Elme munities(ELME) - 2018 Q4 - Annual Report

PART I Item 1. Business Washington REIT is an equity REIT focused on income-producing properties in the Washington metro region, managing a diversified portfolio of office, multifamily, and retail assets - Washington REIT is a self-administered equity REIT, operating in the greater Washington metro region, focusing on ownership and operation of income-producing real property[11] - The company's strategy involves generating returns and maximizing shareholder value through proactive asset management, prudent capital allocation, and investing in properties with potential for improved operating results and increased value, primarily within the Washington metro region's Beltway[12] Washington Metro Region Real Estate Market Statistics (2018 vs. 2017) | Metric | 2018 | 2017 | |:---------------------------------------------|:------------|:------------| | Office: | | | | Average asking rent per square foot | $42.07 | $42.14 | | Total vacancy rate at year end | 16.4% | 17.0% | | Net absorption (millions of square feet) | 2.0 | (0.1) | | Space under construction (millions sq ft) | 11.1 | 11.8 | | Multifamily: | | | | Increase in net effective rents (Class A & B)| 2.5% | 0.7% | | Stabilized vacancy rate (Class A & B) | 4.5% | 5.0% | | New apartment deliveries ( of units) | 11,401 | 13,618 | | Retail: | | | | Increase in rental rates (neighborhood) | 5.6% | 3.0% | | Vacancy at neighborhood centers | 5.5% | 5.6% | | Net absorption (millions of square feet) | 0.3 | (0.3) | Portfolio Composition and Revenue by Segment (as of Dec 31, 2018) | Segment | Percent Leased at Dec 31, 2018 | % of Total Real Estate Rental Revenue 2018 | % of Total Real Estate Rental Revenue 2017 | % of Total Real Estate Rental Revenue 2016 | |:------------|:-------------------------------|:-------------------------------------------|:-------------------------------------------|:-------------------------------------------| | Office | 94% | 53% | 52% | 53% | | Multifamily | 97% | 28% | 29% | 27% | | Retail | 93% | 19% | 19% | 20% | | Total | | 100% | 100% | 100% | Total Real Estate Rental Revenue (2016-2018) | Year | Total Real Estate Rental Revenue (in millions) | |:-----|:-----------------------------------------------| | 2018 | $336.9 | | 2017 | $325.1 | | 2016 | $313.3 | - Approximately one quarter of office leases (by gross annual rents) are set to expire over the next two years, with Arlington Tower and Watergate 600 accounting for a significant portion[23] - The company's tenant base is concentrated in the professional/business services and government sectors (over 40% of payroll jobs in the Washington metro area), making it susceptible to trends in these sectors[24] - No single tenant accounted for more than 5% of real estate rental revenue in 2018, 2017, or 2016; federal government tenants collectively accounted for less than 1% in 2018[25] - Washington REIT believes it qualifies as a REIT under Sections 856-860 of the Internal Revenue Code and intends to maintain this status, requiring distribution of 90% of REIT taxable income annually[31] Item 1A. Risk Factors Washington REIT faces material risks from real estate operations, regional economic conditions, financing, and maintaining its REIT tax status - Performance and value are subject to risks from real estate assets and the industry, including economic downturns, tenant financial condition, consumer confidence, job losses, competition, and operating costs[36][37] - The company is highly dependent on the Washington metropolitan region's economic and regulatory climate, with all properties located there, increasing market-dependent risk[38] - Difficulties or delays in renewing leases or re-leasing space, especially for major tenants, could significantly impact financial condition and ability to make distributions[39][40][41] - Real estate investments are illiquid, potentially limiting the ability to quickly adjust the portfolio in response to changing market conditions and impacting profitability[43][44] - Significant reductions in federal government spending or changes to its timing could adversely affect tenants (many are federal contractors) and the regional economy, impacting the company's financial condition[47][48] - Property development/redevelopment activities carry risks such as cost overruns, delays, inability to obtain permits, and failure to achieve expected occupancy or rents[49][50][51][52] - A shift from brick-and-mortar retail to e-commerce could decrease retail tenants' sales, adversely affecting occupancy and rental rates at the company's retail properties[55][56] - The use of debt, including refinancing risk, rising interest rates, and debt covenants, could limit additional financing, affect share prices, or lead to insufficient cash flow for operations and distributions[104][105][109][110][112][113][126][127][128] - Maintaining REIT tax status is crucial but involves complex Code provisions and factual determinations; failure to qualify would result in significant corporate-level taxes and reduced distributions[147][148][151][152][153] - Compliance with REIT requirements may force the company to forego or liquidate otherwise attractive investments, limit fee income, and restrict hedging strategies[154][155][156][157][162] - Dividends payable by REITs are generally taxed at ordinary income rates for individual shareholders, potentially making REIT investments less attractive compared to C corporations[163] Item 1B. Unresolved Staff Comments There are no unresolved staff comments to report Item 2. Properties Washington REIT's real estate portfolio as of December 31, 2018, comprises 48 office, multifamily, and retail properties, with detailed occupancy and area data - As of December 31, 2018, Washington REIT owned a diversified portfolio of 48 properties, including 19 office, 13 multifamily, and 16 retail properties, plus land for development[20][180] Portfolio Summary as of December 31, 2018 | Property Type | Number of Properties | Total Net Rentable Square Feet / Units | |:--------------|:---------------------|:---------------------------------------| | Office | 19 | 3,735,000 sq ft | | Retail | 16 | 2,338,000 sq ft | | Multifamily | 13 | 4,268 units (3,594,000 sq ft) | | Total | 48 | 9,667,000 sq ft / 4,268 units | Portfolio Occupancy Rates as of December 31, 2018 | Segment | Percent Leased | Ending Occupancy | |:------------|:---------------|:-----------------| | Office | 93.6% | 92.3% | | Retail | 92.6% | 91.9% | | Multifamily | 96.5% | 94.8% | Item 3. Legal Proceedings Washington REIT has no material legal proceedings to report - There are no legal proceedings to report[185] Item 4. Mine Safety Disclosures This item is not applicable to Washington REIT - Mine Safety Disclosures are not applicable (N/A)[186] PART II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Washington REIT's common shares trade on the NYSE under WRE, with 3,587 shareholders as of February 14, 2019, and Q4 2018 share repurchases for tax withholding - Washington REIT's shares trade on the New York Stock Exchange under the symbol WRE, with 3,587 shareholders of record as of February 14, 2019[189] Issuer Repurchases of Equity Securities (Q4 2018) | Period | Total Number of Shares Purchased | Average Price Paid per Share ($) | |:-----------------------------|:---------------------------------|:-----------------------------| | October 1 - October 31, 2018 | — | $— | | November 1 - November 30, 2018 | 57 | $28.93 | | December 1 - December 31, 2018 | 34,397 | $23.00 | | Total | 34,454 | $23.01 | - Repurchased shares represent restricted shares surrendered by employees to satisfy statutory minimum tax withholding obligations in connection with the vesting of restricted shares[189] Item 6. Selected Financial Data Selected historical financial data for Washington REIT for the five years ended December 31, 2018, covers key income statement, balance sheet, and cash flow items Selected Financial Data (2014-2018, in thousands) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | |:---------------------------------------------------------------------|:--------------|:--------------|:--------------|:--------------|:--------------| | Real estate rental revenue | $336,890 | $325,078 | $313,264 | $306,427 | $288,637 | | Net income attributable to the controlling interests | $25,630 | $19,668 | $119,339 | $89,740 | $111,639 | | Net income attributable to the controlling interests per share – diluted | $0.32 | $0.25 | $1.65 | $1.31 | $1.67 | | Total assets | $2,417,104 | $2,359,426 | $2,253,619 | $2,191,168 | $2,108,317 | | Line of credit | $188,000 | $166,000 | $120,000 | $105,000 | $50,000 | | Mortgage notes payable, net | $59,792 | $95,141 | $148,540 | $418,052 | $417,194 | | Notes payable, net | $995,397 | $894,358 | $843,084 | $743,181 | $743,149 | | Shareholders' equity | $1,068,127 | $1,094,971 | $1,050,946 | $835,649 | $819,555 | | Cash dividends declared per share | $1.20 | $1.20 | $1.20 | $1.20 | $1.20 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section reviews Washington REIT's financial condition and results of operations, covering business outlook, operating results, investment, financing, capital, liquidity, and critical accounting policies - Key financial and non-financial indicators for evaluating performance include Net Operating Income (NOI), NAREIT Funds From Operations (FFO), ending occupancy, leased percentage, and leasing activity[196] - Properties are categorized as 'same-store,' 'non-same-store,' or 'discontinued operations' for comparative operating performance analysis[197] Overview This overview highlights Washington REIT's 2018 operating results, investment and financing activities, and anticipated 2019 capital requirements, noting a 30.3% increase in net income Operating Results (2018 vs. 2017, in thousands) | Metric | 2018 | 2017 | Change | % Change | |:-------------------------------------------------|:----------|:----------|:----------|:---------| | Net income attributable to the controlling interests | $25,630 | $19,668 | $5,962 | 30.3% | | NOI | $220,660 | $209,428 | $11,232 | 5.4% | | NAREIT FFO | $146,249 | $140,982 | $5,267 | 3.7% | - Increase in net income primarily due to lower real estate impairment charges ($31.3 million) and higher NOI ($11.2 million), partially offset by lower gains on sale of real estate ($22.4 million), higher depreciation and amortization ($9.2 million), and higher interest expense ($3.6 million)[200][201] - Higher NOI driven by income from acquisitions ($20.0 million) and higher same-store NOI ($5.6 million), partially offset by income loss from properties sold ($14.4 million)[202] - Significant investment transactions in 2018 included the acquisition of Arlington Tower for $250.0 million and the disposition of Braddock Metro Center for $93.0 million and 2445 M Street for $101.6 million[204] - Financing activities in 2018 included an amended $700.0 million unsecured revolving credit facility, a $250.0 million five-year unsecured term loan, and the issuance of 1.2 million common shares under an at-the-market program, raising $35.5 million in net proceeds[205] - Anticipated 2019 capital requirements include $80-$85 million for existing portfolio investments, $65-$70 million for development/redevelopment projects, and funding for potential acquisitions, offset by dispositions[207][254] Results of Operations This section details financial performance for 2018 vs 2017 and 2017 vs 2016, focusing on Net Operating Income (NOI) and its components, including rental income, expenses, depreciation, and impairment charges - NOI is a non-GAAP measure defined as real estate rental revenue less real estate expenses, used to reflect the impact of occupancy rates, rental rates, and operating costs on an unleveraged basis[209][211] NOI Reconciliation to Net Income Attributable to Controlling Interests (2018 vs. 2017, in thousands) | Metric | 2018 | 2017 | $ Change | % Change | |:-------------------------------------------------|:--------------|:--------------|:--------------|:--------------| | Real estate rental revenue | $336,890 | $325,078 | $11,812 | 3.6% | | Real estate expenses | $116,230 | $115,650 | $580 | 0.5% | | NOI | $220,660 | $209,428 | $11,232 | 5.4% | | Depreciation and amortization | $(121,228)$ | $(112,056)$ | $(9,172)$ | 8.2% | | General and administrative expenses | $(22,089)$ | $(22,580)$ | $491 | (2.2)% | | Real estate impairment | $(1,886)$ | $(33,152)$ | $31,266 | (94.3)% | | Gain on sale of real estate | $2,495 | $24,915 | $(22,420)$ | (90.0)% | | Interest expense | $(51,144)$ | $(47,534)$ | $(3,610)$ | 7.6% | | Loss on extinguishment of debt | $(1,178)$ | $— | $(1,178)$ | | | Net income attributable to controlling interests | $25,630 | $19,668 | $5,962 | 30.3% | Same-Store Real Estate Rental Revenue (2018 vs. 2017, in thousands) | Revenue Component | 2018 | 2017 | $ Change | % Change | |:----------------------------------|:----------|:----------|:---------|:---------| | Minimum base rent | $246,650 | $239,716 | $6,934 | 2.9% | | Recoveries from tenants | $28,582 | $27,153 | $1,429 | 5.3% | | Provision for doubtful accounts | $(2,114)$ | $(1,252)$ | $(862)$ | 68.8% | | Lease termination fees | $1,834 | $2,025 | $(191)$ | (9.4)% | | Parking and other tenant charges | $11,665 | $10,859 | $806 | 7.4% | | Total same-store rental revenue | $286,617| $278,501| $8,116 | 2.9% | Same-Store Real Estate Rental Revenue by Segment (2018 vs. 2017, in thousands) | Segment | 2018 | 2017 | $ Change | % Change | |:------------|:----------|:----------|:---------|:---------| | Office | $128,201 | $123,625 | $4,576 | 3.7% | | Multifamily | $95,194 | $92,486 | $2,708 | 2.9% | | Retail | $63,222 | $62,390 | $832 | 1.3% | | Total | $286,617| $278,501| $8,116 | 2.9% | - Acquisitions increased real estate rental revenue by $22.4 million (Arlington Tower) and $4.3 million (Watergate 600). Dispositions decreased revenue by $10.5 million (Braddock Metro Center), $9.7 million (2445 M Street), and $2.8 million (Walker House Apartments)[218] Ending Occupancy by Segment (Dec 31, 2018 vs. 2017) | Segment | Same-Store 2018 | Same-Store 2017 | Same-Store Change | Total 2018 | Total 2017 | Total Change | |:------------|:----------------|:----------------|:------------------|:-----------|:-----------|:-------------| | Office | 91.7% | 92.0% | (0.3)% | 92.3% | 90.1% | 2.2% | | Multifamily | 94.8% | 94.1% | 0.7% | 94.8% | 94.1% | 0.7% | | Retail | 91.9% | 91.2% | 0.7% | 91.9% | 91.2% | 0.7% | | Total | 93.0% | 92.6% | 0.4% | 93.1% | 91.8% | 1.3% | Leasing Activity (2018) | Segment | Square Feet (thousands) | Average Rental Rate (per sq ft) | % Rental Rate Increase | Leasing Costs (per sq ft) | Free Rent (weighted average months) | Retention Rate | |:--------|:------------------------|:--------------------------------|:-----------------------|:--------------------------|:------------------------------------|:---------------| | Office | 325 | $49.22 | 10.3% | $54.86 | 5.0 | 58.1% | | Retail | 307 | $18.48 | 5.8% | $6.54 | 0.6 | 95.5% | | Total | 632 | $34.31 | 9.0% | $31.42 | 3.9 | 75.2% | Same-Store Real Estate Expenses by Segment (2018 vs. 2017, in thousands) | Segment | 2018 | 2017 | $ Change | % Change | |:------------|:----------|:----------|:---------|:---------| | Office | $48,459 | $47,295 | $1,164 | 2.5% | | Multifamily | $37,214 | $36,349 | $865 | 2.4% | | Retail | $15,674 | $15,186 | $488 | 3.2% | | Total | $101,347| $98,830| $2,517 | 2.5% | - Depreciation and Amortization increased due to acquisitions (Arlington Tower, Watergate 600) and same-store properties, partially offset by dispositions[224] - Real estate impairment decreased significantly from $33.152 million in 2017 to $1.886 million in 2018, primarily due to impairment charges on 2445 M Street and Braddock Metro Center in 2017[226] Interest Expense by Debt Type (2018 vs. 2017, in thousands) | Debt Type | 2018 | 2017 | $ Change | % Change | |:--------------------|:----------|:----------|:---------|:---------| | Notes payable | $39,818 | $37,487 | $2,331 | 6.2% | | Mortgage notes payable | $3,926 | $4,804 | $(878)$ | (18.3)% | | Line of credit | $9,491 | $6,207 | $3,284 | 52.9% | | Capitalized interest | $(2,091)$ | $(964)$ | $(1,127)$| 116.9% | | Total | $51,144 | $47,534 | $3,610 | 7.6% | - A $1.2 million non-cash loss on extinguishment of debt was recognized in 2018 due to the write-off of unamortized loan origination costs from refinancing a term loan and expanding the revolving credit facility[230] - The adoption of ASU 2016-02 (Leases) in 2019 is estimated to reduce annual earnings by $1.0 - $1.5 million due to indirect leasing costs no longer qualifying for capitalization[231] NOI Reconciliation to Net Income Attributable to Controlling Interests (2017 vs. 2016, in thousands) | Metric | 2017 | 2016 | $ Change | % Change | |:-------------------------------------------------|:--------------|:--------------|:--------------|:--------------| | Real estate rental revenue | $325,078 | $313,264 | $11,814 | 3.8% | | Real estate expenses | $115,650 | $115,013 | $637 | 0.6% | | NOI | $209,428 | $198,251 | $11,177 | 5.6% | | Depreciation and amortization | $(112,056)$ | $(108,406)$ | $(3,650)$ | 3.4% | | Acquisition costs | $— | $(1,178)$ | $1,178 | (100.0)% | | General and administrative expenses | $(22,580)$ | $(19,545)$ | $(3,035)$ | 15.5% | | Real estate (impairment) and casualty gain, net | $(33,152)$ | $676 | $(33,828)$ | (5,004.1)% | | Gain on sale of real estate | $24,915 | $101,704 | $(76,789)$ | (75.5)% | | Interest expense | $(47,534)$ | $(53,126)$ | $5,592 | (10.5)% | | Net income attributable to controlling interests | $19,668 | $119,339 | $(99,671)$| (83.5)% | Same-Store Real Estate Rental Revenue (2017 vs. 2016, in thousands) | Revenue Component | 2017 | 2016 | $ Change | % Change | |:----------------------------------|:----------|:----------|:---------|:---------| | Minimum base rent | $227,661 | $218,769 | $8,892 | 4.1% | | Recoveries from tenants | $31,297 | $31,064 | $233 | 0.8% | | Provision for doubtful accounts | $(1,191)$ | $(960)$ | $(231)$ | 24.1% | | Lease termination fees | $1,881 | $1,350 | $531 | 39.3% | | Parking and other tenant charges | $10,392 | $9,332 | $1,060 | 11.4% | | Total same-store rental revenue | $270,040| $259,555| $10,485| 4.0% | Same-Store Real Estate Rental Revenue by Segment (2017 vs. 2016, in thousands) | Segment | 2017 | 2016 | $ Change | % Change | |:------------|:----------|:----------|:---------|:---------| | Office | $137,447 | $128,815 | $8,632 | 6.7% | | Multifamily | $70,203 | $69,174 | $1,029 | 1.5% | | Retail | $62,390 | $61,566 | $824 | 1.3% | | Total | $270,040| $259,555| $10,485| 4.0% | Ending Occupancy (Dec 31, 2017 vs. 2016) | Segment | Same-Store 2017 | Same-Store 2016 | Same-Store Change | Total 2017 | Total 2016 | Total Change | |:------------|:----------------|:----------------|:------------------|:-----------|:-----------|:-------------| | Office | 93.1% | 91.7% | 1.4% | 90.1% | 91.1% | (1.0)% | | Multifamily | 93.6% | 95.3% | (1.7)% | 94.1% | 94.5% | (0.4)% | | Retail | 91.2% | 95.7% | (4.5)% | 91.2% | 95.7% | (4.5)% | | Total | 92.7% | 94.0% | (1.3)% | 91.8% | 93.5% | (1.7)% | Leasing Activity (2017) | Segment | Square Feet (millions) | Average Rental Rate (per sq ft) | % Rental Rate Increase | Leasing Costs (per sq ft) | Free Rent (weighted average months) | Retention Rate | |:--------|:-----------------------|:--------------------------------|:-----------------------|:--------------------------|:------------------------------------|:---------------| | Office | 0.5 | $43.63 | 8.8% | $81.25 | 9.2 | 51.4% | | Retail | 0.3 | $29.20 | 16.5% | $12.81 | 1.4 | 66.9% | | Total | 0.8 | $38.35 | 10.8% | $56.18 | 7.0 | 57.2% | Same-Store Real Estate Expenses by Segment (2017 vs. 2016, in thousands) | Segment | 2017 | 2016 | $ Change | % Change | |:------------|:----------|:----------|:---------|:---------| | Office | $51,761 | $50,159 | $1,602 | 3.2% | | Multifamily | $27,203 | $27,655 | $(452)$ | (1.6)% | | Retail | $15,186 | $15,860 | $(674)$ | (4.2)% | | Total | $94,150 | $93,674| $476 | 0.5% | - Real estate impairment losses of $24.1 million and $9.1 million were recognized in 2017 for 2445 M Street and Braddock Metro Center, respectively[246] Interest Expense by Debt Type (2017 vs. 2016, in thousands) | Debt Type | 2017 | 2016 | $ Change | % Change | |:--------------------|:----------|:----------|:---------|:---------| | Notes payable | $37,487 | $33,439 | $4,048 | 12.1% | | Mortgage notes payable | $4,804 | $14,654 | $(9,850)$| (67.2)% | | Line of credit | $6,207 | $5,701 | $506 | 8.9% | | Capitalized interest | $(964)$ | $(668)$ | $(296)$ | 44.3% | | Total | $47,534 | $53,126 | $(5,592)$| (10.5)%| Liquidity and Capital Resources This section details Washington REIT's liquidity and capital resources, including cash, credit facility availability, future capital requirements, debt structure, compliance with covenants, and equity financing activities - As of February 14, 2019, Washington REIT had $15.6 million in cash and cash equivalents and $496.0 million available under its $700.0 million Revolving Credit Facility[253] - Potential liquidity sources include cash flow from operations, borrowings under credit facilities, equity issuances, preferred shares, long-term debt financings, joint venture investments, and asset sales[253] - Expected 2019 capital requirements: $80-$85 million for existing portfolio, $25-$30 million for tenant-related capital/leasing commissions, and $65-$70 million for development/redevelopment projects[254] - The company primarily uses secured or unsecured, corporate-level debt, including unsecured notes, revolving credit facilities, bank term loans, and mortgages, with a weighted average maturity of 3.7 years[256][259] Future Debt Principal Payments (as of Dec 31, 2018, in thousands) | Year | Mortgage Notes Payable ($) | Unsecured Notes Payable/Term Loans ($) | Revolving Credit Facility ($) | Total Debt ($) | Average Interest Rate (%) | |:-----------|:-----------------------|:-----------------------------------|:--------------------------|:--------------|:----------------------| | 2019 | $— | $— | $— | $— | | | 2020 | $— | $250,000 | $— | $250,000 | 5.1% | | 2021 | $— | $150,000 | $— | $150,000 | 2.7% | | 2022 | $44,517 | $300,000 | $— | $344,517 | 4.0% | | 2023 | $— | $250,000 | $188,000 | $438,000 | 3.1% | | Thereafter | $— | $50,000 | $— | $50,000 | 7.4% | | Total | $44,517 | $1,000,000 | $188,000 | $1,232,517| 3.9% | - Debt agreements contain financial covenants, including ratios for total debt to total asset value, secured indebtedness to total asset value, adjusted EBITDA to fixed charges, and net operating income from unencumbered properties to unsecured interest expense. The company was in compliance as of December 31, 2018[262][264][266] - During 2018, Washington REIT issued approximately 1.2 million common shares under its at-the-market program at an average price of $31.18 per share, generating $35.5 million in net proceeds[270][522] - No preferred shares were issued and outstanding as of December 31, 2018[272] - Capital commitments for 2019 include approximately $65-$70 million for development/redevelopment projects (Trove, Riverside Apartments adjacent development, Spring Valley Village) and $32.5 million for major renovation projects across office, multifamily, and retail portfolios[273][274] Contractual Obligations (as of Dec 31, 2018, in thousands) | Obligation Type | Total ($) | Less than 1 year ($) | 1-3 years ($) | 4-5 years ($) | After 5 years ($) | |:----------------------------|:--------------|:-----------------|:--------------|:--------------|:--------------| | Long-term debt | $1,409,808 | $46,208 | $848,654 | $452,258 | $62,688 | | Purchase obligations | $7,983 | $2,798 | $5,185 | $— | $— | | Tenant-related capital | $6,240 | $6,240 | $— | $— | $— | | Building capital | $7,514 | $7,514 | $— | $— | $— | | Operating leases | $13,601 | $323 | $863 | $520 | $11,895 | Historical Cash Flows (2016-2018, in thousands) | Cash Flow Activity | 2018 | 2017 | 2016 | |:------------------------------------|:------------|:------------|:------------| | Cash provided by operating activities | $147,369 | $130,626 | $114,725 | | Cash used in investing activities | $(38,942)$ | $(196,354)$ | $(63,492)$ | | Cash (used in) provided by financing activities | $(113,410)$ | $60,729 | $(70,819)$ | Capital Improvements and Development Costs (2016-2018, in thousands) | Category | 2018 ($) | 2017 ($) | 2016 ($) | |:--------------------------------------------|:-----------|:-----------|:-----------| | Acquisition related | $13,489 | $24,556 | $8,644 | | Expansions and major renovations | $26,045 | $14,629 | $10,869 | | Development/redevelopment | $34,806 | $18,150 | $22,572 | | Tenant improvements (including first generation leases) | $24,914 | $16,926 | $29,657 | | Total accretive capital improvements | $99,254| $74,261| $71,742| | Other capital improvements | $6,622 | $4,404 | $7,924 | | Total | $105,876| $78,665| $79,666| - No off-balance sheet arrangements as of December 31, 2018, that are reasonably likely to have a material effect on financial condition or results of operations[291] Forward-Looking Statements This section clarifies that the Form 10-K contains forward-looking statements, subject to various known and unknown risks that could cause actual results to differ materially from projections - Forward-looking statements are subject to known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially from projections[292] - Key risk factors include real estate ownership risks, economic health of the Washington Metro region, interest rate fluctuations, federal government spending changes, third-party provider risks, operating expense control, tenant economic health, competition, e-commerce shifts, financing availability, compliance with laws, terrorist/cyber attacks, natural disasters, key personnel retention, and maintaining REIT status[292] Funds From Operations NAREIT FFO is a non-GAAP supplemental measure of operating performance for real estate companies, calculated as net income adjusted for property sales, impairments, and depreciation/amortization - NAREIT FFO is a non-GAAP supplemental measure to net income, used to understand operating performance without real estate depreciation and amortization, which can distort property-level results[294] - NAREIT FFO is defined as net income (GAAP) excluding gains/losses from property sales, impairments of depreciable real estate, and real estate depreciation and amortization[294] NAREIT FFO Calculation (2016-2018, in thousands) | Metric | 2018 ($) | 2017 ($) | 2016 ($) | |:--------------------------------------------|:-----------|:-----------|:-----------| | Net income | $25,630 | $19,612 | $119,288 | | Adjustments: | | | | | Depreciation and amortization | $121,228 | $112,056 | $108,406 | | Impairment of depreciable real estate | $1,886 | $33,152 | $— | | Gain on sale of depreciable real estate | $(2,495)$ | $(23,838)$ | $(101,704)$| | NAREIT FFO | $146,249| $140,982| $125,990| Critical Accounting Policies and Estimates This section outlines Washington REIT's critical accounting policies and estimates, requiring significant judgment in areas like real estate acquisitions, doubtful accounts, capitalized interest, impairment, stock-based compensation, and federal income taxes - Critical accounting estimates include estimated useful lives of real estate assets, fair value of acquired leases, cost reimbursement income, bad debts, contingencies, and litigation[296] - Real estate acquisitions are accounted for as asset acquisitions, with acquired assets and liabilities recorded at fair value, including physical assets and in-place leases (absorption cost, tenant origination cost, leasing commissions, net lease intangible)[298][299][395][396][397] - Allowance for doubtful accounts is established based on historical experience and monthly review of receivables, considering tenant payment history and financial condition[301][387] - Interest costs incurred on borrowing obligations are capitalized while qualifying assets are being readied for their intended use and amortized over the useful life of related assets[302][392] - Impairment losses on long-lived assets are recognized if undiscounted cash flows are less than the carrying amount, adjusting the carrying amount to estimated fair value[303][394] - Stock-based compensation expense for service-based awards is recognized ratably over the vesting period; for performance/market conditions, it's based on fair value at grant date (Monte Carlo simulation for market conditions) and amortized over the service period[304][410] - As a REIT, no provisions for income taxes are generally necessary, except for taxes on undistributed taxable income and income generated by taxable REIT subsidiaries (TRSs), which are subject to corporate federal and state income tax[306][373] Item 7A. Qualitative and Quantitative Disclosures about Market Risk Washington REIT's primary financial market risk is interest rate risk, mitigated through interest rate swap arrangements used as cash flow hedges with creditworthy financial institutions - The principal material financial market risk is interest rate risk, related to refinancing fixed-rate obligations, opportunity cost in falling rate environments, and variable-rate credit lines[308] - Interest rate swap arrangements are used to reduce exposure to variability in future cash flows from interest rate changes, qualifying as cash flow hedges[308][309] Debt Obligations and Interest Rates (as of Dec 31, 2018, in thousands) | Debt Type | Principal ($) | Interest Payments (2019) ($) | Interest Rate on Debt Maturities (%) | |:--------------------------|:--------------|:-------------------------|:---------------------------------| | Unsecured fixed rate debt | $1,000,000 | $39,102 | 4.0% | | Unsecured variable rate debt | $188,000 | $— | 3.5% | | Mortgages (principal amortization) | $57,370 | $3,206 | 4.0% | Interest Rate Swap Contracts (as of Dec 31, 2018, in thousands) | Notional Amount ($) | Fixed Rate (%) | Floating Index Rate | Effective Date | Expiration Date | Fair Value (Dec 31, 2018) ($) | |:----------------|:-----------|:--------------------|:---------------|:----------------|:--------------------------| | $75,000 | 1.619% | One-Month USD-LIBOR | 10/15/2015 | 3/15/2021 | $1,367 | | $75,000 | 1.626% | One-Month USD-LIBOR | 10/15/2015 | 3/15/2021 | $1,353 | | $100,000 | 1.205% | One-Month USD-LIBOR | 3/31/2017 | 7/21/2023 | $5,270 | | $50,000 | 1.208% | One-Month USD-LIBOR | 3/31/2017 | 7/21/2023 | $2,648 | | $25,000 | 2.610% | One-Month USD-LIBOR | 6/29/2018 | 7/21/2023 | $(202)$ | | $25,000 | 2.610% | One-Month USD-LIBOR | 6/29/2018 | 7/21/2023 | $(200)$ | | $25,000 | 2.610% | One-Month USD-LIBOR | 6/29/2018 | 7/21/2023 | $(199)$ | | $25,000 | 2.610% | One-Month USD-LIBOR | 6/29/2018 | 7/21/2023 | $(198)$ | | Total | | | | | $9,839 | Item 8. Financial Statements and Supplementary Data This item incorporates by reference the consolidated financial statements and supplementary data from pages 61 to 98 of the Form 10-K, including balance sheets, income, equity, and cash flow statements - The consolidated financial statements and supplementary data appearing on pages 61 to 98 are incorporated by reference[312] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There are no changes in or disagreements with accountants on accounting and financial disclosure to report - There are no changes in and disagreements with accountants on accounting and financial disclosure[312] Item 9A. Controls and Procedures Washington REIT maintains effective disclosure controls and procedures, evaluated by management as of December 31, 2018, with no material changes in internal control over financial reporting during Q4 2018 - Disclosure controls and procedures are designed to ensure timely and accurate reporting of information required by the Securities Exchange Act[313] - Management concluded that disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2018[314] - No material changes in internal control over financial reporting occurred during the three months ended December 31, 2018[316] Item 9B. Other Information There is no other information to report under this item - There is no other information to report[317] PART III Item 10. Directors, Executive Officers and Corporate Governance This section lists Washington REIT's current trustees and executive officers, with additional information incorporated by reference from the 2019 Proxy Statement Directors and Executive Officers | Name | Position | |:----------------------|:----------------------------------------------------------------------| | Trustees: | | | Paul T. McDermott | Chairman and Chief Executive Officer | | Charles T. Nason | Lead Independent Trustee; Retired Chairman, President and CEO, The Acacia Group | | Benjamin S. Butcher | CEO, President and Chairman of the Board of Directors, STAG Industrial, Inc. | | William G. Byrnes | Retired Managing Director, Alex Brown & Sons | | Edward S. Civera | Retired Chairman, Catalyst Health Solutions, Inc. | | Ellen M. Goitia | Retired Partner, KPMG | | Thomas H. Nolan, Jr. | Former Chairman of the Board and CEO, Spirit Realty Capital Inc. | | Vice Adm. Anthony L. Winns (RET.) | President, Middle East-Africa Region, Lockheed Martin Corporation | | Executive Officers: | | | Thomas Q. Bakke | Executive Vice President and Chief Operating Officer | | Stephen E. Riffee | Executive Vice President and Chief Financial Officer | | Taryn D. Fielder | Senior Vice President, General Counsel and Corporate Secretary | - Additional information is incorporated by reference to the Proxy Statement for the 2019 Annual Meeting of Shareholders[320][321] Item 11. Executive Compensation Information regarding executive compensation is incorporated by reference from Washington REIT's definitive Proxy Statement - Information on executive compensation is incorporated by reference to the Proxy Statement[322] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership of beneficial owners and management, and related stockholder matters, is incorporated by reference from the Proxy Statement - Information on security ownership of certain beneficial owners and management, and related stockholder matters, is incorporated by reference to the Proxy Statement[322] Item 13. Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the Proxy Statement - Information on certain relationships and related transactions, and director independence, is incorporated by reference to the Proxy Statement[323] Item 14. Principal Accountant Fees and Services Information concerning principal accountant fees and services is incorporated by reference from Washington REIT's definitive Proxy Statement - Information on principal accountant fees and services is incorporated by reference to the Proxy Statement[324] PART IV Item 15. Exhibits and Financial Statement Schedules This section lists all documents filed as part of the Form 10-K, including financial statements, supplementary data, and various exhibits, with specific page references - This item lists all documents filed as part of the Form 10-K, including financial statements, supplementary data, and various exhibits[327] - Financial statements include Consolidated Balance Sheets, Statements of Income, Comprehensive Income, Equity, and Cash Flows for the years ended December 31, 2018, 2017, and 2016, along with accompanying notes[327] - Financial statement schedules include Schedule II – Valuation and Qualifying Accounts and Schedule III – Consolidated Real Estate and Accumulated Depreciation[328] Item 16. Form 10-K Summary Washington REIT has chosen not to include a Form 10-K Summary - Washington REIT has chosen not to include a Form 10-K Summary[334]