulated other comprehensive loss | (14,278) | | | (19,091) | |
Total shareholders’ equity | Total shareholders’ equity | 1,296,147 | | | 1,320,787 | | Total shareholders’ equity | 1,280,898 | | | 1,316,755 | |
Noncontrolling interests in subsidiaries | Noncontrolling interests in subsidiaries | 309 | | | 322 | | Noncontrolling interests in subsidiaries | 301 | | | 307 | |
Total equity | Total equity | 1,296,456 | | | 1,321,109 | | Total equity | 1,281,199 | | | 1,317,062 | |
Total liabilities and equity | Total liabilities and equity | $ | 1,852,810 | | | $ | 2,409,818 | | Total liabilities and equity | $ | 1,879,534 | | | $ | 1,875,994 | |
See accompanying notes to the consolidated financial statements.
WASHINGTON REAL ESTATE INVESTMENT TRUSTELME COMMUNITIES AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Revenue | | | | | | | |
Real estate rental revenue | $ | 42,499 | | | $ | 43,716 | | | $ | 124,403 | | | $ | 133,216 | |
Expenses | | | | | | | |
Property operating and maintenance | 9,901 | | | 10,372 | | | 28,655 | | | 29,598 | |
Real estate taxes and insurance | 5,544 | | | 5,741 | | | 16,525 | | | 17,420 | |
Property management | 1,499 | | | 1,541 | | | 4,448 | | | 4,682 | |
General and administrative | 7,909 | | | 6,330 | | | 19,838 | | | 17,963 | |
Transformation costs | 1,016 | | | — | | | 4,796 | | | — | |
Depreciation and amortization | 18,252 | | | 18,064 | | | 52,542 | | | 52,683 | |
| | | | | | | |
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| 44,121 | | | 42,048 | | | 126,804 | | | 122,346 | |
Loss on sale of real estate | — | | | — | | | — | | | (7,539) | |
Real estate operating (loss) income | (1,622) | | | 1,668 | | | (2,401) | | | 3,331 | |
Other income (expense) | | | | | | | |
Interest expense | (8,106) | | | (8,711) | | | (28,387) | | | (28,307) | |
Loss on interest rate derivatives | (106) | | | — | | | (5,866) | | | — | |
(Loss) gain on extinguishment of debt | (12,727) | | | — | | | (12,727) | | | 262 | |
Other income | 231 | | | — | | | 3,037 | | | — | |
| | | | | | | |
| (20,708) | | | (8,711) | | | (43,943) | | | (28,045) | |
Loss from continuing operations | (22,330) | | | (7,043) | | | (46,344) | | | (24,714) | |
Discontinued operations: | | | | | | | |
Income from operations of properties sold or held for sale | 7,208 | | | 6,087 | | | 23,083 | | | 20,071 | |
Gain on sale of real estate, net | 46,441 | | | — | | | 46,441 | | | — | |
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Income from discontinued operations | 53,649 | | | 6,087 | | | 69,524 | | | 20,071 | |
Net income (loss) | $ | 31,319 | | | $ | (956) | | | $ | 23,180 | | | $ | (4,643) | |
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Basic net (loss) income per common share: | | | | | | | |
Continuing operations | $ | (0.26) | | | $ | (0.09) | | | $ | (0.55) | | | $ | (0.31) | |
Discontinued operations | 0.63 | | | 0.07 | | | 0.82 | | | 0.24 | |
Basic net income (loss) per common share (1) | $ | 0.37 | | | $ | (0.01) | | | $ | 0.27 | | | $ | (0.06) | |
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Diluted net (loss) income per common share: | | | | | | | |
Continuing operations | $ | (0.26) | | | $ | (0.09) | | | $ | (0.55) | | | $ | (0.31) | |
Discontinued operations | 0.63 | | | 0.07 | | | 0.82 | | | 0.24 | |
Diluted net income (loss) per common share (1) | $ | 0.37 | | | $ | (0.01) | | | $ | 0.27 | | | $ | (0.06) | |
| | | | | | | |
Weighted average shares outstanding – basic | 84,496 | | | 82,186 | | | 84,457 | | | 82,142 | |
Weighted average shares outstanding – diluted | 84,496 | | | 82,186 | | | 84,457 | | | 82,142 | |
______________
(1) Earnings per share may not sum due to rounding | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Revenue | | | | | | | |
Real estate rental revenue | $ | 54,603 | | | $ | 42,499 | | | $ | 153,787 | | | $ | 124,403 | |
Expenses | | | | | | | |
Property operating and maintenance | 13,092 | | | 9,901 | | | 35,404 | | | 28,655 | |
Real estate taxes and insurance | 6,469 | | | 5,544 | | | 19,893 | | | 16,525 | |
Property management | 1,916 | | | 1,499 | | | 5,462 | | | 4,448 | |
General and administrative | 6,403 | | | 7,909 | | | 20,998 | | | 19,838 | |
Transformation costs | 2,399 | | | 1,016 | | | 6,645 | | | 4,796 | |
Depreciation and amortization | 23,632 | | | 18,252 | | | 69,871 | | | 52,542 | |
| | | | | | | |
| | | | | | | |
| 53,911 | | | 44,121 | | | 158,273 | | | 126,804 | |
| | | | | | | |
Real estate operating gain (loss) | 692 | | | (1,622) | | | (4,486) | | | (2,401) | |
Other income (expense) | | | | | | | |
Interest expense | (6,582) | | | (8,106) | | | (18,388) | | | (28,387) | |
Loss on interest rate derivatives | — | | | (106) | | | — | | | (5,866) | |
Loss on extinguishment of debt | (4,917) | | | (12,727) | | | (4,917) | | | (12,727) | |
Other income | 68 | | | 231 | | | 454 | | | 3,037 | |
| | | | | | | |
| (11,431) | | | (20,708) | | | (22,851) | | | (43,943) | |
Loss from continuing operations | (10,739) | | | (22,330) | | | (27,337) | | | (46,344) | |
Discontinued operations: | | | | | | | |
Income from operations of properties sold or held for sale | — | | | 7,208 | | | — | | | 23,083 | |
Gain on sale of real estate, net | — | | | 46,441 | | | — | | | 46,441 | |
| | | | | | | |
| | | | | | | |
Income from discontinued operations | — | | | 53,649 | | | — | | | 69,524 | |
Net (loss) income | $ | (10,739) | | | $ | 31,319 | | | $ | (27,337) | | | $ | 23,180 | |
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| | | | | | | |
Basic net (loss) income per common share: | | | | | | | |
Continuing operations | $ | (0.12) | | | $ | (0.26) | | | $ | (0.32) | | | $ | (0.55) | |
Discontinued operations | — | | | 0.63 | | | — | | | 0.82 | |
Basic net (loss) income per common share | $ | (0.12) | | | $ | 0.37 | | | $ | (0.32) | | | $ | 0.27 | |
| | | | | | | |
Diluted net (loss) income per common share: | | | | | | | |
Continuing operations | $ | (0.12) | | | $ | (0.26) | | | $ | (0.32) | | | $ | (0.55) | |
Discontinued operations | — | | | 0.63 | | | — | | | 0.82 | |
Diluted net (loss) income per common share | $ | (0.12) | | | $ | 0.37 | | | $ | (0.32) | | | $ | 0.27 | |
| | | | | | | |
Weighted average shares outstanding – basic | 87,453 | | | 84,496 | | | 87,354 | | | 84,457 | |
Weighted average shares outstanding – diluted | 87,453 | | | 84,496 | | | 87,354 | | | 84,457 | |
See accompanying notes to the consolidated financial statements.
WASHINGTON REAL ESTATE INVESTMENT TRUSTELME COMMUNITIES AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Net income (loss) | $ | 31,319 | | | $ | (956) | | | $ | 23,180 | | | $ | (4,643) | |
Other comprehensive income (loss): | | | | | | | |
Unrealized gain (loss) on interest rate hedges | 221 | | | 1,774 | | | 2,805 | | | (34,582) | |
Reclassification of unrealized loss on interest rate derivatives to earnings | 511 | | | — | | | 7,290 | | | — | |
Comprehensive income (loss) | $ | 32,051 | | | $ | 818 | | | $ | 33,275 | | | $ | (39,225) | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Net (loss) income | $ | (10,739) | | | $ | 31,319 | | | $ | (27,337) | | | $ | 23,180 | |
Other comprehensive income: | | | | | | | |
Unrealized gain on interest rate hedges | 442 | | | 221 | | | 3,284 | | | 2,805 | |
Reclassification of unrealized loss on interest rate derivatives to earnings | 509 | | | 511 | | | 1,529 | | | 7,290 | |
Comprehensive (loss) income | $ | (9,788) | | | $ | 32,051 | | | $ | (22,524) | | | $ | 33,275 | |
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See accompanying notes to the consolidated financial statements.
WASHINGTON REAL ESTATE INVESTMENT TRUSTELME COMMUNITIES 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 | 84,409 | | | $ | 844 | | | $ | 1,649,366 | | | $ | (298,860) | | | $ | (30,563) | | | $ | 1,320,787 | | | $ | 322 | | | $ | 1,321,109 | | |
Balance, December 31, 2021 | | Balance, December 31, 2021 | 86,261 | | | $ | 863 | | | $ | 1,697,477 | | | $ | (362,494) | | | $ | (19,091) | | | $ | 1,316,755 | | | $ | 307 | | | $ | 1,317,062 | |
| Net income | — | | | — | | | — | | | 23,180 | | | — | | | 23,180 | | | — | | | 23,180 | | |
Net loss | | Net loss | — | | | — | | | — | | | (27,337) | | | — | | | (27,337) | | | — | | | (27,337) | |
Unrealized gain on interest rate hedges | Unrealized gain on interest rate hedges | — | | | — | | | — | | | — | | | 2,805 | | | 2,805 | | | — | | | 2,805 | | Unrealized gain on interest rate hedges | — | | | — | | | — | | | — | | | 3,284 | | | 3,284 | | | — | | | 3,284 | |
Loss on interest rate derivatives | — | | | — | | | — | | | — | | | 5,760 | | | 5,760 | | | — | | | 5,760 | | |
| Amortization of swap settlements | Amortization of swap settlements | — | | | — | | | — | | | — | | | 1,530 | | | 1,530 | | | — | | | 1,530 | | Amortization of swap settlements | — | | | — | | | — | | | — | | | 1,529 | | | 1,529 | | | — | | | 1,529 | |
Distributions to noncontrolling interests | Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (13) | | | (13) | | Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (6) | | | (6) | |
| Dividends ($0.77 per common share) | — | | | — | | | — | | | (65,372) | | | — | | | (65,372) | | | — | | | (65,372) | | |
Dividends ($0.51 per common share) | | Dividends ($0.51 per common share) | — | | | — | | | — | | | (44,708) | | | — | | | (44,708) | | | — | | | (44,708) | |
Equity issuances, net of issuance costs | Equity issuances, net of issuance costs | 24 | | | — | | | 467 | | | — | | | — | | | 467 | | | — | | | 467 | | Equity issuances, net of issuance costs | 1,032 | | | 10 | | | 26,841 | | | — | | | — | | | 26,851 | | | — | | | 26,851 | |
Shares issued under Dividend Reinvestment Program | Shares issued under Dividend Reinvestment Program | 65 | | | — | | | 1,468 | | | — | | | — | | | 1,468 | | | — | | | 1,468 | | Shares issued under Dividend Reinvestment Program | 32 | | | — | | | 777 | | | — | | | — | | | 777 | | | — | | | 777 | |
Share grants, net of forfeitures and tax withholdings | Share grants, net of forfeitures and tax withholdings | 130 | | | 2 | | | 5,520 | | | — | | | — | | | 5,522 | | | — | | | 5,522 | | Share grants, net of forfeitures and tax withholdings | 179 | | | 2 | | | 3,745 | | | — | | | — | | | 3,747 | | | — | | | 3,747 | |
Balance, September 30, 2021 | 84,628 | | | $ | 846 | | | $ | 1,656,821 | | | $ | (341,052) | | | $ | (20,468) | | | $ | 1,296,147 | | | $ | 309 | | | $ | 1,296,456 | | |
Balance, September 30, 2022 | | Balance, September 30, 2022 | 87,504 | | | $ | 875 | | | $ | 1,728,840 | | | $ | (434,539) | | | $ | (14,278) | | | $ | 1,280,898 | | | $ | 301 | | | $ | 1,281,199 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | 82,099 | | | $ | 821 | | | $ | 1,592,487 | | | $ | (183,405) | | | $ | 1,823 | | | $ | 1,411,726 | | | $ | 336 | | | $ | 1,412,062 | |
| | | | | | | | | | | | | | | |
Net loss | — | | | — | | | — | | | (4,643) | | | — | | | (4,643) | | | — | | | (4,643) | |
Unrealized loss on interest rate hedges | — | | | — | | | — | | | — | | | (34,582) | | | (34,582) | | | — | | | (34,582) | |
Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (11) | | | (11) | |
Dividends ($0.90 per common share) | — | | | — | | | — | | | (74,387) | | | — | | | (74,387) | | | — | | | (74,387) | |
Equity issuances, net of issuance costs | 46 | | | 1 | | | 1,241 | | | — | | | — | | | 1,242 | | | — | | | 1,242 | |
Shares issued under Dividend Reinvestment Program | 64 | | | 1 | | | 1,580 | | | — | | | — | | | 1,581 | | | — | | | 1,581 | |
Share grants, net of forfeitures and tax withholdings | 142 | | | 1 | | | 5,852 | | | — | | | — | | | 5,853 | | | — | | | 5,853 | |
Balance, September 30, 2020 | 82,351 | | | $ | 824 | | | $ | 1,601,160 | | | $ | (262,435) | | | $ | (32,759) | | | $ | 1,306,790 | | | $ | 325 | | | $ | 1,307,115 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | 84,409 | | | $ | 844 | | | $ | 1,649,366 | | | $ | (298,860) | | | $ | (30,563) | | | $ | 1,320,787 | | | $ | 322 | | | $ | 1,321,109 | |
| | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | 23,180 | | | — | | | 23,180 | | | — | | | 23,180 | |
Unrealized gain on interest rate hedges | — | | | — | | | — | | | — | | | 2,805 | | | 2,805 | | | — | | | 2,805 | |
Loss on interest rate derivatives | — | | | — | | | — | | | — | | | 5,760 | | | 5,760 | | | — | | | 5,760 | |
Amortization of swap settlements | — | | | — | | | — | | | — | | | 1,530 | | | 1,530 | | | — | | | 1,530 | |
Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (13) | | | (13) | |
Dividends ($0.77 per common share) | — | | | — | | | — | | | (65,372) | | | — | | | (65,372) | | | — | | | (65,372) | |
Equity issuances, net of issuance costs | 24 | | | — | | | 467 | | | — | | | — | | | 467 | | | — | | | 467 | |
Shares issued under Dividend Reinvestment Program | 65 | | | — | | | 1,468 | | | — | | | — | | | 1,468 | | | — | | | 1,468 | |
Share grants, net of forfeitures and tax withholdings | 130 | | | 2 | | | 5,520 | | | — | | | — | | | 5,522 | | | — | | | 5,522 | |
Balance, September 30, 2021 | 84,628 | | | $ | 846 | | | $ | 1,656,821 | | | $ | (341,052) | | | $ | (20,468) | | | $ | 1,296,147 | | | $ | 309 | | | $ | 1,296,456 | |
See accompanying notes to the consolidated financial statements.
WASHINGTON REAL ESTATE INVESTMENT TRUSTELME COMMUNITIES 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, June 30, 2021 | 84,590 | | | $ | 846 | | | $ | 1,654,409 | | | $ | (357,934) | | | $ | (21,200) | | | $ | 1,276,121 | | | $ | 314 | | | $ | 1,276,435 | | |
Balance, June 30, 2022 | | Balance, June 30, 2022 | 87,392 | | | $ | 874 | | | $ | 1,727,031 | | | $ | (408,882) | | | $ | (15,229) | | | $ | 1,303,794 | | | $ | 302 | | | $ | 1,304,096 | |
| Net income | — | | | — | | | — | | | 31,319 | | | — | | | 31,319 | | | — | | | 31,319 | | |
Net loss | | Net loss | — | | | — | | | — | | | (10,739) | | | — | | | (10,739) | | | — | | | (10,739) | |
Unrealized gain on interest rate hedges | Unrealized gain on interest rate hedges | — | | | — | | | — | | | — | | | 221 | | | 221 | | | — | | | 221 | | Unrealized gain on interest rate hedges | — | | | — | | | — | | | — | | | 442 | | | 442 | | | — | | | 442 | |
| Amortization of swap settlements | Amortization of swap settlements | — | | | — | | | — | | | — | | | 511 | | | 511 | | | — | | | 511 | | Amortization of swap settlements | — | | | — | | | — | | | — | | | 509 | | | 509 | | | — | | | 509 | |
Distributions to noncontrolling interests | Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (5) | | | (5) | | Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (1) | | | (1) | |
| Dividends ($0.17 per common share) | Dividends ($0.17 per common share) | — | | | — | | | — | | | (14,437) | | | — | | | (14,437) | | | — | | | (14,437) | | Dividends ($0.17 per common share) | — | | | — | | | — | | | (14,918) | | | — | | | (14,918) | | | — | | | (14,918) | |
| Shares issued under Dividend Reinvestment Program | Shares issued under Dividend Reinvestment Program | 20 | | | — | | | 459 | | | — | | | — | | | 459 | | | — | | | 459 | | Shares issued under Dividend Reinvestment Program | 12 | | | — | | | 259 | | | — | | | — | | | 259 | | | — | | | 259 | |
Share grants, net of share grant amortization and forfeitures | Share grants, net of share grant amortization and forfeitures | 18 | | | — | | | 1,953 | | | — | | | — | | | 1,953 | | | — | | | 1,953 | | Share grants, net of share grant amortization and forfeitures | 100 | | | 1 | | | 1,550 | | | — | | | — | | | 1,551 | | | — | | | 1,551 | |
Balance, September 30, 2021 | 84,628 | | | $ | 846 | | | $ | 1,656,821 | | | $ | (341,052) | | | $ | (20,468) | | | $ | 1,296,147 | | | $ | 309 | | | $ | 1,296,456 | | |
Balance, September 30, 2022 | | Balance, September 30, 2022 | 87,504 | | | $ | 875 | | | $ | 1,728,840 | | | $ | (434,539) | | | $ | (14,278) | | | $ | 1,280,898 | | | $ | 301 | | | $ | 1,281,199 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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, June 30, 2020 | 82,327 | | | $ | 823 | | | $ | 1,598,620 | | | $ | (236,673) | | | $ | (34,533) | | | $ | 1,328,237 | | | $ | 329 | | | $ | 1,328,566 | |
Net loss | — | | | — | | | — | | | (956) | | | — | | | (956) | | | — | | | (956) | |
Unrealized gain on interest rate hedges | — | | | — | | | — | | | — | | | 1,774 | | | 1,774 | | | — | | | 1,774 | |
Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (4) | | | (4) | |
Dividends ($0.30 per common share) | — | | | — | | | — | | | (24,806) | | | — | | | (24,806) | | | — | | | (24,806) | |
Shares issued under dividend reinvestment program | 23 | | | 1 | | | 515 | | | — | | | — | | | 516 | | | — | | | 516 | |
Share grants, net of forfeitures and tax withholdings | 1 | | | — | | | 2,025 | | | — | | | — | | | 2,025 | | | — | | | 2,025 | |
Balance, September 30, 2020 | 82,351 | | | $ | 824 | | | $ | 1,601,160 | | | $ | (262,435) | | | $ | (32,759) | | | $ | 1,306,790 | | | $ | 325 | | | $ | 1,307,115 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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, June 30, 2021 | 84,590 | | | $ | 846 | | | $ | 1,654,409 | | | $ | (357,934) | | | $ | (21,200) | | | $ | 1,276,121 | | | $ | 314 | | | $ | 1,276,435 | |
Net income | — | | | — | | | — | | | 31,319 | | | — | | | 31,319 | | | — | | | 31,319 | |
Unrealized gain on interest rate hedges | — | | | — | | | — | | | — | | | 221 | | | 221 | | | — | | | 221 | |
| | | | | | | | | | | | | | | |
Amortization of swap settlements | — | | | — | | | — | | | — | | | 511 | | | 511 | | | — | | | 511 | |
Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (5) | | | (5) | |
Dividends ($0.17 per common share) | — | | | — | | | — | | | (14,437) | | | — | | | (14,437) | | | — | | | (14,437) | |
| | | | | | | | | | | | | | | |
Shares issued under Dividend Reinvestment Program | 20 | | | — | | | 459 | | | — | | | — | | | 459 | | | — | | | 459 | |
Share grants, net of forfeitures and tax withholdings | 18 | | | — | | | 1,953 | | | — | | | — | | | 1,953 | | | — | | | 1,953 | |
Balance, September 30, 2021 | 84,628 | | | $ | 846 | | | $ | 1,656,821 | | | $ | (341,052) | | | $ | (20,468) | | | $ | 1,296,147 | | | $ | 309 | | | $ | 1,296,456 | |
See accompanying notes to the consolidated financial statements.
| WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES | |
ELME COMMUNITIES AND SUBSIDIARIES | | ELME COMMUNITIES AND SUBSIDIARIES |
| CONSOLIDATED STATEMENTS OF CASH FLOWS | CONSOLIDATED STATEMENTS OF CASH FLOWS | CONSOLIDATED STATEMENTS OF CASH FLOWS |
(IN THOUSANDS) | (IN THOUSANDS) | (IN THOUSANDS) |
(UNAUDITED) | (UNAUDITED) | (UNAUDITED) |
| | | Nine Months Ended September 30, | | Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2022 | | 2021 |
Cash flows from operating activities | Cash flows from operating activities | | | | Cash flows from operating activities | | | |
Net income (loss) | $ | 23,180 | | | $ | (4,643) | | |
Net loss | | Net loss | $ | (27,337) | | | $ | 23,180 | |
Adjustments to reconcile net loss to net cash provided by operating activities: | Adjustments to reconcile net loss to net cash provided by operating activities: | | Adjustments to reconcile net loss to net cash provided by operating activities: | |
Depreciation and amortization | Depreciation and amortization | 75,446 | | | 89,789 | | Depreciation and amortization | 69,871 | | | 75,446 | |
Credit losses on lease related receivables | Credit losses on lease related receivables | 1,631 | | | 3,271 | | Credit losses on lease related receivables | 1,816 | | | 1,631 | |
| (Gain) loss on sale of real estate, net | (Gain) loss on sale of real estate, net | (46,441) | | | 7,539 | | (Gain) loss on sale of real estate, net | — | | | (46,441) | |
Share-based compensation expense | Share-based compensation expense | 6,478 | | | 5,901 | | Share-based compensation expense | 6,157 | | | 6,478 | |
| Net amortization of debt premiums, discounts and related financing costs | Net amortization of debt premiums, discounts and related financing costs | 3,322 | | | 2,036 | | Net amortization of debt premiums, discounts and related financing costs | 3,084 | | | 3,322 | |
Loss on interest rate derivatives | Loss on interest rate derivatives | 5,866 | | | — | | Loss on interest rate derivatives | — | | | 5,866 | |
Loss (gain) on extinguishment of debt | Loss (gain) on extinguishment of debt | 12,727 | | | (262) | | Loss (gain) on extinguishment of debt | 4,917 | | | 12,727 | |
Changes in operating other assets | Changes in operating other assets | (4,720) | | | (11,566) | | Changes in operating other assets | (952) | | | (4,720) | |
Changes in operating other liabilities | Changes in operating other liabilities | (11,106) | | | (7,841) | | Changes in operating other liabilities | (6,100) | | | (11,106) | |
Net cash provided by operating activities | Net cash provided by operating activities | 66,383 | | | 84,224 | | Net cash provided by operating activities | 51,456 | | | 66,383 | |
Cash flows from investing activities | Cash flows from investing activities | | Cash flows from investing activities | |
Real estate acquisitions, net | Real estate acquisitions, net | (47,757) | | | — | | Real estate acquisitions, net | (204,433) | | | (47,757) | |
Net cash received for sale of real estate | Net cash received for sale of real estate | 897,783 | | | 56,353 | | Net cash received for sale of real estate | — | | | 897,783 | |
| Capital improvements to real estate | Capital improvements to real estate | (18,649) | | | (38,490) | | Capital improvements to real estate | (19,046) | | | (18,649) | |
Development in progress | Development in progress | (8,099) | | | (23,454) | | Development in progress | (671) | | | (8,099) | |
| Insurance proceeds | | Insurance proceeds | 2,224 | | | — | |
Non-real estate capital improvements | Non-real estate capital improvements | (37) | | | (196) | | Non-real estate capital improvements | (1,322) | | | (37) | |
Net cash provided by (used in) investing activities | 823,241 | | | (5,787) | | |
Net cash (used in) provided by investing activities | | Net cash (used in) provided by investing activities | (223,248) | | | 823,241 | |
Cash flows from financing activities | Cash flows from financing activities | | Cash flows from financing activities | |
Line of credit (repayments) borrowings, net | (42,000) | | | 130,000 | | |
Line of credit repayments, net | | Line of credit repayments, net | 43,000 | | | (42,000) | |
Dividends paid | Dividends paid | (76,292) | | | (74,285) | | Dividends paid | (44,440) | | | (76,292) | |
Principal payments – mortgage notes payable | — | | | (46,567) | | |
Repayments of mortgage notes payable | | Repayments of mortgage notes payable | (76,598) | | | — | |
| Repayments of unsecured notes payable, including penalties for early extinguishment | Repayments of unsecured notes payable, including penalties for early extinguishment | (311,894) | | | — | | Repayments of unsecured notes payable, including penalties for early extinguishment | — | | | (311,894) | |
Repayments of unsecured term loan debt | Repayments of unsecured term loan debt | (150,000) | | | (250,000) | | Repayments of unsecured term loan debt | — | | | (150,000) | |
Proceeds from term loan | — | | | 150,000 | | |
| Settlement of interest rate derivatives | Settlement of interest rate derivatives | (5,866) | | | — | | Settlement of interest rate derivatives | — | | | (5,866) | |
Payment of financing costs | Payment of financing costs | (4,828) | | | (567) | | Payment of financing costs | (39) | | | (4,828) | |
Distributions to noncontrolling interests | Distributions to noncontrolling interests | (13) | | | (11) | | Distributions to noncontrolling interests | (6) | | | (13) | |
Proceeds from dividend reinvestment program | Proceeds from dividend reinvestment program | 1,468 | | | 1,581 | | Proceeds from dividend reinvestment program | 777 | | | 1,468 | |
Net proceeds from equity issuances | Net proceeds from equity issuances | 467 | | | 1,240 | | Net proceeds from equity issuances | 26,851 | | | 467 | |
Payment of tax withholdings for restricted share awards | Payment of tax withholdings for restricted share awards | (554) | | | (150) | | Payment of tax withholdings for restricted share awards | (2,100) | | | (554) | |
| Net cash used in financing activities | Net cash used in financing activities | (589,512) | | | (88,759) | | Net cash used in financing activities | (52,555) | | | (589,512) | |
Net decrease in cash, cash equivalents and restricted cash | Net decrease in cash, cash equivalents and restricted cash | 300,112 | | | (10,322) | | Net decrease in cash, cash equivalents and restricted cash | (224,347) | | | 300,112 | |
Cash, cash equivalents and restricted cash at beginning of period | Cash, cash equivalents and restricted cash at beginning of period | 8,290 | | | 14,751 | | Cash, cash equivalents and restricted cash at beginning of period | 234,220 | | | 8,290 | |
Cash, cash equivalents and restricted cash at end of period | Cash, cash equivalents and restricted cash at end of period | $ | 308,402 | | | $ | 4,429 | | Cash, cash equivalents and restricted cash at end of period | $ | 9,873 | | | $ | 308,402 | |
| | | | | | | | | | | |
WASHINGTON REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES |
| | | |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
(IN THOUSANDS) |
(UNAUDITED) |
| | | |
| Nine Months Ended September 30, |
| 2021 | | 2020 |
| | | |
Supplemental disclosure of cash flow information: | | | |
Cash paid for interest, net of amounts capitalized | $ | 26,409 | | | $ | 27,386 | |
Change in accrued capital improvements and development costs | (4,885) | | | 4,147 | |
Dividend payable | 14,440 | | | 24,767 | |
| | | |
| | | |
Reconciliation of cash, cash equivalents and restricted cash: | | | |
Cash and cash equivalents | $ | 307,797 | | | $ | 3,814 | |
Restricted cash | 605 | | | 615 | |
Cash, cash equivalents and restricted cash | $ | 308,402 | | | $ | 4,429 | |
| | | | | | | | | | | |
ELME COMMUNITIES AND SUBSIDIARIES |
| | | |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
(IN THOUSANDS) |
(UNAUDITED) |
| | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
| | | |
Supplemental disclosure of cash flow information: | | | |
Cash paid for interest, net of amounts capitalized | $ | 18,386 | | | $ | 26,409 | |
Change in accrued capital improvements and development costs | 2,510 | | | (4,885) | |
Dividend payable | 14,919 | | | 14,440 | |
| | | |
| | | |
Reconciliation of cash, cash equivalents and restricted cash: | | | |
Cash and cash equivalents | $ | 8,436 | | | $ | 307,797 | |
Restricted cash | 1,437 | | | 605 | |
Cash, cash equivalents and restricted cash | $ | 9,873 | | | $ | 308,402 | |
See accompanying notes to the consolidated financial statements.
WASHINGTON REAL ESTATE INVESTMENT TRUSTELME COMMUNITIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20212022
(UNAUDITED)
NOTE 1: NATURE OF BUSINESS
Washington Real Estate Investment Trust (“WashREIT”),Elme Communities, a Maryland real estate investment trust, is a self-administered equity real estate investment trust, successor to a trust organized in 1960. In October 2022, the Company changed its name from Washington Real Estate Investment Trust to Elme Communities to reflect the Company’s continued transition into a focused multifamily company, and subsequent geographic expansion into Sunbelt markets. On October 20, 2022, the Company’s ticker symbol on the New York Stock Exchange changed from “WRE” to “ELME.” Our business primarily consists of the ownership of apartment communities in the greater Washington, DC metro and SoutheasternSunbelt regions. Within these notes to the financial statements, we refer to the three months ended September 30, 20212022 and September 30, 20202021 as the “2021“2022 Quarter” and the “2020“2021 Quarter,” respectively, and the nine months ended September 30, 20212022 and September 30, 20202021 as the “2021“2022 Period” and the “2020“2021 Period,” respectively. During the 2021 Period, we executed the sale of 12 office properties and the sale of 8 retail properties in two separate transactions (see note 3). The sold office and retail properties are classified as discontinued operations. We have one remaining office property, Watergate 600, that does not meet the qualitative or quantitative criteria for a reportable segment (see note 10). The dispositions of the office and retail properties are part of a strategic shift away from the commercial sector to the residential sector which simplifies our portfolio to 1 reportable segment (residential) (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. The net taxable gains on the sales of our office and retail properties were distributed to shareholders through quarterly dividends in 2021.
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 subsidiariessubsidiary (“TRSs”TRS”). Our TRSs areTRS is subject to corporate federal and state income tax on theirits taxable income at regular statutory rates. As of both September 30, 20212022 and December 31, 2020,2021, our TRSsTRS 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, 2020.2021.
Principles of Consolidation and Basis of Presentation
The accompanying unaudited consolidated financial statements include the consolidated accounts of WashREIT,Elme Communities, our majority-owned subsidiaries and entities in which WashREITElme Communities 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 GAAPGenerally Accepted Accounting Principles (“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, 2020.2021.
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 of operations for all periods presented.
Lessee Accounting
For leases where we are the lessee, primarily our corporate office operating lease, we recognize a right-of-use asset and a lease liability in accordance with Accounting Standards Codification (“ASC”) Topic 842. The right-of-use asset and associated liability is equal to the present value of the minimum lease payments, applying our incremental borrowing rate. Our borrowing rate is computed based on observable borrowing rates taking into consideration our credit quality and adjusting to a secured borrowing rate for similar assets and term. As of September 30, 2021,2022, our balance sheet included $4.6$1.1 million in a right-of-use assetsasset and liabilities.liability, net of amortization. During the 2022 Quarter, we remeasured the the right-of-use asset and liability due to a decrease in the estimated term of our corporate office operating lease, resulting in a $2.0 million decrease in both the asset and the liability.
Lease expense for the operating lease is recognized on a straight-line basis over the expected lease term and is included in “GeneralGeneral and administrative expense.”expense on the consolidated statements of operations.
Restricted Cash
Restricted cash includes funds held in escrow for tenant security deposits.deposits and mortgage escrows.
Transformation Costs
Transformation costs include costs related to the strategic transformation,shift away from the commercial sector to the residential sector, including the allocation of internal costs, consulting, advisory and termination benefits.
Use of Estimates in the Financial Statements
The preparation of financial statements in conformity with Generally Accepted Accounting Principles (“GAAP”)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
Acquisitions
We acquired the following propertyproperties during the 2021 Period (the “2021 acquisition”):2022 Period: | Acquisition Date | Acquisition Date | | Property | | Type | | # of homes (unaudited) | | Average Occupancy (unaudited) | | Contract Purchase Price (in thousands) | Acquisition Date | | Property | | Type | | # of homes | | Ending Occupancy (1) | | Contract Purchase Price (in thousands) |
August 10, 2021 | | The Oxford | | Residential | | 240 | | 93.5% | | $ | 48,000 | | |
February 1, 2022 | | February 1, 2022 | | Carlyle of Sandy Springs | | Residential | | 389 | | 93.1% | | $ | 105,586 | |
May 5, 2022 | | May 5, 2022 | | Marietta Crossing | | Residential | | 420 | | 94.5% | | 107,900 | |
May 5, 2022 | | May 5, 2022 | | Alder Park | | Residential | | 270 | | 95.2% | | 69,750 | |
| | | 1,079 | | $ | 283,236 | |
|
(1) As of September 30, 2022.
The results of operations from the acquired operating propertyproperties are included in the condensed consolidated statements of operations as of itstheir acquisition date and arewere as follows (in thousands): | | | | | | | |
| | | Three and Nine Months Ended September 30, 2021 |
Real estate rental revenue | | | $ | 488 | |
Net loss | | | (349) | |
| | | | | | | | | | | |
| Three Months Ended September 30, 2022 | | Nine Months Ended September 30, 2022 |
Real estate rental revenue | $ | 4,897 | | | $ | 9,623 | |
Net loss | (7,427) | | | (11,034) | |
We accounted for the 2021 acquisition2022 acquisitions as an asset acquisition.acquisitions. We measured the value of the acquired physical assets (land and building) and, in-place leases (absorption costs) and mortgage notes by allocating the total cost of the acquisition on a relative fair value basis.
The total cost of the 2021 acquisition2022 acquisitions was as follows (in thousands): | | | | | | | |
Contract purchase price | | | $ | 48,000283,236 | |
| | | |
Capitalized acquisition costs | | | 52478 | |
Total | | | $ | 48,052283,714 | |
We have recorded the total cost of the 2021 acquisition2022 acquisitions as follows (in thousands): | | | | | | | |
Land | | | $ | 4,79850,547 | |
Building | | | 42,079220,825 | |
Absorption costs | | | 1,1757,300 | |
Aggregate discount on assumed mortgages | | | 5,042 | |
Total acquisition cost | | | 283,714 | |
Outstanding balance on assumed mortgages | | | (76,554) | |
Total carrying amounts recorded | | | $ | 48,052207,160 | |
The weighted remaining average life for the absorption costs is 4two months.
The difference in the total acquisition cost of $283.7 million for the 2022 acquisitions and the cash paid for the acquisitions per the consolidated statements of cash flows of $204.4 million is due to the assumption of two mortgage notes secured by Marietta Crossing and Alder Park for an aggregate outstanding balance of $76.6 million and credits received at settlement totaling $2.8 million. In September 2022, we extinguished the liabilities associated with the two mortgage notes though defeasance arrangements.
Development/Redevelopment
We have properties under development/redevelopment and held for current or future development. As of September 30, 2021,2022, we have invested $29.4$30.4 million, including the cost of acquired land, in a residential development adjacent to Riverside Apartments. In addition, in our residential segment,During the second quarter of 2022, we paused development activities at the aforementioned property and ceased associated capitalization of interest on spending and real estate taxes. However, we continue to capitalize qualifying costs on
several other projects with minor development activity necessary to ready each project for its intended use. We placed the remainder of the Trove development costs into service during the first quarter of 2021.
Properties Sold and Held for Sale
We intend to hold our properties for investment with a view to long-term appreciation, to engage in the business of acquiring, developing and owning our properties and to make occasional sales of properties that no longer meet our long-term strategy or return objectives and where market conditions for sale are favorable. The proceeds from the sales may be reinvested into other properties, used to fund development operations or to support other corporate needs or distributed to our shareholders. Depreciation on these properties is discontinued at the time they are classified as held for sale, but operating revenues, operating expenses and interest expense continue to be recognized until the date of sale.
We did not sell or classify any properties as held for sale during the 2022 Period. We sold the following properties during 2021 and 2020:($ in thousands):
| 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 | | (Loss) Gain on Sale |
July 26, 2021 | July 26, 2021 | | Office Portfolio (1) | | Office | | 2,370,000 | | | $ | 766,000 | | | $ | (11,220) | | July 26, 2021 | | Office Portfolio (1) | | Office | | 2,370,000 | | | $ | 766,000 | | | $ | (11,220) | |
September 22, 2021 | September 22, 2021 | | Retail Portfolio (2) | | Retail | | 693,000 | | | 168,314 | | | 57,661 | | September 22, 2021 | | Retail Portfolio (2) | | Retail | | 693,000 | | | 168,314 | | | 57,661 | |
| | Total 2021 | | 3,063,000 | | $ | 934,314 | | | $ | 46,441 | | | Total 2021 | | 3,063,000 | | $ | 934,314 | | | $ | 46,441 | |
| April 21, 2020 | | John Marshall II | | Office | | 223,000 | | $ | 57,000 | | | $ | (6,855) | | |
December 2, 2020 | | Monument II | | Office | | 207,000 | | 53,000 | | | (8,595) | | |
December 17, 2020 | | 1227 25th Street NW | | Office | | 135,000 | | 53,500 | | | 1,125 | | |
| Total 2020 | | 565,000 | | $ | 163,500 | | | $ | (14,325) | | |
(1)Consists of 12twelve 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.
(2) Consists of 8eight 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 sold in 2020 and 2021 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. Upon execution of the purchase and sale agreement, 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, recognizing a loss on sale of real estate of $11.2 million.
In June 2021, we executed a letter of intent to sell the Retail Portfolio. During 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 closed on the sale on September 22, 2021, recognizing a gain on real estate of $57.7 million.
The dispositions of the Office Portfolio and the Retail Portfolio represent a strategic shift that will havehad a major effect on our financial results and we have accordingly reported the Office Portfolio and Retail Portfolio as discontinued operations.
As of September 30, 2021,2022, we assessed our properties, including assets held for development, for impairment and did not recognize any impairment charges during the 2021 Quarter.2022 Period. We applied reasonable estimates and judgments in evaluating each of the properties as of September 30, 2021.2022. 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 September 30, | | Nine months ended September 30, | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2021 | | 2020 | | | Three Months Ended September 30, 2021 | | | Nine Months Ended September 30, 2021 |
Real estate rental revenue | Real estate rental revenue | $ | 10,932 | | | $ | 29,511 | | | $ | 70,519 | | | $ | 89,673 | | Real estate rental revenue | | $ | 10,932 | | | | $ | 70,519 | |
Expenses | Expenses | | Expenses | | | | |
Property operating and maintenance | Property operating and maintenance | (1,870) | | | (5,232) | | | (11,201) | | | (15,433) | | Property operating and maintenance | | (1,870) | | | | (11,201) | |
Real estate taxes and insurance | Real estate taxes and insurance | (1,476) | | | (4,839) | | | (11,136) | | | (14,233) | | Real estate taxes and insurance | | (1,476) | | | | (11,136) | |
Property management | Property management | (378) | | | (947) | | | (2,195) | | | (2,830) | | Property management | | (378) | | | | (2,195) | |
Depreciation and amortization | Depreciation and amortization | — | | | (12,406) | | | (22,904) | | | (37,106) | | Depreciation and amortization | | — | | | | (22,904) | |
| Gain on sale of real estate, net | Gain on sale of real estate, net | 46,441 | | | — | | | 46,441 | | | — | | Gain on sale of real estate, net | | 46,441 | | | | 46,441 | |
Income from discontinued operations | Income from discontinued operations | $ | 53,649 | | | $ | 6,087 | | | $ | 69,524 | | | $ | 20,071 | | Income from discontinued operations | | $ | 53,649 | | | | $ | 69,524 | |
| Basic net income per share | Basic net income per share | $ | 0.63 | | | $ | 0.07 | | | $ | 0.82 | | | $ | 0.24 | | Basic net income per share | | $ | 0.63 | | | | $ | 0.82 | |
Diluted net income per share | Diluted net income per share | $ | 0.63 | | | $ | 0.07 | | | $ | 0.82 | | | $ | 0.24 | | Diluted net income per share | | $ | 0.63 | | | | $ | 0.82 | |
| Capital expenditures | Capital expenditures | $ | 833 | | | $ | 4,239 | | | $ | 3,316 | | | $ | 11,825 | | Capital expenditures | | $ | 833 | | | | $ | 3,316 | |
All assets and liabilities related to the Office Portfolio and Retail Portfolio were sold as of September 30, 2021. As of December 31, 2020, assets and liabilities related to the Office Portfolio and Retail Portfolio were as follows (in thousands):
| | | | | | | | |
| | December 31, 2020 |
Land | | $ | 249,869 | |
Income producing property | | 958,704 | |
| | 1,208,573 | |
Accumulated depreciation and amortization | | (414,008) | |
Income producing property, net | | 794,565 | |
Development in progress and land held for development | | 1,122 | |
Investment in real estate, net | | $ | 795,687 | |
Cash and cash equivalents | | 3 | |
Restricted cash | | 10 | |
Rents and other receivables | | 48,532 | |
Prepaid expenses and other assets | | 41,452 | |
Total assets | | $ | 885,684 | |
Accounts payable and other liabilities | | $ | 14,706 | |
Advance rents | | 4,754 | |
Tenant security deposits | | 5,769 | |
Liabilities related to properties sold or held for sale | | $ | 25,229 | |
2021.
NOTE 4: UNSECURED LINE OF CREDIT PAYABLE
During the third quarter of 2021, Quarter, 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”) and the continuation of an existing $250.0 million unsecured term loan (“2018 Term Loan”). The Revolving Credit Facility has a four-year term ending in August 2025, with 2two 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. As a result of the transaction, we recognized a loss on extinguishment of debt of $0.2 million related to the write-off of unamortized loan origination costs. We incurred $4.8 million of additional loan origination costs which will be amortized as interest expense over the term of the Revolving Credit Facility.
The Revolving Credit Facility bears interest at a rate of either one month LIBOR plus a margin ranging from 0.70% to 1.40% or the base rate plus a margin ranging from 0.0% to 0.40% (in each case depending upon WashREIT’sElme Communities’ 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 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’sElme Communities’ credit rating) on the $700.0 million committed revolving loan capacity, without regard to usage. As of September 30, 2021,2022, the interest rate on the Revolving Credit Facility is one month LIBOR plus 0.85%, the one month LIBOR is 0.08%3.14% and the facility fee is 0.20%.
All outstanding advances for the Revolving Credit Facility are due and payable upon maturity in August 2025, unless extended pursuant to one or both of the 2two six-month extension options. Interest only payments are due and payable generally on a monthly basis.
The 2018 Term Loan increased and 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’sElme Communities’ 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.
On September 27, 2021, we prepaid a $150.0 million portion of the 2018 Term Loan using proceeds from the sale of the Office Portfolio and Retail Portfolio (see note 3). As a result of the prepayment, we recognized a loss on extinguishment of debt of $0.3 million related to the write-off of unamortized loan origination costs. Simultaneous with the prepayment, we terminated five interest rate swap arrangements (see note 6). We currently expect to hold the remaining $100.0 million portion of the 2018 Term Loan until maturity.
The amount of the Revolving Credit Facility’s unsecured line of credit unused and available at September 30, 2021 is2022 was as follows (in thousands):
| | | | | |
Committed capacity | $ | 700,000 | |
Borrowings outstanding | — (43,000) | |
| |
Unused and available | $ | 700,000657,000 | |
In the first and second quarters of 2022, there were no borrowings or repayments on the Revolving Credit Facility. We executed borrowings and repayments on the Revolving Credit Facility during the 2021 Period2022 Quarter as follows (in thousands):
| | | | | | | | | | | | | | |
Balance at December 31, 2020June 30, 2022 | $ | 42,000— | |
Borrowings | 108,00065,000 | |
Repayments | (150,000)(22,000) | |
Balance at September 30, 20212022 | $ | —43,000 | |
NOTE 5: MORTGAGE NOTES PAYABLE
In August 2021,May 2022, we redeemed $300.0assumed a $42.8 million mortgage note in connection with the acquisition of our existing unsecured notes that were scheduled to matureMarietta Crossing. This mortgage note bears interest at 3.36% per annum. The effective interest rate on this mortgage note is 4.50% based on quotes obtained for similar loans. We recorded the mortgage note at its estimated fair value of $40.0 million. Principal and interest are payable monthly until May 1, 2030, at which time all unpaid principal and interest are payable in 2022. Asfull.
In May 2022, we assumed a result$33.7 million mortgage note in connection with the acquisition of Alder Park. This mortgage note bears interest at 2.93% per annum. The effective interest rate on this mortgage note is 4.00% based on quotes obtained for similar loans. We recorded the mortgage note at its estimated fair value of $31.5 million. Principal and interest are payable monthly until May 1, 2030, at which time all unpaid principal and interest are payable in full.
In September 2022, we extinguished the liabilities associated with both of the prepayment, we recognized a lossmortgage notes through defeasance arrangements, recognizing aggregate losses on extinguishment of debt of $12.3 million comprised of a prepayment penalty of $11.9 million and the write-off of unamortized loan origination costs of $0.4$4.9 million.
NOTE 6: DERIVATIVE INSTRUMENTS
On July 22, 2016, we entered into 2 forward interest rate swap arrangements with notional amounts of $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 fixed 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 had an all-in fixed interest rate of 2.87%.
In the second quarter of 2021 we determined that the hedged transactions for 5 interest rate swap arrangements with an aggregate notional value of $150.0 million were probable not to occur and that these interest swap arrangements were no longer effective cash flow hedges as of June 30, 2021 due to our intention to prepay a $150.0 million portion of the 2018 Term Loan. As a result, we recognized a loss of $5.8 million for the second quarter of 2021, which was recorded to Loss on interest rate derivatives on our condensed consolidated statements of operations. On September 27, 2021, we prepaid the $150.0 million portion of the 2018 Term Loan (see note 4). In connection with the prepayment, we terminated the 5 interest rate swap arrangements with an aggregate notional value of $150.0 million.
Our remainingWe have one interest rate swap arrangement with a notional amount of $100.0 million that effectively fixes the remaining $100.0 million portion of the 2018 Term Loan. The interest rate swap arrangement is recorded at fair value in accordance with GAAP, based on discounted cash flow methodologies and observable inputs. We record the effective portion of changes in fair value of the cash flow hedge in Other comprehensive income (loss). We assess the effectiveness of a cash flow hedge both at inception and on an ongoing basis. If a cash flow hedge is no longer expected to be effective, hedge accounting is discontinued. Hedge ineffectiveness of our cash flow hedges is recorded in earnings.
The fair values of the interest rate swapsswap as of September 30, 20212022 and December 31, 2020, are2021, were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value |
| | | | Derivative Liabilities |
Derivative Instrument | Aggregate Notional Amount | Effective Date | Maturity Date | September 30, 2021 | | December 31, 2020 |
Interest rate swaps | $ | 100,000 | | March 31, 2017 | July 21, 2023 | $ | (1,689) | | | $ | (2,671) | |
Interest rate swaps | 50,000 | | March 31, 2017 | July 21, 2023 | — | | | (1,338) | |
Interest rate swaps | 100,000 | | June 29, 2018 | July 21, 2023 | — | | | (6,246) | |
| | | | $ | (1,689) | | | $ | (10,255) | |
| | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value |
| | | | Derivative Assets (Liabilities) |
Derivative Instrument | Aggregate Notional Amount | Effective Date | Maturity Date | September 30, 2022 | | December 31, 2021 |
Interest rate swap | $ | 100,000 | | March 31, 2017 | July 21, 2023 | $ | 2,463 | | | $ | (821) | |
| | | | | | |
| | | | | | |
| | | | | | |
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 net unrealized gains or losses on the effective swaps arewere recognized in Other comprehensive income (loss), as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Unrealized gain (loss) on interest rate hedges | $ | 221 | | | $ | 1,774 | | | $ | 2,805 | | | $ | (34,582) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Unrealized gain on interest rate hedges | $ | 442 | | | $ | 221 | | | $ | 3,284 | | | $ | 2,805 | |
Amounts reported in Accumulated other comprehensive loss related to 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 nine months ended September 30, 20212022 and 2020,2021, were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Loss reclassified from Accumulated other comprehensive loss into interest expense | $ | 511 | | | $ | — | | | $ | 1,530 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Loss reclassified from accumulated other comprehensive loss into interest expense | $ | 509 | | | $ | 511 | | | $ | 1,529 | | | $ | 1,530 | |
During the next twelve months, we estimate that an additional $3.1$2.5 million will be reclassified as an increasea decrease 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 September 30, 2021,2022, the fair value of derivative assets, including accrued interest, was $2.5 million and we did not have any derivatives in an asset position and the fair value of the derivative liabilities, including accrued interest, was $1.7 million.a liability position. As of September 30, 2021,2022, 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 7: 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
Level 2: Significant other observable inputs
Level 3: Significant unobservable inputs
The only assets or liabilities we had at September 30, 20212022 and December 31, 20202021 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 derivatives (see note 6).
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 derivatives is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each interest rate derivative. This analysis reflects the contractual terms of the interest rate 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 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 derivatives fall into Level 2 in the fair value hierarchy.
The fair values of these assets and liabilities at September 30, 20212022 and December 31, 20202021 were as follows (in thousands):
| | | September 30, 2021 | | December 31, 2020 | | September 30, 2022 | | December 31, 2021 |
| | 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 | $ | 2,420 | | | $ | — | | | $ | 2,420 | | | $ | — | | | $ | 2,433 | | | $ | — | | | $ | 2,433 | | | $ | — | | SERP | $ | 1,969 | | | $ | — | | | $ | 1,969 | | | $ | — | | | $ | 2,566 | | | $ | — | | | $ | 2,566 | | | $ | — | |
| Interest rate derivatives | | Interest rate derivatives | 2,463 | | | — | | | 2,463 | | | — | | | — | | | — | | | — | | | — | |
Liabilities: | Liabilities: | | Liabilities: | |
Interest rate derivatives | Interest rate derivatives | $ | (1,689) | | | $ | — | | | $ | (1,689) | | | $ | — | | | $ | (10,255) | | | $ | — | | | $ | (10,255) | | | $ | — | | Interest rate derivatives | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | (821) | | | $ | — | | | $ | (821) | | | $ | — | |
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 September 30, 20212022 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 September 30, 20212022 and December 31, 2020,2021, the carrying values and estimated fair values of our financial instruments were as follows (in thousands):
| | | September 30, 2021 | | December 31, 2020 | | September 30, 2022 | | December 31, 2021 |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Cash and cash equivalents | Cash and cash equivalents | $ | 307,797 | | | $ | 307,797 | | | $ | 7,697 | | | $ | 7,697 | | Cash and cash equivalents | $ | 8,436 | | | $ | 8,436 | | | $ | 233,600 | | | $ | 233,600 | |
Restricted cash | Restricted cash | 605 | | | 605 | | | 593 | | | 593 | | Restricted cash | 1,437 | | | 1,437 | | | 620 | | | 620 | |
| Line of credit | Line of credit | — | | | — | | | 42,000 | | | 42,000 | | Line of credit | 43,000 | | | 43,000 | | | — | | | — | |
Notes payable, net | Notes payable, net | 496,823 | | | 517,185 | | | 945,370 | | | 978,678 | | Notes payable, net | 497,247 | | | 459,725 | | | 496,946 | | | 515,341 | |
NOTE 8: STOCK BASED COMPENSATION
WashREITElme Communities maintains short-term (“STIP”) and long-term (“LTIP”) incentive plans that allow for stock basedstock-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 basedshare-based awards was $2.7$1.9 million and $2.1$2.7 million for the 20212022 Quarter and 20202021 Quarter, respectively and $6.5$6.2 million and $5.9$6.5 million for the 2021 Period2022 and 20202021 Period, respectively.
Restricted Share Awards
The total fair values of restricted share awards vested was $1.6$4.8 million and $0.8$1.6 million for the 20212022 Period and 20202021 Period, respectively.
The total unvested restricted share awards at September 30, 20212022 was 430,993401,416 shares, which had a weighted average grant date fair value of $28.46$23.51 per share. As of September 30, 2021,2022, the total compensation cost related to unvested restricted share awards was $5.7$5.8 million, which we expect to recognize over a weighted average period of 1832 months.
NOTE 9: 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.
The computations of basic and diluted earnings per share for the three and nine months ended September 30, 20212022 and 20202021 were as follows (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Numerator: | | | | | | | |
Loss from continuing operations | $ | (22,330) | | | $ | (7,043) | | | $ | (46,344) | | | $ | (24,714) | |
| | | | | | | |
Allocation of earnings to unvested restricted share awards | 121 | | | (151) | | | (349) | | | (453) | |
Adjusted net loss from continuing operations | (22,209) | | | (7,194) | | | (46,693) | | | (25,167) | |
Income from discontinued operations | 53,649 | | | 6,087 | | | 69,524 | | | 20,071 | |
Allocation of earnings to unvested restricted share awards to discontinued operations | (283) | | | — | | | — | | | — | |
Adjusted income from discontinuing operations | 53,366 | | | 6,087 | | | 69,524 | | | 20,071 | |
Adjusted net income (loss) | $ | 31,157 | | | $ | (1,107) | | | $ | 22,831 | | | $ | (5,096) | |
Denominator: | | | | | | | |
Weighted average shares outstanding – basic and diluted | 84,496 | | | 82,186 | | | 84,457 | | | 82,142 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Earnings per common share, basic: | | | | | | | |
Continuing operations | $ | (0.26) | | | $ | (0.09) | | | $ | (0.55) | | | $ | (0.31) | |
Discontinued operations | 0.63 | | | 0.07 | | | 0.82 | | | 0.24 | |
Basic net income (loss) per common share (1) | $ | 0.37 | | | $ | (0.01) | | | $ | 0.27 | | | $ | (0.06) | |
Earnings per common share, diluted: | | | | | | | |
Continuing operations | $ | (0.26) | | | $ | (0.09) | | | $ | (0.55) | | | $ | (0.31) | |
Discontinued operations | 0.63 | | | 0.07 | | | 0.82 | | | 0.24 | |
Diluted net income (loss) per common share (1) | $ | 0.37 | | | $ | (0.01) | | | $ | 0.27 | | | $ | (0.06) | |
| | | | | | | |
Dividends declared per common share | $ | 0.17 | | | $ | 0.30 | | | $ | 0.77 | | | $ | 0.90 | |
______________
(1) Earnings per share may not sum due to rounding
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Numerator: | | | | | | | |
Loss from continuing operations | $ | (10,739) | | | $ | (22,330) | | | $ | (27,337) | | | $ | (46,344) | |
| | | | | | | |
Allocation of earnings to unvested restricted share awards | (68) | | | 121 | | | (191) | | | (349) | |
Adjusted net loss from continuing operations | (10,807) | | | (22,209) | | | (27,528) | | | (46,693) | |
Income from discontinued operations | — | | | 53,649 | | | — | | | 69,524 | |
Allocation of earnings from discontinued operations to unvested restricted share awards | — | | | (283) | | | — | | | — | |
Adjusted income from discontinuing operations | — | | | 53,366 | | | — | | | 69,524 | |
Adjusted net (loss) income | $ | (10,807) | | | $ | 31,157 | | | $ | (27,528) | | | $ | 22,831 | |
Denominator: | | | | | | | |
Weighted average shares outstanding – basic and diluted | 87,453 | | | 84,496 | | | 87,354 | | | 84,457 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Earnings per common share, basic: | | | | | | | |
Continuing operations | $ | (0.12) | | | $ | (0.26) | | | $ | (0.32) | | | $ | (0.55) | |
Discontinued operations | — | | | 0.63 | | | — | | | 0.82 | |
Basic net (loss) income per common share | $ | (0.12) | | | $ | 0.37 | | | $ | (0.32) | | | $ | 0.27 | |
Earnings per common share, diluted: | | | | | | | |
Continuing operations | $ | (0.12) | | | $ | (0.26) | | | $ | (0.32) | | | $ | (0.55) | |
Discontinued operations | — | | | 0.63 | | | — | | | 0.82 | |
Diluted net( loss) income per common share | $ | (0.12) | | | $ | 0.37 | | | $ | (0.32) | | | $ | 0.27 | |
| | | | | | | |
Dividends declared per common share | $ | 0.17 | | | $ | 0.17 | | | $ | 0.51 | | | $ | 0.77 | |
NOTE 10: SEGMENT INFORMATION
We operate in a single reportable segment which includes the ownership, development, redevelopment and acquisition of apartment communities. EachNone of our operating properties including our remaining office property, do not meet the criteria to be considered separate operating segments on a stand-alone basis. WeWithin the residential segment, we do not distinguish or group our consolidated operations based on size type or geography. All but(only one community, is within the Washington, DC metro region and no communityRiverside Apartments, comprises more than 10% of consolidated revenues.revenues), type (all assets in the segment are residential) or geography (all but five communities are within the Washington, DC metro region). Further, our apartment communities have similar long-term economic characteristics and provide similar products and services to our residents. As a result, our operating properties are aggregated into a single reportable segment: residential.
Prior to the end of the second quarter of 2021, we had 2two reportable segments: office and residential. During the third quarter of 2021, Quarter, we closed on the sales of the Office Portfolio and the Retail Portfolio (see note 3), and following such sales, we have 1one remaining office property, Watergate 600, which does not meet the criteria for a reportable segment, and has been classified within “Other” on our segment disclosure tables.
We evaluate performance based upon net operating income (“NOI”) of the combined properties in the segment. Our reportable operating segment consolidates 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 incomeNOI is a key measurement of our segment profit and loss and is defined as real estate rental revenue less real estate expenses.
The following tables present revenues, net operating income,NOI, capital expenditures and total assets for the three and nine months ended September 30, 20212022 and 20202021 from our Residential segment as well as Other, and reconcile net operating incomeNOI to net income (loss) as reported (in thousands):
| | | Three Months Ended September 30, 2021 | | Three Months Ended September 30, 2022 |
| | Residential | | Other (1), (3) | | Consolidated | | Residential | | Other (1) | | Consolidated |
Real estate rental revenue | Real estate rental revenue | 38,046 | | | 4,453 | | | $ | 42,499 | | Real estate rental revenue | 49,889 | | | 4,714 | | | $ | 54,603 | |
Real estate expenses | Real estate expenses | 14,146 | | | 1,299 | | | 15,445 | | Real estate expenses | 18,198 | | | 1,363 | | | 19,561 | |
Net operating income | Net operating income | $ | 23,900 | | | $ | 3,154 | | | $ | 27,054 | | Net operating income | $ | 31,691 | | | $ | 3,351 | | | $ | 35,042 | |
Other income (expense): | Other income (expense): | | Other income (expense): | |
Property management expenses | Property management expenses | | (1,499) | | Property management expenses | | (1,916) | |
General and administrative expenses | General and administrative expenses | | (7,909) | | General and administrative expenses | | (6,403) | |
Transformation costs | Transformation costs | | (1,016) | | Transformation costs | | (2,399) | |
Depreciation and amortization | Depreciation and amortization | | (18,252) | | Depreciation and amortization | | (23,632) | |
| Interest expense | Interest expense | | (8,106) | | Interest expense | | (6,582) | |
Loss on interest rate derivatives | | (106) | | |
| Loss on extinguishment of debt | Loss on extinguishment of debt | | (12,727) | | Loss on extinguishment of debt | | (4,917) | |
Other income | Other income | | 231 | | Other income | | 68 | |
| Discontinued operations: | | |
Income from operations of properties sold or held for sale | | 7,208 | | |
Gain on sale of real estate, net | | 46,441 | | |
| Net income | | $ | 31,319 | | |
| Net loss | | Net loss | | $ | (10,739) | |
| Capital expenditures | Capital expenditures | $ | 7,283 | | | $ | 1,002 | | | $ | 8,285 | | Capital expenditures | $ | 7,764 | | | $ | 567 | | | $ | 8,331 | |
Total assets | Total assets | $ | 1,355,893 | | | $ | 496,917 | | | $ | 1,852,810 | | Total assets | $ | 1,694,750 | | | $ | 184,784 | | | $ | 1,879,534 | |
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2020 |
| Residential | | Other (2), (3) | | Consolidated |
Real estate rental revenue | 36,292 | | | 7,424 | | | $ | 43,716 | |
Real estate expenses | 13,660 | | | 2,453 | | | 16,113 | |
Net operating income | $ | 22,632 | | | $ | 4,971 | | | $ | 27,603 | |
Other income (expense): | | | | | |
Property management expenses | | | | | (1,541) | |
General and administrative expenses | | | | | (6,330) | |
| | | | | |
Depreciation and amortization | | | | | (18,064) | |
| | | | | |
Interest expense | | | | | (8,711) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Discontinued operations: | | | | | |
Income from operations of properties sold or held for sale | | | | | 6,087 | |
| | | | | |
| | | | | |
| | | | | |
Net loss | | | | | $ | (956) | |
| | | | | |
| | | | | |
Capital expenditures | $ | 6,520 | | | $ | 6,590 | | | $ | 13,110 | |
Total assets | $ | 1,338,812 | | | $ | 1,193,460 | | | $ | 2,532,272 | |
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2021 |
| Residential | | Other (1), (3) | | Consolidated |
Real estate rental revenue | $ | 111,075 | | | $ | 13,328 | | | $ | 124,403 | |
Real estate expenses | 41,440 | | | 3,740 | | | 45,180 | |
Net operating income | $ | 69,635 | | | $ | 9,588 | | | $ | 79,223 | |
Other income (expense): | | | | | |
Property management expenses | | | | | (4,448) | |
General and administrative expenses | | | | | (19,838) | |
Transformation costs | | | | | (4,796) | |
Depreciation and amortization | | | | | (52,542) | |
| | | | | |
Interest expense | | | | | (28,387) | |
Loss on interest rate derivatives | | | | | (5,866) | |
Loss on extinguishment of debt | | | | | (12,727) | |
Other income | | | | | 3,037 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Discontinued operations: | | | | | |
| | | | | |
Income from operations of properties sold or held for sale | | | | | 23,083 | |
Gain on sale of real estate, net | | | | | 46,441 | |
| | | | | |
Net income | | | | | $ | 23,180 | |
| | | | | |
| | | | | |
Capital expenditures | $ | 15,082 | | | $ | 3,604 | | | $ | 18,686 | |
| | | Nine Months Ended September 30, 2020 | | Three Months Ended September 30, 2021 |
| | Residential | | Other (2), (3) | | Consolidated | | Residential | | Other (1), (2) | | Consolidated |
Real estate rental revenue | Real estate rental revenue | $ | 108,942 | | | $ | 24,274 | | | $ | 133,216 | | Real estate rental revenue | 38,046 | | | 4,453 | | | $ | 42,499 | |
Real estate expenses | Real estate expenses | 39,100 | | | 7,918 | | | 47,018 | | Real estate expenses | 14,146 | | | 1,299 | | | 15,445 | |
Net operating income | Net operating income | $ | 69,842 | | | $ | 16,356 | | | $ | 86,198 | | Net operating income | $ | 23,900 | | | $ | 3,154 | | | $ | 27,054 | |
Other income (expense): | Other income (expense): | | Other income (expense): | |
Property management expenses | Property management expenses | | (4,682) | | Property management expenses | | (1,499) | |
General and administrative expenses | General and administrative expenses | | (17,963) | | General and administrative expenses | | (7,909) | |
Transformation costs | | Transformation costs | | (1,016) | |
Depreciation and amortization | | Depreciation and amortization | | (18,252) | |
| Depreciation and amortization | | (52,683) | | |
Loss on sale of real estate | | (7,539) | | |
Interest expense | Interest expense | | (28,307) | | Interest expense | | (8,106) | |
Gain on extinguishment of debt | | 262 | | |
| Loss on interest rate derivatives | | Loss on interest rate derivatives | | (106) | |
Loss on extinguishment of debt | | Loss on extinguishment of debt | | (12,727) | |
Other income | | Other income | | 231 | |
| Discontinued operations: | Discontinued operations: | | Discontinued operations: | |
Income from operations of properties sold or held for sale | | Income from operations of properties sold or held for sale | | 7,208 | |
Gain on sale of real estate | | Gain on sale of real estate | | 46,441 | |
| Income from operations of properties sold or held for sale | | 20,071 | | |
| Net loss | | $ | (4,643) | | |
Net income | | Net income | | $ | 31,319 | |
| Capital expenditures | Capital expenditures | $ | 15,477 | | | $ | 23,209 | | | $ | 38,686 | | Capital expenditures | $ | 7,283 | | | $ | 1,002 | | | $ | 8,285 | |
Total assets | | Total assets | $ | 1,355,893 | | | $ | 496,917 | | | $ | 1,852,810 | |
(1) 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.
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2022 |
| Residential | | Other (1) | | Consolidated |
Real estate rental revenue | $ | 139,869 | | | 13,918 | | | $ | 153,787 | |
Real estate expenses | 51,411 | | | 3,886 | | | 55,297 | |
Net operating income | $ | 88,458 | | | $ | 10,032 | | | $ | 98,490 | |
Other income (expense): | | | | | |
Property management expenses | | | | | (5,462) | |
General and administrative expenses | | | | | (20,998) | |
Transformation costs | | | | | (6,645) | |
Depreciation and amortization | | | | | (69,871) | |
| | | | | |
Interest expense | | | | | (18,388) | |
| | | | | |
Loss on extinguishment of debt | | | | | (4,917) | |
Other income | | | | | 454 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Net loss | | | | | $ | (27,337) | |
| | | | | |
| | | | | |
Capital expenditures | $ | 17,623 | | | $ | 2,745 | | | $ | 20,368 | |
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2021 |
| Residential | | Other (1), (2) | | Consolidated |
Real estate rental revenue | 111,075 | | | 13,328 | | | $ | 124,403 | |
Real estate expenses | 41,440 | | | 3,740 | | | 45,180 | |
Net operating income | $ | 69,635 | | | $ | 9,588 | | | $ | 79,223 | |
Other income (expense): | | | | | |
Property management expenses | | | | | (4,448) | |
General and administrative expenses | | | | | (19,838) | |
Transformation costs | | | | | (4,796) | |
Depreciation and amortization | | | | | (52,542) | |
| | | | | |
Interest expense | | | | | (28,387) | |
Other income | | | | | 3,037 | |
Loss on extinguishment of debt | | | | | (12,727) | |
Loss on interest rate derivatives | | | | | (5,866) | |
| | | | | |
| | | | | |
| | | | | |
Discontinued operations: | | | | | |
Income from operations of properties sold or held for sale | | | | | 23,083 | |
Gain on sale of real estate | | | | | 46,441 | |
Net income | | | | | $ | 23,180 | |
| | | | | |
| | | | | |
Capital expenditures | $ | 15,082 | | | $ | 3,604 | | | $ | 18,686 | |
(1)Other represents Watergate 600, an office property that does not meet the qualitative or quantitative criteria for a reportable segment and office properties sold during 2020: John Marshall II, Monument II and 1227 25th Street.segment.
(3)(2) Total assets and capital expenditures include office and retail properties classified as discontinued operations.
NOTE 11: 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 “Equity Distribution Agreements”). for our at-the-market program. Also on February 17, 2021, we entered into a separate equity distribution agreement with BTIG, LLC on the same terms as the Amended Equity Distribution Agreements (the “BTIG Equity Distribution Agreement”). On September 22, 2021, BTIG, LLC notified us that it was terminating the BTIG Equity Distribution Agreement, effective as of September 27, 2021. Pursuant to the Equity Distribution Agreements, we may sell, from time to time, up to an aggregate price of $550.0 million of our common shares of beneficial interest, $0.01 par value per share. Issuances of our common shares are made at market prices prevailing at the time of issuance. We may use net proceeds from the issuance of common shares under this program for general business purposes, including, without limitation, working capital, the acquisition, renovation, expansion, improvement, development or redevelopment of income producing properties or the repayment of debt. We did not issue common shares under the Equity Distribution Agreements during the 20212022 Quarter or 20202021 Quarter. Our issuances and net proceeds on the Equity Distribution Agreements and the Original Equity Distribution Agreements, respectively, for the 2022 Period and 2021 Period and 2020 Period arewere as follows ($ in thousands, except per share data):
| | | | Nine Months Ended September 30, | | | | Nine Months Ended September 30, |
| | | 2021 | | 2020 | | | | 2022 | | 2021 |
Issuance of common shares | Issuance of common shares | | 24 | | | 46 | | Issuance of common shares | | | 1,032 | | | 24 | |
Weighted average price per share | Weighted average price per share | | $ | 22.06 | | | $ | 31.07 | | Weighted average price per share | | | $ | 26.27 | | | $ | 22.06 | |
Net proceeds | Net proceeds | | $ | 467 | | | $ | 1,242 | | Net proceeds | | | $ | 26,851 | | | $ | 467 | |
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 nine months ended September 30, 2022 and 2021 and 2020 arewere as follows ($ in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Issuance of common shares | 19 | | | 23 | | | 65 | | | 64 | |
Weighted average price per share | $ | 23.73 | | | $ | 22.51 | | | $ | 22.97 | | | $ | 25.12 | |
Net proceeds | $ | 459 | | | $ | 516 | | | $ | 1,468 | | | $ | 1,581 | |
NOTE 12:SUBSEQUENT EVENTS
Subsequent to the end of the 2021 Quarter, we executed a purchase and sale agreement for the acquisition of 2 apartment communities in Henry County, Georgia, for a contract purchase price of $106.0 million. The apartment communities have a combined total of 490 apartment units and we currently anticipate closing on the transaction during the fourth quarter of 2021, subject to customary closing conditions. | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Issuance of common shares | 12 | | | 19 | | | 32 | | | 65 | |
Weighted average price per share | $ | 21.15 | | | $ | 23.73 | | | $ | 24.01 | | | $ | 22.97 | |
Net proceeds | $ | 259 | | | $ | 459 | | | $ | 777 | | | $ | 1,468 | |
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, 20202021 filed with the Securities and Exchange Commission (“SEC”) on February 16, 2021.18, 2022.
We refer to the three months ended September 30, 20212022 and September 30, 20202021 as the “2021“2022 Quarter” and the “2020“2021 Quarter,” respectively, and the nine months ended September 30, 20212022 and September 30, 20202021 as the “2021“2022 Period” and the “2020“2021 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 WashREITElme Communities to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Currently, one of the most significant factors continues to be the adverse effect of the COVID-19 virus, including any variants and mutations thereof, the actions taken to contain the pandemic or mitigate the impact of COVID-19, and the direct and indirect economic effects of the pandemic and containment measures. The extent to which COVID-19 continues to impact WashREIT, its properties and its residents and tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, the continued speed and success of the vaccine distribution, effectiveness and willingness of people to take COVID-19 vaccines, and the duration of associated immunity and their efficacy against emerging variants of COVID-19, among others. Moreover, investors are cautioned to interpret many of the risks identified in the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2020 filed on February 16, 2021 and elsewhere in this Quarterly Report on Form 10-Q, as being heightened as a result of the ongoing and numerous adverse impacts of COVID-19. Additional factors which may cause the actual results, performance, or achievements of WashREITElme Communities to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements include, but are not limited to theto: risks associated with the failure to enter into and/or complete contemplated acquisitions or dispositions within the price ranges anticipated and on the terms and timing anticipated, or at all; our ability to execute on our strategies, including new strategies with respect to our operations and our portfolio, including the acquisition of residential propertiesapartment homes in the SoutheasternSunbelt markets, on the terms anticipated, or at all, the operational benefits from our operating model redesign on the timing contemplated or at all, and to realize any anticipated returns and benefits, including the performance of any acquired residential properties at the levels anticipated; our ability to reduce actual net leverage to levels consistent with our targeted net leverage range; the risks associated with ownership of real estate in general and our real estate assets in particular; the economic health of the areas in which our properties are located, particularly with respect to greater Washington, DC metro region and the larger SoutheasternSunbelt region; the risk of failure to enter into and/or complete contemplated acquisitions and dispositions, at all, within the price ranges anticipated and on the terms and timing anticipated; changes in the composition and geographic location of our portfolio; fluctuations in interest rates and other risks related to changes in interest rates; reductions in or actual or threatened changes to the timing of federal government spending; the risks related to use of third-party providers; the economic health of our residents and tenants;residents; the availability and terms ultimate duration of financing and capitalthe COVID-19 global pandemic, including any mutations thereof, the actions taken to contain the pandemic or mitigate its impact, and the general volatilitydirect and indirect economic effects of securities markets;the pandemic and containment measures, the effectiveness and willingness of people to take COVID-19 vaccines, and the duration of associated immunity and efficacy of the vaccines against emerging variants of COVID-19; the impact from macroeconomic factors (including inflation, increases in interest rates, potential economic slowdown or a recession and geopolitical conflicts; compliance with applicable laws and corporate social responsibility goals, including those concerning the environment and access by persons with disabilities; the risks related to not having adequate insurance to cover potential losses; the risks related to our organizational structure and limitations of stock ownership; changes in the market value of securities; terrorist attacks or actions and/or cyber-attacks; whether we will succeed in the day-to-day property management and leasing activities that we have previously outsourced; the availability and terms of financing and capital and the general volatility of securities markets; the risks related to our organizational structure and limitations of stock ownership; failure to qualify and maintain our qualification as a REIT and the risks of changes in laws affecting REITs; whether our estimated transformation costs for 2022 will be correct; and other risks and uncertainties detailed from time to time in our filings with the SEC, including our 20202021 Form 10-K filed on February 16, 2021 and elsewhere in this Quarterly Report on Form 10-Q.18, 2022. 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 20212022 Quarter to the 20202021 Quarter and the 20212022 Period to the 20202021 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 NAREITNational Association of Real Estate Investment Trusts, Inc. (“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”)FFO, calculated as set forth below under the caption “Funds from Operations.” NAREIT FFO is a non-GAAP supplemental measure to net income.
•Average occupancy, calculated as average daily occupied apartment homes as a percentage of total apartment homes.
For purposes of evaluating comparative operating performance, we categorize our properties as “same-store” or “non-same-store”.“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. Development properties are categorized as same-store when they have reached stabilized occupancy (90%) before the start of the prior year. We define redevelopment properties as those for which we have planned or ongoing significant development and construction activities on existing or acquired buildings pursuant to an authorized plan, which has an impact on current operating results, occupancy and the ability to lease space with the intended result of a higher economic return on the property. We categorize a redevelopment property as same-store when redevelopment activities have been complete for the majority of each year being compared.
Overview
Our revenues are derived primarily from the ownership and operation of income producing properties. As of September 30, 2021,2022, we owned approximately 7,3008,900 residential apartment homes in the Washington, DC metro and SoutheastSunbelt regions. We also own and operate approximately 300,000 square feet of commercial space in the Washington, DC metro region.
During the secondthird quarter of 2021, we executed a purchase and sale agreement for the sale ofsold twelve office properties (the “Office Portfolio”) (see note 3 to the condensed consolidated financial statements) for a purchase price of $766.0 million. During the 2021 Quarter, we executed a purchase and sale agreement for the sale of eight retail properties (the “Retail Portfolio”) (see note 3 to the condensed consolidated financial statements) for a purchase pricecontract sale prices of $766.0 million and $168.3 million. We closed on the sale of the Office Portfolio on July 26, 2021 and on the sale of the Retail Portfolio on September 22, 2021.million, respectively. Both the Office Portfolio and Retail Portfolio are classifiedmeet the criteria for classification as discontinued operations in our condensed consolidated financial statements. TheOur remaining office property, Watergate 600, does not meet the qualitative or quantitative criteria for a reportable segment (see note 10 to the condensed consolidated financial statements).
The dispositions of officethe Office Portfolio and retail propertiesRetail Portfolio are part of a strategic shift away from the commercial sector to the residential sector, which simplifiessimplified our portfolio to one reportable segment (residential) (the “strategic transformation”). Subsequent to the end of the 2021 Quarter, we executed a purchase and sale agreement for the acquisition of two apartment communities in Henry County, Georgia, for a contract purchase price of $106.0 million. The apartment communities have a combined total of 490 apartment units and we currently anticipate closing on the transaction during the fourth quarter of 2021, subject to customary closing conditions.
Outlook
We plan to useused the net proceeds from the sales to fund the expansion of our residential platform through acquisitions in SoutheasternSunbelt markets and to reduce our leverage by repaying outstanding debt. The plannedDuring the third and fourth quarters of 2021, we completed the acquisitions of residential propertiestwo apartment communities in Georgia for contract purchase prices of $48.0 million and dispositions$106.0 million, respectively. The apartment communities have a combined total of office and retail properties are part730 apartment homes. During the 2022 Period, we completed acquisitions of three apartment communities in Georgia with a strategic shift away from the commercial sector to the residential sector. This strategic shift simplifies our portfolio to one reportable segment (residential).combined total of 1,079 apartment homes for a total contract purchase price of $283.2 million. We believe the successful execution of this research-driven strategic shift will lead to greater, more sustainable growth.
In connection with this strategic transformation, we are redesigning our operating model for purposes of more efficiently and effectively supporting residential operations. This operating model redesign includes insourcing the property-level management activities currently performed by third-party management companies. Costs related to the strategic transformation, including the allocation of internal costs, consulting, advisory and termination benefits, are included in Transformation costs on our consolidated statements of operations. We recognized $2.4 million and $6.6 million of transformation costs, net of amounts capitalized, on the condensed consolidated statements of operations during the 2022 Quarter and 2022 Period, respectively, and anticipate incurring approximately $3.0 - $4.0 million of additional transformation costs during 2022. Community onboarding is expected to be completed in phases starting in October 2022. We expect to realize significant operational benefits from this operating model redesign and complete its implementation in 2023.
In October 2022, the Company changed its name from Washington Real Estate Investment Trust to Elme Communities reflecting the Company’s continued transition into a focused multifamily company, and subsequent geographic expansion into Sunbelt markets. On March 11, 2020,October 20, 2022, the World Health Organization declared COVID-19, a respiratory illness caused byCompany’s ticker symbol on 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 regionNew York Stock Exchange changed from “WRE” to institute quarantines, shelter-in-place rules and restrictions on travel, the types of business that may continue to operate and/or the types of construction projects that may continue.
While the COVID-19 pandemic impacted the 2021 Quarter, as of October 26, 2021, we collected 99% of cash rent at same-store communities during the 2021 Quarter. We saw a decrease in credit losses of $0.3 million during the 2021 Quarter compared to the 2020 Quarter. The effects of COVID-19 on our residential tenants led to a decline in rental rates during the 2021 Quarter compared to the 2020 Quarter. However, we expect to be able to increase rental rates in the remainder of 2021 as market conditions have begun to improve. We had an increase in average occupancy of approximately 150 basis points during the 2021 Quarter compared to the 2020 Quarter, excluding Trove, which began lease-up in the first quarter of 2020.
We expect the COVID-19 outbreak, including any variants and mutations thereof, to continue to affect our financial condition and results of operations during 2021, including but not limited to real estate rental revenues, credit losses and leasing activity. Given our current concentration in the Washington, DC metro region, the majority of our existing portfolio could be impacted at the same time by quarantines, shelter in place rules and various other restrictions imposed or re-imposed in response to a surge in COVID-19 cases. To help mitigate the impact on our operating results of the COVID-19 pandemic, we previously initiated various operational cost-saving initiatives across our portfolio. Due to the uncertainty of the future impacts of the COVID-19 pandemic, the extent of the financial impact remains difficult to reasonably estimate.
New legislation was enacted to provide relief to businesses in response to the COVID-19 pandemic. We have evaluated and will continue to evaluate the relief options available, or that become available in the future, such as the Coronavirus Aid, Relief, and Economic Securities Act (“CARES Act”), or other emergency relief initiatives and stimulus packages instituted by the federal government. A number of the available relief options contain restrictions on future business activities that require careful evaluation and consideration, including the ability to repurchase shares and pay dividends. We will continue to assess these options and any subsequent legislation or other relief packages, including the accompanying restrictions on our business, as the pandemic continues to evolve. The legislation did not have a material impact on our results of operations for the 2021 Period and 2020 Period.“ELME.”
Operating Results
Net loss, NOI and NAREIT FFO for the three months ended September 30, 20212022 and 20202021 were as follows (in thousands):
| | | Three Months Ended September 30, | | | Three Months Ended September 30, | |
| | 2021 | | 2020 | | $ Change | | % Change | | 2022 | | 2021 | | $ Change | | % Change |
Net income (loss) | $ | 31,319 | | | $ | (956) | | | $ | 32,275 | | | (3,376.0) | % | |
Net (loss) income | | Net (loss) income | $ | (10,739) | | | $ | 31,319 | | | $ | (42,058) | | | (134.3) | % |
NOI (1) | NOI (1) | $ | 27,054 | | | $ | 27,603 | | | $ | (549) | | | (2.0) | % | NOI (1) | $ | 35,042 | | | $ | 27,054 | | | $ | 7,988 | | | 29.5 | % |
NAREIT FFO (2) | NAREIT FFO (2) | $ | 3,130 | | | $ | 29,514 | | | $ | (26,384) | | | (89.4) | % | NAREIT FFO (2) | $ | 12,893 | | | $ | 3,130 | | | $ | 9,763 | | | 311.9 | % |
______________________________ | ______________________________ | | ______________________________ | |
(1) See page 30 of the MD&A for a reconciliation of NOI to net income. | (1) See page 30 of the MD&A for a reconciliation of NOI to net income. | (1) See page 30 of the MD&A for a reconciliation of NOI to net income. |
(2) See page 40 of the MD&A for a reconciliation of NAREIT FFO to net income. | |
(2) See page 41 of the MD&A for a reconciliation of NAREIT FFO to net income. | | (2) See page 41 of the MD&A for a reconciliation of NAREIT FFO to net income. |
The increase in net incomeloss is primarily due to the net gaingains on sale of real estate ($46.4 million), higher in 2021 and lower income from discontinued operations ($1.17.2 million) due to the sales of the Office Portfolio and Retail Portfolio during 2021, higher depreciation and amortization expenses ($5.4 million), higher transformation expenses ($1.4 million) and higher property management expenses ($0.4 million). These were partially offset by higher NOI ($8.0 million), lower loss on extinguishment of debt ($7.8 million), lower general and administrative expenses ($1.5 million) and lower interest expense ($0.6 million), partially offset by loss on extinguishment of debt ($12.7 million), higher general and administrative expenses ($1.6 million), higher transformation expenses ($1.0 million), lower NOI ($0.5 million) and higher depreciation and amortization expenses ($0.21.5 million).
The lowerhigher NOI is primarily due to the salesacquisitions of Monument IIAssembly Eagles Landing ($0.91.2 million) and 1227 25th StreetThe Oxford ($0.2 million) in 2021 and Carlyle of Sandy Spring ($1.4 million), Marietta Crossing ($1.1 million) and Alder Park ($0.8 million) during 2020, partially offset by placing Trove, a residential development, into service starting in 20202022, higher NOI from same-store properties ($1.02.3 million) and the acquisition of The Oxfordhigher NOI from Trove ($0.30.8 million), which achieved stabilization in the fourth quarter of 2021, Quarter.and higher NOI at Watergate 600 ($0.2 million). The higher same-store NOI was primarily due to higher rental rates. Residential same-store average occupancy for our portfolio increaseddecreased to 95.6% as of September 30, 2022 from 95.8% as of September 30, 2021 from 94.3% as of September 30, 2020, due to higher occupancy across the portfolio as the portfolio recovers from the COVID-19 pandemic.2021.
The lowerhigher NAREIT FFO is primarily due to thehigher NOI ($8.0 million), lower loss on extinguishment of debt ($12.77.8 million), lower general and administrative expenses ($1.5 million) and lower interest expense ($1.5 million), partially offset by lower income from discontinued operations net of depreciation and amortization ($11.37.2 million), higher general and administrativetransformation expenses ($1.61.4 million) and transformationhigher property management expenses ($1.00.4 million) and lower NOI ($0.5 million). These were partially offset by lower interest expense ($0.6 million).
Investment Activity
Significant investment transactions during the 20212022 Period included the following:
•In the second quarterAcquisition of 2021, we entered intoCarlyle of Sandy Springs, a purchase and sale agreement with a single buyer to sell the Office Portfolio for a contract sales price of $766.0 million. We closed on the Office Portfolio sale transaction on July 26, 2021.
•During the 2021 Quarter, we entered into a purchase and sale agreement with a single buyer to sell the Retail Portfolio for a contract sales price of $168.3 million. We closed on the sale of the Retail Portfolio on September 22, 2021.
•During the 2021 Quarter, we acquired The Oxford, a 240-unit389-unit apartment community in Conyers,Sandy Springs, Georgia for a contract purchase price of $48.0 million.$105.6 million during the first quarter of 2022.
•Acquisition of Marietta Crossing, a 420-unit apartment community in Marietta, Georgia for a contract purchase price of $107.9 million during the 2022 Quarter. We assumed a $42.8 million mortgage with this acquisition.
•Acquisition of Alder Park, a 270-unit apartment community in Smyrna, Georgia for a contract purchase price of $69.8 million during the 2022 Quarter. We assumed a $33.7 million mortgage with this acquisition.
Financing Activity
Significant financing transactions during the 20212022 Period included the following:
•We redeemed $300.0Issuance of 1.0 million common shares at a weighted average price per share of $26.27 for net proceeds of $26.9 million through our Senior Notes due 2022 and repaid $150.0 million of borrowings outstanding under the 2018 Term Loan. In conjunction with these repayments, we terminated five interest rate swaps (see note 6 to the consolidated financial statements).at-the-market program.
•DuringIn September 2022, we extinguished the 2021 Quarter, we entered intoaggregate $76.5 million of mortgages secured by Marietta Crossing and Alder Park through defeasance arrangements, recognizing an amended and restated credit agreement which provides for a $700.0 million unsecured revolving credit facility (“Revolving Credit Facility”).The Revolving Credit Facility has a four-year term ending in August 2025, with two six-month extension options. We recognized a $0.2 million non-cashaggregate loss on extinguishment of debt related toof $4.9 million. We partially funded the write-off of unamortized loan origination costs.defeasances with a $65.0 million draw on our unsecured revolving credit facility.
As of September 30, 2021,2022, the interest rate on the $700.0 million unsecured revolving credit facility (“Revolving Credit Facility”) was one month LIBOR plus 0.85% and the facility fee was 0.20%. As of October 26, 2021, we had no outstanding balance and a full borrowing capacity of $700.0 million on24, 2022, our Revolving Credit Facility and $297.1 millionhas a borrowing capacity of cash on hand, primarily due to the proceeds from the Office Portfolio and Retail Portfolio sales.$634.0 million.
Capital Requirements
With the redemption of the $300.0 million of Senior Notes scheduled to mature in 2022, as discussed above, weWe have no debt maturities scheduled until the third quarter of 2023. We expect to have additional capital requirements as set forth on page 3633 (Liquidity and Capital Resources -– Capital Requirements).
Results of Operations
The discussion that follows is based on our consolidated results of operations for the 20212022 Quarter and 2021 Period and 2020 Quarter and 2020 Period.Quarter. The ability to compare one period to another is significantly affected by acquisitions and dispositions made during 20212022 and 20202021 (see note 3 to the consolidated financial statements). Additionally, the COVID-19 pandemic adversely impacted our operating results for the 2021 Quarter, 2020 Quarter, 2021 Period and 2020 Period, and we expect that the COVID-19 outbreak will continue to adversely affect our business, financial condition, results of operations and cash flows going forward, including but not limited to, real estate rental revenues, credit losses, and leasing activity, in ways that may vary widely depending on the duration and magnitude of the COVID-19 pandemic and ensuing economic turmoil, as well as numerous other factors, many of which are outside of our control, as discussed under “Part I - Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2020 filed on February 16, 2021 and elsewhere in this Quarterly Report on Form 10-Q.
Net Operating Income
NOI, defined as real estate rental revenue less direct real estate operating expenses, is a non-GAAP measure. NOI is calculated as net income, less non-real estate revenue and the results of discontinued operations (including the gain or loss on sale, if any), plus interest expense, depreciation and amortization, lease origination expenses, general and administrative expenses, acquisition costs, real estate impairment, casualty gain and losses and gain or loss on extinguishment of debt. NOI does not include management expenses, which consist of corporate property management costs and property management fees paid to third parties. We believe that NOI is a useful performance measuresmeasure because, when compared across periods, it reflects the impact on operations of trends in occupancy rates, rental rates and operating costs on an unleveraged basis, providing perspective not immediately apparent from net income. NOI excludes certain components from net income in order to provide results more closely related to a property’s results of operations. For example, interest expense is not necessarily linked to the
operating performance of a real estate asset. In addition, depreciation and amortization, because of historical cost accounting and useful life estimates, may distort operating performance at the property level. As a result of the foregoing, we provide NOI as a supplement to net income, calculated in accordance with GAAP. NOI does not represent net income or income from continuing operations calculated in accordance with GAAP. As such, NOI should not be considered an alternative to these measures as an indication of our operating performance. A reconciliation of NOI to net income (loss)loss follows.
20212022 Quarter Compared to 20202021 Quarter
The following table reconciles NOI to net (loss) incomeloss and provides the basis for our discussion of our consolidated results of operations and NOI in the 20212022 Quarter compared to the 20202021 Quarter. All amounts are in thousands, except percentage amounts. | | | Three Months Ended September 30, | | | Three Months Ended September 30, | |
| | 2021 | | 2020 | | $ Change | | % Change | | 2022 | | 2021 | | $ Change | | % Change |
Residential revenue: | Residential revenue: | | | | | | | | Residential revenue: | | | | | | | |
Same-store portfolio | Same-store portfolio | $ | 35,408 | | | $ | 35,674 | | | $ | (266) | | | (0.7) | % | Same-store portfolio | $ | 38,771 | | | $ | 35,408 | | | $ | 3,363 | | | 9.5 | % |
Acquisitions (1) | Acquisitions (1) | 488 | | | — | | | 488 | | | — | % | Acquisitions (1) | 8,150 | | | 488 | | | 7,662 | | | 1,570.1 | % |
Development (2) | Development (2) | 1,846 | | | 445 | | | 1,401 | | | 314.8 | % | Development (2) | 2,711 | | | 1,846 | | | 865 | | | 46.9 | % |
Non-residential (3) | Non-residential (3) | 304 | | | 173 | | | 131 | | | 75.7 | % | Non-residential (3) | 257 | | | 304 | | | (47) | | | (15.5) | % |
Total | Total | 38,046 | | | 36,292 | | | 1,754 | | | 4.8 | % | Total | 49,889 | | | 38,046 | | | 11,843 | | | 31.1 | % |
Residential expenses: | Residential expenses: | | Residential expenses: | |
Same-store portfolio | Same-store portfolio | 13,003 | | | 13,180 | | | (177) | | | (1.3) | % | Same-store portfolio | 14,031 | | | 13,003 | | | 1,028 | | | 7.9 | % |
Acquisitions | Acquisitions | 212 | | | — | | | 212 | | | — | % | Acquisitions | 3,157 | | | 212 | | | 2,945 | | | 1,389.2 | % |
Development | Development | 846 | | | 411 | | | 435 | | | 105.8 | % | Development | 941 | | | 846 | | | 95 | | | 11.2 | % |
Non-residential | Non-residential | 85 | | | 69 | | | 16 | | | 23.2 | % | Non-residential | 69 | | | 85 | | | (16) | | | (18.8) | % |
Total | Total | 14,146 | | | 13,660 | | | 486 | | | 3.6 | % | Total | 18,198 | | | 14,146 | | | 4,052 | | | 28.6 | % |
Residential NOI: | Residential NOI: | | Residential NOI: | |
Same-store portfolio | Same-store portfolio | 22,405 | | | 22,494 | | | (89) | | | (0.4) | % | Same-store portfolio | 24,740 | | | 22,405 | | | 2,335 | | | 10.4 | % |
Acquisitions | Acquisitions | 276 | | | — | | | 276 | | | — | % | Acquisitions | 4,993 | | | 276 | | | 4,717 | | | 1,709.1 | % |
Development | Development | 1,000 | | | 34 | | | 966 | | | 2841.2 | % | Development | 1,770 | | | 1,000 | | | 770 | | | 77.0 | % |
Non-residential | Non-residential | 219 | | | 104 | | | 115 | | | 110.6 | % | Non-residential | 188 | | | 219 | | | (31) | | | (14.2) | % |
Total | Total | 23,900 | | | 22,632 | | | 1,268 | | | 5.6 | % | Total | 31,691 | | | 23,900 | | | 7,791 | | | 32.6 | % |
Other NOI (4), (5) | 3,154 | | | 4,971 | | | (1,817) | | | (36.6) | % | |
Other NOI (4) | | Other NOI (4) | 3,351 | | | 3,154 | | | 197 | | | 6.2 | % |
Total NOI | Total NOI | 27,054 | | | 27,603 | | | (549) | | | (2.0) | % | Total NOI | 35,042 | | | 27,054 | | | 7,988 | | | 29.5 | % |
Reconciliation to net income (loss): | | |
Reconciliation to net (loss) income: | | Reconciliation to net (loss) income: | |
Property management expenses | Property management expenses | (1,499) | | | (1,541) | | | 42 | | | (2.7) | % | Property management expenses | (1,916) | | | (1,499) | | | (417) | | | 27.8 | % |
General and administrative expenses | General and administrative expenses | (7,909) | | | (6,330) | | | (1,579) | | | 24.9 | % | General and administrative expenses | (6,403) | | | (7,909) | | | 1,506 | | | (19.0) | % |
Transformation costs | Transformation costs | (1,016) | | | — | | | (1,016) | | | — | % | Transformation costs | (2,399) | | | (1,016) | | | (1,383) | | | 136.1 | % |
Depreciation and amortization | Depreciation and amortization | (18,252) | | | (18,064) | | | (188) | | | 1.0 | % | Depreciation and amortization | (23,632) | | | (18,252) | | | (5,380) | | | 29.5 | % |
| Interest expense | Interest expense | (8,106) | | | (8,711) | | | 605 | | | (6.9) | % | Interest expense | (6,582) | | | (8,106) | | | 1,524 | | | (18.8) | % |
Loss on interest rate derivatives | Loss on interest rate derivatives | (106) | | | — | | | (106) | | | — | % | Loss on interest rate derivatives | — | | | (106) | | | 106 | | | (100.0) | % |
Loss on extinguishment of debt | Loss on extinguishment of debt | (12,727) | | | — | | | (12,727) | | | — | % | Loss on extinguishment of debt | (4,917) | | | (12,727) | | | 7,810 | | | (61.4) | % |
Other income | Other income | 231 | | | — | | | 231 | | | — | % | Other income | 68 | | | 231 | | | (163) | | | (70.6) | % |
Discontinued operations (6): | | |
Discontinued operations (5): | | Discontinued operations (5): | |
Income from operations of properties sold or held for sale | Income from operations of properties sold or held for sale | 7,208 | | | 6,087 | | | 1,121 | | | 18.4 | % | Income from operations of properties sold or held for sale | — | | | 7,208 | | | (7,208) | | | (100.0) | % |
Gain on sale of real estate, net | Gain on sale of real estate, net | 46,441 | | | — | | | 46,441 | | | — | % | Gain on sale of real estate, net | — | | | 46,441 | | | (46,441) | | | (100.0) | % |
Net income (loss) | $ | 31,319 | | | $ | (956) | | | $ | 32,275 | | | (3376.0) | % | |
Net (loss) income | | Net (loss) income | $ | (10,739) | | | $ | 31,319 | | | $ | (42,058) | | | (134.3) | % |
______________________________
(1)Acquisitions:
2021: The Oxford and Assembly Eagles Landing
2022: Carlyle of Sandy Springs, Alder Park, Marietta Crossing
(2)Development/redevelopment: Trove, Riverside Development (multifamily development adjacent to Riverside Apartments)
Trove
(3)Non-residential:
Includes revenues and expenses from retail and public parking garage operations at residential properties.
(4)Sold (classified as continuing operations):
2020 Office - John Marshall II, Monument II and 1227 25th Street
(5)Other (classified as continuing operations): Watergate 600
Watergate 600
(6)(5)Discontinued operations:
2021 Office - 1901 Pennsylvania Avenue, 515 King Street, 1220 19th Street, 1600 Wilson Boulevard, Silverline Center, Courthouse Square, 2000 M Street, 1140 Connecticut Avenue, Army Navy Club, 1775 Eye Street, Fairgate at Ballston and Arlington Tower
2021 Retail - Takoma Park, Westminster, Concord Centre, Chevy Chase Metro Plaza, 800 S. Washington Street, Randolph Shopping Center, Montrose Shopping Center and Spring Valley Village
Real Estate Rental Revenue
Real estate rental revenue from our apartment communities is comprised of (a) rent from operating leases of multifamily residential apartments with terms of approximately one year or less, recognized on a straight-line basis, (b) revenue from the recovery of operating expenses from our residents, (c) credit losses on lease related receivables, (d) revenue from leases of retail space at our apartment communities and (e) parking and other tenant charges.
Real estate rental revenue from same-store residential properties decreased $0.3increased $3.4 million, or 0.7%9.5%, to $38.8 million for the 2022 Quarter, compared to $35.4 million for the 2021 Quarter, compared to $35.7 million for the 2020 Quarter, primarily due to higher rental income ($2.4 million), lower rent abatements ($0.40.7 million), partially offset by higher move-in charges ($0.1 million) and lower credit losses ($0.1 million).
Real estate rental revenue from acquisitions increased $7.7 million due to the acquisitionacquisitions of Carlyle of Sandy Springs ($1.8 million) during the first quarter of 2022, Marietta Crossing ($1.8 million) and Alder Park ($1.3 million) during the second quarter of 2022, Assembly Eagles Landing ($2.2 million) during the fourth quarter of 2021, and The Oxford ($0.50.6 million) during the 2021 Quarter.third quarter of 2021.
Real estate rental revenue from development properties increased $0.9 million due to the continued lease-up of Trove, ($1.4 million). We placedwhich reached stabilization in the remainder of the Trove development costs into service during the firstfourth quarter of 2021.
Real estate rental revenue from non-residential activity increased due to lower credit losses ($0.1 million).
Average occupancy for residential properties for the 20212022 Quarter and 20202021 Quarter was as follows:
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September 30, 2021 | | September 30, 2020 | | Increase |
Same-Store | | Non-Same-Store | | Total | | Same-Store | | Non-Same-Store | | Total | | Same-Store | | Non-Same-Store | | Total |
95.8 | % | | 82.0 | % | | 94.7 | % | | 94.3 | % | | 17.1 | % | | 89.9 | % | | 1.5 | % | | 64.9 | % | | 4.8 | % |
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September 30, 2022 | | September 30, 2021 | | % Change |
Same-Store | | Non-Same-Store | | Total | | Same-Store | | Non-Same-Store | | Total | | Same-Store | | Non-Same-Store | | Total |
95.6 | % | | 94.3 | % | | 95.3 | % | | 95.8 | % | | 82.0 | % | | 94.7 | % | | (0.2) | % | | 12.3 | % | | 0.6 | % |
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The increasedecrease in same-store average occupancy was primarily due to lower average occupancy at Roosevelt Towers, Assembly Leesburg, The Paramount and Assembly Alexandria, partially offset by higher average occupancy at 3801 Connecticut Avenue, The Paramount, The Kenmore, Clayborne Apartments and Yale West.Maxwell.
Real Estate Expenses
Residential real estate expenses as a percentage of residential revenue for the 2022 Quarter and the 2021 Quarter were 36.5% and 2020 Quarter were 37.2% and 37.6%, respectively.
Real estate expenses from same-store residential properties decreased $0.2increased $1.0 million, or 1.3%7.9%, to $14.0 million for the 2022 Quarter, compared to $13.0 million for the 2021 Quarter, compared to $13.2 million for the 2020 Quarter, primarily due to lowerhigher repairs and maintenance ($0.3 million), administrative ($0.3 million), contract maintenance and supplies ($0.2 million) expenses and lower real estate taxestax ($0.2 million), partially offset by higher utilities expenses.
Real estate expenses from acquisitions increased $2.9 million due to the acquisitions of Carlyle of Sandy Springs ($0.10.4 million) during the first quarter of 2022, Marietta Crossing ($0.7 million) and insuranceAlder Park ($0.10.4 million) expenses.during the 2022 Quarter, Assembly Eagles Landing ($1.0 million) during the fourth quarter of 2021, and The Oxford ($0.4 million) during the third quarter of 2021.
Other NOI
Other NOI classified as continuing operations decreasedincreased due to the sales of Monument II ($0.9 million) and 1227 25th Street ($0.8 million) during the fourth quarter of 2020 and lowerhigher NOI at Watergate 600 ($0.2 million).
Other Income and Expenses
Property management expenses: These expenses include costs directly relatedIncrease of $0.4 million primarily due to the third-party management of property operations and corporate management and other costs.acquisitions.
General and administrative expenses: IncreaseDecrease of $1.5 million primarily due to higher short-termlower short term incentive compensation expense ($1.00.9 million), higher office rent and lower share based compensation expense ($0.20.4 million) due to the commencement of the corporate office lease during the 2021 Quarter, higher accounting fees ($0.2 million) and higher insurance expense ($0.1 million).2022 Quarter.
Transformation costs: DuringIncrease of $1.4 million during the 20212022 Quarter we incurred $1.0 million of costs relatedprimarily due to the strategic transformation, includinghigher consulting advisory and termination benefits.professional fees ($0.7 million) and higher employee time allocations ($0.6 million).
Depreciation and amortization: Increase of $5.4 million primarily due to placing into service the remainderacquisitions of the Trove developmentMarietta Crossing ($0.82.7 million), the acquisitionAlder Park ($1.3 million), Carlyle of The OxfordSandy Springs ($0.61.1 million), Assembly Eagles Landing ($1.0 million) and higher
depreciation and amortization at Watergate 600 ($0.3 million). The increase was partially offset by lower depreciation and amortization at same-store residential properties ($0.3 million). These increases were partially offset by the dispositions of Monument II ($0.9 million) and 1227 25th StreetThe Oxford ($0.50.1 million) in the fourth quarter of 2020..
Interest Expense: Interest expense by debt type for the three months ended September 30, 20212022 and 20202021 was as follows (in thousands):
| | | Three Months Ended September 30, | | | Three Months Ended September 30, | |
Debt Type | Debt Type | 2021 | | 2020 | | $ Change | | % Change | Debt Type | 2022 | | 2021 | | $ Change | | % Change |
Notes payable | Notes payable | $ | 7,523 | | | $ | 7,902 | | | $ | (379) | | | (4.8) | % | Notes payable | $ | 5,127 | | | 7,523 | | | $ | (2,396) | | | (31.8) | % |
Mortgage notes payable | | Mortgage notes payable | 524 | | | — | | | 524 | | | 100.0 | % |
Line of credit | Line of credit | 765 | | | 1,281 | | | (516) | | | (40.3) | % | Line of credit | 931 | | | 765 | | | 166 | | | 21.7 | % |
Capitalized interest | Capitalized interest | (182) | | | (472) | | | 290 | | | (61.4) | % | Capitalized interest | — | | | (182) | | | 182 | | | (100.0) | % |
Total | Total | $ | 8,106 | | | $ | 8,711 | | | $ | (605) | | | (6.9) | % | Total | $ | 6,582 | | | $ | 8,106 | | | $ | (1,524) | | | (18.8) | % |
•Notes payable: Decrease primarily due to the prepayment during the 2021 Quarter of $300.0 million of unsecured notes originallyduring the third quarter of 2021 that had been scheduled to mature in October 2022 the prepayment of our $150.0 million 2015 Term Loan in December 2020, the $150.0 million 2020 Term Loan executed in May 2020 and prepaid in November 2020 and the prepayment of a $150.0 million portion of the 2018 Term Loan during the 2021 Quarter. These were partially offset bythird quarter of 2021.
•Mortgage notes payable: Increase due to assumed mortgages of $42.8 million and $33.7 million in the $350.0 million Green Bonds executed in December 2020.acquisitions of Marietta Crossing and Alder Park, respectively, during the second quarter of 2022. In September 2022, we extinguished the liabilities associated with these mortgages though defeasance arrangements.
•Line of credit: DecreaseIncrease primarily due to lowerhigher weighted average borrowings of $22.4 million and a weighted average interest rate of 3.34% in the 2022 Quarter, as compared to weighted average borrowings of $20.9 million and a weighted average interest rate of 1.1% induring the 2021 Quarter, as compared to $202.2 million and 1.2%, respectively, during the 2020 Quarter.
•Capitalized interest: Decrease primarily due to placing into service assets at Trove.ceasing capitalization of interest on spending related to the multifamily development adjacent to Riverside Apartments due to a pause in development activities resulting from macroeconomic uncertainty.
Loss on extinguishment of debt: During the 2022 Quarter, we extinguished the liabilities associated with mortgage notes payable for Marietta Crossing and Alder Park through defeasance arrangements, recognizing aggregate losses on extinguishment of debt of $4.9 million. During the 2021 Quarter, we recognized a $12.3 million loss on extinguishment of debt related to the prepayment of the $300.0 million of unsecured notes that were originally scheduled to mature in October 2022, a $0.2 million loss on extinguishment of debt related to the prepayment of a $150.0 million portion of the $250.0 million 2018 Term Loan and a $0.2 million loss on extinguishment of debt related to the renewal of our Revolving Credit Facility.
Discontinued operations:operations
Income from operations of properties sold or held for sale: Increase primarily due to lower depreciation and amortization ($12.4 million), lower real estate expenses ($6.7 million) and lower management fees ($0.6 million), partially offset by lower operating income ($18.6 million)Decrease due to the sale of the Office Portfolio and the Retail Portfolio during the 2021 Quarter.
Gain on sale of real estate:estate, net: The net gain during 2021 Quarter is due to the salesgain on sale of the Retail Portfolio ($57.7 million), partially offset by the loss on sale of the Office Portfolio and Retail Portfolio.($11.2 million).
20212022 Period Compared to 20202021 Period
The following tables reconcile NOI to net income (loss) and provide the basis for our discussion of our consolidated results of operations and NOI in the 20212022 Period compared to the 20202021 Period. All amounts are in thousands, except percentage amounts.
| | | Nine Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2021 | | 2020 | | $ Change | | % Change | | 2022 | | 2021 | | $ Change | | % Change |
Residential revenue: | Residential revenue: | | | | | | | | Residential revenue: | | | | | | | |
Same-store portfolio | Same-store portfolio | $ | 105,641 | | | $ | 107,651 | | | $ | (2,010) | | | (1.9) | % | Same-store portfolio | $ | 112,702 | | | $ | 105,641 | | | $ | 7,061 | | | 6.7 | % |
Acquisitions (1) | Acquisitions (1) | 488 | | | — | | | 488 | | | — | % | Acquisitions (1) | 18,718 | | | 488 | | | 18,230 | | | 3,735.7 | % |
Development (2) | Development (2) | 4,152 | | | 696 | | | 3,456 | | | 496.6 | % | Development (2) | 7,642 | | | 4,152 | | | 3,490 | | | 84.1 | % |
Non-residential (3) | Non-residential (3) | 794 | | | 595 | | | 199 | | | 33.4 | % | Non-residential (3) | 807 | | | 794 | | | 13 | | | 1.6 | % |
Total | Total | 111,075 | | | 108,942 | | | 2,133 | | | 2.0 | % | Total | 139,869 | | | 111,075 | | | 28,794 | | | 25.9 | % |
Residential expenses: | Residential expenses: | | Residential expenses: | |
Same-store portfolio | Same-store portfolio | 38,589 | | | 37,997 | | | 592 | | | 1.6 | % | Same-store portfolio | 40,428 | | | 38,589 | | | 1,839 | | | 4.8 | % |
Acquisitions | Acquisitions | 212 | | | — | | | 212 | | | — | % | Acquisitions | 8,049 | | | 212 | | | 7,837 | | | 3,696.7 | % |
Development | Development | 2,420 | | | 895 | | | 1,525 | | | 170.4 | % | Development | 2,720 | | | 2,420 | | | 300 | | | 12.4 | % |
Non-residential | Non-residential | 219 | | | 208 | | | 11 | | | 5.3 | % | Non-residential | 214 | | | 219 | | | (5) | | | (2.3) | % |
Total | Total | 41,440 | | | 39,100 | | | 2,340 | | | 6.0 | % | Total | 51,411 | | | 41,440 | | | 9,971 | | | 24.1 | % |
Residential NOI: | Residential NOI: | | Residential NOI: | |
Same-store portfolio | Same-store portfolio | 67,052 | | | 69,654 | | | (2,602) | | | (3.7) | % | Same-store portfolio | 72,274 | | | 67,052 | | | 5,222 | | | 7.8 | % |
Acquisitions | Acquisitions | 276 | | | — | | | 276 | | | — | % | Acquisitions | 10,669 | | | 276 | | | 10,393 | | | 3,765.6 | % |
Development | Development | 1,732 | | | (199) | | | 1,931 | | | (970.4) | % | Development | 4,922 | | | 1,732 | | | 3,190 | | | 184.2 | % |
Non-residential | Non-residential | 575 | | | 387 | | | 188 | | | 48.6 | % | Non-residential | 593 | | | 575 | | | 18 | | | 3.1 | % |
Total | Total | 69,635 | | | 69,842 | | | (207) | | | (0.3) | % | Total | 88,458 | | | 69,635 | | | 18,823 | | | 27.0 | % |
Other NOI (4), (5) | 9,588 | | | 16,356 | | | (6,768) | | | (41.4) | % | |
Other NOI (4) | | Other NOI (4) | 10,032 | | | 9,588 | | | 444 | | | 4.6 | % |
Total NOI | Total NOI | 79,223 | | | 86,198 | | | (6,975) | | | (8.1) | % | Total NOI | 98,490 | | | 79,223 | | | 19,267 | | | 24.3 | % |
Reconciliation to net income (loss): | | |
Reconciliation to net loss: | | Reconciliation to net loss: | |
Property management expenses | Property management expenses | (4,448) | | | (4,682) | | | 234 | | | (5.0) | % | Property management expenses | (5,462) | | | (4,448) | | | (1,014) | | | 22.8 | % |
General and administrative expenses | General and administrative expenses | (19,838) | | | (17,963) | | | (1,875) | | | 10.4 | % | General and administrative expenses | (20,998) | | | (19,838) | | | (1,160) | | | 5.8 | % |
Transformation costs | Transformation costs | (4,796) | | | — | | | (4,796) | | | — | % | Transformation costs | (6,645) | | | (4,796) | | | (1,849) | | | 38.6 | % |
Depreciation and amortization | Depreciation and amortization | (52,542) | | | (52,683) | | | 141 | | | (0.3) | % | Depreciation and amortization | (69,871) | | | (52,542) | | | (17,329) | | | 33.0 | % |
Loss on sale of real estate | — | | | (7,539) | | | 7,539 | | | (100.0) | % | |
| Interest expense | Interest expense | (28,387) | | | (28,307) | | | (80) | | | 0.3 | % | Interest expense | (18,388) | | | (28,387) | | | 9,999 | | | (35.2) | % |
Loss on interest rate derivatives | Loss on interest rate derivatives | (5,866) | | | — | | | (5,866) | | | — | % | Loss on interest rate derivatives | — | | | (5,866) | | | 5,866 | | | (100.0) | % |
(Loss) gain on extinguishment of debt | (12,727) | | | 262 | | | (12,989) | | | (4957.6) | % | |
Loss on extinguishment of debt | | Loss on extinguishment of debt | (4,917) | | | (12,727) | | | 7,810 | | | (61.4) | % |
Other income | Other income | 3,037 | | | — | | | 3,037 | | | — | % | Other income | 454 | | | 3,037 | | | (2,583) | | | (85.1) | % |
Discontinued operations (6): | | |
Discontinued operations (5): | | Discontinued operations (5): | |
Income from operations of properties sold or held for sale | Income from operations of properties sold or held for sale | 23,083 | | | 20,071 | | | 3,012 | | | 15.0 | % | Income from operations of properties sold or held for sale | — | | | 23,083 | | | (23,083) | | | (100.0) | % |
Gain on sale of real estate, net | Gain on sale of real estate, net | 46,441 | | | — | | | 46,441 | | | — | % | Gain on sale of real estate, net | — | | | 46,441 | | | (46,441) | | | (100.0) | % |
Net income (loss) | $ | 23,180 | | | $ | (4,643) | | | $ | 27,823 | | | (599.2) | % | |
Net (loss) income | | Net (loss) income | $ | (27,337) | | | $ | 23,180 | | | $ | (50,517) | | | (217.9) | % |
______________________________
(1)Acquisitions:
2021: The Oxford and Assembly Eagles Landing
2022: Carlyle of Sandy Springs, Alder Park, Marietta Crossing
(2)Development/redevelopment:
Trove, Riverside Development (multifamily development adjacent to Riverside Apartments)
(3)Non-residential:
Includes revenues and expenses from retail and public parking garage operations at residential properties.
(4)Sold (classified as continuing operations):
2020 Office - John Marshall II, Monument II and 1227 25th Street
(5)Other (classified as continuing operations)
Watergate 600
(6)(5)Discontinued operations:
2021 Office - 1901 Pennsylvania Avenue, 515 King Street, 1220 19th Street, 1600 Wilson Boulevard, Silverline Center, Courthouse Square, 2000 M Street, 1140 Connecticut Avenue, Army Navy Club, 1775 Eye Street, Fairgate at Ballston and Arlington Tower
2021 Retail - Takoma Park, Westminster, Concord Centre, Chevy Chase Metro Plaza, 800 S. Washington Street, Randolph Shopping Center, Montrose Shopping Center and Spring Valley Village
Real Estate Rental Revenue
Real estate rental revenue from our apartment communities is comprised of (a) rent from operating leases of multifamily residential apartments with terms of approximately one year or less, recognized on a straight-line basis, (b) revenue from the recovery of operating expenses from our residents, (c) credit losses on lease related receivables, (d) revenue from leases of retail space at our apartment communities and (e) parking and other tenant charges.
Real estate rental revenue from same-store residential properties decreased $2.1increased $7.1 million, or 1.9%6.7%, to $112.7 million for the 2022 Period, compared to $105.6 million for the 2021 Period, compared to $107.7 million for the 2020 Period, primarily due to lowerhigher rental ratesincome ($1.85.6 million), higherlower rent abatements ($1.3 million) and lower latehigher one time fees ($0.10.4 million), partially offset by higher recoveries ($0.5 million), lower waived fees ($0.2 million), higher termination fees ($0.1 million), higher move-in charges ($0.1 million), lower credit losses ($0.1 million) and higher parking income ($0.10.2 million).
Real estate rental revenue from acquisitions increased $18.2 million due to the acquisitionacquisitions of Carlyle of Sandy Springs ($4.6 million) during the first quarter of 2022, Marietta Crossing ($2.9 million) and Alder Park ($2.1 million) during the 2022 Quarter, Assembly Eagles Landing ($6.1 million) during the fourth quarter of 2021 and The Oxford ($0.52.5 million) during the 2021 Quarter.third quarter of 2021.
Real estate rental revenue from development properties increased $3.5 million due to the continued lease-up of the Trove development, ($3.5 million). We placedwhich reached stabilization in the remainder of the Trove development costs into service during the firstfourth quarter of 2021.
Real estate rental revenue from non-residential activity increased due to lower credit losses ($0.1 million) and higher rental revenue ($0.1 million).
Average occupancy for residential properties for the 20212022 Period and 20202021 Period was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2021 | | September 30, 2020 | | Increase |
| Same-Store | | Non-Same-Store | | Total | | Same-Store | | Non-Same-Store | | Total | | Same-Store | | Non-Same-Store | | Total |
| 95.1 | % | | 57.6 | % | | 92.7 | % | | 94.7 | % | | 8.4 | % | | 89.8 | % | | 0.4 | % | | 49.2 | % | | 2.9 | % |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | September 30, 2021 | | % Change |
| Same-Store | | Non-Same-Store | | Total | | Same-Store | | Non-Same-Store | | Total | | Same-Store | | Non-Same-Store | | Total |
| 95.7 | % | | 94.4 | % | | 95.4 | % | | 95.1 | % | | 57.6 | % | | 92.7 | % | | 0.6 | % | | 36.8 | % | | 2.7 | % |
The increase in same-store average occupancy was primarily due to higher average occupancy at The Paramount, The Ashby, The MaxwellKenmore, 3801 Connecticut Avenue, Assembly Germantown, Assembly Herndon and Assembly Leesburg,Park Adams, partially offset by lower average occupancy at CascadeThe Ashby at Landmark.
McLean.
Real Estate Expenses
Residential real estate expenses as a percentage of residential revenue for the 2022 Period and 2021 Period were 36.8% and 2020 Period were 37.3% and 35.9%, respectively.
Real estate expenses from same-store residential properties increased $0.6$1.8 million, or 1.6%4.8%, to $38.6$40.4 million for the 20212022 Period, compared to $38.0$38.6 million for the nine months ended September 30, 2020,2021, primarily due to higher expenses related toadministrative ($0.5 million), real estate tax ($0.5 million), utilities ($0.3 million), insurance ($0.3 million) and contract maintenance and supplies ($0.40.2 million), utilities expenses.
Real estate expenses from acquisitions increased $7.8 million due to the acquisitions of Carlyle of Sandy Springs ($0.41.9 million) during the first quarter of 2022, Marietta Crossing ($1.1 million) and insuranceAlder Park ($0.30.7 million), partially offset by lower real estate tax expenses during the 2022 Quarter, Assembly Eagles Landing ($0.42.7 million) during the fourth quarter of 2021, and administrative expensesThe Oxford ($0.11.4 million). during the 2021 Quarter.
Other NOI
Other NOI classified as continuing operations decreasedincreased due to the sales of Monument II ($3.0 million) and 1227 25th Street ($2.2 million) during the fourth quarter of 2020, the sale of John Marshall II ($1.4 million) during the second quarter of 2020 and lowerhigher NOI at Watergate 600 ($0.20.4 million).
Other Income and Expenses
Property management expenses: These expenses include costs directly relatedIncrease of $1.0 million primarily due to the third-party managementacquisitions of property operationsThe Oxford and corporate managementAssembly Eagles Landing during the third and other costs.fourth quarters of 2021, the acquisitions of Carlyle of Sandy Springs, Marietta Crossing and Alder Park during the 2022 Period and Trove reaching stabilization during the fourth quarter of 2021.
General and administrative expenses: Increase of $1.2 million primarily due to corporate overhead no longer being allocated to office management due to the sales of the Office and Retail Portfolios in 2021 ($2.0 million), higher legal fees ($0.9 million), higher
Generaloffice rent ($0.6 million) from the commencement of the corporate office lease during the third quarter of 2021 and administrative expenses: Increase primarily due to a higher short-termrecruitment fees ($0.2 million). The increase was partially offset by lower short term incentive compensation expense ($2.01.8 million) and higher share-based compensation expenselower leasing expenses ($0.30.7 million), partially offset by lower legal fees ($0.4 million). during the 2022 Period.
Transformation costs: During the 2021 Period we incurred $4.8Increase of $1.8 million of costsprimarily due to higher employee time allocations ($1.2 million) related to the strategic transformation, including consulting, advisoryhigher software depreciation ($1.2 million) and termination benefits.higher software costs ($0.6 million), partially offset by lower severance expenses ($1.3 million).
Depreciation and amortization: Increase of $17.3 million primarily due to placing into service the remainderacquisitions of the Trove developmentAssembly Eagles Landing ($3.25.7 million), the acquisitionCarlyle of Sandy Springs ($4.8 million), Marietta Crossing ($4.0 million), Alder Park ($1.9 million) and The Oxford ($0.61.0 million) and higher depreciation and amortization at Watergate 600 ($0.20.6 million). These increases were partially offset by the dispositions of Monument IIlower depreciation and amortization at same-store residential properties ($2.90.6 million) and 1227 25th StreetTrove ($1.30.1 million) in the fourth quarter of 2020.
Loss on sale of real estate: The loss during the 2020 Period is due to the sale of John Marshall II..
Interest Expense: Interest expense by debt type for the nine months ended September 30, 20212022 and 20202021 was as follows (in thousands):
| | | Nine Months Ended September 30, | | | Nine Months Ended September 30, | |
Debt Type | Debt Type | 2021 | | 2020 | | $ Change | | % Change | Debt Type | 2022 | | 2021 | | $ Change | | % Change |
Notes payable | Notes payable | $ | 26,484 | | | $ | 25,623 | | | $ | 861 | | | 3.4 | % | Notes payable | $ | 15,331 | | | $ | 26,484 | | | $ | (11,153) | | | (42.1) | % |
Mortgage notes payable | Mortgage notes payable | — | | | 172 | | | (172) | | | (100.0) | % | Mortgage notes payable | 1,014 | | | — | | | 1,014 | | | 100.0 | % |
Line of credit | Line of credit | 2,464 | | | 4,404 | | | (1,940) | | | (44.1) | % | Line of credit | 2,326 | | | 2,464 | | | (138) | | | (5.6) | % |
Capitalized interest | Capitalized interest | (561) | | | (1,892) | | | 1,331 | | | (70.3) | % | Capitalized interest | (283) | | | (561) | | | 278 | | | (49.6) | % |
Total | Total | $ | 28,387 | | | $ | 28,307 | | | $ | 80 | | | 0.3 | % | Total | $ | 18,388 | | | $ | 28,387 | | | $ | (9,999) | | | (35.2) | % |
•Notes payable: IncreaseDecrease primarily due to the $350.0 million Green Bonds executed in December 2020, partially offset by the prepayment of all $250.0 million of our 4.95% Senior Notes in April 2020, prepayment of our $150.0 million 2015 Term Loan in December 2020, prepayment of the $150.0 million 2020 Term Loan in November 2020 and the prepayment during the 2021 Quarter of the $300.0 million of unsecured notes originallyduring the third quarter of 2021 that had been scheduled to mature in October 2022.2022 and the prepayment of a $150.0 million portion of the 2018 Term Loan during the third quarter of 2021.
•Mortgage notes payable: DecreaseIncrease due to repaymentthe assumed mortgages of $42.8 million and $33.7 million in the mortgage note secured by Yale West Apartments in January 2020.acquisitions of Marietta Crossing and Alder Park, respectively, during the 2022 Period. In September 2022, we extinguished the liabilities associated with these mortgages though defeasance arrangements.
•Line of credit: Decrease primarily due to lower weighted average borrowings of $46.5$7.5 million and a lowerweighted average interest rate of 3.34% in the 2022 Period, as compared to weighted average borrowings of $46.5 million and weighted average interest rate of 1.1% during the 2021 Period, as compared to $193.2 million and 1.6%, respectively, during the 2020 Period.
•Capitalized interest: Decrease primarily due to placing into service assets at Trove.ceased capitalization of interest on spending related to the multifamily development adjacent to Riverside Apartments due to a pause in development activities.
Loss on interest rate derivatives: We terminated five interest rate swap arrangements with an aggregate notional value of $150.0 million and recognized a $5.9 million loss on interest rate derivatives during the 2021 Period (see note 6 to the consolidated financial statements).
(Loss) gainLoss on extinguishment of debt: During the 2022 Period, we extinguished the liabilities associated with mortgage notes payable for Marietta Crossing and Alder Park through defeasance arrangements, recognizing aggregate losses on extinguishment of debt of $4.9 million. During the 2021 Period we recognized a $12.3 million loss on extinguishment of debt related to the prepayment of the $300.0 million of unsecured notes that were originally scheduled to mature in October 2022, a $0.2 million loss on extinguishment of debt related to the prepayment of a $150.0 million portion of the $250.0 million 2018 Term Loan and a $0.2 million loss on extinguishment of debt related to the renewal of our Revolving Credit Facility. We recognized a gain on extinguishment of debt $0.5 million during the first quarter of 2020 related to the prepayment of the mortgage note secured by Yale West Apartments. This was partially offset by a loss on extinguishment of debt of $0.2 million during the second quarter of 2020 related to the prepayment of all $250.0 million of our 4.95% Senior Notes that were scheduled to mature in October 2020.
Other income: WeIncome during the 2022 Period relates to real estate tax refunds ($0.4 million) received in the first quarter of 2022 on previously sold properties. During the 2021 Period, we recognized $1.3 million in other income related to a legal settlement, $1.3 million related to a real estate tax refund for an office property sold in 2018 and $0.4 million related to a construction easement at a retail property during the 2021 Period.
Discontinued operations:operations
Income from properties sold or held for sale: Increase primarily due to lower depreciation and amortization ($14.2 million), lower real estate expenses ($7.3 million) and lower management fees ($0.6 million), partially offset by lower operating income ($19.1 million)Decrease due to the sale of the Office Portfolio and the sale of the Retail Portfolio during the 2021 Period.Quarter.
Gain on sale of real estate:estate, net: The net gain during the 2021 Period is due to the salesgain on sale of the Retail Portfolio ($57.7 million), partially offset by the loss on sale of the Office Portfolio and the Retail Portfolio.($11.2 million).
Liquidity and Capital Resources
We believe we will have adequate liquidity over the next 12twelve months to operate our business and to meet our cash requirements. requirements, including meeting our debt obligations, capital commitments and contractual obligations, as well as the payment of dividends, on-going transformational costs and funding possible growth opportunities. Through our Office Portfolio and Retail Portfolio sales in 2021, which had a combined contract sales price of approximately $934.3 million, we executed strategic transactions that will allow us to pursue residential expansion in Sunbelt markets, meet our debt obligations for the next twelve months, and pay a dividend on a quarterly basis. In connection with our strategic transformation, we are designing our operating model for purposes of more efficiently and effectively supporting residential operations. We recognized $2.4 million and $6.6 million of transformation costs, net of amounts capitalized, on the condensed consolidated statements of operations during the 2022 Quarter and 2022 Period, respectively, and anticipate incurring approximately $3.0 - $4.0 million of additional transformation costs during 2022. We expect to realize significant operational benefits from this operating model redesign and complete its implementation in 2023.
We also believe we have adequate liquidity beyond October 2022, with only $143.0 million of scheduled debt maturities prior to 2027. As of October 26, 2021,24, 2022, we had cash and cash equivalents totaling $297.1$19.7 million and no outstanding balance and a full borrowing capacity of $700.0$634.0 million on our Revolving Credit Facility, resulting in a total liquidity position of $997.1$653.7 million.
Through our Office Portfolio and Retail Portfolio sales,While we executed strategic transactions that will allow us currently intend to pursue residential expansion in Southeastern markets, meet our debt obligations for the next twelve months, including our completed redemption of all $300.0 million of unsecured notes originally duecontinue to mature in 2022 during the 2021 Quarter, and pay a dividend on a quarterly basis. We have no debt maturities until 2023.
dividends at or about current levels
We, we will continue to assess the payment of our dividends on a quarterly basis. Future determinations regarding the declaration and payment of dividends, if any, will be at the discretion of our Boardboard of Trusteestrustees which considers, among other factors, trends in our levels of funds from operationsNAREIT FFO and ongoing capital requirements to achieve a targeted payout ratio.
Capital Requirements
As of the end of the 20212022 Quarter, we summarize our full-year 20212022 capital requirements as follows:are summarized below:
•Funding dividends and distributions to our shareholders;
•Approximately $25.0 - $30.0 million to invest in our existing portfolio of operating assets, including approximately $2.5 - $7.5 million to fund tenant-related capital requirements and leasing commissions;assets;
•Approximately $7.5$0.7 - $10.0$1.0 million to invest in our development and redevelopment projects; and
•Funding for potential property acquisitions throughout 2021 and additional debt reductions,2022, offset by proceeds from potential property dispositions.
There can be no assurance that our capital requirements will not be materially higher or lower than the above expectations. We currently believe that we will generate sufficient cash flow from operations and potential property sales and have access to the capital resources necessary to fund our requirements for the remainder of 2021.2022. However, as a result of the uncertainty of the general market conditions in the greater Washington, DC metro and SoutheastSunbelt regions, economic conditions affecting the ability to attract and retain tenants, declines in our share price, unfavorable changes in the supply of competing properties, or our properties not performing as expected, we may not generate sufficient cash flow from operations and property sales or otherwise have access to capital on favorable terms, or at all. If we are unable to obtain capital from other sources, we may need to alter capital spending to be materially different than what is stated above. 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 wouldwill 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.
OurAs of September 30, 2022, 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 | | $ | — | | | $ | — | | | $ | — | | | —% | |
2022 | 2022 | | — | | | — | | | — | | | —% | 2022 | | $ | — | | | $ | — | | | $ | — | | | —% |
2023 | 2023 | | 100,000 | | (1) | — | | | 100,000 | | | 2.3% | 2023 | | 100,000 | | (1) | — | | | 100,000 | | | 2.3% |
2024 | 2024 | | — | | | — | | | — | | | —% | 2024 | | — | | | — | | | — | | | —% |
2025 | 2025 | | — | | | — | | | — | | | —% | 2025 | | — | | | 43,000 | | | 43,000 | | | 4.0% |
2026 | | 2026 | | — | | | — | | | — | | | —% |
| Thereafter | Thereafter | | 400,000 | | | — | | | 400,000 | | | 4.5% | Thereafter | | 400,000 | | | — | | | 400,000 | | | 4.5% |
Scheduled principal payments | Scheduled principal payments | | $ | 500,000 | | | $ | — | | | $ | 500,000 | | | 4.1% | Scheduled principal payments | | $ | 500,000 | | | $ | 43,000 | | | $ | 543,000 | | | 4.1% |
| Net premiums/discounts | Net premiums/discounts | | (144) | | | — | | | (144) | | | Net premiums/discounts | | (122) | | | — | | | (122) | | |
Loan costs, net of amortization | Loan costs, net of amortization | | (3,033) | | | — | | | (3,033) | | | Loan costs, net of amortization | | (2,631) | | | — | | | (2,631) | | |
Total | Total | | $ | 496,823 | | | $ | — | | | $ | 496,823 | | | 4.1% | Total | | $ | 497,247 | | | $ | 43,000 | | | $ | 540,247 | | | 4.1% |
______________________________
(1)WashREITElme Communities entered into an interest rate swapsswap to effectively fix a LIBOR plus 100110 basis points floating interest rate to a 2.31% all-in fixed rate for the remaining $100.0 million portion of the 2018 Term Loan. The interest rates are fixed through the term loan maturity of July 2023.
The weighted average maturity for our debt is 7.56.3 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 secured and unsecured notes and term loans through open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Debt Covenants
Pursuant to the terms of our Revolving Credit Facility, 2018 Term Loan and secured and unsecured notes, we are subject to customary operating covenants and maintenance of various financial ratios.
Failure to comply with any of the covenants under our Revolving Credit Facility, 2018 Term Loan, secured and unsecured notes or other debt instruments could result in a default under one or more of our debt instruments. This could cause our lenders to accelerate the timing of payments and could therefore have a material adverse effect on our business, operations, financial condition and
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 September 30, 2021,2022, we were in compliance with the covenants related to our Revolving Credit Facility, 2018 Term Loan, and unsecured notes.
Common Equity
We have authorized for issuance 150.0 million common shares, of which 84.687.5 million shares were outstanding at September 30, 2021.2022.
On February 17, 2021, we entered into separate amendments to each of our existing equity distribution agreements (“Original Equity Distribution Agreements”) with each of Wells Fargo Securities, LLC, BNY Mellon Capital Markets, LLC, Capital One Securities, Inc., Citigroup Global Markets Inc., Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, KeyBanc Capital Markets Inc. and Truist Securities, Inc. (f/k/a SunTrust Robinson Humphrey, Inc.), each dated May 4, 2018 (collectively, as amended, the “Equity Distribution Agreements”). for our at-the-market program. Also on February 17, 2021, we entered into a separate equity distribution agreement with BTIG, LLC on the same terms as the Amended Equity Distribution Agreements (the “BTIG Equity Distribution Agreement”). On September 22, 2021, BTIG, LLC notified us that it was terminating the BTIG Equity Distribution Agreement, effective as of September 27, 2021. Pursuant to the Equity Distribution Agreements, we may sell, from time to time, up to an aggregate price of $550.0 million of our common shares of beneficial interest, $0.01 par value per share. Issuances of our common shares are made at market prices prevailing at the time of issuance. We may use net proceeds from the issuance of common shares under this program for general business purposes, including, without limitation, working capital, the acquisition, renovation, expansion, improvement, development or redevelopment of income producing properties or the repayment of debt. We did not issue common shares under the Equity Distribution Agreements during the 20212022 Quarter or 20202021 Quarter. Our issuances and net proceeds on the Equity Distribution Agreements and the Original Equity Distribution Agreements, respectively, for the 2022 Period and 2021 Period and 2020 Period arewere as follows ($ in thousands, except per share data):
| | | | Nine Months Ended September 30, | | | Nine Months Ended September 30, |
| | | 2021 | | 2020 | | | 2022 | | 2021 |
Issuance of common shares | Issuance of common shares | | 24 | | | 46 | | Issuance of common shares | | 1,032 | | | 24 | |
Weighted average price per share | Weighted average price per share | | $ | 22.06 | | | $ | 31.07 | | Weighted average price per share | | $ | 26.27 | | | $ | 22.06 | |
Net proceeds | Net proceeds | | $ | 467 | | | $ | 1,242 | | Net proceeds | | $ | 26,851 | | | $ | 467 | |
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 nine months ended September 30, 2022 and 2021 and 2020 arewere as follows ($ in thousands, except per share data):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
Issuance of common shares | Issuance of common shares | 19 | | | 23 | | | 65 | | | 64 | | Issuance of common shares | 12 | | | 19 | | | 32 | | | 65 | |
Weighted average price per share | Weighted average price per share | $ | 23.73 | | | $ | 22.51 | | | $ | 22.97 | | | $ | 25.12 | | Weighted average price per share | $ | 21.15 | | | $ | 23.73 | | | $ | 24.01 | | | $ | 22.97 | |
Net proceeds | Net proceeds | $ | 459 | | | $ | 516 | | | $ | 1,468 | | | $ | 1,581 | | Net proceeds | $ | 259 | | | $ | 459 | | | $ | 777 | | | $ | 1,468 | |
Preferred Equity
WashREIT’sElme Communities’ 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 WashREITElme Communities an additional financing tool that may be used to raise capital for future acquisitions or other business purposes. As of September 30, 2021,2022, no preferred shares were issued orand 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):
| | | Nine Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change |
| | 2021 | | 2020 | | $ | | % | | 2022 | | 2021 | | $ | | % |
Net cash provided by operating activities | Net cash provided by operating activities | $ | 66,383 | | | $ | 84,224 | | | $ | (17,841) | | | (21.2) | % | Net cash provided by operating activities | $ | 51,456 | | | $ | 66,383 | | | $ | (14,927) | | | (22.5) | % |
Net cash provided by (used in) investing activities | 823,241 | | | (5,787) | | | 829,028 | | | (14,325.7) | % | |
Net cash (used in) provided by investing activities | | Net cash (used in) provided by investing activities | (223,248) | | | 823,241 | | | (1,046,489) | | | (127.1) | % |
Net cash used in financing activities | Net cash used in financing activities | (589,512) | | | (88,759) | | | (500,753) | | | 564.2 | % | Net cash used in financing activities | (52,555) | | | (589,512) | | | 536,957 | | | (91.1) | % |
Net cash provided by operating activities decreased primarily due to the sales of the Office Portfolio and the Retail Portfolio duringin 2021 (see note 3 to the 2021 Quarter and costs associated with our strategic transformationconsolidated financial statements).
Net cash (used in) provided by investing activities increased primarily due to the sales of the Office Portfolio and the Retail Portfolioportfolios during the 2021 Quarter partially offset byPeriod and the acquisitionacquisitions of The OxfordMarietta Crossing, Alder Park and Carlyle of Sandy Springs during the 2021 Quarter.2022 Period.
Net cash used in financing activities increaseddecreased primarily due to the repaymenta higher volume of $300.0 million of unsecured notes indebt repayments during the 2021 QuarterPeriod and higher net repayments onproceeds from equity issuances and lower dividends paid in the Revolving Credit Facility during the 20212022 Period.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as of September 30, 20212022 that are reasonably likely to have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Funds From Operations
NAREIT FFO is a widely used measure of operating performance for real estate companies. In its 2018 NAREIT FFO Whitepaper Restatement, the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”)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 income (loss)loss for the three and nine months ended September 30, 20212022 and 20202021 (in thousands):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
Net income (loss) | $ | 31,319 | | | $ | (956) | | | $ | 23,180 | | | $ | (4,643) | | |
Net (loss) income | | Net (loss) income | $ | (10,739) | | | $ | 31,319 | | | $ | (27,337) | | | $ | 23,180 | |
Adjustments: | Adjustments: | | Adjustments: | |
Depreciation and amortization | Depreciation and amortization | 18,252 | | | 18,064 | | | 52,542 | | | 52,683 | | Depreciation and amortization | 23,632 | | | 18,252 | | | 69,871 | | | 52,542 | |
| Loss on sale of depreciable real estate | — | | | — | | | — | | | 7,539 | | |
| Discontinued operations: | Discontinued operations: | | Discontinued operations: | |
Depreciation and amortization | Depreciation and amortization | — | | | 12,406 | | | 22,904 | | | 37,106 | | Depreciation and amortization | — | | | — | | | — | | | 22,904 | |
| Gain on sale of depreciable real estate | Gain on sale of depreciable real estate | (46,441) | | | — | | | (46,441) | | | — | | Gain on sale of depreciable real estate | — | | | (46,441) | | | — | | | (46,441) | |
| NAREIT FFO | NAREIT FFO | $ | 3,130 | | | $ | 29,514 | | | $ | 52,185 | | | $ | 92,685 | | NAREIT FFO | $ | 12,893 | | | $ | 3,130 | | | $ | 42,534 | | | $ | 52,185 | |
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 nine months ended September 30, 2021.2022. We discuss the most critical estimates in our Annual Report on Form 10-K for the year ended December 31, 20202021 filed with the SEC on February 16, 2021.18, 2022.
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 September 30, 20212022 (in thousands):
| | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | Thereafter | | Total | | Fair Value | | 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | Thereafter | | Total | | Fair Value |
Unsecured fixed rate debt | Unsecured fixed rate debt | | | | | | | | | | | | | | | Unsecured fixed rate debt | | | | | | | | | | | | | | |
Principal | Principal | $ | — | | | $ | — | | | $ | 100,000 | | (1) | $ | — | | | $ | — | | | $ | 400,000 | | | $ | 500,000 | | | $ | 517,185 | | Principal | $ | — | | | $ | 100,000 | | (1) | $ | — | | | $ | — | | | $ | — | | | $ | 400,000 | | | $ | 500,000 | | | $ | 459,725 | |
Interest payments | Interest payments | $ | 576 | | | $ | 20,300 | | | $ | 19,340 | | | $ | 17,995 | | | $ | 17,995 | | | $ | 87,364 | | | $ | 163,570 | | | Interest payments | $ | 576 | | | $ | 19,340 | | | $ | 17,995 | | | $ | 17,995 | | | $ | 17,995 | | | $ | 69,369 | | | $ | 143,270 | | |
Interest rate on debt maturities | Interest rate on debt maturities | — | % | | — | % | | 2.3 | % | | — | % | | — | % | | 4.5 | % | | 4.1 | % | | Interest rate on debt maturities | — | % | | 2.3 | % | | — | % | | — | % | | — | % | | 4.5 | % | | 4.1 | % | |
| | | Unsecured variable rate debt | | Unsecured variable rate debt | |
Principal | | Principal | $ | — | | | $ | — | | | $ | — | | | $ | 43,000 | | | $ | — | | | $ | — | | | $ | 43,000 | | | $ | 43,000 | |
Variable interest rate on debt maturities | | Variable interest rate on debt maturities | | 4.0 | % | | 4.0 | % | |
(1)IncludesRepresents a $100.0 million term loan with a floating interest rate. The interest rate on the $100.0 million term loan is effectively fixed by interest rate swap arrangements at 2.31%.
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 September 30, 20212022 and December 31, 20202021 and their respective fair values (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Notional Amount | | | | Floating Index Rate | | | | | | Fair Value as of: |
| Fixed Rate | | | Effective Date | | Expiration Date | | September 30, 2021 | | December 31, 2020 |
$ | 100,000 | | | 1.205% | | One-Month USD-LIBOR | | 3/31/2017 | | 7/21/2023 | | $ | (1,689) | | | $ | (2,671) | |
50,000 | | | 1.208% | | One-Month USD-LIBOR | | 3/31/2017 | | 7/21/2023 | | — | | | (1,338) | |
25,000 | | | 2.610% | | One-Month USD-LIBOR | | 6/29/2018 | | 7/21/2023 | | — | | | (1,562) | |
25,000 | | | 2.610% | | One-Month USD-LIBOR | | 6/29/2018 | | 7/21/2023 | | — | | | (1,562) | |
25,000 | | | 2.610% | | One-Month USD-LIBOR | | 6/29/2018 | | 7/21/2023 | | — | | | (1,561) | |
25,000 | | | 2.610% | | One-Month USD-LIBOR | | 6/29/2018 | | 7/21/2023 | | — | | | (1,561) | |
$ | 250,000 | | | | | | | | | | | $ | (1,689) | | | $ | (10,255) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Notional Amount | | | | Floating Index Rate | | | | | | Fair Value as of: |
| Fixed Rate | | | Effective Date | | Expiration Date | | September 30, 2022 | | December 31, 2021 |
$ | 100,000 | | | 1.205% | | One-Month USD-LIBOR | | 3/31/2017 | | 7/21/2023 | | $ | 2,463 | | | $ | (821) | |
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We enter into debt obligations primarily to support general corporate purposes including acquisition of real estate properties, capital improvements and working capital needs.
In the second quarter of 2021 we determined that the hedged transactions for five interest rate swap arrangements with an aggregate notional value of $150.0 million were probable not to occur and that these interest swap arrangements were no longer effective cash flow hedges as of June 30, 2021 due to our intention to prepay a $150.0 million portion of the 2018 Term Loan. As a result, we recognized a loss of $5.8 million for the second quarter of 2021, which was recorded to Loss on interest rate derivatives on our condensed consolidated statements of operations. On September 27, 2021, we prepaid a $150.0 million portion of the 2018 Term Loan. In connection with the prepayment, we terminated the five interest rate swap arrangements with an aggregate notional value of $150.0 million. We currently expect to hold the remaining $100.0 million portion of the 2018 Term Loan until maturity. The interest rate swap arrangement with a notional value of $100.0 million related to the remaining portion of the 2018 Term Loan is an effective cash flow hedge as of September 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, 20202021 filed with the SEC on February 16, 2021.18, 2022. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Debt Financing.”
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’sElme Communities’ 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’sElme Communities’ internal control over financial reporting.
PART II
OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None.
ITEM 1A: RISK FACTORS
Other than as noted below, thereThere 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, 20202021 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 residential 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.18, 2022.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4: MINE SAFETY DISCLOSURES
None.
ITEM 5: OTHER INFORMATION
None.
ITEM 6: EXHIBITS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Incorporated by Reference | | |
Exhibit Number | Exhibit Description | | Form | | File Number | | Exhibit | | Filing Date | | Filed Herewith |
3.1 | | | 10-K | | 001-06622 | | 3.1 | | 2/16/2021 | | |
3.2 | | | 10-Q | | 001-06622 | | 3.2 | | 7/31/2017 | | |
10.1 | | | 10-Q | | 001-06622 | | 10.1 | | 8/03/2021 | | |
10.2 | | | | | | | | | | | X |
31.1 | | | | | | | | | | | X |
31.2 | | | | | | | | | | | X |
31.3 | | | | | | | | | | | X |
32 | | | | | | | | | | | 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 | | | 10-K | | 001-06622 | | 3.1 | | 2/16/2021 | | |
3.2 | | | 8-K | | 001-06622 | | 3.1 | | 10/17/2022 | | |
3.3 | | | 8-K | | 001-06622 | | 3.2 | | 10/17/2022 | | |
31.1 | | | | | | | | | | | X |
31.2 | | | | | | | | | | | X |
31.3 | | | | | | | | | | | X |
32 | | | | | | | | | | | 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) | | | | | | | | | | |
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 TRUSTELME COMMUNITIES |
| | |
| | /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: October 29, 202128, 2022